Business Models and Corporate Reporting: Defining the Platform to Illustrate Value Creation 036786083X, 9780367860837

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Business Models and Corporate Reporting

This book discusses the role of business models in corporate reporting. It  illustrates the evolution of non-financial reporting, the importance of business model reporting, and the main conceptualisations of business models. It also offers a methodological contribution to the assessment of business model reporting. Finally, it discusses the main implication of business model reporting for different categories of subjects and some challenges related to this kind of disclosure. Readers will understand the role of business models in the non-financial reporting landscape. They will also gain an understanding of how business models can help users of the annual report contextualise other non-financial items disclosed. However, effective business model reporting implies paying attention to certain features that define its quality. This theme is discussed in the empirical part of the book and in the section devoted to implications for preparers, users, and regulators. As large companies in the EU and the UK have to disclose the business model in the annual report, this book will be of interest to preparers and users of financial statements, regulators involved in the ongoing non-financial regulatory process, and professional bodies. It will also be of interest to academics interested in the investigation of non-financial reporting. Lorenzo Simoni is a Research Fellow in Accounting at the Department of Economics and Business Studies at the University of Genoa, Italy. His main research interests are related to non-financial reporting, with a focus on business model reporting, non-financial key performance indicators, intellectual capital, risk reporting, and sustainability reporting and assurance. He has obtained a PhD in Business Administration and Management from the University of Pisa, Italy. Lorenzo has been awarded two research grants from the Institute of Chartered Accountants of Scotland (ICAS), the latter of which has been co-funded by the European Financial Reporting Advisory Group (EFRAG), to investigate the relationships between business model and non-financial indicators and between business model and risk reporting, respectively. More recently, he has expanded his interests to earnings quality and distress prediction.

Routledge Studies in Accounting







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Business Models and Corporate Reporting Defining the Platform to Illustrate Value Creation Lorenzo Simoni

First published 2022 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2022 Lorenzo Simoni The right of Lorenzo Simoni to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Simoni, Lorenzo, author. Title: Business models and corporate reporting : defining the platform to illustrate value creation / Lorenzo Simoni. Description: 1 Edition. | New York : Routledge, 2021. | Series: Routledge studies in accounting | Includes bibliographical references and index. Subjects: LCSH: Business planning. | Corporation reports. | Financial statements. Classification: LCC HD30.28 .S4355 2021 (print) | LCC HD30.28 (ebook) | DDC 658.4/012—dc23 LC record available at https://lccn.loc.gov/2021013106 LC ebook record available at https://lccn.loc.gov/2021013107 ISBN: 978-0-367-86083-7 (hbk) ISBN: 978-1-032-07404-7 (pbk) ISBN: 978-1-003-01679-3 (ebk) DOI: 10.4324/9781003016793 Typeset in Sabon by codeMantra

Contents

List of illustrations

vii

1

Introduction

2

The disclosure of non-financial information and the role of business models 6 2.1 Non-financial information and value creation 6 2.2 Voluntary disclosure of non-financial information 10 2.3 Mandatory non-financial disclosure 12 2.4 Empirical research on non-financial disclosure 14 2.4.1 Extent and quality of non-financial disclosure 14 2.4.2 The determinants of non-financial disclosure 17 2.4.3 The effects of non-financial disclosure 20 2.5 Business model and non-financial disclosure: contextualising other information 24 2.6 What a business model is 25 2.6.1 Purpose of business models 25 2.6.2 Business model ontologies 29 2.6.3 Business model taxonomies 33 2.6.4 Common traits of different business model definitions 34

3

Business model communication in corporate reporting 50 3.1 Business model disclosure: providing users with information about value creation 50 3.2 Regulation of business model disclosure 54 3.3 Empirical evidence on business model disclosure practices 56 3.3.1 Business model disclosure as a framework for non-financial reporting 60 3.3.2 Business model disclosure manipulation 62 3.3.3 Usefulness of business model disclosure 63

1

vi

Contents 3.3.4 Business model disclosure in integrated reports 64 3.3.5 Business model disclosure through different channels than the annual report 65 3.3.6 Discussion of empirical findings on business model disclosure 65 3.4 The assessment of business model disclosure: methodological issues and further developments 66 3.4.1 Current issues in business model disclosure assessment 66 3.4.2 How to address issues in evaluating business model disclosure: combining different approaches 70 3.4.3 Developing business model disclosure indexes 77 3.4.4 The application of business model disclosure quality score 81

4

The implications of business model disclosure 4.1 Opportunities and challenges of business model disclosure for preparers 93 4.2 Relevance of business model disclosure for users 95 4.3 Regulators and business model disclosure 97 4.4 Future research avenues on business model disclosure 99

5

Concluding remarks

106

Index

111

93

Illustrations

Figures 3.1 3.2

The relationship between business model and other non-financial items The procedure to content-analyse business model disclosure

54 78

Tables 2.1 3.1 3.2 3.3 3.4 3.5

Constitutive elements of the business model according to Osterwalder et al. (2005) Summary of empirical studies on business model disclosure Frameworks and qualitative characteristics used in business model disclosure content analysis Elements to be considered when evaluating business model connectivity Sample companies Business model disclosure scores

32 57 71 76 82 85

1

Introduction

Businesses all over the world have become more and more complex in recent years. Evaluating companies and predicting their future performance has become increasingly difficult for investors and analysts, who need information that can help them understand the main sources of competitive advantage of a company and how an entity can defend that advantage. In this context, the concept of business model (BM) has emerged as a tool that allows the identification of the main drivers of value for a firm. By offering a simplified representation of how a business generates value, the BM becomes a tool that companies can internally use to identify and manage the most relevant aspects of their operational model. At the same time, the availability of information about the BM allows external users to understand the business logic of a company. For this reason, the BM has become popular in the field of reporting. While the concept of BM has found applications in some accounting standards, its definition for the purpose of financial reporting differs from the conceptualisation of BM as a managerial tool. For instance, in IFRS 9, a BM test allows to distinguish companies that hold financial instruments for the purpose of collecting contractual cash flows from companies that actively trade financial instruments. Some documents also discuss the opportunity to use the BM to inform financial reporting standards (EFRAG research paper, 2013). Accounting standards and documents that propose the BM as a concept that is capable of informing accounting principles consider the BM as a tool to identify the structure of transactions or to define how a company manages some assets. However, the view of the BM that emerges from the managerial literature reflects a more complex concept, which is able to synthetise and represent all the main sources of value of a company and their mutual relationships (Bukh, 2003; Beattie and Smith, 2013; Nielsen and Roslender, 2015; Bini et al., 2018, 2019). For its nature, the information about how a company generates value usually takes on the narrative form (Holland, 2004). Thus, if the concept of BM as not solely a representation of transaction structure or an approach to asset management but an overall picture of value creation is embraced, DOI: 10.4324/9781003016793-1

2 Introduction the natural channel to communicate the BM as a story of value creation is the narrative section of the annual report. The use of BM narrative to convey information about how value is generated and capture has been the object of an important academic debate, which has placed this story of value creation at the heart of narrative reporting (Beattie and Smith, 2013). Regulators have underlined the importance of providing narrative information that supports financial statements. The Securities and Exchange Commission (SEC) and the International Accounting Standards Board (IASB) have devoted great attention to the management discussion and analysis (MD&A) and the management commentary, respectively. Moreover, several entities have proposed frameworks that aim to facilitate the integration of narratives in the annual report. The most important examples are the International Integrated Reporting Council (IIRC) and the World Intellectual Capital Initiative (WICI). Both entities have been established to support companies in the transition from a traditional financial reporting model to an enhanced reporting model, which incorporates narrative information that helps investors assess a company’s resources and activities. The reporting model proposed focuses on the communication of information that cannot be reflected in the financial statements, such as information on intangible items that cannot be clearly identified or reliably measured but contribute to value creation. All these frameworks consider the BM as one of the most important items that narratives should address. By offering a comprehensive picture of the value creation process, the BM has been identified as the tool that allows companies to illustrate the contribution of different resources and activities to the generation of that value. In the view of scholars, the contribution of the BM is not limited to activities and resources but considers all potential sources of value (Nielsen and Roslender, 2015). For instance, the BM has also the potential to show how a company benefits from relationships with third parties. The interest of academics and practitioners towards this theme has led regulators in the UK and the EU to require large entities to communicate information about the BM in the narrative part of the annual report, believing that this kind of information has the power to improve the quality of communication and to enrich the information set that investors and other stakeholders can use to evaluate a company. Hence, academics and regulators are attempting to pave the way to a better model of corporate reporting, which is able to offer a platform to define the value creation process. This path towards an enhanced reporting model needs a reflection on the main challenges and opportunities that companies are exposed to. The disclosure of the BM as a value creation platform can find its place in this path, which places emphasis on using narrative reporting to disclose information about intangible factors that are not represented in the financial statements and on the importance of comprehensive reporting frameworks for environmental, social, and governance (ESG) information.

Introduction  3 BM reporting has the same ambitions of narrative reporting about intangibles and ESG, which consist in a more faithful representation of a company’s overall value. Nonetheless, the disclosure of BM distinguishes itself from other forms of narrative disclosures, offering new possibilities. Being the story of how the value, which is the object of reporting, has been created and how a company can defend its competitive advantage, the BM offers a framework for other information disclosed in the annual report. Hence, the disclosure of the BM has the potential to inform investors about the role that different resources play in value creation (Beattie and Smith, 2013; Nielsen and Roslender, 2015). This distinctive trait emphasises the importance of BM. While other information, like information about intangibles, ESG factors, and risks, enriches the information environment by providing investors with additional information, the contribution of the BM can go beyond the sole production of new information. The BM can become a piece of information that allows users to correctly assess other information disclosed, thus enhancing the value of information about intangibles, ESG factors disclosed, key performance indicators, and risks. Despite the interest in the topic and the potential of BM in narrative reporting, the process of developing sound BM reporting practices and effective regulations is still in its early stages, and several questions remain unanswered. For instance, regulators have required the disclosure of BM but have not offered detailed guidelines about how companies should be compliant. Preparers of financial statements, which have to comply with norms, can either see an opportunity in showing their capability to create value or withhold information to avoid loss of competitiveness. These contrasting results have been identified by early empirical research (Bini et al., 2016; Di Tullio et al., 2019). From the academic research perspective, the first stage of enquiry into the BM has offered several conceptual contributions, which have emphasised its potential in corporate reporting. A second stage, which has just started, consists in the empirical investigation of BM disclosure practices. Studies have moved from being explorative studies to investigate factors associated with BM disclosure. In this phase, the research approach to the investigation of BM can be further improved and examined. The main issues relate to the different frameworks and attributes that are used to assess BM disclosure, which may consistently vary among different pieces of research. Hence, a definition issue emerges in the literature, which needs further reflection. In light of these premises, academics and regulators will have to answer questions like: how are companies approaching the duty to communicate the BM? Which value do users assign to information about the BM? How can the regulations of BM disclosure be revised and improved? How can academics further contribute to the debate around BM reporting and support policymakers?

4 Introduction This book offers a review of the role of BM in corporate reporting and a discussion around early evidence about BM disclosure practices. It also offers insights on methodological issues related to the assessment of BM disclosure by companies and future research directions. The successful achievement of the goal to offer a wider and more meaningful value creation story through the annual report can be realised by means of the BM. The capability of regulators and practitioners to solve these issues and to correctly evaluate the opportunities offered by a reporting centred around the BM will be fundamental to reach the aim of improving reporting in the next years. Scholars can contribute to this debate in several ways. Academic research can shed light on BM disclosure practices and their consequences, identifying potential gaps. Regarding the issues related to the definition of BM, scholars have defined and identified several conceptualisations and definitions of BM and its main components. Advancing the research in this field can help academic research further develop empirical studies on BM reporting but has also practical implications. The use of these frameworks and conceptualisations can help regulators develop more detailed guidelines and assist companies in the identification and disclosure of the main BM elements. The rest of the book is organised as follows. Chapter 2 discusses the role of non-financial information in modern economies and examines the literature on non-financial disclosure. It offers an overview of the most popular frameworks and of the results of empirical studies on non-financial disclosure. It also illustrates the most important issues that characterise non-financial disclosure according to several academics. The BM is introduced as a concept that can help overcome non-financial reporting limitations. The potential of BM reporting in shaping non-financial information is largely debated and emphasised, as well as some issues and challenges associated with BM reporting, which are mainly related to the absence of a shared definition of this concept and to the loose requirements companies are subject to. Chapter 3 focuses on the disclosure of the BM in corporate reports. It offers a review of existing empirical evidence on BM disclosure practices, how companies approach BM reporting, and the effects of the communication of this kind of information. In the chapter, I review current methodological issues in the assessment of BM disclosure in annual reports. In the absence of strict requirements and shared definitions, the assessment of BM disclosure can pose several challenges to researchers and professionals aiming at understanding the value creation process. Starting from the main BM disclosure assessment issues and methods employed by previous studies, a new BM disclosure index is proposed. An application of the index to a sample of listed companies is offered. Chapter 4 presents the most important implications that BM reporting has for preparers, users, regulators, and academics, indicating potential research avenues for the future. Concluding remarks are presented in Chapter 5.

Introduction  5

References Beattie, V., & Smith, S. J. (2013), “Value creation and business models: Refocusing the intellectual capital debate”, The British Accounting Review, Vol. 45 No. 4, pp. 243–254. Bini, L., Dainelli, F., & Giunta, F. (2016), “Business model disclosure in the Strategic Report Entangling intellectual capital in value creation process”, Journal of Intellectual Capital, Vol. 17 No. 1, pp. 83–102. Bini, L., Bellucci, M., & Giunta, F. (2018), “Integrating sustainability in business model disclosure: Evidence from the UK mining industry”, Journal of Cleaner Production, Vol. 171, pp. 1161–1170. Bini, L., Dainelli, F., Giunta, F., & Simoni, L. (2019), Are non-financial KPIs in annual reports really “key”. An investigation of company disclosure and analyst reports in the UK. Edinburgh: The Institute of Chartered Accountants of Scotland (ICAS). Bukh, P. N. (2003), “The relevance of intellectual capital disclosure: a paradox?”, Accounting, Auditing & Accountability Journal, Vol. 16 No. 1, pp. 49–56. Di Tullio, P., Valentinetti, D., Nielsen, C., & Rea, M. (2019), “In search of legitimacy: a semiotic analysis of business model disclosure practices”, Meditari Accountancy Research, Vol. 28 No. 5, pp. 863–887. EFRAG (2013), The role of business model in financial statements, research paper, Bruxelles: European Financial Reporting Advisory Group (EFRAG). Holland, J. (2004), Corporate intangibles, value relevance and disclosure content. Edinburgh: Institute of Chartered Accountants of Scotland (ICAS). Nielsen, C., & Roslender, R. (2015), “Enhancing financial reporting: The contribution of business models”, The British Accounting Review, Vol. 47 No. 3, pp. 262–274.

2

The disclosure of nonfinancial information and the role of business models

2.1 Non-financial information and value creation The interest of academics and practitioners in the disclosure of non-financial information has steadily grown over time (Ferenhof et al., 2015). Since the 1990s, many scholars have investigated non-financial disclosure, adopting different perspectives, such as agency theory (Li et al., 2008), legitimacy theory (Guthrie et al., 2006), or signalling theory (Whiting and Miller, 2008). The main reason behind the popularity of non-financial information is the shift from a traditional economy to an economy based on intangible, knowledge-based resources (Porat and Rubin, 1977; OECD, 1981), i.e. an economy “(…) directly based on the production, distribution and use of knowledge and information” (OECD, 1996, p. 3). In this kind of economy, knowledge-based assets represent the main source of a company’s competitive advantage and a major driver of corporate performance (Edvinsson and Malone, 1997; Ittner et al., 1997; Stewart, 1997; Bontis, 2001). The term intellectual capital (IC) was created in order to distinguish those resources from material assets. IC refers to all those intangible resources that are based on knowledge, like know-how, expertise, relationships, and reputation. Stewart (1997) defines IC as intellectual material – knowledge, information, intellectual property, and experience – that can be put to use to create wealth. The OECD (1999) defines IC as “the economic value of two categories of intangible assets of a company,” which are organisational capital and human capital. Andriessen and Tiessen (2000) propose a framework characterised by five categories of intangible assets: skills and tacit knowledge – talent embedded in people; collective values and norms; technology and explicit knowledge; primary and management processes; and endowments – what a company has inherited from the past. While IC plays a fundamental role in value creation (Mavrinac and Siesfeld, 1997; EFFAS Commission on Intellectual Capital, 2008), it is not adequately represented by financial statements. In fact, accounting principles only allow the recognition of a limited set of intangibles that can be identified and measured. According to Andriessen (2001), the characteristics DOI: 10.4324/9781003016793-2

Disclosure of non-financial information  7 of intangibles that make them difficult to report in a traditional transactionbased accounting system are the following: (a) the fact that they are not rival assets, i.e. an intangible asset can be simultaneously used by more actors in different processes; (b) their value can increase or decrease without any transaction taking place (Webber, 2000); (c) the benefits deriving from intangibles are much more uncertain than tangible assets; (d) the strict link between the value of intangibles and the unique competitive advantage of a company, which may create problems in defining and quantifying the loss of value of intangibles (Andriessen and Tissen, 2000); and (e) the impossibility to add up intangibles. As a consequence of their inability to represent IC, financial statements alone do not show their true value and their contribution to value creation (Barth et al., 2001; Alwert et al., 2009). This has led to a loss of informative power of traditional financial measures. The loss of value relevance of financial measures has been discussed in the literature (Francis and Schipper, 1999; Breton and Taffler, 2001) and demonstrated by some empirical studies (Lev and Zarowin, 1999). Similarly, Ittner and Larcker (1998b, p. 217) point out some reasons that determine the scarce informative power of traditional financial measures. In particular, the factors that they identify are: • • • • • • • •

the backward looking perspective; the lack of the predictive ability to explain future performance; the rewarding of short-term incorrect behaviour; the scarce power to drive action as they provide little information on root causes or solutions to problems; the inability of timely signalling of key business changes; the fact that they are too aggregated to guide managerial action; the incapacity to reflect “cross-functional processes”; the inadequate consideration to “difficult to quantify ‘intangible’ assets such as intellectual capital.”

The problem of misrepresentation or of a missing representation of intangibles in corporate reports could be the cause of potential information asymmetries. Lev (2000) argues that the lack of transparency and an inadequate representation of non-financial items can lead to abnormal gains for informed investors, increased volatility of financial markets, an increase in the bid-ask securities spread, and an increase in the average cost of capital. Intangible-intensive companies are particularly sensitive to the consequences of a bad representation of intangible resources, as they could be easily undervalued (Lev, 2000; Andriessen, 2004). Another important issue within financial reporting that might affect financial statement informativeness is related to the increasing attention to the capability of a company to generate value not only for shareholders but for a wider range of stakeholder categories (Fasan, 2013). These subjects

8  Disclosure of non-financial information include, but are not limited to, employees, customers, local communities, and national governments (Freeman, 2015). The attention towards different stakeholders’ informative needs has been leveraged by recent scandals, which have shown how companies can harm some stakeholder categories, causing environmental or social damage. In this context, companies are expected to provide information about the attention devoted to environmental, social, and governance (ESG) factors to be perceived as fully legitimate. Differently from financial information, non-financial information is capable of showing the contribution of intangible resources to the value creation process that characterises a company (Mavrinac and Siesfeld, 1997; Holland and Johanson, 2003; Goodman, 2006; Sriram, 2008; Alwert et al., 2009) and to satisfy the informative needs of different stakeholder categories by illustrating the role of ESG factors. Researchers have shown that this kind of information can integrate and complement financial data, especially when earnings informativeness is low (Amir and Lev, 1996; Dempsey et al., 1997; Ittner and Larcker, 1998a; Liedtka, 2002; Riley et al., 2003; Vanstrelen et al., 2003; Fogarty and Rogers, 2005; Flostrand et al., 2006; Coram et al., 2011). It is not a case that investors, standard setters, and other stakeholder categories have required companies to disclose non-financial information, as this is supposed to allow information users to make better investment decisions (Eccles and Mavrinac, 1995; Holland and Johanson, 2003; Alwert et al., 2009). Many attempts have been made in order to emphasise the importance of disclosing non-financial information. In the United States, the American Institute of Certified Public Accountants edited the report titled “Improving Business Reporting – A Customer Focus,” where the disclosure of non-financial information in the annual report is recommended in order to improve the overall quality of corporate reporting. Following that initiative, the Financial Accounting Standards Board (FASB, 2001) advocated for the disclosure of non-financial items that can be helpful to better understand companies’ critical success factors. The Canadian Institute of Chartered Accountants (CICA) has launched different initiatives to explore the role of non-financial items in corporate reporting. In Europe, the Institute of Chartered Accountants of England and Wales (ICAEW) has started discussing the opportunity for firms to communicate information about their key resources and how strategies should deliver value in the long term. More recently, the UK and the European Commission have issued mandatory requirements about non-financial items for listed companies, while South Africa mandated the inclusion of non-financial information in the annual report for companies listed at the JSE in 2013. These regulations require companies to disclose a set of information related to ESG issues, intangible resources, strategy, and value creation. Some companies, professional bodies, and scholars have elaborated guidelines that can be adopted in order to measure and report various kinds of non-financial items (see Bontis, 2001). Regarding the contribution of

Disclosure of non-financial information  9 intangibles to value creation, Kaplan and Norton (1992) have developed the Balance Scorecard. This model offers a representation of a company’s activity on the basis of four dimensions of performance: financial, customer satisfaction, internal business processes, and innovation and learning. Both financial and non-financial aspects are included in the Scorecard in the attempt to link strategy to performance. Skandia (1994) has issued the so-called Skandia Navigator, a tool that other companies can use to measure the contribution of intangibles to value generation. The model developed by Skandia classifies IC elements into five dimensions: financial, customer, process, renewal and development, and human capital. The model proposed by this company represents the first attempt to develop a new reporting framework that integrates financial and non-financial information. Roos et al. (1997) have proposed a synthetic index, named IC-index, which should take into account a company’s strategy and distinctive resources. Those aspects allow each company to assign different weights to intangible elements in the elaboration of the index. A limitation of this approach is represented by the fact that it is extremely context specific, making comparisons among different companies meaningless (Bontis, 2001). Haanes and Lowendahl (1997) have elaborated a model where a company’s intangible resources are divided in two groups: competences – skills that result in the ability to perform a task and relational capital. Lowendahl (1997) has further worked on the model adding a distinction between individual and collective levels of usage of intangible resources. Sveiby (1997) have developed the Intangible Assets Monitor. According to this model, companies should display a number of indicators related to three major categories of intangibles: external structure (brands, customer and supplier relations), internal structure (management, legal structure, manual systems, attitudes, R&D, software), and individual competence (education, experience). Management should select the most important measures in each category on the basis of the company’s strategy. Another case is represented by the Danish Agency for Trade and Industry (2001), which has proposed a set of guidelines for IC reporting. The guidelines emphasise the role attributed to IC statements as a tool that a company can use to manage knowledge. IC communication is structured in four main parts according to this framework. First, there is a “knowledge narrative,” which aims at showing the main intangible resources of a company and the activities performed to put those resources at work. The second part is represented by the presentation of challenges that management has to face in the attempt to strengthen its main resources and develop new ones. The third part should set out the initiatives that can be put in place in order to take on the challenges depicted in the second part. Finally, the fourth part should provide a description of the main indicators that companies use to monitor progresses against the exploitation and the development of intangibles.

10  Disclosure of non-financial information Ferenhof et al. (2015) have conducted a study aimed at reviewing the various existing frameworks that have been used to categorise IC components. Their analysis reveals 11 components that are considered as important categories of IC by many frameworks. The main IC dimensions highlighted by Ferenhof et al. (2015) are customer, structural, human, innovation, business, organisational, processes, relational, relational and customer, and social and technological. Another widely adopted framework is the one developed by the World Intellectual Capital Initiative (WICI). In its guidelines, WICI proposes a non-financial reporting model that focuses on the contribution of IC and offers a definition of intangibles (WICI, 2016). Following previous definitions, WICI distinguishes IC in the three areas related to structural capital (labelled as “organisational capital”), human capital, and relational capital. Differently from prior frameworks, which consider intangible assets only, WICI offers also a definition of “Intangible liabilities,” which are connected to specific risks, like bad reputation or poor management quality, that might have a negative effect on a company’s value (WICI, 2016). In the field of ESG reporting, the Global Reporting Initiative (GRI) have developed some standards to assist companies providing stakeholders with valuable information. GRI standards can be voluntarily adopted by companies and offer guidance on how to report ESG. For instance, they offer definitions of ESG items, suggestions on how the materiality of those items for an entity can be assessed, and how to report them. Moreover, the International Financial Reporting Standards (IFRS) foundation has issued consultations about the opportunity to develop non-financial reporting standards.

2.2 Voluntary disclosure of non-financial information In response to the demand for non-financial disclosure, companies have started to voluntary communicate non-financial information to shed light on how intangibles and ESG factors contribute to value creation. In the absence of any regulations, voluntary disclosure has been found to reduce information asymmetries that characterise the markets (Healy et al., 1999; Richardson and Welker, 2001; Botosan and Plumlee, 2002). To obtain the benefits related to the reduction of asymmetries, companies should provide detail about the role of IC resources or ESG factors in value creation (Vandemaele et al., 2005; Burgman and Roos, 2007; Sriram, 2008; Mervelskemper and Streit, 2017). Both in the cases of IC and ESG disclosures, companies have started elaborating some independent documents, presented separately from the annual report (Brooking, 1997; Edvinsson, 1997; Edvinsson and Malone, 1997; Roos, et al., 1997; Stewart, 1997; Sveiby, 1997; Petty and Guthrie, 2000; Thorne et al., 2014). While separate reports have been often used to communicate information about IC or ESG issues, the annual report has kept its function as the primary tool to disclose financial data (De Villers and Van Staden, 2011).

Disclosure of non-financial information  11 At the same time, the awareness of the importance of establishing links between financial and non-financial information has grown (Hopwood et al., 2010). Since the annual report can be considered the primary source of information for all stakeholder categories (Knutson, 1992; Botosan, 1997), some entities have proposed the inclusion of non-financial information in the annual report in order to provide a holistic picture. The inclusion of non-financial information in the annual report has been supported by professional bodies like the International Integrated Reporting Council (IIRC). This body has published a reporting framework recommending that the annual report should go beyond financial measures, providing information about “(…) how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.” (IIRC, 2013, p. 7). Many large corporations have voluntarily adhered to the IIRC framework, disclosing non-financial information in the annual report together with financial information. The Integrated Reporting Framework, updated in 2021 (IIRC, 2021), has proposed a model that includes six different capitals. The capitals indicated by the IIRC (2021) as those that should be addressed by reporting are financial capital, manufactured capital, IC, human capital, social and relationship capital, and natural capital. Differently from other frameworks, IIRC uses the term intellectual capital (IC) to designate structural capital only, while human and relational capital are labelled as different capitals. However, the main areas identified by previous IC frameworks are included by IIRC. The communication of information about IC and ESG mainly takes the form of narrative disclosure (Holland, 2004; Dumay, 2008; Beattie and Smith, 2013). The use of narrative reporting for intangibles is related to the nature of the information that is conveyed. Since knowledge “does not consist of separable ‘assets’ that can be captured (…) by accounting rules” (Mouritsen et al., 2001, p. 740), IC statements use narrative to describe those activities that allow managers to manage knowledge. In this context, disclosure helps information users better understand how knowledge contributes to the definition of a product or a service that has a value to customers (Mouritsen et al., 2004). Similarly, information about ESG factors illustrates a company’s actions and policies (Clarkson et al., 2011). Narratives are the stories that companies use to talk about themselves (Simakova and Neyland, 2008), which can be used for “translating ideas across the organization so that they are comprehensible and appear legitimate to others” (Bartel and Garud, 2009, p. 107). Holland (2004) has investigated how the perceived change in the value creation process has shaped disclosure. In his work, he emphasises how narratives have become a fundamental tool for companies to communicate how intangible resources contribute to value creation. The power of narrative disclosure is due to the capability of the story to connect hard to recognise intangibles

12  Disclosure of non-financial information to “(…) more visible intangibles and to tangibles as well as to output and performance measures” (Holland, 2004). Narrative disclosure about IC and ESG can be supported by numbers. Many companies have started developing their own sets of non-financial indicators. Some studies show that non-financial indicators allow companies to better align performance measurement systems to strategic objectives (Dossi and Patelli, 2010) and have a great impact on organisational effectiveness (Upadhaya et al., 2014). At the same time, non-financial indicators are necessary “to understand past performance, future potential and make well-informed investment decisions” (PwC, 2015). They provide information about the way the different categories of intangible assets, such as human capital (Royal and O’Donnell, 2008), relational capital (April et al., 2003), organisational capital (Lev and Radhakrishnan, 2003), and corporate social responsibility (Smith and van der Heijden, 2017), contribute to value creation. Indicators complement narrative information by making it more reliable (Mouritsen et al., 2001; Holland, 2006). While narratives provide information about intangible resources and knowledge management activities, but only in an abstract form (Mouritsen et al., 2001), the indicators allow to measure the progresses against managerial actions, thus making the story credible and verifiable (Mouritsen et al., 2001; Holland, 2006).

2.3 Mandatory non-financial disclosure The interest in non-financial information has led standard setters to regulate non-financial disclosure. Factors like disclosure costs (Verrecchia, 1983; Dye, 1986; Arya et al., 2010), uncertain investor response (Dutta and Trueman, 2002), management incentives, and governance structure (Core, 2001) may lead companies to offer a partial disclosure of private information or to avoid disclosure at all. These factors can promote accounting regulation desirability, but they do not necessarily imply regulation enforcement. Different explanations to the enforcement of disclosure regulations can be found in accounting literature. For instance, Beyer et al. (2010) point out the following reasons that can influence the decision to regulate disclosures: (a) the presence of financial externalities, which are related to the fact that information disclosed by a company may provide information about other companies. As companies are often unaware of the information about other firms that they convey through their disclosures, their disclosure levels are socially inefficient. In this perspective, the regulators’ interventions aim to make companies disclose more information to improve social welfare (Admati and Pfleiedere, 2000); (b) the presence of real externalities. Those externalities are caused by the influence that a company’s disclosure has on other companies’

Disclosure of non-financial information  13 economic decisions (Kanodia et al., 2000; Pae, 2002). Also in this case, the enforcement of disclosure regulation is directed towards an optimal disclosure level by companies, which enhances social welfare; (c) the presence of agency costs, as higher level of disclosure can reduce information asymmetries (Shleifer and Wolfenzon, 2002); (d) improving disclosure comparability between companies and generating market cost savings and efficiency gains (Dye and Sridhar, 2008). All these factors are related to the willingness to improve social welfare. Another factor that influences the choice to issue new disclosure requirements is represented by political pressures (Ramanna, 2008; Correia, 2009; Hochberg et al., 2009). Non-financial disclosure regulations flourished in different European countries in recent years. In France, large companies have been required to disclose social and environmental information since 2001 and some additional requirements since 2010. Danish companies have been required to provide information about IC elements since 2002. Similarly, the UK Companies Act 2006 was amended in 2013, when the disclosure of a set of non-financial information became mandatory. The most important nonfinancial regulation occurred in 2014, as the European Union issued the Directive 95/2014. The directive requires all large companies based in member countries to report different kinds of non-financial information. With the enforcement of the directive, companies have to report on environmental, social, employee-related, and anti-corruption issues, among others. In order to be judged effective, disclosure regulation should have real effects on decision-making and management choices (Leuz and Wysocki, 2016). Empirical research on the effects of non-financial regulations has shown mixed results. In some cases, non-financial regulations have been found to have a positive impact on disclosure amounts and increased likelihood of assuring reports and of voluntary adoption of disclosure guidelines (Ioannou and Serafeim, 2017). Other studies have shown a negative effect of non-financial regulation on firm performance (Chen et al., 2017; Cordazzo et al., 2020) and negative market reactions to the enforcement of the regulation (Grewal et al., 2018). The main reason behind the failure of non-financial regulations is the difficulty in finding an adequate level of specification for narrative and subjective disclosures (Rutherford, 2003). As non-financial information is firm-specific, it is not easy to define an optimal level of disclosure requirement. Hence, mandatory non-financial disclosure is essentially voluntary in nature, as companies can often decide the extent and type of information disclosed. Moreover, in many cases companies that do not comply with non-financial regulations are exposed to weak sanctions (De Villiers et al., 2018). A document issued by CSR Europe and the GRI in 2017 offers an overview of how the different EU countries have enforced the Directive on non-financial information. While in some jurisdictions, the amount of

14  Disclosure of non-financial information potential fines is explicitly reported in local laws and regulations, in others fines related to the omission of presentation of non-financial information are not specified or treated on a case by case basis. Some authors claim that the lack of well-defined requirements makes non-financial regulations ineffective (Huefner, 2007; Beattie et al., 2008). Nielsen et al. (2017) have examined management perceptions about non-financial disclosure according to the Danish IC reporting project in a mandatory setting. They have found that many companies only perceive non-financial disclosure as a cost rather than an opportunity and that the initiative promoted in Denmark has not been successful.

2.4 Empirical research on non-financial disclosure The above depicted characteristics of non-financial regulations emphasise the essentially voluntary nature of non-financial disclosure. In this context, different reporting behaviours can emerge. Companies might use their discretion to offer a full picture, depicting relevant intangibles and ESG factors and illustrating how these items create value. They could also withhold information about key intangibles and ESG-related issues, if they think that they have to bear high proprietary costs or lose legitimacy. Another case is represented by companies selectively disclosing generic information in order to be compliant or to be aligned with peers, but without allowing users to understand how value is created. In this latter case, companies may offer a boilerplate disclosure that does not add value for stakeholders. The presence of different scenarios regarding how companies approach non-financial disclosure has led academic scholars to investigate nonfinancial disclosure practices in order to understand which non-financial items companies disclose, how they disclose them, what factors can explain different non-financial disclosure behaviours, and how non-financial disclosures inform investor decisions. 2.4.1 Extent and quality of non-financial disclosure Several pieces of research have examined the typologies and quality of non-financial items disclosed in both the annual report and separate reports. These studies can be considered as explorative contributions that try to provide a picture of existing practices among companies. The first explorative studies that have investigated the levels of IC disclosure in companies’ annual reports were conducted in the early 2000s. Scholars usually assess IC disclosure by means of a content analysis of the narrative sections of the annual report (see Guthrie et al., 2004). Some studies examine sources of information that differ from the annual report (Guthrie et al., 2004). This methodology has been widely used in business studies to assess corporate disclosure in general (Bukh et al., 2005; Rimmel et al., 2009; Bryman and Bell, 2015) and IC disclosure in particular

Disclosure of non-financial information  15 (Guthrie and Petty, 2000; Abeysekera and Guthrie, 2002; Bontis, 2003). The analysis usually refers to one of the existing frameworks that define IC and its constitutive elements. Many researchers (Guthrie and Petty, 2000; Brennan, 2001; Bozzolan et al., 2003) refer to the framework elaborated by Sveiby (1997). The Sveiby’s framework categorises intangibles in three broad categories: organisational capital, relational capital, and human capital. Another well-known framework is proposed by Bontis (2003), who draws upon the classification of the World Intellectual Capital Initiative (WICI) to identify 38 items. As in the framework by designed by Sveiby (1997), items are grouped in three main categories: organisational, relational, and human capital. Other classifications have been developed by Abeysekera (2007) and by Sanchez et al. (2000). In developing his framework, Abeysekera (2007) has drawn upon Sveiby’s framework (1997) and its adaptation by Guthrie and Petty (2000). The framework features 45 items and considers three different types of disclosure (narrative, visual, and numeric). The 45 items are divided in the same three categories as Sveiby’s (1997) model. Sanchez et al. (2000) have drawn inspiration from Sveiby (1997) to develop a set of 101 items that are referred to the three categories. Despite the presence of many sources of information, the annual report is the most frequently analysed document by researchers (see Guthrie et al., 2004). Annual reports, in fact, represent the primary source of information for stakeholders (Knutson, 1992; Botosan, 1997). Empirical evidence shows a positive correlation between the amount of information disclosed in a company’s annual report and the quantity of information conveyed through other channels by the same company, like “one-to-one” interviews with analysts or press releases (Lang and Lundholm, 1993; Botosan and Plumlee, 2002). Therefore, the company’s disclosure through the annual report is considered as a proxy for the disclosure provided through all the other channels. While some studies have examined only companies based on a single country, others have examined companies from different countries, in order to make cross-country comparisons. The first category includes the studies by Guthrie and Petty (2000), Brennan (2001), April et al. (2003), and Bozzlan et al. (2003). Guthrie and Petty (2000) have examined annual reports issued by some Australian companies. Their results show that disclosure of companies’ non-financial information is poor and that there is no widely accepted framework for such disclosures. Brennan (2001) has investigated a sample of Irish companies. The findings of the study show low levels of non-financial disclosure in Irish annual reports. The research by April et al. (2003), which focuses on South African companies operating in the mining sector, has shown low levels of non-financial disclosures as well. Bozzolan et al. (2003) have examined Italian companies. They have found Italian companies to provide information mainly on external structure, with a focus on customers, distribution, and collaborations. Cumby

16  Disclosure of non-financial information and Conrod (2001) have investigated non-financial disclosure by Canadian biotech industries and find that those companies attempt to provide non-financial measures that can shed light on critical success factors, like platform technologies and alliances, but fail to communicate innovative measures of value creation. The authors have concluded that companies that operate in that industry, which is a knowledge-intensive one, should try to develop a more effective set of non-financial indicators. The second category of studies comprises cross-country studies, like those conducted by Vandemaele et al. (2005) and Guthrie et al. (2006). The study by Vandemaele et al. (2005) has examined IC disclosure of a sample of companies based in three different countries (the UK, Sweden, and the Netherlands). The analysis has been run on the annual reports of three different years in order to evaluate trends in non-financial disclosure over time. The authors have found that Swedish companies have disclosed more than UK and Dutch companies. However, while in the UK and the Netherlands the amount of information disclosed has improved over the period examined, Sweden have seen a decline. The authors conclude that this could be an indication of convergence among non-financial disclosure practices. In the work by Guthrie et al. (2006), the practices of a sample of Australian companies have been compared to the practices of a sample of companies based in Hong Kong. Findings of this study have confirmed low non-financial disclosure levels. Indicators and quantitative measures have been scarcely used by analysed companies to support narratives. The studies above discussed show that at the end of the 1990 and in the early 2000s, companies were aware of the importance of intangibles and of the necessity to provide information about how they contribute to value creation. At the same time, the amount of information disclosed has been found to be low. This situation can be detected in all the countries that have been examined. Moreover, those studies show that companies often do not include non-financial indicators in their reports and that there are no common frameworks for disclosure about intangibles. Those studies also reveal that non-financial disclosure has mainly focused on external capital (e.g. brands, customers, relationships, collaborations). Finally, companies tend to disclose narrative non-financial information, but quantitative measures are scarcely used. In the area of ESG reporting, several studies have investigated the extent of sustainability disclosures. Early studies have indicated that, while the levels of ESG disclosures were low in the 1980s and 1990s, there has been an increase over time (Niskala and Pretes, 1995; Cormier and Magnan, 1999), even if the level of maturity in ESG disclosure largely depends on the specific entity (Jenkins and Yakovleva, 2006). While in the case of IC an established framework, with its further developments, has been extensively used, frameworks adopted to identify ESG factors exhibit higher variability among different studies. However, a recurrent framework adopted by scholars who have assessed ESG information in the annual report is

Disclosure of non-financial information  17 represented by the GRI framework (Michelon, 2011; Bellucci et al., 2019). Other studies focusing on environmental disclosures rely on frameworks such as the one developed by Wiseman (Wiseman, 1982). Like in the case of IC, early studies have focused on a single country (Patten, 1991, Gray et al., 1995; Brown and Deegan, 1998). Subsequent studies have examined the frequency and quality of ESG disclosures among different countries (Williams and Wern Pei, 1999; Van der Laan Smith et al., 2005). Using a framework developed by Gray et al. (1995), which focuses on information on natural environment, employees, community, and customers, Van der Laan Smith et al. (2005) analyse ESG disclosures in 1998 and 1999 annual reports of a sample of companies from Norway, Denmark, and the US. They show that companies in Scandinavian countries disclose more ESG information than companies domiciled in the US, attributing this difference to national orientation towards sustainability issues. The impression of explorative studies on non-financial disclosure is that, while companies initially withheld this kind of information, the growing attention to these topics has led to an increased awareness by preparers. In this view, Arvidsson (2011) has investigated non-financial disclosure practices of big Swedish companies. Interviews to managers are conducted in order to understand the evolution of non-financial disclosure from their perspective. The author has concluded that managers are aware of the importance of intangibles and that the amount of non-financial items voluntarily disclosed by companies in annual reports has seen an increase over time. Differently from previous studies, a tendency to communicate nonfinancial indicators is detected by this research. An improvement in nonfinancial disclosure over time has been documented also by De Silva et al. (2014), who analyse companies based in New Zealand. Differently form Arvidsson (2011), De Silva et al. (2014) have found that communication is mainly narrative, with only few indicators disclosed by sample companies. 2.4.2 The determinants of non-financial disclosure Researchers have also tried to capture those factors that determine the different levels of non-financial disclosure. Those studies investigate both voluntary and mandatory non-financial disclosure, the latter being considered as voluntary in nature due to the loose and generic requirements of nonfinancial regulations. Several theories are used to frame the investigation of the reasons that can lead companies to offer a wider disclosure. The most frequently used theories are represented by agency theory, signalling theory, stakeholder theory, legitimacy theory, and institutional theory. Agency theory assumes that market agents will pursue the maximisation of their returns, acting in self-interest (An et al., 2011). This behaviour generates information asymmetries between companies and investors (Subramaniam, 2006). According to this theoretical framework, the information asymmetries that characterise financial markets can be reduced by

18  Disclosure of non-financial information disclosure offered by companies (Li et al., 2008; An et al., 2011). Hence, this framework has been extensively used to show how bigger companies disclose more non-financial items to reduce asymmetries (Hossain et al., 1995; Botosan, 1997; Ahmed and Courtis, 1999; Depoers, 2000; Bozzolan et al., 2003; Garcia-Meca et al., 2005; Alsaeed, 2006; Bozzolan et al., 2006; Bruggen et al., 2009). Asymmetries often characterise the relationship between managers and owners. In this vein, another factor that can influence the communication of non-financial information by companies is ownership structure. Existing literature in the field of accounting has examined the impact that management ownership has on information disclosure (Craft, 1981; Leung and Horwitz, 2004). Some authors have investigated the relationship between management ownership and non-financial communication. Bukh et al. (2005) have shown that companies where managers own part of the shares disclose more information about intangibles. Similarly, Li et al. (2008) have found a significant relationship between ownership structure and IC disclosure. Some studies document the role of leadership in the communication of non-financial information, where market leaders influence the industry standard of reporting (Ahmed and Courtis, 1999; Robb and Zarzeski, 2001; Ernst and Young, 2014). While shareholders represent only one, albeit an important, category of subjects a company interacts with, stakeholder theory has been used to explain how stakeholder informative needs can influence disclosure. This theory predicts that companies might use voluntary disclosure to satisfy the informative needs of different stakeholder categories. While financial statements are aimed primarily at investors, companies might have to interact with different kinds of stakeholder. Voluntary disclosure allows companies to offer information about how they generate value for a broad set of stakeholders (Yi and Davey, 2010; An et al., 2011). Thus, extensive disclosure aims to satisfy the informative needs of those groups. Hence, bigger companies, which have to engage with more stakeholder groups, will offer an enhanced disclosure to provide those subjects with sufficient information. Agency theory framework has also been used to predict that companies with a higher level of intangible intensity, measured both at a company level and at an industry level, which suffer from greater asymmetries, have more incentives to disclose non-financial information. It has been shown that companies with a higher intangible intensity at a firm level provide more information about intangibles (Whiting and Miller, 2008). The relationship between intangible intensity at the industry level and disclosure is considered a consequence of the role that intangibles play in different sectors and of the environmental impact that characterises different industries. Companies operating in industries where new technologies have a major role and where innovation is fundamental will more heavily rely on intangible resources. In order to make informed decisions, investors need timely and reliable information about those resources. The association between industry and non-financial disclosure has been documented by several studies,

Disclosure of non-financial information  19 which have focused on different countries (Brennan, 2001; Williams, 2001; Bozzolan et al., 2003; Jones, 2007; Bruggen et al., 2009). Thus, companies operating in industries with a higher intensity of intangible resources provide a greater amount of non-financial information. The level of non-financial disclosure that characterises an industry might spur a company to align its disclosure practices with those of its peers through an imitation mechanism. This circumstance has been analysed through the lenses of institutional theory, which predicts that companies will be influenced by factors like the level of country- or industry-wide practices (Nielsen et al., 2016). Hence, not only information asymmetries levels related to industry characteristics but also the behaviours of peers can determine the level of disclosure. If a company is not able to align its disclosure practices with those of its peers, which might establish a standard, or it is not able to satisfy stakeholder informative needs, its legitimacy to operate could be hampered. Legitimacy theory is strictly connected with stakeholder theory. According to legitimacy theory, an entity needs to demonstrate that it operates in accordance with societal norms and expectations. Hence, a company’s needs to gain legitimacy in the eyes of different stakeholder classes (Deegan and Samkin, 2009). Enhanced disclosure could be used as a tool to inform stakeholders about the capability of the company to respect social norms, thus becoming a legitimation mechanism. Under this theoretical lens, studies have shown that often companies that are perceived as riskier tend to disclose more non-financial information. There is evidence of entities with a higher leverage (Alsaeed, 2006), operating in high-polluting industries, and exposed to higher pressure by media (Rupley et al., 2012), offering a better disclosure to convey information about their capability to sustain debts, reduce emissions and achieve environmental safeguard, and respond to issues identified by media agencies, respectively. In this context, some companies manipulate non-financial disclosure, selectively disclosing only positive information or using an excessively optimistic tone to build their legitimacy (Merkl-Davies and Brennan, 2007). However, companies might also use a substantive disclosure to inform stakeholders about how they have been able to generate value. In fact, signalling theory maintains that companies that have a superior performance and a strong competitive advantage will use voluntary disclosure to explain the sources of that advantage in order to attract investors (Guthrie and Petty, 2000). Building upon this theory, some studies have examined the relationship between non-financial performance and non-financial disclosures. Results are mixed, as some studies have shown a positive relationship (Al-Tuwaijri et al., 2004; Clarkson et al., 2008; Gao and Connors, 2011), while others have documented no relationships (Huges et al., 2001). Regarding IC, Williams (2001) has investigated the relationship between IC performance and IC disclosure. He finds no relationship between IC performance and IC disclosure, and shows that when IC performance is high,

20  Disclosure of non-financial information companies tend to disclose less information about IC. The author concludes that companies with high performance do not want to reveal information about their source of competitive advantage, as this implies proprietary costs of disclosure. In the area of ESG, scholars have shown that ESG performance is positively related to ESG disclosure (Wang et al., 2018). Finally, in a context where regulations are generic and managers may have incentive to withhold or manipulate information, corporate governance can be considered as a monitoring mechanism, which can spur companies to disclose more and higher quality information (Eccles et al., 2001; Iatridis, 2013). Several studies have shown that different aspects related to governance are associated with non-financial disclosures. Bassett et al. (2007) show that external auditor characteristics influence non-financial information disclosed. Other studies that have focused on board characteristics have obtained mixed results. While some studies have found that board size (Abeysekera, 2012; Omair Alotaibi and Hussainey, 2016), the percentage of independent board members (Chau and Gray, 2010; De Viliers et al., 2011), and board member expertise (Peters and Romi, 2014) are positively correlated with non-financial disclosure, others have failed to find a significant association. Wang et al. (2020) have examined the relationship between governance and disclosure by examining companies listed at the Johannesburg Stock Exchange, which have to prepare an integrated report where financial information is presented along with non-financial information. The authors have built a composite score of board quality and found that this score is positively and significantly related to the quality of integrated reports. Another aspect widely investigated is audit committee. Li et al. (2012) have investigated the impact of audit committee size, independence frequency of meetings, members who are also shareholders, and expertise on IC disclosure. They have found that IC disclosure is positively associated with size and frequency of meetings of the audit committee, while it is negatively associated with audit committee directors’ shareholding and not associated with independence and expertise. In their study on the quality of integrated reports, Wang et al. (2020) have also built a composite measure of audit committee quality and found that it has a positive and significant association with integrated reporting quality. 2.4.3 The effects of non-financial disclosure While several factors and circumstances could contribute to shape nonfinancial disclosure practices, the usefulness of that kind of information for stakeholder remains an unsolved issue. Despite the attention devoted to satisfying different stakeholder classes, investors remain the most important category among users. This circumstance is confirmed by the International Accounting Standards Board (IASB) conceptual framework and by scholarly literature that investigates the capability of information to make

Disclosure of non-financial information  21 a difference for users’ decisions, which mainly investigates investor reactions. Many accounting scholars have assessed the economic consequences of non-financial information disclosed by companies. Some empirical studies have shown that companies and financial markets can benefit from an enhanced non-financial disclosure, since it is associated with a lower cost of capital (Sengupta, 1998; Richardson and Welker, 2001; Botosan and Plumlee, 2002), a lower bid-ask spread (Welker, 1995; Petersen and Plenborg, 2003; Barth et al., 2017), and increased stock liquidity (Diamond and Verrecchia, 1991; Healy et al., 1999). As non-financial disclosure offers information that complements financial information, it has the potential to reduce information asymmetries between a company and its stakeholders. This circumstance has been documented by several studies in the field (Andriessen, 2001; Bukh et al., 2005; Mangena et al., 2010). However, other authors have found no effects of non-financial disclosure on investor behaviour (Brown and Hillegeist, 2007; Bruggen et al., 2009). Many scholars have assessed the impact of non-financial disclosure on market values in order to examine the relevance of different kinds of information to investors. The most widely used models are the model developed by Ohlson (1995) and its adaptations (Stober, 1999), which use earnings and book value of equity as predictors of market values, and the model developed by Easton and Harris (1991), which expresses market returns as a function of earnings and change in earnings. The assumption behind the use of those models is that financial markets incorporate all available information, which is reflected in stock prices. Researchers usually add to the basic variable one or more variables that capture the disclosure of non-financial items of interest. A strand of research that examines the effects of non-financial disclosure investigates sustainability and environmental disclosures. Cardamone et al. (2012) and Carnvale and Mazzucca (2014) have found a significant relationship between sustainability disclosure and share prices. Similarly, Reverte (2016) have found that ESG disclosure is value relevant, and Dal Maso et al. (2017) have demonstrated that stakeholder engagement is positively related to market values. In one of the first studies on the relevance of non-financial information, Amir and Lev (1996) have adopted a similar approach and documented a positive association between population size and market values and between market penetration and market values. The authors conclude that those non-financial measures are value relevant. Clarkson et al. (2004) have shown that commitment towards environmental safeguard is relevant to investors under certain conditions, while other studies have found that investors consider brand value in their evaluations (Barth et al., 1998; Barth and Clinch, 1998; Seethamraju, 2003). Chauvin and Hirschey (1993) have found that advertising expenses are value relevant. Several authors have focused on research projects and innovation by

22  Disclosure of non-financial information examining the value relevance of R&D disclosure (Hirschey, 1982; Doukas and Switzer, 1992; Lev and Sougiannis, 1996; Ballester et al., 2000) and of patents (Griliches, 1981; Austin, 1993). Another crucial intangible element in order to understand a company’s capability to create value is represented by customers. For this reason, accounting studies have examined the relevance of customer satisfaction measures (Ittner and Larcker, 1998) and customer franchise value (Bonacchi et al., 2015). While the above-mentioned studies assess the impact of some measures that capture the intensity of intangible elements that can be identified as IC, such as patents, brands, or customer satisfaction, some scholars have examined the value relevance of narrative disclosure on IC. Researchers usually measure IC disclosure by means of a content analysis of corporate documents. The coding is accomplished taking into account description of elements related to the main categories of human capital, relational capital and organisational. Among the most important studies on IC disclosure, Abeysekera (2011) has examined companies based in Sri Lanka in two different periods. His findings show that IC disclosure is not relevant in the period of Civil War, but it is priced by investors in the truce period. Similarly, Anam et al. (2011) have found a positive and significant relationship between IC disclosure and market values for Malaysian companies, and Uyar and Kihc (2012) have documented a positive relationship between IC and market values for Turkish companies. Vafaei et al. (2011) have conducted a cross-sectional study on the value relevance of IC. The study investigates companies from different countries, namely Great Britain, Australia, Hong Kong, and Singapore. The results indicate that IC disclosure has a significant relationship with share prices only in Great Britain and Australia and only for those companies that operate in industries characterised by high intangible factor intensity. The findings of this study support the idea that national culture and industry branch can affect investors’ perception of IC information. Most of the studies on non-financial disclosure have investigated voluntary communication. Only a few studies have examined the impact of mandatory non-financial disclosures. These studies have focused on integrated reporting mandatory adoption in South Africa (Baboukardos and Rimmel, 2016; Barth et al., 2017), greenhouse gas emissions disclosure in the UK (Baboukardos, 2017), environmental liabilities (Schneider et al., 2017; Baboukardos, 2018), and mandatory information about sustainability issues after the introduction of EU Directive 95/2014 (Cordazzo et al., 2020). A limitation of the above illustrated pieces of research is represented by the assumption that financial markets are efficient, and thus, market prices reflect all publicly available information (Fama, 1970). This assumption has been widely criticised by different authors in the fields of accounting and finance (see Shleifer and Vishny, 1997; Koonce, 2001; Farmer et al., 2012). Moreover, the model developed by Ohlson (1995) also imposes a particular structure on the abnormal earnings process and other information.

Disclosure of non-financial information  23 Some authors have also questioned the linearity of the relationships between book values and market values and between earnings and market values (Hand and Landsman, 1998; Myers, 1999; Kothari, 2001). In order to overcome the limitations of the models based on market values, some scholars have resorted to the investigation of financial analyst behaviours. Financial analysts are considered the best proxy for investors, as they are qualified individuals who make investment recommendations on the basis of a formalised company valuation process (Anderson, 1988). Some studies have investigated the contents of analyst reports (Previts et al., 1994; Breton and Taffler, 2001; Premti et al., 2017). Other authors have drawn on case studies and interviews with analysts (Johansson, 2007; Sakakibara et al., 2010; Bukh and Nielsen, 2011). Finally, some pieces of research have assessed the relationship between disclosure levels and analyst forecast errors (Lang and Lundholm, 1996; Hope, 2003; Vanstraelen et al., 2003; Dhaliwal et al., 2012). Results of studies that have applied content analysis to analyst reports in order to evaluate their use of IC have shown mixed results, as in some cases analysts extensively report IC information (Flostrand, 2006; Abhayawansa and Guthrie, 2014), while in other cases IC information in analyst reports is scarce (Garcia-Meca and Martinez, 2007). Authors who have used case studies and interviews with analysts have concluded that analysts have an interest in IC elements, but non-financial disclosure in the annual report does not provide analysts with sufficient information about intangibles. Thus, other channels become fundamental tools to convey IC information (Sakakibara et al., 2010; Bukh and Nielsen, 2011). Another stream of empirical studies has been focusing on the forecasts issued by analysts. While analysts formulate forecasts on future earnings on the basis of available information and as a result of their continuous assessment exercise, the errors in the forecasts are used as a proxy of the quality of those predictions. A wider set of available information is supposed to reduce errors in financial analyst forecasts if that information has an incremental value for users. Under these assumptions, several studies have assessed the relationship between non-financial disclosures and analyst forecast errors. If non-financial information is capable of making a difference in investment decisions, enhanced disclosure should be associated with lower errors in forecasts. The studies that analyse the impacts of non-financial disclosure on analyst forecasts have shown mixed results. Dhaliwal et al. (2012) find that issuing a sustainability report is associated with lower forecast errors and that this relationship is stronger for companies with opaque financial disclosures. Hsu and Chang (2011) have shown that a higher amount of IC disclosure is associated with lower forecast errors, defined as the difference between actual earnings and forecasted earnings, and lower dispersion, defined as the standard deviation of forecasts by different analysts for a company.

24  Disclosure of non-financial information Simpson (2010) has found that analysts under-react to non-financial metrics irregularly disclosed by companies but react to non-financial metrics persistently disclosed. This finding shows that the mere disclosure of a piece of information could not make a difference for investors if the quality of information disclosed is not sufficient. Analogously, Amir et al. (2003) have shown that financial analysts fail to fully incorporate the value of intangible resources in their forecasts. Their results confirm that, while intangibles play a role in firm valuation, users can experience difficulties in incorporating the necessary information in their evaluations, spurring a reflection on the reasons behind these difficulties.

2.5 Business model and non-financial disclosure: contextualising other information Despite the increase in the amount of information about intangibles and ESG factors disclosed by companies and the widely recognised importance of non-financial communication, there seems to be still a gap between non-financial information disclosed by companies and what investors, analysts, and the other market participants need. In a study by Petty et al. (2008), financial professionals are interviewed in order to understand what they think about the necessity for companies to disclose non-financial information. While respondents show a great interest in non-financial items, they also emphasise their dissatisfaction with companies’ disclosure about IC and intangibles. Similar conclusions are found in the study by Sakakibara et al. (2010). Bukh (2003, p. 53) states that “(…) the information disclosed in intellectual capital reports is very similar to the information needed by the capital market actors according to research in this area. Still, this is not how the actors perceive it.” In substance, the literature highlights a sort of paradox: on the one hand, a growing attention of companies and researchers to non-financial inforomation and its forms of communication; on the other hand, the investors’ dissatisfaction with these attempts. The dissatisfaction showed by analysts and investors with non-financial information disclosed by companies is probably related to the way nonfinancial items are communicated. In fact, non-financial communication often focuses on resources and activities and on what managers have done to develop those resources, rather than on how those items are employed to achieve strategic objectives and to gain a sustainable competitive advantage. A company’s capacity to create value largely depends on its capability to gain and defend a competitive position (Beattie and Smith, 2013). Moreover, companies often offer information about separate nonfinancial items, without showing the interconnections among intangible factors (Andriessen, 2001; Bukh et al., 2001; Nielsen and Bukh, 2013). Recent literature maintains that, to be useful for the market, nonfinancial information should be dynamically presented and communicated, showing the contribution offered by intangible assets to value creation and

Disclosure of non-financial information  25 the existing interconnections among intangibles (Mouritsen and Larsen, 2005; Nielsen, 2010). As highlighted by Bukh (2003, p. 53), (…) for intellectual capital disclosure to be perceived as relevant from a capital market perspective, the information should be disclosed as an integral part of a framework illuminating the value creation processes of the firm. This means that non-financial disclosure should communicate the management’s understanding of strategy and value creation, and not only show indicators of general interest. This implies that disclosure of intangibles should be done in the framework of the firm’s strategy for value creation, i.e. the value creation model should also be disclosed. The process of creation and appropriation of value and the dynamic role of intangibles along this process are expressed by the business model (BM) (Amit and Zott, 2001; Magretta, 2002; Ghaziani and Ventresca, 2005; Perkmann and Spicer, 2010).

2.6 What a business model is 2.6.1 Purpose of business models The concept of business model (BM) has gained popularity in managerial literature at the end of the 1990s with the explosion of the e-business. The development of new technologies and the rise of the Internet changed the way companies do business, offering new sources of value creation. Companies had the possibility to develop and sell new kinds of products, using new channels, and to create larger networks with other companies (Evans and Wurster, 1997). Technological development, at the same time, has contributed to an economy characterised by higher pace of change, high levels of complexity, and uncertainty that companies have to face. In this context, managers need a tool that allows them to manage the challenges of this kind of economy. The BM represents that tool, as it offers a schematic representation of the processes that generate value for a business. The term model, in fact, stands for a representation of a piece of reality (Morgan, 2005). BM can be defined as “an abstract representation of the business logic of a company. (…) an abstract comprehension of the way a company makes money, in other words, what it offers, to whom it offers this and how it can accomplish this.” (Osterwalder, 2004, p. 14). All the decisions on how to use a company’s resources to gain and defend a competitive advantage contribute to shape the BM. The BM is believed to be directly linked to a company’s performance. The BM adopted by a company has claimed to be a determinant of its value (Zott and Amit, 2008; Ayadi et al., 2012). Many authors have discussed how BM can be managed and innovated to gain or defend a competitive

26  Disclosure of non-financial information advantage or to increase performance. A primary function of a BM is to exploit business opportunities (Zott and Amit, 2010). Once an opportunity is identified, the BM can be a useful tool to translate a business idea into an effective offer. Managers have the possibility to lever some aspects of a company’s BM, like the content, structure, and governance of the activity system that characterises a company (Amit and Zott, 2010). Many scholars share the view that BM management and implementation is a fundamental managerial capability (Chesbrough, 2010), which allows to translate BM in concrete business structures and processes (Osterwalder et al., 2005), and business activities (Doganova and Eyquem-Renault, 2009). However, BM is a construct that is different from strategy. The differences between these two concepts have been investigated by some scholars (Seddon and Lewis, 2003; Nielsen, 2010). The two concepts can be considered as complementary rather than as substitutes. While the strategy tells how the company differentiates from its competitors, the BM “defines on which basis this is to be achieved, i.e. how it combines its know-how and resources to deliver the value proposition (which will secure profits and thus make the company sustainable)” (Nielsen, 2010, p. 1). The BM poses itself as a strategy’s implementation (Osterwalder and Pigneur, 2010). An argument that supports this view is offered by Nielsen (2010, pp. 1–2), when he states that there are cases “where some companies are more profitable than others in the same industry, even though they apply the same strategy. (…) The difference thus lies in the way activities are performed (strategic and tactical choices)” – that is in the BM. Many scholars have tried to better define BM or to provide BM classifications that can be applied to companies that share the same value creation logic. Timmers (1998) has offered one of the first classifications of BM, which is articulated in three interdependent components: • • •

an architecture for the product or service offered by a company; a description of the potential benefits for business actors; the representation of what the sources of a company’s revenues are.

The definition offered by Timmers (1998) highlights how the BM takes into account not only the configuration of a company’s internal activities but also how value is generated for external actors. The author elaborates this definition of BM with reference to the emerging field of e-business. A similar definition is the one proposed by Weill and Vitale (2001), who focus on e-business companies. In their view, a BM is a representation of the existing roles and relationships among the different types of actors that are connected to a company, like customers, partners, and suppliers. The BM helps identify and trace the flows of information and money among those actors. One of the most important contributions in the field of BM has come from Amit and Zott (2001). The authors have used an inductive approach

Disclosure of non-financial information  27 to obtain a definition of BM. If BM can be thought of as a representation of how a company generates value, understanding and classifying the main sources of value of a large number of companies can lead to the identification of some recurrent elements that define BM. The definition of BM created by Amit and Zott (2001) focuses on some key concepts identified by previous literature. The pillars of Amit and Zott’s proposal are: • •

•

value chains (Porter, 1985), i.e. the representation of firm activities and of the way they generate economic value; transactions (Williamson, 1975, 1979, 1983), i.e. any exchange of good or services among actors. More specifically a transaction “occurs when a good or service is transferred across a technologically separable interface. One stage of assembly activity terminates and another begins” (Williamson, 1983, p. 104); networks, seen as “stable interorganizational ties which are strategically important to participating firms. They may take the form of strategic alliances, joint ventures, long-term buyer-supplier partnerships, and other ties” (Gulati et al., 2000, p. 203).

On the basis of a theoretical framework that takes into account the above discussed concepts, the authors have analysed a sample of companies operating in e-business to understand the sources of value creation for those firms. The analysis of e-business companies has been used by the authors to inductively build a concept of BM. The results of their study emphasise four main dimensions of value creation in e-business. Those dimensions are novelty, lock-in, complementarities, and efficiency. Novelty is not restricted to innovative products or services but refers to innovations in aspects such as the typology of customers a company aims to reach or the structure of transactions. Lock-in is related to the way a company is able to secure customer’s loyalty. Complementarities are broadly defined as complementarities between products and services for customers, between different assets, between technologies, and between activities. Finally, efficiency is closely related to internal aspects of how the firm is managed, such as cost structure or the presence of scale economies. Another major contribution of the study by Amit and Zott (2001) is the fact that they have found that the four dimensions of value creation do not act in isolation. The interdependencies among those elements are crucial to define a company’s way of doing business and its competitive advantage. The authors have proposed the BM as the unit of analysis of a company’s value creation process that is capable of capturing the contribution of the various elements to value creation and the relationships among them. The definition of BM they offer is the following: “A business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities” (Amit and Zott, 2001, p. 511).

28  Disclosure of non-financial information Despite the work of Amit and Zott is structured around e-business, this definition could be generalised. The authors point out that transaction contents refer to the goods or information that are being exchanged, and to the resources and capabilities that are required to enable the exchange. Transaction structure refers to the parties that participate in the exchange and the ways in which these parties are linked. (…) Transaction governance refers to the ways in which flows of information, resources, and goods are controlled by the relevant parties. (Amit and Zott, 2001, p. 511) As in Timmers’s (1998) conceptualisation, the notion of BM takes into account both internal – i.e. resources and processes, which affect efficiency – and external – i.e. relationships among the various actors that are interested in a firm’s activity, which define novelty, lock-in, and complementarities – aspects of the process of value creation. Subsequent definitions of BM have not been conceived specifically for e-business, as they have been aiming at establishing a common ground for the inquiry of the value generation processes of every company. With this aim in mind, Chesbrough and Rosenbloom (2002, p. 530) have defined BM as the “architecture of the revenue,” meaning all the actions that allow a company to capture value from its key resources, translating that value into revenue streams. Linder and Cantrell (2001) see the BM as the core logic of value creation of the firm. This definition includes the value offered to stakeholders, the main operating processes a company relies on, the way these processes are coordinated, and key assets and resources. While each work has contributed to shape BM conceptualisations, the different definitions might result in a fragmented scenario, with some elements that are shared among different definitions and other peculiar items that characterise only one or a few proposals. As stated by Klang et al. (2010, p. 14), the majority of business model definitions are based on previous concepts, which may lead to the assumption of contextual parsimony in the understanding of the business model. This is particularly peculiar as in many cases, the opposite is argued: previous work has often lamented the overall view of the business model to be highly fragmented, consisting of a broad array of conceptions. These contradictive perceptions raise the question, whether the existing view on the business model concept is not that fragmented at all in the end, but rather whether the current literature state-of-the-art has failed to integrate and generalize the existing, rather parsimonious, set of contributions. In order to overcome this fragmentation of BM definitions, some scholars have tried to review the literature about BM in a systematic way. Shafer

Disclosure of non-financial information  29 et al. (2005) have reviewed existing literature about BM in the attempt to identify affinities between the constitutive elements of BM according to the various definitions. The authors have come up with the definition of BM as “a representation of a firm’s underlying core logic and strategic choices for creating and capturing value within a value network” (Shafer et al., 2005, p. 202), which encompasses both internal and external dimensions of value creation. Abd Aziz et al. (2008) have applied factor analysis to the main components of BM identified by the authors in the field in order to narrow down the number of BM elements. Their goal was to define the core elements that generate value for a business. The results of the analysis of Abd Aziz et al. (2008) have shown that the three most important elements that define a BM are related to customers, core competencies, and value creation. Finally, Wirtz et al. (2016) have proposed an extensive BM review. The review points out the different terminologies and BM concepts used by different authors in the field. The analysis of a large sample of articles on BM has revealed that BM is usually described as having various components. The authors have then examined the most recurrent elements across different BM conceptualisations. They have found that resources and market offerings are the items that are most recurrently included in BM definitions. Other relevant items identified by the authors are strategy, network, customers, revenues, service provision, and finances. 2.6.2 Business model ontologies The authors who have tried to review previous literature to build a shared definition of BM often ended up with definitions based on a reductionist approach that tries to identify a minimum set of common definitions (Shafer et al., 2005; Abd Aziz et al., 2008; Wirtz et al., 2016). Other authors who have spent efforts towards a shared concept of BM have developed some ontologies. An ontology can be defined as “an explicit specification of a conceptualization” (Gruber, 1993, p. 3). As Uschold and King (1995, p. 7) point out, “A central activity in the development of ontologies, and modelling more generally, is to identify those aspects of the real world that are of interest, to define them, and create terms to refer to them.” An ontology represents a framework that allows the definition of a shared understanding of a domain among people (Fensel, 2001). The construction of an ontology of BM can help achieve a common definition of this concept in several ways. First of all, since an ontology defines what the main components of a concept are and how the relationships among those elements are structured (Morecroft, 1994; Ushold and King, 1995), the development of a BM ontology allows to better define the main components of BM and the interrelations among those elements. Second, a BM ontology could help managers share their vision and understanding of the logic of value creation of a company with stakeholders.

30  Disclosure of non-financial information Third, the ontology could facilitate the process of changing existing BMs (Petrovic et al., 2001). Once the key elements of a concept are defined, it becomes easier to change the aspects that need improvement. In this perspective, a BM ontology can also be used to simulate businesses before making changes or even before starting a new company. This way, the BM enables risk-free experiments and simulation, which do not compromise a business (Sternman, 2000). It is possible to find three main BM ontologies in the literature. These ontologies are the ones proposed by Petrovic et al. (2001), Gordijn and Akkermans (2003), and Osterwalder et al. (2005). Petrovic et al. (2001) have grounded their study in system theory. The authors have started from the model proposed by Wirtz (2000) and have extended that model. They have identified seven constitutive elements that define a BM. The elements are (Petrovic et al., 2001, p. 2):

Those elements do not act in isolation but are interrelated. The authors argue that the development of a definition of BM can be helpful to have a clearer representation of a company’s processes. This, in turn, would help the process of changing existing models of doing business. Gordijn and Akkermans (2003) have developed the so-called e3-value ontology, which tries to identify the exchanges of value objects that occur among the subjects that are involved in a business. The ontology has

Disclosure of non-financial information  31 been built upon existing literature on BM resorting to a systems theory approach. The key concept of the e3-value ontology is the concept of actor. An actor here is defined as an independent economic (and often also legal) entity. Economically independent refers to the ability of an actor to be profitable after a reasonable period of time (in the case of an enterprise), or to increase economic utility for him/herself (in the case of an end-consumer). In a sound, viable, value model each actor should be capable of making a profit or to do utility increase. (Gordijn and Akkermans, 2003, pp. 119–120) Actors are involved in exchanges of different value objects, which can be represented by goods, services, or money. The value ports are all the mechanisms and channels used by actors to show their interest in providing and/ or receiving value objects. What an actor offers to the business environment is represented in the value offering. The value interface depicts the conditions that underlie the exchanges among actors, on the basis of what each actor expects to receive in return for an offer. Two different value ports are connected through a value exchange. Actors that value objects equally from an economic perspective for one or more of their value interfaces define a market segment. Value interfaces are clustered in composite actors. Finally, each actor performs value activities, which must increase the economic profit of the actor. Compared to the ontology proposed by Petrovic et al. (2001), the e3-value model puts less emphasis on key resources and on a company’s internal processes, while it puts more emphasis on the relationship among different actors – the external aspects of a firm’s activities. The most well-known ontology of BM is the one developed by Ostrewalder et al. (2005). The ontology was built on the basis of previous definitions of BM created by scholars in the field. Starting from the elements identified as BM components by the different authors, Osterwalder et al. (2005) have selected all the items that are cited in at least two different contributions. The results of this review are nine domains that have been recurrently discussed by scholars. These nine building blocks are value proposition, target customers, distribution channels, relationships, key resources, activities, partnerships, revenue stream, and cost structure. The authors have grouped the nine elements in four major pillars. The four pillars and the nine building blocks are shown in Table 2.1. The elements related to value proposition and customer pillars are those that show a company’s relationships with external parties. Key resources and activities, which are related to infrastructure pillar, deal with internal aspects. The third element of infrastructure pillar, partnerships, can be considered as an item related to external aspects (Bini et al., 2019). Regarding financial aspects, costs structure can be considered as related to internal aspects,

32  Disclosure of non-financial information Table 2.1 Constitutive elements of the business model according to Osterwalder et al. (2005) Pillar

Element

Description

Perspective (internal/ external)

Product

Value proposition

External

Customers

Target customers

How a company’s offering adds value to customers Definition of target customers a company aims to reach How a company delivers its products or services to customers How a company builds durable relationships with customers Depicts the most important resources a company relies on Illustrate the most important valuegenerating activities of an entity How a company uses partnerships to generate value How the value generated for customers is captured through revenue streams Composition of the main costs and how they are managed

Distribution channels Relationships Infrastructure

Key resources Activities

Partnerships Financial aspects

Revenue stream

Cost structure

External External External Internal Internal

External External

Internal

Source: Elaboration of the author based on Osterwalder et al. (2005) and Bini et al. (2019).

while revenue stream can be considered as part of external aspects because it depicts how revenues from selling products or services are collected from customers (Bini et al., 2019). The ontology proposed by Osterwalder et al. (2005) can be defined as the most complete and comprehensive one, as both internal and external aspects are considered. The BM ontology elaborated by Osterwalder et al. (2005) and the e3Value ontology have been compared by Gordijn et al. (2005). The authors have used a framework that compares elements like the purpose of an ontology, the definitions adopted, the focus of an ontology, its components and its role, its maturity, the representations of the ontology, and the actors that should use it. They have found that both the ontologies are designed to improve various forms of communication and have the goal to provide a tool that can be used to compare BM for scientific purposes. The two

Disclosure of non-financial information  33 ontologies conceive BM in different ways: while BM ontology proposed by Osterwalder et al. (2005) refers to BM as a concept composed of different but interrelated elements, with a focus on a single company, the e3-value ontology sees BM as the sum of different companies and their customers, which create, distribute, and consume value objects. The difference between the two models is the object of study, which is represented by the company for Osterwalder et al. (2005), and by the constellations of interrelated companies along with their final customers for Gordjin and Akkermans (2003). The two models partially differ also in terms of origins: the ontology by Osterwalder et al. (2005) is rooted in information systems and management science, while e3-Value model has its origins in computer science and management science. The elements that characterise the two ontologies are partially overlapped. In particular, the elements labelled as value offering and value port in the e3-Value Ontology can be conceived as part of what Osterwalder et al. (2005) call value proposition. In a similar way, the items Gordijn and Akkermans (2003) call value activities and value exchange can be considered as part of the value configuration in the model of Osterwlder et al. (2005), while the value objects in the e3-Value Ontology can be thought of as resources according to the ontology created by Osterwalder et al. (2005). Finally, in the ontology developed by Osterwalder et al. (2005), customers and partners play a key role. All those subjects are actors according to the definition provided by Gordijn and Akkermans (2003). The two models share similar potential users. They both are mature, since they have been widely used in practice. Gordijn et al. (2005) have concluded their review with an analysis of how the two ontologies can be integrated. They argue that both ontologies have much to offer in the area of understanding network constellation-related concepts, and therefore, they could contribute to each other, so as in the area of tool support. They also state that the ontology proposed by Osterwalder et al. (2005) is more advanced in relation to offer- and customer-related concepts, while the e3-value ontology is at a more developed stage in the area of value exchange. 2.6.3 Business model taxonomies Some authors have also tried to define BM taxonomies. Differently from definitions or ontologies derived from theory, taxonomies are classifications inductively derived from empirical data (Steininger et al., 2013). The first taxonomies that have been developed are specifically defined for e-business companies. Among those taxonomies, we find the ones elaborated by Timmers (1998), Weill and Vitale (2001), and Amit and Zott (2001). These categorisations present a limitation, as they are developed taking into account only e-business. More recently, Taran et al. (2016) have tried to overcome these imitations by developing an extensive taxonomy of BM that can be applied

34  Disclosure of non-financial information to every kind of company. The taxonomy has been built starting from a literature review of all existing BM definitions. The aim of the research was to identify all the BM configurations developed by the authors in the field. This exercise has been integrated with the study of the most important reviews of BM conceptualisations (Zott et al., 2011; Fielt, 2014; Haslam et al., 2015). Once BM configurations have been identified, they have been mapped using the BM ontology developed by Osterwalder et al. (2005). As the authors state, this ontology has been selected “as a mapping tool because of its popularity amongst business developers, entrepreneurs and academics alike. As such, it provided a shared language from which we could describe, visualize and assess BM configurations” (Taran et al., 2016, p. 499). The authors have used a value driver approach (Amit and Zott, 2001) to group similar configurations. According to the definition of Amit and Zott (2001), value drivers are defined as any factor, like resources, activities, and competencies, which contribute to value creation and represent critical success factors for a business (Amit and Zott, 2001; Zott et al., 2011; Montemari and Nielsen, 2014). Resorting to value drivers identified in the literature (Amit and Zott, 2001; Wesetrlund et al., 2014) and BM classification categories (Afuah and Tucci, 2003; Gassmann et al., 2014), the authors have narrowed down the list of BM configurations to 71. 2.6.4 Common traits of different business model definitions In the light of the above-mentioned discussion, many definitions and categorisations of BM exist. The first classifications specifically refer to e-business, while more recently the notion of BM has been applied to companies operating in every field. Generic definitions have been integrated and reviewed many times. Some authors have also contributed to the development of ontologies, which aim at providing a universal and shared conceptualisation of what a BM is and defining the main components of a BM. Finally, there are scholars who have tried to build BM taxonomies in order to map all the existing BM configurations. Despite the many definitions and categorisations of BM, some common features that contribute to define BM can be found in the dominant literature (Zott et al., 2011). First of all, the concept of BM is different from the concept of strategy (Novak, 2014; Massa et al., 2017). The competitive strategy deals with how a company differentiates itself, while the BM defines on which basis this is to be achieved, i.e. how a company combines its know-how and resources to deliver the value proposition (CasadesusMasanell and Ricart, 2010). Second, the notion of BM revolves around the key resources that a company relies on and how these are combined to create value (Linder and Cantrell, 2001; Bukh, 2003; Shafer et al., 2005; Nielsen, 2010; Teece, 2010). This is confirmed by the review of the BM components made by Wirtz et al. (2016), who identify resources and value

Disclosure of non-financial information  35 proposition as the most recurrent element addressed as key building blocks of a BM. Third, the BM takes into account the activities of external actors, like partners, customers, and suppliers, who participate in the value creation process of a company (Zott et al., 2011).

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3

Business model communication in corporate reporting

3.1 Business model disclosure: providing users with information about value creation As the business model (BM) offers information of how different resources, activities, and relationships contribute to generate value, the knowledge of a company’s BM results in the knowledge of the logic of value creation of that company. A BM helps identifying the key tangible and intangible resources of a company and offers information about how a company competes and about business opportunities that can be exploited. Hence, the communication of BM could be useful for investors, since it would allow them to understand what the main value drivers of business are (Leisenring et al., 2012). The opportunity to disclose BM can be examined through different theoretical lenses. Those lenses are the same that can be adopted to understand the different reasons that drive intellectual capital (IC) disclosure (see Chapter 2). The agency theory (Akerlof, 1970; Jensen and Meckling, 1976) states that an information asymmetry exists between managers and the various stakeholders who are interested in a company’s activities. In this perspective, a greater amount of disclosure is supposed to reduce information asymmetries (Aboody and Lev, 2000; Petersen and Plenborg, 2006; Brown and Hillegeist, 2007; Motokawa, 2015). Therefore, under the lens of agency theory, BM disclosure can be viewed as a tool that allows a company to reduce information asymmetries (Johansson and Malmstrom, 2013). Another theoretical framework that is often used to investigate disclosure practices is the signalling theory. According to this view, the information disclosed by a company is used to show what the distinctive features of that company are and how those aspects contribute to distinguish the company from its competitors (Spence, 1973). Signals can be of extreme importance to attract new investments and gain the trust of stakeholders (Verrecchia, 1990). In this perspective, a company may be interested in communicating BM in order to show investors ad stakeholders what the drivers of its value are and how these elements allow the company to perform better than DOI: 10.4324/9781003016793-3

Business models in corporate reporting  51 competitors, becoming a powerful tool to attract investors (Johansson and Malmstrom, 2013). The need to use disclosure as a signalling tool is much stronger for companies that rely heavily on outside shareholders, like listed companies (Nobes and Parker, 2010). Thus, big companies will more likely benefit from BM disclosure. Finally, legitimacy theory is based on the concept of a contract that exists between a company and its constituencies (Schocker and Sethi, 1974). According to this theory, a company existence depends on the fact that its values are perceived in line with those of the society (Dowling and Pfeffer, 1975; Lindblom, 1994). Thus, in order to be legitimate, the actions of a company should reflect a system of norms, values, beliefs, and definitions (Suchman, 1995). Companies can achieve and strengthen their legitimacy through the information they disclose (Watson et al., 2002). Under this assumption, BM disclosure can be shaped and structured so as to promote the legitimacy of a company’s actions in the eyes of stakeholders (Snihur and Zott, 2013). The opportunity to disclose BM has been widely debated also by standard setters and professional bodies. There is a wide consensus around the fact that a description of BM in the annual report is crucial to allow investors to understand what the core elements of a company’s value creation process are (IASB, 2010; BIS, 2011; CIMA, 2013; EFRAG, 2013; PwC, 2013). As a research paper by the European Financial Reporting Advisory Group (EFRAG, 2013) explains, the BM has the potential to provide investors with valuable information that improves their capacity to link financial and non-financial information, enhances comparability, and represents actual economic reality. BM communication in the annual report should form the basis of a continuing durable standard for enhanced public disclosure of information on BM and its role in corporate value-creation processes. The existence of such a standard would create a level playing for disclosure for those investors not privy to direct one-to-one contact with companies. (Holland, 2004, p. 101) BM disclosure impinges on both the financial statements and the narrative section of the annual report. The Institute of Chartered Accountants of England and Wales (ICAEW, 2010) has pointed out that “assumptions about business models have always been implicit in financial reporting standards” (p. 3). Similarly, EFRAG (2013) claims that “the notion of the business model has already been implicit in IFRS [for] a long time” (p. 4). However, it is in the narrative section that the topic of BM communication plays a pivotal role (Fensel, 2001; Nielsen, 2010). The BM concept, as a schematic representation of the value creation and capture process, grows

52  Business models in corporate reporting into a communicative approach that might allow a company (Bukh, 2003; Nielsen and Bukh, 2013): • • •

to offer stakeholders a view of the business activities that is aligned with management’s view; to identify and highlight the most important contents within the annual report document; to connect information on strategies, IC resources, financial and non-financial performance, and the risks looming over the company.

In substance, the BM offers a macro-level view of the company that allows configuring various components in an organisation that represents the top-level capstone in a business reporting hierarchy (Winter and Szulanski, 2001; Perkmann and Spicer, 2010; Bini et al., 2016a). All the items disclosed by companies can be easily overlooked if the company does not provide external users with information that shows how the various elements of the value creation process are interrelated (Bukh et al., 2001; Mouritsen et al., 2001; Nielsen and Bukh, 2013). BM disclosure can serve this purpose (Kozberg, 2001; Bukh, 2003; Osterwalder et al., 2005; Nielsen, 2010). Against this background, the BM becomes a framework for non-financial disclosure (Kozberg, 2001). Many studies support the role of BM as a framework to interpret non-financial information (Bukh et al., 2001; Eccles et al., 2001; Holland, 2004; Beattie and Smith, 2013; Nielsen and Bukh, 2013), emphasising how non-financial items are usually disentangled from the text of the annual report or the IC report (Nielsen, 2010). The BM disclosure allows the “entangling” of non-financial items by providing information about how they are related to the value creation process (Mouritsen, 2009). What takes shape is a communication model that is structured with different but integrated levels (Nielsen and Bukh, 2011; Beattie and Smith, 2013). On the one hand, information about market transactions and their financial effects is measured and represented by the financial statements. On the other hand, the narrative section of the annual report typically contains information about the environment where a company competes, the opportunities and risks that feature that environment, and the aims and strategies a company works out to cope with those conditions. These two sets of information are connected and coordinated through the BM disclosure, i.e. the disclosure of resources, dynamic capabilities, and relationships with internal and external players a company takes advantage of to create and capture value. This idea is at the heart of the integrated reporting model developed by the International Integrated Reporting Council (IIRC). In fact, the IIRC (2013) declares that “at the core of the organisation is its business model, which draws on various capitals as inputs and, through its business activities, converts them to outputs (products, services, by-products and waste)” (p. 13).

Business models in corporate reporting  53 The view of BM as a context for the interpretation of other kinds of information is shared by academic researchers and the most important consulting firms and professional bodies. In a report about non-financial information recently published by Ernst & Young (2017, p. 4), we can read: “Insight into the company’s business model is important when it comes to placing (…) information in the correct context.” Singleton-Green (2014) and EFRAG (2013) are on the same page when they claim that the description of BM can provide further information on assets and liabilities that are recognised in a company’s financial statements. In this vein, the BM becomes a platform that allows entities to disclose how environmental, social, and governance (ESG) aspects are integrated in value creation. While the communication of isolated ESG factors could be used by managers to disclose only favourable information in order to legitimise their actions, thus creating a decoupling between actions and disclosures (Michelon et al., 2015), the integration of ESG aspects in BM reporting can be used to show how those elements create value for different stakeholders. Hence, the integration between BM and ESG information can become a tool that enhances the credibility and veracity of ESG information, helping distinguish between merely rhetoric disclosures and substantive disclosures on ESG (Bini et al., 2016b). As in the case of IC, narratives can be complemented by indicators. As the BM illustrates the main value drivers of an entity, the measurement of those aspects is crucial to understand their contribution to value generation and to improve the credibility of the story. At the same time, the BM represents a tool for external users to assess and contextualise non-financial performance indicators (Bukh, 2003; Holland, 2004; Mouritsen and Larsen, 2005; Bini et al., 2019). If companies disclose KPIs “without disclosing the business model that explains the interconnectedness of the indicators and why the bundle of indicators is relevant for understanding the firms’ strategy for value creation, then the analysts must do the interpretation” (Bukh, 2003, p. 53). Thus, BM reporting is complemented by the disclosure of KPIs but also enables the distinction between KPIs that measure the outcomes of how a company has exploited its value drivers and other KPIs. Finally, BM information is strictly related to information about risks (IIRC, 2013). Risks represent the uncertainty that characterises the outcomes of a company’s operations (Elshandidy et al., 2018). Hence, uncertainties surrounding the mobilisation of key resources of the key activities that define a company’s BM should be illustrated among the risks that the entity faces in order to offer a complete picture of the value creation process (IIRC, 2013; Sukhari and De Villiers, 2019). A board definition of risks encompasses not only negative but also positive outcomes (opportunities). This implies that the disclosure of information about risks can be used not only to discuss potential failures of the BM or factors that harm the successful exploitation of the value drivers but also to inform investors about the opportunities related to the mobilisation of the different value drivers.

54  Business models in corporate reporting

Intellectual

Environmental, social,

capital

and governance factors Role in value creation

Role in value creation

Business model disclosure Expected outcome of value creation process

Actual outcome of value creation process

Risks and

Non-financial KPIs

opportunities

Financial Predtiction

outcomes

Predtiction

Figure 3.1 The relationship between business model and other non-financial items

In light of the above discussion, the BM has the potential to become a platform that establishes the natural linkages among different pieces of non-financial information and connect that information to financial outcomes. BM can be the natural anchor point to illustrate how IC elements are mobilised to create value, but also to understand the veracity of ESG information and the most important non-financial KPIs. As a consequence of the uncertainty that surrounds the successful implementation of BM, risk reporting becomes a tool to inform investors and other stakeholders about threats to value creation and opportunities related to BM value drivers (Figure 3.1).

3.2 Regulation of business model disclosure The importance of BM disclosure has been recognised by standard setters. Recent regulations have introduced the requirement for large companies to disclose their BM in the annual report. In 2014, the EU issued a European Directive that requires all member countries to regulate non-financial

Business models in corporate reporting  55 disclosure for large companies. The EU Directive 2014/95 requires to disclose different kinds of non-financial information, like information about sustainability and workforce diversity. Among the items discussed in the Directive, the BM plays a fundamental role. Companies are expected to disclose BM as part of the forward-looking information set. In order to support companies in the process of adaptation to the new requirements, in 2017 the European Commission (EC) published a document that contains non-financial reporting guidelines. The UK Government enforced a revised version of the Companies Act in 2013. This version requires companies to disclose BM in a section of the annual report called strategic report. The Financial Reporting Council (FRC) has developed guidelines with the aim to assist UK-based companies in the preparation of strategic report (FRC Guidance on the strategic report, 2014, 2018). Both these regulations see the BM as providing context to other types of information disclosed. The EC claims that BM “provides context for the management report as a whole.” (EU guidelines on non-financial reporting, 2017, p. 10). The FRC is on the same wavelength when it points out that BM disclosure “should provide context for the strategic report and the annual report more broadly” (FRC Guidance on the strategic report, 2018, paragraph 7A.20). In both cases, the linkages between BM and non-financial KPIs and between BM and principal risks are considered pivotal elements of an integrated communication. FRC guidelines explicitly state that there should be “alignment between the KPIs presented in the strategic report and the key sources of value and risks identified in the business model” (FRC Guidance on the strategic report, 2018, paragraph 7A.69). The guidelines also implicitly address the issue of IC disclosure through the BM. For instance, the FRC points out that understanding the BM implies understanding its sources of value, which should be assessed considering “both its tangible and intangible assets and also identify those resources and relationships that have not been reflected in the financial statements because they do not meet the accounting definitions of assets or the criteria for recognition as assets” (FRC Guidance on the strategic report, 2018, paragraph 7A.16). The FRC also states that BM information, which is presented in the strategic report, should be strictly coordinated with the information showed in other sections of the annual report (see FRC, 2018). Although the regulators recognise and underline the most important elements of BM reporting pointed out by scholarly research on the topic, the regulation of BM disclosure is affected by the same problems that characterise previous non-financial disclosure regulatory attempts. While some scholars argue that non-financial regulations can ensure some degree of uniformity, reduce information asymmetries (KPMG and UNEP, 2016), and result in relevant disclosures (Berthelot et al., 2003; Moneva and Cuellar, 2009), limitations related to loose requirements and generic definitions of the items that should be disclosed emerge. Like other non-financial regulations, requirements about the BM provide only broad

56  Business models in corporate reporting and generic definitions of the concept of BM and of how companies should disclose it. A BM definition is provided by the EU in its guidelines. Through BM disclosure, a company is supposed to describe “(…) how it generates and preserves value through its products or services over the longer term” (EU guidelines on non-financial reporting, 2017, p. 10). The definition of the FRC is somehow similar. The description of BM is supposed to show how an entity “(…) generates and preserves value over the longer term” (FRC Guidance on the strategic report, 2018, paragraph 7A.15). As there is not a shared and accepted definition of BM in the academic and professional contexts and the BM is a company-specific concept, regulators might not be capable to define the ideal amount of information companies should disclose in order to fulfil informative purposes and, at the same time, offer valuable information without bearing proprietary costs for the communication of sensitive information about value creation. In this context, companies have wide discretion in deciding what kinds of information to include in the annual report and how to communicate those items. Thus, BM disclosure is essentially voluntary in nature. This circumstance might lead to different behaviours by preparers. Different BM reporting practices can be driven by several factors and have consequences on investors’ decisions. For instance, bigger companies, which might have to interact with wider stakeholder groups and potentially suffer from higher levels of information asymmetries, will have more incentives to be more transparent and offer a more comprehensive disclosure on the BM. Companies operating in industries characterised by higher level of intangible intensity could be spurred to offer a better BM as well, as they have to show how intangibles are managed to create value to be legitimate.

3.3 Empirical evidence on business model disclosure practices The loose requirements and the lack of clear guidance, which might lead to different behaviours in BM disclosure, have spurred empirical research aimed at understanding how companies report their BM, which factors are associated with BM disclosure, and the effects of the communication of this kind of information. To date, only a few empirical studies have examined BM reporting. However, their findings offer useful insights on how companies are approaching BM reporting and the usefulness of this kind of information for users. Existing studies allow to reflect also on the methodological issues related to the assessment of the BM and how the analysis of BM disclosure can be improved. The empirical studies on BM reporting can be grouped according to several characteristics. While some studies focus on the analysis of integrated reports, other consider also companies that do not adopt that form of reporting (Table 3.1). As a crucial feature of BM disclosure is related to its

2018

Bini et al.

Method

Journal of Intellectual Capital

Integrated reporting focus

No

No

Companies often offer a fragmented and scarcely focused description of the business model.

Sustainability issues are rarely contextualised in business model descriptions.

Content analysis is used to assess business model reporting. Relationship between business model and sustainability issues is then evaluated.

No Identified items are industry, market, customer, product, and development. While companies tend to disclose information about customers, products, and processes, disclosure on resources is scarce. As examined companies are from high-tech industries, proprietary costs might affect the disclosure of resources, especially intangible elements.

Results

Content analysis is used to conduct an explorative study of business model disclosure in the strategic report.

Journal of Automated content analysis is Management applied to search for business and Governance model in IPO prospectuses of three case companies.

Journal

Journal of Integrating Cleaner sustainability in Production business model disclosure: Evidence from the UK mining industry

Business model disclosure in the Strategic Report. Entangling intellectual capital in value creation process.

2016

Bini et al.

Title

Business model in IPO prospectuses: insights from Italian Innovation Companies

Year

Bagnoli and 2016 Redigolo

Authors

Table 3.1 Summary of empirical studies on business model disclosure

(Continued)

Yes (ESG)

Yes (IC)

No

Focus on mutual relationships with other concepts

Year

2019

2020

2019

2017

Authors

Bini et al.

Cordazzo et al.

Di Tullio et al.

Mechelli et al.

Meditari Accountancy Research

Business Strategy and the Environment

Journal

Spanish The usefulness of the business model Accounting Review disclosure for investors' judgement in financial entities. A European study

In search of legitimacy: a semiotic analysis of business model disclosure practices

Does the EU Directive on non-financial information influence the value relevance of ESG disclosure? Italian evidence

Are non-financial KPIs in annual reports really key'? An investigation of company disclosure and analyst reports in the UK

Title

No

No

No

No The introduction of a mandatory requirement has had no effects on the value relevance of non-financial information. Non-financial disclosure has slightly improved after the introduction of mandatory non-financial disclosure. No Half of the companies comply with the EU Directive using nonaccounting language, figures, and diagrams, while the others did not disclose substantive information about the business model. Extensive business model disclosure enhances the relevance of book value and earnings.

The authors use content analysis to examine annual reports of Italian companies. The value relevance of book value, earnings, and non-financial disclosure is measured in the pre- and post-enforcement of the EU non-financial regulation. Semiotic analysis is used to content analyse annual reports of EU companies.

Annual reports of a sample of financial entities are content analysed to verify the impact of business model disclosure on the value relevance of book value and earnings through a price-level model.

No

Yes (KPIs)

No Many companies do not disclose non-financial KPIs. About half of the disclosed KPIs are related to the business model. Analysts rarely include business model descriptions in their reports.

Focus on mutual relationships with other concepts

Content analysis is used to assess business model disclosure in annual reports. Business model elements are then matched with KPIs. Subsequently, analyst reports are evaluated to assess the presence of business model information.

Integrated reporting focus

Results

Method

2016

2017

2018

2019

2019

Melloni et al.

Michalak et al.

Pistoni et al.

Simoni et al.

Sukhari and De Villiers

Financial Reporting

The influence of Australian integrated reporting Accounting on business model Review and strategy disclosures

The effects of business model regulation on the value relevance of traditional performance measures. Some evidence from UK companies

The authors analyse IR to identify business model information. They focus on qualitative attributes to assess impression management and disclosure verifiability.

The authors use content analysis to identify the main items disclosed under strategy and business model in the IR.

The authors examine the value relevance of book value of equity and earnings before and after the enforcement of the revision of the Companies Act, which introduced the mandatory requirement to disclose the business model.

Content analysis is used to evaluate the quality of IR. Several items are collected and weighted according to the type of disclosure.

Journal of Parallelism among IC Business Models guidelines, strategic report requirements, and IR are established and discussed. An example of a company’s business model disclosure is offered.

Integrated reporting Corporate Social quality: An Responsibility empirical analysis and Environmental Management

Business model disclosures in corporate reports

The tone of business Journal of model disclosure: Management an impression and Governance management analysis

No

Yes (strategy and risks)

No

Yes Many companies did not disclose strategy and business model before mandatory requirements. The linkage between strategy and business model is not always clearly and effectively presented.

The value relevance of book value of equity has declined after the introduction of the new strategic report, while earnings are more informative. This finding suggests that information about value creation helps assessing financial results.

No

Yes (IC)

Several similarities characterise No IC, IR, and strategic report frameworks. Companies might retain disclosures about the business model to avoid attracting unwanted scrutiny. Disclosures about some Yes areas of the IR, including the business model, are still scarce, despite the increase in quality over time.

No

Many descriptions are positive, Yes suggesting an opportunistic use of business model disclosure. Moreover, most text-units are backward-looking, qualitative descriptions that focus on inputs and processes rather than outcomes.

60  Business models in corporate reporting linkage with other concepts, some of the studies have empirically assessed the level of integration between BM disclosure and the communication of other items, such as strategy, ESG factors, and KPIs. Finally, while some studies are essentially descriptive, explorative pieces of research, one study examines antecedents of BM disclosure (Melloni et al., 2016), while two studies investigate the effects of BM disclosure on investment decisions (Mechelli et al., 2017; Simoni et al., 2019). 3.3.1 Business model disclosure as a framework for non-financial reporting Among empirical studies illustrated in Table 3.1, some papers examine the level of integration of BM disclosure with other items. While the mutual relationships among BM, IC, ESG factors, non-financial KPIs, and risks are widely acknowledged (IIRC, 2013), empirical evidence on the capability of companies to effectively combine these different information categories is limited. Bini et al. (2016a) examine a sample of UK high-tech listed companies in order to assess whether and how the section of the strategic report devoted to the BM is used to convey information about intangibles. The authors resort to the framework developed by Osterwalder and Pigneur (2010) to run a content analysis of the annual report. As the BM should convey information about how different resources and activities are combined to create value, the authors consider only descriptions of actions taken as part of BM, while void expressions related to aims, targets, and intentions are not considered. The authors label the capability of a description to shed light on actions actually put in place as the “focus” attribute. Moreover, authors consider the connectivity issue, which is related to the capability of the story of value creation to illustrate the relationships among different items. Their results show that BM disclosure is often poor and not adequate to convey a holistic picture of how intangibles contribute to value creation. Only a few companies offer detailed, focused, and connected disclosures. Following the same line of though, Michalak et al. (2017) discuss the parallelisms among IC statement guidelines, strategic report requirements on BM disclosure, and Integrated Reporting (IR) Framework to understand the common traits of intangible reporting defined in different frameworks. The authors present a case company, which is considered as a good example of BM reporting. British Land is considered as a valid example by the authors because of the conciseness of BM representation, its capability to define key resources and activities, and the linkages to other parts of the strategic report. Moreover, the company discusses how it generates value from an economic, social, and environmental perspective, thus offering a valuable communication to different stakeholders. Finally, British Land uses KPIs to support the value creation story.

Business models in corporate reporting  61 The latter two issues emphasised by Michalak et al. (2017) are at the foundation of other two empirical studies, which focus on BM and ESG reporting and BM and KPI reporting, respectively. Bini et al. (2018) use the BM Canvas as a framework to analyse BM disclosure of a sample of UK mining companies and to assess the linkages between the value drivers and ESG issues disclosed by those companies. Their findings show that UK companies operating in the mining sector rarely integrate ESG issues, which characterise mining firms, in BM disclosure. As a consequence, ESG disclosures offered might be vague descriptions that do not allow users to understand how ESG issues affect value creation. Drawing on the same BM framework, Bini et al. (2019) analyse 75 UK companies from different industries and empirically examine whether non-financial KPIs reported in the annual report can be connected to the value drivers reported in the BM section. While the relationship between BM and performance measures has been widely explored by scholars and regulators, the study by Bini et al. (2019) offers an empirical analysis of this relation. Their findings cast some doubts on the effectiveness of recent regulations, as many companies in the sample do not include non-financial KPIs in their annual reports. About half of the reported non-financial KPIs can be linked to the BM, while the remaining are disentangled from value drivers. A recent study by Sukhari and De Villiers (2019) examines the connection between information disclosed about strategy, BM, and risks. Differently from prior studies, the authors focus on companies that have to prepare an integrated report. The authors compare disclosure about BM and strategy and their connections in the reports issued by South African companies before and after the enforcement of the requirement to prepare an integrated report. The framework used to analyse the report in this study is drawn from the IR Framework recommendations. While the results show that only some companies clearly link strategic objectives with BM disclosure, other notable findings emerge. The quality of disclosures offered by examined companies has increased in the post-enforcement period. In fact, after the mandatory requirement to issue an integrated report, companies offer extensive disclosures about IC elements, risks, and interactions with stakeholders. Hence, although a full integration among different items is rarely provided, companies offer more valuable information than in the past. Overall, empirical research that examines the level of integration between BM disclosure and other non-financial items shows that the discretion companies enjoy in the field of non-financial reporting might lead to extremely differentiated results. While a minority of companies offer an integrated communication, where the BM is clearly linked to IC and ESG factors and supported by KPIs, most companies prefer to retain relevant information and offer generic, disentangled disclosures. A slight increase in disclosure quality over time has been observed.

62  Business models in corporate reporting 3.3.2 Business model disclosure manipulation Two studies have investigated the opportunistic use of BM disclosure to convey excessively optimistic information about the value of a company or to pursue legitimacy. The manipulation of narratives, which is often directed at misleading users, is defined as impression management (Cho et al., 2010; Merkl-Davies et al., 2011). This practice, which can be put in place by selectively reporting only positive information or manipulating aspects such as the tone of disclosures or the presentation format (Merkl-Davies and Brennan, 2007), can lead to information bias that generates information asymmetries. The first study that examines the opportunistic use of BM disclosure is by Melloni et al. (2016), who also assess the factors associated with BM disclosure quality. In their paper, the authors use the IR Framework to analyse integrated reports issued by 54 large companies. Their analysis considers different attributes of descriptions. Tone, type, time orientation, and topic are used as dimension to classify descriptions about the BM. Tone refers to expressions used, which are classified as positive, negative, or neutral. The authors consider positive tone as a sign of excessively optimistic reporting, which indicates the presence of impression management. Two other linguistic attributes are used to assess the verifiability of the story. Type refers to the presence of numbers (quantitative descriptions) or the use of narratives alone (qualitative descriptions). Regarding time orientation, the authors classify descriptions as forward-looking when they contain prospective information and as others when they only refer to past actions. Descriptions that contain quantitative information and backward-looking information are considered as more verifiable. A final distinction considers whether a description refers to inputs, business activities, and outputs or to outcomes (topic). The authors also consider governance attributes, declining performance, industry, and size as drivers of BM disclosure quality. Their findings show that board size is positively and significantly related to a positive tone of BM disclosures. Evidence also suggests that forwardlooking disclosures, which are less verifiable (Melloni et al., 2016), are in most cases optimistic in the tone, while shorter reports tend to offer more optimistic disclosures. The authors interpret the results as an evidence of an opportunistic use of BM disclosure by companies, which is spurred by governance mechanisms and has its roots in the use of shorter, less verifiable disclosures. The second study examines a random sample of 46 large companies based in EU countries to assess differences related to the enforcement of EU non-financial regulation (Di Tullio et al., 2019). The authors focus on the presence of a dedicated BM section in the annual report or, alternatively, the use of the wording “business model” by companies that do not have a dedicate section. In order to evaluate the presence of potential manipulation and how companies respond to the regulation, Di Tullio et al. (2019)

Business models in corporate reporting  63 classify companies’ behaviours into three categories: acquiescence, which refers to a genuine response to regulations that results in enhanced and transparent disclosures; avoidance, which consists in disclosing only vague information, thus giving the impression of being compliant with the norms without offering substantive information; defiance, which consists in ignoring the regulations, refusing to disclose BM in the annual report. Semiotic analysis is used to compare disclosures between 2016 and 2017 reports and classify firms in the three groups. The most significant finding is that only three companies show a behaviour that is considered as an avoidance strategy, while 20 companies out of 46 showed no sections dedicated to the BM and no descriptions of the BM in their reports, thus being considered as defiant. This result indicates that many companies do not pay attention to the role that BM is assuming in corporate reporting or are reluctant to disclose proprietary information. Hence, in several cases disclosure is perceived as a cost rather than an opportunity to inform stakeholders. 3.3.3 Usefulness of business model disclosure So far, only the studies by Mechelli et al. (2017) and Simoni et al. (2019) have examined the consequences associated with BM disclosure. Starting from the premise that BM information should allow users to better contextualise and interpret financial numbers, both studies resort to pricelevel models (Ohlson, 1995) to assess the impact that BM has on the value relevance of accounting amounts. Mechelli et al. (2017) examined the effects of voluntary BM disclosure on the value relevance of accounting amounts of a set of financial entities. They use the International Accounting Standard Board (IASB, 2010) requirements about information categories that should be included in the management commentary to assess BM disclosure. The elements that should be included in management commentary according to IASB are the nature of the business, objectives and strategies, the main resources, risks and relationships, results of operations, and the critical performance measures used by the management to evaluate progress against strategic objectives. The findings of their study show that the disclosure of these items is associated with an increase in the value relevance of book value and earnings. Thus, the authors conclude that BM disclosure can influence investors’ perceptions of accounting numbers, as it provides context to their interpretation. Simoni et al. (2019) use a sample of UK non-financial listed companies to assess the differences in the value relevance of book value of equity and earnings in the pre- and post-enforcement of the Companies Act 2013, which has introduced the strategic report and the requirement to disclose the BM. Their results show that, after the introduction of the new requirement, the value relevance of book value has declined, while the value relevance of earnings has increased. The first finding is interpreted as a consequence of book value of assets and liabilities not being able to fully capture the value

64  Business models in corporate reporting of intangible resources, which are explained in the narrative section of the annual report. Hence, a substitution effect between financial statements and narrative information seems to emerge. The second finding is related to the capability of information about value creation to allow users to better understand how earnings are generated and the factors that drive a company’s success and, ultimately, its profits. While those studies focus on BM disclosure, another study, which has a different focus, considers BM disclosure in this perspective. Cordazzo et al. (2020) examine the effects of non-financial regulations on the value relevance of accounting amounts and of non-financial disclosure in Italy. Although their findings show that non-financial regulations have had no impact on the value relevance of non-financial information, the authors also document a slight increase in non-financial disclosure amounts between the pre- and post-enforcement period. The increase in non-financial disclosure amounts is driven by the increase in disclosures about BM (Cordazzo et al., 2020). Hence, in line with previous studies, this piece of research documents an increase, albeit very contained, in BM disclosure levels when a mandatory requirement is introduced. 3.3.4 Business model disclosure in integrated reports Another characteristic of empirical studies on BM disclosure is related to the analysis of integrated reports. Companies adopting an integrated report are supposed to disclose a wider set of non-financial information and to better integrate non-financial items. While most of the studies on BM disclosure investigate both companies that have issued an integrated report and companies that have not issued an integrated report, three of them focus on the first category. The study of Sukhari and De Villiers (2019), which documents a scarcely satisfactory level of integration in non-financial information, but an improvement of disclosure quality over time, focuses on South Africa, where integrated reporting has become mandatory. One of the key findings of their study is that the quality of communication has improved after the introduction of the mandatory requirement to issue an integrated report, suggesting that non-financial regulations can play an important role in enhancing disclosure quality. Melloni et al. (2016) consider 54 companies that have voluntarily prepared an integrated report in the period under examination. Another study examines disclosure quality of companies that have issued an integrated report. Pistoni et al. (2018) examine companies that have voluntarily issued an integrated report. They develop a framework that considers different items that companies issuing an integrated report should disclose, including the BM. Readability and clarity of descriptions, conciseness, and accessibility of the document are assessed. Results show that the quality of BM reporting is low but has increased over time, thus confirming results of other studies.

Business models in corporate reporting  65 3.3.5 Business model disclosure through different channels than the annual report As a final category, it is worth mentioning those studies that look for information in different documents than the annual report. Companies usually convey information through different channels, like presentation to analysts. One of the main documents that have been examined in accounting and finance literature is the initial public offering (IPO) prospectus. IPO prospectuses are considered as documents that place more emphasis on future expectations about market developments, strategy, and management intents (Beattie, 1999; Bukh et al., 2005) and companies bear more negative consequences when disclosing misleading or inaccurate information in IPO prospectuses than in the annual report (Bukh et al., 2005). For this reason, IPO prospectuses have been the focus of empirical studies aiming at documenting the level of disclosure in those documents (Bukh et al., 2005; Cordazzo, 2007; Hanley and Hoberg, 2010; Wyatt, 2014). In the field of BM disclosure, only one study has examined IPO prospectuses. Bagnoli and Redigolo (2016) analyse BM disclosure in the IPO prospectuses of three Italian companies. The authors conduct interviews with managers of the three companies to better understand their BM and the key challenges they have to face. Subsequently, automated content analysis is used to identify the most recurrent items in the prospectuses. The authors identify some BM components on the basis of prior literature, which are suppliers, resources, processes, products, and customers. Findings indicate that all the examined companies disclose information about customers, product, and processes in IPO prospectuses. However, the disclosure about other factors is limited. In particular, companies do not disclose information about their resources, including IC resources like knowledge and expertise. As companies in this study are high-tech companies, the results show that companies that rely more on IC might withhold information about intangibles because of high proprietary costs they have to bear when revealing such information. 3.3.6 Discussion of empirical findings on business model disclosure Overall, empirical studies on BM disclosure offer useful insights on how companies are approaching the communication on value creation. A first result of those studies is that, while some companies acknowledge the importance of linking information about BM to strategy, risks, and performance measures, many companies still offer a vague and scarcely integrated communication. Description of the BM in the annual report does not always offer a coherent picture of value creation. The motivations behind this result can be related to the proprietary costs that companies have to bear when deciding to disclose information about their main sources of

66  Business models in corporate reporting value, but also to a partial understanding of what a BM is and how it can be used as a platform to offer a more credible, substantive disclosure. These results emerge both from the studies that focus on annual reports (Bini et  al., 2016a, 2019) and from the analysis of other documents, like IPO prospectuses (Bagnoli and Redigolo, 2016). However, empirical studies show a general improvement in BM reporting after the introduction of mandatory requirements by regulators in the form of the recently issued EU Directive 95/2014 or in the form of mandatory integrated reporting adoption by companies listed at the JSE. Hence, despite the criticisms of non-financial regulations, stricter requirements have the power to improve disclosure practices. While rules cannot specify minimum disclosure requirements or require the disclosure of certain items, they may have the capability to attract the attention on a topic, spurring a response by at least part of the companies subject to the regulation. In fact, companies are divided between those that have responded to the regulations through a substantive enhancement of their disclosures and those that essentially ignore requirements (Di Tullio et al., 2019). This kind of distinction between good and bad reporters has also emerged in surveys and studies promoted by regulators (FRC, 2016). Companies that report on their BM extensively can have some benefits related to the capability of this kind of information to contextualise other information, allowing investors to better assess earnings (Mechelli et al., 2017; Simoni et al., 2019). Companies that offer the best disclosure practices could set a standard, leading their peer to imitate them in order to legitimate their results. Some critical issues remain, as extensive communication per se could not be sufficient. A considerable number of companies have been found to provide excessively optimistically disclosures, thus possibly manipulating narrative communication about the BM. In order to solve this issue, BM narratives should be complemented by quantitative information about the results of the exploitation of the main value drivers (Holland, 2004). The integration of the story of value creation by means of performance indicators (Bini et al., 2019) and a clear linkage to strategic objectives and risks (Sukhari and De Villiers, 2019) might help improve the credibility and veracity of the story.

3.4 The assessment of business model disclosure: methodological issues and further developments 3.4.1 Current issues in business model disclosure assessment Empirical research has resorted to content analysis to investigate a company’s BM disclosure. Content analysis is a research technique based on the objective, systematic, and quantitative description of the manifest content of communication (Berelson, 1952). It has long been used in the fields of business, communication, and sociology. During the past few decades,

Business models in corporate reporting  67 its popularity among researchers has grown steadily (Merkl-Davies et al., 2011). In particular, according to Bryman and Bell (2015), content analysis has been increasingly used in business research to examine corporate disclosure. However, different studies on BM disclosure show notable differences in how content analysis has been implemented. Different authors have considered different aspects of information related to the BM considering the specific objective of each study. While some characteristics might be relevant only within some particular pieces of research, a common issue is represented by the framework that can be used to identify BM elements in the text. Previous studies that investigate non-financial disclosure, like information about IC or ESG issues, have assessed disclosure on the basis of a predefined list of items, which is applied to every company. The list of items is usually developed on the basis of a conceptual framework elaborated by scholars in the field. In other cases, the items that are used to assess non-financial disclosure are drawn from an accounting standard or from guidelines defined by a professional body or a standard setter. For instance, most of the studies on IC resort to the most widely adopted framework that divides IC into the three domains of human capital, relational capital, and structural capital (Guthrie and Petty, 2000; Brennan, 2001; April et al., 2003; Bozzolan et al., 2003; Vandemeale, 2005; Guthrie et al., 2006; An et al., 2011). In the ESG literature, rich and widely used frameworks exist, like those that are based on Global Reporting Initiative (GRI) guidelines. Other studies assess the value relevance of a predefined set of non-financial indicators. The indicators are usually those that are deemed to be the most important for a particular industry (Amir and Lev, 1996; Aboody and Lev, 1998; Jorion and Talmor, 2001; Riley et al., 2003). In the case of BM, the absence of a shared definition of BM in the academic literature and of detailed guidelines offered by regulators leads to different approaches to assess the presence of the BM. Scholarly literature about BM disclosure is limited to a few studies, and an established practice to assess the BM has not been properly defined. This has led to a plurality of approaches. Some authors have resorted to the identification of elements that are indicated as BM components by the IR Framework (Melloni et al., 2016; Sukhari and De Villiers, 2019). Mechelli et al. (2017) consider the five elements which companies adhering to the “Management Commentary – A Framework for Presentation” issued by the IASB (2010) have to disclose as BM components. Their research design is based on the search for those elements in the annual report of the companies included in their sample. The studies conducted by Bini et al. (2016a, 2018, 2019) use the ontology developed by Osterwalder and Pigneur (2010) and integrate this ontology with the definition provided by the FRC (2014) and with some recent literature reviews on BM conceptualisation (Wirtz et al., 2016) to build a framework to investigate BM disclosure. The framework is built upon the pillars

68  Business models in corporate reporting that are proposed by Osterwalder and Pigneur (2010). Those elements are used to identify descriptions related to BM in annual reports. Cordazzo et al. (2020) use the framework defined by the law that has enforced the EU Directive 95/2014 in Italy to identify the constitutive elements of the BM. Bagnoli and Redigolo (2016) use a framework built on the basis of previous literature in the field of BM. A second issue related to BM assessment relates to qualitative aspects of disclosure. Many studies on non-financial disclosure only capture the presence or absence of a list of items. Some studies assess the quality of disclosure on the basis of the amount of information reported. As the objective of BM reporting is to convey information about how different resources and activities are combined to create value, the mere presence of an item will likely not be sufficient to achieve the stated goal of BM disclosure if adequate explanations on how that item contributes to generate value are not provided. Following the same logic, the amount of information will probably not be a good proxy for the quality of BM reporting. For this reason, most studies on BM disclosure consider qualitative aspects of descriptions. However, different studies assess different qualitative aspects of disclosure. The focus on value creation represents a crucial issue in BM disclosure analysis (Bini et al., 2016a, 2019). This attribute is defined as the capability of a description to illustrate how an element contributes to value creation. Companies might disclose a huge amount of information but offer only vague descriptions or boilerplate sentences, which do not meet the objective of BM reporting. The investigation of the focus attribute allows researchers to avoid considering empty expressions and to capture information that is in line with what the BM should convey. Bini et al. (2016a, 2019) operationalise this concept by taking into account only information that clearly explains what companies have done to exploit a resource or what policies have been put in place. Information that merely describes hopes, aims, intentions, or uses generic terms is not coded as BM. Pistoni et al. (2018) evaluate the details offered in each description, assigning higher value to more exhaustive disclosures. The focus attribute is somehow considered also by Melloni et al. (2016) when they distinguish between backward-looking and forward-looking information. As the authors state, backward-looking information is associated with what a company has effectively done, thus being more verifiable. Melloni et al. (2016) consider other qualitative aspects, namely the tone, the topic, and the type. Tone refers to the use of positive, optimistic tone, which is associated with impression management. Topic refers to the item disclosed. Type of disclosure is used to assess whether a text-unit contains numerical information. While the authors consider numerical information as more verifiable than narrative, their assumption could conflict with the assessment conducted by Bini et al. (2016a, 2019), who consider the mere exposition of results as a non-focused description. Bini et al. (2019) report an example of a text-unit included in the BM section of the 2016 strategic report of a listed company based in the UK, Electronic

Business models in corporate reporting  69 Data Processing. The text-unit contains quantitative information and is not coded as focused. In fact, the company reports that “recurring revenues represented 82% of total revenues during the year” (p. 3), offering no information about how that value has been created. A hierarchy clearly emerges, as only when a description is focused, other characteristics, like the topic, the tone, or the presence of quantitative information, become relevant to support the assertions made by the company. Among qualitative characteristics of BM disclosure, connectivity has been considered by many researchers. The connectivity issue emerges as a consequence of the capability of the BM to act as a framework that connects several pieces of information to the story of value creation. This role, which has been attributed by the dominant literature and by standard setters to the illustration of the BM, has been operationalised by many authors. Sukahri and De Villiers (2019) consider the connections among BM, strategy, risks, and KPIs as qualitative attributes that improve BM reporting. In their view, when clear linkages between the BM and other items are offered, the quality of BM disclosure is higher. On the basis of the same premise, Bini et al. (2019) investigate the connections between BM and non-financial KPIs. The mutual relationships between BM and non-financial performance measures have been clearly explained by scholarly literature and underlined by regulators, which require the disclosure of both types of information and the provision of sufficient information to understand how they are linked. The connection to non-financial KPIs, which are required by regulations, can offer more valuable insights than the mere presence of numbers within a description. Another type of connectivity discussed in the literature is the connectivity among different items disclosed in the narrative section. Bini et al. (2016a) include this assessment in their content analysis of BM, explaining that both direct and indirect connections between two text-units are considered as signs of connectivity. Direct connections are established by using connectives, while indirect connections are obtained by text construction. The above discussion points out how different authors have operationalised the concept of connectivity of BM information resorting to different approaches. Hence, no commonly accepted rules to address this issue have been defined among scholars. Further, the assessment of qualitative characteristics of disclosure requires the preliminary identification of the unit of analysis, which is functional to both the count of items disclosed and their codification according to the attributes. Regarding this point, the most frequent choice in textual research is between the use of sentences or smaller pieces of text, named text-units. A text-unit is defined as “each group of words containing a ‘single piece of information’ that is meaningful in its own right” (Beattie et al., 2004, p. 207). When different types of information pertaining to different categories are included in the same sentence, the use of text-units allows to code different types of information in several different categories. Moreover, text-units reduce subjectivity in coding complex sentences (Husin et al., 2012). Among

70  Business models in corporate reporting the examined studies on BM reporting, those that aim to evaluate characteristics like scope or the mere presence of an item are quite generic and often do not adequately specify the unit of analysis (Mechelli et al., 2017). Other studies explicitly indicate text-unit as a coding unit. The capability of text-units to facilitate complex information coding has led many scholars to employ this unit of analysis in BM disclosure research (Bini et al., 2016a, 2018, 2019; Melloni et al., 2016). A final issue that might affect BM disclosure assessment is the locus of information. While regulations in the UK and EU countries do not specify that BM should be disclosed in a dedicated section of the annual or management report, many companies have decided to issue a specific section of the annual report devoted to the BM. These sections are often entitled “Our Business Model,” “Business Model,” or “How we create value.” Several studies have decided to focus on dedicated sections where available (Bini et al., 2016a, 2018, 2019). As Bini et al. (2019) explain, the choice to analyse only the section dedicated to the BM is related to the nature of the BM concept. The BM, in fact, is supposed to act as a holistic framework that links different types of information about activities, resources, and partnerships together in a value creation story (Beattie and Smith, 2013). Thus, BM communication should provide information about the role of each element within the value creation process, and not in isolation (Holland, 2004; Nielsen, 2010; IIRC, 2013; Nielsen and Bukh, 2013). The disclosure of the same elements spread across different parts of the annual report does not adequately reflect the connections among the different elements, which is a key feature of BM (Beattie and Smith, 2013). If this would be the case, the representation of the items in isolation should not even be considered a description of the BM. The unifying framework that the BM is supposed to offer is well depicted by Nielsen and Bukh (2013, p. 10): “At the very core of the business model description should be the connections between the different elements that we traditionally divide the management review into.” Table 3.2 summarises the different approaches to content analysis of BM disclosure in the annual report. 3.4.2 How to address issues in evaluating business model disclosure: combining different approaches The different BM disclosure assessment practices that emerge in prior literature spur a reflection on how it is possible to consider the different issues and aspects of prior studies when running a content analysis on BM reporting. In this section, I draw upon previous studies and the relevant literature on BM reporting to offer further insights on the content analysis of BM. A first aspect that a researcher must address is where information should be searched for. Regarding the locus, the choice of a dedicated section about the BM seems the most appropriate solution for the reasons well exposed by Bini et al. (2019). As the BM should cohesively depict value

2016

2016

2018

2019

2020

2019

2017

2016

2018

Bagnoli and Redigolo Bini et al.

Bini et al.

Bini et al.

Cordazzo et al.

Di Tullio et al.

Mechelli et al.

Melloni et al.

Pistoni et al.

Sukhari and De 2019 Villiers

Year

Authors

Quantity Scope Focus Connectivity Quantity Focus

Quantity

Attributes examined

Not specified

Business Model Scope Canvas, FRC Focus guidelines, and literature reviews EU Directive 95/2014 Scope items

Business Model Canvas

Items identified by prior studies Business Model Canvas

Framework

Annual report of separate non-financial report

Dedicated section where available, otherwise the whole strategic report

Strategic report

Dedicated section where available, otherwise the whole strategic report

IPO prospectuses

Locus

Presence of a NA dedicated section about the BM IASB Management Quantity Dedicated section where Commentary items present, otherwise the whole annual report Items identified by the Quantity Whole annual report Integrated Reporting Type Framework Tone Time orientation Topic Integrated reporting quality: An empirical Items identified by the Presence Whole annual report analysis Integrated Reporting Quality Framework The influence of integrated reporting on Items identified by the Scope Dedicated section where business model and strategy disclosures Integrated Reporting Connections present, otherwise the Framework whole annual report

Does the EU Directive on non-financial information influence the value relevance of ESG disclosure? Italian evidence In search of legitimacy: a semiotic analysis of business model disclosure practices The usefulness of the business model disclosure for investors’ judgement in financial entities. A European study The tone of business model disclosure: an impression management analysis

Integrating sustainability in business model disclosure: Evidence from the UK mining industry Are non-financial KPIs in annual reports really ‘key’? An investigation of company disclosure and analyst reports in the UK

Business model in IPO prospectuses: insights from Italian Innovation Companies Business model disclosure in the Strategic Report. Entangling intellectual capital in value creation process.

Title

Table 3.2 Frameworks and qualitative characteristics used in business model disclosure content analysis

Not specified

Not specified

Text-units

Not specified

NA

Not specified

Text-units

Text-units

Not specified Text-units

Unit

72  Business models in corporate reporting creation, information that is spread across different sections of the report might not allow users to identify BM elements and their mutual connections, which arguably compromise the function of BM reporting (Nielsen and Roslender, 2015). This choice is also supported by evidence of prior studies, which demonstrate that most of the companies subject to the new regulations present the BM in a dedicated section. Thus, that section should be analysed when looking for the BM. However, sometimes BM disclosure is presented alongside other information (e.g. a company’s strategy). In these cases, it is possible to follow Bini et al. (2016a, 2019), who only analyse sub-paragraphs that featured clear references to BM. Similarly, the authors have dealt with cases where BM information is not clearly identified (through, say, subtitles or graphic elements). The entire section about strategy and BM or the whole strategic report has been analysed in order to isolate information that deals specifically with BM elements. Moreover, since the companies are recommended to connect disparate pieces of information in different parts of the report (FRC, 2014, §1.1), all disclosures directly or indirectly linked to the sections devoted to BM can be examined to understand whether they contain further details about BM value drivers (Bini et al., 2019). Direct links can be provided by explicit references (i.e. page numbers). Indirect links consist of references to specific keywords, colours, or flags that identify a company’s BM component. A unit of analysis must be selected. As the use of text-units facilitates the analysis of complex sentences and descriptions, it is particularly useful in analysing BM disclosures (Bini et al., 2016a; Melloni et al., 2016). Prior studies have either focused on text-units or not provided specific information about the unit of analysis, limiting to consider the presence or absence of an item (Table 3.2). In the light of the high subjectivity that can affect the assessment of BM disclosure and of the nature of this kind of information, which could contain information about more value drivers in a sentence, the choice of text-units as unit of analysis seems to be the most appropriate. The subsequent step is to code text-units in search of information about BM and evaluate the qualitative aspects of disclosure. The identification of BM requires the definition of a framework. As previously illustrated, scholars have employed different frameworks for the analysis. The most popular frameworks are based on one of the following: • • •

the BM Canvas (Osterwalder and Pigneur, 2010); the Integrated Reporting Framework (IIRC, 2013); academic literature on the BM.

The selection of an appropriate framework is crucial to the identification of the elements by researchers. Regarding this issue, some considerations emerge. Authors who adopt the IR framework code the BM into information about inputs, business activities, outputs and outcomes (Melloni et al., 2016; Sukhari and De Villiers, 2019). These elements are considered by the

Business models in corporate reporting  73 BM Canvas, which includes key resources (inputs), activities, how products generate value for customers, and revenue model. However, the Canvas offers a more detailed articulation of the BM, encompassing aspects such as customer relationships, target customer identification, value added by partnerships and collaborations, and cost structure. Hence, the Canvas includes all the items in the IR Framework. Moreover, the Canvas is built as an ontological framework that encompasses all the elements identified as BM components by at least two academic studies in the field. The capability of the Canvas to offer a more detailed and wider view of those aspects identified as value drivers in the academic literature and in other frameworks has led several authors to define that framework as the most popular and impactful BM framework (Alt and Zimmermann, 2014; Upward and Jones, 2015). The pillars of the Canvas have also been used to identify value drivers that allow to define BM configurations (Taran et al., 2016). In the light of this premise, the Canvas represents the most complete framework that can be used to assess BM disclosure in annual reports. The coding procedure consists in identifying elements related to the Canvas building blocks in the text-units. In this phase, qualitative attributes of BM disclosure are assessed. Building on prior literature and non-financial regulations, it is possible to identify and combine the most important qualitative attributes that should be considered. The first attribute is the focus attribute. In the above discussion of the attribute, I have shown how different authors consider this attribute. The main difference that can be detected is between studies that attribute a score to a text-unit on the basis of this attribute (Melloni et al., 2016) and those that consider as BM descriptions only focused descriptions, thus excluding other descriptions (Bini et al., 2016a, 2018, 2019). Both regulators and academics agree that BM illustration should set out how resources have been mobilised and the activities implemented by an entity to achieve a competitive advantage. In this vein, vague or non-verifiable assertions do not contribute to the assessment of a company’s BM. Considering a vague description as part of BM could be misleading. This issue is strictly related to the other major qualitative attribute, which is connectivity. Connectivity represents a crucial issue of BM disclosure, which is emphasised by academics and regulators. The inclusion of a vague description as a BM item could result in a bias in the subsequent assessment of the connectivity between that item and other elements, like KPIs, risks, and strategy. For instance, if a vague description about a resource is offered, without an explanation of how that resource contributes to the value creation process, and a KPI related to the same topic is presented, the inclusion of that element, albeit if coded as non-focused, would be relevant to assess the relationship with the KPI. In this case, a company would offer a KPI related to a resource but not sufficient information to assess the importance of that resource, and consequently of the KPI, in creating value. Hence, the inclusion of elements that are not adequately framed in the value creation

74  Business models in corporate reporting process might hamper the assessment of other qualitative attributes. This consideration motivates the choice of Bini et al. (2016a, 2019) to consider only focused descriptions, which emerges as an optimal solution. In order to stick to this rule, researchers should not code as BM descriptions vague expressions. BM disclosure is expected to illustrate the underlying logic of a business, rather than the operations that occurred during the reporting year. Thus, mere descriptions of the results achieved during the reported year should be excluded (e.g. “Revenues in the period have grown by…”). Sentences that address a BM element in general terms, without highlighting how this element contributes to value creation, should not be coded. Finally, BM disclosure should illustrate the company’s business logic and the actions put in place to achieve value creation. Hence, researchers should not take into account descriptions indicating the hopes, aspirations, ambitions, intentions, and commitments. General policies, programs, or forwardlooking information, which is not verifiable, should not be considered as part of the BM (Bini et al., 2019). Once focused text-units have been coded, each of them must be evaluated on the basis of the other qualitative characteristics. The main features that emerge from prior studies are time orientation, quantitative information, tone, and connectivity. Some of the dimensions considered in those studies overlap. Thus, it is possible to identify and reduce the number of items to the most important ones. As discussed above, time orientation considers backward-looking information as more verifiable (Melloni et al., 2016). This attribute overlaps with the focus attribute, as this latter aspect deals with the capability of narrative to provide information about actual actions and policies (Bini et al., 2016a). As focus can be considered as a preliminary qualitative attribute that all BM descriptions should possess, time orientation is somehow already incorporated by that preliminary evaluation. Regarding qualitative attributes of BM descriptions, one of the most salient aspects is connectivity. A first aspect related to connectivity is the connection of different BM items. The connections among different text-units can be considered as a plus in BM disclosure quality assessment, as the BM should depict how different elements are combined. Following Bini et al. (2016a), connections could be identified by the use of words and expression that connect two pieces of text that contain information about the BM. The authors offer an example from the annual report of Genus plc, where the following expression is coded as connected (p. 93): In our porcine business, we outsource more than 95% of our pig multiplication requirements to third-party producers or customers. Our network of multiplication partners is a significant strength allowing us to meet demand for our genetics while reducing our exposure to farming and commodity risk.

Business models in corporate reporting  75 In this example, the authors show how the company explains the connection between partnerships, in the form of outsourcing (coded as a partnership in the Canvas framework) and the capability of the company to meet demand and reduce exposures to risks. The different text-units on the benefits of the partnerships are implicitly connected by expressions like “allowing us.” A second relevant aspect that deals with connectivity is the connection to other non-financial items. Following prior studies and regulators’ guidelines, it is possible to assess the linkages with three areas of the management report that should show connections with and be framed within the description of BM. The first area is related to KPIs, with an emphasis on non-financial KPIs, which allows the contextualisation of those measures and improve the veracity of narratives. This linkage is explicitly addressed by regulations and emphasised by scholars. If a company links its performance measures with the BM description, then the quantitative information is offered to users along with narratives. Hence, the presence of related quantitative information is part of the connectivity attribute. When a value driver has been identified, its linkages to KPIs disclosed in the management report can be assessed on the basis of the focus of a KPI on the same issue (Bini et al., 2019; Sukhari and De Villiers, 2019). For instance, if patents are identified as a value driver (resources according to the selected framework), a KPI that indicates the number of patents during the year or the number of submissions for approval can be considered as a quantitative measure of that value driver. The presence of a KPI enhances the reliability of the information provided in the narrative form, allowing users to better understand and evaluate the contribution of that driver. Similarly, Sukhari and De Villiers (2019) argue that strategic objectives should be linked to the BM. While the strategy sets out how a company wants to achieve a competitive advantage, the BM should illustrate the actions implemented to achieve those goals. Hence, when it is clearly possible to identify a statement of strategic objective, they should be compared to BM description to assess coherence. Sukhari and De Villiers (2019) consider the information provided in a section called “Strategy” or under labels like “Mission” or “Vision” to establish this kind of correspondence. The third item that could be linked to BM is represented by risks. Companies that have to disclose information about BM, strategy, and non-financial KPIs have also to offer information about principal risks they face. Companies usually report risks in a dedicated section of the annual report, where each risk is depicted, along with an illustration of its expected impact. The communication of information about risks allows users to better predict the entity’s ability to generate value in the future and to exploit the value drivers presented as part of the BM. Hence, in order to offer a full picture of value creation, risks that affect the major elements of the BM and hamper their capability to create value should be disclosed. This linkage is explicitly

76  Business models in corporate reporting stated by the FRC in its guidance. In the example that accompanies BM requirements, the FRC states that identifying relationships between the business model and other content elements could provide linkage with other relevant information in the strategic report. For instance, it could highlight the principal risks that affect, or strategy that relates to, a specific part of the business model. (FRC, 2018 paragraph 7A.20) Sukhari and De Villiers (2019) use content analysis to evaluate this connection. For instance, if patents are disclosed as a value driver in the BM section, a company should provide additional information about risks related to patents, like intellectual property protection issues, in the section of the management report devoted to risks. The dimensions related to connectivity are summarised in Table 3.3. Table 3.3 Elements to be considered when evaluating business model connectivity Type of connection

Description

Connectivity Logical among connections text-units between two textunits reporting information about value drivers are provided. Connection Disclosure of one with KPIs or more KPIs that focus on the same issue as a value driver description.

Assessment

Example

Direct or indirect relationships can be assessed on the basis of connectives.

A company that explains how the use of a resource allows the entity to generate superior value for customers.

KPIs presented in the management report are matched to value drivers identified as BM components by means of content analysis. Connection Disclosure of Value drivers with strategy strategic objectives identified are that are aligned compared to stated with BM. strategic objectives in the management report. Connection with risks

Disclosure of risks that are related to one or more value drivers.

A company discloses information about patents and offers a measure of the patents approved in the year.

A company that would like to compete on the basis of cost and presents a cost reduction programme or cost structure as value drivers in the BM section. A company that Content analysis of considers a particular information about risks, usually disclosed technology as a value in a dedicated section, driver in the BM and offers information to evaluate the about technological correspondence with the elements presented obsolescence risks in the section devoted to risks. as part of the BM.

Business models in corporate reporting  77 The other major qualitative aspect that emerges from the literature is the tone of disclosure. Tone refers to the use of optimistic, positive tone to communicate information about the BM, indicating potential signs of narrative disclosure manipulation (Melloni et al., 2016). For each text-unit, the assessment of tone can be employed. The tone of a text-unit could be positive, when they illustrate good news for the company; neutral, when they only report facts or circumstances in a neutral way; and negative, when they illustrate negative news for a company. However, there is another attribute that has been considered by Bini et al. (2016a), which is worth addressing. The authors refer to completeness as the capability of a description to cover all the aspects identified in their framework. This attribute is common to many studies about IC and ESG disclosures, as the presence of items of a framework is usually assessed. However, in the case of the BM, it is acknowledged that companies usually rely on a set of value drivers that might be related to one or a few areas of the Canvas (Taran et al., 2016). Hence, companies might not be interested in depicting other items, which are not deemed to be directly related to firm value. Following this reasoning, Nielsen et al. (2017) propose the classification of a company according to its BM typology in order to correctly identify value drivers and align internal reporting practices of material information. Results of the study by Bini et al. (2016a) confirm this expectation, as companies rarely cover all the areas of the Canvas. Hence, this attribute could not be considered, privileging the aspects related to focus, connectivity, and tone discussed above. In the light of the above discussion, content analysis of BM could be seen as a process (Figure 3.2). Researchers must first identify a description of an item related to the pillars of the BM Canvas. Once a text-unit containing information about one of the Canvas elements is found, the focus attribute should be evaluated. If the description is focused, then researchers should assess the other qualitative aspects that characterise the description; otherwise, the text-unit should be discarded. If the text-unit is focused, researchers might assess the tone and the presence of connections with other focused text-units. They should also look for information about strategy, KPIs, and risks in the other section of the management report to establish linkages among the various items reported. 3.4.3 Developing business model disclosure indexes The results of the content analysis are often used by researchers to obtain a measure or a score of disclosure quality. These scores can be used to verify the association between disclosure and other factors that are deemed as being related to the construct under investigation. Disclosure indexes may take various forms, capturing different disclosure dimensions. The results of the content analysis on BM disclosure can be used to assign a value to BM disclosure behaviours resorting to disclosure indexes. Disclosure

78  Business models in corporate reporting

Identification of a text-unit reporting information about one of the elements of the Canvas

NO Is it focused?

Discard

YES

Assessment of other qualitative attributes

Qualitative attributes

Tone

Connections

Among text-units

KPIs

Strategy

Risks

Figure 3.2 The procedure to content-analyse business model disclosure

indexes used in non-financial disclosure studies usually resort to different approaches. In this section, I will discuss the opportunity to adapt those approaches to BM disclosure and propose an index that captures the qualitative aspects illustrated in the previous section. The first aspect is related to the capability of information disclosed to cover all the relevant areas of a concept. Many accounting researchers have considered scope of disclosure as a proxy for quality (Cooke, 1989; Giner, 1997; Haniffa and Cooke, 2002; Hossain et al., 2005; Alsaeed, 2006). This approach has been widely used in IC literature (Bozzolan et al., 2003; Guthrie et al., 2004). Studies that have investigated IC disclosures are mainly based on the assessment of how many of the three areas of IC, namely human capital, structural capital and relational capital, are covered by companies. Similarly, studies on ESG disclosure usually rely on a list of items and assess the presence or absence of an item. Disclosure studies that adopt this approach usually build scope indexes. A scope index measures

Business models in corporate reporting  79 how many items out of a predefined list are disclosed by a company. Hence, they take the following form: n

Scope index =

∑i=0Items disclosedi Number of items in the framework

Applied to the BM, the calculation of a scope index allows to capture the completeness of information, which refers to the capability of a company to offer disclosure on all the areas of the Canvas framework. While early studies on BM disclosure consider completeness as a fundamental aspect of disclosure (Bini et al., 2016a, 2019) and this approach is the most commonly adopted in the investigation of non-financial disclosure, some criticalities emerge. The most important is the fact that a company might rely on value drivers that are related solely to some of the areas of the Canvas. Hence, entities could disclose information about the BM areas that are deemed important for value creation, ignoring the others. A different approach consists in the use of measures that take into account the extension of disclosure. In accounting literature, there has been a wide, long-lasting debate of whether the quantity of information could be a good proxy for quality (Hasseldine et al., 2005). Indexes based on the quantity of information usually consider the number of sentences or text-units. Instead of the raw number of units, empirical studies that focus on disclosure quantities adopt a transformation in order to account for scale effect. Several studies use the logarithmic transformation of a disclosure score or use a relative index. A relative index based on the quantity of information takes the following form (Urquiza et al., 2009): n

Relative disclosure index =

∑i=0N it  −  min max −  min

where Nit indicates the number of sentences or text-units disclosed by company i at time t; max represents the maximum number of text-units disclosed by a company across the sample in the period examined; and min is the minimum number of text-units disclosed by a company across the sample in the period. In the case of BM disclosure, the number of text-units on BM can be used as a measure. However, many scholars argue that the amount of information is not necessarily a proxy of quality of communication. Moreover, the two dimensions that are most frequently assessed, scope and quantity of information, do not allow to consider the qualitative aspects of disclosure. In order to account for these aspects, some authors have developed disclosure indexes that assign a value to each qualitative aspect. For instance, Beretta and Bozzolan (2004) assign a value to several attributes of risk

80  Business models in corporate reporting disclosure, which are content, economic sign, the presence of quantitative measures, and outlook orientation. Similarly, Veltri et al. (2020) assess the disclosure of risks related to ESG factors on the basis of type, time orientation, and the presence of quantitative information. This approach allows to consider several aspects of disclosure. Transposed to BM disclosure, this approach allows to consider the attributes previously illustrated. Each attribute is assessed on the basis of the related value driver. Hence, if a company identifies a value driver in the BM section, focus and tone of description, as well as connections of that value driver with other items, can be assessed. For each element coded as a value driver, the presence of each attribute can be assigned one point. Considering the aspects defined as relevant in BM disclosure assessment, the following attributes can be assigned a score for each value driver: • • • • • •

focus; tone; connections with other value drivers; connection with a KPI; connection with strategy; connection with risks.

Drawing from the framework previously defined, a value driver can be assigned a value equal to 1 if the description is focused, and 0 otherwise. As illustrated, the focus attribute can be considered as an essential prerequisite for BM disclosure to be considered as a meaningful disclosure. Hence, only value drivers that are coded as focused are evaluated regarding the other aspects (see procedure in Figure 3.2). A focused value driver is then assigned a value equal to 1 if the tone is neutral or negative, and a value equal to 0 if the tone is positive (Melloni et al., 2016). Regarding connections, each of them is assigned a value equal to 1 if present, and 0 otherwise. Hence, if a value driver is connected with at least another value driver, it will be assigned a value equal to 1, while if it is not connected, it will be assigned a value equal to 0 for that attribute. Similarly, a value driver will be assigned a value equal to 1 if at least a KPI can be matched with that value driver, and 0 otherwise. If strategic objectives can be associated with a value driver, 1 point will be awarded, and 0 otherwise. Finally, a value driver will be given one point if at least a risk can be associated with the value driver, and 0 otherwise. The score for each value driver can be computed as the sum of each score as follows: Value driver score = Focus + Tone + Connectivity + KPI + Strategy + Risks Thus, the score for each value driver ranges from 1 to 6, where 1 indicates a focused description that is not connected with other information and shows a positive tone and 6 indicates a focused description that is presented

Business models in corporate reporting  81 using a neutral or negative tone and is connected to other value drivers, at least a performance measure, at least a risk item, and related to strategy. As a company might disclose different value drivers in the BM section of the annual report, a score at the firm level can be obtained by calculating the mean value of the scores attributed to each value driver as follows: n

Business model quality score =

∑i=0Value driver scoreit Number of value driversit

Being the mean of scores that range between 1 and 6, the BM disclosure quality score can assume values in the same range, where a value of 6 implies high quality of disclosure, and a value of 1 the minimum quality level for a company that discloses at least a focused item about the BM. Differently from disclosure scores usually employed in the field of non-financial information, which are based on the scope or quantity of information, this kind of index allows to include all the different features identified as relevant by the literature in the assessment of BM in a synthetic measure. 3.4.4 The application of business model disclosure quality score After having defined a disclosure index that is able to include different qualitative aspects of BM disclosure quality, this paragraph illustrates how this method can be applied to the content analysis of companies’ annual reports. The annual reports of companies from the telecommunications industry listed in the main market at the London Stock Exchange for the year 2019 are analysed. The choice of the telecommunication industry is related to the fact that this sector is characterised by a high intensity of intangible resources. For this reason, it has been the object of seminal studies on the relevance of non-financial information (Amir and Lev, 1996). I analyse UK listed companies because the UK was the first country to introduce mandatory BM disclosure in the annual report. Hence, those companies will likely have more experience in the communication of the BM. UK regulations also require listed companies to disclose information about non-financial performance measures, principal risks, and strategy in the strategic report. I have identified 16 UK listed companies operating in the telecommunications industries. After removing companies with a null or unspecified market capitalisation, ten companies remain (Table 3.4). Following the content analysis procedure presented above, I have downloaded companies’ annual reports from the websites. I have searched for the presence of a section devoted to the BM. While seven companies clearly define a section of the strategic report devoted to the BM, which can be labelled with expressions such as “Business model,” “Our unique value

82  Business models in corporate reporting Table 3.4 Sample  companies Name

Country of incorporation

Integrated report

Airtel Africa plc BATM Advanced Communications Ltd BT Group plc Helios Towers plc Spirent Communications plc Talktalk Telecom Group plc Telecom Plus plc Toople plc Vodafone Group plc Zegona Communications plc

UK Israel UK UK UK UK UK UK UK UK

Yes No No No No No No No No No

creation,” or “Our business and value creation model,” there are three exceptions. BATM, a company based in Israel, has issued a strategic report in line with UK requirement but has not identified a clear section devoted to BM. Information pertaining to BM elements in the strategic report cannot be clearly assessed for that company. Toople has devoted a section to the BM, but that section is presented outside the strategic report. Finally, Zegona Communications presents BM ad strategy in the same section. This circumstance shows that companies comply with the norm in different ways. While most companies identify a section devoted to the BM, in line with previous findings (Bini et al., 2019), this practice, which allows an easier and clearer identification of BM disclosure, has not become generally accepted yet. Where available, the section about the BM has been carefully read in search of information about the constitutive elements defined by the Canvas. When the BM is presented along with strategy, the whole section has been analysed to isolate information about the BM. When BM information is not clearly identified (through, say, subtitles or graphic elements), the entire strategic report has been analysed in order to isolate information that deals specifically with BM elements. Moreover, when the BM illustration is clearly linked to other sections of the annual report, those sections have been analysed as well. To identify value drivers, I have isolated each text-unit that a) refers to one or more of the constitutive elements included in the Canvas framework (Bini et al., 2019), and; b) focuses on value creation. In line with the above-mentioned discussion on the focus attribute, void expressions containing hope, aspirations, and mere results have not been coded as BM. Nonetheless, it is worth pointing out that almost all the

Business models in corporate reporting  83 companies include such statements in the description of BM. For instance, in the section of the strategic report of Airtel devoted to the BM, the company reports the following text: We are committed to increase the investments in building our network infrastructure to enrich customer experience and expand the user base across businesses. (Airtel 2019 annual report, p. 32) As this expression only refers to firm commitment towards investments, and not actions effectively put in place, it has not been coded as a focused description of a value driver (Bini et al., 2016a). Similarly, Helios Towers report: Aim to maximise value generation through full execution of the strategy. (Helios Towers 2019 annual report, p. 21) As aims and goals are considered as non-focused, this description has not been coded as a BM component. Text-units containing focused information about the BM have been coded and their qualitative characteristics assessed. For instance, Spirent discloses in the BM section the following information about how it is capable of generating value for customers: Through highly advanced solutions, such as virtual test agents, [Value proposition] we are able to transfer our award-winning lab expertise [Resources] into the operational environment, providing continuous assurance that reduces operating costs while improving the customer experience [Value proposition]. (Spirent Communications 2019 annual report, p. 4) Different text-units can be identified. Advanced solutions offered to customers are part of Spirent services, which contribute to offer a valuable experience to clients. Thus, this value driver has been coded as part of value proposition according to the BM Canvas. Similarly, assurance is part of the products and services offered by the company to its customers, which allows them to reduce costs. Assurance services are coded as a value driver related to value proposition. The capability of the company to offer these solutions depends upon the transfer of people expertise, which has been coded as a value driver related to resources. Regarding connections, these three value drivers are presented as tied together in the value creation process. Hence, it is possible to assign a value equal to 1 to the inter-value driver connectivity to these three items. The tone is neutral; hence, a value of 1 is attributed to these descriptions.

84  Business models in corporate reporting Regarding the other connections, it was not possible to identify any non-financial KPIs directly related to these aspects in the company’s strategic report. The company presents a section of the strategic report entitled “Our strategic priorities,” where strategic objectives are presented. While the improvement of the solutions and the development of new services are presented as strategic objectives, experience cannot be directly linked to the objectives presented in the section. Hence, the value drivers related to solutions and assurance services are assigned 1 point for the connection with strategy, while experience is assigned 0 points for this attribute. Lastly, the company presents technological change, which can lead to a loss of competitiveness of the solutions offered, and employee skill base as risks in the section devoted to principal risks. Those risks can be associated with solutions and employee expertise, respectively. Hence, these two value drivers are assigned a value equal to 1 for the connections to risks. Overall, the value driver related to solutions has been assigned a value equal to 1 for the focus attribute, which represents a prerequisite, and a value equal to 1 for the tone. One point has been assigned to the value driver for the connections to other value drivers. Other two points derive from the connections to risks and strategy. The score of the value driver related to solution is 5 (out of 6). The only qualitative attribute that is not present is a KPI that can be considered as strictly related to that value driver. By applying the same logic, expertise totals a score equal to 4, as information about a KPI and the linkage to strategy are not present. Assurance services provided by the company is assigned a value equal to 4, as there are no KPIs or risks directly attributable to that value driver. While Spirent shows some integration between BM and strategy and BM and risks, it does not disclose non-financial indicators that can be directly linked to value drivers. An example of non-financial measures that are anchored to the BM can be found in BT Group. In the BM section of the annual report, BT identifies the expertise and diversity of people as a key value driver (2019 annual report, 12). On page 32, among non-financial KPIs, the company discloses employee engagement index, information about gender composition of the management team, and ethical perception obtained from a survey. Similarly, BT identifies customer experience as a value driver (2019 annual report, p. 12). The company discloses information about the level of customer services among non-financial indicators (p. 30), which can be associated with customer experience. The score at the company level is computed as the average of the scores of the different value drivers disclosed by each company (BM_quality). The score can be compared to two traditional indexes that take into account the scope and the quantity of disclosure. A scope index can be built considering the number of BM Canvas items disclosed out of the nine building blocks

Business models in corporate reporting  85 in the framework (BM_scope). I have also built a quantitative index based on  the number of text-units disclosed by each company (BM_textunits). The index has been transformed as follows: n

BM_textunits =

∑i=0 Text unitsit − min max − min

,

where text units refer to the number of focused text-units about the BM disclosed by company i in the year t; min is the minimum number of textunits disclosed by a company in the sample for the same period; and max is the maximum number of text-units disclosed by a company in the sample for the same period. Hence, this index ranges from 0 to 1. Comparing the results, it is evident that the three indexes capture different aspects and that companies that disclose more information or information that coves more areas of the BM Canvas do not necessarily provide qualitative disclosures (Table 3.5). While for BATM it is not possible to identify BM value drivers in the annual report, all other companies clearly present this kind of information as required by the regulations. The only company that explicitly communicates its adherence to the IR Framework, which is Airtel, is the one that communicates the highest number of text-units on the BM. However, the connectivity of those pieces of information seems to be moderate. Among the three companies that total a quality score higher than 4, two seem to provide a quite contained number of text-units. Only Vodafone Group communicates extensive information that is also connected and of high quality on the basis of the proposed standards. Regarding scope, seven companies out of the nine that disclose information about the BM cover three of the nine building blocks of the Canvas. Although those companies obtain the same value in terms of scope, notable differences among those companies exist in terms of quantity and quality of disclosure. Two companies cover Table 3.5 Business model disclosure scores Name

BM_quality BM_scope BM_textunits

Airtel Africa plc BATM Advanced Communications Ltd BT Group plc Helios Towers plc Spirent Communications plc Talktalk Telecom Group plc Telecom Plus plc Toople plc Vodafone Group plc Zegona Communications plc

3 0 3.8 3 3.6 4.7 4.4 4 4.3 3.8

0.33 0 0.56 0.33 0.33 0.33 0.78 0.33 0.33 0.33

1 0 0.92 0.62 0.54 0.62 0.69 0.23 0.85 0.38

86  Business models in corporate reporting five of the nine pillars (BT Group, with a value of 0.56 for the scope index) and seven out of nine pillars (Telecom Plus, with a scope index of 0.78), respectively. However, while Telecom Plus shows high levels of integration between BM and the other items that I have used to assess disclosure quality, the BT Group quality disclosure score places the company at the fifth spot among the ten companies analysed. Overall, results indicate that largely different results are obtained when using disclosure indexes and that scope and quantity are not necessarily a proxy for BM disclosure quality. Hence, future studies that employ a BM disclosure score might consider including the qualitative attributes discussed in this chapter to obtain more significant and reliable results.

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4

The implications of business model disclosure

4.1 Opportunities and challenges of business model disclosure for preparers The discussion of the role of the business model (BM) in corporate reporting and of the evidence of different BM disclosure behaviours spurs a reflection of the implications that this kind of disclosure has for companies, which have to comply with the recently issued regulations on non-financial reporting and satisfy stakeholder information needs. Current regulatory requirements offer companies the possibility to decide which items to disclose and how. At the same time, those requirements offer the opportunity to satisfy the increasing demand for information that complements financial statements expressed by investors and other stakeholders. Studies on BM disclosure generally show low levels of BM disclosures. Hence, companies seem to withhold information about their value generation process (Bini et al., 2016, 2019). Proprietary costs of disclosing sensitive information about the BM might explain this behaviour. While the disclosure of proprietary information represents a challenge for companies, the BM entails significant opportunities. In a context where companies can satisfy the minimum requirement related to BM disclosure with little effort or decide not to comply with the norms without being exposed to adequate sanctions (Di Tullio et al., 2019), other factors could lead to better disclosure practices. First, as users can obtain useful information from BM disclosure, financial markets have been shown to reward companies with a more transparent disclosure (Mechelli et al., 2017). Thus, a better BM disclosure would allow companies to reduce information asymmetries and obtain financing. A second aspect that preparer should consider is related to the pressures that financial markets, regulators, and peers could exercise. Several professional bodies and regulators are devoting attention to this topic. For instance, the European Financial Reporting Advisory Group (EFRAG) has launched a project related to how companies can foster disclosure on intangibles and another project aimed at studying the relationships between BM reporting and non-financial risks. The growing awareness around the topic DOI: 10.4324/9781003016793-4

94  Implications of business model disclosure of BM reporting might lead different stakeholder categories to pay close attention to what companies disclose in the BM. The growing expectations around a clear and transparent BM disclosure can underline the function of BM disclosure as a legitimisation tool. If companies are not able to offer a clear picture of value creation or refuse to disclose the BM in the annual report, they could face a loss of legitimacy (Di Tullio et al., 2019). This process is further accelerated by pressures from industry peers (Oliveira et al., 2006). As all large companies have to disclose BM after the enforcement of recent regulations, those with the highest disclosure quality might set a standard and be considered by investors as a benchmark for industry peers. This situation would create peer pressures for other companies. This phenomenon has been widely studied in the area of non-financial reporting by adopting the lenses of institutional theory. For instance, Nielsen et al. (2016) explore the pressures deriving from peers regarding the decision to disclose information about IC and refer to a coercive isomorphism. In some cases, regulators can further encourage the alignment with the best disclosure practices within an industry. In the UK, the regulator contributes to the identification of best companies in terms of non-financial reporting through its research activities. The reports published by the Financial Reporting Council (FRC, 2016, 2018b) illustrate and discuss some real-world examples of non-financial reporting and emphasise the traits of good reporting. The characteristics of the annual reports analysed are discussed and evaluated with interviewed managers and investors, who share their views and opinions. In their reports, the FRC also points out potential avenues for BM reporting improvement, which are in line with what they report in their guidelines (FRC 2014, 2018a) and with academic literature. In order to be legitimate, BM disclosure should not only provide users with valuable information to assess how the company has performed and to better evaluate how it has pursued its strategic objectives but also be presented in a clear and consistent manner. The consistency of non-financial information can be considered as a crucial aspect. While non-financial items can be difficult to compare among firms as a consequence of information being firm-specific, longitudinal comparability can help users assessing the credibility of such disclosures. In the field of BM, the relative stability of the factors that drive value for a business should be reflected in external reporting. Thus, companies are expected to communicate the same set of value drivers over time, unless major changes in the BM occur. While such changes might happen in some moments in the life of a company, major factors that drive a company’s success should be relatively stable over time. This implies that, in normal conditions, companies should report the same value drivers. If the internal assessment of value drivers or major events leads to a change in the set of factors considered as key, external reporting should reflect these changes, but management should clearly explain the reasons behind this change. Inconsistencies in communication over

Implications of business model disclosure  95 time – i.e. arbitrary changes in reporting from a period to another without proper explanations – could induce a loss in legitimacy. The disclosure of BM might be considered as an opportunity to address other open challenges for companies. While the importance of intellectual capital (IC) in modern economies is widely acknowledged, previous attempts to regulate or encourage IC disclosure have led to inconclusive results. As recent regulations require companies to offer information about the BM, companies could integrate IC in BM disclosure, showing how intangible resources contribute to value creation (Beattie and Smith, 2013). Similarly, the mandatory requirement of BM disclosure can be taken as an opportunity to show how environmental, social, and governance (ESG) aspects are integrated in value creation. While firms can offer rhetoric information about those issues with the aim to mislead users of information and to obtain legitimacy (Michelon et al., 2015), the BM can help distinguishing rhetoric ESG information from substantive information (Bini et al., 2018). In fact, if ESG factors actually represent drivers of value for a company, they should be form part of its BM. Thus, the integration of ESG in the narration of the value creation process might help disclosing substantive ESG information. A final consideration on the benefits that companies can obtain from a clear and coherent disclosure of BM is related to the internal assessment of value drivers. The exercise related to the development of a transparent and truthful disclosure about the BM implies that companies are able to internally identify and prioritise the value drivers that should be externally reported. The assessment of value drivers is the premise not only to offer a truthful picture of value creation but also to internally identify the crucial risks, which affect the exploitation of the value drivers, and the performance measures that can be used to monitor the progresses against strategic objectives (Nielsen et al., 2017a). This elevates the concept of a BM to the link between internal and external reporting. Internally, the correct assessment of the value drivers allows preparers to identify crucial aspects that should subsequently be disclosed to offer valuable information about value creation. In order to facilitate the identification of the drivers of value and their possible evolution, preparers might resort to conceptualisation, like the BM Canvas (Osterwlder & Pigneur, 2010) or a taxonomy that defines the attributes of different BM configurations (Taran et al., 2016).

4.2 Relevance of business model disclosure for users Mandatory disclosure of BM has implications for users of financial statements, who have been demanding more non-financial information in recent years. Empirical evidence suggests that BM information can have an incremental value for investment decisions (Mechelli et al., 2017; Simoni et al., 2019). However, the BM might also allow investors to assess other information by a company. For instance, some empirical studies show that

96  Implications of business model disclosure non-financial KPIs alone are not relevant for users (Elzahar et al., 2015). The disclosure of the BM might help users contextualise information about non-financial indicators and predict firm value. Similarly, the disclosure of BM can help users assess information about risks or ESG factors. Among users of financial statements, two categories of subject might have a great interest in BM disclosure. The first category is represented by financial analysts, who have to perform evaluations on the companies they follow. Financial analysts have to contextualise financial statement data and other information disclosed in the value creation process of a company. While analysts might have access to private information about the BM, its disclosure in the annual report could facilitate the information search process and give analysts access to new information that could be difficult to find before the new regulations were enforced. Early evidence suggests that, while analysts incorporate the value of part of intangible resources in their evaluations, they are not able to capture that value in full (Amir et al., 2003; Simpson, 2010). This gap can be reduced by information about the BM, which might allow analysts to understand how a company exploits its intangibles to create value and the role of different intangible items for a specific entity. A potential challenge associated with the use of BM information is the presence of a meaning gap that could emerge between preparers and analysts, which is related to the absence of a widely accepted definition of BM (Di Tullio et al., 2019). A second category of users that might be interested in BM disclosure is represented by auditors. With the enforcement of new regulations, auditors based in many countries have to assure non-financial information. Even when voluntary, the assurance of non-financial reports is a desirable service that companies require in order to improve the reliability of their reports (Simnett et al., 2009; Simoni et al., 2020). External audit has been shown to strongly influence users’ perceptions of relevance and reliability of non-financial KPIs (Coram et al., 2009). According to the different jurisdictions, auditors have either to evaluate the correct presentation of non-financial information or to assess the coherence between non-financial information and the financial statements. Recently, the Institute of Chartered Accountants in England and Wales (ICAEW) has emphasised how the assurance of non-financial information is changing. In its series called “The Journey: Assuring All of the Annual Report?” ICAEW points out the importance of considering value generation and strategic objectives to correctly assure information about risks and non-financial KPIs. Considering the key drivers of value of a business allows auditor to correctly evaluate the appropriateness of the KPIs disclosed and the impact of risks communicated by a company and to assess material misstatements or omissions (ICAS, 2010). While the assurance of non-financial information and integrated reports remains a challenge (Simnett and Huggins, 2015), the capability of the BM to act as a framework for the other items disclosed might spur auditors to use the BM as a platform to evaluate non-financial items

Implications of business model disclosure  97 and their coherence with financial statements. From this perspective, the potential of the BM to be used as a guide for the assurance of non-financial information remains an under-discussed issue. While there are numerous sets of auditing standards and guidelines for non-financial assurance, the assessment of coherence of information could benefit from the use of BM information. Besides analysts and auditors, the BM might be a useful information for different kinds of qualified and unqualified subjects. For instance, as companies usually resort to ESG disclosures to explain how they generate value for a broad set of stakeholders, different stakeholder classes might use the BM as a tool to contextualise and evaluate ESG disclosures (Bini and Bellucci, 2020). When the information disclosed about ESG factors is not compatible with information reported under the BM section, a misalignment could emerge. Such a misalignment can indicate a rhetoric use of ESG disclosures (Bini et al., 2018).

4.3 Regulators and business model disclosure In recent times, regulators have devoted attention to BM as well, recognising this concept as a fundamental tool in corporate reporting. Regulators in the UK and Europe are involved in an ongoing process of regulation of non-financial information. Regulations require large companies to disclose several non-financial items, including the BM. After the revision of the UK Companies Act in 2013 and the enforcement of the EU Directive 95/2014 in all EU member countries, EFRAG has started a project aimed at improving the Directive and the International Financial Reporting Standards (IFRS) Foundation has issued a consultation about the opportunity to develop a set of non-financial standards. However, evidence on non-financial reporting suggests that many issues remain unsolved. While regulators recommend disclosing the BM and linking this kind of information to other non-financial items, some concerns related to definitions, presentation, and sanctions for non-compliant companies have emerged. The nature of non-financial information prevents from the adoption of a one-size-fits-all approach. Hence, regulators could not develop specific requirements about the items that a company should disclose as part of its BM. Thus, despite indicating the BM as the platform that can be used to contextualise other information (Beattie and Smith, 2013), regulators cannot impose strict requirements, leading to potentially ineffective rules. Guidance on how to report the BM has been developed but without clarifying the notions. A possible solution to the issues related to definitions is the use of academic frameworks and conceptualisations. In its current form, the definition of BM provided by the EU offers a vague definition of BM, which is focused on how a company creates value. The FRC has made an effort in order to illustrate what is meant by BM more in detail. The FRC (2018a)

98  Implications of business model disclosure states that the description of the BM should illustrate how a company “generates and preserves value over the longer term” (paragraph 7A.15). In the most recent version of the Guidance on the Strategic Report, the regulator also offers some further details when it indicates as part of the BM the “sources of value, being the key resources and relationships that support the generation and preservation of value” (FRC, 2018a, paragraph 7A.16). These definitions are aligned with the most popular definitions of BM that can be found in the academic literature (Massa et al., 2017) but do not provide adequate information about what the components of BM are and about the mutual relationships that exist among those elements. Regulators might draw upon the most well-known frameworks and ontologies developed by academics to offer a more detailed definition and stress the importance of some attributes of the BM. For instance, while key resource and activities, as well as partnerships, are cited by regulators as parts of the BM, other areas that are included in the BM Canvas seem not to be considered. One of the most important is the dimension called value proposition, which explains how a product, or a service, generates value for the customer (Osterwalder and Pigneur, 2010). Similarly, the dimensions of the Canvas related to customers and customer relationship seem to be ignored. The inclusion of such aspects in a detailed guidance on how to report the BM might help companies. While not all the areas of the Canvas might have the same importance for all companies, other frameworks or BM taxonomies (Taran et al., 2016) can be used as a starting point to identify potential value creation patterns. The identification of the crucial items that are considered as part of the BM might facilitate the identification and presentation of BM. BM presentation can take different forms. BM is conveyed mostly resorting to narrative reporting, which can be supported by performance indicators. A crucial presentation issue is represented by the locus of BM disclosure. In fact, requirements change across different jurisdictions. The main difference is related to the possibility to derogate from the requirement to disclose the BM in the management report, which is part of the annual report, and include that kind of information in a separate report. In the UK, the BM has to be disclosed in the section of the annual report called Strategic Report, which is devoted to narrative information. In EU countries, some national regulators have opted for the requirement to disclose the BM in the annual report, while others allow companies to use a separate document. While this choice can generate different behaviours, it spurs a reflection on the usefulness of separate statements for non-financial information. The desire to offer an integrated and coherent set of information has led to the development of integrated reporting models and frameworks, which are widely adopted in practice on a voluntary basis. The choice of some national regulators to allow companies to disclose information in a separate document seems to go in the opposite direction, considering also the results

Implications of business model disclosure  99 of prior studies on the relevance of information disclosed in separate documents. Nielsen et al. (2017b) explain how the use of separate documents to disclose IC has led to a failure in Denmark. More recently, Cordazzo et al. (2020) document a non-significant effect of the application of the EU non-financial directive on the value relevance of ESG disclosures in Italy, where companies can include non-financial information in a separate document. Other studies document that companies adopting an integrated approach to reporting of non-financial information tend to offer more valuable information than companies that resort to separate reports (Mervelskemper and Streit, 2016). Hence, regulators should carefully consider harmonising the different requirements that are in place in different jurisdictions in order to promote an integrated communication. Finally, one of the most important sources of ineffectiveness of non-financial regulations is related to ineffective sanctioning mechanisms. The loose regulatory requirements leave companies the possibility to comply with the norms by disclosing a concise set of information. Besides the possibility that companies disclose only boilerplate information, many companies could decide not to comply with non-financial requirements without bearing high costs (Di Tullio et al., 2019). For instance, Bini et al. (2019) have investigated some of the largest listed companies based in the UK and have found that about half of them do not report any non-financial KPIs. Di Tullio et al. (2019) show that many companies that should disclose the BM decide not to comply with the norm. Currently, sanctions for non-compliant companies can differ from country to country. While in some cases, like Austria, Belgium, and Germany, sanctions are clearly identified, in other cases, like Denmark and the Netherlands, fines are not well specified. The revision and the harmonisation of sanction system should be considered by regulators in order to encourage companies to disclose BM and other non-financial information effectively.

4.4 Future research avenues on business model disclosure Academic research has been contributing to the development of BM conceptualisation. Starting from the studies in the managerial field, scholars have transposed the BM in the accounting area. From an academic perspective, the discussion of the role of BM in reporting has the potential to tie together different perspectives. In fact, the BM is a concept that has its origins in the managerial literature, while the classic paradigm used to investigate disclosure is the economic theory of the firm. As Beattie and Smith (2013) suggest, the BM can be viewed as the bridge between economic and managerial views of the firm and the discussion of the role of BM in reporting has created a new paradigm, which ties together economics, management, and accounting. Conceptual studies on the role of BM in reporting have made a contribution in this field by emphasising the function of the BM as a simplified representation of a company that allows to understand and

100  Implications of business model disclosure manage firm complexity, thus becoming the key to understand information about value generation and to contextualise all those value creation items that are not reflected in the financial statements (Bukh, 2003; Nielsen and Roslender, 2015). This research has the power to contribute to the debate about BM reporting and regulation and to inform policymakers’ decisions. However, empirical contributions are still in their early stages and should be further developed. Empirical contributions have the power to emphasise the determinants and the effects associated with BM disclosure and can be of particular interest for regulators and professional bodies. Future studies on BM reporting might address open points and consider different perspectives. Some issues have not been properly investigated yet. First, despite the presence of some studies on the impact of BM reporting on market values (Mechelli et al., 2017; Simoni et al., 2019), it is still unclear how BM disclosure affects investment decision. While studies that have been conducted use market values as dependent variables, other factors might be taken into account. Accounting research uses different proxies to assess the impact of disclosure on investors, like the cost of equity capital, or the bid-ask spread (Barth et al., 2017). Future studies could expand current research to the investigation of the association between BM information and information asymmetry levels, proxied by the bid-ask spread, and between BM information and the cost of capital. Evaluating how markets respond to BM reporting is crucial to support standard setters in developing adequate guidance and preparers, which must abide by the new regulations. Second, the determinants of BM disclosure quality remain an under- explored area. Prior studies on non-financial disclosure have identified several determinants, such as size, risk, profitability, ownership, and governance characteristics. Understanding the incentives and disincentives that might affect an entity’s decision to offer an enhanced disclosure of the BM could help regulators in sharpening BM disclosure requirements. Third, while the connections of the BM with KPIs, risks, and strategy are widely recognised as crucial features that contribute to BM disclosure quality, empirical studies on these connections are scarce. Early studies on the role of BM reporting as a platform to contextualise non-financial disclosure are based either on conceptual contributions (Bukh, 2003; Holland, 2004; Beattie and Smith, 2013; Nielsen and Roslender, 2015) or on explorative studies (Bagnoli and Redigolo, 2016; Melloni et al., 2016; Bini et al., 2016, 2019; Sukhari and De Villiers, 2019). However, evidence on capital market consequences and the determinants of the integration among these items lacks. For instance, while both academics and regulators support the linkage to BM as a crucial feature of non-financial KPIs, which allows investors to tell relevant KPIs from KPIs that are not anchored to the value creation process, no studies have empirically validated the usefulness of this linkage. Hence, future research could assess the association between KPIs that are anchored to the BM and stock prices, bid-ask spreads, or analyst forecast errors to evaluate the potential impact of that integration. Similarly, the

Implications of business model disclosure  101 consequences of integrating risks to the BM remain unexplored, thus representing another open issue. Fourth, several frameworks for non-financial disclosure or integrated reporting have become popular in recent years. Among those frameworks, some of the most important are the Integrated Reporting Framework developed by the International Integrated Reporting Council (IIRC) (2013) and the framework on intangibles developed by the World Intellectual Capital Initiative (WICI) (2016). Both frameworks have been widely adopted by companies on a voluntary basis. Those frameworks assign a great importance to the BM as a basis for reporting. Companies adopting those frameworks should be spurred to better communicate BM and use it as a context for other kinds of information. However, the frameworks do not provide preparers with detailed definitions and guidelines on how to achieve the aim of integrating different kinds of information. Early studies on the capability of integrated reporting to effectively act as a disclosure strategy that integrates BM with other information show poor results. Maniora (2017) finds that integrated reporting does not always lead to a more integrated disclosure. Tweedie et al. (2018) and Roslender and Nielsen (2020) suggest that the framework developed by the IIRC does not adequately address BM disclosure. Finally, Sukhari and De Villiers (2019) find that companies in South Africa have started disclosing the BM after the mandatory provision to issue an integrated report, but that the level of integration between the BM and other items is scarce. In light of this, future studies might further investigate whether companies that adopt a disclosure framework for integrated reporting actually disclose more information about the BM and whether the level of integration of information is higher for those companies compared to entities that do not adopt such frameworks. Future research could also assess what incentives and disincentives companies that adopt integrated reporting have to disclose the BM and link it to other kinds of information. From a methodological perspective, different frameworks have been used to assess BM disclosure and different qualitative aspects have been evaluated. Future studies might consider all the major qualitative aspects outlined in prior research in the assessment of BM. A disclosure index that might allow to consider all these features can be developed and employed in future research (see Chapter 3). Moreover, different approaches could be combined to enrich content analysis. For instance, Guthrie and Abeysekera (2006) recommend using traditional content analysis in conjunction with other methods, like survey and semi-structured interviews. While scholars usually assign all the items in a framework the same importance, the use of a mixed methodology could allow researchers to assign different weights to the different items. Hence, content analysis could be performed taking into account the different BM definitions and conceptions that preparers have adopted. Interviews and surveys can not only be used as a means to improve the credibility of content analysis and to obtain a more tailored and nuanced

102  Implications of business model disclosure assessment of narratives but be employed to understand the perceptions of the subjects that have to deal with BM disclosure. The existence of different BM conceptualisations (Massa et al., 2017) and the absence of a clear and articulated definition of BM and its components by regulators and professional bodies can result in the adoption of different BM conceptual frameworks by the different actors. Different subjects might adopt different BM conceptualisation and privilege some aspects rather than others. In order to address this issue, studies that adopt qualitative and behavioural research methodologies could be developed. For instance, those studies might investigate which conception of BM preparers and users of financial statements adopt. The comparison of preparers’ and users’ points of view of non-financial reporting has the power to shed light on potential conceptual or meaning gap (Helfaya et al., 2019). Understanding and analysing that gap is crucial to start a process aimed at developing further guidance on how to report information about BM that meets users’ demand. Such research could also shed light on people that are in charge of collecting information and preparing BM reporting within organisations and on how users process and use BM information in their evaluation processes. To my knowledge, the only study that has investigated analysts’ perceptions of what constitutes a BM is the paper by Nielsen and Bukh (2011). The study was conducted by means of interviews with Danish analysts before the recent requirements in terms of BM disclosure were issued. The analysis of preparers’ and users’ perceptions of BM disclosure could have significant policy implications. Regulators like FRC have promoted interviews and surveys with various stakeholders in order to understand which kind of information they pay closest attention to (FRC, 2018b). However, regulators have not devoted much attention to the definition and to the conceptualisation of the BM. Understanding what market actors think of the BM, which importance they assign to this concept, and how they interpret the mutual relationships that link this concept to other items disclosed in the annual report can be important in order to inform future policymaking actions around BM and non-financial reporting. Currently, non-financial reporting regulation issued by the EU is under revision, and the EFRAG has appointed a task force devoted to the analysis of current requirements and possible ways to improve them. Hence, regulators might be interested in the results of such studies, which would also allow to verify whether the definitions and the conceptualisation of the BM that have been developed by the academic literature are shared and understood by financial professionals.

References Amir, E., Lev, B., & Sougiannis, T. (2003), “Do financial analysts get intangibles?”, European Accounting Review, Vol. 12 No. 4, pp. 635–659. Bagnoli, C., & Redigolo, G. (2016), “Business model in IPO prospectuses: insights from Italian Innovation Companies”, Journal of Management & Governance, Vol. 20, pp. 261–294.

Implications of business model disclosure  103 Barth, M. E., Cahan, S. F., Chen, L., & Venter, E. (2017), “The economic consequences associated with integrated reporting quality: Capital market and real effects”, Accounting, Organizations & Society, Vol. 62, pp. 43–64. Beattie, V., & Smith, S. J. (2013), “Value creation and business models: Refocusing the intellectual capital debate”, The British Accounting Review, Vol. 45 No. 4, pp. 243–254. Bini, L., Dainelli, F., & Giunta, F. (2016), “Business model disclosure in the Strategic Report Entangling intellectual capital in value creation process”, Journal of Intellectual Capital, Vol. 17 No. 1, pp. 83–102. Bini, L., Bellucci, M., & Giunta, F. (2018), “Integrating sustainability in business model disclosure: Evidence from the UK mining industry”, Journal of Cleaner Production, Vol. 171, pp. 1161–1170. Bini, L., Dainelli, F., Giunta, F., & Simoni, L. (2019), Are non-financial KPIs in annual reports really “key”. An investigation of company disclosure and analyst reports in the UK, Edinburgh: The Institute of Chartered Accountants of Scotland (ICAS). Bini, L., & Bellucci, M. (2020), Integrated sustainability reporting, Cham: Springer. Bukh, P. N. (2003), “The relevance of intellectual capital disclosure: paradox?”, Accounting, Auditing & Accountability Journal, Vol. 16 No. 1, pp. 49–56. Coram, P. J., Monroe, G. S., & Woodliff, D. R. (2009), “The value of assurance on voluntary nonfinancial disclosure: An experimental evaluation”, Auditing: A Journal of Practice & Theory, Vol. 28 No. 1, pp. 137–151. Cordazzo, M., Bini, L., & Marzo, G. (2020), “Does the EU directive on non-financial information influence the value relevance of ESG disclosure? Italian evidence”, Business Strategy and the Environment, Vol. 29 No. 8, pp. 3470–3483. Di Tullio, P., Valentinetti, D., Nielsen, C., & Rea, M. A. (2019), “In search of legitimacy: semiotic analysis of business model disclosure practices”, Meditari Accountancy Research, Vol. 28 No. 5, pp. 863–887. Elzahar, H., Hussainey, K., Mazzi, F., & Tsalavoutas, I. (2015), “Economic consequences of key performance indicators’ disclosure quality”, International Review of Financial Analysis, Vol. 39, pp. 96–112. European Commission (EC) (2017), Guidelines on non-financial reporting (methodology for reporting non-financial information). Financial Reporting Council (FRC) (2014), Guidance on the Strategic Report, June 2014. Financial Reporting Council (FRC) (2016), Lab Project Report: Business Model Reporting, October 2016. Financial Reporting Council (FRC) (2018a), Guidance on the Strategic Report, July 2018. Financial Reporting Council (FRC) (2018b). Business model reporting; Risk and viability reporting. Where are we now?, October 2018. Guthrie, J., & Abeysekera, I. (2006), “Content analysis of social, environmental reporting: What is new?”, Journal of Human Resource Costing & Accounting, Vol. 10 No. 2, pp. 114–126. Helfaya, A., Whittington, M., & Alawattage, C. (2019), “Exploring the quality of corporate environmental reporting: Surveying preparers’ and users’ perceptions”, Accounting, Auditing & Accountability Journal, Vol. 32 No. 1, pp. 163–193. Holland, J. (2004), Corporate intangibles, value relevance and disclosure content, Edinburgh: Institute of Chartered Accountants of Scotland (ICAS).

104  Implications of business model disclosure Institute of Chartered Accountants of Scotland (ICAS) (2010), The future of assurance, Edinburgh: ICAS. International Integrated Reporting Council (IIRC) (2013), The integrated IR framework, London: International Integrated Reporting Council. Maniora, J. (2017), “Is integrated reporting really the superior mechanism for the integration of ethics into the core business model? An empirical analysis”, Journal of Business Ethics, Vol. 140, pp. 755–786. Massa, L., Tucci, C. L., & Afuah, A. (2017), “A critical assessment of business model research”, Academy of Management Annals, Vol. 11 No. 1, pp. 73–104. Mechelli, A., Cimini, R., & Mazzocchetti, F. (2017), “The usefulness of the business model disclosure for investors’ judgements in financial entities. A European study”, Revista de Contabilidad-Spanish Accounting Review, Vol. 20 No. 1, pp. 1–12. Melloni, G., Stacchezzini, R., & Lai, A. (2016), “The tone of business model disclosure: n impression management analysis of the integrated reports”, Journal of Management & Governance, Vol. 20, pp. 295–320. Mervelskemper, L., & Streit, D. (2016), “Enhancing market valuation of ESG performance: Is integrated reporting keeping its promise?”, Business Strategy and the Environment, Vol. 26 No. 4, pp. 536–594. Michelon, G., Pilonato, S., & Ricceri, F. (2015), “CSR reporting practices and the quality of disclosure: An empirical analysis”, Critical Perspectives on Accounting, Vol. 33, pp. 59–76. Nielsen, C., & Bukh, P. (2011), “What constitutes a business model: The perception of financial analysts”, International Journal of Learning and Intellectual Capital, Vol. 8 No. 3, pp. 256–271. Nielsen, C., & Roslender, R. (2015), “Enhancing financial reporting: The contribution of business models”, The British Accounting Review, Vol. 47 No. 3, pp. 262–274. Nielsen, C., Roslender, R., & Schaper, S. (2016), “Continuities in the use of the intellectual capital statement approach: Elements of an institutional theory analysis”, Accounting Forum, Vol. 40 No. 1, pp. 16–28. Nielsen, C., Lund, M., & Thomsen, P. (2017a), “Killing the balanced scorecard to improve internal disclosure”, Journal of Intellectual Capital, Vol. 18 No. 1, pp. 45–62. Nielsen, C., Roslender, R., & Schaper, S. (2017b), “Explaining the demise of the intellectual capital statement in Denmark”, Accounting, Auditing & Accountability Journal, Vol. 30 No. 1, pp. 38–64. Oliveira, L., Rodrigues, L. L., & Craig, R. (2006), “Firm-specific determinants of intangibles reporting: evidence from the Portuguese stock market”, Journal of Human Resource Costing & Accounting, Vol. 10 No. 1, pp. 11–33. Osterwalder, A., & Pigneur, Y. (2010), Business model generation: A handbook for visionaries, game changers, and challengers, Hoboken: John Wiley & Sons. Roslender, R., & Nielsen, C. (2020), “Accounting for the value expectations of customers: Re-imagining the Integrated Reporting initiative”, Critical Perspectives on Accounting, forthcoming. Simnett, R., Nugent, M., & Huggins, A. L. (2009), “Developing an international assurance standard on greenhouse gas statements”, Accounting Horizons, Vol. 23 No. 4, pp. 347–363.

Implications of business model disclosure  105 Simnett, R., & Huggins, A. L. (2015), “Integrated reporting and assurance: Where can research add value?”, Sustainability Accounting, Management and Policy Journal, Vol. 6 No. 1, pp. 29–53. Simoni, L., Bini, L., & Giunta, F. (2019), “The effects of business model regulation on the value relevance of traditional performance measures. Some evidence from UK companies”, Financial Reporting, Vol. 1, pp. 83–111. Simoni, L., Bini, L., & Bellucci, M. (2020), “Effects of social, environmental, and institutional factors on sustainability report assurance: evidence from European countries”, Meditari Accountancy Research, Vol. 28 No. 6, pp. 1059–1087. Simpson, A. V. (2010), “Analysts' use of non-financial information disclosures”, Contemporary Accounting Research, Vol. 27 No. 1, pp. 249–288. Sukhari, A., & De Villiers, C. (2019), “The influence of integrated reporting on business model and strategy disclosures”, Australian Accounting Review, Vol. 29 No. 4, pp. 708–725. Taran, Y., Nielsen, C., Montemari, M., Thomsen, P., & Paolone, F. (2016), “Business model configurations: a five-V framework to map out potential innovation routes”, European Journal of Innovation Management, Vol. 19 No. 4, pp. 492–527. Tweedie, D., Nielsen, C., & Martinov-Bennie, N. (2019), “The business model in integrated reporting: Evaluating concept and application”, Australian Accounting Review, Vol. 28 No. 3, pp. 405–420. World Intellectual Capital Initiative (WICI) (2016), Intangibles reporting framework, WICI.

5

Concluding remarks

In a context where an improved model of corporate reporting is emerging, the business model (BM) has been indicated as a fundamental concept in communicating value creation to investors (Bukh, 2003; Holland, 2004; ICAEW, 2010). The purpose of the BM is to obtain a simplified representation of a company. Applied to reporting, it is deemed to offer a holistic view of a business that allows preparers to offer a key to interpret all the items disclosed in the annual report. Ideally, the BM allows to contextualise non-financial information disclosed by emphasising the role and the importance of different intangible resources to value creation (Beattie and Smith, 2013). This view is clearly supported by regulators. Starting from the questions and the unsolved issued set out at the beginning, this book aims to offer a view on BM reporting, its potential, and some challenges that preparers, users, and regulators have to face. The potential of the BM to depict an entity value creation and to clarify the role of different resources and activities in the value creation process is unquestioned (Bukh, 2003; Beattie and Smith, 2013; Nielsen and Roslender, 2015). This function can be achieved only when companies are sufficiently transparent in their reporting. Empirical evidence on how companies are approaching mandatory BM disclosure suggests the presence of different behaviours, which range from non-compliance, which means deliberately deciding not to report the BM, to effectively communicating the BM in the annual report (Maniora, 2017; Bini et al., 2018, 2019). An effective communication of the BM is not limited to the explanation of the main factors that drive an entity’s competitiveness, but entails building linkages with other non-financial items, like strategy, non-financial key performance indicators (KPIs), and risks. Regarding these aspects, only some companies seem to achieve high levels of integration of the information. This is only possible in a context where companies have to exercise judgement in their disclosure choices, which characterises BM reporting, as well as other attempts to regulate non-financial information. This limitation is related to the difficulties in specifying a minimum set of items to disclose and in defining an optimal amount of disclosure. This circumstance is influenced by the BM being extremely firm-specific. Moreover, compared to other kinds DOI: 10.4324/9781003016793-5

Concluding remarks  107 of non-financial information, the BM suffers from a lack of a shared definition. The academic literature features different classifications and conceptualisations of BM (Osterwalder and Pigneur, 2010; Taran et al., 2016; Massa et al., 2017). Despite the different definitions having some common traits, the absence of a shared standard might generate uncertainty and confusion among market participants. Companies could avoid providing detailed information about the BM while being considered compliant, as minimum requirements are easy to meet. A scenario characterised by different BM reporting practices raises the question of how those practices are evaluated by users. Evidence suggests that investors and analysts benefit from an enhanced disclosure of BM in the annual report. Hence, it is in the interests of preparers and regulators to improve BM reporting to address users’ informative needs. Regulators’ efforts to improve reporting are witnessed by an ongoing revision process, which aims at improving existing frameworks and defining better nonfinancial reporting standards. Recently, the European Commission has started a process that will lead to a revised version of non-financial regulations that have been enforced across member countries. Within the scope of this revision to the Non-Financial Reporting Directive, the European Financial Reporting Advisory Group (EFRAG) has been required to undertake preparatory work to develop possible non-financial reporting standards. The set of non-financial reporting standards has the objective to align preparers’ reported practices, enhancing their comparability and reliability. In the UK, the Financial Reporting Council (FRC) has been researching non-financial disclosure practices for a long time, in the attempt to improve reporting practices around BM, risks, and disclosure of strategic objectives. Moreover, the International Financial Reporting Standards (IFRS) Foundation has recently launched a consultation around the opportunity to develop a set of non-financial reporting standards. This continuous regulatory review process can benefit from partnerships between regulatory bodies and academic experts, which would allow exploiting the synergies that derive from different backgrounds. Some academic experts have been appointed by EFRAG as members of the task force that is working on the development of possible non-financial reporting standards. This issue is related to another major issue pointed out in the introduction, which is how academics can assist regulators and companies in the challenge of BM reporting. Academics can contribute to the action of policymakers in several ways. Two areas are of utmost importance, which revolve around the themes of BM definitions and conceptualisations and of providing empirical evidence on BM reporting. The first issue can be of extreme interest for regulators, which have not provided a clear and articulated definition of BM. This circumstance leaves companies with considerable discretion. So far, academic literature has offered different definitions of BM. Some authors have conducted thorough reviews of the literature to find common traits of those conceptualisations

108  Concluding remarks (Wirtz et al., 2016; Massa et al., 2017). Advancing research on conceptualisations and definition of BM and its components can facilitate regulators in their effort to better define BM disclosure requirements. The second area can offer practitioners and regulators evidence around BM disclosure practices. Shedding light on the factors that might lead companies to opt for an effective and comprehensive disclosure of the BM, rather than a vague disclosure, can be highly informative for policymakers. Other areas that remain largely under-explored are related to the consequences of BM disclosure. Academic research could further investigate market reactions to the disclosure of BM information and how this information affects the perceptions that analysts and investors have of other information disclosed in the annual report. In order for empirical research on BM to be able to assist regulators, methodological issues related to the assessment of BM disclosure debated in this book might be addressed by the research community. Understanding the crucial aspects and attributes in the assessment of BM disclosure represents a fundamental step in support of academic studies on this theme.

References Beattie, V., & Smith, S. J. (2013), “Value creation and business models: Refocusing the intellectual capital debate”, The British Accounting Review, Vol. 45 No. 4, pp. 243–254. Bini, L., Bellucci, M., & Giunta, F. (2018), “Integrating sustainability in business model disclosure: Evidence from the UK mining industry”, Journal of Cleaner Production, Vol. 171, pp. 1161–1170. Bini, L., Dainelli, F., Giunta, F., & Simoni, L. (2019), Are non-financial KPIs in annual reports really “key”. An investigation of company disclosure and analyst reports in the UK, Edinburgh: The Institute of Chartered Accountants of Scotland (ICAS). Bukh, P. N. (2003), “The relevance of intellectual capital disclosure: a paradox?”, Accounting, Auditing & Accountability Journal, Vol. 16 No. 1, pp. 49–56. Holland, J. (2004), Corporate intangibles, value relevance and disclosure content, Edinburgh: Institute of Chartered Accountants of Scotland (ICAS). Institute of Chartered Accountants England and Wales (ICAEW) (2010), Business models in accounting: The theory of the firm and financial reporting: Information for better markets Initiative, London: ICAEW. Maniora, J. (2017), “Is integrated reporting really the superior mechanism for the integration of ethics into the core business model? An empirical analysis”, Journal of Business Ethics, Vol. 140, pp. 755–786. Massa, L., Tucci, C. L., & Afuah, A. (2017), “A critical assessment of business model research”, Academy of Management Annals, Vol. 11 No. 1, pp. 73–104. Nielsen, C., & Roslender, R. (2015), “Enhancing financial reporting: The contribution of business models”, The British Accounting Review, Vol. 47 No. 3, pp. 262–274. Osterwalder, A., & Pigneur, Y. (2010), Business model generation: A handbook for visionaries, game changers, and challengers, Hoboken: John Wiley & Sons.

Concluding remarks  109 Taran, Y., Nielsen, C., Montemari, M., Thomsen, P., & Paolone, F. (2016), “Business model configurations: a five-V framework to map out potential innovation routes”, European Journal of Innovation Management, Vol. 19 No. 4, pp. 492–527. Wirtz, B. W., Pistoia, A., Ullrich, S., & Göttel, V. (2016), “Business models: Origin, development and future research perspectives”, Long Range Planning, Vol. 49 No. 1, pp. 36–54.

Index

activities 2, 9, 11, 12, 24, 26, 27, 31, 34, 35, 50, 52, 53, 60, 62, 68, 70, 72, 73, 94, 98, 106 agency theory 6, 17, 18, 48, 50 Balance Scorecard 9 business logic 1, 25, 74 business model 1–4, 25–35, 32, 50–6, 54, 57–9, 60–70, 71, 72–7, 76, 79–86, 93–102, 106–8; definitions 28, 29, 34, 101, 107; disclosure 3–4, 50–2, 54–6, 54, 57–9, 60–5, 67–70, 71, 72–4, 77–80, 86, 93–6, 100–2, 106, 108; elements 4, 29, 67, 72, 82; reporting (see business model disclosure) Canvas 61, 71, 72–3, 75, 77–9, 82–5, 95, 98 Companies Act 13, 55, 59, 63, 97 completeness 77, 79 connectivity 60, 69, 71, 73–7, 80, 83, 85 constitutive elements 15, 29, 68, 82 content analysis 14, 22–3, 57–9, 60, 65–7, 69, 70, 71, 76–7, 81, 101 Directive 95/2014 13, 22, 66, 68, 71, 97 disclosure index 4, 77–9, 81, 86, 101 ESG 2–3, 8, 10–11, 14, 16–17, 20, 53–4, 57–8, 60–1, 67, 71, 80, 95–7; disclosure 10, 16, 20–1, 77–8, 97, 99 financial analysts 23–4, 96 focus attribute 60, 68, 73–4, 77, 80, 82, 84

GRI 10, 13, 17, 22, 67 IASB 2, 20, 51, 63, 67, 71 IFRS foundation 10, 97, 107 IIRC 2, 11, 52–3, 60, 70, 72, 101 impression management 59, 62, 68, 71 information asymmetries 7, 10, 13, 17, 19, 21, 50, 55–6, 62, 93 institutional theory 17, 19, 94 intangible factors see intangible resources intangible items see intangible resources intangible resources 6–9, 11–12, 18–19, 24, 50, 64, 81, 95–6, 106 intangibles 3, 6, 7, 9, 10–12, 14–18, 23–5, 56, 60, 65, 93, 96, 101 integrated reporting 20, 22, 52, 58, 59, 64, 66, 98, 101 Integrated Reporting framework 11, 71, 72, 101 intellectual capital 6–7, 11, 24–5, 50, 54, 57, 71, 95 IPO prospectues 57, 65–6, 71 key performance indicators (KPIs) 3, 53–5, 58, 60, 61, 69, 71, 73, 75, 76, 77, 78, 80, 84, 96, 99, 100, 106 legitimacy theory 6, 17, 19, 51, 62, 95 management commentary 2, 63, 67, 71 mandatory non–financial disclosure 12, 13, 17, 22, 58 narrative information 2, 12, 64, 98 narrative reporting 2, 3, 11, 98 narratives 2, 11, 12, 16, 53, 62, 66, 75, 102

112 Index non-financial disclosure 14–25, 52, 55, 58, 64, 67–8, 78–9, 100–1, 107; regulations 13 non-financial indicators 12, 16, 17, 67, 84, 96 non-financial reporting standards 10, 107 ontologies 29–30, 32–4, 98 proprietary costs 14, 20, 56, 57, 65, 93 qualitative attribute 59, 69, 73–4, 78, 84, 86 quality of communication 2, 64, 79 relative index 79 reporting framework 9, 11, 71, 72, 101, 105 resources 2, 3, 6–12, 18–19, 24–6, 28–31, 32, 33–4, 50, 52–3, 55, 57, 60, 63–5, 68, 70, 73, 75, 81, 83, 95–6, 98, 106 risks 3, 10, 52–3, 54, 55, 59, 60, 61, 63, 65–6, 69, 73, 75–7, 76, 78, 80–1, 84, 93, 95–6, 100–1, 106–7 scope index 78, 79, 84, 86 signalling theory 6, 17, 19, 50 Skandia Navigator 9

stakeholder theory 17–19 strategic objectives 12, 24, 61, 63, 66, 75, 84 strategic report 55–6, 57, 59, 60, 63, 68, 71, 72, 76, 81, 82–4, 98 strategy 8–9, 11, 25–6, 29, 34, 53, 58, 59, 60–1, 63, 65, 69, 71, 72–3, 75–7, 78, 80–4, 100, 106 Sveiby’s framework 15 taxonomies 33, 34, 98 text-units 59, 69–70, 71, 72–5, 76, 77, 78, 79, 83, 85 tone 19, 59, 62, 68–9, 71, 74, 77, 78, 80–1, 83–4 value creation 1–4, 6–12, 16, 24–9, 34–5, 50–3, 54, 56, 57, 59, 60–1, 64–6, 68–70, 71, 73–5, 79, 82–3, 94–6, 98, 100, 106, 108 value driver 34, 50, 53–4, 61, 66, 72–3, 75–7, 79–85, 94–5 value proposition 26, 31, 32, 33, 34, 83, 98 value relevance 7, 22, 58, 59, 63–4, 67, 71, 99 voluntary disclosure 10, 18–19 WICI 2, 10, 15, 101