Integrated Reporting (IR) for Sustainability: Business Cases in South Asia (Eco-Efficiency in Industry and Science, 34) 3031418328, 9783031418327

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Eco-Efficiency in Industry and Science 34

Ki-Hoon Lee Samanthi Senaratne Nuwan Gunarathne   Editors

Integrated Reporting (IR) for Sustainability Business Cases in South Asia

Eco-Efficiency in Industry and Science Volume 34

Eco-efficiency has become one of the buzzwords of our time. The term reflects the paradigm shift that has occurred since the late eighties. Rather than regarding ecology and economy as mutually opposing entities, it is now widely recognised that eco-efficient production is a major opportunity to enhance a company’s competitive position in the market. Correspondingly, the general view of industry’s role in the sustainable development debate has also changed: rather than being identified as a part of the problem, business is now seen increasingly as a part of the solution. All this means that industry faces a new range of opportunities and challenges - in product design, material and supplier choice, producer responsibility for the waste stage, and product image.

Ki-Hoon Lee · Samanthi Senaratne · Nuwan Gunarathne Editors

Integrated Reporting (IR) for Sustainability Business Cases in South Asia

Editors Ki-Hoon Lee Griffith Business School Griffith University Brisbane, QLD, Australia

Samanthi Senaratne Department of Accounting University of Sri Jayewardenepura Nugegoda, Sri Lanka

Nuwan Gunarathne Department of Accounting University of Sri Jayewardenepura Nugegoda, Sri Lanka

ISSN 1389-6970 Eco-Efficiency in Industry and Science ISBN 978-3-031-41832-7 ISBN 978-3-031-41833-4 (eBook) https://doi.org/10.1007/978-3-031-41833-4 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Paper in this product is recyclable.

Foreword by Prof. Mervyn King

Financial reporting is critical but not sufficient for directors to discharge their duty of accountability. Sustainability reporting is critical but on its own not sufficient to discharge the duty of accountability. The two reported in separate silos are divorced from reality of how companies operate. Companies do not operate on the basis of financial capital and non-financial capital being in separate silos or in different buildings. The financial and non-financial resources are integrated on a daily basis. There is general agreement in the corporate world that the financial and nonfinancial matters should be integrated into reporting. Thus, the International Integrated Reporting Council (IIRC) was established in 2010. An integrated report gives a holistic representation as to how the company has created, preserved or eroded value during a reporting period. The global institutions creating financial and sustainability reporting standards cannot overlook the reality of the integration of the financial and non-financial matters. This is clearly demonstrated in this book by the learned authors. Once a board decides to do an integrated report integrated thinking flows through the company. The tone at the top is critical. There is no case study which shows that management changed from silo thinking to integrated thinking from the beat of the feet at the bottom to the tone at the top. The capital markets of the world have longed for a global comprehensive corporate reporting system. With such a system, the asset owner or manager can make an informed comparison between two companies even if they are in different parts of the world. The authors have shown how integrated reporting has benefited companies operating in South Asia. This is a huge contribution to standard setters around the world.

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Foreword by Prof. Mervyn King

This is a must-read book certainly for people in South Asia but for companies around the world to illustrate the benefits flowing from integrated thinking and doing an integrated report. Johannesburg, South Africa

Prof. Mervyn King, SC Chair Emeritus of the IIRC

Foreword by Heshana Kuruppu

It is my great pleasure to write the foreword for the book Integrated Reporting (IR) for Sustainability—Business Cases in South Asia. This book, edited by Ki-Hoon Lee, Samanthi Senarathne and Nuwan Gunarathne, brings together a collection of research papers and case studies that shed light on the important role of integrated reporting and sustainability accounting practices in the South Asian region. The South Asian region faces a range of sustainability-related issues that pose significant challenges to its economic, social and environmental well-being. Rapid economic development has led to rising levels of greenhouse gas emissions, biodiversity loss and social inequality. The region is also susceptible to natural disasters such as droughts and floods, which disrupt economies and threaten livelihoods. Addressing these issues requires concerted efforts from businesses, organizations and governments to promote sustainable practices, mitigate climate change and achieve the United Nations’ Sustainable Development Goals (SDGs) for inclusive and resilient development in the region. The South Asian Federation of Accountants (SAFA), as an esteemed partner of the International Federation of Accountants (IFAC) network, represents approximately 400,000 accountants who are members of national chartered accountancy and cost and management accountancy institutions across South Asian countries. SAFA recognizes sustainability as a paramount priority for the region and has established a dedicated Sustainability and Assurance Committee. This committee aims to facilitate the sharing of best practices, dissemination of knowledge, identification of opportunities, promotion of sustainability literacy and adoption of the Sustainability Reporting Maturity Model to assess and advance sustainability reporting practices at various levels. Moreover, the International Sustainability Standards Board (ISSB) is currently finalizing comprehensive requirements for disclosing sustainability-related financial information under IFRS S1 and S2. This effort addresses the pressing challenge of lack of standardization in sustainability reporting. The absence of a global reporting baseline has allowed companies to exercise discretion in their disclosures, resulting in inconsistencies and potentially enabling greenwashing practices. This undermines the credibility and effectiveness of sustainability reporting. vii

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Foreword by Heshana Kuruppu

As noted earlier, ISSB has made significant progress to tackle this issue. In March 2022, the ISSB released exposure drafts of the Sustainability Disclosure Standards, which are designed to provide globally applicable guidelines of high quality for disclosing climate and sustainability information. This milestone development holds immense potential to enhance the reliability, measurability and comparability of sustainability data across global markets. It will empower businesses and investors with a robust framework to navigate the complex landscape of Environmental, Social and Governance (ESG) reporting, replacing confusion with clarity. Against this backdrop, the editors of this book have successfully gathered a wealth of best practices implemented by corporate players and professional accounting bodies in the South Asian region, thanks to the contributions of esteemed authors from different countries. This compilation of knowledge and experiences serves as a valuable resource, enabling comparisons and benchmarking that will contribute to uplifting sustainable practices. By gaining access to such insights, stakeholders can drive positive change and further advance integrated reporting and sustainability reporting efforts in the region. I would like to commend the authors, editors and contributors involved in the development of this book. Their dedication and expertise have resulted in a comprehensive collection that contributes to the advancement of integrated reporting and sustainable practices in South Asia. In conclusion, Integrated Reporting (IR) for Sustainability—Business Cases in South Asia plays a significant role in promoting sustainable development, transparency and accountability in the South Asian region. I believe this book will inspire further research, facilitate meaningful discussions and drive positive change in the corporate reporting landscape. Heshana Kuruppu Vice President-South Asian Federation of Accountants; Vice President-CA Sri Lanka

Preface

The South Asian region is experiencing increasing threats to the natural environment associated with rapid economic development, which result in rising levels of global greenhouse gas emissions, biodiversity loss and social inequality. Furthermore, significant droughts and floods have caused serious disruptions and volatility in the economies of this region. Many companies in South Asia are already facing serious resource constraints linked to water scarcity, loss of biodiversity, soil erosion and various other sustainability challenges. Hence, the concerted effort and support of businesses and other organizations are vital in achieving the 17 Sustainable Development Goals (SDGs) of the United Nations (UN), despite the fact that the primary responsibility for achieving the SDGs by 2030 rests with governments. Since companies impact virtually all sustainable development challenges, in the last few decades, public awareness has focused strongly on the role of corporations in achieving these goals. This has necessitated companies to report not only on their financial performance but also on non-financial performance. In this context, integrated reporting (IR), which provides a holistic representation of value creation in an organization, has gained recognition as a corporate reporting model that would facilitate companies to work towards sustainable development. IR combines different strands of corporate reporting such as financial, governance and sustainability, into a coherent whole that explains the manner in which an organization creates and sustains business and societal value. IR is not only a reporting model but also a managerial technology that is expected to improve management practices of organizations and move these practices towards sustainable development. Hence, IR drives organizational change towards more sustainable performance outcomes by supporting sustainability, integrated thinking and decision-making, and actions that focus on sustainable value creation for investors and other stakeholders of organizations in South Asia. Moreover, IR can improve the transparency and accountability of the reporting entities in this region, which can act as a catalyst in promoting stakeholder support that will drive inclusive and sustainable development. To improve our knowledge and understanding of IR, it is important to understand the roles and usefulness of IR for companies operating in South Asia. This

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book explores and discusses issues, challenges, opportunities, methodological innovations and trends in IR for sustainability with specific reference to the South Asian region. In addition to research papers by academics, the book also contains case studies illustrating the ways in which companies and professional accounting bodies develop and advance corporate IR and sustainability accounting practices, what practical solutions and applications have been developed in South Asia and how certain IR tools and accounting methods are disseminated. Hence, this book provides advanced research, concepts, applications, developments, discussions and case studies on IRrelated practices in South Asia and the roles of different IR and sustainability-oriented decision support tools and methods in strengthening competitiveness by achieving corporate sustainability. Thus, this book would be a useful reference for researchers, academics, policymakers, standard setters, practitioners, professional accounting bodies and educators. Brisbane, Australia Nugegoda, Sri Lanka Nugegoda, Sri Lanka Summer 2023

Ki-Hoon Lee Samanthi Senaratne Nuwan Gunarathne

Acknowledgements

This book has been developed through the co-operation of academia, practitioners and professional accounting bodies consisting of approximately 30 experts from different contexts having the passion and commitment to contribute towards the expansion of integrated reporting (IR) and sustainable development. We sincerely thank each contributor for making this book inclusive, insightful and diverse with their valuable contributions. We wish to express our gratitude to the Accelerating Higher Education Expansion and Development (AHEAD) Operation of the Ministry of Higher Education, Sri Lanka, funded by the World Bank [Grant Number AHEAD/DOR/HEMS/SJP/No.8], which provided the financial support for various activities of this project in order to make this publication possible. We are also thankful to the Director and staff of the AHEAD Project Office of the University of Sri Jayewardenepura for their continued support. We sincerely thank Mervyn King, Former Supreme Court Judge, South Africa and Chair Emeritus of the International Integrated Reporting Council (IIRC) and the Global Reporting Initiative (GRI) and Heshana Kuruppu, Vice President, South Asian Federation of Accountants (SAFA) for their forewords to and endorsements of this book which emphasized the importance of its contents to our readership. We express our sincere appreciation to the external reviewers of book chapters— Roshan Ajward, Alexandr Akimov, Upeka Atupola, Katherine Christ, Thilini Cooray, Dinithi Dissanayake, Robert Hales, Roshan Herath, Karen Maas, Isuru Manawadu, Kensuke Ogata, Radiah Othman, Luckmika Perera, Mahendra Peiris, Wei Qian and Dileepa Samudrage for strengthening the overall quality of this publication by joining in the double-blind review process. We acknowledge with a deep sense of gratitude the academia, the professional accounting bodies and the companies that are represented by the contributions to this volume. The authors of this book comprise individuals, teams and institutions from Australia, Bangladesh, India, Sri Lanka, New Zealand, Sweden and the UK. Their support throughout this book development project is greatly appreciated. We wish to express our special thanks to Kumara Kanchana, who functioned as the Research Assistant for the World Bank Grant of the Department of Accounting, xi

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Acknowledgements

University of Sri Jayewardenepura and to Madusha Hashen, a graduate of the Department of Accounting, for the typesetting of the book. Our thanks are also due to Kumari Goonesekere for proofreading our chapters. Finally, we would like to thank our respective families for their moral support at all times as well as the other staff at Springer Nature for their kind support and hard work during the editorial and production processes.

Contents

1

South Asia Perspectives on Integrated Reporting for Sustainability: An Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ki-Hoon Lee, Samanthi Senaratne, and Nuwan Gunarathne

Part I 2

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4

5

Integrated Reporting for Sustainability: Challenges and Opportunities

Integrated Reporting Adoption in Sri Lanka Through an Institutional Theoretical Lens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. M. I. Lakshan, Mary Low, and Charl de Villiers

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Institutional Pressures and Integrated Reporting Adoption in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nuradhi Kalpani Jayasiri

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Determinants of Integrated Reporting Adoption in an Emerging Market— Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thilini Cooray and Dinithi Dissanayake

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Adapting a National Pandemic Control Model as a Surveillance-Control Mechanism to Facilitate Corporate Sustainability and Integrated Reporting . . . . . . . . . . . . . . . 113 Prabanga Thoradeniya, Roshini Galappatti, and Mukesh Garg

Part II 6

1

Integrated Reporting for Sustainability—Corporate Implementation and Applications

Application of Integrated Reporting—A Case Study of Tata Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Shruti Ashok and Deepika Dhingra

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7

Benefits and Implementation Challenges of Integrated Reporting: Perspectives of Preparers at Indian Listed Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Nandita Mishra and Mohamed Nurullah

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Incorporating the International Integrated Reporting Framework in the Corporate Reporting Ecosystem: A Case-Based Study from Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Md. Shafiqul Islam

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Transformation from a Narrow Capital to a Multi-capital Performance Measurement Model in Value Creation: A Case of a Logistics and Freight Forwarding Company in Sri Lanka . . . . . 207 Sadma Umagiliya and Dileepa Samudrage

10 DIMO’s Integrated Reporting Journey: From Separation to Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Suresh Gooneratne 11 The Role of Integrated Thinking and Reporting in the Sustainable Business Journey: A Case Study of Talawakelle Tea Estates PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 Roshan Rajadurai, Senaka Alawattegama, Lakshitha Bandara, and Krishna Ranagala 12 The Aitken Spence Approach to Integrated Reporting . . . . . . . . . . . . 281 Yasangi Muditha Randeni and Rohan Fernando 13 The Impact of Private Certifications on Social and Environmental Performance and Integrated Reporting: The Case Study of Watawala Plantations PLC in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 M. A. T. K. Munasinghe and Saman Kumara Part III Integrated Reporting for Practitioners—Corporate Experience and Professional Practice 14 Reporting on Key Performance Indicators Related to Non-financial Capitals: Evidence from Sri Lankan Integrated Report Preparers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Nayomi Wijesinghe, Subhash Abhayawansa, and Carol Adams 15 Association of Chartered Certified Accountants Experience as a Professional Accounting Body Promoting Integrated Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 Sharon Machado and Yen-pei Chen

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16 Role of the Institute of Chartered Accountants of Sri Lanka as a Facilitator in Promoting Integrated Reporting in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371 Chathumin Gunarathne and Asite Talwatte 17 Role of the Chartered Institute of Management Accountants on Supporting, Upholding, and Promoting the Integrated Reporting Concepts in South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 Akila Gunarathna 18 CMA Sri Lanka’s Journey Towards Promoting Integrated Reporting in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 Jinandi Chandraratne Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417

Editors and Contributors

About the Editors Ki-Hoon Lee is Full Professor of Corporate Sustainability Management and Sustainability Accounting. Through his research, he embraces environmental, social and economic challenges, integrating sustainability into the business value chain to enhance both business and societal values. Many of his research partners and funding bodies are Fortune Global 500 companies and leading Asia Pacific public and private organizations. He holds visiting professorship at Vienna University of Economics and Business (WU in Austria) and Seoul National University (South Korea). From 2019 to 2022, he served as Deputy Research Program Leader of the Australian Blue Economy Cooperative Research Centre and the United Nations’ technical expert on Climate Change and Ocean Accounting. He is the Chairman of Environmental and Sustainability Management Accounting Network (EMAN) in Asia Pacific to lead Asia-Pacific focused ‘business/industry/professionals–scientists/academia’ network for corporate sustainability and sustainability management accounting. He has more than 150 research publications and has been ranked among the top-cited researchers in management, accounting and economics. For the period 2020–22, he is among the top 2% in Elsevier and Stanford University’s World Scientist Ranking. Samanthi Senaratne is Professor in Accounting at the Department of Accounting, University of Sri Jayewardenepura, Sri Lanka. She specializes in accounting education, corporate governance and corporate reporting. She holds a Bachelor’s Honours Degree in Accounting, an MBA and a Ph.D. in Finance. She is a prolific researcher and has published widely in the areas of accounting education, corporate governance, corporate sustainability accounting and integrated reporting in leading international peer-reviewed journals. She has also co-authored book chapters with reputed international book publishers such as Springer and IGI Global. She has won awards in recognition of her research work and received research grants from external agencies such as World Bank and Chartered Institute of Management Accountants (CIMA) UK. She regularly participates as a panellist in various local and international forums

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on accounting education, quality assurance in education and integrated reporting. Presently, she serves as a member of the Education Global Forum Panel of the Association of Chartered Certified Accountants (ACCA) UK, and the Integrated Reporting Council of Sri Lanka. In addition, she is actively engaged in policy development and implementation of quality assurance activities of universities and national educational institutions in Sri Lanka, and in national curriculum development and assessment process of the Ministry of Education, Sri Lanka. She served as the Founding Director of Quality Assurance of the University of Sri Jayewardenepura, Sri Lanka, and has extensive experience in managing World Bank funded education projects in Sri Lanka. Nuwan Gunarathne is an academic, consultant and researcher specializing in corporate sustainability and sustainability accounting. Currently, he is employed as a Senior Lecturer at the University of Sri Jayewardenepura, Sri Lanka. He is a fellow member of the Institute of Certified Management Accountants of Sri Lanka and a member of the Chartered Institute of Management Accounting (UK). He obtained his doctorate in corporate sustainability and sustainability accounting from Griffith University, Australia. He holds an MBA from the Postgraduate Institute of Management (PIM), Sri Lanka, and a Business Administration degree from the University of Sri Jayewardenepura, Sri Lanka. He has published over 30 articles in internationally reputed journals covering various spheres of management accounting, sustainability accounting and integrated reporting, waste management and accounting education. Additionally, he has authored more than 15 book chapters with international publishers such as Springer and Routledge. He is a sought-after speaker on sustainability, sustainability accounting and reporting, and integrated reporting. He has extensive experience in managing both locally and internationally funded research projects, including those funded by the World Bank, CIMA (UK), and the Ministry of Environment (Sri Lanka). In 2014, he spearheaded the launch of the ‘Environmental Management Accounting (EMA) Guidelines for Sri Lankan Enterprises’. He currently serves as a committee member of the Environmental and Sustainability Management Accounting Network (EMAN) Asia Pacific (AP) and as the country representative of the Sri Lanka Chapter of EMAN-AP.

Contributors Subhash Abhayawansa Swinburne University of Technology, Hawthorn, VIC, Australia Carol Adams Durham University Business School, Durham, England Senaka Alawattegama Talawakelle Tea Estates PLC, Colombo, Sri Lanka Shruti Ashok School of Management, Bennett University, Greater Noida, India Lakshitha Bandara Talawakelle Tea Estates PLC, Colombo, Sri Lanka

Editors and Contributors

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Jinandi Chandraratne Education, Training & Research, Institute of Certified Management Accountants of Sri Lanka, Colombo, Sri Lanka Yen-pei Chen Integrated Reporting Consultant, London, UK Thilini Cooray Department of Accounting, University of Sri Jayewardenepura, Nugegoda, Sri Lanka Charl de Villiers University of Auckland, Auckland, New Zealand; Department of Accounting, University of Pretoria, Pretoria, South Africa Deepika Dhingra School of Management, Bennett University, Uttar Pradesh, India Dinithi Dissanayake UniSA Business, University of South Australia, Adelaide, Australia Rohan Fernando Aitken Spence PLC, Colombo, Sri Lanka Roshini Galappatti Vitawell (Pvt.) Ltd., Battaramulla, Sri Lanka Mukesh Garg Department of Accounting, Monash Business School, Monash University, Clayton, Australia Suresh Gooneratne Diesel & Motor Engineering PLC, Colombo, Sri Lanka Akila Gunarathna Department of Commerce, National Institute of Education, Maharagama, Sri Lanka Chathumin Gunarathne The Institute of Chartered Accountants of Sri Lanka, Colombo, Sri Lanka Nuwan Gunarathne Department of Accounting, University of Sri Jayewardenepura, Nugegoda, Sri Lanka Md. Shafiqul Islam East West University, Dhaka, Bangladesh Nuradhi Kalpani Jayasiri Department of Accounting, Faculty of Management and Finance, University of Colombo, Colombo, Sri Lanka Saman Kumara Financial Accountant, Watawala Plantations PLC, Watawala, Sri Lanka A. M. I. Lakshan School of Applied Business, Unitec Institute of Technology, Auckland, New Zealand; Department of Accountancy, University of Kelaniya, Kelaniya, Sri Lanka Ki-Hoon Lee Griffith Business School, Griffith University, Brisbane, Australia Mary Low School of Accounting, Finance and Economics, University of Waikato, Hamilton, New Zealand Sharon Machado Sustainable Business and Professional Insights at ACCA, London, UK Nandita Mishra Linköping University, Linköping, Sweden

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Editors and Contributors

M. A. T. K. Munasinghe Department of Accountancy, University of Kelaniya, Kelaniya, Sri Lanka Mohamed Nurullah Banking and Finance, Kingston Business School, Kingston University, London, UK Roshan Rajadurai Talawakelle Tea Estates PLC, Colombo, Sri Lanka Krishna Ranagala Talawakelle Tea Estates PLC, Colombo, Sri Lanka Yasangi Muditha Randeni Aitken Spence PLC, Colombo, Sri Lanka Dileepa Samudrage University of Sri Jayewardenepura, Gangodawila, Nugegoda, Sri Lanka Samanthi Senaratne Department of Accounting, University of Sri Jayewardenepura, Nugegoda, Sri Lanka Asite Talwatte The Institute of Chartered Accountants of Sri Lanka, Colombo, Sri Lanka; Management Systems Ltd, Colombo, Sri Lanka Prabanga Thoradeniya Department of Accounting, Monash Business School, Monash University, Clayton, Australia Sadma Umagiliya University of Sri Jayewardenepura, Gangodawila, Nugegoda, Sri Lanka Nayomi Wijesinghe Swinburne University of Technology, Hawthorn, VIC, Australia

Abbreviations

AAT ACCA AICPA CA Sri Lanka CAPA CBSL CDSB CEA CFO CIDA CIMA CMA CPD CSE CSR DIMO DIRC ETI ETP FLO GDP GRI GST HRMI IAASB IAESB ICAB ICAI ICASL IFAC IFOAM

Association of Accounting Technicians of Sri Lanka Association of Chartered Certified Accountants American Institute of Certified Professional Accountants Institute of Chartered Accountants of Sri Lanka Confederation of Asian and Pacific Accountants Central Bank of Sri Lanka Climate Disclosure Standards Board Central Environment Authority Chief Financial Officer Canadian International Development Agency Chartered Institute of Management Accountants Certified Management Accountants of Sri Lanka Continuing Professional Development Colombo Stock Exchange Corporate Social Responsibility Diesel and Motor Engineering PLC Deakin Integrated Reporting Centre Ethical Trading Initiative Ethical Tea Partnership Fairtrade Labelling Organizations International Gross Domestic Product Global Reporting Initiative Goods and Services Tax Human Resource Management Institute International Auditing and Assurance Standards Board International Accounting Education Standards Board Institute of Chartered Accountants of Bangladesh Institute of Chartered Accountants of India Institute of Chartered Accountants of Sri Lanka International Federation of Accountants International Federation of Organic Agriculture Movements xxi

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IFRS IIRC IIRCSL IIRF ILO IoDSA IOSCO IR IRCSL ISAE ISSB IUCN KPIs LEED MDGs NGOs NGRS NIS NIT NPOs NUS OECD PLCs RA SAARC SAFA SASB SBUs SDGs SEBI SEC SLID SMEs SR TCFD TTEL UN UNGC UNGCB UNICEF UNWP WHO

Abbreviations

International Financial Reporting Standards International Integrated Reporting Council Integrated Reporting Council of Sri Lanka International Integrated Reporting Framework International Labour Organization Institute of Directors in South Africa International Organization of Securities Commissions Integrated Reporting Integrated Reporting Council in Sri Lanka International Standard on Assurance Engagements International Sustainability Standards Board International Union for the Conservation of Nature Key Performance Indicators Leadership in Energy and Environmental Design Millennium Development Goals Non-Governmental Organizations National Green Reporting System New Institutional Sociology New Institutional Theory Not-for-Profit Organizations National University of Singapore The Organization for Economic Co-operation and Development Publicly Listed Companies Rainforest Alliance South Asian Association for Regional Cooperation South Asian Federation of Accountants Sustainability Accounting Standards Board Strategic Business Units Sustainable Development Goals Securities and Exchange Board of India Securities and Exchange Commission Sri Lanka Institute of Directors Small- and Medium-Scale Enterprises Sustainability Reporting Task Force on Climate-related Financial Disclosures Talawakelle Tea Estates PLC United Nations United Nations Global Compact United Nations Global Compact Board United Nations International Children’s Emergency Fund United Nations Women Empowerment World Health Organization

List of Figures

Fig. 2.1 Fig. 3.1

Fig. 4.1

Fig. 4.2 Fig. 4.3 Fig. 5.1 Fig. 5.2

Fig. 5.3

Fig. 5.4

Fig. 8.1 Fig. 9.1 Fig. 9.2 Fig. 9.3

Institutional isomorphism, institutional entrepreneurs and adoption of IR in Sri Lankan PLCs . . . . . . . . . . . . . . . . . . . . Institutional context of the organisation. Source Author, based on DiMaggio and Powell (1983); Jensen and Berg (2012); Matten and Moon (2008) . . . . . . . . . . . . . . . . . . . . . . . . . Total IR adoption in Sri Lanka. Source Analysed by the authors based on the annual reports available in the CSE website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sector-wise adoption. Source Analysed by the authors based on the annual reports available in the CSE website . . . . . Institutional pressures towards IR adoption in Sri Lanka. Source Constructed by the authors . . . . . . . . . . . . . . . . . . . . . . . . Adopted from Tomas Pueyo’s Hammer and Dance Theory (2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conceptualization of the whole-of-government approach—Adopted from LOO model. Source State Intelligence Service (2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adopted from DIT model (Detection, Isolation, and Tracing) as a subset of the military/intelligence/ police line of operation. Source State Intelligence Service (2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate DIT model: proposed model to control business impacts at a time of crisis. (Adopted from LOO and DIT Models) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Integrated business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analytical framework. Source Authors Developed . . . . . . . . . . . Background of performance measurement systems at ABC company. Source Authors Developed . . . . . . . . . . . . . . . Key performance indicators of balanced scorecard—ABC company. Source Balanced scorecard worksheet—ABC Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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99 100 106 114

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Fig. 9.4

Fig. 9.5

Fig. 9.6 Fig. 10.1 Fig. 10.2 Fig. 10.3 Fig. 10.4 Fig. 12.1 Fig. 12.2 Fig. 12.3 Fig. 12.4

Fig. 12.5 Fig. 12.6 Fig. 12.7 Fig. 12.8 Fig. 12.9 Fig. 12.10 Fig. 14.1 Fig. 14.2 Fig. 14.3 Fig. 14.4 Fig. 14.5 Fig. 14.6 Fig. 15.1 Fig. 15.2

List of Figures

Key performance indicators of multi capital model—ABC Company. Source Multi capital model worksheet—ABC Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution of multi capital model components toward the six capitals and value creation. Source Authors Developed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overcoming the failures of the narrow capital model through multi capital model. Source Authors developed . . . . . . DIMO’s organisational structure. Source Author . . . . . . . . . . . . Governance structure of DIMO. Source DIMO PLC (2021, p. 22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DIMO’s corporate strategy. Source DIMO PLC (2021, p. 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Importance of key stakeholders to DIMO and their dependency on DIMO. Source DIMO PLC (2021, p. 16) . . . . . Heritance Kandalama hotel was designed to blend into nature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A synopsis of Aitken Spence’s sustainability journey . . . . . . . . Aitken Spence’s team for sustainability performance management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . STING consultants explains the basis on which it assesses the level of corporate accountability in Sri Lanka biennially, (LMD 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Process for determining material topics to report on . . . . . . . . . Company’s sustainability strategy . . . . . . . . . . . . . . . . . . . . . . . . A sector-wise summary of the priorities identified . . . . . . . . . . . Reporting frameworks adopted by Aitken Spence . . . . . . . . . . . Application levels of the GRI G3 reporting framework (GRI 2000–2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value creation model of Aitken Spence. Source pages 12–13, annual report of 2020/2021 . . . . . . . . . . . . . . . . . . Role of non-financial capital KPIs in sustainability . . . . . . . . . . Number of non-financial capitals associated with KPIs . . . . . . . Types of non-financial capital-related KPIs by type of report preparers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial capitals disclosed in the materiality matrix . . . . . Identification of risks relating to non-financial capitals . . . . . . . Linking of KPIs to the company strategy . . . . . . . . . . . . . . . . . . ACCA qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACCA’s IR journey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

220

220 225 244 244 245 259 283 290 292

292 293 294 294 295 296 298 332 342 343 344 345 345 357 363

List of Figures

Fig. 16.1

Fig. 18.1

xxv

Components of the market value of the top 20 market capitalized companies for the period 2012–2014. Source A Preparer’s Guide to Integrated Corporate Reporting, Institute of Chartered Accountants of Sri Lanka (2016) . . . . . . . Number of organizations that have applied for the IR competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

379 408

List of Tables

Table 1.1 Table 2.1 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 5.1 Table 5.2 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 7.1 Table 7.2 Table 8.1 Table 8.2 Table 8.3 Table 8.4

Summary of different views and definitions of IR for sustainability provided by each author . . . . . . . . . . . . . . . . Stages of thematic analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of the IIRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classification of institutional pressures . . . . . . . . . . . . . . . . . . . Adoption of IIRF by Sri Lankan PLCs (from 2010 to 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Involvement of regulatory authorities in promoting IR . . . . . . Inclusion of IR into curricula of professional accounting bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Events organised by local professional accounting bodies to promote IR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competitions organised in Sri Lankan professional accounting bodies on IR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secondary sources of information . . . . . . . . . . . . . . . . . . . . . . . Contributions of the Corporate DIT Model to the IR . . . . . . . . Integrated reporting: Six capitals . . . . . . . . . . . . . . . . . . . . . . . . Country-wise comparison of benefits . . . . . . . . . . . . . . . . . . . . Summary of all the listed risks in the IR reports of Tata Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comparison of the contents of Tata Steel integrated reports (2015–16 to 2019–20) . . . . . . . . . . . . . . . . . . . . . . . . . . Details of interviewees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Demographic characteristic . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sectoral analysis of IR reporters in Bangladesh as of 2021 . . . Best presented annual integrated reporters of Bangladesh . . . Comparison between the IIRC’s and the IDLC’s content elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Six capitals of the IR framework and the IDLC’s viewpoint on SDG integration . . . . . . . . . . . . . . . . . . . . . . . . . .

6 40 94 98 100 101 103 105 106 126 132 146 147 152 154 168 169 186 187 190 194

xxvii

xxviii

Table 8.5 Table 9.1 Table 9.2 Table 9.3

Table 9.4 Table 10.1 Table 10.2 Table 10.3 Table 11.1 Table 12.1 Table 12.2 Table 12.3 Table 13.1 Table 13.2 Table 13.3 Table 14.1 Table 14.2 Table 14.3 Table 14.4 Table 14.5 Table 14.6 Table 14.7 Table 14.8 Table 14.9 Table 14.10 Table 15.1 Table 16.1 Table 16.2 Table 16.3 Table 16.4 Table 17.1 Table 17.2

List of Tables

Degree of adherence of the IDLC IR principles to the IIRC guiding principles . . . . . . . . . . . . . . . . . . . . . . . . . . Details of interviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Categories of issues associated with implementations of the narrow capital model . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reasons for the failure of the narrow capital model at ABC company (results drawn from questionnaire respondents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overcoming the barriers of the narrow capital model through multi capital model . . . . . . . . . . . . . . . . . . . . . . . . . . . . DIMO annual report journey . . . . . . . . . . . . . . . . . . . . . . . . . . . DIMO’s integrated reporting journey . . . . . . . . . . . . . . . . . . . . Different definitions of materiality . . . . . . . . . . . . . . . . . . . . . . Evolution of TTE PLC’s corporate reporting . . . . . . . . . . . . . . Summary of the company—nature and scale of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of material topics prioritised and efforts to manage priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mapping between the GRI topic-specific standard topics and the capitals of the IIRC framework . . . . . . . . . . . . . . . . . . Trends in social and environmental performance disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social and environmental certifications and standards . . . . . . . Comparison of integrated reporting disclosures . . . . . . . . . . . . Characteristics of quantitative indicators . . . . . . . . . . . . . . . . . Isomorphic pressures on listed companies to prepare integrated reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Categories of IR adopters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions and examples of non-financial capitals . . . . . . . . . Data collection fields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KPIs relating to non-financial capitals . . . . . . . . . . . . . . . . . . . Sample companies by industry sector . . . . . . . . . . . . . . . . . . . . Sample companies by environmental sensitivity . . . . . . . . . . . Sample companies by size (market capitalisation) . . . . . . . . . . Average number of KPIs disclosed . . . . . . . . . . . . . . . . . . . . . . Externally commissioned research . . . . . . . . . . . . . . . . . . . . . . Composition of the IRCSL . . . . . . . . . . . . . . . . . . . . . . . . . . . . CA Sri Lanka’s initiatives to promote IR in Sri Lanka . . . . . . Workshops organized by CA Sri Lanka . . . . . . . . . . . . . . . . . . Publications of CA Sri Lanka and IRCSL . . . . . . . . . . . . . . . . Certificate level subjects and topics covered in the CIMA syllabus from 2015 to 2019 (excluding case studies) . . . . . . . . Professional level subjects and topics covered in the CIMA syllabus from 2015 to 2019 (excluding case studies) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

196 217 218

224 230 248 251 256 270 285 288 300 311 314 321 333 335 337 338 339 339 340 341 341 342 359 374 375 376 378 390

390

List of Tables

Table 17.3 Table 17.4 Table 18.1 Table 18.2 Table 18.3

xxix

Publications of CIMA from 2019 to 2021 . . . . . . . . . . . . . . . . Summary of challenges and their remedial measures . . . . . . . Panel of judges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Categories of awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of CPD and capacity building activities . . . . . . . . . .

391 395 405 407 410

Chapter 1

South Asia Perspectives on Integrated Reporting for Sustainability: An Introduction Ki-Hoon Lee, Samanthi Senaratne, and Nuwan Gunarathne

1.1 Why Integrated Reporting for Sustainability in South Asia? South Asia, with its rapidly increasing natural resource consumption and greenhouse gas emissions, stands as one of the most vulnerable regions to climate change (IMF 2018). The increasing threats to the natural environment associated with rapid economic development result in rising levels of global greenhouse gas emissions, biodiversity loss and social inequality. Significant droughts and floods associated with climate change have caused serious disruptions and challenges to the economic, social and environmental sustainability of the region (ADB 2015). Many companies in the South Asian region are facing serious resource constraints linked to water scarcity, loss of biodiversity, soil erosion and various other sustainability challenges. These concerns led the United Nations (UN) to adopt the 17 Sustainable Development Goals (SDGs), which see the economy, environment and society as embedded systems. While the primary responsibility of achieving the SDGs by 2030 rests with governments, they cannot be achieved without the concerted effort and support of businesses and other organizations (Adams 2017). Since corporations have impacts on virtually all sustainable development challenges, in the last few decades, public awareness has focused strongly on the role of corporate entities. This has necessitated corporate entities to report not only on their financial performance but also on K.-H. Lee (B) Griffith Business School, Griffith University, Brisbane, Australia e-mail: [email protected] S. Senaratne · N. Gunarathne Department of Accounting, University of Sri Jayewardenepura, Nugegoda, Sri Lanka e-mail: [email protected] N. Gunarathne e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_1

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their non-financial performance (Lee and Schaltegger 2018). In this context, integrated reporting (IR) has become a communication tool between organizations and their stakeholders, while some companies use them as a legitimizing tool (De Villiers et al. 2014). More specifically, in certain South Asian countries, such as Sri Lanka, IR has witnessed a bandwagon effect, where IR has been a transition evolving through incremental changes in sustainability reporting (Gunarathne and Senaratne 2017; Cooray et al. 2022). IR can help solve the region’s issues related to the economy, society and environment while also contributing to long-term sustainable development. As a consequence, it provides a useful tool for many stakeholders such as corporate organizations, investors, regulators and policymakers, the general public and consumers to improve the region’s sustainability performance. More precisely, IR provides a platform for business organizations (or reporting entities) to demonstrate their value creation stories across several capitals (IIRC 2021). This will push these organizations or entities to be more open and relevant in delivering information on their environmental, social, economic and governance performance. This increased openness in information disclosure creates a better degree of responsibility by providing an avenue for multiple stakeholders to analyse organizational sustainability performance and hold organizations accountable for the value they create, preserve or destroy across the six capitals (Adams 2015; Bernardi and Stark 2016). This circumstance improves sustainability performance, governance and accountability in business affairs by enabling organizations to identify value drivers and explicate how these drivers contribute to strategic goals (Simnett and Huggins 2015). IR, on the other hand, supports more stakeholder engagement by actively involving diverse stakeholders including investors, workers, regulators, suppliers, customers, distributors, communities and the general public in managing various capitals (Higgins et al. 2014). These stakeholder inputs can help firms identify, prioritize and make decisions on social, economic and environmental problems associated with regional sustainability. Similarly, from the standpoint of control and performance evaluation, IR provides business organizations with a set of performance indicators and metrics encompassing various capitals that measure organizational performance over time, assess their status relative to the industry and competitors and thus identify areas for improvement. This aspect of performance evaluation enables stronger sustainable performance through better resource allocation and capital management. IR and its assurance practices enable South Asian business entities to showcase their value creation stories to both domestic and international investors who are concerned with the entities’ long-term sustainability performance and risk management, as well as their short-term financial performance (Simnett and Huggins 2015). As a result, IR provides a vehicle for firms in South Asia to have enhanced access to financing, a higher credit rating and opportunities for business expansion. IR may also provide significant insights to South Asian regulators and lawmakers to identify organizational performance, regional sustainability concerns and areas where policy advocacy and regulatory changes are required. The consistent, transparent and credible information offered by IR on various facets of company activities

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can support evidence-based policy-making, effective regulatory interventions and law enforcement in the area, which is currently lacking (see Gunarathne and Lee 2019). On the other hand, these macro-level support and guidance have the potential to encourage a shift from company-level sustainability interest to the adoption of more sustainable business models, such as the circular economy, as an alternative to the current linear economic model (Gunarathne et al. 2021). Furthermore, the uptake of IR can provide valuable insights for educators in this region, enabling them to integrate IR and sustainability into the education curricula. This will necessitate curriculum revisions and the delivery of courses that encompass a broad perspective, aligning with the expectations of diverse stakeholder groups in the region (Senaratne et al. 2022). On the whole, IR in South Asia offers numerous opportunities not only for business entities, but also for various stakeholders, to foster sustainability performance, transparency, accountability and stakeholder engagement, while also serving as a vehicle for attracting investments and influencing regulatory and policy interventions. By using these reporting standards, organizations and other stakeholders may help to address critical sustainability concerns such as climate change, water shortages, poverty, deforestation and biodiversity loss, and socioeconomic inequities in the area, all of which have hampered the region’s sustainable development.

1.2 Academic and Practitioner Views on Integrated Reporting (IR) for Sustainability In the academic literature, IR is viewed as a corporate reporting model which provides both financial and non-financial ESG information of an entity in a single document, showing their interconnections (Eccles and Krzus 2010) and thereby presenting a holistic picture of their businesses’ value-creating activities (Simnett and Huggins 2015; Milne and Gray 2013). Hence, it is widely believed that IR is particularly useful in understanding the importance of sustainable development issues to the value creation process of an organization through its multi-capital approach, longterm focus, connectivity of information and requirement for board involvement in this process (Adams 2015, 2017). Moreover, according to Bernardi and Stark (2016), IR links with environmental and sustainability reporting by capturing the interconnections between the financial and non-financial drivers of performance. The studies of Lueg et al. (2016) and Rowbottom and Locke (2016) provide evidence that IR is perceived as a measure that signals the value creation contribution of non-financial aspects, in general, and of sustainability issues in particular. Hence, the features of IR have the potential to shift the thinking of corporate actors to better align notions of profit maximization with the well-being of society and the environment (Adams 2015). Therefore, IR leads to the socialization of financial and ESG performance, as business organizations respond to the legitimate needs of the stakeholders (Higgins et al. 2014).

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Rowbottom and Locke (2016) document that IR has emerged from a concept practised by a few companies to a widely recognized corporate reporting practice backed by the International Integrated Reporting Council (IIRC) IR Framework and even included in national regulations in some countries. Accordingly, the practitioner’s view on IR for sustainability is presented in the IR Framework and other practice-based documents, as described below. The IIRC (2011) points out that IR brings together the material information about an organization’s strategy, governance, performance and prospects reported in separate reporting standards in a way that reflects the commercial, social and environmental context in which it operates. According to the IIRC (2021), the primary objective of IR is to explain to the providers of financial capital how an organization creates, preserves or erodes value in the short, medium and long terms. In this respect, the IIRC Framework emphasizes the importance of integrated thinking within an organization, which “takes into account the connectivity and interdependencies between the range of factors that affect an organization’s ability to create value over time” (IIRC 2021, p.3). Hence, integrated thinking within an organization will create the basis for IR to provide a combined emphasis on strategic focus and future orientation, conciseness, the connectivity of information and the capitals that denote the value creation within an organization, as well as their interdependencies (Herath et al. 2021). In this context, King IV (2016) indicates that such an integrated approach is the hallmark of sustainable development and the core purpose of an organization, and that the risks and opportunities, strategy, business model, performance and sustainability are inseparable elements of the value creation model of an organization. Presently, IR is also used as the basis to drive the connectivity between the financial statements and the sustainability-related financial disclosures proposed by the global baseline standards on sustainability reporting formulated by the International Sustainability Standards Board (ISSB) of the IFRS Foundation. Hence, with the consolidation of the IIRC with the IFRS Foundation in 2022, the IR Framework is now expected to result in efficient allocation of resources by acting as a force for financial stability and sustainable development (IFRS 2023). The comparison of academic views and practical views indicates the potential impact of IR on sustainable development. This common agreement is reflected in the document “The Sustainable Development Goals, integrated thinking and the integrated report” by Adams (2017), which describes how the value creation process set out in the IR Framework can facilitate a focus on sustainable development. This document provides a framework comprising five steps, which preparers of integrated reports can use to contribute to the SDGs consistent with the IR Framework. The document also considers how contributions to the SDGs can be linked with the outcomes for the six capitals of the IR Framework.

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1.3 South Asian Views and Definitions of Integrated Reporting (IR) for Sustainability Although the preceding section provides global perspectives on IR from academic and practitioner perspectives, how scholars and practitioners in the South Asian region view it may differ due to their unique understanding, socio-cultural, economic and institutional settings, as well as experiences and exposures. As a result, it will be intriguing to explore South Asian perspectives and definitions of IR for sustainability. Table 1.1 summarizes the points of view offered by the authors of the book’s chapters.

1.4 Motivations for This Book: Integrated Reporting (IR) for Sustainability IR is expected to improve the management practices of an organization and move it towards sustainable development. Thus, these are not merely reporting (or broadly accounting) practices but organization-wide change mechanisms that finally lead to the production of a sustainable or integrated report (De Villiers et al. 2017). For example, the instant popularity of IR is due to its potential to change the mindset of corporate actors, leading to further integration of the sustainability of actions and impacts into corporate strategic planning and decision-making (Eccles and Krzus 2010). Further, IR drives organizational change towards more sustainable performance outcomes by supporting sustainability, integrated thinking and decision-making, together with actions that focus on sustainable value creation for stakeholders (Simnett and Huggins 2015). However, it has been identified that these reporting practices, such as IR or sustainability reporting, have not necessarily led to organizational wide changes rather the existing corporate sustainability strategies have been aligned with SDGs (Weerasinghe et al. 2023). To improve our understanding and knowledge of IR, it is important to discuss the drivers, roles and barriers to the adoption and practice of IR in companies operating in South Asia. For instance, in countries such as Sri Lanka, it has been identified that IR has been mainly a transition evolving through incremental changes in sustainability reporting (Gunarathne and Senaratne 2017). Hence, it is important to identify and address these questions; how does IR support measures of corporate sustainability performance? How and why do companies adopt and use IR for developing corporate sustainability management, and how is the response to sustainability issues different in various countries of South Asia? In the adoption and implementation of corporate sustainability management, how does IR play a role in stakeholder communication in South Asia? How do the propagators of IR such as professional accounting bodies and universities promote and build the capacity of practitioners in the IR adoption process? Particularly for developing and newly industrialized countries where the improvement of economic welfare has been emphasized for the last few decades, the question of how corporate sustainability management practices can be improved with the support of IR is particularly pertinent.

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Table 1.1 Summary of different views and definitions of IR for sustainability provided by each author Chapter no.

Chapter title

Authors

Views and definitions of IR for sustainability

2

Integrated Reporting (IR) adoption A.M.I. in Sri Lanka through an Lakshan Institutional Theoretical (IT) Lens Mary Low Charl de Villiers

IR is the succinct communication of an organization’s present value creation story and future potentials for value creation by linking strategy, governance, performance and prospects with economic, social and environmental aspects. Integrated thinking and connectivity are essential features of IR

3

Institutional pressures and integrated reporting (IR) adoption in Sri Lanka

Nuradhi Kalpani Jayasiri

IR is sharing the value creation story of corporates with their stakeholders

4

Determinants of IR adoption in an emerging market - Sri Lanka

Thilini Cooray IR is a principle-based Dinithi communication mechanism Dissanayake built on the integrated thinking process that leads an organization to create, preserve or erode value over time. Currently, most companies tend to adopt IR without understanding the real meaning of integration. We believe that organizations should embrace integrated thinking, and it should be reflected in their practices. To this end, reporting should be done on the real integration of the strategy, governance, performance and prospects of an organization. However, often, symbolic reporting on content elements has overshadowed the real value of IR (continued)

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Table 1.1 (continued) Chapter no.

Chapter title

Authors

Views and definitions of IR for sustainability

5

Adapting a national pandemic control model as a surveillance-control mechanism to facilitate corporate sustainability and integrated reporting

Prabanga Thoradeniya Roshini Galappatti Mukesh Garg

IR is a holistic corporate reporting approach which collects, analyses and reports performance in a way that facilitates integrated thinking and decision-making in order to create value for stakeholders. In doing so, IR recognizes value creation through materiality, reliability, and completeness of information, monitoring externalities and internalities, strategic and risk review, and effect on capital and governance

6

Application of Integrated Reporting - A case study of Tata Steel

Shruti Ashok Deepika Dhingra

IR may be defined as a practice that communicates an organization’s value, through the adoption of a holistic process, integrating both financial and non-financial information This reporting format allows the presentation of extensive business models and aids in value creation for all stakeholders. Integrated reports provide information on corporate governance, strategy and performance in an organized manner, connecting financial and non-financial information in a single report, thereby significantly enhancing the quality of reporting (continued)

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Table 1.1 (continued) Chapter no.

Chapter title

Authors

Views and definitions of IR for sustainability

7

Benefits and implementation challenges of integrated reporting: Perspectives of preparers at Indian listed companies

Nandita Mishra Mohamed Nurullah

As companies strive for effectiveness and sustainability, there is an increasing need for a broad reporting framework. This requirement can easily be fulfilled by the IR Framework. Integrated reports compile financial and non-financial information that provides a holistic view of a company’s performance and allows companies to narrate their unique story through their annual reports. Stakeholders also reap the benefits of quick access to the company’s capability to create value over time and can help identify areas for improvement

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Incorporating the International Md. Shafiqul Integrated Reporting Framework in Islam the Corporate Reporting Ecosystem: A Case-Based Study from Bangladesh

IR is the future of corporate communication, both in the public and private sectors across the globe with one important objective: telling a story that reflects the long-term sustainable value co-created by the company for its multifaceted stakeholders. A profound change in the traditional view of the corporate narrative, IR has the potential to alter the perspective of how companies are doing business, how they are thinking about business and most importantly, what impact they can have on society at large (continued)

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Table 1.1 (continued) Chapter no.

Chapter title

Authors

Views and definitions of IR for sustainability

9

Transformation from a narrow capital to a multi-capital model: a case of a logistics and freight forwarding company in Sri Lanka

Sadma Umagiliya Dileepa Samudrage

IR promotes sustainable corporate management by setting out how an organization’s strategy, governance, performance and prospects collectively create value. IR allows all corporates to integrate their resources and assess business performance in a holistic manner by improving relationships among stakeholders and implementing efficient governance and reporting

10

DIMO’s Integrated Reporting (IR) journey: From Separation to Integration

Suresh Gooneratne

IR seeks knowledge about every material aspect of an organization and its ecosystem. Together with the principle of connectivity, it signals a significant step towards seeking better visibility of the corporate anatomy

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The Role of Integrated Thinking and Reporting in the Sustainable Business Journey: A Case Study of Talawakelle Tea Estates PLC

Roshan Rajadurai Senaka Alawattegama Lakshitha Bandara Krishna Ranagala

The core philosophy of IR is that it is a strategic reporting mechanism that combines essential data about an organization’s strategy, governance, performance and prospects in a way that accurately represents the economic, social and environmental context in which it operates. From this influence, IR improves an entity’s ability to think in an integrated manner and to report on the company’s sustainability journey and business performance, as well as to gain insights into its prospects through a multi-capital and value creation lens (continued)

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Table 1.1 (continued) Chapter no.

Chapter title

Authors

Views and definitions of IR for sustainability

12

The Aitken Spence Approach to Integrated Reporting

Rohan Fernando Yasangi Muditha Randeni

IR is a useful tool to convey an organization’s story in the most comprehensive and clear manner. While GRI Standards provide metrics to present information on the performance and management approach, IR guides organizations on how the story should be narrated so that every stakeholder would understand the operations clearly and comprehensibly

13

Private Certifications’ Impact on Sustainable Performance and Reporting: A case study of a planation company in Sri Lanka

M.A.T.K. Munasinghe Asiri Saman

IR is a means for organizations to create their own corporate story integrating not only corporate actions and outcomes but also future orientation, which is obviously quite favourable. Despite IR suggesting five types of capital categorization as a theoretical underpinning in this process, the proposed six types of capital have become a common reference point of compliance reporting

14

Reporting on key performance indicators related to non-financial capitals: Evidence from Sri Lankan integrated report preparers

Nayomi Wijesinghe Subhash Abhayawansa Carol A Adams

IR promotes a more cohesive and efficient approach to corporate reporting and aims to improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital (IIRC, 2021, p. 5) (continued)

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Table 1.1 (continued) Chapter no.

Chapter title

Authors

Views and definitions of IR for sustainability

15

Association of Chartered Certified Accountants (ACCA)’s experience as a professional accounting body promoting integrated reporting

Sharon Machado Yen-pei Chen

“ACCA strongly believes that integrated reporting and integrated thinking go hand-in-hand. For the continued existence of a sustainable and trusted global business community, it is essential to practice integrated thinking and IR together”

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CMA Sri Lanka’s journey towards promoting Integrated Reporting in Sri Lanka

Jinandi Chandraratne

IR is a revolution in corporate reporting which attempts to provide a broad but concise picture of an organization’s value creation story to its stakeholders. Unlike conventional corporate reporting which emphasizes more on financial information, IR provides an extensive view of how an organization utilizes its inputs (capitals) in creating value for its stakeholders, which enables users to understand the sustainability of the business organization and make better and more informed decisions related to the organization

1.5 Structure of This Book The book is structured in three parts and 18 chapters. Part I, “Integrated Reporting for Sustainability: Challenges and Opportunities”, identifies and addresses key challenges and opportunities for integrated reporting. Part II, “Integrated Reporting for Sustainability—Corporate Implementation and Applications”, collects empirical cases and evidence on the corporate use of IR and addresses regional and national contexts affecting the implementation and applications of IR in the South Asian context. Part III, “Integrated Reporting for Practitioners—Corporate Experience and Professional Practice”, delineates the roles played by professional accounting bodies and their experience in facilitating IR for corporate sustainability in the South Asian context.

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1.6 Summaries Chapter 2 Integrated reporting adoption in Sri Lanka through an institutional theoretical lens This chapter explores the IR adoption decision made by the Sri Lankan public listed companies from an institutional theoretical perspective, with special reference to institutional isomorphism and institutional entrepreneurship. The study draws on qualitative, semi-structured interviews with 55 interviewees chosen from 12 sample companies. The data were analysed thematically. Findings revealed that three types of isomorphic pressures (coercive, mimetic and normative) individually and collectively act to influence decisions to adopt IR by the sample companies. A clear example of institutional entrepreneurship was identified. The study contributes to the theory by shedding light on the influence of institutional isomorphism and institutional entrepreneurship on IR adoption decisions. Chapter 3 Institutional pressures and integrated reporting (IR) adoption in Sri Lanka Chapter 3 explores why publicly listed companies are voluntarily motivated to adopt IR in Sri Lanka. Based on the interview data, the drivers which motivated companies to adopt IR are classified as external drivers. In addition, in this chapter, these drivers of IR are described using the institutional theoretical lens through institutional isomorphism to identify the coercive, mimetic and normative forces that act on institutions. Chapter 4 Determinants of IR adoption in an emerging market—Sri Lanka This chapter provides an overview of IR adoption and identifies the institutional pressures that drive IR adoption and implementation in Sri Lanka, an emerging nation in South Asia. The institutional pressures on IR adoption are identified and classified as coercive, normative and mimetic pressures, based on the new institutional theory. The results of archival analysis reveal that normative pressure is the dominant institutional pressure and mimetic pressure also exists at a moderate level, while coercive pressure on IR adoption in Sri Lanka is minimal. Chapter 5 Adapting a National pandemic control model as a surveillancecontrol mechanism to facilitate corporate sustainability and integrated reporting This chapter examines the control and surveillance practices undertaken by the public sector in mitigating the spread of Coronavirus during the first wave of the pandemic in Sri Lanka. The “Hammer and Dance” strategy was applied in a wholeof-government approach, using proactive, aggressive, and continuous control and surveillance measures, combined with the modulation of economic measures. The chapter demonstrates the criticality of control and surveillance in managing the impact of the crisis and proposes the application of a similar framework to be

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extrapolated to control business impacts at a time of crisis, to facilitate corporate sustainability and IR. Chapter 6 Application of Integrated reporting—A Case Study of Tata Steel To achieve the organization’s vision, IR is carried out to reveal how financial performance is combined with other organizational performance factors. An increasing number of firms demonstrate that learning about and revealing more about the social and environmental impacts of their operations may be a source of new ideas for business models, products and collaborations. Indeed, the need to continue on this path has become quite pressing. The present study employs a case study analysis of TATA Steel, as it is one of the pioneer adopters of IR in India and operates globally. The study aims to analyse and evaluate the adoption of IR and the benefits of the implementation of IR by TATA Steel. The findings of the study confirm the positive effects of IR within the company, irrespective of the fact that the reporting most often caters to the needs of external stakeholders. Chapter 7 Benefits and implementation challenges of integrated reporting: perspectives of preparers at Indian listed companies Technological innovations, global competition and enhanced regulations have changed business reporting and the business landscape. With new regulations and new reporting frameworks being implemented, it is extremely important to understand the perceptions of the preparers of Annual reports. This chapter examines the perceptions of integrated report preparers regarding the benefits and challenges of IR in India. It also focuses on the process of preparation of IR and the role that preparers play in the entire process. The study is based on nine semi-structured, in-depth interviews with report preparers. The results of the study demonstrate that the perception of preparers towards IR is generally positive, and that they play an important role in the adoption and preparation of integrated reports. Chapter 8 Incorporating the International integrated reporting framework in the corporate reporting ecosystem: a case-based study from Bangladesh The chapter has attempted to draw a critical portrait of how a leading Bangladeshi company, IDLC Finance Limited, embraced an IR framework in its corporate annual reporting. In doing so, the entire discussion sheds light on three different dimensions of the IR framework in IDLC Finance Ltd.’s annual report produced in the year 2021: these being eight content elements, six capitals and the guiding principles. IDLC has been the leader in the IR-based annual reporting landscape in Bangladesh for several years, and hence, the chapter provides an in-depth overview of its award-winning annual integrated report to highlight important implications for other companies that are willing to adopt the IR framework as well. The chapter has recommended several pathways and has identified several challenges as well in relation to the question of how the IR framework can play a pivotal role in strengthening corporate sustainability in the South Asian region, especially in the context of a developing economy like Bangladesh. Several works of literature support the findings of this chapter, and hence, policymakers can use these recommendations to promote the

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voluntary adoption of the IR framework in Bangladesh or in countries with a similar economy. Chapter 9 Transformation from a narrow capital to a multi-capital model: the case of a logistics and freight forwarding company in Sri Lanka The six capitals in the IR framework can guide and nurture a successful multiple capital-based performance measurement system. Yet, the use of six capitals-based key performance indicators in performance measurement is not adequately discussed with respect to IR practices. Therefore, the study aimed to investigate why narrow capital models failed as strategic performance measurement tools and how a multicapital model, designed based on the six capitals, has successfully influenced the upgrading of corporate performance. This study was conducted using a qualitative explorative approach and a case study methodology, on a company operating in the freight forwarding and logistics industry in Sri Lanka. Chapter 10 DIMO’s integrated reporting journey: from separation to integration The chapter articulates DIMO’s evolution in IR and the ecosystem surrounding it. The role of materiality, integrated thinking and connectivity are highlighted. A short discussion on the aspect of institutionalizing integrated thinking triggers thoughts on the need for better visibility of trade-offs. Benefits, challenges and lessons learnt are reflected upon to share the learning outcomes. Here, IR is not only seen as a reporting methodology. The “Value”-based thinking that it brings about leads organizations to seriously consider short-, medium- and long-term trade-offs, when consuming capitals. Chapter 11 The role of integrated thinking and reporting in the sustainable business journey: a case study of Talawakelle Tea Estates PLC (TTEL) This case study will effectively illustrate TTEL’s involvement in integrated thinking and reporting on its sustainable business journey. It also reveals how TTEL views the significance of IR through the introductory phase. The second phase contains an overview of the company and the integrated thinking methodology of TTEL’s top management. In the third phase, TTEL’s sustainability practices and reporting procedures are described in detail. By accomplishing long-, medium- and short-term corporate goals, the utilization and support of integrated thinking and reporting in TTEL’s sustainability journey are realized under the fourth phase. The challenges that TTEL faced when adopting IR and the remedial action taken to overcome those challenges are examined in the fifth phase. The sixth phase emphasizes the significant takeaways from TTEL’s IR journey and the future prospects of the company. The conclusion summarizes the key facts in the entire case study. Chapter 12 The aitken spence approach to integrated reporting Aitken Spence is a diversified conglomerate in Sri Lanka and a reputed leader in corporate sustainability. The company embraced a strategic approach early on to manage its impacts and to create sustainable value for all its stakeholders through

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measurable, proactive efforts. The company has established frameworks to disclose these efforts and their performance against targets. The company first benchmarked these efforts to the Global Reporting Initiative (GRI)’s sustainability reporting framework. Aitken Spence commenced aligning the company’s annual reports to integrated reports in the 2012/2013 financial year. This chapter presents an overview of the journey of Aitken Spence from sustainability reporting to IR, the challenges faced and the lessons learnt. Chapter 13 The impact of private certifications on social and environmental performance and integrated reporting: the case study of Watawala plantations PLC in Sri Lanka This chapter presents the business case of Watawala Plantations PLC, an early adopter of IR among the plantation sector companies in Sri Lanka. The trend in social and environmental information disclosures in company annual reports over ten years, starting from 2009, illustrates the impact of third-party certifications on adopting sustainable practices and on reporting improved social and environmental performances in line with the IR framework. The chapter also points out the challenges faced by the company during the IR adoption process and the remedial action taken to strengthen IR in future. Chapter 14 Reporting on key performance indicators related to non-financial capitals: evidence from Sri Lankan integrated report preparers This chapter examines how integrated report preparers in Sri Lanka have used Key Performance Indicators (KPIs) to explain the use of non-financial capitals in creating value in their annual reports. Report preparers were classified into three categories based on the duration of integrated report preparation. These groups are mature, mid-term and new integrated report preparers. Findings revealed that the disclosure of KPIs relating to non-financial capitals increased with companies’ maturity in preparing integrated reports. However, inconsistencies and limitations in the use of KPIs among adopters raise doubts about companies’ focus on integrated thinking and the genuineness of their commitment to sustainability. Chapter 15 Association of chartered certified accountants (ACCA)’s experience as a professional accounting body promoting integrated reporting Chapter 15 presents the Association of Chartered Certified Accountants (ACCA)’s experience in adopting and promoting IR. One of the earliest organizations in the world to adopt IR, ACCA’s decade-long engagement with the movement provides a real-life case study which can furnish information to professional bodies and higher education institutions that wish to pursue similar aims. Interviews conducted with senior ACCA staff members across different functions—including qualification syllabus design, research and policy, market engagement, communications and the Chief Executive herself—bring to life ACCA’s multifaceted approach to advocating IR. The chapter highlights key challenges encountered and lessons learnt, including working with limited research resources, reflecting the ever-widening

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scope of sustainability topics in syllabus design, countering policymakers’ perception that IR is a niche topic, and overcoming technical and operational issues in preparing ACCA’s own integrated report. Chapter 16 Role of the institute of chartered accountants of sri lanka as a facilitator in promoting integrated reporting in Sri Lanka Globally, there has been an increasing trend towards providing non-financial information in the annual reports published by Companies. One of the widely used frameworks for such disclosures is the Integrated Reporting Framework (IIRF). Recognizing this trend, the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) came up with various initiatives to promote the use of IIRF in Sri Lanka. The Integrated Reporting Council of Sri Lanka (IIRCSL) was set up, guidelines were published, and workshops held in association with the IIRC to educate the preparers and practitioners. In addition, preparers of exemplary integrated reports were recognized at Annual Reports Competitions. These initiatives facilitated an increase in the number of preparers of integrated reports and led to improvements in the content and quality of reports. Chapter 17 Role of the chartered institute of management accountants (CIMA) on supporting, upholding and promoting the integrated reporting concept in South Asia This chapter explains the role played by CIMA in recognizing integrated reporting and propagating the concept among its students and members. The chapter also explores the difficulties that were associated with the general acceptance and adaptation of the IIRC Framework on IR with specific reference to the challenges faced in adopting it to suit the South Asian context. Moreover, this chapter explains the lessons learned by CIMA in supporting and promoting IR, and its future plans on multiple fronts to promote and popularize IR in future as a premier global accounting body focusing on management accounting. Chapter 18 CMA Sri Lanka’s Journey towards promoting integrated reporting in Sri Lanka The main objective of this chapter is to narrate the story of CMA Sri Lanka’s journey towards promoting IR in Sri Lanka and the region. To this end, the primary emphasis has been given to the various activities conducted by CMA Sri Lanka to educate businesses on IR and propagate IR among Sri Lankan business organizations. This is elaborated with respect to four major activities, namely the conducting of the “CMA Excellence in Integrated Reporting Awards” competition, education on IR, CPD activities conducted and policy-level initiatives taken by CMA Sri Lanka. This chapter also discusses the various challenges faced by CMA Sri Lanka in implementing the above-mentioned activities and the remedial actions taken to overcome these challenges. In conclusion, the chapter briefly discusses CMA Sri Lanka’s way forward on its journey towards IR, and the various actions it intends to implement in future in this regard.

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References Adams CA (2015) The international integrated reporting council: a call to action. Crit Perspect Account 27:23–28 Adams CA (2017) The sustainable development goals, integrated thinking and the integrated report. International Integrated Reporting Council, London ADB (2015) The economics of climate change in South Asia-adaptation and impact assessment, ADB, Philippines Bernardi C, Stark AW (2016) Environmental, social and governance disclosure, integrated reporting, and the accuracy of analyst forecasts. Br Account Rev 50:16–31 Cooray T, Senaratne S, Gunarathne N, Herath R, Samudrage DN (2022) Adoption of integrated reporting in Sri Lanka: coverage and trend. J Financial Report Account 20(3/4):389–415 De Villiers C, Rinaldi L, Unerman J (2014) Integrated reporting: insights, gaps and an agenda for future research. Account Audit Account J 27(7):1042–1067 De Villiers C, Venter ER, Hsiao PCK (2017) Integrated reporting: background, measurement issues, approaches and an agenda for future research. Account Finance 57(4):937–959 Eccles RG, Krzus MP (2010) One report: integrated reporting for a sustainable strategy. Wiley, NJ, Hoboken Gunarathne N, Lee K-H (2019) Institutional pressures and corporate environmental management maturity. Manag Environ Qual 30(1):157–175 Gunarathne N, Senaratne S (2017) Diffusion of integrated reporting in an emerging South Asian (SAARC) nation. Manag Audit J 32(4/5):524–548 Gunarathne N, Wijayasundara M, Senaratne S, Kanchana PK, Cooray T (2021) Uncovering corporate disclosure for a circular economy: an analysis of sustainability and integrated reporting by Sri Lankan companies. Sustain Prod Consum 27:787–801 Herath R, Senaratne S, Gunarathne N (2021) Integrated thinking, orchestration of the six capitals and value creation. Meditari Account Res 29(4):873–907 Higgins C, Stubbs W, Love T (2014) Walking the talk(s): organisational narratives of integrated reporting. Account Audit Account J 27(7):1090–1119 IFRS Foundation (2023) Management commentary exposure draft and the integrated reporting framework, https://www.ifrs.org/ [accessed on 15.04.2023] IIRC (2011) Towards integrated reporting: communicating value in the 21st century. IIRC, London IIRC (2021) The international integrated reporting framework. IIRC, London IMF (2018) Boiling point, Available via: https://www.imf.org/en/Publications/fandd/issues/ 2018/09/southeast-asia-climate-change-and-greenhouse-gas-emissions-prakash [Accessed on 12.05.2023] King (2016) King report IV on Governance for South Africa, Johannesburg: King Committee on Corporate Governance Lee K-H, Schaltegger S (eds) (2018) Accounting for sustainability: Asia Pacific perspectives. Springer, Netherlands Lueg K, Lueg R, Andersen K, Dancianu V (2016) Integrated reporting with CSR practices: a pragmatic constructivist case study in a Danish cultural setting. Corporate Commun: Int J 21(1):20–35 Milne MJ, Gray RH (2013) W(h)ither ecology? The triple bottom line, the global reporting initiative, and corporate sustainability reporting. J Business Ethics 118(1):13–29 Rowbottom N, Locke J (2016) The emergence of . Account Bus Res 46(1):83–115 Senaratne S, Gunarathne N, Herath R, Samudrage D, Cooray T (2022) Institutional pressures and responses to the introduction of integrated reporting into accounting curricula: the case of Sri Lankan universities. Acc Educ 31(5):536–566 Simnett R, Huggins AL (2015) Integrated reporting and assurance: where can research add value? Sustain Account Manage Policy J 6(1):29–53

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Weerasinghe T, Samudrage D, Gunarathne N (2023) The influence of top management team diversity on sustainable development goals (SDG) reporting: evidence from Sri Lanka. Bus Strategy Environ. Available via: https://doi.org/10.1002/bse.3465

Ki-Hoon Lee is Full Professor of Corporate Sustainability Management and Sustainability Accounting. Through his research, Professor Lee embraces environmental, social and economic challenges, integrating sustainability into the business value chain to enhance both business and societal value. Many of his research partners and funding bodies are Fortune Global 500 companies and leading Asia Pacific public and private organisations. He holds visiting professorship at Vienna University of Economics and Business (WU in Austria) and Seoul National University (South Korea). From 2019 to 2022, he served as Deputy Research Program Leader of the Australian Blue Economy Cooperative Research Centre and the United Nations’ technical expert on Climate Change and Ocean Accounting. He is the Chairman of Environmental and Sustainability Management Accounting Network (EMAN) in Asia Pacific to lead Asia-Pacific focused ‘business/industry/professionals—scientists/academia’ network for corporate sustainability and sustainability management accounting. He has more than 150 research publications and has been ranked among the top cited researchers in management, accounting and economics. For the period 2020-22 he is among the Top 2% in Elsevier and Stanford University’s World Scientist Ranking. Samanthi Senaratne is a Professor in Accounting at the Department of Accounting, University of Sri Jayewardenepura, Sri Lanka. She specializes in accounting education, corporate governance, and corporate reporting. She holds a Bachelors Honours Degree in Accounting, an MBA, and a PhD in Finance. She is a prolific researcher and has published widely in the areas of accounting education, corporate governance, corporate sustainability accounting and integrated reporting in leading international peer-reviewed journals. She has also co-authored book chapters with reputed international book publishers such as Springer and IGI Global. She has won awards in recognition of her research work and received research grants from external agencies such as World Bank and Chartered Institute of Management Accountants (CIMA) UK. She regularly participates as a panelist in various local and international forums on accounting education, quality assurance in education, and integrated reporting. Presently, she serves as a member of the Education Global Forum Panel of the Association of Chartered Certified Accountants (ACCA) UK, and the Integrated Reporting Council of Sri Lanka. In addition, she is actively engaged in policy development and implementation of quality assurance activities of universities and national educational institutions in Sri Lanka, and in national curriculum development and assessment process of the Ministry of Education, Sri Lanka. She served as the Founding Director of Quality Assurance of the University of Sri Jayewardenepura, Sri Lanka and has extensive experience in managing World Bank funded education projects in Sri Lanka. Nuwan Gunarathne is an academic, consultant and researcher specializing in corporate sustainability and sustainability accounting. Currently, he is employed as a Senior Lecturer at the University of Sri Jayewardenepura, Sri Lanka. He is a fellow member of the Institute of Certified Management Accountants of Sri Lanka and a member of the Chartered Institute of Management Accounting (UK). He obtained his doctorate in corporate sustainability and sustainability accounting from Griffith University, Australia. He holds an MBA from the Postgraduate Institute of Management (PIM), Sri Lanka, and a Business Administration degree from the University of Sri Jayewardenepura, Sri Lanka. He has published over 30 articles in internationally reputed journals covering various spheres of management accounting, sustainability accounting and integrated reporting, waste management, and accounting education. Additionally, he has authored more than 15 book chapters with international publishers such as Springer and Routledge. Nuwan is a sought-after speaker on sustainability, sustainability accounting and reporting, and integrated reporting. He has extensive experience in managing both locally and internationally funded

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research projects, including those funded by the World Bank, CIMA (UK), and the Ministry of Environment (Sri Lanka). In 2014, he spearheaded the launch of the ‘Environmental Management Accounting (EMA) Guidelines for Sri Lankan Enterprises.’ He currently serves as a committee member of the Environmental and Sustainability Management Accounting Network (EMAN) Asia Pacific (AP) and as the country representative of the Sri Lanka Chapter of EMAN-AP.

Part I

Integrated Reporting for Sustainability: Challenges and Opportunities

Chapter 2

Integrated Reporting Adoption in Sri Lanka Through an Institutional Theoretical Lens A. M. I. Lakshan, Mary Low, and Charl de Villiers

Abstract This chapter sheds light on the integrated reporting (IR) adoption decision by Sri Lankan Public Listed Companies (PLCs) from an institutional theoretical (IT) perspective, with special reference to institutional isomorphism and institutional entrepreneurship to describe and analyse how external and internal pressures drive PLCs towards IR adoption. The study draws on qualitative semi-structured interviews with 55 interviewees (who were involved in the IR process) from 12 sample companies (companies that were practicing IR at different levels). The data were analysed thematically, using NVivo software. Findings revealed three types of isomorphic pressures (coercive, mimetic and normative) that individually and collectively act to influence decisions to adopt IR by the sample companies. A clear example of institutional entrepreneurship was identified. In this case, a path-creating/ path-changing individual introduced IR into his company in the financial year 2010/ 11, even before the IIRC introduced the consultation draft of the international IR framework. The study contributes to the theory by ascertaining the influence of institutional isomorphism and institutional entrepreneurship on IR adoption decisions by the sample companies. The findings about normative isomorphic pressure exerted by annual report design organisations and the presence and influence of an institutional entrepreneur in driving IR adoption are new contributions to the extant literature. A. M. I. Lakshan (B) School of Applied Business, Unitec Institute of Technology, Auckland, New Zealand e-mail: [email protected] Department of Accountancy, University of Kelaniya, Kelaniya, Sri Lanka M. Low School of Accounting, Finance and Economics, University of Waikato, Hamilton, New Zealand C. de Villiers University of Auckland, Auckland, New Zealand e-mail: [email protected] Department of Accounting, University of Pretoria, Pretoria, South Africa M. Low e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_2

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Keywords Institutional entrepreneurship · Institutional isomorphism · Institutional theory · Integrated reporting · Normative isomorphism

2.1 Introduction Due to the ongoing criticisms of the ad hoc ness and isolated nature of social and environment reporting, a more holistic approach to corporate reporting is being paved (Arora et al. 2021). This holistic approach, termed integrated reporting (IR), developed by the International Integrated Reporting Council (IIRC) in 2013, “aims to encourage organisations to think about and report their financial, social and environmental performance information in an interconnected manner” (Arora et al. p.2). IR is a recent development in corporate reporting, a practice which combines financial and non-financial information in a single, forward-looking performance report (De Villiers et al. 2020). An integrated report should be a concise account of an organisation’s future value creation story, including information on financial and nonfinancial capitals, and referencing the organisation’s strategy and business model (de Villiers et al. 2020; de Villiers, and Maroun 2018). Disclosing future-oriented information is an important aspect of IR (Lakshan et al. 2021). In line with this, integrated thinking can be seen as a form of management with the potential to improve organisational outcomes (De Villiers and Dimes 2020). However, researchers like Arora et al. (2021), Lakshan et al. (2021, 2022) Melloni et al. (2018) and Dumay et al. (2017) question whether there is an adequate understanding of the IR concept by IR preparers, observing consequentially, that challenges arising would impede the successful adoption of IR in practice. Annual financial reporting is based on accounting information which is gathered within organisations. Accounting is shaped by its institutional context; its form and role are determined by the organisational environment, whereby accounting is seen to shape this environment (Moll et al. 2006). Institutional theory is one of the most dominant frameworks in organisational analysis (Lounsbury 2008). There is rising interest in institutional theory in providing arguments to support transparency practices (Brammer et al. 2012; Matten and Moon 2008). Institutional theory explores how (at a broader level) particular organisational forms might be adopted in order to bring legitimacy to an organisation (Deegan 2009; Zahir-ul-Hassan and Vosselman 2010). Generally, accounting is accepted as a symbol of legitimacy (Brown and Fraser 2006; DiMaggio and Powell 1983; Meyer and Rowan 1977). “Organisations conform (to institutional pressures for change) because they are rewarded for doing so through increased legitimacy, resources and survival capabilities” (Scott 1987, p. 498). Institutional theory accepts that organisations are rooted in a comprehensive system of political, financial, educational, cultural and economic institutions that coerce institutional pressure on those organisations (Jackson and Apostolakou 2010; Matten and Moon 2008). This study examines the institutional pressures that might have contributed to the significant early adoption of IR by Sri Lankan PLCs.

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Therefore, the setting for this research is Sri Lanka, an open market economy with a population of over 20 million. The country has a well-developed accounting infrastructure including the Registrar of Companies, the Securities and Exchange Commission of Sri Lanka (government regulatory bodies), the Colombo Stock Exchange, and the Institute of Chartered Accountants of Sri Lanka (ICASL). ICASL, the professional accounting body, has delegated powers from the Government relating to registration of accountants and auditors. ICASL also works with other governing bodies in the development and dissemination of reporting standards for PLCs. Sri Lanka is among the top countries in terms of the proportion of listed companies adopting IR (Lakshan et al. 2021, 2022). One Sri Lankan company participated in the IIRC IR pilot programme in 2011 and paved the way for the evolution of the new corporate reporting system, known as IR. Though IR adoption is not mandatory in the country, an increasing number of companies in the country have adopted IR. The IR adopting companies have increased from 2 in 2011 to 83 by 2018 (Gunarathne and Senaratne 2017; Herath et al 2019). Cooray et al. (2022, p. 396) highlighted that “compliance with IIRF has become (or is becoming) an important institutional norm in the Sri Lankan voluntary reporting landscape and strategic consideration for the management of an organisation”. Gibassier et al.’s (2019) project places Sri Lanka in Panel A, which includes countries with a higher number of integrated reports included in the sample. However, no in-depth research has been carried out to investigate the forces which accelerate IR adoption in a country. Therefore, Sri Lanka is fertile ground in which to investigate factors accelerating IR adoption and is therefore selected as the empirical ground of this research, particularly so with Gunarathne and Senaratne’s (2017) study that found gaps, anomalies and mismatches in the integrated reports by firms that had participated in IR competitions. They found that most Sri Lankan “firms follow IR more for rhetorical purposes” (p. 541) where “they have not realised the meaning of IR other than to view it as another reporting mechanism” (ibid). This is a significant issue, reinforcing Adams’ (2004) view of a “practicereporting portrayal gap”. Gunarathne and Senaratne (2017) question whether “IR has changed the way organisations are doing business” (p.541) and/or that “companies will need more guidance in the process to achieve integrated thinking that leads to integrated practices and performance” (ibid). This chapter addresses the research question “What institutional pressures were at play during the early adoption of IR by Sri Lankan Public Listed Companies (PLCs)”. It explores institutional isomorphism and the concept of institutional entrepreneurs to analyse how external and internal isomorphic pressures may have influenced a significant number of Sri Lankan PLCs to adopt and implement IR. Institutional theory is one of the leading theoretical perspectives in organisational studies (Lounsbury 2008), and it is being increasing applied in accounting research (Abernethy and Chua 1996; Bebbington et al. 2009; de Villiers and Alexander 2014; Dillard et al. 2004; Sharma et al. 2010, 2014; Tsamenyi et al. 2006). IR adoption has been observed through institutional theory perspectives and useful insights have been drawn (Higgins et al. 2014; Jensen and Berg 2012; Wild and van Staden 2013). For

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instance, Jensen and Berg (2012) find that IR adoption is determined by institutional pressures similar to the pressures exerted by the financial, educational, labour, cultural and economic systems of a country. This chapter has nine main sections. The first four sections explain the literature on IR, institutional theory, prior studies on the use of institutional theory and theoretical factors useful for understanding the adoption of IR. Sections 2.5, 2.6 and 2.7 explain the methods and present the discussion, and conclusions. The final two sections set down the contributions and limitations of the study.

2.2 Integrated Reporting There was a gap between the information previously reported by companies and the information investors needed to assess business prospects and value more effectively. IR originates from two distinct fields of accounting practice: financial reporting and sustainability reporting (SR) (Eccles and Krzus 2010). IR can help fill this gap by providing a basis for companies to explain their value creation more effectively to capital markets (KPMG 2012). Diffusion of IR expects to bring in several rewards to reporting organisations and their stakeholders. IR provides several benefits as it facilitates integrated thinking within an organisation (Adams and Simnett 2011) and provides forward-looking information (Lakshan et al. 2021, 2022). It is described as a new reporting paradigm that is holistic, strategic, responsive, material and relevant across multiple time frames. It emphasises enhanced disclosure of the value drivers for organisations and represents a journey to more meaningful reporting (Adams and Simnett 2011). IR is also about presenting a balanced view—it provides business and economic information, as well as social and environmental information (IIRC 2013). It moves beyond compliance-based disclosures to emphasising a commitment to transparency. It is a transparent approach to reporting that covers a wide variety of issues and provides an honest representation of performance, both good and bad (Adams and Simnett 2011). A key objective of IR is to enhance accountability and stewardship of the broad base of six kinds of capital and to promote understanding of their interdependencies (Busco 2014). Rossouw (2010) describes IR as involving: the disclosure of forward-looking information, assurance on the quality of information, annual presentation, positive aspects and challenges, a holistic and integrated view of financial and sustainability elements, performance areas, and assurance on material sustainability. Materiality matters in IR would improve the quality of reporting and enable efficient and productive allocation of resources. This affects decision-making by internal and external parties (Lakshan et al. 2021, 2022). Stakeholder engagement becomes an increasingly important business imperative in IR. In addition, the ACCA (2011) suggests that developing a dialogue with key internal and external stakeholders can help ensure that companies continue to focus

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on the most pertinent issues, identify opportunities for innovation and growth and build public trust. In tandem with IR transformation, business sustainability in general and environmental performance, in particular, are also gaining prominence in the corporate landscape (Omran et al. 2021). Grassmann (2021) asserts that IR positively moderates the association between environmental expenditures and firm value for firms with either a low or a high level of environmental expenditures. In support of this, Nakajima and Inaba (2021) found that the Japanese stock market reacts positively to voluntary IR publication by firms. Thus, IR could positively impact several important aspects of an organisation. Provision of quantitative and qualitative information on economic, environmental and social matters for better decisions by investors and other stakeholders is one of the central contributions of IR. Rapid adoption of IR by organisations enables the development of a broader concept of business reporting. Therefore, a study which focuses on the influencers of IR adoption is vital to accelerate IR adoption among the listed companies in any country.

2.3 Institutional Theory Several competing theories on non-financial disclosure, such as the political economy theory, institutional theory, stakeholder theory, agency theory, stakeholder-agency theory, legitimacy theory and signalling theory, have emerged. “Institutional Theory”, with specific reference to the concepts of institutional isomorphism and institutional entrepreneurs was chosen as the theoretical lens to provide an understanding of the IR adoption by Sri Lankan PLCs. Several researchers have used the institutional theoretical lens to explain the achievement of legitimate expectations on the form and adoption of verities of non-financial reporting (Bebbington, Higgins, and Frame 2009; Brown, de Jong, and Levy 2009a, b; Etzion and Ferraro 2010). This section provides an introduction to the theory and also links the theory to IR practice, its predictions about IR motivations, institutional entrepreneurs and the role of entrepreneurs in creating new institutions. Some institutional theorists believe that organisations are open systems and organisational structures arise as reflections of rationalised institutional rules (DiMaggio and Powell 1983; Meyer and Rowan 1991). All organisations are socially constituted and are the subject of institutional processes that “define what forms they can assume and how they may operate legitimately” (Scott 1995, p. 136). “Institutional theory is based on the premise that organisations respond to pressures from their institutional environments and adopt structures and/or procedures that are socially accepted as being the appropriate organisational choice” (Carpenter and Feroz 2001, p. 569). Managers adopt institutionalised practices because the social legitimacy of their firms is at stake—that is, managers desire to be seen as acting “normally” and “appropriately” among their peers. Thus, institutionalism induces isomorphism, whereby firms adopt similar practices, in similar ways, and articulate similar reasons

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for doing so (Higgins, Stubbs, and Love 2014). New-institutional theory, in particular, has stressed how organisations adopt institutionalised forms of behaviour in an effort to increase their internal and external legitimacy (Scott 1995). Institutional theory is primarily concerned with an organisation’s interaction with the institutional environment, the effects of social expectations on the organisation and the incorporation of these expectations as reflected in organisational practices and behaviour (Martinez and Dacin 1999). The use of IR is one of the ways that reflect organisational practices and behaviour chosen in order to meet social expectations. Financial service institutions have become early adopters of IR. It has been suggested that this industry might be pursuing the new reporting regime in order to regain legitimacy, following the major loss of investor confidence in the wake of the global financial crisis (Wild and van Staden 2013). Another view of institutional theory is that the institutionalisation of management practices is “a process entailing the creation of reality” (Scott 1987, p. 505), where IR attempts to demonstrate the reality of the reporting process by explaining material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates (IIRC 2013). This explanation of institutional theory is the first step in the justification for why this theory has been chosen as the theoretical lens to provide an understanding of the influences on IR adoption by Sri Lankan PLCs.

2.3.1 Types of Institutional Theories Three types of institutional theories have been used to gain insights into organisational change. They are: Old Institutional Economics (OIE); New Institutional Economics (NIE); and New Institutional Sociology (NIS) (Scapens 2006). Old Institutional Economics is concerned with the institutions that shape the actions and thoughts of individual human agents. New Institutional Economics is concerned with the structures used to govern economic transactions. By contrast, going beyond an individual perspective and economic factors, NIS adopts a broader, multi-dimensional approach by focusing on issues related to external and internal organisational contexts (Greenwood and Hinings 1996). Thus, NIS is concerned with the institutions in the organisational environment that shapes organisational structures and systems (Scapens 2006). Drawing on the NIS perspective, this study focuses on how various institutional pressures (internal and external) drive the adoption of IR by the sample companies.

2.3.2 New Institutional Theory (NIT) The concept of NIS was developed in the seminal work of Meyer and Rowan (1977). They argue that organisations are influenced by their institutional environment and

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gradually become isomorphic with them. From NIS, New Institutional Theory (NIT) was subsequently developed and elaborated further by DiMaggio and Powell (1983). NIT claims that if organisations want to achieve legitimacy in the organisational field, they must conform to institutional pressures. DiMaggio and Powell (1983) further pointed to coercive, mimetic and normative isomorphism as the sources that could cause institutional pressure. Scott (1995) further developed the three institutional pressures introduced by DiMaggio and Powell (1983). He identifies three distinct pillars of the institutional context, namely regulative (consistent with coercive pressures); normative (related to normative pressures); and cultural cognitive (elaboration of mimetic pressures). The regulative pillar directs action through coercion and the threat of formal sanctions, the normative pillar supports action through norms of acceptability, morality and ethics, and the cognitive pillar guides action through the very categories and frames by which actors know and interpret their world (Scott 1995). Thus, mimetic, normative and regulative factors represent the different forces acting on institutions. In the adoption of social practices, these forces are expected to apply different levels of inspirations by institutions (Kostova and Roth 2002), and IR is considered to be the latest social pattern in the field of reporting (Eccles and Krzus 2010b). Institutional theorists attempted to understand institutionalisation as a process of isomorphism (DiMaggio and Powell 1983; Lounsbury 2008) where institutional pressures can force organisations to adopt the same organisational forms (Greenwood and Hinings 1996). According to institutional theory, companies are economic units that operate in environments containing similar institutions that affect their behaviour and impose expectations on them (Campbell 2007). Acceptance of this pressure results in companies with institutional similarities to adopt homogeneous patterns of behaviour (Claessens and Fan 2002). The process of homogenisation has been termed isomorphism (DiMaggio and Powell 1983) and is believed to promote the stability and long-term survival of companies, equipping them with greater power and institutional legitimacy. However, more than one isomorphic pressure may be operating simultaneously, and influences of institutional pressures may change over time as a result of constantly changing endogenous (e.g., key decision-maker’s norms; values and unconscious conformity to traditions; motivation; competence and professionalism at the individual level; and shared belief systems, power and politics at the organisational level) and exogenous (e.g. regulatory pressures; public pressures; and professional norms and values at the organisational field level) factors (Carpenter and Feroz 2001). It is suggested, for instance, that the three types of isomorphic forces collectively influence Corporate Social Responsibility Reporting practices and patterns adopted by companies (de Villiers and Alexander 2014). The following sections describe the three classifications of institutional isomorphism: coercive, mimetic and normative.

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Coercive Isomorphism

Coercive isomorphism mounts from two sources: formal and informal pressure excreted on the organisation by other organisations (on which they depend) and expectations of the operating society of the organisation (DiMaggio and Powell 1983). This view, i.e. resource dependence and legitimacy concerns, is confirmed by Judge, Li and Pinsker (2010). Touron (2005) claimed regulative forces and resourcedominant actors as sources of coercive pressure. Shareholder influence and government policy are external factors of coercive isomorphism. Powerful, critical stakeholders who want to change organisations’ institutional practices can coerce organisations (Deegan 2009). Deegan (2009, pp. 359, 360) states that “a company could be coerced into adopting its existing voluntary corporate reporting practices to bring them into line with the expectations and demands of its powerful stakeholders”. Thus, companies most likely to act responsibly in reporting their behaviour are those which operate in an institutional context where there is coercive pressure, arguably where a significant, well-developed legal system exists that seek to protect stakeholders, and which is not exclusively oriented towards shareholders’ interests (Campbell 2006). It is assumed in new institutionalism that externally codified rules, norms or laws assign legitimacy to new management practices (Matten and Moon 2008). The key issue investigated in this study is whether the IR adoption decision of the Sri Lankan PLCs could have been influenced by the acts of the IIRC and its supporting organisations, and other stakeholders.

2.3.2.2

Mimetic Isomorphism

DiMaggio and Powell (1983) proposed the concept of mimetic isomorphism which was later confirmed by Scott (1995) as the cognitive pillar. Mimetic isomorphism stems from modelling the practices of rivals in the field (Jennings and Zandbergen 1995; Scott 2008). Companies attempt to respond to uncertainty by imitating the practices of successful members in the industry (Meyer and Rowan 1977) to obtain completive advantages related to legitimacy. Thus, uncertainty is one of the most powerful forces which encourages imitation (DiMaggio and Powell 1983). The prime threat to imitation seems to be perceived challenges to organisational legitimacy and competitive advantage from a failure to be seen to either follow best practices, as adopted by other organisations, or to institute practices more advanced than those of competitors (Unerman and Bennett 2004). Pressures on organisational behaviour include the need to conform to wider industrial norms regarded as best practice in order to avoid reputational risk, to employ report content as a means to manipulate stakeholder perceptions, and to gain, or attempt to regain, operational legitimacy. Such pressures may drive individual firms within an industry to adopt particular practices, such as the manner of communicating firm information (DiMaggio and Powell 1983; Scott 1995). Therefore, in a business environment with increased uncertainty and increasingly complex technologies, managers tend to consider practices as legitimate if they are regarded

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as “best practices” in their organisational fields (Matten and Moon 2008). Consequently, mimicking others is argued to be a cost-effective way of gaining legitimacy (DiMaggio and Powell 1983, 1991; Mizruchi and Fein 1999), and IR adoption by companies appears to be the newest trend in best practices established to maintain corporate legitimacy and obtain competitive advantages.

2.3.2.3

Normative Isomorphism

Group norms to adopt particular institutional practices stimulate normative isomorphism. Standards set to legitimise organisational practices by educational and professional authorities are sources of normative isomorphism (Matten and Moon 2008). Professions play a major role in normative isomorphism (DiMaggio and Powell 1983) which occurs through two mechanisms: a transmission of norms by professionals and the development of professional networks (DiMaggio and Powell 1983). Also, normative isomorphism is indicated as the process of applying professionally correct procedures to the organisation, where education, training, social interaction and professional membership play important roles in shaping individuals’ beliefs in shared norms (de Villiers et al. 2014a, b). Research into understanding change processes and their motivations is largely restricted to factors at the organisational field level (Ezzamel et al. 2007; Greenwood and Suddaby 2006; Greenwood, Suddaby, and Hinings 2002) or at the organisational level (Burns and Scapens 2000; Lukka 2007). In addition, the NIT emphasises isomorphism and, as such, ignores human agents and their interests (DiMaggio and Powell 1983, 1991; Tolbert and Zucker 1983). Therefore, one of the major criticisms of NIT is its relative inattention to the role of proactive actors in constructing institutions (Dambrin, Lambert, and Sponem 2007; Dillard, Rigsby, and Goodman 2004; Lounsbury 2008). To address this issue, researchers have integrated the institutional entrepreneurship approach from institutional work. The next section discusses the concepts of institutional work and institutional entrepreneurs.

2.3.3 Institutional Work The concept of institutional work describes “the purposive action of individuals and organisations aimed at creating, maintaining and disrupting institutions” (Lawrence and Suddaby 2006, p. 215). This concept is used to explain non-isomorphic change, using an institutional lens (Dacin, Goodstein, and Scott 2002). Rules and structures ensure a measure of conformity among individuals. Therefore, researchers often focus on how institutions; rules, structures and routines, influence individuals. However, the concept of institutional work acknowledges that individuals are able to influence institutions as well (Bui and de Villiers 2014). The creation of change within new/old institutions requires institutional work from a wide range of actors,

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both those with the resources and skills to act as entrepreneurs and those whose role is supportive or facilitative of the entrepreneur’s endeavours (Leblebici et al. 1991). DiMaggio (1988), Oliver (1991) and Oliver (1992) suggest an approach to the study of institutional work that focuses on three key elements. The first element in the study of institutional work should highlight the awareness, skill and reflexivity of individual and collective actors. The second element is that an understanding of institutions is constituted in the more or less conscious actions of individual and collective actors. The third element (which is a practice perspective on institutional work) suggests that we cannot step outside of action as practice and argues that even action which is aimed at changing the institutional order of an organisational field occurs within sets of institutionalised rules. Some institutional theorists strongly emphasise the “taken-for-grantedness” of institutions and have the potential to construct actors as cultural “dopes” (Hirsch and Lounsbury 1997). Other institutional theory-based studies in accounting (Abernethy and Chua 1996; Gendron and Barrett 2004) have highlighted that economic exchange is always “embedded” within institutionalised societal norms, and that interpretive rules such as fairness, equity and reciprocity, and seniority are taken for granted (Chua and Mahama 2007). In contrast, the concept of institutional work suggests the existence of culturally competent actors with strong practical skills, resources and sensibility and suggests that these actors can navigate creatively within their organisational fields (Clemens 1993; Greenwood, Suddaby, and Hinings 2002; Holm 1995; Oakes et al. 1998). The change process at the individual organisational level affects both internal and external factors (Brignall and Modell 2000; Collier 2001; Modell 2002; Tsamenyi et al. 2006). Old Institutionalism and New Institutionalism in sociology could be used to understand the process of change. Old institutionalism is about internal factors or intra-organisational dynamics such as interests, values, power dependencies and capacity for action. New institutionalism explains the external factors, at an organisational field level, affecting the change process (Greenwood and Hinings 1996). The change process is the result of interaction between these two factors, where the interaction is supported by “institutional entrepreneurs” (Dillard et al. 2004; Greenwood and Hinings 1996). The role of actors in the transformation of existing institutions and fields has also risen to prominence within institutional research. Institutional studies have documented the ability of actors, particularly those with some key strategic resources or other forms of power, to have significant impacts on the evolution of institutions and fields (Clemens 1993; Greenwood et al. 2002; Holm 1995; Oakes et al. 1998).

2.3.3.1

Institutional Entrepreneurs

The concept of institutional entrepreneurs is helpful in exploring how actors shape emerging institutions and transform existing ones, despite the complexities and path dependencies that are involved (Garud et al. 2007). Institutional entrepreneurs are

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skilled actors who use existing cultural and linguistic materials to narrate and theorise change so that other social groups in the field agree to cooperate in the change process (Greenwood et al. 2002; Maguire et al. 2004; Suddaby and Greenwood 2005). These entrepreneurs try to connect the new practices to stakeholders’ routines and values (Maguire et al. 2004). In addition, institutional entrepreneurs use “framing” strategically (Khan et al. 2007), where they articulate their change projects in particular ways, so as to “define the grievances and interests of aggrieved constituencies, diagnose causes, assign blame, provide solutions, and enable collective attribution processes to operate” (Snow and Benford 1992, p. 150). The concept of institutional entrepreneurs has emerged to help answer the question of how new institutions arise (Fligstein 1997; Rao et al. 2000). Institutional entrepreneurship represents the activities of actors who have an interest in particular institutional arrangements and who leverage resources to create new institutions or to transform existing ones (Fligstein 1997; Maguire et al. 2004; Rao et al. 2000). The role of actors in creating new institutions has been titled institutional entrepreneurship (Eisenstadt 1980). Institutional entrepreneurs serve as agents of legitimacy, supporting the creation of institutions that they deem to be appropriate and aligned with their interests. These agents have the resources and hence the power to shape the character of institutions and institutional change (Dacin et al. 2002). However, creation and change within institutions are expensive and require high levels of interest and resources. Thus, only institutional entrepreneurs, who are organised and possess sufficient resources, are capable of introducing institutional change (Leblebici et al. 1991). Garud et al. (2007) define institutional entrepreneurs as path-creating/path-changing individuals or organisations. It has been found that sometimes, even less powerful actors may shape institutional change, especially in emerging fields (Zahir-ul-Hassan and Vosselman 2010). To qualify as institutional entrepreneurs, individuals must break with existing rules and practices associated with the dominant institutional logic(s) and institutionalise the alternative rules, practices or logics they are championing (Battilana 2006; Garud and Karnøe 2001). Institutional entrepreneurship links with the undertakings of actors who are able to mobilise resources to enable collective action (Khan et al. 2007) and has been presented as a promising way to account for institutional change endogenously (Battilana 2006). DiMaggio (1988) describes the concept of institutional entrepreneurship as a means of understanding how new institutions arise. The concept of institutional entrepreneurship is important because it focuses attention on the manner in which interested actors work to influence their institutional contexts through such strategies as technical and market leadership, lobbying for regulatory change and discursive action (Fligstein 1997; Hoffman 1999; Lawrence and Suddaby 2006; Maguire et al. 2004; Rao et al. 2000; Suchman 1995). It has also been claimed that there is a tendency of early adoptions of organisational constructs to be driven by efficiency rather than legitimacy considerations (DiMaggio and Powell 1983). Accounting research also indicates that both efficiency and legitimacy considerations might operate, and that they need not be mutually exclusive (Hopper and Major 2007). Models that combine insights from transaction

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cost economics and institutional theory in sociology point to the interplay between efficiency and legitimacy (Zahir-ul-Hassan and Vosselman 2010). The involvement of institutional entrepreneurs is important in this interplay. One important category of such actors is the category of professionals, often organised in professional networks. Professionals, because of their knowledge and status, often play a leading role in field-level change (Bui and de Villiers 2014). These actors promote innovations in the field, and support and advertise them by explaining the benefits and highlighting the disadvantages of the competing alternatives (Zahir-ul-Hassan and Vosselman 2010). Professionals such as consultants, controllers and accountants are important institutional entrepreneurs in accounting as they shape and control practices and technologies. They are organised in professions and professional networks that encompass organisations such as accounting institutes, non-academic/practitioner platforms and other organisations used for disseminating ideas and making contacts. Hence, professionals and their networks are active in shaping the organisational construct at the level of the organisational field (Zahir-ul-Hassan and Vosselman 2010). Sharma, Lawrence, and Lowe (2014) found that accountants and heads of business units were instrumental in enabling changes to business routines through accounting technology. It is important to note that most empirical studies of institutional entrepreneurship conducted thus far have been in emerging fields that are less institutionalised and consequently characterised by higher levels of uncertainty (Déjean, Gond, and Leca 2004; Garudet al. 2002; Lawrence 1999; Lawrence and Phillips 2004; Maguire et al. 2004). IR is also such an emerging area in the corporate reporting field.

2.4 Prior Studies on the Use of Institutional Theory as a Theoretical Lens Institutional theory is the dominant theoretical perspective in organisational analysis (Lounsbury 2008) and is increasingly being applied in accounting research (Abernethy and Chua 1996; Bebbington et al. 2009; de Villiers and Alexander 2014; Dillard et al. 2004; Sharma et al. 2010, 2014; Tsamenyi et al. 2006). Importantly, Institutional theory applied in IR adoption studies has provided useful insights (Higgins, Stubbs, and Love 2014; Jensen and Berg 2012; Wild and van Staden 2013), which will be discussed in the following section.

2.4.1 Non-financial Reporting Prior studies have attempted to explain the achievement of a legitimate agreement on the form and adoption of varieties of non-financial reporting, through an institutional lens (Bebbington et al. 2009; Brown et al. 2009a, b; Etzion and Ferraro 2010).

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Bebbington et al. (2009) analysed the influence of cultural-cognitive, normative and coercive isomorphic pressures on how SR was shaped in six New Zealand firms. They found that mimetic isomorphism lay behind embracing sustainable development reporting within New Zealand corporations. This rationale constitutes a cognitive mechanism within institutional theory. Further, for those particular New Zealand organisations, choosing to engage in sustainable development reporting appears not to have been a rational choice. They found that non-financial reporting is initiated because it has come to be an accepted part of pursuing a differentiation strategy, where it offers some contribution to existing business challenges, and because organisations value the rewards it offers. de Villiers and Alexander (2014) find the overall characteristics of corporate social responsibility reporting, specific examples of corporate social responsibility reporting, and the corporate social responsibility reporting management structures of Australian and South African mining companies to be similar. Further, they found that similarities appear to be driven by isomorphic pressures, i.e. companies copy others, are pressurised to adopt, and because of the professionalisation of corporate social responsibility reporting, these companies willingly adopt general (global) solutions to respond to environmental pressures. Fortanier et al. (2011) find evidence for upward harmonisation in reporting for MNEs that adhere to global CSR standards. They found that adherence to global CSR standards reduced cross-country differences in CSR reporting and made these reports more harmonised. This seems to hint at a dynamic isomorphism in which MNEs adhere to global standards, stimulated by and put in the context of international institutions, which leads to increased interaction between these firms, often via regular events that take place. Sotorrío and Sánchez (2008) argue that although differences may exist when comparing companies in different societal groups, companies that exist at the same societal level will have similar practices due to isomorphic attributes. They found that on average, the level of CSR was higher in Europe compared to North America. This was attributed to the stronger institutional environment in European countries regulated by different European institutions (European Commission, national and local governments, consumers’ associations and NGOs), media or financial investors. Furthermore, the region or country of a company can condition the level, components and motives of its social behaviour and can be used to corroborate the premises of the institutional theory (Sotorrío and Sánchez 2008). Muthuri and Gilbert (2011) found for the Kenyan situation that the nature and orientation of CSR differ across companies with operations only in Kenya and those headquartered abroad or with international operations. They noted that firm-related drivers such as public relations and performance, as well as global institutional pressures, explain the focus and form of CSR in Kenya. Further, Kenyan companies were found to mimic the practices of foreign corporations. Kholeif’s (2010) study based on Egyptian companies found that organisations adopt similar formal structures such as IFRSs due to external organisational institutions’ pressures. These include pressures from state laws and regulations, stock exchanges, and accounting professions.

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2.4.2 Integrated Reporting The institutionalisation of IR is spreading, and isomorphism is expected to follow (Higgins et al. 2014). Institutional factors could influence IR adoption (Lai et al. 2013). Jensen and Berg (2012) find that IR adoption is influenced by institutional pressures from the financial, educational and labour system, cultural system and economic system of a country. Kılıç et al. (2020) assert that the code-law orientation and strength of institutional quality are significantly associated with the IR of Fortune 500 companies. Lai et al. (2016) found that legitimacy pressures (size, leverage, profitability, industry) do not play a role in explaining IR adoption. They also claim that corporate engagement in IR is not a matter of strategic legitimation. The route of IR is mainly determined by outside legitimate forces (van Bommel and Rinaldi 2014); for instance, organisations look for advantages and benefits from early adoption of IR (Wild and van Staden 2013). Wild and van Staden (2013) identified factors to support business confidence in order to regain legitimacy following the major loss of investor confidence in the wake of the global financial crises and optimising access on favourable terms to capital markets. On the other hand, Eccles and Serafeim (2011) claimed that powerful institutional shareholders could exercise pressure on IR implementation. Frias-Aceituno et al. (2014) found a negative impact of industry concentration on the development of a more pluralist report. Their study simultaneously took into account stakeholders, sustainability, and the long-term viewpoint, as well as questions of responsible investment, business ethics, and transparency. Another finding was that company size and profitability, on the other hand, have a positive impact on the likelihood of an integrated report being produced. Frías-Aceituno et al.’s (2013) study analysed the adoption and diffusion of IR using an institutional theoretical framework. The results of this study revealed that companies located in civil law countries, and where indices of law and order are high, are more likely to create and publish a broad range of integrated reports, thus favouring decision-making by the different stakeholders. Moreover, size, profitability and legal enforcement in the country are positively related to IR adoption. García-Sánchez et al. (2013) propose that stakeholder influence has a significant impact on the extent of IR at the country level. Firms originating from countries with higher collectivist and feminism dimensions are more likely to produce integrated reports. At the firm level, firm size, industry and profitability are associated with the extent of holistic disclosure adopted. The future of IR diffusion depends on market and regulatory forces in combination with institutional isomorphism (Eccles and Serafeim 2011). Mimetic isomorphism stimulates early IR adoption (Wild and van Staden 2013), and leading firms’ best practices coerce voluntary IR adoption by other organisations. For instance, referring to mimetic isomorphism, the code of best practices or disclosure by competitors may determine the information included in integrated reports (McNally et al. 2017). Thus, the accounting profession and big accounting firms may have a considerable influence on IR adoption decisions (Dumay et al. 2017; Flower 2015).

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2.4.3 Theoretical Factors for Understanding the Adoption of IR This section discusses prior studies that have been conducted on Sri Lankan firms and the institutional factors that have influenced early adoption of IR by Sri Lankan PLCs. These factors relate to institutional isomorphism and focus on mimetic, normative and coercive processes as well as the concept of institutional entrepreneurs. According to Deegan (2009), institutional theory links organisational practices, including accounting and other non-financial reporting practices. The NIT assumes that organisations adopt structures and management practices that are considered legitimate by other organisations in their fields. Legitimated structures or practices can be transmitted to organisations in a particular field in a number of ways, which is through imitation, coercion, and normative pressures (Carpenter and Feroz 2001). Thus, the voluntary adoption of IR practices can be considered a part of institutional practice. IR represents a journey to more meaningful reporting that can be instrumental for reporting organisations (Adams and Simnett 2011), and it increases the effectiveness of what firms actually report (Higgins et al. 2014). The consolidation of the Climate Disclosure Standard Board (CDSB) and the Value Reporting Foundation (VRF) will have a significant impact on the adoption of IR among organisations worldwide. This consolidation is expected to complete by June 2022. The VRF houses the IR Framework and the SASB Standards (VRF 2021). These developments create the necessary institutional arrangements and technical groundwork for better disclosure by organisations. Of course, the support of the IIRC is obvious in the institutionalisation agenda of IR (Higgins et al. 2014; Rowbottom and Locke 2013). Moreover, business associations are influential in promoting IR because they stimulate organisations and industries, bringing together like-minded managers who develop a shared experience that shapes norms about how others in similar situations will think and act (DiMaggio and Powell 1983). In this regard, the IIRC is important. It has brought together like-minded managers from more than 80 business organisations and more than 35 investor institutions under the IIRC pilot programme. Also, the IIRC is a coalition of some of the world’s most powerful accounting-related organisations. This includes reporting bodies (e.g., the GRI, the Sustainability Accounting Standards Board); the “Accounting for Sustainability” (A4S) project; business associations (e.g., the World Business Council for Sustainable Development, the Global Compact); standard-setting bodies (e.g. the IFRS—Foundation for International Accounting Standards Board, the Tokyo Stock Exchange); accounting bodies (e.g., CPA Australia, ACCA); consulting firms (including KPMG, PwC, Deloitte) and academic and non-governmental organisations (e.g, the WWF, Transparency International) (Higgins et al. 2014). Therefore, it is evident that IR has undergone much institutionalisation. The IIRC and other supportive global organisations have made IR a worldwide trend, and therefore, it has come under an institutionalisation agenda. In addition, IIRC pilot programme participants produce quality integrated reports.

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Therefore, organisations that produce integrated reports mimic these programme participants to be considered legitimate. Resource dependence and legitimacy concerns are the causes of coercive isomorphism (Judge et al. 2010). Though IR is not a regulatory reporting requirement in Sri Lanka, the IIRC and its supporting organisations have made IR a worldwide trend. Therefore, the IIRC and its supporting organisations are able to influence Sri Lankan companies to adopt IR. One Sri Lankan PLC participated in the IIRC pilot programme, and the IIRC was able to influence other companies to adopt IR through this pilot programme participant. Adoption of a particular reporting practice by a firm can be coerced by powerful stakeholders (Deegan and Samkin 2013; Eccles and Serafeim 2011). Influential stakeholders, including institutional investors of Sri Lankan PLCs, could influence firms’ IR adoption decisions. Competition is also a reason to adopt IR (McNally et al. 2017), and competition is high among Sri Lankan companies. Mimetic isomorphism drives early adoption of IR (Wild and van Staden 2013) and companies desire to follow the best practices of the industry and adopt mimetic processes (Jensen and Berg 2012). Therefore, copying or improving upon best practices may bring competitive advantages to companies in terms of legitimacy. Dominant professions, professional bodies and/or consultants advance structures and procedures which companies need to adopt (DiMaggio and Powell 1983). The ICASL is the sole authority in Sri Lanka for reporting. The auditors of Sri Lankan PLCs obtain “practicing certificates” from the ICASL (Yapa et al. 2017). Also, qualified accountants and some employees of the finance divisions of Sri Lankan PLCs are members of the ICASL. Therefore, the ICASL influences Sri Lankan companies to adopt IR via auditors and other qualified members. The IR implementation guide issued by the ICASL, and the annual report awards competition organised by the ICASL are the avenues opened by the Institute to promote IR adoption in the country. The “big four” accounting firms through a mode of normative pressure have played a prominent role in the globalisation of accounting (Albu et al. 2011). Therefore, the largest accounting firms in the country have an influence on the IR adoption decisions of Sri Lankan companies. Creating new institutions and changing existing institutions require institutional work on the part of a wide range of actors, both those with the resources and skills to act as entrepreneurs and those whose role is to support or facilitate the entrepreneur’s endeavours (Clemens 1993; Greenwood et al. 2002; Holm 1995; Leblebici et al. 1991; Oakes et al. 1998).

2.5 Methods A qualitative methodological approach was adopted to answer the research questions. This study is an exploratory qualitative research study that relies on semi-structured interviews. The objectives of the study and issues identified in the literature were

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the bases of the interview questions (Cheng et al. 2014; de Villiers et al. 2014a, b; Morros 2016). A properly designed, well-structured interview guide helps to create connections with interviewees (Braun and Clarke 2013). The face validity of the interview guide was ensured by discussions with academic IR experts. These views were useful in establishing the validity and reliability of the data (Lichtman 2013). Identifying companies that have adopted IR was important as this helped to find interview participants. The researchers reviewed the 2012/2013 and 2013/2014 annual reports of all Sri Lankan PLCs to find out whether they had adopted IR or produced integrated reports/integrated annual reports. Of the 16 PLCs that were practicing IR at different levels at the time the study commenced in Sri Lanka, 12 companies were willing to allow their executives to participate in the research. Purposive sampling was used to select employees from the 12 Sri Lankan PLCs for the semi-structured interviews. Maxwell (2008) defines purposive sampling as a type of sampling in which particular settings, persons or events are deliberately selected for the important information they can provide that cannot be obtained as well from other choices. Semi-structured interviews were conducted with 55 managers who were involved in the IR processes of the sample companies to obtain their views and experiences of drivers of IR adoption.

2.5.1 Data Collection Suitable interviewees were selected based on their involvement in the IR process of the relevant organisation and their knowledge about IR concepts. The selection of sample companies was the starting point to ensure the validity and reliability of the interview data. Semi-structured interviews were conducted to obtain data from twelve sample companies. Fifty-four interviews (out of 55) were conducted in the interviewees’ offices and one interview was conducted at the University of Kelaniya, Sri Lanka. Conducting interviews in natural settings (such as in offices and homes) further ensures a high level of validity of qualitative research (Creswell 2003). All interviews were conducted in English. Appendix 2.1 provides information regarding the interviewees and their profiles. All the interviews were tape-recorded to ensure the accuracy and reliability of data. Tape recording the interviews also helps to reduce mistakes in transcribing the interviews (Barriball and While 1994). Different types of probing questions were used to uncover the particular viewpoints held by the interviewees on issues related to influences on IR adoption.

2.5.2 Data Analysis Thematic analysis was used to analyse the data collected from the interviews. NVivo software was used to organise and manage the qualitative data. The goal of the thematic analysis in this research is to extract salient themes from interviewees to

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promote greater understanding of the influences on IR adoption in Sri Lanka. As the interpretation of the data is dependent on the context in which the data were extracted, an understanding of IR from different perspectives was gained. Initial codes were generated, themes were extracted from the transcribed interview data, and later grouped to form the findings. The six phases of thematic analysis (Braun and Clarke 2006) were used in the analysis process, as explained in Table 2.1. The analysis is not a linear process, but entails moving back and forth among the data as needed (Braun and Clarke 2006). The thematic analysis facilitated the development of insights into the influences on IR adoption. Intercoder reliability is often perceived as the standard measure of research quality (Kolbe and Burnett 1991). Reliability arises through the categories that researchers use to analyse each text. These categories should be used in a standardised way. A standard way of doing this is known as “interrater reliability” (Silverman 2015). “Interrater agreement represents the extent to which the different judges tend to assign exactly the same rating to each object” (Tinsley and Weiss 2000, p. 98). Intercoder reliability is at the heart of content analysis (Lombard et al. 2002). In this study, Table 2.1 Stages of thematic analysis Phase

Name of the phase

Description

1

Becoming familiar with the data

Became familiar with the depth and breadth of the content. This included repeated reading of the data, reading the data in an active way searching for meanings and patterns

2

Generation of initial codes

The generation of initial codes from the data. Coding was performed using the NVivo software programme

3

Searching for themes

Re-focusing the analysis at the broader level of themes, rather than codes, involves sorting the different codes into potential themes, and collating all the relevant coded data extracts within the identified themes

4

Reviewing the themes

Reviewed the themes involving refinement of candidate themes. It was important to ensure that data within themes should cohere together meaningfully

5

Defining and naming themes

Defined and further refined the themes by identifying the essence of what each theme was about and determining what aspect of the data each theme captures

6

Producing the report

The final analysis and write-up of the report ensure that the analysis provides a concise, coherent, logical, non-repetitive and interesting account of the story the data narrates within and across themes

SourceAdapted from Braun and Clarke (2006)

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two coders engaged in coding the transcriptions and identification of themes. The intercoder percentage agreement of the study was recorded as 88%.

2.6 Findings and Discussion—Isomorphic Pressures and Institutional Entrepreneurs’ Involvement in IR Adoption It is not mandatory to produce integrated annual reports (IARs) in Sri Lanka. However, there are forces at play that persuade companies to adopt new practices. The role of institutional isomorphism influencing the decision to adopt IR is herein analysed and discussed under three headings: coercive isomorphism; mimetic isomorphism; and normative isomorphism.

2.6.1 Coercive Isomorphism Coercive isomorphism arises from formal and informal pressures exercised on an organisation by other organisations on which they depend (DiMaggio and Powell 1983); resource dependence and legitimacy concerns (Judge et al. 2010); and influential or powerful stakeholders who encourage the adoption of particular reporting practices (Deegan and Samkin 2013; Eccles and Serafeim 2011). Interviewees from nine (of 12) PLCs mentioned the “global movement” as a reason for their shift to IR: The external reasons have been the worldwide trend towards the adoption of IR as the best-accepted norm and the promotion of IR by various institutions and organizations. These include the IIRC, the UNGC, the United Nations Global Compact, and other award granting bodies. For example, in Sri Lanka, the ICASL presents annual reporting awards, and the Chamber of Commerce presents Best Corporate Citizen Awards. So, these bodies also encourage IR whenever they are considering companies and applicants for awards (Interviewee F M08).

Interviewees of some Sri Lankan companies felt that they had developed their IR process to a high level—as evidenced by the IIRC IR pilot programme participant winning the Gold Medal for the best Integrated Annual Report at the ICASL annual report awards for several years. While the pressure from the IIRC appears to be coercive isomorphism, the pressure from the ICASL is more subtle; it encourages companies to enter the competition to produce the best integrated annual report. In a way, this subtle encouragement is more linked to normative isomorphism (discussed later). One Sri Lankan company [Diesel and Motor Engineering PLC—DIMO] had participated in the IIRC pilot programme in 2011. This IIRC pilot programme participant’s report, and the achievements included in it, would have influenced other Sri

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Lankan companies to move into IR. This is an example of how the IIRC influences other organisations to move towards IR through coercive isomorphism. Another interviewee also mentions the integrated annual report of the IIRC pilot programme participant: The pioneer of IR in Sri Lanka is ‘DIMO’. I think the effort and care that they had taken has also given us some insights into IR (Interviewee F M05).

Shareholders are a source of coercive isomorphism as well. PLCs obtain funds from equity capital or borrowings. Thus, it is apparent that the wider group of stakeholders of Sri Lankan companies can influence or coerce them to adopt IR. Some interviewees evidenced that shareholder pressure influenced them to move to IR: There are shareholders who are looking at whether what we are doing is in line with that of other companies. Some organisations have introduced IR. We have shareholders who hold shares in other companies as well. Therefore, in order to add value to the shareholders, as well as to our stakeholders, we should be in line with their requirements (Interviewee H E03).

The influence of international shareholders is evident in the adoption of the new reporting practice that is IR by Sri Lankan PLCs. This pressure from large institutional shareholders who hold equity in the sample companies suggests coercive isomorphism which causes formal pressure for IR adoption. DiMaggio and Powell (1983) postulate that coercive isomorphism arises from formal and informal pressures exercised on an organisation by the other organisations on which they depend. Although there is no legal requirement to produce IARs in Sri Lanka, some Sri Lankan companies were “persuaded” to adopt IR in line with other local and global organisations that are moving towards IR due to the influence of the IIRC. Coercive pressures can arise from regulatory forces and resource-dominant actors. The IIRC acts as one of the resource-dominant actors, encouraging organisations around the world to adopt IR, using the established IIRC Framework. Various supporting organisations (e.g., GRI, the Sustainability Accounting Standards Board, A4S, World Business Council for Sustainable Development, the Global Compact), and standard setting bodies that encourage IR are also considered sources of coercive pressures. The IIRC and its supporting organisations are portrayed as exerting informal coercive pressure on the sample companies’ IR adoption decisions. Coercive isomorphism also stems from resource dependence and legitimacy concerns (Judge et al. 2010). Influential or powerful shareholders of the wider group of stakeholders of a company can influence an organisation to adopt particular reporting practices (Deegan and Samkin 2013; Eccles and Serafeim 2011). An important finding was that several interviewees indicated that their institutional practices changed in response to pressure from the shareholders upon whom the organisation is dependent. It also seems that the sample companies’ decision to adopt IR has been influenced primarily by the informal pressure exercised by the IIRC. Thus, coercive isomorphism can be considered as arising from pressures from the IIRC, IR-supporting organisations and shareholders.

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43

2.6.2 Mimetic Isomorphism Mimetic isomorphism stems primarily from competition (McNally et al. 2017); copying best practices (Jensen and Berg 2012; Matten and Moon 2008); and stakeholders’ demands for an increased range of information (Wild and Van Staden 2013). The majority of the sample companies (representatives from nine PLCs) mentioned competition or competitor pressure as a reason to move towards IR. For example: Our competitors started to do IR, almost everyone did (Interviewee A M03).

The sample companies also want to be better than their competitors. The interviewees indicated that their company does not want to be inferior in its reporting activities: To stand out from our competitors and be better than other companies in the market. Our desire was that our report would be better than our competitors’ reports. With this change [IR], I think we now have a competitive advantage (Interviewee D E02).

Mimetic isomorphism stems from applying best practices. The sample companies were influenced to apply best practices. The interviewees considered that best practices help to ensure corporate legitimacy and obtain further competitive advantages. The bank embraces best practices. Therefore, we decided to implement IR (Interviewee F M11). It is [IR] an internationally accepted best practice, and we also wish to adopt international best practices (Interviewee B M01).

In order to gain legitimacy, the interviewees are keen to follow best practices. Similarly, the interviewees clearly wanted to follow the best practices of their industry, and thereby, they were influenced by mimetic processes. Here, managers imitate the strategies of other successful organisations and competitors, which are regarded as best practices in the industry. A key influence on IR adoption is the best practices of other Sri Lankan companies that have adopted IR. One Sri Lankan company that had participated in the IIRC pilot programme influenced other companies to adopt IR as well. The majority of the interviewees indicated that they copied or improved upon other organisations’ practices in order to obtain competitive advantages. There also appeared to be a desire to adopt IR as one way to achieve legitimacy. Legitimacy is considered to be “a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman 1995, p. 574). In a business environment with increased uncertainty and increasingly complex technologies, managers tend to consider practices as legitimate if they are regarded as “best practices” in their organisational field (Jensen and Berg 2012; Matten and Moon 2008). The desire to emulate the best practices of leading national and international firms (Eccles and Serafeim 2011) exerted a certain amount of pressure on Sri Lanka companies to adopt IR. Mimetic isomorphism is also seen to influence companies to respond to their stakeholders’ demands for an increased range of information on the firm’s social and

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environmental impacts by reporting in a manner that is perceived to be consistent with, or better than, that of their competitors in a particular industry (Wild and van Staden 2013). Thus, as mentioned before, competition is a reason for companies to adopt IR (McNally et al. 2017). These findings have been confirmed in this Sri Lankan study where mimetic isomorphism is observed as pressure from competitor organisations and other IR-practicing Sri Lankan companies, which ultimately resulted in the adoption of IR by the sample companies.

2.6.3 Normative Isomorphism Normative isomorphism stems from structures and procedures advanced by particularly dominant professions, professional bodies and/or consultants (DiMaggio and Powell 1983). The big four accounting firms play an important role in the globalisation of accounting through normative pressure (Al-Omari 2010; Irvine 2008; Kamal Hassan 2008; Street and Gray 2002). Though the ICASL, as the national accounting and auditing standard-setting body, has not mandated IR, the Institute attempts to influence Sri Lankan listed companies to apply IR: That basically comes from the Chartered Institute direction because the world has moved in that direction. The Institute has taken the initiative and provided the guidelines. So, we are also compelled to move in that direction in order to fall in line with the tune of the Institute (Interviewee F M04).

The ICASL has had a huge impact on the adoption of IR among the sample companies. Interviewees indicated that the ICASL encourages sample companies to move towards IR by presenting awards for the best IARs and non-traditional annual reports. Representatives from eight of the twelve sample companies stated that the ICASL annual report competition was one factor influencing them to adopt IR. The respondents from the sample companies expect that winning an award at the ICASL annual report award ceremony will improve the image of their organisation: Initially, it was only because of the ICASL awards competition, but after that, we realised that this is a very good value-added concept for the company (Interviewee A M01).

As the accounting and auditing standard-setting body for the whole country, the ICASL introduces and updates accounting and auditing standards in keeping with those international requirements which are applicable to Sri Lankan companies. The ICASL was conducting awareness programmes and training programmes for IR. They were even conducting an awards ceremony. They were holding discussions with all the organisations to come up with IR, and to identify the areas where they needed improvement (Interviewee B M04).

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45

The largest accounting firms in Sri Lanka appeared to influence the IR adoption decisions of the sample companies. Their mode of influence ranged from “advising” to “arranging training sessions”: KPMG, the external auditors, influenced us. We sought advice from them. They were very much involved in the IR implementation process (Interviewee F M06).

Further, annual report design companies1 provided considerable impetus for the sample companies to introduce IR. They possess knowledge and expertise in producing IARs, and their directions and advice influence Sri Lankan companies to implement IR: The preparation of the annual report of the Bank is handled by an annual report agency called ‘Smart Media’. They may have produced more than 50% of the annual reports in the country. One of the main driving forces to go for IR was this annual report agency (Interviewee F M04).

This finding makes a contribution to the literature as the influence of annual report design companies is not mentioned in the extant literature. The pressure from annual report design companies stems from the knowledge and the expertise that they have on IR, and hence, their significant influence on companies that use their services. The ICASL plays an active role in promoting IR among Sri Lankan companies. They conduct roundtable discussions and seminars for professional members and representatives from the listed companies to popularise IR. Thus, accounting and finance staff of Sri Lankan companies, especially accountants who are members of the ICASL, can be expected to influence Sri Lankan companies to adopt IR. In 2015, the ICASL released an IR implementation guide to promote IR among Sri Lankan companies. This guide was prepared based on the fundamentals of the IIRC, the GRI, and the UN Global Compact (ICASL 2015). The findings indicate the ICASL as an influential factor for the adoption of IR by the sample companies. Under the patronage, guidance and support of the IIRC, the Council of the ICASL formed a committee on 05 July 2016, titled the IR Council, with a view to promoting IR in Sri Lanka, enabling corporates and others interested in sharing knowledge on matters relating to the content, context and implementation of IR (ICASL 2018). The ICASL has taken leadership in conducting a series of programmes focusing on IR development among PLCs in the country. Therefore, as the key provider of resources for reporting and auditing matters in the country, the ICASL has a great deal of influence in encouraging Sri Lankan companies to adopt IR. Furthermore, every listed company in Sri Lanka needs to be audited by qualified statutory auditors who obtain “practicing certificates” from the ICASL (Yapa et al. 2017). Therefore, auditors who are members of the ICASL are influential enough to pressure Sri Lankan companies towards IR adoption. The influence of professionalisation allows for the rapid diffusion of new models of change throughout organisations. Thomas (1989) claims that a company relies on professional specialists such as accountants and auditors who exert their influence on various corporate 1

Companies that provide services to PLCs to prepare their annual reports in a nicer manner. These design companies possess up to date skills, knowledge and technology to design the annual reports.

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strategies, including financial reporting decisions. The degree of professionalisation in accounting practices is also influenced by the accounting firms themselves. The role played by the “big four” accounting firms in the process of the globalisation of accounting is significant, and therefore, represents normative pressure (Albu et al. 2011). The four largest international accounting firms that operate in Sri Lanka (at the time of data collection) were KPMG, Ernst and Young, PwC and BDO partners. Together, they audit 84% of the listed companies in Sri Lanka (Yapa et al. 2017). Therefore, the auditors of the sample companies can be considered to have a huge influence on the latter’s adoption of IR. There is consensus in the literature that the big four accounting firms play an important role in the globalisation of accounting and represent significant normative pressures within the accounting field (Al-Omari 2010; Irvine 2008; Kamal Hassan 2008; Street and Gray 2002). The accounting profession and multinational enterprises dominate the governing council of the IIRC (Dumay et al. 2017; Flower 2015). Therefore, the largest accounting firms have significant influence on the IR adoption decisions of companies in Sri Lanka. This is evident in comments from the interviewees about the influence of large accounting firms on IR adoption decisions.

2.6.4 Institutional Entrepreneurs and IR Adoption Institutional work acknowledges that individuals can influence institutions (Bui and de Villiers 2014). Thus, institutional entrepreneurs are also agents of change (Sharma et al. 2014). Of the 55 interviewees, one clear example of institutional entrepreneurship was identified. In this section, this case is presented and discussed in conjunction with the extant literature. The Director Finance/CFO of this case study exhibits many of the characteristics of institutional entrepreneurs. He had put a great deal of effort into introducing IR to his organisation even before the IIRC introduced the consultation draft of the international IR framework. The company’s first integrated annual report was produced for the financial year 2010/11. Thus, the Director Finance/CFO drives the process of IR adoption in his company: If you tell me that I am the driving force behind IR, that’s correct because I am not only the public eye of IR in this company, I also get very involved in conceptualisation and everything else as well (Interviewee C M01). It was initiated by our Finance Director. He was the main person who kept driving it, and he was always the driving force behind it. He is the one who decided on developing this IR concept - where everything is in a single report (Interviewee C M03).

Institutional entrepreneurs use existing cultural and linguistic materials to narrate and theorise change so that other social groups in the field agree to cooperate in the change process (Greenwood et al. 2002; Maguire et al. 2004; Suddaby and Greenwood 2005), and attempt to connect the new practices to stakeholders’ routines and values (Maguire et al. 2004). As suggested by Garud et al. (2007), this Finance Director /CFO

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is a path-creating/path-changing individual in the organisation. Another interviewee in the same organisation commented on the way the Finance Director/CFO drives the IR process and his knowledge of this area: He is the Finance Director; he is also a Board Director and an Executive Director. He always pioneers this; he drives IR and the reporting process. His thinking and his depth of knowledge has a huge bearing on our own thinking related to IR. That thinking influences our operations as well (Interviewee C M02).

Creating and changing new institutions require institutional work on the part of a wide range of actors, both those with the resources and skills to act as entrepreneurs and those whose role is to support or facilitate the entrepreneur’s endeavours (Clemens 1993; Greenwood et al. 2002; Holm 1995; Leblebici et al. 1991; Oakes et al. 1998). The Director Finance/CFO can allocate the resources required to facilitate change: in this case, the introduction of IR. In addition, he has the knowledge of IR required to bring about the change, and his followers within the organisation rely on this knowledge. Sometimes, even less powerful actors may shape institutional change, especially in emerging fields (Zahir-ul-Hassan and Vosselman 2010). However, in this case, the Director Finance/CFO is a powerful actor in all aspects, especially those involving knowledge of IR and resource allocation: The IR drive is being led by the Director Finance/CFO. He is the pioneer person. Actually, people say he is the Sri Lankan ‘guru’ of IR in a Sri Lankan context. He has a huge knowledge of the subject (Interviewee C E01).

Accounting professionals such as consultants, controllers and accountants are important institutional entrepreneurs who can shape control practices and technologies (Zahir-ul-Hassan and Vosselman 2010). The Director Finance/CFO is a fellow member of the ICASL and has exhibited institutional entrepreneurial characteristics in IR. His role is to support and facilitate the entrepreneur’s endeavours. He explains: I was instrumental but, of course, I do not take all the credit as I have a super-dedicated team. Therefore, we all work together, but I think that it is correct to say that I am instrumental in leading the annual report team (Interviewee C M01).

Professionals play a leading role in field-level change by taking advantage of their knowledge and status (Bui and de Villiers 2014). These actors promote innovations in the field, support and advertise them by explaining their benefits and highlight the disadvantages of competing alternatives (Zahir-ul-Hassan and Vosselman 2010). The changes initiated by institutional entrepreneurs mean that organisations will be forced to deviate from their original practices by modification, addition or replacement (Dorado 2005). The Director Finance/CFO wants to be innovative in reporting and demonstrates the advantages of IR to the other members of his organisation:

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A. M. I. Lakshan et al. The Director wanted to carry out reporting differently and that was how he started doing IR. First, he heard about it, learned how to do it, and then wanted to try it. I have had a lot of discussions with him and I understand his way of thinking. He wanted to do it differently because he believed in IR, not just the report (Interviewee C M02).

This chapter, like most of the discussions in empirical studies of institutional entrepreneurship conducted so far, is about an emerging field that is less institutionalised and consequently characterised by higher levels of uncertainty (Déjean et al. 2004; Garud et al. 2002; Lawrence 1999; Lawrence and Phillips 2004; Maguire et al. 2004). A section in it illustrates how an institutional entrepreneur can be the driving force for adopting IR. Based on the findings of the study, the pressure exerted through coercive isomorphism, mimetic isomorphism, normative isomorphism and institutional entrepreneurs’ involvement in the decision to adopt IR by Sri Lankan PLCs is summarised in Fig. 2.1.

Organisational field of Sri Lankan PLCs

The IIRC & IIRC supportive organisations

Competitors Best Practices

CASL Accounting firms Institutional Entrepreneurs

Coercive isomorphism

Mimetic processes

Normative pressures

Adoption of IR by Sri Lankan PLCs

Individual Pressure Collective Pressure Fig. 2.1 Institutional isomorphism, institutional entrepreneurs and adoption of IR in Sri Lankan PLCs

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2.7 Conclusions This chapter explored the institutional and isomorphic pressures that may have influenced the early adoption of IR by a significant number Sri Lankan PLCs, which exist in a developing country, when globally, companies in more developed countries were reluctant to adopt IR. Institutional Theory with special reference to institutional isomorphism and institutional entrepreneurs was adopted as the theoretical lens to analyse how external and internal pressures influenced Sri Lankan PLCs’ managers into adopting IR. These lenses were important to develop an understanding of why companies adopt IR, since there needs to be an understanding of the change processes at the organisational field level (Ezzamel et al. 2007; Greenwood and Suddaby 2006; Greenwood et al. 2002) as well as at the organisational level (Burns and Scapens 2000; Lukka 2007). We found all three (coercive, mimetic and normative) forms of isomorphic pressures to have influenced the early IR adoption decisions of Sri Lankan companies. The responses of the interviewees evidenced experiences of coercive isomorphism stemming from pressures from the IIRC, IR-Sri Lankan supporting organisations and Sri Lankan shareholders. The interviewees also appear to be pressured by mimetic isomorphism from competitors and other organisations that had already adopted IR. Mimetic isomorphic influenced the interviewees to perceive IR as the best practice for non-financial reporting, which meant that they subsequently felt pressured to adopt it. The findings from the Sri Lankan interviewees’ IR adoption accord with the findings of de Villiers and Alexander (2014), in that all three forces are observed to collectively influence the adoption of IR in other countries as well. The ICASL and the largest accounting firms like IR-Sri Lankan supporting organisations influenced the early IR adoption decisions of the PLCs in our study, normatively. The ICASL, acting as both the accounting and auditing standard setter, the reporting regulator, and the issuer of practicing certificates to all audit-listed companies throughout the country, had a huge influence on Sri Lankan companies in persuading them to adopt IR. Annual report design organisations in Sri Lanka that provide services to companies are also a source of pressure on Sri Lankan companies to adopt IR, by way of normative isomorphism. The role of these organisations as agents of normative isomorphism has not been identified or discussed in the existing literature. One clear case of institutional entrepreneurship was identified. The institutional entrepreneur had the required skills and resources to make the necessary changes. This organisation produced its first integrated annual report even before the IIRC introduced the consultation draft of the international IR Framework. The adoption of IR due to institutional entrepreneurship has not been discussed in the existing IR literature.

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2.8 Contributions This chapter contributes to the literature by adopting an institutional theoretical lens to analyse the interview findings to develop a better understanding of why companies choose to adopt IR practices. The study provides empirical evidence to fill this knowledge gap. In addition, this research study contributes three new findings to the IR literature: . Influence of all three types of isomorphic forces individually and collectively on IR adoption decisions; . The normative isomorphic pressure from annual report design organisations; and . The presence of an institutional entrepreneur in IR adoption. The research indicates that mimetic isomorphism is just one of the factors driving early adoption, in contrast to the finding of Wild and van Staden (2013), who consider that mimetic isomorphism drives the early uptake of IR. This research uses and confirms the three forms of isomorphism (coercive, mimetic and normative) as significant factors impacting upon the IR adoption decisions made by the sample of Sri Lankan companies. The influence of Annual Report Design companies on IR adoption decisions by Sri Lankan companies illustrates the presence of normative isomorphism. This finding, that Annual Report Design companies have an influence on IR adoption decisions, has not been identified in the extant literature. The concept of institutional entrepreneurs was also raised as an influence in this study. One clear example of institutional entrepreneurship was identified. The interviewee demonstrated that he had the knowledge and ability to allocate resources required to facilitate change, i.e. to bring IR into his company. The identification of influences on IR adoption decisions is important to policymakers and regulators who may want to speed up the adoption of IR among other PLCs in Sri Lanka as well as in other countries. The IIRC and its supporting organisations were seen to exert coercive pressure on the sample companies’ IR adoption decisions. It became apparent that stakeholders of Sri Lankan companies can influence or coerce Sri Lankan companies to adopt IR. Interviewees indicate that their most important stakeholders influenced their decision to adopt IR, and so they changed their practice and produced IARs in response to stakeholder pressure. Coercive isomorphism was also found to stem from shareholders, including large institutional shareholders. Mimetic isomorphism stems from competitors and the best practices of other Sri Lankan companies that have adopted IR. The voluntary adoption of IR in Sri Lanka has influenced companies to emulate the “best practices” of other leading firms, nationally and internationally. The Sri Lankan company that had participated in the IIRC pilot programme influenced other companies to also adopt IR. The sample companies were found to copy best practices in order to gain legitimacy. Thus, competition is one reason for the sample companies to adopt IR.

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Normative isomorphism influencing the sample companies to adopt IR stems from the ICASL, accounting firms, auditors and annual report design companies. As the key provider of resources for reporting and auditing matters in the country, the ICASL has had a great deal of influence in encouraging Sri Lankan companies to adopt IR. The big accounting firms in the country are also very influential and exercise normative pressure in order to influence other companies to adopt IR. Annual report design companies also provide considerable impetus for sample companies to introduce IR. Their guidance and advice have induced some Sri Lankan companies to implement IR. The role played by the annual report design companies in adoption decisions has not been mentioned in the extant literature on isomorphism. Although there is no legal requirement to produce IARs in Sri Lanka, Sri Lankan companies were persuaded to adopt IR in line with other local and global organisations that are embracing IR due to the influence of the IIRC. All three forms of isomorphism were observed and noted through the analysis of interview findings. These isomorphisms are seen to act individually and collectively to influence the decision by sample companies to adopt IR.

2.9 Limitations One possible limitation of this research is the small number of companies included in the study and its single-country focus. However, the study provides unique insights and contributions to theory, knowledge, practice and policymakers. Though the study was conducted in a developing country, it has some broader implications for other settings as well, because it can be argued that these Sri Lankan listed company managers face similar influences and conditions to those in other jurisdictions, as they were fully aware of the challenges in IR implementation and the practical issues related to IR. A further limitation of this research study is that broader groups of stakeholders’ viewpoints were not explored. The selected interviewees were managers, the majority of whom were ICASL members. This may have resulted in a certain bias in the findings with regard to the “best IR practices” which may have been significantly influenced by the practices of the ICASL. This gives rise to the implication that the early adoption of IR by Sri Lankan companies may have been more rhetorical in nature (Gunarathne and Senaratne 2017), rather than having any meaningful impact on integrated thinking related to the manner in which organisations were doing business to create value for themselves and their stakeholders.

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Appendix 2.1: Profile of Interviewees2

No

Interview code

Interview date

Interviewee’s position

Industry

1

A M01

29/01/2016

Manager—Finance

Insurance

2

A M02

7/02/2016

Chief Manager—Finance

Insurance

3

A E01

16/02/2016

Executive

Insurance

4

A E02

16/02/2016

Executive

Insurance

5

A M03

3/03/2016

Assistant Accountant

Insurance

6

A M04

3/03/2016

Chief Operating Officer

Insurance

7

B M01

8/02/2016

Director/CFO

Finance

8

B M02

9/02/2016

DGM—Finance

Finance

9

B M03

9/02/2016

Manager—Treasury

Finance

10

B M04

10/02/2016

Head—Risk Management

Finance

11

B M05

15/02/2016

AGM—Finance

Finance

12

B M06

16/02/2016

Head—Sustainability

Finance

13

C M01

17/02/2016

Director/CFO

Motors

14

C E01

11/03/2016

Assistant Manager

Motors

15

C M02

16/03/2016

GM—HumanResources

Motors

16

C M03

6/04/2016

Accountant

Motors

17

D M01

17/03/2016

Manager—Finance

Insurance

18

D M02

18/03/2016

CFO

Insurance

19

D E02

30/03/2016

Assistant Accountant

Insurance

20

D M03

1/04/2016

Head—Risk Management

Insurance

21

D E03

1/04/2016

Executive—Finance

Insurance

22

E M01

23/03/2016

Group Finance Director

Diversified Holdings

23

E E01

7/04/2016

Assistant Manager

Diversified Holdings

24

F M01

14/10/2015

Manager—Finance

Banking

25

F M02

15/10/2015

AGM—Finance

Banking

26

F M03

21/10/2015

Manager—FTP Unit

Banking

27

F M05

30/10/2015

Manager—Finance

Banking

28

F M04

22/10/2015

Head—Finance

Banking

29

F M06

24/11/2015

Chief Manager—Operations

Banking

30

F M07

27/11/2015

Chief RiskOfficer

Banking

31

F M08

10/12/2015

DGM—Marketing

Banking (continued)

2

14 interviewees were selected from one of the sample companies (F) by considering the special circumstances of the company. This company had adopted IR in 2012 and practice it for two years. However, the company stopped practicing IR in 2014 and again started the traditional reporting practice. Again, after two years in 2016, the company re-implemented IR into the company.

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(continued) No

Interview code

Interview date

Interviewee’s position

Industry

32

F M09

21/01/2016

AGM—Compliance

Banking

33

F M10

22/01/2016

DGM—HumanResources

Banking

34

F M11

22/01/2016

DGM—Management Audit

Banking

35

F M12

26/01/2016

Manager—Risk Management

Banking

36

F M13

26/01/2016

Manager—Risk Management

Banking

37

F M14

26/01/2016

Manager—Risk Management

Banking

38

G M01

5/04/2016

Senior Manager—Finance

Banking

39

G M02

5/04/2016

CFO

Banking

40

H E01

1/03/2016

Executive—Administration

Banking

41

H E02

1/03/2016

Assistant Manager—Finance

Banking

42

H E03

14/03/2016

Assistant Manager—Finance

Banking

43

H E04

17/03/2016

Executive

Banking

44

I E01

25/02/2016

Assistant Manager—Finance

Finance

45

I E02

25/02/2016

Assistant Manager—CRM

Finance

46

I M01

25/02/2016

Manager—Finance

Finance

47

I M02

25/02/2016

Senior Manager—Finance

Finance

48

I E03

26/02/2016

Junior Executive—Finance

Finance

49

I E04

26/02/2016

Deputy Manager—Finance

Finance

50

I E05

26/02/2016

Executive—Finance

Finance

51

I M03

26/02/2016

Senior Manager

Finance

52

J E01

3/03/2016

Assistant Manager—Finance

Insurance

53

J M02

24/03/2016

Manager—Finance

Insurance

54

K E01

7/04/2016

Senior Assistant Manager

Telecommunication

55

L M01

18/02/2016

GM—Finance

Finance

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A. M. I. Lakshan is a lecturer at the School of Applied Business, Unitec Institute of Technology, New Zealand, and the Department of Accountancy, Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka. Lakshan is a member of CPA Australia. Lakshan’s teaching focuses on accounting, management accounting and auditing course units for undergraduate and postgraduate programmes. His research interests include integrated reporting, sustainability reporting, corporate governance, and non-financial reporting. Mary Low is an Associate Professor and the Accounting Subject Convenor in the School of Accounting, Finance and Economics at the University of Waikato. Mary is a Fellow Chartered Accountant member of Chartered Accountants Australia and New Zealand (CAANZ) and a Fellow CPA Australia member. Mary’s current teaching focuses on postgraduate programme levels. Her research interests include financial reporting issues, corporate governance, sustainability accounting, ethical issues in accounting and accounting education. Charl de Villiers is Professor of Accounting at The University of Auckland, New Zealand. He is internationally known for his Sustainability Accounting and Integrated Reporting research and expertise. Charl is also an adjunct professor at the University of Cape Town, University of Pretoria, and University of the Western Cape, in South Africa; and Universiti Teknologi Mara, in Malaysia. Charl has over 400 research-based publications and presentations, including more than 100 articles in refereed journals, and two Routledge published edited books. As an indication of impact, his research has been cited more than 10,000 times and his h-index is over 50, i.e. 50 + of his research publications have been cited 50 + times. A Stanford University study ranks Charl 49th among the 4377 accounting academics globally, based on citations during 2021.

Chapter 3

Institutional Pressures and Integrated Reporting Adoption in Sri Lanka Nuradhi Kalpani Jayasiri

Abstract This chapter addresses the question as to why public listed companies are driven to the voluntary adoption of integrated reporting in Sri Lanka. The analysis was carried out using the institutional theoretical lens, with specific reference to the concept of institutional isomorphism in order to identify the coercive, mimetic and normative pressures that are the external driving forces for the adoption of IR. The study involved in-depth semi-structured interviews with key IR stakeholders in Sri Lanka, including early adopters, timely and late adopters, professional associations, accounting firms, annual report producing companies, a consultant and an academic. All three types of isomorphic forces were found to collectively influence decisions to adopt IR by the sample companies. Coercive isomorphism was identified as coming about through pressure from the International Integrated Reporting Council (IIRC), influence from the organisational adoption of sustainability reporting practices, influence from the parent company and pressure from stakeholders. The sample companies demonstrated experiences of mimetic isomorphism from competitive pressure, global trends and corporate recognition and the bandwagon effect through the role model or leading organisations in IR (best practice organisations) since practitioners considered IR as the best practice for corporate reporting. The interviewees appeared to be pressured by normative isomorphism through the influence of auditors and professional organisations. Annual report producing companies which provide supporting services to public listed companies (PLCs) in their annual report preparation process, were also found to be a source of normative pressure acting on Sri Lankan companies to adopt IR. Keywords Coercive pressures · Institutional theory · Integrated reporting · Isomorphism · Mimetic pressures · Normative pressures · Sri Lanka

N. K. Jayasiri (B) Department of Accounting, Faculty of Management and Finance, University of Colombo, Colombo, Sri Lanka e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_3

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3.1 Introduction The aim of this chapter is to address why PLCs in Sri Lanka are motivated to adopt IR. In so doing, it unveils a research gap identified by Jensen and Berg (2012), by answering the question as to what motivates or what drives companies to voluntarily publish integrated reports in Sri Lanka. In this way, the present study offers a platform to address certain underexplored areas in the IR literature by developing an understanding of the impact of this new reporting mechanism by exploring why exactly IR is adopted in Sri Lanka. We were motivated to carry out the study in Sri Lanka because of the existence of an Integrated Reporting Council in Sri Lanka (IRCSL), which is Asia’s first such council established under the patronage of the IIRC, the global coalition for IR that promotes communication on the value creation story of businesses as the next step in the evolution of corporate reporting. Another reason for selecting Sri Lanka was because of a Sri Lankan listed company which was one of the pilot programme participants that helped the IIRC to draw up the International Integrated Reporting Framework in December 2013 and that still plays an influential advocacy role as part of the IIRC’s International Business Network. This company continues to enjoy great success through IR by becoming the winner of many IR awards in Sri Lanka. This study was interested in exploring whether IR helps other Sri Lankan companies to make Sri Lanka a hot spot for IR by being vehicles for the improvement of the quality of corporate reporting. This study bridges a theoretical gap in the existing body of the IR literature (Adams 2015; De Villiers et al. 2014; Jensen and Berg 2012) by exploring why the selected organisations have been driven towards the adoption of IR and also by highlighting how the institutional context of the corporation has an impact on the adoption of IR through the application of institutional theory. In the present study, it appeared that the existing literature has addressed the ‘whether’, ‘what’ and ‘how’ aspects of IR practice (Haji and Anifowose 2016) and that what the IR literature lacks is the ‘why’ aspect of IR adoption. Thus, the present study closes a research gap by addressing the research question as to why listed companies are motivated to voluntarily publish integrated reports in Sri Lanka. The theoretical contributions of this study also extend the application of institutional theory by highlighting the manner in which homogeneous factors lead IR adoption in Sri Lanka, and these factors are explained as external drivers acting through three isomorphic forces: coercive, mimetic and normative. As practical contributions, findings of the present study provide potential insights to other organisations who seek to undertake or who have already adopted IR by revealing what necessarily encourages more companies to adopt IR. Hence, this chapter contributes to one of the key objectives of this book, which is to present and discuss new developments in IR practice in South Asia, by analysing the relationship between institutional pressures and IR adoption by providing examples of sustainable business cases in Sri Lanka The structure of this chapter is as follows. Section 3.2 provides an overview of the available literature, and Sect. 3.3 provides an overall understanding of the theoretical

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perspective used in the study and explains the research method adopted. Section 3.4 presents the key findings and discussion while Sect. 3.5 concludes the chapter.

3.2 Literature Review IR is a new and emerging approach to reporting (Adams and Simnett 2011; Lee and Yeo 2016), and it is gaining momentum in both the developed and developing countries due to its potential to change corporate thinking. Therefore, it leads to an integration of sustainable impacts into corporate strategic planning and decisionmaking (Adams 2015; Gunarathne and Senaratne 2017; Juma et al. 2018; Robertson and Samy 2015). However, a dearth of research on IR is found in developing country contexts and scholars have evidenced that IR in developing countries has not yet been widely embraced by businesses, regulators and governments (Adegboyegun et al. 2020; Engelbrecht et al. 2018; Juma et al. 2018; Lipunga 2015), while in the developed countries IR has rapidly gained considerable prominence since the formation of the IIRC in 2010 (Setia et al. 2015). Among the studies that have focused on motivating factors for IR, scholars used explanatory factors, such as industry concentration, size, business sector, profitability, growth opportunities on production and disclosure of an integrated report (Buitendag et al. 2017; Frias-Aceituno et al. 2014). Frias-Aceituno et al. (2013a), Vitolla et al. (2020a) and Vitolla et al. (2020b) examined the role played by diverse characteristics in defining the board, with respect to the voluntary development of an integrated report. The influence of the legal (Frías-Aceituno et al. 2013b) and cultural systems (Garcıa-Sanchez et al. 2013) that characterise the country of origin of the company that adopts IR have also been explored in the IR literature. Results revealed that companies located in civil law countries, in those countries where indices of law and order are high (Frías-Aceituno et al. 2013b) and when companies are located in societies with strong collectivist and feminist values, they are more likely to publish integrated reports (Garcia-Sanchez et al. 2013). To explore the main determinants of IR, as opposed to traditional sustainability reporting, Jensen and Berg (2012) conducted empirical studies to examine the applicability of institutional theory to explain differences and similarities in traditional sustainability reporting (SR) and IR, and to measure the impact of identified variables and mechanisms through which institutional pressures lead to the adoption of IR versus traditional sustainability reporting. Results showed that IR correlates with the financial, economic, educational, labour and cultural determinants of a country, while political factors revealed no significant impact. Extending the empirical study of Jensen and Berg (2012), Ioana and Adriana (2013) conducted research with the objective of demonstrating the impact of political pressure over corporate reporting and to substantiate the impact of economic and cultural factors on corporate reporting. Their argument was based on institutional theory and the determinants of voluntary

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adoption of IR systems that emerged from this study were political, cultural and economic factors, following Jensen and Berg (2012)’s theoretical perspective. According to institutional theory, organisations can be described using sociological perspectives that reveal an integral relationship between patterns of institutional norms and behaviour and have embedded a comprehensive system of political, financial educational, cultural and economic institutions that exert institutional pressure on them (Jensen and berg 2012; Matten and Moon 2008; Wild and van Staden 2013). The main argument of Matten and Moon (2008) for new institutionalism was that beyond the impact of national institutional factors, such as political, financial, educational, labour and cultural systems, the changes in organisational processes and systems and changes in the nature of firms when they become institutionalised happen because they are considered legitimate (Jensen and berg 2012; Matten and Moon 2008). The same argument was affirmed by Wild and van Staden (2013), who suggest that individual firms are influenced by the rules, norms and belief systems prevalent within the structural parameters of their particular operating environment, are motivated to adopt organisationally advantageous behaviours and seek to optimise benefits to the firm within this specific environment (DiMaggio and Powell 1983). These norms and behaviours lead organisations to a condition of institutional isomorphism (similarity in form, both structurally and procedurally) which is considered legitimate (Wild and van Staden 2013).

3.3 Methodology 3.3.1 Theoretical Framework The adoption and diffusion of organisational practices are often analysed using institutional theory (DiMaggio and Powell 1983; Jensen and Berg 2012). It is evident that institutional theory has been widely used among scholars as a theoretical base to address IR (including, Adams et al. 2016; Adhariani and De Villiers 2018; Atkins et al. 2015; Baldo 2017; Briem and Wald 2018; Frías-Aceituno et al. 2013b; GarcíaSánchez et al. 2018; Gibassier et al. 2019; Jensen and Berg 2012; Rivera-Arrubla, Zorio-Grima, and García-Benau 2017; Vaz et al. 2016; Velte and Stawinoga 2017; Wild and van Staden 2013; Zinsou 2018). For example, the research purpose of Higgins, Stubbs and Love (2014) was to explore how managers of early adopting Australian firms contribute to the institutionalisation of IR, and here, they argue that the managers of these firms are important in the institutionalisation process, because they engage in important institutional work. According to many IR researchers, new institutionalism (neo-institutional theory) addresses the question of homogenisation in the institutionalisation process in organisations and this new institutional isomorphism is gained through coercive isomorphism, mimetic conduct or processes and normative pressures (Briem and Wald 2018; Jensen and Berg 2012; Wild and van Staden 2013).

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Organizational adoption of IR

Coercive pressure

Mimetic pressure

Normative pressure

Institutional isomorphisms Fig. 3.1 Institutional context of the organisation. Source Author, based on DiMaggio and Powell (1983); Jensen and Berg (2012); Matten and Moon (2008)

However, the impact of these three isomorphisms on the adoption of IR has been found to be negligible in both the studies of Jensen and Berg (2012) and Wild and van Staden (2013), due to three reasons; the absence of even a voluntarily usable framework prior to the IIRC International IR Framework pronouncement in 2013 December; the newness of the IR concept, and availability of only a small sample of IR adopters; and the absence of pressure from educational and professional authorities in legitimating IR as an organisational practice. Yet, drawing from institutional theory, the present study extends this prior research to explain the impact of coercive, mimetic and normative elements (see Fig. 3.1) which serves as three vital pillars of institutions (regulative, cultural-cognitive and normative) (Deegan 2014) in exploring the external drivers of IR in Sri Lanka. According to Scott (2008), the definition of institutions is provided in terms of three elements, three vital pillars of institutions, namely regulative, cultural-cognitive and normative) (Deegan 2014). The regulative pillar involves rules, laws and associated sanctions, and this pillar is maintained through various coercive mechanisms, many of which are endorsed by the government or powerful constituents that organisations are dependent upon. As Scott (2008) identified, the second pillar, the culturalcognitive pillar, is the major distinguishing feature of institutional theory. This consists of taken-for-granted symbolic systems and meanings. This pillar is maintained by certain mimetic mechanisms in which organisations tend to imitate (or copy) others. The normative pillar incorporates values and norms reflecting certain social obligations (socially accepted processes or structures which reveal the right or moral ways of doing things) or expectations (right or proper ways to do things), and this pillar is maintained through processes such as accreditations, professional endorsements and formal education. In exploring what makes IR institutionalised in the selected organisations in Sri Lanka, the present study draws on institutional theory as the theoretical basis on which to explain the adoption of IR disclosure practices. Thus, the notion of isomorphism better explains why the selected Sri Lankan organisations have adopted IR disclosure practices in communicating their unique value creation story. As part of this task, this study first uncovers ‘why’ the selected organisations have adopted IR

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as a new corporate reporting model, drawing from regulative or coercive isomorphism. The study also investigates whether the selected companies tend to imitate other organisations’ best practices as a motive to adopt IR, as they are influenced by mimetic isomorphism. Furthermore, this study also looks into whether the selected organisations’ IR institutionalisation process has been influenced by professional endorsements, reflected by normative isomorphism. Therefore, drawing from institutional theory, the present study extends prior research to explain the impact of coercive, mimetic and normative elements in the voluntary IR disclosure practices of the selected organisations.

3.3.2 Method According to the key objective of this study, it undertakes a qualitative approach to exploring the motives behind the voluntarily adoption of IR by the sample of companies in their journey with IR. The primary data collection method of this study was semi-structured interviews. Doody and Noonan (2013) have claimed that interviews are particularly useful in uncovering the stories behind participants’ experiences, and researchers can follow a line of questions to gain information about a topic. The interview method used also addresses one of the future research suggestions by Jensen and Berg (2012), that is, to use the primary data in order to consider companies’ motives for adopting IR. The sample population comprised a total number of 295 listed companies on the Colombo Stock Exchange (CSE), Sri Lanka, representing 20 business sectors as of January 31, 2018 (CSE 2019). Purposive sampling was considered as the primary sampling method. However, in some circumstances, snowball sampling was also used in contacting the interviewees. When preparing the list of potential interviewees, this study considered the chief financial officers who are responsible for the corporate reporting agenda in these Sri Lankan PLCs and also considered the contact person stated in the annual/integrated reports detailed as the person who is in charge of any questions or inquiries regarding that particular annual/integrated report. This study carried out thirty-seven (37) interviews based on a participant triangulation, including 22 interviews from 14 timely adopters of IR, five from three late adopters of IR, one from a public sector company and nine other interviews representing two professional institutions, two auditing companies, two annual report producing companies, one annual report writer in a consultancy company and one local academic (see Appendix 3.1). The IR framework was launched in 2014. Therefore, companies that adopted IR in 2014 have been named ‘timely adopters’, whereas companies which adopted IR before 2014 have been identified as ‘early adopters’. The companies which adopted IR after 2014 were classed together as ‘late adopters’. All the interviews were conducted in person at the respective participant’s office premises during the period from February to July 2018 in Sri Lanka. The duration of most interviews was between 1 and 2 h. The total interviewing time for the 37 interviews was 1748 min (29 h and 8 min). Qualitative interview data were organised

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using NVivo software and analysed using thematic content analysis (as Argento et al. 2018; Atkins and Maroun 2015; Feng et al. 2017; Stubbs and Higgins 2018; Stubbs et al. 2014) to focus on key themes in order to gain an in-depth understanding of the drivers or motives for the adoption of IR practice in the selected organisations. Institutional theory provides the broad theoretical basis for this thematic content analysis, while also providing the theoretical lens used to view the manner in which IR has been institutionalised in the selected companies included in the IR sample. The present study uses both open codes, which were drawn based on the 62 interview transcript data, as well as a priori codes, where the codes were created beforehand based on the key concepts of IR and the key facets of institutional theory used in the study.

3.4 Findings and Discussion The findings reveal that there are several external factors which persuaded Sri Lankan companies to voluntarily adopt IR. Influence from the IIRC or Integrated Reporting Council of Sri Lanka (IRCSL), influence exerted through organisational adoption of sustainability reporting, influence from the parent company, global trends, corporate image and recognition, influence from stakeholders, IR awards, competition, influence from auditors, influence from professional organisations and influence from annual report producing companies were identified as external drivers for the adoption of IR in Sri Lanka. The concept that best captures the process of homogenisation is isomorphism (DiMaggio and Powell 1983). The concept of institutional isomorphism is used as a tool in this study to understand the external drivers which lead the sample companies to adopt IR through three mechanisms: coercive isomorphism; mimetic isomorphism; and normative isomorphism.

3.4.1 Coercive Isomorphism Coercive isomorphism results from both formal and informal pressures exerted on organisations by other organisations upon which they are dependent (DiMaggio and Powell 1983). De Maggio and Powell further claimed that such pressures may be felt as force, as persuasion, or as invitations to join in collusion. Thus, the influence of IIRC or IRCSL, influence from the parent company and influence from stakeholders have been categorised as coercive pressures which persuaded the relevant company to adopt IR in Sri Lanka.

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3.4.1.1

Influence from the IIRC

The IIRC, as the global regulatory body and as the global coalition for IR, promotes communication about value creation as the next step in the evolution of corporate reporting and exerts coercive pressure by encouraging organisations around the world to adopt IR, using the established IIRC Framework. Of the 100 (approximately) participants who participated in the IIRC pilot programme in 2011, there was only one Sri Lankan company which used the draft framework to create its own integrated report and, based on its experience, provided feedback for releasing the framework. One of the interviewees from that company had this to say: Actually, looking back, we have benefited tremendously from being a pilot programme company. We have been thought leaders, and it has given us a lot of opportunities. But going forward, I think we want to take the same momentum forward, at least for a few more years, until we are completely on our own. By participating in the IIRC pilot programme, conferences, and webinars and once you have listened to what is being discussed, it triggers a lot of thought processes. They gave us new ideas, parts to think about and so on. And we have a lot of technical material that we get from the IIRC, which we really appreciate. So there are a lot of benefits (Interviewee Motor1-1).

This shows how the IIRC inspires global organisations to move towards IR through coercive isomorphism exerted through their pilot programme and other such initiatives around the world. Based on the interview data, no pressure is identified from the IRCSL, though it has been established as the first Integrated Reporting Council in all of Asia. Under the patronage, guidance and support of the IIRC, the IRCSL was launched by the ICASL.

3.4.1.2

Influence of IIRC Support Organisations

As coercive pressures arise from the IIRC as a regulatory force, various other organisations that support the IIRC (such as the GRI) are also considered sources of coercive pressures. Some interviewees stated that being on sustainability reporting (SR) practices motivated them to go for IR in Sri Lanka: First initiation was somewhere in 2006, where I wrote something about sustainability (Interviewee Bank1-1). It began worldwide, then everybody talks about sustainability and the triple bottom line and so on. So, that’s the start (Interviewee Telecommunications1-5). I think companies did good SR and went very well into integrated reporting (Interviewee Annual report writer-1).

A similar study done in Sri Lanka claimed that the concept of IR was not a stranger to those companies due to the availability of SR and the general awareness among companies of the importance of sustainability reporting (Gunarathne and Senaratne 2017).

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One participant shared his view on the overall growing trend in IR by Sri Lankan companies: In Sri Lanka, it first started with SR. We have matured fairly in all these sustainability reports… This maturity I saw in SR as well (Interviewee Motor1-1).

This was further described in Stubbs and Higgins (2014) who suggested that most organisations have already had some form of sustainability committees in place when starting to follow SR or IR. Therefore, it is evident that coercive pressure was exerted through the IIRC and other supporting organisations, such as the GRI, on sample companies’ decision to step into IR in Sri Lanka.

3.4.1.3

Influence from the Parent Company

In a conglomerate or a diversified holding company, subsidiaries adopt accounting practices, performance evaluations, and budgetary plans that are compatible with the policies of the parent corporation. In this way, the parent company coerces the homogenisation of organisational models through direct authority relationships (DiMaggio and Powell 1983). Interviewees from two plantation companies which are grouped under a diversified holding shared the fact that their company’s move towards IR is due to the influence of the parent company. In 2013, long ago, our group [DH1] wanted to go for IR and a part of that came to us also (Interviewee PL1-2). Once DH1 moved into IR, if you take sustainability or anything we have to keep reporting it in every month of achievements, goals or targets or whatever, to align with this IR (Interviewee PL1-1). One is it’s a requirement and expectation of the listed companies in the conglomerates. Like DH1, they expect us to be relevant and up to date with the latest reporting styles. That is how we got into IR (Interviewee PL1and2-1).

This way, large corporations can have a similar impact on their subsidiaries (DiMaggio and Powell 1983). Moreover, pressure from the parent (group) to follow the IR mechanism is also identified in Gunarathne and Senaratne (2017) as another instance where this coercive pressure is exerted in the adoption of IR by companies in Sri Lanka.

3.4.1.4

Influence from Stakeholders

Another coercive force that encourages the voluntary adoption of IR is pressure from investors (Eccles and Serafeim 2011). From the point of view of two participants, one motive behind IR adoption is investor pressure:

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N. K. Jayasiri When we discuss with our foreign investors and when we discuss with our financial institutions, they always ask for a lot of information. And that time we did not have that information readily available. Information from the investors’ perspective is there in IR. Then, we decided that we should go for IR (Interviewee Power/PW1-1). As a reputed company in the country and as the pioneer of the construction industry, we thought to have an integrated report for all our stakeholders. That is why we decided to have IR (Interviewee Constructions/CN1-1).

Although it seems that a wider group of stakeholders can influence companies to adopt IR (Eccles and Serafeim 2011), through interview data it appeared that only shareholders (investors) and institutional investors actually apply pressure on two companies (PW1 and CN1) to board IR. That means that only two interviewees (out of 62) indicated that their institutional practices have changed in response to pressure from their shareholders and institutional investors upon whom those organisations are dependent. Related to stakeholder pressure, the above interviewees further stated that: Actually, earlier they asked for a lot of additional information, and after that we have now experienced that we do not have many inquiries (Interviewee Constructions/CN1-1). Earlier, they requested a lot of documents, financial related documents, industrial history and a lot of things. Nowadays, all the information is there in our annual reports and they can easily refer to it and they are not going to ask for additional information (Interviewee Constructions/CN1-2). ..The information they ask for is certainly in our reports (Interviewee Power/PW1-1).

Similar thoughts were shared by one of the ARPC participants: I guess something that triggered this is also because the investors started looking at companies differently (Interviewee/ARPC3-1).

However, after the adoption of IR, IR has been a benefit for the organisations to provide the information required by diverse stakeholders, while IR also helped them to gain new investments. For example, some study participants shared the following insights: IR is not just a document for shareholders, we gain a lot of advantages when we go into business ties with partners (Interviewee Telecommunications1-5). When you spell out the strategy, investors will gain confidence that they are following the right strategy, otherwise we will not be able to draw in any investments. Because any knowledgeable investor will look at that and understand what our strengths are (Interviewee Plantaions3-1).

Although there is no legal requirement to produce integrated reports in Sri Lanka, coercive isomorphism acts through the influence of the IIRC and IR frameworks, influence of the organisational adoption of SR (IIRC supporting organisations), influence of the parent company and influence from shareholders and institutional investors, as part of the motives behind IR adoption among sample companies in Sri Lanka. These findings are contrary to what Jensen and Berg (2012) found, as owing to the newness of IR, the impact of related rules, norms or laws was extraordinarily low.

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During the period of their study, there was not even a voluntarily useable framework. Thus, the impact of coercive isomorphism on IR was considered to be negligible in their study. On the other hand, the present study results are also in contrast to that of Gunarathne and Senaratne (2017) who stated that the impact of forced selection from a regulatory perspective of IR is not yet important. However, the present findings are in conformity with Gunarathne and Senaratne (2017), where they claimed that forced selection could stem from pressure from the parent company.

3.4.2 Mimetic Isomorphism In contrast to coercive isomorphism, another important external force impacting the voluntary adoption of IR by Sri Lankan listed companies is mimicking other organisations because they see the benefits in doing so (DiMaggio and Powell 1983; Eccles and Serafeim 2011). Competitive pressure, or the bandwagon effect, which means looking at what the IR role model or IR leading companies do, global trends, and the corporate image and recognition are also suggested to exert mimetic pressure on the selected companies in Sri Lanka to adopt IR. Mimetic isomorphism in organisational theory refers to the tendency of an organisation to imitate another organisation’s structure because of the belief that the structure of the other organisation is beneficial (DiMaggio and Powell 1983).

3.4.2.1

Pressure from Competition

Scholars have claimed that mimetic isomorphism arises from competition (Jensen and Berg 2012; McNally et al. 2017). Six interviewees (from five IR adopters and one audit company) mentioned competition or competitive pressure. For example, Why did this IR come here, because of the competition? (Interviewee Bank1-1). One of the key drivers would be the change in the macro environment. Because we could see our leading listed companies were taking the same path. So why not we?. That is one of the reasons we went for IR (Interviewee Healthcare1-1). Whether you are revealing it or not, the pressures are there from every aspect. It could be market pressure, it could be regulators, it could be new entrants, new products and services, global products that are pressurising local markets. So they are eroding our international revenue, so whether we like it or not, pressure will come. While being in the competition and absorbing all the pressures, world trends are being followed, and best practices are being followed (Interviewee Telecommunications1-5). We are among the top 3 or 4. So we improved our quality and we have adopted so many managerial practices like total quality management, then benchmarking, then stakeholder engagement and a lot of things, and somehow we have been the trendsetters in the market. We do a lot of competitor analysis, then we compare ourselves against our competitors. We compare ourselves with the local plantation companies and the foreign plantation companies (Interviewee Plantaions3-1).

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The auditor’s view was also the same on competition: We have done a plantation company audit this year, then what happens next year sometimes, one of their competitors will come to us and say we want to get an assurance. That’s how our business increases. Until we start one of the sectors, it will not happen, once somebody starts, their competitors also want to get it (Interviewee Auditor/AU1-1).

An important finding is that several interviewees indicated that their institutional practices have changed in response to pressure from competition, especially because their former employer was an early adopter of IR. DiMaggio and Powell (1983) claimed that this copying may become diffused unintentionally, indirectly, through employee transfer or turnover. It was also noted that all these examples are from the same sector, diversified holdings (DH). I was at DH2 earlier and I was doing annual reports there for three years and I know what the differences there are and what the differences here are (Interviewee MT1-2). Now, after the new GM [general manager] came, he came from DH4, so he is used to IR, and he said let’s get together and do things (Interviewee HT2-1). I was working for DH1 before I came here. IR, we were doing as a practice there (Interviewee DH3-3).

3.4.2.2

Influence of Best Practices

Scholars have claimed that mimetic isomorphism arises from copying best practices or the bandwagon impact (Eccles and Serafeim 2011; Jensen and Berg 2012; Matten and Moon 2008). Two interviewees from two professional accounting bodies in Sri Lanka supported this view, as follows: IR is like the trend in accounting that people want to get into. Like a bandwagon. But they do not really know what they are really doing or if it is actually leading to integrated thinking. And the other thing is, let’s say one entire industry, like the banking finance and insurance industry. Let’s say they are all doing integrated reports, their corporate reports are following IR. So people want to join on that bandwagon, it’s called mimetic isomorphism, right? So that is what we normally see. So these are the kinds of trends in IR (Interviewee PAB2-1). When leading companies are doing that then everybody wants to do that. So that is also a good push. Competition is driving it (Interviewee PAO1-1).

A Sri Lankan University academic (AICASL) shared a similar view: Other one is trend. Those who are doing IR in the industry, others are doing the same. What is practicing in the industry, others also doing that and they will act according to that (Interviewee AICASL2).

Some IR adopters also mentioned that they are apt to follow what others do in the market: We can learn from others also, because when this is done, if something we have not seen, we can see from others (Interviewee Bank3-2).

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First, we see the gaps between the sector leaders as well as industry leaders. When we compare our gaps, we see where we can improve (Interviewee Plantations1-2). We knew that these things were taking place in the market and that other companies were adopting this (Interviewee Telecommunications1-1). We developed the report from what we saw in the market (Interviewee Power1-1). I’m also copying some information from good reporters (Interviewee Power1-2). We wanted to report information in the annual report in a kind of format which was being practised in the industry (Interviewee Power1-3).

It is clear from the above that some companies tend to ‘look into what others do’ for two reasons. One is to emulate and learn the best practices of successful organisations to be in competition with them, and the second is to copy others just for the sake of reporting something. The first reason is discussed with relation to ‘role model or leading companies in IR’ (Eccles and Serafeim 2011) in Sri Lanka, where some companies copy the best practices of the role models or leaders in IR to overcome the competition. In this way, the best practices of leading organisations or the role model organisations that practice IR are identified as a key influence on IR adoption in Sri Lanka. One of these leaders in IR is the only Sri Lankan company that took part in the IIRC pilot programme, which is identified here as MT1. Following this, the other companies copied or improved upon IR leaders’ practices in order to adopt IR as one means to achieve legitimacy. Some of the interviewees provided evidence for the bandwagon effect due to role model organisations in IR, as follows: MT1 was really a good report, I was following that and a lot of my things and thinking was based on MT1. I was trying to structure the report that way (Interviewee Plantaions1-1). There are companies in SL who come out with new things. MT1, they came out with a new reporting format or they come out with international reporting frameworks, whatever, and it has become the standard across SL (Interviewee Diversified holding1-1). If you look at MT1 they are the number one in Sri Lanka in adopting IR in a full IR module, to align with the IR council IIRC. That is why everyone has benchmarked MT1 (Diversified holding3-1). MT1 has been doing a very good INR. They always win the award (Interviewee Telecommunications1-1).

From the points of view of the two annual report producing companies, similar thoughts were shared: Companies like MT1 have been tested and little by little other companies started taking on IR (Interviewee ARPC3-1). They [MT1] were part of the pilot project, then when they came out with their first report and then if you see our client profile also like DH2, DH4, DH1 and all those kinds of clients, I think I wanted to do it as soon as MT1 came out with their report. Also B8, they wanted to try and carry out integrated reporting (ARPC2-2).

In the literature, it is stated that in organisations with increased uncertainty and increasingly complex technologies, managers tend to consider practices as legitimate if they are regarded as ‘best practices’ in their organisational field (Jensen and Berg 2012; Matten and Moon 2008).

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The second reason why companies look at what others do is because they want to copy others merely to report something without having a proper understanding of what they do. This behaviour happens primarily when an organisation’s goals or means of achieving these goals are unclear (DiMaggio and Powell 1983). In this case, mimicking another organisation perceived as being legitimate becomes a ‘safe’ way to proceed. When goals are ambiguous, or when the environment creates symbolic uncertainty, organisations may model themselves on other prestigious organisations (DiMaggio and Powell 1983). It is noted that the majority who took part in the interviews from the three annual report producing companies affirmed the above: They’ll look at somebody else’s report and say we want that. They may not have the processes, models or anything, but they want to include this value creation chart and that model and everything (ARPC2-1). They look at the report that has won, if it has more colours they say it’s the colour that we have to meet. But they do not look at the content (ARPC2-2). There are times you might see some reports are more alike, that’s because we all get influenced by each other, the chances that you see resemblance is very high. You are doing it because everyone is doing it (ARPC3-1).

The term modelling, as used in DiMaggio and Powell (1983), is a response to uncertainty. The modelled organisation may be unaware of the modelling or may have no desire to be copied; it merely serves as a convenient source of practices that the borrowing organisation may use. All these findings confirm the presence of mimetic isomorphism in Sri Lanka towards IR adoption through pressure from competition and the influence of best practices or the bandwagon effect. This influence from mimetic pressures in Sri Lanka is contrary to what is observed in Jensen and Berg (2012) due to the fact that IR was very new, and the number of organisations that had adopted it was small in number to cause such a bandwagon effect during their study. Nevertheless, recent observations in Sri Lanka, in Gunarathne and Senaratne (2017), also found that the actions of leading successful competitors have prompted others to emulate these best practices owing to mimetic pressures, which are in conformity with the present study’s results.

3.4.2.3

Global Trends and the Corporate Image

Interviewees from two early adopters (diversified holdings/DH1 and plantations/ PL1) and one timely adopter (healthcare/HC1) mentioned ‘global trends’ as a driving force for them to adopt IR. Every year we look at the new requirements and trends and we follow those in reporting (DH1-3). We need to be with what is with the market also. And therefore, we need to give a very good annual report to the shareholders and investors. For that purpose only, we went in for IR (DH1-1).

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We have to go with our country’s trends (PL1-2) Motivation was because in terms of size, our image, status quo and all of that, we had to go with the trend, and do something new (PL1-1). We have seen the world moving in this direction… sustainability, the environment, all these were playing a key role. So that was one of the key moves. When the world is rolling, we have to be with it. (HC1-1).

One of the participants from the audit companies also added that: These days IR is the trend. That’s what most of our clients are reporting on (interviewee AU1-1).

‘The corporate image and recognition’ can also be linked with certain global trends which in turn would exert coercive pressure on IR adopters. Mimetic conduct is also said to be driven by the need to conform to wider industrial norms regarded as best practices in order to avoid reputational risk (DiMaggio and Powell 1983). One of the interviewees from a late adopter and an interviewee from one of the annual report producing companies shared the following information: For us we are one of the market capitals in the country, sometimes we go as third or fourth in the country. And we have 35-36% of our fund managers residing outside the country as well. Then, to give you some kind of idea of how we create value through this kind of concept, that is by having a good amount of exposure and a good amount of understanding among the stakeholders. That is one of the reasons for us to come up with this reporting, despite the influence of the ICASL also (Bank3-1) Some wanted to look good in the public eye (ARPC3-1)

Presenting similar results, Steyn (2014), in the South African context, finds that the primary motive to adopt IR is to enhance corporate ‘reputation’ and organisational legitimacy, while Stubbs and Higgins (2014), in Australia, share similar observations from their interviews with Australian sustainability, finance and communication managers.

3.4.3 Normative Isomorphism The third source of isomorphic organisational change is identified as normative, and stems primarily from professionalisation, which is professional standards or networks (DiMaggio and Powell 1983; Gunarathne and Senaratne 2018). In this chapter, the influence from professional bodies, influence from IR awards, influence from auditors and the pressure from annual report producing companies are considered parts of normative isomorphism.

3.4.3.1

Influence from Professional Institutions

Educational and professional authorities that directly or indirectly set standards for legitimate organisational practices are the source of normative isomorphism in new

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institutionalism (Matten and Moon 2008). Here the role of professional accountancy organisations (such as ICASL, and the Institute of Certified Management Accountants of Sri Lanka and other professional accounting bodies (such as the Chartered Institute of Management Accountants/CIMA, the Association of Chartered Certified Accountants/ACCA), universities, and other educational institutions play an important role. During the diffusion period of IR in Sri Lanka, Gunarathne and Senaratne (2017) noted the very active role of fashion setters in promoting IR. Here, the role of professional accounting bodies and business schools is identified to be important as propagators. The interview data reveal that ICASL was the standard setter for national accounting and auditing standards that influenced many listed companies in Sri Lanka in their adoption of IR. We are following the accounting standard set by the ICASL and they conduct the introduction part as to the meaning of the IR, benefits and the world trend regarding this. Then, we decided to add this new thing (Constructions/CN1-1). Three or four years back, the ICASL introduced separate recognition for IR and thereafter they have been promoting it (Bank/B3-1). We got to know from ICASL about IR. Then we started to follow IR from 2014 (Power/ PW1-1). ICASL was the pioneer in implementing this concept of IR and the CSE also they have a lot of requirements and both institutes had the prime responsibility of implementing this concept (Bank/B2-1).

Of 11 participants who mentioned the influence of ICASL, only one interviewee mentioned the CSE’s role in IR (as in B2-1). Clearly, it is identified that among the three national professional accountancy organisations, ICASL played a huge role in companies’ decision to adopt IR, confirming that normative isomorphic change is driven by pressures brought about by professional organisations. Along with the influence of professional institutions, this study also presents the interview responses shared by interviewees related to the support and facilities provided by professional institutions towards adopting IR and preparing integrated reports, to the selected sample of companies. For example, Professional accounting bodies are doing a lot of awareness building and links leadership to IR which is also really great (PAB2-1). ICASL has a couple of books on IR and online there are materials in the IR website and we read those and try to understand much more and whatever (ARPC3-1). Through the CA, they formed this local council and then they have webinars or something every other week... The Chartered Institute has published a preparers’ guideline also (Insurance1-2). We rigorously put our team into the training programmes on IR conducted by the CSE, ICASL, and various other institutes like the ACCA (Bank2-1).

It appears that Sri Lankan listed companies were getting help via conducting workshops, seminars, webinars and training programmes on IR, publishing IR materials,

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by professional accountancy organisations, such as ICASL, and also by other professional accounting bodies such as the ACCA and CIMA, by the CSE, by other professional standard setters like GRI, and consultancy firms. These findings correspond with the initiatives taken by professional accounting bodies to project IR as a viable reporting practice, as mentioned in Gunarathne and Senaratne (2017). Gunarathne and Senaratne (2017) claimed that almost all professional accounting bodies, both foreign and local, prepared their latest annual reports as integrated reports. Setting an example by preparing their annual reports as integrated reports, a respondent from one of the professional accounting bodies remarked, as follows: And even our annual report, if you look at it, it is presented in an integrated philosophy of IR and INT that is used in terms of developing that as well. So even when you look at the organisation as a whole, we do follow and work according to the principles of IR and integrated thinking. You need to practice what you preach (PAB2-1).

Norms developed during education also enter into organisations. Universities and professional training institutions are important centres for the development of organisational norms among professional managers and their staff (DiMaggio and Powell 1983). One of the university academics shared the following thoughts: Also we are teaching IR to undergraduates as well as in Master’s degree classes. There is a one subject called Financial Reporting Regulation. Under that one topic comes IR practices and at the Master’s level also there is a subject called Accounting for Managers. There we teach one topic called IR. For the last three or four years, I have done that (AICASL2).

One of the participants from a professional accounting body said: IR was included in the new syllabus …. So it is incorporated. Integrated thinking, IR and aspects of it, we talk about them in our subjects. It is inculcated into our syllabus and we really believe in it and we drive it (PAB2-1).

This confirms the findings of Gunarathne and Senaratne (2017) and Senaratne (2022), that in addition to professional accounting bodies, some business schools in universities in Sri Lanka are very active in promoting IR and they have introduced IR into their degree curricula as parts of different subjects and have organised guest lectures on IR as well. The participant from a state bank which adopted IR also shared his views on institutionalising norms through professional training institutes (DiMaggio and Powell 1983) such as the Institute of Bankers in Sri Lanka (IBSL): And in our efficiency by IBSL examination, in internal terms, you have to get through the exams for internal promotion, then we will incorporate this IR concept into those exam questions. If that is there, then everybody is keen to know and understand (State bank1-1).

3.4.3.2

Influence from IR Awards

So far, the results were based on one of the modes through which normative isomorphism gets institutionalised in organisations, which is the legitimisation inherent in

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professional bodies. The other mode is the professional networks that span organisations (DiMaggio and Powell 1983). These professional networks are linked with the IR award ceremonies around which most of the IR adopters in Sri Lanka are gathered. The two main professional accountancy organisations in Sri Lanka, namely the ICASL and the CMASL, organise two key awards ceremonies, ‘Annual Report Awards’ and ‘CMA Excellence in IR Awards’, to promote voluntary adoption of IR among a wide range of business sectors in Sri Lanka, such as CSE listed companies, non-listed companies, state-owned enterprises or public sector companies, not-forprofit organisations, and small- and medium-scale enterprises (SMEs), to enhance the quality of corporate reporting in the country, which will be beneficial to investors and stakeholders. Some participants mentioned that award competitions have a direct influence on companies in their move to IR: Why do a lot of companies in SL go for IR. One major reason is the awards (Bank3-3). I’ll say 80% of the effort is done to win an award and use it as a marketing tool, 20% of it is indirectly supporting overall organisational growth (Diversified holding3-3).

Representatives from seven out of 21 sample companies interviewed for the study stated that the ICASL annual reports awards competition was one of the motives for them to adopt IR. For example, I got to know about IR because CA Sri Lanka announced it when we went for the competition (Hotel2-1). One of the panellists for the AR awards was talking to me and said that you should move into IR (State bank1-1). Most of the companies are pushed by or I would say there is a significant amount of influence coming from the ICASL contest (Bank3-1). As I repeatedly said, all these are happening with the only purpose of winning an award from the Chartered Institute’s annual report award competition (DH1-3). Most Sri Lankan companies, especially the banking, finance and insurance sectors, are very much focused on the award (IN1-2).

It was interesting to see that the awareness of the IR concept of one of the academics who participated in the study came from these award competitions. The same participant has also been an evaluator for the ICASL award competitions. All the time I’m getting eight, nine or less than ten reports. In that case, I got to know about the IR concept, their principles and the framework and all that (AICASL2).

One of the interviewees from an ARPC shared that he also started looking into IR because of the ICASL awards: I think I heard about IR during the ICASL awards, where we were having just a common conversation about IR reporting and we saw that there is a new structure to report on. As a result, we just googled and saw what IR is and the IR council was, and with that, we started trying to understand more about what IR is (ARPC3-1).

It was noteworthy that still these IR award competitions seem to be the driving force for many sample companies to continue with IR. For example,

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Last year [2017] due to the IR awards, on a large scale, among the DH2 and DH4, and overall, we were number two. Totally we won about ten awards from the institute (Diversified holding/ DH1-1). The annual report award is a motivating factor for us and we will go and see how we are on par with the others (Trading/TR1-1). Only we cannot stand against the trend. So the awards are the main reason. (DH1-3). Without this report, we cannot get the award. That’s why we are doing IR (Power/PW1-2). Our main focus is to submit the report to the audit on time and submit it to the ICASL competition on time (Telecommunications/TLC1-4).

Professional networks provide arenas in which central organisations are recognised and their personnel given positions of substantive or ceremonial influence (DiMaggio and Powell 1983). The results indicate the ICASL as an influential factor for the adoption of IR by the sample companies by means of a professional institution and an organiser of an annual report award competition. The literature supports the fact that the structures and procedures are advanced by particularly dominant professions, and professional bodies (DiMaggio and Powell 1983). Furthermore, the present findings affirm, together with Gunarathne and Senaratne (2017; 2018), that with respect to the contribution of professional accounting bodies in promoting IR, IR awarding schemes have become very influential in encouraging firms to adopt IR. However, the findings on the active role of the professional institutions in Sri Lanka is contrary to the work of Jensen and Berg (2012), which observed that because of the newness of the concept during their study period, business schools had not yet adopted IR in German curricula, exerting very negligible pressure on the profession.

3.4.3.3

Influence from Auditors

There are numerous accounting firms operating in Sri Lanka, including the ‘big four’, namely KPMG, Ernst and Young, PWC and SJMS Associates (independent correspondent firm of Deloitte) and other members from international accounting firms (IFAC 2019). The ICASL, as the sole authority with regard to accounting and auditing standards in the country, has also been the licensing authority for auditors in Sri Lanka, as only members of the ICASL can conduct audits in the country (IFAC 2019). Scholars have found that the big four accounting firms play an important role in legitimating international accounting standards through normative pressure (Hassan 2008). This section intends to examine whether these audit companies (two of the big four accounting firms) in Sri Lanka have exerted pressure on the adoption of IR in the sample companies. It was found that some companies in the interview sample had contacted their auditors to gain knowledge and assistance to follow IR subsequent to the awareness of IR as a new reporting concept:

80

N. K. Jayasiri In the meantime I spoke to our auditors AU2, and I got their help as well. I engage AU2 to guide us to do GRI and IR and take it forward (Interviewee Trading1-1). Somebody came from AU1 and gave us a lecture on IR (Interviewee Plantaions1-1) We got down all the IR materials. And we discussed with AU2. At that time they were our auditors (Interviewee Hotel/HT2-1).

One of the above interviewees also specified the service provided by audit companies with respect to IR momentum in Sri Lanka. So AU2 said they have a special unit to support people who are interested in doing IR under [person’s name]. AU2 asked for the entire IR project [rupee value]. AU2 said that they will do it in three stages. First we’ll give the questionnaire, then we’ll tell you how to capture the information, then we’ll say how to record it. (HT2-1).

One of the auditor’s (AU1) perspective was contrary to the above in terms of the support provided through audit companies in adopting IR in Sri Lanka. No, we don’t have anyone who is only doing the IR at the moment in Sri Lanka. As long as I know, we don’t have a unit which is looking at IR. I could be wrong. To my knowledge I don’t know anything about this. (AU1-1).

The same representative also mentioned that they promote SR with their clients and no instances were found where their clients required their assistance in this IR process, but only needed help with SR: We encourage people to do SR, because that’s our job. We have to do it. Otherwise we don’t have business. Again it’s not for IR really. It’s for SR. Not IR (AU1-1).

However, the same interviewee also stated that they have been contacted for assurance for IR: When clients ask for assurance for IR, we have been contacted (AU1-1).

Similar views were shared by the participant at AU2 also. When asked for the tasks of AU2 in the IR agenda, the interviewee participant mentioned that assurance, advisory work, training and process improvement for SR are carried out, and that AU2 has not contacted IIRC. It was further revealed that: We are assurance providers and we have resources to put down and we are assisting and encouraging companies in SR (AU2-1).

This confirms that two of the ‘big four accounting firms’ selected for the study in Sri Lanka seemed to play a ‘facilitating role’ rather than ‘an influential force’ which drives companies towards IR. In normative isomorphism, professionalisation plays a major role and this degree of professionalisation in accounting practices is also influenced by the accounting firms themselves (Thomas 1989).

3 Institutional Pressures and Integrated Reporting Adoption in Sri Lanka

3.4.3.4

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Influence from Annual Report Producing Companies

In the Sri Lankan IR setting, it is observed that the annual report producing companies have played a very active role in promoting IR and persuading companies to implement IR. Though the study identifies this ‘actor’ as annual report producing companies, interviewees taking part in this study identified them as ‘annual report agencies/ companies’, ‘reporting agencies’, ‘annual report design companies’, ‘annual report partners/service partners’, ‘printing agencies’, ‘printers’. This influence from annual report producing companies is a new finding with regard to the Sri Lankan IR agenda. According to the best of the knowledge of the present researcher, no previously mentioned literature was found on isomorphic influence in this regard, except Gunarathne and Senaratne (2017), who used the interview data of a key person in one ARPC in understanding the IR adoption process in Sri Lanka. However, DiMaggio and Powell (1983) stated that ‘professional associations’ are another vehicle for the definition and promulgation of normative rules about organisational and professional behaviour. In similar vein, the present study relates ‘annual report producing companies’ to ‘professional associations’ in the absence of further literature. Seven companies (out of 21) shared the following views on the influence of annual report producing companies on IR adoption by the sample companies. For example, We initiated this change from year 2013 with ARPC1 Printers (Diversified holdings/DH1-3). At that time, ARPC1 did DH1’s reporting also and our reporting has been with ARPC1 for a long time (Plantations/PL1-1). In 2013, at that time, there was another annual report service partner. We suggested them. They were ARPC1 and they came forward with this framework (Plantations/PL1-2). We carry out IR through the annual reporting company, ARPC1 and they came up with plan…In 2014 we started IR with them, earlier we had normal reporting (Hotel/HT1-1).

With many other companies, the annual report producing companies appeared to be playing a key role in providing assistance and guidance that helped towards the adoption of IR, rather than imposing a direct pressure on companies’ decisions to adopt IR. Confirming the work of DiMaggio and Powell (1983), professional organisations, IR award competitions, auditors and annual report producing companies exert normative isomorphism pressures on the adoption of IR in the present study. Overall, this study is also in agreement with Vaz et al. (2016), who showed that coercive and normative isomorphism mechanisms exert pressure on present integrated reports. Nevertheless, the present study found corresponding results with De Villiers and Alexander (2014)) (which was a study of the institutionalisation of corporate social responsibility reporting), when observing a collective influence through the three forces (coercive, mimetic and normative).

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3.5 Conclusion This chapter addressed the rationale behind the move towards IR or what has driven the selected companies to adopt IR in Sri Lanka. The study adopted an institutional theory approach through institutional isomorphism to examine the external motives that drive the voluntary decision to adopt IR. External drivers were explored through coercive, mimetic and normative isomorphisms. Thus, influence exerted through the IIRC, pressure through the organisational adoption of sustainability reporting, influence from the parent company and influence from stakeholders have been identified as coercive pressures which generally persuade IR adoption in Sri Lanka. The influence of the IIRC through the pilot programme held in 2011 was investigated as coercive isomorphism on one of the early adopters of IR in Sri Lanka. Though there is an Integrated Reporting Council in Sri Lanka (IRCSL), which is known as Asia’s first IR council, interviewees were silent about, unaware and uncertain of the existence of such a governing body, resulting in a lack of coercive pressure from the IRCSL, according to this study. However, the IRCSL is initiated by the Council of ICASL. Therefore, a subtle pressure is identified from IRCSL through the influence of the ICASL. The pressure from the ICASL, as the national professional body for accountancy, is considered as a normative isomorphism. Hence, the influence from the professional bodies in Sri Lanka, influence from IR awards, and the influence from auditors are included in this normative isomorphism. The study also found that annual report producing companies who assist listed companies to prepare their yearend corporate reports also influence IR adoption decisions as a normative pressure. The pressure from competition, the influence of the bandwagon effect through role model organisations or leaders of IR in Sri Lanka, global trends, corporate image and recognition are found to exert a mimetic pressure on the decision to adopt IR by companies. However, the interviewees also indicated that except for a few Sri Lankan companies that were recognised as the role model organisations and leaders in IR in Sri Lanka and that had established the real momentum necessary to embrace the integrated thinking behind these new reporting practices, other companies have striven to compete with others in seeking awards. The results from the Sri Lankan IR experience are helpful to current and future report preparers to introduce an IR requirement in a way that listed companies would be encouraged to adopt IR to enhance their competitiveness and reputation in financial markets. The empirical insights of this chapter, drawn from a voluntary IR environment in an emerging country, are useful in developing capital market strategies, policies and listing requirements for policy-makers and regulators. Professional institutes, accounting firms and educators may conduct more workshops, seminars and round table discussions on IR to broaden extant knowledge on IR, to share current best practices by corporates and to identify areas for further improvement. These activities would also help accelerate IR adoption in Sri Lanka in terms of normative and mimetic forces. This study also reveals a need to incorporate IR in the curricula of professional accountancy bodies and universities.

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The findings of this study are interpreted with several limitations. First, the study is limited to Sri Lanka, where IR is still voluntary. This study also accepts the inherent subjectivity of the coding approach in interpretive qualitative research when using interviews as a research method. The stance of the present study stresses the need for more IR research in future. Future research needs to shed more light on the link among IR, governance, accountability and assurance, overall strategy of the organisation, IR guidelines and new areas, such as the United Nation’s SDGs and climate disclosures. A few more opportunities for future researchers to conduct IR research are: as comparative analyses involving mandatory and voluntary settings, developing and developed country settings, on stakeholders’ conversations about what made them demand IR, on the link between IR and integrated thinking, and on technology and IR adoption.

Appendix 3.1: Interviewee Details

No. Interview date Industry (m/d/y)

Company/ Interviewee’s institute position code

Interviewee code

1

04/04/18

Bank 1/PPE

B1

CFO

B1-1

2

06/07/18

Bank 2

B2

Senior Manager Finance

B2-1

3

06/13/18

Insurance 1

IN1

Senior Manager

IN1-2

4

05/17/18

Construction 1

CN1

General Manager (GM)-Commercial

CN1-1

5

05/09/18

Diversified Holding 1

DH1

Group CFO

DH1-1

6

01/29/18

Diversified Holding 1

DH1

Accountant

DH1-3

7

03/22/18

Diversified Holding 3

DH3

Group CFO

DH3-1

8

05/18/18

Diversified Holding 3

DH3

Business Analyst

DH3-3

9

06/13/18

Healthcare 1

HC1

Head of Finance and Corporate Planning

HC1-1

10

05/16/18

Hotel 1

HT1

Finance Controller

HT1-1

11

06/22/18

Motor 1

MT1

CFO

MT1-1

12

07/13/18

Motor 1

MT1

Accountant 1

MT1-2

13

02/02/18

Plantation 1 and 2

PL1&2

Managing Director

PL1&2–1

14

02/02/18

Plantation 1

PL1

GM Tea Marketing and Corporate Affairs

PL1-1

(continued)

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N. K. Jayasiri

(continued) No. Interview date Industry (m/d/y)

Company/ Interviewee’s institute position code

Interviewee code

15

02/07/18

Plantation 1

PL1

GM Finance

PL1-2

16

05/04/18

Plantation 3

PL3

CFO/DGM Finance

PL3-1

17

03/15/18

Power 1

PW1

CFO

PW1-1

18

05/10/18

Power 1

PW1

Head of Finance

PW1-2

PW1

19

05/10/18

Power 1

Finance Manager

PW1-3

20

04/11/18

Telecommunications TLC1 1

CFO

TLC1-1

21

04/10/18

Telecommunications TLC1 1

DGM—Accounting Systems

TLC1-4

22

05/15/18

Telecommunications TLC1 1

Senior Assistant Manager-Corporate Communications

TLC1-5

23

06/07/18

Bank 3

Chief Financial Officer (CFO)

B3-1

B3

24

05/24/18

Bank 3

B3

DGM Finance

B3-2

25

05/24/18

Bank 3

B3

Executive Officer—MIS and Sustainability Unit

B3-3

26

05/17/18

Healthcare 2

HC2

CFO

HC2-1

27

06/13/18

Trading 1

TR1

Group CFO

TR1-1

28

06/01/18

State Bank 1

SB1

Deputy General SB1-1 Manager (DGM) Finance and Planning

29

03/07/18

Professional Accounting Organisation 1

PAO1

Former president/ Partner

30

01/09/18

Professional Accounting Body 2

PAB2

Senior Specialist, PAB2-1 Technical Policy and Engagement

31

07/18/18

Audit Firm 1

AU1

Manager-Transaction AU1-1 Advisory Services

32

07/09/18

Audit Firm 2

AU2

Manager-Client Services

PAO1-1

AU2-1

33

05/24/18

AR Writer 1

ARW 1

Director

ARW1-1

34

06/05/18

AR Producing Company 2

ARPC 2

CEO

ARPC2-1

35

06/05/18

AR Producing Company 2

ARPC 2

Executive

ARPC2-2

36

06/12/18

AR Producing Company 3

ARPC 3

Executive CEO

ARPC3-1 (continued)

3 Institutional Pressures and Integrated Reporting Adoption in Sri Lanka

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(continued) No. Interview date Industry (m/d/y) 37

07/20/18

Company/ Interviewee’s institute position code

Academic/Sri Lanka ACASL

Senior Lecture 2

Interviewee code

ACASL2

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Steyn M (2014) Organisational benefits and implementation challenges of mandatory integrated reporting: perspectives of senior executives at South African listed companies. Sustain Account Manage Policy J 5(4):476–503 Stubbs W, Higgins C, Milne M, Hems L (2014) Financial capital providers’ perceptions of integrated reporting working paper. SSRN Electron J Stubbs W, Higgins C (2014) Integrated reporting and internal mechanisms of change. Account Audit Account J 27(7):1068–1089 Stubbs W, Higgins C (2018) Stakeholders’ perspectives on the role of regulatory reform in integrated reporting. J Bus Ethics 147:489–508 The International Federation of Accountants (IFAC) (2019) Member organizations and country profiles: Sri Lanka. Available via: http://www.ifac.org/aboutifac/membership/country/sri-lanka Thomas AP (1989) The effects of organizational culture on choices of accounting methods. Account Bus Res 19(76):363–378 Vaz N, Fernandez-Feijoo B, Ruiz S (2016) Integrated reporting: an international overview. Business Ethics: Euro Rev 25(4):577–591 Velte P, Stawinoga M (2017) Integrated reporting: the current state of empirical research, limitations and future research implications. J Manag Control 28(3):275–320 Vitolla F, Raimo N, Marrone A, Rubino M (2020a) The role of board of directors in intellectual capital disclosure after the advent of integrated reporting. Corp Soc Responsib Environ Manag 27:2188–2200 Vitolla F, Raimo N, Rubino M (2020b) Board characteristics and integrated reporting quality: an agency theory perspective. Corp Soc Responsib Environ Manag 27:1152–1163 Wild S, Van Staden C (2013) Integrated Reporting: Initial analysis of early reporters—an institutional theory approach. Paper presented at the Asia-Pacific Interdisciplinary Research in Accounting (APIRA) Conference, Kobe, Japan Zinsou KMC (2018) Integrated or non-integrated reports: French listed companies at a crossroads? Sustain Account Manage Policy J 9(3):253–288

Nuradhi Kalpani Jayasiri serves as a Senior Lecturer in the Department of Accounting, University of Colombo, Sri Lanka. She obtained her first degree in Bachelor of Business Administration (Special) with a First-Class Honours in 2005 and Master of Business Administration (MBA) from University of Colombo in 2012. She obtained her Ph.D. from the University of Otago, New Zealand in 2020. Her Ph.D. thesis has formally recognised by the Division of Commerce of the School of Business, University of Otago, New Zealand as being of exceptional quality. During her Ph.D., she has also been a recipient of the Alan MacGregor Award by the Department of Accountancy and Finance, University of Otago, New Zealand in 2017. Nuradhi has published several research articles in local and internationally reputed journals and presented at many national and international conferences as well. She has been contributing to the corporate report prepares in Sri Lanka through her research and professional competence. She has been serving as a resource person and a panellist at workshops conducted by the professional accounting bodies and as an advisory committee member at the Integrated Reporting Council in Sri Lanka.

Chapter 4

Determinants of Integrated Reporting Adoption in an Emerging Market— Sri Lanka Thilini Cooray

and Dinithi Dissanayake

Abstract Integrated reporting (IR) is one of the latest practices in corporate reporting which is increasingly being adopted by corporations worldwide. The external institutional and contextual pressures which influence the adoption of IR still remain an unexplored area in IR-related research. Thus, this chapter aims to identify the institutional pressures that induce IR adoption and implementation in Sri Lanka, where IR is a mainstream voluntary reporting practice. New institutional theory (NIT) is used as the theoretical underpinning of this chapter. This theoretical framing helps in explaining how the IR behaviour of companies listed on the Colombo Stock Exchange (CSE) is influenced by different coercive, normative and mimetic pressures. Secondary data from institutional publications and extant literature on IR are used to understand the different external institutional pressures acting on the adoption of IR prevalent in Sri Lanka. The findings reveal that normative pressure is the dominant institutional pressure acting on IR adoption and implementation in Sri Lanka, while mimetic pressure also exists at a moderate level. Nevertheless, owing to the voluntary nature of IR reporting and a lack of industrial lobby groups, coercive pressure is minimal in driving the adoption and implementation of IR in the Sri Lankan context. Keywords Adoption · Institutional pressures · Institutional theory · Integrated reporting · Sri Lanka

T. Cooray (B) Department of Accounting, University of Sri Jayewardenepura, Nugegoda, Sri Lanka e-mail: [email protected] D. Dissanayake UniSA Business, University of South Australia, Adelaide, Australia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_4

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4.1 Introduction At present, IR is one of the common forms of corporate reporting which combines and presents financial and nonfinancial information in a more holistic way (De Villiers et al. 2014). IR focuses on providing information on the value creation story of an organisation to a wide range of stakeholders through the broad concept of integration (Pistoni et al. 2018). The International Integrated Reporting Council (IIRC), the apex organisation that promotes IR world-wide, issued the International Integrated Reporting Framework (IIRF) in 2013, which was later revised in 2021. The IIRF is a principle-based framework which provides guidance on how to present information regarding strategy, performance and prospects of an organisation in a composite, organised and cohesive form (Rinaldi et al. 2018). Given the novelty of this reporting model, a need has arisen to understand country-specific institutional pressures which influence the adoption of IR, especially in relation to developing countries, as most prior studies on IR have focused on developed countries, including South Africa (Adhariani and De Villers 2019; Lipunga 2015). Even though disclosures on several non-financial items have been mandated in countries such as Denmark, France, the UK and the Netherlands, IR is largely a voluntary disclosure practice for many countries, except for South Africa (Maroun 2019). Despite its voluntary nature, IR has exhibited an increasing world-wide adoption over the past ten years. Vaz et al. (2016) point out that the choice to implement or adopt IR can be explained through determinants at a country-level and at a firm-level. There are several prior studies which have examined the influence of country-level determinants on the adoption of IR in a cross-national context (Speziale 2019; Vitolla et al. 2019), with specific consideration of external institutional pressures (Kılıç et al. 2021; Tudor-Tiron and Dragu 2014; Dragu and Tudor-Tiron 2013; Frías-Aceituno et al. 2013a; Jensen and Berg 2012). It is argued that these external institutional forces provide different levels of motivation in instances when institutions respond to social patterns (Kostova and Roth 2002), of which IR is considered an emerging social movement in the field of corporate reporting (Lakshan et al. 2021). However, there is a dearth of studies conducted on identifying the external institutional pressures that encourage the adoption of IR in a single country (Kılıç et al. 2021). Therefore, the purpose of this chapter is to identify the external institutional pressures that influence the adoption of IR in a specific country, namely the South Asian nation of Sri Lanka. Institutional theory is used as the theoretical underpinning of this study. Institutional theory is generally used to explain why organisations attain conformity and standardisation in their norms of behaviour (Wild and van Staden 2013). However, NIT provides further valuable insights about drivers of institutional change (Wild and van Staden 2013). Organisational behaviour can be pressured to change following major shifts in the operating environment. Therefore, as per DiMaggio and Powell (1983), corporate behaviour is shaped by the institutional environment in which companies operate. IR is a contemporary corporate reporting practice and institutional theory is one of the most useful theories utilised to provide insights about IR (Abeywardana et al. 2021; Lakshan et al. 2021). Specifically, this theory provides

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direction towards the identification of antecedents and other perspectives of IR and similar voluntary corporate reporting practices (Adhariani and De Villiers 2019; Abeywardana et al. 2021). Thus, institutional theory is considered to be appropriate to understand the external institutional pressures that affect the IR adoption process (Abeywardana et al. 2021; Jayasiri 2020). The country selected for this study is Sri Lanka, a developing nation in the South Asian region. Over the years, Sri Lanka has become a hub of accountants in Asia, exporting its accountants to Australasia, the Middle East and Africa (Senaratne and Gunarathne 2017). According to the World Bank (2015) and Dissanayake et al. (2016), Sri Lanka has shown an ardent interest in embracing new improvements in accounting and auditing practices. Consequently, it has become an early adopter of IR, where one Sri Lankan Public Listed Company (PLC) voluntarily participated in the IIRC pilot project (Gunarathne and Senaratne 2018). Further, Gunarathne and Senaratne (2017) revealed that the adoption of IR in Sri Lanka is at the diffusion stage, and hence, that there will be many more adopters in future. Cooray et al. (2021) also revealed that Sri Lankan companies are making progress in the preparation of integrated reports in line with the IIRF. Moreover, KPMG (2020) recognised Sri Lanka as one of the countries where IR is a major reporting practice,1 despite its voluntary nature. Hence, Sri Lanka has an appropriate background against which to identify the external institutional pressures that influence the adoption of IR, based on the institutional theory. The adoption of IR (i.e. overall and sector-wise) was examined based on the integrated reports published from 2010/2011 to 2020/2021 by companies listed on the CSE. The external institutional pressures which induce IR adoption in Sri Lanka were identified based primarily on a systematic analysis of archives, including institutional publications, websites and the extant literature on IR research. One of the authors has served as a technical evaluator for the Excellence In IR Awards organised by the Institute of Certified Management Accountants of Sri Lanka (CMA). Moreover, both authors are actively involved in research related to IR and sustainability reporting. Therefore, the experience of the authors along with the insights of prior research conducted by other authors in the field have been used to further enrich the study. This chapter makes several contributions. First, it attempts to identify the external institutional pressures that influence the adoption of IR based on a single county. Thereby, it is expected to add more insights to the existing body of literature on IR through identifying country-specific external institutional pressures on IR adoption in a country where IR continues to be a dominant form of reporting. Second, it expands the literature on institutional theory by applying the NIT to identify coercive, normative and mimetic pressures on IR adoption. Third, the findings of this study have a practical importance for standard setters, local regulatory bodies, professional accounting bodies and other related organisations to rethink the manner in which they can improve their contribution towards increasing IR adoption in Sri Lanka.

1

Despite widespread adoption of IR, KPMG (2020) revealed that IR has become mainstream corporate reporting practice in some countries than others (e.g. South Africa, Japan and Sri Lanka).

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The subsequent sections of this chapter are organised as follows: Sect. 4.2 provides a literature review, while Sect. 4.3 presents the NIT. Section 4.4 explains the methodology. Section 4.5 analyses and discusses IR adoption and institutional pressures in Sri Lanka, while Sect. 4.6 concludes the chapter.

4.2 Development of IR In this section, the existing literature on IR is analysed under two broad headings: the concept of IR and its historical evolution, and the determinants of IR implementation.

4.2.1 IR and Its Evolution Corporate reporting has undergone enormous changes over the past few decades, evolving from a narrow focus on financial reporting to a broader approach, which includes non-financial information as well (Uyar 2016). Initially, business organisations have been producing many lengthy, complex and segregated reports which have resulted in information overload (IIRC 2013). However, financial reporting was criticised for its backward looking nature, short term focus, failure to incorporate intangible aspects and its primary focus on physical and financial assets (De Villiers et al. 2014). To address those criticisms, different forms of non-financial reporting approaches such as corporate social responsibility reporting and sustainability reporting (SR) have emerged over the years (Rupley et al. 2017). SR focuses on reporting an organisation’s environmental, economic, and social impacts and their interactive effects. Some scholars have also been critical of this kind of reporting for its disconnection with financial reporting and its failure to build relationships between sustainability issues and the organisation’s core strategies (Clayton et al. 2015). Therefore, the concept of IR was introduced as a mechanism to rectify the limitations in existing corporate reporting approaches (Herath and Gunarathne 2016). According to De Villiers and Hsiao (2017), IR involves reporting financial and nonfinancial aspects such as environmental, social, governance and risk information in a single document to enhance the quality of information available to providers of financial capital and other stakeholders, while, at the same time, enabling the more efficient and productive allocation of capitals. At the very beginning, IR was carried out as a practice-led initiative. The first integrated reports were issued by the Danish biotech company, Novozymes and the Brazilian cosmetics manufacturer, Natura in 2002 and 2003, respectively (De Villiers and Hsiao 2017). The speciality about these reports was that they were issued voluntarily without any involvement from regulations or guidelines. In 2009, South Africa’s King III Code of Governance Principles was issued, and they suggested that companies can prepare and publish integrated reports on an “apply

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or explain” basis (Institute of Directors Southern Africa 2009). As per Ahmad Haji and Anifowose (2016), the term “integrated reporting” was officially introduced in this King III Code of Corporate Governance Principles as a part of South African corporate governance reforms. According to the Institute of Directors, Southern Africa (2009, p. 54), “integrated reporting means a holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability”. These corporate governance reforms were established to support national objectives of attracting more foreign direct investments, and to reduce corruption as well as social and economic disparities in South Africa. Further, King III inspires managers to link financial information and sustainability or non-financial information into a single report (De Villiers and Hsiao 2017). Subsequently, companies listed on the Johannesburg Stock Exchange were required to prepare integrated reports starting from March 2010 or to provide explanations for not preparing these reports (van Zyl 2013). As a result of this requirement, South Africa became the first and currently the only country which has mandated the preparation of integrated reports (De Villiers and Hsiao 2017). The Integrated Reporting Committee (IRC) of South Africa was established in May 2010 to develop guidelines on good practices in IR (Integrated Reporting Committee of South Africa 2011). In August 2010, the Prince’s Accounting for Sustainability Project and the Global Reporting Initiative (GRI) collaboratively formed the International Integrated Reporting Committee, and it evolved to become the International Integrated Reporting Council (IIRC) by November 2011 (Rowbottom and Locke 2016). The IIRC is an international alliance of regulators, investors, companies, standard setters, accounting professionals and NGOs, and its prime focus is to communicate information about value creation as the next step in the evolution of corporate reporting (IIRC 2022). In order to achieve the aforementioned objective, the IIRC issued the IIRF in 2013, to accelerate the adoption of IR across the world. Prior to that, the discussion paper, “Towards Integrated Reporting—Communicating Value in the 21st Century” was launched in September 2011. Afterwards, the IIRC conducted its very first pilot programme in October 2011 with participants from business and investor communities. In November 2012, the IIRC released a prototype of the IIRF. The finalised version of the IIRF was published by the IIRC in April 2013 (IIRC 2022). As mentioned above, the purpose of the IIRF is to establish guiding principles and content elements that can control the overall content of an integrated report and to clarify the basic concepts that underpin them (IIRC 2021). In January 2021, the IIRC published the revised IIRF to facilitate more decisionuseful reporting. This revised framework further clarifies the concepts included in the earlier version and simplifies the guidelines that facilitate the adoption of IR. As per the IIRC (2021), this new version applies to the reporting period commencing from January 1, 2022. IR is an endeavour launched to establish more effective corporate disclosures in order to improve the efficiency of management and investment decision-making (De Villiers and Hsiao 2017). According to Cooray et al., (2020), IR is much more advanced than combining financial reporting and SR together. Alternatively, IR

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focuses on reporting financial and non-financial aspects like sustainability, governance and risk management based on a more holistic concept of integration (De Villiers and Hsiao 2017; Pistoni et al. 2018). The IIRC (2021) defines IR as “a process founded on integrated thinking that results in a periodic integrated report by an organisation about value creation, preservation or erosion over time and related communications regarding aspects of value creation, preservation or erosion” (p. 53). As per the above definition, IR is based on integrated thinking which involves envisioning the interrelationships among capitals, their connections with different functions in an organisation and getting the organisation as a whole to work together to achieve value creation (Herath et al. 2021a). Integrated thinking drives the two main concepts of IR, that is, capitals and value, explaining how various capitals contribute towards value creation/preservation/erosion. The IIRF further explains these two fundamental concepts, establishing guiding principles and content elements, and provides guidance on preparing the integrated report which is the outcome of the IR process (Cooray et al. 2020). The IIRC (2021) also defines IR as “…a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value in the short, medium and long term” (p. 53). A summary of the IIRF is presented in Table 4.1. Cooray et al. (2021), Kılıç and Kuzey (2018) and Ahmed Haji and Anifowose (2016) highlight the tendency in companies to follow the IIRF in the preparation of integrated reports. The implementation or adoption of IR can be symbolised through an integrated report, and the implementation of IR is one of the prominent areas in IR-related research (Rinaldi et al. 2018). Table 4.1 Summary of the IIRF Fundamental concepts

Guiding principles of IR

Content elements of an integrated report

Capitals: • financial • manufactured • intellectual • human, • social and relationship • natural

Strategic focus and future orientation

Organisational overview and external environment

Value creation, preservation or erosion Source IIRC (2021)

Connectivity of information Governance Stakeholder relationships

Business model

Materiality

Risks and opportunities

Conciseness

Strategy and resource allocation

Reliability and completeness

Performance

Consistency and comparability

Outlook Basis of presentation

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The next section presents a brief literature review on IR implementation, specifically in relation to the determinants of IR implementation.

4.2.2 Determinants of IR Implementation Speziale (2019) and Vitolla et al. (2019) focused on the determinants of IR implementation in their studies. Further, Vitolla et al. (2019) and Del Baldo (2017) pointed out that these studies have assessed the determinants of IR based mainly on institutional theory (Jensen and Berg 2012; Frías-Aceituno et al. 2013a; Dragu and TudorTiron 2013; Tudor-Tiron and Dragu 2014; Kılıç et al. 2021) and stakeholder theory (Frías-Aceituno et al. 2013b, 2014; Alfiero et al. 2018). Vaz et al. (2016) examined empirically whether the choice to implement IR can be explained through determinants (or drivers) at a country level (i.e. political systems and legal enforcement mechanisms; economic development; and cultural characteristics) and at a company level (i.e. size, profitability or industry). The findings indicate that the adoption of IR was more frequent in countries with a “comply or explain” IR regulation and when IR was operating in less individualistic countries (countries with a higher collectivism dimension). Additionally, they found that both coercive and normative institutional mechanisms influence the adoption of IR. There are several studies that assess the relationship between country-level determinants and IR in a cross-national context based on institutional theory (Speziale 2019; Vitolla et al. 2019). Jensen and Berg (2012) compared and contrasted companies that adopt traditional SR and those that publish integrated reports. This study used a sample of 309 companies representing 43 countries. It used institutional theory to identify the factors which determine the adoption of IR. The findings indicate that several country-level determinants are different for companies reporting on IR and those undertaking sustainability reporting. These determinants include investor and employment protection laws, the intensity of market coordination and ownership concentration, the level of economic, environmental, and social development, the degree of national corporate responsibility and the value system of the country of origin. Subsequently, Frías-Aceituno et al. (2013a) assessed a sample of 750 international companies and found that companies located in countries with a foundation of civil law, and where law and order are high, have a higher tendency to publish integrated reports. Dragu and Tudor-Tiron (2013) analysed the content of integrated reports issued by a sample of 58 IIRC pilot programme companies for the period 2010–2012, and the results indicate that political, cultural, and economic factors influence the voluntary adoption of IR. Based on the same sample, Tudor-Tiron and Dragu (2014) measured the IR disclosures of each company using an index, and revealed that the disclosure level of IR is higher in common law countries than in civil law countries. Kılıç et al. (2021) assessed whether the institutional environment is associated with the adoption of IR using a sample of Fortune 500 companies. Their findings revealed

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that the code-law orientation and strength of institutional quality are significantly associated (i.e. positively and negatively, respectively) with the IR of those Fortune 500 companies. Even though these cross-national studies have identified the factors determining IR implementation in relation to institutional theory (institutional pressures), none of them have identified and assessed the institutional pressures which induce the adoption of IR in the context of a single country. Therefore, this chapter attempts to identify the institutional pressures that influence the adoption or implementation of IR in the context of a developing country in South Asia, Sri Lanka, based on NIT.

4.3 Institutional Theory Institutional theory is the dominant and frequently used theory in organisational analysis (Aksom and Tymchenko 2020). It provides a comprehensive outlook on organisations (Zucker 1987). Institutional theory has two branches, namely old institutional theory and NIT. As per Hodgson (1998), old institutional theory emphasises the fact that the actions of individuals and firms are decided by certain acceptable and socially learned behaviours. NIT focuses on institutional pressures which create three types of isomorphisms, viz. coercive, normative and mimetic (DiMaggio and Powell 1983). According to Higgins et al. (2014) and Abeywardana et al. (2021), managers responsible for IR are influenced by different institutional pressures operating in the external environment. The nature of these pressures can be coercive, mimetic and/or normative (Katsikas et al. 2017). Thus, NIT which emphasises the above three pressures can be used as a theoretical lens to observe and investigate the institutional pressures affecting IR. DiMaggio and Powell (1983) defined coercive pressure as a set of formal and informal pressures exerted on an organisation by other organisations upon which they are dependent, and by certain cultural and societal expectations they face. Coercive pressure to adopt IR is prominently created by the IIRC, which is the global regulatory body for IR. Moreover, coercive pressure towards IR may be exerted by the government (Bhimani et al. 2016; Abd Razak et al. 2020), local regulatory bodies, regulations (Adhariani and De Villiers 2019) and other stakeholders (i.e. suppliers, customers and broader society) (Bhimani et al. 2016; Sridhar and Jones 2013). DiMaggio and Powell (1983) defined normative pressure as the pressure stemming primarily from the professionalisation of a specific field. As per Colwell and Joshi (2013), normative pressure involves the socialisation of a business within its institutional environment. DiMaggio and Powell (1983) proposed the different groups related to professionalisation as the source of normative pressures, for example, trade unions, educational institutions promoting cognitive behaviour, professionals from industrial groups and associations, or non-governmental organisations having an interest in a particular industry. Normative pressure to follow IR may stem from the professional accounting bodies and their related activities, professional networking,

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universities, annual reporting companies, assurance providers and consultancy firms (Bhimani et al. 2016; Gunarathne and Senaratne 2018; Abd Razak et al. 2020). Mimetic pressure drives businesses to avoid uncertainty and risk by copying or replicating the processes or structures of other successful institutions (DiMaggio and Powell 1983). As per Saeed et al. (2018) and Chu et al. (2017), mimetic pressures occur when a business imitates the actions of successful competitors in the industry. Due to pressure from regulatory bodies, organisations may mimic the IR practices of other organisations (Adhariani and De Villiers 2019). Furthermore, the nature of the industry and integrated report competitions (Gunarathne and Senaratne 2018) may influence companies to copy the IR practices of the best players in the industry.

4.4 Methodology Two steps were followed in investigating IR adoption in Sri Lanka. First, the total adoption of IR by companies listed on the CSE was examined for the period 2010/ 2011 to 2020/2021. All annual and standalone reports were downloaded for these years. Subsequently, a coding scheme of “1” (produced an IR) or “0” (did not produce an IR) was allocated for each company in order to identify the adoption of IR over this period. The prevalence of IR was also analysed based on ten different industrial sectors. Then, systematic searches were undertaken of the regulatory (Securities and Exchange Commission [SEC] and Central Bank of Sri Lanka [CBSL]) as well as the professional accounting bodies’ guidance on IR adoption in Sri Lanka. This involved visiting the websites of each relevant body, such as the Institute of Chartered Accountants of Sri Lanka (ICASL), and searching each for material relevant to IR (for instance, guidance notes on adopting IR or awards to celebrate IR reporting excellence). This provided information on external institutional forces driving IR within the country. In addition, prior research on IR and the experience of the authors were also used to identify external institutional pressures. The identified external institutional forces were then classified into the three institutional pressures (i.e. coercive, normative and mimetic pressures), triggers which were emphasised by NIT, based on the previous literature. Table 4.2 shows the classification of institutional pressures.

4.5 IR Adoption and Institutional Pressures in Sri Lanka 4.5.1 IR Adoption This section provides an overview of IR adoption in Sri Lanka. There are three categories of IR adopters present in the Sri Lankan context, namely PLCs, non-listed private companies and public sector organisations. The majority of IR adopters are

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Table 4.2 Classification of institutional pressures Institutional pressure

Definition

Sources (based on prior studies)

References

Coercive pressure

A set of formal and informal pressures exerted on an organisation by other organisations upon which they are dependent and by the cultural and societal expectations they face

Local and global regulatory bodies Government Other stakeholder pressures (suppliers, customers and broader society)

DiMaggio and Powell (1983), Bhimani et al. (2016), Abd Razak et al. (2020), Adhariani and De Villiers (2019), Sridhar and Jones (2013)

Normative pressure

The pressure stemming primarily from the professionalisation of a specific field

Professional accounting bodies Professional networking Universities Annual reporting companies Assurance providers Consultancy firms

DiMaggio and Powell (1983), Bhimani et al., (2016), Gunarathne and Senaratne (2018), Abd Razak et al. (2020)

Mimetic pressure

Pressure that drives the businesses to avoid uncertainty and risk by copying or replicating the processes or structures of other successful institutions

Integrated report competitions Nature of industries

DiMaggio and Powell (1983), Gunarathne and Senaratne (2018)

PLCs, and their information can be obtained through the CSE. The exact details of IR adopters in the other two categories are difficult to ascertain due to the unavailability of a governing body such as the CSE to officially track and preserve their integrated reports. The following section presents an analysis based on the companies listed on the CSE. According to Jayasiri (2020), the majority of IR adopting PLCs follow the IIRF. However, during the early stages there had been some IR adopting PLCs which followed another IR framework developed by a local annual report producing company. There are also IR adopters that do not follow any IR-related framework. Therefore, it is important to note that the following analysis includes all the IR adopting PLCs in Sri Lanka, regardless of whether they follow an IR-related framework or not.

4.5.1.1

Total Adoption

As per Fig. 4.1, a rapid increase in total IR adoption is observable from 2010/2011 to 2018/2019. The highest number of adopters (i.e. 92 companies) was reported in the year 2018/2019. However, a considerable decline (i.e. 25%) is observable in 2019/

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84

80 61 60

92 79 69

42

40 20

68

99

26 1

4

9

0

IR Adopters

Fig. 4.1 Total IR adoption in Sri Lanka. Source Analysed by the authors based on the annual reports available in the CSE website

2020 due to the aftermath of the Easter Sunday Attack and the COVID-19 outbreak. During 2020/2021, the total adoption increased to 79 companies, despite the severe negative economic and social consequences of the COVID-19 pandemic.

4.5.1.2

Sector-Wise Adoption2

As per Fig. 4.2, the Financial sector, which consists of banks, and diversified financial and insurance industries, indicates the highest number of adopters in all the years, except for 2010/2011 and 2011/2012. The Consumer Staples sector includes the food, beverages and tobacco, food and staples retailing, and household and personal products industries. It has the second highest number of adopters. The Consumer Discretionary sector consists of four industries: automobiles and components, consumer durables and apparel, consumer services, and retailing. It is in the third position. Presently, IR adopters are not available in industries such as commercial and professional services (in the industrial sector), automobiles (in the consumer discretionary sector) and household and personal products (in the consumer staples sector). The above analysis indicates a considerably higher IR adoption level in Sri Lanka, both in terms of the number of companies and sector-wise. This is consistent with the findings of Jayasiri (2021), who emphasises that IR in Sri Lanka is now moving towards the maturity level. This further confirms the findings of Cooray et al. (2021) and KPMG (2020) that IR is a key corporate reporting practice in Sri Lanka. As per Jayasiri (2020), external institutional pressures are one of the major reasons that trigger the extensive level of IR adoption in Sri Lanka. Therefore, the next section investigates the institutional pressures that influence the rapid adoption of IR in Sri Lanka, as per NIT. 2

IR adopting PLCs were categorised based on the Global Industry Classification Standards (GICS) sector classification provided on the website of the CSE.

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35 30 25 20 15 10 5 0

Energy

Material

Industrial

Consumer Discretionary

Consumer Staples

Health Care

Financials

Communication Services

Real estates

Utilities

Fig. 4.2 Sector-wise adoption. Source Analysed by the authors based on the annual reports available in the CSE website

Table 4.3 Adoption of IIRF by Sri Lankan PLCs (from 2010 to 2018) Year

2010

2011

2012

2013

2014

2015

2016

2017

2018

No. of Companies

0

0

3

4

11

25

41

53

70

Source Jayasiri (2021)

4.5.2 Institutional Pressures that Influence IR Adoption in Sri Lanka 4.5.2.1

Coercive Pressures

IR is a voluntary reporting practice in Sri Lanka. A majority of Sri Lankan IR adopters follow the IIRF issued by the IIRC (Jayasiri 2020), which is the global regulatory body overlooking IR. Thus, it can be considered as the main coercive pressure on IR adoption in Sri Lanka. Table 4.3 indicates only the number of Sri Lankan PLCs which have adopted the IIRF.3 Even though IR is a voluntary reporting practice in Sri Lanka, some regulatory authorities such as the SEC of Sri Lanka (through the CSE) and the CBSL indirectly encourage and promote environmental, social, governance reporting and IR. Table 4.4

3

As per Jayasiri (2020), despite the availability of the IIRF, some Sri Lankan IR adopters prepare their integrated reports based on another framework developed by an annual report producing company, while there are also IR adopters that do not follow any framework. Therefore, the numbers presented in Table 4.3 are not consistent with Fig. 4.1.

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Table 4.4 Involvement of regulatory authorities in promoting IR Institute

Initiatives

References

SEC

Issuing the Code of Best Practices on Corporate Governance in 2013 and 2017 in collaboration with IICASL According to Principle A.1.2 of the Code of Best Practices on Corporate Governance-2017, a board should be responsible for considering the need for adopting IR Issuing the guide “Communicating Sustainability-Six Recommendations for Listed Companies” to encourage environmental, social, governance reporting Under this guide, adopting IIRF of IIRC has been identified as one of the main initiatives to communicate sustainability information Offer environmental, social, governance reporting related training

ICASL (2017), Cooray et al. (2020), CSE (2019)

CBSL

Issuing “Roadmap for Sustainable Finance in Sri Lanka” to promote environmental, social, governance reporting and risk management among banks and other financial institutions in Sri Lanka

CBSL (2019)

indicates the different initiatives taken by these regulatory authorities to propagate IR in Sri Lanka. The purpose of coercive pressure is to obtain compliance with IR adoption. Since IR is not a mandatory reporting practice, the coercive pressure for IR adoption is relatively low in Sri Lanka.

4.5.2.2

Normative Pressures

The extent of normative pressure on corporate reporting (including IR) is relatively high in the Sri Lankan context (Gunarathne and Senaratne 2017). The professional accounting bodies, Universities, Consultancy firms, Annual report producing companies and IR assurance providers can be identified as the main sources of normative pressure towards IR adoption in Sri Lanka. . Professional Accounting Bodies There are three local professional accounting bodies (i.e. Institute of Chartered Accountants of Sri Lanka [ICASL], Institute of Certified Management Accountants of Sri Lanka [CMA] and the Association of Accounting Technicians of Sri Lanka [AAT]) and two international professional accounting bodies (the Chartered Institute of Management Accountants UK [CIMA] and the Association of Chartered Certified Accountants UK [ACCA]) that are currently available in Sri Lanka (Gunarathne and Senaratne 2018). These professional accounting bodies are actively involved in promoting IR through various activities which are presented below.

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I. Inclusion of new developments in accounting such as IR in their Curricula An analysis on how the professional accounting bodies have incorporated the concept of IR into their curricula is presented in Table 4.5. According to this table, most professional accounting bodies provide knowledge on the IIRF, including its fundamental concepts, content elements, and guiding principles, and emphasise integrated thinking and its application in the real context. Thereby, the professional accounting bodies encourage future accounting professionals to follow this reporting practice. II. Conducting awareness through sessions/seminars, conferences and forums on IR for members and other interested parties Professional accounting bodies conduct these events for their members and other interested parties such as academics, non-member professionals in both corporate and public sectors, specifically to enhance knowledge and skills pertaining to IR and to further promote this reporting practice. Table 4.6 presents some of these events organised by local professional accounting bodies. III. Organising competitions/award schemes on IR These IR competitions have influenced many companies to initiate this new reporting practice and they have now become a major inspiration for existing IR adopters to further improve their integrated reports. Table 4.7 provides examples for IR award competitions conducted by the professional accounting bodies operating in Sri Lanka. IV. Establishment of the Integrated Reporting Council by the ICASL In addition to the above initiatives, the ICASL has specifically formed a committee titled the “Integrated Reporting Council” on July 05, 2016, with the purpose of promoting IR and facilitating corporates and others interested parties to share knowledge on matters relating to the content, context and implementation of IR. The ICASL launched the “Preparer’s Guide to Integrated Corporate Reporting” in 2015 and published “A Supplement to a Preparer’s Guide to Integrated Corporate Reporting” in corroboration with the Integrated Reporting Council in 2017. . Universities At present, there are 17 state-funded universities (University Grants Commission [UGC] 2021a) and of those, 11 offer undergraduate accounting degrees (UGC 2021b). There are also Masters degrees related to the management and commerce stream available in 10 state universities (UGC 2021b). The curricula of these undergraduate accounting degrees and master’s degrees include contemporary developments in accounting such as IR and SR to different extents (i.e. as a topic in a course, as a topic under emerging issues, in one course or in several courses with a clear progression) (Senaratne et al. 2022; Gunarathne and Senaratne 2018). Thereby, universities educate their undergraduate/postgraduate students on IR (Gunarathne and Senaratne

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Table 4.5 Inclusion of IR into curricula of professional accounting bodies Professional Level accounting body

Course

Coverage/learning objectives

References

AAT

Level III

Financial reporting

Explain IR and sustainability reporting

AAT (2020)

ICASL

Corporate

Financial reporting & governance

Demonstrate awareness of IR

ICASL (2020)

Strategic

Advanced business reporting

Compile an integrated report Evaluate integrated reports based on IIRC guidelines

Integrated case study

Evaluate contemporary issues/developments in accounting and finance (e.g. IR) and recommend appropriate strategies for managing those issues to enhance sustainable business growth Discuss various reporting CMA (2018) frameworks available for sustainability and corporate reporting (e.g. IIRF, GRI)

CMA

Strategic

Strategic management accounting

CIMA

Certificate

Fundamentals of Identify the need for and financial accounting information to be included in an integrated report

CIMA (2017)

Operational

Financial reporting

CIMA (2019)

Management Advanced financial reporting

Identify regulators (e.g. the IIRC) and discuss their role Describe the role of the IIRC Explain integrated thinking Discuss the IIRF Explain the measurement and disclosure issues related to the six capitals

(continued)

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Table 4.5 (continued) Professional Level accounting body

ACCA

Course

Coverage/learning objectives

Strategic

Financial strategy

Discuss how to value intangibles in business valuation and their link with IR

Strategic professional

Strategic business reporting

Evaluate current developments such as IR

References

London School of Business and Finance (2021)

2018). In addition, university academics in the accountancy and finance fields conduct research on IR and promote the IR concept among corporate sectors (Senaratne et al. 2022). . Consultancy Firms These companies conduct research on IR and provide the required awareness and training to IR adopters in preparing their integrated reports. . Annual Report Producing Companies These firms play a facilitating role in the integrated report preparation process (Jayasiri 2020). Annual reporting companies provide consultation and design services, and sometimes write, edit and produce the integrated reports on behalf of their clients, thereby promoting the adoption of IR in the Sri Lankan context. . IR Assurance Providers IR assurance providers issue an external, independent view on the integrated reports. These external assurances are used to determine the credibility of the non-financial information in the reports (Herath et al. 2021b). This non-financial information includes sustainability information, internal controls, corporate governance and key performance indicators (KPMG 2021). There are two types of assurance providers available in Sri Lanka. I. Audit firms which provide non-financial assurance II. Other firms which provide non-financial assurance. 4.5.2.3

Mimetic Pressures

Due to the competitive IR award schemes organised by the professional accounting bodies, many companies attempt to mimic or follow companies that have the best IR practices (Jayasiri 2020). Thus, IR award competitions can be identified as the main source of mimetic pressure on IR adoption in Sri Lanka. Moreover, companies in some sectors, such as banking, finance and insurance, have a higher tendency to adopt IR (Cooray et al. 2020; Jayasiri 2020). Senaratne

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Table 4.6 Events organised by local professional accounting bodies to promote IR Professional accounting body ICASL

Event

Name/theme and other details

Organised year

Webinar

Measuring and reporting natural capital

2021

Forum

Integrated thinking and reporting

2020

Workshop

IR: moving beyond the basics

2019

Workshop

IR: a reality check with IIRC’s guiding principles

2018

Workshop

IR: kick start the journey to better business reporting (Organised in collaboration with Deakin University, Australia)

2017

Corporate directors programme

Organised in collaboration with IIRC and 2014 SEC

Conference

South Asia Conference on Financial Reporting for Economic Development (FRED) (The importance of IR as an emerging reporting practice was discussed)

2014

Roundtable discussion

How to be better a corporate: The numerous benefits of IR (Organised in collaboration with IIRC)

2013

Conference

International Conference on IR

2012

Webinar

SAFA Regional Focus Group for the Revision of the International IR Framework(Organised in collaboration with South Asian Federation of Accountants [SAFA])

2020

CMA Global Management Accounting Conference

IR—Future of corporate reporting

2018

CFO Forum Seminar CMA

Workshop

Achieving excellence in IR

2016

CMA Global Management Accounting Summit

Business resilience through IR

2015

Source Constructed by the Author based on Jayasiri (2020), ICASL and CMA websites

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Table 4.7 Competitions organised in Sri Lankan professional accounting bodies on IR Competition

Organised by

Excellence in integrated reporting awards

CMA

Integrated reporting award presented at the annual report competition

ICASL

Source Gunarathne and Senaratne (2018)

et al. (2015) also revealed that mimetic pressure is present among companies in the banking and finance sector that compete for IR awards in Sri Lanka. Therefore, this reporting practice has become a real trend in industries which have a higher IR adoption rate. However, it can be seen that some companies adopt IR without understanding the real value of it. Therefore, symbolic reporting is also present in these IR reports. The above analysis provides insights about the institutional pressures relevant to IR adoption in Sri Lanka. Figure 4.3 summarises the key pressures which have influenced IR in Sri Lanka based on the theoretical explanation provided under Sect. 4.3. It is to be noted that the results of this archival analysis were derived interpretatively. As per the analysis, normative pressures seem to be a key driver for IR adoption compared to coercive and mimetic pressures. This may be due to certain cultural, socio-economic and historical aspects specific to Sri Lanka (Alawattage and Fernando 2017; Dissanayake et al. 2021; Gunarathe and Senaratne 2018). The dominant Sinhalese-Buddhist culture inspires Sri Lankan society towards holistic and systematic thinking which is related to the integrated thinking of IR, and thus, Coercive Pressure IIRC Local regulatory bodies . SEC of Sri Lanka . CBSL

Mimetic Pressure

Normative Pressure Professional accounting bodies Universities Consultancy firms Annual report producing companies Assurance providers

Integrated Report Preparers

Competitive IR award schemes Nature of the industries/sectors

Fig. 4.3 Institutional pressures towards IR adoption in Sri Lanka. Source Constructed by the authors

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it has a favourable impact on the accounting profession, practices and accounting education (Gunarathne and Senaratne 2018). Historical evidence reveals that the accounting profession, practices and education were available in Sri Lanka even before the introduction of Buddhism to the country (before the 3rd Century BC). However, they evolved further after the introduction of Buddhism and during the colonial period followed by post-independence (Liyanarachchi 2009; Senaratne and Gunaratne 2017; Yapa 2006). However, the accounting profession and practices in Sri Lanka became more professionalised after the country gained independence from Britain in 1948. The introduction of an open economic policy in 1977 and the continuation of a liberalised economic policy created a greater demand for professional accountants in Sri Lanka (Senaratne and Gunaratne 2017). Over time, Sri Lanka has become a global hub for accountants as the country continues to produce highly competent accountants owing to its outstanding accounting education system (Senaratne and Gunaratne 2017; AT Kearney 2012). Sri Lanka is known to have an excellent education system which provides universal free education from school to tertiary level. Thus, the country has a strong accounting education system which comprises both academic and professional education and supportive educationrelated policies. In particular, Sri Lankan accounting education is profession-centric, where a university education is not an essential requirement for students to enrol in a professional accounting body (Senaratne et al. 2022). Consequently, Sri Lanka has two sets of accountants: “academic professionals” and “professionals without a degree” (Senaratne and Cooray 2012). Both academic and professional accounting courses in Sri Lanka tend to embrace new developments in accounting such as SR and IR into their curricula (Senaratne et al. 2022). Therefore, both academic and professional accounting education in Sri Lanka have made a substantial contribution to the progressive nature of the accounting profession by producing competent accountants and responding in a timely manner to global developments in the accounting arena (Senaratne and Gunaratne 2017; Senaratne et al. 2022). This progressive accounting profession and education have ultimately caused normative pressures to act on IR adoption in Sri Lanka. The analysis highlights that mimetic pressures on IR are present, to a certain extent, due to the competitive IR award schemes and nature of the industries or sectors. These mimetic pressures are likely to grow with time, as more award schemes are likely to be initiated and companies would prefer to differentiate themselves by adopting IR and securing their positions as market leaders. While IR remains voluntary in Sri Lanka at present, IR adoption continues to grow significantly around the globe. Hence, the coercive pressures exerted by bodies such as the CBSL may become more stringent, which will greatly influence IR adoption in Sri Lanka. Perhaps, in future, there could be some legislative requirements related to IR for PLCs in Sri Lanka, which would then align them with companies in other countries (Steyn 2014). To sum up, the influence of normative, coercive and mimetic pressures on IR adoption are unlikely to be stagnant as the concept of IR continues to expand in the context of Sri Lanka.

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4.6 Conclusion This chapter offers a review of the institutional pressures that may influence the adoption or implementation of IR in an emerging South Asian country, Sri Lanka. NIT is used to identify the different institutional forces (i.e. coercive, normative and mimetic pressures) in the external environment that are likely to drive the adoption of IR. The normative pressure created by professional accounting bodies, universities, consultancy firms, annual report producing companies and IR assurance providers seems to be the key institutional pressure on IR adoption and implementation in this setting. Further, mimetic pressure is also present to a certain extent, primarily due to the various competitive IR award schemes since companies are likely to garner reputational benefits by participating in these awards. However, coercive pressure towards IR adoption is at a very minimum level due to the voluntary nature of IR in Sri Lanka and perhaps due to the lack of regulatory and industrial lobby groups that demand that companies adopt IR. The findings add to the existing evidence and to the ongoing discussion on understanding the institutional pressures that act on IR adoption in a particular country context, where these pressures are likely to be significantly different country-wise, even if the countries are from the same region of the world. From a practical point of view, standard setters and other regulators can make use of the findings to influence more companies to take up IR and also look towards mandating IR, at least for certain business entities. Specifically, local regulators can have a mandatory requirement that the largest listed companies (e.g. the top 100) prepare IR reports. Moreover, these local regulatory bodies can develop a national-level policy on IR to further support the adoption of this system of disclosure in Sri Lanka. In addition, professional accounting bodies and other institutions can extend their role in encouraging IR among medium- and small-scale businesses, while reaching out to other stakeholders as well. Professional accounting bodies in Sri Lanka can also use a platform like the SAFA to develop regional-level policies on IR and to share their knowledge and experience on adopting IR to further promote this reporting practice at the regional level. The findings of this chapter are primarily based on existing archives related to IR and the experiences of the authors in the field of corporate reporting in Sri Lanka. However, deeper insights about these external institutional pressures on IR adoption can be obtained through primary data such as interviews with the relevant stakeholders as well as surveys. Future research can investigate the internal institutional pressures that influence IR adoption in a single context, in a country other than Sri Lanka, which also remains largely underexplored at present.

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Thilini Cooray is a Lecturer attached to the Department of Accounting, University of Sri Jayewardenepura, Sri Lanka. She holds a master’s degree from University of Sri Jayewardenepura and currently reading for a Ph.D. Her research interests include Integrated reporting (IR), Climate accounting and reporting, Sustainability accounting and reporting, Corporate governance, Management control systems, Sustainable development and Accounting education. She has co-authored in several indexed journal publications and book chapters and has engaged in both locally and internationally (e.g., World Bank) funded research projects. Further, she has served as a technical evaluator in several local and international IR award competitions. Dinithi Dissanayake is a Lecturer in Accounting at the University of South Australia. She has completed a Bachelor of Commerce (Honours) and a Ph.D. in Accounting. Her research expertise is in sustainability accounting and reporting in developing countries and recently working on the impact of technology on accounting. She has published in premier Accounting and Business journals including Journal of Cleaner Production; Business Strategy and the Environment; Meditari Accountancy Research (all rated A according to the ABDC journal quality list); Pacific Accounting Research and Sustainability Accounting and Management Policy Journal. Her research has also been supported by external funding from the Global Reporting Initiative.

Chapter 5

Adapting a National Pandemic Control Model as a Surveillance-Control Mechanism to Facilitate Corporate Sustainability and Integrated Reporting Prabanga Thoradeniya , Roshini Galappatti , and Mukesh Garg

Abstract The study outlines the role of control and surveillance practices in mitigating the impact of COVID-19 during the first wave of the pandemic in Sri Lanka and explores the potential to extend these practices to control corporate crises in order to facilitate sustainability and integrated reporting. Secondary research was conducted to examine the control and surveillance practices undertaken by the public sector in mitigating the spread of the novel Coronavirus during the first wave of the pandemic in Sri Lanka. The “Hammer and Dance” strategy was applied in a wholeof-government approach, using proactive, aggressive, and continuous control and surveillance measures combined with modulation of economic measures. The study proposes the application of a similar framework to be extrapolated to control business impacts at a time of crisis, to facilitate corporate sustainability and IR. The study demonstrates the criticality of control and surveillance in managing the impact of the crisis and the degrees to which control and surveillance can be modulated to suit the dynamic nature of the crisis to facilitate sustainability and IR. The study is original in its interpretation and adoption of an epidemiological model (Hammer and Dance) at a national level, and its extension to the business context to facilitate corporate sustainability and IR. This study is one of the first to explore the transposition of learning from the management of a global pandemic at a national level to the management of a corporate crisis. Keywords Crisis · Control and surveillance · COVID-19 · Hammer and dance · Integrated reporting · Sri Lanka P. Thoradeniya (B) · M. Garg Department of Accounting, Monash Business School, Monash University, Clayton, Australia e-mail: [email protected] M. Garg e-mail: [email protected] R. Galappatti Vitawell (Pvt.) Ltd., No. 26 Main Street, Battaramulla, Sri Lanka e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_5

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5.1 Introduction This chapter aims to outline the role of control and surveillance practices stemming from the impact of a major crisis (COVID-19) in Sri Lanka, a developing country in South Asia. The study explores the potential to adapt these practices to control and surveil crises at the corporate level which also facilitates sustainability and integrated reporting (IR), which is essential for business sustainability and continuity. Based primarily on an evaluation of the COVID-19 control mechanisms and approach adopted by the Sri Lankan public sector, the research highlights the integration of the Hammer and Dance strategy, an epidemiological theory proposed by Tomas Pueyo in his article “Coronavirus: why you must act now” (Pueyo 2020) published in Medium in March 2020. The hammer is a relatively short period [weeks] with rather extreme measures such as a lockdown of most aspects of public life. The dance is a period of stabilization, whereby as many restrictions as possible are lifted. Pueyo’s articulation of the Hammer and Dance strategy became the defining base strategy in formulating control and surveillance strategies adopted by nations across the globe, at varying degrees of containment (see Fig. 5.1). The UK government, in its approach to sustainable development, outlined the importance of the “whole-of-government” approach, which involves dialogue with multiple stakeholders and government agencies (Raynsford 1999). In the healthcare system, Carey and Crammond (2015) recommend the development of a deeper awareness of political and policy structures, and the discursive conventions they seek to influence within specific settings. Even the World Health Organization (WHO) recommends that national governments adopt a “whole-of-government” approach to address ‘upstream’ level change (i.e., change at the macro level within governments), which will result in wide-spread health benefits (Bambra et al. 2010).

Fig. 5.1 Adopted from Tomas Pueyo’s Hammer and Dance Theory (2020)

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Sri Lanka’s response to the first wave of the COVID-19 pandemic was based fundamentally on the Hammer and Dance strategy, with public policy proactively framed as a whole-of-government approach (State Intelligence Service 2020). The whole-of-government approach was articulated as four key lines (L) of (O) operation (O), i.e., the LOO Model, which is unique to Sri Lanka. This model is a structured approach devised by the government of Sri Lanka to utilize its key state institutions and stakeholders to monitor and control the spread of COVID-19. Conceptualized as the four LOOs: (a) Military/Police/Intelligence to detect (D) isolate (I) and trace (T) (i.e., DIT Model), (b) Medical and Health Care for epidemiology, public health inspection, and hospital care, (c) Psychological management through access to information, confidence-building and consolidation of solidarity, (d) Economic and community well-being by managing supply chains of food, medicines, and essential services. The mapping and documenting of varying degrees of containment and severity of controls opted for by countries was carried out by the Blavatnik School of Government in the University of Oxford under the “Oxford COVID-19 Government Response Tracker.” The Oxford COVID-19 Government Response Tracker aggregated common policy responses across an ordinal scale of scores interpreted as a rating of stringency of a country’s response, labeled the Government Response Stringency Index (Hale et al. 2020). Cited by the Oxford COVID-19 Government Response Tracker as a nation scoring highly for stringency, Sri Lanka’s approach to COVID-19 management during the first wave was a unique and dynamic process (State Intelligence Service 2020). The world has been devoid of an experience over the last century, akin to a similar situation, despite numerous natural or human-made disasters. The COVID19 pandemic may return in multiple waves over the next two years. A sovereign and financial crisis may stem from its fallout, triggering social unrest (Asian Development Bank 2020). Therefore, a case for more robust crisis and resilience planning capabilities (Williams and Shepherd 2016), incorporating a culture of strict control and surveillance, is essential for business sustainability and continuity at the corporate level. The economic challenges and the social fallout due to the COVID-19 pandemic are severe, resulting in a shortage of resources—both financial and non-financial—and simultaneous disruptions in supply and demand and normal human life. Coordinated efforts are required by both governments and businesses to not only save lives but also protect economic prosperity (Pak et al. 2020). Therefore, there is a greater need for private sector businesses to follow strict control and surveillance practices for business sustenance. IR during the pandemic needs to be reliable, and resources must be safeguarded from leakage. While the current policy responses by global economies primarily address the health crisis, extended periods of shut down of businesses, rapid increases in unemployment, and large-scale stimulus programs (Coibion et al. 2020; De Vito and Gomez 2020) have changed the way businesses are now conducted. COVID-19 created a new normal affecting social and economic life worldwide (Brammer et al. 2020). Companies and individuals have responded

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to COVID-19 in different ways. Thus, differential effects of COVID-19 are visible across industries and organizations (Bapuji et al. 2020). The COVID-19 pandemic demonstrated to the corporate world that the primacy of financial reporting has come to an end (Mackintosh 2020), redefining how businesses interact with human, social and manufactured capital. The International Integrated Reporting Council (IIRC) calls for “the urgent formation of a global comprehensive and connected corporate reporting system, fundamental to tackle future challenges” (Mackintosh 2020, para. 5). The pandemic has brought the international community to a realization of the need for greater disclosure on areas of crisis surveillance and management, preparedness and response (IIRC 2020), with reporting balanced between financial concerns—revenue and profitability—and pre-financial issues such as occupational health and safety, employee assistance and business continuity planning. At times of crisis, sustainability initiatives, sustainability investments, sustainability accounting, sustainability reporting (SR), and IR are sidelined as they are not generally prioritized or set as critical to organizational function. Thus, the risk of senior executives of organizations adopting a short-term perspective on sustainable development has increased due to enhanced investor pressure and decision-making criteria (Siegrist et al. 2020). COVID-19 has prompted substantial discussions around the need for society to catalyze reductions in existential risks, as they also relate to broader issues around future sustainable development (Bapuji et al. 2020; Brammer et al. 2020). The economic downturn due to the pandemic may overshadow concerns pertaining to key sustainability issues such as climate change, which now appear to be more of a distant threat to humanity. Businesses in both advanced and developing countries need to continue to examine their ability to roll out a substantial clean energy transition. In a recent study, Siegrist et al. (2020) highlight the government’s failure to provide adequate solutions to sustainability and environmental problems. The relationship between sustainability and the corporate bottom line is tenuous, as sustainability is most often perceived in light of philanthropy (Vogel 1996). However, sustainability goes beyond philanthropy and corporate social responsibility (CSR) to also include an impact on a business’s ability to continue (Miller 2011) and is considered a strategic business function with stewardship from the Board of Directors. Savitz and Weber (2012) indicate that sustainability, business continuity, and crisis management support shareholder value creation and profitability. Thus, one of the aims of IR is to create value for internal and external stakeholders over time by supporting integrated thinking, integrated decision-making, and actions (IIRC 2021). In the value creation process, it is vital to continuously monitor and analyze the external environment in the context of the organization’s purpose, mission, and vision to identify “risks and opportunities relevant to the organization, its strategy, and its business model” (IIRC 2021, p. 14). The severity of the impact of the COVID-19 pandemic on society as a whole has prompted business entities to engage in strategic CSR (Garcia-Sanchez and GarciaSanchez 2020), proactively engaging themselves with doing good in the interest of all stakeholders. In light of these perceptible first steps toward value creation for

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internal and external stakeholders, coupled with the call for more robust disclosure to manage future complexities, the need arises for a fluid framework for surveillance and management. The application and transposition of a stringent national pandemic control framework to the workplace, to surveil and control business impacts at times of crisis, would serve as a parameter that can identify risks and opportunities that facilitate IR. De Villiers et al. (2014), Simnett and Huggins (2015), De Villiers et al. (2017), and Rinaldi et al. (2018) call for future research in IR to guide developments in policy and practice. Also, Lee and Schaltegger (2018) call for pragmatic research in sustainability accounting and corporate sustainability management. This study contributes to the limited literature on control and surveillance, sustainability, and IR from a developing country perspective in South Asia (in a national and organizational context). It showcases how the adoption of stringent control and surveillance measures curtails mitigating effects and helps the containment of crises, thereby enabling the resumption of “normalcy,” the achievement of sustainability of the business and the facilitation of IR. In doing so, a conceptual framework/model is proposed that could be utilized by organizations in crises to manage organizational sustainability and facilitate IR. The Sri Lankan government’s LOO and DIT Models for control and surveillance based on the Hammer and Dance strategy to respond to COVID-19 are adopted within this chapter to propose a conceptual framework (i.e., Corporate DIT Model) for the business and management community, with an intention to extrapolate the concept to aid decision-making toward sustainable investment, build personal and team resilience, support employees to do their jobs more effectively and to ensure that the organization continues to perform under pressure during a crisis, facilitating IR. The remainder of the chapter is organized as follows: Sect. 5.2 provides the background for the study by outlining Sri Lanka as the research context. Section 5.3 outlines sustainability and IR in Sri Lanka. Section 5.4 presents a literature review. Section 5.5 explores the theoretical framework for the study. Section 5.6 sets down the research method. This is followed by the findings and discussion in Sect. 5.7. Finally, the concluding remarks and future research are presented in Sect. 5.8.

5.2 Background of the Study Sri Lanka offers a unique and valuable setting to explore the impact of the COVID-19 pandemic viewed using the lens of crisis management and IR. The historical practice of sustainability, uniqueness of the Sri Lankan approach to dealing with natural disasters, and the country’s success in effectively managing the first wave of COVID19 position Sri Lanka as a unique context for this research. Social polarization, rising urban poverty levels, urban conflict and violence, terrorism, natural disasters, and climate change all result in a high level of evolving risk (Eizenberg and Jabareen 2017).

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Corporate social responsibility has been practiced in Sri Lanka since ancient times (Thoradeniya 2021). Sri Lanka is primarily a Buddhist country where the majority of the population practice Buddhism. The Buddhist worldview informs and enriches efforts to modify consumption into “sustainable consumption” forms that can bring about and sustain a better quality of life and well-being for humans and the living environment (Daniels 2011). Extant literature acknowledges that Buddhism informs sustainability as an alternative to current business practices which are predominantly governed by an economic rationale (Abeydeera et al. 2016a, b). Despite the practice of sustainability in Sri Lanka for thousands of years, a crisis is not new to Sri Lanka. Sri Lanka is susceptible to several natural disasters, out of which tsunamis, floods, droughts, landslides, and cyclones are categorized as significant disasters requiring mitigation planning (Wickramaratne et al. 2012). Sri Lanka’s DesInventar Disaster Typology is characterized by climatological disasters attributable to 99% of all disasters (UNDP 2009). Sri Lanka experienced a devastating tsunami in 2004, claiming more than 31,000 lives, 150,000 livelihoods affected, and over a million people displaced (WFP 2005). Sri Lankans are recognized for acts of altruism. In times of crisis, while the leadership in disaster management comes from the government, public participation, volunteerism, and public–private sector collaborations are commonplace. Sri Lankan society is considered as demonstrating highly valued altruistic behavior (Ven. Somananda 2020). The culmination of cultural and sociological values influenced by Buddhism and extended family concepts (Gamage and Wickramasinghe 2012) influence altruistic behavior. Ven. Somananda (2020) refers to people who are alert to social activities or problems and mentally associated with social issues as those with high “social sensitivity,” defining the phrase as follows: “Social sensitivity describes the proficiency at which an individual can identify, perceive, and understand cues and contexts in social interactions along with being socially respectful to others” (p. 145). Sri Lankans understand and recognize that the suffering caused by being irresponsible in the face of the pandemic affects everyone in society, including themselves, their families, and their communities (Hettiarachchi et al. 2020). This high degree of social sensitivity shapes not only individual behavior but transposes individual predispositions to planned behavior toward sustainable action at the corporate level (Thoradeniya et al. 2015). Sri Lanka’s effective management of the first wave of the COVID-19 pandemic is a key factor in the choice of context. During the first wave of the pandemic— which is the focus of this study (as of September 25, 2020)—Sri Lanka reported only 3,333 total confirmed cases, of which 178 were active cases and 13 deaths (Worldometer 2020). Daily new cases averaged at 3–5 cases a day, due in large part to the repatriation of Sri Lankans living abroad. At the time, health authorities confirmed that social spread had been curbed, and cases were restricted to quarantine centers (Health Promotion Bureau 2020). An initial stringent lockdown period of eight weeks, coupled with measures of leniency as case numbers declined, proved that a phased strategy of lockdown in tune with case numbers and empathy toward ethics of care for society (Hettiarachchi et al. 2020) were successful in containing the pandemic over the period April 2020 to September 2020, the official first wave.

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5.3 Sustainability and Integrated Reporting (IR) in Sri Lanka Organizations produce different types of corporate reports such as financial reports, annual reports, standalone sustainability reports, and integrated reports, among others. In the year 2000, the Global Reporting Initiative(GRI) published its first global framework for SR (G1 guidelines). Due to the high take up of SR around the world, the GRI transitioned from providing guidelines and launched its first global standard for SR in 2016 (GRI 2021). The multi-capital approach, long-term focus, guiding principle of connectivity, and requirement for board involvement in IR led to an increase in the understanding of sustainable development issues that will create value (Adams 2017). In 2021, the IIRC released its revised IR framework to support organizations in improving their corporate reporting, focusing on stakeholder value creation and increasing stakeholder trust (CIMA 2021). Thus, IR became the corporate norm of future reporting. The integrated report elucidates the creation, preservation, or erosion of organizational value over time to providers of capital. Value creation is influenced by the external environment that affects the organization, through relationships with stakeholders, and is dependent on various resources. When integrated thinking is embedded into organizational activities, it will lead to better information flow, analysis, and decisionmaking, as well as the integration of information systems, to support the reporting process (IIRC 2021). During the COVID-19 pandemic, with a view to simplifying corporate reporting, five global framework and standard-setting organizations—the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the GRI, the IIRC, and the Sustainability Accounting Standards Board (SASB)—expressed their intention to work together to progress toward comprehensive corporate reporting. Each of these organizations is committed to engaging with key actors, including the International Organization of Securities Commissions (IOSCO), the IFRS, the European Commission, and the World Economic Forum’s International Business Council (IIRC 2021). On November 25, 2020, the IIRC and the SASB announced their intention to merge. By mid-2021, the Value Reporting Foundation was formed, aimed at building a more comprehensive corporate reporting system by linking the concepts between the IR Framework and the SASB Standards (IIRC 2021). In the “new normal” post-coronavirus period, sustainability-focused investments with an enhanced focus on environmental, social, and governance factors are on the rise (Forbes 2020). While in the past, corporates and investors viewed sustainability as a limiting investment (Henderson 2015; Whelan and Fink 2016), the recent contraction of global business with the impairment of consumer spending and supplier networks foretells contracting wealth generation for corporates that have been less receptive to sustainable business strategy. This is evidenced in a study by Morningstar—a reputed rating system for mutual funds—that indicates that sustainable equity funds continue to outperform (Morningstar 2020) non-sustainable funds on a

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relative basis. COVID-19 may well have changed the pace of adaptation and acceptance of sustainability practice and IR in the corporate sector and may well be the key to sustainable business continuity. In scouting out the dynamics of corporate externalities and internalities, it seems fit that an effective national pandemic control and surveillance model be adaptable to an organizational setting, especially in light of the degree of rigor in the control, surveillance, and cohesion of business units, to facilitate sustainability and IR. Since 2009, Sri Lanka has been striving for economic development with the end of over three decades of terrorism and conflict. Consequently, there has been increasing attention paid to CSR and SR by Sri Lankan companies (Thoradeniya et al. 2021, 2022). Prior studies found that the GRI SR guidelines influence the voluntary SR of many Sri Lankan companies (Abeydeera et al. 2016a, b; Dissanayake et al. 2019, 2016). The Colombo Stock Exchange (CSE) collaborated with the GRI to enhance sustainability performance and communication of listed companies in Sri Lanka (GRI 2018). Gunarathne and Senaratne (2017) explored the diffusion of IR in Sri Lanka. Their study found that the early adopters of IR were driven by the efficient-choice perspective, while others were influenced by the trend to engage in IR. It was also noted that many companies were using IR as an add-on to SR without internalizing IR principles. A recent study by Cooray et al. (2021) finds that Sri Lankan companies have made good progress in preparing integrated reports in line with the elements of the International Integrated Reporting Framework (IIRF). However, there are several reasons why companies may not always prepare sustainability and integrated reports. In a study of countries in the Indo-Pacific region, Dissanayake et al. (2021) find that lack of knowledge and understanding, additional costs, time constraints, and a lack of initiatives from the government are some of the main barriers to sustainability and IR. In the context of Sri Lanka, stakeholders’ demands, a supportive accounting profession and the availability of professional accountants, high competition among companies, award schemes, and national culture are recognized as key influencing factors for the adoption of IR (Gunarathne and Senaratne 2018). Understanding the relevant national cultures supports the adoption and implementation of environmental and sustainability management accounting practices in different countries (Lee and Herold 2018). IR looks beyond mere financial reporting to identify risks, opportunities, and outcomes that may affect stakeholders’ value creation (IIRC 2021). The glaring impacts of the pandemic on organizations require a rethinking of reporting practices, and in this context, IR serves as a tool that provides future-oriented information (Garcia-Sanchez and Garcia-Sanchez 2020). In the current study, this aspect is explored to develop a framework extrapolated from the national pandemic control model to manage the corporate crisis, which is material for stakeholder value creation. Disclosures in the integrated report might include information derived from the corporate crisis management framework and identified risks, opportunities, and outcomes related to internal and external stakeholders.

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5.4 Literature Review 5.4.1 Control and Surveillance in an Organizational Context The recession in the early 1980s triggered the first line of corporate restructuring, initiating a period of transformation in the centralization of control over the managerial process (Prechel 1994). Formal controls over the managerial process were intensified. Discretion over many decisions was centralized in decision centers; formal controls increased surveillance overproduction, and the corporation became more tightly coupled and more flexible (Harley 2013). However, the 1990’s classical control processes, which were feedback systems, proved to be less effective as they were reactive and not proactive (Preble 1992). Conceptual contributors to the strategic control literature highlighted the need for anticipatory feed-forward controls that were innovative and organic and recognized a rapidly changing and uncertain external environment (Durden 2013). These new systems were designed to operate continuously, checking and critically evaluating assumptions, strategies, and results (Ossadnik and Steins 2013). Management control tools as value drivers for the public sector (Dreveton 2017) have been implemented to implant private sector values into public organizations in a transfer process that deploys new values to the public sector. Although not directly aligned to the control function of public or private organizations, the COVID-19 pandemic as a crisis has shed light on a new operational model of control surveillance (World Health Organization 2006). Firstly, it is appropriate for pandemic containment, and secondly, possibly applicable to any form of crisis containment. Surveillance and control viewed under the lens of COVID-19 have been defined as participatory disease surveillance mechanisms for the prevention and management of the pandemic, in alignment with the Hammer and Dance strategy (Pueyo 2020). The self-regulation, adaptation and re-application of learning from the previous crisis are evident in the control and surveillance management approach of the COVID-19 pandemic scenario in Sri Lanka (Waduge 2020).

5.4.2 Hammer and Dance Strategy At the beginning of January 2022, over 300 million cases of COVD-19 had been reported worldwide, with 5,488,000 deaths and over 257 million recoveries. As of January 6, 2022, global daily new cases from COVD-19 still amount to 2,576,850, and global daily deaths are over 7554 (Worldometer 2022). In contrast to the rest of the world, Sri Lanka has contained the pandemic to 590,063 total confirmed cases, 15,083 fatalities (as of 5 January 2022) and 561,557 recoveries (Worldometer 2022). The disparity between world case trends and Sri Lanka’s case trend has been attributed to the stringent application of containment strategies reflective of the propositions of the Hammer and Dance strategy (Erandi et al. 2020).

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Subsequent to Pueyo’s (2020) elaboration of the Hammer and Dance strategy as a pandemic control mechanism, it has been hailed as a strategy from an epidemiological perspective as well. However, in practice, Pueyo’s model (2020) has been embraced as a twin model useful not only for disease control but also as a gauge of economic impact (Assenza et al. 2020). This is evident in that many governments have followed a two-phased strategy of confinement coupled with financial relief to recognize the impact of containment strategies. Cross-country differences are evident in intensities and durations of containment and the reliance on public enforcement versus private incentives (Assenza et al. 2020). The measures countries take to tackle the effects of COVID-19 can be classified broadly as mitigation methods and suppression methods (OECD 2020). In mitigation, the focus is to slow down the spread of the virus and achieve a paced-out disease spread. Suppression methods are more forceful and focused on stopping the spread completely. As governments enter the second phase of gradual lifting of confinement measures and subsequent restarting of economic activity, the pandemic must be kept under control with intervention for further containment measures. The dynamics of the epidemic dictate the dynamics of optimal policy, a cause-effect cycle determined by the degree and effectiveness of control and surveillance (Erandi et al. 2020). It is this same process that has been adopted by the Government of Sri Lanka in controlling the spread of COVID-19 during the first wave, focusing on using stringent and proactive suppression measures (Hammer), and thereby containing the spread of the virus to controllable levels (Dance) (State Intelligence Service 2020).

5.4.3 COVID Control Measures in Sri Lanka The full impact of COVID-19 will be felt by the Sri Lankan economy over the calendar years 2020–2023, with the economy expected to contract significantly, where the country’s economic growth was anticipated to contract by 6.7% (World Bank 2021). Stringent domestic lockdown measures and the global spillover from COVID-19—with the key sectors of tourism, apparel, construction, and retail indicating negative growth—a damaged economic activity for the year 2020 (World Bank 2021), with a spillover into 2021 and 2022. Additional welfare implications of the pandemic—mass testing, quarantine accommodation, public health costs, welfare, and fiscal stimulus—will add further burdens to the State (United Nations 2020). In tackling the pandemic, Sri Lanka’s control and surveillance measures were aggressive and suppressive, from the beginning, especially during the first wave of the pandemic. These included quarantining all inbound passengers to the country, suspension of inbound flights, closing schools and universities, implementing an island-wide curfew, proactive contact tracing, quarantining confirmed cases and isolating their first, second, and third contacts, and enforcing social distancing (College of Community Physicians 2020). In April 2020, Sri Lanka’s Government Medical Officers Association proposed a ten-step containment strategy drawn from the Hammer and Dance Theory to control the COVID-19 outbreak in Sri Lanka. The

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recommendation was that “all possible aggressive actions should be implemented to control COVID-19” (Daily Mirror 2020). The aggressive measures proposed comprised (a) more than 80% social distancing, (b) minimizing travel between cities, (c) isolating confirmed cases, (d) more than 80% contact tracing, (e) wide-spread testing, (f) minimizing travel to public spaces, (g) effective monitoring and treatment, (h) closing ports of entry, and (i) vaccination. Some key actions implemented include aggressive “social distancing” measures implemented country-wide, travel bans to other affected countries and the closure of ports and airports, country-wide strict curfews and a halt on inter-province travel, isolation of clusters by geographic location, public–private partnerships to aid Sri Lankan households to obtain emergency supplies/services, emergency health and economic measures, including several economic relief measures for the poorest segments of society and the most vulnerable sectors of business (Erandi et al. 2020). Additionally, an increase in government spending on health care and public safety measures, as well as the establishment of a National Coronavirus Task Force, aided the effective coordination of health and containment, quarantine, and contact tracing efforts (PricewaterhouseCoopers 2020). These control and surveillance strategies have been demonstrated to be effective with at least 50% contact rate reduction or at least 40% isolation of the infected population’s contact history (Erandi et al. 2020). The country entered a strict curfew lockdown from March 20 to May 11, 2020. The Oxford COVID-19 Government Response Tracker Stringency Index figure for Sri Lanka stood at 100 (most stringent) at the peak of the Sri Lankan lockdown (Oxford COVID-19 Government Response Tracker 2020). Sri Lanka initiated measures to respond to COVID-19 in advance of the first confirmed case and gradually heightened the response between the first and second cases that were six weeks apart. The nation further escalated its response immediately after the second case to a stringency index of 75% within one week and 97% within two weeks (Jayatilleke et al. 2020). The closure of airports and ports restricted the possibility of the entrance of the virus to the island. Recent overseas visitors were tracked and monitored. Identified cases were transferred to quarantine centers for 14 days. Strong community mobility control measures were exercised to curtail the mobility of the virus (Jayatilleke et al. 2020), including a nationwide curfew at the point of the Hammer, easing into inter-district travel restrictions, and lockdown of high-risk villages, as Dance mechanisms (Jayatilleke et al.2020). By effectively utilizing the COVID-19 Stringency Index (C19SI), Sri Lanka mapped and manipulated its response in line with a projection model for COVID-19 cases in Sri Lanka, applied to different scenarios after lockdown, utilizing the stringency index as a basis for government response (Jayatilleke et al. 2020). A survey of 108 countries carried out by Yicai Research Institute in 2020 cited Sri Lanka as the second-best performing country in terms of COVID-19 prevention measures, economic recovery, and international cooperation (Ceylon Today 2020). The Australian think tank Lowy Institute cited Sri Lanka among the top ten countries in its COVID Performance Index—deconstructing the pandemic response. With a sample of 98 countries, Sri Lanka was in the 10th position in handling the pandemic in the most effective way (Lowy Institute 2021).

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The learnings from the management of the first wave of the pandemic in Sri Lanka would be helpful in managing the impact of organizational crises and would facilitate corporate sustainability, SR and IR.

5.5 Theoretical Framework Managers in public services are pressurized to enhance the quality-of-service delivery, while performance management is more complex in the public sector. However, an effective public manager is expected to deliver a quality service as well (Arnaboldi et al. 2015). Sri Lankan government and public servants exhibited this quality by taking initiatives to combat COVID-19 through the implementation of multiple lines of operation across multiple levels of public and private, social, and economic tiers (State Intelligence Services 2020). The Sri Lankan government’s novel “Whole-of-Government” COVID-19 response policy framework is indicative of the Government’s intention to take full accountability for the national response and economic recovery (State Intelligence Services 2020). The “whole-of-government” LOO Model is novel in that it has been conceptualized uniquely by the Sri Lankan Government for COVID-19 crisis management (State Intelligence Services 2020). The comprehensive and cohesive model encapsulates key areas of concern for the Government and actively delegates responsibility to specific State Institutions with key deliverables (State Intelligence Services 2020). Each LOO manages a core component of the overall crisis management strategy. Tactics for each LOO are dynamic and based on the real-time situation of the crisis and the peak and ebb of the COVID-19 wave, as denoted in the Hammer and Dance strategy. The unique application of this model, its cohesiveness and operational fluidity, as well as its success in the containment of the first wave, provides an opportunity of exploring the transposition of these key concepts to their application at the corporate level. The risk perspectives, possible ability to manage macro- and micro-crises, and the potential for value creation across key lines of operation, impacting all stakeholder groups and enabling the capture of stakeholder data, confirm the operational model as a powerful tool for IR.

5.6 Research Method The secondary research (Stewart and Kamins 2011) approach was pursued for information collection. The novelty of the issue under investigation in a developing country context gives the study an exploratory nature (Yin 2011). The goal of a secondary research method is similar to other research methods as it contributes to knowledge by offering an alternative perspective and provides broader insights

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into the issues being explored (Johnston 2014). This method allows for a comprehensive discussion on how control and surveillance is viewed under the lens of the Hammer and Dance strategy. Relative to a crisis, this strategy can be implemented in managing organizations and facilitating sustainability and IR. Advancements in technology have created avenues to utilize existing information for secondary research (Johnston 2014). Information was collected for this study from published sources such as government reports and policy documents (e.g., Combating COVID-19: Sri Lankan approach), websites (e.g., Worldometer), online publishing platforms (e.g., Medium), newspaper articles, books, and journal articles. Table 5.1 highlights the sources of information utilized for this research. The use of multiple sources of information is the best way to proceed in secondary research (Stewart and Kamins 2011). The utilization of existing information provided a viable option for this study due to limited time and resources (Johnston 2014), including travel restrictions which were a barrier to conducting primary research, because of the COVID-19 pandemic. Secondary analysis is a systematic method with procedural and evaluative steps. The key to secondary data analysis is applying theoretical knowledge and conceptual skills to utilize existing data to address the research questions (Johnston 2014, p. 620). The current study followed the data analysis approach suggested by Johnston (2014). The research question was developed, and as existing data can be utilized in addressing the research question, an in-depth literature review of the areas of interest (for example, COVID-19 pandemic and crises, Sri Lankan government’s response to COVID-19 pandemic, IR and SR) was conducted. Through the literature review, relevant studies were identified, and this was followed by a thorough evaluation of information referring to the theoretical framework of the study. The following evaluative steps were followed to determine the appropriate match of data to the current study and to ensure the congruency and quality of previous studies: “(a) what was the purpose of this study; (b) who was responsible for collecting the information; (c) what information was actually collected; (d) when was the information collected; (e) how was the information obtained; and (f) how consistent is the information obtained from one source with information available from other sources” (Johnston 2014, p. 622). The researchers utilized information found in the above-mentioned sources in order to complete this evaluation. The evidence and insights were interpreted in the context of the theoretical framework (LOO and DIT Models as denoted in the Hammer and Dance strategy), and a developing country perspective was used to discuss and refine the emerging findings, develop a framework (Corporate DIT Model) that is applicable for the management of organizational impacts during a crisis to facilitate sustainability and IR, and reach conclusions that have not been suggested by any other source.

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Table 5.1 Secondary sources of information Asian Development Bank—https://www.adb.org Central Bank of Sri Lanka—https://www.cbsl.gov.lk Ceylon Today—https://ceylontoday.lk Colombo Stock Exchange (CSE)—https://cse.lk College of Community Physicians of Sri Lanka—https://ccpsl.org COVID-19 Stringency Index—https://ourworldindata.org/grapher/covid-stringency-index Daily Mirror—https://www.dailymirror.lk Ernst & Young Global Limited—https://www.ey.com Forbes—https://www.forbes.com Government Medical Officers’ Association (GMOA)—https://www.gmoa.lk Health Promotion Bureau—https://www.hpb.health.gov.lk/en Journal articles and books as listed in the references Lowy Institute—https://www.lowyinstitute.org Ministry of Defence—Sri Lanka—https://www.defence.lk Medium—https://medium.com Morningstar—https://www.morningstar.com.au Oxford COVID-19 Government Response Tracker—https://www.bsg.ox.ac.uk/research/res earch-projects/covid-19-government-response-tracker PricewaterhouseCoopers (PwC)—https://www.pwc.com/pwc Securities and Exchange Commission of Sri Lanka—https://www.sec.gov.lk State Intelligence Service—https://www.president.gov.lk/.Documents/Concept-Paper-COVID19-Ver-6-11-May-20-E.pdf Sri Lanka Army—https://www.army.lk The Chartered Institute of Management Accountants (CIMA)—https://www.cimaglobal.com The Global Reporting Imitative—https://www.globalreporting.org The International Integrated Reporting Council (IIRC)—https://www.integratedreporting.org/ The Institute of Internal Auditors (IIA)—https://na.theiia.org The Organization for Economic Co-operation and Development (OECD)—https://www.oecd.org United Nations Children’s Fund (UNICEF)—https://www.unicef.org United Nations—https://www.un.org United Nations Development Program (UNDP)—https://www.undp.org Worldometer—https://www.worldometers.info/coronavirus/ World Bank—https://www.worldbank.org World Food Programme (WFP)—https://www.wfp.org World Health Organization—https://www.who.int Yicai Research Institute/Yicai Global—https://img.cbnri.org

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5.7 Findings and Discussion 5.7.1 The Outcome of Sri Lanka’s First Wave of COVID-19 Management By July 27, 2020, Sri Lanka reopened its schools, welcoming children back after nearly five months of school closures. Tim Sutton, Representative for the United Nations Children’s Fund (UNICEF), congratulated Sri Lanka “for its effective response to COVID-19, which has placed it in the most impressive position of being among the first countries in South Asia to open schools and bring children back in a safe way” (Sutton 2020). As per government sources, Sri Lanka was free of the social transmission of COVID-19 since April 30, 2020, a month and a half since the reported first case of the first wave of COVID-19 in Sri Lanka on March 10, 2020 (Health Promotion Bureau 2020). The Government of Sri Lanka initiated several endeavors to help the country prevent, detect, and respond to the COVID-19 pandemic and strengthen its public health preparedness. Despite a conservative 3.81% GDP allocated to Health (Health Promotion Bureau 2020), the country has a reputation for excellence in public health care and is one of the few countries in the world to offer free healthcare to all its citizens. Since the 1980s, Sri Lanka’s healthcare system has been a case study (Payne 2001).

5.7.2 Core Factors Impacting Outcomes While it can be argued that Sri Lanka’s COVID-19 management practices are mostly the same or similar to that of other countries, the course of this research has indicated that a core factor for Sri Lanka has been the implementation of a management strategy based on a whole-of-government approach that closely coordinated the operations of top public service providers along four key lines of operations. It can be defined as a “whole-of-government” approach toward “proactive intervention to prevent any outbreak of COVID-19 within Sri Lanka,” as envisioned by President Gotabhaya Rajapakse (2020). The “concept of whole-of-government” is a public administration strategy, originally conceptualized in Britain, as public administration reforms that strived for a holistic approach to state functions, repealing fragmentation of authority and responsibility (Christensen and Laegreid 2006). The main focus of the whole-of-government strategy is coordination and integration and collaboration among different core components of the State toward a clear national objective (Christensen and Laegreid 2007). The vision and direction for strategy at the very top of the public service (from the President), and the execution by the four LOO sectors – 1) Military/Police/

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Intelligence, 2) Medical and Healthcare, 3) Psychological 4) Economy and wellbeing of a community (State Intelligence Service, 2020), and their synchronization and coordination with all state and private sector partners led to a seamless process engaged towards the achievement of one objective. Each LOO is further empowered and designated with specific and accountable responsibilities, as outlined in Fig. 5.2. Of the four LOO, Military/Police/Intelligence remained key to the final outcome, accountable for detection, isolation, and tracing of possible COVID-19 contacts. This LOO focused on control of the entry of COVID19 disease into the country and containment and prevention of the further spread of the disease (State Intelligence Service 2020). Delegated roles under the supervision of the Ministry of Defense saw State Intelligence Services focus on contact tracing, the Sri Lanka Army on containment, and the Police on controlling mobility (State Intelligence Service 2020) (see Fig. 5.2).

Present status

Military/Police/Intelligence line of operation Detection

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PHIs

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prevented,

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Fig. 5.2 Conceptualization of the whole-of-government approach—Adopted from LOO model. Source State Intelligence Service (2020)

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5.7.3 Transposition of the LOO Approach to Business and the Proposed Model A further drill-down into the LOO provides an insightful framework that can lend itself to exploration as a control and surveillance framework applicable to businesses in a developing country context, as a proactive crisis control tool to facilitate sustainability and IR. The Military/Police/Intelligence LOO, as outlined in Fig. 5.3, is an intelligencedriven model (State Intelligence Service 2020) with its essence in Detection (D), Isolation (I), and Tracing (T) and is termed the DIT Model by the Government of Sri Lanka. None of the components of the model are mutually exclusive, but instead are interdependent and inter-driven toward a common goal. The DIT Model is a proactive and aggressive, two-way process, working backward and forward. Employing a multitude of sources, the model works forward to isolate (quarantine) and contact traces. In applying the LOO approach to an organizational setting—with Detection, Isolation, and Tracing as the key intelligence-driven variables—organizations can formulate a control and surveillance model that best fits their purpose to proactively scout for impacts of a future crisis and facilitate sustainability and IR. With the current pandemic seen as a fluid crisis that will extend to the medium term, companies should consider establishing pandemic-specific policies and procedures, capabilities for employee communications, telecommuting, and personal/ family leave to minimize disruptions to the workplace (Ernst & Young Global Limited 2020). The success of the model will depend on how effectively any given organization maps its control and surveillance variables to match its externalities and internal requirements. Disruptions to business due to crises can vary in scale, while others may be systematic (as with COVID-19), and may differ in velocity or escalation of criticality. Some may last longer or impact the workforce, supply chain, customers, and stakeholders. Following the approach of the Sri Lankan government, through the Corporate DIT Model (see Fig. 5.4), organizations would be able to proactively detect futureoriented information, disruptions, challenges, or shortcomings, using a combination of big data, secondary data, and primary data to isolate issues on the severity of the impact. In turn, through an iterative process developed based on knowledge of the nature of the impact of the crisis on the business, primary and secondary levels of disruptions can be traced, flagged, controlled, or neutralized. This will provide a fundamental framework within organizations that can act as a crystal ball to predict disruptions, negate reactive crisis management, and be a continuous and ongoing process toward sustainable business processes that also facilitate IR.

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I n t e l l i g e n c e

Detection

Isolation

Big-data analysis

Highly vulnerable community

Record cross checking

Moderately vulnerable community

Ground intelligence

Less vulnerable community

Self-quarantine

Curfew Village isolations

Central-quarantine Lock-downs

D r i v e n Tracing

Big-data analysis

Family associates (FA)

Record cross checking

Close associates (CA)

Ground intelligence

Distance associates (DA)

Fig. 5.3 Adopted from DIT model (Detection, Isolation, and Tracing) as a subset of the military/ intelligence/police line of operation. Source State Intelligence Service (2020)

5.7.4 Potential Contributions of the Corporate DIT Model to Corporate IR The Corporate DIT Model (Fig. 5.4) has the potential to be a systematic viewfinder for risk assessment, surveillance, and control practices, thereby aiding the value creation model of the IIRC Framework and facilitating IR in the post-pandemic era. Its contribution in the ensuing years, where we will certainly acknowledge the continued impact of the pandemic, will be of greater worth. However, the potential to apply the Corporate DIT Model for crises of all types—outside of the pandemic— needs to be further explored to examine how it will facilitate IR.

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Fig. 5.4 Corporate DIT model: proposed model to control business impacts at a time of crisis. (Adopted from LOO and DIT Models)

The Corporate DIT Model, based on the whole-of-government’s LOO and DIT Models, can be aligned to the strategic focus and future orientation that is key to IR. Strict control and surveillance practices help organizations monitor and control their four LOOs (i.e., Governance LOO, Top management LOO, Psychological LOO, and Economic, environmental and social well-being LOO) and ensure sustainable performance as depicted in the Corporate DIT Model (Fig. 5.4). The Governance LOO of the Corporate DIT Model would identify, define, and analyze the crisis/ issue and associated risks, opportunities, and outcomes to make relevant decisions in line with the strategy of the organization to enhance organizational value creation in order to facilitate IR. The Top management LOO would support the allocation of resources and manage the affected strategic business units of the organization to improve performance, corporate sustainability and IR. The Psychological LOO would provide the right information, build up confidence, and consolidate solidarity among internal and external stakeholder of the organization to manage crises and enhance corporate sustainability and IR. The economic, environmental, and social well-being LOO would supply the necessary food, medicine, and essential items and care to affected internal and external stakeholders of the organization to manage crises and improve corporate sustainability and IR. These LOOs would provide insights into how the organization is achieving its long-term strategies and competitive strategies, and how this leads to value creation for stakeholders in the short, medium, and long term to enhance corporate sustainability and facilitate IR. Playing the role of an organizational performance management system, the proposed Corporate DIT Model can assist the portrayal of a holistic picture of the combination, interrelatedness, and dependencies between factors that affect the organization’s ability to create value over time and facilitate IR. The proposed Corporate DIT Model would also provide insights into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, considers, and responds to their legitimate needs and interests. It can reveal stakeholder relationships and assist in disclosing information about matters that substantively affect the organization’s

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ability to create value across stakeholder groups over the short, medium, and long term, as well as facilitate corporate sustainability and IR. Table 5.2 outlines possible contributions of the proposed Corporate DIT Model to IR based on materiality, reliability, and completeness, monitoring of externalities and internalities, risk review, strategic review, and effects on capital and governance based on the IIRF (IIRC 2021). For example, the Corporate DIT Model would highlight material matters, both positive and negative, in a balanced manner to address the ‘materiality’ of IR. Table 5.2 Contributions of the Corporate DIT Model to the IR Corporate DIT model/control and surveillance IR practice

Contribution

Materiality

Bring to light material matters, positive and negative, in a balanced manner

Reliability & completeness

Consistency and comparability can be maintained in data gathered and analyzed

Monitor externalities & Greater visibility to future risk and opportunity internalities Review risk

Specific risks and opportunities can be mapped alongside levels of urgency and action, stimulating varying strategic action and resource allocation

Strategic review

Determine if the corporate strategy is in alignment with stakeholder expectations, to what extent the organization has achieved strategic objectives

Effects on the capitals

Human Capital—The Corporate DIT Model will enable organizations to realize its strengths and shortfalls in the area of human capital. Issues raised will depend on the nature of the business—investment into human capital, health infrastructure, societal health and hygiene, macro-impact of business on overall value creation or value dissipation (impact of business on societal health) Social & Relationship Capital—redefinition of working relationships, work ethics, and work modalities. Assessment of the offer of physiological and Psychological solutions Natural Capital—impact of organizational operations on natural assets, offer solutions for sustainable use, conservation Manufactured Capital—assess the organization for digital mobility, ecommerce, virtual collaboration Financial Capital—assess the mobilization of new capital for strategic growth, to under resourced SBUs or organizational functions, facilitate reliable, and accountable transfer of financial capital to small and medium enterprises and entrepreneurs by way of reviewing supply chain partnerships

Governance

Greater transparency and accountability to regulatory bodies through drilled down disclosures, facilitating role of CSE, Securities Exchange and Central Bank of Sri Lanka

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5.8 Conclusion IR is considered a prominent tool in changing corporate behavior (IIRC 2013), leading to the ideation of a sustainability strategy to minimize sustainability impacts. Changes evolve through improved integrated thinking, controls, data integrity, and through the assessment of whether integrated thinking is embedded in the organizational function (Hoque 2017). Additionally, IR contributes to better relations with stakeholders and their expectations (IIRC 2011), precipitating market side effects (IIA 2016). Wadee (2011), noted that IR can assist an organization to understand not only its past and current performance but also its future resilience. The study proposes a theoretical framework (Corporate DIT Model) for application in organizational settings, borrowing from the LOO and DIT Models based on the whole-of-government approach adopted by the government of Sri Lanka. The introduction of the LOO and DIT Models is based on the principles of the Hammer and Dance strategy to effectively control and surveil threats. Extrapolated to control and surveil business impacts, at a time of crisis, in a developing country setting, the proposed Corporate DIT Model could possibly be a viable model to facilitate corporate sustainability and IR which is essential for business sustainability and continuity. As businesses in the developing country context of the South Asian region lack access to large-scale control and management surveillance tools, the applicability of the LOO and DIT Models, their relevance, and ease of execution (modulated and customized to the organization’s industry, size, and scale) serve to place them in a favorable light to facilitate IR. The proposed Corporate DIT Model will provide a holistic view of the externalities, internalities, future risks, and opportunities. Since more than one level of government plays an important role in designing, implementing, and enforcing regulations (OECD 2009), there are policy-level implications of the Sri Lankan approach, as it brings together both regulators and businesses. In doing so, the approach offers direction and impetus for private businesses to engage in IR and ensures the universal aim of achieving sustainable development. In essence, a “whole-of-organization” approach toward sustainable business will enhance IR, enabling businesses to report information that will allow all stakeholders a prospect on actions put in place to manage and mitigate the business-level impacts of the pandemic and to forecast future risks. The application of a Hammer and Dance strategic process at the corporate level will assist organizations to modulate the policy measures applied to diverse scenarios of crisis, with components of the DIT Model adapted to expansionary and restrictive application based on the nature, scale, and impact of the crisis scenario. A Hammer and Dance heuristic, in principle, will catalyze the application of stringent management measures in situations of high crisis management, followed by the easing out of controls as the crisis scenario slackens. Over time, the availability of data to better understand varying scenarios will facilitate IR and enable integrated thinking and data-driven decision-making support.

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Considering that crisis management and IR in developing countries are not at a high level and stakeholders do not exert significant pressure on these matters, a more proactive role and intervention from regulatory bodies like the CSE, the Securities and Exchange Commission, and the Central Bank of Sri Lanka (CBSL) are necessary to guide organizations to adopt the proposed Corporate DIT Model to facilitate IR during crises. This is consistent with the findings of Dissanayake et al. (2021) that mention that initiatives by the government are necessary to increase IR. A future study may expand on and assess the practicality and effectiveness of the application of the Hammer and Dance strategy in the adaptation of the proposed Corporate DIT Model toward lending control and surveillance to organizational crisis settings, with the aim of facilitating sustainability and IR. It is important to apply the proposed model to assess the externalities and internalities of the organizations and its consequent investments in sustainable business across its value chain, to understand how this facilitates sustainability and IR. In the post-COVID corporate scenario, it has been recognized that sustainable investments will drive growth and facilitate IR. Therefore, future research can also focus on developing several intelligence-driven critical decision-making models for developing country corporates in order to drive them toward sustainable investment and IR.

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Prabanga Thoradeniya is a Senior Lecturer in Management Accounting in the Department of Accounting at the Monash Business School, Monash University. She obtained her Ph.D. from the Australian National University. Her research interests are in the areas of environmental management accounting and environmental, social, and sustainability accounting and reporting. She has published her work in refereed scholarly journals, both nationally and internationally. Roshini Galappatti has over twenty years of professional experience in the multi-disciplinary industry. Specializing in areas of Integrated Communications, Strategic Marketing, Strategic Management, and Social Reporting, she is currently the Founder and Managing Director of Sri Lanka’s first and only specialist nutraceutical retail network. She holds an MBA from the University of Wales, Bangor, and a BSc. Business from Manchester Metropolitan University, UK. Mukesh Garg is an Associate Professor in the Department of Accounting at Monash University. He joined Monash University in 2006, where he completed his Ph.D. in Accounting and Finance. He is an experienced researcher and educator with a demonstrated history of working in Australia’s higher education sector for close to two decades. His research interest is in financial reporting regulations, reporting quality, auditing, performance, climate change, and tax avoidance. During his industry sabbatical, Mukesh worked as the Research and Education Principal at the Australian Accounting Standards Board (AASB) where he was the head of research and education.

Part II

Integrated Reporting for Sustainability—Corporate Implementation and Applications

Chapter 6

Application of Integrated Reporting—A Case Study of Tata Steel Shruti Ashok

and Deepika Dhingra

Abstract Issues related to transparency and sustainability have been revolutionizing the nature of corporate reporting. Stakeholders are interested in accessing financial and non-financial data on the business activities of companies. Despite information accessibility, many stakeholders cannot use the disclosed information mainly due to segregation of reports. Thus, an ‘Integrated Report’ demonstrates the links among financial and non-financial performance metrics. This paper attempts to study the impact of integrated reporting (IR) on Tata Steel over a period of 3 years—post its adoption in 2017. Tata Steel has been a pioneer in India in developing an integrated report in the true sense of the word and in the spirit of enabling stakeholders to analyse and assess the company’s ability to create and sustain value in the medium to long-term horizon. We investigated Tata Steel’s IR reports post implementation period and its corporate/annual reports pre-implementation period to assess how IR has altered the reporting process and the benefits that have accrued to Tata Steel and its stakeholders after IR adoption. The adoption of IR has been based on the six capitals, viz. financial, manufactured, intellectual, human, social and relationship, and natural capitals. Keywords Corporate reporting · Integrated reporting six capitals · Social responsibility · Tata Steel

S. Ashok (B) School of Management, Bennett University, Greater Noida, India e-mail: [email protected] D. Dhingra School of Management, Bennett University, Uttar Pradesh, India e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_6

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6.1 Introduction Whether mandatorily or non-mandatorily, volume of information disclosed by companies has increased significantly over the last decade. Spate of information availability has led to proliferation in the number of reports, namely traditional financial statements, corporate governance, remuneration report, and corporate social responsibility (CSR) report. However growth in information through enhanced reporting has proved to be effective in providing additional insights, it is a fact that such contributions and claims have rendered firm reporting fragmented and confusing (e.g. Flower 2015; Daub 2007). Without a doubt, several reports released appear to be disengaged and challenging to incorporate, they also weaken the representational accuracy, authenticity of disclosure (Setia et al. 2015), and obstruct stakeholders’ decisions. Though new reports enhance transparency, while ‘accumulating various types of disclosures, this exercise still results in an information loss’ (Botosan and Plumlee 2002). The financial crisis of 2008 was a watershed moment. While progressive organizations were deciphering the impact of sustainability issues on their operations, many others chose to merely implement a tick-box approach. Some opted to publish essential information conventionally, overlooking information that might be beneficial for investors and the society at large. The financial crisis compelled decision-makers to recognize the absence of reliable and precise non-financial information that would be useful to stakeholders. With an objective to improve transparency, more companies resorted to preparing integrated reports. Integrated reporting (IR) summarizes the company’s activities in one document, providing investors a comprehensive view of its value generation procedures (Eccles and Krzus 2010). An integrated report also stresses the contribution of every element to the final performance of the company (Eccles and Krzus 2010), enhancing trustworthiness while providing homogeneous information to all stakeholders. Adoption of IR practices can bring manifold benefits to organizations. With enhanced disclosure quality, investors can make improved investment decisions. Organizations also benefit by preparing a single document (should the IR replace the existing reports) coupled with their increased market value. Finally, other stakeholders, bondholders, and workers enjoy the advantages of better transparency due to enhanced disclosures of the company’s risks (Vitolla et al.2018a, b). Despite such widespread audience of institutions, practitioners, and academics advocating IR, its implementation is largely confined to the context of compulsory implementation (Eccles and Serafeim 2015; Pistoni and Songini 2015). Majority of the extant literature available is either focused on theoretical models, explaining benefits and issues of IR or deliberates on determinants and outcomes of IR by applying econometric models. These studies lack in providing empirical evidence w.r.t. adoption of IR and its merits. Therefore, it becomes imperative that more studies are conducted to provide empirical evidence on the benefits of IR adoption. Hence, this study endorses IR implementation by recognizing and conferring its diverse advantages through a case study analysis of Tata Steel—one of the first industry

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leaders in India to adopt this practice. This analysis also highlights some significant reasons that led Tata Steel to embrace IR practices and the various advantages that resulted, post adoption. This chapter is organized as follows: Sect. 6.1 introduces the concept of IR and its adoption in the Indian context. Section 6.2 discusses the review of literature followed by the research gap in Sect. 6.3. Section 6.4 reports the research methodology, discussing the reason for selecting Tata Steel Sect. 6.4.1 shares and method of analysis in Sect. 6.4.2, respectively. Section 6.5 provides a broad discussion of the findings of the study. Section 6.6 gives the conclusion. Section 6.7 contains the limitations of the study and avenues for further research.

6.1.1 IR Adoption in India The reporting structure of corporate entities worldwide has evolved significantly by becoming more transparent, precise, and by exhibiting information to a vast set of users. In recent studies, many Indian companies have reported social and environmental responsibility information in their annual financial reports. Though, it is common knowledge that IR shapes a progressive corporate reporting structure, enhancing the quality of information available, only a few Indian companies have been able to publish integrated reports in the real sense of the term. Only a handful of organizations have made promising efforts towards this by adding a few more pages to their report and providing some scattered information about the six capitals; however, these reports are still a far cry from what a comprehensive IR report should be. A circular issued by the Securities and Exchange Board of India, on 6 February 2017, suggested that “IR may be adopted voluntarily from the financial year 2017–18 by (the) top 500 organizations which are required to prepare Business Responsibility report”. In the financial year 2017–2018, around 30 Indian companies issued their integrated reports. At the end of the second financial year from the year the circular was issued by the Securities And Exchange Board of India, companies began to implement IR. To this end, some Indian companies are turning their annual reports into integrated reports.

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6.2 Literature Review 6.2.1 What is Integrated Reporting? Integrated reporting signifies the matured practice of integration of non-financial information with financial data to communicate a synchronous image of the company. Instead of sending the financial and the non-financial report to the respective stakeholders, an integrated report is observed by the entire audience. An integrated report reduces the gap between market and intrinsic values by accounting for intangible assets and externalities, empowering investors to take better and more informed decisions (Othman et al 2022). IR caters to an investor’s need for adequate information directly from organizations, since this source of information is not third-party sources, such as Bloomberg, index ratings, or media coverage, but the organization itself. IR is not simply the evolution of a report, but also the outcome of a long journey towards the enhanced integration of the business (Vitolla et al.2018a, b). The study done by Herath et al. (2021) explores how varying perspectives on integrated thinking result in variations in value creation.

6.2.2 Contents of an Integrated Report According to the latest IIRC (2021), the IR framework comprises the following content elements, which are connected to each other and are not mutually exclusive. The elements allow companies to determine the information required for reporting. The list is given below: i. Organizational overview and external environment: What does the company do and under what circumstances does it operate? ii. Governance: How does the company’s structure of governance back its capability to generate value in the long term, medium term, and short term? iii. Business model: What is the company’s business model? iv. Opportunities and Risks: What are the opportunities and risks that impact the company’s capability to generate value over the long term, medium-term, and short term and how does the company manage to deal with them? v. Strategy and Resource Allocation: Where does the company aim to reach and how does the company intend to reach that position? vi. Performance: To what extent has the company accomplished its strategic goals for the period and what are its consequences in terms of effects on the capitals? vii. Outlook: What are the uncertainties and challenges the company may face in application of its strategy and what can be the probable consequences of its current business model and performance in future?

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viii. Basis of Preparation and Presentation: How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?

6.2.3 Integrated Reporting: The Six Capitals In this era of global connectivity and its accompanying scrutiny, understanding externalities has become crucial. This new shift to IR is redefining some vital concepts regarding corporate reporting, with an emphasis on intangible assets. When recognizing the range of resources, a company depends on its business models, it can be observed that capital is no longer a singular term; but has been transformed into a ‘multiple capitals approach’. Corporate firms depend on various types of capital that forms the inputs of an organization’s business model. Resource use, emissions, and reliance on all types of natural, human, intellectual, and social capital are no more confined to the role of the corporate responsibility department. In fact, they have groundbreaking and innovative consequences on the balance sheet over the medium and long term. Taking all the above-mentioned viewpoints into consideration, the IIRC identified six primary capitals that form the core of a company’s value generation process. These capitals are mutually dependent, directly, or indirectly. Their mutual interactions are a function of the organization’s focus and beliefs. Though most companies rely on all six capitals to a certain extent, some capitals might not have much significance in reporting. Table 6.1 shows all six capitals identified under the IIRC framework: financial capital; manufactured capital; intellectual capital; human capital; social and relationship capital; and natural capital.

6.2.4 Benefits of Integrated Reporting Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium, and long term. The concept of integrated thinking necessitates a managerial revolution for the implementation of IR (Busco et al. 2013; Thomson 2015). Motivations that push companies to adopt IR are not limited to sustainability and environmental, social, governance indicators. IR is aimed primarily at stakeholders. Among these stakeholders, investors derive the greatest benefits from the publication of integrated reports, thanks to the amount and quality of information in these documents. Enhanced transparency due to IR allows investors to make informed investment choices, supported by greater knowledge of company performance. According to this perspective, the main advantage deriving from an external perspective is to provide investors with both financial and non-financial information in a single document. Many studies have identified several other benefits resulting from the adoption of IR (Black 2012; Blesener 2014; Chartered Institute of Management Accountants 2015).

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Table 6.1 Integrated reporting: Six capitals Capital name

Description

Financial capital

Corpus that is available to a company to be used for manufacturing of products or the provision of services. The conventional yardstick to measure performance, this capital comprises funds which are obtained through financing

Manufactured capital

This encompasses physical infrastructure, technology, and manufactured physical objects such as equipment and tools that are used in the production of goods or in the provision of services comprising infrastructure, buildings, and equipment

Intellectual capital

This accounts for organizational knowledge-based intangibles comprising intellectual property related to brand and reputation, in addition to patents, copyrights, organizational systems and related procedures and ‘Organizational Capital’ such as tactical knowledge

Human capital

The skills and know-how of a company’s employees, in addition to their commitment and motivation—which further affects their capability to accomplish their roles. People’s capabilities, experience, and their motivations to innovate together with their skills in implementing strategy, loyalties, and motivation

Social & relationship capital

This involves the relationships and resources between an organization and all its stakeholders, comprising governments, communities, customers, and suppliers, including shared norms, reputation, and trust

Natural capital

All environmental resources both renewable and non-renewable and processes that provide goods or service come under natural capital, and this includes resources such as air, water, land, solar energy, fossil fuels, crops, and carbon sinks, which cannot be replaced and are indispensable for the functioning of the whole economy

Source Author

From an internal perspective, IR improves the ability to identify and assess risks and aids in the decision-making process through an integration of environmental, social, governance variables. It also encourages the evaluation of company’s strategies, provides data on expected results, facilitates access to capital and credit markets while improving quality of management by fostering better communication among various departments. Externally, in addition to providing more information to investors, IR offers a holistic overview of the company, improving its image, and encourages the establishment of good relations with stakeholders. In addition, stakeholder inputs are facilitated for a company’s allocation decisions. Various studies have discovered that publishing an integrated report for environmental, social, governance performance has better consequences in comparison with the stand-alone report (for example, Mervelskemper and Streit 2017). Table 6.2 exhibits benefits of IR that have been discovered in Malaysia, Italy, UK, and Singapore. Based on the ISCANUS (2014), survey, the table displays six common benefits that have accrued to the companies. These array of benefits are further extended and include five additional benefits as per other surveys carried out in Italy and the UK, in 2017.

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Table 6.2 Country-wise comparison of benefits No.

Benefits

1

Communication

2

Access capital

3

Low-cost capital

4

Share price

5

Transparency

6

Breaking silos

7

More integrated thinking and management

8

Greater clarity on business issues and performance

9

Improved corporate reputation and relationship with the stakeholders

11

Improved gross margin

12

Employee engagement

Present study √

Singapore (ISCA-NUS 2014) √

Malaysia √

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

Italy

UK

√

√

√

√

√

√

√

√

√ √

√

Source Author

The journey from the first proposal (IIRC 2011) to the framework (IIRC 2013, 2021) was subject to disparagement and disapproval by some scholars and academics (see among others Flower 2015; Thomson 2015). However, the recent surfacing of IR, established by the International Integrated Reporting Council, has extended to companies an innovative tool for the diffusion of intellectual capital information (Vitolla and Raimo 2018a, b; Vitolla et al.2018a, b). The framework bolstered and strengthened the debate on reporting practices used by corporates. To be precise, researchers focused on an assessment of the framework (see for example Haller and van Staden 2014), of its goals and objectives (e.g. Dumay et al. 2016; Stacchezzini et al. 2016) on how it is correlated with other reports (Maas et al. 2016), on its association with the sustainable development objectives of the United Nations (Adams 2018, 2017) and the dynamics influencing its adoption. Mervelskemper and Streit (2017) analysed the value relevance of environmental, social, and governance scores within three contexts: without environmental, social, governance, when an environmental, social, governance report is published and when an Integrated Report is developed. Validating the view of Flower (2015) to some extent, they provided proof that the efficiency of an Integrated Report is superior to that of stand-alone reports, in communicating environmental, social, governance information. Likewise, Adams (2017, 2018) supported the efficiency of IR in addressing sustainability to the extent that the new reporting framework might

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assist the realization of the sustainability development goals of the United Nations. Conversely, Pistoni et al. (2018) assessed IR quality, finding that it is still low. In their opinion, organizations follow the framework but, thanks to the flexibility they have, scarcely any useful information is revealed. Numerous researchers and scholars have analysed the advantages of adopting IR. Setia et al. (2015) revealed improved information disclosure pertaining to business capital, meeting expectations of regulators in South Africa. Also focusing on South Africa, Lee and Yeo discovered a positive connection between the quality of IR information and a company’s value proxied by Tobin’s Q, although Baboukardos and Rimmel (2016) found that due to new reports, the book value (value relevance of earnings) increases (decreases). Baboukardos and Rimmel (2016) discover that in the South African context, the introduction of the King Report has enhanced the value relevance of EPS, at the expense of net assets, which declined over time. Encouraging signals regarding the adoption of IR also emerge from the assessment of Mervelskemper and Streit (2017) and Barth et al. (2017): the former discloses a greater market valuation of environmental, social, governance scores on preparing IR, though the latter discovers that adopting IR relates to higher cash flows and investments in future. On the other hand, Pistoni et al. (2018), based on the quality scores generally approved and accepted for voluntary disclosure, discover that IR quality is low, drawing the conclusion that adopters emphasize form rather than content. The mixed and diverse evidence on disclosure quality doesn’t help to overcome the uncertainty around the new reporting scheme (Perego et al. 2016). Ideally, information disclosure is not expected to be a reason for any indisputable market reaction. Should the Integrated Report be capable of reducing information disproportionateness, we may witness an enhancement in the market value of an organization (Reitmaier and Schultze 2017; Boedker et al. 2008). Conversely, should the costs related to the preparation of new report, whether direct (i.e. execution of the framework) or indirect (i.e. inviting attacks from regulators and politicians, as claimed by Watts and Zimmerman 1990), be beyond the benefits of adoption, we may witness a decline in the market value of adopting organizations. Without a doubt, the existing literature still needs to make an assessment whether voluntary compliance improves the quality of disclosure with the new reporting scheme. By focusing on the effects of voluntary disclosure (Verrecchia 1983), we bridge this gap by providing new evidence on the efficiency of IR. Therefore, we deviate from Lee and Yeo and Baboukardos and Rimmel (2016) who assessed the effectiveness of IR according to a compulsory adoption perspective. We also differ from Pistoni et al. (2018) as we do not develop a quality score, using the value relevance of accounting information under IR as a quality indicator (Barth et al. 2001).

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6.3 Research Gap Study of the existing literature reveals that even though numerous studies have been conducted on IR, due to the current situation related to its adoption across the world and distinctions between traditional Sustainability Reports and Integrated Reports, the scope of these studies is still limited. In the Indian framework, the majority of studies are concentrated on exploring the concept and the suitability of IR practices in the country. Extensive studies on company-wise/item-wise disclosures of different aspects of IR are absent in the Indian literature. Despite the innumerable studies highlighting the benefits of IR, only a handful of Indian companies have adopted this form of disclosure. Poor adoption of IR by Indian companies is also due to the absence of empirical evidence that bears witness to the real benefits derived from the adoption of this practice. This study attempts to fill this gap by identifying and presenting the many benefits of IR that have accrued to Tata Steel—the company that was the forerunner in adopting this practice and has always been an industry leader. This study will explore the primary reasons that led Tata Steel to adopt IR practices and the many benefits that accrued to it, post adoption. Considering the above discussions, the research questions of this study are formulated as follows: RQ1: What are the reasons for the adoption of IR? RQ2: What are the benefits of adopting IR?

6.4 Research Methodology To answer these research questions, we have carried out an in-depth case study analysis of an Indian company—Tata Steel. Tata Steel is chosen as the subject in this case study, as it is one of the pioneer adopters of IR in India. Tata Steel was also credited with ‘Asia’s Best Integrated Report’ in the year 2017. The case study methodology is selected because of its ability to analyse a complicated phenomenon that establishes a new field of research (Eisenhardt 1989). The research method employed is longitudinal content analysis of 5 years of annual reports. The procedure that approaches IR through case study analysis and the benefits of its adoption have been scarcely explored in previous studies. The selection process of the case study was not based on sampling logic, peculiar to surveys and statistical methods. In fact, the case was selected purposefully (Patton 1990) as it allows the acquisition of comprehensive information in line with our research objective. This study has focused on report quality assessment in Tata Steel’s adoption of IR, employing the method introduced by Eccles and Krzus(2010), that compares the IIRC Framework’s (2013) requirements with companies’ integrated reports to gauge the magnitude of compliance. Sustainability reporting evolution evidenced by analysing the contents of annual and integrated reports in the period 2015–16 to 2019–20. This study explores the reasons for the adoption of IR by Tata Steel and the benefits that have accrued to the company, post adoption. It also analyses the

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length of reports, evolution of its contents, and change in disclosures over a period of 5 years. Concerns of reliability were reduced by maintaining accurate records during the analysis and by reviewing the important issues and findings among the co-authors. This process ensured that the interpretations were not skewed by a single individual’s analysis.

6.4.1 Why Tata Steel? With a presence in over 150 countries, Tata Steel is a global business enterprise with a crude steel capacity of 33 million tons per annum. It is one of the world’s most geographically diversified steel manufacturers, with operations and commercial footprints across the globe. Excluding SEA (Southeast Asia) operations, the group has documented a consolidated turnover of US $22.67 billion in the financial year ending March 31, 2019. ‘A Great Place to Work’ certified TM organization, it has a workforce of more than 65,000 employees spread across five continents. A pioneer in many aspects of steelmaking and an industrial benchmark on many parameters, Tata Steel adopted IR in the FY 2015–16. It was one of the first companies to adopt IR in India. Since then, Tata Steel has not abandoned this reporting tool, publishing its integrated reports in 2017, 2018, 2019, and 2020. The reports were so well published that in 2017, the company’s report was acknowledged and declared as ‘Asia’s Best Integrated Report’ by Asia Sustainability Reporting Awards.1 In the year 2018, it was again conferred the ‘Best Integrated Report Award’ by the Asian Centre for Corporate Governance and Sustainability. Mr. Biren Bhuta, Chief of corporate sustainability services, pointed out in a presentation that IR would assist stakeholders to shift their focus towards a short-term approach based on quarter-on-quarter numbers. IR will reflect comprehensive and long-term outcomes of the decisions made by Tata Steel that will help stakeholders understand the intentions of the company with respect to creating and sustaining value.

6.4.2 Annual Report Analysis Method The study examines secondary data collected from Tata Steel’s website for the last 5 years. IR reports were analysed for a number of disclosures, coverage of regulatory requirements as per IIRC, the form of reporting and reviews of the company meeting the GRI (Global Reporting Initiative) requirements. The company’s website was selected for data extraction as it is the most effective means of communication

1

https://www.tatasteel.com/media/newsroom/press-releases/india/2019/tata-steel-conferred-thebest-integrated-report-award-for-2018-by-asian-centre-for-corporate-governance-sustainability/. Accessed on 22 February’2022.

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between a company and its stakeholders (Debreceny et al. 2001). Based on the analysis of existing literature of (for example Kolk 2010), 5 annual reports and integrated reports (2015–2020), the study focused on the following areas: • The reporting framework applied by Tata Steel to assess the influence of the reporting framework on sustainability practices. • Evolution of Tata Steel’s sustainability reporting practices over a period of 5 years. • Identification and inclusion of various risks in the integrated reports and how these risks were linked to the six capitals. • Inclusion of non-financial performance metrics used in reporting formats and the benefits brought about by such inclusions. The analysis explored the evolution of the metrics to assess what was considered important and investigated how this assessment changed over time. The above aspects are tabulated yearly in the findings section. These findings are expected to enhance the understanding of the benefits accruing to the company due to the adoption of IR over a period.

6.5 Findings Driven by well-coordinated efforts among various departments: Sustainability, Corporate Communications and the Secretarial Division, IR reporting was envisaged as a scientific project at Tata Steel. Tata Steel’s adoption of internationally recognized non-financial reporting frameworks, like GRI and later IR, is an evidence of the fact that these frameworks were fast becoming the accepted norm for sustainability reporting in the company (De Villiers et al. 2014). Table 6.3 summarizes the analysis of the company’s integrated reports. The table shows that before 2015–16, the company did not follow IR guidelines. In the period 2015–16, they adopted IR practices, and these practices continue to date. The table also underlines the steady increase in the adoption of IR practices and the various disclosures undertaken by the company. Findings of the study, after a detailed analysis of the integrated reports of Tata Steel from 2015–16 to 2019–20, are discussed below. Roadmap for the future: Changes in the reporting format over a period of five years Length of the Integrated report: In complying with the requirements of the IR framework and GRI reporting norms, the total length of reports published by Tata Steel has steadily increased over the years. In the 2015–16 version, the quarterly report comprised 300 pages, which went up to 380 pages in 2016–17. Thereafter, in the following years, the length has averaged around 410 pages, though it went up to 444 pages in 2018–19. The number of reports published by Tata Steel from 2015 to 2020 presents a narrative section containing information as per the IR framework. The narrative section provides information that is compliant with financial reporting regulations and consolidated financial statements.

Yes

Linked to the six capitals under the IR framework

Source Author

Strategic risk, Operational risk, Legal and Compliance risk, and risk of Impact on capital + Market risk + strategy risk, people risk and climate change risk + safety risk + commodity risk + community risk

Strategic risk, Operational risk, Legal and Compliance risk, and risk of Impact on capital + Market risk + strategy risk, people risk and climate change risk + safety risk + commodity risk + community risk

New risks included

Yes

11

2018–2019

Total number of risks 11

2019–2020

Table 6.3 Summary of all the listed risks in the IR reports of Tata Steel

No

Strategic risk, Operational risk, Legal and Compliance risk, and risk of Impact on capital + Market risk + strategy risk, people risk and climate change risk

8

2017–2018

No

Strategic risk, Operational risk, Legal and Compliance risk, and risk of Impact on capital + Market risk

5

2016–2017

No

Strategic risk, Operational risk, Legal and Compliance risk, and risk of Impact on capital

4

2015–2016

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IR reports have significantly improved intra-company communications within Tata Steel. The fact of having to provide feedback on their actions for the purpose of preparing an integrated report and the collaboration of various verticals in drafting the document has improved communication and collaboration between various areas and departments in Tata Steel, improving the flow of internal information. Reporting of Material matters: One of the significant benefits brought about by IR is the inclusion of materiality in all the reports, wherein due emphasis is accorded to material, social, and environmental matters. An ‘Approach to materiality’section was introduced in Tata Steel’s Integrated Report from 2017 to 18 onwards. This section identifies the top 20 environmental, social, governance issues that are material to the company and are additionally mapped to four strategic objectives: social, economic, environmental, and governance, with each objective being linked to the impacted capitals. Inclusion of Sustainability Reporting: From the year 2017–18 onwards, Tata Steel’s integrated reports started including non-financial information that was earlier available separately in the sustainability report. Tata Steel’s Integrated reports made positive impact on balance and content of sustainability disclosures, leading to the inclusion of IR as a useful accounting technology (Broadbent 2016). Strategy Planning: The 2019–20 report included a separate section on strategy planning, which was absent in all the previous years. The integrated report of 2018–19 referred to strategy planning under the section ‘roadmap to the future’. Risks and Opportunities: Over a period of 5 years, Tata Steel identified and included multiple risks impacting business performance. The 2015–16 report published only four types of risks, while the 2016–17 report added ‘market related risk’ to this category. The 2017–18 report further added strategy risk, people risk and climate change risk to this section. It is to be noted here that none of the reports till the one of 2018 linked risks with the six capitals (as defined by the IR framework). The 2018–19 and 2019–20 reports not only added three more risks: safety, commodity, and community risks, but also linked all of them to the six capitals (Refer Table 6.3). Research Question 1: What are the reasons for the adoption of Integrated Reporting? From the content viewpoint, the conceptual division of the International Framework is traced in all integrated reports of Tata Steel. The decision to adopt GRI by Tata Steel was largely motivated by the general acceptance of the GRI framework (Dumay et al. 2016). Taking all given information into consideration, it becomes easy to see how the power of information is significantly enhanced, since the integrated reports deliver an overall view of all the aspects that have an impact on the company through the process of value creation. Showcasing Value Creation for Stakeholders: Through the integrated reports of 2018–19, Tata Steel wanted to echo the immensity of its scale and the magnanimity of its corporate philosophy, while articulating consistent value creation for all its stakeholders. It wanted to elucidate the details of its strategy and describe content in a simple manner for easy understanding by stakeholders across

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the board. Satisfying stakeholders’ information needs was an important reason for Tata Steel to adopt IR. The 2018–19 report split the integrated report section into four verticals # leadership, business, strategy, and capitals. Each strategic focus area was further related to the specific types of capital resources used and the contributions made towards the SDGs through business activities. The 2019–20 integrated report further redefined these categories and presented this information in a manner that represented the interlinkages between strategy and the different ‘capitals’ used. This interconnection between business actions, strategy, and resources evidently outlined the organization’s model of ’value creation’ for its stakeholders. Another notable feature of the 2019–20 report was the inclusion of a separate report on the ‘mapping of the integrated report’ with other reporting frameworks. Evolving Reporting Culture: The reporting format of Tata Steel has evolved with time. Reports of all the years define Vision, Mission, Values, and external context after summarizing the main data related to the company. The Business Model in Tata Steel’s reports delves into details about the organization, illustrating governance, strategy, and performance. As is evident from Table 6.4, the 2015–16 integrated report was divided into two sections: the integrated report and company financials, and covered topics like leadership, performance, strategic objectives and strategy, business model, risks and opportunities, governance, and outlook. The 2016–17 and 2017–18 reports were an improvement over the 2015–16 report. These later reports followed the same format but categorized the ‘financials’ section into statutory reports and financial statements to provide more clarity to readers. Compliance with the IIRC principles: In all its reports, Tata Steel declares that it follows the IIRC principles in the preparation of the document (Tata Steel, 2015– 16; 2016–17; 2017–18; 2018–19; 2019–20). Details of the document framework are given in all the reports: in 2015–16 in the section ‘About this report’ (Tata Steel, 2015–16), in 2016–17 and 2017–18 in the section ‘Approach to Reporting’ (Tata Steel 2016–17;2017–18) and in 2018–19, 2019–20 in the section ‘Approach to Reporting’ in the subsection ‘About this report’ (Tata Steel 2018–19; 2019–20).

Table 6.4 Comparison of the contents of Tata Steel integrated reports (2015–16 to 2019–20) 2019–2020

2018–2019

2017–2018

2016–2017

2015–2016

Contents

Contents

Contents

Contents

Contents

Introducing Tata Steel

Our leadership

Integrated report

Integrated report

Integrated report

Statutory reports

Statutory reports

Financials

Performance review Our business Strategy

Our strategy

Strategic review

Our Capitals

Statutory reports

Statutory reports

Financial statements Financial statements Source Author

Financial statements Financial statements

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Research Question 2: What are the benefits of adopting Integrated Reporting? Integrated thinking represents a fundamental transformation in the way Tata Steel means business. Adoption of IR has fundamentally changed Tata Steel by refining its perception of external stakeholders (Partnering Tata Steel’s integrated reporting journey | Tata Steel | AICL). Benefits to Tata Steel Accurate and Reliable Corporate Communication: Experts have appreciated the materiality of corporate communication, citing development in Tata Steel’s economic and financial performance reports. With reference to regulatory financial reporting, the application of integrated thinking, its concepts of materiality, transparency, and conciseness, have led to the rationalization of the quarterly financial report. Applicable to a Broad Range of Stakeholders: The integrated report of Tata Steel has utility across various stakeholders, including operators in the Steel sector. Its internal Integrated Report comprises approximately twenty pages including vital elements for corporate action that are adapted to individual areas like mission, strategic objectives, organization, and performance. The IR framework of Tata Steel has succeeded in highlighting and promoting the company’s intention to enhance the engagement of the entire organization and its ability to integrate its strategic objectives with that of departmental objectives. The IR reports contain a ‘Financial Supplement’ that includes vital information for all stakeholders. As mentioned in one of the IR reports of Tata Steel ‘Despite the synthesis process, all required information at the regulatory level has been contained within other communication media, such as the Financial Supplement, thus guaranteeing the new document an all-inclusive information capacity and augmented accessibility in favour of a broader range of stakeholders. The information summarizing process, both for the quarterly and the annual report, is connected to the management’s decision to make the reporting system more suitable and attractive for an audience not only composed of highly qualified operators’. Improved Corporate Image: IR reports over the years have enhanced Tata Steel’s corporate image, demonstrating its commitment to implant an environmental, social, and governance model into its core business. The company’s vision has strengthened through deeper partnerships with the community, emphasizing its concern for the environment. The reports also reflect Tata Steel’s dedication towards creating a better tomorrow for all its stakeholders and communicate its continued involvement in societal needs and environmental protection.

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6.6 Conclusions The objective of our study was to analyse IR adoption and the benefits derived from its implementation. To this end, we carried out an in-depth analysis of Tata Steel through illustrative and exploratory case study methods. The key contributions of the study to the existing literature show that the process of implementing IR is the result of a clear desire of top management. This demonstrates the importance of corporate culture in the process of adopting IR (Vitolla et al. 2016). From the study, it becomes evident that the pressures of external stakeholders are not enough to establish IR within a company, but that the change must start from within the company through a corporate culture devoted to sustainability and transparency. The results also advocate positive impact of IR on the company’s image. Favourable reactions were recorded by analysts who recognized a higher quality of external reporting combined with an enhanced readability of documents. Stakeholder engagement activity also benefited from the adoption of IR. Moreover, the implementation of IR has had positive effects even within the same company with the greater involvement of employees. The findings confirm, along with the existing literature, the positive effects of IR. The most significant of these is the effect of such reporting practices on employees within the company, given the fact that reporting is generally considered an instrument addressed mainly to external stakeholders. This research is one of the few studies that explore the benefits of IR adoption through a real case study analysis of an established Indian company, thus contributing to the existing literature.

6.7 Limitation of the Study and Scope for Future Research The limitations of this research emanate primarily from the case study methodology chosen, in the sense that the results cannot be generalized and applied to other companies. Therefore, the authors suggest that future, upcoming research can adopt suitable econometric models to examine the efficacy of IR on firm value or on the cost of capital. Potential research can employ the case study methodology to compare the efficacy of, benefits of, and compliance with IR in multiple Indian companies over a period of time.

References Adams CA (2017) Conceptualising the contemporary corporate value creation process. Account Audit Accountability J 30(4):906–931 Adams CA (2018) Debate: Integrated reporting and accounting for sustainable development across generations by universities. Public Money Manage 38(5):332–334

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Patton MQ (1990) Qualitative evaluation and research methods. SAGE Publications, Inc. Perego P, Kennedy S, Whiteman G (2016) A lot of icing but little cake? taking integrated reporting forward. J Clean Prod 136:53–64 Pistoni A, Songini L (2015) New trends and directions in CSD: the integrated reporting. In: Sustainability disclosure: state of the art and new directions, pp 81–105 Pistoni A, Songini L, Bavagnoli F (2018) Integrated reporting quality: an empirical analysis. Corp Soc Resp Environ Manage Reitmaier C, Schultze W (2017) Enhanced business reporting: value relevance and determinants of valuation-related disclosures. J Intellect Cap 18(4):832–867 Setia N, Abhayawansa S, Joshi M, Huynh AV (2015) Integrated reporting in South Africa: some initial evidence. Sustain Account Manage Policy J 6(3):397–424 Stacchezzini R, Melloni G, Lai A (2016) Sustainability management and reporting: the role of integrated reporting for communicating corporate sustainability management. J Clean Prod 136:102–110 Tata Steel Integrated Report 2015–16 Tata Steel Integrated Report 2017–18 Tata Steel Integrated Report 2018–19 Tata Steel Integrated Report 2019–20. Thomson I (2015) ‘But does sustainability need capitalism or an integrated report’ a commentary on ‘The International Integrated Reporting Council: a story of failure’ by Flower J. Crit Perspect Account 27:18–22 Verrecchia RE (1983) Discretionary disclosure. J Account Econ 5:179–194 Vitolla F, Raimo N (2018a) Adoption of integrated reporting: reasons and benefits—a case study analysis. Int J Bus Manage 13(12):244–250 Vitolla F, Raimo N, De Nuccio E (2018a) Integrated reporting: development and state of art—The Italian case in the international context. Int J Bus Manage 13(11):233–240 Vitolla F, Raimo N, Rubino M (2018b) Appreciations, criticisms, determinants, and effects of integrated reporting: a systematic literature review. Corp Soc Responsib Environ Manag 26(1):518–528 Vitolla F, Rubino M, Garzoni A (2016) Integrated corporate social responsibility: driving factors and means of integration—a multiple case study analysis. J Manage Dev 35(10):1323–1343 Vitolla F, Raimo N (2018b) Adoption of integrated reporting: reasons and benefits-a case study analysis. Int J Bus Manage 13:244–250 Watts RL, Zimmerman JL (1990) Positive accounting theory: a ten year perspective. Account Rev, pp 131–156

Shruti Ashok is an academician, researcher & Finance professional with a Ph.D. in Finance from (FMS) Faculty of Management Studies, Delhi University and B.Com (Hons) From SRCC, Delhi University, with over 14 years of experience across academia and corporate. Skilled in equity valuation, corporate finance, financial statement analysis and Portfolio management. Currently working with Bennett University as an Assistant Professor in Finance. Also held visiting faculty engagements with Bombay Stock Exchange and NMIMS, Mumbai. Industry engagements include working in banks like HSBC Dubai, Citibank, HDFC Bank and State Bank of India over a 3year period, spanning various domains like relationship banking, wealth management (both front end and backend) and operations. Has published research papers in ABDC listed journals, Scopus indexed journals, national and international refereed journals and presented research work at conferences organised by IITs, IIMs and FMS in the area of reverse mortgage, capital markets and corporate Finance. Research areas of interest including banking, corporate finance, distress prediction, corporate restructuring and financial analysis.

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Deepika Dhingra is a Doctorate in Finance from Faculty of Management Studies, Delhi University. Her work experience spans over a decade and half and is divided between industry and academia. Her research areas include Corporate Restructuring, Financial Innovation, Financial Services & Financial & Capital Markets. She has published several research papers in indexed journals like ABDC, ABS, Scopus, Web of Science, SCI, along with others. She has presented her research in various international and national conferences & has also participated in several workshops. Dr. Deepika has also conducted training sessions for officers of PSU’s such as Engineers in Limited, Gas authority of India Limited & NBCC.

Chapter 7

Benefits and Implementation Challenges of Integrated Reporting: Perspectives of Preparers at Indian Listed Companies Nandita Mishra

and Mohamed Nurullah

Abstract The present study is an attempt to examine the perceptions of integrated report preparers towards the benefits and challenges of integrated reporting (IR) in India. This study also aims to analyse the process of preparation of integrated reports and the role of preparers in that process. The study is timely in the light of the Security and Exchange Board of India’s circular published in 2017 which encouraged listed Indian companies to adopt IR and the recent increased attention towards IR in India. The study draws its conclusion from nine semi-structured in-depth interviews with report preparers. The result of the study shows that the perception of preparers towards IR is generally positive and that they play an important role in the adoption and preparation of integrated reports. The analysis reveals that integrated thinking plays an important role in company disclosures and has emerged as a sense of involvement of the company with its various stakeholders. Keywords Benefits · Challenges · Indian listed companies · Integrated reporting preparers

7.1 Introduction Corporate reporting was dominated for decades by financial information. While financial information is critically important, it provides only part of the picture of business performance. From around the 1960s, stakeholders began to put pressure on organizations to disclose more non-financial information, including information about strategy, governance, and sustainability. Over time, these disclosures N. Mishra (B) Linköping University, Linköping, Sweden e-mail: [email protected] M. Nurullah Banking and Finance, Kingston Business School, Kingston University, London, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_7

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expanded corporate reports to sometimes include hundreds of pages. However, by the first decade of the twenty-first century, corporate reporting had become too big, too cumbersome, and too incomprehensible (CIMA/PwC 2016). This was of major concern to many stakeholders including investors, regulators, standard-setters, businesses, and other stakeholders. Growing awareness of social, environmental, and governance issues has brought big changes in the way businesses operate (Seuring and Müller 2008; Kolk and van Tulder 2010). This called for changes in the way companies report. After the financial crisis of 2008, globalization, and new laws and regulations, corporate reporting was expected to present more relevant information needed by various stakeholders. Corporate reporting is governed by a variety of national and international laws, rules, standards, and guidelines (Miller and Skinner 2015), and these requirements are likely to increase after the pandemic (Covid-19). Globally, there is a growing need for better information disclosures in corporate reports, including those in emerging economies like India. In India, corporate reporting is now giving prominence to transparency, accountability, and improvement in disclosure quality (PricewaterhouseCooper 2018). Reporting is changing drastically because of these regulatory changes and the need for information by different stakeholders. However, the enactment of several economic reforms such as the implementation of the Goods and Service Tax (GST) and demonetization has affected economic growth (Rakshit and Basistha 2020). Due to these developments, companies started transforming their business models and strategies. A need was also felt to associate investment decisions and corporate behaviour with financial and sustainable development for providing a more holistic view of organizational activities (Grant Thornton Bharat 2020). Indian companies also started realizing the gap in reporting and presenting information (Basu 2017). Among several developments in this field, the most prominent ones were when in the year 2015, the Confederation of Indian Industry—ITC Centre of Excellence for Sustainable Development in alliance with the IIRC created an IR lab to stimulate IR practices in India (Basu 2017). On the 6 February 2017, securities and exchange board of India came up with a circular in which they motivated 500 top companies preparing Business Responsibility Reports to adopt IR voluntarily. The Institute of Chartered Accountants of India (ICAI) had established an IR category in the ‘ICAI awards for excellence in Financial Reporting from the year 2018. A survey was conducted by the Bombay Chamber of Commerce and Industry and the PwC to check the perceptions of the corporate sector towards IR. The findings revealed that to enhance transparency and long-term relationships with stakeholders, leading companies are espousing the framework (Grant Thornton Bharat 2020). More than 80 companies had adopted IR by 2020. This shows that IR is gaining popularity in India. Also, many academic events, panel discussions, and debates were hosted by various organizations like the Confederation of Indian Industries, the ICAI (The Institute of Chartered Accountants of India), and many others to create awareness of IR. ICAI also constituted a new board by the name of “Sustainability Reporting Standards Board” under the leadership of Dr. Sanjeev Singhal in February 2020, to promote sustainability reporting in India. The board also came up with many

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awareness programmes centred around IR. The board has proposed to increase the number of awards given under the IR category from three to eight. The use of voluntary disclosure is increasing to better satisfy accountability, transparency, and access to information (Busco et al. 2013; Dumay and Rooney 2016). In India, this has led to an increase in the number of pages of an average annual report, mirroring what was happening in many countries, and which lead to the development of IR. Moreover, organizations publish information in various documents such as annual financial statements, sustainability reports, and governance reports, which makes it difficult for users to extract and understand relevant information. Keeping these developments in mind, there is a need to understand the viewpoint of adopters of IR. There are many studies focusing on the quality of integrated reports by Indian companies (Mishra et al. 2022; Ghosh 2019), but there is not much work done on the perceptions of preparers of IR. Furthermore, the IIRC celebrated its 10th anniversary in 2020. In February 2020, the IIRC invited public comment on selected aspects of the IR Framework. A consultation draft and a companion document were issued in May 2020, based on some 300 responses received by the IIRC. During the consultation period ending in August 2020, around 21 regional roundtable and focus group meetings were held around the world which involved over 1000 individuals. This consultation and discussion process resulted in a revised version of the IR Framework which was released in January 2021 (IIRC 2021). Motivated by the IIRC’s call for the revision of the IR Framework, this study focuses on the perception of the preparers of IR and the challenges faced by them. The chapter also examines the process of adoption of the IR Framework. It concludes by suggesting future research opportunities related to the IR Framework. The chapter proceeds as follows—Sect. 7.2 deals with the literature review, Sect. 7.3 provides the research methodology, and Sect. 7.4 highlights the results of the study. Section 7.5 contains the conclusion of the study, and Sect. 7.6 presents the implications and limitations of the study.

7.2 Literature Review 7.2.1 Need for IR With the effects of globalization, the financial crisis, the global pandemic, the environmental crisis, and the need for more transparent reporting, IR appears to be a logical solution to many of these corporate reporting issues. IR is an evolution of environmental and sustainability reports and is a perfect combination of financial and non-financial disclosures (Eccles and Krzus 2010). It addresses the changes expected in corporate reporting and thinking to better reflect the connectivity of today’s globalized world (Adams 2015).

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The research undertaken by Gibassier, Adams, and Jerome on behalf of the IIRC suggests that IR is being adopted by many organizations around the world, although exact figures do not seem to be available. During the COVID-19 pandemic, IR and value creation have been emphasized by many stakeholders, as having a far-reaching impact on corporate reporting. Therefore, research on these areas is urgently needed in order to understand various facets of IR, especially in emerging economies. In India, the adoption of IR started with Kirloskar Brothers Ltd in 2013–2014, followed by Tata Steel in 2014–15. Eccles and Serafeim (2017) have pointed out the lack of connectivity between strategies, business model, and outlook as a critical factor that hinders a company’s adoption of IR. It has been stated that many companies have begun adopting IR, but still prepare a standalone integrated report which is prepared on a voluntary basis. In the current context, where a company’s leadership desires to combine financial information and sustainability information, IR is a good vehicle; however, the integrated report should not be seen as a substitute for either, because the former reports contain more detailed information. The integrated report draws together and relates the important aspects of financial, sustainability, and governance reporting. IR is primarily aimed at providers of financial capital, but it is useful to a range of stakeholders (IIRC 2021). Transparency in the annual report allows investors and managers to make more informed decisions (Gasperini 2014; Burke and Clark 2016). IR promotes a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time. It is well documented that much of the value of an organization exists in intangible assets, and therefore, reporting about intangible assets is very important (Mouritsen et al. 2001; Dumay 2016; Dumay and Rooney 2016). Dumay (2016) emphasized that intellectual capital accounting has lost popularity, while IR is gaining in popularity. He suggests that IR may offer new opportunities for intellectual capital measurement, management, and reporting because the IR Framework includes the capitals traditionally included in intellectual capital as well. Thus, IR is a concise communication about how an organization’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the creation, preservation, or erosion of value in the short, medium, and long term (IIRC 2021).

7.2.2 Who Are Preparers? The IIRC does not define the term “preparers” in the IR Framework. However, it identifies “those charged with governance” or “responsibility for an integrated report” in the 2013 framework and the revised framework, respectively. The IR Framework requires a statement from those charged with governance, acknowledging their responsibility to ensure the integrity of the integrated report. It also requires their opinion or conclusion about whether, or the extent to which, the integrated report

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is presented in accordance with the IR Framework.1 Generally, those charged with governance would refer to the board of directors with responsibility for overseeing the strategic direction of the organization (IIRC 2021). Of course, there are many people in an organization who are involved to some extent in the preparation of the integrated report. These include people involved in data collection, data preparation, report writing, and external advisors who assist in preparing the report. Therefore, many studies have demonstrated that there are a large number of actors who are involved in the preparation of integrated reports (Al-Htaybat and von Alberti-Alhtaybat 2018; Busco et al. 2018). These actors may be directly or indirectly involved in the preparation of the integrated report. For example, the department that physically prepares the report is directly involved in the preparation, but the risk management department may provide information about risks in an indirect way (Lai et al. 2016; Stacchezzini et al. 2019). In some companies, the sustainability department or communication department takes the overall lead in the preparation of the integrated report (Lai et al. 2016), and in a few, a new department is set up for the preparation of the report (Stacchezzini et al. 2019). In India, the hiring of an external adviser or report preparer is quite common. In this study, we have identified preparers as all the individuals who are involved, directly or indirectly, in the preparation of the integrated report. This may include the report writer, one who assists in writing the report, one who provides information, one who collects information, one who designs the report, one who reviews the report, and those charged with governance who take responsibility for the report.

7.2.2.1

Need for the Study

With the passage of time, the IR Framework has met with some criticism (Flower 2015; Thomson 2015; Perego et al. 2016). A few researchers have suggested that IR is a unilaterally narrow approach for evaluating and reporting sustainability concerns within an organization (Brown and Dillard 2014). Many researchers have focused on a theoretical analysis of the IR Framework (Haller and van Staden 2014; Adams 2017). A few have focused on IR’s relationship with other frameworks (Dumay 2016; Maas et al. 2016), and a few on the merits of IR and its link with the United Nations Sustainable Development Goals (Adams and Simnett 2011; Adams 2017). A few have linked IR with corporate social responsibility (CSR) or business outcomes (Jensen and Berg 2012; Soyka 2013). IR was also proposed as a solution to combine financial reporting, sustainability reporting, and CSR activity with business outcomes. IR, as the IR Framework explains, is principally a forward-looking form of reporting, as compared to financial reporting, which is more backward-looking (Kılıç and Kuzey 2018). Other researchers consider IR as 1

In some countries, the legal or regulatory framework precludes a statement of responsibility from those charged with governance. In those circumstances, the revised IR Framework suggests that the organisation should explain the measures taken to ensure the integrity of the report (IIRC 2021).

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a combination of public accounting, accounting for sustainability, corporate governance, and conventional reporting (Veltri and Silvestri 2015; Velte and Stawinoga 2017). The IR Framework discusses the importance of integrated thinking being applied in an organization if it wishes to produce an effectively integrated report (IIRC 2013, 2021). It is claimed that integrated thinking will lead to behavioural and cultural changes within the organization (Nduneseokwu et al. 2017; Herath et al. 2021) as well. It is also suggested that IR will improve the link between the various departments of an organization and will improve cooperation levels among them (Krzus 2011). Stubbs and Higgins (2014) examined IR practices in Australia and observed that a highly centralized reporting process necessitates a shift in corporate culture. Lately, many studies have focused on the development of new disclosure policies in emerging markets. For example, Acar and Temiz (2020) explore the relationship between the environmental performance of organizations and the level of voluntary environmental disclosure in emerging markets, e.g. Turkey. Khemir (2019) focused on environmental, social, governance disclosures in Tunisia. In India, IR is voluntary. Voluntary disclosures increase transparency and accountability (Ho and Wong 2003; Coluccia et al. 2016). Various studies have expanded the literature on voluntary disclosure to include IR (Abeysekera 2013; Steyn 2014; Lee and Yeo 2016). These studies have documented many benefits of IR. EY’s Excellence in Integrated Reporting Awards 2020 (EY 2020) identified that 43% of investors globally are using non-financial information to make investment decisions. The report also highlights how the COVID-19 pandemic has accelerated the transformation of society. It suggests that there is a strong emerging global focus on long-term value. It goes on to state that society is increasingly demanding greater responsibility from the entities that they work for, buy from, and invest in. Krzus (2011) identified four major implications of IR, which enhance contemporary reporting. These were clearer results, stronger decision-making, greater participation, and a decrease in the risk of credibility. The implementation of an IR structure is of great significance in the corporate and organizational reporting frameworks’ restructuring process. Nevertheless, to understand this new reporting pattern, the factors that influence economic and non-economic output need to be identified (Yongvanich and Guthrie 2006). The construction and identification of key performance measures that can be used to assess success relevant to the sustainability strategy, and how these measures can be used in both organizational planning and decision-making, is an important subject to investigate (Adams and Frost 2008). Some studies show that the financial crisis of 2008–09 was a key reason that the demand for non-financial reporting increased. Durak (2013) has identified factors at a country level and firm level which impact the adoption of IR. He highlights those countries where societal values surmount individual values and mentions that countries with a high demand for information and effective governance frameworks are more likely to adopt IR. At the firm level, big and profitable companies with good governance policies tend to be more likely to adopt IR.

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Many researchers have attempted to find out the determinants of IR adoption (Galani et al. 2012). Frias-Aceituno et al. (2014) stated that one of the key factors in the preparation and distribution of integrated reports is the size of the organization. Frías-Aceituno et al. (2013) have linked IR adoption to the legal framework of the country. Robertson and Samy (2015) studied the perspectives of senior managers of firms in the UK and highlighted factors impacting the diffusion of IR. With various studies focusing on the advantages and challenges of IR, it is evident that the adoption of IR worldwide is increasing, including in India. That adoption may be due to IR being a rational choice of reporting in the current circumstances (Churet and Eccles 2014; Adams 2015; Serafeim 2015) or it may be because of a reaction to pressure from investors and the market (Stubbs and Higgins 2014, 2018; van Bommel 2014) or it may even be because of a current trend (Flower 2015). Evidence shows that there is a rising trend in adoption, and therefore, this chapter attempts to gather the perceptions of preparers of IR in India. In India, it has been observed that there is a massive drive towards transparent and concise reporting. In February 2017, the securities and exchange board of India encouraged companies to adopt IR on a voluntary basis (SEBI 2017). However, it is interesting to note that there have been only very few academic studies on IR in India. This is probably because the adoption of IR in India is at an early stage. Among the mixed responses towards IR, it is difficult to understand the status of IR in a country like India. Since India is one of the emerging economies in the world, it has a great deal of importance for all the stakeholders, and therefore, it is very important to analyse the perceptions of preparers of IR, who have a crucial role to play in the adoption of IR. In this study, the authors have attempted to analyse the perceptions of preparers and also understand their role in the preparation of the report.

7.3 Methodology The objectives of this research were to examine the perceptions of preparers and to understand the role of preparers in the preparation of integrated reports for the company. The study is an attempt to seek their views and perspectives on these issues. To achieve this objective, a qualitative methodology was adopted. We adopted a qualitative research approach because it is flexible and allows an in-depth evaluation of respondents’ views. In addition, it engenders a variety of opinions and ideas. It also helps in filling the gap which is left by survey-based methods. We carried out 9 in-depth, semi-structured interviews as part of this qualitative research. Due to COVID-19, India was under a total lockdown from 23 March 2020. These interviews were scheduled for March 2020 and May 2020, and therefore, all the interviews were conducted online using the Zoom video-conferencing facility. The interviews lasted between 46 and 96 min (details in Table 7.1). All the interviews were recorded and transcribed. The name of the company and the interviewees have been kept anonymous and a general identification number has been given to each interviewee.

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However, the name of the department in which the interviewee works is given in Table 7.1, because that can be linked to the process of preparation and the opinions of preparers (interviewees). Table 7.1 also shows whether the interviewee was part of the company or was an external party who was helping the company in the preparation of the integrated report. Internal interviewees were from five different companies. For the selection of interviewees, mails were sent to companies that participated in the Institute of Chartered Accountants of India—Best Integrated Reporting Awards and to their respective external report advisors. Mails were sent to 33 companies, out of which five companies agreed to provide respondents for the interviews. The companies that agreed to participate in the research were contacted and the interviews were conducted. In the first stage of study, documentary analysis was conducted to understand these five companies that agreed to participate in the interviews. For the interviews, an actor network was identified, and general broad themes emerged from this which also formed a basis for the interviews. Potential interviewees or key actors were identified from the elementary documentary analysis. The selection of interview questions was based on the results of the literature review and the status of IR in India. We attempted to obtain unrestricted and open answers from interviewees but avoided forcing them to express views on issues they felt uncomfortable dealing with. A broad framework for the questions was prepared and followed throughout the interview. The detailed framework is provided in the Appendix 7.1. Table 7.1 Details of interviewees Interviewee

Industry

Department

Designation

Duration (min.)

Internal/ External

INT#1

Financial service

Accounting and finance

General Manager

46

Internal

INT#2

Manufacturing

Accounting and finance

Manager

72

Internal

INT#3

Manufacturing

Investor relations and risk management

General Manager

48

Internal

INT#4 INT#5

Manufacturing

Sustainability

VicePresident

50

Internal

INT#6

Manufacturing

Environment and safety

Assistant general manager

60

Internal

INT#7

Service provider

Integrated reporting

CEO

96

External

INT#8

Service provider

Integrated reporting

Vice President

80

External

INT#7

Financial service

Sustainability

Head

60

Internal

Source—Authors’ compilation

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Proper preparation is important in any research project, and therefore, before the interviews were conducted, the author read through the integrated reports prepared by the companies concerned as well as the annual reports, where appropriate. This reading provided a basic knowledge about the companies and helped the author to tailor questions for the interview. After data collection, coding was done with the help of Nvivo (Qualitative data analysis computer software package) to understand and interpret the results. Analysis started with an initial reading of all the transcribed interviews which gave us a broad outline of the preparer’s perspective. Gabriel (2011) was followed to uncover the meaning of the interviewee’s responses and connect it with the research objective. In his book, Gabriel has explained how to extract meaning from an organization’s story. Nine interviews were conducted with nine respondents, and of these nine respondents, eight were male. The majority of the interviewees (n = 6) were from the age group 40–50 years and only three interviewees were in the age group 30–40 years. The work experience of all the interviewees was more than 10 years (please refer Table 7.2). Table 7.2 Demographic characteristic Characteristic

Frequency

Gender Male

8

Female

1

Age (years) 20–30

Nil

30–40

3

40–50

6

Above 50

Nil

Work experience (years) 1–5

Nil

5–10

Nil

More than 10

9

Number of integrated reports published

(Number of companies)

1

Nil

2

1

3

3

4

1

5

Nil

Source—Authors’ compilation

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In the last stage of analysis, the author identified common and conflicting elements. Insights were gathered into how the process of reporting works within the organizations and what roles were played by the different preparers. The result of the analysis is discussed below.

7.4 Analysis of Result During the analysis of the interviews, keeping in mind the objective of the study, the authors have tried to identify major themes which emerged from the interviews. Actor network analysis helped in identifying the themes. The responses of different actors showed clustering around a few subject areas which we named as themes. In total, six themes are discussed below. Theme 1—Type of IR prepared in India While carrying out the literature review, the author studied the annual reports of all companies that have adopted IR in India, and it was noticed that there are four major types of presentation of IR, which are currently practiced in India. One is a standalone integrated report, which is prepared according to the IR framework but is released separately. Companies like Larsen & Toubro Ltd follow this type of approach. Some companies present their integrated report as a separate section in their annual report, for example, Yes Bank and Wipro. The third variant is when the company includes IR disclosures in its sustainability report, for example, companies like Dr. Reddy Laboratories, Mahindra Finance, and Grasim Ltd. The last and the most common approach is an annual report prepared in the form of an integrated report, like the one prepared by Tata Steel or Vedanta Ltd. In this study, the author interviewed executives from five companies. Of these, three companies prepared annual reports in the form of an integrated report and two prepared a standalone integrated report. Moreover, it was found that one of the companies prepared a complete annual report including IR information in one year, but in the subsequent year, they moved to a standalone integrated report. The reasons for their actions, according to them, were The full annual report was very long because of the mandatory disclosure and therefore we released a separate IR report this year. (INT#7) A separate integrated report means that we don’t have any pressure to prepare it before the Annual General Meeting(AGM) and therefore, after completing our annual report, we prepare a standalone integrated Report”. (INT#6)

Theme 2—Potential drivers and doers of IR In our interviews, we sought the opinions of interviewees who took the decision to adopt IR in the company. All the companies had adopted IR within the past 5 years (detail in Table 7.2). We identified that the decision to adopt IR was taken at the top level, i.e. top management, with the approval of the Board.

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In addition, it was found that all the companies had experienced the impact of IR in their work practice and had observed the benefits of IR adoption. Responses by interviewees included the following comments: IR helps companies to come up with their unique stories. (INT#3) Companies are able to communicate their strategies in a better way through IR. (INT#4) We have always been doing things for our society and environment, but previously, we were not able to identify our contribution towards our stakeholders in the annual report. IR helps us showcase all our efforts in the field of sustainability. (INT#3) Another interviewee pointed out that “Investors need the information to make decisions and IR is helping companies in communicating the same.” (INT#7)

Overall, all the companies interviewed in the study were positive about IR adoption and were satisfied with the IR Framework. Theme 3—Process of preparing IR CSR information is a mandatory requirement for disclosure in the annual reports of Indian companies. All listed companies must prepare a Business Responsibility Report which discloses material, social, environmental, and economic information of the company. It was found that because companies were already preparing Business Responsibility Reports or sustainability reports before the adoption of IR, preparing an integrated report was easier for them. One of the interviewees pointed out that The materiality process and disclosure of material, social, economic and environmental information are important building blocks for the preparation of an integrated report. (INT#4)

Out of five companies, the “Accounting and Finance department” was responsible for the preparation of the integrated report in three companies and the “Sustainability department” in the other two. These departments define the integrated report content and select the KPIs for disclosure. They also maintain communications with the Chief Financial Officer or Chief Executive Officer (depending on who takes responsibility from the perspective of management). These departments are also responsible for obtaining information from the various departments and companies and seeking management approval for the integrated report. If the company hires an external advisor for designing the integrated report, then they also maintain communication with the external advisor. It became clear that the preparation of an integrated report involves the engagement of many departments and different branches of the company, as well as external advisors. Interviewees helped us in identifying the various participants and processes involved in the preparation of the integrated report. Interestingly, all the companies who participated in our study have hired an external advisor for designing and assisting in the preparation of the integrated report. The Board helps in identifying which department will be responsible for the content in IR and takes responsibility for the integrity of the report. They also provide their inputs related to stakeholder engagements and help in identifying issues material for IR, ultimately approving the report with the assistance of the audit committee. One of the interviewees stated that

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Almost all departments and branches of the company are directly or indirectly involved in the preparation of the Integrated report. Either they provide data, or they are directly involved in the preparation of the Integrated report. (INT#5)

Interviewees indicated that after preparing the draft integrated report, multiple approvals and adjustments ensue at the top management level to ensure that it is a balanced report. The CEO and CFO approve the report from a management point of view and the board of directors finally approves the integrated report for release. The audit committee also plays an important role in the interrogation and approval of the integrated report, and this observation is in line with many academic studies (Chariri and Januarti 2017). Theme 4—Integrated thinking and reporting are two sides of the same coin The IIRC suggests in the IR Framework that the adoption of integrated thinking improves reporting both internally and externally and facilitates better decisionmaking using the multi-capital approach (IIRC 2013). Integrated thinking aims at breaking the “silos within the company.” This enables a smooth flow of information among different sections of the company, resulting in effective and improved communication. One of the respondents stated that After the adoption of IR, I see more coordination between the different departments. The head office is also more aligned with its branches situated in the different locations. (INT#8)

Another stated that The process of preparing the integrated report is maturing year on year. Now that we know what kind of data is required, we have our information system in place. (INT#9)

When interviewees were asked about integrated thinking and the role of integrated thinking in IR, the author found that all the interviewees believed integrated thinking has made a positive contribution to the company. One interviewee had a very creative answer to this. He said Integrated thinking was always there in our company; the only thing is that now we have a name for our ideology. (INT#9)

Another interviewee said, “IR helps us to get a more holistic view of our business model.” (INT#1). INT#2 mentioned that “IR helps in better employee engagement, which is an important aspect of integrated thinking.” It was found that in all the companies chosen as the sample, integrated report preparation required the involvement of people across departments. This reinforces the application of integrated thinking and helps in breaking the silos. Integrated thinking could lead to value creation which can be demonstrated through the six capitals of the company. When asked about the six capitals and the concept of value creation, most interviewees agreed that IR has focused their attention on short, medium- and long-term value creation. One of the interviewees highlighted that “When we report using the

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six capitals and their performance, it is easier for us to identify the ways in which value is created.” (INT#4). Another stated that “IR helps us to identify the impact of the company’s activity across the six capitals, and this enhances connectivity.” (INT#2). One very interesting comment by one of the interviewees broadened the concept of value creation. INT#7 commented that “We have started collaborating and comparing ourselves with companies in our sector. This helps in improving IR and also creates value for the company as well as for the whole sector.” Theme 5—Materiality The IR framework provides guidance to organizations on how to identify the relevant and material matters for inclusion in the integrated report. An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium, and long term (IIRC 2013). The majority of interviewees believed that defining materiality is not a problem for the company as they have a clearly defined process for defining materiality; however, a few companies identified this as a challenge. An external advisor put it this way, “Most companies have an established process of identifying material issues, a few companies are not sure and therefore, we assist them in defining their materiality” (INT#8). Theme 6—Challenges India is still in the early stages of adoption of IR, and therefore, the author came across a few challenges that companies faced in IR adoption. A common challenge that was highlighted was the lack of general awareness about IR in the company. One of the interviewees highlighted the fact that Not everyone in the company is aware of all facets of IR. Therefore, we have planned a series of internal seminars and programs to highlight the importance of reporting non-financial aspects of the company.

In a few interviews, it was highlighted that the meaning of “outcomes” and “output” in the IR Framework is not clear, terms which cause some confusion. One of the interviewees stated that In some types of companies, especially in conglomerates, it is difficult to identify the difference between outcomes and output. (INT#6).

It should be noted that the revised IR Framework helps to clarify the difference. (IIRC 2021).

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7.5 Discussion and Conclusion The objectives of this research were to examine the views and opinions of preparers of integrated reports in India and to understand their role in the preparation of integrated reports. As stated earlier, there have been very few studies on IR in India. This chapter is an attempt to reduce the research gap by investigating the role and perspectives of preparers of integrated reports in India. The analysis reveals that integrated thinking plays an important role in integrated report preparation. Integrated thinking has emerged as a sense of involvement. It was found that companies following IR had more understanding of the holistic picture of reporting now (Herath et al. 2021). Most responses were collected from companies that have adopted IR on a voluntary basis and who had participated in the ICAI’s awards. This may be identified as one of the reasons why companies seemed generally satisfied with the framework. IR has helped companies to enhance connectivity within the company and to identify the impact of the company’s activity across the six capitals. Many departments were involved in the preparation of integrated reports either directly or indirectly. The research shows that departments interact with one another to facilitate the preparation of the integrated report, which is in line with the goal of integrated thinking. This is also in line with the argument of many academicians (Dumay and Dai 2017; Guthrie et al. 2017). The study also supports the notion that IR is breaking down organizational silos. The chapter highlights the different types of integrated reports prepared by organizations in India. Almost all the interviewees were found to be very positive about the advantages of the adoption of IR. It was found that most companies were collecting data on the six capitals. In some cases, it was found that they had been collecting this information even before adopting IR. Through the adoption of IR, these organizations have been given a platform to display and communicate the importance of the six capitals to stakeholders, thus improving communication with the latter.

7.6 Implications and Avenues for Future Study This study contributes to the literature in many ways. Firstly, the study provides perspectives of the preparers of IR in India. While many studies have been done on factors impacting the adoption of IR (Frias-Aceituno et al. 2013; Gunarathne and Senaratne 2017; Kurniawan and Wahyuni 2018; Robertson and Samy 2019), only a few studies provide practical insights into the preparers’ viewpoint. This study is the first of its kind in India where in-depth interviews with preparers are used to understand their perspectives towards IR. Secondly, this study expands the scope of extant knowledge by describing the process followed by companies in the preparation of an integrated report through the provision of a clear understanding of the process, which also adds practical insights to conceptual knowledge. Thirdly, the study interlinks integrated thinking and IR as implemented in practice. Therefore,

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this study has practical implications as well since it will guide other companies that want to adopt IR with the details of the process and also provide insights into the benefits of and challenges faced in the adoption of IR. As IR is still in its infancy in India, the process of adoption needs triggering from regulators and other stakeholders to increase take-up. This study provides a basis for such discussions. However, the study is limited in its content and relies only on interviews with preparers who are involved in the preparation of integrated reports (directly or indirectly). The number of participants in the study was thus limited, and they were selected from similar backgrounds, which may have limited their opinions on IR. The study provides scope for future studies to expand research horizons and explore the perspectives of other stakeholders of IR like regulators, company leaders, auditors, and legislative bodies. It may be extended to other emerging economies as well, and comparisons can be drawn between IR in these economies and that in India.

Appendix 7.1: Framework for the Interview The interview guide followed during the interview is summarized below. 1. Does your company present a standalone integrated report or a combined integrated report? 2. Who drives the reporting process in the organization? 3. What are the perceived benefits of the adoption of IR? 4. What are the challenges in implementing IR? 5. Do you feel IR is a better way of communication and satisfies all stakeholders? 6. Do you think it addresses the growing demand for transparency? 7. Do you think IR is a logical solution for integrating financial and non-financial information? 8. Who decides on the format for reporting? 9. What was the company’s experience when shifting from traditional reporting to IR? 10. On what basis was the decision taken? 11. Describe your company’s process of preparing its integrated report? 12. Who is involved in the preparation of the integrated report? 13. Did you see any organizational or internal changes after the adoption of IR? 14. What do the six capitals mean for the company and how does the company report value creation? 15. Has the company adopted integrated thinking? 16. Some questions were unique depending on the role of the interviewee.

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Nandita Mishra is Associate Professor in Linköping University, Sweden. She is also an ambassador to IIRC (International Integrated Reporting Council), London and a country director of HETL (USA). She is also part of the Sustainability Reporting Board of ICAI (Institute of Chartered Accountants of India) and works closely with the Big 4 in the field of sustainability and reporting. Nandita Mishra is a cost and management accountant and holds her Ph.D. in the field of corporate governance in the banking sector and has more than 20 years of experience in corporate and academic. She has a wide variety of teaching experience having taught at different universities at all levels ranging from undergraduate to doctoral supervision. She has attended various international seminars and conferences and has publications in well-renowned journals. Nandita Mishra has also completed 3 funded research projects. She is engaged with consultancy work with many companies in which she helps them in communicating their sustainability initiative and non-financial reporting.

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Mohamed Nurullah (Ph.D., City, London, SFHEA) is Associate Professor (Reader) of Banking and Finance at the Department of Accounting, Finance, and Informatics at Kingston University London. Mohamed did his Ph.D. from Cass (now Bayes) Business School of City University London where he also started his full-time academic career in 1999. He then worked for Westminster University, Glasgow Caledonian University, and Glasgow University. Mohamed has written over 50 academic papers, book chapters and commissioned reports. He has published papers in leading academic journals, such as the Journal of Economic Behavior & Organization, British Accounting Review, Journal of Financial Services Research, and Journal of International Financial Markets, Institutions and Money. Mohamed has successfully supervised 18 Ph.D. students. He previously acted as Chief Examiners for the Chartered Institute for Securities and Investment (CISI) and the Institute of Financial Services (formerly Chartered Institute of Bankers) London. He was also Head of the Department of Accounting, Finance, and Informatics at Kingston University London.

Chapter 8

Incorporating the International Integrated Reporting Framework in the Corporate Reporting Ecosystem: A Case-Based Study from Bangladesh Md. Shafiqul Islam

Abstract This chapter delves deep into the International Integrated Reporting Framework (IIRF) in the voluntary corporate disclosure context of Bangladesh, following a case study approach. Commencing with a detailed historical sketch of the evolution of Integrated Reporting IR in Bangladesh, this chapter attempts to point out some crucial challenges faced in its implementation. In doing so, the chapter critically compares the latest integrated annual report published by the IDLC Finance Limited using the IR framework under three different dimensions: the content elements, the six capitals with linkage to the SDGs, and the seven guiding principles of the framework. The findings suggest a promising future for IR adoption in the corporate communication ecosystem of Bangladesh in a bid to support the growth of a transparent and efficient capital market. The analysis also reflects positively on the management of IDLC Finance Limited in its attempt to incorporate advanced concepts of ‘Integrated Thinking’ and long-term value creation within a sustainable business model. The chapter serves as a valuable source of reference for the policymakers, especially those involved in the Bangladesh Securities and Exchange Commission, and the academicians who want to see a broader picture of the evolution of IR in a South Asian economy like Bangladesh that has experienced a significant economic upsurge in recent years. Keywords Bangladesh · IDLC Finance · Integrated reporting · Integrated thinking

Md. S. Islam (B) East West University, Dhaka, Bangladesh e-mail: [email protected]; [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_8

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8.1 Introduction Traditional financial reporting cannot adequately represent the long-term value of a business to its investors and other stakeholders. A compelling call to action for businesses in a dynamic environment urges them to be proactive of their responsibilities towards society. Organizations publish different reports under different labels such as Sustainability Reports and Corporate Social Responsibility (CSR) Reports. The majority of these reports concern the environment and society in general. Nevertheless, they are criticized due to their lengthy and sophisticated representation (de Villiers et al. 2014, p. 1043). Most of the criticisms hold that these reports have disconnected, compartmentalized elements that hinder basic connectivity within the departments of an organization. To answer the queries of different stakeholders and to satisfy them with a blend of financial and non-financial information, Integrated Reporting (IR) emerged in the corporate communication arena more than a decade ago, addressing all these inadequacies and reimagining the corporate reporting of tomorrow. The Institute of Directors in South Africa (IoDSA) pioneered IR before the International Integrated Reporting Council (IIRC) did, the latter of which is a global entity responsible for preaching IR as the worldwide standard for reporting. The formal committee known as the IIRC was founded in August 2010, and later became the international coalition of regulators, investors, standard setters, accounting bodies, and other stakeholders that work together to create a global compact on an organization’s ability to create long-term value (IIRC 2011, p. 3). The Pilot Program (2011) allowed corporations to run trials of IR, and in December of 2013, the International Framework for IR was made accessible to any firm worldwide to freely adopt as their corporate reporting framework (IIRC 2013a). After being first published in 2013, the first-ever updated framework is now accessible through the IIRC from January 2021. The new framework’s basic ideas and guiding principles remain intact for organizations worldwide, encompassing nearly 2500 firms in over 70 countries as the IR reporter (IIRC 2021). Bangladesh, the country of concern in this chapter, is one of those 70 countries where the reporting revolution in the form of IR has taken place and is evolving. Recently, Navarrete-Oyarce et al. (2022) studied five Chilean companies to understand the reasons behind adopting IR and deciphering the benefits associated with it. They have listed several perceived benefits of adopting IR such as reduced cost and increased efficiency, increased transparency, simplicity in presentation, better benchmarking with local and international adopters and meeting international legal requirements. Okwuosa and Atkins (2022) discussed the meaningfulness of IR from preparer-centric and user-centric view points and asked to reconcile the perceived differences to harness the intended benefits of IR. Recently, Bangladesh has successfully completed the process of being upgraded from a least developed nation to the lower-middle-income category in 2015, effectively meeting all the basic requirements in March 2018. The consulting company PwC estimates that Bangladesh will make it to the 23rd largest economy in the world by the year 2050, and according to the forecasts published by The Goldman Sachs Group, Inc., Bangladesh will be one of the nations in the “N11” that would

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rule the global economy in the future, (PwC 2019, p. 4). Apart from the developments mentioned, Bangladesh is a unique case for sustainability due to several related incidents. One important wake-up call for policymakers of Bangladesh in ensuring sustainability was the Rana Plaza incident on 24th April 2013. After the tragic incident of Rana Plaza, there has been growing concern from customers and other stakeholders who want to know what companies are doing to ensure sustainability within the entire value chain. Bangladesh also faces the threat of climate change which becomes crystal clear from the latest Global Climate Risk Index (CRI) 2021. Bangladesh ranks as the seventh most climate change vulnerable country, which is an added threat to the nation’s economic sustainability. Bangladesh lost approximately $3.72 billion from 2000 to 2019 due to climate change-related issues, and in future, this will only increase if the government does not implement proper sustainable solutions (Climatelinks 2018). Bangladeshi companies face an extended internal business process that often delays the project approvals and their effective implementation (ADB 2022). Therefore, Bangladesh faces major challenges ahead of sustaining its promising economic outlook and ensuring that all operations within the business environment are carried out with sustainability issues in mind. One of the critical areas in the broader sustainability arena is corporate sustainability. When investors assess the sustainability of an emerging economy like Bangladesh, they rely, most often, on corporate annual reports. However, traditional corporate reports are not designed to showcase companies’ sustainability and longterm value creation capabilities. Instead, they mainly showcase financial statements, but add some formality by including discussions with management that are linked to value creation and exploitation of those firms’ different intangibles or intellectual capitals. In simple terms, there is no integrated thinking process evident within the firm to prove that all departments work together, breaking the silos of the departments to create and disclose value created for investors and subsequently, other stakeholders. This is where the timely intervention of a new corporate reporting framework called the IR framework comes into play. Initially, the IR framework was adopted in South Africa, and later gained popularity in other countries with the growing concern of regulatory bodies with improving the quality of disclosures, more specifically, in an integrated manner. Moreover, recently Setia et al. (2022), after analysing research articles published from 2010 to 2021 focusing on IR and sustainability, argued that the provision for sustainability related disclosure has been increased by the adopters of IR. In line with the above arguments, this chapter aims to discuss the following research issues: 1. Demonstrating the recent interest shown by the prime corporate reporting regulatory organ in Bangladesh, ICAB regarding voluntary adoption of the IR framework in Bangladesh. 2. Examining the disclosure pattern of the leader in IR in Bangladesh—IDLC Finance Limited, to understand how it has successfully incorporated the IR framework in its corporate reporting. 3. Pointing out some of the possible challenges that might arise in the future concerning the adoption of the IR framework in Bangladesh.

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How IR has gained popularity in a voluntary disclosure regime like Bangladesh is an exciting area to focus on in the South Asian context. This chapter explains how IDLC Finance Limited, the pioneer in IR in Bangladesh, has adopted this new corporate reporting paradigm. More specifically, the chapter underlines the lessons that can be learned from the reporting practices of IDLC Finance Limited, which might be used as a best-case scenario for other companies who are still not sure about the concept of and the benefits derived from IR practice. Several empirical studies (Islam 2021; Dey 2020; Mohammad 2019; Islam and Islam 2018; Nakib and Dey 2018) have focused on the relationship between firm performance, corporate value, and market growth and the former adoption of IR practices in Bangladesh and they create positive vibes among the leading corporate firms. This chapter extends the scope of previous studies by incorporating an analysis of the leading IR reporter in Bangladesh and links it with the IR framework for a clearer understanding of the journey towards adopting this new reporting paradigm. For the ease of understanding of the readers, the rest of this chapter is organized into several sections. Section one sketches the IR journey in Bangladesh with a brief literature review. Section two discusses the movements towards IR adoption in Bangladesh, followed by a sectoral analysis of IR reporters, shedding light on the leading IR reporters of Bangladesh and some recent developments in this area. Section three brings the research methodology and discusses the relevance of using the case study approach. Then, three interrelated sections follow. Section four discusses IDLC’s integrated report with respect to the content elements of the IIRC framework, section five discusses on the SDGs and the Six Capitals integration, and section six compares IDLC’s adherence to the IIRC’s guiding principles. Section seven brings discussion that highlights the important findings in the light of previous works of literature in the field of IR, and some challenges towards IR in Bangladesh have been mentioned as well. Finally, the chapter ends with the conclusion in section eight.

8.2 A Brief Timeline of IR in Bangladesh The emergence of IR in Bangladesh dates back to 2013 when a few banks listed on the Dhaka Stock Exchange voluntarily applied the IR framework in their annual reports (Dey 2020). In 2015, the first regulatory form of initiative related to IR took place in Bangladesh. The national accounting and auditing standards-setting body of Bangladesh, the ICAB, circulated a disclosure checklist where the IR framework of the IIRC had been incorporated. After that, the leading companies listed on the Dhaka Stock Exchange started to follow the circulated disclosure checklist, and some of them became exemplary in preparing an annual integrated report. The momentum accelerated one year later when the International Integrated Reporting Council crowned IDLC Finance Ltd, a Bangladesh-based leasing company, with the title of “Best Integrated Report” in Asia in the financial service category for their annual report of 2016 (Islam 2021). The series of incidents mentioned here

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demonstrates a growing pattern of interest in voluntarily adopting IR as a corporate reporting paradigm in Bangladesh. Prior works of literature also confirm the growing popularity of IR in Bangladesh. Islam and Islam (2018) analysed the top eleven multinational companies listed on the Dhaka Stock Exchange with respect to their disclosure of IR practices in their annual reports from 2013 to 2015. Using manual content analysis, they demonstrated that the sample companies had started following IR practices but only in the form of CSR disclosure, not as a fully fledged integrated report guided by the IIRC. Their study found an overall IR disclosure percentage of 69, 77, and 79% in 2013, 2014, and 2015. Nakib and Dey (2018), in another parallel study of IR practices in Bangladesh, considered Dhaka Stock Exchange 30 companies as the sample, covering the years 2014–2016. They used fifty items under eight subcategories in their index, which was developed following the framework provided by IIRC for a content analysis of the integrated reports, or, in absence of those, the annual reports. They showed that the overall compliance rate increased to 61.48% from 45.11% within the three years of their study period. These numbers represent a growing consciousness among corporate managers and other stakeholders regarding the importance of IR as a decision-support system. Mohammad (2019) identified that most banks commenced disclosing sustainability and IR from 2012 to 2017 in Bangladesh. He also notes that IR disclosure in the banking industry is increasing rapidly, although significant variations in disclosure patterns are observed.

8.2.1 Movements Towards IR Adoption in Bangladesh As the previous section discussed the brief timeline and some literature regarding IR in Bangladesh, this section sheds light on further developments and movements of different industries towards voluntary adoption of the IR framework. After the circulation of the disclosure checklist by the ICAB regarding IR, many companies in Bangladesh started to disclose the information mentioned in that checklist. Nevertheless, one particular company, IDLC Finance Limited, has proactively adopted the advanced concepts of the IR framework, such as integrated thinking and decisionmaking based on exploiting the six capitals. Not surprisingly, IDLC’s effort was also recognized by the IIRC. As mentioned earlier, IDLC was recognized as an exemplary IR reporter in Asia in the financial service category in 2016, as has been included in the IIRC’s database of exemplary IR reporters. Apart from IDLC Finance Limited, there are other IR reporters in the different industrial sectors of Bangladesh. For example, in the NBFI sector, LankaBangla Finance Limited has been producing its annual integrated report since 2017. In the pharmaceuticals sector, Orion Pharma Ltd. has been leading the field of IR reporting since 2016. A sectoral analysis of the fully adopted IR reporters in Bangladesh has been summarized in the following section. Thus, the discussion leads to strengthening the argument that more and more companies now understand the importance of quality corporate disclosures, even voluntarily, that will benefit them positively in the long run.

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8.2.2 Sectoral Analysis of IR in Bangladesh Although the banking sector has dominated IR in Bangladesh, other companies from various sectors are joining the movement towards adopting the integrated framework of corporate reporting. The following table provides a brief sectoral analysis of the current scenario of IR reporters in Bangladesh (see Table 8.1): Table 8.1 shows the number of companies listed under different industries and the companies showing IR related disclosures. One thing that should be clear is that the number of IR reports demonstrating fully fledged compliance with the IIRC’s IR framework is lower than the companies that are partially disclosing IR related issues. In this case, companies partially or fully following/disclosing IR are both considered to be IR preparers. As seen in Table 8.1, the banking industry has the highest percentage of companies adopting IR as their reporting framework, followed by the ceramics industry. Financial institutions, also known as the NBFI industry, are slowly experiencing adoption of the IR paradigm. In the Telecommunication sector, Robi Axiata Limited, the second-largest telecom service provider in Bangladesh, has only recently adopted the IR framework, leading to this industry’s 33% adoption rate. One critical incident to note here is that Robi Axiata Limited is the first company in Bangladesh that has debuted its annual reporting journey on 31st December 2020, by 100% compliance with the IIRC’s IR framework, and it will be exciting to see how the other telecom giant, Grameenphone Limited, responds to this move. Another interesting fact to note from Table 8.1 is that the tannery industry, an environmentally sensitive one, has not witnessed IR amongst any of its companies. Of all the industries given in Table 8.1, this is the worst regarding voluntary adoption/disclosure of the IR framework. Thus, the above is a fruitful area for further study as to why the tannery industry is not showing any proactive measures to adopt IR, which is a tool for achieving accountability in actions towards ensuring sustainable business operations. Overall, the sectoral analysis reveals that all companies voluntarily follow the IR approach to presenting their annual reports. Albeit, the number might be higher if the IR framework was endorsed by the capital market regulator, the Bangladesh Securities and Exchange Commission. Table 8.1 Sectoral analysis of IR reporters in Bangladesh as of 2021 Industry

Total number of listed companies

Companies adopting the IR approach

Percentage of total (%)

Bank

31

15

48

Financial Institutions

23

6

26

Cement

7

1

14

Ceramics

5

2

40

Telecommunication

3

1

33

Tannery

6

0

0

Source Author’s own construction using the annual reports

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8.2.3 Leading IR Reporters of Bangladesh and Recent Developments The prime accounting body of Bangladesh, the ICAB, has been regularly arranging an event entitled “ICAB Best Presented Annual Reports” since 2001, and the extent and scope of this event has expanded massively over the last decade. ICAB has continuously added new categories of annual reports where it figures out the best performer for a particular year and recognizes it with a crest and a certificate in the presence of the finance minister of Bangladesh, senior dignitaries, business leaders, and academicians who were involved in the evaluation process where the champion annual reports were chosen. From 2015 onwards, the ICAB has added the best presented integrated report as a separate category in this event. Table 8.2 summarizes the top-performing IR reporters in Bangladesh from the year 2015 to 2019: As Table 8.2 represents, IDLC Finance Limited has been the leading performer in IR in Bangladesh from the very beginning, as is evident from its strong presence in the first position from 2015 till 2018. Most recently, in 2019, Lanka Bangla Finance Limited has come first in the IR category, and hence it can be easily perceived that competition among the financial companies to establish their footprints in the world of IR is increasing gradually. The banking sector is also doing very well in producing exemplary integrated reports, as evident from their strong presence in the best presented IR list in Table 8.2. Surprisingly, except for the financial and banking industry, no other sectors are represented in this list, which means that IR practice in Bangladesh is taking place only on a “lead by example” basis. This means that if the market-leading company adopts the IR framework within an industry, only then would other smaller rival firms also start mimicking its behaviour. This is a prime example of corporate legitimacy theory where firms will legitimize their activities by following social demand and peer group pressures. A similar sentiment was echoed by Vitolla et al. (2020a, b), where the authors argue that the quality of internal reporting Table 8.2 Best presented annual integrated reporters of Bangladesh Second position

Third position

2015 IDLC Finance Ltd.

Bank Asia

Prime Bank

2016 IDLC Finance Ltd.

Green Delta Insurance

United Commercial Bank Ltd.

2017 IDLC Finance Ltd.

BRAC Bank Ltd.

Bank Asia and Islami Bank Ltd.

2018 IDLC Finance Ltd.

BRAC Bank Ltd.

Bank Asia and Lanka Bangla Finance

Year

First position

2019 Lanka Bangla Finance Ltd. IDLC Finance Ltd. 2020 IDLC Finance Ltd.

Bank Asia and BRAC Bank Ltd.

Lanka Bangla Finance Ltd. Bank Asia

Source Author’s own construction using the ICAB Newsletters

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becomes critical for the social legitimization of big and prosperous organizations and serves as a barometer of management’s value creation attitude. Moving to the international arena, the annual integrated reports of the companies listed in Table 8.2 have won several awards from global and regional accounting bodies as well. To cite some, in 2019 alone, Bangladeshi companies scored the highest in eight categories of the South Asian Federation of Accountants (SAFA) best presented annual reports (Star Business Desk 2020). This symbolizes transparency and accountability in the progressive companies in Bangladesh, and in many cases, they are the trend setters. This striving towards the highest ethical standards of governance, compliances, and disclosures of broader stakeholders’ information in the form of an integrated report is quite promising for a country like Bangladesh. Apart from being the champion in the IR category, IDLC Finance limited is also the winner of the SAARC Anniversary Award for Corporate Governance. Lanka Bangla Finance was crowned the first runner-up in the SAARC Anniversary Award for Corporate Governance and the second runner-up in the IR category. These recent achievements demonstrate Bangladeshi companies’ growing concern, especially among financial industries, to adopt the globally recognized IR framework as their prime disclosure policy.

8.3 Methodology Understanding the IR framework’s adoption process in Bangladesh requires a critical analysis of a particular entity that leads this field. Several studies conducted in other country settings have followed a case study approach with a focus on a particular entity to understand its approach towards the adoption of the IR framework (see Brusca et al. 2018; Manes-Rossi 2018; Veltri and Silvestri 2015). With this in mind, this chapter has selected the annual report of IDLC Finance Limited and critically evaluated several disclosures, graphical visuals, and forward-looking statements from the board representing the company’s viewpoint on the IR framework and, as deemed appropriate, drawn references to other sources. To be more specific, the chapter addresses the incorporation of the IR framework into IDLC from three different dimensions. First, a comparison between the IIRC’s and IDLC’s IR content elements have been thoroughly discussed. Second, a critical reflection on the six capitals mentioned in the IR framework has been carried out based on the report of the IDLC. Finally, the degree of adherence of the IDLC’s IR to the IIRC guiding principles has been addressed to confirm that IDLC has adopted the guiding philosophy of the IR framework fully. Hence, this chapter adopts a case study approach. The author believes that the chapter will serve the purpose for which it has been written: that is, to provide the reader with a deeper understanding of the current practices of IR disclosures in the corporate annual reports in Bangladesh, particularly of the leading company in this area. The case study approach makes this chapter an essential reference point for global audiences looking for an in-depth analysis of the IIRF in the context of a developing economy, by focusing on a single entity. The entity

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chosen for the case study, IDLC Finance Limited, has won the crown for the best presented annual report in the South Asian region several times. As evident from Table 8.2, IDLC Finance has been the pioneer in IR in Bangladesh and has been a global example of best practices in this area. Here, the Integrated Annual Report 2020 and 2021 of IDLC Finance Ltd. has been taken into consideration, and they were the latest one available at the time this study was conducted.

8.4 IDLC Integrated Report Versus IIRC Framework: Eight Content Elements This section of the chapter draws attention to a critical comparison between the IIRC’s IR framework and the IDLC’s Annual Integrated Report of 2021. This comparison is essential to understand how IDLC has been complying with the essential content elements that are vital elements of an integrated report. A tabular analysis is presented under the eight content elements for ease of comparison, as shown in the IR framework. IIRC’s framework also considers the general reporting guidelines on the disclosure of material matters, short-, medium- and long-term aggregation and disaggregation as an essential part of the eight different content elements. The comparison presented in Table 8.3 also comprises a different section dedicated to analysing this particular item. The table underlines the fact that the content elements highlighted by the IDLC’s integrated annual report fully comply with the required elements shown by the IIRC in its framework. To be more specific, Table 8.3 shows that IDLC Finance has explained to its stakeholders the company’s story for the year 2020 concisely and effectively. Since 2020 was a year badly hit by the COVID-19 pandemic, the desire of stakeholders to know the particular actions the firm has undertaken were also addressed in the relevant areas. Recently, García-Sánchez et al. (2020) found IR to be the most ideal instrument to portray the pandemic’s business-level implications, owing to its adaptability and capacity to provide a comprehensive view of corporate management. IDLC disclosed the risk response area separately, with a special section dedicated to the risks faced due to the COVID-19 pandemic, while the actions taken to recover have also been highlighted. Talking about the business model, IDLC follows an integrated business model where integrated thinking and value creation with the effective utilization of the six capitals are demonstrated. IDLC reinforced that their business activities are aligned with their core values and guided by their governance framework during the entire cycle. Figure 8.1 reveals the IDLC’s integrated business model that shows a comprehensive visual example of the discussions summarized in Table 8.3. Thus, the integrated business model of IDLC serves as an example of incorporating integrated thinking into a business model, a process of value to other companies.

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Table 8.3 Comparison between the IIRC’s and the IDLC’s content elements Eight content elements

1. Organizational overview and external environment

IIRC’s IR Framework

IDLC’s annual integrated report of 2021

The organization’s mission and vision Key quantitative information Significant factors affecting the external environment and the organization’s response

Straight forward mission and vision statements with a link to strategic objectives are highlighted Financial metrics with appropriate discussion from management attract the attention of stakeholders very effectively Influences of the external environment have been elaborated with a constant focus on value enhancements. During the COVID-19 pandemic of 2020, the company highlighted its responses with detailed information

2. Governance

The organization’s leadership structure Specific processes and particular actions Remuneration and incentives

IDLC maintained a separate section on Corporate Governance that clarifies the leadership structure within the company The value creation process and its link with the different governance actors have been closely identified with easy-to-understand graphical visuals Remuneration, incentives, and other related factors have been an integral part of the Human Capital section

3. Business model

Inputs Business activities Outputs Outcomes

A comprehensive business model with clear identification of the significant inputs, business activities, outputs, and outcomes are thoroughly explained with the help of visually appealing theoretical discussions that have explicitly incorporated “Integrated Thinking”

4. Risks and opportunities

The specific sources of risks and opportunities The organization’s assessment of risks The particular steps taken to manage risks

Separate disclosures on risk response with a special section dedicated to the risks faced due to the COVID-19 pandemic have been discussed Specific actions taken to address the risks and a rigorous assessment of the risks using a risk assessment model were highlighted

5. Strategy and resource allocation

The organization’s strategic objective The resource allocation plan The linkage between them

IDLC derives its strategic objectives from its mission statement, and using managerial discussions throughout the report, the resource allocation plans are highlighted How the strategic objectives will help accomplish the SDGs has been well disclosed with a focus on long-term value creation (continued)

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Table 8.3 (continued) 6. Performance

Quantitative indicators on targets and risks The organization’s effects on capitals The state of key stakeholders’ relationships Linkages with past and future performance

IDLC discloses several innovative quantitative indicators that portray the significant targets and risks A significant amount of explanation concerning the six capitals mentioned in the IR framework has been provided with an alignment with their impacts on various stakeholders identified by the company In determining the key stakeholders, IDLC uses economic, social, and environmental classifications Short-, medium- and long-term performance metrics, objectives, and strategies are clearly articulated

7. Outlook

The organization’s expectations and how the organization is equipped to face them Discussions of potential implications for future financial performance

Chairman and CEO’s statements give a well-versed direction of the company with a comprehensive outlook of the country’s macroeconomic conditions Future implications and how the company expects to respond to these appropriate business policy simulations are extensively highlighted

8. Basis of preparation and presentation

The organization’s materiality determination process The description of the reporting boundary Frameworks and methods used to quantify or evaluate material matters

Clear identification of the materiality determination process by use of graphical visuals Reporting boundaries are clearly stated in the beginning, along with the declaration of any significant changes from the previous year IIRC’s IR framework, GRI – G4, and local regulations are used to evaluate the materials presented

Disclosure of material matters Disclosures about the capitals Time for short, medium, and long term Aggregation and disaggregation

Significant material issues were identified by illustrating the materiality determination process The discussion section on the six different capitals discloses an impressive amount of detailed explanation used to capture the essence of using that capital for long-term value generation Independent impact assessment of the decisions on three different time horizons (short, medium, and long term) has been disclosed with proper linkages keeping sustainable business operation in focus

General reporting guidance

8.5 SDGs and the Six Capitals: Carrying Out an Integration This section discusses the innovations in reporting the six capitals and their different linkages with the SDGs, as shown in the IDLC’s integrated report. It will be exciting to explore how firms operating in a country with a voluntary disclosure regime

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Fig. 8.1 Integrated business model

with no particular directives of disclosing sustainability issues in corporate reporting except some minor exceptions, disclose their sustainability practices within their own business framework. The adoption of the SDGs in 2015 has been identified as a call to action for companies to adopt sustainable choices across all areas of their value chains. To understand the importance of the SDGs, such as reducing global warming, companies have to have a long-term view. It is also true that industry

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and government must work together to realize the SDGs. Therefore, incorporating sustainable development within the decision-making ecosystem of an organization has become vital. The IIRC-backed multi-capital International IR Framework aids high-level participation and holistic thinking in enterprise-wide functions. Voluntary users of this methodology have claimed improved identification of risks and opportunities and consequential long-term value creation. At the same time, relying only on a framework will not supply all of the answers related to the SDGs. This becomes a challenging endeavour without concerted leadership from the top (Adams 2014). This means that a focus on short-term profits must give way to long-term value creation, critical to the SDGs. Abhayawansa et al. (2021) used data extracted from the public proposals submitted to the Foreign Affairs, Defence, and Trade (DFAT) References Committee of the Australian Senate, which conducted an SDG Inquiry in the latter half of 2018, and found that integrated thinking and the value generation philosophy in the IR framework specifically addresses SDG challenges. With respect to integrated thinking (IT) and value creation, Mohammed et al. (2021) revealed that IT is significantly related to value creation in the Malaysian context. This clarifies the fact that the concept of corporate sustainability has been given increased attention worldwide after the enactment of a global compact featuring the 2030 Agenda. Moreover, IR has acquired a direction focused on long-term value creation, which ultimately incorporates the philosophy of the SDGs. Table 8.4 summarizes the discussions presented in the annual report of IDLC Finance in this regard. The IDLC Finance Limited integrated the SDGs and the six capitals that build the foundation of integrated thinking and reporting in their corporate best practices. The report reflects how IDLC integrates the six capitals under the IR framework and how they impact on the 17 SDGs. IDLC incorporates employee-level resource consumption as an essential benchmark of individual employee-level sustainability. The company disclosed sustainability issues under the discussion of the natural capital category. The recent annual report shows that in 2021 alone, IDLC’s outcomes in exploiting the natural capitals resulted in a controlled carbon footprint, increased CSR initiatives (details of their CSR initiatives are disclosed in a separate sustainability report), and finally, increased its Green Banking Portfolio. To ensure integration with the SDGs, the company matched its six SDGs: clean water and sanitation, affordable and clean energy, responsible consumption and production, climate action, and life below water. The linkage reflects a vast area of impact identified by the IDLC’s operation concerning corporate sustainability. Besides these, IDLC also shows the Inputs (I) and Outcomes (O) and their relevance to the SDGs. For example, IDLC dedicated a section in its report called “Our sustainable resource allocation practices and relevance to SDGs,” to this association. They show that knowledge investment is the input in the intellectual capital category and knowledge enhancement is the outcome (IDLC 2021, p. 106). IDLC Finance discussed all six capitals and linked them with the material issues that might affect its stakeholders. Salvi et al. (2020) advocate for more discussion of intangibles throughout the integrated reports as they provide long-term value in a knowledge-based economy, which is a primary IR objective as well. Vitolla et al. (2020a, b) found that intellectual capital disclosure in an IR negatively correlates with the cost of equity. IDLC

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Table 8.4 Six capitals of the IR framework and the IDLC’s viewpoint on SDG integration Capital type

Elaboration based on the IR framework

IDLC’s viewpoint aligning with the SDGs

1. Financial

The pool of funds available to an organization for use in the production of goods or provision of services obtained through financing or generated by the firm

IDLC considers financial capital comprised of the monetary resources which are constantly enhanced through their business activities • No. of SDGs impacted: 12

2. Manufactured

Manufactured physical objects (as distinct from natural physical objects) that are available to an organization for use in the production of goods or the provision of services

The physical objects range from branch networks and IT infrastructure to supplies that the company uses to provide services to its clients • No. of SDGs impacted: 4

3. Intellectual

Organizational, knowledge-based intangibles

IDLC considers its amassed intellectual capital in branding, product innovations, in-house proprietary software, and improved process and policies • No. of SDGs impacted: 14

4. Human

People’s competencies, capabilities and experience, and their motivations to innovate

Employees and their health and well-being, expertise, experience, innovative capacity, and motivation are all considered to be the human capital of IDLC • No. of SDGs impacted: 5

5. Social and relationship

The institutions and the relationships within and between communities, groups of stakeholders, and other networks, and the ability to share information to enhance individual and collective well-being

The robust relationships with stakeholders and the inter-relationships between them enable more significant value creation for all built and nurtured by the IDLC • No. of SDGs impacted: 9

6. Natural

All renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current, or future prosperity of an organization

Ecosystems and natural resources directly or indirectly affected by IDLC’s business initiatives are considered part of the natural capital • No. of SDGs impacted: 6

recognizes knowledge-based assets as their intellectual capital, including licenses, software, copyrights, policies, procedures, and protocols. Research and development items have been linked with the local communities, regulators, colleagues, and other stakeholders, representing a reasonable amount of time to integrate these issues. Also, IDLC visualizes a matrix where readers can link the exploitation of the six capitals with a particular emphasis on attaining the SDGs, an innovative best-case example.

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Other companies can learn the way in which they can incorporate the impact of business activities on SDG attainment from this innovation by IDLC, which will also clarify their position on sustainability to environmentally concerned stakeholders.

8.6 IIRC’s IR Framework Versus IDLC’s IR: Guiding Principles This section provides the adherence to the guiding principles of the IIRC’s IR Framework by IDLC Finance Ltd. The IR framework mentions that the seven Guiding Principles underpin the preparation and presentation of an integrated report, informing the report’s content and how information is presented (IIRC 2021). These guiding principles underpin the content elements given in Table 8.3 earlier. To facilitate an understanding of IDLC’s adherence to these guiding principles, a tabular analysis has been created, giving the reader a side-by-side comparison of the framework and the report of the IDLC. Table 8.5 is best understood if the reader simultaneously connects the earlier discussions on the content elements disclosure and the six capitals of IDLC provided in Tables 8.3 and 8.4. As given in Table 8.5, firm adherence to all seven guiding principles is established in the reporting practices of IDLC. This reflects the commitment from the management of IDLC to remain the leader in IR in Bangladesh. Innovative design of the report, clear and concise presentation, comparability, stakeholder identification, and the materiality determination process are areas where IDLC has successfully narrated its story of value creation. Next, a few areas are highlighted addressing the interesting disclosure mechanisms that IDLC has followed when attempting to adhere to the guiding principles.

8.6.1 Strategic Focus and Future Orientation In the IR framework, strategic focus and future orientation are considered an essential guiding principle that enhances the quality of integrated reports. Apart from providing detailed discussions in different sections regarding the outlook of the industry and the strategic footprints of IDLC Finance limited, the company has incorporated this very concept within the discussion of the chairman and CEO’s statement regarding the company’s plans. For example, IDLC has demonstrated its focus on digital space, which is a broad outlook on future organizational landscapes. The pursuit of continuous process enhancements shows corporate commitment towards enhancing the current intellectual capitals and exploiting them even further. Other interested firms can follow this exceptional reporting of the firm’s outlook within an integrated report and address the strategic objectives in the industry.

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Table 8.5 Degree of adherence of the IDLC IR principles to the IIRC guiding principles Guiding principles

IIRC’s IR framework

IDLC’s annual integrated report

1. Strategic focus and future orientation

An integrated report should provide insight into the organization’s strategy and how it relates to the organization’s ability to create value in the short, medium and long term, and to its use of and effects on the capitals

IDLC’s integrated annual report combines the strategic decision-making process with long-term value creation as the central focus • Strong adherence

2. Connectivity of information

An integrated report should show a holistic picture of the combination, interrelatedness, and dependencies between the factors that affect the organization’s ability to create value over time

A comprehensive picture of the organization with linkages to exploiting the six capitals to create and sustain long-term value has been mentioned in a separate navigation section • Strong adherence

3. Stakeholder relationships

An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests

IDLC takes a comprehensive view of its stakeholders with impact assessments, responses to their concerns and value enhancements for them. How different stakeholders are affected by the use of the six capitals is also highlighted • Strong adherence

4. Materiality

An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term

IDLC places Integrated Thinking at the heart of their Materiality Determination for Integrated Decision-Making and IR to achieve sustainable growth • Strong adherence

(continued)

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Table 8.5 (continued) Guiding principles

IIRC’s IR framework

IDLC’s annual integrated report

5. Conciseness

An integrated report should be concise

A mapping of the content highlighting the connectivity of the report has been provided. The structure of the report follows a logical sequence, incorporating insights on The Company, Stewardship, Operating Environment and Risk Management, Management Discussion and Analysis, Governance, and Financial Statements • Strong adherence

6. Reliability and completeness

An integrated report should include all material matters, both positive and negative, in a balanced way and without material error

Statement of Directors’ Responsibility for Internal Control, Financial Reporting, and Corporate Governance implies a sensible approach undertaken by the IDLC to provide a reliable and complete picture of the integrated report • Strong adherence

7. Consistency and comparability

The information in an integrated report should be presented: (a) on the basis that is consistent over time, and (b) in a way that enables comparison with other organizations; it is material to the organization’s ability to create value over time

IDLC remained consistent with its integrated reports since the first publication of an integrated report in 2016. Continuous improvements in the disclosure have been persistent while comparison with the industry competitors seems possible. IDLC fully adopted the IR framework, and hence, it is expected to compare their reports with those of other firms following the same framework • Strong adherence

8.6.2 Connectivity of Information Apart from its regular integrated reports, IDLC Finance has been issuing a sustainability report separately for a long time. The sustainability reports the company prepares broadly explains the key areas of corporate sustainability discussed in the integrated report. This type of separate reporting of sustainability is not new. The IR framework mentions this fact quite explicitly. Broadly, this practice can be stated as the connectivity issue. Furthermore, the IIRC mentions this clearly in the consultation draft regarding the holistic nature of integrated reports: Organizations may provide additional reports and communications (e.g., financial statements and sustainability reports) for compliance purposes or to satisfy the particular information needs of a range of stakeholders. The integrated report may include links to these other reports and communications. (IIRC 2013b, p. 9)

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IDLC’s approach of navigating through the integrated report is a practical demonstration of the integrated thinking and IR process outlined in the IIRC draft paper on connectivity issues (IIRC 2013c, p. 1).

8.6.3 Stakeholder Relationships As stated earlier in Table 8.3, IDLC uses economic, social, and environmental classifications in determining its key stakeholders. Furthermore, for translating integrated thinking into IR, IDLC has a holistic view of its strategy, governance, performance, and prospects. The integrated report of IDLC Finance Limited links the IR Framework’s content elements and fundamental concepts and bridges time horizons. These effective connections between IDLC’s qualitative and quantitative information provide context and credibility to the information presented in the report and, hence, increases the company’s corporate image among its multidimensional stakeholders. In this respect, Di Vaio et al. (2020) suggest an integrated circular plan capable of using the information to charter the company in its strategic process of creating value for employees, suppliers, institutions, and regulatory concerns. They encourage this integrated circular plan to reuse information to promote cooperation in various departments within the firm, reduce costs, and experiment with new technologies to connect, generate, and preserve value. In this case, the results show that IR and IT open up space to new interpretations of corporate reporting as value-enhancing management tools for the company.

8.6.4 Materiality Materiality determination is essential for establishing integrated thinking inside an organization that follows the IR framework for corporate reporting (IIRC 2013a). Disclosing the material issues and how they are determined and subsequently resolved is essential when investors evaluate a company (Beske et al. 2020). IDLC Finance has developed the materiality determination process over the years. In 2016, the first year of adoption of the IR framework, it did not disclose material matters in detail. However, gradually, managerial focus on material matters has changed. Rigorous mapping of materiality has been incorporated in the annual reports of 2019, 2020, and 2021. The latest bulletin of annual news showcases the company’s identification with material matters and the prioritization of the issues to be addressed. After a material issue is resolved, it is immediately disclosed to the internal and external parties involved with IDLC Finance. One significant area to focus on here is that the company monitors and reviews all material matters continuously, and hence, this particular process has become a more robust one.

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8.6.5 Conciseness IDLC graphically depicts how report users will navigate the report to find out the core questions related to the company, where to look for the possible answers, what sort of answer the user is supposed to get and in which location (page number) they will find that answer. This is an innovative, concise, and effective visualization of the entire report that immediately captures the reader’s attention. IDLC has been maintaining this unique way of visualizing its entire integrated report from 2016 till the present. Moreover, at the onset of their annual report, the company has also mentioned the purpose behind adopting the IR framework to address the reporting boundary. The following is the excerpt taken from the integrated yearly report of 2021: The aim of our IR approach is to enable our stakeholders, including investors, to make a more informed assessment of the value of IDLC and its prospects, as this report is organized around our story of value creation. (IDLC 2021, p. 8)

8.7 Discussion This section now discusses the findings derived from the critical assessment of the integrated report of IDLC Finance Ltd. Many aspects of the report have several potential areas to be followed by companies interested in adopting the IR framework. IDLC states their crucial objective of focusing particularly on creating value in the long run, which is also one of the main ideas behind the IR framework. Regarding stakeholder engagement, IDLC has identified five important stakeholders, directly or indirectly interested in its activities, and have afterwards mentioned the disclosure impacts related to the material matters in 2019, 2020, and in 2021. The five stakeholders mentioned, namely, colleagues, clients, shareholders, govt./regulators, and community and environment, capture all interested parties. In 2021, the report considered the separate impact on service providers and suppliers, which summarizes IDLC’s commitment to disclosing material matters regarding the business that are of direct interest to those stakeholders. Grassmann (2020) finds that IR acts as a moderator of the U-shaped link between company value and environmental costs. Corporations that invest more in ecological concerns may benefit from including an explanation of all environmental contributions in their integrated reports. The author’s findings are consistent with the IIRC’s strategy of promoting integrated thinking on financial and non-financial capitals. Another area where IDLC Finance has been quite remarkable is its concern for integrated thinking in the business process during the uncertain times of the COVID-19 pandemic. This chapter sought to determine the information that businesses operating in Bangladesh can include in their integrated reports in the aftermath of the COVID-19 pandemic. In line with the previous study of GarcíaSánchez et al. (2020), the discussions provided in this chapter demonstrate a series of information, first on the general content elements and then, on the specific capitals identified by the IR framework that companies must include in their integrated

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reports to maintain and defend their legitimacy and to enable investors to make more precise investment decisions. The concept of materiality determination has been given primary consideration at IDLC, although disclosing material matters in company annual reports is not yet an established practice in Bangladesh. Very recently, Islam (2021) draws attention to this particular matter as well. Of all the indices the author had developed to figure out the overall compliance with the IR framework by non-financial companies of Bangladesh, the least disclosed area was materiality aspects. Apart from a few companies, most firms either partially revealed or, in many cases, totally ignored one of the fundamental concepts of the materiality determination process of the IR framework. The main point here is that if the IR framework is claimed to have been adopted by the firms in Bangladesh, they must put more effort towards the materiality determination process as has been done by IDLC Finance. Another critical issue is that apart from merely visualizing the impacts, IDLC Finance has proactively provided a detailed breakdown of the challenges it faced and the responses to those challenges. For example, during the COVID-19 pandemic, the integrated report of 2020 and 2021 contained a significant number of relevant discussions on the stance of IDLC in tackling the adversities of the pandemic. This is an excellent incorporation in IR that it has been pioneering from 2016 onwards in Bangladesh. The challenges and responses demonstrated show the detailed investigation carried out by management teams to provide essential information to report users. Another innovative idea that has been incorporated by IDLC Finance Limited is the introduction of the trade-off matrix. This matrix shows two crucial developments of IDLC Finance Limited under the intellectual capital category—new product launches and investment in automation and optimizations. What is innovative in this approach is that the report user can better understand both the short- and longterm impacts of the two above-mentioned issues. Other companies in the market can follow this approach towards short-term and long-term impact assessment and increase the credibility of their disclosed assessment of the capitals, because this type of reporting enhances the impression of the firm to users and broader stakeholders. IDLC has been the market leader in the Non-Banking Financial Institutions category of Bangladesh for its industry-leading innovative products created for its clients. The addition of innovative disclosure mechanisms such as IR is, without any question, a value enhancer for the group at large. The author believes that the case study of IDLC provides a lesson for organizations interested in or that seek to adopt the IR framework in Bangladesh. By disclosing the integrated business model with the information necessary to stakeholders in a consistent and comparable format, the adopting firms can perceive a competitive advantage. Another lesson gained is that by pinpointing the operating and strategic context, governance, performance, and forward-looking information, an organization can differentiate itself from others in the industry it belongs to, resulting in a significant reputational benefit (Veltri and Silvestri 2015). There are several important implications of the findings of this chapter that can be a useful reference point for academicians and researchers of corporate reporting,

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policymakers, students of accounting, and investors to use in their own decisionmaking processes. First, this chapter takes the case of IDLC Finance Limited, the leading company that introduced the IR framework in Bangladesh. Analysing this case makes it easy to grasp the development of IR practices in Bangladesh and hence provides an in-depth overview of the best practices in IRrelated disclosures in the corporate annual reports produced in Bangladesh. Second, this chapter links the content elements, the six capitals and the guiding principles provided by the IR framework with the recently published annual integrated report of IDLC Finance, along with a discussion on sustainability. Hence, it is expected that the rigorous overview provided in this chapter will contribute, to a significant extent, to other interested companies in Bangladesh that want to adopt the IR framework voluntarily.

8.7.1 Challenges Towards IR in Bangladesh As noted in a very recent article investigating the relationship between IR and firm performance in Bangladesh by Islam (2021), the disclosure pattern of the content elements has changed sharply among non-financial companies of Bangladesh after the circulation of the new Corporate Governance Code 2018 by the Bangladesh Securities and Exchange Commission. From the historical sketch of IR in Bangladesh, as described in this chapter, the reader can perceive that IR has gained popularity among leading companies as a new form of corporate reporting. However, it should be emphasized here that companies that have adopted the IR framework or checklist provided by the IIRC fully are very limited in number, and most of them are very reputed firms in terms of providing the highest quality annual reports in the recent past as well. So, it might be difficult for a new firm to adopt the IR framework fully and entirely successfully, unlike the older and more reputed firms. It involves a good amount of initial cost to sketch the pattern of IR within a company’s disclosure policy. Also, creativity in the reporting process is of enormous importance because showcasing only the disclosure index and merely providing tick marks does not truly represent compliance with the IR concept as a whole. This section emphasizes some practical challenges towards implementing the IR framework in Bangladesh. First of all, a significant portion of capital market participants is individual investors in Bangladesh, unlike in developed economies, where institutional investors hold significant company shares. This is a big issue as individual investors in this country are most often financially unaware of the impact of their investment decisions. Rumour mills, exciting news, unethical and biased reporting on poorly graded shares dominate the decisions of most individual investors, and hence, they give very little attention to concepts like IR. Tirado-Valencia et al. (2021) found that an effective legal system and years of experience preparing IR are the two crucial factors behind the compelling governance aspect of integrated thinking. So, before thinking of a wider acceptance of the IR framework and the concept of sustainability, the literacy program of investors become a compulsory, rather than a secondary issue in

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Bangladesh. Second, if IR is implemented broadly, board members’ dedication, willingness, and spontaneous engagement are necessary. Relevant to this is a recent study by Mähönen (2020), where the author argues that IR is investor-oriented through a critical review of the IIRC’s IR system. As stated in the IR framework’s aim, a business should maximize the long-term value of its shareholders while simultaneously considering the interests of other stakeholders participating in the value creation process. Katsikas et al. (2017) believe that the primary value of the IR framework is in the underlying business model innovation. Unfortunately, in Bangladesh, the culture of strategic corporate reporting has grown very narrowly as a concept among C-suite managers. Thirdly, without their active initiatives, the future of IR will only be confined to annual award ceremonies. IR will be considered merely as a publicity stunt or, in academic terms, a legitimization tool, which is not included in the natural appeal of the IR framework. In fact, Cooray et al. (2021) argue that an increase in compliance with the IR framework’s content elements demonstrate the legitimacy theory’s strategic and institutional perspectives, owing to the proactive efforts made by managers to achieve legitimacy, as well as the various normative and mimetic forces present in the IR landscape. Even if the annual report’s name is changed to an annual integrated report, that change will not make a massive difference until the advanced concept of integrated thinking is widely practised within the company (Herath et al. 2021). Recently, Wahl et al. (2020) explored data from listed companies in a voluntary context and conclude that no evidence can be reasonably established between IR and earnings forecast accuracy. Furthermore, they could not draw any significant association between IR and firm value attributed to the voluntary disclosure regimes. Previous studies focusing on South Africa contradict Wahl et al. (2020)’s findings. However, Wahl et al. (2020) find that a higher level of transparency characterizes firms with IR disclosures in a voluntary regime, and according to voluntary theory, adopting IR only marginally decreases information asymmetry. Their analysis underlines that capturing the full benefit of IR is more perceivable in a mandatory setting than in a voluntary one. This is going to be a real challenge in future if the IR framework is made a reporting requirement by the Bangladesh Securities and Exchange Commission. Fourth, many investors lack financial literacy; hence, understanding the communications made via an integrated report might not be adequately understood. In addition, analysing the information contents of an integrated report might be perceived as irrelevant by an investor with a lack of technical skills. Understanding more advanced concepts of IR, such as integrated thinking, requires the ability to connect different parts of the report simultaneously to gain the proper insight that was intended to be delivered by the company. In this case, as suggested in Cooray et al. (2020), corporations might include IR disclosures in their internal business communications, business websites, and press releases regularly. Also, employees within the organization may exhibit a certain reluctance to prepare an integrated report due to the complexity in designing and planning the report and providing the proper context of Bangladesh, since there are no official standards available to follow. Adequate brainstorming for ideas can be challenging for employees at all levels within the organization. Reluctance and initiative fatigue can also hamper the process a great

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deal. Moreover, preparing an integrated report requires a good amount of expenditure to be incurred by the company at the initial stage. With little evidence of having a positive benefit in adopting the IR framework voluntarily may deter companies from undertaking the initiative to venture on the IR project. The final challenge the author perceives is related to auditing an integrated report. As has been the case in many other countries, in Bangladesh, the auditing of nonfinancial information, such as sustainability information and intellectual capital disclosures within an integrated report, has not developed yet. In this regard, professional accounting bodies of Bangladesh, such as the ICAB, and the ICMAB can play an instrumental role in introducing audits of non-financial information in an integrated report that will enhance and legitimize the information disclosed within the report. Landau et al. (2020) shed light on the value relevance of IR in the context of Europe. Their empirical observations concluded that IR does play a role in the equity valuation, but that this valuation is negative if the firm does not provide IR with an assurance from the Big 4 audit firms. The authors also note that the market value is penalized if the IR is assured but does not follow the newest GRI standards (G3.1 or G4). They also highlight that IR is more of a cost-producing element than a corporate advantage using the cost-concerned school and cognitive cost theory. However, they find that the negative effect of unassured IRs on the market valuation is higher than that of assured IRs. So, audit firms in Bangladesh need to innovate their systems so that auditing an integrated report can be offered as part of their consultancy services.

8.8 Conclusion In 2013, although some banks listed on the stock market of Bangladesh disclosed annual reports in an integrated format, fully fledged IR commenced only in 2016. As mentioned earlier, ICAB issued the checklist due to a perceived interest by financial companies of Bangladesh to try the newly emerged IR framework of 2013 voluntarily. As a direct consequence of that interest towards IR, a local but globally recognized leasing company called IDLC Finance Limited was crowned as the producer of the best presented integrated report in the financial category in the Asia and the Pacific region in the following year. Till the present, IR has been growing as an acceptable form of corporate communication in Bangladesh. This chapter looked into the historical sketch of IR and its development over the last six years. Bangladesh is a strategic development partner for neighbouring countries in the South Asian region. The post-independence environment in Bangladesh is marked by the infusion of significant amounts of foreign aid, which is vital for the capital market’s development (Kamal and Islam 2018). Khan and Islam (2020) determined that accounting is technical, not forward looking, and full of numbers. Therefore, understanding how investors evaluate forward looking information is essential. This chapter takes a case study approach towards analysing the integrated report of IDLC Finance for 2020 and 2021, critically. Although Islam (2021) recently showed that a uniform pattern

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in the disclosure or in the more advanced concept of IR, such as integrated thinking, is not visible in most reports, the case of IDLC has been different. This chapter attempted to give the reader a broader view of the IR practices in Bangladesh using a case study of IDLC Finance Limited. With an in-depth analysis of the latest annual integrated report published by IDLC Finance, this chapter sheds light on the firm’s disclosures in compliance with the widely accepted IR framework. Bangladesh has seen massive progress in the voluntary adoption of the IR framework, especially in the country’s financial sector, as was evident from the historical sketch of IR in Bangladesh. Growing interest in this new corporate reporting framework inevitably raises many questions among concerned parties. Obeng et al. (2020) note that the benefit realized from IR differs between voluntary and mandatory disclosure regimes. In voluntary regimes, firms with higher IR practices tend to have lower agency costs. Also, stakeholder-oriented countries benefit more from IR practices than shareholder-oriented countries, which is consistent with the notion that managers in stakeholder-oriented countries view IR as an effective mechanism in reducing agency costs and increasing corporate value creation. Therefore, it seems that Bangladesh is now at a focal point to think about mandatory adoption of the IR framework. Several challenges have been highlighted here for readers to understand the possible future road maps of this new corporate reporting paradigm. The case study approach followed in this chapter looked into all the critical areas of IR. It discussed integrated thinking to enlighten other interested parties in Bangladesh planning to move or shift towards the IR framework shortly. With a promising economic outlook, leading best practices in the IR framework, and with the deep interest shown by the ICAB concerning the adoption of IR, Bangladesh will possibly see even more voluntary adopters of integrated reports in the coming days. Therefore, this chapter facilitates interested parties to gain a case-based understanding of the leader in IR in the Asia and the Pacific region.

References Abhayawansa S, Adams CA, Neesham C (2021) Accountability and governance in pursuit of sustainable development goals: conceptualizing how governments create value. Account Audit Account J Adams CA (2014) Sustainability and the company of the future. In: BBVA open mind, reinventing the company in the digital age, pp 411–430 Asian Development Bank (2022) ADB’s work in Bangladesh Beske F, Haustein E, Lorson PC (2020) Materiality analysis in sustainability and integrated reports. Sustain Account Manage Policy J 11(1):162–186 Brusca I, Labrador M, Larran M (2018) The challenge of sustainability and integrated reporting at universities: a case study. J Clean Prod 188:347–354 Climatelink (2018) Climate risk profile: Bangladesh. Available via: https://www.climatelinks.org/ sites/default/files/asset/document/2018-02-Mar_CadmusCISF_Climate-Risk-Profile-Bangla desh.pdf

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Cooray T, Senaratne S, Gunarathne N, Herath R, Samudrage DN (2020) Does integrated reporting enhance the value relevance of information? Evidence from Sri Lanka. Sustainability 12(19):8183 Cooray T, Senaratne S, Gunarathne N, Herath R, Samudrage DN (2021) Adoption of integrated reporting in Sri Lanka: coverage and trend. J Finan Report Account 20(3/4):389–415 De Villiers C, Rinaldi L, Unerman J (2014) Integrated reporting: insights, gaps and an agenda for future research. Account Audit Account J 27(7):1042–1067 Dey PK (2020) Value relevance of integrated reporting: a study of the Bangladesh banking sector. Int J Disclos Govern 1–13 Di Vaio A, Syriopoulos T, Alvino F, Palladino R (2020) Integrated thinking and reporting towards sustainable business models: a concise bibliometric analysis. Meditari Account Res 29(4):5691– 5719 García-Sánchez IM; Raimo N, Marrone A, Vitolla F (2020) How does integrated reporting change in light of COVID-19? A revisiting of the content of the integrated reports. Sustainability 12(18):7605 Grassmann M (2020) The relationship between corporate social responsibility expenditures and firm value: the moderating role of integrated reporting. J Clean Product 124840 Herath R, Senaratne S, Gunarathne N (2021) Integrated thinking, orchestration of the six capitals and value creation. Meditari Account Res 29(4):873–907 IDLC (2021) IDLC finance limited annual report 2021. Available at: https://web.idlc.com/uploads/ financial_report/idlc-annual-report-2021-653139.pdf IIRC (2013a) International IR framework. Int Integr Report Council. Available at: http://integrate dreporting.org/resource/international-ir-framework/ IIRC (2013b) Consultation draft of the international IR framework. IIRC, New York. Available at: http://www.theiirc.org/wp-content/uploads/Consultation-Draft/Consultation-Draft-of-theInt ernationalIRFramework.pdf. Accessed 17 Feb 2021 IIRC (2013c) Connectivity. Background paper for IR, IIRC, New York. Available at: http://www. theiirc.org/wp-content/uploads/2013c/07/IR-Background-Paper-Connectivity.pdf. Accessed 17 Feb 2021 International Integrated Reporting Committee (IIRC) (2021) IIRC publishes revisions to international IR framework to enable enhanced reporting. Available at: https://integratedreporting.org/ news/iirc-publishes-revisions-to-international-framework-to-enable-enhanced-reporting/ Islam MS (2021) Investigating the relationship between integrated reporting and firm performance in a voluntary disclosure regime: insights from Bangladesh. Asian J Account Res 6(2):228–245 Islam R, Islam MR (2018) Insights the practice of integrated reporting: a study on MNCs in Bangladesh on the degree of adherence to the reporting framework. Open J Business Manage 6(03):733 Islam S (2020) Bangladesh: the rising economic power, modern diplomacy. Kamal Y, Islam MS (2018) The paradox of foreign loans and grants: an econometric analysis in the perspective of Bangladesh. Dhaka Univ J Business 39(3):51–66 Katsikas E, Manes RF, Orelli RL (2017) Principles, concepts and elements of integrated reporting. In: Towards integrated reporting. Springer Briefs in Accounting Khan I, Islam MS (2020) Accounting and auditing through the lens of non-accountants: an emerging economy experience. Asia-Pacific Manage Account J 15(2):65–91 Landau A, Rochell J, Klein C, Zwergel B (2020) Integrated reporting of environmental, social, and governance and financial data: does the market value integrated reports? Bus Strateg Environ 29(4):1750–1763 Mähönen J (2020) Integrated reporting and sustainable corporate governance from European perspective. Account Econom Law A Convivium 1:20–3 Manes-Rossi F (2018) Is integrated reporting a new challenge for public sector entities? Afr J Bus Manage 12(7):172–187 Mohammad N (2019) Integrated reporting practice and disclosure in Bangladesh’s banking sectors. Indonesian J Sustain Account Manage 3(2):147–161

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Mohammed NF, Sutainim NA, Islam MS, Mohamed N (2021) Integrated thinking, earnings manipulation and value creation: Malaysian empirical evidence. Bus Process Manag J 27(4):1179–1199 Nakib M, Dey PK (2018) The journey towards integrated reporting in Bangladesh. Asian Econom Financ Rev 8(7):894–913 Navarrete-Oyarce J, Moraga-Flores H, Gallegos Mardones JA, Gallizo JL (2022) Why integrated reporting? Insights from early adoption in an emerging economy. Sustainability 14(3):1695 Obeng VA, Ahmed K, Cahan SF (2020) Integrated reporting and agency costs: international evidence from voluntary adopters. European Account Rev 1–30 Okwuosa I, Atkins J (2022) Exploring the meaningfulness of integrated reporting: a framing perspective. J Appl Acc Res 24(3):508–522 PwC (2019) Destination Bangladesh. Available at: https://www.pwc.com/bd/en/assets/pdfs/res earch-insights/2019/destination-bangladesh.pdf Salvi A, Vitolla F, Raimo N, Rubino M, Petruzzella F (2020) Does intellectual capital disclosure affect the cost of equity capital? An empirical analysis in the integrated reporting context. J Intellect Cap 21(6):985–1007 Setia N, Abhayawansa S, Joshi M (2022) The role of integrated reporting in advancing sustainability: reflections from academic literature and a future research agenda. Explor Latest Trends Manage Literat 1:185–206 Star Business Desk (2020) Bangladeshi entities top SAFA award for best published annual reports. The Daily Star Tirado-Valencia P, Cordobés-Madueño M, Ruiz-Lozano M, De Vicente-Lama M (2021) Integrated thinking in the integrated reports of public sector companies. Evid Context Factors Sustain Account Manage Policy J 12(2):330–352 International Integrated Reporting Committee (IIRC) (2011) Towards integrated reporting. In: Communicating value in the 21st century, international integrated reporting committee. London. Available at: https://integratedreporting.org/wp-content/uploads/2011/09/IR-Discus sion-Paper2011_spreads.pdf. Accessed 23 Mar 2021 Veltri S, Silvestri A (2015) The Free State University integrated reporting: a critical consideration. J Intellect Cap 16(2):443–462 Vitolla F, Salvi A, Raimo N, Petruzzella F, Rubino M (2020a) The impact on the cost of equity capital in the effects of integrated reporting quality. Bus Strateg Environ 29(2):519–529 Vitolla F, Raimo N, Rubino M, Garzoni A (2020b) The determinants of integrated reporting quality in financial institutions. Corp Govern Int J Business Soc 20(3):429–444 Wahl A, Charifzadeh M, Diefenbach F (2020) Voluntary adopters of integrated reporting-evidence on forecast accuracy and firm value. Bus Strateg Environ 29(6):2542–2556

Md. Shafiqul Islam is a Fulbright scholar (Accounting/Finance) of the US Department of State at the Rochester Institute of Technology (RIT) with a remarkable track record in both academic and professional arenas. He has achieved the first runner-up position in the IDLC Finance Olympiad 2018, graduated as a valedictorian, and won two gold medals from the University of Dhaka. He is currently a faculty member at the Department of Business Administration, East West University, where he teaches and conducts cutting-edge research on accounting, finance, and development economics. He has contributed to the advancement of his field by publishing his scientific articles in renowned accounting and finance journals. His current research interest is using data analytics towards integrated thinking and reporting in the corporate reporting ecosystem, which aims to improve the quality and transparency of corporate disclosures.

Chapter 9

Transformation from a Narrow Capital to a Multi-capital Performance Measurement Model in Value Creation: A Case of a Logistics and Freight Forwarding Company in Sri Lanka Sadma Umagiliya and Dileepa Samudrage

Abstract In creating corporate value, many companies currently tend to use performance measurement tools that focus on multiple capitals due to shortcomings in narrow capital performance measurement systems. The six capitals in integrated reporting framework can guide and nurture a successful multiple capital-based performance measurement system. However, the use of six capitals-based key performance indicators in performance measurement is not adequately discussed with respect to integrated reporting practices. Therefore, the current research study aimed to investigate why the narrow capital model failed as a strategic performance measurement tool and how a multi capital model, designed based on the six capitals, has successfully influenced the upgrading of corporate performance. This study was conducted using a qualitative explorative approach and a case study methodology, on a company operating in the freight forwarding and logistics industry in Sri Lanka. Interviews, questionnaires and documentation reviews were used to collect data. The findings revealed that conceptual, technical, social and political issues related to the narrow capital performance measurement system hindered successful corporate performance, but that the multi capital model functioned as a successful value creating performance measurement system, overcoming the limitations of the narrow capital model. In addition, the multi capital model upgraded company performance and value creation by improving transparency, accountability, corporate governance, reporting structure, efficiency, innovation and profitability. Keywords Key performance indicators · Multi capital model · Narrow capital model · Performance measurement system · Six capitals · Value creation S. Umagiliya (B) · D. Samudrage University of Sri Jayewardenepura, Gangodawila, Nugegoda, Sri Lanka e-mail: [email protected] D. Samudrage e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_9

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9.1 Introduction Integrated reporting (IR) ensures that companies expand their reporting to include all of the resources they use as inputs in their business activities. Integrated reporting is not simply combining the sustainability report, annual report and financial statements. It requires a fundamentally different way of thinking on what makes an organization successful and its reliance on a much broader set of resources than financial resources (Adams 2013; Graham 2014). Therefore, IR uses the term capitals to denote various resources, with the six primary capitals being identified as: financial; manufactured; intellectual; human; social and relationship; and natural (International Integrated Reporting Council 2021). The objective of the six capitals framework is not to measure individual capitals but to formulate extensive key performance indicators or metrics to measure integrated corporate performance (International Integrated Reporting Council 2021). By taking the six capitals into account when measuring and reporting its performance, a company provides a fuller picture of the way in which it creates corporate value (Climent 2016; Thompson 2017). Though there are many studies done on IR, the researching of key performance indicators based on the six capitals in the IR framework is not adequately discussed in the past literature. In addition, the literature relevant to organizational transition from narrow capital models to multi capital performance measurement systems is limited. Therefore, there is a need for studies that explore how organizations consider the availability of capitals in the context of overall strategy and governance, and how they incorporate various capitals into a performance measurement system in the value creation process (Asiaei and Jusoh 2017; Herath et al. 2021; Schörger and Sewchurran 2015). Narrow capital models are performance measurement systems based on single or limited capitals consisting of short-term performance measures (Ghalayini and Noble 1996). Variance analysis, Kaplan and Norton’s traditional balanced scorecard and Shenhar and Dvir’s success dimensions framework are a few examples of narrow capital models (Maltz et al. 2003, Marzuki et al. 2019). Narrow capital models became popular over the past three decades but later, their applicability became arguable due to various limitations and dynamics in the business world. Some studies have investigated the limitations of the narrow capital concept in general (e.g., Norreklit 2000; Aidemark 2001; Heinz 2001; Kennerley and Neely 2002; Olson and Slater 2002). Further evidence has proved that the implementation of narrow capital models failed when processes were changed in companies (Bourne and Neely 2003). Consequently, many companies transitioned to alternative performance measurement tools that focus on multiple capitals and value creation. Accordingly, many companies have begun to practice multi capital performance measurement tools to enhance value creation, replacing narrow capital modules. The inadequacies of traditional performance measurement systems led to the creation of a new performance measurement system named dynamic multi-dimensional performance model used to measure different capitals in the business environment (Bourne and Neely 2003; Maltz et al. 2003). The multi-dimensional characteristic of organizational performance is very helpful in building and improving the confidence of

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stakeholders related to the effectiveness of the organization and its value creation process (Dess and Robinson Jr 1984; Venkatraman and Ramanujam 1986; Murphy et al. 1996). Companies expect the performance measurement system to be not only a control tool but a value adding multi capital dimensional tool (Folan and Browne 2005). The multi capital performance measurement system in value creation covers a broad set of indicators used for multiple perspectives such as customers, employees, quality, community interests, environmental factors, resource allocation and financial results (Ittner et al. 2003). Incorporating the six capitals of IR in business models is one way that companies can deliver value to the environment and society. This research was designed to examine how the six capitals proposed by the IIRCs translated to a corporate performance measurement system in value creation named the multi capital model. Hence, the research aimed to investigate why the narrow capital model failed as a strategic performance measurement tool and, on the other hand, how multi capital model has successfully influenced the upgrading of corporate performance and value creation. The theoretical and practical significance of the study is that multi capital model creates value by combining different capitals to satisfy internal and external stakeholder requirements while operating as the performance measurement system of the company. Similarly, according to enlightened stakeholder theory, the majority of stakeholders must be taken into account when planning and evaluating the performance of a company (Jenson 2000). The study elaborates on the practical application of the six capitals in a single performance measurement system guiding the logistics of companies when they plan, organize, execute and evaluate logistics performance using multiple capitals under IR framework. Addressing different capitals using a single performance measurement system will enhance integrative thinking and decision making (Coulson et al. 2015). Moreover, the study provides guidance on the manner in which the company’s political, social, cultural and technical environment is positioned for effective implementation of a multiple capital performance measurement system. For managers, the accurate measuring of company performance beyond financial indicators is demonstrated in this study, as it will lead to more successful future planning, coordinating and controlling activities. The chapter is designed to explain enlightened stakeholder theory and the six capitals of the IR framework. The rest of the chapter is organized as follows: Section Two presents the literature review covering empirical evidence for failures in the narrow capital models and the contributions of the multi capital performance measurement system in value creation toward organizational performance. Section Three elaborates on the theoretical background of the study. Section Four provides the research method. Section Five delineates the background of performance measurement systems at the case study organization. Section Six presents the findings of the study followed by a discussion in Section Seven. The chapter concludes by providing a summary of the study.

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9.2 Literature Review 9.2.1 Narrow Capital Models for Performance Measurement Narrow capital models are characterized by the lack of a broad conceptualization of performance and a limited emphasis on different capitals (Dess and Shaw 2001). A few examples of narrow capital models are variance analysis, Kaplan and Norton’s traditional BALANCED SCORECARD and Shenhar and Dvir’s success dimensions framework (Maltz et al. 2003, Marzuki et al. 2019). These narrow capital models fail to capture and monitor the multiple dimensions of performance as they concentrate almost exclusively on a few aspects of organizations (Sofian et al. 2005). Hence, narrow capital models were seen to have many different limitations in their design and coverage of capitals. Over-emphasizing financial capital and a rather reactive approach are the main drawbacks of the variance analysis method (Marzuki et al. 2019). While the balanced scorecard framework facilitates several capitals and overcomes the limitations of single measures, still there is no clear provision for very long-term measures and broad base of capitals apt for the modern business environment (Maltz et al. 2003). There was a great interest in implementing balanced scorecard, but evidence has proved that many of those implementations failed due to changing processes in companies (Bourne and Neely 2003, Johanson et al. 2006). The lack of focus on a company’s human resources dimension is a major weakness in the success dimension model (Maltz et al. 2003). Likewise, those narrow capital models, based on a few capitals, provided only a narrow reflection of the company’s integrated or holistic performance.

9.2.2 Failure in the Implementation of Narrow Capital Models in Value Creation In global practice, narrow capital models have failed due to many different reasons. When the business environment changes with the time, it was discovered that narrow capital models lack essential information, a competitive environment, shareholder orientation and are full of practical implementation failures (Speckbacher et al. 2003). Narrow capital models also failed due to the inadequate demonstration of the contributions made against predetermined objectives by employees and suppliers, the inability to recognize the role played by the community and incapability of identifying performance metrics with which to measure stakeholder contributions (Atkinson et al. 1997). Some narrow capital models are simply a static management dashboard, highly weighted by financial information (Lee and Amaral 2002). Madsen and Stenheim (2014) explored in their study the perceived problems in balanced scorecard implementation, and the results revealed that there are four types of balanced scorecard problems: conceptual issues, technical issues, social issues and political issues. Narrow capital models fail due to the lack of highly developed

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information systems, inadequate top management support and/or excessive management focus on short-term issues (Chan 2004). Managers’ ignorance about processes that are needed to make performance measurement systems successful, inclination to take shortcuts, ignorance of the dynamics in the external environment when planning the implementation of their strategies and the difficulty in developing a causal model for strategies have also led to failures in narrow capital models (Othman et al. 2006). Failures in narrow capital models have encouraged companies to look for alternative value creating performance measurement systems.

9.2.3 The Six Capitals of the IR Framework in Creating Value The primary purpose of an integrated report is to explain how an organization creates value over time. The best way to do so is through a combination of quantitative and qualitative information, which is where the six capitals come in. IR is not only an evolution of corporate reporting with a focus on conciseness, strategic relevance and future orientation; it is also advertised as potentially leading to behavioral changes and improvements in performance throughout an organization through integrated thinking (Cooray et al. 2022). The capitals are key concepts of IR and are used in the value creation process (International Integrated Reporting Council 2021). The IIRC recognizes six distinct but interrelated capitals: financial, manufactured, natural, human, intellectual and social, and relationship. The integrated report will identify how these six capitals are used, consumed or transformed by the company in producing outputs, and whether or not they created or destroyed value (Cheng et al. 2014). Properly nurtured capitals can release value over time, while simultaneously growing their capacity as a store of value (Thompson 2017). There are previous studies underlining the impact of IR in practice and the importance of the six capitals. Stubbs and Higgins (2014) found that the adoption of IR produced an incremental change in the organizations’ processes and structures. Haji and Hossain (2016) analyzed how companies reported and integrated multiple capitals in various organizational reporting channels. Adams (2017) found that the six capitals of IR generated awareness of the importance of environmental, social and governance issues, together with a broader view of value creation. Hence, many companies attempted to incorporate the six capitals in IR to performance measurement systems and reporting structures to enhance value creation and sustainability (Herath et al. 2021).

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9.2.4 Transformation to a Multi-capital Performance Measurement System in Value Creation Designing a value creating dynamic performance measurement system addressing the limitations of narrow capital models is reasonably challenging. A performance measurement system is a strategic expert system through which organizations observe and measure their intangible performance elements in the form of qualitative and quantitative assessments (Fried 2010). The performance measurement system is the heart of the performance management process and influences managerial decisions to improve the company’s performance (Bititci et al. 1997). Multi-dimensional performance measurement systems cover indicators used for multiple perspectives such as customers, employees, quality, community interests, environmental factors, resource allocation or resource flexibility, and financial results (Ittner et al. 2003). Organizations adapt their performance measurement systems to accommodate changes in the external environment, including technological innovations, increased competition and environmental uncertainty (Bourne and Neely 2003). Paranjape et al. (2006) justified the need for a dynamic performance measurement system aligning with the present organizational context and considering a broad range of capitals. Maltz et al. (2003) demonstrated the inadequacies of the traditional balanced scorecard and the need for a new dynamic performance measurement system to measure the new dimensions of business environment. The performance prism proposed by Neely and Adams (2000) is based on interconnected perspectives on measurements illustrated by the facets of a prism. Therefore, the multi capital performance measurement (MCPM) model, a new performance measurement system created with multidimensional performance measures, became essential to predict the future business environment (Kasie and Belay 2013). Another contribution to performance measurement systems which is important in improving different areas of an organization includes the dynamic performance measurement system proposed by Bititci et al. (2000).

9.2.5 Multi-capital Performance Measurement Systems and Corporate Value Creation In the long run, multi-capital performance measurement systems have improved organizational performance in many different ways. Many multi-capital performance measurement systems have a strategic orientation, focusing on the provision of complete information, which assists with the identification and achievement of strategic objectives (Lillis 2002). Ittner et al. (2003) observed that firms using a broad set of financial and non-financial performance measures reported higher satisfaction with their performance measurement system and higher stock market returns. Dynamic multi-dimensional performance models have overcome the limitations of traditional models and improved organizational performance (Maltz et al. 2003).

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The use of a broader set of performance measures can also assist in addressing the information asymmetry problem between principals and agents and improve governance (Ittner et al. 2003). Thus, a wide range of measures will assist management in achieving staff-related goals and motivate employees toward organizational learning and innovations (Atkinson et al. 1997). Multi-capital performance measurement systems ensure good governance, reduce corruption, ensure accountability and, above all, provide parameters demonstrating value for money (Tillema et al. 2010). Based on the evidence gathered from empirical studies, subsequent sections will build new knowledge with respect to the identified research question.

9.3 Theoretical Framework 9.3.1 Enlightened Stakeholder Theory and the Six Capitals The study is practically explained but linked with enlightened stakeholder theory highlighting the significance of considering wider stakeholder requirements while maintaining shareholders’ value maximization. In the traditional view, shareholders or stockholders are the owners of the organization, and it is the duty of the company to put their needs first, increasing their value (Freeman 1984). Later, the concept changed to a more stakeholder-oriented perspective from a shareholder-oriented perspective. A stakeholder is a party that has an interest in a company and can either affect or be affected by the business (Fernando 2021). Besides customers and employees, these parties include suppliers, competitors, environment, pressure groups, financial institutions, government and the general community (Freeman 1984). Thus, stakeholders are not a homogeneous category, and therefore, they are difficult to define (Pichet 2008). Any company becomes interdependent and interactive with all these groups when dealing in a co-operative business environment. According to enlightened stakeholder theory, the objective of the firm is to maximize total long-term firm market value (Jenson 2000). The capacity of an organization to respond to stakeholders’ needs and interests will create value in the future (International Integrated Reporting Council 2021). The theory of stakeholders broadens the organization’s vision to the external environment and allows the use of non-financial indicators to verify the relationship of the external environment with organizational behavior (Freeman 1984). Ensuring the long-term satisfaction of stakeholders by forming alliances and partnerships extends beyond the immediate benefits of opening new doors and unforeseen opportunities (Gupta and Govindarajan 1984; Kanter 1994). Therefore, it is essential to consider wider stakeholder concerns and keep these stakeholders satisfied for a company’s long-term success; otherwise, the company will eventually collapse. Typical narrow capital models have a narrow reflection and strategic analysis focused on the external business environment and external stakeholders. Moving to a multi capital performance measurement model will broaden value creation to include different stakeholders.

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Fig. 9.1 Analytical framework. Source Authors Developed

Such a change will lead to stakeholder integration in strategic planning and management (Plaza-Ubeda 2010). Thus, a change from a narrow capital model to multi capital model can satisfy the requirements of the majority of stakeholders. IR uses the term capitals to denote these various resources, with the six capitals being identified as: financial; manufactured; intellectual; human; social and relationship; and natural (International Integrated Reporting Council 2021). Multi capital model dimensions are formed around these six capitals, enhancing accountability to stakeholders and transparency. IR framework explicitly acknowledges that to create value overall, organizations need to identify different capitals in the process (Morros 2016). That is, the notion of value espoused in the framework presents a direct challenge to the shareholder-driven model of capitalism that has dominated financial markets and corporate behavior during the past few decades (Morros 2016). Haller (2016) perceived the six capitals as theoretical guidelines to the value creation concept. The rise in multi capital model demonstrates creating value and fulfilling wider stakeholder concerns by using six capitals-based performance measures. Based on the theoretical background of study, the following analytical framework is developed. According to Fig. 9.1, multi capital model was created as a result of barriers to and failure in the narrow capital model. The narrow capital model referred to in this study is traditional balanced scorecard. Typical balanced scorecard measures the progress of a company from four perspectives (i.e., financial, customer, internal business processes, learning and innovation). Multi capital model components were formed around the six capitals of IR framework, reflecting enlightened stakeholder theory, resulting value creation and corporate performance improvement.

9.4 Research Methodology 9.4.1 Case Study Approach This study uses a case study approach to investigate the failures in the narrow capital model and the resultant establishment of multi capital model. A case study is an empirical inquiry that investigates a contemporary phenomenon in depth within its real-life context, when the boundaries between the phenomenon and the context are

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not clearly evident (Yin 2018). Case study research emphasizes answering questions that ask how or why, and where the author has slight control of events that are happening at present (Yin 2018). The research question of the current study is why the narrow capital model failed as a strategic performance measurement tool, and how multi capital model has successfully influenced the upgrading of corporate performance. Furthermore, the authors have only slight control over activities and decision making in the case study setting. Therefore, the study is compatible with the explanation of Yin. Accordingly, the authors selected the case study approach to examine in detail the past and present performance measurement systems experienced at the case study setting. When analyzing the past literature, the authors identified that the single case study design had been widely used to conduct studies based on the corporate application of IR (Farneti et al. 2019; Dameri and Ferrando 2021). Therefore, the authors selected the holistic, single case study design proposed by Yin (2018), since the research covers one whole company without examining various strategic business units (SBUs) separately.

9.4.2 Case Study Setting The authors selected a logistics company in which to conduct the study. Meanwhile, there are more demands for multi capital logistics performance measurement systems, since old-fashioned logistics performance measuring methods that focused heavily on financial measures cannot meet their new roles within an organization any longer (Kumar and Nambirajan 2013; Wu 2017). Wisner (2003) hypothesized that logistics performance is a positive predictor of organizational performance. The role of a multi capital model related to the logistics industry is beyond monitoring mere logistics performance, but is also used to provide logistics improvement suggestions and resolve trade-offs between different logistics activities (Wu 2017). The case study setting was treated as anonymous to ensure confidentiality. Therefore, the entity was named as ABC Company by the authors. ABC Company has been playing a leading role for the past 20 years in Sri Lanka’s freight forwarding and logistics industry, catering widespread end-to-end logistics solutions for sea, air and land transportation and logistics. ABC Company is the transportation and logistics arm of the parent company, XYZ PLC. As a freight forwarder, ABC Company contributes to international trade in Sri Lanka through the provision of ocean freight, air freight, multi modal transportation, multi country consolidation, free zone logistics warehousing, project cargo freight and courier services. ABC Company’s audited financial statements evidenced that company’s revenue and net profit amounted to LKR 1.7 Bn and 30 Mn, respectively, in the financial year 2020/21. Currently, 43 employees are permanently employed by the company. ABC Company has a global presence in six other countries, namely Hong Kong, China, Malaysia, Indonesia, Thailand and India. In 2007, ABC Company used the principles of balanced scorecard to measure performance. Subsequently, due to inefficiencies in the balanced scorecard, managers

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had a hard time measuring performance at ABC Company with the frequently changing business environment. Since balanced scorecard principles no longer add value to the company, the management decided to shift to an alternative new value, adding the performance measurement system named, “Multi-Capital Model,” which provides a reflection of the company’s dynamic progression, representing multiple capitals. Meanwhile, there is a high demand in the logistics industry for multi capital performance measurement systems in value creation. Logistics strategies have influenced product design, customer selection, information technology, partnership building, vendor selection and many other processes. Unfortunately, the old-fashioned logistics performance measuring methods that focus heavily on financial measures cannot meet their new role within an organization any longer. Thereby, by choosing a company in the freight forwarding industry, the necessity for referring the dynamic performance measurement system to external environmental factors and stakeholder concerns can be emphasized. High growth rates, rising opportunities in the import and export sector of Sri Lanka, the high level of industrial rivalry and new entrants, the requirement for modern business technologies for survival and operating in a dynamic business environment are a few other reasons for selecting a company in the logistics industry. As the research was carried out based on the case study approach, support from the organization mattered significantly in the data gathering process. Company reputation and experience, innovative stakeholder-driven business culture, qualified staff knowledge on performance measurement systems and accessibility to information led the authors to choose ABC Company as the case study setting.

9.4.3 Data Collection The research was conducted using the qualitative explorative approach. Using multiple sources in data collection, creating a database of materials for later use by the authors and maintaining a chain of evidence are the guiding principles of data collection, as mentioned by Yin (2018). Hence, the authors used interviews, a questionnaire and documentation review to collect data. The interviews were semi-structured and based on a preset interview guide which was prepared by analyzing the past literature (Maltz et al. 2003; Spangenberg and Callie 2004; Chavan 2009; Pujas 2010; Madsen and Stenheim 2014; Misawo 2016). The questions were categorized into three sections according to the research objectives and were chronologically arranged to maintain the flow of the study. The interview guide is attached to the appendices (see Annexure 9.1). The selection of interviewees was based on their sound knowledge about company evolution, shifting of performance measurement systems, target setting, management and changes in performance measurement systems at the ABC Company. All seven interviewees were from managerial level and had rendered their services to company for more than ten years (see Table 9.1). Two face-to-face interviews were carried out initially

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at the organizational premises, but due to COVID-19 pandemic, the rest of the interviews were held online. A questionnaire was used to triangulate the findings of interviews. The questionnaire was prepared by the authors via analyzing past literature. The questionnaire covered three sections, i.e., background information, reasons for balanced scorecard failure and transition to multi capital model. Questionnaires were distributed among eight long-tenured executive employees and non-executive employees from different departments who had above ten years of service at ABC Company, and three executives from the Business Development Unit. The questionnaire is attached in the appendices (see Annexure 9.2). The long-tenured employees and executives from the Business Development Unit were chosen as questionnaire respondents because of their past experience with planning, designing, implementing and improving performance measurement systems. Thirteen questionnaires were manually distributed among the selected employees and twelve responses were received. To gather useful information for the study and to validate the interviews, access was gained to observe company documents and other materials related to the implementation of performance measurements and reporting at ABC Company. Multi capital model evaluation and interpretations were gathered using the minutes of supervisory board meetings, chief operating decision-making meetings and performance review meetings. The financial reports portrayed how company performance and reporting had improved over the years. Moreover, business plans comprised information on how multi capital model is connected with company strategy, performance improvement, existing limitations and anticipated future developments. Electronic platforms such as company websites, e-brochures and social media pages were also studied to gain knowledge on the background of the study setting and new avenues to understand the case study setting. Table 9.1 Details of interviews Interview no.

Interviewee’s designation

Date

Duration (min)

01

Operations and Customer Service Manager

25.10.2020

65

02

Sales and Marketing Manager

05.11.2020

45

03

Deputy General Manager of Finance

08.11.2020

70

04

Occupational Health and Safety Representative

25.10.2020

55

05

Human Resource Manager

01.11.2020

65

06

Head—Business Development Unit

02.04.2021

55

07

Assistant Manager—Business Development Unit

02.04.2021

60

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9.4.4 Data Analysis and Validation Yin (2018) explained that collecting evidence should be done with a deep understanding of how the authors are going to analyze the data. The authors developed a checklist of barriers identified in narrow capital models by analyzing the past literature. The barriers were categorized into four general themes, namely conceptual, technical, social and political issues (see Table 9.2). Initially, primary data collected by conducting semi-structured interviews were recorded and transcribed into a single written format. The responses to the questionnaire were analyzed using descriptive statistics. The transcribed document and summarized questionnaire responses document were compared with the barriers identified to find the reasons for the failure of the narrow capital model at ABC Company. The method through which multi capital model overcomes the weaknesses of the narrow capital model was uncovered using content analysis. By the keywords frequently used in interviews, the content in the transcribed document was analyzed thematically. The influence of multi capital model on uplifting company performance was analyzed using the transcribed document and validated against the findings of the documentation review. Data triangulation refers to the use of multiple sources of data to confirm the findings (Merriam 1995). In terms of the current study, the authors had initially collected data through interviews with managerial-level employees. To confirm the findings of the interviews, a questionnaire was distributed among long-tenured executives and non-executives. Since both interviews and questionnaires were biased by personal opinions, a documentation review was carried out at ABC Company to obtain written conformance from the company and to improve transparency in data collection. Table 9.2 Categories of issues associated with implementations of the narrow capital model Issue type

Barrier/problem

Conceptual issues

Lack of understanding on balanced scorecard No linkage between strategy and balanced scorecard Company focuses only on financial perspective

Technical issues

Problems associated with design Lack of dynamic environmental orientation

Social issues

Incompatibility of organizational culture Lack of top management commitment

Political issues

Lack of employee participation Lack of information technology and enterprise resource planning system assistance

Source Madsen and Stenheim (2014)

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9.5 Analysis and Findings Companies are deliberately focused on creating a multi capital performance measurement system that enhances accountability and ownership for a broad base of capitals, including financial, manufactured, intellectual, human, social and relationship, and natural capital (International Integrated Reporting Council 2021). Accordingly, the multi capital model was designed comprising eight major dimensions named sales and service excellence, process and compliance, innovation and technology, financial performance, employee and competency development, environmental health and safety, customer focus and suppliers (see Fig. 9.2). Together they provide an integrative model that addresses many limitations discussed in the narrow capital model i.e., balanced scorecard. Key performance indicators of balanced scorecard and multi capital model are given in Figs. 9.3 and 9.4. Measuring organizational activities and performance in terms of the six capitals for the past, present and future is a value-added factor (International Integrated Reporting Council 2021). Similarly, multi capital model delivers a dynamic progression representing multiple time horizons from past to future and contributes toward creating a practical value-added framework for the assessment of sustainable organizational success (see Fig. 9.4). Each and every multi capital model component was designed covering the six capital of the IR framework, as illustrated below (see Fig. 9.5).

Fig. 9.2 Background of performance measurement systems at ABC company. Source Authors Developed

Fig. 9.3 Key performance indicators of balanced scorecard—ABC company. Source Balanced scorecard worksheet—ABC Company

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Fig. 9.4 Key performance indicators of multi capital model—ABC Company. Source Multi capital model worksheet—ABC Company

Fig. 9.5 Contribution of multi capital model components toward the six capitals and value creation. Source Authors Developed

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9.5.1 Background to the Application of the Narrow Capital Model The narrow capital model referred to in this study was the traditional balanced scorecard. The balanced scorecard initiative at ABC Company was started way back in August 2007. According to supervisory board meeting minutes held in May 2007, the reason behind the initiative was for the company to become the most successful freight forwarding company in Sri Lanka by identifying its limitations and improving performance, both financially and non-financially.

9.5.2 Weaknesses of the Narrow Capital Model at ABC Company By analyzing the collected data, the authors investigated whether ABC Company experienced the same weaknesses in the narrow capital model as those identified by reviewing the literature. The findings regarding each weakness are discussed under the four issue categories named conceptual, technical, social and political.

9.5.2.1

Conceptual Issues

Conceptual issues are concerned with the interpretation and understanding of the narrow capital model. Lack of understanding of the balanced scorecard, no proper linkage with company strategy and imbalanced treatment meted out to balanced scorecard perspectives are the weaknesses recognized under conceptual issues. In 2007, the term balanced scorecard was a novelty and the level of balanced scorecard experience in Sri Lankan corporate practice was very low during that period. The authors discovered that there was a lack of understanding on the balanced scorecard among employees working at the company. The Operational and Customer Service Manager commented on balanced scorecard knowledge among operationallevel employees at ABC Company. Many employees were not professionally qualified at that time. Some operational level employees had not even heard the word balanced scorecard.

In the questionnaires distributed, only 30% agreed that they had an understanding of balanced scorecard at the introduction stage. The idea of balanced scorecard behind ABC Company was to demonstrate the results against targets in contrast to presenting the strategic overview and future outlook of the company. At the interview, the Human Resources Manager highlighted the ultimate objective of BSC. There were no strategy maps or direct linkage between the vision and balanced scorecard, but the ultimate objective was to monitor whether the targets had been met.

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More than 50% of questionnaire respondents disagreed that the balanced scorecard connected with the company vision and mission. In addition, the authors did not discover any written evidence for strategy maps used in the past which were in line with balanced scorecard implementation. ABC Company had appraised its performance most often by using financial outcomes before the introduction of the balanced scorecard. ABC Company’s Finance Manager stated that though the company wanted performance to be measured more than financially, top management reviewed and relied more on financial data when making decisions. Only 20% of questionnaire respondents agreed that the company treated all balanced scorecard perspectives equally. This was amply confirmed by chief operating decision-making meeting presentations held before 2017, which comprised only financial results presented for top management review.

9.5.2.2

Technical Issues

The identified barriers under technical issues are problems associated with the design of the narrow capital model, and a lack of attention to dynamic environmental factors when setting performance metrics. Successful performance measurement systems require a clear plan, effective data gathering, analyzing procedures and skillful designing. By gathering evidence from different sources, the authors identified the root causes given below, which gave rise to certain limitations in designing the balanced scorecard at the ABC Company. . . . . .

Difficulties in accessibility to external information. Relying more on the company’s internal data. Limited discussions with strategic business unit management. Strict deadlines enforced by management. Management-related quick balanced scorecard implementation.

Most of the interviewees expressed their disagreement with regard to the acceleration and quick implementation of the balanced scorecard project within the company. In the questionnaire responses, 78% disagreed with the statement that initial data gathering and analysis were carried out effectively when designing the balanced scorecard. Balancing key performance indicators between inward and outward stakeholders and business environmental factors is another vital action. The Assistant Manager of the Business Development Unit commented that most of the key performance indicators in the balanced scorecard were inward looking. A documentation review disclosed that in several chief operating decision making minutes, strategic business unit managers had requested top management to enhance balanced scorecard by including outward assessing key performance indicators. Yet, very few stakeholder requirements were taken into account when creating the balanced scorecard at ABC Company. In response to the questionnaire, 70% of employees stated that key performance indicators in the balanced scorecard did not consider wider stakeholder groups.

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Social Issues

Social issues related to incompatible organizational culture and lack of top management commitment toward implementation of the narrow capital model. Unquestioning acceptance and risk averseness were two main causes for culture incompatibility that hindered the implementation of the narrow capital model. The Operations and Customer Service Manager stated that employees were quick to agree with the decisions of top management without further arguments. The majority of questionnaire respondents agreed that the company possessed teamwork, learning and a value sharing culture; nevertheless, 80% of respondents replied that change was not welcomed in the organization. The top management at ABC Company had contemplated the balanced scorecard initiative as a priority, extending assistance and supervision to it, but a few years later the initial enthusiasm had gradually dampened. The Sales Manager commented that they did not receive top management assistance continuously, as they had had at the commencement stage of the balanced scorecard. Correspondingly, in response to the questionnaire, 80% disagreed with the statement that top management continuously supported balanced scorecard implementation.

9.5.2.4

Political Issues

The political issues are lack of employee participation, lack of information technology and enterprise resource planning system assistance. The balanced scorecard initiative at ABC Company was an arbitrary, top-down initiative with minimal employee participation. The authors discovered the root causes mentioned below for the lack of employee participation in balanced scorecard initiatives. . BSC was created according to a top-down approach. . Lower-level employees had no clear idea and understanding of balanced scorecard. . Lack of employee accountability related to balanced scorecard measures. . Lower-level employees were not motivated to participate in the balanced scorecard process. . Employee inputs were rarely valued by top management. The Human Resources Manager mentioned that employees had a perception that balanced scorecard was a reporting tool and management was solely responsible for it. In responding to the questionnaire, only 30% of employees agreed that they had actively engaged in balanced scorecard implementation. No proper enterprise resource planning system had been used, aligning with balanced scorecard implementation at the ABC Company, and the underdeveloped information technology system hampered the narrow capital model, causing problems when measuring corporate performance. From the evidence gathered from 2008 to 2013, the business plans of ABC Company, not having an advance enterprise resource planning system to integrate logistics, tracking of shipments, job costing

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Table 9.3 Reasons for the failure of the narrow capital model at ABC company (results drawn from questionnaire respondents) Reasons for the failure of the narrow capital model at ABC company

Responses (%)

Lack of a dynamic environmental orientation

19

Problems associated with designing balanced scorecard

16

Lack of understanding on balanced scorecard

15

No linkage between strategy and balanced scorecard

11

Lack of employee participation

11

Lack of top management commitment

9

Lack of information technology and enterprise resource planning assistance

8

Company focused only on the financial perspective

6

Incompatibility of organizational culture

5 100

Source Authors’ developed

and invoicing, accounting and marketing information, were pointed out as flaws of the company. The Finance Manager stated that there had been no separate enterprise resource planning system until 2015, and computations and comparisons were done manually using the Microsoft Office package. In line with this, 90% of questionnaire respondents agreed that there was no enterprise resource planning system newly introduced or modified with the narrow capital model. The findings demonstrated that ABC Company experienced a wide range of barriers related to balanced scorecard implementation, ranging from conceptual and technical problems to social and political problems (see Table 9.3). In most cases, these problems appeared to be interrelated. The findings evidenced that the most critical reason for the failure of the narrow capital model was a lack of dynamic environmental orientation. However, all the barriers identified by the authors in the prior literature had hindered balanced scorecard implementation at ABC Company. Hence, all the above barriers had together obstructed the implementation of the narrow capital model

9.5.3 Overcoming the Failures of the Narrow Capital Model Through Multi-capital Model Due to the limitations of the narrow capital model, management was encouraged to shift to a new performance measurement system which addressed the flaws of the narrow capital model comprehensively and created value. The company focused deliberately on creating a multi capital dimension performance measurement system enhancing accountability and ownership for a broad base of capitals, namely financial, manufactured, intellectual, human, social and relationship, and natural capital

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Fig. 9.6 Overcoming the failures of the narrow capital model through multi capital model. Source Authors developed

(International Integrated Reporting Council 2021). Due to dealing with the limitations of BSC metrics, managers became frustrated, since a strategic business unit’s actual performance was not reflected and recognized through the balanced scorecard. The idea of changing to a better system had been contemplated since 2014, and according to meeting minutes, after a broad analysis, the management had introduced multi capital model in July 2016. Figure 9.6 illustrates the different ways in which multi capital model overcame the weaknesses of the balanced scorecard at ABC Company (see Fig. 9.6). Role 01: Improving the understanding of multi capital model Lack of understanding had been an obstacle to balanced scorecard application at the ABC Company. Therefore, the company introduced some new guidelines for trainees, stating that every member should attend a multi capital model training session within the first three months of their recruitment. Answering the questionnaire distributed, 70% of employees responded that multi capital model is a comprehensible framework. In addition, every employee’s job role was directly or indirectly linked with multi capital model to increase their level of understanding and to motivate the workforce. Role 02: Construct a linkage between strategy and multi capital model The balanced scorecard was not perceived as a strategic management tool to ensure a prosperous future for ABC Company. Therefore, top management embedded the purpose of ABC Company, which is Inspire, Connect and Enrich, into multi capital model. The continuous monitoring and analysis of the business environment in the context of the organization’s mission and vision is an important factor for the success of any business enterprise (International Integrated Reporting Council 2021). In this

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regard, the environmental Health and Safety representative explained how strategy and multi capital model were linked together. The multi capital model components are directly linked with the purpose of our company. Then, key performance indicators were combined with inspire, connect and enrich. The action plans are created for each key performance indicator by assigning weightages.

Role 03: Equal attention to all multi capital model dimensions Since balanced scorecard demonstrated a lack of balance when reviewing company performance, multi capital model gives priority to maintain balance among all the perspectives. From documentation analysis, the authors observed that eight dimensions of multi capital model had been given almost similar weightages when designing the metrics. Furthermore, each dimension consists of five to eight key performance indicators. When reviewing the company’s monthly performance at the chief operating decision-making meeting, top management had guided all SBUs by sharing a sample template, in order to present their performance covering all eight dimensions. The Human Resources Manager added that SBUs will be rewarded based on all dimensions. Role 04: Effective data collection, analysis and communication for successful multi capital model design The rigid time frames, excessive dependence on internal environmental factors, lack of agreement on metrics between strategic business unit level managers and employees created defects in the balanced scorecard design. In order to experience the advantages of multi capital model and ensure that employees stay focused, multi capital model was implemented with a well-defined plan. The Business Development Unit had been given flexible time frames to rationally understand the activities and come up with the best framework. The project team had maintained constant discussions with management and employees when designing the strategies, metrics and key performance indicators of multi capital model, including action plans. The Head of the Business Development Unit revealed that after analyzing the data, they shared the revised drafts with strategic business unit management to check progress before submitting the data for top management approval. Role 05: Multi capital model as a dynamic sustainable performance measurement system Lack of concern with dynamic environmental factors, a limited number of KPIs and serving very few stakeholders were a few primary reasons for the nonperformance of the balanced scorecard at ABC Company. Therefore, the top management, the Business Development Unit and SBUs desired to develop a dynamic, sustainable performance measurement system which serves a variety of stakeholders, covering a wide range of capitals. The Sales Manager commented that branding creates a competitive edge, and that therefore, necessary measures need to be included in multi capital model. The supply chain management measurements were incorporated into multi capital model to quantify timeliness, availability and quality. Further measures

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were established to improve the company’s digitalization process and to upgrade technical innovations. Role 06: Multi capital model compatibility with company culture The balanced scorecard was incompetent to absorb the positivity of ABC Company’s teamwork, learning and innovative culture because of the inefficiencies in change management. One of the reasons for balanced scorecard failure was that top management did not focus on how to familiarize employees with the balanced scorecard by changing employee thinking patterns and attitudes in order to obtain the agreement of employees working at every level of the organization. 70% of questionnaire respondents agreed that multi capital model is compatible with organizational culture. The Human Resources Manager described how employee mindset was transformed in order to accept multi capital model. ABC Company changed the mindset of employees with the introduction of multi capital model by encouraging team work activities, cross functional job expertise and brainstorming forums to convert innovative ideas into action.

Role 07: Commitment of top management The initiative to implement balanced scorecard was originated by the highest decision-making body at ABC Company, the top management of the parent company. However, lack of employee participation caused top management to feel a gradual loss of confidence in the balanced scorecard model. Therefore, top management did not attempt to eliminate the inefficiencies in balanced scorecard itself, but instead, concentrated on developing a new performance measurement system rectifying past inefficiencies and extending continuous guidance. The interviewees commented that top management had continuously communicated with them on multi capital model changes, reviewed the metrics, held training sessions and appointed a team to assist employees with queries on the multi capital model dashboard. Role 08: Employee participation in multi capital model implementation A limiting factor of the balanced scorecard model was a lack of employee participation for effective implementation. Interviewees commented that motivating employees to learn multi capital model, cascading organizational strategy from top to bottom, the user-friendly design of multi capital model and valuing employee inputs had developed and increased employee participation in multi capital model implementation. The Occupational Health and Safety Representative mentioned how multi capital model became comprehensible. 85% of questionnaire respondents also commented that multi capital model is comprehensible and user-friendly. Role 09: Assistance from the information technology and enterprise resource planning system The authors noticed that data on financials, customers, employees and suppliers are scattered throughout the company, so that the company had faced difficulties when manually calculating and measuring performance. As a solution, through the

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implementation of Logix and SAP, all the data derived from different departments were processed through the same format. The Qlik view was used as the management information system of the company. The multi capital model dashboard was created in the Qlik view to capture and process all the data. The Finance Manager described how enterprise resource planning systems and the multi capital model dashboard become beneficial for multi capital model implementation. The dashboard is flexible and user-friendly. Managers can easily access the multi capital model dashboard on their laptops to see the progress of the company in real time. All the reports needed to calculate the KPIs can be derived using the Qlik view.

However, the Occupational Health and Safety Representative pointed out that the multi capital model dashboard can be further developed as a decision support system, suggesting the most economic outcome under each given scenario.

9.5.4 The Influence of Multi-capital Model on Upgrading Corporate Performance and Value Creation MCM was designed with multiple capitals covering a wide range of internal and external factors, which contributed to improving ABC Company’s performance in different aspects. The introduction of multi capital model improved employees’ accountability. From documentation analysis, the authors realized that every person’s job role was directly or indirectly linked with multi capital model to increase the level of accountability. The Occupational Health and Safety Representative commented on multi capital model’s positive impact on accountability. Multi capital model increases the accountability of what we are doing. On a weekly basis we have to provide an update. Therefore, I have discussions with my team members frequently and review with the CEO on improvements in environmental health and safety activities.

The transparency in the strategies of the company increased employee commitment and reduced communication gaps. The Human Resource Manager stated in his interview that in multi capital model, there is a clear link among all elements and transparency in the path used to achieve the ultimate purpose. Furthermore, the authors discovered that from 2017 onwards, strategy maps had been included in all annual corporate business plan presentations, illustrating how multi capital model components link with objectives and action plans. Multi capital model improved the compliance of the company and shaped progressive change in reporting. 80% of questionnaire respondents stated that multi capital model had improved accountability and corporate governance in the company. Multi capital model comprised of measurements related to ABC Company’s adherence to statutory requirements such as mandatory external audits, taxations, license handling and legal compliance. In addition, when reviewing the company’s monthly performance at chief operating decision-making meetings, the top management guided all

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SBUs by sharing a sample template with which to present their performance covering all eight dimensions of multi capital model, which improved reporting consistency. The SBUs were rewarded based on their achievements of all the dimensions. CSR demonstrates business interest in the wider stakeholder community and social issues, which makes positive corporate sense and drives the organization toward sustainability. With the introduction of multi capital model, it had become compulsory to organize a main corporate social responsibility project annually. The Occupational Health and Safety Representative stated that apart from the annual CSR project, minor scale community and eco projects implemented on a monthly basis were reviewed and appraised by top management. In agreement with this, 85% of the respondents stated that multi capital model met majority stakeholder concerns. To utilize the available resources in the best possible manner, it is useful to identify the loopholes in company processes. The Sales Manager highlighted that he noticed the presence of improved work patterns as well as more streamlined departments after multi capital model implementation. Ultimately, the efficiency of the company will impact positively on corporate profitability. The monthly financials evidence that the company’s profitability had increased yearly since the introduction of multi capital model. Innovation assists companies to differentiate themselves by providing a competitive advantage. 80% of questionnaire respondents agreed that multi capital model drives employees’ innovation. The Human Resources Manager provided positive feedback on the innovations driven by multi capital model. Employees are enthusiastic to express their creative ideas and work on innovations. It will benefit the company and the employee because both get reviewed and awarded under multi capital model

The authors discovered how the value adding multi-capital performance measurement system, multi capital model, addresses the dynamics in the business environment, overcoming the limitations of the narrow capital model. The following table illustrates how multi capital model overcame the weaknesses of the narrow capital model (see Table 9.4). Gradually, multi capital model contributed to uplifting company performance financially and non-financially by creating value over time.

9.6 Discussion The narrow capital performance measurement system at ABC Company had several adverse impacts and design failures, creating conceptual, technical, social and political problems in the performance measurement system, as highlighted in the prior literature. These weaknesses were lack of understanding of the narrow capital performance measurement system, improper linkage between company strategy and the performance measurement system, overemphasis on the financial perspective, problems associated with design, lack of dynamic environmental orientation, incompatibility of organizational culture with the performance measurement system, absence

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Table 9.4 Overcoming the barriers of the narrow capital model through multi capital model Barriers in the narrow capital model

Overcoming the barrier through multi capital model

Conceptual issues Lack of understanding on BSC

Linking the employee’s job role with multi capital model to improve ownership and accountability

No linkage between strategy and the BSC

Strategy maps were constructed linking purpose with objectives and action items

Focus only on the financial perspective

Equal attention paid to all multi capital model dimensions

Technical issues Problems associated with designing a narrow capital model

Effective data collection, analysis and communication in the multi capital model design

Lack of dynamic environmental orientation

Multi capital model was created as a value adding, dynamic, sustainable multi-capital framework

Social issues Incompatibility of organizational culture

Changing employee thinking patterns and attitudes to upgrade learning, teamwork and innovative culture

Lack of top management commitment

Continuous guidance by top management on improvements in multi capital model

Political issues Lack of employee participation

Bottom-up approach to encourage employee participation

Lack of information technology and enterprise resource planning system assistance

The Qlik View and the MCM dashboard developed as management information systems

of strategy redesign, lack of top management commitment, lack of employee participation and lack of information system and enterprise resource planning system assistance for the performance measurement system. These facts are in line with those of many past empirical findings (Bourne and Neely 2003; Chavan 2009; Pujas 2010; Madsen and Stenheim 2014; Hoang et al. 2018; Weerasinghe et al. 2023). The majority of interview and questionnaire respondents believed that a lack of dynamic environmental orientation impacted on the failure of the narrow capital model. When the business environment undergoes change, the lack of essential information on the business environment and shareholder orientation in the narrow capital model will ultimately lead to practical failures (Speckbacher 2003). Similarly, Bourne and Neely (2003) emphasized that in today’s dynamic business environment, awareness about competitors, supplier relationships, environmental and community concerns are vital for survival and success. Collectively, then, all barriers identified by authors in the past

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literature together hindered the implementation of the narrow capital performance measurement system at ABC Company. Multi capital model has a number of important characteristics that distinguish it from the narrow capital model used for assessing organizational success. Primarily, the company background was designed to support successful multi capital model implementation. A cascading performance measurement system from top to bottom is essential for the success of the initiative in larger organizations (Niven 2005). Correspondingly, employees perceived multi capital model as a comprehensible performance measurement system and were encouraged to participate in multi capital model execution. The strategy maps linked multi capital model with company vision and mission. The KPIs were developed following the logic of the strategy and only then did people understand the relationship between the incorporated metrics (Pujas 2010). In addition, management support needed to be long term, last throughout the implementation process, and continue afterward to ensure its continuous use (Pujas 2010). Multi capital model gives priority to maintaining a balance among all the dimensions. Concentration on the external environment and its risks and opportunities will gradually create value for the company (International Integrated Reporting Council 2021). The management information system and enterprise resource planning software, Qlik View and Logix greatly supported the successful implementation of multi capital model. Such information technology infrastructure will help the performance measurement system to be successfully implemented (Madsen and Stenheim 2014). Corporate value is not created within an organization alone, but influenced by the external environment, stakeholder relationships and various resources and capitals (International Integrated Reporting Council 2021). This means that the ability of the organization to create value depends upon balancing quantitative and qualitative information (International Integrated Reporting Council 2021). The best way to do so is through a combination of quantitative and qualitative information, which is where the six capitals come in. The capitals and integrated thinking are key concepts of IR and are used in the value creation process (Herath et al. 2021; International Integrated Reporting Council 2021). Multi capital model dimensions cover multiple capitals when measuring corporate performance. According to the Enlightened stakeholder theory, the objective of the firm is to maximize total long-term market value (Jensen 2000; Cooray et al. 2020). The multi capital model explicitly acknowledges the critical roles of multiple stakeholders, which were missing in previous frameworks, to serve the requirements of many interested parties effectively. The addition of specific attention to stakeholder-oriented dimensions recognizes the organization’s needs to serve several external parties. Moreover, multi capital model can be identified as a two-way process, which enables management to assess stakeholders’ contributions toward achieving the company’s goals, and enables stakeholders to assess whether the organization is capable of fulfilling its obligations to them. Measuring organizational activities and performance in terms of the six capitals for the past, present and future is a value adding factor (International Integrated Reporting Council 2021). Similarly, multi capital model delivers a dynamic progression representing multiple capitals and contributes toward creating a practical value adding framework for the assessment

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of sustainable organizational success. This confirms that multi capital model is a dynamic, environment- oriented framework that creates value for all stakeholders. ABC Company witnessed improvements in corporate performance and value creation after multi capital model execution. Primarily, accountability improved among the workforce and governance, transparency, adherence to compliance and the reporting structure were upgraded. The use of a broader set of performance measures can also assist in addressing the information asymmetry problem between principals and agents and improve governance (Ittner et al. 2003). Therefore, multicapital performance measurement systems ensure accountability (Tillima et al. 2010). Many multi-capital performance measurement systems have a strategic orientation, focusing on the provision of complete information, which assists with the identification and achievement of strategic objectives (Lillis 2002). Multi-capital performance measurement systems ensure good governance, reduce corruption and above all, provide parameters demonstrating value for money (Tillima et al. 2010). Stubbs and Higgins (2014) and Gunarathne and Senaratne (2017) found that the adoption of integrated reporting produced an incremental change in organizations’ processes and structures. Similarly, the ABC Company’s internal process loopholes were identified through multi capital model measurements, and it was possible to propose the best solutions to increase operational efficiency. Increase in efficiency contributes directly toward the upsurge of company profitability. Ittner et al. (2003) observed that firms using a broad set of financial and non-financial performance measures reported high stock market returns. Apart from quantitative value creation, multi capital model encouraged qualitative value creation inside the organization. The workforce was enthusiastic about presenting their creative ideas and proposed innovations since multi capital model reviews and rewards the best. A wide range of measures will assist management in achieving staff-related goals and motivate employees toward organizational learning and innovations (Atkinson et al. 1997). Organizations adapt their performance measurement systems to accommodate changes in their external environments, including technological innovations (Bourne and Neely 2003). Adams (2017) found that the six capitals of IR generated awareness of the importance of environmental, social and governance issues, together with a broader view of value creation. Bourne and Neely (2003) emphasized that in today’s dynamic business environment, concern for the community is vital for survival and success. Similarly, multi capital model can be perceived as a stakeholder-oriented framework which contemplates various stakeholder concerns, ensuring long-term sustainability for the company.

9.7 Conclusion The chapter was aimed at investigating why narrow capital models failed as strategic performance measurement tools, and how multi capital model has successfully influenced upgrading corporate performance. The overall results supported the fact that the company has diversified its KPIs related to six types of capitals defined

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by the IIRC, to improve performance. The research was conducted as a qualitative, explorative study using the case study approach at the ABC Company, in the freight forwarding and logistics industry. The study evidenced that many weaknesses identified by the literature, which can be grouped as conceptual, technical social and political issues, hindered the successful performance of the narrow capital model (traditional balanced scorecard) at the ABC Company. Subsequently, the study discovers an improvement in understanding of the performance measurement system, linking strategy with multi capital model, effective designing with balanced dimensions, dynamic business orientation, commitment of top management, active employee participation, culture compatibility and information technology and enterprise resource planning support to uplift multi capital model, while eliminating the inefficiencies of the narrow capital model. Meanwhile the company began experiencing elevated performance in reporting structure, transparency and compliance, stakeholder and community orientation, process efficiencies, profitability, employee accountability and innovations. Thus, the authors believe it is critical that performance measurements be simple, dynamic, flexible, foster corporate improvement and be linked to the organization’s strategy, goals and objectives. Ultimately, multi capital model provides a framework for assessing organizational success based on a multitude of measures covering the six capitals, assisting companies to constantly examine themselves and improve their chances of sustainable and on-going success. The implications of the study highlight the fact that the accurate measuring of company performance will lead to successful future planning, decision making, value creation, coordination and controlling purposes. As the business gets more and more complex, many dimensions of the internal and external environment have to be addressed by the performance measurement system. Similarly, multi capital model directs managers to raise the company beyond the expected level by improving performance in many different areas. Thus, the ability to measure firm performance effectively is critical to the firm’s survivability and ensures that the entity is managed efficiently. The research findings can be used as a guideline to design a performance measurement system built around the six capitals of IR. In addition, the research emphasizes the need for refining performance measurement systems by corporates, along with the passage of time, in correspondence to requirements in the dynamic business environment, in order to obtain the maximum benefits from these performance measurement systems. Case study analysis however is subject to a number of limitations. A holistic, single case study deals with only one company and one event, and therefore, it would be unlikely to represent the wider body of similar instances. Consequently, the findings related to the ABC Company may or may not be compatible with those from other organizational settings. The second critique is that there can be room for observer bias in this method, and this could be due to reliance on subjective opinions. The limited number of employees who had experience of both balanced scorecard and multi capital model was another limiting factor in data collection. Another constraint in designing a multi capital performance measurement system is that it requires a substantial cost and effort to implement and develop. Future research can focus on financial and non-financial costs related to the design and

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implementation of a multi capital performance measurement system. Furthermore, future researchers can provide insights into analyzing the effectiveness of multi capital performance measurement systems in improving organizational operational processes.

Annexure 1: Summarized Interview Guide Section 01: Background for the study 1. When, why and who started the initiative to build BSC at ABC Company? Section 02: Identifying the reasons for BSC failure 1. How the required data was collected, analyzed, reported and distributed throughout the company for BSC implementation and was there an adequate support from top management? 2. Did team members have some previous experience, knowledge on BSC and besides the project team, did other managers and employees take part in the initiative? 3. Did company spend considerable time making the vision, mission, objectives and strategies explicit in a strategy map before articulated them in BSC? 4. Did you use or newly develop an enterprise resource planning system for BSC and how was the influence of organizational culture impact toward BSC initiative? 5. Did you use existing KPIs or develop new ones? 6. According to your knowledge what is the main reason for BSC failure? Section 03: Alternative performance measurement system: MCM 1. When company stopped using BSC and shifted to new performance measurement system and who initiated MCM? 2. What are the major dimensions of MCM and how the measures are established? 3. How MCM components create value to the company overcoming the limitations of BSC and does MCM meet the stakeholder’s expectations? 4. Does MCM combine the company vision mission and strategy? (if yes, explain how) 5. Do all managers and employees actively participate toward the development and implementation of MCM?

Annexure 2: Questionnaire Section 1: Background Information

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Section 2: Reasons for BSC failure at ABC Company Please mark a tick in the appropriate box. According to your knowledge what were the most critical factors for BSC failure at ABC Company? (Tick the most appropriate) Factors for BSC failure Lack of dynamic environmental orientation Lack of understanding on BSC No linkage between strategy and BSC Company focuses only on financial perspective Problems associated with data gathering and analyzing for effective BSC implementation Incompatibility of organizational culture Lack of top management commitment Lack of employee participation Lack of information technology and enterprise resource planning system assistance Source Madsen and Stenheim (2014), Chavan (2009), Pujas (2010) and Misawo (2016)

Section 3: MCM implementation at ABC Company Please mark a tick in appropriate box Statement Employees welcome MCM at organization MCM links with company vision mission goals and objectives MCM improves accountability and corporate governance MCM drives employees to innovate MCM is more compatible with dynamic business environment MCM meets the expectations of majority of stakeholders Managers and employees are actively participating toward MCM implementation An enterprise resource planning (ERP) system is aligning with MCM MCM is compatible with organization culture MCM is comprehensible and user-friendly The benefits associated with MCM exceed cost Source Spangenberg and Callie (2004), Maltz et al. (2003), Madsen and Stenheim (2014), and Chavan (2009)

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Sadma Umagiliya [MBA (UWS-UK); B.Sc. Accounting Special (SJP); ACCA (UK)] is a Graduate of Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura and currently employs as a Senior Associate in Investment Research at Acuity Knowledge Partners, Sri Lanka. Her academic journey at University of Sri Jayewardenepura provided her with a solid foundation in research studies. Sadma’s research interests have been focused on integrated reporting and performance measurement systems. Dileepa Samudrage [B.Com (Sp.) (SJP); MSc. (SJP); MEcon. (Japan); PhD (Japan)] is a Professor in the Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura. With a strong passion for academia and research, she has made remarkable contributions in the fields of management control systems and strategic change, beyond budgeting and balanced scorecard.

Chapter 10

DIMO’s Integrated Reporting Journey: From Separation to Integration Suresh Gooneratne

Abstract Integrated reporting (IR) has brought multi-capital thinking into focus on the premise that management of multiple capitals is important to create value for providers of financial capital in the short, medium and long terms. As a result, IR has encouraged organisations to prepare integrated reports and institutionalise trade-offs related to decision making on resource allocation. The universal adoption of IR is gathering momentum, and the case for its adoption is becoming more apparent. Diesel & Motor Engineering PLC (DIMO), commenced its IR journey in the year 2011, gradually increasing its compliance with the principles of IR along the way. DIMO is currently a member of the IFRS Sustainability Alliance. This chapter highlights many aspects relating to the importance, principles, complexity, benefits, challenges and issues associated with integrated thinking and IR. Upon introducing the organisation, the discussion proceeds to the integrated reporting journey of DIMO, the organisation’s thinking behind IR and its adaptation, integrated thinking and materiality at DIMO. A brief discussion on the DIMO Annual Report brings the chapter to a close. Keywords Accountability · Corporate reporting · Integrated reporting · Stakeholders · Value creation

10.1 Introduction Corporate reporting for a business entity is a requirement as well as a necessity. The requirement aspect arises from laws, regulations and best practices stemming from the need for transparency and accountability, whilst necessity arises from the need to communicate the value created by the entity and its ability to create value in the short, medium and long terms to investors and other stakeholders. S. Gooneratne (B) Diesel & Motor Engineering PLC, 65 Jetawana Road, Colombo, Sri Lanka e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_10

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The Annual Report of a business entity is a key tool in corporate reporting through which many facets of the business are communicated to shareholders and other stakeholders. It also helps readers to assess the collective business intellect of the organisation. In Sri Lanka, awards and accolades bestowed upon companies that excel in corporate reporting have also brought a competitive nature to compiling and producing Annual Reports (Gunarathne and Senaratne 2017, 2018). These factors, together with other reasons, have led to a rapid evolution of reporting practices and an appetite to voluntarily adopt new reporting guidelines and frameworks (Cooray et al. 2022). DIMO as a company has trodden the path of corporate reporting for over half a century. The company’s Annual Report has passed a different era in corporate reporting taking on board best practices along the way. Whilst the Annual Report of DIMO has progressed over the years attracting recognition by many bodies for excellence in corporate reporting, the commitment of the leadership to adopting best practices in reporting has remained a constant. The most recent landmark in the company’s journey of corporate reporting is the adoption of IR in the year 2011. Integrated reporting (IR) is a significant milestone in that it attempts to provide a holistic picture of the value created by the organisation and its ability to create value in future. In doing so, an integrated report deals with a variety of interconnected aspects such as strategy, capitals, materiality, connectivity and trade-offs, articulating the “corporate anatomy” of the company, constituting of complex systems, connections, interdependencies and dynamics, in an understandable way. This chapter is an attempt to present the IR journey of DIMO, identifying the aspects that are relevant to its science, art and craft. This introduction is followed by an overview of the organisation and a visit to the evolution of corporate reporting at DIMO in Sect. 10.2. Upon reflecting on the context to this chapter, the case for IR is examined in Sect. 10.3. Maturity in IR usually happens over a period of time. DIMO’s experience was no different from this norm. Section 10.4 is dedicated to reflecting upon the evolution of corporate reporting at DIMO. Integrated thinking is a prerequisite for IR. Given the importance of integrated thinking in compiling an integrated report, Sect. 10.5 was dedicated to the subject and its implications for DIMO’s Annual Report. Given the importance of materiality and conciseness in IR, this chapter also contains a brief discussion of these two aspects in Sect. 10.6. Finally, the chapter presents the important aspects of the DIMO Annual Report and a discussion of the benefits that IR brings to the company.

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10.2 Overview of the Organisation 10.2.1 Historical Review Diesel & Motor Engineering PLC, better known as DIMO in Sri Lanka, traces its origins to the year 1939 when four friends started a business. This business evolved into what DIMO is today. The company became a corporate body in the year 1945 and was listed on the Colombo Brokers’ Association, the predecessor to today’s Colombo Stock Exchange, in the year 1964. Therefore, the company spans over three generations.

10.2.2 The Construct of the Organisation The business domains of the company span over many areas that include automobile sales and engineering, power engineering, fluid management, building technologies, medical engineering, construction machinery, logistical equipment, agriculture, retail and a few others clustered into six areas (see Fig. 10.1). Given the diversified nature of the business, DIMO is usually identified as a local conglomerate. During the recent past, DIMO has ventured overseas and currently operates in three foreign countries, namely Maldives, Myanmar and Uganda. The annual turnover for the financial year 2020/21 was over LKR 30 billion brought home by 1800 employees. Business is spread mainly across the disciplines of engineering, engineering services, trading and manufacturing. DIMO also represents many global brands in Sri Lanka that include reputed brands such as Mercedes Benz, Tata, Jeep, Siemens, Zeiss, Komatsu, Michelin, Stanley Black & Decker, Mahindra and BASF.

10.2.3 Governance Structure The governance structure of the organisation is given in Fig. 10.2. “Enterprise governance is at the heart of everything we do. Therefore, stewardship, transparency, accountability and integrity are key elements of our corporate philosophy”. (DIMO PLC 2021, p. 22). In order to fulfil the transparency obligations arising from the above vision, it is necessary that DIMO communicates to its shareholders and other stakeholders non-monetised aspects that affect value creation, with the same importance given to monetised aspects that create financial value. The stewardship role played by the directors ensures that corporate policy drives value creation for DIMO, whilst it creates value for its stakeholders. As such, the governance framework of DIMO covers both the conformance and performance dimensions of enterprise governance.

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Fig. 10.1 DIMO’s organisational structure. Source Author

Fig. 10.2 Governance structure of DIMO. Source DIMO PLC (2021, p. 22)

From a compliance angle, DIMO follows the voluntary code of best practices on corporate governance issued by the ICASL. The level of compliance of the company to each provision of the code is available on the corporate website. From a value creation perspective, such conformance is expected to enhance trust between DIMO and its stakeholders.

10.2.4 Leadership Philosophy The leadership philosophy is extremely clear about the role played by the stakeholders in value creation and eventually, in the success of DIMO. This is clearly manifested in the corporate strategy of DIMO, as depicted in Fig. 10.3.

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Fig. 10.3 DIMO’s corporate strategy. Source DIMO PLC (2021, p. 17)

The statement of purpose of DIMO “Fuelling Dreams and Aspirations” is best explained by the following quote drawn from the company’s Annual Report. Our purpose mandates that we collaborate with stakeholders to deliver their dreams and aspirations and create value for the organisations in a responsible manner. (DIMO PLC 2021, p. 17)

The above statement underlines the critical role played by stakeholders in creating value for DIMO and, at the same time, recognises the company’s partnership with its stakeholders in fulfilling their dreams and aspirations. The organisational policies, leadership and employee behaviour and performance management strongly drive stakeholder-centric behaviour, to derive competitive advantages. The commitment to building trust between DIMO and customers, employees, foreign principals, and government agencies and delivering on their expectations are clearly evident in all facets of DIMO’s culture and values. Transparency is one such tool used to enhance trust. This is manifested in the leadership behaviour at DIMO as well. Stakeholder-centric behaviour, including trust-based customer relationships, humane employee relationships, professional deliverance on foreign principal expectations and ethical behaviour towards society drive day-to-day operations of the company. Such thinking and behaviour are of paramount importance to the company, as the strategies for competitive advantage and inputs for value creation come from stakeholders. In other words, the philosophy of stakeholder-centric value creation has been embedded in DIMO’s strategic thinking. Therefore, careful management of capitals coming from stakeholders has always been part of DIMO’s culture.

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10.2.5 Drivers of Corporate Reporting for DIMO The Annual Report fulfils many compliance requirements and, at the same time, serves as an effective tool for communicating value creation to stakeholders. The thinking behind the purpose of the DIMO Annual Report extends beyond its use as a document to meet compliance requirements. Its power as a communication tool and as a mode of transparency is well recognised. Since transparency is a cornerstone of the leadership philosophy, the company has continually strived to communicate its philosophy, beliefs, values, performance and prospects to its shareholders and stakeholders. Towards meeting this end, the leadership has envisioned that adopting best practices in corporate reporting is a key to ensuring transparency. This line of thinking has always encouraged the early adoption of best practices when reporting on financial aspects, corporate governance and sustainability. The adoption of IR in the year 2011 too bears testimony to this commitment, as manifested in the following statement. “Adopting the principles underlying IR promotes more holistic, long-term thinking and decision making by organisations, across a comprehensive range of factors material to long-term value creation” (Chartered Global Management Accountant, 2014, pp. 5–8). Since DIMO is a company that represents the best-in-class leaders in engineering and in other spheres in Sri Lanka, it has been conscious of the role played by foreign principals as a key stakeholder in creating value for shareholders. Whilst being navigated by the commitment to transparency and best practices in corporate reporting, the company also gives due consideration to aspects valued by its principals, which often synchronise with the best practices in reporting. This inclusive approach allowed the senior management of the principals to see through DIMO as their preferred business partner in Sri Lanka and, in some cases, in the region as well. A long history of its Annual Reports being recognised with accolades and such excellence in corporate reporting becoming embedded in its brand equity, has also motivated the company to adopt best practices and excel in corporate reporting. DIMO also believes that the Annual Report is a key document that demonstrates its collective intellect, strength and capacity, to its stakeholders. The commitment of the leadership towards stewardship, accountability and transparency, together with the aforesaid reasons pertaining to brand equity has led the DIMO leadership to give its due place to the Annual Report and to adopt best practices in corporate reporting.

10.3 The Case for Integrated Reporting at DIMO The business case for IR at DIMO arises from many fronts. The justification of the business case is based on one presumption. The company seeks value creation in the short, medium and long terms as opposed to solely focusing on profits in the short term. Short-term profits, as DIMO perceives, evaluate the organisation’s capabilities

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narrowly, whilst value created through all capitals in the short, medium and long terms is a better indicator of the organisation’s ability to create financial and nonfinancial value, leading to the success of the company in the long term. Given below are some areas where integrated thinking at DIMO and adoption of IR as a form of reporting are useful. (a) The Value of DIMO As in the case of all companies, DIMO too presents itself to be valued based on its ability to create value in future. Thus, it is relevant to present information that enables a valuation which takes into account all factors that will affect the ability to create value in the short, medium and long terms. In other words, DIMO should present itself to be valued based on future cash flows built considering, among other things, the corporate strategy, quality and quantity of capitals available and their alignment in executing strategy. (b) The Investor Perspective The outcome expected by an investor who supplies financial capital to a business is termed “Total Shareholder Return”, which comprises returns received, and the appreciation of the capital invested. The current returns can be seen from the historical financial statements. The estimation of the ability to generate future returns and multi-capital wealth accumulation needs an evidence-based approach. The broader capital approach followed by IR addresses this investor requirement, thus making it a strong candidate for the investor preferred reporting methodology. However, forming estimations about future value creation based on current plans, resources, context and forecasts would require the involvement of technology at a higher level. The IR approach of DIMO facilitates the formation of such investor perspectives. (c) Stakeholder Perspective An integrated report becomes a comprehensive document through which the Board of Directors could communicate to stakeholders as to how they have discharged their stewardship and accountability obligations. The disclosures relating to governance, strategy, capitals, risks, impacts, outcomes, connectivity and responsible behaviour provide information that stakeholders seek to strengthen their trust in the business. Since DIMO is a company that places a high value on its stakeholders, they stand to benefit from such an approach. (d) Stimulus for Long-term Value Creation “Adopting principles underlying IR promotes more holistic, long-term thinking and decision making by organisations, across a comprehensive range of factors material to long-term value creation” (Integrated Thinking: the next step in integrated reporting 2014, pp. 5–8). This is one key reason that any business, including DIMO, should be motivated to adopt IR, as it helps an organisation to be transparent about its future value ability to create value.

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(e) Quasi-Ownership of Capitals and Their Management Many capitals that DIMO relies on to derive competitive advantage are not legally owned by the company. These include human capital, and social and relationship capital. This amounts to quasi-ownership of the capitals, where the legal or moral ownership is by the stakeholder and is available for use as inputs for value creation by DIMO. Therefore, such capitals, though not legally owned by DIMO, need to be nurtured to ensure a supply of the required quantity and quality of inputs. Thus, integrated thinking supported by IR helps the effective management of such capitals.

10.4 Evolution of Corporate Reporting at DIMO 10.4.1 Chronological Presentation of the Evolution The earliest available Annual Report in the company’s archives dates back to 1966, and the following landmarks can be identified in the corporate reporting journey of DIMO (see Table 10.1). Table 10.1 DIMO annual report journey 1966

Oldest annual report available in company archives. 2001 Titled “Directors’ Report and Accounts”

Introduction of a report on environment which became a CSR report the year after

1972

Use of colours in the annual report. Introduction of “Chairman’s Statement”. First use of graphs to present data. First use of photographs in the annual report

2005

The first report titled sustainability report introduced. Prepared base on triple bottom line. GRI guidelines followed

1992

Introduction of managing director’s review of operations, in addition to the chairman’s statement. A discussion on human resources. This could be considered as the beginning of the management discussion and analysis

2006

Third-party assurance obtained for the Sustainability report for the first time. Number of pages reaches 100

1996

Number of pages reaches 50

2007

Published the first GRI index based on GRI G3 guidelines

2000

Introduction of a report corporate governance

2011

Published the first integrated report

Source Author

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10.4.2 Beginning of a Journey DIMO has always sought adoption of best practices in corporate reporting for reasons discussed previously in this chapter. DIMO was an early adopter of practices such as reporting on corporate governance, triple bottom line-based sustainability reporting, adoption of GRI guidelines and obtaining assurance on sustainability reports, to name but a few. IR, when introduced in 2011, presented an opportunity for the company to report on different aspects that helped to create financial value. With the introduction of the notion of “capitals” by the IR Framework, the company obtained an opportunity to present its value in terms of its relationships with its business partners, customers, and community, together with the employees that the leadership dearly valued. Seizing an opportunity for the early adoption of a reporting practice, coupled with the enhanced possibility to demonstrate its value creation ability in the short, medium and long terms, helped the company embark on a journey of adopting IR and initiate its association with the International Integrated Reporting Council (IIRC) as a Pilot Programme Company. DIMO embarked on its IR journey in the year 2011, the year that the IIRC was formed. The first annual report identified and entitled as an integrated annual report, was issued for the financial year ended 31st March 2011. The two-hundred-and-forty-page Annual Integrated Report for the year 2010/11, enumerates eight strategic imperatives and seven capitals. However, the business model, outlining how the group delivers value for financial capital providers and other stakeholders, was unavailable in the first report. The following introductory statement from the Annual Report 2011/12 gives an indication of the company’s thinking at the time the first integrated report was prepared. As the annual report of DIMO (2011) states, This year, we decided to present an integrated annual report. In the past, our sustainability report and the rest of our Annual Report were sharply demarcated. We have structured this Annual Report based on our eight strategic imperatives in an attempt to make ourselves better understood. As much as it is a report about DIMO’s duties of responsible trusteeship, faithful stewardship and uncompromising accountability, it is also a report of DIMO’s drivers of value, or, as we call it, a report of DIMO’s financial capital and intellectual capital.

The reality is that IR has resulted in financial and non-financial performance no longer being separated, and an organisation accepting that one affects the other and vice-versa. The organisation’s strategy is shared by all functions and divisions and decision- making is being carried out with a longer-term view on value creation (King and Atkin 2016, p. 85).

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10.4.3 Association with the International Integrated Reporting Council DIMO was introduced to the IIRC by the then Country Head of the Association for Chartered Certified Accountants (ACCA)—Sri Lanka Branch. Consequently, DIMO became a participant in the Pilot Programme of the IIRC in the year 2011. As a participant, the company obtained an opportunity to participate in the discourse that preceded the publication of the IIRC framework in December 2013. This initiative exposed the company to the IIRC’s thinking and philosophy on integrated thinking and IR and helped DIMO to progress rapidly in its pursuit of corporate reporting. The IIRC, founded in August 2010, enlisted companies around the globe to its Pilot Programme, which officially kicked off in October 2011 at a conference in Rotterdam, Netherlands. DIMO was a founding participant of the Pilot Programme and was represented at the Rotterdam conference. The first Annual Report, identified as an integrated report, was published in May 2011. Therefore, chronologically, DIMO published its first integrated report a few months prior to joining the IIRC Pilot Programme.

10.4.4 Readiness for Integrated Reporting Very often, questions are asked about the changes that were required within the organisation in order for it to embrace IR and to institutionalise it. In order to understand this, it is appropriate to consider the underlying requirements for a successful integrated report. An integrated report is a concise communication of the organisation’s value creation and the ability to do so in future, as indicated by the IIRC. “The primary purpose of an integrated report is to explain to the providers of financial capital how an organisation creates, preserves or erodes value over time” (International Integrated Reporting Council 2021, p. 05). A prerequisite for a successful integrated report is the ability to articulate an entity’s value creation story with clarity. This requires a clear understanding of corporate strategy, capitals, trade-offs, impacts and connectivity between capitals and connectivity between the short, medium and long terms. Thus, demands of an integrated report are primarily related to clarity, articulation, availability of information and data. The need for structures and processes, though important for integrated thinking, could follow. With a stakeholder-centred philosophy and a strategy already in place and the availability of an existing process to provide financial and non-financial data relating to stakeholders, capital and other areas, including governance and sustainability, DIMO was well equipped to commence its IR journey.

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Table 10.2 DIMO’s integrated reporting journey Report period Main features 2010/ 11–2012/13

The report was divided into four sections: introduction, management report, governance report and financials. The report was more silo-based, with basic levels of connectivity. There were very few disclosures regarding the business model and value creation

2013/14

The report focused on value creation. Reporting on the business model was present for the first time

2014/ 15–2017/18

More focus on completeness and content elements. Clarity on how capitals and other different elements of the organisation create value. Introduction of capital and impact reports to the Sri Lankan corporate reporting landscape

2018/ 19–present

Gradually moving out of silo-based reporting to reflect the substance of the business. The focus was on material aspects for value creation. Emphasis on how integrated thinking leads to better value creation The focus was on improving the conciseness of the report

Source Author

10.4.5 The Integrated Reporting Journey of DIMO DIMO’s pioneering effort in IR in Sri Lanka gathered momentum over the years, with many factors, as discussed earlier, providing the reason and motivation for its gradual improvement. It may not be fair to ignore the commitment shown by the successive teams responsible for the report, who also had ample motivation to compile the best possible report, given the important role the report plays with respect to stakeholders and due to the accolades and recognition received from outside and within the organisation. In this context, Table 10.2 presents the highlights of DIMO’s IR journey.

10.4.6 Accolades and Recognitions Along the way, DIMO has received many accolades and recognition in the areas of corporate reporting such as for annual reports, sustainability reporting and IR, as well as for best practices relating to human capital, responsible behaviour and business excellence. Since 2011, when the company produced its first integrated report, the DIMO Annual Report has received over 50 awards in various categories. These include the Overall Winner’s award for the Best Annual Report and for the Best Integrated Report from the ICASL, successive awards such as the Overall Winner of the Best Integrated Report from the Institute of Certified Management Accountants of Sri Lanka and repeated awards such as the Overall Winner of the Best Sustainability Report from the ACCA Sri Lanka.

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These accolades and recognition have positive effects on DIMO and motivate the company towards continuous improvement. Some of these positive effects are enumerated below. (i) The recognition and accolades are indications of the collective intellectual strength of the members of the organisation and their commitment towards excellence. This makes a positive impact on the brand equity of DIMO. (ii) The positive commercial effects are derived from the enhancement of brand equity. (iii) Independent recognition enhances the trust of stakeholders. (iv) Recognition for excellence enhances the employer brand of DIMO. (v) The awards received for reporting enhance the integrity of such reports and the corporate reports of DIMO in general.

10.5 Integrated Thinking—A Prerequisite Translating purpose into action and eventually delivering stakeholder expectations requires a thorough understanding of the elements that facilitate value creation and their connectivity with one another. Action without an understanding of these intricacies may lead to sub-optimisation and compromised productivity. Therefore, as an organisation, “we focus on creating a culture that enables people to pursue their individual objectives and those of the organisation fully aware of the dynamics and connectivity surrounding their specific domains of responsibility” (DIMO PLC 2021, pp. 5–8). The articulation of integrated thinking within DIMO is explained in the following sections.

10.5.1 The Corporate Anatomy A corporate entity is a very complex system featuring resources, forces, drivers, interdependencies, links, dynamics, interactions, cultures and many more facets, operating in an environment where change is a norm. Management of such an entity or a system requires knowledge on the workings of these subsystems and their interplay. Until the emergence of IR ten years ago, it was not common for organisations to institutionalise the management of these subsystems and interplays, although some of these aspects were managed in silos. Management of human resources and relationships with customers are two examples. However, after the advent of IR, businesses have begun to look at these relationships as a capital stock that provides inputs for value creation (Gooneratne 2020). Articulating the workings of a complex organisation is no easy task. Thus, identifying the systems and interplay of many dynamic aspects in an organisation and placing it on paper is a very complex undertaking. In order to do this effectively, a thorough understanding of the organisation and how the company is organised to

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deliver on its purpose is a prerequisite. Therefore, a thorough understanding of the integrated thinking of DIMO was a key requirement in mapping the connectivity between the capitals and the short, medium and long terms.

10.5.2 Role of Connectivity Integrated thinking is a prerequisite for IR, and it is characterised by the trade-offs between capitals and the short, medium and long terms. At the same time, integrated thinking is demonstrated through connectivity between capitals, contents of the report and between the past, present and the future of an organisation. Therefore, connectivity is an essential element in integrated thinking. One would find the concept of integrated thinking to be quite familiar, as many day-to-day decisions are taken based on trade-offs. One simple example is that we set aside a budget every year for training. If an amount is spent on training for a customer service executive, the expectation is that the quality of the human resource would improve, the quality of customer service will improve, increasing the attachment of the customer to the organisation, and the retention of this customer may bring more profits in the short, medium and long terms. Thus, financial capital is traded off in return for the creation of value in human capital and relationship capital. At the same time, a favourable impact on financial capital is expected in the short, medium, and long terms as well. However, given the complexity of DIMO’s corporate anatomy, it is an arduous task to install a decision-making system where triggers of tradeoffs and relevant connectivity are identified in a structured manner. Since DIMO is a group diversified into six segments, it is an extremely complex task to identify material matters and institutionalise them. However, it is imperative that significant advancement is made in this area, and such efforts are already in place. The use of technology and technological advancements would facilitate such efforts.

10.5.3 Institutionalising Integrated Thinking at DIMO This is, perhaps, the single most challenging area for DIMO in integrated thinking. This can be identified as an area that needs significant improvement, particularly in relation to management of trade-offs between the medium and long terms and between non-monetised capitals. DIMO, presently, has many processes that facilitate integrated thinking, though not in a holistic manner, for the reasons described in this chapter. The following can be identified as activities and processes that use the principles of integrated thinking. (i) Corporate planning (ii) Strategic planning for each segment

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(iii) Management systems for quality, environment, social accountability and health and safety (iv) Key performance indicators (v) Standard operating procedures. In addition to the above, trade-off evaluation frameworks are used at DIMO at transactional level. Evaluation of training effectiveness, evaluation of the effectiveness of marketing expenses, and spending on customer relationship management are a few such examples. However, these frameworks, often, assess only the short-term impacts, and long-term impacts are not reliably assessed. Thus, these evaluation frameworks need to be extended to cover the medium and long terms more often. Also, broader impacts should be considered, covering all impacted capitals, without limiting the consideration to financial implications alone. This is an area in which DIMO can improve. The institutionalised practice of integrated thinking requires the establishment of a cause–effect relationship between capitals and the impact of trade-offs in the short, medium and long terms. In order to do such mapping, the effects of every trigger have to be identified and a methodology for such impact identification has to be established. Although such an effort may bring reasonable results at a macro level, an organisation-wide coverage at a micro-level will not be easy and may draw attention away from the management of other crucial matters. However, given the sub-optimisation of resources that lack of integrated thinking can cause, it is prudent to deploy adequate resources to institutionalise integrated thinking and, thereby, make better informed decisions related to trade-offs. DIMO understands the importance of the need to establish frameworks for integrated thinking and has incorporated them in future plans, particularly in technology initiatives.

10.5.4 Management by Outcomes Recognition of the value created via outcomes, as opposed to value creation through outputs, allows an organisation to view itself in a more holistic manner. The advantages associated with visibility and usefulness of a company’s performance across multiple capitals with IR will encourage organisations to institutionalise integrated thinking and make the allocation of capital more efficient. This calls for more technological innovations and knowledge creation in integrated thinking and IR. Ideally, performance reviews at top management level should be governed by outcomes with pay for performance aligned to it. At the same time, unification of internal and external reporting needs to take place, where reporting will be based on multi-capital value creation, bringing the organisation and the stakeholders on to the same platform. DIMO, though it has not reached such a level yet, is destined to reach this landmark.

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10.6 Materiality—A Key Determinant of the Content 10.6.1 The Case for Materiality The guiding principle for materiality, as per the IIRC framework, prescribes that an integrated report should disclose matters that substantively affect an organisation’s ability to create value over the short, medium and long terms. Materiality could have a bearing on an integrated report in two ways. Firstly, it helps in identifying matters that affect value creation materially. By identifying and reporting on material matters, an integrated report allows users to focus on matters that affect their interests, allowing them to make informed decisions. Secondly, it helps in preserving the conciseness of the integrated report. An integrated report giving unnecessary importance to matters not material could mislead its users. On the other hand, lack of conciseness may also affect the visibility of material matters, defeating the purpose of an integrated report.

10.6.2 Definitions of Materiality It is interesting to note the following differences noted by The Corporate Reporting Dialogue (CRD)1 (2016) on different contexts in which materiality is perceived in the world of corporate reporting (see Table 10.3). The CRD convened by the IIRC and eight organisations came up with a Statement of Common Principles of Materiality. The following table is an extract of the said document. From the above analysis, it could be seen that materiality in IR encompasses a broader scope as the other two definitions could be seen as subsets of the IR definition. Materiality in the corporate reporting of DIMO was also confined to what is defined under the IFRS/SLFRS (formerly Sri Lanka Accounting Standards) till the turn of the century, when the scope of materiality broadened to include the definition prescribed by the GRI guidelines. The applicability of the current concept of materiality, encompassing a more holistic scope for a business, came in the year 2010 with the introduction of IR. What is of interest to note is that many material matters for DIMO under sustainability became material matters under IR. This is because stakeholder-related matters encapsulated in sustainability reporting became material matters under IR, as stakeholders are also providers of capital inputs and key players in delivering competitive advantage. The role played by the stakeholders

1

Corporate Reporting Dialogue (CRD) is an initiative convened by IIRC, designed to respond to market calls for greater coherence, consistency and compatibility between corporate reporting frameworks, standards and related requirements. The participants are Climate Disclosure Standards Board, Financial Accounting Standards Board, Global Reporting Initiative, International Accounting Standards Board, International Integrated Reporting Council, International Organization for Standardization, Sustainability Accounting Standards Board and CDP.

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Table 10.3 Different definitions of materiality IR

IFRS

GRI

Providers of financial capital

All existing/potential investors, lenders and other creditors

All stakeholders

Subject matter/ Value creation over report purpose time

Financial performance and position

Significant impacts on; • Economic • Environmental • Social • Governance

Nature of definition

Information is material if omitting it or misstating it could influence decisions that users make based on financial information about a specific reporting entity

Material Aspects are those that reflect the organisation’s significant economic, environmental and social impacts; or that substantively influence the assessments and decisions of stakeholders

Audience

A matter is material if it could substantively affect the organisation’s ability to create value in the short, medium or long terms

Source Corporate Reporting Dialogue (2016, pp. 5–8)

is clearly visible in the value creation model and the corporate strategy of DIMO (DIMO PLC 2021, pp. 18–19).

10.6.3 Materiality Determination As a first step, it is necessary to determine matters that can affect DIMO’s corporate strategy, enterprise governance, performance and prospects. This is identified mainly from discussions at board meetings, meetings of the group management committee, during strategy formulation, through historical experience and during stakeholder interactions. The material determination process for the integrated report will go through a further process where the potential effects of these material matters are evaluated and ranked. This will also help in identifying matters to be reported on and the content of the report. Due consideration is also given to the connectivity of the matters reported on.

10.6.4 Conciseness as an Outcome A sound materiality determination process and an effective application of materiality is a steady stepping-stone to a concise integrated report. Therefore, one can see it as an outcome of a sound materiality determination process and its application. Simultaneously, it is important to seek a balance between conciseness and completeness.

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DIMO, over the years, has been paying attention to the conciseness of its Annual Report and has transformed it from a report based on “include all” thinking to a report that contains only what is relevant and material. An outcome of this process is the reduction in the number of pages of the Annual Report. The first integrated report of DIMO in 2010/11 consisted of 242 pages, whilst the Annual Report of 2020/21 comprised only 156 pages. However, it is important to note that the number of pages is not a measure of conciseness per se, though conciseness usually leads to a lesser number of pages.

10.7 Annual Report of DIMO The annual report of DIMO seeks to satisfy three requirements. Firstly, meeting the regulatory requirements related to annual reports, including the relevant disclosures. Secondly, to provide investors and stakeholders with an account of how directors’ obligations on stewardship, trusteeship and accountability have been discharged. Last, though not the least important, to communicate the value created by an organisation and its ability to create value in future for the providers of financial capital and other stakeholders. For the purpose of this chapter, the focus will be on the last requirement.

10.7.1 Articulation of the DIMO Value Creation Story The preparation of the annual report of DIMO is driven by a core team with the support of other members who provide their inputs in their areas of specialisation. The core team is led by the finance function and receives valuable inputs from members holding responsibilities in the areas of corporate planning, management accounting and sustainability. DIMO follows a four-step process described by the words comprehend, capture, connect and communicate, in compiling the annual report. This means that the team that drives the preparation of the annual report first needs to understand how DIMO creates value. Capturing material matters and making the connection from purpose to value creation and to every element in between is a key task in conceptualising the report. Due consideration and visibility are given to the short, medium and long terms. Finally, the story of value creation is presented in an understandable, creative and concise manner. The first three steps are discussed and understood by the team concurrently. As these aspects are not expected to change dramatically year on year, the discussions most often revolve around any changes that have taken place in the organisation and new points of view presented by the members of the team. With regard to the communication aspect of the report, the DIMO core team takes the responsibility

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for comprehensibility and conciseness and seeks external assistance to present the report in a creative manner.

10.7.2 Linking the Purpose to Value Creation The articulation of the value creation story commences from the stated “purpose” of DIMO. The strategy is formulated to deliver on what is expected by the stated purpose. The value creation model articulates how the strategy is deployed in the given environment to deliver the expected value. The risks, that affect value creation and the outputs and outcomes through which value creation is manifested in the capitals, are also identified. The system of enterprise governance drives conformance and performance. That describes, in a nutshell, DIMO’s manner of articulating the value creation process.

10.7.3 Fuelling Dreams and Aspirations DIMO is dependent on its stakeholders for creating value for its shareholders. Bound by its purpose, the company is committed to delivering value to all its stakeholders, who, in turn, provide the inputs required for value creation. The following diagram is a depiction of how DIMO depends on its stakeholders, and the value that is delivered to them in return (see Fig. 10.4).

10.7.4 Resource-Based Strategy DIMO’s competitive strategy is dependent upon the quality and the quantity of inputs obtained from stakeholders, as it is those factors that provide competitive advantages. The strategy is formulated based on the strengths of these resources. For DIMO, effective management of the quality and quantity of inputs is of paramount importance. The quality and the quantity of capitals are key aspects that need to be considered when designing a competitive strategy. The inputs for a collaboration strategy for DIMO flow from business partner relationships and employees, whereas a differentiation strategy is secured through sources such as technological excellence that is derived from intellectual capital, trained employees, tacit knowledge and technology transfer from business partners. Similarly, other sources of competitive advantage such as aftercare, customer primacy and responsible behaviour are derived from a combination of capitals and values embedded in the company culture.

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Fig. 10.4 Importance of key stakeholders to DIMO and their dependency on DIMO. Source DIMO PLC (2021, p. 16)

10.7.5 Value Creation Model and Other Enablers The value creation model of DIMO explains the intended manner in which the inputs received from capitals, and the competitive strategy leads to outcomes that create value for the company and for its stakeholders. The rest of DIMO’s Annual Report deals with the value created during the period, positioning for present value creation with appropriate strategies, and gearing for future value creation by effective management of strategy, capitals, impacts and risks.

10.7.6 Benefits of Integrated Reporting The benefits of IR come from many fronts. The case for IR presented in a previous paragraph outlines its merits from the point of view of corporates, investors and stakeholders. More research and deployment of technology are bound to enhance the benefits.

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At the same time, the benefits derived will also depend on the level of maturity of the IR process and the level of institutionalisation of integrated thinking in the organisation. It is noteworthy that the benefits derived are available to all stakeholders. By adopting IR, DIMO expects benefits in the areas of resource allocation, decision making, visibility, transparency and control in the medium and long terms. Some benefits of IR can be summarised as follows.

10.7.6.1

Internal Benefits

1. IR speeds up institutionalisation of integrated thinking, leading to better decision making. 2. IR facilitates the management to take a holistic view of the organisation, which enables better planning and resource allocation. 3. IR, together with integrated thinking, promotes efficient management of nonmonetised capitals and enables informed decision making relating to trade-offs. 4. IR enables a focus on non-monetised performance of the business, which affords DIMO accessibility to the required quality and quantity of non-monetised capitals. It also helps in deriving competitive advantage through better capital inputs. 5. IR enhances the focus on the criticality of capitals to supply chain activities and their criticality to different business segments, which help more efficient resource allocation. 6. IR broadens the scope of risk management, resulting in greater stability in creating value in the medium and long terms. 10.7.6.2

External Benefits

1. Shareholders and prospective investors will be more informed when assessing DIMO’s ability to create monetised value in the medium and long terms. 2. Provision of more relevant information enhances the transparency of DIMO and improves its trustworthiness to stakeholders. 3. Focus on non-monetised capitals leads to enhanced brand equity in the minds of stakeholders such as employees, customers and suppliers.

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10.8 Challenges and Remedial Action 10.8.1 Challenges from Many Fronts The multi-capital approach and integrated thinking behind IR are perceived to be beneficial to the organisation’s leadership. However, institutionalising such integrated thinking is a complex task. Transformation to such an approach to management will entail significant changes to current management systems and practices. These include: (a) Installation of an impact/trade-off evaluation system. (b) Performance management systems based on non-monetised aspects of the business that may be difficult to quantify. (c) Pay for performance based on deliverables that may not have a direct impact on current financial performance. (d) Alteration of Enterprise Resource Planning systems to accommodate new requirements. (e) Change in the Board room agenda, currently dominated by compliance and financial performance. (f) Above all, a change in the mind-sets of everyone involved with the company.

10.8.2 Leadership Commitment This challenge is enormous. As a first step, the unwavering commitment of leadership is of paramount importance. This will not be only in terms of their will, but also in terms of resource allocation. Even with the availability of all these, the required technological innovation is significant, especially in the areas of trade-off evaluation and monitoring non-monetised aspects. The only way out of this trap is to take the first step, and then keep on improving. For DIMO, this is the current direction.

10.8.3 The Dilemma DIMO also faced the twin dilemmas that a preparer is often confronted with when preparing a concise report. Firstly, the urge to report all the information that the preparer is in possession of, in the name of transparency. Secondly, the fear of the consequences of leaving out available information in the assessment that leads to awards and accolades. Publishing supplementary information on the corporate website is one way to deal with the former, provided it warrants such disclosure considering its relevance and materiality. With regard to the latter, the DIMO Annual Report preparing team concluded that this is a false presumption and continued on the basis that the conciseness of the Report will not be compromised.

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10.9 Lessons Learned and the Way Forward IR, since the launch of the IIRC framework in 2013, has drawn many organisations towards it and the number is still growing. It has also drawn attention to integrated thinking, with literature being published on this subject as well. However, it appears that what has largely happened to date is only the adoption of a sound concept in corporate reporting, backed by sound principles such as integrated thinking. Perhaps, only a handful of organisations, if any at all, are able to boast of reaching the final destination in IR and reaping all the associated benefits. As for DIMO, it is our belief that a long journey is ahead of us before we are able to look back with a sense of accomplishment. Until then, it is a journey of continuous improvement. Going forward, DIMO will pay special attention to the following areas related to maximising the benefits of integrated thinking and IR. 1. 2. 3. 4. 5.

More visibility on the connectivity between resource allocation and outcomes. Synchronisation of internal reporting and external reporting. Board room agenda to be more “non-monetised capital” focused. Management behaviour to encourage more focus on non-monetised capital. Performance management system to include KPIs relating to non-monetised capitals that link the statement of purpose to value creation. 6. Pay for performance to include value creation via non-monetised capital. Connecting strategy, capitals and other drivers of value for future value creation requires more technological interventions, though the current state of the disclosure may support validation of future cash flows, to some extent. The progress of IR and its use by investors for assessment or validation of future value creation may depend largely on the quality of the reports produced, the advancement of which depends primarily on the usage of technology as well as the creation of new knowledge. As an organisation, DIMO too will be watching the advancements made in technology and new knowledge. It will also look for its own innovations to provide momentum to its own IR journey. Future advancements will count on corporate will and making available the resources required for further development. A deep dive into possible reasons some boardrooms are being filled with financial numbers, predominantly historical, is necessary. So is the need to look at whether the present body of knowledge and the tools available to the board are adequate to deal with the complex nature of the corporate anatomy.

Development of tools to comprehend, capture, connect and communicate value creation would improve the effectiveness of integrated thinking and consequently, IR. Perhaps academic research may help to fulfil this need. “Exponentially growing technology in areas such as the IoT, AI, big data and augmented reality may help formulate these tools at an organisational level” (Gooneratne 2020). Therefore, DIMO appears to have identified the tip of an iceberg that needs further exploration. In conclusion, the capacity of IR to communicate a holistic picture of an organisation and its ability to create value in the short, medium and long terms should be capitalised upon. The capability of IR to improve transparency by presenting a wider

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array of business aspects further improves its credibility as a tool for transparency. The adoption of IR has brought many benefits to the organisation, both internally and externally. However, in order to harness all the intended benefits, DIMO has to overcome many challenges. Further institutionalisation of integrated thinking, advancements in the use of technology to manage trade-offs, and the formation of the correct mind-set, beginning from the Board Room, stand out among them.

References Cooray T, Senaratne S, Gunarathne N, Herath R, Samudrage DN (2022) Adoption of integrated reporting in Sri Lanka: coverage and trend. J Financ Report Account 20(3/4):389–415 Corporate Reporting Dialogue (2016) Statement of common principles of materiality Diesel & Motor Engineering PLC (2011) 2010/11 Annual report of the Diesel & Motor Engineering Diesel & Motor Engineering PLC (2020) 2019/20 Annual report of the Diesel & Motor Engineering PLC Diesel & Motor Engineering PLC (2021) 2020/21 Annual report of the Diesel & Motor Engineering PLC Gunarathne N, Senaratne S (2017) Diffusion of integrated reporting in an emerging South Asian (SAARC) nation. Manag Audit J 32(4/5):524–548 Gunarathne AND, Senaratne S (2018) Country readiness in adopting integrated reporting: a diamond theory approach from an Asian Pacific Economy. In: Lee K, Schaltegger S (eds) Accounting for sustainability: Asia Pacific perspectives. Springer, Netherlands, pp 39–66 Gooneratne S (2020) Global perspectives. International Integrated Reporting Council International Integrated Reporting Council (2021) International Integrated Reporting Council King M, Atkins J (2016) Chief value officer: accountants can save the planet. Greenleaf Publishing, Saltaire, UK

Suresh Gooneratne is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka and The Institute of Certified Management Accountants, Sri Lanka. He holds a Master of Business Administration Degree from the Postgraduate Institute of Management, University of Sri Jayewardenepura, and is an alumnus of KPMG, Sri Lanka. Mr. Gooneratne is a member of the Board of Directors of Diesel & Motor Engineering PLC (DIMO) and serves as its Chief Financial Officer. He is a recipient of Professional Excellence Award from the Institute of Chartered Management Accountants, Sri Lanka. Mr. Gooneratne has been associated with Integrated Reporting since 2011 with his involvement in representing DIMO in the Pilot Program of the International Integrated Reporting Council. He is also a former Alternate Chairman of the Integrated Reporting Council of Sri Lanka.

Chapter 11

The Role of Integrated Thinking and Reporting in the Sustainable Business Journey: A Case Study of Talawakelle Tea Estates PLC Roshan Rajadurai, Senaka Alawattegama, Lakshitha Bandara, and Krishna Ranagala

Abstract This chapter illustrates the role of integrated thinking and reporting in the sustainable business journey of Talawakelle Tea Estates PLC (TTE PLC), one of the regional plantations Companies in Sri Lanka. It provides a business case analysis of the evolution of sustainability practices and the corporate reporting mechanism in TTE PLC. More specifically, this case presents the evolution of the sustainability practices and reporting mechanism of the company, influence of integrated thinking and reporting in the company’s sustainability journey, challenges and remedial action taken during the adaptation process related to integrated reporting, key learning outcomes and outlook on integrated reporting, and key benefits to the business due to the implementation of integrated reporting. In the last two decades, particularly, the corporate reporting model of this company has witnessed one of its most dynamic periods, during which this business model has been reshaped to become more sustainable. Hence, the adoption of integrated reporting is a key milestone for TTE PLC, which has highly influenced the redesigning of its corporate reporting mechanism and reshaped its business model by integrating sustainable value creation to its core business activities. Keywords Business model · Integrated reporting · Integrated thinking · Sustainability · Tea industry R. Rajadurai · S. Alawattegama · L. Bandara · K. Ranagala (B) Talawakelle Tea Estates PLC No 400, Deans Road, Colombo 01000, Sri Lanka e-mail: [email protected] R. Rajadurai e-mail: [email protected] S. Alawattegama e-mail: [email protected] L. Bandara e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_11

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11.1 Introduction The corporate reporting function is one of the most important parts of a business, to which a significant resource allocation is made by every corporate entity. The growing trend towards corporate reporting and its wide range of financial and non-financial information requirements have become an influencing factor for business decisions. According to the dynamic information requirements of internal and external stakeholders, the last two decades saw the introduction of numerous frameworks and guidelines for corporate reporting by many national and international organizations, covering various environmental, social, economic and governance aspects (Malafronte et al. 2020). Integrated reporting (IR) is the holistic reporting approach used for disclosing financial and non-financial information, including sustainability information, in an integrated manner. The International Integrated Reporting Framework (IIRF) enables instant access to concise corporate information for stakeholders (International Integrated Reporting Council 2021). Furthermore, the IIRF is the most efficient framework for providing the required information about the value creation process of a business in a holistic manner, and this helps to enhance the effectiveness of the integrated thinking, decision-making process as well as stakeholder engagement (Hoque 2017). As a holistic approach for corporates, integrated thinking is a key success factor for most organizations to ensure their short, medium and long-term value creation with excellent overall performance. IR is a key driver that connects each sub-operation and supportive operation to lead to a common goal (Moolman et al. 2019). Moreover, IR has important benefits for corporates, such as efficient resource allocation, greater engagement with internal and external stakeholders and a proper risk and opportunity management approach (Hoque 2017). Integrated thinking and reporting practices lead to the integration of sustainability into the core business by creating awareness on sustainability-related risk and its negative impacts. According to a study by Herath et al. (2021), IR and the integrated thinking approach and corporate sustainability practices work towards the same goal of enhancing overall corporate performance sustainably. Influence from top-level decision-makers in the corporate sector is an important driver that will change the behaviour of corporates. To enhance the sustainability business drive, top-level decision-makers must understand the criticality and urgency of a sustainable business approach during implementation. IR enables strong communication with stakeholders and top-level decision-makers regarding sustainability matters and current performance, which is extremely important when making sustainable decisions (Van Zyl 2014). In this context, the objective of this chapter is to provide the reader an understanding of the role of integrated thinking and reporting in the sustainable business journey of Talawakelle Tea Estates (TTE) PLC. TTE PLC is a Regional Plantation Company (RPC), with agriculture and manufacturing operations in 6491.5 ha of land in the central highlands and low-country wet zone, with 15 tea-manufacturing facilities and three mini-hydroplants. Based on a case study of TTE PLC, this

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chapter emphasizes how a sustainable business agenda is benefited by an integrated thinking-related organizational culture and IR practice. Considering the significant business impacts of TTE PLC on the environment and society, a sustainable business approach is a critical requirement for the plantationsbased company for its long-term survival and credible business performance. TTE PLC’s agriculture practices, manufacturing operations and performances are highly sensitive to natural and social factors in the plantations industry. Considering all these facts, the transition to an integrated thinking and reporting framework is a key milestone in the sustainable value creation of the company, including its business planning, decision-making, and the implementation and evaluation of performance in a holistic manner. With an understanding of the relationship between IR and a sustainable business drive, TTE PLC started its IR journey by publishing its first integrated report in 2013. The rest of the sections of the chapter are organized as follows: Section Two provides an overview of the company including its key milestones. Section Three provides a description of the evolution of the sustainability practices and reporting mechanism of the company. Section Four presents a critical analysis of how integrated thinking and reporting influence a company’s sustainability journey. Section Five discusses the various challenges and remedial actions related to IR implementation. Section Six deliberates on the key learning outcomes and the new outlook of the company in its journey towards IR. Finally, Section Seven concludes the chapter.

11.2 Company Overview The agriculture sector contributes 7% to Sri Lanka’s Gross Domestic Product (GDP) and comprises 27% of its employment. The plantation industry is a significant component of and contributor to the Sri Lankan agricultural sector (Central Bank of Sri Lanka 2020). The plantations industry utilizes 338,000 hectares, with 2.8 million people of the country being dependent on this sector. The average export income share from the plantation crop has been 15% during the period 2000 to 2020 (Chandrabose and Ramasamy 2021). The contribution towards the national GDP from the plantation sector is 2.9%, through Tea, Rubber, Coconut and other perennials crops (Central Bank of Sri Lanka 2021). These statistics reveal that the plantation sector in Sri Lanka plays a crucial role in the country’s economy. TTE PLC is a subsidiary of Hayleys PLC, which is Sri Lanka’s most diversified and largest listed business conglomerate in the country. The Hayleys Group accounts for approximately 3.2% of Sri Lanka’s export income, 3.6% of its tea and 3.9% of its rubber production, with business interests in 16 business sectors and global operations spanning five continents and over 86 countries (Hayleys 2021). TTE PLC was incorporated in June 1992, under the Conversion of Public Corporations or Government-Owned Business Undertakings into Public Companies Act No. 23 of 1987 and is governed under the said Act and the Companies Act No. 17 of 1982. The Managing Agent of the company, since its incorporation, has been

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Hayleys Plantation Services (Pvt) Ltd, which is also a subsidiary of the Hayleys Group. TTE PLC has focused on environmental conservation from its early stages, with these efforts quickly reaching global standards. Owning lands that are among the best tea lands in the country, TTE PLC produces high-quality teas from 16 tea gardens situated in the high and low regions of the country. Of these tea gardens, 12 estates are situated within the Nuwara Eliya District, with the rest being situated in Deniyaya and Galle in the South. One of its estates, Mattakelle Estate has remained the top estate in the Western High Grown category for the last decade, while the others, Somerset, Great Western, Bearwell, Holyrood, Dessford and Wattegoda have always been in the reckoning for the top 10. The finest green tea is produced in Radella, while Kiruwanaganga from Deniyaya is the flagship among the low-grown estates. In addition, the Calsay, Clarendon, Logie, Palmerston, Indola and Moragalla Estates contribute to the ranking of TTE PLC as a leading company. TTE PLC has been the top-ranked RPC for more than a decade in western high grown, low grown and overall categories. Furthermore, TTE PLC presently employs 6135 workers with a female representation of 58% within its workforce. Including all these inputs, TTE PLC generates an annual average revenue of USD 21.3 million, greenhouse gas emission 8400 tCO2e, energy intake 181.8 Terajoules, renewable energy generation 221.7 Terajoules, invests USD 0.53 million in social development annually and shares 56% of the total value generated among its employees. The business model of the company depicts the manner in which it creates value. TTE PLC’s business model demonstrates how the organization’s good governance and strategic management are aligned to its vision and mission. It paves the way for core capitals to work in harmony to create value and meet stakeholder expectations. The capital inputs transform through the value creation process into outputs and outcomes. These outcomes are the value drivers of the company that encompass economic, social and environmental aspects from a triple-standpoint. This process is continuous, with transformed capital reassigned to create further value and the impacts managed to ensure greater sustainability.

11.3 The Evolution of Sustainability Practices and Reporting Mechanisms in TTE PLC TTE PLC perceives sustainability as a business drive promoting a strong integration between the environment and social aspects, to ensure that economic value is created for internal and external stakeholders of the organization. Operating ethically and sustainably is not just a responsibility for the company, but is a fundamental enabler of its long-term commercial success as a responsible corporate entity. Sustainability is at the core of the business model for the plantations sector to ensure its long-term survival and profitability. With global and local demands on the corporate sector to be more sustainable, companies are establishing robust and sustainable management systems. As one of the resources-intensive industries, the plantations sector has also

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begun to implement and enhance its sustainable practices as standalone initiatives to emphasize its adaptation to sustainable business norms. With its commitment to the Rainforest Alliance,1 Ethical Tea Partnership,2 Forestry Stewardship3 and other sustainability-related certifications,4 these various schemes and sustainability partnerships supported the company to develop a more holistic approach to sustainability systems management. With sustainability as a core business driver, the plantations sector optimized and systematized its management techniques to ensure long-term survival with a proper integration of its social and environmental aspects. Thus, TTE PLC, as part of the plantations sector, also commenced its system integration in a more sustainable manner with the support of various certification schemes and partnerships. To ensure transparency and fulfil the stakeholder information requirements in financial and non-financial disclosures, the company began its sustainable reporting journey from 1999 onwards, by including certain sustainability-related information within the management discussion and analysis section of its annual report. From 1999 onwards, TTE PLC’s reporting practices gradually evolved into an integrated annual report, which initially included sustainability information according to the comprehensive option of the Global Reporting Initiative (GRI) regulations Furthermore, it became aligned to several national and international corporate reporting standards, while fulfiling stakeholder information, which caused it to be recognized by many awards at national and international level (See Table 11.1). The significant differences in the initial period of the company corporate reporting process can be identified through the analysis of the reported information and sustainability practices of the company. These practices, initially functioning in a standalone manner, were thereafter transformed into a more systematic process by reporting their sustainability according to GRI standards. With the implementation of IR practices, the company’s sustainability initiatives revealed higher levels of integration with the core business function, and the latest report expressed a more holistic picture about the company, which aligns well with the overall sustainability of all social, environmental and economic aspects (See Table 11.1).

1

Rainforest Alliance (RA) is a standard and certification programme for sustainable farming. Ethical Tea Partnership (ETP) is a membership organization working with tea companies, development organizations and governments to improve the lives of tea workers, farmers and their environment. 3 Forestry Stewardship Council (FSC) is an organization to unite citizens, businesses, governments and NGOs under a common goal: protecting healthy, resilient forests. 4 ISO 14001:2015 Environment Management System, ISO 14064-1:2018 GHG Emission Management System & ISO 50001:2018 Energy Management System. 2

CR, MDA, HRP, CG, FA

Extended financial report

CSR and financial CR, report MDA, CSRR, CG, FA

Sustainability and financial report

1999–2005

2006–2009

2010–2012

CR, MDA, SR, CG, FA

Only FA

Financial report

1992–1998

Report content

Report type

Year

• HACCP certification for the first time in the industry • The best energy conservation project—merit award • National safety awards

• Winner of the national productivity award • JESTICA 5S awards

Awards and recognition

(continued)

• Certified under the rainforest alliance (RA) • Ethical tea partnership (ETP) certifications • Won the presidential awards for the best replanting programme among all RPCs

• Commencement of TTE PLC’s export division • The first-ever ISO 22000:2005 food safety implementation of the food safety and management system management system certification in Sri Lanka within the tea factories • National productivity awards • Business diversification through green tea and other crops • Industrial safety award • Investments in three mini hydro plants 2.1 MW to expand the renewable energy commitment

• Implementation of a food hygienic system for tea factories and good agricultural practices for field operations • Switching to bio-renewable bio-mass boilers from fossil fuel (diesel boilers) in all tea factories

• Implementation of the 5S system and a standalone management system for each operation

Significant sustainable initiatives

• Company’s act • Implementation of the home for every plantation worker programme, by adopting a holistic approach to managing • Code of best practice on social capital, including the four focus areas of improving corporate governance the living environment, community capacity building, • Listing rules of CSE health and nutrition, and youth empowerment. expansion • GRI of the tea replanting programme • National Green Reporting System (NGRS)

• Company’s act • Code of best practice on corporate governance • Listing rules of CSE

• Company’s act • Code of best practice on corporate governance • Continuous listing rules of CSE

• Company’s Act

Reporting framework

Table 11.1 Evolution of TTE PLC’s corporate reporting

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Integrated annual report

2013–2021

IR

Report content

• Company’s act • Code of best practice on corporate governance listing rules of colombo stock exchange • GRI • NGRS • IR

Reporting framework • Enhancement of a robust environmental, occupational health and safety management system • Introduction of the key company value drives programme • Establishment of the research and development unit and introduction of a new product range with a minimum environmental footprint • Initiation of the one million tree planting programme • Digitalization of the bottom-to-top performance-monitoring system • Support of the “Sathdiyawara” CSR project • Aligned and enrolled with the United Nations global compact 10 principle and 17 UN SDGs • Completion of planting half a million saplings in the tree planting programme • Optimization of the environment and quality management systems aligned with the ISO 14001/9001:2015 standard • Commission of the first solar rooftop to commit to renewable energy generation • Enrollment and alignment with the United Nations women empowerment principle • Implementation of a robust climate action strategic plan with compressive greenhouse gas emission inventory measures • Commissioning of a second solar rooftop • Implementation of the future navigator programme to ensure that overall initiatives align, and are integrated with sustainability value creation processes • Commencement of a waste to energy and value-added product project • Sri Lanka’s first organization and the world’s first plantations company to commit to the science based targets initiative

Significant sustainable initiatives

• UTZ Sustainability farming certification • Overall winner of the national business excellence awards including the overall silver awards for best environment and social category • CA sector winner of the CA Annual Report awards • Merit awards for the CMA best integrated report • Winner of the presidential awards and green awards • Winner of social dialogue and workplace cooperation awards • Ceylon specialty estate tea of the year • Certified under the ISO 14001: 2015 and ISO 9001:2015 certifications as the first plantations company • Winner of the national HR excellence awards • Best presented annual report awards and the SAARC anniversary awards • Winner of the Asia best integrated report awards, the runner-up of the ACCA Sri Lanka sustainability reporting awards • Best green reporter of the year • Best energy efficiency awards national cleaner production awards • Winner of the green world awards • Winner of world’s best sustainability report design in the hallbars sustainability report awards • Certified under ISO 14064-1:2018 and ISO 50001:2018 • 4th position in the most awarded company and the most respected entity in the plantation sector Sri Lanka (LMD)

Awards and recognition

FA Financial Accounts, CR Chairman’s Review, MDA Management Discussion and Analysis, HRP Human Resource and People, CG Corporate Governance, CSRR Corporate, Social Responsibility Report, SR Sustainability Report, IR Integrated Report

Report type

Year

Table 11.1 (continued)

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11.4 Role of Integrated Thinking and Reporting in TTE’s Sustainability Journey The development of integrated thinking is the ultimate purpose of IR (Haller and Staden 2014; Moolman et al., 2019). IR drives integrated thinking within an organization, which is very important when attempting to manage corporate actions to achieve short-term and mid-term goals while driving the company’s vision and mission (Atkins and Maroun 2015, as cited in Moolman et al. 2019). This case study emphasizes that alignment with IIRF and integrated thinking are crucial to realizing a company’s vision and mission in the long term, while, at the same time, achieving mid-term and short-term company goals. The management of TTE PLC took a decision in 2013 to transit to IR and align its annual report with IIRF requirements. Simultaneously, TTE PLC’s corporate sustainability strategy transited to a continuous phase of development. TTE PLC published its first Integrated Annual Report in 2013 and seventh Integrated Annual Report in 2021. These seven reports are a testament to the company’s sustainability journey, and its performance is highly responsive to the links between the departments and operations of the company. The higher integration of company functions has increased its sustainability performance when compared to the phase of lower integration of company functions, which latter had resulted in an average sustainable performance. This case study reinforces the fact that integrated thinking is the ultimate purpose of IR practice. The study also illustrates that the level of operational integration and the depth of integrated thinking associate directly with a company’s overall performance. TTE PLC commenced its IR journey in 2013, when it published its first integrated report by expanding on the previous sustainability report that was prepared in accordance with the GRI Guidelines. The transition to the IIRF standards was a challenging task for TTE PLC, as at that time, the company was producing a sustainability report according to GRI Guidelines. The transition to and creation of a collaboration between SR and IR was one of the most arduous tasks for the company due to the large number of material topics. IR is a process of communicating the whole value creation narrative within an annual integrated report, disclosing corporate strategy, governance, performance, and prospects in the context of the company’s external environment, which creates value over the short, medium and long terms (Brady and Baraka 2013). IR was also one of the important change agents in the management model of the company. Developing integrated thinking, creating integrated thinking-based decision-making processes, and generating sustainable value through the proper integration of the six capitals were the crucial tasks in this transition (Gunarathne and Senaratne 2017). Thus, the IIRF guiding principles were a key tool that supplemented this transition. TTE PLC’s Annual IR Report provides general directions that disclose its strategic focus and future orientation, while capturing the synergies between all reporting information to emphasize the holistic picture of the company, including its nature and the quality of its stakeholder relationships. Reporting on materiality is another important guideline related to IR, where resource allocation

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is done for the most material areas, and these are reported. Adaptation to the IIRF guiding principle of conciseness was the most challenging task during this transition process, where a detailed disclosure was maintained according to GRI Guidelines. The company has also to consider fulfiling both requirements of providing information in the necessary depth and maintaining conciseness in the report. Another challenge in maintaining reliability and completeness of information as per the IIRF guiding principles is providing the real picture of the company, including both negative and positive outcomes. Maintaining consistency and comparability of TTE PLC’s integrated report was entrusted to the internal procedure of IR to ensure this important guiding principle. Accordingly, these guiding principles were adopted by TTE PLC’s corporate reporting function and a management approach was also adopted to ensure the two-way function of IRwhich is to “Say What You Do & Do What You Say”. According to this perception, the company ensured its transparency and strong sustainable value creation process through its integrated report in a reliable and balanced manner. This justified the transition to IR by TTE PLC, which comprised two main tasks that had to be carried out by the company: (1) Adopting an integrated thinking culture and (2) disclosing detailed information in an integrated manner to provide a holistic picture of the company. The transition to a management approach involving integrated thinking was a key milestone achieved by TTE PLC, one that generated numerous benefits. Improving the effectiveness of management decisions, was a key benefit of the adaptation to IR due to its resulting in improved collective decision-making and success in planned action with the strong engagement of various teams. Enhancing business focus is also a considerable advantage of IR, since it is a principle-based approach, which supports the maintenance of clarity of business matters and business priorities in an organized manner. The improvements showcased by the company’s enhanced corporate reputation that reflected better stakeholder relationships through a concise and holistic information tool, the integrated report, exemplifies the connection TTE PLC has with its external stakeholders. The improvement of reporting efficiency is another important advantage, which enhances the convenience of report users while facilitating the report preparation team to fulfil the requirements of applicable reporting standards, regulations and stakeholders. Moreover, these stakeholders can access the relevant information from a single document. Therefore, the IR approach helps to enhance business performance while providing the right and requisite information available for cost-effective management decisions. IR also increases the level of employee engagement while developing a strong connectivity among various teams in the company. As stated by Kaya et al., (2016), IR drives a business to incorporate sustainable value creation across all operations in the short, medium and long terms. Successful communication enables strong stakeholder engagement and customer loyalty. IR also strongly supports the interlinking of financial and non-financial performance to provide a holistic picture of decision-making across all levels, while creating an integrated thinking culture as the ultimate achievement (Ewings 2013 as cited in Kaya et al. 2016 Marianne 2013 as cited in Kaya et al. 2016). The overall performance of TTE PLC was impacted positively and significantly by IR, and the resultant integrated

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thinking culture of the company drove sustainable value creation which directly impacted every level of management. Against the backdrop of various crises in the corporate sector, and failures in the sustainable development of economic, social and environmental aspects, IR is a successful way to incorporate healthy economic practices, ethical social relationships and a minimum environmental footprint. TTE PLC is continually generating and growing more sustainable values in all aspect of sustainability, while maintaining healthy economic results, ethical social practices and being more environmentally friendly through the adaptation of IR. Moreover, IR reporting has become the backbone of effective communication of the credible achievements of the company to its stakeholders, which is crucial to build strong stakeholder engagement, and thereby obtain a competitive advantage.

11.5 Challenges and Remedial Action Related to the Adaptation to IR The challenges faced by TTE PLC in its IR journey were many fold. They include implementing an integrated thinking culture, limited awareness and technical capability of the internal team engaged in IR and minimal stakeholder engagement. The following paragraphs explain these challenges in detail, as well as the remedial action taken to address them. “Some organizations take time to implement integrated thinking internally, before preparing their first integrated report” (Chen and Perrin 2017, p. 11). Thus, implementing an integrated thinking culture was the most critical challenge for TTE PLC. The establishment of an integrated thinking culture is required to build a strong interconnection between all departments of the company (Mauro et al. 2020). To improve the integrated thinking culture of the company, TTE PLC conducted a brainstorming and awareness session for all operational-level stakeholders. In addition to stakeholder consultations, the company engaged with different levels of internal stakeholder teams. Through this awareness building, TTE PLC developed a disclosure matrix focusing on the environmental, social and economic aspects of IR. This matrix covers all other frameworks of GRI, the United Nations 17 SDGs, the ten United Nations Global Compact (UNGC) principles, the United Nations Women Empowerment (UNWP) principles, ISO 26000, the National Green Reporting System (NGRS), and all relevant regulatory standards in Sri Lanka. This matrix was extremely useful for avoiding information redundancy; and for improving clarity and completeness in a balanced manner to achieve connectivity and develop a holistic picture of the company. Moreover, the integration of already established sustainability practices with the core business model was another challenging exercise. Since it is a plantations company, TTE PLC has a wider business model and operational scope than many other companies, with a higher stakeholder involvement. This is a very challenging

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situation to meet when attempting to institute an integrated thinking culture and develop a high-quality integrated report. To overcome this challenge, TTE PLC developed a procedure for the bottom-up approach called “Material Assessment”, which was completed during the initial period of every reporting cycle. According to the topic-specific disclosures of the GRI standard, 27 out of 33 standards are high- and medium-level material topics, which are considered for reporting. This is another challenging fact, since the completeness and conciseness of the report have to be maintained simultaneously. As a solution, a robust materiality assessment would help filter out non-material items. TTE PLC uses a navigated template for its integrated report with cross-references, smart graphics, tables and figures to maintain the conciseness and completeness of the report, while fulfiling all necessary information required by the various key stakeholders. Furthermore, certain supporting information within the report has been transferred to the annexures, when they have not been disclosed within the main report. Ensuring reliability and completeness by avoiding biased information and material errors are a critical requirement of IR (Brady and Baraka 2013). This is one of the challenges when attempting to achieve a high-quality IR. TTE PLC established several internal procedures to regularize the disclosure and disclosure selection process, for example, the procedures when identifying the “Key Stakeholders”, when conducting “Material Assessments”, when identifying and assessing “Risks and Opportunities” to formulate corporate strategies, together with the “Balanced Scorecard-Based Management Approach”. These internal controls drive the whole IR process to ensure greater reliability and completeness. Maintaining consistency of the reporting information is crucial to enable an effective comparability though IR (Brady and Baraka 2013). The initial phase of the IR transition process proved to be a complex exercise when preparing the TTE PLC report. However, the establishment of internal controls with well-defined KPIs for each type of capital—financial, manufacturing, intellectual, relationship, social and human, and natural, assisted in overcoming this challenge. TTE PLC identified its KPIs through a comprehensive survey of existing reporting best practices. Thereafter, normalizing these KPIs according to industry norms and aligning them with regulatory requirements was the next step. This evaluation helped select the most important and relevant KPIs to report the company’s performance in an effective and comprehensive manner, while covering the information required by all key stakeholders. In line with these measures, TTE PLC was able to overcome challenges they encountered in their IR journey. Thus, TTE PLC optimized its management approach to ensure sustainable value creation through strategic-level management implications.

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11.6 Key Learning Outcomes and Outlook Related to IR in TTE PLC The following paragraphs explain in detail key learning points of the IR journey of the company and its future outlook. Throughout the TTE PLC IR journey, there are significant key learning outcomes to be highlighted. The adoption of IR enables a strong connectivity among all teams across the company. This forms a supportive bridge for the transformation from conventional value creation to a sustainable value creation model, which is essential in the modern corporate era, especially when facing dynamic challenges. A holistic picture of the business is a key requirement for internal and external stakeholders, and decision-makers of the company. IR was the key success driver that enabled the creation of this holistic picture by providing clear visibility across business operations to explicate the manner in which value creation takes root. An enhanced engagement with senior management and a clear focus on long-term sustainability is another key achievement and learning outcome of the IR journey of the company. Utilizing the holistic picture of the company, decision-makers at all levels could engage in the sustainable value creation process more efficiently with proper integration of all components of the business model. A better explanation and holistic picture also helps to amplify the company’s corporate image due to the availability of a strong, sustainable value creation process, and a clear expression of it. Creating value for stakeholders is the ultimate objective of this IR process, while developing an integrated thinking-oriented culture within the organization. Realizing the optimal manner in which value is created for stakeholders is another important key learning. Adapting to IR practices and a new integrated thinking culture are challenging transition for any organization, especially for larger and publicly listed companies. A larger numbers of stakeholders and a wider scope of business means that this transition becomes more challenging. However, the transition to better corporate reporting practices with higher levels of transparency will become mandatory for all organizations in the near future, and therefore, TTE PLC is moving in the right direction. Due to the high demand for more sustainable value creation in the corporate sector by investors and other stakeholders, most stock exchanges are now aggressively promoting the environmental, social, governance reporting practice, and some stock exchanges have even implemented this as a mandatory requirement of the environmental, social, governance reporting practice. Therefore, better environmental, social, governance reporting will be the only choice for an organization to survive in future. Therefore, IR provides a clear pathway for the best environmental, social, governance and other non-financial reporting in a very efficient manner. After completing a few cycles of IR, the actions which do not focus on sustainable value creation are clearly emphasized and remedial action can be taken to optimize sustainable value creation. Through this journey, any organization will be capable of improving its value creation practices with efficient resource allocation in a sustainable manner. IR provides a holistic business picture, and the TTE PLC case study emphasizes how an IR process influences the transition of a company

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towards a business model that is more holistic to ensure sustainable value creation with more efficient resource allocation.

11.7 Conclusion “IR is now established not only as a form of valuable corporate reporting, but also as an approach to sound business management” (Chen and Perrin 2017). TTE PLC’s core business model is being shaped into a more sustainable one through its sustainability journey using all-important learnings and external/internal influence. IR acted as the moderator that helped TTE PLC rethink its approach to a more sustainable one. TTE PLC took policy level decision to adapt to IR-based corporate reporting practices by identifying the future trends of corporate reporting and business value creation. The corporate reporting policy of a company ensures the continuous improvement of reporting and transparency, while improving sustainable value creation and business integration as well. Moreover, TTE PLC’s corporate reporting journey is shaped by integrating sustainable value creation into the core business model of the company. Therefore, continual improvement of reporting practices aligning with IIRF and other relevant standards is crucial to produce valuable reports for stakeholders. Implementing and maintaining a systematic management approach involving all aspects of the business is also a key concern of a responsible corporate entity. TTE PLC strongly believes that economic sustainability cannot exist without social concern, and social sustainability cannot exist without environmental well-being. Therefore, TTE PLC’s effort is to ensure the equitable enforcement of all three pillars of a sustainable business. In conclusion, it must be mentioned that IR plays a role which goes far beyond a mere reporting tool for the organization; it is also about management principles which result in integrated thinking for the company. These management principles helped shape TTE PLC’s sustainable value creation through short, medium and long-term strategies.

References Brady C, Baraka DC (2013) Integrated reporting. Encyclopedia of corporate social responsibility Central Bank of Sri Lanka (2020) Central Bank Annual Report Central Bank of Sri Lanka (2021) Central Bank Annual Report Chandrabose AS, Ramasamy R (2021) Plantation system in transition: a study on changing patterns of land, production and employment in the tea plantation sector of Sri Lanka. Vistas J 14(2) Chen YP, Perrin S (2017) Insights into integrated reporting. Association of chartered certified accountants Gunarathne N, Senaratne S (2017) Diffusion of integrated reporting in an emerging South Asian (SAARC) nation. Manag Audit J 32(4/5):524–548 Hayleys PLC (2021) Hayleys PLC annual report 2020/21 Herath R, Senaratne S, Gunarathne N (2021) Integrated thinking, orchestration of the six capitals and value creation. Meditari Accountancy Res 29(4):873–907

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Hoque ME (2017) Why company should adopt integrated reporting? Int J Econ Financ Issues 7(1):241–248 International Integrated Reporting Council (2021) < IR > Framework about the IIRC, (January), 58. Available Via: https://integratedreporting.org/wp-content/uploads/2021/01/InternationalIn tegratedReportingFramework.pdf Kaya CT, Ergude AE, Sayar AZ (2016) Essence of integrated reporting: a holistic framework for sustainability and value creation. Int J Acad Res Acc, Finance Manage Sci 6(1):29–34 Malafronte I, Pereira J, Busco C (2020) The role of corporate culture in the choice of integrated reporting. CIMA Res Executive Summary 16 Mauro SG, Cinquini L, Simonini E, Tenucci A (2020) Moving from social and sustainability reporting to integrated reporting: exploring the potential of Italian public-funded universities reports. Sustainability (switzerland) 12(8):31–72 Moolman J, Oberholzer M, Steyn M (2019) The effect of integrated reporting on integrated thinking between risk, opportunity and strategy and the disclosure of risks and opportunities. South Afr Bus Rev 20(1):600–627 Van Zyl AS (2014) Sustainability and integrated reporting in the South African corporate sector. J Sustain Manage (JSM) 1(1):19–42

Roshan Rajadurai is an accomplished professional holding a B.Sc Honours in Plantation Management, an M.Sc. in Organizational Behaviour (OB), an MBA and an M.Sc. in Agriculture and Plantation Crops from the prestigious Post Graduate Institute of Agriculture, University of Peradeniya. With a Ph.D. in Management and a D.Sc. in Agriculture, he brings a wealth of knowledge to his current role as the Managing Director of the Hayleys Plantations sector. Boasting an extensive 40 years of experience in the plantation sector, he has made significant contributions throughout his career. Notably, he has held key positions such as Chairman of the Planters’ Association of Ceylon and Board Member of various prominent organizations, including the Sri Lanka Tea Board, Tea Research Institute, Rubber Research Board, Tea Small Holdings Development Authority and the Tea Council of Sri Lanka. Senaka Alawattegama is a highly experienced professional with an impressive 37-year tenure in the Plantation Sector. Throughout his journey, he has held several notable positions, including Group Manager, Visiting Agent, Deputy General Manager, Senior Regional General Manager and General Manager—Plantations. In February 2020, he assumed the role of Director/CEO after serving as the Director—Plantations. His educational background includes an MBA from the London Metropolitan University, UK. He actively contributes to the industry in various leadership capacities. He holds the esteemed position of Chairman in the Planters’ Association of Ceylon and serves as the Deputy Chairman of the Colombo Tea Traders Association. Additionally, he is a Board Member of the Sri Lanka Tea Board and the Rubber Research Institute. Furthermore, he is a valued Committee Member of the Estate Staffs’ Provident Society and a member of the Ceylon Tea Road Map 2030 committee. Lakshitha Bandara is a finance professional with 15 years of experience spanning across the fields of Auditing, Hotel Management, Plantation Industry and Construction Industry. His expertise covers a diverse range of sectors, enabling him to contribute effectively in various domains. Throughout his career, he has demonstrated exceptional skills in overseeing the finance department functions. His responsibilities have encompassed a wide array of areas, including Accounts Management, Treasury Operations, Taxation, Group Reporting, Corporate ReportingSustainability Reporting, as well as Systems Development. Furthermore, he has served as a Project Manager for the implementation of SAP/S4-HANA, showcasing his proficiency in managing complex technology projects.

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Krishna Ranagala is currently serving as the Deputy General Manager—Sustainability and Quality Systems Development at Talawakelle Tea Estates PLC. In this role, he oversees and manages sustainability and related functions for a portfolio of 16 plantation estates and 15 tea factories. He holds an impressive educational background, including an M.Sc. in Environmental Science from the Open University of Sri Lanka, a Masters of Agri-Enterprises and Technology Management from the Wayamba University of Sri Lanka and a B.Sc. EcoBusiness Management Special Degree from the Sabaragamuwa University of Sri Lanka. Additionally, he is currently pursuing an M.Sc. in Energy for Circular Economy, a programme jointly offered by The Open UniversityUniversity of Moratuwa, University of Peradeniya, University of Ruhuna, Sri Lanka and Royal Institute of Technology, Sweden; CentraleSupelec, France; and University of Twente, Netherlands.

Chapter 12

The Aitken Spence Approach to Integrated Reporting Yasangi Muditha Randeni and Rohan Fernando

Abstract Aitken Spence is a diversified blue-chip conglomerate in Sri Lanka and a reputed leader in corporate sustainability. This chapter provides a closer look at the journey of Aitken Spence from sustainability reporting (SR) to integrated reporting. The company embraced a strategic and systemic approach early on to manage its environmental, social and economic impacts and to create and retain sustainable value for all its stakeholders through measurable, proactive efforts implemented to monitor the trade-off of capitals. These efforts include monitoring, measuring and disclosing information about the company’s non-financial performance in the company’s annual report. The company has established frameworks to disclose how different capitals are used in these efforts, as well as to highlight their performance against targets. From the outset, the company benchmarked these efforts to the Global Reporting Initiative (GRI)’s reporting framework and incorporated non-financial information into the company’s financial reports, without publishing a separate report for sustainability information. With the introduction of integrated reporting guidelines in 2010 by the International Integrated Reporting Council (IIRC), Aitken Spence commenced its journey towards aligning the company’s annual reports to integrated reports in the 2012/2013 financial year, making it one of the first companies in Sri Lanka to make a shift towards integrated reporting. This chapter presents an overview of how integrated reporting has helped the company to demonstrate the use of available capitals in business operations to manage impacts while creating and retaining value. Keywords Integrated reporting · Sustainability · Sustainability reporting · Sustainable value creation

Y. M. Randeni (B) · R. Fernando Aitken Spence PLC, 315, Vauxhall Street, Colombo 00200, Sri Lanka e-mail: [email protected] R. Fernando e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_12

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12.1 Introduction Aitken Spence PLC is a business conglomerate with a history spanning over 150 years. The company has operations in 16 diverse industries, across eight countries, with a workforce of over 12,000 employees. It is a well-known, diversified holding company in Sri Lanka with pioneering ventures in hotels, destination management, maritime, freight forwarding, integrated logistics solutions, power generation, insurance, printing and packaging, plantations, apparel and other services. With a legacy that spans over a century, Aitken Spence is a company led with bold decisions, robust strategies, and a commitment to creating sustainable value. For example, when the tourism industry was experiencing a downturn due to the civil war in Sri Lanka, Aitken Spence made a bold decision to venture into resort management operations in the Maldives, thus becoming the first Sri Lankan resort operator to do so. Aitken Spence was also the first Sri Lankan company to enter into a public–private partnership overseas, with the company’s entry into the South Pacific for port management operations (Aitken Spence 2021). Furthermore, in the early 1990s, Aitken Spence endeavoured to build a luxury hotel in Dambulla, in the heart of the cultural triangle of the country. The location was also an ecosystem rich in biodiversity. The company faced protests from the community and prominent public figures with regard to the construction of this hotel. While some of this opposition stemmed from political influence, there were also genuine concerns about the environmental and social degradation that may result from the presumed consequences of a luxury hotel being built within a culturally and environmentally sensitive ecosystem (Whittaker 2013). In this case, the company had two options. One option was easier: to shift the location of the hotel elsewhere. The second option was far more complex but offered a possibility to create sustainable value for all stakeholders. The company’s response was to engage with the community to understand their concerns and to find solutions for those concerns in the design of the hotel. The company was transparent about their plans and stayed committed to design the hotel in such a way that protected and enriched the environment (Whittaker 2013). The company also rolled out policies to prioritise economic development and social sustainability for the community. What resulted was a best practice that has inspired many across the world, as illustrated below (see Illustration 12.1). Illustration 12.1 Heritance Kandalama success story. “In response, the resort developers embarked on sustained and ongoing environmental, social and community development programmes to preserve the physical environment, benefiting the surrounding communities and involving local residents in the operations of the resort. The resort, Heritance Kandalama, went on to receive many international awards for environmental management and social and community development. It was the first Asian hotel to receive the Green Globe 21 certification in 1999. The resort also raised the profile of its parent company, ASHH (Aitken Spence Hotel Holdings PLC), as one of the pioneers of sustainable tourism in Asia..” Geok and Buche (2008, October 23)

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Fig. 12.1 Heritance Kandalama hotel was designed to blend into nature

Heritance Kandalama is the first Leadership in Energy and Environmental Design (LEED) certified hotel in the world, and the first building outside the USA to embrace this framework of sustainable architecture (USGBC and Jacques 2015). At a time when no other peer examples were available in our region, investing in such a framework, and building a hotel of this calibre was nothing short of a gamble. The hotel was built with minimal excavation on the rock face and elevated to protect water streams that enrich over 30 water systems downstream (see Fig. 12.1). The story did not end there; the company purchased 198 acres of land adjacent to the hotel to be maintained in its pristine condition to protect the inherent ecosystems surrounding the hotel. Combined with the 58 acres of forest cover protected inside the hotel premises, Heritance Kandalama preserves ecosystems that are home to more than 19 species of reptiles and amphibians, 128 species of native flora, 64 species of butterflies and dragonflies and 183 species of birds (Aitken Spence 2021). Heritance Kandalama exemplified that responsible use of resources can result in sustainable creation and retention of value. The lessons learnt from Heritance Kandalama were captured in the Group’s integrated sustainability policy framework and cascaded across the entire group of companies. Now, the company is renowned for its efforts to promote corporate sustainability. Since it is a public listed company, Aitken Spence also produces annual financial reports benchmarked to local and global reporting standards. The company introduced SR to its annual reports according to the Global Reporting Initiative (GRI) framework in 2008, with disclosures about its social and environmental (nonfinancial) performance for the benefit of shareholders and other key stakeholders. Starting from sustainability reporting, the company has evolved its reporting practices to IR and published its 10th consecutive integrated report in 2021 (Annual Report 2020–2021). The company was among the first companies in Sri Lanka to adopt SR and IR. Aitken Spence’s award-winning sustainability strategy and reporting practices were developed in-house, purely with internal capacity. The diversity of

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the company’s operations and home-grown solutions to address environmental, social and economic priorities demonstrates many opportunities to study integrated, sustainability reporting. In this context, this chapter aims to present Aitken Spence’s sustainability strategy and its journey in sustainability reporting. The rest of the chapter is structured as follows: Section Two presents the strategic approach to sustainability adopted by the company. Section Three describes the SR journey of the company, followed by the manner in which it transitioned to IR. The next section discusses the challenges to IR and the remedial actions taken. The last section concludes the chapter by setting down the lessons learnt.

12.2 A Strategic Approach to Sustainability Aitken Spence has operations spanning Asia, South Africa and the South Pacific. Consisting of a workforce of well over 12,000 employees spread over 16 industries located in eight countries, with a plethora of business activities, Aitken Spence has the potential to create social, environmental and economic value as well as adverse impacts in its countries of operation. The company has understood this and worked proactively to identify social, environmental and economic priorities commensurate with the nature and scale of the potential impacts of its operations. An overview of Aitken Spence’s scale of operations and the nature of the businesses that the company operates in are provided in Table 12.1. It also provides a context for identifying the said primacies through a summary of stakeholder concerns and the company’s social, environmental and economic priorities. Accordingly, the company identified material topics specific to each sector and subsidiary that are commensurate with the nature and scale of its environmental, social and economic impacts. This is illustrated in Table 12.2. This process was developed over time by the Sustainability Team of Aitken Spence and has gradually evolved over the years to be what it is now, as is evident in Fig. 12.2.

12.2.1 The Aitken Spence Approach to Sustainability Aitken Spence finds inspiration from the definition of the Brundtland Report on sustainable development stated above, and considers corporate sustainability to be a proactive approach to ensuring long-term organisational viability, profitability and integrity (Aitken Spence 2012). A proactive approach requires strategic and systemic procedures to identify and manage social, environmental and economic priorities. The company believes that it is important to ‘Build Better Before’ instead of trying to build back from social or environmental damage caused by business operations. The Heritance Kandalama hotel is perhaps the best example that illustrates the fact that a

Tourism

Hospitality management – 11 properties in Sri Lanka – 5 properties in the Maldives – 4 properties in Oman – 1 property in India Destination management – Fleet of owned and managed vehicles – Network of more than 200 global agents represented in Sri Lanka Airline general sales agents – Global partnerships – Network of suppliers and service providers

Company’s main sectors

Key industries Maritime & port services freight Forwarding & courier Airline GSA (Cargo) Education Integrated logistics – 46 acres of logistics service capacity – 368,172 sq. ft. warehouse capacity – Fleet of owned and managed vehicles – State-of-the-art facilities and mobile storage solutions – Operating seven global ports

Maritime, Freight, Logistics

Table 12.1 Summary of the company—nature and scale of operations

Apparel manufacture – Apparel manufacturing for global brands – State-of-the-art manufacturing facilities Plantations – 13 estates in up, mid and low country regions – Over 8000 ha of estates surveyed for biodiversity Power generation – 100 MW thermal energy – 15.5 MW renewable energy generation (wind, waste to energy and hydro) Printing and packaging – LEED certified, carbon neutral, printing facility

Strategic investments

(continued)

Elevator agency – Sole distributor for OTIS elevators in Sri Lanka and Maldives Property management – Owning and – managing 195,784 sq ft. of commercial space Insurance – Agents for Lloyd’s of London since 1876 Money transfer services – Principal agent in Sri Lanka for western union money transfer services with ~50% market share

Services

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Operating environment and context for environmental and social impacts (overview of the assessment from the 2020-2021 financial year. Source: page 66, annual report of 2020–2021)

Company’s main sectors

Tourism

Table 12.1 (continued) Maritime, Freight, Logistics

Strategic investments

Services

(continued)

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Tourism

Partners and investors Employees Customers Community Government Regulators Shareholders

Suppliers/Service providers Financial Institutions Banks Agents Industrial, trade and professional associations Social environmental interest groups

Company’s main sectors

Key stakeholdershighest priority: (i.e. highest potential to influence decisions of the organisation)

Other key stakeholders: (i.e. stakeholders whose input adds value to the operation)

Table 12.1 (continued)

Financial Institutions Banks Industrial, trade and professional associations Community Social environmental interest groups

Maritime, Freight, Logistics

Customers Financial Institutions Banks Industrial, trade and professional associations Social environmental interest groups

Investors Employees and the community Government Partners, buyers and agents Suppliers/service providers Regulators Shareholders

Strategic investments

Suppliers/service providers Financial Institutions Banks Industrial, trade and professional associations Government Community

Partners Investors Employees Customers Shareholders Regulators

Services

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Table 12.2 Summary of material topics prioritised and efforts to manage priorities Company’s main sectors

Tourism

Economic priorities

Economic performance Market presence Indirect economic impacts Procurement practices Anti-corruption Anti-competitive behaviour

Maritime, Freight, Logistics

Strategic investments

Environmental Energy priorities Water Biodiversity Emissions Effluents & waste Environmental compliance Supplier environmental assessment Social priorities

Labour practices & decent work Employment opportunities Labour management relations Occupational health & safety Training & education Diversity & equal opportunity Non-discrimination Human rights at the workplace Security practices Human rights assessment Local communities Supplier social assessment Customer health & safety Marketing & labelling Customer privacy Socioeconomic compliance

Services

Economic performance Market presence Indirect economic impacts Anti-corruption Anti-competitive behaviour Energy Water Emissions Effluents & waste Environmental compliance Labour practices & decent work Employment opportunities Labour management relations Occupational health & safety Training & education Diversity & equal opportunity Non-discrimination Human rights at the workplace Security practices Human rights assessment Supplier social assessment Customer health & safety Marketing & labelling Customer privacy (continued)

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Table 12.2 (continued) Company’s main sectors

Tourism

Maritime, Freight, Logistics

Strategic investments

Services

Management systems standards maintained for social and environmental priorities

ISO 22000 (food safety) Travel life certified operations (social and environmental governance) ISO 9001 (quality) ISO 50001 (energy) management ISO 14001 (environmental impact control)

ISO 9001 (quality) ISO 14001 (environmental impact control) ISO 45001 (occupational health and safety)

ISO 22000 (food safety) ISO 9001 (quality) ISO 14001 (environmental impact control) Rainforest Alliance certification (social and environmental governance) WRAP and Compliance + (responsible manufacturing)

ISO 9001 (quality) ISO 14001 (environmental impact control)

Applicable SDGs

4–Quality education 5–Gender equality 8–Decent work and economic growth 9–Industry, innovation and infrastructure 12–Responsible consumption and production 13–Climate action 14–Life below water 15–Life on land

4–Quality education 8–Decent work and economic growth 9–Industry, innovation and infrastructure 12–Responsible consumption and production 13–Climate action 14–Life below water

4–Quality education 5–Gender equality 6–Clean water and sanitation 7–Affordable and clean energy 8–Decent work and economic growth 9–Industry, innovation and infrastructure 12–Responsible consumption and production 13–Climate action 15–Life on land

4–Quality education 6–Clean water and sanitation 8–Decent work and economic growth 9–Industry, innovation and infrastructure 12–Responsible consumption and production 13–Climate action

profit-making corporate entity can also ensure social, environmental and economic sustainability. As per the definitions presented by GRI, an ‘impact’ is the effect an organisation has on the economy, the environment, and/or society. It does not refer to an effect upon an organisation, such as a change to its reputation. A sustainability strategy aligns a company’s economic goals with its environmental and social priorities. The objective of a sustainability strategy is to institutionalise mechanisms to control the adverse impacts resulting from a business and to create sustainable outcomes for all stakeholders.

Fig. 12.2 A synopsis of Aitken Spence’s sustainability journey

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With examples such as the story of Heritance Kandalama mentioned before, Aitken Spence had experienced the potential to create long-term value through a systemic approach to ensuring environmental, social and economic sustainability. In the early 2000s, Aitken Spence initiated a process to establish a framework for environmental, social and economic sustainability across all its operations. The company became a signatory to the United Nations Global Compact (UNGC) on the 28th May 2002 and was among the first companies in Sri Lanka to embrace this global network for corporate accountability. Along with the company’s own examples in sustainable development, Aitken Spence was guided by the Ten Principles of the UNGC in formulating a corporate policy for sustainability. Aitken Spence rolled out its integrated sustainability policy in 2005 (See Fig. 12.2) with internal action implemented to streamline group-wide efforts. Accordingly, the company formed a core team to lead these actions at its subsidiary companies in 2006. The policy was revised in 2007 and expanded to include an implementation framework to guide the subsidiary companies on specific requirements needed for 15 key focus areas integrated within a single sustainability policy for the group. The purpose of this effort was to have procedural mechanisms in place to identify, proactively, where the company could create value, where the company needs to control impacts and how it needs to communicate with key stakeholders to sustain business operations. Aitken Spence was also ahead of its peers in moving away from philanthropic, ad-hoc, project-based ‘corporate social responsibility’ efforts, and moving towards adopting a systemic approach to sustainability. This was because the company understood the need to adopt a more scientific approach to mitigate adverse impacts and to create more sustainable value to all stakeholders. The company’s sustainability policy was revised again in 2019 to include more focus areas. The requirements of this policy are implemented by the representatives from all its subsidiary companies, referred to as the company’s core ‘Sustainability Team’. The company also has a network of subcommittees formed across its subsidiary companies to support the implementation of required action, as presented in Fig. 12.3, which shows the large number of members in the company’s Sustainability Team. This integrated sustainability policy of Aitken Spence is available in Sinhala, Tamil and English on the company’s website (www.aitkenspence.com/sustainab ility). Due to its comprehensive coverage of sustainability priorities, the company was named the ‘best in its class for policy coverage’ in the STING Corporate Accountability Index (LMD 2012),1 which is one of Sri Lanka’s most comprehensive indices for corporate accountability published by the LMD Magazine in partnership with STING Consultants. The index reviews organisational policies and procedures for sustainability based on global criteria to recognise best practices in the country and 1

LMD STING Corporate Accountability. (n.d.). LMD Magazine. LMD, formerly known as Lanka Monthly Digest, is an English language Sri Lankan business magazine. The magazine is owned by Media Services Ltd and was first issued in August 1994. The magazine is available in print and as online versions.

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Fig. 12.3 Aitken Spence’s team for sustainability performance management

to promote responsible corporate behaviour and accountability. The index evaluates corporate performance based on six key categories, as shown in Fig. 12.4. These six categories are corporate values, stakeholder engagement, identifying impacts, risks and opportunities, policy coverage, management and governance, and measurement and disclosure. Fig. 12.4 STING consultants explains the basis on which it assesses the level of corporate accountability in Sri Lanka biennially, (LMD 2012)

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Aitken Spence has been consecutively ranked among the top five companies listed in the publications of this index, while also being ‘Platinum’ classified in consistent indices. This is the highest classification awarded to a company based on the overall score achieved (LMD 2012). The company’s integrated sustainability policy guides its subsidiary companies, the Strategic Business Units (SBUs) within the Aitken Spence Group, on material topics for sustainability and required action to control impacts. Material topics are focus areas that companies prioritize for action. These focus areas are commensurate with the nature and scale of the operational activities, resources that cause impacts, emissions, effluents and solid waste generated as well as concerns raised by key stakeholders in company assessments, as illustrated in Fig. 12.5. To identify these priorities or material topics, the company depends on several criteria, such as desk research on impacts and risks, key stakeholder feedback, compliance requirements, requirements of voluntary endorsements, results of inspections (internal and external) and industry-specific dynamics and requirements. Developing a comprehensive strategy to encapsulate the priorities of operations spanning 16 diverse industries in distinct geographical locations is no easy task. Each industry, each location, each stakeholder network carries a diverse set of priorities. Taking all considerations into account, priorities are picked based on the scale of their impact or the potential to create sustainable value. The company’s sustainability strategy provides guidance to the SBUs on possible action using a three-pronged approach, as shown in Fig. 12.6.

Fig. 12.5 Process for determining material topics to report on

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Fig. 12.6 Company’s sustainability strategy

Each subsidiary in the company selects priorities based on this process. A sectorwise summary of the priorities identified is shown in Fig. 12.7, as reflected in the company’s annual report of 2020/2021. Reporting on the performance of all identified priorities is considered ‘Essential’ for all subsidiary companies of Aitken Spence.

Fig. 12.7 A sector-wise summary of the priorities identified

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12.3 Sustainability Reporting of Aitken Spence Aitken Spence documents its strategies and progress made through the company’s annual report for the benefit of its key stakeholders. The company has produced annual reports for a long period of time as a public listed company, and annual report preparation is done, at present, in accordance with the frameworks identified in Fig. 12.8. The process is led by the Finance Department of the Group with support from all other divisions, including Internal Audit, Group Secretariat, Group Sustainability, and Group Business Development Divisions, as well as the sustainability, corporate communications and finance teams of all subsidiary companies of the Group. Aitken Spence adopted the GRI reporting framework to report on its sustainability performance since 2007/2008. The company’s SR practices align with global benchmarks such as the GRI due to the following reasons: – To provide comparability of information over the years and with other companies – To identify requirements for monitoring and measurement, and areas for improvement – To provide accuracy, clarity and reliability to the non-financial information included in the report. In keeping with the company’s approach of developing home-grown solutions for sustainability, Aitken Spence worked through their in-house Sustainability Team to implement global reporting benchmarks within the Group’s reporting procedures. Accordingly, the Group has incorporated sustainability performance information within its annual report since 2007/2008, instead of publishing information related to environmental and social Key Performance Indicators (KPIs) separately. The process evolved and grew with the team.

Fig. 12.8 Reporting frameworks adopted by Aitken Spence

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Fig. 12.9 Application levels of the GRI G3 reporting framework (GRI 2000–2011)

The Group first reported information on its social sustainability initiatives using the guidelines of the GRI G3 framework, at application-level C in the 2007/08 annual report. This was the beginning of the company’s journey into sustainability reporting, along with the introduction of the Group’s sustainability strategy, as marked in the timeline presented in Fig. 12.2. With the onset of a formal, strategic approach to sustainability, the company progressed to reporting on the GRI application-level B, including performance information on key priorities identified for the Group. To meet reporting level ‘A’ as per the GRI guidelines, a company had to report on all listed indicators. Though companies were allowed to report ‘Not Applicable’ for indicators not material to their operations in application-level A, the group never considered advancing to this level as it did not align with the Group’s values to report unnecessarily on unrelated topics. The different application levels of the GRI G3 framework are presented in Fig. 12.9. Over the years, Aitken Spence worked to build capacity internally and improve frameworks within the company to collect and analyse performance reports without handing over the task to external consultants, as indicated below. This is because the company firmly believes that nobody would understand its systems better than its own teams. – The company invested in training its core team members on the GRI reporting framework – Trained team members converted the GRI framework to data collection frameworks and easy-to-use data collection templates relatable to the company and its operations, according to the material topics identified, as explained earlier in this chapter

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– Subsidiary companies were recommended to identify the key members within their companies that have access to important information that will enable them to be included in the Sustainability Sub-Committee of the subsidiary – Subsidiary Sub-Committees were trained on how to use the templates developed in-house – This framework is now accessible online through the company’s online data management platform, so that team members can enter data and also access data submitted in previous reporting cycles conveniently. The company was the first in Sri Lanka to include a detailed ‘Shareholder Feedback Form’ in the annual report to seek comments from shareholders about the contents presented. This feedback form was extended subsequently to all stakeholders external to the organisation’s operations. In this form, the company proactively sought feedback from its shareholders on whether the contents included on environmental and social performance, as well as financial information, helped in making decisions about the company. Opinions thus shared were included in internal reviews to improve disclosures in the report. Currently, Aitken Spence uses GRI Sustainability Standards, as well as the international IR framework of the IIRC, in order to combine the non-financial information with the financial information in the report. For Aitken Spence, the annual report is also the company’s ‘Communication on Progress’ on the commitments made to the UNGC and the Women’s Empowerment Principles. Aitken Spence’s ‘Communication on Progress’ is one among the handful of documents of leading companies in Sri Lanka that have achieved the ‘GC Advanced’ status.

12.4 Transitioning to Integrated Reporting In this process, reporting frameworks such as the GRI Standards give directions to identify material topics and specific KPIs that organisations can use to disclose information about specific areas of focus within the material topics. While the GRI framework provided directions on specifics within a sustainability strategy, the IR guidelines help an organisation reveal the ‘bigger picture’; that is, IR shows the trade-off between capitals and how different capitals were used to create and retain value within the operational priorities identified for an organisation (Gunarathne et al. 2021). The GRI reporting framework provides measurable KPIs within those capitals to explain the key areas of performance and the progress made, as shown in Fig. 12.10, which presents an overview of how the company has used its capitals to create and retain value. The KPIs that are aligned with the GRI Standards presented across the report highlight the performance of the company in terms of specific capitals and progress made against targets. The purpose of an annual report is to provide disclosures of performance information to key stakeholders in a way that helps them make decisions about a company. An integrated report is a concise communication about how an organisation’s strategy,

Fig. 12.10 Value creation model of Aitken Spence. Source pages 12–13, annual report of 2020/2021

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governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long terms (IIRC 2021). Aitken Spence first incorporated the IIRC Framework on Integrated Reporting into the Group’s annual report of 2012/2013, as it offered a mechanism to present a more holistic view of how the company creates value by presenting information in relation to the six capitals: Financial Capital, Human Capital, Natural Capital, Manufactured Capital, Intellectual Capital, and Social & Relationship Capital. Since then, the company has been working to improve its disclosures to present performance information to its key stakeholders (Table 12.3). What is appealing about the IIRC’s integrated reporting framework is that it consolidates well with the GRI reporting framework that the company has already followed, to make the disclosures of the company more effective and articulate to all audiences of the report. Therefore, transitioning from a typical annual report to an integrated report was a seamless process. This process, however, was not entirely straightforward.

12.5 The Challenges of Integrated Reporting and the Remedial Action Taken This section presents the challenges faced by the company in transferring to integrated reporting and the remedial action taken to meet these challenges. The Challenge: Adapting international frameworks developed to fit single-industry organisations to a diversified conglomerate. As previously detailed, a conglomerate of the magnitude of Aitken Spence has many concerns to be considered in its every aspect, commencing from developing a policy to reporting on performance. Identifying the KPIs to report on and showing the trade-off between capitals accurately while keeping the report concise is akin to combining the reports for multiple companies into a single publication. These KPIs set the tone for the report and the capitals reflected in creating and retaining sustainable value. Considering the diversity of the Group, both geographically and industrially, integrating information into a concise report that also addresses the material topics of the company is certainly a challenge. A conglomerate must also provide compliance information for member companies operating in a variety of industries. In fact, producing an integrated report for companies operating in singleindustry sectors is an easier task, as the information required in the report is far less diverse. Nonetheless, Aitken Spence has produced integrated reports since 2012/ 2013 and has been recognized in many platforms for successful reporting practices. Remedial action: The company has worked on refining its integrated report over many years and, to this end, has studied review reports published by assurance providers and successful integrated reports from across the world, especially reports from South Africa, where IR has been mandated. The learnings have been implemented into the

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Table 12.3 Mapping between the GRI topic-specific standard topics and the capitals of the IIRC framework Specific disclosures from the GRI standard for topics identified as ‘Material’ to the company

Reasons for materiality

Corresponding capitals as per the IIRC framework included within the disclosures

200—Economic standards Economic performance (201–1, 2, 3), Market presence (202–1, 2), Indirect economic impacts (203–1, 2) Procurement practices (204–1) Anti-corruption (205–1, 2, 3) Anti-competitive behaviour (206–1)

Economic value generation Financial sustainability Social and environmental governance

Financial capital Manufactured capital Social & relationship capital Intellectual capital

300—Environmental standards Energy (302–1, 4) Water (303–1, 2, 3) Biodiversity (304–1, 2, 3, 4) Emissions (305–1, 2, 5) Effluents & waste (1, 2, 3, 5) Environmental compliance (397–1) Supplier environmental assessment (308–1, 2)

Environmental impact control Local and global commitments Stakeholder expectations Potential to create positive influence

Natural capital Social & relationship capital Intellectual capital Manufactured capital Financial capital

400—Social standards Labour practices & decent work Employment (400–1, 2) Labour management relations (402–1) Occupational health & safety (403–1, 2) Training & education (404–1, 2, 3) Diversity & equal opportunity (405–1, 2) Non-discrimination (406–1) Freedom of association & collective bargaining (407–1) Child labour (408–1) Forced or compulsory labour (409–1)

OHS Talent retention and management Business sustainability Risk management Compliance

Human capital Social & relationship capital Intellectual capital Manufactured capital Financial capital

Human rights Security practices (410–1) Human rights assessment (412–1, 2)

Business sustainability Risk management and compliance

Human capital Social & relationship capital Intellectual capital (continued)

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Table 12.3 (continued) Specific disclosures from the GRI standard for topics identified as ‘Material’ to the company

Reasons for materiality

Corresponding capitals as per the IIRC framework included within the disclosures

Society Local communities (413–1, 2) Supplier social assessment (414–1, 2)

Building stakeholder relationships Potential to create sustainable value Business sustainability

Human capital Social & relationship capital Natural capital

Product responsibility Impact on customers Customer health & safety Compliance and risk (416–1, 2) management Marketing & labelling (417–1, 2, 3) Customer privacy (418–1) Socioeconomic compliance (419–1)

Human capital Social & relationship capital Intellectual capital Manufactured capital

Group’s annual reports. In the 2019/2020 annual report, the company changed focus and presented information about the company from a stakeholder perspective to show how value has been created from different capitals for different stakeholders. The Challenge: Assurance of non-financial information even with travel restrictions, especially in the aftermath of the COVID-19 pandemic As explained in Fig. 12.5 in this chapter, the company also seeks external assurance for its disclosures to provide credibility and to identify areas to improve in the sustainability performance management process. The company’s financial information disclosed in the report has been externally assured uninterruptedly. However, unlike financial audits, assurance of non-financial performance information requires on-site audits to evaluate the effectiveness of implemented policies and procedures while auditing the reported information. In the 2018/2019 financial year, the company was not able to complete on-site audits for operations in Sri Lanka, as the Easter Sunday terrorist attack took place just before the audit schedule was planned for the operations in Sri Lanka in April 2019, and international auditors were issued travel advisories against travelling to Sri Lanka. Therefore, the company had to seek limited assurance for non-financial information. Subsequently, as the company was preparing to audit non-financial information for the 2019/2020 financial year, the COVID-19 global pandemic erupted, and travel restrictions imposed worldwide meant that auditors could not travel to any of the operational sites. Remedial action: Aitken Spence is a company with operations in key industry sectors across eight countries. Therefore, it is not possible to provide credible assurance of non-financial performance data without on-site inspections. It is recommended to conduct audits at selected sites representing all key sectors of operation as a minimum requirement. The voluntary external assurance of non-financial information for the

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years 2019/2020 and 2020/2021 of the company was postponed, since limited assurance without on-site inspections would have compromised the credibility of the assurance process. The company will resume assurance of non-financial information once conditions become conducive to conducting audits again. The Challenge: A report must reflect the company’s story and the company’s unique approach to managing social, environmental and economic priorities. Staying true to the said inimitable approach while meeting the disclosures requested by external stakeholders prevents adhering into cookie-cutter review models based on average practices seen across industries. Developing a comprehensive strategy for business sustainability is a necessity for any organisation. It guides organisations to identify where operations could have social, environmental and economic impacts, and the scope to create sustainable value. A sound, sustainable business strategy must consider the nature and the scale of an organisation, as well as its potential to create positive and negative impacts, as a core strategic requirement. Furthermore, such a strategy must also consider each business segment within the Group and its geographical location as the impacts and outcomes of the strategic efforts would depend heavily on these dynamics. sustainability strategy of an organisation serves to address these priorities in ways best fitted An integrated sustainability report explains the organisation’s sustainability strategy within its corporate strategy and presents information through specific disclosures on sustainability such that the report clarifies how an organisation creates value with its available resources. It also provides a comparable, accountable mechanism with which to track progress and efforts to include key stakeholders in the decision-making process of an organisation. Therefore, an integrated sustainability report must reflect the social, environmental and economic priorities unique to the company and the solutions adopted by the company that best fits the organisation’s priorities. Shareholders who are better informed can make decisions by correctly understanding how the company uses its resources to create sustainable value. For shareholders to be able to do this, information presented in the report must also reflect the company’s own unique story and should not be a document narrated by external writers to fit into cookie-cutter reporting models. This can be challenging for an organisation like Aitken Spence that has a unique strategy. If the average reader of an annual report expects a certain pattern or style as seen in other, more typical reports, a unique report structure can be a disadvantage. For example, if a certain disclosure is not presented in the same manner as it is reported in a typical report, the reader may assume that such information is not included in the report. Further, the company is in a constant effort to make the report shorter and easier to read for the average audience. This is not easy for an organisation with diverse operations across multiple countries and a unique approach to manage its environmental, social and economic priorities. The effort to summarise information to simplify the disclosures sometimes results in insufficient information in the disclosures for some

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readers of the report who expect specific styles in reporting or in-depth explanations of the process to fully understand the company’s strategies and management approach. Frequently used patterns seen in typical reports create a narrow set of expectations for the reader or shareholder of what should really be presented in a good report. This has been observed in external reviews of annual reports, where stakeholders have expressed that information is not available in the report, or that organisations are recommended to show certain typical reporting elements that may not be relevant to that particular organisation. Therefore, typical reporting patterns, or cookiecutter reporting models, as they are called, enforced without considering the unique dynamics that differ from company to company, are quite a challenge, especially for diversified conglomerates such as Aitken Spence. Remedial Action: It is important that the members of the company are involved in the reporting process right from the beginning. The narration of the story should come from the company and not from the writers. In order for the information to add up, it should also be noted that the context of the company is properly understood when reviewing information about the performance of the company. In conclusion, Aitken Spence recommends that organisations focus on developing a sustainability strategy aligned to the company’s social, environmental and economic impacts by using global benchmarks of SR and IR to provide a broader point of view to key stakeholders. Using frameworks such as the GRI Standards gives direction to identify material topics and specific KPIs to report on. Aitken Spence recommends that companies produce integrated reports, as such reports provide a correct perspective on a company’s use of available resources in creating value in a sustainable manner.

12.6 Lessons Learnt This section presents the lessons learnt by the company when transferring to IR. Reporting is a journey of continual improvement. Reporting teams in organisations need to be cognizant of the changing dynamics of the operating environment, socio-economic and environmental impacts and stakeholder needs to ensure that the disclosures presented in the report are comprehensive, concise, and, most importantly, relevant to the organisation’s operational priorities. Therefore, in their integrated reports, organisations should portray clearly how the capitals integrate to create value. IR guidelines assist organisations to present a broad view of the organisation, while frameworks such as the GRI Standards offer tools to present specific performance data and disclosures. Embracing these guidelines and standards enables wider reach, credibility and comparability of information with peers. Consequently, despite the challenges, adopting international frameworks to disclose information about the

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organisation is an advantage, especially for organisations that work with diverse stakeholders from across the world.

References Aitken Spence PLC (2012) Aitken Spence PLC, STING recognizes Aitken spence sustainability strategy, Aitken Spence Blog. Available at: https://aitkenspenceplc.wordpress.com/tag/itkenspence-sustainability-strategy/ Aitken Spence (2021) Annual report, Aitken Spence PLC. Available at: https://aitkenspence.com/ annualreport Geok B, Buche I (2008) Sustainable tourism: heritance Kandalama resort of Sri Lanka, Harvard Business Publishing GRI (2000–2011) Global reporting initiative, sustainability reporting guidelines—GRI application levels, 2 Gunarathne N, Wijayasundara M, Senaratne S, Kanchana PK, Cooray T (2021) Uncovering corporate disclosure for a circular economy: an analysis of sustainability and integrated reporting by Sri Lankan companies. Sustain Prod Consumption 27:787–801 IIRC (2021) The international integrated reporting framework. Available at: https://integratedrepor ting.org/resource/international-ir-framework/ USGBC, Jacques K (2015) In the LEED: 15 years of projects LMD STING Consultants & Anthonisz T (2012) STING corporate accountability index methodology: the building blocks. LMD magazine Whittaker MH (2013) The Kandalama story. From conflict to cooperation: adventures in the business of nation-building

Yasangi Muditha Randeni is the General Manager, Corporate Strategy & Sustainability at Aitken Spence PLC. She leads young team of professionals managing strategic interventions for sustainability, corporate communications, branding and new ventures at Aitken Spence PLC. A graduate of Monash University in electrical and computer systems engineering, she also holds a postgraduate diploma in sustainable development from University of London, Centre for Development, Environment & Policy (CeDEP, SOAS), and a specialist/advanced diploma in teaching, training & assessing learning from City & Guilds (UK). With over a decade of experience in sustainability reporting, she is a Certified Sustainability Professional based on the Global Reporting Initiative’s Universal Standards 2021. She represents Aitken Spence in the Steering Committee of the UN Global Compact’s Local Network and the private sector consultation platform of the Asia Pacific Alliance for Disaster Management—Sri Lanka. A Distinguished Toastmaster (DTM), she is a past Chairperson of the Toastmasters Leadership Institute for Sri Lanka and a past Area Director for Area C2 of District 82 in Toastmasters International. Rohan Fernando is an Executive Director of Aitken Spence PLC. He joined Aitken Spence Plantation Management in May 1994 and has been the Managing Director of Aitken Spence Plantation Managements PLC and Elpitiya Plantations PLC since August 1997. He has extensive experience in the plantation industry; both in the public and private sectors; corporate management, corporate strategy and has played a key role in the plantation privatization programme. He was the Chairman of UN Global Compact, Network—Sri Lanka, a former President of the Chartered Institute of Marketing Sri Lanka Chapter and a past Chairman of the Planters Association of Ceylon. He is currently the President of the Palm Oil Industry Association and serves on the committee of the Asian Palm Oil Alliance (APOA). In 2023, he was appointed under the Co-Chairmanship of

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Advisor to the President and Chairman of the National Science Foundation as a Member of the Expert Cluster on ‘Perennial Crops’ to achieve food security and nutrition in the country. He was appointed to the Main Board of Aitken Spence PLC in April 2005 and is currently Head of the Plantations segment, Sustainability, Business Development, Corporate Strategy and Branding. He holds a Ph.D. and an MBA from the University of Colombo and is also a Chartered Marketer and a Fellow of the Chartered Institute of Marketing (CIM UK).

Chapter 13

The Impact of Private Certifications on Social and Environmental Performance and Integrated Reporting: The Case Study of Watawala Plantations PLC in Sri Lanka M. A. T. K. Munasinghe and Saman Kumara

Abstract Integrated reporting (IR) is gradually becoming the norm in corporate reporting of public listed companies in Sri Lanka. In recent years, a large number of companies in the plantation sector in Sri Lanka have adopted IR. Hence, this chapter presents the business case of Watawala Plantations PLC, an early adopter of IR in this industry sector, focusing on its motives for adoption and practices relating to IR. The chapter specifically highlights the impact of third-party certifications on the adoption of sustainability practices and reporting thereof. The chapter illustrates trends in social and environmental disclosures of Watawala Plantations over a tenyear period commencing from 2009, the year in which the company began complying voluntarily with international reporting standards. The paper then presents third-party certifications obtained by the company and extends the discussion to showcase how these certifications have resulted in improved social and environmental performances and subsequently, in the adoption of IR. The chapter also points out the challenges faced by the company during the IR adoption process and the remedial action taken to improve IR in future. Keywords Integrated reporting · Plantation sector · Private certification · Sustainability performance · Sustainability reporting

M. A. T. K. Munasinghe (B) Department of Accountancy, University of Kelaniya, Kelaniya, Sri Lanka e-mail: [email protected] S. Kumara Financial Accountant, Watawala Plantations PLC, Watawala, Sri Lanka e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_13

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13.1 Introduction The integrated report aims to benefit shareholders and other fund providers by communicating to them how organizations create value over time, and such information benefits other stakeholders as well (International Integrated Reporting Council, 2013). This new form of reporting is gradually becoming the norm in corporate reporting of PLCs in Sri Lanka and is supported by a nexus of factors, including the accounting profession and accountants, stakeholder demands, and award schemes (Gunarathne and Senaratne, 2018). While the literature reveals a few supportive cases, varying levels of adoption are reported across different contexts and countries, raising concerns regarding the lack of a fundamental change in existing business models and operations; in this way, an integrated report is seen as a transformed sustainability report (Stubbs and Higgins, 2014; Gunarathne and Senaratne 2017). However, the nature and extent of the adoption of integrated reporting (IR) by individual listed companies in Sri Lanka, particularly in the plantation sector, has not been examined. The plantation sector is one of the industry sectors represented in the Colombo Stock Exchange (CSE). A key feature of the plantation industry is the proliferation of private certifications such as the Rainforest Alliance (RA), Fairtrade Labelling Organizations International (FLO), and the Ethical Tea Partnership (ETP) that encourage sustainable production practices, and many listed plantation companies adopt them voluntarily as a move that goes beyond greenwashing to contribute towards sustainable development (Munasinghe et al., 2021). The related social and environmental performances have been disclosed through the annual reports over the years in the form of CSR information, sustainability reports and now, as IR. Thus, this chapter presents motives for IR adoption and practices related to IR of Watawala Plantations PLC, which is an early IR adopter in the plantation sector. In this respect, the chapter highlights the impact of third-party certifications towards the adoption of sustainability practices and the reporting thereof. Prior research on the impact of RA certification on the tea production industry reveals that sustainability certifications have a positive impact on the social and ecological outcomes of companies, of which Watawala is one case (Atupola and Gunarathne 2022; Munasinghe 2017; Munasinghe et al. 2021). Private certifications have emerged over the last three decades as a means of managing and controlling the social and environmental conditions of distant supply chains. The social and environmental conditions under which goods are produced are often distinct from the conditions in which these same goods are consumed (Bebbington & Larrinaga, 2014). Therefore, certification schemes, generally established in developed consumer markets, are used to verify and monitor global supply chain production practices against pre-defined criteria (Giovannucci & Ponte, 2005; Moog et al., 2015). Therefore, these certifications seek to provide some sort of control over producer practices in order to ensure that products appear acceptable to the ethical and moral expectations of those in developed consumer markets.

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In this context, this chapter focuses on the Sri Lankan plantation sector, and Watawala Plantations PLC is selected as a business case for the study, aiming to identify motives for IR and provide insights on and the impact of third-party certifications towards adopting IR. The next section provides an overview of the case organization. This is followed by a description of the social and environmental certifications and standards. How these certifications’ adoption impacts environmental performances and social performances and the reporting thereof is discussed in sub Sects. 13.3.1.1 and 13.3.1.2 respectively. Section 13.4 reveals challenges in adopting certification requirements and proposes remedial actions, and the chapter concludes by highlighting the lessons learned and the way forward.

13.2 Overview of the Case Organization Watawala Plantations PLC (here-in-after “Watawala Plantations PLC” is termed “Watawala”), incorporated in 1992, is a plantation company listed on the Colombo Stock Exchange. As a diversified plantation company, Watawala produced tea, rubber, and palm oil as its main export products, until its business divesture strategy segregated tea operations to a newly formed company - Hatton Plantations PLC in 2017/18. From then onwards, as an agribusiness company, Watawala focused only on palm oil and dairy operations as its main businesses. Three multinational companies, namely TATA Global Beverages PLC—the World’s second largest tea company, Pyramid Wilmar Plantations, Asia’s largest palm oil producer, and Sunshine Holdings PLC, held equal stakes in Estate Management Services (Pvt) Ltd, which is the parent company of Watawala. The composition and the stakes in this strategic alliance changed with the business divesture strategy in 2017, increasing the stake of Sunshine Holdings PLC to 60% and the balance to Pyramid Wilmar Plantations. As a labour-intensive industry, the company employs around 11,000 employees. The plantation consists of 19 estates leased from the Government of Sri Lanka, 15 tea processing factories, two rubber factories, and a palm oil mill. In terms of financial performance, tea plantations accounted for 68% of the revenue and 64% of the profits during 2013/14, which was reduced to 2.8% of revenue by 2018 due to the divesture of the tea plantations. Palm oil contributed 23% to the revenue and 146% to the profits during 2013/2014 and the contribution of palm oil has risen to 95% of the revenue by 2018, due to the company’s new business strategy. With the increasing trend in voluntary disclosure of social and environmental impacts by organizations globally, Watawala has been keen to reflect its social and environmental responsibilities by producing a sustainability report as part of its annual financial statements and obtaining third-party assurance for such sustainability reports since 2010/2011. Accordingly, social and environmental boundaries of operations are recognized and disclosed with probable impacts, as highlighted below.

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Being a key player in the agriculture industry, Watawala has significant impacts on the environment in which it operates, while being intrinsically dependent on favourable environmental conditions, not least of which are climate conditions, for the survival and growth of its business. Further, with its close interconnection with rural communities and extensive workforce living and working on its plantations, employee and estate community welfare is also a key material aspect to be considered by the company (Watawala Annual Report, 2012/2013, p. 110).

Being an upstream supplier to global tea, rubber and palm oil export supply chains, Watawala was pressured to adopt a number of private social and environmental certifications to showcase its compliance with international social and environmental standards. Such pressures have come through multinational buying companies such as Unilever, which announced its commitment to purchase only Rainforest Alliance certified tea at the Colombo Tea auction by 2015, and competitive pressure from other listed plantation companies operating in the industry adopting a number of certifications and acting as an export barrier. For example, Watawala had moved to the Roundtable on Sustainable Palm Oil Certification (RSPO) when one of its foreign bank accounts was suspended from operations due to the lack of such certifications. Further, such compliances have been an enabler for obtaining environmental protection licenses from local authorities, for instance, from the Central Environment Authority (CEA), and have been an advantage to the company when revealing social and environmental performance through the annual report over the years. Furthermore, Watawala, was also driven by pressure from the ICASL to incorporate non-financial information disclosures, and therefore, it issued its first sustainability report in 2010/2011 as a supplementary document to the annual report. The first sustainability report was prepared based on the Global Reporting Initiative (GRI) G3 guidelines, and the report disclosed a number of social and environmental performance and sustainability issues as required by the reporting guideline, satisfying the reporting level C. From the financial year 2013/2014 onwards, sustainability information was prepared and presented in accordance with the GRI G4 guidelines. Being certified with a number of private certifications, for Watawala, the adoption of GRI guidelines had been merely an exercise in ticking the box. Similarly, when ICASL encouraged PLCs to adopt IR since companies that apply for the CA Annual Report Award competition need to do so, Watawala also produced its first integrated report in 2013/2014. The company continued to produce integrated reports thereafter, complying with the international IR framework and GRI G4. Table 13.1 depicts the trends in reporting social and environmental performance over the years. Next, Sect. 13.3 provides an overview of third-party certifications that triggered Watawala to adopt sustainable practices and reporting thereof, and subsection 13.3.1 reveals the organizational practices relating to sustainability compliances and disclosure trends in the Annual Report which facilitated adopting IR.

–

Disclosure of global issues with responsive actions Green house gas emission

FLO

GRI 3

2011/12

Triple Bottom Line: People, Planet, Profit

FLO

GRI 3

2012/ 13

FLO ETP RA CEA-license

GRI 4 IR

2014/15

Five Capitals: MDG Financial, Intellectual, Manufactured, Human, Natural, Social & relationships

FLO ETP RA

GRI 4 IR First Integrated Report issued

2013/14

SDGs17

FLO ETP RA CEA-license

GRI 4 IR

2015/16

SDGs 17

FLO ETP RA CEA-license

GRI 4 IR

2016/17

SDGs 17

FLO ETP RA CEA-license

GRI 4 IR

2017/18

SDGs 17

FLO ETP RA CEA-license

GRI 4 IR

2018/19

Source Developed by the authors based on the review of Watawala annual reports Note GRI (Global Reporting Initiative), IR (International Integrated Reporting Framework), FLO, ETP (Ethical Tea Partnership), RA (Rainforest Alliance), Fairtrade Labelling Organizations International (FLO), MDG (Millennium Development Goals), SDGs, CEA (Central Environment Authority)

–

FLO

None None First Sustainability supplement issued

Social & FLO Environmental Certifications

Reporting guideline adopted

Financial year 2009/ 2010/11 10

Table 13.1 Trends in social and environmental performance disclosures

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13.3 Voluntary Adoption of Social and Environmental Certifications Watawala has voluntarily obtained three private certifications that aim to promote the social and environmental conditions of upstream suppliers in global supply chains. The first of such certifications is the Fairtrade Labelling Organizations (FLO) International, certified ten years ago, which was followed by two other certifications—the Rainforest Alliance (RA) and Ethical Tea Partnership (ETP) obtained in 2014. The adoption of these certifications is communicated to stakeholders through disclosures in the annual report, showcasing Watawala’s commitment to sustainable agricultural practices, as indicated below. Watawala Plantations obtained certification from the Rainforest Alliance, confirming our eco-friendly agricultural practices on five estates, which adds to our existing portfolio of certifications which include certifications for Food Safety Management and the environmental and social aspects of how we conduct business. (Watawala Annual Report, 2013/14, p. 23)

These certifications are a means for Watawala to provide assurance to its overseas buyers on the adoption of sustainable production practices, which is an emerging concern of overseas buyers, particularly those in developed countries. In turn, these certifications enabled Watawala to showcase the benchmarking of its practices with international best practices on sustainable production, as highlighted below. Certifications awarded confirm our commitment to the preservation of human rights and the environment and our processes and procedures pertaining to the quality of our products. These also serve to benchmark our policies, agricultural practices, processes, and procedures with international best practices. They have been awarded based on comprehensive reviews of the Company’s practices against pre-defined criteria, and affirm our compliance with the same (Watawala Annual Report, 2013/14, p. 14)

However, though such compliances seem voluntary, they have now become compulsory for plantation companies through the export conditions imposed by MNC buying companies. For instance, Unilever promoted the Rainforest Alliance certification in Sri Lanka as it declared that it will purchase only Rainforest Alliance certified teas at the Colombo Tea Auction. With respect to palm oil exports, the Roundtable on Sustainable Palm Oil Certification for export was a necessity. These certifications afford competitive advantages to the companies that possess them in the plantation industry, such as price premiums for Rainforest Alliance certified teas; contribution of additional funds for improving community welfare through Fairtrade Labelling Organizations International certification and providing opportunities to showcase Watawala’s sustainable production practices to its stakeholders through the adoption of international certifications voluntarily. However, such financial benefits do not outweigh their costs for Watawala. The major cost components are preparation costs, including required changes to the existing production systems and procedures, improvement of infrastructure facilities, maintenance costs, and direct costs such as certification fees, renewal charges and expenses for certification audits

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by external auditors. Table 13.2 depicts those certifications and their compliance requirements through social and environmental standards. The next section details how certification compliances have an impact on company operations and practices, and the reporting of such information over the years, through adopting different international reporting guidelines and frameworks.

13.3.1 Impact on Social and Environmental Performances and Reporting Since it is a labour-intensive industry, Watawala employs a large workforce in its plantations and is committed to the welfare of those workers and their families, which constitutes the community of plantation companies. Such spending is considered a substantial cost for Watawala, and, as such, is disclosed as CSR information in company annual reports. Those activities included spending on charity activities, workers’ childcare, medical benefits, and health camps. The analysis of the content of social and environmental disclosures present in published annual reports of Watawala over the ten-year period from 2009/2010 to 2018/2019 provides evidence of improved disclosures over the years, reflecting a transition from general disclosures of CSR information towards developing social and environmental policies and strategies, measuring social and environmental performances, reflecting on global targets—Millennium Development Goals (MDGs) and Sustainability Development Goals (SDGs), and finally, advancing towards producing an Integrated Report. It is noteworthy that such reports have been subject to thirdparty verifications from the outset. The next section presents social and environmental performances and the reporting thereof, analysed separately in two subsections.

13.3.1.1

Environmental Performance and Trends in Information Disclosure

Watawala issued its first Sustainability supplementary in 2010/2011 together with its annual financial report, as the company was motivated to apply for the ICASL Annual Report Awards competition. From the next year onwards, as directed through the ICASL, Watawala used the GRI guidelines in the preparation and presentation of sustainability reports. According to the GRI guidelines, reporting on environmental information requires the identification and disclosure of the nature, types and amounts of environmental resource usage across the categories of materials, energy, water and biodiversity, and an assessment of negative impacts such as emissions, effluents and waste. In addition to these, reporting organizations are required to produce information on the environmental impacts of their products and services, including the impact of emissions during goods transportation. All these GRI requirements had

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Table 13.2 Social and environmental certifications and standards Private certification and focus

Social standards

Environmental standards

Fairtrade labelling organizations international (FLO)

Standards for the democratic organization, the collective use of social premium, and upholding ten ILO conventions (rights to association and collective bargaining, freedom from discrimination and unequal pay, no forced or child labour, minimum social and labour conditions, rights to safe and healthy working conditions) International federation of organic agriculture movements (IFOAM) members are expected to uphold key ILO conventions (rights to association and collective bargaining, freedom from discrimination), and employed children are to be given educational opportunities Producers are paid a minimum guaranteed price, and in addition, a Fairtrade premium is paid to a fund to improve community welfare activities

Standards for a reduction in agrochemical use, reduction and composting of wastes, promotion of soil fertility, prevention of fires, and avoidance of GMOs Standards are based on four principles: health, ecology, fairness and care It aims to promote the health of soil, plants and people through organic farming

Ethical tea partnership Ethical tea partnership (ETP) Formed in 1997 by UK tea companies to improve tea supply chain conditions

The ETP standard (ETP Global) is based on the ethical trading initiative (ETI) base code mainly covering international labour organization (ILO) conventions and environmental standards

Focused on the protection of soil, water, ecosystems and wildlife through environmental management systems

Rainforest alliance (RA) Standards of the sustainable agriculture network This certification is based on the sustainable agriculture network standard, which covers ten principles to ensure agricultural sustainability through improving the health and safety of workers/ community and conservation of biodiversity and the environment

Standards for fair treatment and good conditions for workers upholding key ILO conventions (freedom from discrimination and unequal pay, no forced or child labour), occupational health and safety, and community relations

Standards for ecosystem and wildlife conservation, integrated crop management and integrated management of wastes

Source Developed by the authors through reviewing certification websites & documentation and literature

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already been practised by Watawala for the Fairtrade Labelling Organizations International Certification, and hence, was mainly a box-ticking exercise for GRI reporting purposes. With the adoption of the International IR Framework (IR framework), probable risk assessments based on the materiality principle, and recognizing critical factors affecting sustainable performance and reporting value creation across the six types of capitals are encouraged, together with reporting governance information. In the first three years of sustainability reporting, disclosure of environmental information was limited to reporting the nature, types and amounts of direct and indirect energy resources used by the organization. As disclosed, Watawala depends on imported fuel, diesel, petrol, furnace oil and electricity, and thus, it acknowledges that GHG emissions are the relevant sustainability issue. The report emphasizes the need for energy conservation, renewable energy sources and also the responsibility of the company to contribute towards lowering the balance of payment deficit of the country by reducing the importation of fuel. Therefore, plans for future energy reduction and efficiency are disclosed in the initial reports, and these include increased use of bio-mass as an energy source and the installation of mini-hydroplants at the estates. The identified environmental impacts include factory/mill operations stemming from emissions, effluents and waste. The execution of such plans and outcomes was revealed in subsequent years, and, as such, compliances became obligatory through certification standards requirements. For instance, in year three, Watawala added one more disclosure on wasterelated information. The report discloses the composition of its waste (treated decanted water, Decanted Cake, Empty Fruit bunch fibre) and reveals initiatives that have been taken to reduce the release of hazardous waste by adopting responsible waste disposing methods, as highlighted below: All non-degradable and hazardous waste is disposed of through Central Environmental Authority-approved collectors. Wastewater from factories is diverted to soak pits to prevent discharge to natural water bodies [shown under the Rainforest Alliance Certification initiative] (Watawala Annual Report, 2014/2015, p. 52)

The disclosures include the waste reuse initiatives of Watawala and environmental impact assessments. The examples of such disclosures made in its annual reports are presented below: Briquetting- A positive aspect of using briquettes made out of Factory waste material as fuel lies in its minimal influence on the environment in comparison with fossil fuel such as coal (Annual Report, 2012/2013, p. 126) Paddy husks and sawdust, which would normally be strewn haphazardly or polluting streams, are bought and collected by us for the production of briquettes of high calorific values. (Watawala, Annual Report, 2013/2014, p. 58) The steam turbine at the palm oil mill is heated with the waste from the fresh fruit bunches of oil palm, meeting almost the entirety of its requirement (Watawala Annual Report 2014/ 15, p. 53)

The outcome of sustainability initiatives has been measured and reported in later years, as shown below:

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As a result of our initiatives, total energy efficiency has increased over the years. Of the total energy consumed in 2016, renewable energy accounts for 78% (in 2015–76%) (Walawala Annual Report 2015/16, p. 66)

A significant improvement in the disclosure of the nature and types of environmental information is evident from 2013/2014 onwards, with the company’s move towards new sustainability-oriented certifications—the Rainforest Alliance and Ethical Tea Partnership. Watawala had been persuaded by ICASL in 2014 to adopt a new form of reporting—the Integrated Report. With a number of certifications adopted, Watawala was also keen to reflect their social and environmental performances and engaged the services of an external consultant to prepare its Integrated Report, which illustrates the integration of energy, land, biodiversity and water as the key sensitive resources involved in Watawala’s business strategies, as highlighted below: Our Strategy: we are focused on four areas of Strategy, which have an impact on our operations as well as the environment. These are energy efficiency, land management and biodiversity, and water management (Watawala Annual Report, 2013/14, p. 57)

The manner in which these strategies have been put into action reveals that the company has followed the standard implementation guidelines; for instance, Rainforest Alliance certification requires companies to set up a social and environmental management system within the organization, and such internal mechanisms in action are disclosed as follows: Our Approach; …. The environmental sustainability strategy is overseen by the Chief Executive Officer, who is supported by the area General Managers and the Managers and their staff on each estate. An agriculture policy that is updated regularly is a key part of this process. All Corporate Budgets include environmental expenditures and are passed on with the relevant guidelines for implementation at the estate level (Watawala Annual Report, 2013/2014, p. 57)

Another interesting and novel disclosure relating to water management initiatives, which is another Rainforest Alliance Certification requirement, is the tracking of water sources by mapping them, locating user points, and accounting for usage. As tea plantations depend only on rainwater in Sri Lanka, this requirement has encouraged Watawala to store rain water without allowing it to completely drain out. Rainwater harvesting was done in all the estates and practices such as resorting to deep draining were adhered to ensure that rainwater is stored to the maximum possible levels (Watawala Annual Report, 2014/2015, p. 49)

At the same time, Watawala has complied with reporting requirements by mapping water resources as well. In our efforts to better manage water, we have identified and mapped all the water bodies and the purposes for which they are used within the estates, allowing better management of the natural resources. The initiative to measure all the water withdrawals from all the sources was e taken during the reporting year, and we expect to provide the exact quantities of water used from the next year onwards (Watawala Annual Report, 2014/2015, p. 49)

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The local practices adopted to support environmental conservation such as burial of pruning materials, planting of Calliandra and Bamboo species in water-logged areas are amongst the reported practices and chemical-free buffer zones imposed as essential requirements of the certifications, as indicated below: We maintain chemical-free buffer zones around the water bodies and water withdrawn for both production and domestic consumption of the estate population is checked against the standards adopted under the ISO and Rainforest Alliance certification to ensure that no contaminated water is consumed. (Watawala Annual Report, 2014/15, p. 50)

The certifications relating to environmental performance constitute the “natural capital” component of the IR framework. For instance, biodiversity conservation is a major Rainforest Alliance certification requirement, and such performance information is reported under the “natural capital” component of the IR framework. To quote an example, Watawala discloses the number of species identified in its plantations in the International Union for the Conservation of Nature (IUCN) Red List and in the local conservations list as well. Habitats that may be affected due to Watawala’s operations are included in reporting information in IR, as highlighted below: We continued the ingenuities introduced on conservation of biodiversity under the Rainforest Alliance Certification programme. Partnering with "Friends of Horton Plains," a NonGovernmental Organization, the series of studies aimed at identifying the present status of habitats and continuously monitoring them …and five new species of National Red List threatened Birds and Insects were identified during the year (Watawala Annual Report, 2014/ 2015, p. 50)

How well Watawala has been able to respond to environment-related global issues are amongst the key disclosures in IR, and these issues include addressing global warming through measuring and monitoring greenhouse gas emissions, as reflected below in its annual report. As per the IR framework, concentration on the external environment and the context within which the company operates is a key disclosure requirement. For the first time, we have measured our emissions in order to monitor and reduce the same in future. …We engaged the National Cleaner Production Center, an environmental consultancy agency, to measure the Co2 emissions under the threescope approach (direct emissions, indirect emissions of operations, and other indirect emissions) (Watawala Annual Report 2014/15, p. 50). In 2015/2016, Watawala disclosed its sustainability practices aligning with the 17 SDGs as general disclosures. However, of them, several SDGs, “SDG 6: Clean water and sanitation”, “SDG 7: Affordable and clean energy”, “SDG 12: Responsible consumption and production”, SDG 13: Climate action”, “SDG 14: Life below water” and “SDG 15: Life on land” were given specific attention with promising performance targets. Adopting the IR framework, the company classifies these SDGs into “inputs” and “outputs”; for instance, materials, energy and water belong to inputs and outputs are emissions, waste and effluents. The certification-driven sustainable performances and reporting thereof enforces Watawala’s compliance with local regulations. For instance, the company’s commitment towards the use of permitted fertilizers ensures compliance disclosures related

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to the local regulations of the Sri Lanka Standards Institution, Sri Lanka Tea Board and the Central Environment Authority, as reflected below. The Company uses only agrochemicals that are approved by the regulators and also conform to the certifications obtained which cover the health and safety of consumers such as ISO 22000:2005 and HACCP and the environmental management practices of the Company such as the Rainforest Alliance, Ethical Tea Partnership, Fairtrade and the combined certification provided by the Sri Lanka Standards Institution and the Sri Lanka Tea Board (Watawala Annual Report, 2014/2015, p. 48). All the estates have the Environment Protection license which certifies that operations are in line with the Central Environment Authority Regulations (Watawala Annual Report, 2015/16, p. 52). The identification of operational impacts on workers and the community, and the monitoring and disclosure of related benefits are also a requirement of certifications. The next section reveals information relating to social performance and disclosures over the periods.

13.3.1.2

Social Performance and Trends in Information Disclosure

Similar to its environmental performance disclosures during the early periods of sustainability reporting, Watawala reported only a limited type of information relating to certain aspects of social performance such as employee profiles, opportunities for collective bargaining, and aspects of the improved working conditions of employees during the early periods. Such information shows adherence to the Fairtrade Labelling Organizations International standards, which includes International Labour Organization requirements and healthy working conditions. The initiatives taken by Watawala to improve health and safety through the creation of proper working conditions for employees were disclosed in the first sustainability report as follows: The working conditions for our associates were improved during the year, by replacing the bamboo baskets which were used by our tea-plucking associates, with plastic ones. … In addition, finger guards were provided to the associates to prevent soreness of fingers that occurs when plucking tea leaves. Watawala Plantations PLC is proud to report that during the year under review, we did not experience any major injuries, occupational diseases, lost days, or work-related fatalities in any of our operations island-wide (Watawala Annual Report, 2011/12-p. 76)

In these endeavours, Watawala has partnered with voluntary local bodies, such as the Wild-Life Conservation Society, and such interactions came to represent the “Social and Relationship” capital of the IR framework in later years. An awareness programme on the proper management of serpent bites was conducted in partnership with the Wild- Life Conservation Society of Sri Lanka. Given the high vulnerability of estate populations in some of the regions to snake bites, the programme has been found to be very useful (Watawala Annual Report, 2011/2012, p. 78)

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With the adoption of additional certifications, new aspects such as impacts from agrochemicals and fertilizers have been added as core elements of the occupational health and safety policy of Watawala and disclosed through the annual reports during its initial year of providing CSR information, as shown below: Occupational Health and Safety is a key area of focus due to the nature of the industry, which includes hazards such as contact with agrochemicals, difficulties presented by the terrain and the biodiversity within the plantations (Watawala Annual Report, 2013/214, p. 50)

Similar to environmental regulatory compliances, worker/community-related regulations have been reinforced through certifications, and such compliances were disclosed through reporting: Watawala Plantations is fully compliant with the Factory Ordinance No. 45 of Act 1942 and the Workmen’s Compensation Ordinance of 1935 and the amendments thereto. Further, this area is also assessed in certifications obtained from Fairtrade, the Ethical Tea Partnership, ISO 22000 and the Rainforest Alliance (Watawala Annual Report, 2013/14, p. 50).

Watawala uses these aspects of social performance in the reporting of societyrelated information as per the GRI guidelines, and this performance was later reported under the “human capital” component of the IR framework. We aim to provide all employees, contractors, and visitors to the Company property with the safest and healthiest conditions reasonably practicable. We will comply with all statutory regulations and codes of practice governing health, safety and welfare work and strive to set the benchmarks for the industry. (Watawala Annual Report, 2013/2014-p. 51)

The annual report of the company discloses the nature of relations that exist between the company and plantation workers, and the steps taken over time to strengthen employer-employee relationships as recommended through certifications and reporting guides. The plantation industry has a long history of poor relationships with employees on estates, and building trust and confidence is paramount to our continued operations. We have undertaken several measures to improve industrial relations with employees in the estates as we recognize that changes are necessary for us to move forward together. … Our policy framework complies with the Fairtrade, Ethical Tea Partnership, International Labour Organization conventions, the GRI Guidelines, the Employers’ Federation of Ceylon, the Labour law of the country and the Plantations’ Collective Agreement and ensure that the policies are implemented consistently across the organization (Watawala Annual Report, 2013/ 2014-p. 50)

In addition to occupational health and safety, new considerations such as grievance handling mechanisms have been introduced. The information relating to human rights, diversity, equal opportunity, and non-discrimination, that were not disclosed during early periods, were disclosed from 2013/2014 onwards. However, information was not available on investments in human rights and training of employees on human rights policies or procedures. Nevertheless, the management approach to human rights was disclosed. Community-related activities relate mainly to the provision of health services, and such engagements were previously reported as CSR information before the advent

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of IR. The integrated report presents this information as part of the “community integration” component. Community relations related to the provision of health-related services to employees’ families and communities, such as through conducting health and medical camps, eye camps. Amongst the other health-related initiatives during the year were programmes to increase awareness on the prevention of HIV /AIDS and Dengue (Watawala Annual Report, 2013/ 14, p. 78)

The community of the plantation includes employees themselves and their families. Therefore, the same information is used to demonstrate company commitment towards the single theme of “human capital & community integration” in IR, as reflected below: plantation companies work with the Plantation Human Development Trust to provide them with adequate housing and accommodation to ensure that an acceptable standard of living is maintained within the estates managed by us. …Watawala Plantations has contributed Rs. 6,436,222/- to PHDT during the financial year (Watawala Annual Report, 2013/14)

A review of sustainability performance and related disclosures over the years shows that with the adoption of more certifications, Watawala has gradually increased the extent of disclosures in this respect by following different disclosure guidelines e.g. Global Reporting Initiative (2016) and frameworks. These achievements have enabled Watawala to produce both its financial and non-financial information together in the form of an integrated report since 2013/2014, assisted by an external consultant. For instance, moving away from the general disclosure of information, the company produced impact information by 2018/2019 through quantifying the sustainable performance of key aspects such as emissions, effluents, and waste with the KPIs. These disclosures also captured the water intensity, energy intensity, percentage of renewable energy used, the carbon footprint, and recycled bio-waste of the company. Based on the principle of the “materiality” of the IR framework, the company has recognized a number of important environmental and social factors, which includes biodiversity conservation, water, energy, sustainable agricultural practices, product quality, effluents and waste, emissions, and local community welfare and relations. Materiality is determined based on social and environmental risk assessments which are a mandatory requirement of the certification standards. For Watawala, IR is a transformation of its sustainability information to a new reporting format as guided by ICASL through a published guide and the GRI sustainability reporting (SR) guidelines. Table 13.3 illustrates a comparison of disclosures trends relevant to the six capitals of the IR framework between the financial years 2013/2014 and 2018/2019. These changes have resulted due to the guidance of an external resource person to fit Watawala’s economic, social and environmental performances into an “Integrated Format’ based on expertise in the industry and the information requirements of certifications. Watawala presents its integrated annual reports in an attractive manner by incorporating environmental and social performance information in the form of narratives, facts, figures and photographs. The previously described private certifications and

Debt/equity capital

Harvested land extent

Harvested land extent, ageing of plantations, yield, renewable energy, energy intensity, carbon footprint and IUCN Red list-endangered/threatened species in numbers

2013/2014 IR Initiation year

2018/2019 Latest IR

Source Developed by authors based on Watawala annual reports

Earnings, financial position and returns to shareholder information

Financial capital

Natural capital

Financial year

Table 13.3 Comparison of integrated reporting disclosures

Production capacity, capacity utilization % and Capex during the year

No of tea factories, plant & machinery

Manufactured

Selling marks

Intellectual

Human capital and community Innovations integration Number of No of employees, training hours innovations per employee, employee retention ratio, injuries, no. of employees living on estates, amount invested for community activities and number of beneficiaries of community activities

No of employees

Human capital

Social and relationship capital Number of strategic partners

Number of buyers/brokers and strategic partners

Social and relationship capital

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SR frameworks have served as guides in shaping the nature and extent of this novel form of reporting termed “IR”.

13.4 Challenges and Remedial Actions Despite Watawala having produced its annual financial statements as an integrated report continuously since the year 2013/14, the top management of the company has a limited understanding of the concept of IR and its requirements. Indeed, they are not sufficiently convinced as to how IR would benefit the business, beyond it being another compliance requirement in corporate reporting. With lack of direction and support from top management, middle managers and operational level employees are not even interested in dedicating their time and energy to IR, and thus, resist undertaking responsibility in the preparation of the integrated report. Since there is only a handful of external experts available for writing up integrated reports for companies, it is a costly and challenging exercise for the company every year. The information required for the report is supplied based on the availability of data and is mainly limited to the data that is generated and maintained for private certification monitoring and auditing purposes. It is quite challenging to collect other specific information directly perceived as necessary for IR due to the absence or lack of procedures for data tracking, collection, and recording in place within the organization. Though the IR guidance book published by the ICASL is being used by internal resource persons in identifying and framing the basic data for the integrated report, it is yet another box-filling exercise for them, similar to ticking the boxes of GRI compliance.

13.5 Lessons Learned and the Way Forward The suitability of IR as a concept and a new form of reporting needs to be well understood in the context of the companies in which this is being practised. As illustrated in the Case company of Watawala, IR is a requirement to “do, measure and publish” company activities. It is not known whether all key stakeholders demand sustainable information (Rowbottom and Lymer (2009). On the other hand, since the tea plantation industry has existed for more than 150 years, it should be an economically sustainable industry, and, at the same time, the interests of its wider stakeholders need to be satisfied. For instance, the Board of directors of Watawala expects no publicity for their voluntary work such as the construction of plantation roads or the construction and development of childcare centres, emphasizing that such extra costs are worth investing towards such work. This shows that prescribing and standardizing social and environmental performances and reporting them needs to take into account their contextual backgrounds as well.

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However, this case shows how compliance with these external certifications brings both direct and indirect financial incentives. For instance, Fairtrade Labelling Organizations International relieves Watawala in spending on certain community welfare activities by paying a Fairtrade premium towards a fund established to improve community welfare activities. Similarly, the premium price paid for Rainforest Alliance-certified teas motivates tea companies towards certification. On the other hand, such certification compliances have only become obligatory through export requirements and the bid to win overseas buyers. Thus, the company is committed to adhering to these certifications despite the high cost associated with them for monitoring and external audits, as such adherence provides the license for exports, and attracts sustainability interested overseas buyers. In this context, the ICASL has an important role to play in recommending IR as a worthy concept to top managers of large corporate entities operating in the tea sector in Sri Lanka, and changing their mind-sets to accept IR.

References Atupola U, Gunarathne N (2022) Institutional pressures for corporate biodiversity management practices in the plantation sector: evidence from the tea industry in Sri Lanka. Bus Strateg Environ. https://doi.org/10.1002/bse.3143 Bebbington J, Larrinaga C (2014) Accounting and sustainable development: an exploration. Acc Organ Soc 39(6):395–413 Giovannucci D, Ponte S (2005) Standards as a new form of social contract? Sustainability initiatives in the coffee industry. Food Policy 30:284–301 Global Reporting Initiative (2016) GRI standards: Universal standards. Available at https://www. globalreporting.org/standards. Accessed 10 Feb, 2017 Gunarathne AND, Senaratne S (2018) Country readiness in adopting integrated reporting: a diamond theory approach from an Asian Pacific economy. Account Sustain: Asia Pacific Perspect 39–66 Gunarathne N, Senaratne S (2017) Diffusion of integrated reporting in an emerging South Asian (SAARC) nation. Manag Audit J 32(4/5):524–548 International Integrated Reporting Council (2013) The international framework. Available at: https:// integratedreporting.org/wpcontent. Accessed 4 Jan 2017 Moog S, Spicer A, Bohm S (2015) The politics of multi-stakeholder initiatives: the crisis of the forest stewardship council. J Bus Ethics 128(3):469–493 Munasinghe A, Cuckston T, Rowbottom N (2021) Sustainability certification as marketization: rainforest alliance in the Sri Lankan tea production industry. Account Forum 45(3):247–272 Munasinghe A (2017) The agency of global sustainability certifications in developing countries: rainforest alliance & the Sri Lankan tea industry Rowbottom N, Lymer A (2009) Exploring the use of online corporate sustainability information. Account Forum 33(2):176–186 Stubbs W, Higgins C (2014) Integrated reporting and internal mechanisms of change. Account Auditing Account J 27(7):1068–1089

M. A. T. K. Munasinghe is Senior Lecturer in the Department of Accountancy at the University of Kelaniya. She graduated from the University of Sri Jayewardenepura with a B.Sc. in Accounting (Special) and holds an MBA from the University of Colombo. She was awarded a

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Commonwealth scholarship for a Ph.D. at the University of Birmingham, UK. She is a member of professional accounting bodies: a fellow member of the Institute of Chartered Accountants, Sri Lanka, and an associate member of the CIMA, UK, and started her career as an audit trainee at Ernst & Yong. She teaches undergraduates and postgraduates in the areas of financial accounting, forensic accounting, auditing & governance, and their contemporary issues. Her research interests include sustainability accounting, auditing, governance issues, business reporting and forensic accounting. She has contributed to developing the first Accounting Subject Benchmark statement for state universities. Saman Kumara is Financial Accountant at Watawala Plantations PLCSri Lanka. He is a graduate of the Department of Accountancy, University of Kelaniya, and a Certified Business Accountant (CBA) of the Institute of Chartered Accountants of Sri Lanka. He started his career as an Audit Trainee. He is an experienced Financial Accountant with broad exposure in listed & public company finance and business operations (Watawala Plantations PLCWatawala Dairy Limited and Diversified Holding company) over a 15-year tenure. He contributes to developing the financial reporting and disclosure of non-financial information for Watawala Plantations PLC, including the preparation of Integrated Reports.

Part III

Integrated Reporting for Practitioners—Corporate Experience and Professional Practice

Chapter 14

Reporting on Key Performance Indicators Related to Non-financial Capitals: Evidence from Sri Lankan Integrated Report Preparers Nayomi Wijesinghe, Subhash Abhayawansa, and Carol Adams

Abstract The International Integrated Reporting (IR) Framework guides companies when considering a broad range of capitals, including non-financial capitals, in the process of value creation and reporting. Companies’ approaches to incorporating non-financial capitals into their strategies, decision-making, and value creation have hitherto received little attention. This chapter examines how integrated report preparers in Sri Lanka use Key Performance Indicators (KPIs) to explain the use and transformation of non-financial capitals to create value. Three categories of integrated report preparers are identified based on the duration of integrated report preparation. Data was collected from 2018 company reports. The study finds that the disclosure of KPIs relating to non-financial capitals increases with companies’ maturity in preparing integrated reports. Nearly half of the integrated report preparers have failed to display the necessary alignment between non-financial capitals, topics material to stakeholders, risk management and company strategy. The formats used to disclose KPIs and the periods covered by the KPIs are inconsistent, hindering comparability of company performances on capitals between companies and across periods. Most companies have not set targets in relation to KPIs on non-financial capitals, making performance evaluation difficult. More narrative content and less result-oriented quantitative information has been provided on critical non-financial capitals related to sustainability. The findings raise doubts about companies’ ability to leverage integrated thinking, a fundamental enabler of integrated reporting and the genuineness of companies’ commitment to sustainability. N. Wijesinghe (B) · S. Abhayawansa Swinburne University of Technology, Hawthorn, VIC, Australia e-mail: [email protected] S. Abhayawansa e-mail: [email protected] C. Adams Durham University Business School, Durham, England e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 K.-H. Lee et al. (eds.), Integrated Reporting (IR) for Sustainability, Eco-Efficiency in Industry and Science 34, https://doi.org/10.1007/978-3-031-41833-4_14

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Keywords Integrated reporting · Integrated thinking · Key performance indicators (KPIs) · Non-financial capitals · Sri Lanka · Sustainability

14.1 Introduction The main objective of integrated reporting (IR) is to embed integrated thinking within business practices (International Integrated Reporting Council (IIRC) 2021). Many public and private sector companies have adopted the International IR (IR) Framework published in 2013 and updated in 2021. The IR Framework identifies six capitals that organisations use as inputs and later transform into outputs and outcomes: financial, manufactured, human, natural, intellectual, and social & relationship capitals. Although traditional corporate reporting is primarily focused on financial capital, the adoption of IR has stimulated companies to expand their focus to non-financial capitals and the integration of financial and non-financial information, among other things. Setting Key Performance Indicators (KPIs) is a primary mechanism used to integrate non-financial capitals into the organisation’s strategy, decision-making, and value creation processes. The use of KPIs relating to non-financial capitals is one of the changes that have happened in reporting practices resulting from IR (Higgins et al. 2019). Although the IR Framework does not prescribe specific disclosure items or indicators, it encourages adopters to use KPIs in explaining how an organisation creates value across the six capitals (IIRC 2021). There are concerns that the adoption of IR might discourage companies from disclosing information about their true impact on the environment and society, favouring the disclosure of social and environmental information that is financially material (Flower 2015). Whether a company can achieve long-term sustainability through IR has been much debated in the literature. Flower (2015) argues that the IIRC has abandoned sustainability accounting based on two considerations. First, the IIRC’s concept of value is value for investors and not for society, although the IR Framework published in 2013 refers to value creation for the organisation and society. Second, the IIRC has placed no obligation on firms to report harm inflicted on outside entities. Stacchezzini et al. (2016) reveal that firms offer biased disclosures in integrated reports, provide limited forwardlooking and quantitative disclosure on sustainability outcomes and do not provide information about sustainability performance when their social and environmental results are poor. Also, Brown and Dillard (2014) argue that IR offers a minimal and one-sided approach to assessing and reporting sustainability issues. Maniora (2017) found that IR adoption has not impacted sustainability reporting; hence, companies produce stand-alone environmental, social and governance reports alongside their integrated report. Despite criticisms, some scholars have identified IR as a mechanism that facilitates the creation of a more sustainable society, which involve less regulation and reputational risks, better internal decision-making processes, and financial stability (Adams 2015; Eccles and Saltzman 2011; Ioana and Adriana 2014). According to

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Setia et al. (2015), the introduction of IR increased the extent of disclosure of nonfinancial capitals by the top 25 listed companies in South Africa. Similarly, Montecalvo et al. (2018) find a steady increase in the quantity and quality of sustainability disclosures in organisations adopting IR. They claim that the IR process has resulted in a more balanced disclosure of the material aspects of sustainability, indicating that IR adopters have enhanced sustainability reporting (SR) for all stakeholders. Vitolla et al. (2019) state that IR enables a better understanding of sustainability issues by top management and allows greater alignment between published information and investor needs. Churet and Eccles (2014) find a positive relationship between the effective management of environmental, social, governance issues and the adoption of IR. They state that companies that are managing risks and opportunities arising from environmental, social, governance matters are more likely to communicate sustainability issues in an integrated way. Churet and Eccles (2014) and Vitolla et al. (2019) indicate that the adoption of IR has reduced the gap between sustainability disclosure and performance. However, according to Stacchezzini et al. (2016), reporting biases do exist, even in integrated reports. The purpose of this chapter is to investigate whether companies adopting the IR Framework are contributing to sustainability by communicating how they preserve/ increase non-financial capitals in creating value. To this end, the study reported in this chapter sheds light on the extent and nature of disclosure of KPIs relating to nonfinancial capitals by Sri Lankan integrated report preparers who are at different stages of maturity in terms of adopting the IR Framework. The insights generated from this investigation can explain whether and how IR influences companies to focus on non-financial capitals and sustainability. It is expected that when companies become more experienced with preparing integrated reports, they will use more KPIs relating to non-financial capitals, inform them through materiality determination processes and link them with strategy and risk management. Sri Lankan companies are encouraged to adopt IR mainly by public accounting bodies of Sri Lanka. A Sri Lankan company published the first integrated report in 2011. IR has gained much recognition among Sri Lankan listed companies over the past decade. Analysis of year 2018 annual reports revealed that eighty-nine companies out of 286 companies listed on the Colombo Stock Exchange (CSE) (nearly 31%) adopted the IR Framework in preparing annual/integrated reports. High institutional support and motivation from professional accounting bodies, regulators and accounting firms have been identified as driving a high IR adoption rate in Sri Lanka (Gunarathne and Senaratne 2017). However, Sri Lankan integrated report preparers are at various stages in their IR journeys. This study classifies integrated report preparers into three groups, based on the number of years (period) of adopting the IR Framework in preparing integrated/annual reports. It explores how these different groups of preparers disclose KPIs related to non-financial capitals in their annual/ integrated reports. The findings of this study reveal that the disclosure of non-financial-capital-related KPIs increases with companies’ maturity in preparing integrated reports. Integrated report preparers have used different formats and time spans for reporting on KPIs relating to non-financial capitals, limiting the comparability between companies and

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across periods. Nearly half the integrated report preparers have failed to display an alignment between non-financial-capitals, topics material to stakeholders, risk management and company strategy. Only a very few companies have set KPIs for non-financial capitals for future periods. The findings indicate that companies tend to do more narrative reporting with less results-oriented quantitative information on critical non-financial capitals relating to sustainability. The rest of the chapter is organised as follows. Section 2 reviews the relevant literature on the relationship between IR, integrated thinking, sustainability and disclosure of KPIs, relating to non-financial capitals. Section 3 describes how institutional theory provides a useful framework to understand the adoption of IR by Sri Lankan companies and, in turn, disclosure of KPIs relating to non-financial capitals. Section 4 describes the research design of the study. Section 5 explains and discusses the findings, and the concluding remarks are provided in Sect. 6.

14.2 Literature Review One objective of IR is to enhance integrated thinking within organisations. ‘Integrated thinking is the active consideration by an organisation of the relationships between its various operating and functional units and the capitals that the organisation uses or affects’ (IIRC 2021, p. 3). The practice of integrated thinking involves considering the organisation’s activities, performance and outcomes of the capitals (IIRC 2021). KPIs are a means of quantifying the impact of non-financial capitals on value creation, preservation, and erosion, and the impact of organisational value creation processes on non-financial capitals. Therefore, the use of KPIs relating to non-financial capitals facilitates integrated thinking. Although it is not the primary purpose of an integrated report to quantify or monetise uses of or effects on the capitals, KPIs help companies manage, assess and enhance the performance of/on non-financial capitals. By setting performance objectives, collecting and analysing performance data and comparing performance against objectives, organisations can develop strategies and make decisions to improve the values they create for themselves, the environment and society (Chan and Chan 2004). The use of KPIs in this manner enables organisations to ‘enhance accountability and stewardship for the broad base of capitals … and promote understanding of their interdependencies’, which of course is an aim of IR (IIRC 2021, p. 2). Since the IR Framework does not recommend specific KPIs, measurement methods or the disclosure of specific information items, company management needs to exercise judgement to determine which matters are material and how they are disclosed (IIRC 2021). However, the IIRC (2021, p. 12) states that ‘quantitative indicators, including KPIs and monetized metrics … can be very helpful in explaining how an organization creates, preserves or erodes value and how it uses and affects various capitals’. The use of KPIs increases the readability, comparability and clarity of integrated reports, thereby ‘improv[ing] the quality of information available to

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providers of financial capital to enable a more efficient and productive allocation of capital’ as stated in the IR Framework (IIRC 2021, p. 2). The IIRC and the Sustainability Accounting Standards Board (SASB) announced plans to merge in 2020 to form the Value Reporting Foundation. It aims to provide investors and corporates with a comprehensive corporate reporting framework to report on the full range of enterprise value drivers (IIRC 2020). The establishment of the Value Reporting Foundation and its proposed consolidation (along with the Climate Disclosure Standards Board) into the International Sustainability Standards Board (ISSB) indicate that the IR Framework may permeate the SR space and more measurable, comparable and consistent information about non-financial capitals might be prescribed in future sustainability standards. It has been noted that the establishment of the ISSB has been driven by the aim to deliver consistent, comparable, reliable and assurable information relevant to enterprise value creation, sustainable development and evolving stakeholder expectations (IFAC 2021). KPIs can improve IR quality by linking material sustainable development issues pertaining to non-financial capitals with risk management, strategy and value creation. The non-financial capitals that are material from a value creation point of view can be identified through a materiality determination process, which integrated report preparers are encouraged to undertake. According to the IR Framework, material matters are those that affect an organisation’s ability to create value in the short, medium and long terms, and key stakeholders should be consulted, and their perspectives should be considered and understood when identifying these matters. It is argued that the IR Framework promotes financial materiality: it is the social and environmental materiality that broadens organisations’ focus, prompting disclosures of organisational impacts that matter to society and the environment, and, thus, sustainable development (Abhayawansa and Adams 2022 forthcoming). The concept of double materiality, which incorporates both the aforementioned perspectives (World Business Council for Sustainable Development 2021), enables organisations to consider sustainable development risks and opportunities that have direct or indirect impacts on capitals and value creation. Adams et al. (2020) explain that even a company adopting the IR Framework can broaden its scope (as explained in the Sustainable Development Goal Disclosure Recommendations) to adopt a double materiality perspective. In a company adopting a double materiality perspective, KPIs relating to nonfinancial capitals can be used to monitor and manage sustainable development risks and link them to strategy and financial performance. The IIRC (2021, p. 46) notes that: Key performance indicators that combine financial measures with other components (e.g. the ratio of greenhouse gas emissions to sales) … may be used to demonstrate the connectivity of financial performance with performance regarding other capitals. In some cases, this may also include monetizing certain effects on the capitals (e.g. carbon emissions and water use).

Similarly, such a company will use KPIs relating to non-financial capitals to communicate the impacts of its activities on society and the environment.

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Fig. 14.1 Role of non-financial capital KPIs in sustainability

Given that non-financial capitals (especially human, social and relationship and natural capitals) are closely associated with sustainability, the KPIs relating to non-financial capitals invariably reflects companies’ commitment to implementing sustainable strategies (Hristov and Chirico 2019). Adams and Frost (2008) identify KPIs as a mechanism for measuring sustainability performance and find that many companies use sustainability KPIs in decision-making, planning and performance management. Setting up or disclosing KPIs without linking them with issues identified as material (through the materiality determination process), the risk management framework, business strategy and governance priorities is unlikely to provide meaningful information to stakeholders. Oshika and Saka (2017) claim that it is important to report KPIs for a sufficient/considerable period, as otherwise, it is difficult to confirm whether specific KPIs lead to a firm’s sustainability. Similarly, KPIs alone would not be sufficient to explain how a company has created (and will create) value and its sustainability performance (Adams and Abhayawansa 2022 forthcoming). As KPIs can be misleading (or even deceptive), especially when explaining sustainability performance, Allison-Hope (2016) suggests the inclusion of a succinct narrative (Key Performance Narrative) at the top to enable users to contextualise the value creation story of the company. Figure 14.1 shows how the materiality determination process can be connected to sustainable development by enabling organisations to focus on creating value for the environment and society in addition to financial capital providers. It also highlights how KPIs enable this connection to be strengthened and communicated both internally and externally. Prior literature and the IR Framework provide a basis for conceptualising a system of KPIs relating to non-financial capitals. Hristov and Chirico (2019) state that KPIs should strictly correlate with corporate goals that must be achieved. After identifying organisational goals, the KPI system must be defined. Hristov and Chirico (2019, p. 7) further identify that KPIs must: . ‘correlate with strategic organisational objectives; . be significant and effectively explain the value creation process; . be reliable, comprehensive, consistent, and comparable’. The IR Framework provides characteristics of quantitative indicators about capitals, which are useful for determining a system of KPIs. Table 14.1 provides these characteristics.

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Table 14.1 Characteristics of quantitative indicators 1 Relevant to the circumstances of the organisation 2 Consistent with indicators used internally by those charged with governance 3 Connected (e.g. they display connectivity between financial and other information) 4 Focused on the matters identified by the organisation’s materiality determination process 5 Presented with the corresponding targets, forecasts or projections for two or more future periods 6 Presented for multiple periods (e.g. three or more periods) to provide an appreciation of trends 7 Presented against previously reported targets, forecasts or projections for accountability 8 Consistent with generally accepted industry or regional benchmarks to provide a basis for comparison 9 Reported consistently over successive periods, regardless of whether the resulting trends and comparisons are favourable or unfavourable Source IIRC (2021, p. 50)

14.3 Institutional Theoretical Explanation of the Practice of Integrated Reporting This section explains the reporting practice of Sri Lankan integrated report preparers viewed through the lens of institutional theory. Institutional theory DiMaggio and Powell (1983) examined why there is a homogeneity of forms and practices (institutional isomorphism) among organisations. They identified three isomorphic pressures affecting the homogeneity of organisational forms and practices, namely coercive, mimetic and normative pressures. Coercive isomorphism results from formal and informal pressures exerted on organisations by other organisations upon which they are dependent, and by cultural expectations of the society within which they function (DiMaggio and Powell 1983). Mimetic isomorphism generally occurs when there are uncertainties and competition. Uncertainties can be created when organisational technologies are poorly understood, when goals are ambiguous or when the environment creates symbolic uncertainty. Organisations tend to model themselves on similar organisations in their field that they perceive to be legitimate or successful in order to cope with these uncertainties. Similarly, when there is intense competition in the market and industry, companies tend to mimic the forms and practices of other successful companies (DiMaggio and Powell 1983). Normative isomorphism stems primarily from professionalisation. Professionals exhibit many similarities to their professional counterparts in other organisations (DiMaggio and Powell 1983). Prior studies have identified that isomorphic pressures influence the adoption of IR. For instance, Lakshan (2018) finds that the three types of isomorphic forces

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collectively act to influence the decision to adopt IR by Sri Lankan publicly listed companies. Similarly, Montecalvo et al. (2018) find that disclosure of sustainability information by companies over an extended period is initially influenced by coercive pressure but later, by a combination of coercive, normative and mimetic isomorphic pressures. Adams et al. (2016) argue that the evolution of corporate reporting on social investment activities can be explained by isopraxism, a concept that has an important but subtle difference from isomorphism. While isomorphism does not result in reinventions by the adopters of a given practice, under isopraxism, ideas are translated and modified as they travel between adopters, although they adopt it for the same or similar reasons (Adams et al. 2016). It is likely for isopraxism to occur when integrated report preparers interpret the principles and guidelines of the IR Framework differently based on their own experiences and maturity. Therefore, while isomorphism explains the adoption of IR by Sri Lankan companies, isopraxism can manifest in the use of KPIs relating to non-financial capitals in integrated reports, as there are minimal guidelines on what and how KPIs should be used. Gibassier et al. (2019) find that IR has diffused in complementary processes, including isonymistic processes, in addition to the isomorphic and isopraxic processes that had already been identified in the literature. Like isomorphism and isopraxism, isonymism is also a process of imitation: it leads to the adoption of the same names (e.g. the corporate report labelled as an integrated report) but for different forms and practices (e.g. differences in the use of KPIs in the so-called integrated reports) (see Erlingsdóttir and Lindberg 2005). Isomorphic pressures in Sri Lanka There are several isomorphic pressures on Sri Lankan listed companies not only to prepare integrated reports but also to enhance the quality of their reports. First, normative pressure is created by the accounting profession in Sri Lanka by embracing IR and encouraging the members of Sri Lankan professional accounting bodies to implement IR within the companies in which they work. In addition, the accounting profession actively advocates and promotes the diffusion of the practice of IR. The ICASL and the Institute of Certified Management Accountants (CMA) of Sri Lanka have taken the leading roles in this regard. Both these professional accounting bodies organise seminars, workshops and conferences to enhance the awareness of IR among their members and companies and educate them in the preparation of integrated reports. In 2016, the ICASL, in association with the IIRC, formed the Integrated Reporting Council with a view to ‘promoting integrated reporting in Sri Lanka and enabling corporates to share knowledge on matters relating to the content, context and implementation’ of IR (ICASL 2021, p. 1). In operationalising this aim, the ICASL has issued guidelines for the preparation of integrated reports in 2015 and 2017. Moreover, CMA Sri Lanka publishes its own integrated report to highlight its commitment to the practice of IR. Universities and other educational institutions also create normative pressure by including IR in their curricula (Senaratne et al. 2022). Secondly, mimetic isomorphic pressure is created by making Sri Lankan companies compete with one another for annual and IR awards. The ICASL and CMA Sri Lanka conduct annual reporting competitions separately. CMA Sri Lanka’s yearly

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award competition is purely for integrated report preparers. In 2020, CMA Sri Lanka held the competition for the 6th consecutive time, and now it has become a popular event in the Sri Lankan corporate calendar. The ICASL annual report awards is another major corporate event that has been held over the past 55 years. The best integrated report preparers are also evaluated as a part of the ICASL awards. These annual/integrated report awards create mimetic pressure because winning an award creates market visibility for companies. Finally, the CSE, which is the only stock exchange in Sri Lanka, by preparing an integrated report, passively creates coercive pressure on all listed companies to adopt IR. The CSE also collaborates with CMA Sri Lanka in organising the annual report awards, thereby reinforcing their expectations of listed companies to prepare integrated reports. The sources of isomorphic pressure explained in this section are summarised in Table 14.2. Isomorphic pressures encourage companies to follow the IR Framework. Arguably, including KPIs in integrated reports can be an effective way for companies to enhance the quality of communication about capitals in response to isomorphic pressures and distinguish them from other integrated report preparers. Hence, isonymism might explain the use of KPIs by integrated report preparers in Sri Lanka. At the same time, as Sri Lankan integrated report preparers differ in their levels of experience in preparing integrated reports (i.e. some are new adopters while others Table 14.2 Isomorphic pressures on listed companies to prepare integrated reports Type of isomorphic pressure Actors

How isomorphic pressures are created

Coercive pressures

• IIRC • CSE

• Issuing guidelines for companies for preparing integrated reports • Conducting IR awards and competitions • Preparing their own integrated report

Normative pressures

• ICASL • CMA Sri Lanka • Other public accounting bodies • Local universities

• Issuing guidelines for companies for preparing integrated reports • Conducting workshops, seminars and conferences • Including IR in the curriculum for accounting students and professional accountants

Mimetic pressures

• CMA Sri Lanka • ICASL • Other companies (peers)

• Encouraging companies to disclose information in an integrated manner and earn recognition • Advocating for companies to compete with each other to enhance reporting

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are mature adopters), some level of isopraxism might be observable in relation to the use of KPIs for non-financial capitals. In these ways, the disclosure of KPIs by Sri Lankan integrated report preparers can be explained through institutional theory.

14.4 Research Design Sample The data for this study were collected through content analysis of year 2018 annual reports of companies listed on the CSE. In Sri Lanka, some companies prepare annual reports for the year ended 31st December while others for the year ended 31st March. This study content analysed annual reports prepared for the years ended 31 December 2018 and 31 March 2019. Some companies label their reports annual reports despite claiming compliance with the IR Framework. Hence, the report’s label was not used as the sole determinant of whether a report was an integrated report or not. Instead, all reports were analysed against the criteria used in Gibassier et al. (2019) to determine whether they were actually integrated reports. The criteria used were: (1) whether the report is labelled an integrated report, (2) whether the company has referred to the IIRC or the IR Framework, (3) whether the report includes explanations of the organisational overview and external environment, (4) whether the report explains the company’s business model, (5) whether the report explains the corporate governance aspects of the company, (6) whether the report explains the risks and opportunities facing the company, (7) whether the report describes the company’s strategy and resource allocation, (8) whether the report identifies relevant capitals of the business, (9) whether the report depicts the materiality matrix of the company and (10) whether the report describes the stakeholders and stakeholder management process of the company. Companies that have satisfied all of these ten criteria are considered ‘integrated report preparers’ in this study. In the financial year 2018, eighty-nine companies of the 286 listed companies had prepared integrated reports. The reports prepared by these companies in prior periods were scrutinised to determine the length of time they have been preparing integrated reports. The maximum period of adopting IR by a Sri Lanka company is nine years, and the minimum is one year, as of 2018. Three categories of adopters were identified based on the period of IR adoption: (1) mature adopters (companies that have been preparing integrated reports for more than five years); (2) mediumterm adopters (companies that have been preparing integrated reports for three to five years); and (3) new adopters (companies that have been preparing integrated reports for up to two years). Table 14.3 shows the number and proportion of companies in each of the three categories of the total population as well as in our sample. The sample of integrated report preparers examined in this study was chosen by randomly selecting approximately half of the companies from each of the three categories shown in Table 14.3. A stratified sampling approach was adopted to ensure

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Table 14.3 Categories of IR adopters Category

No of companies

%

Study sample

%

Mature adopters (>5 years)

21

23

11

51

Medium-term adopters (3–5 years)

39

44

20

52

New adopters ( = LKR2.2 Bn)

26 (57%)

2 (8%)

2 (8%)

3 (11%) 18 (69%)

16

Small (