Disclosure of Non-Financial Information by Companies

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The corporate world is changing as a result of the expansion and social deepening of processes of globalization. To be successful, companies must be knowledgeable about international markets, a diverse range of stakeholders, and comply with ever-increasing regulations on the need for non-financial disclosures. Organizations should also review how their social and ecological impacts affect stakeholders, and most importantly, their shareholders’ financial position (Abdel, 1993)

Globalization has constantly continued to influence corporate governance reforms and its structure to be able to respond to increasing completion. A distinguishing characteristic of this reform is corporate accountability and transparency this has put immense pressure on companies to disclose non-financial information and more specifically social and environmental issues as they are of great importance to the survival of the firm (American Institute of Certified Public Accountants [AICPA], 1994). Organizations have responded to this pressure voluntarily however there is a need to have regulatory principles to form a basis in which non-financial information is disclosed in the organization (Amir, 1996).

The reason non-financial disclosure is required is that users of the financial report, including employees, suppliers, management, shareholders, financial analyst, creditors, and the state require such reports for decision making. It is thus of great importance that published annual reports contain reliable information that is timely to enhance efficient decision-making. However, these published reports have different extent and quality of disclosure that differs among companies as well as countries.

Companies have increased the extent and scope of public reporting of non-financial information. There has also been increased review of the information provided as well as the overall performance of the organizations. This has led to the adoption of certain reporting frameworks as the GRI as well as the engagements of assurance service providers. In recent times, non-financial performance measures have been critical to organizations as regulators-imposed requirements for reporting and management of an organization’s activities. From voluntary schemes such as the Greenhouse Challenge and National Packaging Covenant to the mandatory reporting requirements of the National Pollution Inventory and the National Greenhouse and Energy Reporting Scheme, businesses are increasingly required to provide accurate, reliable, and timely data on non-financial performance.

Importance of non-financial disclosure

The need for and importance of non-financial disclosure are very broad and can be viewed from the angle in which past business performance used to be measured to how business performance is measured at the present. In the past, profit was used as the main performance indicator. This was when most businesses were done by a single person or by partners. However, as joint-stock companies came up, corporate performance was measured by market capitalization, share price as well as financial ratios. Presently corporate performance is measured by corporate social responsibility whose disclosure falls under non-financial reporting. This is the basis for the need for non-financial disclosure and the reason why it is important.

Non-financial reporting is vital for a financial institution like banks as this financial institution is not only concerned with returns but the risk-return trade-off, non-financial reporting deals with those risks that are created in the society which makes its disclosure in the financial institution very important.

Non-financial disclosure has gained fame in many ways today. This is not only because of the inclusion of the social and environmental aspects but also because of several other reasons. The other reason is that it has been realized that the goal of businesses is to not only get profits but also grow. It is also meant to enable inclusive growth. If the process of growth is not equal, then it cannot be sustained. If inclusive growth is to be made a permanent venture, it must be able to be sustainable. In recent history, many problems in the business have been said to be caused by the lack of one thing – inclusive growth (Financial Accounting Standards Board [FASB], 2001).

The need for non-financial disclosure also comes from the fact that reporting has to be credible and that it must be audited. Making non-credible reporting systems is useless.

Evidence on the need for non-financial disclosure is also highlighted in a study by Ittner (1997) that showed many firms use non-financial measures such as product quality, customer satisfaction, and market share to evaluate and reward managerial performance. The rewarding of management based on these types of measures indicates that they are seen as valuable relevant information.

Stakeholders are increasingly calling for organizations to address their demands for corporate accountability and transparency. Organizations have responded in one way through the issue of nonfinancial reports, which aim to provide stakeholders with information about business activities and impacts not captured by traditional financial reporting (American Institute of Certified Public Accountants (AICPA), 1997). Most of this non-financial disclosure has been done under the name of corporate social responsibility (CSR) although the reports normally have a variety of titles, including CSR reports, sustainability reports, corporate citizenship reports, and environment, health, and safety reports.

Global Reporting Initiative, which is the new form of non-financial reporting, produces Sustainability Reporting Guidelines, designed to provide companies with standardized indicators for economic, environmental, and social reporting. However, the main purpose of these non-financial reports has been to provide stakeholders with information on the state of the company and to help explain the complexity of the company, it also makes non-financial reporting a strategic tool to monitor alignment between actions and strategic objectives is less established scenarios. While some managers use data collected from social and environmental reporting in strategic decisions, however, they often do not see the full value of the reporting process as it relates to strategic planning (Chow, 1982).

The need for non-financial disclosure is also highlighted by the use of satisfaction measures indicators of financial performance as provided by Banker (2000) and colleagues. They used time-series data for several months from a chain of different hotels to provide evidence on the behavior of non-financial measures and their impact on firm performance. Their results indicate that non-financial measures of customer satisfaction are significantly associated with future financial performance and contain additional information not reflected in the past financial measures.

These studies provide some evidence of an association between certain types of non-financial performance measures and firm performance. However, they do not say whether investors use the non-financial performance measures, it may be that they use other information that is correlated with the non-financial performance measures in their decision-making processes.

Non-financial information is approached from the context of business operations, and policy performance. In the corporate world, decisions are rare events, and the most common activities involve the search for information. The need to disclose non-financial information comes from the nature of non-financial information which can be qualitative or quantitative, quantitative means that the information is numerical and is therefore possible to be expressed in numbers or figures, for instance in quantities or periods. Quantitative non-financial information, on the other hand, is related to financial information but it is less uniform (Botosan, 1997).

Since the industrial revolution, there has been a general perception. People believe that economic development has come with its fair share of negative effects. It has had negative effects on the environment and has led to the destruction of nature in very large-scale proportions. It has led to the destruction of nature. Therefore, the growth process has not been inclusive but rather exclusive. It is because of these negative effects on the environment that the activities entailing nonfinancial reporting were initiated. The non-governmental organizations pressured organizations to initiate it. Another group that exerted similar pressure was civil society.

These concerned bodies claimed that the firms (organizations) were not responsible enough to care for the environment or to be concerned about the effects of the business ventures on the social welfare of society. It argued that the financial health of any firm is not only dependent on the number of assets on their records or the number of profits (or losses) they generated (or incurred) from the business. There was more to it than just that.

The use of non-financial reports is important in communication. It creates an open and transparent way of communicating its activities to the relevant stakeholders and partners. In these reports produced by the organizations, information about the cases and pieces of evidence of environmental impacts and social impacts of the previous year are provided (Botosan, 2000). Such information is vital to any organization. This is because it is used to develop the company’s risk-return profile.

Nonfinancial disclosure acts as several things to the preparers. Firstly, they act as tools to increase chances for comparison and to reduce the cost incurred in sustainability. It is also necessary when considering enhancing and differentiating in the marketplace. It also helps to avoid brand erosion that may occur due to the actions of the competitors and suppliers. It also fosters innovation and makes the processes within the organization friendly to the environment and the society (Dopuch, 1986). The nonfinancial disclosure may also be useful to the users. The information provided in the report may be used as a benchmarking tool. It may also be used as a corporate governance tool. It may also be used to provide an avenue for organizations to conduct dialogue in the future.

Framework for non-financial disclosure

The non-financial disclosure framework is based on the GRI, which is of the view that a company’s vision of success must be placed within system boundaries, which involves understanding sustainability constraints as well as overall business goals and values. Taking into account other system trends, such as the push for corporate governance reform, stakeholder demands for greater accountability and transparency, and the emphasis on social and environmental impacts as they relate to long-term economic viability, sustainability disclosure becomes an important feature of long-term business success. Hence, companies should be reporting on how they do operate within system boundaries to achieve their vision of success (Eagly, 1978)

The report should explain specifically explain: The system, provide enough information about the organization so that stakeholders can understand the external and internal environment in which the company operates (Elliott, 1998). The vision of success lays out the company’s purpose, values, and strategic objectives, being specific about the sustainability principles that constrain the vision (Healy, 1999). The strategy communicates the strategies employed to reach the vision, such as policies, programs, and targets for social and environmental sustainability. The actions, document all actions taken as part of the strategy towards success (Fama, 1971).

In addition, a framework for sustainability disclosure should provide comparability across companies, compatibility with other sustainability initiatives, credibility, and legitimacy. However, there are pressing questions concerning the framework like what exactly would this disclosure framework look like? Are the Global Reporting Initiative’s Sustainability Reporting Guidelines, currently the “gold standard” of non-financial disclosure, meeting this need for measuring progress towards a scientific definition of sustainability? If not, what modifications can be made to GRI to align it with existing gaps? The applicability of the non-disclosure standards will thus be the basis of knowing whether all the above questions are answered or not.

Reporting framework

The structure for reporting has evolved over the years. Studies justify these changes. In the 1990s, reports did not focus on many indicators. It only relied on environmental indicators. However, today’s reports are more comprehensive. They combine the social and economic data. They also look at the environmental data (Eccles, 2001). Since reporting frameworks are constantly changing, a person who is interested and capable of starting a report should not wait for its finality. The Global Reporting Initiative (GRI) is a body concerned with these issues. It standardizes the nonfinancial reports. This standardization is adopted internationally and is the standard (Hunton, 2000).

GRI has long-term goals. It has numerous stakeholders. Its mission is to develop and distribute sustainability-reporting guidelines to all corners of the world because they are standardized. Firms use these guidelines voluntarily. They report on the economic, environmental, and social impacts that their goods or services have (Fargher, 1996). These include every activity undertaken. The goal of the organization is to ensure that the guidelines assist the organizations to make valid reports. It also helps the stakeholders to understand the importance and contributions of the reports in sustainability. GIS’s G3 guidelines are among the widely used guidelines. It has been used to generate more than 7000 reports worldwide. In addition, more than 100 such reports have been published.

Information is always reported in conformity with a specific frame of reference. A frame of reference presents the criteria or standards for the valuation, classification, and presentation of the information (Heider, 1958). As far as this framework relates to the presentation of information in a report, it is referred to as accounting principles. Financial reporting has passed through a long period of development and the generally accepted accounting principles are available for it (Ittner, 1998b). Examples include the national standards issued by the DASB (Dutch: Richtlijnen Voor de Jaarverslaggeving) and international standards such as IFRS (private sector) or IPSAS (public sector).

This applies to a much lesser extent to non-financial information; the quality requirements for the information and how it is presented are not uniform. The professional rules of conduct for auditors in the field of this information have only been developed to a limited extent (Eagly, 1975). The debate on reporting and assurance of the information is in its early stages. In terms of standardization of corporate social responsibility, reporting is at the forefront. The organization Global Reporting Initiative (GRI) issues international sustainability reporting guidelines (G3). Their application is voluntary (American Accounting Association Financial Accounting Standards Committee (AAA FASC), 2002).

The development of the reporting framework is still in progress; attention has to be devoted to embedding non-financial information in the management cycle, meeting basic conditions, and ensuring proper coordination between all parties involved.

When the voluntary provision of non-financial information is positive, it is expected that users will perceive the information as self-serving (Hirst, 1995). Given this perception, attribution theory suggests that users would be more uncertain about the validity of the information and discount it. In these circumstances and given the expected benefits from the provision of assurance to reduce uncertainty as per the information hypothesis, it is expected that assurance would have a positive effect on users’ stock price estimates. However, it is unlikely that voluntary disclosure of negative non-financial information would be perceived as self-serving in most circumstances, therefore it is not expected that assurance would make any difference to users’ stock price estimates (Kachelmeier, 2002).


There have been calls for greater disclosure of non-financial information and there has been some evidence to suggest benefits have arisen from this type of disclosure. However, due to the lack of disclosure of this type of information in the marketplace, this study evaluates the benefit of additional disclosure of non-financial information in an experimental setting through its impact on stock price estimates.

If non-financial measures are value-relevant because they are leading indicators of financial performance, improved decision-making and decreased uncertainty will be reflected in higher relative stock price estimates when positive non-financial indicators are disclosed and lower relative stock price estimates when negative non-financial indicators are disclosed. This, in essence, shows that non-financial disclosure is a concept that most organizations should adopt to survive in the corporate market and to also remain competitive.


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