Attaining Legitimacy by Employee Information in Annual Reports

Accounting, Auditing & Accountability Journal
Attaining legitimacy by employee information in annual reports

Pamela Kent Tamara Zunker
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Auditing & Accountability Journal, Vol. 26 Iss 7 pp. 1072 - 1106
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AAAJ
26,7
Attaining legitimacy by employee

information in annual reports
Pamela Kent and Tamara Zunker
1072
Bond Business School, Bond University, Gold Coast, Australia

Abstract
Purpose The purpose of this study is to provide evidence on the category, quantity and quality of
voluntary employee-related information Australian listed companies disclose in their annual report.
An explanation is also sought to determine whether companies adopt employee-related disclosures to
legitimise their relationship with society. Voluntary adoption of corporate governance best practice
recommendations is used as a measure of companies attempts to attain ex ante legitimacy. Media
agenda setting theory is used as a measure of an attempt to gain legitimacy ex post following adverse
publicity from the media.
Design/methodology/approach The annual reports of all companies with at least one employee
listed on the Australian Stock Exchange with a 30th June balance date of 2004 are examined to identify
employee-related disclosures. This employee-related information is categorised and identified as
positive, negative or a combination of positive and negative information by three independent coders.
Ordinary least squares regression is used to explain the quantity of disclosure with a corporate
governance score and number of adverse newspaper articles included as experimental variables.
Findings Adopting voluntary corporate governance mechanisms is associated with the quantity of
voluntary annual report employee-related disclosures. Higher levels of adverse publicity are also
significantly associated with higher quantities of employee-related disclosures. The quality of these
disclosures is questioned because 124 companies had adverse publicity relating to employees and only
two of these companies reported any negative employee-related disclosures. Few companies from the
whole sample reported any negative information relating to their employees in their annual report,
with 98 per cent of companies reporting positive news or no news.
Originality/value Most previous social responsibility research has focused on environmental
disclosures. This study is original because it focuses on employee-related disclosures. Honest,
transparent employee disclosures are an international corporate governance recommendation by the
Organisation for Economic Co-operation and Development and studies have not previously tested the
relation between reporting recommended corporate governance mechanisms and employee-related
disclosures in annual reports.
Keywords Employee disclosures, Corporate governance, Adverse publicity, Annual reports, Australia
Paper type Research paper
1. Introduction
Social responsibility disclosures integrate disclosures relating to the relationship
between a company and its physical and social environment, including disclosures
about the environment, energy, human resources and community participation
(Deegan et al., 1995). The first objective of this study is to focus on employee-related
Accounting, Auditing
& Accountability Journal
Vol. 26 No. 7, 2013
pp. 1072-1106
q Emerald Group Publishing Limited
0951-3574
DOI 10.1108/AAAJ-03-2013-1261
The authors acknowledge with thanks the helpful comments of Muhammad Jahangir Ali,
Kamrad Ahmed, Jacqueline Christensen, Jere Francis, Orapin Duangploy, Janice Hollindale, Ray
McNamara, Carolyn Windsor and workshop participants at 20th Asian-Pacific Conference on
International Accounting Issues, Paris, France, 9-12 November, 2008 and European Accounting
Association 33rd Annual Congress, Istanbul, Turkey, 19-21 May 2010 and three anonymous
referees. This project is funded by AFAANZ.
disclosures as a specific form of social disclosure. The second objective is to investigate

the category (for example, health and safety), quantity and quality (for example,
positive or negative disclosure) of the employee-related disclosures made by
Australian companies within their annual reports. Research is required to determine
the category, quantity and quality of employee-related information to ascertain
whether employee-related disclosures in annual reports should continue to be
voluntary. The final objective is to determine whether publicly listed companies choose
to disclose employee-related information in annual reports to legitimise their place in
society.
Employee-related disclosures by Australian companies are predominantly carried
out on a voluntary basis with the exception of mandatory reporting for employee
benefits and disclosure of executive compensation (Deegan et al., 2000; Waddock and
Smith, 2000; Whitehouse, 2003) under AASB 1028 Employee Benefits (2001)[1].
Therefore, other information is not provided about employee-related matters unless
management chooses to disclose this information.
The Australian Federal Government signalled the importance of corporate social
responsibility reporting when they set up an enquiry in 2006 into whether corporate
social reporting should be mandatory. The enquiry concluded that the current
Corporations Act gave directors adequate guidance for providing non-financial
information such as employee-related reporting by listed companies (The
Commonwealth Government of Australia, 2006b). The enquiry recommended that
corporate social responsibility reporting remain voluntary and unregulated (The
Commonwealth Government of Australia, 2006a).
The Organisation for Economic Co-operation and Development (OECD) and the
Global Reporting Initiative recognise that employees and other stakeholders play an
important role in contributing to the long-term success and performance of companies.
These organisations stress the importance of disclosing employee-related information
in companies annual reports (Global Reporting Initiative (GRI), 2002; Organisation for
Economic Co-operation and Development, 2004).
Many companies support the OECD initiative identifying the importance of their
employees to their company (Flamholtz, 1999; Guthrie et al., 2001; Mouritsen, 1998;
Petty and Guthrie, 2000). For example, Jubilee Mines N.L., 2004, p. 12 states in their
annual report that:
The outstanding performance achieved by the Company during the past year would not have
been possible without the knowledge, skill, professionalism, and commitment of our
employees, contractors and consultants. The Company has maintained a philosophy and
culture that all personnel - employees, contractors and consultants irrespective of their
employer - are part of a united team focussed on the safe, efficient and cost effective
production of nickel concentrate whilst providing a positive and fulfilling workplace for all.
Wesfarmers Limited (2004, p. 1) state in their annual report that:

The primary objective of Wesfarmers is to provide a satisfactory return to shareholders . . .
by providing a fulfilling and safe working environment for employees, rewarding good
performance and providing opportunities for advancement.
Limited evidence exists on actual employee-related disclosures by a wide range of

listed companies that are required to produce an annual report in spite of these
supportive statements by the Australian Commonwealth Government, the OECD and
Employee
information in
annual reports
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listed companies. Assertions of commitment to employee-related disclosures in annual

reports by regulatory bodies and companies are meaningless without evidence on
actual reporting behaviour to substantiate these assertions.
Deegan and Gordon (1996), Deegan and Rankin (1996), Deegan et al. (2002),
Hackston and Milne (1996), Islam and Deegan (2008) and Kuasirikun and Sherer (2004)
find employee-related information to be more prevalent than any other category of
social disclosure in annual reports. An initial analysis of 970 Australian publicly listed
companies as at 30 June 2004 balance date indicates that 67 per cent of companies are
voluntarily disclosing employee-related information in their annual reports. A natural
research progression is to examine the nature of the disclosures and gain an
understanding of companies motivations to provide these disclosures given that
employee-related reporting is widespread in annual reports.
The first contribution of the study is to extend corporate social responsibility
accounting research by focusing on employee-related disclosures for all publicly listed
companies in Australia with a 30 June balance date for 2004. The study provides
descriptive material on the quantity and nature of voluntary employee-related
disclosures in annual reports for Australian companies. It is important to know
whether companies are reporting in a consistent manner so that comparisons can be
made between companies. Stakeholders are expected to be interested in a range of
topics including employee profiles, employee assistance or benefits, industrial
relations, health and safety, employee training and development, employee
remuneration, employment of minorities or women, employee morale, equal
opportunities, work-life balance and integration of disadvantaged groups (Global
Reporting Initiative (GRI), 2002; Vuontisjarvi, 2006). This study provides evidence on
whether these categories are consistently reported in annual reports.
This is an important contribution because human resources (employees) are
considered one of the most important elements of a companys competitive advantage
and a crucial factor to the success of a companys operations over time. The category,
quantity and quality of disclosure found in annual reports are frequently considered to
be associated with the importance companies place on human resources (Vuontisjarvi,
2006). Few studies have analysed employee-related disclosures in isolation to other
corporate social responsibility disclosures.
The second contribution is to test the relation between recognised best corporate
governance practices and the quantity of disclosures in Australia. Section 5 of the
OECD Principles of Corporate Governance (Organisation for Economic Co-operation
and Development, 2004, pp. 22, 49) identifies the importance of disclosure as a
governance mechanism and states that:
The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.
Section A (7) specifically states that issues regarding employees should be disclosed
(Organisation for Economic Co-operation and Development (2004, pp. 22, 49). Limited
research has been conducted relating corporate social responsibility reporting to
formal corporate governance practices and has mostly been associated with
environmental reporting and corporate governance practices (Sun et al., 2010).
Third, the research contributes by applying legitimacy theory to employee-related

disclosures using two broad measures associated with legitimacy. Legitimacy is
measured using the voluntary adoption of recommended corporate governance
practices as a means of facilitating ex ante legitimacy with society, while media agenda
setting theory is applied as a means of recovering ex post legitimacy following adverse
publicity in the media about the company. An understanding of the motivations for
voluntary employee-related disclosures assists users of this information to make
judgments regarding the quantity and quality of the disclosures (Heitzman et al., 2010;
Kent and Chan, 2009).
Finally, the results of this study assist regulators when considering disclosure
regulations, by focusing their attention on the perceived inadequacies in the current
social reporting framework. The need to regulate employee-related disclosure is
unnecessary if we find that companies are providing honest, transparent disclosures
voluntarily in a consistent manner (Kent and Chan, 2009). Alternatively, the policy to
continue to allow voluntary disclosure should be reviewed to assist the provision of
honest transparent employee-related disclosures.
The subjects of negative adverse publicity in our study include reports of employees
being hospitalised, employees being involved in gas and fire accidents, industrial
accidents, job cuts, lawsuits for negligence and damage to employees, objections by
employees to executive remuneration, mining accidents involving employees,
employees being exposed to pollution, employees being sacked despite excessive
profits, job losses due to bank closures, remuneration disputes, safety and
environmental issues concerning employees, toxic poisoning and union activity.
Results indicate that the voluntary adoption of the recommended corporate
governance practices and number of adverse newspaper articles are significantly
associated with the quantity of employee-related disclosures. Unfortunately, the
quality of these disclosures is in doubt because 124 companies had publicity about the
company relating to their employees indicating negative news. Only two of these
companies reported any negative information relating to their employees in their
annual report.
Control variables that explain the quantity of disclosure are employee
concentration, industry classification, debt to assets ratio and log of market
capitalisation. The remainder of the paper is structured as follows. Previous research is
examined and hypotheses are developed in the next section. The third section explains
the research method, including the sample selection and measurement of the variables.
The fourth section reports and discusses the results of the study, while in the final
section some conclusions are drawn, the limitations of the study are acknowledged and
opportunities for further research are noted.
2. Theoretical background and hypotheses
2.1 Social responsibility disclosures
Previous research explains social responsibility disclosures generally (for example,
Bebbington et al., 2008; Roberts, 1992) and social responsibility reporting has mostly
focused on environmental disclosures (Brown and Deegan, 1998; Deegan, 2002;
ODonovan, 2002; Wilmshurst and Frost, 2000). Refinements to social responsibility
accounting research have focused on redundancies in the forest industry (Makela and
Nasi, 2010), green house gas emission information (Freedman and Jaggi, 2004), carbon
Employee
information in
annual reports
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trading practices (Egenhofer, 2007; Okereke, 2007; Roeser and Jackson, 2002), site
restoration costs (Li and McConomy, 1999), water pollution (Cormier and Magnan,
1999), financial markets reaction to social and environmental disclosure (Murray et al.,
2006) and specific countries (De Villiers and Van Staden, 2006; Egenhofer, 2007;
Freedman and Jaggi, 2004; Leuz and Verrecchia, 2000; Li and McConomy, 1999, Makela
and Nasi, 2010; Neu et al., 1998; Okereke, 2007).
1076
2.2 Human resource disclosures
Intellectual capital literature covers human capital which is embedded in human
resources, employees and managers (Vuontisjarvi, 2006), so that employee-related
disclosures are a subset of intellectual capital reporting. Researchers have recognised
the increasing value of intellectual capital to companies (Guthrie and Petty, 2000;
Yongvanich and Guthrie, 2007) but low quantities of intellectual capital reporting have
been identified internationally (April et al., 2003; Brennan, 2001; Bontis, 2003; Ordonez
de Pablos, 2002).
Researchers have studied employee-related disclosures in association with other
categories of corporate social responsibility reporting. Cowen et al. (1987), for example,
analyse the relationships between independent corporate characteristics and various
categories of disclosure including the environment, energy, fair business practice,
human resources, community involvement, products and other disclosures for a
relatively small US sample consisting of predominantly large companies. Islam and
Deegan (2008) analyse human resource disclosures as one of the six categories of social
information in their study. They find that human resource disclosures account for the
highest proportion of total disclosures in Bangladeshi companies across the period of
1987-2005.
Other Australian and overseas studies have focused on employee-related
disclosures as a specific corporate social responsibility category. Deegan et al. (1995)
examine the practices and policies of large Australian companies in producing special
purpose employee reports rather than the disclosures present in annual reports.
Hossain et al. (2004) analyse the nature of voluntary disclosures on human resources in
the annual reports of Bangladeshi companies. Vuontisjarvi (2006) explores the extent
to which large Finnish companies have adopted honest and transparent reporting
practices with a focus on human resource reporting within corporate annual reports.
The results find that human resource disclosures lack overall consistency and
comparability. Quantitative indicators are disclosed by few companies in the sample,
with further concern evident by a lack of attention paid to disclosures relating to equal
opportunities, work-life balance and integration of disadvantaged groups
(Vuontisjarvi, 2006).
Welford (2005) reports that there has been an increased emphasis on employee and
human resource issues by European companies, but less focus on employee issues by
Asian companies. Everaert et al. (2008) identify that Belgian companies
overwhelmingly report on employee-related issues or labour practices, as did
Vuontisjarvis (2006) analysis of Finnish companies.
2.3 Legitimacy theory
Legitimacy theory is possibly the most widely used theory to explain environmental
and social disclosures (see for example, Adams et al., 1998; Deegan and Gordon, 1996;
Guthrie and Parker, 1989; Milne and Patten, 2002; ODonovan, 2002; ODwyer, 2002;
Patten, 1991; Wilmshurst and Frost, 2000). Other theories are used to explain social
responsibility reporting, although legitimacy theory has mostly become the dominant
explanatory theory in this research area (Deegan, 2002). Therefore, legitimacy theory is
an appropriate theory to explain employee-related disclosures as a specific area of
social responsibility disclosures.
Legitimacy theory is derived from the concept that companies operate in society by
means of a social contract, seeking to satisfy stakeholders by behaving in a socially
desirable manner (Brown and Deegan, 1998; Shocker and Sethi, 1974). The social
contract represents the expectations that society has on how the company should
conduct its operations. These expectations from society are not fixed and change over
time. This forces companies to be responsive to their operating surroundings (Deegan,
2002). Legitimacy theory assumes that companies disclose information as a reaction to
various economic, social, political, and environmental factors, and that these
disclosures help to legitimise the companys actions (Brown and Deegan, 1998; Buhr,
1998; Kotonen, 2009; Neu et al., 1998; Shocker and Sethi, 1974). Corporate disclosure
policies represent a method for management to influence external perceptions about
their companys activities (Brammer and Pavelin, 2004; Deegan et al., 2002; Epstein and
Freedman, 1994; Pfeffer and Salancik, 1978; Tsang, 1998; Woodward et al., 2001).
Managers legitimising strategies vary depending on whether they are trying to
gain, maintain or repair the legitimacy of their company (ODonovan, 2002; Suchman,
1995). The simplest way to gain legitimacy is to conform to an existing institutional
recommendation or rule. The task of maintaining legitimacy is easier than gaining or
repairing legitimacy and frequently maintaining legitimacy can be taken for granted
and achieved by continuing previous strategies (Suchman, 1995). The ASX Limited
Corporate Governance Council Principles of Good Corporate Governance and Best
Practice Recommendations released in 2003 and subsequent amendments have an
underlying principle of promoting transparent reporting to users of financial
statements (Australian Securities Exchange (ASX), 2010). Reporting the adoption of
the recommended corporate governance practices provides a way for management to
promote their company as an honest, transparent organisation and provides a way to
gain and maintain legitimacy.
These recommendations are not mandatory in Australia unlike many other
countries such as the US, but ASX Listing Rule 4.10.3 requires every listed company to
disclose in its annual report the extent to which it complies with the recommendations
and to provide an explanation when these recommendations are not followed. Only the
top 500 of approximately 2000 listed companies (approximately 1700 in 2004) are
required to have an audit committee and only the top 300 must adhere to the ASX best
practice recommendations for audit committees relating to composition, operation and
responsibility of the audit committee (Listing Rule 12.7). Other recommendations are
voluntary. This means that governance mechanisms can be viewed as voluntary
mechanisms for most of our sample (Christensen et al., 2010). Therefore, it is expected
that reporting the voluntary adoption of the recommendations is partly motivated by a
desire by management to gain legitimacy by signally that the companys management
is honest and transparent to stakeholders including their employees. This leads to the
following hypothesis.
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information in
annual reports
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H1. Companies report increased quantities of employee-related disclosures when

best practice corporate governance practices are voluntarily adopted and
reported.
2.4 Media agenda setting theory

The task of repairing legitimacy is similar to the task of gaining legitimacy. A major
difference is that repairing legitimacy usually involves a reactive response to an
unforeseen crisis such as media coverage of negative events relating to employees. The
reporting of these negative employee-related events in the media requires the company
to repair legitimacy following the crisis (ODonovan, 2002; Suchman, 1995). Media
agenda setting theory is applied as a means of assessing whether voluntary
employee-related disclosures are made by management in response to negative media
coverage about companies employee-related issues.
Deegan et al. (2002) and ODonovan (1999) show that managers make annual report
disclosures in response to media coverage. This is because the print media can
influence public perceptions and create a legitimacy gap (Brown and Deegan, 1998).
The importance that the public assign to an issue is influenced by the amount of media
attention it receives (Funkhouser, 1973; McCombs and Shaw, 1972). Public salience for
an issue increases with the number of media articles between takeoff and tapering
thresholds of media coverage. A certain critical number of articles are required to move
an issue to one of public concern, and the pattern of evolving public awareness varies
for different categories of issues (Neuman, 1990). The response function varies
according to the issue covered, but there is consistent evidence of a relationship
between the volume of media coverage and the level of public concern (Brosius and
Kepplinger, 1990).
The way in which the media covers the issue can also affect the likelihood of
whether it impacts public attitudes. Dearing and Rogers (1996) establish that an issue
presented in a negative light is more likely to be regarded by the community as an
important concern. That is, negative media attention is more likely to have an effect on
the publics salience for a particular issue relative to favourable attention (Deegan et al.,
2002). Evidence also suggests there is an increase in positive self-laudatory disclosures
around the time of an event that portrays a company in an unfavourable manner
(Deegan and Rankin, 1996; Deegan et al., 2002; Patten, 1991).
Public concerns and the media agenda are not necessarily reflective of real world
conditions (Ader, 1995; Funkhouser, 1973). For example, Ader (1995) finds that the
amount of media attention devoted to pollution influenced the degree of public salience
for the issue, but the real-world pollution indicator was negatively correlated with the
amount of media coverage. However, companies receiving negative media coverage
regarding employee-related categories typically perceive that they have damaged their
legitimacy with the public. Increased disclosure of employee-related categories is one
way of re-establishing damaged legitimacy following adverse media attention about
negative activities and events related to employee issues. This leads to the following
hypothesis:
H2. Companies report higher quantities of employee-related disclosures when
more adverse media publicity about employee issues exists.
The two hypotheses are linked representing different forms of legitimacy. Voluntary
adoption and reporting of corporate governance recommended practices are used as an
example of gaining and maintaining legitimacy, while media agenda setting theory is
applied as a way to repair damaged legitimacy. Both hypotheses focus on quantities of
disclosure and some indication of quality of disclosures is required. Prior studies have
assumed that greater quantity of disclosures suggests higher quality disclosures (Gray
et al., 1995; Zeghal and Ahmed, 1990). Kent and Chan (2009) found that their measure of
quality of disclosures is highly correlated with the quantity of disclosure. Toms (2002)
however, argues that the quality of a signal is more important than the quantity of
information. Signalling theory provides some suggestions as to how the quality of the
employee-related disclosures can be assessed in our study.
2.5 Signalling theory
Disclosure studies applying signalling theory assume that managers have superior
information to outside investors on companies expected future performance, even with
the assumption of an efficient capital market, and managers can improve the quality of
their financial reporting by voluntarily providing additional disclosures (Healy and
Palepu, 2001). Signalling theory explains that a company attempts to signal positive
information to investors through the annual reporting mechanism (Oliveira et al., 2006).
Companies disclose positive information when they believe they are superior to other
companies to signal to investors to attract investment and a more favourable
reputation (Campbell et al., 2001). The theory suggests that company value increases
when companies make positive disclosures and decreases when they make negative
disclosures (Gennotte and Trueman, 1996).
A constraint on additional disclosures occurs because of competitive forces in
product markets. Disclosure of private information on strategies and their expected
economic consequences can harm the companies reputation and competitive position.
Managers have to decide whether information is likely to improve their capital market
value or whether the provision of private information disadvantages the company
(Darrough, 1993; Darrough and Stoughton, 1990; Feltham and Xie, 1992; Gigler, 1994;
Healy and Palepu, 1993; Newman and Sansing, 1993; Verrecchia, 1983; Wagenhofer,
1990). Williams (2001) suggests that companies with high intellectual capital
performance are reluctant to disclose intellectual capital information because of a
potential threat to the companys competitive advantage.
Another decision to be made is whether bad news information should be voluntarily
reported. Research indicates that managers can make their report more credible, and
enhance the market value of their firm by signalling good news and bad news
information (Healy and Palepu, 1993). Gigler (1994) suggests that voluntary
disclosures are perceived as honest and transparent because users of the financial
statements realise that companies incur proprietary costs to disclose voluntary
information. Therefore, the proprietary costs of negative employee-related information
incurred by management in making the disclosure provide quality to voluntary
disclosures.
An indication of the quality of the voluntary disclosures is provided by determining
whether companies provide good news, bad news or a combination of good and bad
news. Clearly, companies with adverse publicity have bad news to report; therefore the
reporting of some bad news by these companies is an estimate of the quality of
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information in
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voluntary information. Information released via the media is not private information
that can damage the companies competitive advantage and disclosing this
information has the potential to improve the companies capital value. Given that
many of the companies have received adverse media coverage, it is expected that these
companies include some bad news with good news in their annual reports.
1080
2.6 Control variables

Researchers have identified industry membership as a characteristic associated with
social disclosure practices (Cowen et al., 1987; Deegan and Gordon, 1996; Kelly, 1981;
Patten, 1991; Roberts, 1992). Consumer-oriented companies are expected to exhibit
greater concern with demonstrating their social responsibility to the community, since
this is likely to enhance corporate image and influence revenues (Cowen et al., 1987).
Companies with higher levels of industrial volatility are more likely to make deliberate
efforts to manage the impressions of employees than those with lower levels of
volatility (Magness, 2006). Industry membership is therefore measured in this study.
Employee concentration is used in this paper as a measure of stakeholder power. It
is expected that companies are more likely to report employee-related information
when employees represent a greater resource for the company. In addition, a greater
number of events and employee-related issues are likely to be present within the
company with increased employee numbers. Thus, management has increased needs
to address negative and positive employee issues (Gray et al., 1995). Employee
concentration is therefore, included as a control variable in the model.
Many researchers (Kent and Chan, 2009; McGuire et al., 1988; Mills and Gardner,
1984; Roberts, 1992; Wilmshurst and Frost, 2000) have tested for a relationship
between financial performance and social performance to determine whether this
relationship is of a positive or negative nature. This study uses return on assets as a
measure of economic performance to examine the existence of a relationship between
financial performance and employee-related disclosures because it has been widely
used by previous researchers (Balatbat et al., 2004; Brown and Caylor, 2009;
Christensen et al., 2010; Haniffa and Hudaib, 2006).
Agency costs are higher for companies with proportionally more debt in their
capital structures (Meek et al., 1995), since potential wealth transfers from bondholders
to shareholders and managers increase with leverage. Therefore, voluntary disclosures
are expected to increase with leverage. The restrictive covenants included in debt
agreements are intended to reduce managements ability to create wealth transfers
between shareholders and bondholders (Belkaoui and Karpik, 1989). Frequently used
limitations include limits on financial leverage (long-term debt to assets ratio) and
limits on payout rates. The decision to disclose social information follows an outlay for
social performance which reduces earnings. Therefore, highly leveraged companies
have incentives to reduce their cost of capital by improving their disclosure levels
(Kent and Monem, 2008) and hence leverage is measured in the study.
Company size is another measure that is generally related to increased disclosures
and political costs (Belkaoui and Karpik, 1989; Cowen et al., 1987; Kelly, 1981; Lang and
Lundholm, 1993; Pang, 1982; Patten, 1991; Trotman and Bradley, 1981). Company size
is the most widely used construct to represent political visibility, and is related to
political costs, agency costs and capital market incentives. Watts and Zimmerman
(1978) suggest a companys greater visibility is through their ability to achieve higher
profit levels, which encourage larger companies to disclose more information than
smaller companies. In addition, larger companies undertake more activities, make a
greater impact on society, have more stakeholders concerned with social events
undertaken by the company, and the annual report acts as an efficient resource for
communicating this information (Cowen et al., 1987). The difficulty with measuring
company size is that it can substitute for many different factors including management
expertise and industry (Ball and Foster, 1982). Regardless of this difficulty, size is
measured in the study.
3. Research design
3.1 Annual report disclosure
Australian companies can choose to disclose information voluntarily through
numerous media channels, with many empirical studies analysing the voluntary social
disclosure framework by examining the incidence or content of the companys annual
reports, company websites, separate social, environmental, and special purpose
employee reports (Brammer and Pavelin, 2004; Gray et al., 1995; Guthrie and Parker,
1989; Hackston and Milne, 1996; Robertson and Nicholson, 1996).
This study focuses on annual reports as the source of employee-related disclosures
for the following reasons. First, disclosure levels in annual reports are generally one of
the most important sources of corporate information (Lang and Lundholm, 1993;
Oliveira et al., 2006). Research indicates that company managers believe that the
annual report is an effective way for informing and educating the public of their
companies view about social issues (ODonovan, 1999). The annual report has been the
central source of corporate communications to investors and other stakeholders, and is
widely used by companies for various voluntary social disclosures (Campbell, 2000;
Rockness, 1985; Wiseman, 1982). Former social reporting research (Cowen et al., 1987;
Gray et al., 1995; Guthrie and Parker, 1989, 1990; Neu et al., 1998; Roberts, 1992;
Wiseman, 1982) has focused on the annual report as a major medium for
communicating social information to the public.
Second, all listed companies must produce an annual report and auditors are
required to ensure voluntary information is consistent with the auditors knowledge of
the company. It is brought to the attention of users of the financial statements if
voluntary information is inconsistent with the auditors overall knowledge of the
company (Ghandar and Tsahuridu, 2012). This provides us with one medium that
must be used by all listed companies and provides a point of comparison between
companies. Third, voluntary social disclosure is related to the amount of disclosure
provided by other media (Lang and Lundholm, 1993; Oliveira et al., 2006). Fourth,
companies have editorial control over the voluntary information published in their
annual reports and are less susceptible to the potential risk of external media
interpretations or falsification through the popular press (Campbell, 2000; Guthrie and
Parker, 1989). Therefore, the annual report represents voluntary information that
management has selected to disclose. Finally, the annual report presents an historical
account of the activities of a company and its managements perceptions in a
comprehensive and compact manner (Niemark, 1995).
Employee
information in
annual reports
1081
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3.2 Sample selection

The original data consists of all public companies listed on the Australian Securities
Exchange Limited (ASX) with a 30th June balance date in 2004. Companies that did not
have any employees for the year 2004, such as trusts or companies that use the services of
contractors were excluded from this population providing a sample of 970 companies.
The year 2004 was selected because it was the first year of implementation of the ASX
Principles of Good Corporate Governance and Best Practice Recommendations requiring
companies to provide a corporate governance statement in their annual reports. The ASX
Corporate Governance Council released Principles of Good Corporate Governance and
Best Practice Recommendations in, 2003 specifying ten broad principles designed to
provide guidance to companies on implementing an appropriate corporate governance
structure[2]. These recommendations are not mandatory but companies must explain
reasons for not adopting any of the recommendations and a corporate governance
statement is required in the annual report. Therefore, this was the first year when
corporate governance data were required for all listed companies (Christensen et al., 2010),
allowing the collection of these data for all listed companies. Recall that voluntary
reporting and adoption of the recommendations is our measure of companies attempt to
gain and maintain legitimacy.
A model testing companies quantities of disclosure of employee-related information
is presented as follows:
Sentencesi b0 b1 corporate governance scorei b2 adverse publicityi
b3 industryi b4 employee concentrationi b5 return on assetsi
b6 leveragei b7 sizei e:
where:
Sentencesi number of sentences of disclosure.
Corporate governance scorei
sum of nine individual corporate governance variables.
Adverse publicityi
number of adverse media articles in the year prior to 2004.
Industryi
1 if the company is in the energy, materials, utility,

telecommunications, industrial, healthcare, consumer discretionary,
information technology, bank or insurance and consumer staples
industries, and 0 otherwise.
Employee concentrationi
number of employees divided by total assets in 2004.
Return on assetsi
net profit after tax divided by assets at balance date.
Leveragei
total debt divided by total assets in 2004.
Sizei
log market capitalisation.
3.3 Measurement of the variables

Quantity of disclosure requires a measure of the amount of space allocated to employee
disclosures. The units of measurement used in written communications are words,
sentences and portions of pages (Gray et al., 1995). Former studies have quantified each
of the disclosure categories recording whether or not a company made a disclosure, and
quantity was measured to the nearest tenth or quarter of a page. Ng (1985) is critical of
portion of pages measurement because print sizes, column sizes and page sizes differ
between annual reports. Ng (1985) used number of words to overcome these problems.
Measuring social disclosure quantities by the number of words leaves the researcher a
difficult task assessing whether an individual word is a social disclosure. Using
sentences as a measurement unit overcomes the difficulty of fractions of pages and
removes the need to standardise the number of words. As ordinary units of written
English that exist between two punctuation marks, sentences are also likely to provide
more reliable measures of multiple coding than words (Kent and Chan, 2009). The
measure used in the model is the number of sentences relating to the employees of the
company in the annual report for the year ending 30th June 2004. Companies with no
disclosures are included in the statistical model with a zero score.
All measures have limitations for comparative purposes between companies
because page, column and font sizes vary between companies, whereas sentence
lengths are also subject to variations (Hackston and Milne, 1996). Data were also
collected on the number of pages devoted to the required disclosure. However, some
companies provided only one sentence of disclosure so measuring pages is misleading
in this case.
Three independent coders read the annual reports of the sampled companies and
passages of text broadly termed employee-related disclosures were identified and
highlighted by each of the three independent parties. One of the coders was the author
of this paper and two other independent university graduates with formal accounting
qualifications followed the same process as the author.
A set of decision rules was employed to reduce the subjectivity involved in the
process of identifying sentences that include employee-related information. Only
voluntary disclosures are examined in this study and therefore the coders were
required to distinguish between mandatory and voluntary employee-related
information. It is not compulsory for companies to identify the number of employees
in their company so a sentence identifying the number of employees was counted as
one sentence of employee-related information. The coders decided whether the
information was an employee-related disclosure, assigned it to a category, identified
the disclosure as providing positive or negative information, and counted the number
of sentences. Any differences between coders were discussed and a resolution made.
We relied on the Global Reporting Index (2002) to form a broad reference for the
identification of categories. The Global Reporting Index was not widely used by
companies in the sample period and some categories identified in that index were not
reported by companies in our sample. The coders found that the employee-related
categories covered by our sample companies are employee profiles, employee
assistance or benefits, industrial relations, health and safety, employee training and
development, employee remuneration, employee morale and employment of minorities
or women.
Employee
information in
annual reports
1083
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3.4 Measurement of independent variables

Some Australian studies have used a combined corporate governance score to examine
the relationship between corporate governance and voluntary disclosure (Clarkson
et al., 2003; Collett and Hrasky, 2005; OSullivan et al., 2008). OSullivan et al. (2008)
confirmed a correlation existed between a composite corporate governance factor and
the disclosure of prospective information in company annual reports in 2000 but not in
2002. DeFond et al. (2007) use a dichotomous variable for strong versus weak corporate
governance structures defined by six characteristics examining whether the market
values financial expertise on audit committees. Gompers et al. (2003) use 24 governance
rules to construct a governance index to proxy for the level of shareholder rights in
approximately 1,500 large companies during the 1990s.
Several studies have investigated just one or two corporate governance mechanisms
(see Akhtaruddin et al., 2009; Cooper and Owen, 2007; Cormier et al., 2009; Ho and
Wong, 2001; Sikka, 2008). However, a companys corporate governance score reflects
an assessment of the companys corporate governance practices and policies and the
recommendations refer to multiple indicators of best practice corporate governance.
ASX Principles of Good Corporate Governance and Best Practice Recommendations
(2003) consist of ten principles as follows: lay solid foundations for management and
oversight; structure the board to add value; promote ethical and responsible
decision-making; safeguard integrity in financial reporting; make timely and balanced
disclosure; respect the rights of shareholders; recognise and manage risk; encourage
enhanced performance; remunerate fairly and responsibly; recognise the legitimate
interests of stakeholders. The report also made 25 recommendations. Many of these
principles are subjective and open to interpretation. The variables that can be
operationalised from these principles and recommendations by reference to the report
and previous research are: Principle 2 Structure the board to add value Companies
should have a board of an effective composition, size and commitment to adequately
discharge its responsibilities and duties. This can be operationalised as number of
directors and board meetings. Additional recommendations are that a majority of the
board should be independent (recommendation 2.1), separation of the roles between the
board chair and the chief executive officer (recommendation 2.3), existence of a
nomination committee (recommendation 2.4), an audit committee (recommendation
4.2), and a remuneration committee (recommendation 9.2) (Christensen et al., 2011).
Our study uses a corporate governance score because individual corporate
governance attributes can act as substitutes for each other. Ward et al. (2009, p. 248)
refer to governance bundles and build on earlier studies that show companies adopt
an efficient bundle of governance mechanisms based on a cost-benefit tradeoff (Beatty
and Zajac, 1994; Rediker and Seth, 1995; Zajac and Westphal, 1994).
We adopt a scoring system based on the Horwath Corporate Governance Report
(2004). This report annually rates Australias largest 250 companies, and more recently
mid-cap listed companies, on their corporate governance structures and policies, and
assigns them a score (Christensen et al., 2010). The corporate governance assessment
model developed in the Horwath research is based upon a combination of factors
identified in national and international best practice guidelines and research studies.
These include the USA Blue Ribbon Committee Report (1999), the UK Hampel Report
(1999), the OECD Report (2004), the UK Higgs Report (2003), the Australian Ramsay
Report (2001), and the ASX Corporate Governance Council Principles and
Recommendations (2003). We particularly focus on the items that are related to

Principles of Good Corporate Governance and Best Practice Recommendations (2003).
Nine individual corporate governance variables are analysed in this study and are
summed to produce a combined corporate governance score. Those relevant to this
study are size of the board of directors, board independence, duality of the role of board
chair and chief executive officer, number of board meetings, identity of external
auditor, presence of a social responsibility committee, an audit committee, a
remuneration committee and a nomination committee. A social responsibility
committee is not recommended in the corporate governance best practice
recommendations but appears particularly relevant to a social responsibility
disclosure study. The identity of the auditor is also not covered in the
recommendations but many studies assume that a big 4 auditor is a higher quality
auditor that influences disclosures by companies (Clarkson et al., 2003).
The corporate governance score is constructed by transforming most of the
corporate governance characteristics into dichotomous variables as identified in
Table I. The size of the board of directors and the number of board meetings are the
only measures that are continuous variables. Therefore, a board with more than five
directors is coded one (signifying a larger board), and a board with less than five
directors is coded zero (signifying a smaller board). The cut-off point of five directors is
chosen because it is the average number of directors on the boards of companies in the
sample. A company that holds more than ten meetings throughout 2004 is assigned a
score of one, with companies holding ten meetings or less during 2004 coded zero. The
cut-off point of ten meetings is chosen because it is the average number of meetings in
2004 for the board of directors of companies in the sample.
Board independence is measured as a dichotomous variable whereby companies
with a majority of independent directors are coded one and zero otherwise. A
dichotomous variable was also used for dual CEO and Chair with the variables taking
the value of one if the roles of the chairperson and CEO are separated and zero
otherwise. The existence of an audit, remuneration, nomination and social
responsibility committee is identified by a dichotomous variable taking a value of
one if the company has one of these committees operating during the year and zero
otherwise.
The adverse publicity variable was collected by inserting each company name
individually in the Factiva database, which records editorials from all major
Corporate governance characteristic
Details
Score
Details
Score
1
2
3
.5
.0.50
1
1
,5
, 0.50
0
0
No
. 10
Big 4
Yes
Yes
Yes
Yes
1
1
1
1
1
1
1
Yes
,10
Non-Big 4
No
No
No
No
0
0
0
0
0
0
0
4
5
6
7
8
9
Size of the board of directors

Majority of board independent
Duality of the role of board chair and chief
executive officer
Number of board meetings
Identity of external auditor
Presence of a social responsibility committee
Presence of an audit committee
Presence of a remuneration committee
Presence of a nomination committee
Employee
information in
annual reports
1085
Table I.
Variables for
constructing the
corporate governance
score
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1086
Australian and New Zealand newspapers. Only adverse publicity relating to specific
companies and employee-related issues were included so that references to
industry-wide employee-related publicity were excluded. The same three
independent parties used to identify employee-related disclosures adopt similar
procedures to identify adverse publicity at the company level as that used to measure
employee-related disclosures. News reports were read by these three parties, and they
identified whether the news items constituted adverse publicity relating to employees
based on the nature and content of the items. The number of news items was counted
for each company for the year prior to 2004. Any discrepancies between coders results
were discussed and a resolution made.
3.5 Measurement of control variables
Each industry sector is measured as a dichotomous variable, given a value of one if the
company belongs to the specific industry sector, and a value of zero if the company is
not classified as a member of the relevant industry.
The number of employees divided by total assets is used in this paper as a measure
of employee concentration. Total employees was collected from the Aspect Huntleys
Datanalysis database as at 30th June 2004 and divided by total assets for the year.
Return on assets is measured by dividing net profit after tax by assets and leverage is
measured by dividing liabilities by assets.
A number of alternative measures of size have been used in the literature. Sales
revenue (Deegan and Gordon, 1996; Moses, 1987; Trotman and Bradley, 1981), log of
net sales (Belkaoui and Karpik, 1989; Geiger et al., 2005), net income (Deegan and
Hallam, 1991; Wong, 1988), total assets (Hagerman and Zmijewski, 1979; Skinner, 1993;
Trotman and Bradley, 1981), log of total assets (Reynolds et al., 2004) and market
capitalisation (OBrien et al., 2010) have frequently been used as measures. Given that
no measure of size is necessarily better than another (Hagerman and Zmijewski, 1979),
log of market capitalisation is used in this study, as it is readily available for all
publicly listed companies.
4. Results
Table II shows the industry classification of the sample companies as per the Global
Industry Classification Standard. The largest representation of the sample is from the
materials industry, with a total of 177 in the sample. The second largest representation
is from the finance industry (173), while the smallest representation is the utility
industry (13). It illustrates that 66.91 per cent (649 companies) of the total sample of
companies are disclosing employee-related information in their 30 June 2004 annual
report.
Table III illustrates the prevalence of the different categories of employee-related
information present in the samples annual reports. Employee morale is surprisingly
the most frequently disclosed category of employee-related information (462), followed
by industrial relations related disclosures (403). Employment of minorities is by far the
least discussed of all the categories with only 14 disclosures made over the entire
sample. This result is different to that reported by Deegan et al. (2000), who find that
health and safety disclosures are the most frequently disclosed employee-related
disclosure. Only 135 employee disclosures relating to health and safety are revealed
across our sample. Some 68 per cent of companies in the materials industry made
GICS industry
classification
Consumer
discretionary
Consumer staples
Energy
Financial
Healthcare
Industrial
Information
Technology
Materials
Telecommunications
Utility
Total
Number of sample Number of disclosing Percentage of sample companies

companies
companies
disclosing employee information
125
48
29
173
120
141
92
34
21
105
88
97
73.60
70.83
72.41
60.69
73.33
68.79
116
177
28
13
970
68
121
15
8
649
58.62
68.36
53.57
61.54
66.91
employee-related disclosures (Table II), and 37 per cent (50/135) of the total disclosures
relating to occupational health and safety were made by companies in the materials
industry. Mining companies are included in the material sector and have been
traditionally associated with health and safety issues.
Many companies did not report specific quantitative information and relied on
disclosures that could not be readily substantiated. To illustrate, companies have the
opportunity to report the average hours of training per year per employee by
employee category (Global Reporting Index, 2002, p. 310) when providing information
on training and education. Most companies only refer to information relating to
employee training and development providing very general information. This
information is reported inconsistently across the sample and information on each of the
nine categories was found in different sections of companys annual reports. For
example, while some companies have particular sections relating to health and safety
procedures and results, other companies reveal the information as part of the directors
report. Examples of specific discourses are provided in the Appendix.
Tables IV and V report the descriptive statistics for the variables in the model
including the variables that are used to construct the corporate governance score. The
continuous variables are illustrated in Table IV and the binary variables in Table V.
Table IV shows the number of sentences of employee-related disclosure range from
zero to 50, with a mean of 8.84. The corporate governance score ranges from zero to
eight, with a mean of 4.16. The number of adverse newspaper articles range from zero
to 20, with a mean of 0.62. The variables have a range of values and are approximately
normally distributed.
Board size ranges from a minimum of three directors to a maximum of 15 directors.
This illustrates that the sample includes very small and large boards with an average
board size of 5.06. The number of employees varies greatly between companies and
industry groups, with a total sample range of one to 89,208 and a mean of 1,212
employees indicating the importance of scaling employee numbers by assets.
Employee concentration ranges from 0.01 to 30.99, with a mean of 0.57. Return on
assets ranges from 2 10.63 to 20.91, with a mean of 2 0.10 and leverage ranges from
zero to 3.91 with an average of 0.39. Companies differ substantially in terms of log of
Employee
information in
annual reports
1087
Table II.
Industry classification of
sample companies
Table III.
Frequency of employee
disclosures by industry
category
2
0
2
3
2
9
10
8
3
39
6
0
0
2
0
11
13
11
0
43
1
3
7
6
6
0
32
5
0
4
11
7
56
85
78
4
329
50
7
31
Note: Many disclosing companies reported multiple categories
Health and safety

Employment of minorities
Training and development
Employee assistance
and benefits
Employee remuneration
Employee profiles
Employee morale
Industrial relations
Other
Total
12
6
56
77
68
1
286
31
4
31
14
10
77
75
64
1
265
4
0
20
6
7
55
56
52
5
206
12
1
12
Energy Telecom Utility Materials Industrial Finance Health
8
6
49
67
57
0
214
7
0
20
Consumer
discretionary
1
4
22
48
37
2
123
7
0
2
IT
4
1
18
25
22
2
95
11
2
10
Consumer
staples
1088
Category of employee
disclosure
62
46
360
462
403
18
1,632
135
14
132
Total
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26,7
Variable
Number of sentences
Corporate governance score
Number of adverse newspaper articles
Number of independent directors
Number of directors
Number of board meetings
Number of employees
Number of employees/assets
Return of assets
Leverage
Log of market capitalisation
Variable
Presence of employee-related disclosures
Adverse publicity
Positive employee-related disclosures
Board independence
Duality of CEO/chair
Audited by Big 4
Audit committee
Remuneration committee
Nomination committee
Social responsibility committee
Mean
Median
Std dev.
Minimum
Maximum
8.84
4.16
0.62
2.59
5.06
10.53
1,212
0.57
20.10
0.39
88.10
2.00
4.00
0
2.00
5.00
11
49
0.21
0.02
0.37
87.75
14.04
1.99
2.55
1.66
1.79
4.98
5,692
1.84
1.05
0.35
4.93
0
0
0
0
3
1
1
0.01
210.63
0
71.09
50
8
20
11
15
51
89,208
30.99
20.91
3.91
103.71
Percentage
Number of companies
67
13
98
61
11
58
82
56
31
12
649
124
633
583
109
561
796
544
298
113
market capitalisation with a range of 71.09 to 103.71 and an average of 88.10 indicating
that the sample included small and large companies.
Results in Table V reveal that 61 per cent of company boards have a majority of
independent directors, indicating that most companies adopt the recommendation to
have a majority of independent directors. Strong support is also found for the
recommendation not to have a dual CEO and Chair, with only 11 per cent of companies
having a dual CEO/Chair. The incidence of audit committees is very high while few
companies install a social responsibility committee. It is disappointing that there is not
more support for social responsibility committees. Some 82 per cent of companies
have an audit committee, 56 per cent of companies have a remuneration committee,
31 per cent have a nomination committee and 12 per cent have a social responsibility
committee.
Tables VI and VII provide details of the adverse publicity by disclosing companies
and also breaks down adverse publicity by industry group. A total of 13 per cent of all
publicly listed companies had adverse publicity in major Australian and New Zealand
Newspapers. However, 98 per cent of companies disclose only positive
employee-related information or no information. It is interesting that 18 companies
with adverse media coverage did not report any employee-related information in their
annual reports. The greatest amount of adverse publicity was from the consumer
discretionary industry, followed by the industrial industry, with companies in the
Employee
information in
annual reports
1089
Table IV.
Descriptive statistics:
continuous variables
Table V.
Descriptive statistics:
binary variables
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Table VI.
Frequency of adverse
publicity by companies
utility industry receiving no adverse publicity. The financial industry was also ranked
relatively high, being ahead of materials, while energy ranked very low. Material,
energy and utility industries are likely to attract more adverse publicity relating to
environmental issues rather than employee-related issues.
Table VIII reports Pearsons bi-variate correlation matrix for all variables. The
highest correlation is between log of market capitalisation and corporate governance
score, with a correlation of 0.63. Additional analysis of variance inflation factors
suggest that multicollinearity between variables does not threaten the computational
accuracy of the results.
The model in Table IX is significant, with an adjusted R-squared of 0.30 ( p , 0.00).
The corporate governance score is significant at p 0.00 in explaining the number of
sentences of disclosure with a coefficient of 1.41. These results strongly support
hypothesis one indicating that companies voluntarily reporting and adopting best
practice corporate governance practices are more likely to have increased quantities of
employee-related disclosures. The Organisation for Economic Co-operation and
Development and the Global Reporting Initiative emphasise the importance of these
disclosures as a corporate governance mechanism and companies appear to see this as
a way to gain and maintain legitimacy.
Hypothesis two is strongly supported in that companies with more adverse
publicity produce significantly ( p 0.02 and coefficient 0.32) more
employee-related information in their annual reports. This indicates that companies
also use disclosure to repair damaged legitimacy when the company receives publicity
indicating that the company has deviated from their social contract.
Number of companies
Companies with
adverse publicity
Percentage
GICS industry
classification
Table VII.
publicity by GICS
industry classification
Consumer
discretionary
Industrial
Materials
Financial
Consumer staples
Healthcare
Information
technology
Telecommunications
Energy
Utilities
Disclosing companies
Non-disclosing
companies
Total
649
321
970
106
16.33% (106/649)
18
5.61% (18/321)
124
12.78% (124/970)
publicity
Number of companies with

adverse publicity
Percentage of
industry
174
121
89
99
52
49
28
24
20
17
11
8
22.40
17.02
11.30
9.83
22.92
6.67
15
55
4
0
8
7
1
0
6.90
25.00
3.45
0
0.25 * *
0.01
20.10 * *
0.06 *
20.07 *
0.10 * *
0.12 * *
0.63 * *
2 0.01
0.06
0.11 * *
0.51 * *
Corporate
governance score
0.46 * *
0.26 * *
0.07 *
2 0.02
0.06
Number of
sentences
0.01
0.03
0.11 * *
0.40 * *
2 0.03
2 0.02
2 0.03
Adverse
publicity
20.01
20.03
0.04
0.06
20.06
20.04
Health
care
2 0.08 * 2 0.04
0.06
2 0.075 *
2 0.18 * * 2 0.15 * *
2 0.01
0.01
2 0.18 * *
Utilities Materials
20.07 *
0.08 *
20.10 * *
Employee
concentration
Leverage
0.04
Return on
assets
20.13 * *
0.17 * *
Notes: Sentences the number of sentences of disclosure; Corporate governance score sum of nine corporate governance variables; Adverse
publicity the number of adverse media articles in the year prior to 2004; Materials a dichotomous variable which takes a value of one if the company
belongs to the materials industry and zero otherwise; Health care a dichotomous variable which takes a value of one if the company belongs to the
health care industry and zero otherwise; Utilities a dichotomous variable which takes a value of one if the company belongs to the utilities industry and
zero otherwise; Employee concentration number of employees divided by assets in 2004; n net profit after tax divided by assets in 2004;
Leverage total debt divided by total assets in 2004; Size log of market capitalisation
Corporate
governance score
Adverse publicity
Utilities
Material
Health care
Employee
concentration
Return on assets
Leverage
Size
Variables
Employee
information in
annual reports
1091
Table VIII.
Pearsons correlation
matrix
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1092
Table IX.
Dependent variable:
number of sentences
(n 970)
Variables
Constant
Corporate governance score
Adverse publicity
Materials
Health care
Utilities
Employee concentration
Return on assets
Leverage
Size
Expected sign
Coefficient
T statistic
p value *
?
?
?
2 89.86
1.41
0.32
1.57
2.92
5.57
0.31
2 0.07
3.20
101.44
2 10.36
6.06
2.00
1.53
2.44
1.69
1.50
2 0.18
2.80
9.62
0.00
0.00
0.02
0.06
0.02
0.09
0.07
0.86
0.01
0.00
Notes: *Two tailed tests unless directed predicted; Adjusted R-squared 0.30, F 47.82,
Model p 0.00
Three industry variables have significantly more disclosures and these industries are
the materials ( p 0.06, coefficient 1.57), health care ( p 0.02, coefficient 2.92)
and utilities ( p 0.09, coefficient 5.57). Cowen et al. (1987) find that
consumer-oriented companies are expected to exhibit greater concern with
demonstrating their social responsibility to the community, and health care and
utilities have high consumer participation. Materials include metal and mining,
chemicals, construction materials, containers and packages, and paper and forest
products. These industries are expected to have a greater need for disclosures relating
to occupational health and safety.
Employee concentration is marginally significant in explaining quantities of
employee disclosure with a p 0.07 and a coefficient of 0.31 indicating that increased
resources allocated to employees are associated with increased employee-related
disclosure. Leverage is significant with a p 0.01 and coefficient of 3.20, indicating
that potential wealth transfers from bondholders to shareholders and managers
increase with leverage. Voluntary disclosures are a means for highly leveraged
companies to reduce their cost of capital by improving their disclosure quantities.
However, return on assets was not significant in explaining quantities of employee
disclosure[3]. This is consistent with results from the voluntary disclosure
environmental literature of Kent and Chan (2009), but not consistent with Roberts
(1992). Finally, log of market capitalisation as a measure of size is significant in
explaining number of sentences of disclosure ( p 0.00, coefficient 101.44). Past
research indicates that larger companies have increased voluntary disclosures because
they are more politically sensitive and attract more attention from relevant
stakeholders.
Recall that 98 per cent of companies reported only positive information or no
information. This is consistent with previous environmental research indicating that
companies mostly report environmental information that is favourable to their
companys reputation (Deegan and Gordon, 1996; Guthrie and Parker, 1990). Deegan
and Rankin (1996) found this to be the case even for companies that had been
successfully prosecuted for environmental infringements. This was particularly
interesting research because these companies reported predominantly favourable

information when it was clear that the companies had bad news to report.
At least 124 companies of our sample received negative adverse publicity.
Reporting some of this information could be viewed as adding quality to the voluntary
employee-related information. However, it could be argued that this was not private
information because it had been disclosed in the media and referring to this
information in the annual report duplicates disclosure. Only two companies with
adverse publicity reported negative information in their annual report. The Chair of
Gowings Limited stated in the annual report (Gowings Retail Limited, 2004) when
referring to the poor financial performance of the company:
Our loyal employees have had to put up with inadequate tools with which to do the job. In
2004, our people should not be subjected to performing manual stocktakes at times they
would rather be out enjoying themselves socially. Moreover, why should staff have to
perform these anachronisms as a necessity ahead of serving customers? To our employees
past and present we also wish to profoundly apologise for the travails you have been forced to
endure (Gowings Retail Limited, 2004, p. 1).
BHP Billiton made a negative statement when it stated:

Tragically 17 employees or contractors lost their lives during the year, an outcome that is
unacceptable by any measure. Management have refocused and redoubled their efforts to
address this issue in line with the Groups target of Zero Harm (BHP Billiton Limited, 2004,
p. 3).
Gowings Retail Limited received one adverse media article, while BHP Billiton Limited
had 20 adverse newspaper reports. BHP Billiton Limiteds negative information was
included with a large quantity of positive information, and these results generally
support the signalling theory argument that companies choose to report good news for
employee-related annual report disclosures.
5. Conclusion and limitations
The results show that companies report employee-related disclosures to legitimatise
their companies place in society. This is done by voluntarily reporting and adopting
recommended corporate governance practices to gain and maintain legitimacy, and
to restore damaged legitimacy following adverse media disclosures in Australia.
Key areas covered include employee profiles, employee assistance or benefits,
industrial relations, health and safety, employee training and development,
employee remuneration, employee morale and employment of minorities or women.
Most of the employee-related information provided in the companies annual report
is not specific or quantifiable and therefore this information cannot be
independently verified. In addition, there is no consistency in the way that
companies report employee-related information. Very few companies report any
negative employee-related information, although many companies receive negative
publicity, indicating that many of these companies have negative information to
report.
We find that companies are not voluntarily reporting employee-related information
in the annual report that is honest and transparent and this reporting is not consistent
or comparable between companies. It is also very general in content and self-laudatory.
The policy to continue to allow voluntary disclosure of employee-related information
Employee
information in
annual reports
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should be reviewed if regulators genuinely believe that it is important for companies to

supply employee-related information in the annual report of listed companies.
Our measure of the quality of voluntary employee-related disclosures relies on
companies reporting negative information, particularly when it is clear that the
company has negative information to report. This measure has limitations and in
depth interviews and case studies could address this issue in future research.
Our study only focuses on employee-related disclosures in annual reports and these
disclosures could exist in other reported areas. Prior research reveals that companies
with negative news tend to disclose that information earlier through their interim
reports (Skinner, 1993). Therefore, annual reports could omit information that is
redundant, having already been disclosed through more timely information channels
such as half yearly reports and other continuous disclosure methods. Future research
should focus on alternative communication channels and determine how this is
associated with annual report disclosures.
We focus on the motivations of management to supply the information for the
annual reports. Future research should survey user stakeholders to determine the
employee-related information that they require.
Notes
1. 1. AASB 119 Employee Benefits replaced AASB 1028 for financial years beginning on or after
1 January 2005.
2. 2. The Guidelines were reissued in 2007, and now comprise eight broad principles.
Fundamental changes were not made to the guidelines.
3. 3. The error term is normally distributed after windsorising extreme values for number of
sentences of disclosure, number adverse newspaper articles and return on assets. Analysis
was also taken without windorising extreme values and the results are qualitatively the
same.
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monitoring in large US corporations: when more is not better, Strategic Management
Journal, Vol. 15, pp. 121-142.
Zeghal, D. and Ahmed, S. (1990), Comparison of social responsibility information disclosure
media used by Canadian firms, Accounting, Auditing & Accountability Journal, Vol. 3
No. 1, pp. 38-53.
Employee
information in
annual reports
1101
AAAJ
26,7
1102
Further reading
Australian Accounting Standards Board (2001), Accounting Standard AASB 1028 Employee
Benefits, Australian Accounting Standards Board, Melbourne.
Australian Agricultural Company (2004), Annual Report, Australian Agricultural Company, p. 13.
Australian Securities Exchange (ASX) (2007), Corporate Governance Council, Corporate Governance
Principles and Recommendations with 2010 Amendments, 2nd ed., ASX, Sydney.
Boral Limited (2004), Annual Report, Boral Limited, pp. 4-5.
Brambles Limited (2004), Annual Report 2004, Brambles Limited, p. 9, 44.
CSL Limited (2004), Annual Report, CSL Limited, p. 28.
Coates Hire Limited (2004), Annual Report, Coates Hire Limited, p. 18.
Coffey International Limited (2004), Annual Report, Coffey International Limited, p. 10.
Coles Myer Limited (2004), Annual Report, Coles Myer Limited, p. 3.
Collection House Limited (2004), Annual Report, Collection House Limited, p. 9.
Deegan, C. (2012), Financial Accounting Theory, 7th ed., McGraw Hill Book Company, Sydney.
Fletcher Building Limited (2004), Annual Report, Fletcher Building Limited, p. 11.
Flight Centre Limited (2004), Annual Report, Flight Centre Limited, p. 22.
Gribbles Group Limited (2004), Annual Report, Gribbles Group Limited, p. 13.
Insurance Australia Group Limited (2004), Annual Report, Insurance Australia Group Limited, p. 29.
Kingsgate Consolidated Limited (2004), Annual Report, Kingsgate Consolidated Limited, p. 15.
Mayne Group Limited (2004), Annual Report, Mayne Group Limited, p. 27.
OneSteel Limited (2004), Annual Report, OneSteel Limited, p. 3.
Peter Lehmann Wines Limited (2004), Annual Report, Peter Lehmann Wines Limited, p. 14.
Publishing and Broadcasting Limited (2004), Annual Report, Publishing and Broadcasting
Limited, p. 19.
Qantas Airways Limited (2004), Annual Report, Qantas Airways Limited, p. 4.
Singapore Telecommunications Limited (2004), Annual Report, Singapore Telecommunications
Limited, p. 29.
Southern Cross Broadcasting Limited (2004), Annual Report, Southern Cross Broadcasting
Limited, p. 17.
Strathfield Group Limited (2004), Annual Report, Strathfield Group Limited, p. 9.
Suncorp Group Limited (2004), Annual Report, Suncorp Group Limited, p. 11.
Telstra Corporation Limited (2004), Annual Report, Telstra Corporation Limited, p. 130.
The Environmental Group Limited (2004), Annual Report, The Environmental Group Limited, p. 9.
Transfield Services Limited (2004), Annual Report, Transfield Services Limited, p. 8.
Virgin Blue Limited (2004), Annual Report, Virgin Blue Limited, p. 3.
Warrnambool Cheese and Butter Factory Company Holdings Limited (2004), Annual Report,
Warrnambool Cheese and Butter Factory Company Holdings Limited, p. 6.
Woolworths Limited (2004), Annual Report, Woolworths Limited, p. 26.
Zinifex Limited (2004), Annual Report, Zinifex Limited, p. 3.
Corresponding author
Pamela Kent can be contacted at: pkent@bond.edu.au
2. Employee assistance
or benefits
Brambles
1. Employee profiles
In the past year, Brambles employees, particularly those in CHEP, have worked under tremendous strain to effect the
business transformation. Their efforts have been tireless and are a credit to all those involved. The challenges facing the
other businesses have been no less arduous, and their achievements are a testament to the professionalism, diligence and
integrity of the employees throughout the entire group. p. 9
Staff numbers were further reduced from 753 in 2002/03 to 692 at the end of 2003/04. With staff numbers now stabilised,
the focus has moved to improving efficiencies, streamlining operating procedures and developing programs for managing
human resources issues. p. 9
Professor Ian Findlay is leading Gribbles charge to be at the forefront of developing and transforming leading edge
molecular science research into improved medical testing. Ian pioneered the technique of DNA fingerprinting in single
cells in 1994. p. 13
Late in 2003 we restructured the Company along business lines to make it less complicated, and so our people knew how
they fitted into the organisation, and had clear lines of responsibility and accountability. We then looked at all the jobs in
the Company and made sure we had the right people in the right jobs, with the appropriate job targets and proper financial
incentives in place. We called that process the leadership framework, and it has had a marked effect in lifting morale and
improving performance. p. 11
Examples
More than one-quarter of Borals Australian and US workforce are over the age of 50. We recognise that an aging
workforce brings with it the need for greater focus on specific workplace health and safety issues, superannuation and
retirement planning education, and the provision of workplace flexibilities. In addition, there is a greater focus on formal
competency based on-the-job training to assist older workers to develop, cope with new technologies, gain recognition for
competencies and share their knowledge within the workplace.p. 4
Peter Lehmann Wines
We recognise the importance of balancing work responsibilities with family and community interests. Vintage is a
particularly busy time when employees work long hours and we strive to provide a family friendly work environment.
Employees who have gone on maternity leave have been offered part time work if they choose not to return to work full
time when the 12 month period following the birth of the child expires. p. 14
Qantas
Qantas also recognises that many staff balance a busy range of work and personal commitments. Qantas has committed
$50 million over the next three years to initiatives that will assist staff to balance their work and family life. From August
2004, Qantas employees in Australia received: increased paid maternity leave from six to 10 weeks, with equivalent
improvements for those staff groups that have special existing arrangements;10 weeks paid adoption leave consistent
with maternity leave; one week paid paternity leave; and up to 10 days carers leave per annum; A keep in touch program
for staff on maternity and adoption leave will also be introduced. Qantas is also building two new child care centres, one in
Melbourne and one in Brisbane, and is evaluating child care needs for staff in other Australian cities where the Company
has a significant presence. These will complement the child care centre opened at Qantas Sydney headquarters in May
2003. p. 4.
Warrnambool Cheese and The Company remains committed to the professional development of its employees. During the year, we supported a
Butter Factory
number of staff in their pursuit of business-relevant tertiary studies, conducted a supervisor development program and
put a number of production staff through specific dairy processing programs. We also continued our internal leadership
and workplace development program. p. 6
(continued)
Boral
Suncorp
Gribbles
Collection House
Company
Disclosure Category
Appendix
Employee
information in
annual reports
1103
Table AI.
Examples of employee
disclosures
Mayne Group
Coles Myer
Insurance Australia
Group (IAG)
BHP Billiton
Virgin Blue
Fletcher Building
5. Employee training and The Environmental

development
Group (EGL)
Southern Cross
Broadcasting
4. Health and safety
Boral
3. Industrial relations
The aim of our Staff Training Program is to provide 20 to 25 hours of training hours per employee per year in a range of
skill based and personal development areas. p.9
A training record for all staff has been developed to ensure all staff obtain appropriate skills. Further innovative training
and development programmes are being implemented, including an on-line training facility. p. 17
(continued)
Despite this progress, we have failed to meet our most important target zero fatalities. Tragically 17 employees or
contractors lost their lives during the year, an outcome that is unacceptable by any measure. Management have refocused
and redoubled their efforts to address this issue in line with the Groups target of Zero Harm. We know this is achievable
because we have many operations around the world where excellence in safety has been and is being consistently
achieved. p. 3
Safety RIGHT NOW program awareness rolled out to all Coles Myer team members p. 3
We developed the besafe programme to encourage our staff to participate in keeping our work places healthy, safe and
clean. To assist us in improving our safety performance we train our people in: Prevention creating safe and secure
working environments and promoting safe behaviour to avoid harm; Treatment prompt reporting and early
intervention to minimise harm; and Rehabilitation focusing on early recovery and return to work. Almost 500 employees
have undertaken a St John Ambulance First Aid Training Course since December 2003, adding to the growing number of
staff trained throughout the organisation. p. 29
At Mayne, safety in the workplace is everyones responsibility. Providing our people with the training and resources to
sustain health and safety practices underpins this philosophy. In the past financial year, a revised and extensive library of
OH&S information and procedures was placed on the Company intranet to give employees better access. All employees
with direct responsibility for OH&S participated in a coordination seminar and management responsibility training was
conducted with executives, senior managers and line managers. p. 27
Borals industrial relations strategy is based on line management ownership, with a primary focus on the business unit
needs and issues and an ongoing emphasis on constructive employer-employee relationships through participation and
consultation. This approach is consistent with the diversified nature of our businesses which range from large
manufacturing facilities down to one or two person operations across our 552 sites in Australia. p. 5
Coates continued to maintain good relations with industry and employee representatives across the Group. There was no
major industrial action during the period, and no material impact on any operations was recorded in 2004 as a result of any
protracted or significant industrial relations or union action. p. 18
The constructive relationships we enjoy with labour unions are also a positive contributor to the employment climate
within the company. That some 3,000 employees and their families attend the annual company sports day in Auckland,
that 1,000 employees participate in the Round The Bays run in Fletcher Building T-shirts, and that the company
gymnasium and child care facility are so valued are all signs of a healthy employer-employee relationship. p. 11
Operational economies are facilitated by our competitive and flexible workplace agreements. These agreements provide
us with the latitude to cross-train and multi-task our staff. p. 3
Our ability to compete is reinforced by our workplace agreements, which have revolutionised workplace relations for
airlines in Australia. The interests of over 85 percent of Virgin Blue staff are represented by just three unions, a fraction of
the number covering the employees of traditional airlines. p. 8
Examples
1104
Coates Hire
Company
Table AI.
Disclosure Category
AAAJ
26,7
7. Employment of
minorities or women
6. Employee
remuneration
Disclosure Category
Australian Agricultural
Co.
Brambles
Zinifex
Telstra
One Steel
Publishing and
Broadcasting
As a large land holder and one of the biggest employers in rural and regional Australia, AACo recognises its special
responsibility to the community and to the Indigenous population. p. 13
We are an equal opportunity employer. We are committed to developing a diverse workforce and providing a work
environment in which everyone is treated fairly and with respect, irrespective of sex, race, sexual orientation, age,
disability, religion or ethnic origin. Employment and advancement at Brambles are based on merit. Brambles employs
disabled people and we work to develop and maintain active careers for them. If a Brambles employee becomes disabled
while in our employment and, as a result, is unable to perform their duties, we make every effort to find them suitable
alternative employment and provide retraining. Our Human Resources practices, including recruitment, selection,
remuneration and training, are undertaken on a non-discriminatory basis, in line with our Code of Conduct. p. 44
(continued)
Crown has recently signed a new four-year agreement covering the majority of its operational employees. The agreement
reflects improved working conditions and competitive wage rates within a framework that will allow the complex to
continue profitable growth. It also provides for enhanced career opportunities for employees, particularly in the table
games area. p. 19
The companys remuneration policy for senior executives aims to: attract, develop and retain executives with the
capabilities required to lead the company in the achievement of business objectives; have a significant proportion of
executives pay at risk to ensure a focus on delivering annual financial, safety and business objectives; and reward
executives for maintaining sustained returns to shareholders.p. 3
As part of the overall remuneration strategy and to encourage a longer term perspective, directors are required to receive
a minimum of 20% of their remuneration by way of restricted Telstra shares through the DirectShare Plan. The shares are
purchased on market and allocated to the participating director at market price. The shares are held in trust for a period of
5 years unless the participating director ceases earlier with the Telstra Group. In accordance with our policy, directors may
state a preference to increase their participation in the DirectShare Plan. Where this occurs, we may provide a greater
percentage of directors fees in Telstra shares. p. 130
We believe that people do indeed make a difference. To this end, we are progressively rolling out performance-based pay
which will ultimately see each employee rewarded for achieving individual targets combined with the Companys overall
financial performance. p. 3
Over the course of the year, 60 employees graduated from our leadership and management training programs. In
addition, a further 24 new graduates were accepted into our internal graduate program and we launched a Fast-track
Diploma of Management. In addition, our employee development initiatives were recognised with two external awards.
p. 8
All of our people, whether in stores or support functions, know our business extremely well. Our employees experience
and knowledge of how our business operates is one of our most valuable assets and contributes to our ongoing success.
Woolworths has a strong culture of developing and promoting people from within the business and encouraging
outstanding performance from our existing employees at all levels. Training and development remains a key focus for
Woolworths with the formation of the Woolworths Academy and a partnership with the Macquarie Graduate School of
Management (MGSM). p. 26
Transfield
Woolworths
Examples
Company
Employee
information in
annual reports
1105
Table AI.
Table AI.
9. Other
Wesfarmers
Kingsgate Consolidated
CSL
Coffey International
Strathfield Group
Singapore Telecom.
Flight Centre
Coffey International Limited has some of the worlds most experienced and talented people in the engineering, scientific
and international development fields. Professor Harry Poulos is just one example. He was voted 2003 Civil Engineer of the
Year and the 2004 inaugural winner of the Geotechnical Practitioner of the Year. p. 10
CSLs biennial Global Employee Opinion Survey conducted late in 2003 revealed strengths in customer focus,
organisational commitment and the effectiveness of immediate supervisors, as well as an overall 75% level in job
satisfaction. p. 28
For the second year running the company was awarded the Prime Ministers Best Practice Award for Employee
Welfare and in 2004 the Governor of Phichit Province and several of his officers visited the site to see at first hand some of
the initiatives the mine has undertaken to win this award. During the visit, the officials were introduced to several of the
sites employee relations policies including work practices, employee benefits, dispute and harassment, promotion of
women and recent initiatives in the health and safety area including drug and alcohol use, health hygiene and sexual
transmitted diseases. The visitors met key employees and conversed with a wide selection of the work force exchanging
ideas for further development both at the mine site and in local communities. p. 15
I would like to acknowledge the important role played by all employees in the achievement of the 2003/04 result. Their
skill, loyalty and commitment represents one of the major strengths of the Wesfarmers group. On behalf of the Board, I
thank them for their dedication and excellent performance. p. 5
Flight Centre actively promotes a set of values designed to assist all employees in their dealings with each other,
competitors, customers and the community. The values endorsed include: honesty, integrity, fairness and respect. These
values are incorporated into the company core philosophies and considered the equivalent of a Code of Conduct as it sets
out the standards expected of all employees. p. 22
The Group also recognises that one of its most important assets is its human capital. Whether in Singapore or Australia,
employees work in a culture which encourages and rewards personal excellence and which provides training and
development opportunities for individuals to achieve their best. p. 29
Life as a Strathfield Business Manager is exciting, inspiring and challenging. Leading a team of people to achieve
financial and non-financial goals, and balancing this with excellence in customer service provides a rewarding challenge
for our team. Our Business Managers are responsible for all aspects of managing a store from stock, to service to
merchandise presentation. From Strathfields early days in Albert Rd, Strathfield we recognised the importance of people,
their happiness at work and the impact this can have on our customers. Customer service is one of the platforms we have
built the business on and our results are testimony to this fact. p. 9
Collection House recruitment strategies were revised during the year to attract more female applicants. More than 55% of
the Company workforce is now female and there is an increasing proportion of women in senior management positions in
our Australasian operations. There is also a greater focus on work/life balance including more flexible working hours. p. 9
The company has a policy to improve the quality of life for women workers who comprise approximately 16% of the
workforce. Although low by general industry standards, the number of women employed is relatively high for the mining
industry. In 2004 the company was awarded a trophy and certificate by the Ministry of Labour for its efforts on
understanding the importance in improving the quality of life for women workers. p. 15
Collection House
Kingsgate Consolidated
Examples
Company
1106
8. Employee morale
Disclosure Category
AAAJ
26,7

Attaining Legitimacy by Employee Information in Annual Reports

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Attaining legitimacy by employee information in annual reports

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Attaining legitimacy by employee

Bond Business School, Bond University, Gold Coast, Australia

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disclosures as a specific form of social disclosure. The second objective is to investigate

Wesfarmers Limited (2004, p. 1) state in their annual report that:

Limited evidence exists on actual employee-related disclosures by a wide range of

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listed companies. Assertions of commitment to employee-related disclosures in annual

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Third, the research contributes by applying legitimacy theory to employee-related

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H1. Companies report increased quantities of employee-related disclosures when

2.4 Media agenda setting theory

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2.6 Control variables

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3.2 Sample selection

1 if the company is in the energy, materials, utility,

total debt divided by total assets in 2004.

log market capitalisation.

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3.3 Measurement of the variables

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3.4 Measurement of independent variables

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Recommendations (2003). We particularly focus on the items that are related to

Size of the board of directors

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Number of sample Number of disclosing Percentage of sample companies

Note: Many disclosing companies reported multiple categories

Health and safety

Energy Telecom Utility Materials Industrial Finance Health

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Number of companies with

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interesting research because these companies reported predominantly favourable

BHP Billiton made a negative statement when it stated:

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should be reviewed if regulators genuinely believe that it is important for companies to

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(The) Commonwealth Government of Australia (2006a), The Social Responsibility of

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Okereke, C. (2007), An exploration of motivations, drivers and barriers to carbon management: