Abstract
This study examines how governance mechanisms affect the quality of integrated reporting (IR), which is fast emerging both as a tool to help firms understand their value creation process and to communicate effectively with external stakeholders. This study first developed an index to assess the quality of integrated reports. Subsequently, 132 integrated reports of Sri Lankan public listed companies selected over a three-year period were content analysed. The hypotheses formulated on the relationship between corporate governance and the quality of IR based on the agency theory were analysed using multivariate linear regression and panel regression. The results show that there is limited support from the corporate governance system for providing quality information to stakeholders on the value creation process through IR, except for board size and the availability of a separate risk management committee. This is the result of the heavy emphasis of corporate governance requirements and the resulting mechanisms of Sri Lankan companies on mandatory corporate reporting requirements compared to a voluntary reporting model such as IR. Since many corporate governance aspects are meant to fulfill mandatory reporting requirements, the results imply that the directors have given limited attention to providing quality information through voluntary disclosure practices such as IR, although they use resources to prepare integrated reports.
Highlights
Among the various mandatory and voluntary modes of corporate reporting, “integrated reporting [(IR)] has fast emerged as a new accounting practice to help firms understand how they create value and be able to effectively communicate this to external stakeholders” [1] (p. 53)
The study finds a positive relationship between board size and IR quality (IRQ) as in other studies, the existence of contradictory and cautionary findings implies that a firm has to strike a balance when increasing the number of directors to prevent shortcomings such as lack of communication, control, and coordination
This study has investigated the impact of corporate governance characteristics on IRQ
Summary
Among the various mandatory and voluntary modes of corporate reporting, “integrated reporting [(IR)] has fast emerged as a new accounting practice to help firms understand how they create value and be able to effectively communicate this to external stakeholders” [1] (p. 53). As IRQ generally refers to the capacity of IR to present the strategic elements that describe the performance and value creation of a firm [10], a much broader perspective should be adopted for evaluating the quality of how companies think, operate, monitor and report their performance in a connected way [11]. Corporate governance structure facilitate the adoption of a holistic view on strategy making, which results in the integration of different facets of value creation in an organization. It provides the oversight required for the value generation process and involves discharging the accountability of a firm depicting the connectivity of its value drivers. An effective corporate governance structure would lead to greater value creation in organizations, while providing a basis for IR to provide quality information
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