Examination of the relationship between national culture and probability of integrated reporting adoption mediated by sustainability disclosure

Abstract

The concept of integrated thinking is gaining momentum. However, it is not known whether integrated thinking and its important manifestation namely integrated reporting (IR) can be uniformly applied across the globe when cultural barriers affect the disclosure of companies guided by the IR framework. Knowledge about why IR is not being adopted by firms located in various countries is still being investigated and there is no clarity in the literature on the various issues that surround IR adoption. This research conducted a literature search which revealed that national cultural factors can have a direct influence on the probability of IR adoption although current knowledge about this aspect is not deep. The national cultural factors were identified using Hofstede model which included power distance, individualism vs collectivism, masculinity vs femininity, uncertainty avoidance, long term vs short term orientation and indulgence vs restraint. This research argued that there is a need to test the direct relationship between those factors and the probability of IR adoption need to be tested and compared with another path containing interventions in the aforementioned relationship. Such an argument was posited to improve the predictive power of the models developed by other researchers and provide a deeper understanding of the influence of the cultural factors on the probability of IR adoption by manipulating the interventions. Accordingly, a conceptual model was drawn with one path depicting a direct relationship between the six national cultural factors and the probability of IR adoption and another path which included three interventions namely environmental, social and governance (ESG) disclosure based on the support offered by the stakeholder, legitimacy, upper echelon and Hofstede theories. The paths were linked to 27 hypotheses. Quantitative research method was used to test the model by using secondary data available on Hofstede Insights, Bloomberg and Global Reporting Initiative (GRI) concerning 628 firms situated in five countries namely Brazil, Japan, Sweden, UK and USA. Positivist research philosophy was adopted for the research supported by objective ontology, deductive research approach and quantitative research method. GRI report formed the basis to identify the final set of 628 companies located in the five countries from amongst 7122 companies located in 122 countries. The process of determining the sample set of companies followed a strandardised method described in the related literature. 15 hypotheses were supported while 12 were rejected. Using logistic and linear regressions it was found that power distance, individual vs collectivism, uncertainty avoidance and indulgence vs restraint were found to have a direct relationship with probability of IR adoption. These findings differed from those of the other researchers’ and offered a deeper and better understanding of the relationship between cultural factors and probability of IR adoption. The paths related to the relationships drawn between the six cultural factors and ESG factors on the one hand and ESG factors and probability of IR adoption on the other were tested. The findings revealed that power distance, masculinity, uncertainty avoidance and long-term orientation affected the probability of IR adoption through environmental disclosure while masculinity, uncertainty avoidance and long-term orientation affected probability of IR adoption through social disclosure. Governance did not affect the probability of IR adoption. The results obtained between the direct and indirect relationship between the national cultural factors and probability of IR adoption were compared. The results showed that introduction of interventions provided a greater understanding of how the cultural factors could affect probability of IR adoption. A notable finding is that cultural aspects could be tackled to enhance the chances of companies to adopt IR through a matrix of combinations discovered in this research. Thus, this research provides an opportunity to deal with IR adoption in firms situated in various countries using cultural factors. Three matrices were developed to show how those matrices could be used as templates to predict the probability of IR adoption using cultural factors. Theoretically the model expands the application of Hofstede model, stakeholder, legitimacy, and upper echelon theories. In addition, the outcomes contribute to practice by enhancing the prospects of mandating the adoption of IR across the world which was a challenge till now.