Developing trust through stewardship. Implications for intellectual capital, integrated reporting, and the EU Directive 2014/95/EU

Pages11-39
DOIhttps://doi.org/10.1108/JIC-06-2018-0097
Published date05 December 2018
Date05 December 2018
AuthorJohn Dumay,Matteo La Torre,Federica Farneti
Subject MatterAccounting & Finance,Information & knowledge management,HR & organizational behaviour,Knowledge management
Developing trust through
stewardship
Implications for intellectual capital,
integrated reporting, and the EU Directive
John Dumay
Department of Accounting and Corporate Governance, Macquarie University,
Sydney, Australia
Matteo La Torre
Department of Economic Studies, University G. dAnnunzioof Chieti-Pescara,
Pescara, Italy, and
Federica Farneti
Department of Sociology and Economic Law, University of Bologna, Forlì, Italy
Abstract
Purpose This paper examines the gap between reporting and managersbehaviour to challenge the
current theoretical underpinnings of intellectual capital (IC) disclosure practice and research. The authors
explore how the key features from IC and integrated reporting can be combined to develop an extended
model for companies to comply with EU Directive 2014/95/EU and increase trust in corporate disclosures
and reports.
Design/methodology/approach This essay relies on academic literature and examples from practice to
critique the theories that explain corporate disclosure and reporting but do not change management
behaviour. Based on this critique, the authors argue for a change in the fundamental theories of stewardship
to frame a new concept for corporate disclosure incorporating using a multi-capitals framework.
Findings We argue that, while the inconsistency between organisationsreporting and behaviour
persists, increasing, renewing or extending the information disclosed is not enough to instil trust in
corporations. Stewardship over a companys resources is necessary for increasing trust. The unanticipated
consequences of dishonest behaviour by managers and shareholders compels a new application of
stewardship theory that works as an overarching guide for managerial behaviour and disclosure. Emanating
from this new model is a realisation that managers must abandon agency theory in practice, and specifically
the bonus contract.
Research limitations/implications We call for future empirical research to explore the role of
stewardship theory within the dynamics of corporate disclosure using the approach. The research
implications of those studies should incorporate the potential impacts on management behaviours
within a stewardship framework and how those actions, and their outcomes, are disclosed for rebuilding
public trust in business.
Practical implications The implications for integrated reporting and reports complying with the new EU
Directive are profound. Both instruments rely on agency theory to coax managers into reducing information
asymmetry by disclosing more. However, agency theory only re-affirms the power managers have over
corporate information. It does not change their behaviour, nor to act in the interest of all stakeholders as the
stewards of an organisations resources.
Social implications We advocate that, in business e ducation, greater empha sis is needed
on how stewardship has a more positive impact on management behaviour than agency, legitimacy and
stakeholder theories.
Originality/value We reflect on the current and compelling issues permeating the international landscape
of corporate reporting and disclosure and explain why current theories which explain corporate disclosures
do not change behaviour or engender trust in business and offer an alternative disclosure model based
on stewardship theory.
Keywords Integrated reporting, Intellectual capital, Agency theory, Corporate disclosure,
Stewardship theory, EU Directive 2014/94/EU
Paper type Conceptual paper
Journal of Intellectual Capital
Vol. 20 No. 1, 2019
pp. 11-39
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-06-2018-0097
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
11
Developing
trust through
stewardship
1. Introduction
We live in a world of distrust. It is a sad indictment on our modern society that, in
most countries, society distrusts the very institutions that are supposed to be its pillars
(Ries et al., 2018). Regrettably, there is a loss of trust in business because people do not know
which companies and brands are honest or acting in their best interests. The recent
Volkswagen defeat devicescandal is a perfect example of how the trust in a company and
brand was destroyed overnight (Hotten, 2015). In the defeat device scandal, Volkswagen
sold investors and consumers a lemon(Akerlof, 1970). Governments responded with
instruments demanding mandatory disclosure and greater transparency, to which
companies and other self-interested stakeholders countered with voluntary disclosure
instruments of their own making.
The recent development of the Integrated Reporting framework is a primary example of
how the accounting profession has reacted by promoting more disclosure to counteract the
loss of trust in accounting emanating from the Global Financial Crises (International
Integrated Reporting Council (IIRC), 2013; Gleeson-White, 2014). Similarly, the European
Union has implemented EU Directive aimed at rebuilding trust with investors and
consumers(European Union, 2014, p. 1). Also, while recent years have witnessed an
increasing amount of mandatory and voluntary company disclosures to engage with
stakeholder (Bartels et al., 2016), for many companies, the aim of disclosing material issues
is to rebuild their legitimacy and their licence to operate (Suchman, 1995). Meanwhile, public
trust in companiescontinues to decline (Rieset al., 2018). Thus, there is adiscrepancy between
how companies walk the talkconcerning their social responsibility.
In this essay, we investigate these two responses to increasing investors and consumers
distrust to build upon our understanding of intellectual capital (IC) and the lessons learned
from IC practice and reporting. We argue that by using the lessons learned from IC
reporting, we can avoid making the same errors when implementing integrated reporting
and the EU Directive. As a result, we first develop a disclosure model that incorporates the
key features from IC and integrated reporting and exemplify how these features can be used
by companies to comply with the EU Directive. Next we examine the relationship between
reporting and management behaviour to challenge the current theoretical underpinnings of
corporate disclosure practice and research.
A distinguishing feature of our essay is a critique of agency, legitimacy, and stakeholder
theory, which scholars normally use to explain why companies disclose or report
information. However, these theories do not explain how management behaviour might be
guided or changed to foster honest disclosures. Drawing upon the theoretical critique, we
contribute by developing a theory that more disclosure does not increase trust. Therefore,
our analysis has two levels: a practice-oriented level discussing how reporting practices can
change to adhere to the EU Directive; and a theoretical level, which examines the theoretical
underpinnings of corporate reporting and disclosure.
We argue that proper stewardship of a companys resources is a key necessity for
increasing trust. A new concept of stewardship theory is required that serves as an
overarching guide to inform managerial behaviour and disclosure. Emanating from this
new model is a realisation that we must abandon agency theory practice, and specifically
the bonus contract because dishonest and profit-seeking behaviour by managers and
shareholders has had unanticipated consequences.
This essay and the concepts and models within it have profound implications for
integrated reporting and reports prepared under the new EU Directive. Both instruments
aim to reduce information asymmetry and promote greater levels of corporate disclosure
using agency theory as a counsellor for change. However, using agency theory only
reaffirms the power managers have over corporate information. It does not change their
behaviour to act in the interests of all stakeholders or to be honourable stewards of
12
JIC
20,1

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