Social Responsibility Journal

Sustainability KPIs for integrated reporting

Tomoki Oshika, Chika Saka,
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 Sustainability KPIs for integrated
reporting
Tomoki Oshika and Chika Saka

Abstract Tomoki Oshika is

Purpose – The framework of the International Integrated Reporting Council (IIRC) is principles-based Professor at the Faculty
and does not provide specific key performance indicators (KPIs) for integrated thinking and reporting. of Commerce, Waseda
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Therefore, the purpose of this paper is to propose KPIs for integrated reporting which decipher a firm’s University, Tokyo, Japan.
sustainability through empirical analysis. Chika Saka is Professor
Design/methodology/approach – As a proxy of firms’ sustainability, the authors focus on firms that at the School of Business
have survived for more than 100 years and that have already achieved sustainability, and analyze these Administration, Kwansei
firms to reveal the financial features that distinguish sustainable firms from the other firms.
Gakuin University,
Findings – The study found two distinguishing facts: the value added that is distributed to stakeholders
Nishinomiya, Japan.
other than shareholders is significantly larger, and the stability of profitability and the profitability itself
are significantly higher in sustainable firms.
Practical implications – The study proposes a value-added distribution and the stability of profitability
as sustainability KPIs for integrated reporting.
Originality/value – First, this study provides the first evidence that value added distribution and the
stability of profitability distinguish a firm’s sustainability. Second, it provides a new perspective in
the search for sustainability KPIs. Third, as the empirical data consist of all listed firms in 136 countries,
the results should be robust and general.
Keywords Sustainability, Integrated reporting, Value added, Created value
Paper type Research paper

1. Introduction
Integrated reporting, which involves concise communication about how value is created by
an organization in the short, medium and long terms, is a growing trend. Integrated
reporting presents a panoramic view of a firm’s status as disclosed through various types
of reports, including sustainability, governance and remuneration reports along with annual
reports. The International Integrated Reporting Framework (2013) issued by the
International Integrated Reporting Council (IIRC) documents that: “A primary goal of
integrated reporting is to explain to providers of financial capital how an organization
creates value [. . .] The cycle of integrated thinking and reporting, resulting in efficient and
productive capital allocation, will act as a force for financial stability and sustainability”. At
the same time, the framework continues: “The more integrated thinking is embedded in the
business, the more likely it is that a fuller consideration of key stakeholders’ legitimate needs
Received 13 July 2016
and interests is incorporated as an ordinary part of conducting business [emphasis Revised 27 October 2016
added]”. Integrated reporting needs information on the value created by the organization Accepted 21 November 2016
that meets stakeholders’ needs and creates financial stability and sustainability. The authors acknowledge the
Ministry of Education, Culture,
IIRC Chief Executive Paul Druckman said, “Japan’s business leaders increasingly Sports, Science and
Technology-Japan, and Japan
appreciate the contribution that integrated reporting reform and integrated reporting Society for the Promotion of
specifically, can make towards achieving greater financial stability and a focus on Science for their financial
support (Grant-in-Aid for
long-term investment” (IIRC, 2014), acknowledging that Japan has the largest number of Scientific Research(C):
long-established firms in the world, many of which have survived for several hundred 15K03792).

DOI 10.1108/SRJ-07-2016-0122 VOL. 13 NO. 3 2017, pp. 625-642, © Emerald Publishing Limited, ISSN 1747-1117 SOCIAL RESPONSIBILITY JOURNAL PAGE 625
 years[1]. One of the reasons why Japan has so many sustainable firms is that, instead of
emphasizing business succession by blood relationship, firms recognize that they have a
social and public existence. A well-known management philosophy that has been followed
for several centuries in Japan is sanpou-yoshi, which originally meant providing satisfaction
to sellers, buyers and society. Now, this is interpreted as “providing satisfaction to
stakeholders” and has been regarded as a valuable philosophy for business success even
in the context of modern society.
Based on this philosophy, several Japanese firms, including Unicharm, Aeon and
Ito-Yokado, have disclosed how they are “providing satisfaction to stakeholders” under the
section “Corporate Social Responsibility Accounting” in their sustainability reports.
The contents of the disclosure are value-added distribution to the firms’ stakeholders. The
philosophy and concept of value added is related to “how an organization creates value
over time” and “consideration of key stakeholders’ legitimate needs and interests”, which
an integrated report should explain in accordance with the section on fundamental
concepts in the IIRC’s Integrated Reporting Framework.
In this study, we focus on the management philosophy of long-established firms in Japan –
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“providing satisfaction to stakeholders”, and examine whether value-added information, which

measures how to “provide satisfaction to stakeholders” is useful for integrated reporting to
interpret a firm’s sustainability. A lot of research has considered the concept of value added
(Burchell et al., 1985; Meek and Gray, 1988; Aldama and Zicari, 2012) since the 1960s, and the
value-added information has been used in corporate reporting worldwide. Value added is the
simplest and most immediate way of putting the firm’s profit into proper perspective in terms of
a collective effort by various stakeholders. At the same time, value-added distribution can show
how the firm has distributed it as wages, dividends and interest and taxes to pay those
contributing to its creation (Riahi-Belkaoui, 1999). In addition, the traditional measure of value
added is practical, effective, efficient and reliable; thus, it is a useful reporting instrument that
complements and represents the concept of integrated reporting (Haller and van Staden,
2014).
However, IIRC’s framework, which is principles-based, does not provide specific key
performance indicators (KPIs). Thus, major integrated reporting firms currently apply the
Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines because they
provide KPIs[2]. With regard to KPIs, numerous studies explore environmental and social
KPIs and investigate their usefulness (Burritt and Saka, 2006; Adams and McNicholas,
2007; Bebbington et al., 2009; Saka and Oshika, 2014); however, as far as we know, these
studies do not provide evidence that any proposed KPIs are actually useful for evaluating
a firm’s sustainability.
Although KPIs for integrated reporting are critical, the reason why it has been difficult to
confirm whether specific KPIs actually lead to firms’ sustainability is that an experimental
period is needed that is long enough to be considered a mark of sustainability. In addition,
the concept of sustainability is interpreted in several different ways in a business context
(Montiel and Delgodo-Ceballos, 2014; Lankoski, 2016), and there is a lack of definition
about the relationship between the sustainability concept and accounting (Çalişkan, 2014).
Moreover, there are a few studies on long-established firms. Although many
long-established firms are family businesses (Lee, 2006; Allouche et al., 2008; Molly et al.,
2010), there is no relationship between a family business and sustainability (Colli, 2012). In
general, research firms such as Teikoku Data Bank, Tokyo Shoko Research and Toyo
Keizai define long-established firms as those that have survived for more than 100 years.
Thus, in this study, as a proxy of firms’ sustainability, we focus on firms that have survived
for more than 100 years and that have already achieved sustainability and define the firms
as “sustainable firms”. We depart from the research design of prior studies and analyze
these firms to reveal the financial features that distinguish sustainable firms and other firms.

PAGE 626 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 We also propose these features as KPIs for integrated reporting to decipher a firm’s
sustainability.
We find two distinguishing facts. Our first result shows that the value added distributed to
stakeholders other than shareholders is significantly larger in sustainable firms. This is the
first evidence that information on the distribution of value added is actually useful for
deciphering a firm’s sustainability; thus, we propose value added distribution as a
sustainability KPI for integrated reporting. However, value added distribution deals with
shareholders as just one group of many stakeholders. The IIRC framework mentions that
the primary goal of integrated reporting is to explain to providers of financial capital how an
organization creates value. Thus, firms should also satisfy shareholders. In this regard, our
second result shows that stability of profitability and the profitability itself are significantly
higher in sustainable firms. Such stability generates “financial returns to the providers of
financial capital” over medium and long terms. Thus, we also propose the stability of
profitability as another sustainability KPI for integrated reporting.
Our study contributes to the literature on three key points. First, we empirically explore
sustainability KPIs under the IIRC framework and provide the first evidence that value
added distribution and the stability of profitability distinguish a firm’s sustainability. As the
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IIRC framework does not provide specific KPIs, we propose that these KPIs should
be included in integrated reporting. Second, we provide a new perspective in the search
for sustainability KPIs. We use a research design that is different from prior studies. As a
proxy of firms’ sustainability, we focus on firms that have survived for more than one
century. We analyze these firms to reveal the financial features that distinguish sustainable
firms and other firms, and we propose these features as KPIs for integrated reporting. Third,
as our empirical data consists of all listed firms worldwide in 136 countries, our results
should be robust and general.
The remainder of this paper is organized as follows. Section 2 provides the background to
the analysis and reviews the related research. Section 3 develops our hypotheses. Sections
4 and 5 describe, respectively, the empirical models and samples, and the results for our
two hypotheses and supplementary analysis. Section 6 concludes the paper.

2. Background and prior research

2.1 Integrated reporting and stakeholders
In recent years, integrated reporting has been a fast-growing research category. The
research also includes several subcategories. First, conceptual research discusses and
proposes frameworks and templates for integrated reporting (Eccles and Krzus, 2010;
Abeysekera, 2013; Dumitru et al., 2013; Brown and Dillard, 2014; Cheng et al., 2014).
Second, case study research investigates the internal and disclosure mechanisms used by
early adopters of integrated reporting (Higgins et al., 2014; Stubbs and Higgins, 2014).
Third, content analysis of integrated reports aim to find compliance levels with guidelines
(Hindley and Buys, 2012; Van Zyl, 2013; Maubane et al., 2014) and levels of integration
(Gurvitsh and Sidorova, 2012). Other research investigates the utilization of integrated
reports by stakeholders (Rensburg and Botha, 2014) and the effect of mandatory
integrated reporting on the volume of disclosure (Solomon and Maroun, 2012). Further,
research on integrated reporting and firm characteristics shows that the following factors
affect the implementation of integrated reporting: firm size and industry (Frías-Aceituno
et al., 2013b; Sierra-García et al., 2013); financial performance (Dragu and Tiron-Tudor,
2013a); the intensity of market coordination and ownership concentration (Jensen and
Berg, 2012); corporate governance mechanisms (Frías-Aceituno et al., 2013b; Velte, 2014);
and country, political and cultural factors (Eccles and Serafeim, 2011; Jensen and Berg,
2012; Dragu and Tiron-Tudor, 2013b; Frías-Aceituno et al., 2013a; Garcia-Sánchez et al.,
2013). However, the absence of specific sustainability KPIs for integrated reporting
remains an issue.

VOL. 13 NO. 3 2017 SOCIAL RESPONSIBILITY JOURNAL PAGE 627

 An integrated report aims to explain how an organization creates value over time. Value
creation entails not only intra-organizational efforts but also relationships with its
stakeholders. In this regard, an integrated report should provide insight into the nature and
quality of an organization’s relationships with its key stakeholders, including how and to
what extent the organization understands, takes into account and responds to their
legitimate needs and interests (IIRC, 2013). Stakeholder engagement by an integrated
reporting firm reflects enlightened value maximization (Parrot and Tierney, 2012).
Definition of a stakeholder is those groups that are vital to the survival and success of the
organization (Freeman, 2004). Discussing the relationship between firms and stakeholders
is the stakeholder theory. According to this theory, a firm’s success is dependent on the
successful management of all its relationships with its stakeholders. Stakeholders can be
managed successfully only if a firm has the continued support of the relevant ones among
them (Elijido-Ten, 2007; Elijido-Ten et al., 2010). Therefore, the purpose of a firm is to serve
as a channel for coordinating stakeholders’ interests. To ensure survival, a firm must work
for the benefit of its stakeholders and play the role of an agent for them (Freeman and Evan,
1990).
In this regard, the way in which a firm manages the benefits of its various stakeholders to
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ensure its own survival and success is represented by how it distributes value added
among these stakeholders. Value added has the potential to serve as a practical and
effective reporting instrument for integrated reporting (Haller and van Staden, 2014).
However, there is no evidence, as far as we know, investigating the relationship between
a firm’s sustainability and value added (Aras et al., 2011).

2.2 Value added for stakeholders

Value added measures how much input a firm has invested in its business activities to
produce output and represents how effectively the firm utilizes this input. In a case where
financial capital is the only input and profit is the only output, profitability would be a
suitable measure of efficiency. However, as firms’ inputs usually include various
management elements besides financial capital, it is inappropriate to recognize profit as
the only output. Although profits are an essential part of any market economy, they are only
a small part of value added. Value added is the simplest, most immediate way of putting
profit into perspective vis-à-vis the whole enterprise in terms of the collective effort of
employees, capital and management (ASSC, 1975; Meek and Gray, 1988). Thus, given that
a firm is inevitably a social entity involving both shareholders and various other
stakeholders, we need a more comprehensive analysis based on value added, besides
profit.
The concept of value added involves two aspects – productive and distributional. Although
the productive aspect can be calculated in a variety of ways, a firm’s value added can be
measured only by subtracting the value of materials and services purchased from other
firms (input) from the value of goods it has produced (output). This measurement excludes
the contribution of other producers in the total value produced by the firm; thus, essentially
value added is equal to the value created by the firm, and this is the firm-focused
performance aspect (ASSC, 1975; Meek and Gray, 1988; Aldama and Zicari, 2012; Haller
and van Staden, 2014). The productive aspect is calculated as follows:
Total value added ⫽ Value of goods produced (output) – Value of materials
and services purchased from other firms (input) (1)
For the distributional aspect, a firm’s value added can be measured by adding the
remuneration of the productive factors – that is, “labor” of the employees and “capital” of
the creditors, shareholders and community (represented by the government and society).
These four stakeholders are identified in Freeman’s (2004) study. Further, the distributional
aspect of value added indicates how the value created has been distributed among
stakeholders in the form of wages, interests, dividends and taxes to compensate those who

PAGE 628 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 contribute to its creation (Riahi-Belkaoui, 1999), and this is the society-focused aspect
(ASSC, 1975; Meek and Gray, 1988; Aldama and Zicari, 2012; Haller and van Staden,
2014). The distributional aspect is calculated as follows:
Total value added ⫽ Share distributed to employees ⫹ Share distributed to creditors
⫹ Share distributed to shareholders ⫹ Share distributed to
the community (government and society) (2)
Theoretically, the proportion of value added from these two aspects, calculated using
equations (1) and (2), should yield equal results. This means that values added represent
the value created by the firm and stakeholders through its business activities and, at the
same time, the value added is distributed to stakeholders of the firm. As the calculation of
value added in equation (1) is controversial, considering the way in which the measurement
is performed and the items included as output and input, we use equation (2) as the proxy
for value added. Equation (2) shows the society-focused aspect of firms and how the
benefits of the business’s efforts are shared among stakeholders (Riahi-Belkaoui, 1999;
Haller and van Staden, 2014).
Since The Corporate Report (ASSC, 1975), much research has been conducted on value
added (Burchell et al., 1985; Meek and Gray, 1988; Aldama and Zicari, 2012). Further, for
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several decades, value added has been used in corporate reporting and productivity
management in countries such as England, France, Germany, Japan, Singapore, Australia
and South Africa. Indeed, several countries require value added statements, most recently
Brazil. One of the reasons why value added has attracted such attention is because the
firms pursuing only profit have caused environmental pollution, unemployment and other
social problems that have a negative impact on societal sustainability. Thus, value added
has been studied as an index of aspects of a firm’s performances that profit alone cannot
express. In addition, prior research shows that value added has usefulness, superior
explanatory power, lower variability and higher persistency (Riahi-Belkaoui and Fekrat,
1994; Riahi-Belkaoui and Picur, 1994; Evraert and Riahi-Belkaoui, 1998).
The concept of value added is related to the purpose of integrated reporting. The
fundamental concepts section of the IIRC framework states that “an integrated report
explains how an organization creates value over time”. The GRI guidelines, applied by
major integrated reporting firms, also have the same KPI as value added: “direct economic
value generated and distributed”. The value added concept can integrate a firm’s
performance and its efficiency with regard to the “six capitals” of the IIRC framework:
financial, manufactured, intellectual, human, social and relationship and natural. A firm’s
individual benefit can be linked to its stakeholders’ benefits by value added. Consequently,
value added has great potential to contribute to the usefulness of integrated reporting;
indeed, it could and should become one of the key reporting instruments for integrated
reporting (Haller and van Staden, 2014). Thus, we investigate whether value added is
useful as a sustainability KPI for integrated reporting.

2.3 Value added for shareholders

Integrated reporting takes into account the whole spectrum of factors that affect an
organization’s success and, consequently, its long-term investment returns (IIRC, 2011); in
other words, integrated reporting considers the organization’s sustainability. The value
added mentioned in the last section takes into account the benefits for stakeholders, but
the fundamental concepts section of the IIRC framework states another aspect: “value
created for the organization itself, which gives financial returns to the providers of financial
capital” (IIRC, 2013). To satisfy the providers of financial capital, a firm should also seek
stability of financial performance over the medium and long terms to achieve sustainability.
Thus, the following question arises:
Q1. What are the factors that lead to a firm’s financial performance and sustainability?

VOL. 13 NO. 3 2017 SOCIAL RESPONSIBILITY JOURNAL PAGE 629

 “Financial performance” and “sustainability” are subjects of a great deal of research. Over
the past three decades, many studies have analyzed the relationship between firms’ social
performance and financial performance. The results are not consistent, although recently
they have tended to conclude that a firm’s social performance relates to its financial
performance (Margolis and Walsh, 2003; Orlitzky et al., 2003; Allouche and Laroche, 2005;
Beurden and Gössling, 2008). If this is true, one might then ask how financial performance
is related to sustainability. Most integrated reports apply GRI guidelines and disclose the
KPIs; however, prior research on integrated and sustainability reporting has not provided
evidence on whether specific KPIs are related to firms’ sustainability. To overcome the
difficulty to confirm whether specific KPIs actually lead to firms’ sustainability, we focus on
sustainable firms, as a proxy of firms’ sustainability, and analyze the usefulness of value
added information.

3. Hypothesis development
3.1 Value added distributions for stakeholders
Integrated reporting should provide insights into the nature and quality of the organization’s
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relationships with its key stakeholders (IIRC, 2013). As stakeholder theory highlights the
criticality of proper stakeholder management for firms’ sustainability (Freeman and Evan,
1990), firms need to distribute their value added to not only shareholders but also other
stakeholders to achieve sustainability. In this regard, as discussed in Section 2.2, value
added distribution indicates the amount of value created for stakeholders and the
relationship with them.
The importance of value added distribution can also be observed in the management
philosophy of “providing satisfaction to stakeholders”, being followed in Japan since the
sixteenth century. This philosophy places a high value on long-term relationships with
stakeholders, which is also the aim of integrated reporting. Even in the context of modern
society, many Japanese firms such as Panasonic and the Sumitomo Corporation place a
high value on operating “for the public benefit”, which is a similar philosophy. The emphasis
on value added distribution has made many firms sustainable in Japan, which is also the
country with the largest number of sustainable firms in the world.
Value added distribution is a practical, effective, efficient, reliable and thus useful reporting
instrument that complements and represents the concept of integrated reporting (Haller
and van Staden, 2014). However, to the best of our knowledge, there is no evidence of a
relationship between a firm’s sustainability and value added. Thus, we use worldwide data
to investigate whether sustainable firms that have survived for more than a century
distribute more of their value added to stakeholders other than shareholders, leading to the
following hypothesis:
H1. Value added distributions to stakeholders other than shareholders are larger in
sustainable firms.

3.2 Stability of profitability

H1 depicts the importance of proper stakeholder management. However, value added
distribution deals with shareholders as just one group of many stakeholders. The primary
goal of integrated reporting is to explain to the providers of financial capital how an
organization creates value over the short, medium and long terms (IIRC, 2013). To satisfy
“providers of financial capital”, shareholders, firms need stability of profit, which provides
financial returns to them and financial stability over the medium and long terms.
To be sustainable, firms need to achieve high and stable profitability over the long run.
Ohlson (1995) shows that firm value can be calculated using linear information dynamics
(LID) based on the standard residual income model. The model, which expresses firm

PAGE 630 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 value as the sum of book value and the present value of residual income, is written as
follows:
⬁
xt⫹␶ ⫺ BVt⫹␶⫺1 ⫻ r
Vt ⫽ BVt ⫹ 兺
␶⫽1 (1 ⫹ r)␶
(3)

where Vt is the firm value at time t, BVt is the book value at time t, Xt is the income for period
t and r is the discount rate. LID tells us that next year’s income depends on a persistent
portion related to the current year’s income and a new portion of income from “other
information”. In addition, the “other information” exhibits a degree of persistence over time.
Thus:
Xt⫹1 ⫽ ␻1Xt ⫹ Yt ⫹ ␧1, Yt⫹1 ⫽ ␻2Yt ⫹ ␧2 (4)
where Yt is the “other information” at time t, and ␻1 and ␻2 are the persistence parameters
for income and “other information”, respectively. In this sense, persistence (i.e. stability) of
income is one of the important factors determining firm value and hence sustainability.
Thus, we compare the stability of profitability between sustainable firms and other firms and
propose the following hypothesis:
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H2. The stability of profitability is higher in sustainable firms.

4. Sample selection and data collection

In this section, we conduct empirical analysis on the hypotheses previously derived. To gain the
broadest possible perspective, we examine listed firms from across the world. Using the Orbis
database, we first collect the year each firm was founded. Sustainable firms are defined as
firms whose foundation year is in or before 1913. Firms founded in or after 1914 are categorized
as “other firms”. We omit firms listed in countries where the number of listed sustainable firms
is less than ten to ensure comparability between the sustainable firms and the other firms. Thus,
our sample consists of the firms listed in 136 countries.
Using this criterion extracts firms which have already achieved sustainability, even though
we would like to decipher the firms which will achieve sustainability in the future. Also,
“other firms” are firms that “have not already achieved sustainability” and are not
necessarily firms without sustainability. To conduct empirical analysis more precisely, it is
clear that we should use the firms that existed in 1913, but this is not feasible because of
data constraints[3].
For the analysis of H1 (i.e. distributions to stakeholders other than shareholders), we look at four
groups of stakeholders: employees, creditors, government and shareholders, based on
equation (2) (ASSC, 1975; Meek and Gray, 1988; Aldama and Zicari, 2012; Haller and van
Staden, 2014). To calculate the value added distributed to each group, we use the costs of
employees, interest paid, tax paid and net income, respectively, and the sum of these is
defined as total value added. The data for ten fiscal years (FYs) (FY2004 to FY2013) is used in
the analysis. By limiting the sample to firms with available data, our final sample becomes
200,621, of which 6,702 (approximately 3.3 per cent) are sustainable firms[4].
For the analysis of H2 (i.e. stability of profitability), we look at the stability of several kinds
of profitability. We use gross margin (gross profit divided by operating revenue), earnings
before interest and taxes (EBIT) ratio (EBIT divided by operating revenue), net income ratio
(net income divided by operating revenue), return on equity (ROE) (net income divided by
shareholders’ equity) and two types of return on assets (ROA) (EBIT or net income divided
by total assets). We calculate the standard deviation of each profitability ratio over nine
fiscal years, FY2005 to FY2013[5]. Firms with available data for fewer than nine years are
omitted. The result is a sample of 289,949 firms, of which 8,876 (approximately 3.1 per
cent) are sustainable firms. Table I shows the sample size used in the testing of H1 and
H2[6].

VOL. 13 NO. 3 2017 SOCIAL RESPONSIBILITY JOURNAL PAGE 631

 Table I Number of samples for each analysis
H1 H2
No. of No. of Proportion of No. of No. of Proportion of
Country sustainable firms other firms sustainable firms (%) sustainable firms other firms sustainable firms (%)

Algeria 0 17 0.0 0 0 –
Argentina 12 315 3.7 5 39 11.4
Armenia 0 2 0.0 0 0 –
Australia 194 6,646 2.8 9 178 4.8
Austria 193 600 24.3 16 33 32.7
Azerbaijan 0 2 0.0 0 0 –
Bahamas 0 30 0.0 0 3 0.0
Bahrain 0 26 0.0 1 6 14.3
Bangladesh 2 510 0.4 0 7 0.0
Barbados 8 15 34.8 0 1 0.0
Belgium 183 1,214 13.1 18 53 25.4
Bermuda 281 5,053 5.3 24 433 5.3
Bhutan 0 10 0.0 0 0 –
Bolivia 0 0 – 0 4 0.0
Bosnia and Herzegovina 38 3,359 1.1 0 0 –
Botswana 4 63 6.0 0 4 0.0
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Brazil 51 974 5.0 16 137 10.5

Bulgaria 82 2,177 3.6 0 1 0.0
Burkina Faso 0 5 0.0 0 0 –
Cote d’Ivoire 0 170 0.0 0 1 0.0
Cambodia 0 6 0.0 0 0 –
Canada 29 5,700 0.5 6 356 1.7
Cape Verde 0 8 0.0 0 0 –
Cayman Islands 31 5,759 0.5 4 360 1.1
Chile 5 160 3.0 11 100 9.9
China 0 1,435 0.0 1 1,397 0.1
Colombia 4 65 5.8 2 17 10.5
Costa Rica 0 14 0.0 0 1 0.0
Croatia 26 284 8.4 0 7 0.0
Curacao 0 24 0.0 0 3 0.0
Cyprus 0 319 0.0 0 7 0.0
Czech Republic 9 524 1.7 0 3 0.0
Denmark 157 985 13.7 14 59 19.2
Ecuador 0 123 0.0 0 7 0.0
Egypt 20 667 2.9 5 84 5.6
El Salvador 4 11 26.7 0 1 0.0
Estonia 0 38 0.0 0 11 0.0
Fiji 9 92 8.9 0 6 0.0
Finland 134 1,167 10.3 12 84 12.5
France 611 7,370 7.7 51 349 12.8
Gabon 0 10 0.0 0 1 0.0
Georgia 0 5 0.0 0 0 –
Germany 1,317 5,705 18.8 98 274 26.3
Ghana 0 54 0.0 0 6 0.0
Gibraltar 0 19 0.0 0 0 –
Greece 12 1,310 0.9 2 137 1.4
Guatemala 0 4 0.0 0 0 –
Guyana 0 6 0.0 0 0 –
Hong Kong 298 1,447 17.1 26 123 17.4
Hungary 1 203 0.5 0 12 0.0
Iceland 10 71 12.3 1 6 14.3
India 383 26,435 1.4 18 875 2.0
Indonesia 97 2,987 3.1 10 211 4.5
Iraq 0 138 0.0 0 25 0.0
Ireland 29 481 5.7 4 26 13.3
Islamic Republic of Iran 0 669 0.0 0 37 0.0
Israel 7 1,846 0.4 2 200 1.0
Italy 231 2,280 9.2 20 125 13.8
(continued)

PAGE 632 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 Table I
H1 H2
No. of No. of Proportion of No. of No. of Proportion of
Country sustainable firms other firms sustainable firms (%) sustainable firms other firms sustainable firms (%)

Jamaica 8 63 11.3 1 8 11.1

Japan 12 4,347 0.3 128 2,432 5.0
Jordan 0 1,092 0.0 0 63 0.0
Kazakhstan 0 12 0.0 0 15 0.0
Kenya 14 192 6.8 0 10 0.0
Kuwait 0 536 0.0 0 14 0.0
Latvia 31 42 42.5 5 23 17.9
Lebanon 0 4 0.0 0 0 –
Liberia 0 8 0.0 0 0 –
Liechtenstein 0 10 0.0 1 1 50.0
Lithuania 0 49 0.0 0 22 0.0
Luxembourg 0 374 0.0 0 18 0.0
Macedonia 1 132 0.8 0 1 0.0
Malawi 1 30 3.2 0 1 0.0
Malaysia 21 8,327 0.3 3 588 0.5
Malta 0 94 0.0 0 1 0.0
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Marshall 0 56 0.0 0 2 0.0

Mauritius 14 47 23.0 2 1 66.7
Mexico 0 8 0.0 0 60 0.0
Monaco 10 9 52.6 1 0 100.0
Montenegro 0 24 0.0 0 0 –
Morocco 0 475 0.0 0 26 0.0
Mozambique 0 3 0.0 0 0 –
Namibia 0 23 0.0 0 1 0.0
Nepal 4 13 23.5 0 0 –
Netherlands 210 996 17.4 20 57 26.0
New Zealand 44 765 5.4 0 11 0.0
Nigeria 1 448 0.2 0 26 0.0
Norway 150 1,936 7.2 12 51 19.0
Oman 0 744 0.0 0 51 0.0
Pakistan 49 2,279 2.1 2 98 2.0
Palestinian Territories 0 149 0.0 0 4 0.0
Panama 0 52 0.0 0 7 0.0
Papua New Guinea 0 37 0.0 0 3 0.0
Paraguay 0 76 0.0 0 11 0.0
Peru 0 18 0.0 3 53 5.4
Philippines 20 1,388 1.4 2 101 1.9
Poland 29 2,009 1.4 2 41 4.7
Portugal 50 602 7.7 3 26 10.3
Qatar 0 162 0.0 0 10 0.0
Republic of Korea 0 1,469 0.0 2 716 0.3
Romania 8 6,671 0.1 0 3 0.0
Russian Federation 6 148 3.9 7 76 8.4
Rwanda 0 4 0.0 0 0 –
Saint Kitts and Nevis 0 2 0.0 1 0 100.0
Saint Lucia 0 1 0.0 0 0 –
Saudi Arabia 0 622 0.0 0 59 0.0
Senegal 0 5 0.0 0 0 –
Serbia 28 10,897 0.3 0 0 –
Singapore 40 5,446 0.7 4 399 1.0
Slovakia 0 1,491 0.0 0 4 0.0
Slovenia 10 586 1.7 1 8 11.1
South Africa 96 1,758 5.2 7 75 8.5
Spain 112 2,016 5.3 10 75 11.8
Sri Lanka 83 1,260 6.2 5 39 11.4
Sudan 0 7 0.0 0 0 –
Swaziland 0 6 0.0 0 0 –
Sweden 182 4,163 4.2 19 173 9.9
(continued)

VOL. 13 NO. 3 2017 SOCIAL RESPONSIBILITY JOURNAL PAGE 633

 Table I
H1 H2
No. of No. of Proportion of No. of No. of Proportion of
Country sustainable firms other firms sustainable firms (%) sustainable firms other firms sustainable firms (%)

Switzerland 0 1,867 0.0 0 134 0.0

Syrian Arab Republic 0 15 0.0 0 0 –
Taiwan 0 12,951 0.0 0 870 0.0
Thailand 17 2,771 0.6 3 365 0.8
Trinidad and Tobago 4 23 14.8 3 5 37.5
Tunisia 0 262 0.0 0 12 0.0
Turkey 7 1,748 0.4 1 104 1.0
Uganda 0 26 0.0 0 1 0.0
Ukraine 237 2,740 8.0 1 0 100.0
United Arab Emirates 0 279 0.0 0 33 0.0
United Kingdom 675 10,197 6.2 57 497 10.3
United Republic of Tanzania 0 25 0.0 0 1 0.0
United States 30 6,840 0.4 74 2,486 2.9
Uruguay 5 35 12.5 0 0 –
Venezuela 0 7 0.0 0 4 0.0
Vietnam 0 1 0.0 0 61 0.0
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Virgin Islands 0 226 0.0 0 7 0.0

Zambia 15 65 18.8 0 4 0.0
Zimbabwe 6 49 10.9 0 0 –
Total 6,702 193,919 3.3 756 15,858 4.6

5. Results of the analysis

5.1 Empirical results for H1 (value added distribution)
To examine differences between the value added distributions of sustainable firms and
other firms, we compare the proportions of the total distribution made to each stakeholder
group. We define “total value added” as the sum of the costs for employees, interest paid,
tax paid and net income, based on equation (2), which are proxies for the distribution made
to each stakeholder group. We then calculate the proportion of total value added that the
distribution to each group represents. A Wilcoxon rank-sum test was chosen to test for
statistical difference. As the distribution of each variable does not resemble a t-distribution,
we consider it unwise to use a t-test.
Table II shows the result of the pooled sample and for each year. Of the pooled sample, for
example, the median proportion of the distribution to employees in sustainable firms is
greater than that in other firms (0.650 vs 0.522), and the difference is statistically significant
at the 1 per cent level. The same results are found regarding the distribution to creditors
and to government. Thus, consistent with H1, sustainable firms distribute a higher
proportion of their value added to stakeholders other than shareholders. As a result, we
obtain empirical results that support H1. Thus, we propose that the distribution ratios to
stakeholders should be included as integrated reporting KPIs because these ratios tell us
something about the sustainability of the disclosing firms.
However, by distributing more value added to stakeholders other than shareholders (i.e.
employees, creditors and government), the proportion distributed to shareholders is less in
sustainable firms than in other firms (0.188 vs 0.257 for the pooled sample, a result that is
statistically significant). This may seem odd from the perspective of shareholders, who
perhaps should argue for a larger distribution. Thus, we compare the total value added,
which is shown in Table III. After deflation by the amount of sales to achieve consistency in
scale, the total value added of sustainable firms is about 39 per cent more than that of other
firms, and the difference is statistically significant. This means that the size of the “pie” to
be distributed is much larger in sustainable firms and, thus, the “slice” to their shareholders
is not small, even if the proportion is smaller. In fact, the size of the “slice” is 0.056
(0.298 ⫻ 0.188) in the sustainable firms and 0.055 (0.215 ⫻ 0.257) in the other firms.

PAGE 634 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 Table II Distribution of the total added value to each stakeholder: proportion of
distribution of the total added value
Distribution to Distribution to Distribution to Distribution to
Year Group of firms N employees creditors government shareholders

2013 Sustainable firms 685 0.693*** 0.055*** 0.049 0.166***

Other firms 19,021 0.528 0.041 0.043 0.253
2012 Sustainable firms 707 0.675*** 0.055*** 0.051 0.178***
Other firms 20,227 0.517 0.044 0.043 0.246
2011 Sustainable firms 722 0.665*** 0.055*** 0.056*** 0.184***
Other firms 20,910 0.500 0.043 0.044 0.263
2010 Sustainable firms 704 0.642*** 0.056*** 0.056** 0.192***
Other firms 21,246 0.500 0.043 0.044 0.272
2009 Sustainable firms 693 0.662*** 0.061*** 0.044 0.167***
Other firms 20,713 0.518 0.045 0.036 0.256
2008 Sustainable firms 682 0.645*** 0.066*** 0.051*** 0.172***
Other firms 20,376 0.529 0.048 0.035 0.239
2007 Sustainable firms 664 0.592*** 0.055*** 0.063*** 0.242**
Other firms 19,969 0.504 0.047 0.040 0.283
2006 Sustainable firms 644 0.621*** 0.054*** 0.057*** 0.221***
Other firms 18,647 0.516 0.044 0.038 0.277
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2005 Sustainable firms 628 0.646*** 0.049*** 0.055*** 0.198***

Other firms 17,578 0.552 0.041 0.033 0.256
2004 Sustainable firms 573 0.681*** 0.051*** 0.052*** 0.166***
Other firms 15,232 0.581 0.041 0.029 0.227
Pooled Sustainable firms 6,702 0.650*** 0.055*** 0.053*** 0.188***
Other firms 193,919 0.522 0.043 0.039 0.257
Notes: Distribution to employees is defined as the costs for employees; distribution to creditors is
defined as the interest paid; distribution to government is defined as the tax paid; distribution to
shareholders is defined as net income; the total amount of the distribution to the four groups is
defined as the total added value; the exhibit shows the median of all the samples of the proportion
of the distribution of the total added value to each of four groups. As the median is shown, the sum
is not required to be one; *** and ** show that the Z-score on the difference between two groups is
significant at 1% and 5% (two-tailed), respectively

Even so, it may be puzzling why shareholders do not argue for a larger proportion of the
larger pie. For this reason, in the next subsection, we look at the stability of profitability.
Valuation models such as discounted cash flow model and residual income model
demonstrate that shareholder value depends on future cash flow or income and not on
current income. As shown in Section 3.2, Ohlson (1995) adds LID to the standard residual
income model and shows that persistency of income is one of the factors that determines
shareholder value. Thus, it is plausible that shareholders might willingly give up a portion
of the current year’s distribution if they believe that they will prosper by doing so over the
long run.

5.2 Empirical results for H2 (stability of profitability)

In this subsection, we present the empirical results for H2 (i.e. stability of profitability), which
predicts that we will see evidence of higher stability of profitability in sustainable firms. The
rationale is that shareholders in sustainable firms are willing to relinquish a portion of the
current year’s value added distribution if they are convinced that they will receive more
distribution in the future. If the foregoing statement is true, we propose that the information
on stability of profitability should be included as an integrated reporting KPI, as it is
indicative of sustainability.
To measure stability of profitability, we calculate the standard deviation of each profitability
ratio for the nine fiscal years – FY2005 to FY2013. The ratios used are: gross margin (gross
profit divided by operating revenue), EBIT ratio (EBIT divided by operating revenue), net
income ratio (net income divided by operating revenue), ROE (net income divided by
shareholders’ equity) and two types of ROA (EBIT or net income divided by total assets).

VOL. 13 NO. 3 2017 SOCIAL RESPONSIBILITY JOURNAL PAGE 635

 Table III Distribution of the total added value to each stakeholder: total added value to
sales
Year Group of firms N Total added value/sales

2013 Sustainable firms 685 0.281***

Other firms 19,021 0.217
2012 Sustainable firms 707 0.287***
Other firms 20,227 0.211
2011 Sustainable firms 722 0.293***
Other firms 20,910 0.211
2010 Sustainable firms 704 0.294***
Other firms 21,246 0.218
2009 Sustainable firms 693 0.282***
Other firms 20,713 0.206
2008 Sustainable firms 682 0.286***
Other firms 20,376 0.197
2007 Sustainable firms 664 0.328***
Other firms 19,969 0.227
2006 Sustainable firms 644 0.322***
Other firms 18,647 0.225
2005 Sustainable firms 628 0.317***
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Other firms 17,578 0.223

2004 Sustainable firms 573 0.311***
Other firms 15,232 0.222
Pooled Sustainable firms 6,702 0.298***
Other firms 193,919 0.215
Notes: Distribution to employees is defined as the costs for employees; distribution to creditors is
defined as the interest paid; distribution to government is defined as the tax paid; distribution to
shareholders is defined as net income; the total amount of the distribution to the four groups is
defined as the total added value; the exhibit shows the median of all the samples of the proportion
of the distribution of the total added value to each of four groups. As the median is shown, the sum
is not required to be one; *** shows that the Z-score on the difference between two groups is
significant at 1% (two-tailed)

A Wilcoxon rank-sum test is employed to test the difference between sustainable firms and
other firms.
Table IV shows the result. The stability of profitability is higher (i.e. the standard deviation
is smaller) in sustainable firms than in other firms. All differences are significant at the 1 per
cent level. The empirical result is consistent with H2; thus, we conclude that shareholders
relinquish a higher current year distribution in expectation of much higher distributions in
the future.
Even so, shareholders may not be satisfied if the “level” of profitability is low. By contrast,
shareholders are satisfied if the level of profitability is high and stable. Thus, we compare
the profitability of sustainable firms and other firms. The result is shown in Table V. All of the
profitability ratios are higher in sustainable firms. Although the significance levels are not
always high, the difference in profitability is significant at the 1 per cent level in most cases.

Table IV Stability of profitability

Gross EBIT Net ROA ROA
Year Group of firms N margin ratio income ratio ROE (EBIT) (Net income)

Pooled Sustainable firms 756 0.035*** 0.034*** 0.034*** 0.082*** 0.030*** 0.032***
Other firms 15,858 0.045 0.049 0.049 0.093 0.042 0.042

Notes: Gross margin is gross profit divided by operating revenue. EBIT ratio is EBIT divided by operating revenue. Net income ratio is net income divided
by operating revenue. ROE is net income divided by shareholders’ equity. ROAs are EBIT and net income divided by total assets; we calculate the standard
deviation for nine years between FY2005 and FY2013; the exhibit shows the median of all the samples; ***shows that the Z-score on the difference between
two groups is significant at 1% (two-tailed)

PAGE 636 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 Table V Stability of profitability: Profitability
Year Group of firms N Gross margin EBIT ratio Net income ratio ROE ROA (EBIT) ROA (Net income)

2013 Sustainable firms 979 0.401*** 0.063*** 0.039*** 0.079*** 0.034*** 0.031***
Other firms 31,681 0.348 0.055 0.033 0.065 0.028 0.027
2012 Sustainable firms 1,043 0.400*** 0.062*** 0.038*** 0.079*** 0.031*** 0.030***
Other firms 34,261 0.347 0.054 0.031 0.064 0.027 0.026
2011 Sustainable firms 1,043 0.411*** 0.068*** 0.039*** 0.086*** 0.035*** 0.034***
Other firms 34,038 0.348 0.058 0.033 0.071 0.030 0.029
2010 Sustainable firms 1,014 0.417*** 0.072*** 0.041*** 0.086 0.035 0.034
Other firms 33,529 0.353 0.063 0.036 0.083 0.034 0.033
2009 Sustainable firms 997 0.420*** 0.056*** 0.029** 0.065 0.026 0.025
Other firms 32,409 0.353 0.051 0.026 0.061 0.024 0.023
2008 Sustainable firms 994 0.406*** 0.065*** 0.032*** 0.067*** 0.027*** 0.026***
Other firms 31,417 0.346 0.050 0.020 0.052 0.020 0.018
2007 Sustainable firms 979 0.405*** 0.086*** 0.052*** 0.124*** 0.048*** 0.047***
Other firms 30,158 0.353 0.066 0.039 0.095 0.039 0.038
2006 Sustainable firms 946 0.411*** 0.086*** 0.051*** 0.118*** 0.048*** 0.047***
Other firms 28,121 0.354 0.064 0.038 0.091 0.038 0.036
2005 Sustainable firms 881 0.404*** 0.080*** 0.047*** 0.110*** 0.041*** 0.410***
Other firms 25,459 0.349 0.062 0.035 0.081 0.033 0.032
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Pooled Sustainable firms 8,876 0.407*** 0.070*** 0.041*** 0.089*** 0.035*** 0.034***
Other firms 281,073 0.350 0.057 0.032 0.073 0.030 0.029
Notes: The profitability ratios are the same as shown in Table IV; the exhibit shows the median of all the samples; *** and ** show that
the Z-score on the difference between two groups is significant at 1% and 5% (two-tailed), respectively

Thus, we can conclude that shareholders are sufficiently satisfied with high and stable
profitability that they are willing to wait for future distributions[7].

6. Summary and conclusion

Integrated reporting promotes efficient and productive capital allocation, acting as a force
for sustainability. However, the current situation suggests that many integrated reports
merely “connect” financial and sustainability information, and that KPIs for sustainability are
lacking. Although there is prior research on KPIs for sustainability reporting, it is difficult to
find KPIs that ensure firms’ sustainability, as they require a period of experimentation long
enough to be considered an accurate indication of sustainability. However, KPIs for
integrated reporting are critically necessary because the IIRC framework is
principles-based and does not provide specific KPIs. Thus, we use a research design that
differs from prior studies in its focus on sustainable firms that have survived for more than
100 years. Then, we analyze these firms to reveal the financial features that distinguish
sustainable firms and other firms, and we propose these features as KPIs for integrated
reporting.
In our analysis, we turn our attention to the management philosophy of sustainable
Japanese firms, which hints at the way that sustainability is achieved because it
emphasizes “providing satisfaction to stakeholders”. This management philosophy
matches the IIRC framework in its emphasis on considering the legitimate needs and
interests of key stakeholders. Value added provides information that can show how firms
“provide satisfaction to stakeholders” from a financial perspective. Although a theoretical
discussion of the usefulness of value added as an integrated reporting instrument is
presented in Haller and van Staden (2014), the authors offer no evidence to show whether
value added information is actually useful in judging a firm’s financial stability and
sustainability.
Thus, our study provides the first evidence that information about value added distribution
is actually useful to evaluate a firm’s sustainability. We focus on sustainable firms and
analyze these to reveal the financial features that distinguish sustainable firms and other

VOL. 13 NO. 3 2017 SOCIAL RESPONSIBILITY JOURNAL PAGE 637

 firms. We find that sustainable firms and other firms have two distinguishing features –
different value added distributions and different degrees of stability in profitability.
Our first result shows that value added distribution is useful for deciphering a firm’s
sustainability because the value added distributed to stakeholders other than shareholders
is significantly larger in sustainable firms. Thus, we propose value added distribution as a
sustainability KPI for integrated reporting.
However, value added distribution deals with shareholders as just one of many groups of
stakeholders. As a primary goal of integrated reporting is to explain to providers of financial
capital how an organization creates value (IIRC, 2013), firms should also satisfy
shareholders. Stability of profit generates financial returns to the providers of financial
capital and helps such providers, shareholders, to judge a firm’s financial stability and
sustainability. Our second result shows that information on the stability of profitability is also
useful for deciphering a firm’s sustainability because stability of profitability is significantly
higher in sustainable firms. Thus, we propose stability of profitability as a sustainability KPI
for integrated reporting.
Since, concern for profits is the result rather than the driver in the process of value creation
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(Freeman et al., 2004), we propose that value added information is a primary KPI, and
stability of profitability is a secondary KPI for integrated reporting. These two KPIs are
significant indicators of firms’ sustainability for stakeholders and shareholders, an idea
similar to that proposed in the Integrated Reporting Framework (IIRC, 2013)
Our study contributes to the literature on three key points. First, we empirically explore
sustainability KPIs and provide the first evidence that value added distribution and the
stability of profitability distinguish a firm’s financial stability and sustainability. As the IIRC
framework does not provide specific KPIs, we propose that our suggested KPIs should be
included in integrated reporting. Second, we provide a new perspective in the search for
sustainability KPIs. We use a research design that is different from prior studies. As a proxy
for firms’ sustainability, we focus on firms that have survived for more than 100 years. Then,
we analyze these firms to reveal the financial features that distinguish sustainable firms
from other firms. Third, as our empirical data consist of all listed firms worldwide, our results
are robust and general.
Our study still has some limitations. First, our empirical results only show the characteristics
of sustainable firms (i.e. firms that already have achieved sustainability) and not the
characteristics of firms that will become sustainable. Future researchers could collect the
data required to analyze value added distribution and the stability of profitability of firms in
existence 100 years ago to see if a larger distribution of value added to stakeholders other
than shareholders, and higher stability of profitability, yield sustainability. Second, although
our results shed light on the usefulness of value added information for stakeholders, and
not only for shareholders, we need to conduct further research on its practical implications
concerning the methodology for measuring value added distribution to different groups of
shareholders. Moreover, future studies must conduct a more comprehensive analysis to
determine the characteristics of our proposed KPIs. Third, we only show a few potential
KPIs and not a comprehensive list. Future research should widen the list of potential KPIs.

Notes
1. Worldwide, the number of firms more than 200 years old is 5,586. Among these, more than half are
Japanese (3,146 firms, 56.3 per cent), 837 (15.0 per cent) are German, 222 (4.0 per cent) are Dutch
and 196 (3.5 per cent) are French (Yonhap News Agency, 2008). In addition, according to the
Guinness Book of World Records, the world’s oldest firm is Kongo-gumi, a Japanese firm
established in 578 AD.

2. Among the integrated reporting firms worldwide, 60 per cent apply the GRI guidelines, according
to the authors’ survey of CorporateRegister.com at the time of September 2014.

PAGE 638 SOCIAL RESPONSIBILITY JOURNAL VOL. 13 NO. 3 2017

 3. We also tried to conduct empirical analysis on the firms existing in 1985, the first available year of
the Orbis database; however, this approach limits our sample to 1,094 firms for H1, whereas we
obtain 12,345 firms if we use the criterion mentioned in this paragraph.

4. The reduction in the sample used to test H1 is due mainly to the lack of data on costs of employees,
which is not a mandatory disclosure in most countries.

5. We could calculate the profitability only for nine years, even though we had data for ten years,
because some profitability ratios such as ROE and ROA require numbers on the balance sheet for
two consecutive years.

6. Note that the number of sustainable firms remaining in the final sample may be less than ten in each
country because a two-step selection was made. Namely, we first choose the countries with more
than nine sustainable firms and then select firms that have all available data.

7. Additionally, we rerun the empirical analysis on H1 and H2 to determine if there is any difference
between firms in economically advanced countries and those in less economically advanced
countries. The classification is made in accordance with the list proposed by the International
Monetary Fund. For firms in economically advanced countries, we find results that are either similar
to or stronger than those obtained in our main analysis; however, the level of significance of the
results is weaker or insignificant for firms in other countries. Therefore, in the future, a more
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comprehensive analysis is needed to determine the characteristics of our proposed KPIs.

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Responsibility Journal, Vol. 7 No. 3, pp. 381-392.

Corresponding author
Tomoki Oshika can be contacted at: oshikat@waseda.jp
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