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CorporateReportingofNon-FinancialLeading
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Corporate Reporting of Non-Financial Leading Indicators of
Economic Performance and Sustainability
Jeffrey Cohen
Department of Accounting
Boston College
Lori Holder-Webb
Department of Accounting and Finance
Western New England University
Leda Nath
Department of Sociology
University of Wisconsin – Whitewater
David Wood
Center for Corporate Citizenship
Boston College
August 1, 2011
Electronic copy available at: http://ssrn.com/abstract=1420977
2
CORPORATE REPORTING OF NON-FINANCIAL LEADING INDICATORS OF
ECONOMIC PERFORMANCE AND SUSTAINABILITY
Abstract
The call for disclosure of non-financial information has grown in response to the awareness that financial statements omit salient information about the company (Adams et al. 2011).
This study follows earlier studies of non-financial disclosures of governance and corporate social
responsibility information (Holder-Webb et al. 2008, 2009) and examines the public voluntary
disclosure of a set of leading indicators of economic performance and sustainability of earnings
provided during 2004 by a sample of 50 publicly traded firms across five industries. The results
indicate that, among the sample firms, there remains a lack of rigorous and expansive disclosure
of this type of information and that considerable variability exists in disclosure practice based on
both industry and size. For example, companies disclose a wide variety of non-financial information both through mandatory filings such as 10-Ks and through alternative sources such as investor promotion materials and company websites, with the most frequent types of disclosures being
concerned with information pertaining to market share and innovation. We conclude by discussing the role of this study within recent developments in integrative reporting (Adams et al. 2011)
and suggest that these types of disclosures would benefit from the availability of assurance services.
Key Words: Corporate Disclosure, Non-financial Information, Leading Indicators, Competitiveness Information, Content Analysis, Integrative reporting
Electronic copy available at: http://ssrn.com/abstract=1420977
3
CORPORATE REPORTING OF NON-FINANCIAL LEADING INDICATORS OF
ECONOMIC PERFORMANCE AND SUSTAINABILITY
Introduction
The value-relevance of non-financial information has increased markedly over the last
several years. Most top executives at large multinational firms believe that non-financial performance measures are more valuable than traditional financial measures in assessing long-term
value (PricewaterhouseCoopers, 2002). This shift in information preferences has stimulated a
substantial increase in the volume of non-financial information conveyed by firms to their stakeholders and market participants. Thus, current mandated financial reporting does not give a complete picture of a firm and is too short-term in orientation (Holder-Webb et al. 2008, 2009; Simnett et al. 2009a)
The focus of traditional financial reporting is one of measuring historical performance: it
decouples the reported historical value of assets from the measure of their probable future cash
flows, and the financing choices made by the management from the measurement of the opportunity costs of those choices. This approach imposes additional information search costs upon
anyone who wishes to derive a value for the firm.1 In a world where the market value of the firm
is decoupled from the value of its underlying assets, non-financial information offers a tool for
measuring the firm value arising from intangibles and future cash flows that is missing from traditional financial reports (Lev 2001).2
Given the limitations of historical financial information, an important question arises
about what other information is of benefit to potential stakeholders. Holder-Webb et al. (2008,
2009) studied the disclosure of corporate governance and corporate social responsibility but Cohen et al. (2011) found that retail investors were most concerned with non-financial disclosures
that more directly affected future earnings such as the disclosure of leading economic indicators.
In a recent review of developments on the integration of financial and non-financial information,
Adams et al. (2011 1) argue that, “Integrated reporting is a means to providing a more coherent,
balanced and complete picture of company performance, centered around strategic objectives
1
See Cole and Jones 2005 for a more thorough survey of the literature.
2
For example, Banker et al. (2000) and Dikolli et al. (2007) found that customer satisfaction measures are
good indicators of future performance. The necessity for developing a way of evaluating the intangible value is driven as well by the increasing presence of multinational corporations (Chua 2006; Clark et al. 2005).
4
and business models, and sensitive to the multiple drivers of value for today’s businesses.”
Thus, it is important to see what drivers are being disclosed and in what format. Accordingly,
this study extends the investigation of disclosures of non-financial indicators conducted by Holder-Webb et al. (2008, 2009) and considers integrated reporting by focusing on the disclosure of
leading indicators pertaining to the quality of management and the sustainability of earnings.
Items are drawn from those identified in the literature (Dikolli et al. 2007; Chua 2006; Banker et
al. 2000) as relevant to assessing a firm’s value prospects. We describe the state of reporting of
these leading indicators by a sample of U.S. firms listed on major U.S. exchanges. 3 We present
descriptive statistics on company disclosures of six leading indicators (market share, quality
rankings, customer satisfaction, employee satisfaction, turnover and innovation) through seven
types of disclosure venues (mandatory filings, website, governance document, product fact sheet,
CSR report or brochure, press release and “other” documents [disclosure venues not included in
the six primary types]) using 10 firms in each of five industries (manufacturers of surgical
equipment, pharmaceuticals, software developers and publishers, oil and gas firms, and groceries) with two firms each from within size quintiles for each industry. Research questions are
based upon the extent and intensity of reporting, the means through which disclosures are made,
and the effects of size and industry on reporting. Finally, we discuss how our results fit in to an
integrated reporting framework, and address the question of whether the disclosure of this information should be encouraged by regulatory bodies and subjected to assurance services.
The study involves a content analysis on the public disclosure packages of a sample of 50
firms domiciled in the U.S. and listed on major U.S. exchanges during 2004. Disclosure packages consisted of all mandatory filings, voluntary reports, and corporate and investor-relations
websites captured during 2004. Results suggest that companies disclose a wide variety of nonfinancial information both in mandatory filings such as 10-Ks and in alternative sources such as
investor promotion materials and company websites with the most frequent types of disclosures
being concerned with information pertaining to market share and innovation. Sample firms distributed information about leading indicators primarily through formal reports, both through
mandatory filings and voluntary formal reports. We find size and industry differences in disclosures. Larger firms tend to disclose more information about market share and innovation. Fur-
3
This study is based on the same sample used by Holder-Webb et al. (2008, 2009).
5
ther, disclosures are consistent with the strategic focus and competitive landscapes within which
different industries operate, as well as the presence of industry-specific success factors such as
the heavy dependence on human resources or individual-specific intellectual capital. The industry specific trends confirm the initiatives in integrated reporting that propose industry specific
guidance for non-financial disclosures (Adams et al. 2011).
In the next section, we review the relevant research and present the research questions.
Then we describe the research method and the results. The final section is devoted to a discussion of the key findings and the implications of the study for reporting activists, auditors, regulators and academics who are reconsidering the nature of corporate reporting of non-financial information in an integrated reporting framework.
Literature Review and Research Questions
The historical focus of financial reporting provides an incomplete picture of a firm’s current status to auditors, investors, and creditors and has limited relevance for evaluating future
prospects (Lev and Zarowin 1999; Lev 2001; Graham et al. 2005). Cohen et al. (2000) demonstrate that the efficiency and effectiveness of audits is improved through auditor use of nonfinancial information. However, the backward-looking financials are subjected to assurance services, are standardized among firms by GAAP, and possesses the currency of long use by external parties; thus stakeholders may over-rely on financial information that does not fully reflect
the sources of value of a business.
These issues with the historical and financial approach to disclosure are well known to
the regulatory and investing community. Disclosure of non-financial information is essential to
reduce the information asymmetry that exists between management and important stakeholders
(Narayanan et al. 2000). Providing non-financial information allows investors to better assess
key areas of performance and supports a broader view of corporate performance that also encompasses society at large (see Holder-Webb et al. 2009). These insights are not new – the role
of intangibles such as quality of management in corporate success has a long history in the literature (Trueman 1986) – but they do point to a crucial question raised by critics of the current reporting system. What is the most effective way of informing stakeholders of those elements of
business performance that do not show up on the financial statements?
A number of recent initiatives designed to encourage the integration of financial and nonfinancial metrics in an integrated reporting framework have arisen over the past decade. For ex-
6
ample, the Global Reporting Initiative (GRI) (2011) provides guidelines for presenting a sustainability report that emphasizes evaluating a company by its ability to promote sustainable growth
that is also cognizant of environmental, social, and governance metrics. Adams et al. (2011 2)
argue that three major differences between integrated reporting and traditional reporting are “incorporating a variety of financial and non-financial metrics and their interlinkages; capturing a
longer-term perspective; and providing a better reflection of company strategy.” In contrast, an
overemphasis on financial reporting metrics leads to a short-term orientation and short-run operating decisions that boost short-term profit at the expense of long term performance.
This begs the question of what metrics allow external users to evaluate a company’s viability and the company’s value proposition effectively. We develop a subset of non-financial performance information that capture many of the main value propositions for a firm: market share
contributes information about key success factors, while other leading indicators such as employee or customer satisfaction permits the assessment of the firm in its primary operating context. This information can be combined with an evaluation of the competitive landscape and strategic positioning in order to generate more reliable forecasts of future performance and value.
This information has been shown to be in demand by retail investors (Cohen et al., 2011), who
believe that greater disclosure of this information will help them make more effective stock investment decisions. Because disclosures of this information are generally voluntary, we also explore the extent to which the management emphasizes it, what venues management chooses for
disclosure, and the presence of size and/or industry effects in disclosure patterns. By evaluating
the quality of these disclosures, we determine the existing level of variability in reporting practices under the current unregulated environment, and consider whether it might be appropriate to
bring a higher level of standardization to the presentation of this information.
Non-Financial Performance Information and Leading Indicators
It is important for stakeholders to review information that compares a company to its
competitors in order to understand a company’s current and future standing within an industry.
Riley et al. (2003) found that non-financial metrics had incremental explanatory power over traditional accounting measures on pricing within the airline industry, while accounting measures
contained no incremental explanatory value over the non-financial metrics. Ittner and Larker
(1998) found that customer satisfaction measures are indicators of accounting metrics, suggesting that investors can make better decisions if provided with customer-related measures. Moreo-
7
ver, Dikolli et al. (2007) and Banker et al. (2000) both found that customer attitudes are good
predictors of future financial performance.
Non-financial information affects management behavior.4 Ittner et al. (1997) found that
measures such as market share data are frequently used to evaluate managerial performance. Srinivasan et al. (2006) found that airline industry metrics such as on-time arrival had significant
incremental power in explaining executive compensation. The relevance of this type of information to the employee evaluation process suggests that managers can respond by increasing the
disclosure of non-financial performance metrics.
Non-financial information affects investment decisions. Coram et al. (2009) use information derived from a balanced scorecard and found that the voluntary disclosure of non-financial
information such as customer satisfaction ratings affected estimates of the trend of future stock
prices. This effect was especially strong when the information had received some form of assurance report.
A complicating factor when using or studying disclosure of non-financial information is
that firms have many disclosure venues from which to choose for distributing this information.
While mandatory filings have extensive mandatory content, there is also considerable discretionary latitude (for example, in determining the contents of the Management’s Discussion and
Analysis or the sections of the 10K dedicated to descriptions of the company’s business and risk
factors). The mandatory filing can be viewed as the minimum acceptable level of disclosure;
most companies choose to disclose through many other sources, including the issuance of specialized sustainability reports and press releases. Publicly traded U.S. firms typically also offer a
corporate website, often with a special Investor Relations section. While the target audience of
the mandatory filing is defined by the SEC as the investor, the target audiences of other information releases are less defined. Product fact sheets are generally targeted towards customers or
consumers, but press releases and corporate websites are sent out to the public at large.
Disclosure formats such as websites offer a particular challenge in that they are demanddriven and do not require distribution to particular parties; nor is it easy to determine who accesses the website and why. It is possible that evaluating the information contained within this
4
It is more difficult to manipulate non-financial performance data in the short- or near-term than it would
be to manipulate financial statement data (Brazel, et al. 2008). Consequently, increased disclosure of non-financial
performance data can lead to firms paying more attention to long-term performance.
8
type of disclosure format will yield an understanding of who the company believes the target audience is, or what information the company believes to be most necessary to convey to the stakeholding public.
Further, there has been a movement to develop frameworks that are tailored to a specific
industry or sector (Adams et al. 2011). For example, the GRI (2011) has issued supplements for
a number of industries (e.g., financial services, utilities) and are developing guidelines for other
industries (e.g., construction, telecommunication). This suggests that it is important to explore if
disclosure of non-financial information differs by industry and to examine why these disclosures
differ.
Collectively, the results of prior studies suggest that non-financial performance data pertaining to the quality of management and sustainability of earnings has value-relevance to investors, and that companies may disclose this information as a signaling device to the investing public. The incremental explanatory value that certain non-financial performance measures have for
accounting measures and estimates of firm value suggests that they are leading indicators of future economic performance. However, little is known about the actual practice of disclosing this
type of information. Accordingly, we investigate the following four research questions:
Research Question 1: To what extent do the sample firms disclose information about
leading indicators?
Research Question 2: Where do the sample firms choose to disclose leading indicators
information?
Research Question 3: How does the size of the sample firms affect disclosure of information about leading indicators?
Research Question 4: How does the industry of the sample firms affect disclosure of information about leading indicators?
Research Design
In the interests of comparability with prior research, we use the same sample and several
of the same analysis techniques that Holder-Webb et al. (2008, 2009) employed when examining
the disclosure of governance and Corporate Social Responsibility (CSR) information respective-
9
ly. 5 While the governance and CSR disclosures are motivated from a very different perspective
than that of leading economic indicators (and thus likely present different supply and demand),
the analysis technique used in prior studies (Holder-Webb et al. 2008, 2009) yields an optimal
method for the analysis not just of narrative disclosures, but also of the package of disclosures
provided by a single firm during a set period. Holder-Webb, et al. (2008, 2009) use a stratified
random sampling technique that permits the construction of a smaller sample than would be required under traditional random sampling while maintaining the robustness of inferential statistical techniques. They identify two strata of interest: industry and size, and find that five industry macro-groups comprise the majority of US firms that were actively traded during the sample
period of 2004. These industries are simple manufacturing, development-intensive manufacturing, intellectual product development, extractive activities, and sales; the industry groups featured in the sample are manufacturers of surgical equipment, pharmaceuticals, software developers and publishers, oil and gas firms, and groceries. Industries are stratified into size quintiles
based on total assets. A list of the firms identified through this process is provided in Table 1.
The Data
We searched the public data sources (including Edgar, Lexis/Nexis Academic Universe,
and company and investor-relations websites) to obtain the disclosures originating within the
company for each firm during 2004. We consider that independent press coverage (such as that
provided by the Wall Street Journal, or by ratings agencies) yields interesting and useful information for the investment decision, but cannot be considered a disclosure made by the firm. Following Holder-Webb et al. (2008, 2009) we consider each stand-alone or discrete piece of information (each report, press release, portion of the company website) to represent a unique disclosure effort and refer to them hereafter as “information bursts” for convenience. This process
yielded a total of 863 information bursts for the entire sample.
5
Along with Holder-Webb et al. (2008, 2009), this study is part of a grant project that was funded by the
Financial Industry Regulatory Authority Investor Education Foundation that was designed to examine the availability and use of non-financial information. The information included governance, CSR and leading economic indicators.
10
The Analysis Technique
Content analysis was performed on each burst of information by the research team, with
information bursts assigned randomly to members of the team (no member scored the entire disclosure package for a given firm). A list of leading indicators was developed based on a review
of the literature (Merkl-Davies and Brennan 2007; Coram et al. 2009; Lau and Shohilin 2005;
HassabElnaby et al. 2005; Said et al. 2003) as well as focus-group discussions held with retail
investors in Boston and Milwaukee.6 The resulting variable list is a reflection of the tradeoff between the desire to capture the fullest possible set of variables and the need to condense the
source data. The categories included market share, quality rankings, customer satisfaction, employee satisfaction, turnover, innovation and “Other” disclosures .7
While we drew upon the guidelines and frameworks in an effort to understand disclosure
practices in the absence of regulation and the presence of multiple potential reporting frameworks, it was also necessary to accommodate the possibility that information was being provided
that was not indicated by the guidelines or frameworks. After coding the information bursts according to the framework discussed above, we carefully examined the information content of the
“Other” category in order to determine whether there were observable trends that would suggest
we had missed an important category of disclosure that should have been coded as a separate entity. Examples of disclosures categorized in the “Other” are non-specific promotional language
pertaining to leading-indicator matters, speculations about the future that are not supported with
any level of detail, receipt of ethics awards, industry statistics that are presented without placing
the company within that context, discussions of generic business processes without discussions
6
A total of 48 retail investors took part in focus groups that explored retail investors’ perceptions of the
importance of a large variety of non-financial information in which a subset of the information is related to nonfinancial performance information. Full analysis of focus group data requires very extensive qualitative work and
thus the complete results from the focus groups will be reported in subsequent research. For the purposes of this
paper, the focus groups generally agreed with the suggestions of the academic literature.
7
We recognize that this list of factors is not an exhaustive list of potential performance indicators that a
company can adopt. A recent report by the Global Reporting Initiative (2006) identifies the G3 guidelines that provide a number of performance metrics to evaluate when examining a company especially from an integrative sustainability framework. Recently, this has been updated as version 3.1 (GRI 2011) with a proposed G 4 that are likely to
be enacted. These enhanced guidelines are meant to allow the metrics to undergo objective assurance (Adams et al.
2011).
11
of the company’s efforts in this area, and so forth. We were unable to construct any additional
disclosure categories based on the “Other” disclosures and concluded therefore that we had not
missed important disclosure categories. Appendix 1 lists the variables as well as definitions of
the variables. Appendix 2 provides examples of disclosures of the variables from several sample
firms.
Holder-Webb et al. (2008, 2009) provide an innovation on the traditional content analysis
techniques that permits the capture not just of the volume of narrative pertaining to a particular
concept, but of the relative intensity of focus placed on the conveyance of that concept within the
narrative stream provided by the discloser. They refer to their measure as an Intensity Score.
Each information burst was coded on a 7-point Likert scale anchored on 0 (no mention of a given
concept) to 6 (text was entirely devoted to discussion of the given concept). This scheme permits the binary identification of the text as having or not having content (with respect to a given
concept) and, provided that it does have content, it yields an estimate of the focus on the concept
within the selected content. The Holder-Webb et al. (2008, 2009) Intensity score is computed by
multiplying the number of information bursts disclosing a particular concept (X) at each level of
the Likert-scale coding Y (where 0≥Y≥6) by Y, and summing the products across variables. See
Appendix 3 for an illustration of this process.8 Intensity scores increase when disclosers provide
the information through more venues, provide dedicated information releases, or both. Higher
intensity scores indicate greater concern on the part of management with conveying the concept,
8
Intensity is sensitive both to the number of times a type of information is disclosed and to the manager’s
decision to provide specific or dedicated information releases. One information release that is fully dedicated to
Market Share, for example, yields the same Intensity as brief discussions of Market Share in six other places. A
frequency count suggests that the brief mentions represent a six-fold increase in interest on the part of the manager
in conveying the information relative to the single more focused disclosure. The Intensity score addresses this by
weighting the frequency based on the degree of emphasis placed on disclosing that type of information within that
disclosure instance. Correlation coefficients for frequency vs. Intensity range from .863 (p=.000) to .987 (p=.000).
These reflect the role of frequency in the Intensity score, but they suggest that Intensity captures incremental information. We also coded the number of unique pieces of information contained in each information burst and calculated correlations for this value vs. Intensity for each information type. Correlations range from .658 to .950
(p=.000), suggesting that disclosures with greater (lesser) Intensity provide more (less) unique pieces of information;
however, scatterplots with fit lines show that the relationship is not linear for any information type. Thus, we conclude that the Intensity score is an imperfect proxy for informativeness.
12
given that they are willing to repeat the information through multiple channels or to create specialized information releases in order to do so.
To check for inter-rater reliability, three researchers used the specific coding system (the
7 point Likert scale mentioned above) on 41 documents from five companies. Coders were compared for their level of inter-rater reliability using correlation coefficients. Coding for all study
variables met or exceeded the standard cutoff 70% correlation coefficient used in determining
reliability (Frey et al. 2000; Neuendorf 2002).
Figure 1 provides a breakdown of the population of information bursts issued by the
sample firms by document type. Corporate websites were the most prolific disclosures during the
period (37% of all information bursts), followed by stand-alone governance documents and
mandatory filings (19% and 12% of all information bursts, respectively). Figure 2 displays the
sub-sample of documents issued by the reporting firm that included disclosures of leading indicator variables (n=311) during the sample period, by document type (percentages are rounded).
The primary venue for disclosures of this type of information among all sample firms still appears to be company websites (representing 42% of all documents containing the information),
followed by mandatory filings (19%) and product fact sheets and press releases (13% each). As
expected, governance documents are not a preferred format for delivering this type of information, with only four documents of that type containing any non-financial leading indicator disclosures.
Analysis and Discussion
Extent of Disclosure of Leading Indicators: RQ1
Research Question 1 asks to what extent non-financial leading indicators are disclosed.
Table 2 presents information about the relative emphasis on disclosure of non-financial leading
indicators within the entire body of public information releases made available by the sample
firms during 2004. According to Table 2, no leading indicator information was provided in more
than 15% of the entire mass of disclosures released to the public during the year. Some items are
very infrequently discussed (employee satisfaction is mentioned in only 3.7% of disclosures
made, while turnover is mentioned in only 0.3%).9 The most frequently disclosed types of in9
These disclosure rates are comparable to the rates of disclosure of CSR information found by Holder-
Webb, et al. (2009) (the range of disclosure of relevant items was 1.6% for the least-discussed, and 16.2% for the
13
formation pertain to market share and innovation (with over 15% of all information bursts containing relevant disclosures). Innovation directly pertains to the company’s pipeline of future
products and thus presumably to the potential for future revenue gains; market share, as a significant element of the firm’s competitive advantage, speak directly to the sustainability of earnings.
Quality rankings and customer satisfaction are both linked to the future demand for products rather than the supply and are less frequently disclosed. Employee satisfaction is more linked to
cost controls (reduced turnover) and to quality issues, and thus represents a second or third-order
influence and is disclosed less frequently than the more direct influences on earnings. Employee
turnover, a cost item, is disclosed infrequently (less than 1% of information bursts contain this
type of information).10
We focus the following analysis on the 311 information bursts provided during 2004 that
contain disclosures about the leading non-financial indicators. Table 3 displays Intensity scores
for the sample.11 Panel A displays descriptive statistics about the Intensity scores for the entire
sample of firms, Panel B displays Intensity scores for each size quintile, and Panel C displays
Intensity scores for each industry.12 Consistent with the data shown in Table 2, the most heavily
most-discussed), but noticeably lower than the prevalence of governance-related disclosures found by Holder-Webb,
et al. (2008) (the range of disclosure of relevant items was 5.1% for the least-discussed, and 21% for the mostdiscussed). While it appears that the sample companies release information on CSR and leading indicators with
comparable frequency, the discussion of governance matters happens at a much higher rate during the sampling period.
10
Comparison of the reporting frequencies with the results provided by Holder-Webb, et al. (2008, 2009)
yields the information that the sample company disclosure rates shown in Table 2 are comparable to their disclosure
rates for CSR information, and that both leading indicators and CSR information are disclosed with notably lower
frequency than information about governance. This finding may be sensitive to the time period, if companies and
their stakeholders were still highly sensitized to governance matters as a result of the major business failures and
ensuing regulatory reforms. The question warrants further research in order to establish whether this pattern still
holds.
11
While there is necessarily a strong relationship between frequency of disclosure and the Intensity score
due to the computations underlying the Intensity score, there is a less-than-perfect mapping between these two elements. Correlations between Intensity and frequency (measured as number of disclosures) have coefficients ranging
between .863 and .987.
12
While the “Other” category of disclosures was coded in a such a way as to permit the computation of an
Intensity score, as discussed above, the content of this category is strongly heterogeneous. With the other catego-
14
emphasized material pertains to market share and to innovation. In general, the Intensity scores
suggest the same ordering effect and general magnitude of differences between disclosure types
for the entire sample of firms.
The data, overall, suggests an emphasis on the disclosure of and focus on information that
is directly relevant to the firm’s key value propositions (i.e., market share for current products,
which yields pricing power, and innovation, which yields sustainability for earnings). Items that
are indirectly related to pricing power and sustainability of earnings and/or future cost reduction
are disclosed, but with less frequency and intensity than the more direct measures. Size and industry effects are examined in detail in following sections.
Reporting Formats for Leading Indicators: RQ2
Research Question 2 asks what reporting formats or venues managers choose to convey
leading indicators. Table 4 shows the reporting of leading indicators by reporting format category. This data constitutes a multiple response set because a given information burst may contain
more than one type of disclosure. Table 4 provides counts (number of each type of format that
contained each type of disclosure), as well as percentages. Row percentages reflect the proportion of each disclosure type to be found in each format (thus, approximately 21% of all customer
satisfaction disclosures were made through mandatory filings, and approximately 28% of all customer satisfaction disclosures were made through websites). Column percentages reflect the
proportion of each format type that contained a given type of information (thus, approximately
15% (17%) of mandatory filings contained disclosures about customer satisfaction (employee
satisfaction) respectively). 13 For the purposes of this analysis, the sample of information bursts
ries, we have a clear concept-based disclosure category and can thus discuss management’s interest in providing
information about that conceptual construct, but no such conceptual focus is possible with the “Other” category.
Therefore, while the Intensity score is mathematically possibly, an interpretation of that score would not be meaningful and thus, the “Other” category is excluded from this portion of the analysis.
13
Analysis of the disclosure patterns on a firm-level basis yields similar results, not reported separately.
The presence of the trends on both the information burst-level and firm-level suggests that the trends are not being
driven by a small number of firms, and do represent generalized disclosure trends within the study.
15
was restricted to those containing at least one non-financial leading indicator disclosure
(n=311).14
Disclosures about market share, employee satisfaction, and innovation were made primarily through mandatory filings and corporate websites. Market share and innovation
represent, respectively, the current company’s competitive position in the industry, and the future
growth prospects of the firm. Employee satisfaction can be thought of as providing information
about the future stability of the production workforce. It is possible that the focused disclosure of
these items in mandatory filings represents an interest in sharing in the legitimacy conferred
through that disclosure venue while the website disclosure represents the desire for the broadest
possible dissemination of this information (Holder-Webb et al. 2009). Disclosures about quality
rankings were made primarily through the mandatory filings, the website, and through press releases, while customer satisfaction disclosures were made primarily through mandatory filings,
websites, and product fact sheets, likely reflecting a desire to focus the attention of the prospective customer on the value imputed to the firm’s products by external agencies. 15
The column percentages reflect the likely uses of different disclosure formats for conveying information about economic indicators. According to Table 4, mandatory filings are most
likely to contain information about market share and innovation, as are websites. Product fact
sheets are likely to contain information about market share, customer satisfaction, and innovation. CSR reports, while their primary focus is not on economic indicators, are likely to contain
information about market share, quality rankings, employee satisfaction, and innovation. Press
releases are somewhat likely to contain information about market share and innovation.16
The general picture yielded by Table 4 is that market share and innovation – two items
that can be considered strongly linked to current and future performance – are a major focus for
14
Expected values for many cells in Table 4 are less than five, which is a violation of a key assumption of
various statistical tests of differences in frequencies and distributions. Furthermore, the assumption of independence
for these statistical tests is violated by the multiple response opportunity. Therefore, we limit our discussion to observed patterns in these sample firms and cannot generalize these observations with confidence to the larger population.
15
Only three turnover disclosures were made by the entire sample; thus, this item is omitted from the de-
tailed narrative analysis as insignificant.
16
Only four governance documents contained information about leading indicators; thus, this item is omit-
ted from the detailed narrative analysis as insignificant.
16
managerial disclosure decisions. These items are disclosed heavily throughout the range of disclosure venues. Mandatory filings (which arguably confer greater legitimacy among the stakeholders of the company) and corporate websites (which offer a low cost to the company and easy
accessibility to interested parties) are used heavily to disclose most of the different types of information on leading indicators.
Size Effects: RQ3
Research Question 3 asks whether there are size effects evident in the decision to disclose
leading indicators. Table 5 shows disclosures of each information type by within-industry size
ranks.17 As with the contents of Table 4, the data represents a multiple response set: firms in a
given quintile can report more than one type of information, and each type of information can be
reported multiple times. Panel A of Table 5 provides counts (number of each type of disclosure
that was reported by firms within each industry size quintile), as well as percentages. Row percentages reflect the proportion of each disclosure type to be reported within each quintile (thus,
approximately 10% of all market share disclosures were made by firms in the smallest quintile,
and approximately 38% of all market share disclosures were made by firms in the largest quintile). Column percentages reflect the proportion of disclosures from each quintile that contained
a given type of information (thus, approximately 45% (24%) of disclosures made by firms in the
smallest quintile contained disclosures about market share (quality rankings) respectively).
Row percentages in Panel A reflect disclosure trends by size, for a given disclosure type.
Despite the commonly held belief that disclosure is a function of firm size, we do not find monotonically increasing amounts of disclosure based on firm size for any disclosure type other than
market share. This increasing trend is consistent with larger firms possessing larger market share
within their industry and thus having more news (or possibly more good news) to convey about
market share. Innovation, the other direct value driver for companies, displays a trend that is
generally, but not monotonically, increasing. No other significant trends emerge from Panel A
with respect to relative disclosure by different size firms of the different disclosure types.
Column percentages in Panel A reflect disclosure trends of different information types
within size quintiles. These percentages indicate an emphasis on disclosing market share and
17
Size trends in frequencies and intensity are similar if reported on an absolute size-ranking (size quintiles
within the entire sample of 50 firms). Results are not reported separately, as they do not differ in substance.
17
innovation that extends across all size quintiles; innovation and market share are the subject of at
least 30% of the disclosures made within each industry size quintile. Column totals in Panel A of
Table 5 are generally suggestive of increasing disclosure frequency based on firm size. This increasing trend is consistent with larger firms possessing larger market share within their industry
and thus having more news (or possibly more good news) to convey about market share. Innovation, the other direct value driver for companies, displays a trend that is generally, but not monotonically, increasing. No other information types suggest distinct intra-industry size trends in disclosure frequency. Panel B, however, contains mixed results; there appears to be a general size
effect with respect to the focus on market share information, but no other variable exhibits a monotonically increasing emphasis on disclosure of leading indicators. Overall, the sample data
does not yield evidence of linear size effects in information reporting and/or disclosure format
choice.
Industry Effects: RQ4
Research Question 4 asks whether there are industry effects evident in the decision to
disclose leading indicators. Figure 3 displays disclosures by industry for each of the variables.
Grocery and Software firms provide the highest volumes of information (34 and 30 disclosures
respectively), with Oil firms providing the least (20 disclosures). Grocery is a highly competitive
industry dealing largely with commodity products.
While some sample firms use a niche strategy, most of these firms are cost leaders rather
than differentiators and are thus likely to be highly dependent on market share as a source for
earnings. Software is characterized by low start-up costs and a large volume of entrants into the
field. Furthermore, there is a relatively high investment in training and equipment to support the
adoption of a particular software package which results in high switching costs for users; thus,
the ability to obtain market share would be a major determinant of success in this field.
The customer investment required for Software products suggests that these firms will be
relatively more concerned with providing customer satisfaction information as well. Figure 3
supports this, showing customer satisfaction measures provided by the Software firms at a rate
over three times that of the next most frequent discloser of this information.
Product innovation and product quality disclosures are made frequently by the three industries in the sample that are most concerned with research and development activities: Pharma,
Software, and Manufacturing. The volume of innovation disclosures for these three industries
18
reflects their reliance on research and development activities and pressures to bring new products
to the market to ensure continued growth. Pharma and Software firms sell products that have the
potential to impose significant costs on users in the event of product failure (unacceptably dangerous side effects for pharmaceuticals, and the risk of data loss and/or theft from software failures) and would naturally be concerned with reassuring stakeholders as to the quality of their
product. The motivation of the Manufacturing firms for disclosing product quality may be a
function of the specific industry identified in the sample: medical instruments, which also present
significant costs to the patient in the event of product failure. The Grocery industry provides relatively few disclosures of these types, perhaps reflecting the commodity nature of its main revenue stream. Despite the reliance of extractive industries on identifying and developing new
sources for products with a globally finite supply, the Oil firms also make few disclosures about
innovation or product quality.
The only two industries that disclose employee satisfaction data with any frequency are
Grocery (which depends more highly on employee-customer face-to-face contact than the other
industries) and Software (which is relatively dependent on employee-specific human resource
capital in the form of particular programming expertise and familiarity with the product source
code).
The results of the preceding analyses indicate that overall, sample firms were concerned
with disseminating information about all leading indicators evaluated in this study with the exception of employee turnover. There are discernable industry-based trends in disclosure that are
consistent with the strategic focus and competitive landscapes within which different industries
operate, as well as the presence of industry-specific success factors such as the heavy dependence on human resources or individual-specific intellectual capital. This is consistent with calls
for developing unique industry specific non-financial metrics (Adams et al. 2011).
Research Question 4 also extends to the question of whether there are industry-driven differences in reporting format choice. In Table 6 we provide an analysis of inter-industry patterns
in information types presented within each reporting format. Cell contents in Table 6 reflect the
number of disclosures of each type of information provided by each industry via the given reporting format. The preferred venues for market share for all industries are mandatory filings and
corporate websites. Innovation is disclosed more frequently on websites in the Pharma, Manufacturing, and Oil industries, while it is disclosed more frequently in mandatory filings in the Gro-
19
cery and Software industries. Customer satisfaction disclosures are made mainly through websites and mandatory filings for all firms except Software, which provided these disclosures mainly through product fact sheets. Employee satisfaction disclosures are also provided primarily
through websites and mandatory filings, with the exception of manufacturing firms, who provided some of this information through press releases (generally press releases announcing results of industry and/or employee surveys). Product quality ranking disclosures are provided
through more diverse routes, with many appearing in websites, mandatory filings, product fact
sheets, and press releases for Manufacturing and Software firms, while Grocery firms exhibit a
strong dominant preference for website disclosures.
Consistent with prior research (e.g., Holder-Webb et al. 2009) corporate websites are a
popular venue for all industries. All industries make relatively high use of mandatory filings as
well to deliver this information. Grocery and Manufacturing use press releases to disclose leading indicators at a higher rate than the other industries. Otherwise, there do not appear to be
strong industry-based patterns in disclosure choice. In general, the industry disclosure patterns
are consistent with the size-based ones, and suggest that firms maximize the coverage of the
mandatory filings and relatively low cost websites in order to disseminate leading indicators.18
Conclusions
The objective of this study is to extend the examination of disclosures of non-financial information pertaining to corporate governance (Holder-Webb et al. 2008) and corporate social
responsibility (Holder-Webb et al. 2008, 2009) by exploring the supply of disclosures of non18
According to Merkl-Davies and Brennan (2007), the most common strategies preparers use to affect user
impressions of firm performance involve the prominent display of favorable information through use of positive
words or emphasizing positive performance, prominently displaying positive information, choosing benchmarks
designed to generate positive assessment of company outcomes, and selecting the most positive information from an
array of possible disclosures. Thus, we explored whether the information disclosed was generally portrayed in a
more favorable light. Overall, the information presented was positive in nature and the more optional the disclosure
venue the more positive was the spin in the disclosures. This finding is consistent with an inclination to report more
neutrally in documents that are required by regulators and potentially subject to greater scrutiny, and to limit spin
efforts to more “soft” information venues. In general, the results of these analyses suggest, however, that companies
are more likely to report leading indicators in positive terms than they are to report this information in negative
terms.
20
financial leading indicators contained within the portfolio of public disclosures made by a sample of U.S. firms. This type of information is increasing in terms of the volume provided and in
its perceived importance in the eyes of the investing public (Cohen et al. 2011; Adams et al.
2011)), yet there is a lack of exploration of historical disclosure of non-financial leading indicator information by U.S. firms. Non-financial disclosures are less heavily regulated than financial
disclosures; firms have significant latitude in choosing whether to disclose, and if to disclose,
what, where, when, and how to do so. Furthermore, the volume of discretionary information releases is considerably greater than that of mandatory filings. These structural differences in the
disclosure environments raise questions about assumptions over the similarity of corporate behavior in this matter. The question of whether the generally understood influences of size, industry,
and political costs on financial disclosure influence non-financial disclosures is an empirical
question; this study represents an attempt to explore the applicability of extant understandings of
financial disclosure behavior to the arena of non-financial disclosures.
We draw a portrait of non-financial disclosure practices, examining an important subset
of these disclosures (leading indicators) in terms of understanding the prevalence of the disclosures, the reporting formats firms choose to convey them, and whether size and industry have an
effect on what is reported. The data examining RQ 1 indicates that the sample firms make extensive and detailed disclosures about market share and innovation practices, and disclose other
leading indicators broadly. Results for RQ 2 also indicate that the sample firms commonly use
mandatory filings to convey this information regardless of firm size or industry, with optional
filings also used extensively. It is evident that the sample firms prefer to distribute information
about leading indicators through formal reports, including mandatory filings and voluntary CSR
reports. Companies may view this information as more directly relevant to the value proposition
of the firm. It is possible that corporations believe that providing this information through these
more formalized channels adds to the credibility of the data in the eyes of shareholders. We also
find a limited size effect with larger firms tending to disclose more information about market
share and innovation (RQ 3). Further, there is evidence of an industry effect (RQ4) with disclosures that are consistent with the strategic focus and competitive landscapes within which different industries operate, as well as the presence of industry-specific success factors such as the
heavy dependence on human resources or individual-specific intellectual capital.
21
The potential bias of selective disclosure in this area raises the question of whether regulators should consider mandating some of these disclosures. If leading indicator disclosures were
mandated and/or assured by professional accountants, the reliability of these disclosures could
potentially increase in the future (Coram et al. 2009). The requirement for an assurance may influence management to disclose the information in a more credible manner revealing negative
news as well as positive news. For example, there has been movement in the international regulatory environment to have a framework for evaluating another non-financial area, namely sustainability information (Simnett et al. 2009b). Assurance of this information could function as a
signal to the market place that the firm is taking this disclosure quite seriously (Coram et al.
2009). A future study should explore the role that an audit plays on both the quantity and quality
of non-financial disclosures.
A significant portion of the source data used in this paper is ephemeral (as it was obtained
from company websites) and can be changed or substituted easily at the whim of the organization. This presents both a limitation, in that large portions of the source data are no longer available for other researchers who wish to examine these items, and a strength of the study, in that
our study of the disclosure practices is not constrained by a need to rely only on permanently and
publicly archived information such as 10-Ks.
Subsequent to the collection of this dataset, the Global Reporting Initiative (2006, 2011)
released a comprehensive sustainability reporting framework that has attracted a large international following. Many of our leading indicators overlap with the “standard” disclosures provided by the GRI (2006, 2011) and thus this study provides a baseline for comparison with more
recent data in an effort to assess the impact of the emerging formal guidance on non-financial
disclosures. For example, a partial list of the GRI’s standard disclosures includes information
about strategy and analysis, product responsibility, labor practices and decent work and economic performance indicators. In this study, we study market share, quality rankings, customer satisfaction, employee satisfaction, turnover and innovation. Thus, the metrics on market share, quality rankings, customer satisfaction and innovation can be linked to both strategy and analysis as
well as economic indicators while employee satisfaction and turnover can be related to labor
practices and decent work disclosures.
22
Another interesting framework for integrated reporting19 was proposed by the World Intellectual Capital Initiative (2011). This group of both private and public stakeholders is working
to improve disclosures in order to enhance capital allocation to promote sustainable economic
growth. They are promoting the use of key performance indicators that are useful across all industries including metrics for demand management, supply management and support services.
For example, in demand management, one key performance indicator measures product development effectiveness, which is analogous to our metric of innovation. Further, they have a measure for human resources responsiveness that is captured by our metrics on employee satisfaction
and turnover. Thus, the empirical evidence gathered in this study represents one baseline to see
how integrated reporting has evolved and will evolve over time.
As with any study, there are limitations that represent opportunities for future research.
The sample consists of a limited number of firms within industries that are relatively homogeneous and representative of a wide spectrum of economic industries. We recognize that there are
discrete industries not included in the study that have substantially different disclosure practices.
For example, the relevance of data about leading indicators may also be contingent on the competitiveness of a particular industry (Banker and Mashruwala 2007). Future studies could investigate disclosures in other industries such as those that are heavily regulated (e.g. financial services) and those that are “old economy” such as the automobile industry, or examine disclosure
patterns for tangible-asset firms versus intangible-asset firms (Abdolmohammadi et al. 2006).
We also chose six metrics that were a result of a search in the literature at the time the data was
collected as well as through a focus group with individual investors. To allow better comparability with some of the current developments in non-financial reporting, a future study could use
some of the metrics outlined in the integrative reporting frameworks such as more salient measures of risk (Adams et al. 2011). The sample was limited to disclosures made during a single calendar year (2004) in order to identify and establish cross-sectional patterns. Future studies can
address how the disclosures have changed with recent developments in the economic climate.
Prior research has found that, in general, the quality of disclosures is associated with the quality
of corporate governance in both the United States (Cohen et al. 2004) and abroad (Chen and Jaggi 2000; Eng and Mak 2003). Thus, a follow-up study could examine in greater depth what go-
19
For a full review of current trends in integrated reporting, please see Adams et al. (2011).
23
vernance characteristics are associated with better disclosure of non-financial information. Finally, the data was from disclosures made during 2004. This study could serve as a benchmark for
changes in this type of disclosure against data that would be collected from the current disclosure
climate.
Enhanced reporting offers investors the means to better assess a company’s likelihood of
future success, current business acumen, or risk management systems. Indeed, it has been argued, for instance by the UNEP FI Asset Management Working Group (2004), that standards of
materiality in equity pricing are changing as the role of business in global society changes. It will
be essential to obtain both an understanding of investor demand for non-financial disclosures and
an improved understanding of how investors use the types of non-financial disclosures examined
in this paper. Only then will it be possible to consider standardizing or regulating this type of information.
24
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28
Table 1
Sample Firms
Size*
Company
Total Assets
(in millions)
Size*
Company
Grocery
1
Foodarama Supermarkets
348.636
3
Winn-Dixie Stores Inc
1
Wild Oats Markets Inc
405.560
4
Great Atlantic & Pac Tea Co
2
Ingles Markets Inc
1063.687
4
Supervalu Inc
2
Whole Foods Market Inc
1519.793
5
Safeway Inc
3
Pathmark Stores Inc
1253.400
5
Kroger Co
Manufacturing
1
Cardima Inc
6.537
3
Endocare Inc
1
Cytomedix Inc
8.186
4
Possis Medical Inc
2
Bioject Medical Technol
18.370
4
Icu Medical Inc
2
Rochester Medical Corp
21.384
5
Boston Scientific Corp
3
Memry Corp
32.988
5
Baxter International Inc
Oil
1
Kestrel Energy Inc
2.991
3
Atp Oil & Gas Corp
1
Aspen Exploration
6.946
4
W&T Offshore Inc
2
Panhandle Royalty Co
54.186
4
Cabot Oil & Gas Corp
2
Gulfport Energy Corp
78.150
5
Occidental Petroleum Corp
3
Petroquest Energy Inc
231.617
5
Devon Energy Corp
Pharma
1
Med Gen Inc
0.610
3
Seracare Life Sciences Inc
1
Lectec Corp
2.803
4
Chattem Inc
2
Genelabs Technologies Inc
29.383
4
K V Pharmaceutical
2
Icagen Inc
38.137
5
Johnson & Johnson
3
Auxilium Pharma Inc
61.040
5
Pfizer Inc
Software
1
Summus Inc/Oasys Mobile
2.406
3
Art Technology Group Inc
1
Simulations Plus Inc
4.964
4
Mro Software Inc
2
Peerless Systems Corp
12.647
4
Webmethods Inc
2
Document Sciences Corp
23.513
5
Sungard Data Systems Inc
3
Ultimate Software Group Inc 52.546
5
Microsoft Corp
*Size quintiles (within industries) ranked from 1 (smallest) to 5 (largest).
Total Assets
(in millions)
2618.891
2801.968
6278.342
15377.400
20491.000
34.374
86.021
164.768
8170.000
14147.000
372.147
760.784
1210.956
21391.000
29736.000
89.128
371.724
558.317
53317.000
123684.000
97.803
222.721
275.344
5194.641
92389.000
29
Table 2
Frequencies and Rates of Leading Indicator Disclosures (n=863)*
Variables
Frequency
Percent of Total Information Bursts**
Market Share
136
15.8
Quality Rankings
68
7.9
Customer Satisfaction
43
5.0
Employee Satisfaction
32
3.7
Turnover
3
0.3
Innovation
133
15.4
*Includes all public disclosures identified for the entire sample of 50 firms. Of these 863 disclosures, 311 contained
leading indicator disclosures. Some information bursts contained more than one type of leading indicator disclosure.
Analysis of the subset of disclosures containing leading indicators is provided in subsequent tables.
**Percentages will not sum to 100%, as not all information bursts include information about leading indicators, and
some information bursts contain more than one type of information.
30
Table 3
Reporting Intensity by Leading Indicator Variable (n=311)
Panel A. Entire Sample
Disclosure Type
Market Share
Quality Rankings
Customer Satisfaction
Employee Satisfaction
Turnover
Innovation
Intensity Score For Disclosure Type*
Mean (SD)
Min (Max)
8.65 (7.05)
0 (32)
4.85 (6.68)
0 (29)
3.17 (6.32)
0 (32)
2.24 (4.67)
0 (24)
0.22 (.096)
0 (6)
11.54 (10.42)
0 (45)
Panel B. By Relative Size Quintile
Disclosure Type
Q1
Market Share
Quality Rankings
Customer Satisfaction
Employee Satisfaction
Turnover
Innovation
Mean
(SD)
4.88
(3.56)
3.12
(3.83)
1.25
(2.12)
0.38
(1.06)
0.00
(0.00)
5.12
(3.72)
Min
(Max)
0
(11)
0
(11)
0
(6)
0
(3)
0
(0)
0
(9)
Intensity Score For Disclosure Type*
Q2
Q3
Q4
Mean
Min
Mean
Min
Mean
Min
(SD)
(Max) (SD) (Max)
(SD)
(Max)
4.89
3
6.90
0
9.89
0
(1.97)
(9)
(6.44)
(21)
(6.31)
(19)
1.44
0
8.10
0
4.44
0
(2.60)
(6)
(9.72)
(29)
(5.48)
(14)
2.78
0
4.70
0
5.44
0
(4.35)
(11)
(7.92)
(19)
(10.48)
(32)
3.11
0
2.00
0
1.00
0
(7.88)
(24)
(3.16)
(9)
(2.35)
(7)
0.22
0
0.80
0
0.00
0
(0.67)
(2)
(1.93)
(6)
(0.00)
(0)
15.11
0
9.80
3
11.89
2
(14.56)
(45)
(7.23)
(22)
(10.61)
(30)
Q5
Mean
Min
(SD)
(Max)
15.70
4
(8.46)
(32)
6.40
0
(7.46)
(24)
1.50
0
(2.17)
(6)
4.30
0
(5.27)
(15)
0.00
0
(0.00)
(0)
14.90
0
(11.20)
(29)
Panel C. By Industry
Disclosure Type
Intensity Score For Disclosure Type*
R&D
Retail
Mfg
Software
Oil
Mean
Min
Mean
Min
Mean
Min
Mean
Min
Mean
Min
(SD)
(Max) (SD) (Max) (SD) (Max)
(SD)
(Max) (SD) (Max)
9.22
4
9.89
0
8.70
3
8.70
2
6.50
0
Market Share
(6.83)
(20)
(9.77)
(32)
(5.40)
(21)
(5.40)
(18)
(8/65)
(26)
5.56
0
2.33
0
5.50
0
7.80
0
2.38
0
Quality Rankings
(9.98)
(29)
(1.87)
(6)
(4.45)
(14)
(8.80)
(24)
(3.96)
(11)
0.56
0
2.11
0
2.20
0
10.0
0
0.00
0
Customer Satisfaction
(1.13)
(3)
(3.89)
(11)
(3.46)
(10)
(10.17)
(32)
(0.00)
(0)
1.67
0
5.33
0
1.70
0
2.10
0
0.25
0
Employee Satisfaction
(3.08)
(8)
(7.97)
(24)
(4.72)
(15)
(2.77)
(9)
(0.70)
(2)
0.00
0
0.00
0
0.60
0
0.40
0
0.00
0
Turnover
(0.00)
(0)
(0.00)
(0)
(1.90)
(6)
(0.84)
(2)
(0.00)
(0)
20.89
2
8.22
0
11.30
3
10.70
0
6.12
0
Innovation
(13.83)
(45)
(7.33)
(23)
(9.32)
(29)
(9.58)
(29)
(5.17)
(15)
*Intensity Score is equal to the intensity rating [0-6] per disclosure type per information burst, multiplied by the
number of information bursts receiving each rating, summed for each disclosure type for each firm; higher scores
indicate variables that are more intensively discussed (with greater frequency, with greater focus, or both). “Other”
category excluded from the analysis of Intensity scores as the heterogeneous nature of those disclosures precludes
meaningful analysis.
31
Table 4
Information Type by Reporting Format (n=311)
Mandatory
Filings
Website
Count
Row %
Column %
43
31.62
71.67
50
36.76
37.59
Count
Row %
Column %
11
16.18
18.33
32
47.06
24.06
Disclosure Type
Reporting Formats
Product CSR ReGovernance
Fact
port or
Documents
Sheet
Brochure
Market Share
0
16
4
0.00
11.76
2.94
0.00
41.03
50.00
Quality Rankings
0
5
0.00
7.35
0.00
12.82
Press
Release
Other
Documents
Total
9
6.62
22.50
14
10.29
51.85
136
3
4.41
37.50
11
16.18
27.50
6
8.82
22.22
68
1
2.33
12.50
2
4.65
5.00
6
13.95
22.22
43
4
12.50
50.00
4
12.50
10.00
1
3.13
3.70
32
Count
Row %
Column %
9
20.93
15.00
12
27.91
9.02
Customer Satisfaction
0
13
0.00
30.23
0.00
33.33
Count
Row %
Column %
10
31.25
16.67
10
31.25
7.52
Employee Satisfaction
1
2
3.13
6.25
25.00
5.13
Count
Row %
Column %
2
66.67
3.33
1
33.33
0.75
Turnover
0
0
0.00
0.00
0.00
0.00
0
0.00
0.00
0
0.00
0.00
0
0.00
0.00
3
Count
Row %
Column %
36
27.07
60.00
53
39.85
39.85
Innovation
3
16
2.26
12.03
75.00
41.03
5
3.76
62.50
11
8.27
27.50
9
6.77
33.33
133
Other Disclosures
19
19
0
1
2
6
5
52
Count
36.54
36.54
0.00
1.92
3.85
11.54
9.62
Row %
31.67
14.29
0.00
2.56
25.00
15.00
18.52
Column %
60
133
4
39
8
40
27
311
Total
Row percentages reflect the proportion of each disclosure type to be found in each format. Column percentages
reflect the proportion of each format type that contained a given type of information. Analysis is restricted to the
information bursts that contained any disclosure of the study variables. Row totals reflect the total number of disclosures that were made for each disclosure type, while column totals reflect the total number of information bursts
within each reporting format. The total number of information bursts containing any study disclosure type is 311.
Row totals and column totals will not sum to this amount because this is a multiple response set where each reporting format may contain multiple disclosure types, and each disclosure type may be reported in multiple formats.
32
Table 5
Size Effects among Disclosures Containing Non-Financial Leading Indicator Information
(n=311)
Panel A. Frequencies of Disclosure, Relative Size Ranks*
Disclosure Type
1
2
Intra-Industry Size Quintile
3
4
5
Total
Market Share
Count
13
15
25
31
52
136
Row %
9.6%
11.0%
18.4%
22.8%
38.2%
Column %
44.8%
31.3%
38.5%
45.6%
51.5%
Quality Rankings
Count
7
4
25
13
19
68
Row %
10.3%
5.9%
36.8%
19.1%
27.9%
Column %
24.1%
8.3%
38.5%
19.1%
18.8%
Customer Satisfaction
Count
4
7
12
14
6
43
Row %
9.3%
16.3%
27.9%
32.6%
14.0%
Column %
13.8%
14.6%
18.5%
20.6%
5.9%
Employee Satisfaction
Count
1
9
6
4
12
32
Row %
3.1%
28.1%
18.8%
12.5%
37.5%
Column %
3.4%
18.8%
9.2%
5.9%
11.9%
Turnover
Count
0
1
2
0
0
3
Row %
0.0%
33.3%
66.7%
0.0%
0.0%
Column %
0.0%
2.1%
3.1%
0.0%
0.0%
Innovation
Count
11
29
26
30
37
133
Row %
8.3%
21.8%
19.5%
22.6%
27.8%
Column %
37.9%
60.4%
40.0%
44.1%
36.6%
Other
Count
8
11
4
5
24
52
Row %
15.4%
21.2%
7.7%
9.6%
46.2%
Column %
27.6%
22.9%
6.2%
7.4%
23.8%
Total
29
48
65
68
101
311
Row percentages reflect the proportion of each disclosure type to be made by firms in each relative size quintile.
Column percentages reflect the proportion of each size quintile that provided a given type of information. Analysis
is restricted to the information bursts that contained any disclosure of the study variables. Row totals reflect the total
number of disclosures that were made for each disclosure type, while column totals reflect the total number of information bursts within each size quintile. The total number of information bursts containing any study disclosure
type is 311. Row totals and column totals will not sum to this amount because this is a multiple response set where
each size quintile may provide multiple disclosure types, and each disclosure type may be provided by multiple
quintiles.
33
Panel B. Intensity of Disclosure, by Size*
Mean (Median) Intensity Score
Disclosure Category
Q1
Q2
Q3
Q4
Market Share
3.9 (3.5)
4.4 (4.0)
6.9 (4.5)
8.9 (7.5)
Quality Rankings
2.5 (1.0)
1.3 (0.0)
8.1 (4.5)
4.0 (2.0)
Customer Satisfaction
1.0 (0.0)
2.5 (0.0)
4.7 (0.0)
4.9 (0.0)
Employee Satisfaction
0.3 (0.0)
2.8 (0.0)
2.0 (0.0)
0.9 (0.0)
Turnover
0.0 (0.0)
0.2 (0.0)
0.8 (0.0)
0.0 (0.0)
Innovation
4.1 (4.5)
13.6 (9.5)
9.8 (7.5)
10.7 (7.0)
*based on quintile rankings of total assets within each industry
Q5
15.7 (15.0)
6.4 (3.5)
1.5 (0.0)
4.3 (2.0)
0.0 (0.0)
14.9 (17.0)
34
Table 6
Reporting Format Choices by Leading Indicator Type and Industry (n=311)*
Information Type
Format Category
Pharma
Grocery
Mfg
Software
Oil
Mand. File
2
1
6
Website
1
2
4
5
Governance Doc
Customer Satisfaction
Prod. Fact Sheet
1
12
CSR Report
1
Press Release
1
1
Other
1
2
3
Mand. File
5
1
3
1
Website
1
6
3
Governance Doc
1
Employee Satisfaction
Prod. Fact Sheet
1
1
CSR Report
2
1
1
Press Release
1
3
Other
1
Mand. File
8
5
10
10
3
Website
24
4
11
7
7
Governance Doc
2
1
Innovation
Prod. Fact Sheet
4
3
9
CSR Report
3
1
1
Press Release
1
4
1
1
Other
2
1
1
2
3
Mand. File
9
8
11
10
5
Website
9
10
11
10
5
Governance Doc
Market Share
Prod. Fact Sheet
1
3
2
8
2
CSR Report
1
1
1
1
Press Release
2
6
1
Other
3
6
2
2
1
Mand. File
2
6
2
1
Website
14
4
6
5
3
Governance Doc
Quality Rankings
Prod. Fact Sheet
1
4
CSR Report
1
1
1
Press Release
1
3
7
Other
1
2
1
2
*Cell counts reflect the frequency of disclosures of each information type within each reporting format for each industry. Blank cells reflect frequencies of zero. Turnover has been eliminated from display due to overall infrequency
of reporting in any format or by any industry.
35
Figure 1
Disclosure Venues for Total Information Bursts (n=863)
Mandatory Filings (n=104)
7%
12%
Corporate Websites (n=322)
Stand-Alone Governance Documents (n=169)
11%
Product Fact Sheets (n=78)
CSR Reports (n=39)
Press Releases (n=94)
5%
Other (n=57)
9%
37%
19%
36
Figure 2
Disclosure Venues for Information Bursts Containing Non-Financial Leading Indicator
Disclosures (n=311)
Mandatory Filings (n=60)
9%
19%
Corporate Websites (n=133)
Stand-Alone Governance Documents (n=4)
Product Fact Sheets (n=39)
13%
CSR Reports (n=8)
Press Releases (n=40)
Other (n=27)
3%
13%
1%
42%
37
Figure 3
Frequency of Disclosure by Industry
Innovation
Turnover
Oil
Software
Employee Satisfaction
Mfg
Grocery
Pharma
Customer Satisfaction
Quality Rankings
Market Share
0
5
10
15
20
25
Frequency of Disclosure
30
35
40
45
38
Appendix 1
Leading Indicator Variables Coded in the Study
Variables
Market Share
Quality Rankings
Customer Satisfaction
Employee Satisfaction
Turnover
Innovation
Other
Variable Definitions
Percentage or size of market share for company as a whole, division, unit, or significant
product(s)
ISO certifications, prizes conferred upon company or individual unit for production, external awards, certifications, ratings, and/or recognition for quality in production or other
items, relative to some external benchmark, including industry members and other firms.
Descriptions of customer service initiatives, customer loyalty, survey customers on something, popularity awards, responsiveness to marketing campaigns, discussions of preexisting, on-going, or expected difficulties with customer satisfaction.
Comparison of company to industry or other firms in discussions of programs to induce
employee loyalty, retain employees, Fortune ratings or awards
Turnover rates (quits, hires, fires, retires) as compared to industry averages or other firms.
Innovation pertaining to the production process, research and development, introduction of
new products, time to market, other factors affecting the company’s ability to innovate, etc.
Any other info relating themselves to others in terms of their business line.
39
Appendix 2
Selected Disclosures from Source Documents
1.
Analyst Conference Call Disclosing Market Share Point Estimates
“In the second quarter we introduced 142 new items to our corporate brand lineup. The market share of Kroger’s
private-label grocery items, in terms of dollars, increased 67 basis points to approximately 24.47% versus a year
ago. Private-label grocery share, in terms of units, declined 48 basis points to approximately 31.34%. This decline is
due in large part to tonnage decreases in dairy categories such as milk, cheese, butter and ice cream where we experienced significant price increases.”
2.
Annual Report (10-K) Discussion of Market Share
“We are a leading supermarket chain, operating as a single segment, in the densely populated New York - New Jersey and Philadelphia metropolitan areas, operating 143 stores. We pioneered the development of the large supermarket/drugstore format in the Northeast, opening our first store of this kind in 1977. Operating in the New York - New
Jersey and Philadelphia metropolitan areas for over 36 years, we have successfully developed a leading supermarket
franchise with strong brand name recognition and customer loyalty. We believe we are the largest supermarket chain
operating under a single banner in our market area in terms of sales. We focus our operations on this market area,
where we believe we can maintain and build upon our strong market presence and achieve additional operating
economies. All of our stores are located within 100 miles of our corporate office in Carteret, New Jersey and of our
company-operated and outsourced distribution facilities. Proximity of these distribution facilities to our stores assists
us in optimizing in-stock conditions and distribution costs. Our market area includes some of the most densely populated regions of the United States, representing approximately 10% of the U.S. population and encompassing two of
the five largest U.S. metropolitan areas by population, namely New York and Philadelphia. We believe that the high
population density in our markets coupled with the geographic concentration of our stores provide substantial opportunities for economies of scale.
3.
Fact Sheet Discussion of Quality Rankings and Awards
“In June 2006, Ultimate Software won the American Business Award, or “Stevie,” for Best Customer Service Organization. The American Business Awards are the only national, all-encompassing business awards program honoring great performances in the workplace…
…Ultimate Software’s customer support center was certified for the seventh consecutive year in November 2005
under the prestigious Support Center Practices (SCP) Certification program…
…Ultimate Software was selected by Start magazine in June 2004 as one of its Hottest Companies of 2004…”
4.
10-K Discussion of Customer Satisfaction Matters
“A high level of customer service and technical support is critical to customer satisfaction in our industry. Many of
the Company's customers implement our products in complex, large-scale IT environments on which the success of
their organizations depend. The Company believes that its approach to support has been and will continue to be a
significant factor in the market acceptance of its products.
As of September 30, 2004, the Company employed a technical hot-line support staff of 102 employees operating out
of the Company's corporate headquarters in Massachusetts and four international technical response centers located
in the United Kingdom, Australia, Canada, and Brazil as well as in six satellite support offices in China, Korea,
Mexico, Japan, Sweden and McLean, Virginia. Support services are provided on a seven-day week, 24-hour day
basis using our support centers in United Kingdom, Australia, United States (Bedford, MA) and Canada. The Company also provides premium support via resources dedicated to meeting the needs of our larger enterprise-wide
clients. Premium Support is a fee-based service provided in addition to all of the standard support provided to all of
our clients.
40
Appendix 3
Computation and Assignment of Intensity Scores
Calculation of Market Share Intensity Score for WebMethods
Level of Dedication
1
2
3
4
5
6
Total Intensity Score for Market Share,
This Company
No of Disclosures per Level for the Company
0
4
2
1
0
0
0
8
6
4
0
0
18