Materiality matrix use and misuse: a new impression management technique ?
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This document summarizes a research paper that examines how companies use materiality matrices from an impression management perspective. The researchers analyzed 23 sustainability reports from European financial companies. They found that companies often lack disclosure around stakeholder identification and engagement methods. Most companies use colors and sizing to describe issues, but only half measure issue importance numerically. There is a tendency for reported issues to be highly aligned between business relevance and stakeholder relevance, raising potential selection bias concerns. Only 39% of companies explicitly approve their materiality matrix. The researchers believe some impression management techniques may be used but more research is needed.
Materiality matrix use and misuse: a new impression management technique ?
- 1. Materiality matrix use and misuse: a new impression management technique? Lorenzo Gelmini Francesco Bavagnoli* Maurizio Comoli *presenter Università del Piemonte Orientale Dipartimento di Studi per l’Economia e l’Impresa Department of Business and Economics Novara, Italia
- 2. Affiliation Università del Piemonte Orientale Department of Business and Economics, Novara, Italy, www.disei.uniupo.it
- 3. Introduction Through a preliminary empirical study, this paper examines materiality matrices from an impression management perspective to determine whether firms use such matrices as a new impression 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 may also use impression management techniques in their sustainability reports to project a more favorable image of their social and environmental performance. We investigate a sample of 23 firms to evaluate their use of materiality matrices and whether this leads to presenting their firms in a more favorable light.
- 4. Research question The main motivation of our paper lies in the novelty of both the topic and the consequent research question: is the materiality matrix a new tool of impression management? The more sustainability accounting and disclosure turn into a popular mantra amongst the companies, the more strategic becomes the effort to unveil the real underlying motivations and rationales.
- 5. Literature review: relevant conversations on the topic Stakeholder theory (Freeman, 2010) lays the foundation of the extent of stakeholder involvement, underlining the obligations companies have to their internal and external stakeholders including suppliers, employees, customers, communities and investors. Institutional theory (Scott, 2013) frames the discussion on the coercive, mimetic and normative pressures that help clarify how and what companies choose to report (Searcy and Buslovich, 2014). Amongst debates in the broad institutional theory context, institutional isomorphism (Di Maggio and Powell, 1983) explains that organizations come to resemble one another over time as a result of such pressures. With reference to the legitimacy theory, Cho et al. (2012) show that companies that are poor environmental performers often manipulate, at least in part, the use of the language in their environmental disclosures to apparently obfuscate their poor performance.
- 6. Literature review: impression management Merkl-Davies et al. (2011) suggest that managers engage in impression management with the expectation that stakeholders will respond in less undesirable ways to the corporate behaviors described in the companies narrative documents. These authors further argue that the impression management construction can be accomplished by emphasizing positive outcomes (enhancement) and/or by obfuscating negative performance (concealment), thereby presenting an inaccurate view of organizational outcomes (self-presentational dissimulation).
- 7. 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
- 8. The GRI-G4 Sustainability Reporting Guidelines The importance of reporting material issues is confirmed in both GRI’s Sustainability Reporting Guidelines (2013) and in its Implementation Manual (2013). According to the former, materiality is the threshold at which the sustainability subjects covered 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 of stakeholders. Key stakeholders - such as investors, market regulators, civil society, suppliers, employees or customers - have a vital role to play in shaping an organization’s materiality assessment. Taking stakeholders’ views into account is essential in order to develop a robust understanding of a company’s economic, environmental and social impacts, and of how these relate to business value and resilience.
- 9. The GRI-G4 Sustainability Reporting Guidelines (2) The Implementation Manual includes a figure called “visual representation of prioritization of aspects” which we refer to in the paper as “the materiality matrix” and comprises an X-axis labeled “Significance of economic, environmental and social impacts” and a Y-axis labeled “Influence on stakeholder assessments and decisions”.
- 10. The sample Our sample comprises all companies included in the GRI dataset “Sustainability Disclosure Database” (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 “financial services”); e) released their report in 2015 (for reasons of incontrovertible language interpretations, we only 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.
- 11. The methodology The methodology of our paper is mainly descriptive, since we have looked in the notes of the reports 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.
- 12. 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 the materiality matrix? 2) Stakeholder engagement: What engagement methods are adopted? To what extent do the companies 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 the current or the future state? If so, is there an explicit time dimension?
- 13. 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?
- 14. (1) Stakeholder identification Of the surveyed companies 22 (or 95.65% of the sample) do not state in detail the specific stakeholders considered when developing the materiality matrix and identify only a generic list of 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 the process of the development of the matrix. Tentative hypothesis on impression management mechanism: not specifically identifying stakeholders in order to avoid criticism on how the borders have been drawn
- 15. Example of detailed stakeholder identification; stakeholder map (Intesa San Paolo, Integrated Report 2014)
- 16. (2) Stakeholder engagement tools and methods The 23 companies overall declared 86 stakeholder engagement methods and tools with an average of 3.74. The median, maximum, minimum and standard deviations are 4, 7, 1 and 1.92 respectively. The most recurring frequency is 3 in 5 companies, while 2 companies do not disclose any stakeholder engagement method. Companies which use external tools on average use more tools than companies which rely exclusively on internal tools. 11 companies use all kinds of engagement tools (internal, external and mixed).
- 17. (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
- 18. (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
- 20. (4) Issue description 14 companies use a materiality matrix (almost 61% of the sample), whereas out of the remaining nine companies, 7 present data with a double-entry table, 1 uses narratives and 1 limits disclosure to a list of material issues. Out of the 14 companies adopting the materiality matrix, 10 use the visual saliency of colors while 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 differentiate the 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 of labels
- 21. ING 2014
- 23. (5) Dimension definition: X and Y axis Usually X-axis is Significance / impact on business and Y-axis is significance / impact on stakeholders (3 exceptions) In one case the time dimension is explicit: increasing impact… Tentative hypothesis on impression management mechanism: Y-axis (relevance for stakeholders) shorter than X-axis (relevance for business)
- 24. (5) Dimension definition: X and Y axis Time
- 25. Alpha Bank 2014
- 26. (6) Issue scoring Only 7 companies disclosing a materiality matrix (50%) measure the relative importance of issues, 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), while the other two adopt different scales (for instance, from 3 to 7), which in one case is different for the two axes and originates from an internal scoring not available to readers.
- 27. (6) Issue scoring: AMF 2014
- 28. (7) Use of the matrix Use 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%
- 29. (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 environmental themes, 7 to social items, 5-6 are financials and 3 are mixed (for instance, transparency).
- 30. (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
- 31. (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%
- 32. (9) Materiality Convergence: Royal Bank of Scotland
- 33. (9) Materiality convergence: Swedish Export Credit Corporation
- 34. (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 well as their stakeholders. The percentage is highly linked and of course related to the strong level of materiality convergence previously mentioned. Tentative hypothesis on impression management mechanism: biased selection of issues relevant for the business (and for the stakeholders)
- 35. (11) Explicit approval Only 9 companies (39.13%) of the total 23 companies explicitly mention that the materiality matrix was approved by an internal body or company department. Indeed, the formal steps for the official release of these documents should be more clearly disclosed so that readers may become aware of the company’s level of commitment to sustainability and materiality.
- 36. 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 generic definition 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 the users of the integrated reports.
- 37. Limitations and future research The results of our paper are still preliminary, due to a number of important limitations: limited scope of analysis (just the financial sector), the small number of reports examined (in terms of both the sample and the time-series) and the need to improve the methodology and better define impression management mechanisms. Future research could expand our preliminary results using both time-series matrices and different industries. Another idea could be to apply the legitimacy approach, for instance, verifying if companies that perform poorly with regard to sustainability issues present matrices to generate, ceteris paribus, more favorable stakeholder perceptions.