According to legitimacy theory, organisations seek to meet societal expectations and display conformity to a societal value system through reporting (Dowling & Pfeffer 1975). Organisations, and by implication their reports, may accordingly seek to achieve the accounting objectives of decision usefulness and accountability to build legitimacy from the viewpoint of specific stakeholders.

Considering the views of Weber (1968) on legitimacy and substantive rationality, legitimacy can be based on approval from a greater number of stakeholders (popular legitimacy) or on the convincing power of specific experts (expert legitimacy). This distinction resembles the differences between symbolic and substantive legitimacy and between outside-in (external societal pressure) and inside-out perspectives (management’s response to external developments) (Burritt & Schaltegger 2010).

As managers can influence stakeholders’ perceptions through communications, symbolic disclosure may be used to communicate changes in behaviour in an attempt to repair poor legitimacy (Suchman 1995). As such, depending on whether legitimisation techniques reflect a real change in corporate operations, the legitimation strategy of a company can be described as substantive or symbolic (Deegan & Unerman 2011). While few studies on non-financial reporting have applied this distinction (Chelli, Durocher & Fortin 2018), several authors referred to these legitimisation strategies when assessing IR (Ahmed Haji & Anifowose 2017; Setia et al. 2015).

Some scholars have accordingly classified companies based on the nature of their reporting, as quality reporters (linked to substantive legitimacy) or window dressers (linked to symbolic legitimacy). A so-called quality reporter publishes more comprehensive and consistent information (Borgstedt et al. 2019), while the disclosure of misleading information is related to ‘greenwashing’ (Mahoney et al. 2013). Some legitimacy theorists suspect that companies with lower sustainability performance or a bad corporate reputation tend to disclose more information in an attempt to legitimise their actions (Buitendag, Fortuin & De Laan 2017; De Villiers & Van Staden 2011). Yet, an increase in the volume of disclosed information does not per se equate to higher company performance (Hassan & Guo 2017).

Selected South African chief executive and chief financial officers confirmed that legitimacy is an important consideration when publishing integrated reports in a market where IR is a listing requirement (Steyn 2014). Research on the mining and finance industries employed legitimacy perspectives to illustrate how mining companies and banks use IR to safeguard their licence to operate (Maroun 2018; Van Zijl, Wöstmann & Maroun 2017). Interviews with South African investors (Atkins & Maroun 2015) confirmed that ‘good’ corporate reports offer better quality information and advance credibility, thereby helping organisations to meet the expectations of priority stakeholder groups.

Based on an examination of award-winning South African integrated reporters, Ahmed Haji and Hossain (2016) concluded that their disclosures are often generic and lack substance. Setia et al. (2015) likewise referred to symbolic disclosures, as several listed companies appear to merely follow the IIRCs (2013) guidance to the letter. Other authors have also criticised South African companies’ integrated reports for poor materiality (Marx & Mohammadali-Haji 2014), complex language usage that impaired the readability of reports and by implication the value that stakeholders can derive from them (Du Toit, Van Zyl & Schütte 2017). Legitimacy initiatives are hence often linked to specific stakeholder audiences.

Based on the stakeholder theory (Freeman 1984), it can be argued that corporate disclosures should account for the information needs of different stakeholder groups. Reflections on whether corporate disclosures are driven by economic motives or accountability points to two branches of the stakeholder theory, namely managerial and normative approaches. While the normative approach considers the intrinsic right of stakeholders to be treated fairly (Stoney & Winstanley 2001), the managerial view more pragmatically manages stakeholder audiences in terms of their relative power, legitimacy and urgency in posing demands (Mitchell, Agle & Wood 1997). The managerial perspective hence acknowledges that different stakeholders, and not only shareholders, have economic interests. As such, the managerial perspective is likely to result in more substantive disclosures (Brennan, Guillamon-Saorin & Pierce 2009).

Historically, the sustainability reporting movement has focused on the intrinsic rights of and engagement with stakeholders (Perego & Kolk 2012). It advanced a new approach to the objective of accountability, and ‘stakeholder inclusiveness’ was established as a core reporting principle of the GRI guidelines (Grushina 2017). The multistakeholder approach, including decisions on relevant content and assurance, was deemed critical in enhancing reporting legitimacy (Perego & Kolk 2012). However, an inclusive process can still produce different disclosure formats targeting select priority audiences.

While the managerial branch of stakeholder theory tends to be more positivist than normative in approach, non-financial reporting standards increasingly describe what information a firm ‘should’ disclose to select stakeholders including investors. The Sustainability Accounting Standards Board (SASB 2018) offered reporting guidance on an industry basis. Based on investor pressure, sector peers may voluntarily adopt reporting norms without clarity on whether these norms actually improve organisational efficiency. As such, institutional pressure towards isomorphism is strengthened (DiMaggio & Powell 1983).

Scholars have been raising concerns for decades that similar reporting formats might be used to conform to external expectations to reinforce legitimacy (DiMaggio & Powell 1983; Perego & Kolk 2012) despite being decoupled from actual corporate practices (Meyer & Rowan 1977). The potential disconnect between the actual corporate practices and the publicly pronounced practices is referred to as decoupling by institutional theorists (Haack & Schoeneborn 2015).

Institutional theory focuses on the institutional environment that moves organisations to apply professional guidelines (Meyer & Rowan 1977). These include industry norms and standard guidance such as IFRS, GRI and the IIRCs <IR> Framework. Cho et al. (2015) hence suggested that the stakeholder and institutional theories and the dimensions of substantive versus symbolic legitimacy should be incorporated when deliberating the merit of corporate reporting.

There is a key difference between the IIRC and GRI in terms of their recommended target audiences. While the latter targets all stakeholders, the former prioritises financial capital providers (IIRC 2013). Companies are hence challenged in finding the ‘right balance’ between simplicity and complexity when disclosing information to diverse stakeholder groups. They need to consider which target audiences to prioritise for different forms of reporting.

Given that it is the market where IR is most established, South Africa has attracted considerable interest from researchers in analysing the determinants and consequences of IR. There is an important difference in guidance provided by the South African Integrated Reporting Committee (IRC) and its international counterpart on the suggested target audience. The South African IR framework reflected a multi-stakeholder approach (Eccles & Krzus 2014), while the IIRC (2013) declared that the providers of financial capital are the primary target audience.

Given critique that a key weakness of sustainability reporting is the attempt to ‘impress’ multiple stakeholders, the narrow target audience of the IIRC was arguably intended to improve reporting effectiveness (Clayton, Rogerson & Rampedi 2015; Eccles & Krzus 2014; IIRC 2018; IRC 2011). Based on the guidance offered in its <IR> Framework, the IIRC (2013) aimed to improve the decision usefulness of information available to investors and to enhance accountability for a broad base of capitals. A more holistic understanding of value creation, including enhanced accountability for interconnected, multiple capitals, was also promoted (Adams et al. 2016).

In the past, the IIRC (2011) described several expected benefits of IR that illustrate a combination of the interests of diverse stakeholders (Burke & Clark 2016). The IIRC’s 2011 discussion document highlighted, amongst others, the interests of companies, their managers and employees in addition to investors. The prioritisation of different stakeholder groups is arguably related to divergent understandings of legitimacy in making the case for a specific reporting format.

Future deliberations on IR offer opportunities for transcending the shareholder-stakeholder divide, including the exploration of ‘enlightened shareholder value’ (Ho 2010). Substantive legitimacy is key in targeting a specific user group and to convincingly display the business case for managing resources with an integrated and long-term perspective. Such legitimacy can be deemed material as it transcends juxtaposing ‘what is good for the organisation’ (pragmatic-strategic legitimacy) with ‘what is good for society’ (moral-institutional legitimacy) (Dumay, Frost & Beck 2015).

Alongside accountability to different stakeholders stands the accounting objective of decision usefulness of the reported information. Decision usefulness is not well served by the approach of companies reporting separately on their financial performance in financial reports and on social and environmental performance in sustainability reports. This approach leaves investors with fragmented information published in several lengthy reports (De Villiers et al. 2017), a practice that does not address the interconnection between strategy, risks and the six capital resources as proposed by the IIRC (2013).

However, some scholars question whether IR truly represents a step forward compared with sustainability and financial reporting. Given the IIRC’s (2013) focus on financial capital providers, Flower (2015, 2020) declared IR as a step backward. Yet if IR was targeting several stakeholders, its publication might become an ineffective symbolic practice (Rensburg & Botha 2014). Other scholars referred to the potential of IR to shift managerial thinking to better align the objective of profit maximisation with the well-being of society. Reference was also made to a more balanced integration of stakeholder concerns by reporting in an integrated manner (Adams 2015; Stacchezzini & Lai 2020).

Some scholars expressed the concern that the IIRC’s framework is used as a disclosure checklist, with limited stakeholder engagement (McNally, Cerbone & Maroun 2017). The adoption of the IIRC’s (2013) <IR> Framework thus seems to represent a double-edged sword. While the application thereof could enhance the comparability and consistency of IR across industries, the nature of the reports could become monotone (Ahmed Haji & Anifowose 2017).

Efficiency considerations should also be considered when reflecting on corporate information disclosure to stakeholders (Deegan & Unerman 2011; eds. Gray et al. 2010). Scholars should account for the theory of efficient capital markets and the value of IR to financial capital providers. Fama (1970) described an efficient market as one in which share prices always fully reflect all available information. Reference was made to three information subsets, namely historical data, publicly available information and private information, to which some well-connected investors and corporate insiders may have access (Fama 1970).

Investors rely not only on annual reports, earning announcements and other disclosures by companies but increasingly on diverse sources of information. These include intermediaries such as data providers and raters in the ESG ‘financial ecosystem’ (OECD 2020). As they are subject to more public scrutiny, larger companies tend to be associated with more diverse sources of information and analyst following, all of which benefit informed decision-making (Deegan & Unerman 2011).

The shortcomings of the efficient market hypothesis and market failure have been illustrated by events such as the global financial crisis of the late 2000s (Yen & Lee 2008). Investors often exhibit subjectivity and bounded rationality, which is particularly relevant amid information overload despite the information processing ability that digital technologies offer. Interest in behavioural finance has therefore grown, given heightened awareness of seemingly irrational investor behaviour (Koller, Goedhart & Wessels 2010).

Building on insights from human psychology, the prospect theory (Kahneman & Tversky 1979) highlights how investors employ relative reference points and have a greater aversion to losses than their drive for gains. This theory can be used to explain why weak sustainability performance tends to have a greater impact on investor assessment of reporting on corporate financial performance than strong sustainability performance (Van der Laan, Van Ees & Van Witteloostuijn 2008).

Positive accounting theory researchers tend to follow an opportunistic or efficient perspective (Deegan & Unerman 2011). Managers opportunistically follow reporting approaches that bring them greater financial rewards. The assumption is that managers display this behaviour as self-interested individuals who seek to maximise their wealth. In contrast, the efficiency perspective indicates how accounting methods can be used to offer stakeholders, including financial capital providers, a true representation of the company’s performance (Deegan & Unerman 2011). Moreover, the agency theory highlights how managerial contracts and quality board supervision serve to reduce information asymmetry and agency costs (Vitolla, Raimo & Rubino 2020).

Legitimacy can be described as a consequence of IR, while financial and non-financial (ESG) performance can be viewed as determinants of IR (De Villiers et al. 2017). The widely studied business case for IR includes enhanced understanding of the user audience and more decision-useful information based on a more complete representation of operations (Burke & Clarke 2016). This includes a true representation of performance, weak and strong, and a material reflection on the dependence and impact on strategic resources or capitals.

Several authors have examined the association between IR quality and firm value, cost of capital and profitability, respectively, and reported mixed results (Barth et al. 2017; Horn, De Klerk & De Villiers 2018; Lee & Yeo 2016; Marcia, Maroun & Callaghan 2015; Mans-Kemp & Van der Lugt 2020; Zhou, Simnett & Green 2017). The general expectation seems to be that IR should increase transparency and lower information asymmetries, which will lead to beneficial capital market outcomes. However, the seeming lack of appreciation from equity investors can be indicative of confusion about the IR target audience and limitations in the degree to which reporting content is effectively integrated (Barth et al. 2020).

As they are the primary target audience of IR, investors are expected to exhibit special interest in whether IR is associated with better financial performance. It is hence expected that IR will enhance investors’ understanding of the interrelations between financial and non-financial performance (Maniora 2017). As such, De Villiers et al. (2017) suggested that the link between IR adoption and corporate value should be assessed while controlling for ESG considerations. If the IR process enables a company to prioritise and focus on material matters, reporting could form part of a virtuous circle of mutually supportive performance aspects as proposed by Nelling and Webb (2009).

Khan, Serafeim and Yoon (2016) reported that companies that focus on material ESG issues significantly outperform the share market and notably outperform peer companies that concentrate their sustainability efforts on non-material issues. Although Churet and Eccles (2014) observed a positive relationship between effective management of ESG issues and IR, they did not find that good IR practices were related to financial performance. Melloni, Caglio and Perego (2017) found a link between weak financial and social performance and IR report length. They argued that companies with poor financial performance choose a communication strategy to enhance legitimacy. Evidently corporate assurance providers should caution against becoming instruments of their ‘paymasters’ by decoupling assurance practices from organisational processes (O’Dwyer & Owen 2007).

As shown in Figure 1, the proposed aspirational efficiency view attempts to connect accountability and efficiency perspectives. Complementary components of both can be identified to serve as building blocks for a more integrated perspective. The related building blocks include substantive legitimacy that displays alignment between internal and external reporting. The managerial stakeholder approach emphasises that the interests of different stakeholders should be duly acknowledged. Furthermore, professional and industry norms and standards linked to the institutional theory should be accounted for in ensuring consistency between different disclosures and reporting formats. Contracting mechanisms proposed by the agency theory should also be considered, mindful of the accountability of corporate leaders towards shareholders and a broader range of stakeholders. The efficiency perspective pursued in positive accounting theory, and the related emphasis on investor and lender interest should be balanced by recognising the subjectivity and bounded rationality of individuals, as described by behavioural finance theorists.

Firstly, the proposed cross-cutting aspirational efficiency theoretical lens can be applied to IR from an accountability angle. In this case, focus is placed on the substantive (vs. mere symbolic) provision of material information in internal and external reporting. The accountability perspective emphasises that scholars should account for how corporate entities prioritise and acknowledge the different interests of their stakeholders. This view includes aligning new understandings of value creation and communicating to economically motivated stakeholders with a more holistic economic rationale.

Given the relevance of diverse capitals, IR seeks to improve the ability of corporate reporting to facilitate accountability and stewardship. The realities of market failure underline the need for improving analysis of ESG factors that are generally treated as externalities in conventional financial accounting. Improved managerial decision-making assures capital providers of managerial accountability for responsible resource use. Such assurance should be supported by properly functioning and strategic management accounting systems.

Furthermore, industry considerations and benchmarking should be considered when defining and disclosing the material content. Related to the agency theory, contracting mechanisms that link financial and sustainability performance need to be identified. Managerial and shareowner interests will arguably be better aligned by focusing on shared value creation. When applying the proposed theoretical view, users should recognise that a range of primary stakeholders can benefit from mutual value creation endeavours over the long run.

Critical stakeholders question the gap between idiomatic corporate ‘talk’ (reporting) and ‘walk’ (practices). With reference to organisational façades and enhanced efficiency, different functional corporate units can join forces when conducting integrated planning, executing plans and reporting on outcomes. Cho et al. (2015) thus argued that ‘organisational talk’ should be aspirational to affect change. Their view is reflected by the aspirational component of the proposed theoretical lens.

Secondly, from an efficiency angle, the importance of disclosing material information to enhance market efficiency should be acknowledged. Report preparers should reflect on how they can expand the provision of multi-capital performance information with a long-term sustainable value creation perspective. Rather than offering fragmented financial and non-financial information, the interrelations and the connectivity between different capital sources should be addressed.

Given the IIRC’s (2013) focus on financial capital providers, companies can strategically attempt to advance communication on relevant information to economically motivated stakeholders in a specific reporting format. Yet, corporate communications should not exclude other stakeholders. Reporters should seek to provide tailored information packages to different target audiences, implying different albeit aligned reporting formats. Given the bounded rationality and subjectivity of investors, the proposed aspirational efficiency lens would consider the use of mechanisms such as accounting principles, rankings and ratings, standards and taxonomies in collecting, analysing and presenting relevant information in formats that progressively inform investors more efficiently and effectively.

If it is a given that markets are not fully efficient, investors can achieve a relative gain by thoroughly analysing multi-capital performance and ESG information sets. While the legitimacy theory postulates that more information does not necessarily equal higher performance, the quality and relevance of an information set can be determined by assessing the perspectives of priority stakeholder groups. These include scientific and industry views on what information is most relevant and material to value creation with a longer term, dynamic perspective.

In contrast to classical economics that typically views the reporting entity as a unitary actor, driven by rational self-interest and wealth maximisation, companies need to re-examine the roles of internal stakeholders as well. The proposed aspirational efficiency theoretical lens recognises that the IR process can involve more inclusive, multi-departmental teams and advance integrated thinking. Reporters are also challenged to display enlightened self-interest. The emphasis of the IIRC (2013) <IR> Framework on multi-capital resources (own, shared and public), enhances awareness of the interrelations between the wealth of primary corporate actors and the wealth of other stakeholders.

The authors argue that a stakeholder-inclusive process can run parallel with producing a strategic report that speaks to a specific target audience. While IR focuses on one primary stakeholder group as a user audience, other disclosure formats such as sustainability reporting can target the information needs of other stakeholders. A reporting entity should ensure consistency between different disclosure formats by applying relevant industry standards. By offering a concise overview of connected performance indicators, IR might bridge the divide between ‘corporate walk and talk’, including ‘talk’ through different disclosure channels.