Encompassing non-financial reporting in a coercive framework for enhancing social responsibility: Romanian listed companies' case

Tiron-Tudor, Adriana; Nistor, Cristina Silvia; Ştefănescu, Cristina Alexandrina; Zanellato, Gianluca Article Encompassing non-financial reporting in a coercive framework for enhancing social responsibility: Romanian listed companies' case Amfiteatru Economic Journal Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Tiron-Tudor, Adriana; Nistor, Cristina Silvia; Ştefănescu, Cristina Alexandrina; Zanellato, Gianluca (2019) : Encompassing non-financial reporting in a coercive framework for enhancing social responsibility: Romanian listed companies' case, Amfiteatru Economic Journal, ISSN 2247-9104, The Bucharest University of Economic Studies, Bucharest, Vol. 21, Iss. 52, pp. 590-606, https://doi.org/10.24818/EA/2019/52/590 This Version is available at: https://hdl.handle.net/10419/281462 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ AE Encompassing Non-Financial Reporting in A Coercive Framework for Enhancing Social Responsibility: Romanian Listed Companies’ Case 590 Amfiteatru Economic ENCOMPASSING NON-FINANCIAL REPORTING IN A COERCIVE FRAMEWORK FOR ENHANCING SOCIAL RESPONSIBILITY: ROMANIAN LISTED COMPANIES’ CASE Adriana Tiron-Tudor1 * , Cristina Silvia Nistor2, Cristina Alexandrina Ştefănescu3 and Gianluca Zanellato4 1)2)3)4) Babeş-Bolyai University, Cluj-Napoca, Romania. Please cite this article as: Tiron-Tudor, A., Nistor, C.S., Ștefănescu, C.A. and Zanellato, G., 2019. Encompassing Non-Financial Reporting in A Coercive Framework for Enhancing Social Responsibility: Romanian Listed Companies’ Case. Amfiteatru Economic, 21(52), pp. 590-606. DOI: 10.24818/EA/2019/52/590 Article History Received: 29 March 2019 Revised: 16 May 2019 Accepted: 25 June 2019 Abstract This study investigates the disclosure levels of Romanians listed companies’ pre and post the implementation of the European Directive 2014/95 (EUD) in order to explore the effects of the new regulation entered into force in January 2017, under the institutional lens. Moreover, the paper emphasises whether Romanian Energy (Oil & Gas and Utilities) listed companies are delineating, in their reports, issues regarding environmental, social, and governance (ESG) aspects. The empirical research performed throughout a pre/post effect analysis of the level of non-financial disclosure, followed by an exploration of its determinants using the Paired-samples t-test and regression analysis enable us to demonstrate a slight increasing in disclosure level, after the entry into force of the EUD. Moreover, Energy companies who are the most challenged by the bio-economy trend, demonstrated a considerable increasing in terms of disclosure as well as focused and awareness about ESG issues. Research findings lead to an effort increasing in order to satisfy EUD requirements, information are useful to practitioners and policy makers. According to authors best knowledge this is the first assessment of disclosure levels and its determinant pre and post directive adoption in the Romanian case, which can result useful to appreciate the effect of the EUD. Keywords: non-financial disclosure, sustainability, bio-economy, social responsibility, disclosure index, European Directive 95/2014, Romania. JEL Classification: Q57, Q01. * Corresponding author, Tiron-Tudor Adriana – [email protected] Social Responsibility Code – Instrument for Better Correlation of Policies in the Field of Bio-Economy AE Vol. 21 • No. 52 • August 2019 591 Introduction In the global context of resource scarcity provoked by climate change, deforestation, and other forms of environmental damage, the business’ sustainable development needs to enhance a trustful cooperation with the communities based on environmental, social and governance (ESG) framework. Since ESG policy, sustainable development and stakeholder engagement became of increasing strategic importance, the interests in non-financial reporting, too. For this reason, the research focus on adopted solutions by companies concerning the publication of non-financial information in addition to the historic financial data, including ESG elements and forward-looking information over the short, medium and long term. The information also needs to be integrated so that business decisions are taken on a holistic basis, with all impacts considered. The European Commission, very attentive at the market’s needs, have been actively promoting non-financial reporting, not only for the benefit of society, but also as a means to improve the competitiveness and innovation of businesses in the European Union (EU) (FEE, 2016). In this frame, the paper comes to explore the non-financial information (hereafter NFI) disclosure prior and post period of the EU Directive 95/2014 (hereafter EUD), since it is a topic that raises important challenges in its implementation. Moreover, our study is focused on an Eastern European emerging economy without a long tradition in voluntary NFI disclosures and the first European country to ratify the Kyoto Protocol and a member of the International Labour Organization (ILO). The Romanian listed companies at the Bucharest Stock Exchange (BSE), included in the BET-Plus Index, compose the analysed sample for the years 2016-2017, a period that corresponds with the moment pre/post transposition of the EUD in the national legislation. In this context, the present contribution has been conducted under the institutional theoretical framework as a coercive isomorphism can be expected, due to the mandatory character of the EUD. The key objective of this study is to identify the impact of the EUD enactment on the level of transparency, and then there is a specific interest on how energy companies (oil & gas and utility sector), those companies carrying out activities affected by the moving to a bio-economy, have increased their reporting of ESG information in response to regulatory demands and pressure for voluntary disclosures. Thus, it aims to assess whether the level of non-financial disclosures has changed after the EUD’s implementation and to identify the main factors of influence. This assessment is useful to understand companies’ reaction to regulatory change, particularly in those sectors with impact on bio-economy. Thus, it allowed us to comment upon, current status and future improvements of the national initiatives, basing on the potential enablers and barriers that might have influenced the legislative enactment. The originality of the study is provided both theoretically and empirically. Thus, we enriched the literature by approaching the non-financial perspective of corporate reporting which is a fresh path (Dumitru et al., 2017), focusing on an emerging country where evidence on this topic is still scarce. Thus, we added value in this field by assessing the level of disclosures on NFI, thus chasing the effects of the EUD enactment and its potential factors of influents. The empirical viewpoint contains a quantitative research methodology that combines a descriptive approach aimed to compare the disclosure degree between industries and across time, thus focusing on the impact of the EUD enactment on the level of transparency, with a statistical approach designed to investigate its determinants through AE Encompassing Non-Financial Reporting in A Coercive Framework for Enhancing Social Responsibility: Romanian Listed Companies’ Case 592 Amfiteatru Economic regression analysis. In addition, to increase the reliability of the empirical analysis, we performed appropriate significance and robustness tests, all of these coming to add value to the research literature. The main findings of our research reveal that Romanian companies’ disclosure was on average, higher than the Italian (Venturelli et al., 2017) or the Polish ones (Matuszak and Rozanska, 2017), the strong increase being encountered in case of companies belonging to an environmental sensitive industry (e.g. Oil & gas), which reached a level higher even than the average of the European extractive petroleum companies (Carini, et. al, 2018). Additionally, the main factors influencing the degree of disclosure proved to be the size of the company, its performance and the industry sector in which it operates. The study addresses a broad range of users including the regulators, industry or academia members. All third parties become very interested in companies ESG criteria with regard to the firm's ethical impact and sustainable practices. Moreover, knowing that even the bioeconomy represent the future, it cannot replace the fossil-based economy on short term (McCormick, 2011) and energy industry that have a strategic role in each state economy. The remainder of the paper proceeds as follows. The introduction reveals the whole image of the context, need, objective, scope, methodology and actuality of the study performed in a tight correlation with the theoretical background for non-financial information reporting, focusing on the importance of the new EUD at both international and national level. The research, framed in the institutional theory, develops predictions based on theoretical aspects argument and interpreted by empirical approaches (research methodology, results and conclusions) contribute by an original approach to the reveal of the positive impact of EUD adoption over the transparency level in the case of Romanian listed companies. 1. Literature review The presentation of traditional and purely financial indicators that ignores non-financial issues is no longer sufficient for investors and appears to be less relevant in a new century in which social and environmental aspects are essential (Atkins et al., 2015). Thus, different forms and reporting frameworks have developed over time (De Villiers and Sharma, 2017). The non-financial voluntary reporting birth and propagation are related to the development of democracy and economy. In the 1980s, the environmental issues became prevalent, due to the high level of risks associated with the impact of economic activities on nature’s degradation (Dura et al., 2019). Then the sustainability and social responsibility had spread in the 1990s when the holistic approach emerged, and the triple-bottom-line reporting acknowledged the interplay between economic, social and environmental facets of business (Ali et al., 2017; Idowu et al., 2018). Until the last part of the 20th century, reporting of non-financial information (social and environmental information) was made through annual corporate reports (De Villiersm et al., 2014). Subsequently, the company's social and environmental disclosures were made more and more in individual reports. In the European context, long before the commencement of the EUD, corporate sustainability reporting has always been considered a voluntary act. The most widely used standard is the GRI (Global Reporting Initiative). It proved very useful to organise environmental, social and governance indicators, to produce comparable and complete sustainable reports (Lueg et al., 2016) used by a considerable number of the reporting companies worldwide. Other Social Responsibility Code – Instrument for Better Correlation of Policies in the Field of Bio-Economy AE Vol. 21 • No. 52 • August 2019 593 frameworks used include AccountAbility’s AA1000 Standards, ISO 26000 and the policy initiative recommended by the United Nations Global Compact. CSR reporting is considered “The process of providing information designed to discharge social accountability” (GRI, 2011). Individual, social and environmental reports have become in time increasingly complex and long size because information on a wider range of non-financial issues has been presented to respond to the alleged information needs of several stakeholders (De Villiers et al., 2014). As a result, the overload of information makes it difficult for the readers to appreciate the links between all the information presented in the report (Dumay et al., 2016) and emerge the idea of integrating all of these in a single report, and the resulting practices became known as integrated reporting. Mandatory NFI reporting is about to gain momentum in the EU, especially after the introduction of the EUD. It lays down rules for companies with more than 500 employees to disclose specific information on social and environmental impacts of their operations. This Directive supports corporate reporting as a means towards better integration of sustainability within business models. The EUD, which has been ongoing implemented into national laws by its member states, becomes active from 2017. Before and moreover after the EUD issuance, conceptual and empirical research on the emerging NFI reporting practices has received growing attention from researchers, practitioners, and policymakers across various disciplines. Thus, most researchers conducted an ex-ante analysis of the non-financial reporting and its determinants (Carini et al., 2018; Szadziewska et al., 2018; Dumitru et al., 2017; Galant and Cerne, 2017), while there are few ex-post evidences (Sierra-Garcia et al., 2018; Venturelli et al., 2017; Matuszak and Rozanska, 2017). For example, the quality of CSR disclosure in Polish-listed Companies in the light of EUD requirements (Matuszak and Rozanska, 2017), the compliance to the EU Guidelines 2017/C215/01 with the IIRF and the GRI 4 guidelines on the European companies (Manes-Rossi et al., 2018), the level of non-financial and diversity disclosure and the transposition of the EUD into Italian law (Venturelli et al., 2017) or the level of completeness of NFI and the expected impact of the EUD in oil and gas sector (Carini et al., 2018) and the clarity of reports published by organizations (containing elements related to bioeconomy) in Europe (Avram et al., 2018). In Romania, the concept of CSR emerged only after the 1990s when the transition to a decentralized economy started. After 1990, the market economy starts, the strongly undercapitalised Romanian citizens and economic actors seek to maximise their immediate incomes and tend to neglect the long-term perspectives, but, a learning process concerning CSR was initiated and fostered by various market’ actors (Korka, 2005). Moreover, the accession as an EU member state in 2007 change a lot the Romanian society, business environment and corporate governance culture. Reforms influenced the involvement of companies in CSR and sustainability activities, which consisted largely in improvement or replacement of production technologies more “friendly” environment and social measures that targeted the employees or the company (Zapciu, 2015). After Romania’s integration into the EU, significant improvements were made to the normative acts concerning the protection of the environment, the health and safety of employees, transparency and anti-corruption. The implementation of responsible practices has become stronger and was driven mainly by the involvement of multinational companies that have transferred their practices and organisational culture from the headquarters to a local AE Encompassing Non-Financial Reporting in A Coercive Framework for Enhancing Social Responsibility: Romanian Listed Companies’ Case 594 Amfiteatru Economic level (Istrate et al, 2017). Besides the transfer of knowledge and best practices, a different kind of companies and “responsible industries” was developed after the European integration – the companies whose business objective itself is “to be responsible”. These companies are engaging in activities, which by their nature bring benefits to the environment and communities, and their responsibility comes as an indirect result of the goods and services they produce/provide. Since 2012, for all Romanian companies there is a legal requirement to explain: non-financial KPIs, employee-related and environmental information (Order 1286/2012) and moreover for listed companies, the analysis of the company’s activities including information related to employees, environmental impact, risk management and the associated policies and objectives, as well as prospective information. (CNVM Reg. no. 1/2006). The EUD is transposed in Romanian legislation by Order No. 1938/2016. The Order, is according with the EUD concerning the reporting framework, disclosure format, safe harbour principle, diversity reporting required, and adapted the definition of entities, report topics and content, auditor's involvement, and noncompliance penalties. The report must include the follows features: environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. According to the EUD, the report shall contain a description of the undertaking’s business model, company policies relating to nonfinancial matters, and the outcomes of those policies, principal risks related to nonfinancial matters and business activities, any nonfinancial KPIs that are used. This information shall be presented in the administrator report, or a separate report published alongside it or within six months of the balance sheet date, made available on the undertaking’s website and referenced in the directors' report. Just after 2007, Romanian companies’ narrative reports become a subject of study and one of this study (Bogdan et al., 2007) reveal the fact that after the privatisation, the management started to account for issues related to its social responsibility. CSR reporting in Romania is studied using the listed companies case (Jindrichovska and Purcarea, 2011; Dumitru et al., 2011; Dura et al. 2019), through the role of the stakeholders in its institutionalization (Gușe et al., 2016), or in relation with the EUD (Dumitru et al., 2017) or specific issues such as environmental information disclosure (Istrate et al., 2017) CSR reporting impact on companies’ employees (Dura et al., 2019), and financial performance (Hațeganu et al., 2017). Analysing the evolution of NFI reporting studies in Romania there is a positive trend, starting from inconsistent information in 2006-2008, to a more consistent in a short period (Jindrichovska and Purcarea, 2011). Moreover, in recent years, increasing demands on food security, energy conservation, water and raw materials have led to a growing need for switching to the use of renewable energy in the economy (wind energy, solar (thermal, photovoltaic and concentrated), hydroelectric power, tern energy, geothermal energy, biomass and the renewable part of waste) (Jenkins, 2008). The use of renewable energy has many potential benefits, including the reduction of greenhouse gas emissions, diversification of energy sources and reduced dependence on fossil fuels markets (especially oil and gas). In this respect, bio-economy (which includes the production, transformation and use of bio-materials and products) becomes the central theme of most economic and macro-economic strategies and programs, especially in industries traditionally based on (Eickhout, 2012) Due to these aspects, bioeconomy offers Social Responsibility Code – Instrument for Better Correlation of Policies in the Field of Bio-Economy AE Vol. 21 • No. 52 • August 2019 595 a sustainable alternative for the economy in general and especially for the energy and fuel industry (Jenkins, 2008). 2. Research methodology Voluntary disclosure of NFI can be seen as a strategy of legitimating companies’ behavior as “some organizations are considerably more visible, and some organizations depend relatively more heavily on social and political support” (Dowling and Pfeffer, 1975; p. 133). According to Deegan (2009), voluntary disclosure is related to institutional practices. Accordingly, EUD introduction fundamentally changed the context in which, from now on, organizations will disclose NFI. As for organizations with more than 500 employees becomes mandatory to disclose NFI, draws the non-financial disclosure into a coercive context. Given the previous assertions, our contribution is instituted on the theoretical framework provided by institutional theory, as “it operates to produce common understanding about what is appropriate, fundamentally, meaningful behavior” (Zucker, 1983; p. 5). For all of this arguments, institutional theory can be seen as “the social process by which individuals come to accept a shared definition of social reality – a conception whose validity is seen as independent of the actor’s own views or actions but is taken for granted as defining the “way things are” and/or the “way thing are to be done” (Scott, 1987; p. 496). In addition, Aldrich suggests that “the major factors that organizations must take into considerations are other organizations” (1979, p. 265). Moreover, the adopted theory enlightens management behavior similarities according to three means: mimetic, coercive and normative isomorphism (DiMaggio and Powell, 1983). In this vein, our study encounters two of the three mentioned processes as in the case of organizations with more than 500 employees’ organizations are confronting with a coercive isomorphism which originates from political influence and companies with less employees are imitating bigger similar organizations perceived, by them, as more legitimate or successful (DiMaggio & Powell, 1983). In line with the existent literature, institutional theory has been employed in order to demonstrate how organizations from the same country are conforming corporate behavior practices in their reporting system, outlining a low similarity in term of corporate practices (Guse et al., 2016). Further on, Dumitru et al. (2017) investigated, under the institutional theoretical framework, the EU Directive adoption by Poland and Romanian companies finding as the most influential institutional factor is regulation (Dumitru et al., 2017). Accordingly, organizations directly affected by the EUD should increase their disclosure levels because of coercive isomorphism, while organizations with less than 500 employees should increase their disclosure levels because of mimetic isomorphism. Grounded on the above assumptions we framed the subsequent research questions:  RQ1: What is the impact of the EUD enactment on the level of transparency?  RQ2: How coercive, mimetic and normative pressures influence the level of nonfinancial disclosure? For answering these research questions, we performed a quantitative research on a sample collected by gathering the annual reports issued by the 40 organisations included in the BET Plus, from the BSE, for the years 2016-2017. The sampled companies were grouped in AE Encompassing Non-Financial Reporting in A Coercive Framework for Enhancing Social Responsibility: Romanian Listed Companies’ Case 596 Amfiteatru Economic industry sectors according to Melloni et al. (2017), thus resulting six main categories, as follows: Consumer Good (8), Consumer Services (4), Financial (8), Industrial (12), Oil & Gas (5) and Utilities (3). In the first stage, for running the pre/post effect enquiry aimed to measure the impact of the EUD enactment on the level of transparency (RQ1), we proceeded to develop a tool for assessing it. In this respect, we performed a manual content analysis (Krippendorff, 2013) in order to investigate the level of the NFI disclosure provided by Romanian companies in their annual reports. This type of analysis was often used in prior studies focused on similar topics as environmental and social reporting (Giannarakis, 2014; Ali et al., 2017). In this vein, we conducted the analysis according to the checklist proposed by Manes et al. (2018) based on the requirements included in the European Union Guidelines 2017/C215/01 (hereafter EUG). Therefore, we used a dichotomous approach to quantify the information by attributing scores of “1” for the presence of the required element and “0” in case of absence (Venturelli et al., 2017; Gușe et al., 2016; Galant and Cerne, 2017). Consequently, we developed the non-financial information disclosure index (NFI) by dividing the number of elements disclosed in the annual report, required by the EUG, to the total number of elements. We used an un-weighted disclosure index to quantify the level of compliance of the reports considering the aim of our research, namely to assess the impact of the EUD enactment on the level of transparency by investigating only whether the required elements were included in the reports, without focusing on their degree of presentation (Guthrie and Parker, 2010). In order to ensure the reliability and validity of the investigation, the annual reports have been analysed separately by two authors. Then, the results have been compared and discussed to minimize any discrepancies and, finally appointed, thus increasing their trustworthiness. In the second stage, for performing the regression analysis aimed to identify possible factors influencing transparency enacted through the EUD (RQ2), we selected the potential determinants of the NFI disclosure (dependent variable) according to prior studies conducted on a similar topic. Among the most analyzed factors influencing there are the company size (measured by the number of employees, total assets or market capitalization), profitability (measured by ROA/ROE), financial leverage, Tobin’s Q, business sector, assurance, type of reporting (Szadziewska et al., 2018; Sierra-Garcia et al., 2018; Duran and Rodrigo, 2018; Venturelli et al., 2017; Galant and Cerne, 2017). A summary of the independent variables considered in this research comprising their definition, proxies and reference authors is presented in table no. 1. Table no. 1: Variables description Variable definition / proxy Prior studies Size ASSET The natural logarithm of the total assets value measured at the end of the fiscal year Szadziewska et al. (2018); Sierra-Garcia et al. (2018); Duran and Rodrigo (2018); Galant and Cerne (2017) EMPL The natural logarithm of the total number of employees at the end of the fiscal year Venturelli et al. (2017); Galant and Cerne (2017) Industry SENS Industry’s environmental sensitivity: “0” (Consumer goods and services); “1” (Industry, Oil &gas); “2” (Financial) Venturelli et al. (2017); Sierra-Garcia et al. (2018) Social Responsibility Code – Instrument for Better Correlation of Policies in the Field of Bio-Economy AE Vol. 21 • No. 52 • August 2019 597 Variable definition / proxy Prior studies Performance ROA Return on assets ‒ The ratio of the annual net income to the total assets at the year’s end Szadziewska et al. (2018); Duran and Rodrigo (2018); Galant and Cerne (2017) ROE Return on equity ‒ The ratio of the annual net income to the stockholders’ equity at the end of the fiscal Szadziewska et al. (2018); Duran and Rodrigo (2018) LEV Financial leverage ratio ‒ The ratio of the total debt divided by the total assets at the end of the fiscal year Szadziewska et al. (2018); Duran and Rodrigo (2018); Galant and Cerne (2017) Reporting type MAND The mandatory character of reporting due to the employees’ number criteria Venturelli et al. (2017) Source: Authors’ projection 3. Results and discussion For achieving our goal – to analyse the companies’ openness for the publication of NFI on social responsibility and sustainability, we performed a two-steps investigation throughout a pre/post effect analysis of the level of non-financial disclosure, followed by an exploration of its determinants. Firstly, for assessing the impact of the EUD enactment on the level of transparency (RQ1), the descriptive results reveal a noticeable increase in terms of disclosure in the year 2017, the first reporting period of the mandatory non-financial disclosure (see Table no. 2). Moreover, the average level of disclosure of our sample is higher, compared to the score of the Italian companies (49%) (Venturelli et al., 2017) or the Polish ones (36%) (Matuszak and Rozanska, 2017). Table no. 2: Disclosure levels per element Year Tot. NFI EUG 1 2 3 4 5 6 7 8 9 10 11 2016 0.51 0.78 0.39 0.11 0.86 0.22 0.75 0.83 0.25 0.31 0.06 1.00 2017 0.69 1.00 0.65 0.13 1.00 0.46 0.95 1.00 0.43 0.55 0.40 1.00 EUG: (1)Business model; (2)Policies and due diligence; (3)Outcome; (4)Principal risks and their management; (5)Key performance indicators; (6)Environmental matters; (7)Social & employee matters; (8)Respect for human rights; (9)Anti-corruption & bribery matters;(10) Reporting frameworks;(11) Board diversity disclosure Source: Calculations made by authors using SPSS software In order to analyse how reporting behaviour changed, as well as to outline further steps required by the Romanian listed companies to respect the EUD, it is relevant to consider the scores obtained by each element. Thus, for the year 2016, the results reveal companies’ predilection for disclosing the: Board Diversity Disclosure, Principal Risks and Their Management, Social and Employee Matters and Business Model (requested by CNVM Reg. no 1/2006) whilst, the lowest results have been obtained in Reporting Frameworks, Outcome, Key Performance Indicators and Respect for Human Right. In this sense, we found different reporting behaviours, revealing dissimilarities with other studies focused on the European level, as well as inconsistencies with other countries’ behaviour concerning the non-financial reporting required by the EUD. 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