Materiality matrix use and misuse: a new impressionmanagement technique?

Lorenzo Gelmini Francesco Bavagnoli*

Maurizio Comoli*presenter

Università del Piemonte OrientaleDipartimento di Studi per l’Economia e l’Impresa

Department of Business and EconomicsNovara, Italia

Affiliation

Università del Piemonte Orientale

Department of Business and Economics, Novara, Italy, www.disei.uniupo.it

Introduction

Through a preliminary empirical study, this paper examines materiality matrices from animpression management perspective to determine whether firms use such matrices as a newimpression management technique.

In other words, just as corporations appear to manipulate the narratives (Cho et al. 2012),visuals (Davison 2010) and graphs (Beattie and Jones 2008) in their financial reports, they mayalso use impression management techniques in their sustainability reports to project a morefavorable image of their social and environmental performance.

We investigate a sample of 23 firms to evaluate their use of materiality matrices and whetherthis leads to presenting their firms in a more favorable light.

Research question

The main motivation of our paper lies in the novelty of both the topic and the consequentresearch question: is the materiality matrix a new tool of impression management?

The more sustainability accounting and disclosure turn into a popular mantra amongst thecompanies, the more strategic becomes the effort to unveil the real underlying motivationsand rationales.

Literature review: relevant conversations on the topic

Stakeholder theory (Freeman, 2010) lays the foundation of the extent of stakeholderinvolvement, underlining the obligations companies have to their internal and externalstakeholders including suppliers, employees, customers, communities and investors.

Institutional theory (Scott, 2013) frames the discussion on the coercive, mimetic and normativepressures that help clarify how and what companies choose to report (Searcy and Buslovich,2014).

Amongst debates in the broad institutional theory context, institutional isomorphism (DiMaggio and Powell, 1983) explains that organizations come to resemble one another over timeas a result of such pressures.

With reference to the legitimacy theory, Cho et al. (2012) show that companies that are poorenvironmental performers often manipulate, at least in part, the use of the language in theirenvironmental disclosures to apparently obfuscate their poor performance.

Literature review: impression management

Merkl-Davies et al. (2011) suggest that managers engage in impression management with theexpectation that stakeholders will respond in less undesirable ways to the corporate behaviorsdescribed in the companies narrative documents.

These authors further argue that the impression management construction can be accomplishedby emphasizing positive outcomes (enhancement) and/or by obfuscating negativeperformance (concealment), thereby presenting an inaccurate view of organizational outcomes(self-presentational dissimulation).

Literature review: visuals

Companies communicate using graphs and visual mechanisms (such as materiality matrices)rather than tables or narratives for six main reasons (Beattie and Jones, 2008):

- flexibility

- eye catching

- summarizing, distilling and communicating effectively hard financial information

- spatial intelligence

- visuals are memorable

- visuals are egalitarian

The GRI-G4 Sustainability Reporting Guidelines

The importance of reporting material issues is confirmed in both GRI’s Sustainability ReportingGuidelines (2013) and in its Implementation Manual (2013).

According to the former, materiality is the threshold at which the sustainability subjectscovered by the Guidelines – the “Aspects“ - become sufficiently important to be reported.

G4-based reports should cover aspects that reflect the organization’s significant economic,environmental and social impacts, or substantively influence the assessments and decisions ofstakeholders.

Key stakeholders - such as investors, market regulators, civil society, suppliers, employees orcustomers - have a vital role to play in shaping an organization’s materiality assessment. Takingstakeholders’ views into account is essential in order to develop a robust understanding of acompany’s economic, environmental and social impacts, and of how these relate to businessvalue and resilience.

The GRI-G4 Sustainability Reporting Guidelines (2)

The Implementation Manual includes a figure called “visual representation of prioritization ofaspects” which we refer to in the paper as “the materiality matrix” and comprises an X-axislabeled “Significance of economic, environmental and social impacts” and a Y-axis labeled“Influence on stakeholder assessments and decisions”.

The sample

Our sample comprises all companies included in the GRI dataset “Sustainability DisclosureDatabase” (at 1st December 2015) that simultaneously:

a) are incorporated in Europe;

b) are large companies;

c) follow the G4 Guidelines;

d) operate in the financial industry (according to the GRI wording, they provide “financialservices”);

e) released their report in 2015 (for reasons of incontrovertible language interpretations, weonly selected reports published either in English or in our mother tongue Italian).

Our sample, taking into account points a) to e) above, comprises 23 companies.

The methodology

The methodology of our paper is mainly descriptive, since we have looked in the notes of thereports for the presence/absence of a number of items consistent with our research question,namely using the tool of the content analysis of the documentation available.

The research (sub)questions

In more detail, moving from the work of Eccles et al. (2014), we develop the following research(sub)questions:

1) Stakeholder identification: Are the relevant stakeholders identified when developing themateriality matrix?

2) Stakeholder engagement: What engagement methods are adopted? To what extent do thecompanies pursue this engagement?

3) Issue identification: Which issues are included in the materiality matrix?

4) Issue description: How are the different issues described in terms of color and size?

5) Dimension definition: How have the X-axis and Y-axis been labeled? Do they relate to thecurrent or the future state? If so, is there an explicit time dimension?

The research (sub)questions (2)

6) Issue scoring: Are the items measured? If so, is there a numeric approach (e.g., 1 to 5) or a word label definition (e.g., low, medium and high)?

7) Use of the matrix: Does the report mention the extent to which the company uses the materiality matrix (i) for the purpose of planning & strategy (ii) to shape day to day business operations or (iii) to allocate scarce resources?

8) Most represented areas: Which are the areas (environmental/social/financial) most represented in the matrices?

9) Materiality Convergence: Is the perception of the relevance of a given issue for the business aligned with the perception of the relevance of the same issue for the stakeholders?

10) Selection bias: Are there any biases in selecting items to be disclosed in the materiality matrix?

11) Explicit approval: Is there formal approval of the materiality matrix?

(1) Stakeholder identification

Of the surveyed companies 22 (or 95.65% of the sample) do not state in detail the specificstakeholders considered when developing the materiality matrix and identify only a generic listof influential groups such as, for example, customers, suppliers, employees, investors,shareholders, partners, environment related entities, communities and so forth.

As a single notable exception (see next slide), one company dedicates a specific section (called“The Stakeholder Map”) to specifically identify the relevant stakeholders considered in theprocess of the development of the matrix.

Tentative hypothesis on impression management mechanism: not specifically identifyingstakeholders in order to avoid criticism on how the borders have been drawn

Example of detailed stakeholder identification; stakeholder map(Intesa San Paolo, Integrated Report 2014)

(2) Stakeholder engagement tools and methods

The 23 companies overall declared 86 stakeholder engagement methods and tools with anaverage of 3.74. The median, maximum, minimum and standard deviations are 4, 7, 1 and 1.92respectively. The most recurring frequency is 3 in 5 companies, while 2 companies do notdisclose any stakeholder engagement method.

Companies which use external tools on average use more tools than companies which relyexclusively on internal tools.

11 companies use all kinds of engagement tools (internal, external and mixed).

(2) Tools and methods for Stakeholder engagement

Methods Frequency % (i) Exclusively internal methods Management review 19 22,09 General internal documentation 3 3,49 Internal CSR Manager 3 3,49 Inquiry of all the company staff 2 2,33 Sub-total 27 31,39 (ii) Exclusively external methods Guidelines (general or specific) 10 11,63 External consultancy 6 6,98 Social media 6 6,98 Benchmark and peers 4 4,65 CSR trends in the industry 3 3,49 Press 3 3,49 Sub-total 32 37,22 (iii) Mixed methods Survey and questionnaires 16 18,60 Meetings/workshops/focus groups 10 11,63 Customer satisfaction assessment 1 1,15 Sub-total 27 31,39 Total 86 100,00

(3) Issue identification

20 companies distinguish between issues generally relevant and working issues

3 companies directly show relevant working issues

Issues “in general”

Working Issues

Min 5 5 Max 54 27 Average 20,35 13 Median 15 13 Standard Deviation 11,45 6,50

Aegon Integrated

Report 2014

(4) Issue description

14 companies use a materiality matrix (almost 61% of the sample), whereas out of theremaining nine companies, 7 present data with a double-entry table, 1 uses narratives and 1limits disclosure to a list of material issues.

Out of the 14 companies adopting the materiality matrix, 10 use the visual saliency of colorswhile the remaining 4 do not (71.43% and 28.57% respectively).

In detail, all 10 companies that use colors in their matrices adopt them to explicitly differentiatethe issues and in some cases combine colors with other visual differentiation mechanisms (e.g.,size and form of labels).

Tentative hypothesis on impression management mechanism: use of colors, size and form oflabels

ING2014

Vnesheconombank, 2014

(5) Dimension definition: X and Y axis

Usually X-axis is Significance / impact on business and Y-axis is significance / impact onstakeholders (3 exceptions)

In one case the time dimension is explicit: increasing impact…

Tentative hypothesis on impression management mechanism: Y-axis (relevance forstakeholders) shorter than X-axis (relevance for business)

(5) Dimension definition: X and Y axis

Time

Alpha Bank2014

(6) Issue scoring

Only 7 companies disclosing a materiality matrix (50%) measure the relative importance ofissues, 4 using words (low, medium or high) and 3 using specific numeric scales.

In the latter case, rather interestingly, only 1 company makes use of the traditional “1-5”segregation of items (comparable to the verbal ranking: 1-low, 3-medium and 5-high), whilethe other two adopt different scales (for instance, from 3 to 7), which in one case is different forthe two axes and originates from an internal scoring not available to readers.

(6) Issue scoring: AMF 2014

(7) Use of the matrixUse Frequency % Planning and strategy Strategy 4 16% Risks and opportunities 3 12% Achieving primary objectives 2 8% Future targets 1 4% Sub-total 10 40% Business Operations 6 24% Corporate and business activities/actions/conduct 4 16% Consumption of resources 1 4% Sub-total 11 44% Disclosure and communication Disclosure 3 12% Stakeholder engagement 1 4% Sub-total 4 16% Total 25 100%

(8) Most represented areas (environmental/social/financial)

Issues % Min Max Average Median Std dev. Environmental 59 13,92% 0 8 2,57 2 2,08 Social 168 39,62% 0 19 7,30 7 4,38 Financial 127 29,95% 0 16 5,52 4 3,85 Mixed 70 16,51% 0 7 3,04 3 1,90 Total 424 100,00%

On average, the materiality matrix discloses 18 issues, of which 2-3 pertain to environmentalthemes, 7 to social items, 5-6 are financials and 3 are mixed (for instance, transparency).

(9) Materiality Convergence:

Is the perception of the relevance of a given issue for the business aligned with the perception of the relevance of the same issue for the stakeholders?

In other words is it more likely to find issues in the Low-Low / High-High quadrants than in the Low-High / High-Low ?

Tentative hypothesis on impression management mechanism: showing fake coincidence between external and internal perceptions of relevance of the issues represented in the matrix (especially if the process of stakeholder engagement isn’t transparent) / lip service to stakeholders

(9) Materiality Convergence Frequency % Total convergence Low-low 36 13,48% Medium-medium 54 20,22% High-high 120 44,94% Sub-total 210 78,64% Medium convergence Low-medium 4 1,50% Medium-low 9 3,37% Medium-high 15 5,62% High-medium 10 3,75% Sub-total 38 14,24% No convergence Low-high 8 3,00% High-low 11 4,12% Sub-total 19 7,12% Total 267 100,00%

(9) Materiality Convergence: Royal Bank of Scotland

(9) Materiality convergence: Swedish Export Credit Corporation

(10) Selection bias

X-axis % Y-axis % Low 48 17,98% 56 20,97% Medium 78 29,21% 68 25,47% High 141 52,81% 143 53,56% Total 267 100,00% 267 100,00%

Over half the issues are considered relevant (i.e., in the “high” area) by the companies as wellas their stakeholders. The percentage is highly linked and of course related to the strong levelof materiality convergence previously mentioned.

Tentative hypothesis on impression management mechanism: biased selection of issuesrelevant for the business (and for the stakeholders)

(11) Explicit approval

Only 9 companies (39.13%) of the total 23 companies explicitly mention that the materialitymatrix was approved by an internal body or company department.

Indeed, the formal steps for the official release of these documents should be more clearlydisclosed so that readers may become aware of the company’s level of commitment tosustainability and materiality.

Conclusions

There is not yet a standard way to build the materiality matrices.

Many differences and lack of disclosure have been identified: in particular, the genericdefinition of relevant stakeholders, the variety of methods used for stakeholder engagement,the different measures of importance of the issues under consideration.

It is possible that impression management mechanisms may be used in order to influence theusers of the integrated reports.

Limitations and future research

The results of our paper are still preliminary, due to a number of important limitations: limitedscope of analysis (just the financial sector), the small number of reports examined (in termsof both the sample and the time-series) and the need to improve the methodology and betterdefine impression management mechanisms.

Future research could expand our preliminary results using both time-series matrices anddifferent industries.

Another idea could be to apply the legitimacy approach, for instance, verifying if companiesthat perform poorly with regard to sustainability issues present matrices to generate, ceterisparibus, more favorable stakeholder perceptions.