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Accounting, Auditing & Accountabi lity JournalAttaining legitimacy by employee information in annual reports

Pamela Kent Tamara Zunker

Article information: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 - 1106Permanent link to this document:http://dx.doi.org/10.1108/AAAJ-03-2013-1261

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Attaining legitimacy by employeeinformation in annual reports

Pamela Kent and Tamara Zunker 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 tolegitimise their relationship with society. Voluntary adoption of corporate governance best practicerecommendations is used as a measure of companies’ attempts to attain ex ante legitimacy. Mediaagenda setting theory is used as a measure of an attempt to gain legitimacy ex post following adversepublicity from the media.

Design/methodology/approach – The annual reports of all companies with at least one employeelisted on the Australian Stock Exchange with a 30th June balance date of 2004 are examined to identifyemployee-related disclosures. This employee-related information is categorised and identified aspositive, 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 corporategovernance 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 alsosignificantly associated with higher quantities of employee-related disclosures. The quality of thesedisclosures is questioned because 124 companies had adverse publicity relating to employees and onlytwo of these companies reported any negative employee-related disclosures. Few companies from thewhole 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 environmentaldisclosures. This study is original because it focuses on employee-related disclosures. Honest,transparent employee disclosures are an international corporate governance recommendation by theOrganisation for Economic Co-operation and Development and studies have not previously tested therelation between reporting recommended corporate governance mechanisms and employee-relateddisclosures in annual reports.

Keywords Employee disclosures, Corporate governance, Adverse publicity, Annual reports, Australia

Paper type Research paper

1. IntroductionSocial responsibility disclosures integrate disclosures relating to the relationshipbetween 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

The current issue and full text archive of this journal is available at

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The authors acknowledge with thanks the helpful comments of Muhammad Jahangir Ali,Kamrad Ahmed, Jacqueline Christensen, Jere Francis, Orapin Duangploy, Janice Hollindale, RayMcNamara, Carolyn Windsor and workshop participants at 20th Asian-Pacific Conference onInternational Accounting Issues, Paris, France, 9-12 November, 2008 and European AccountingAssociation 33rd Annual Congress, Istanbul, Turkey, 19-21 May 2010 and three anonymousreferees. This project is funded by AFAANZ.

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disclosures as a specific form of social disclosure. The second objective is to investigatethe category (for example, health and safety), quantity and quality (for example,positive or negative disclosure) of the employee-related disclosures made byAustralian companies within their annual reports. Research is required to determine

the category, quantity and quality of employee-related information to ascertainwhether employee-related disclosures in annual reports should continue to bevoluntary. The final objective is to determine whether publicly listed companies chooseto disclose employee-related information in annual reports to legitimise their place insociety.

Employee-related disclosures by Australian companies are predominantly carriedout on a voluntary basis with the exception of mandatory reporting for employeebenefits and disclosure of executive compensation (Deegan et al., 2000; Waddock andSmith, 2000; Whitehouse, 2003) under AASB 1028 Employee Benefits (2001)[1].Therefore, other information is not provided about employee-related matters unlessmanagement chooses to disclose this information.

The Australian Federal Government signalled the importance of corporate socialresponsibility reporting when they set up an enquiry in 2006 into whether corporatesocial reporting should be mandatory. The enquiry concluded that the currentCorporations Act gave directors adequate guidance for providing non-financialinformation such as employee-related reporting by listed companies (TheCommonwealth Government of Australia, 2006b). The enquiry recommended thatcorporate social responsibility reporting remain voluntary and unregulated (TheCommonwealth Government of Australia, 2006a).

The Organisation for Economic Co-operation and Development (OECD) and theGlobal Reporting Initiative recognise that employees and other stakeholders play animportant 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 forEconomic 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 theirannual report that:

The outstanding performance achieved by the Company during the past year would not havebeen possible without the knowledge, skill, professionalism, and commitment of ouremployees, contractors and consultants. The Company has maintained a philosophy andculture that all personnel - employees, contractors and consultants irrespective of theiremployer - are part of a united team focussed on the safe, efficient and cost effectiveproduction 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 goodperformance 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 thesesupportive 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 onactual 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 listedcompanies as at 30 June 2004 balance date indicates that 67 per cent of companies arevoluntarily disclosing employee-related information in their annual reports. A natural

research progression is to examine the nature of the disclosures and gain anunderstanding 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 listedcompanies in Australia with a 30 June balance date for 2004. The study provides

descriptive material on the quantity and nature of voluntary employee-relateddisclosures in annual reports for Australian companies. It is important to knowwhether companies are reporting in a consistent manner so that comparisons can bemade between companies. Stakeholders are expected to be interested in a range of

topics including employee profiles, employee assistance or benefits, industrialrelations, health and safety, employee training and development, employeeremuneration, employment of minorities or women, employee morale, equalopportunities, work-life balance and integration of disadvantaged groups (Global

Reporting Initiative (GRI), 2002; Vuontisjarvi, 2006). This study provides evidence onwhether these categories are consistently reported in annual reports.

This is an important contribution because human resources (employees) areconsidered 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 othercorporate 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 theOECD Principles of Corporate Governance (Organisation for Economic Co-operationand 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 ismade 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). Limitedresearch has been conducted relating corporate social responsibility reporting toformal corporate governance practices and has mostly been associated with

environmental reporting and corporate governance practices (Sun et al., 2010).

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Third, the research contributes by applying legitimacy theory to employee-relateddisclosures using two broad measures associated with legitimacy. Legitimacy ismeasured using the voluntary adoption of recommended corporate governancepractices 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 adversepublicity in the media about the company. An understanding of the motivations forvoluntary 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 disclosureregulations, by focusing their attention on the perceived inadequacies in the currentsocial reporting framework. The need to regulate employee-related disclosure isunnecessary if we find that companies are providing honest, transparent disclosuresvoluntarily in a consistent manner (Kent and Chan, 2009). Alternatively, the policy tocontinue 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 employeesbeing hospitalised, employees being involved in gas and fire accidents, industrialaccidents, job cuts, lawsuits for negligence and damage to employees, objections byemployees to executive remuneration, mining accidents involving employees,employees being exposed to pollution, employees being sacked despite excessiveprofits, job losses due to bank closures, remuneration disputes, safety andenvironmental issues concerning employees, toxic poisoning and union activity.

Results indicate that the voluntary adoption of the recommended corporategovernance practices and number of adverse newspaper articles are significantlyassociated with the quantity of employee-related disclosures. Unfortunately, thequality of these disclosures is in doubt because 124 companies had publicity about the

company relating to their employees indicating negative news. Only two of thesecompanies reported any negative information relating to their employees in theirannual report.

Control variables that explain the quantity of disclosure are employeeconcentration, industry classification, debt to assets ratio and log of marketcapitalisation. The remainder of the paper is structured as follows. Previous research isexamined and hypotheses are developed in the next section. The third section explainsthe 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 finalsection some conclusions are drawn, the limitations of the study are acknowledged andopportunities for further research are noted.

2. Theoretical background and hypotheses 2.1 Social responsibility disclosuresPrevious research explains social responsibility disclosures generally (for example,Bebbington et al., 2008; Roberts, 1992) and social responsibility reporting has mostlyfocused on environmental disclosures (Brown and Deegan, 1998; Deegan, 2002;O’Donovan, 2002; Wilmshurst and Frost, 2000). Refinements to social responsibilityaccounting research have focused on redundancies in the forest industry (Makela andNasi, 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), siterestoration 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, Makelaand Nasi, 2010; Neu et al., 1998; Okereke, 2007).

2.2 Human resource disclosuresIntellectual capital literature covers human capital which is embedded in humanresources, employees and managers (Vuontisjarvi, 2006), so that employee-relateddisclosures are a subset of intellectual capital reporting. Researchers have recognisedthe increasing value of intellectual capital to companies (Guthrie and Petty, 2000;Yongvanich and Guthrie, 2007) but low quantities of intellectual capital reporting havebeen identified internationally (April et al., 2003; Brennan, 2001; Bontis, 2003; Ordónezde Pablos, 2002).

Researchers have studied employee-related disclosures in association with othercategories of corporate social responsibility reporting. Cowen et al. (1987), for example,analyse the relationships between independent corporate characteristics and variouscategories of disclosure including the environment, energy, fair business practice,human resources, community involvement, products and other disclosures for arelatively small US sample consisting of predominantly large companies. Islam andDeegan (2008) analyse human resource disclosures as one of the six categories of socialinformation in their study. They find that human resource disclosures account for thehighest proportion of total disclosures in Bangladeshi companies across the period of 1987-2005.

Other Australian and overseas studies have focused on employee-relateddisclosures as a specific corporate social responsibility category. Deegan et al. (1995)

examine the practices and policies of large Australian companies in producing specialpurpose employee reports rather than the disclosures present in annual reports.Hossain et al. (2004) analyse the nature of voluntary disclosures on human resources inthe annual reports of Bangladeshi companies. Vuontisjarvi (2006) explores the extentto which large Finnish companies have adopted honest and transparent reportingpractices with a focus on human resource reporting within corporate annual reports.The results find that human resource disclosures lack overall consistency andcomparability. Quantitative indicators are disclosed by few companies in the sample,with further concern evident by a lack of attention paid to disclosures relating to equalopportunities, 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 byAsian companies. Everaert et al . (2008) identify that Belgian companiesoverwhelmingly report on employee-related issues or labour practices, as didVuontisjarvi’s (2006) analysis of Finnish companies.

2.3 Legitimacy theoryLegitimacy theory is possibly the most widely used theory to explain environmentaland social disclosures (see for example, Adams et al., 1998; Deegan and Gordon, 1996;

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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 socialresponsibility reporting, although legitimacy theory has mostly become the dominantexplanatory 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 bymeans of a social contract, seeking to satisfy stakeholders by behaving in a sociallydesirable manner (Brown and Deegan, 1998; Shocker and Sethi, 1974). The socialcontract represents the expectations that society has on how the company shouldconduct its operations. These expectations from society are not fixed and change overtime. This forces companies to be responsive to their operating surroundings (Deegan,2002). Legitimacy theory assumes that companies disclose information as a reaction tovarious economic, social, political, and environmental factors, and that thesedisclosures help to legitimise the company’s actions (Brown and Deegan, 1998; Buhr,

1998; Kotonen, 2009; Neu et al., 1998; Shocker and Sethi, 1974). Corporate disclosurepolicies represent a method for management to influence external perceptions abouttheir company’s activities (Brammer and Pavelin, 2004; Deegan et al., 2002; Epstein andFreedman, 1994; Pfeffer and Salancik, 1978; Tsang, 1998; Woodward et al., 2001).

Manager’s legitimising strategies vary depending on whether they are trying togain, 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 institutionalrecommendation or rule. The task of maintaining legitimacy is easier than gaining orrepairing legitimacy and frequently maintaining legitimacy can be taken for grantedand achieved by continuing previous strategies (Suchman, 1995). The ASX LimitedCorporate Governance Council Principles of Good Corporate Governance and BestPractice Recommendations released in 2003 and subsequent amendments have anunderlying principle of promoting transparent reporting to users of financialstatements (Australian Securities Exchange (ASX), 2010). Reporting the adoption of the recommended corporate governance practices provides a way for management topromote their company as an honest, transparent organisation and provides a way togain and maintain legitimacy.

These recommendations are not mandatory in Australia unlike many othercountries such as the US, but ASX Listing Rule 4.10.3 requires every listed company todisclose in its annual report the extent to which it complies with the recommendationsand to provide an explanation when these recommendations are not followed. Only thetop 500 of approximately 2000 listed companies (approximately 1700 in 2004) arerequired 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 andresponsibility of the audit committee (Listing Rule 12.7). Other recommendations arevoluntary. This means that governance mechanisms can be viewed as voluntarymechanisms for most of our sample (Christensen et al., 2010). Therefore, it is expectedthat reporting the voluntary adoption of the recommendations is partly motivated by adesire by management to gain legitimacy by signally that the company’s managementis honest and transparent to stakeholders including their employees. This leads to thefollowing hypothesis.


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H1. Companies report increased quantities of employee-related disclosures whenbest practice corporate governance practices are voluntarily adopted andreported.

2.4 Media agenda setting theoryThe task of repairing legitimacy is similar to the task of gaining legitimacy. A majordifference is that repairing legitimacy usually involves a reactive response to anunforeseen crisis such as media coverage of negative events relating to employees. Thereporting of these negative employee-related events in the media requires the companyto repair legitimacy following the crisis (O’Donovan, 2002; Suchman, 1995). Mediaagenda setting theory is applied as a means of assessing whether voluntaryemployee-related disclosures are made by management in response to negative mediacoverage 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 caninfluence 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 mediaattention it receives (Funkhouser, 1973; McCombs and Shaw, 1972). Public salience foran issue increases with the number of media articles between takeoff and taperingthresholds of media coverage. A certain critical number of articles are required to movean issue to one of public concern, and the pattern of evolving public awareness variesfor different categories of issues (Neuman, 1990). The response function variesaccording to the issue covered, but there is consistent evidence of a relationshipbetween the volume of media coverage and the level of public concern (Brosius andKepplinger, 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 issuepresented in a negative light is more likely to be regarded by the community as animportant concern. That is, negative media attention is more likely to have an effect onthe 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 disclosuresaround 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 worldconditions (Ader, 1995; Funkhouser, 1973). For example, Ader (1995) finds that theamount of media attention devoted to pollution influenced the degree of public saliencefor the issue, but the real-world pollution indicator was negatively correlated with the

amount of media coverage. However, companies receiving negative media coverageregarding employee-related categories typically perceive that they have damaged theirlegitimacy with the public. Increased disclosure of employee-related categories is oneway of re-establishing damaged legitimacy following adverse media attention aboutnegative activities and events related to employee issues. This leads to the followinghypothesis:

H2 . Companies report higher quantities of employee-related disclosures whenmore adverse media publicity about employee issues exists.

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The two hypotheses are linked representing different forms of legitimacy. Voluntaryadoption and reporting of corporate governance recommended practices are used as anexample of gaining and maintaining legitimacy, while media agenda setting theory isapplied 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 haveassumed that greater quantity of disclosures suggests higher quality disclosures (Grayet 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 theemployee-related disclosures can be assessed in our study.

2.5 Signalling theoryDisclosure studies applying signalling theory assume that managers have superiorinformation 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 andPalepu, 2001). Signalling theory explains that a company attempts to signal positiveinformation to investors through the annual reporting mechanism (Oliveira et al., 2006).Companies disclose positive information when they believe they are superior to othercompanies to signal to investors to attract investment and a more favourablereputation (Campbell et al., 2001). The theory suggests that company value increaseswhen companies make positive disclosures and decreases when they make negativedisclosures (Gennotte and Trueman, 1996).

A constraint on additional disclosures occurs because of competitive forces inproduct markets. Disclosure of private information on strategies and their expectedeconomic consequences can harm the companies’ reputation and competitive position.

Managers have to decide whether information is likely to improve their capital marketvalue 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 capitalperformance are reluctant to disclose intellectual capital information because of apotential threat to the company’s competitive advantage.

Another decision to be made is whether bad news information should be voluntarilyreported. Research indicates that managers can make their report more credible, andenhance the market value of their firm by signalling good news and bad newsinformation (Healy and Palepu, 1993). Gigler (1994) suggests that voluntarydisclosures are perceived as honest and transparent because users of the financial

statements realise that companies incur proprietary costs to disclose voluntaryinformation. Therefore, the proprietary costs of negative employee-related informationincurred by management in making the disclosure provide quality to voluntarydisclosures.

An indication of the quality of the voluntary disclosures is provided by determiningwhether companies provide good news, bad news or a combination of good and badnews. Clearly, companies with adverse publicity have bad news to report; therefore thereporting 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 informationthat can damage the companies’ competitive advantage and disclosing thisinformation has the potential to improve the companies’ capital value. Given thatmany 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.

2.6 Control variablesResearchers have identified industry membership as a characteristic associated withsocial disclosure practices (Cowen et al., 1987; Deegan and Gordon, 1996; Kelly, 1981;Patten, 1991; Roberts, 1992). Consumer-oriented companies are expected to exhibitgreater concern with demonstrating their social responsibility to the community, sincethis 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 deliberateefforts 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. Itis expected that companies are more likely to report employee-related informationwhen employees represent a greater resource for the company. In addition, a greaternumber of events and employee-related issues are likely to be present within thecompany with increased employee numbers. Thus, management has increased needsto address negative and positive employee issues (Gray et al., 1995). Employeeconcentration 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 relationshipbetween financial performance and social performance to determine whether thisrelationship is of a positive or negative nature. This study uses return on assets as ameasure of economic performance to examine the existence of a relationship between

financial performance and employee-related disclosures because it has been widelyused 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 theircapital structures (Meek et al., 1995), since potential wealth transfers from bondholdersto shareholders and managers increase with leverage. Therefore, voluntary disclosuresare expected to increase with leverage. The restrictive covenants included in debtagreements are intended to reduce management’s ability to create wealth transfersbetween shareholders and bondholders (Belkaoui and Karpik, 1989). Frequently usedlimitations include limits on financial leverage (long-term debt to assets ratio) andlimits on payout rates. The decision to disclose social information follows an outlay forsocial 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 disclosuresand political costs (Belkaoui and Karpik, 1989; Cowen et al., 1987; Kelly, 1981; Lang andLundholm, 1993; Pang, 1982; Patten, 1991; Trotman and Bradley, 1981). Company sizeis the most widely used construct to represent political visibility, and is related topolitical costs, agency costs and capital market incentives. Watts and Zimmerman(1978) suggest a company’s greater visibility is through their ability to achieve higher

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profit levels, which encourage larger companies to disclose more information thansmaller companies. In addition, larger companies undertake more activities, make agreater impact on society, have more stakeholders concerned with social eventsundertaken by the company, and the annual report acts as an efficient resource for

communicating this information (Cowen et al., 1987). The difficulty with measuringcompany size is that it can substitute for many different factors including managementexpertise and industry (Ball and Foster, 1982). Regardless of this difficulty, size ismeasured in the study.

3. Research design3.1 Annual report disclosureAustralian companies can choose to disclose information voluntarily throughnumerous media channels, with many empirical studies analysing the voluntary social

disclosure framework by examining the incidence or content of the company’s annualreports, company websites, separate social, environmental, and special purposeemployee 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 theannual report is an effective way for informing and educating the public of theircompanies’ view about social issues (O’Donovan, 1999). The annual report has been thecentral source of corporate communications to investors and other stakeholders, and iswidely 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 forcommunicating social information to the public.

Second, all listed companies must produce an annual report and auditors arerequired 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 thecompany (Ghandar and Tsahuridu, 2012). This provides us with one medium thatmust be used by all listed companies and provides a point of comparison betweencompanies. 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 theirannual reports and are less susceptible to the potential risk of external mediainterpretations or falsification through the popular press (Campbell, 2000; Guthrie andParker, 1989). Therefore, the annual report represents voluntary information thatmanagement has selected to disclose. Finally, the annual report presents an historicalaccount of the activities of a company and its management’s perceptions in acomprehensive and compact manner (Niemark, 1995).


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3.2 Sample selectionThe original data consists of all public companies listed on the Australian SecuritiesExchange Limited (ASX) with a 30th June balance date in 2004. Companies that did nothave 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 ASXPrinciples of Good Corporate Governance and Best Practice Recommendations requiringcompanies to provide a corporate governance statement in their annual reports. The ASXCorporate Governance Council released Principles of Good Corporate Governance andBest Practice Recommendations in, 2003 specifying ten broad principles designed toprovide guidance to companies on implementing an appropriate corporate governancestructure[2]. These recommendations are not mandatory but companies must explainreasons for not adopting any of the recommendations and a corporate governancestatement is required in the annual report. Therefore, this was the first year whencorporate 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 togain and maintain legitimacy.

A model testing companies’ quantities of disclosure of employee-related informationis presented as follows:

Sentencesi ¼ b0 þ b1corporate governance scorei þ b2adverse publicityi

þ b3industryi þ b4employee concentrationi þ b5return on assetsi

þ b6leveragei þ b7sizei 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 th e c om pany i s in t he e ne rg y, mate rials, u ti lit y,telecommunications, industrial, healthcare, consumer discretionary,information technology, bank or insurance and consumer staplesindustries, 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.

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3.4 Measurement of independent variablesSome Australian studies have used a combined corporate governance score to examinethe relationship between corporate governance and voluntary disclosure (Clarksonet 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 andthe disclosure of prospective information in company annual reports in 2000 but not in2002. DeFond et al. (2007) use a dichotomous variable for strong versus weak corporategovernance structures defined by six characteristics examining whether the marketvalues financial expertise on audit committees. Gompers et al. (2003) use 24 governancerules to construct a governance index to proxy for the level of shareholder rights inapproximately 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 andWong, 2001; Sikka, 2008). However, a company’s corporate governance score reflectsan assessment of the company’s corporate governance practices and policies and therecommendations 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 andoversight; structure the board to add value; promote ethical and responsibledecision-making; safeguard integrity in financial reporting; make timely and balanceddisclosure; respect the rights of shareholders; recognise and manage risk; encourageenhanced performance; remunerate fairly and responsibly; recognise the legitimateinterests of stakeholders. The report also made 25 recommendations. Many of theseprinciples are subjective and open to interpretation. The variables that can beoperationalised from these principles and recommendations by reference to the reportand previous research are: Principle 2 – Structure the board to add value – Companiesshould 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 theboard should be independent (recommendation 2.1), separation of the roles between theboard chair and the chief executive officer (recommendation 2.3), existence of anomination committee (recommendation 2.4), an audit committee (recommendation4.2), and a remuneration committee (recommendation 9.2) (Christensen et al., 2011).

Our study uses a corporate governance score because individual corporategovernance 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 adoptan efficient bundle of governance mechanisms based on a cost-benefit tradeoff (Beattyand 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 recentlymid-cap listed companies, on their corporate governance structures and policies, andassigns them a score (Christensen et al., 2010). The corporate governance assessmentmodel developed in the Horwath research is based upon a combination of factorsidentified 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 RamsayReport (2001), and the ASX Corporate Governance Council Principles and

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Recommendations (2003). We particularly focus on the items that are related toPrinciples of Good Corporate Governance and Best Practice Recommendations (2003).

Nine individual corporate governance variables are analysed in this study and aresummed 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 boardchair and chief executive officer, number of board meetings, identity of externalauditor, presence of a social responsibility committee, an audit committee, aremuneration committee and a nomination committee. A social responsibilitycommittee is not recommended in the corporate governance best practicerecommendations but appears particularly relevant to a social responsibilitydisclosure study. The identity of the auditor is also not covered in therecommendations but many studies assume that a big 4 auditor is a higher qualityauditor that influences disclosures by companies (Clarkson et al., 2003).

The corporate governance score is constructed by transforming most of thecorporate governance characteristics into dichotomous variables as identified in

Table I. The size of the board of directors and the number of board meetings are theonly measures that are continuous variables. Therefore, a board with more than fivedirectors is coded one (signifying a larger board), and a board with less than fivedirectors is coded zero (signifying a smaller board). The cut-off point of five directors ischosen because it is the average number of directors on the boards of companies in thesample. A company that holds more than ten meetings throughout 2004 is assigned ascore of one, with companies holding ten meetings or less during 2004 coded zero. Thecut-off point of ten meetings is chosen because it is the average number of meetings in2004 for the board of directors of companies in the sample.

Board independence is measured as a dichotomous variable whereby companieswith a majority of independent directors are coded one and zero otherwise. Adichotomous 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 zerootherwise. The existence of an audit, remuneration, nomination and socialresponsibility 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 zerootherwise.

The adverse publicity variable was collected by inserting each company nameindividually in the Factiva database, which records editorials from all major

Corporate governance characteristic Details Score Details Score

1 Size of the board of directors .5 1 ¼ ,5 02 Majority of board independent .0.50 1 ¼ ,0.50 03 Duality of the role of board chair and chief

executive officer No 1 Yes 04 Number of board meetings .10 1 ¼ ,10 05 Identity of external auditor Big 4 1 Non-Big 4 06 Presence of a social responsibility committee Yes 1 No 07 Presence of an audit committee Yes 1 No 08 Presence of a remuneration committee Yes 1 No 09 Presence of a nomination committee Yes 1 No 0

Table IVariables for

constructing thecorporate governance

score


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Australian and New Zealand newspapers. Only adverse publicity relating to specificcompanies and employee-related issues were included so that references toindustry-wide employee-related publicity were excluded. The same threeindependent parties used to identify employee-related disclosures adopt similar

procedures to identify adverse publicity at the company level as that used to measureemployee-related disclosures. News reports were read by these three parties, and theyidentified whether the news items constituted adverse publicity relating to employeesbased on the nature and content of the items. The number of news items was countedfor each company for the year prior to 2004. Any discrepancies between coders’ resultswere discussed and a resolution made.

3.5 Measurement of control variablesEach industry sector is measured as a dichotomous variable, given a value of one if thecompany belongs to the specific industry sector, and a value of zero if the company isnot classified as a member of the relevant industry.

The number of employees divided by total assets is used in this paper as a measureof employee concentration. Total employees was collected from the Aspect Huntley’sDatanalysis 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 ismeasured by dividing liabilities by assets.

A number of alternative measures of size have been used in the literature. Salesrevenue (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 andHallam, 1991; Wong, 1988), total assets (Hagerman and Zmijewski, 1979; Skinner, 1993;Trotman and Bradley, 1981), log of total assets (Reynolds et al., 2004) and marketcapitalisation (O’Brien et al., 2010) have frequently been used as measures. Given thatno 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 allpublicly listed companies.

4. ResultsTable II shows the industry classification of the sample companies as per the GlobalIndustry Classification Standard. The largest representation of the sample is from thematerials industry, with a total of 177 in the sample. The second largest representationis from the finance industry (173), while the smallest representation is the utilityindustry (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 annualreport.

Table III illustrates the prevalence of the different categories of employee-related

information present in the sample’s annual reports. Employee morale is surprisinglythe most frequently disclosed category of employee-related information (462), followedby industrial relations related disclosures (403). Employment of minorities is by far theleast discussed of all the categories with only 14 disclosures made over the entiresample. This result is different to that reported by Deegan et al. (2000), who find thathealth and safety disclosures are the most frequently disclosed employee-relateddisclosure. Only 135 employee disclosures relating to health and safety are revealedacross our sample. Some 68 per cent of companies in the materials industry made

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employee-related disclosures (Table II), and 37 per cent (50/135) of the total disclosuresrelating to occupational health and safety were made by companies in the materialsindustry. Mining companies are included in the material sector and have beentraditionally associated with health and safety issues.

Many companies did not report specific quantitative information and relied ondisclosures that could not be readily substantiated. To illustrate, companies have theopportunity to report the “average hours of training per year per employee byemployee category” (Global Reporting Index, 2002, p. 310) when providing informationon training and education. Most companies only refer to information relating toemployee training and development providing very general information. Thisinformation is reported inconsistently across the sample and information on each of the

nine categories was found in different sections of company’s annual reports. Forexample, while some companies have particular sections relating to health and safetyprocedures and results, other companies reveal the information as part of the director’sreport. Examples of specific discourses are provided in the Appendix.

Tables IV and V report the descriptive statistics for the variables in the modelincluding the variables that are used to construct the corporate governance score. Thecontinuous 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 fromzero to 50, with a mean of 8.84. The corporate governance score ranges from zero toeight, with a mean of 4.16. The number of adverse newspaper articles range from zeroto 20, with a mean of 0.62. The variables have a range of values and are approximatelynormally 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 averageboard size of 5.06. The number of employees varies greatly between companies andindustry groups, with a total sample range of one to 89,208 and a mean of 1,212employees 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 onassets ranges from 210.63 to 20.91, with a mean of 20.10 and leverage ranges fromzero to 3.91 with an average of 0.39. Companies differ substantially in terms of log of

GICS industryclassification

Number of samplecompanies

Number of disclosingcompanies

Percentage of sample companiesdisclosing employee information

Consumer

discretionary 125 92 73.60Consumer staples 48 34 70.83Energy 29 21 72.41Financial 173 105 60.69Healthcare 120 88 73.33Industrial 141 97 68.79InformationTechnology 116 68 58.62Materials 177 121 68.36Telecommunications 28 15 53.57Utility 13 8 61.54Total 970 649 66.91

Table IIIndustry classification of

sample companies


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C a t e g o r y o f e m p l o y e e

d i s c l o s u r e

E n e r g y T e l e c o m

U t i l i t y M a t e r i a l s I n d u s t r i a l F i n a n c e H e a l t h

C o n s u m e r

d i s c r e t i o n a r y

I T

C o n s u m

e r

s t a p l e s

T o t a l

H e a l t h a n d s a f e t y

6

2

5

5 0

3 1

4

1 2

7

7

1 1

1 3 5

E m p l o y m e n t o f m i n o r i t i e

s

0

0

0

7

4

0

1

0

0

2

1 4

T r a i n i n g a n d d e v e l o p m e n t

0

2

4

3 1

3 1

2 0

1 2

2 0

2

1 0

1 3 2

E m p l o y e e a s s i s t a n c e

a n d b e n e fi t s

2

3

1

1 1

1 2

1 4

6

8

1

4

6 2

E m p l o y e e r e m u n e r a t i o n

0

2

3

7

6

1 0

7

6

4

1

4 6

E m p l o y e e p r o fi l e s

1 1

9

7

5 6

5 6

7 7

5 5

4 9

2 2

1 8

3 6 0

E m p l o y e e m o r a l e

1 3

1 0

6

8 5

7 7

7 5

5 6

6 7

4 8

2 5

4 6 2

I n d u s t r i a l r e l a t i o n s

1 1

8

6

7 8

6 8

6 4

5 2

5 7

3 7

2 2

4 0 3

O t h e r

0

3

0

4

1

1

5

0

2

2

1 8

T o t a l

4 3

3 9

3 2

3

2 9

2 8 6

2 6 5

2 0 6

2 1 4

1 2 3

9 5

1 , 6 3 2

N o t e : M a n y d i s c l o s i n g c o m p a n i e s r e p o r t e d m u l t i p l e c a t e g o r i e s

Table III.Frequency of employeedisclosures by industrycategory

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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 fewcompanies 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 companiesand 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 positiveemployee-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

Variable Mean Median Std dev. Minimum Maximum

Number of sentences 8.84 2.00 14.04 0 50Corporate governance score 4.16 4.00 1.99 0 8

Number of adverse newspaper articles 0.62 0 2.55 0 20Number of independent directors 2.59 2.00 1.66 0 11Number of directors 5.06 5.00 1.79 3 15Number of board meetings 10.53 11 4.98 1 51Number of employees 1,212 49 5,692 1 89,208Number of employees/assets 0.57 0.21 1.84 0.01 30.99Return of assets 20.10 0.02 1.05 210.63 20.91Leverage 0.39 0.37 0.35 0 3.91Log of market capitalisation 88.10 87.75 4.93 71.09 103.71

Table IVDescriptive statisticscontinuous variables

Variable Percentage Number of companies

Presence of employee-related disclosures 67 649Adverse publicity 13 124Positive employee-related disclosures 98 633Board independence 61 583Duality of CEO/chair 11 109Audited by Big 4 58 561Audit committee 82 796Remuneration committee 56 544Nomination committee 31 298Social responsibility committee 12 113

Table VDescriptive statistics

binary variables


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utility industry receiving no adverse publicity. The financial industry was also rankedrelatively high, being ahead of materials, while energy ranked very low. Material,energy and utility industries are likely to attract more adverse publicity relating toenvironmental issues rather than employee-related issues.

Table VIII reports Pearson’s bi-variate correlation matrix for all variables. Thehighest correlation is between log of market capitalisation and corporate governancescore, with a correlation of 0.63. Additional analysis of variance inflation factorssuggest that multicollinearity between variables does not threaten the computationalaccuracy 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 supporthypothesis one indicating that companies voluntarily reporting and adopting bestpractice corporate governance practices are more likely to have increased quantities of employee-related disclosures. The Organisation for Economic Co-operation andDevelopment and the Global Reporting Initiative emphasise the importance of thesedisclosures as a corporate governance mechanism and companies appear to see this asa way to gain and maintain legitimacy.

Hypothesis two is strongly supported in that companies with more adversepublicity produce significantly ( p ¼ 0.02 and coef fic ien t ¼ 0.32) moreemployee-related information in their annual reports. This indicates that companiesalso use disclosure to repair damaged legitimacy when the company receives publicityindicating that the company has deviated from their social contract.

Disclosing companiesNon-disclosing

companies Total

Number of companies 649 321 970Companies withadverse publicity 106 18 124Percentage 16.33% (106/649) 5.61% (18/321) 12.78% (124/970)

Table VI.Frequency of adversepublicity by companies

GICS industryclassification

Frequency of adversepublicity

Number of companies withadverse publicity

Percentage of industry

Consumerdiscretionary 174 28 22.40Industrial 121 24 17.02

Materials 89 20 11.30Financial 99 17 9.83Consumer staples 52 11 22.92Healthcare 49 8 6.67Informationtechnology 15 8 6.90Telecommunications 55 7 25.00Energy 4 1 3.45Utilities 0 0 0

Table VII.Frequency of adversepublicity by GICSindustry classification

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V a r i a b l e s

N u m b e r o f

s e n t e n c e s

C o r p o r a t e

g o v e r n a n c e s c o r e

A d v e r s e

p u b l i c i t y

U t i l i t i e s M a t e r i a l s

H e a l t h

c

a r e

E m p l o y e e

c o n c e n t r a t i o n

R e t u r n o n

a s s e t s

L e v e r a g e

C o r p o r a t e

g o v e r n a n c e s c o r e

0 . 4 6 * *

A d v e r s e p u b l i c i t y

0 . 2 6 * *

0 . 2 5 * *

U t i l i t i e s

0 . 0 7 *

0 . 0 1

2

0 . 0 3

M a t e r i a l

2

0 . 0 2

2

0 . 1 0 * *

2

0 . 0 2

2

0 . 0 6

H e a l t h c a r e

0 . 0 6

0 . 0 6 *

2

0 . 0 3

2

0 . 0 4

2

0 . 1 8 * *

E m p l o y e e

c o n c e n t r a t i o n

2

0 . 0 1

2

0 . 0 7 *

0 . 0 1

2

0 . 0 1

2

0 . 0 8 *

2 0

. 0 4

R e t u r n o n a s s e t s

0 . 0 6

0 . 1 0 * *

0 . 0 3

2

0 . 0 3

0 . 0 6

2 0

. 0 7 5 *

2

0 . 0 7 *

L e v e r a g e

0 . 1 1 * *

0 . 1 2 * *

0 . 1 1 * *

0 . 0 4

2

0 . 1 8 * *

2 0

. 1 5 * *

0 . 0 8 *

2

0 . 1 3 * *

S i z e

0 . 5 1 * *

0 . 6 3 * *

0 . 4 0 * *

0 . 0 6

2

0 . 0 1

0

. 0 1

2

0 . 1 0 * *

0 . 1 7 * *

0 . 0 4

N o t e s : S e n t e n c e s ¼

t h e

n u m b e r o f s e n t e n c e s o f d i s c l o s u r e ;

C o r p o r a t e g o v e r n a n c e s c o r e ¼

s u m

o f n i n e c o r p o r a t e g o v e r n a n c e v a r i a b l e s ; A d v e r s e

p u b l i c i t y ¼

t h e n u m b e r o f a d v e r s e m e d i a a r t i c l e s i n t h e y e a r p r i o r t o 2 0 0 4 ; M a t e r i a l s ¼

a d i c h o t o m o u s

v a r i a b l e w h i c h t a k e s a v a l u e o f o n e i f t h e c o m p a n y

b e l o n g s t o t h e m a t e r i a l s i n d u s t r y a n d z e r o o t h e r w i s e ; H e a l t h c a r e ¼

a d i c h o t o m o u s v a r i a b l e w h i c h t a k e s a v a l u e o f o n e i f t h e c o m p a n y b e l o n g s t o t h e

h e a l t h c a r e i n d u s t r y a n d z e r o o t h e r w i s e ; U t i l i t i e s ¼

a d i c h o t o m o

u s v a r i a b l e w h i c h t a k e s a v a l u e o f o n e

i f t h e c o m p a n y b e l o n g s t o t h e u t i l i t i e s i n d u s t r y a n d

z e r o o t h e r w i s e ; E m p l o y e

e c o n c e n t r a t i o n ¼

n u m b e r o f e m p l o y e e s d i v i d e d b y a s s e t s i n 2 0 0 4 ; n ¼

n e t p r o fi t a f t e r t a x d i v i d e d b y a s s

e t s i n 2 0 0 4 ;

L e v e r a g e ¼

t o t a l d e b t d i v i d e d b y t o t a l a s s e t s i n 2 0 0 4 ; S i z e ¼ l o g o f m a r k e t c a p i t a l i s a t i o n

Table VIIIPearson’s correlation

matrix


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Three industry variables have significantly more disclosures and these industries arethe materials ( p ¼ 0.06, coefficient ¼ 1.57), health care ( p ¼ 0.02, coefficient ¼ 2.92)and uti lities ( p ¼ 0.09, coefficient ¼ 5.57). Cowen et al. (1987) find thatconsumer-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-relateddisclosure. Leverage is significant with a p ¼ 0.01 and coefficient of 3.20, indicatingthat 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). Pastresearch indicates that larger companies have increased voluntary disclosures because

they are more politically sensitive and attract more attention from relevantstakeholders.

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

Expected sign Coefficient T statistic p value *

VariablesConstant ? 289.86 210.36 0.00

Corporate governance score þ 1.41 6.06 0.00Adverse publicity þ 0.32 2.00 0.02Materials ? 1.57 1.53 0.06Health care ? 2.92 2.44 0.02Utilities ? 5.57 1.69 0.09Employee concentration þ 0.31 1.50 0.07Return on assets þ 20.07 20.18 0.86Leverage þ 3.20 2.80 0.01Size þ 101.44 9.62 0.00

Notes: *Two tailed tests unless directed predicted; Adjusted R -squared ¼ 0.30, F ¼ 47.82,Model p ¼ 0.00

Table IX.Dependent variable:number of sentences( n ¼ 970)

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interesting research because these companies reported predominantly favourableinformation 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 privateinformation because it had been disclosed in the media and referring to thisinformation in the annual report duplicates disclosure. Only two companies withadverse publicity reported negative information in their annual report. The Chair of Gowings Limited stated in the annual report (Gowings Retail Limited, 2004) whenreferring 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. In2004, our people should not be subjected to performing manual stocktakes at times theywould rather be out enjoying themselves socially. Moreover, why should staff have toperform 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 toendure (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 isunacceptable by any measure. Management have refocused and redoubled their efforts toaddress 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 Limitedhad 20 adverse newspaper reports. BHP Billiton Limited’s negative information wasincluded with a large quantity of positive information, and these results generallysupport the signalling theory argument that companies choose to report good news foremployee-related annual report disclosures.

5. Conclusion and limitationsThe results show that companies report employee-related disclosures to legitimatisetheir companies’ place in society. This is done by voluntarily reporting and adoptingrecommended corporate governance practices to gain and maintain legitimacy, andto 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 reportis not specific or quantifiable and therefore this information cannot beindependently verified. In addition, there is no consistency in the way that

companies report employee-related information. Very few companies report anynegative employee-related information, although many companies receive negativepublicity, indicating that many of these companies have negative information toreport.

We find that companies are not voluntarily reporting employee-related informationin the annual report that is honest and transparent and this reporting is not consistentor 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 tosupply employee-related information in the annual report of listed companies.

Our measure of the quality of voluntary employee-related disclosures relies oncompanies reporting negative information, particularly when it is clear that the

company has negative information to report. This measure has limitations and indepth interviews and case studies could address this issue in future research.

Our study only focuses on employee-related disclosures in annual reports and thesedisclosures could exist in other reported areas. Prior research reveals that companieswith negative news tend to disclose that information earlier through their interimreports (Skinner, 1993). Therefore, annual reports could omit information that isredundant, having already been disclosed through more timely information channelssuch as half yearly reports and other continuous disclosure methods. Future researchshould focus on alternative communication channels and determine how this isassociated 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 theemployee-related information that they require.

Notes

1. 1. AASB119 Employee Benefits replaced AASB 1028 for financial years beginning on or after1 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. Analysiswas also taken without windorising extreme values and the results are qualitatively the

same.

References

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