Integrated reporting in Sri Lankan PLCs

This thesis focuses on the Integrated Reporting (IR) adoption decision by Sri Lankan Public Listed Companies (PLCs) from different perspectives. The thesis adopts an institutional theory with special reference to institutional isomorphism and institutional entrepreneurs as a theoretical framework for describing and analysing how external and internal forces drive Sri Lankan PLCs towards the adoption of IR. The thesis also identifies the expected benefits of adopting IR through an institutional theoretical lens. Subsequently, the thesis recognises the challenges faced by Sri Lankan PLCs during IR implementation. This thesis identifies the determination of materiality levels for non-financial information in the integrated reports of the sample companies including; interviewees’ perception of materiality level, managers’ awareness about the difficulty of determining materiality, techniques used by the sample companies to determine materiality levels, participants in the materiality determination decision and available guidance to determine materiality. The International Integrated Reporting Council (IIRC) provides the challenging question to integrated report preparers: “Where does the organisation want to go and how does it get there?” This thesis provides empirical evidence for this question by identifying the extent of future-oriented predictions, the risk inherent in future-oriented predictions and the mechanisms used by the sample companies to manage the risk of predictions in integrated reports. Finally, the expected benefits as specified by the IIRC and the literature are used as a basis against which the perceptions of the interviewees and the individual company’s integrated annual reports (IARs) are assessed. A qualitative method approach was adopted to answer the research questions. Qualitative semi-structured interviews were conducted with 55 interviewees (who were involved in the IR process) from 12 sample companies (who were practicing IR at different levels). Fourteen annual reports (ARs) before IR adoption and 50 IARs after IR adoption from the sample companies were examined. Qualitative data were analysed thematically. NVivo software was used to organise and manage the qualitative data. Findings revealed three types of isomorphic forces (coercive, mimetic and normative) that collectively act to influence the decision to adopt IR by the Sri Lankan PLCs. Of the 55 interviewees, one clear example of institutional entrepreneurship was identified. A path-creating/path-changing individual introduced IR into the company in 2010/11 before the IIRC introduced the consultation draft of the international IR framework. As early adopters of IR, the sample companies have experienced several challenges during the IR implementation period. Due to newness, lack of experience, lack of research and a lack of clarity in IR guidance, the knowledge the first movers have of IR (including implementation and practical requirements) is limited. There were several challenges with the IIRC guidelines: inadequate guidelines, confusion, understanding the framework and its requirements, business model, connectivity and making a concise report. There were several challenges from employees’ perspectives; lack of knowledge and expertise, changing employees’ mindset in favour of IR, obtaining the support of top management and burden for employees. Lack of proper information systems, lack of communication and coordination among different business units, and a lack of support from other divisions were the internal challenges faced during IR implementation. All the sample companies placed a high importance on the concept of materiality for non-financial information. While most of the companies used only the GRI guidelines, a few interviewees indicated the use of both IIRC and GRI guidelines to determine materiality levels. The companies used different methodologies to determine materiality levels for non-financial information. Methodologies were based on value creation, investor requirements/stakeholder analysis, relationship with KPIs/strategy, the usefulness of information for decisions, judgments, impact on stakeholders, and benchmarking. In some instances, companies used a combination of two or more techniques in the materiality level determination process. Most of these methods are consistent with IIRC criterion for materiality determination for non-financial information. The interviewees used preventive and continuing measures to mitigate the risk of making predictions about the future. The interviewees were more prepared to understate future performance predictions than to disclose the growth potential sought by management. They applied some measures to mitigate the risk of not achieving forecasts. These measures are listed under seven themes. However, most of the measures cause to deviate the IIRC objectives of disclosing future-oriented information in integrated reports and hinder the usefulness of information for informed decisions by stakeholders. The need to reduce risk and make predictions as accurately and realistically as possible is recognised. Another strategy to reduce the likelihood of a negative outcome is to be conservative in predictions, possibly rendering the disclosure less useful. The predictions are not likely to present the best reflection of the future direction of the companies. Another strategy is the incorporation of these predictions in the companies’ strategic planning process. Integration of financial predictions with non-financial predictions is also applied. Integrated reporting impacted each organisation’s risk management process. There was an increase in the frequency of monitoring, and special internal risk assessment procedures were introduced. The interview findings and analysis of the IARs provide evidence that the sample companies achieved a substantial number of benefits, particularly from external reporting perspectives. The companies achieved benefits at varying degrees according to the IIRC (2011) categorisation: better alignment of reported information with investor needs, availability of more accurate non-financial information, enhanced risk management, greater engagement with investors and other stakeholders, and lower reputational risk. Engagement with stakeholders improved. However, no evidence was found in support of higher levels of trust with key stakeholders, except from one company. Only a few of the sample companies achieved the following benefits: better resource allocation decisions, better identification of opportunities, an integrated corporate culture, and greater collaboration across different functions within the company. The thesis contributes to the emerging field of integrated reporting from multiple perspectives. It provides directions and insights for companies practicing IR, companies considering adopting IR, policymakers, accounting and non-accounting bodies. This thesis assists understanding of the IR phenomenon and provides an appreciation of the achieved benefits and implementation issues as well as the challenges IR implementers face during the adoption period