This paper examines the effect of corporate governance mechanisms on companies’ decision to assure their sustainability reports and their choice of assurance provider in countries with a greater stakeholder orientation. The corporate governance factors analyzed are related to the strength of the board’s monitoring function, which is determined by the size, independence and activity of the sustainability committee. The international sample consists of 610 companies operating in countries that are more stakeholder oriented from the period 2007–2014. We propose alternative logit models of analysis using the random effects estimator. Consistently with our propositions, our results provide evidence that a firm’s sustainability assurance and its choice of the accounting profession are positively associated with board independence and the activity of the sustainability committee. In addition, the empirical evidence obtained shows a U-shaped relationship between the board size and assurance issues.
Journal of Management & Organization, 23:5 (2017), pp. 647–670© 2017 Cambridge University Press and Australian and New Zealand Academy of Management do their sustainability reports and their choice of assurance provider in countries with a greater stakeholder orientation. The corporate governance factors analyzed are related to the strength ofthe board’s monitoring function, which is determined by the size, independence and activity of the sustainability committee. The international sample consists of 610 companies operating incountries that are more stakeholder oriented from the period 2007–2014. We propose alternativelogit models of analysis using the random effects estimator. Consistently with our propositions, our results provide evidence that a firm’s sustainability assurance and its choice of the accountingprofession are positively associated with board independence and the activity of the sustainabilitycommittee. In addition, the empirical evidence obtained shows a U-shaped relationship betweenthe board size and assurance issues.Keywords: assurance, assurance provider, board of directors, corporate governance,stakeholder-oriented countriesReceived 11 April 2016. Accepted 2 November 2016INTRODUCTIONSustainability performance has achieved remarkable development over the last few years (Fifka,2013), increasing so the trend to report such performance via the voluntary disclosure (Clarkson,Li, Richardson, & Vasvari, 2008) in a sustainability report that assesses the three main components ofenvironmental protection, economic growth and social equity (Morimoto, Ash, & Hope, 2005).Moreover, the continuing calls to achieve the disclosure of sustainability performance have ledcompanies beyond sustainability reports, where some of them have begun to combine social andenvironmental information with financial data in a single document, the integrated reporting, as partof an effective sustainable strategy that meets the need of information demanded by stakeholders(Frías-Aceituno, Rodríguez-Ariza, & García-Sánchez, 2013). Social and environmental information,both in sustainability reports as in integrated reports, are valuable for investors and their data areincorporated into valuation models, generating benefits such as a lower level of analyst forecast error,a higher firm value and reputation, and a lower cost of equity capital (Dhaliwal, Radhakrishnan, Tsang,* Instituto Multidisciplinar de Empresa (IME), Universidad de Salamanca, Campus Miguel de Unamuno, FES,Salamanca, Spain** Instituto Multidisciplinar de Empresa (IME), Universidad de Salamanca, Campus Miguel de Unamuno, FES,Salamanca, SpainCorresponding author: [email protected] OF MANAGEMENT & ORGANIZATION 647& Yang, 2012). However, the upturn in the number of sustainability reports as well as integratedreports has not been accompanied by an increased level of public trust (Hodge, Subramaniam, &Stewart, 2009); the voices of concern about the lack of credibility, transparency and consistency ofsustainability reporting have led to the need for assurance processes (Adams & Evans, 2004; Simnett,Vanstraelen, & Chua, 2009). According to the General Reporting Initiative (2006) assurance ofsustainability reports is defined as ‘activities designed to result in published conclusions on the qualityof the report and the information contained within it’.Similar to auditing financial information and as a result of stakeholders’pressure to enhance thecredibility of sustainability information, assurance is perceived by external scrutiny as the key elementof the social and/or environmental information issued. Regarding this point, assurance may providecredibility and transparency of such information (Adams & Evans, 2004; O’Dywer & Owen, 2005;Deegan, Cooper, & Shelly, 2006; Simnett, Vanstraelen, & Chua, 2009). It increases the trust ofstakeholders not only in the quality of information but also in the corporate sustainable commitment(Hodge, Subramaniam, & Stewart, 2009; Simnett, Vanstraelen, & Chua, 2009). Moreover, it acts as amonitoring tool of managers (Wong & Millington, 2014), since sustainability reporting can addressagency relationships and decrease information asymmetries and uncertainty (Moroney, Windsor, &Aw, 2012). In summary, the voluntary demand for assurance is, in part, intended to increase thecredibility of sustainability information (Perego & Kolk, 2012) as well as to catalyze an effective andconstructive dialogue with the company’s stakeholders (KPMG, 2002).In this context and moreover, the growth of multinational companies in the global marketplace andthe importance in the economic and social sphere of emerging countries imply that firms are economicunits that operate within contexts formed by a nexus of institutions that affect their behaviour andimpose expectations on them (Campbell, Hollingsworth, & Lindberg, 1991; Campbell, 2007). Thatis, organizations operating in countries with similar institutional structures will adopt homogeneousforms of behaviour (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998; Campbell, 2007).DiMaggio and Powell (1983) name this process ‘isomorphism’and argue that it enhances companies’stability and survival, facilitating political power and institutional legitimacy. In other words, anycompany can modify its behaviour towards sustainability practices, disclosure and subsequent assur-ance according to the social environment in which it develops (Meyer & Rowan, 1977). It is expectedthat the ensuring of legitimacy via sustainability assurance may be strongly influenced by institutionalfactors (Simnett, Vanstraelen, & Chua, 2009; Kolk & Perego, 2010; Boiral & Gendron, 2011).Nowadays, however, this approach is reinforced by neo-institutional theory. Following theneo-institutional approach, ensuring corporate long-term survival and social legitimacy may representone of the major reasons for an organization to adopt an assurance process (DiMaggio & Powell, 1983;Kolk & Perego, 2010). Similar to the findings of Frías-Aceituno, Rodríguez-Ariza, and García-Sánchez(2013) for the disclosure of an integrated report, we assume that assurance may be influenced byexternal pressures in the search for legitimacy (Kolk & Perego, 2010), sustainability assurance showsgreat variability between countries, reflecting the fact that, in line with previous studies (Simnett,Vanstraelen, & Chua, 2009; Kolk & Perego, 2010; Boiral & Gendron, 2011) sustainability assurancemay be strongly influenced by institutional factors.As one of these factors and based on previous studies that consider the legal system at the countrylevel as a key institutional factor (Perego, 2009; Martínez-Ferrero & García-Sánchez, 2017), companiesthat are most likely to act in a socially responsible way are those that operate in an institutional settingwith a strong legal system aimed at the protection of stakeholders (Campbell, 2007; Frías-Aceituno,Rodríguez-Ariza, & García-Sánchez, 2013; Garcia-Sanchez, Cuadrado-Ballesteros, & Frias-Aceituno,2016). Smith, Haniffa, and Fairbrass (2011) evidences that firms located in countries that are morestakeholder-oriented report higher-quality sustainability information since they have social responsi-bilities beyond shareholder maximization (Kolk & Perego, 2010). Based on the above, we adopt theJennifer Martínez-Ferrero and Isabel-María García-Sánchez648 JOURNAL OF MANAGEMENT & ORGANIZATIONevidence of Frías-Aceituno, Rodríguez-Ariza, and García-Sánchez (2013) –for integrated reporting –Simnett, Vanstraelen, and Chua, (2009), Kolk and Perego (2010) and Zhou, Simnett, and Green(2013), among others, who report that in countries where stakeholders have a greater influence oncorporate decisions, sustainability performance tends to be more informative and companies show agreater preference for adopting an assurance system.Nonetheless, the effect of country-level factors –and more specifically of stakeholder orientation –on the decision to assure is conditioned by firms’corporate governance structure (Zhou, Simnett, &Green, 2013), since both country and firm factors explain the assurance decision (Francis, Khurana,Martin, & Pereira, 2011). Corporate governance is understood as ‘the system by which companies aredirected and controlled’(Cadbury, 2000), which balances the welfare of all stakeholders and mitigatesbusiness risks. In this regard, while Corporate Governance consists of different mechanisms, one ofthe main ones is the board of directors, which carries out a monitoring role of the management onbehalf of the stakeholders (Aguilera, Williams, Conley, & Rupp, 2006), ensuring that both financialand social responsibility aims are achieved. The board of directors, as the firm’s governing body, isresponsible for safeguarding the interests of the different stakeholders, among other means throughthe dissemination of information and its subsequent verification, to reduce information-relatedproblems –for example, lack of credibility –and to prevent opportunistic behaviour (Richardson &Welker, 2001).Following the description of assurance, corporate governance has been addressed as sets ofaccountability tools that increase the level of legitimacy (Aguilera et al., 2006), establishing the possiblecomplementary or substitutive association among these two concepts. However, despite the wideliterature about voluntary disclosure on sustainability issues (Brammer & Pavelin, 2006; Barako &Brown, 2008), limited knowledge exists about the nature, scope and factors of assurance (Kolk &Perego, 2010; Simnett, Vanstraelen, & Chua, 2009). Accordingly, the aim of this paper is to explorethe corporate governance factors associated with voluntary sustainability assurance and, moreover, withthe choice of the assurance provider, taking as theoretical background the previous evidence regardingsustainability reporting. Moreover, we will focus on examining stakeholder-oriented countries, sincecountry and firm factors interact in the assurance demand and in the choice of the assurance provider(Doidge, Karolyi, & Stulz, 2007; Zhou, Simnett, & Green, 2013).Following these introductory arguments and having described our research aims, the paper isorganized as follows. First, we provide a discussion of the studies that examine the role of corporategovernance mechanisms in the area of sustainability reporting, assurance and assurance providers,developing our testable propositions. The subsequent section present sample data and the researchmodel of the analysis, followed by the empirical results. Finally, conclusions, contributions andsuggestions for future research are provided
