Attaining legitimacy by employee information in ...

Accounting, Auditing & Accountability Journal Attaining legitimacy by employee information in annual reports Pamela Kent Tamara Zunker

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To cite this document: Pamela Kent Tamara Zunker , (2013),"Attaining legitimacy by employee information in annual reports", Accounting, Auditing & Accountability Journal, Vol. 26 Iss 7 pp. 1072 - 1106 Permanent link to this document: http://dx.doi.org/10.1108/AAAJ-03-2013-1261 Downloaded on: 02 January 2015, At: 00:25 (PT) References: this document contains references to 176 other documents. To copy this document: [email protected] The fulltext of this document has been downloaded 852 times since 2013*

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Attaining legitimacy by employee information in annual reports Pamela Kent and Tamara Zunker

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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

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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 company’s competitive advantage and a crucial factor to the success of a company’s 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; O’Donovan, 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


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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; Ordo´nez 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 Vuontisjarvi’s (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; O’Donovan, 2002; O’Dwyer, 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 company’s 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 company’s activities (Brammer and Pavelin, 2004; Deegan et al., 2002; Epstein and Freedman, 1994; Pfeffer and Salancik, 1978; Tsang, 1998; Woodward et al., 2001). Manager’s legitimising strategies vary depending on whether they are trying to gain, maintain or repair the legitimacy of their company (O’Donovan, 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 company’s management is honest and transparent to stakeholders including their employees. This leads to the following hypothesis.


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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 (O’Donovan, 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 O’Donovan (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 public’s 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 company’s 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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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.

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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 management’s 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 company’s 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 company’s 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 (O’Donovan, 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 auditor’s knowledge of the company. It is brought to the attention of users of the financial statements if voluntary information is inconsistent with the auditor’s 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 management’s perceptions in a comprehensive and compact manner (Niemark, 1995).


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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 ¼ b0 þ b1 corporate governance scorei þ b2 adverse publicityi þ b3 industryi þ b4 employee concentrationi þ b5 return on assetsi þ b6 leveragei þ b7 sizei þ e: where: Sentencesi ¼ number of sentences of disclosure. Corporate governance scorei ¼ sum of nine individual corporate governance variables. Adverse publicityi ¼ number of adverse media articles in the year prior to 2004. Industryi

¼ 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 ¼ number of employees divided by total assets in 2004. Return on assetsi ¼ net profit after tax divided by assets at balance date. Leveragei

¼ total debt divided by total assets in 2004.

Sizei

¼ 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.


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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; O’Sullivan et al., 2008). O’Sullivan 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 company’s corporate governance score reflects an assessment of the company’s 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 Australia’s 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

¼ ,5 ¼ , 0.50

0 0

No . 10 Big 4 Yes Yes Yes Yes

1 1 1 1 1 1 1

Yes ¼ ,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


Table I. Variables for constructing the corporate governance score

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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 Huntley’s 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 (O’Brien 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 sample’s 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 company’s 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 director’s 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


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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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 Pearson’s 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 ¼ 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 ¼ 0.02 and coefficient ¼ 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. Frequency of adverse 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)

Frequency of adverse 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 ¼ the number of sentences of disclosure; Corporate governance score ¼ sum of nine corporate governance variables; Adverse publicity ¼ the number of adverse media articles in the year prior to 2004; Materials ¼ a dichotomous variable which takes a value of one if the company belongs to the materials industry and zero otherwise; Health care ¼ a dichotomous variable which takes a value of one if the company belongs to the health care industry and zero otherwise; Utilities ¼ a dichotomous variable which takes a value of one if the company belongs to the utilities industry and zero otherwise; Employee concentration ¼ number of employees divided by assets in 2004; n ¼ net profit after tax divided by assets in 2004; Leverage ¼ total debt divided by total assets in 2004; Size ¼ log of market capitalisation

Corporate governance score Adverse publicity Utilities Material Health care Employee concentration Return on assets Leverage Size

Variables



Table VIII. Pearson’s correlation matrix

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Table IX. Dependent variable: number of sentences (n ¼ 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 *

? þ þ ? ? ? þ þ þ þ

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 ¼ 0.30, F ¼ 47.82, Model p ¼ 0.00

Three industry variables have significantly more disclosures and these industries are the materials ( p ¼ 0.06, coefficient ¼ 1.57), health care ( p ¼ 0.02, coefficient ¼ 2.92) and utilities ( p ¼ 0.09, coefficient ¼ 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 ¼ 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 ¼ 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 ¼ 0.00, coefficient ¼ 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 company’s 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 Group’s 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 Limited’s 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


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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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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: [email protected]

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 Boral’s 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’ carer’s 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


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 Group’s 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 everyone’s 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

“Boral’s 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 company’s 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 Company’s 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



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 world’s 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 “CSL’s 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 Minister’s “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 site’s 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 Strathfield’s 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