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The Evolution of Corporate Disclosure pp 55–100Cite as

Voluntary Corporate Disclosure

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Part of the Contributions to Management Science book series (MANAGEMENT SC.)

Abstract

This chapter presents and discusses the literature on voluntary corporate disclosure. It pays attention to the costs and benefits of voluntary disclosure. The discourse also considers the leading role that corporate governance structures play in shaping firms’ voluntary information environment. This discussion focuses on the literature on corporate board, firm characteristics, and ownership structures that have the biggest influence on corporate voluntary disclosure. Furthermore, to date it appears increasingly relevant to examine the channels that companies use to disseminate information voluntarily, such as conference calls and management forecasts, as well as certain specific types of disclosures like those related to intellectual capital. Finally, the chapter concludes with an analysis of the challenges and opportunities of voluntary disclosure, trying to track the number of paths for future research.

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Fig. 3.1
Fig. 3.2

Notes

  1. 1.

    The relevance of public interest already arises in Chambers (1966: 293) where the author highlights: “Statutes and regulations secure the rights of investors, potential investors, their advisers, their agents, and the public generally, to authenticated financial information, with the object of creating a fair and informed market in securities”.

  2. 2.

    We use the terms “voluntary disclosure”, “voluntary communication”, and “voluntary information” interchangeably. Similarly, the terms “compulsory disclosure” and “mandatory information” assume the same meaning.

  3. 3.

    The GRI is an international independent organization that pioneered corporate sustainability reporting since 1997. It supports organizations with understanding and disclosing their impact on critical sustainability matters, such as human rights, climate change, corruption, and others. The GRI has thousands of reporting practitioners in over 90 countries and provides the world’s most trusted and widely used standards on sustainability reporting. It is grounded in a unique multi-stakeholder principle, ensuring the participation and expertise of diverse stakeholders in order to develop agreed-upon standards (KPMG et al. 2016).

  4. 4.

    For an analysis of the advantages and disadvantages of voluntary disclosure, see also, amongst others, Elliott and Jacobson (1994), Healy and Palepu (2001), Beyer et al. (2010), and Berger (2011).

  5. 5.

    Elliott and Jacobson (1994: 95) offer a thorough interpretation of disclosure informativesness where “the information content of a message is defined as its capacity to reduce uncertainty (i.e. increasing informativeness of disclosure equates to decreasing investor uncertainty, which leads to a decreasing information risk premium demanded by investors). Uncertainty reduction is inversely related to the ex ante probability of receiving a particular true and relevant message: the more improbable the message ex ante, the more informative. For example, the reliable message that a particle moved faster than the speed of light has zero probability ex ante, thus infinite information value to a theoretical physicist (but not a teeny bopper). The reliable message that a building is on fire has very low ex ante probability, thus very high informativeness to an occupant. The response “fine” to the question “how are you?” has very high ex ante probability, thus very low information content. It is well known, for example that stock prices do not respond to earnings-per-share announcements that equal the expected amounts, but do respond to surprising earnings-per-share announcements”.

  6. 6.

    Dye (1986) presents a theory for the disclosure policies adopted when managers trade-off between protecting proprietary information and making value-increasing disclosures. In the same work, Dye defines proprietary information “as information whose disclosure reduces the present value of cash flows of the firm endowed with the information”.

  7. 7.

    In a successive work, management’s reporting credibility is defined as “investors’ beliefs about management’s trustworthiness and competence in financial disclosure” (Mercer 2005).

  8. 8.

    This project is part of a conservation and financial markets collaboration among Ceres, the World Business Council for Sustainable Development, the World Wildlife Fund, and the Gordon and Betty Moore Foundation.

  9. 9.

    Although the majority of respondents who participated in a prior discussion paper (2016) promoted the development of non-authoritative guidance, but not a new assurance standard including mandatory requirements at this time, the IAASB consultation paper (2019) recognizes that the latter may be appropriate in the future.

  10. 10.

    This IAASB consultation paper was issued during February 2019 and is entitled “Extended External Reporting (EER) Assurance”.

  11. 11.

    The concept is strictly related to the adverse selection; in fact, as seen in the market for lemon paradox, the higher quality sellers leave the market unless they can convey the superior quality of their products and, as a consequence, increase the prices of their products (Akerlof 1970).

  12. 12.

    For a deeper analysis of the credibility perception from the eyes of the analysts and the investors, see Eccles et al. (2001), maintaining that “credibility and transparency go hand in hand. This proves especially true if management has made and delivered on past promises. Credibility, of course, ultimately depends on performance, but candour certainly enhances it. When objectives go unmet, or performance lags along some financial or nonfinancial dimension, management’s best tack always is candor. By consistently providing information in both good times and bad, management reinforces its credibility with the marketplace. The market hates surprises, especially negative ones”.

  13. 13.

    Arrow (1984) invokes the adverse selection problem with the hidden-information problem. The Author (1984: 2) explains as follows: “In the hidden-knowledge problems, the agent has made some observation that the principal has not made. The agent uses (and should use) this observation in making decisions; however, the principal cannot check whether the agent has used his or her information in the way that best serves the principal’s interest”.

  14. 14.

    We admit that this is the traditional tripartition of intellectual capital; nonethless, there is countless alternative categorizations of intellectual capital (Blankenburg 2018) that include components, such as innovation capital (e.g. Joia 2000), process capital (e.g. Wang and Chang 2005), renewal capital (e.g. Kianto 2008), and entrepreneurial capital (Inkinen 2016), to cite but a few of the most debated components.

  15. 15.

    The guidelines further specifically define all three components as follows: “Human capital is defined as the knowledge that employees take with them when they leave the firm. It includes the knowledge, skills, experiences, and abilities of people. Some of this knowledge is unique to the individual, some may be generic. Examples are innovation capacity, creativity, know-how and previous experience, teamwork capacity, employee flexibility, tolerance for ambiguity, motivation, satisfaction, learning capacity, loyalty, formal training, and education. Structural capital is defined as the knowledge that stays within the firm at the end of the working day. It comprises organizational routines, procedures, systems, cultures, databases, etc. Examples are organizational flexibility, a documentation service, the existence of a knowledge centre, the general use of Information Technologies, organizational learning capacity, etc. Some of them may be legally protected and become Intellectual Property Rights, legally owned by the firm under a separate title. Relational capital is defined as all resources linked to the external relationships of the firm, with customers, suppliers, or R&D partners. It comprises that part of Human and Structural Capital involved with the company’s relations with stakeholders (investors, creditors, customers, suppliers, etc.), plus the perceptions that they hold about the company. Examples of this category are image, customers loyalty, customer satisfaction, links with suppliers, commercial power, negotiating capacity with financial entities, environmental activities, etc.” (MERITUM 2002: 10–11).

  16. 16.

    WICI (the World Intellectual Capital/Assets Initiative) maintains the value for corporate reporting that integrates the communication of narrative and quantified information with regard to how organizations create value over the short, medium, and long term by creating, managing, combining, and utilizing intangibles. WICI was formed in October 2007, and its participants include organizations representing companies, analysts, and investors, the accounting profession, and academia who collaborate to promote better corporate reporting by recognizing the role of intangibles/intellectual capital in an organization’s sustainable value generation.

  17. 17.

    Up ahead, we can understand the WICI’s (2016: 7) broad interpretation, mainly emphasizing intangibles, of business reporting: “A form of reporting which focuses on qualitative (narrative), quantitative, financially and non-financially expressed information about the past, present and future value creation process of an organisation and the strategy, the resources (especially of intangible nature), the governance and the organisational model which support it”.

  18. 18.

    The CDP, formerly the Carbon Disclosure Project, is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts (for further information see: https://www.cdp.net/en).

  19. 19.

    According to the joint paper, materiality refers to relevant information that is (capable of) making a difference to the users’ decision-making process. Completeness requires that all material matters that are identified for the relevant topic(s) should be reported upon. Accuracy means that the information reported should be free from material errors. The balance (or neutrality) principle requires unbiased information, i.e. the information is not presented such that it would increase the probability of the users receiving the information favourably or unfavourably. Clarity concerns the understandability and accessibility of information in relation to the users, including a certain degree of conciseness. The comparability principle recommends consistent information over time and across organizations. Reliability of the information processes and internal controls ensure information quality and allows for its verifiability.

  20. 20.

    In Appendix to this chapter, the reader can find Table 3.1 that classifies the major Key Performance Indicators (KPIs) and information included in the WICI XBRL Taxonomy available at: http://www.wici-global.com/framework

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Authors and Affiliations

  1. Department of Accounting, Monash University, Caulfield East - Melbourne, VIC, Australia

    Alessandro Ghio

  2. Department of Economics and Management, University of Pisa, Pisa, Italy

    Roberto Verona

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  1. Alessandro Ghio
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  2. Roberto Verona
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Appendix

Appendix

Table 3.1 Prospective corporate voluntary disclosure of intellectual capital
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Table 3.2 Overlap of reporting principles recommended in different frameworks
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Ghio, A., Verona, R. (2020). Voluntary Corporate Disclosure. In: The Evolution of Corporate Disclosure. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-030-42299-8_3

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