Social Responsibility Journal

SUSTAINABILITY REPORTS IN BRAZIL THROUGH THE LENS OF SIGNALING, LEGITIMACY AND STAKEHOLDER
THEORIES
hong ching FÁBIO GERAB
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hong ching FÁBIO GERAB , (2017)," SUSTAINABILITY REPORTS IN BRAZIL THROUGH THE LENS OF SIGNALING,
LEGITIMACY AND STAKEHOLDER THEORIES ", Social Responsibility Journal, Vol. 13 Iss 1 pp. -
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 Tables of the article SUSTAINABILITY REPORTS AND APPLICABILITY OF SIGNALING,

LEGITIMACY AND STAKEHOLDER THEORIES

Table 1: ISE companies

Types of report 2008 2009 2010 2011 2012 TOTAL

Sustainability Reports 14 15 16 15 12 72

Annual report and

Sustainability 10 9 12 16 13 60
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Integrated Reporting 0 0 0 3 5 8

Annual Report 1 0 0 0 0 1

Social Responsibility Report 0 1 1 1 1 4

TOTAL 25 25 29 35 31 145

Reports with External

Assurance 13 14 15 24 24 90

Reports following GRI

Guidelines 21 22 28 35 29 135
 Table 2: Descriptive of the Overall Score results

Std. Std
Subset N Mean Median
Deviation Error

All Companies 145 0,497 0,519 0,200 0,017

2008 25 0,418 0,418 0,215 0,043

2009 25 0,460 0,463 0,211 0,043

2010 29 0,472 0,430 0,162 0,030

2011 35 0,535 0,572 0,203 0,034

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2012 31 0,573 0,630 0,182 0,033

Economic 145 0,551 0,542 0,224 0,019

Environment 145 0,460 0,457 0,256 0,019

Social 145 0,495 0,526 0,225 0,020

Financials 25 0,494 0,498 0,182 0,036

Infrastructure 67 0,540 0,564 0,161 0,020

Industrial 45 0,442 0,379 0,240 0,036

Services 8 0,463 0,479 0,248 0,088

Table 3: Score Normality Test

Kolmogorov-Smirnov a Shapiro-Wilk

Statistic df p-value Statistic df p-value

0,083 145 0,016 0,976 145 0,012

a. Lilliefors Significance Correction

 Table 4: Linear Regression Analysis between Score and Year variables

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t p-value
(Constant) -77,560 23,165 -3,348 ,001
Year ,039 ,012 ,271 3,370 ,001

Table 5: Kruskal-Wallis for Overall Score, grouped by year.

Year N Mean Rank Kruskal-Wallis Test Statistics

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2008 25 57,68 Test Variable Overall

2009 25 64,64 Grouping Year
Variable
2010 29 67,72 Chi-Square 10,198
2011 35 80,34 Df 4
2012 31 88,74 p-value. ,037
Total 145

Table 6: Post-hoc test for Kruskal a among the Years for the Overall Score

Subset for alpha = 0.05

Year N Mean Rank 1 2
2008 25 57,68 57,68
2009 25 64,64 64,64 64,64
2010 29 67,72 67,72 67,72
2011 35 80,34 80,34 80,34
2012 31 88,74 88,74
Total 145
a. Adjustment in the level of significance (Daniel, 1978, Siegel and Castellan,1988)
 Table 7: Company Experience in the observed period 2008-2013

Year Experience Nth report

All Companies 1st 2nd 3rd 4th 5th Total

2008 25 0 0 0 0 25

2009 8 17 0 0 0 25

2010 5 7 17 0 0 29

2011 8 4 6 17 0 35

2012 0 8 3 4 16 31
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Total 46 36 26 21 16 145

Table 8: Descriptive for company Experience for 2008-2013

Year Experience Nth report

1st 2nd 3rd 4th 5th

Reports 46 36 26 21 16

Mean 0,411 0,520 0,510 0,553 0,601

Median 0,385 0,559 0,509 0,572 0,650

Std Deviation 0,189 0,207 0,158 194 0,211

Std Error 0,028 0,037 0,031 0,042 0,053

Table 9: Linear Regression Analysis between Overall Score (dependent) and Experience
(independent) variables
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t p-value
Constant ,389 ,033 113,723 ,000
Experience ,044 ,012 ,296 3,707 ,000
 Table 10: Spearman correlation analysis among all TBL dimension and between dimensions
and report year.
a,b
Spearman’s rho Economic Environmental Social Year
** **
Economic Correlation 1,000 ,546 ,639 ,254**
Coefficient
Sig. (2-tailed) . ,000 ,000 ,002
N 145 145 145 145
** **
Environmental Correlation ,546 1,000 ,667 ,143
Coefficient
Sig. (2-tailed) ,000 . ,000 ,087
N 145 145 145 145
Social Correlation ,639** ,667** 1,000 ,292**
Coefficient
Sig. (2-tailed) ,000 ,000 . ,000
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N 145 145 145 145

Year Correlation ,254** ,143 ,292** 1,000
Coefficient
Sig. (2-tailed) ,002 ,087 ,000 .
N 145 145 145 145
a. * - Significant at 0,05 level
b. ** - Significnt at 0,01 level
 ANALYSIS OF SUSTAINABILITY REPORTS IN BRAZIL THROUGH THE LENS

OF SIGNALING, LEGITIMACY AND STAKEHOLDER THEORIES

Introduction

Sustainability calls for a company to respond not only to its shareholders, but also to other

stakeholders, including employees, trade unions, contractors, suppliers, customers, creditors,

affected communities, government and NGOs (Jenkins and Yakovleva, 2006 and Azapagic,

2004). As a response to this, we see an increase of sustainability reports. Corporate Social

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Responsibility (CSR) communication takes on a crucial role in addressing social and

environmental issues and in engaging effectively in a dialogue with the stakeholder group

investors and the society (Lock and Seele, 2015).

Because CSR reports are of voluntary disclosure by companies and do not follow any

mandatory reporting criteria, the stakeholders find difficulty to determine which firms are

“good” (Mahoney et al, 2013). Moreover, these reports are being perceived as non-credible

communication tools for many readers (Chen and Bouvain, 2009), they have been criticized

for showing little actual substance or disclosures have been minimal (Lyon and Maxwell,

2011, Monseña et al, 2013) and although the reporting quality has improved over the past ten

years, it is still patchy (Corporate Register, 2013). On the other hand, investors are no longer

satisfied with financial information and claim for an enhanced transparency. They need to

trust in company´s sustainable business conduct before investing in it and the sustainability

reporting would be of good value (Jenkins and Yakovleva, 2006, Lock and Seele, 2015).

Our theoretical framework blends elements of three theories – signaling, stakeholder and

legitimacy. The information affects the decision-making processes used by individuals in

households, businesses and governments and they make decisions based on public

information, which is freely available, and private information, which is available for only a
 subset of the public, occurring then information asymmetry (Connelly et al, 2011a). The

disclosure of sustainability reporting can diminish informational asymmetries between the

firm and its stakeholders and is used as a communication tool to win their support (Chiu and

Wang, 2015). The firms send signal about quality via issuing quality CSR reports to seek

legitimacy from their receivers (Connelly et al 2011a). Hahn and Kuhnen (2013) also agree

that reporting quality is a central issue for providing a true and fair view of a company´s

sustainability performance and works as signal to boost sustainability legitimacy. However,

relatively little attention has been paid to disclosure quality of sustainability reporting. Quality
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is one distinguishing characteristic and it refers to the underlying, unobservable ability of the

signaler to fulfill the needs of a receiver observing the signal (Connelly et al, 2011a).

The purpose of this practical research undertaken is to extend the applicability of stakeholder,

legitimacy and signaling theories by examining to what extent proactive CSR disclosures are

interrelated to attempt to gain and maintain legitimacy, to gain support of the stakeholders and

to reduce information asymmetry. Hypotheses about the relationships between legitimacy,

stakeholder and signalling theories and the quality of CSR reports will be tested. This article

also provides a useful method for evaluating disclosure quality, i.e., a score system that

measures the quality of these reports.

Assuming that these three theories are guiding corporate decisions related to the sustainability

reporting, we must expect, among other behaviors: an increase of companies publishing

sustainability reports, gradual increase of the amount of information reported as well as the

quality of disclosure, seek of external assurance of these reports and less asymmetry of

information signaled two distinct groups of audience.

To test these theoretical arguments, we adopted a longitudinal approach over a 5-year period

of 145 companies’ sustainability reports and used statistical analysis to investigate the

evolution of their quality. Social, economic and environmental circumstances do not unfold
 over one financial year, with a longer period of analysis the quality of CSR reports may be

identified more consistently (Mahadeo et al, 2011), and also it might help to observe whether

there is a trend (Legendre and Coderre, 2012). This article also adds to the scarce evidences

on sustainability reporting in Brazil.

We decided to analyze Brazilian companies listed at Indice de Sustentabilidade Empresarial

(ISE) for three reasons: this price index has entered into a mature phase (has been operational

since 2005 and is the fourth stock index created after New York DJSI, London FTSE4Good

and Johannesburg JSE), there is an additional demand to strengthen disclosure quality

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regarding their sustainable activities and extant literature regarding ISE is still incipient

(Corrêa et al, 2012, Macedo et al, 2012 and Ching et al, 2013).

After a literature review on signaling, legitimacy and stakeholder theories, the research

method is presented in the section soon after. Here we present the score system developed to

evaluate sustainability reports regarding the amount of information disclosed and the quality

of its information. Following the sections of the descriptive statistics and the results, the

discussion and conclusion is presented in the final section as well as recommendations for

further developments.

Literature Review

Among the theories that explain sustainability reporting practice, Hahn and Kuhnen (2013)

found studies adopting stakeholder and legitimacy theories and to a certain extent also

institutional theory. However, these studies mostly refer to isolated theoretical reference

points instead of embracing different theoretical explanations regarding sustainability

reporting. Studies on signaling theory were not mentioned by them. The application of

signaling theory is often found in corporate finance (Dionne and Ouedereni, 2011), marketing

(Wells, Valacich and Hess, 2011 and Mavlanova, Benbunan-Fich and Koufaris, 2012) and
 human behavior (Gregory, Meade and Thompson, 2013). Some aspects of the three theories –

signaling, legitimacy and stakeholder – were combined to discuss the results of this paper.

Economic-based disclosure theories (especially voluntary disclosure and signaling theories)

Dye (1985) and Verrecchia (1983) state that firms voluntarily disclose information to reduce

information asymmetries between managers and stakeholders to communicate the firm´s good

performance. In order to reduce information asymmetry, the better informed groups try to

credibly transmit information about themselves to the less informed groups (Connelly et a,

2011b and Spence, 2002). Signaling can be seen as an extension of the voluntary disclosure
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theory. The signaling timeline includes two actors – the signaler, a person or firm, which

sends the information the receivers would find useful and receiver who observes and

interprets the signal – as well as the signal itself (Connelly et al, 2011a).

The core of signaling theory consists of the analysis of different types of signals that signaler

sends to the receiver and the situations in which they are interpreted and used. Signals convey

information about signaler characteristics and receiver examines them to evaluate signaler

credibility (Spence, 2002). For Janney and Folta (2006), the extent to which signaling is

effective depends, in part, on whether receivers scan the environment for signals. Signaling

theory suggests that “good” corporate citizens issue standalone CSR reports to eliminate

information asymmetries that may prevent them from reaping benefits of their actions. Yet,

signaling suggests that firms use standalone CSR reports as a signal of their superior

commitment to CSR (Mahoney et al, 2013). Some signaler characteristics are more likely to

enhance the effectiveness of a signal and credibility is a way to reflect the extent to which a

signaler is honest (Davila et al, 2003). External stakeholders will seek information from

auditors providing independent assurance of Corporate Responsibility CR information and

demonstrating that the company is as serious about CR data as it is about its financial

information (KPMG, 2013).

 Regarding the quality of the signals, ie, the sustainability reportings, it varies significantly.

Marquis and Qian (2014) state that Chinese reporting has been criticized for its low quality

where half of the reports released contained only limited information on specific CSR

activities. CSR itself has been criticized for showing little actual substance or disclosures have

been minimal (Lyon and Maxwell, 2011, Monseñe et al, 2013) and although the reporting

quality has improved over the past ten years, it is still patchy (Corporate Register, 2013).

Huang and Wang (2010) analyzed 162 sustainability reports from 2002 to 2008 and found

that its quality has polarized. Even though the reporting system of some companies has
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arrived at a relatively high level, most of the reports need improvement in many aspects such

as report types, disclosing time, report content and shapes.

Socio-Political Theories of Disclosure

Socio-political theories including political economy, legitimacy theory, and stakeholder

theory suggest that CSR is a function of social and political pressures facing the corporation

(Patten, 2002).

Legitimation is the process whereby a corporation justifies to its conferring publics its right to

continue to operate. Legitimacy can be characterized as a generalized perception or

assumption that the actions of an entity are desirable or appropriate within some socially

constructed system of norms, values, beliefs and definitions (Suchman, 1995). Its theory

states that the greater the likelihood of adverse shifts in a corporation's conferring public´s

perceptions of how a socially responsible corporation is, the greater the desirability on the

part of the corporation to adopt legitimation tactics in an attempt to manage these shifts in

social perceptions (O´Donovan, 2000). Legitimacy also refers to the degree to which the

broader public or stakeholders regard a firm’ actions as both appropriate and useful

(Suchman, 1995) or when the firm’s performance is socially accepted and judged to be fair

and worthy of support (Eugénio et al, 2013). In order to continue to exist, a corporation will
 act to remain legitimate in the eyes of whom it considers is able to affect its legitimacy

(Marquis and Qian, 2014, and Wei et al, 2015). In other words, the theory is based on the idea

that companies must act within the bounds of what society identifies as socially acceptable

behavior in order to continue operating (O´Donovann, 2002) and show adherence to social

norms and expectations (Nikolaeva and Bicho, 2011). The firms have to voluntary conform to

moral, social values and norms while demanding market related resources such as information

sharing, access to financial and human capital and endorsements from the stakeholders (Wei

et al, 2015). This is critical to firm survival because it ensures the continuous inflow of
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external resources and support from various stakeholders (Suchman, 1995). However, when

societal expectations of the firm’s behavior differ from the perception of its behavior, society

could revoke the organization’s license to continue operating (Eugénio et al, 2013).

The identification of important stakeholders that the organization attempts to influence their

perception, usually through sustainability information disclosures, has its roots in the

stakeholder theory (O´Donovan, 2000). In meeting the demands of various stakeholder

groups, a company manager may not accord all stakeholders the same level of importance

(Chiu and Wang, 2015). The focus of stakeholder theory is to gain approval for corporate

decisions by groups whose support is required for the organization to achieve its objectives

(Tricker, 1983). Patten (1992) and Roberts (1992) state that while there is obvious overlap

between stakeholder and legitimacy theories, legitimacy theory offers a broader perspective in

attempting to explain environmental disclosures than does stakeholder theory, more focused

on corporations. The common thread between stakeholder theory and legitimacy theory is

obviously identifying important stakeholders (O´Donovan, 2000). While stakeholder theory

addresses the different interest groups that influence a company, legitimacy theory more

broadly refers to society as a whole that demands sustainable business conduct (Cotter and

Najah, 2012)..
 The acceptability of a company in society is directly linked to stakeholder thinking (Hahn and

Kohnen, 2013). The long run survival of the company requires the support of its stakeholders,

and a principal function of the manager is to handle stakeholders’ needs, expectations and

demands as well as to balance conflicts among them (Chiu and Wang, 2015). In order to

manage legitimacy, corporations must be able to identify who these stakeholders are as well

as what are their needs or demands.

Brower and Maahajan (2013) found evidences that firms are sensitive to diverse stakeholder

demands and are exposed to greater scrutiny or risk of actions from their stakeholders. They
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respond with implementation of policies and programs intended to reach the overarching goal

of CSR.

Methods to Measure the Quality of Sustainability Reports

The need for independent assurance has a purpose of enhancing the reporting quality. Despite

being voluntary, many companies do seek out assurance, motivated by a need to demonstrate

credibility with external stakeholders (KPMG, 2013). Unfortunately, this does not capture the

amount of sustainability information disclosure nor the quality of the information disclosed.

Score systems can be seen as a method to provide perceived credibility to the readers

regarding the amount of disclosure in the reports. Some scholars and organizations have

developed score systems to measure the quality of reporting quality.

Skouloudis and Evangelinos [2009] developed a score systems where each one of the GRI

topics/indicators was allocated a score between 0 and 4 points and assigned as follows: when

a specific topic was not mentioned, 0 points; brief or generic statements received 1 point;

more detailed coverage received 2 points; extensive coverage received 3 points and when

coverage was full and systematic received 4 points.

United Nations Environment Programme (UNEP ) (2002 and 2006) also used 0-4 scores,

where "0 means no relevant coverage, or nothing sufficiently significant to suggest that
 the company is taking this issue seriously” and “4 means the reporting is serious, systematic,

and extensive and it is clear how reporting is linked to general business decision making and

core processes."

Daub (2007) used a rating between 0 and 3 to assess to what degree the reporting fulfills the

criterion, where: 0 = no meaningful information is provided on the specific criterion; 1 =

patchy information is provided; 2 = the reporting provides good information on the criterion,

however, one relevant area/indicator is not addressed and 3 = the reporting includes full

information to the criterion. In his study, 33 individual criteria were broken down into four
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main categories, combining a number of meaningfully associated criteria.

KPMG (2013) and Chiu and Wang (2015) chose, instead, to use criteria or facets to analyze

the quality of CR reporting. KPMG (2013) sought to assess against seven criteria while the

latter used five facets. Ching et al (2013) also constructed their own score system and it will

be used in this paper due to the fact that the dimensions and aspects of Triple Bottom Line

TBL are used in an equitable way. This will be detailed in the methodology section.

strategy, risk and opportunity; the materiality of potential impacts both on the business itself

and its stakeholders; targets and indicators; stakeholder engagement; suppliers and the value

chain; governance of CR and finally transparence and balance, with greater weight given to

the first four items. Chiu and Wang (2015) used five facets to analyze the firms’ disclosure

quality: firm’s disclosure of CSR policies; specification of goals; formulation of initiatives;

quantification of impact and reporting of progress and presentation of external certificates and

audits.

Research Method

We divided this section in the following subsections: formulation of hypotheses, method to

calculate the scores and use of content analysis, sample selection and study period.

Formulation of hypotheses
 The three theories – legitimacy, signaling and stakeholder - were combined to uncover ways

of explaining firm behavior with respect to sustainable reporting disclosure. Legitimacy

suggests that firms that adapt to changing sustainability norms and regulations will be more

likely to survive (Connolly et al, 2011a). One problem that firms face is that their

commitment to sustainability often is not readily observable by stakeholders (Connelly et al,

2011b). For them, the likelihood of long run survival of the firm could be moderated by two

factors: the support of different interest stakeholders that influence the firm and its ability to

communicate the value and actions with respect to sustainability to them. And CSR reports
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can be seen as a way to communicate or to signal of a firm’s superior commitment.

In line with legitimacy and signaling theories, we contend that companies may resort to

sustainability reporting quality as part of a strategy to maintain their standing in society as

well as signaling to a diverse audience the image of concern with social responsibilities.

These reports should act as an important signal to gain legitimacy when information

asymmetry occurs during the legitimacy judgement process (Wei et al, 2015). By improving

the quality of sustainability reports over time, firms may create even better conditions for

their legitimacy (Shocker and Sethi, 1973).

From the perspective of the above theories, there is a greater incentive to disclose information

and the better its quality, the better the firm will be perceived by society and stakeholders, its

actions be legitimized as well as the information asymmetry be reduced. In this same line,

companies can reduce this asymmetry by proactively reporting on their sustainability

activities (Hahn and Lulfs, 2013). For them, the sustainability performance of a company can

be regarded as asymmetric information because it is difficult for parties outside the company

to gain credible information on sustainability aspects. We therefore hypothesize the

following:

H 1 - There is a significant increase in the quality of sustainability reports post 2008.

 Legitimacy, stakeholder and signaling theories can contribute to the notion that good quality

disclosure in each sustainability dimension should enhance firm´s legitimacy with groups of

stakeholders (social, economic and environmental audiences) in meeting their specific needs

and regulatory and normative expectations. Araya et al [2014] stated that disclosing

information about sustainability would help to reinforce the stakeholders´ trust. In this same

line, better social performers are those who increased the breadth of their disclosure to

stakeholders and uniformly distributed disclosure across stakeholders (Vurro and Perrini,

2011). Ching et al (2013) found that the companies are reporting the content in all the three
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dimensions with same quality level and with the same level of adherence to GRI indicators

(Ching et al, 2014).

Taking into account the above arguments, and the results obtained in previous studies, we

want to examine whether the firms accord all stakeholders the same level of importance in

terms of quality disclosure.

H 2 – There is no significant difference in the quality of information disclosed among

the economic, environmental and social dimensions post 2008.

Method to Calculate the Scores

We followed the same method used in Ching et al, (2013) that created four levels to calculate

the scores based on GRI G3 Guidelines. The bottom level, with the 79 information/indicators:

nine indicators in the economical dimension (EC1 to EC9), thirty in the environmental

dimension (EN1 to EN30) and forty in the social dimension (LA1 to LA14, HR1 to HR9, SO1

to SO8 and PR1 to PR9). These 79 information/indicators were aggregated, in an upper level,

by aspect and the scores, in each aspect, were calculated using arithmetic mean of their

respective indicators. Moving up, the aspects were aggregated by dimension and their scores

were composed using arithmetic mean of their respective aspects. Finally, the overall score
 gathering the scores of the 3 dimensions is the top level. An exception was made for the social

dimension, where there is one more level, Category, between aspect and dimension levels.

By using arithmetic mean, we say that every information/indicator to compose the score in

each aspect and every aspect in each dimension has the same weight, despite they (the aspects

and dimensions) have greater or lesser amount of information/indicator. For instance, the 4

indicators of aspect Economic performance have together the same weight as the 3 indicators

of the aspect Market presence and as the 2 indicators of the aspect Indirect economic impacts.

And these 3 aspects in the economic dimension have the same importance as the 9 aspects of
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the environmental dimension.

Each indicator/information was then assigned a score from 0 to 1 using the wording of the

sustainability report. For this purpose, content analysis was applied to make applicable and

valid inferences from data in their context [Jenkins and Yakovleva, 2006]. With this method,

we are looking at the amount of information disclosed as well as the quality of this

information disclosed.

The different scores between the companies can be exemplified as: when there is no

disclosure regarding the information, the score for it was 0 and its level was considered “no

coverage”. “Sketchy” is when the information is not presented in a coherent and systematic

way in the report, so its score is 0,25. For illustration, in Bradesco’s 2009 report (financial

company), this company received financial aid from the government (EC4) but it was not

detailed how much, or how this financial aid was received. When the company presents the

information in a coherent and systematic way, but still missing relevant aspects, it was given

0,5 and it was considered “systematic” level. As an example, Coelce (an energy company) did

not split how much energy was saved due to improvements in efficiency programs (EN5).

When the information is complete, but with little or no evidence that it affects the way the

company conducts its business, it was given 0,75 and considered “extensive” level. It was
 observed on Tractebel’s 2008 report (energy), on indicator LA5 about minimum period for

notifications about operational changes to the employees. There is no such minimum period.

Finally, score 1 is given for “integrated” information, showing high importance for the

company. Most of the companies received score on indicator EN22, about disposal of waste,

the important point for sustainable analysis.

In order to mitigate potential bias in this study, two raters scored the reports following the

criteria described. Possible discrepancies were analyzed together in order to standardize the

analysis. This method provided robustness to our criteria and classification.

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Sample selection and study period

We worked with all the 46 companies listed at ISE for the period of 2008-2012, in a total of

145 reports, being 25 in 2008, 25 in 2009, 29 in 2010, 35 in 2011 and 31 in 2012. We

downloaded all the reports from the companies´ websites. There has been a mild turnover of

companies in ISE list. Just for illustration, of the 25 companies that published reports in 2008,

17 of them published in 2009, 2010, 2011 and 16 in 2012. There were 8 new firms added in

2009, an equal number of firms deleted in the same year, 5 additions in 2010 while 1 was

deleted. The same analysis can be done for other years. Further details can be found in the

Discussion of the Results section in table 8.

Descriptive Statistics

The terminology used for sustainability reporting varies between companies and there is not a

single globally accepted definition. The most common terms to name the report are ‘corporate

responsibility´, ´corporate social responsibility´ and ‘sustainability report´, although the latter

was used by 43% of companies in KPMG Survey [2013].

Table 1 shows the temporal development of ISE companies from 2008-2012. Overall, 145

company’s reports on sustainability are presented in this period, in whatever form of

reporting. Only 1 company disclosed social and environmental information within the Annual
 Report, 60 reports (or 41% of total) were produced as Annual Report and Sustainability, 8

were produced as Integrated Report, 4 were produced as stand-alone Social Responsibility

Report and the majority (72 or 49% of total) as a specific Sustainability Report. This latter is

the dominant form of reporting (Hahn and Kuhnen, 2013 and Kolk, 2010). KPMG survey

[2013] shows that 51% included sustainability information in their annual financial report,

while in the Fortune Global 250 54,4% reported separately and only 20% included in the

financial report [Kolk, 2008].

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Insert here table 1

Although the Sustainability Report represents the majority, its evolution was not as significant

as Annual Report and Sustainability type that has risen from 10 reports in 2008 to 16 in 2011

and dropped to 13 in 2012. The remarkable aspect is the emergence of Integrated Report in

2011, being 8 in total. Although these eight reports do not label themselves as Integrated

Report, we have considered so in this study. They have incorporated some contents of

integrated reporting into their reports, such as, governance, operating context, strategic

planning and/or organizational overview.

The table 1 also shows the variability in the types of reports produced and in the development

of more sophisticated forms of reporting. In 2008, only 21 companies stated that they were

reporting in accordance with the GRI guidelines (84% of total), in 2012, this figure has risen

to 29 (93,5%). The same happens with external assurance of the data contained in the reports.

In 2008, 13 reports (or 52% of total) were externally audited and there has been a gradual

increase in levels of assurance going up to 24 reports (77,4% of total) in 2012. This result is

much higher than presented by Corporate Register (2013) with slightly over 20% in 2012.
 This gradual increase in both the GRI guidelines and external assurance is in line with Jenkins

and Yakovleva study [2006] with the top 10 listed mining companies from 1999 to 2003. In

1999, no company reported using GRI guidelines and only 2 companies had external

assurance. In 2002, only 2 companies were reporting in accordance with GRI and in 2003 this

figure rose to 6 while 6 companies had external assurance in 2002 and it grew to 8 in 2003.

This is also in line with KPMG survey of 2013. Eighty two percent and 59% of G250 largest

companies refer to GRI guidelines and invest in external assurance respectively as opposed to

78% and 46% respectively in 2011. This contrasts with Kolk study [2008] where only one-
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third of Fortune 250 companies resort to external verification. Motivations that are given

include assessing quality, continuous improvement, and responsibility to hear opinions and

enhance the credibility of the reported data.

Insert here table 2

Looking all companies in table 2, the average Overall Score was 0,497, with a standard error

of 0,017. It is possible to note that the size sample is well distributed over the years, going

from a minimum size of 25 reports, for 2008 and 2009 years, to a maximum size of 35 reports

in 2011 subset. The results show slight score differences across the years. The average scores

point to a gradual and consistent year by year increase. This result is in line with the G250

companies that achieved a quality score of 59 out of a possible 100 (KPMG, 2013) but they

contrast with Skouloudis and Evangelinos´ results (2009) with scores climbing to 26% in

2006 from 21% in 2005.

Moreover, looking at the average score of the sustainability dimensions and the economic

sectors for the entire period of 2008-2012, there are no clear differences among the three
 dimensions (Economic, Environment and Social) scores as well as for the four economic

sectors.

Results

Correlation/regression analysis and inter-comparison of distinct subsets are presented and

discussed, followed by sample subsets, separated by year and by sustainability dimensions. In

order to decide between parametric or non-parametric statistical approach, both Kolmogorov-

Smirnov and Shapiro-Wilk normality tests were applied to the overall score, considering all

145 company reports. Table 3 presents the goodness of fit results. Both tests, assuming a 0.05
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significance level, indicate that the Overall Score results are not normally distributed. So, in

order to measure the correlation between the variables, Spearman`s correlation was used.

Following the same approach, Kruskal-Wallis non-parametric test was applied for multiple

subsets inter-comparison.

Insert here table 3

To investigate whether Sustainability Reports disclosure had a consistent increase during the

studied period, a linear model was used, having Overall Score as the dependent variable and

the report year as the independent variable. For paired data, Simple Linear Regression

Analysis can be applied, despite the fact that Overall Score may be not normally distributed.

Table 4 shows the respective Linear Regression results.

Insert here table 4

The Overall Score (OS) can be described as a function of the Year (Y) being the equation
 OS = -77,560 + 0,039Y. These results indicate one annual increment of 0,039 on the

measured average Overall Score.

Aiming to detect significant differences in the Overall Score, Kruskal-Wallis non-parametric

test was applied to perform a directly comparison among all distinct year reports. Table 5

shows the test results.

Insert here table 5

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These inter-comparison test reveals that, at a 0,05 significance level, there are differences in

the Overall Scores when they are grouped by the publication years.

The obtained p-value (0,037), lower than the selected test significant level (0,05), allow us to

look where are these differences. Therefore, to identify whether there are differences in

homogeneous year groups, we apply the post-hoc test for Kruskal-Wallis suggested by Daniel

[1978] and Siegel and Castellan [1988]. This procedure adjusts the level of significance for

multiple comparisons, allowing detecting the distinct homogeneous subsets. These subsets are

presented in table 6.

Insert here table 6

It is possible to verify that there are two year subsets. The first one groups, without significant

differences, reports from 2008 to 2011. The second one groups reports from 2009 until 2012.

It means that this difference evidences that 2012 reports present an average Overall Score

greater than reports of 2008.

 These results, concerning the Overall Report Score analysis, corroborate to accept the first

hypothesis of this work: H 1 - There is a significant increase in the quality of sustainability

reporting post 2008.

We, then, wondered whether this increase in the quality is result of ability in writing good

reports year after year due to gain of experience. The company experience in reporting was

identified, for each company, as the 1st report on the 2008-2012 period, the 2nd report in this

period, up to the 5th report. It means that one company that published 3 reports during the five

year period, regardless the year published, will have the 1st, the 2nd ant the 3rd reports. The 5th
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report will be associated with the last one for companies that published reports in all the five

year period. This is shown in table 7.

For illustration, 25 companies published reports in 2008 (1st report), 17 of them published in

2009 (2nd report), 2010, 2011 and 16 in 2012 (5th report) (see the figures in diagonal). Of the

total 46 companies in the 1st report, 10 published only one report, other 10 published 2

reports, 5 published 3 reports, other 5 published 4 reports and 16 companies published for all

the five years (2008-2012).

Insert here table 7

The descriptive statistics for company Experience is shown in table 8.

Insert here table 8

The results show an improvement in the mean Overall Score as the Experience increases.

Kruskal-Wallis was applied in order to detect significant differences in the Overall Score

across the Experience (Nth report). These inter-comparison test reveals that, at a 0,05
 significance level, there are differences in the Overall Scores when they are grouped by the

Experience. Post-hoc test for Kruskal-Wallis shows that the 5th’s reports Overall Score are

better than the 1st’s reports.

It means that, very likely, companies are increasing its ability in writing a good report because

they are doing it annually.

Table 9 shows the Linear Regression between Overall Score and Experience.

Insert here table 9

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This regression has statistical significance at 0,05 level. It shows that the Overall Score

presents an average 0,044 ± 0,012 increment for each report in the company experience as

years go by.

Moving now to confirm the next hypothesis, it is necessary to perform a detailed statistical

analysis of each sustainability dimension looking at their specific report scores. One question

arises: Is the average score for each dimension similar to the entire three dimensions during

the 2008-2012 period? This question could be addressed applying the Kruskal-Wallis test

among the Economic, Environment and Social scores. These Kruskal-Wallis analysis,

involving all the 145 studied reports, together with the post-hoc test mentioned above,

detected, using a 0,05 level of significance, that the disclosure for Economic dimension is

bigger than the disclosure of the Environment dimension although this difference is subtle

(see table 2). Economic dimension has an average score of 0,551 while Environment has

0,460. Social dimension, with an average score of 0,495, is statistically compatible with both

Economic and Environment dimensions. Therefore, hypothesis H2 cannot be confirmed.

These results are much better than those presented in Skouloudis and Evangelinos´ research

(2009) with average scores of 25%, 15% and 21% for economic, environmental and social
 dimensions respectively. One thing in common is that environmental dimension has the

lowest score.

To verify a consistent behavior of the three dimensions during the analyzed period, a non-

parametric Spearman correlation analysis was performed. Table 10 presents these coefficients

among all the dimensions as well as the correlations between the year of the reports and each

dimension score separated.

Insert here table 10

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The correlation results indicate that all sustainability dimensions are positively correlated,

with Spearman correlation coefficients around 0,6 (0,667 between Environmental and Social;

0,639 between Economic and Social; 0,546 between Economic and Environmental). All the

coefficients are strongly significant (p-value lower them 0,01). It means that we expect that an

improvement in one sustainability dimension score should be followed by the improvement in

the other two complementary sustainability dimensions.

Table 10 also presents the correlations between Year and each sustainability dimension score

separately. Although weaker, compared with inter dimension correlations, the correlations

between the report year and each dimension are still significant for economic (0,254) and

social dimension (0,292). However, for environmental dimension, it was not possible to detect

a significant correlation (0,143).

To detect the homogeneous year groups and their corresponding differences, Kruskal-Wallis

non-parametric test, together with the post-hoc test for Kruskal-Wallis, were again applied.

No statistic difference could be found by Environmental dimension. For both Economic and

Social Dimension, reports published in 2012 are better than those in 2008. One possible

explanation for the improvement in the social dimension can be offered by Vurno and Perrini
 (2011) that state that better social performers are those who increased the breadth of their

disclosure. These results are in agreement with results obtained by the Overall Score (see

table 6). The results show that the Economic and Social dimensions presented a consistent

improvement from 2008 to 2012, however, this was not clear for the Environmental

dimension.

Discussion of the Results and Conclusion

The purpose of this practical research undertaken is to extend the applicability of stakeholder,

legitimacy and signaling theories by examining to what extent proactive CSR disclosures are
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interrelated to attempt to gain and maintain legitimacy, to gain support of the stakeholders and

to reduce information asymmetry. The firms are gradually assimilating the assumptions of

these theories and turning them into business practices. There is a steady increase in the

number of sustainability reports published and the amount of information reported as wells as

the quality of disclosure.

Sustainable practices as well as reportings, because they help overcome asymmetric

information about firms´ intents and behaviors, can be an effective mean for them to achieve

social acceptance. The results show a significant increase in the quality of sustainability

reporting and the gain of experience in writing these reports can contribute to this. Based on

signaling and legitimacy theories, we suggest that the improvement in sustainability reporting

quality acts as an important signal to gain legitimacy when information asymmetry happens

during the legitimacy process. It seems to be more and more important for the companies to

build a company culture of good reporting and use this reporting process to generate value

and trust for their stakeholders, in order to build a meaningful relationship with them.

Furthermore, by improving the quality of sustainability information over time, companies

may create even more conditions for their legitimacy.

 Other dimensions of sustainability reporting may also have similar signaling effects in

information asymmetry conditions. The disclosure for economic and social dimensions is

better than environmental and the quality improvement over time was the result of synergies

and inter-linkages more between these two dimensions of sustainability, and to a lesser extent

of environmental. This should enhance firm´s legitimacy with social and economic audiences.

Society and stakeholders exerting pressure for better and more detailed disclosure must

encourage greater and better quality of the reporting.

The results of this paper are of interest for several reasons: 1) extend and broaden the use of
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signaling in studying its use on sustainability reporting; 2) the use of three theories is an

appropriate framework for empirical analysis of sustainability reporting disclosure quality in

Brazil; 3) it adds to the scarce evidence of sustainability reporting in Brazil. Firms should

view investing in sustainability reporting disclosure as a strategy of obtaining business

legitimacy as the practical implication of this article.

One limitation of this study is that it does not assess the sustainability performance and/or

practices of an organization, but rather evaluates the extent to which the organization seeks to

report this performance to the society and its stakeholders.

Finally, as suggestion for future study, a similar analysis could be made with sustainable

companies of New York Stock Exchange or London Stock Exchange and compare the results

with ISE companies.

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Table 1: ISE companies

Types of report 2008 2009 2010 2011 2012 TOTAL

Sustainability Reports 14 15 16 15 12 72

Annual report and

Sustainability 10 9 12 16 13 60
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Integrated Reporting 0 0 0 3 5 8

Annual Report 1 0 0 0 0 1

Social Responsibility Report 0 1 1 1 1 4

TOTAL 25 25 29 35 31 145

Reports with External

Assurance 13 14 15 24 24 90

Reports following GRI

Guidelines 21 22 28 35 29 135

Table 2: Descriptive of the Overall Score results

Std. Std
Subset N Mean Median
Deviation Error

All Companies 145 0,497 0,519 0,200 0,017

2008 25 0,418 0,418 0,215 0,043

2009 25 0,460 0,463 0,211 0,043

2010 29 0,472 0,430 0,162 0,030

2011 35 0,535 0,572 0,203 0,034

 Std. Std
Subset N Mean Median
Deviation Error

All Companies 145 0,497 0,519 0,200 0,017

2008 25 0,418 0,418 0,215 0,043

2009 25 0,460 0,463 0,211 0,043

2010 29 0,472 0,430 0,162 0,030

2011 35 0,535 0,572 0,203 0,034

2012 31 0,573 0,630 0,182 0,033

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Economic 145 0,551 0,542 0,224 0,019

Environment 145 0,460 0,457 0,256 0,019

Social 145 0,495 0,526 0,225 0,020

Table 3: Score Normality Test

Kolmogorov-Smirnov a Shapiro-Wilk

Statistic df p-value Statistic df p-value

0,083 145 0,016 0,976 145 0,012

a. Lilliefors Significance Correction

Table 4: Linear Regression Analysis between Score and Year variables

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t p-value
(Constant) -77,560 23,165 -3,348 ,001
Year ,039 ,012 ,271 3,370 ,001
 Table 5: Kruskal-Wallis for Overall Score, grouped by year.

Year N Mean Rank Kruskal-Wallis Test Statistics

2008 25 57,68 Test Variable Overall
2009 25 64,64 Grouping Year
Variable
2010 29 67,72 Chi-Square 10,198
2011 35 80,34 Df 4
2012 31 88,74 p-value. ,037
Total 145
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Table 6: Post-hoc test for Kruskal a among the Years for the Overall Score

Subset for alpha = 0.05

Year N Mean Rank 1 2
2008 25 57,68 57,68
2009 25 64,64 64,64 64,64
2010 29 67,72 67,72 67,72
2011 35 80,34 80,34 80,34
2012 31 88,74 88,74
Total 145
a. Adjustment in the level of significance (Daniel, 1978, Siegel and Castellan,1988)

Table 7: Company Experience in the observed period 2008-2013

Year Experience Nth report

All Companies 1st 2nd 3rd 4th 5th Total

2008 25 0 0 0 0 25

2009 8 17 0 0 0 25

2010 5 7 17 0 0 29

2011 8 4 6 17 0 35

2012 0 8 3 4 16 31

Total 46 36 26 21 16 145
 Table 8: Descriptive for company Experience for 2008-2013

Year Experience Nth report

1st 2nd 3rd 4th 5th

Reports 46 36 26 21 16

Mean 0,411 0,520 0,510 0,553 0,601

Median 0,385 0,559 0,509 0,572 0,650

Std Deviation 0,189 0,207 0,158 194 0,211

Std Error 0,028 0,037 0,031 0,042 0,053

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Table 9: Linear Regression Analysis between Overall Score (dependent) and Experience
(independent) variables
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t p-value
Constant ,389 ,033 113,723 ,000
Experience ,044 ,012 ,296 3,707 ,000

Table 10: Spearman correlation analysis among all TBL dimension and between dimensions
and report year.
a,b
Spearman’s rho Economic Environmental Social Year
** **
Economic Correlation 1,000 ,546 ,639 ,254**
Coefficient
Sig. (2-tailed) . ,000 ,000 ,002
N 145 145 145 145
Environmental Correlation ,546** 1,000 ,667** ,143
Coefficient
Sig. (2-tailed) ,000 . ,000 ,087
N 145 145 145 145
Social Correlation ,639** ,667** 1,000 ,292**
Coefficient
Sig. (2-tailed) ,000 ,000 . ,000
N 145 145 145 145
Year Correlation ,254** ,143 ,292** 1,000
Coefficient
Sig. (2-tailed) ,002 ,087 ,000 .
 N 145 145 145 145
a. * - Significant at 0,05 level
b. ** - Significnt at 0,01 level
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