JMAA 2014.11

Volume 10, Number 11, November 2014 (Serial Number 114)

Journal ofModern Accounting and Auditing

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Journal of Modern Accounting and Auditing

Volume 10, Number 11, November 2014 (Serial Number 114)

Contents

Accounting

Implementing Sustainability Reporting (SR): (Neo-) Institutional Theory Insights in the Analysis of the SGR Group, Italy and CityGas, Bulgaria 1067

Maria-Gabriella Baldarelli, Mara Del Baldo, Ninel Nesheva-Kiosseva

Usefulness and Effectiveness of Related Party Transactions (RPTs) Disclosure: Empirical Evidence From Italy 1105

Amedeo De Cesari, Oscar Domenichelli, Martina Vallesi

Finance

Shadow Banking Credit Intermediation: Determinants of Default Risks in Securitization and Collateralization 1119

Mohd Yaziz Mohd Isa, Md. Zabid Haji Abdul Rashid

Organizational Management

Organizational Learning (OL) and Organizational Innovation (OI): The Case of Information and Communication Technology (ICT) Industry in Malaysia 1130

Gholamreza Zandi, Mohamed Sulaiman, Islam Mohamed Salim

Journal of Modern Accounting and Auditing, ISSN 1548-6583 November 2014, Vol. 10, No. 11, 1067-1104

Implementing Sustainability Reporting (SR): (Neo-) Institutional

Theory Insights in the Analysis of the SGR Group, Italy

and CityGas, Bulgaria∗

Maria-Gabriella Baldarelli University of Bologna, Bologna, Italy

Mara Del Baldo

University of Urbino “Carlo Bo”, Urbino, Italy

Ninel Nesheva-Kiosseva

New Bulgarian University, Sofia, Bulgaria

The aim of this paper1 is to investigate how the corporate characteristics and contextual factors influence the choice

of managers in initiating the sustainability report/reporting (SR) and to understand the role of organisational

dynamics. The research design develops through a deductive and inductive approach. The deductive approach is

based on an analysis of the Social and Environmental Accounting Research (SEAR) strands which use the theoretical

framework of (neo-) institutional theory to inquire the adoption and diffusion of SR. The inductive method is based

on a research case that focuses on the SGR Group. “How can the neo-institutional theory help explain the process of

SGR’s SR implementation in Italian and Bulgarian companies”? The study identifies both the internal and contextual

factors associated with the SR development and the regulative, normative, and cognitive dimensions/factors that

affect the implementation and institutionalisation of SR in Italy and Bulgaria, in accordance with the different

institutional environments in which the social and sustainability accounting projects are developed.

Keywords: sustainability report (SR), organisational dynamics, neo-institutional theory, contextual factors, regulative,

normative, cognitive, and mimetic mechanisms, relational change, social and environmental accounting research (SEAR)

∗ Acknowledgements: We want to express our gratitude to Michaela Dionigi, the President of SGR Group, as well as to Demis Diotallevi (CEO), Elisa Tamagnini (CSR and Sustainability Officer), Emanuela Vespa (Marketing and Communication Department), and the CityGas staff for their precious and kindly collaboration in all steps of our research.

Maria-Gabriella Baldarelli, Ph.D., professor of Accounting, Department of Management, University of Bologna. Email: [email protected].

Mara Del Baldo, assistant professor of Small Business Management, Department of Economics, Society, and Politics, School of Economics, University of Urbino “Carlo Bo”.

Ninel Nesheva-Kiosseva, Ph.D., professor of Economics, Department of Economics and Business Administration, New Bulgarian University. 1 The first draft of this paper had been selected and presented at the 4th Italian Conference on Social and Environmental Accounting Research (Italian CSEAR 2012), September 20-21, Trento and at the Financial Reporting Workshop, June 13-14, 2013, Rome, Italy. In April 2013, this paper was awarded by a nomination assigned by the Department of Business Administration to participate in the competition for the prize Pythagora organised by the Bulgarian Ministry of Education and it was presented at the New Bulgarian University Conference of June 4, 2013, Social and Environmental Accounting: Experience and Research, Jubelee International Scientific and Practical Conference “Business Positive Force in Society. 20 Years MBA Business Administration”. This paper is the work of a common research project. However, Maria-Gabriella Baldarelli wrote Sections 3.1 (Methodology), 3.2 (SGR Group Profile), and 5 (Discussion); Mara Del Baldo wrote Sections 1 (Introduction), 2 (SR and Institutional Theory Relationships: Literature Review), 3.3 (The Process of Implementing the SR in SGR Group), and 6 (Conclusions); and Ninel Nesheva-Kiosseva wrote Section 4 (Sustainability Dimensions, Institutional Theory, and the Case Study of CityGas).

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IMPLEMENTING SR: (NEO-) INSTITUTIONAL THEORY INSIGHTS

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Introduction

Companies, and especially multinational corporations, are increasingly adopting sustainability

report/reporting (SR) practices (Cooper & Owen, 2007). At the same time, an increasing body of researchers

have sought to investigate the motives and drivers which lead organisations to initiate and undertake social and

environmental reporting (SER) (Adams, Hill, & Roberts, 1995; 1998; Young & Marais, 2012) and different

theoretical strands have been used to examine various aspects. These studies, which gave food to the

international academic Social and Environmental Accounting Research (SEAR) literature, have been primarily

focused on organisational processes and internal factors as well as on the content, nature, and extern of various

social and environmental reports.

In more recent years, the engagement research has been put forward as a strong approach in developing

theories to understand SER, enhance organisational practices and performances (Adams & Larrinaga-Gonzàlez,

2007; Contrafatto, 2010; 2011), and explore diverse issues, including change within organisations (Adams,

2002; Cooper, Taylor, Smith, & Catchpowle, 2005; Parker, 2005).

Our work is part of this field that is described by Bebbington, Higgins, and Frame (2009) who used an

institutional theory framework for an empirical research focused on reporting champions in New Zealand with

the aim of investigating how and why they initiated the SR.

The extent, to which organisations shape managerial decision-making to initiate the SR process (Gray,

Owen, & Adams, 2010; Bebbington, 2007; Bebbington & Contrafatto, 2006; Gray, Bebbington, & Walters,

1993), depends on a number of organisational dynamics and a variety of regulative, normative, and cognitive

drivers. Adams (2002) identified a multiplicity of corporate characteristics (size, industry, profit, or financial

performance) and contextual factors (country of origin and relative variety of social, political, and legal factors,

social and political change, economic cycles, cultural, specific events, media pressure, and stakeholders’ power)

which influence managers’ decisions to report.

Departing from these premises, the research question, which orients the analysis, can be summarised in

this term: “How can the neo-institutional theory help explain the process of SGR’s SR implementation in Italy

and Bulgaria?”.

Aiming to reply to this question, the research design develops through a deductive and inductive approach

(Denzin, 1978; Cox & Hassard, 2005).

The deductive approach is based on an analysis of the SEAR literature strands which use the theoretical

framework of (neo-) institutional theory to inquire the adoption and diffusion of SR. The inductive approach is

related to the analysis of an exemplary case study.

The inductive method is based on a research case (W. Naumes & M. J. Naumes, 2006) which focuses on

the enterprise SGR Group and the internal and external impact of implementing the SR in two different

countries.

The analysis carried out has enabled us to understand some features of the sustainability process started by

the company in Italy (SGR Group) and Bulgaria (CityGas) and to interpret them as the challenges launched by

the group to create, through its own activities, a civil economy (Bruni & Zamagni, 2004) which is typical of the

corporate culture of responsibility and sustainability.

We identify both the internal and contextual factors associated with the SR development and the

regulative, normative, and cognitive dimensions/factors, in order to understand the implementation and


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institutionalisation of SR in Italy and Bulgaria, in accordance with the different institutional environments in

which the social and sustainability accounting projects are developed.

To reply to the research question, we focus on some points, the first of which is about the reaction of the

enterprise towards institutional pressure. The second one concerns the analysis of what happens inside and

outside the organisation involved in SR in Italy and Bulgaria. Thirdly, by studying institutionalisation at the

organisational level, the work provides a picture about the ways in which businesses outline the

institutionalisation process. Finally, it demonstrates the balanced nature of institutional change in the two

different countries.

Among the wide literature on SEAR, the study aims to add to the existing works which investigated the

spread of SR, using a neo-institutional lens. Different works have inquired this aspect but focus the analysis

mainly on large businesses and organisations (and never pay attention to small, medium, and family-owned

companies) belonging to North American and Australia or, more generally, located in English-speaking

countries (Contrafatto, 2011). There is, indeed, no empirical study focusing on Italian companies or on entities

belonging to Eastern European countries.

In our work, the attention has been addressed to an Italian medium-sized family group. The family

property and the strength of its roots within the local, surrounding fabric (Rimini) where it is located are

mirrored in the values system and in the objectives of the entrepreneurial and managerial heights, just as they

are in the motivations and the behaviours that have led to the introduction of SR.

Furthermore, the selected group has a branch in Bulgaria (Eastern countries) where SEAR is required,

thus contributing to developing the debate on this question which is still at the initial stage. Consequently, our

paper has the aim of contributing to filling some cognitive gaps in the SEAR literature by proposing

new/further lines of reflections that emphasises the relevance of internal and external contingent factors in SR

development and, as suggested by some scholars (Bebbington, 2007; Bebbington et al., 2009), the importance

of the empirical research to strive for the acknowledgment of the SR issue at the scientific, managerial, and

operational levels.

Moreover, the group belongs to a sector (multi-utility) to which only few studies addressed attention in

the past, while researches have mainly been developed on companies belonging to other sectors (Contrafatto,

2011). Finally, since the work is based on the engagement research approach, used to understand

organisational phenomena from the “inside”, thus favouring a more grounded and contextualized

comprehension of the rationale through which actors behave and individual/organisational action is being

constructed (Adams & Larrinaga-Gonzàlez, 2007), it aims to contribute to constructing the culture of

sustainability, which is particularly needed in still far-off contexts, like those of many Eastern European

countries.

This paper is divided into two main parts: The first one presents a literature review on SR and the

conceptual framework focused around (neo-) institutional theory, while the second one presents the

methodology and the main results of the empirical analysis, followed by the discussion and conclusions.

SR and Institutional Theory Relationships: Literature Review

As afore mentioned, the engagement research implies the adoption of a few specific interpretive research

methods and has the potential to provide valuable means to enhance the descriptive and theoretical

understanding of the processes and dynamics of SEAR.


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An illustrative engagement research review provided by Contrafatto (2011) proposed a taxonomy of the

existing works. Using the criteria “issues and focus of analysis”, the author classified the body of SEAR

literature into four groups respectively focused on: motives/drivers, influencing factors, management

perception views, and impact/effects on organisations. The first group includes those studies which have mainly

examined motives and drivers for the initiation of SER (Buhr, 2002; O’Dwyer, 2002; Spence, 2007;

Bebbington et al., 2009; Farneti & Guthrie, 2009), while the second one relates to research exploring the

contextual and internal factors, including managerial attitudes, which influence the nature and extent of SER

and might contribute to or limit change in organisations (Adams, 1999; 2002; Adams & McNicholas, 2007;

Bebbington et al., 2009). The third class is formed by studies focusing on potential and actual possibilities of

SEAR to stimulate organisational change in practices, structures, performance, and/or values (Gray, Walters,

Bebbington, & Thomson, 1995; Larrinaga-Gonzàlez & Bebbington, 2001; Dey, 2007; Albelda-Perez,

Correa-Ruiz, & Carrasco-Fenech, 2007). Finally, the fourth group includes studies which have specifically

analysed the managerial perceptions and views about SEAR and related practices (Belal & Owen, 2007; Farneti

& Guthrie, 2009).

These studies were developed using different fieldwork methodologies (qualitative analysis, in-depth

ethnographic and action research studies) and research methods aimed to carry out the empirical investigation

and collect data and information (primarily interviews and, in addition, observations, visits and meeting

participations, documents analysis, and questionnaires).

Besides, several theoretical frameworks have been explicitly adopted. A prevalence of studies have drawn

on theories of organisational change to ascertain whether and to what degree social and environmental

accounting and reporting interventions produce any substantial organisational changes such as practice,

structures, performance, and value systems (Contrafatto, 2011). Particularly, Bebbington et al. (2009) and Dey

(2007) used institutional insights to investigate respectively the dynamics (drivers) leading to the initiation of

SER and the effects of social accounting intervention on existing organisational systems.

With respect to the subjects and themes, more attention has been addressed to the processes of

reporting/disclosing social and environmental information versus the theme related to the processes of social

and environmental accounting.

Other distinctive aspects are relative to the context of the analysis in terms of location (where the analysis

was conducted), the industry, and time period of the analysis. Firstly, a large number of studies were conducted

in English-speaking countries (especially in the United Kingdom (UK) and Australia/New Zealand). Secondly,

most of the studies considered large corporations that operated in the manufacturing and processing sectors

(i.e., chemical, pharmaceutical, extracting, etc.), while only few research works involved organisations

operating in other contexts, such as the public sector (Farneti & Guthrie, 2009), the public utility

(Larrinaga-Gonzàlez & Bebbington, 2001), and social economy (Dey, 2007). Thirdly, with regard to the time

period, the studies covered different decades, starting from the early 1990s (Gray et al., 1995) to the mid-2000s.

Finally, with regard to the level of analysis, most of the works have explored SEAR practices at the

organisational level of either individual or group of organisations and only a minority addressed the industrial

site or have attempted to explore the intra-organisational dynamics related to the process of initiation and

implementation of SEAR (Contrafatto, 2011).

One aspect which does emerge from the results and findings reported by the studies is that of

the heterogeneity, complexity, and contradictory nature of SEAR and related practices. In fact, a multitude of


1071

organisational, contextual, and institutional factors influence both the decision-making about the initiation

of SEAR and its characteristics (nature and extent). Furthermore, they affect the nature and quality of

SEAR and impact on its relevance to promote change in the organisational realm. However, the way in which

these factors come together and influence the choice and process of SR (Gray, Owen, & Adams, 1996; Gray

et al., 2010; Bebbington, 2007; Bebbington & Contrafatto, 2006; Gray et al., 1993) remains unexplored and

unclear.

For this reason, the present work proposes filling this gap, on one hand, by extending the location in which

the research has been conducted to countries, other than the Anglo-Saxon or Australian ones, like Italy and

Bulgaria which are characterized by different conceptions of business and the role and nature of SEAR and SR;

and on the other hand, by expanding the analysis of internal contingent factors which are linked to family

ownership of the company and which mirror themselves in the mission and governance, and therefore, in the

choice of introducing SR and in the process of its implementation.

Among the strands of research outlined above, the present work, therefore, challenges issues treated in the

first three strands, proposing the enrichment of the knowledge of the multiple organisational, contextual, and

institutional factors that affect SR introduction and development.

In particular, with reference to the first group of studies, as mentioned above, a number of reasons have

been suggested as to why companies adopt SR. Through SR, companies have a chance to respond to stakeholder

expectations and, by doing so, contribute both to societal well-being (Morsing & Schultz, 2006; Deegan &

Samkin, 2006) and to managing their own legitimacy (Archel, Husillos, Larrinaga, & Spence, 2009) and

guarding a company’s reputation (Baldarelli & Gigli, 2012) and identity (Reynolds & Yuthas, 2008). Moreover,

companies adopt SR as they expect some instrumental payoff in terms of long-term profitability, which may

eventuate from improving their ability to attract labour, through reassuring shareholders of non-financial

risks, by reducing information asymmetries (Merkl-Davies & Brennan, 2007) or improving stakeholder

decision-making (Du, Bhattacharya, & Sen, 2010). Several researchers maintain that the reasons for SER are

primarily due to external “jolts” (Laughlin, 1991; Larrinaga-Gonzàlez & Bebbington, 2001; Mallin, Michelon, &

Raggi, 2012). Others hypothesize that not one, but several factors lead business firms to introduce and publish

SR (Duncan & Thomson, 1998).

The literature that falls into the second group of studies has mainly focused on the corporate organisational

factors (internal factors) which impact on the extent, nature, and sophistication of SER and, therefore, on its

potential to activate some forms of organisational change within organisations. Some scholars have gone

further in investigating the reasons why some organisations undertake SER and what drivers exist in both the

external (societal) and internal environments for reporting (Adams, 2002; Solomon & Lewis, 2002). In this

regard, the corporate governance literature provides interesting insights that assist in understanding the nature

of corporate social responsibility (CSR) reporting practices (Kolk, 2008; Young & Marais, 2012). The impact

of industry characteristics by adopting an industry risk perspective has also been considered (Bebbington,

Larrinaga, & Moneva, 2008; Unerman, 2008).

Furthermore, companies may also report because they are forced to do so by diverse institutional pressures.

Focusing on institutions, indeed, helps in understanding SR not only as a voluntary discourse but also as a

requirement imposed by the corporate environment. For instance, companies face coercive pressures to report on

specific environmental issues. These pressures arise from law and regulation and from other organisations, and

by pressures to conform to cultural expectations of society at large (Scott, 2008). Companies also face significant


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normative pressures to engage in SR and CSR reports which arise traditionally from professionalization (Kolk &

Pinkse, 2010). Pressure to adopt SR may also be mimetic pressure as a response to uncertainty. In situations

where a clear course of action is unavailable, managers may imitate a peer organisation perceived to be

successful (Di Maggio & Powell, 1983). SR is thus a discretionary process reflecting managerial choice in the

midst of stakeholder and institutional pressures (Young & Marais, 2012).

These aspects have been considered especially by the literature of the second and third groups where in the

last decade, few contributions have been made to examining how and why SR practices become institutionalised

and reach an institutional status (Miller, 1994; Milne & Patten, 2002; Ball, 2005; 2007; Phillips, Lawrence, &

Hardy, 2004; Lounsbury & Crumley, 2007) and/or produce effects in terms of institutional change

(Larrinaga-Gonzàlez, 2007).

To fill such a cognitive gap, which requires more consistent research approaches (Gray, Javad, Power, &

Sinclair, 2001; Campbell, 2000), several innovative studies recently made (Larrinaga-Gonzàlez, 2007;

Bebbington et al., 2009) have adopted the institutional (Di Maggio & Powell, 1983; Scott, 1987; 1995)

and neo-institutional theories (Di Maggio & Powell, 1991; Powell, 1991) as a theoretical framework to

explain the standardisation or at least the procedures of SR/SER and to understand the drivers of institutional

change.

Table 1

Mechanisms/Structures of Institutionalisation Di Maggio and Powell (1983) Scott (1995) Example

Coercive mechanisms: The law or the market leads organisations to comply and align with the norms in order to gain legitimacy and survive. Consequently, behaviour becomes very similar in all of them.

Regulative structures: The law or the market involves thecapacity to establish rules, inspect conformity, and manage sanctions in order to influence future behaviour.

Consumer boycotts lead companies to change structures and practices. Environmental regulation makes companies adopt new technologies. In the context of SR, regulative structures and activities would include reporting regulations and their enforcement, aswell as the threat of regulation of reporting (i.e., European Commission recommendation).

Normative mechanisms: Diffused through professionalization, formal education, and professional networks, leading individuals to act according to shared social values and norms.

Normative structures: Based on social values and norms, leading individuals to act according to societal expectations of organisations: legitimate authority of norms and values; organisations genuinely think that, given their role in society, they have to acquire some structures or engage in some practices.

Deontological codes shape practices in many professions, such as accountants. In the context of SR, normative structures refer to rules that are followed on moral/ethical grounds or in order to conform to norms established by referential bodies (i.e., Eco Management and Audit Scheme (EMAS), Global Reporting Initiative (GRI), awards for best environmental, social, or sustainability reports, such as Association of Chartered Certified Accountants (ACCA) awards).

Mimetic mechanisms: Organisations imitate (mimetic process) those peer organisations that seem to be more successful and legitimate.

Cognitive structures: They are taken for granted symbols, meanings, and roles in social actions that support the legitimacy of organisations; The social construction of roles and organisations varies over time and space and contributes to stability; Cognitive structures form conceptually support of legitimacy. Their existence is very difficult to prove empirically.

The waves in the use of some concepts and techniques by organisations are associated with vogues (imitation) rather than rationality. In the context of SR, convergence is taking place in some organisational fields where reports are evolving rapidly (from environmental to CSR and SR).


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Conceived in the social context in terms of institutions2, institutional literature focuses on institutional

stability and inertia on the process, which is called “isomorphism”, which arises from the need for organisations

to respond to environmental expectations, guarantee their survival, and increase their success possibilities in a

particular environment. Isomorphism emerges through three different mechanisms (also called as structures and

activities): coercive, normative, and mimetic (Di Maggio & Powell, 1983). In the same way, phrasing this

differently, Scott (1995) argued that legitimacy is based on three pillars of the institutional order: regulative,

normative, and cultural/cognitive (see Table 1).

Using the institutional theory framework, Bebbington et al. (2009) explored how institutional factors

combine with organisational dynamics to contribute to the initiations of the reporting activity.

Since the institutional theory has been blamed for its failure to address change (Greenwood & Hinings,

1996; Hoffman, 1999), neo-institutional theory has been used to develop emerging insights about how the social

context influences the choice of managers to initiate SR.3 Neo-institutional theory “asks questions about

how social choices are shaped, mediated, and channelled by the institutional environment” (Hopwood & Miller,

1974; Hoffman, 1999, p. 351), which is composed of organisations and organisational fields4. A neo-institutional

theory perspective has been adopted by Hoffman (1999), Jennings and Zandbergen (1995), and Bansal (2005) in

their studies of sustainable organisations (Larrinaga-Gonzàlez, 2007).

Hoffman studied how organisations and fields evolve as regards environmental concerns and demonstrated

how coercive, normative, and cognitive pressures have different importance over time and how the

organisational fields are changing.5 While one basic proposition of institutional theory is that different

pressures in one organisational field lead to convergence in organisational forms and practices; thus, the

frequency and quality of reporting would converge worldwide. Kolk (2005) observed that differences in

environmental reporting between United States (US) and European/Japanese multinational corporations were

increasing, suggesting that currently there is a variance of SR practices rather than a convergence in SR

internationally and hence global reporting could not be seen as being part of the same organisational field.

Concerning this, Jennings and Zandbergen (1995) proposed that, for a sustainable value or practice,

organisational fields tend to be local rather than non-local. This conclusion supports the different patterns

of SR.

Assuming as a possible explanation the existence of several organisational fields around the issue of SR,

Larrinaga-Gonzàlez pointed out the existence of locally based SR fields (i.e., EMAS, triple bottom line,

GRI, ISO 14001, etc.) and used the neo-institutional perspective in order to build an institutional explanation

of the development of SR and ascertain the consequences of the institutionalisation of SR. Facing the issue

of change and the institutionalisation of SR, Larrinaga-Gonzàlez (2007) identified specific research patterns:

2 “Institutions consist of cognitive, normative, and regulative structures and activities that provide stability and meaning to social behaviour” (Scott, 1995, p. 33). 3 Since organisations are immersed in a certain cultural and historical context, which is portrayed by the existence of systems of shared beliefs, symbols, and regulation requirements (Scott & Meyer, 1985), the basis of neo-institutional thinking is in the scepticism towards atomistic accounts of social processes and the conviction that institutional arrangements and social processes matter (Di Maggio & Powell, 1991). 4 An organisational field is formed by those organisations that collectively constitute a recognized area of institutional life (Di Maggio & Powell, 1983) “that partake of a common meaning system and whose participants interact more frequently and fatefully with one another than with actors outside the field” (Scott, 1995, p. 56). 5 Neo-institutional accounts of organisational activity downplay rational managerial action and focus on how the social context influences organisational participants to behave relatively unconsciously in ways that are “normal” to “fit in” and appear “appropriate” within the contexts in which they operate.


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the initiating event that may alter the institutional arrangements; whether and how fields may evolve

(Bansal, 2005); what elements play a part in changes to coercive/normative/cognitive structures; and what

relationships exist between competitive forces and institutional structures in the process of institutionalisation.

With this respect, he illustrated how different events served to initiate SR in different contexts and

how the evolving composition of organisational fields allowed the redefinition of the institution, with the

emergence in recent years of social and ethical aspects of SR. He also explored the relationships between

institutionalisation and change and how this affects SR, and went further to examine the relationship between

institutional theory and the legitimacy theory (Deegan, 2002), which is more often adopted in accounting

research. He illustrated how the coercive, normative, and mimetic mechanisms of institutionalisation can

explain different processes of institutionalisation in SR: Coercion can account for SR as a response to

regulation or consumer pressure; normative mechanisms would explain SR as a response to voluntary

initiatives on the grounds of social responsibility; and mimicry could explain how SR could be the

consequence of some trends. SR is thus the result of a mixture of these three mechanisms, taking different

weights in different contexts.

From this theoretical premise, we can conclude this literature review stating that both: (1) the complexity

of the interplay among institutional, contextual, and organisational drivers that creates the conditions for the

“ignition” of the process of SER (Bebbington et al., 2009); and (2) the mixture of the mechanisms/structures of

institutionalisation imply that there is a need to conduct more empirical research to explore in a contextualized

way the conditions that stimulate or constrain SR and its possibilities to promote positive effects on

organisations and society at large (Contrafatto, 2011).

Consequently, after having analysed the literature, in the following sections, we will describe and discuss

the cases of SR implementation in SGR Group and the factors that affect its initiation in CityGas (the Bulgarian

subsidiary).

The Case Study of SGR Group

Methodology

The study of the case (Spence & Gray, 2008; Bebbington et al., 2009) follows the dynamics of the

research case (W. Naumes & M. J. Naumes, 2006).

The selected companies—SGR Group Rimini, Italy and the foreign subsidiary CityGas,

Bulgaria—represent an exemplary case (Yin, 1994) for three main reasons: Firstly, they belong to a sector

which has not been the subject of particular investigation on research questions on this topic; secondly, they are

located in different countries which are characterized for the presence of different external institutional factors

affecting the development of sustainability orientation and SR (Baldarelli & Nesheva-Kiosseva, 2011); thirdly,

because the process of the implementation of SR may be seen from its very first stages. The SGR Group

introduced its first SR in 2011, using internal human and technological resources and CityGas still finds itself

in a phase of primary development of the conditions for its adoption.

SGR Group is a multi-utility and family-owned company, unlisted, based in Italy, made up of several

companies, and with a long experience in gas distribution, that is, over 50 years, during which period it has

always been a one-family-owned enterprise, and this feature has been able to create a very strong connection

with the territory where the enterprise is operating.


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As before mentioned, among the wide array of fieldwork methodologies applied to SEAR, we opted for

various methods to gather data and information (such as interviews, observations, visits and meeting

participations, documents analysis). The tools used are primarily semi-structured interviews, which are aimed at

the entrepreneurial team and corporate management. Such interviews have been carried out by the research

group during the company visits in Italy to the SGR Rimini and in Bulgaria to the CityGas Company, and took

place on a monthly basis, lasting about two hours each, during the years of: 2009-2011 and 2012. The

interviews have been conducted with 10 corporate members (nine Italians and one Bulgarian) considered

important for the purpose of the research investigation. Among these, interviews have been addressed to the

president of the group, the chief financial officer, and managers directly or indirectly involved in SR

(environmental affairs department, accounting department, marketing department, and sustainability manager).

All the interviews were transcribed and compared with the interviewed members of the company.

The second source of data collection derives from the consultation of corporate websites and the analysis

of corporate documentation: decisions of the board of directors, internal communications pertinent to

sustainability, drafts of SR, corporate books regarding company history, leaflets and pamphlets relating to

initiatives promoted about the theme, and corporate publications relevant to the 50th anniversary of its

constitution. Furthermore, we participated in focus groups and round tables in the planning of initiatives aimed

at raising awareness on the theme of sustainability in schools, social and civic groups, and local institutions

including the chamber of commerce. Finally, we were able to directly observe the behaviour of the committee

for sustainability during workshops, seminars, and thematic conventions, in which we participated at the

planning and execution stages.

Besides, we must make it clear that though not yet being in the position of having data/documentary

information relating to the Bulgarian subsidiary (CityGas), which does not draw up an independent SR, the case

(see Section 4) has been developed by way of analysis of micro- and macro-economic data relating to the

institutional environment (internal and external institutional factors) of which CityGas is part, with the end aim

of examining the possibilities of the CityGas Company (Bulgaria) creating SR, consistent with the sustainable

reporting of SGR Rimini (Italy) using an adopted institutional approach. The reflexions which emerged from

the analysis focused, therefore, on one hand, on the possibility of development of the direction towards

sustainability in such a context, and on the other hand, on the obstacles and opportunities derived from

implementation of the tool represented by SR. The analysis is based upon economic and interpretational

indicators of the reference context.

SGR Group Profile

SGR Rimini is an unlisted mixed holding company based in Rimini (Italy), made up of several companies,

all of which are still family-owned.

In 1956, Aldo Domeniconi founded Società Gas Rimini S.p.A., the first company in the area dedicated to

the management and distribution of gas for heating and household use that in 1959 begins the development of

the distribution network of methane gas from the city to the province of Rimini with the most innovative plants

in Europe; these plants in 1970 were connected to the national methane gas pipeline SNAM. Since 1998, the

company has adopted the 9001 system for quality certification (upgraded to Vision 2000 and ISO 9001

standard in the following years), and in 2010, it obtained the ISO 14001 (Environmental Management System)

and the BS OHSAS (Occupational Health and Safety Management System) 18001 certifications.


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In over 50 years of business activity, SGR Rimini has left a significant mark on the history of the

distribution and sale of methane gas in two central Italian regions: the Marches and Emilia Romagna. It has

grown steadily through acquisitions, the winning of tenders, and strategies for sector diversification.

In 2005, SGR went to Bulgaria (through an international tender adjudication) to construct a gas network

for domestic and industrial use in the region of Trakia. During its first three years, the subsidiary company

CityGas Bulgaria won three prestigious awards: award for its contribution to the energy sector; as a major

investor of the year in the energy sector; and the annual award for the energy sector. In 2010, SGR acquired the

company Technoterm Bulgaria and the project finance for the Trakia Project with European Bank for

Reconstruction and Development (EBRD)/BERS and Banca Intesa San Paolo. In 2006, SGR Group won the

“Milano Finanza Creatori di Valore” award.

In 2011, the group reached a turnover of over 251 million Euro, had 328 employees, and obtained a return

on investment (ROI) rate of 11.60% and return on equity (ROE) rate of 12.13%.

The figures and table below illustrate an SGR organisation chart of the holding and group subsidiaries (see

Figure 1), the business areas (see Table 2), and the municipalities served in Italy and Bulgaria (see Figure 2).

Figure 1. SGR Group: organisation chart of the holding.

Table 2

SGR Group Business Areas Distribution of natural gas

Sale of natural gas and electric energy Planning, construction, management, and maintenance of heating plants in condominiums for which they carry out heat management Energy service and district heating

Assembly of solar power plants and sources of renewable energy

Assembly and maintenance of heating and conditioning plants (for families, businesses, and large plants)

Assistance and domestic or company emergencies intervention available 24 hours a day

Global service technicians specialized in the gas sector even for assistance abroad

Utilities technology

Congress centre


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Figure 2. SGR municipalities served in Italy and Bulgaria (2012).

SGR Reti is the company which manages the gas distribution network plants and is the holder of natural

gas supply licences. SGR Servizi is the company which manages sales relations with clients. Utilia is

responsible for creating and developing software package management systems and application modules,

specialized for the energy and utilities sectors. As mentioned above, CityGas is a Bulgarian company controlled

by SGR which was joined by Technoterm in 2010. In 2004, SGR signed an agreement with Hera, to which the

group ceded 20% of SGR Servizi. Hera is an Italian listed company among the national leaders of the sector,

for the joint procurement of bulk gas and the direct sale of electric energy. It also represents the closest best

practice in the sector and has influenced the implantation of SGR Group’s SR, being the territorial corporate

leader (for 10/15 years) as well as one of the most important players in the sector at a national level. The Hera

Group is a huge produce of a process of concentration generated by laws and the rationalisation of operators in

the sector. In its hugeness, caused by the combination of several companies taken over in time, lies its

managerial, coordination, organisational homogeneity, cultural and structural weaknesses, unlike SGR Group.

Before describing the process of implementation of SR in SGR Group, it is necessary to draw attention to

its mission and governance in which internal contingent factors are reflected that have influenced the decision of

introducing SR. The SR represents, in fact, an accountability tool that should be coherent with both the mission

and the governance (Matacena, 2010) as verified in the first step of the study (Baldarelli & Del Baldo, 2013).

The mission of SGR Rimini is structured around the following “milestones”: (1) the values profile of the

founders and the top management team; and (2) an attention to CSR, taking care of the surrounding area, the

local community and the environment, as well as the development of human resources, service, transparency

and social relations, and the centrality of dialogue with the stakeholders. The mission states that: “We are

known as an innovative and dynamic multi-utilities company, respectful of the environment which is greatly

tied to the territory and the community”. The company slogan draws on some of the most important values that

the company embodies: “My energy is local, loyal, and social”. Embeddedness and sense of belonging to the

local community, transparency, solidarity, respect for people, and attention to social and environmental issues

are expressed in the ethical code and attributable to the so-called “system of perennial values” (Catturi, 2007),

to which every other corporate value is connected. In particular, coherence is seen as a commitment to the

transfer of the values into everyday actions.

As gathered from the interviews and meetings with various internal stakeholders (marketing manager;

organisational, quality, safety, and environment managers), SGR puts ideas, strategies, and actions before two

questions: “Are we dealing with an effective answer as regards the evident or latent expectations of one or more

categories of stakeholders?” and “Are we dealing with a choice/action capable of consolidating/fostering the

competitive advantage of the company?”. Similarly, from interviews conducted with company heads, it is


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evident how these values are experienced by the owners and managers and spread throughout the entire

organisation. In other words, they reinforce the group’s corporate culture, implying the anthropological culture

which is reflected in accountability (Gray, Dey, Owen, Evans, & Zadek, 1997). The values therefore constitute

the first level in the orientation towards sustainability, foster social cohesion, and favour a pathway shared by

various stakeholders which is summed up in the code of ethics and the SR.

Another feature of sustainability in the group’s mission is the emphasis placed on reciprocal trust,

transparency, and corporate reputation which are included among the cornerstone principles (see Figure 3).

SGR Group “wants to be the company of trust for its clients and the best place in which to work”.

Figure 3. SGR Group: cornerstone principles.

In an interview with the president of the group, Micaela Dionigi, values (humility, tenacity, determination,

spirit of sacrifice, and energy) emerge which have been inherited from the founders and interpreted by the

actual leader in coherence with the changed internal and external environmental context. Her relational

approach, founded upon a great capacity for listening and interacting, is translated into the principle of the

“door being open” to each collaborator. As she said during the interview: “From the beginning, I acted as a

friend”, and now “it is the company which acts as a friend”. “Before (but even now) we were and still are a

family”. The centrality of relations lies in the centrality of the person: “Over the years, the organization has

become less hierarchical and increasingly more orientated towards team work, aiming to seek a dynamic

balance between singular dimension and plural dimension” (Micaela Dionigi, SGR president).

From the interviews conducted with the sales manager of the group, it emerges that values contained in

the corporate mission are shared and embraced in the relationships among employees: professionalism,

dedication to work, simplicity in colleague relations, and reliability. The words of the chief financial officer

(CFO) testify that the example of the company owners is an authentic message which shapes action. Similarly,

interviews to other key figures in the company’s history have confirmed great entrepreneurial skills,

the solidity of the partners, the charisma and dynamism of the founder, Aldo Domeniconi, who laid down the

necessary conditions for the construction of a “personal” service, and the strong identification with the

surrounding territory. The importance of relationships comes from the past; going back 20-30 years into

the history of the group’s business activities, the supply of methane gas to the area and the country represents

a strong relationship with the territory. The centrality of relations is expressed in client orientation, as well

as in attention to the quality of service, safety, and orientation towards social responsibility and

eco-sustainability.

SGR has a “close” approach to the client, and this allows the company to “explain its business activity and

account for its profit” (CFO). When SGR developed the methane gas infrastructural network, potential clients

perceived the importance of its service, which marked an historic moment of change, like the one being

currently experienced in Bulgaria.

Transparency, integrity, efficiency, coherence, sustainability, personal responsibility, respecting and valuing

people, and quality of supplies and procurement


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Due to the afore mentioned aspects (centrality of values and relationships, rootedness), the group can be

considered as a company “of the territory” (Del Baldo, 2010) which spreads the culture of sustainability

through a wide variety of initiatives and plays a central role (in collaboration with public and private operators

(universities, institutions, non-profit organisations, etc.)) which activates mechanisms of participation in the

socio-economic fabric and pathways to sustainable development aimed at the common good.

Following the description, we can potentially make some considerations that are involving all

mechanisms/structure of (neo-) institutional theory. We can find, in the liveliness and the need for closeness to

the surrounding area and the person, whether he be a customer or employee, a combination of the various

mechanisms which can be seen both in the external coercion due to competitiveness and in the presence of

sound values which orientate the same company thanks to the leadership (see Section 5). However, speaking of

the mission does not allow us to understand which directions such mechanisms take, so it is necessary to move

on to the analysis of the governance.

The SGR Group’s internal governance is composed by the board of directors, which involves five

members and has exclusive jurisdiction on defining the company and the group’s strategic lines and objectives,

including the policies of sustainability, and on the review and approval of the SR. The audit committee is a

collegial organ, nominated by the board of directors, and is made up of a president and two employees of the

group’s organisation and quality office. It was conceived as a listening channel and presides over the

functioning and observance of the organisation.

The decision-making process develops throughout the collegiate bodies within their established

competences. In the daily activity, on the contrary, the decision-making process is orientated by the president,

Michaela Dionigi, and the general director. The aspects relating to sustainability were included in the

duties of the communication and marketing office and of the quality, safety, environment, and sustainability

office.

The process of sustainability initiated by SGR influenced the micro-organisational processes and the

company structure. The CSR manager has existed for about three years. He collaborates and interacts, on a

daily basis, with other offices as well as with management, notwithstanding the direction of management which

does not establish rigid operational limits and which leaves room for individual initiative.

An SGR committee was intended at the design phase and has today been put into operation, subdivided

into areas, such as the coordination and dissemination of the culture of sustainability and social responsibility

organs. A specific “open letter” was inserted into the pay packet of every employee to spread and develop good

practices as well as to organise sustainable initiatives. Other initiatives are represented by the enhancement of

the weekly email to employees (“pills of sustainability”) through: messages of raising awareness throughout the

company; the creation of a database for the collection of data relating to economic, social, and environmental

dimensions; and the project for the study of stakeholder perception.

Since 2008, SGR has also adopted the code of ethics and the organisational model in accordance with the

Italian Legislative Decree 231/01. A company value charter is projected to be adopted.

The ethical code takes on a dual meaning: It represents the “constitutional charter” of the company; a

charter of moral rights and duties, which defines the ethical and social responsibilities of every participant of

the entrepreneurial organisation; and it constitutes a tool for governance and strategic management of the

company, identifying the duties of the company towards the stakeholders.


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The adoption of the code of ethics has been based on a participative process, departing from its drafting

and constitution, reached via a fruitful and fair comparison, thus creating a codification process of the

behaviours of employees, managers, administrators, and collaborators based upon the will to cement the system

of legitimization of the company. In the comparison, the internal working group promoted a path of

stakeholders dialogue and stakeholders engagement that has permitted creating sharing around core values and

principles which constitute the essential traits of “SGR’s way of being”.

The fruits of this process can be “seen” in numerous tools and actions: the company notice board (“make

your voice heard”), the carrying on of dedicated relations events (for example, forums for technicians),

departmental meetings, meetings for those in charge of company operations (of an hour per day), interviews

with those responsible for the various, different areas (commercial area, technical area, and energy

savings/efficiency), annual meetings as well as a plenary one for the presentation of SR.

Stakeholders dialogue represents a means of comparison, negotiation, and acknowledgement of reciprocal

interests. Models of dialogue can be various: bilateral, multi-lateral (with every stakeholder individually, as is

now the case of SGR) or can assume the form of stakeholders network. The success of the stakeholder dialogue,

therefore, depends on both the wish of the company and the conviction of the stakeholders that it is not a matter

of pure rhetoric or manipulation. This model may be developed by the SGR Group in Bulgaria wherein a

network of relationships may be installed. Global strategies are often put to the test at a local level in the

convention the company wishes to transfer costs of competition nationwide.

The success of many companies continues to depend on their roots within the local area wherein they were

set up and developed thanks to positive stakeholder relationships which derive from the quality of human

capital (qualification of the manpower and specific work culture) as well as social capital (social cohesion,

institutional collaboration, informal networks among collective players, solidarity, and interpersonal trust).

In these cases, stakeholders dialogue represents a value-adding praxis of the social capital (Del Baldo, 2010).

Such a dialogue is linked to reciprocal trust.

To respond to and contemporise the stakeholders interests, SGR proceeded with their analysis, followed

by the stakeholders engagement plan, which includes diverse tools of consultation and communication.

Mention can be made of: intranet, accessible at all corporate levels; internet, accessible at several openings

levels; an internal blog; a newsletter; employee satisfaction questionnaires; informative brochures; company

notice boards; plenary meetings (once or twice a year); and company meetings for the offices with the

participation of management (monthly).

Democratic nature, trust, and a relational logic are aspects that have been put into motion in governing the

SGR Group, in that a participatory climate which spreads from the owners to every level of the company goes

together with the hierarchical structure of the various organs of the company organisation chart.

The decision-making process develops, combining participatory aspects to hierarchical decisions, though still

shared ones, which makes the leadership, close to the needs of everybody.

From an analysis of the minutes of the board of directors of Rimini Holding Spa, it is possible to identify

various phases which demonstrate how governance has developed the pathway towards sustainability. The most

important steps are listed in Table 3.

Therefore, the process of developing the SR finds a favourable environment in SGR, due to the attention

paid to social aspects (“open door” of the president, closeness to the needs of the employees in order to


1081

reconcile working time with their families) and environmental aspects (attention paid to the saving of

non-renewable resources with the spreading of a culture for their preservation). The quality certifications,

which preceded the decision of implementing an SR, refined the business culture to the point of making a

document, in which this general “propensity” to sustainability is described, almost “necessary”.

Table 3

Rimini Holding Spa: Board of Directors’ Deliberations Date of summoning of the board of directors

Subject of deliberation

July 14, 2004 Participation in a tender for a licence of natural gas distribution and sale relative to the gas region of Thrace, in Bulgaria.

July 1, 2008 Approval of the Ethical Code and Organization, Management and Control Model formulated by the work group and appointed members of the relative Supervisory Committee (ex D.Lgs.231/01).

November 17, 2009 Confirmation of the Supervisory Committee for three years of 2009-2011.

March 30, 2010 Analysis of the project of the energy efficiency. Energy Efficiency Project relative to the conversion of the internal plants of national clients and potential Bulgarian clients of CityGas Bulgaria.

September 29, 2011 The company’s board of directors assesses the offers of assurance in the SR for the 3-year period of 2012-2014.

This determined the attribution of the duty to a new staff unit which was hired with a temporary contract

within the office which dealt with “quality and sustainability” with the primary duty of developing the SR

following the G3 lines. Afterwards, the contract was made permanent with the aim of spreading the culture of

sustainability within and outside the company. Moreover, during the introduction of the SR surfaced an amount

of work concerning the finding of data and information which leads the new employee to interact with all the

members of the business.

The figure of the CSR manager has been originated from 2010 and represents a “corporate presidium” of

sustainability, who collaborates and interacts on a daily basis with other offices and the management,

notwithstanding their tendency not to set rigid boundaries of activities and to allow the freedom of individual

initiative. The offices providing reference points are those of marketing and communication, quality, safety, and

sustainability. A committee is being set up for sustainable development, divided into areas and conceived as an

organ of coordination aimed at the diffusion of the culture of sustainability and social responsibility.

The new organisational function, which is separated from the previous one within which it was included

and which plays its very own role of autonomy, has become, in its turn, an area where training people can be

included in order to develop internal and external learning and synergies and introduce those innovations that

the company needs. In such a way, it becomes a “relational engine” for the stakeholders engagement, to which

it is operatively delegated in the company trying firstly to create those relational goods (based on internal and

external stakeholders dialogue) which should be at the basis of SR in a virtuous bi-directional circuit of

accountability-governance, which allows for some reflections also in terms of neo-institutional theory.

Once the characteristics of the company are defined, we can examine the process of sustainability

development in more detail.

The Process of Implementing the SR in SGR Group

SGR Rimini has always considered CSR and sustainability an integral part of its mission, values, and

strategies and as the basis on which to build solid relations with its stakeholders (see Figure 4).


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Figure 4. SGR stakeholders structure.

Since 2008, it has implemented processes, tools, and procedures which represent the pieces of a single

mosaic of responsible and sustainable business management. The choice of drawing up an SR is part of this

process started years ago. Other already existing tools have become an integral part of this process (i.e., the

Management and Control Model introduced in 2008 for the prevention of corporate crime, the ethical code, the

declaration of mission and vision statements, the balanced scorecard).

The “CSR and Sustainability Report” project was presented as an insert in the 2009 report. The first SR is

relative to the year 2011 and has been published and presented along with the annual and consolidated report in

May/June 2012. The phases through which the implementation has been realized can be summed up in the

following way:

(1) Definition of the working group, through the involvement of offices and especially processes mainly

affected by data gathering;

(2) Identification of the items of information to gather and of indicators to produce;

(3) Writing of a commentary index;

(4) Structuring of the “work plan” to gather data and other items of information;

(5) Drawing up a draft of the document on the basis of the commentary index and internal diffusion of the

draft document among interested persons;

(6) Editing and validation of the draft by the management;

(7) Final drafting of the document.

In order to better understand the phases of the SR implementation, we outlined, in Table 4, the process,

called the sustainability plan, which preceded the writing of the report.


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Table 4

The Sustainability Plan of SGR Rimini Governance sustainability tools

Commitment Action

Promote the Management and Control Model (ex D.Lgs. No. 231), adopted in 2008

A Supervisory Committee was set up in every company of the group, in order to supervise and control the effectiveness, functioning, and observance of the model. Continuous training inherent to D.Lgs. 231/01 and the model. Publication of the Model 231 on the internet website (http://www.sgrservizi.it/2158/1/Home.html) and the company intranet.

Promote the group’s Ethical Code, adopted in 2008

Sharing the code: The SGR Group requested all those collaborating in company activities to bring their conduct in line with the practices outlined in the current code. Publication of the Ethical Code on the internet website (http://www.sgrservizi.it/2158/1/Home.html) and the company intranet.

Publish a single SR for the whole group in coherence with the initiatives of GRI

2011. Adoption of the SR covering all the dimensions: economic sustainability, social sustainability, and environmental sustainability.

Promote the SR and the culture of sustainability

2011. Numerous internal and external initiatives to promote the culture of sustainability: (1) Periodic meetings with the non-profit association “Children of the World” on the theme of CSR; (2) Collaboration with the University of Bologna, seat of Rimini, and the University of Urbino to deepen the theme of CSR and sustainability; (3) Support and external consultants to start up the process of the accountability of sustainability; (4) Creation of a CSR committee to monitor and stimulate sustainable practices within the company. By 2012. Presentation of the SR at the general assembly along with the presentation of the financial report. Inclusion of the SR, Ethical Code,and the Management and Control Model in the Welcome Kit handed out to new employees. By 2012. Promotion of the SR on the internet website (http://www.sgrservizi.it/2158/1/Home.html).

Note. Source: SGR Rimini Sustainability Report 2011 (http://www.sgrservizi.it/2158/1/Home.html).

What follows (see Table 5) is a summary of commitments, with reference to the diverse stakeholders’

categories.

Table 5

Summary of Stakeholders’ Commitments People (employees)

Commitment Action

Increase interviews with people

2005. Introduction of a survey on the internal climate and a questionnaire to assess satisfaction. The survey is carried out every year in the month of July. These are fundamental tools in the processes of continuous improvement and the involvement and development of employees. 2010. Area meetings to discuss the results of the survey and plan actions for improvement.

Increase the training and awareness of employees regarding the themes of safety, to reduce the frequency and gravity of industrial accidents

2010. Courses on safety for a total of 973 hours concluded.

Implement the training scheme and apply it to all members of the companies

2010. Training activities become increasingly important. The total number of training hours amounted to 10,441 taking into consideration both internal and external training (refresher courses, training, conventions, etc.).


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(Table 5 continued) People (employees)

Commitment Action

Develop activities to reconcile life and work

2010. Two questionnaires were attached to employees’ paychecks to assess the feasibility of extra courses beyond working hours and verify the degree of interest expressed in the project of life and work reconciliation promoted by legislation number 53/00.

Increase internal communication

By 2011. Restyling company intranet and provision of an area dedicated to sustainability, which allows members to send suggestions and advice about improving corporate sustainability. 2011. The Mia Voce Project: setting-up of a wall at the Rimini seat dedicated to employees’ messages. Each month, in agreement with the management, a theme is proposed and employees can express their opinions about it. Plenary meetings, which generally take place once or twice a year.

Diffusion of the culture of sustainability and a corporate atmosphere based on shared values

2011. Initiatives regarding information and awareness about sustainability aimed at internal and external members of the group.

Clients and suppliers

Commitment Action

Define systems of periodic surveys to assess the degree of client satisfaction

Half-yearly interviews conducted by the authorities for electric energy and gas. A project to develop internal interviews has been launched and carried out to clients who have had recent dealings with the companies of the SGR Group.

Maintain and develop the activity of information aimed at saving energy and protecting the environment and safety

2010. Distribution of Water Conservation Kits to clients made up of hydraulic dampers and low-energy fluorescent light bulbs.

Promotion of energy efficiency in the final uses 2010. Making end-users aware of responsible energy consumption. Promoting respect from suppliers for the principles which have inspired the organisational model of the SGR Group

2011. Requested adhesion to the same principles which inspired the group’s Management and Control Model.

Support where possible the development of purchasing processes with features of eco-sustainability

The diffusion of electronic negotiation tools to replace, where possible, traditional paper-based processes.

Define and promote supplier assessment systems 2011. The launch of the development of a project for supplier assessment.

The environment

Commitment Action

Adopt new guidelines and procedures of the group relative to environmental management

2010. The start of work procedures from the attainment of the following certifications: (1) ISO 14001 Environmental Management System; (2) BS OHSAS 18001 Health and Safety Management Systems.

Increase the activity of awareness about energy saving use

2011. “M'illumino di meno”. National initiative aimed at making people aware of an intelligent use of electric energy in which the SGR Group participated through a symbolic action: with a gift token of onelow-energy consumption light bulb + a handbook of good daily habits. Raising awareness about the use of alternative energy sources. 2011. Relations with schools were strengthened through the organisation and promotion of the theme of energy efficiency. Progetto ERRE, which stands for renewable energy and emission reduction, was promoted by the Council of Rimini.

Rationalize energy consumption in Bulgaria by developing a project of energy efficiency

2011. CityGas Bulgaria becomes the official representative in the country in raising awareness on the theme of energy saving and energy efficiency through a communication campaign. The message is the development of a culture of respect for the environment through the reduction of current polluting heating systems.

Institutions and communities of reference

Commitment Action Make channels of communication coherent and transparent, drawing inspiration from the values of sustainable development and the participation demands of all interlocutors (clients, suppliers, employees, and territory)

2011. “La mia energia è…” institutional publicity campaign:(1) new SGR services website; (2) creation of sales leaflets, 2011 calendar and 2011 diary; (3) creation of company profile; (4) new layout of clients’ offices; and (5) sales letters. Creation of information areas within the bill.


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(Table 5 continued) Institutions and communities of reference

Commitment Action

Promotion of a dialogue with local, national, and international institutions

2011. Collaborative relations with public institutions on a national and international scale. Proactive role in the sector and multi-sector to promote themes of sustainability. Energy Efficiency Project in Bulgaria with the EBRD and the Ministry of Bulgaria. CityGas Bulgaria becomes the spokesbody for raising awareness in the country on the theme of energy saving and efficiency through a widespread campaign of communication aimed at developing a culture of respect for the environment by means of reducing current polluting heating systems. The average natural gas consumption per capita in Bulgaria is 2.5 times lower than the European Union (EU)average.

Management of plants in the territory and protection of the biodiversity of the landscape

Improvement and conservation of the natural heritage in areas in which there are plants or green areas near plants (Progetto Natura 2000,http://www.natura.org/).

Support to the community Commitment to the growth and development of territories through the support of initiatives, social, cultural, and sports events (Some examples are given in the right-hand column)

2010. Special recognition given to Micaela Dionigi, chairman of the SGR Group: for the quality of the hosted internships, from Uni Rimini(company consortium for the university in the Rimini area) and for the sensitivity shown in the support of better healthcare for everyone, from Ausl Rimini. 2011. Economic contribution towards the acquisition of two buses to transport the disabled and elderly and schoolchildren. Economic contribution towards the acquisition of garden games for the nursery school. Economic contribution in favour of the health authority of Rimini for the purchase of a multi-layer CT scanner and van for mammogram screenings. Economic contribution to the Istituto Oncologico Romagnolo. Purchase of a defibrillator placed inside the congress structure. Economic contribution to numerous cultural initiatives including “International Study Day” of Pio Manzù and the painting exhibition “Paris. The marvellous years. Impressionists against the Salon as well as Caravaggio and other 17th century painters” and the Plautine feasts. Economic contribution in favour of Crabs, the basketball team of Rimini and numerous other sports associations. Economic support of events promoted and organised by the towns of Rimini, Sarsina, San Leo, Gabicce, Coriano, Talamello, and Pietrarubbia.Other initiatives: Rimini Onlus Solidale, Progetti Tanzania e Bangladesh, and Noi e l’arte.

Collaborations with the university

2011. Inauguration at the SGR congress centre of the new Rimini seat of Bocconi Alumni Association (BAA), to promote initiatives forvalues gained to benefit various professional families operating in our area. Dialogue with all the institutions operating in the territory (confederation of industry, universities, the Council of Rimini, the province of Rimini, foundations and other cultural associations, high schools, local and non-local banks, other sector associations, etc.) with the aim of bringing, even to the province, events and informative debates which give rise to comparison and stimulation and which are usually more common in city areas. Collaboration with the University of Bologna, the seat of Rimini, and the University of Urbino to deepen the themes of sustainability. Collaboration with the junior schools, the University of Bologna, the seat of Rimini, and other educational bodies in work-related learning projects.

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1087

Sustainability Dimensions, Institutional Theory, and the Case Study of CityGas

In this section, we examine the possibilities of the CityGas Company (Bulgaria) creating SR, consistent

with SGR Rimini (Italy) using an adopted institutional approach. We start from the view that the company is

placed in a specific institutional environment in which more complex than pure market factors function,

including internal and external institutions. If this environment is well understood and if we know about the

institutions that set the “rules of the game”, the right decisions could be made, including on the issue of SR and

its contents and its cost/benefits, without ignoring the market.

Therefore, before recommending setting up a system for sustainable accounting, CityGas must make a

thorough analysis of opportunities that bring benefits from accountability of company that will justify the costs

incurred. Then, made investment would produce return and SGR would undertake the creation of SR in its

subsidiary, in Bulgaria, where company sustainable accounting and reporting do not happen, the creation of

investment costs for sustainable accounting and reporting is a particular risk for the company’s financial success.

Two questions must be answered: “Is it justified that there should be the introduction of sustainable

accounting and reporting of CityGas and what is its manner of creation: coercive, normative, or mimetic?” and

“What specific items must it contain in order to contribute benefits to increase the sustainability of the

company?”.

We will examine the institutional factors affecting CityGas through the prism of the risks for the company

and the identification of institutions that are associated with these risks in order to answer the

question—“institutionalisation or change” (see Figure 7).

Figure 7. Influence and interaction of institutional factors on sustainability accounting and reporting.

Sustainable accounting and reporting

External institutions and its effects and

character

Internal institutions and its effects and

character Institutional factors

Elements of institutional system

Constitution, legislation

components risk

Unwritten rules, customs, norms of behaviour, values

components risks

Interests and preferences of users of accounting information

Theory of sustainable accounting and

reporting

Sustainable accounting and reporting methodology &

procedures

Change


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External Institutional Factors

CityGas is one of the two companies created by SGR in Bulgaria. It is managed by a board of directors.

The company’s capital of 60 million Lev, divided into 60,000,000 shares with nominal values of 1BG Lev

(a BG Lev is equal to 0.5 Euro) each. Shareholders of CityGas are Società Gas Rimini and Simen. SGR Group

holds 90.22% of the capital and 54,132,600 ordinary shares, while Simen holds 9.78% of the capital and

5,867,400 ordinary shares (State Energy and Water Regulation Commission [SEWRC], 2011).

Institutional theory emphasises “specification of property rights”. Property rights, which are based on

private ownership, are a factor which has greater stability in comparison with external institutional factors like

the contract for management and the role of manager. Clearly specified, property rights contribute to economic

sustainability of growth. Property rights of owners of CityGas are very clearly specified. This clearly states that

the specification of ownership gives reason to believe that there are good prerequisites for the successful

creation of sustainable accountability.

But there is also a factor which is very positive for the future development of CityGas. The

average natural gas consumption per capita in Bulgaria is 2.5 times lower than the EU average

(http//www.autorita.energia.it//index.htm.thm). This represents another institutional problem. In final energy

consumption in Bulgaria, gas occupies about 2%, while the EU is around 45% (Ivanov, 2007; 2010). This

means that in Bulgaria, there are great free allowances for gas consumption (see Table 6).

Table 6

Comparison Among Natural Gas Consumption, Exports, and Imports of the World Selected Data

Rank (Total) Country Natural gas consumption (Thousand cubic meters)

Per capita

(Cubic meters)

2009 2011 2009 2011

Natural gas consumption of the world

1/1 United States of America 646,600,000 683,300,000 (2010) 2,105 2,203

8 China 87,080,000 129,000,000 65 97

9/10 Italy 78,120,000 77,800,000 1,344 1,275

69/77 Bulgaria 3,350,000 (2008) 2,620,000 461 366

Natural gas imports of the world

4/4 Italy 69,240,000 70,370,000 1,191 1,153

38/44 Bulgaria 3,480,000 (2008) 2,480,000 (2010) 479 347

Natural gas exports of the world

41/44 Italy 124,000 123,000 2 2

46/49 Bulgaria (2008) 0 0 0 0

Note. Source: World by map: statistics, maps, and charts available on http://world.bymap.org/.

Bulgaria is a country in which there is a significant potential for development of the sector of gas supply

and its distribution. Natural gas is supplied in Bulgaria exclusively by Gazprom. Gazprom remains the largest

supplier of gas to Europe. According to the company, it supplies about 27% from the total quantity of gas for

the EU.6 It has never officially disclosed the prices at which its products are supplied to European countries.

The European Commission is seeking to encourage all the EU countries to disclose the terms of contracts with

Gazprom, but has not yet been able to do this.

6 Retrieved from http://www.gazprom.ru/about/marketing/europe/.


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Russian state monopoly of gas Gazprom supplies in the Old World under separate contracts, with the price

of oil is traditionally tied to a basket and fluctuates after world oil prices with a delay of about six months.

At the same time, the original contract price is set individually. The most expensive gas costs the countries

that do not have alternative sources of supply. Bulgaria is 90% dependent on Russian gas.7 In this context,

the most important for the implementation of the sustainability of the development of the gas sector is the

“South Stream” project and the terms of the contract between Gazprom and Bulgaria. The contract is a key

institutional category. According to Williamson (1975; 1985), there is a huge difference between regular

contracts entered into by suppliers and contracts that provide for a long-term business relationship. Gazprom

exports gas to European countries primarily under long-term contracts of up to 25 years, usually on the basis of

intergovernmental agreements. Gazprom believes that long-term contracts are the basis for stability and

reliability of gas supply. But it is the long-term contracts among states that are described by institutional theory

as the “incomplete contracts”. They are practically impossible and are renegotiated. The main features of

long-term contracts offered by Gazprom are:

(1) Pricing system, which takes into account changes in prices of petroleum products during the preceding

6-9 months;

(2) Conditions affecting the unilateral termination of contracts, except for prolonged force majeure;

(3) “Take or pay” contract extended to a large volume, which stipulates that the buyer pays for the year

undrawn amounts and can later select them after the payment of the appropriate minimum annual volume of

deliveries under the contract in the relevant year. Consequently, the probabilities about the sustainability of the

business of gas supply in Bulgaria can be considered in terms of the contract theory and in the sense of risks

inherent in the “incomplete contract”. In this case, there is a complicated problem with risk assessment and ROI

in the gas sector, which is created by the existence of the “incomplete contract”.

This is the difference between the institutional environment of the EU and that of Russia. While the EU

has created and developed institutional environment that requires an expansion of the freedom of the market,

the Russian gas market legislated by government decisions and determine by laws special allowances in

the prices of transportation of gas. In addition, Russia has adopted a policy of “one gas supply”, while the EU

has adopted a policy of “diversification of gas supply” and non-monopolistic position of the firms on the

market.

Economic sustainability of gas supplies by CityGas depends on these institutional problems. Therefore,

the assessment of the risk posed by these institutional circumstances will be important for assessing the

economic sustainability of the company.

Moreover, investment risk is a key indicator for the sustainability of the company at present and in the

future and shows the opportunities for its growth. It is also for these reasons that there is an important motive

for choosing to have either no firm commitment or make the costs of compiling SR. Many reputable scientists

recommend the study of a stability analysis of the company starting with the definition of financial investment

risk of the company and/or industry (Bebbington et al., 2008).

On the other hand, measuring the degree of risk and determining risk factors give a reason for making

management decisions in relation to increasing the sustainability of the company.

7 The poor pay more (Stringer news agency, retrieved from http://stringernews.com/publication.mhtml?Part=37&PubID=24271). Gazprom: questions and answers (Retrieved from http://www.gazpromquestions.ru/?id=34#c624). Gazprom (Retrieved from http://www.gazprom.ru/about/marketing/europe/).


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One of the most popular indicators of financial risk is a statistical measure, called Beta: Gauging Price

Fluctuations (Investopedia, 2012). The object of the activity of CityGas is “transmission, distribution, and sale

of natural gas”. CityGas is a company not listed on the stock exchange, and therefore, its Beta cannot be

directly calculated. For this reason, we will make an indirect analysis of the degree of CityGas risk. From the

period which goes from October 2006 to the end of 2011, the investments made by CityGas amounted to

92 million Lev, in the municipalities of the gas region “Thrace”. According to the company report,

450 kilometres of gas pipelines were built. These include 200 km gas pipelines connecting the distance from

the national gas transmission network of “Bulgartransgaz” to the cities of Kazanlak, Haskovo, Radnevo,

Galabovo, and Krichim. Gas supply is carried out, allowing more than 800,000 people to use gas. Based on

analysis of the reported data, which had been submitted from 2009 to 2010, the implementation of investments

in “mechanism and gas distribution facilities” in 2009 was 77% and 27% in 2010.

The total value of the investment programme for municipalities and Pavel Banya Gurkovo provided for

the period of 2012-2013 amounted to 827,000 Lev for the new activities of municipalities CityGas Gurkovo

and Pavel Banya. The value of investments for distribution and activity of gas supply during the business plan

amounts to 102,884,000 Lev. In the updated business plan 2009-2013 in a specified gas area “Thrace”,

including municipalities Pavel Banya and Gurkovo, the investments amounted to 102,884 Lev. CityGas

must protect the return on these investments, which involve direct financial risk due to its origin from the

EBRD loan.

The main direct risk associated with the servicing of loans is the loan from the EBRD, signed by the

company on July 29, 2010. The loan will be gradually absorbed each year in accordance with the investment

programme. The maturity is five years, with a 3-year free period on principal for each tranche and an interest

rate of 3.8% annually. The amount of loan needed to finance investment intentions of CityGas on the territory

of “Thrace gas region” is 25,000 Lev. The borrowing rate is significantly lower than the interest rates

on newly contracted loans granted by commercial banks to non-financial institutions. Interest rates on this

debt are based on London Interbank Offered Rate (LIBOR) or Euro Interbank Offered Rate (EURIBOR).

The rising of interest thereon could adversely affect solvency and liquidity indicators. Most of the profits to

CityGas come from gas supplies in Bulgarian nation. The Bulgarian Lev is stable now, because it is tied to the

European Central Bank (ECB) at a fixed rate. At this stage, only the volatility of the Euro could lead to an

indirect currency risk. Therefore, currency and monetary financial risk for CityGas is minimized as far as

possible in the present situation. But it still depends on the stability of organisations such as EBRD,

on currency policy of the EU and ECB, in terms of a debt crisis for the EU, and on the stability of the

Bulgarian currency board.

Moreover, Bulgaria’s gas portfolio is not diversified. The entire quantity of gas that is distributed in the

country comes from Russia and is passed through Ukraine. Political instability in Ukraine, as well as certain

global interests of Russian foreign policy, can generate serious risks concerning the possibility of supply,

including the gas crisis in Bulgaria. At the beginning of 2009 (early January), Russian gas supplies to Bulgaria

were completely closed and Bulgaria experienced a gas crisis. The risk problem here is the monopoly of

Bulgarian Energy Holding and its subsidiary Bulgartransgaz. The transportation of gas in Bulgaria is done by a

unified system of gas supply. CityGas owns part of the transmission network in areas where its business is

carried out but the expansion of its activity depends on the state gas distributor Bulgartransgaz and access to

national gas transmission network, which depends on obtaining licenses and permits.


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The main risk factor of this kind is the price of gas. It depends on global markets and on the fact that

CityGas distributes Russian gas. In addition to price risk in the supply of monopoly Bulgartransgaz for CityGas,

there is a risk in sales due to the low income of the Bulgarian population, which is among the lowest in the EU.

Sale prices of Bulgartransgaz are steadily rising, and currently, there is also a significant increase, regardless of

the fact that incomes have not increased in two years and unemployment is rising in the country. The CityGas

Company cannot protect itself against these risks. It can only rely on political arrangements by the Bulgarian

government.

Another important factor is the institutional nature of the Bulgarian energy and water regulator, SEWRC,

which is weak and badly controlled and allows a number of deliberate errors in the regulation of energy and

water prices and their pricing system (Nesheva-Kiosseva & Getov, 2010).

Another external factor of institutional nature is the regulation of the European Commission on gas utility

competition and gas prices. Directive 2009/72/EC8 and Directive 2009/73/EC9 seek to impose changes

including separation of transmission and distribution networks from activities of production and delivery which

eliminate an inherent risk of discrimination not only in network operation, but also in the incentives for

vertically integrated companies to invest adequately in their networks.

The major environmental risks are related to the environmental impact of the construction of gas

transmission networks of the company. Exceeding the limit values of exposure may lead to significant

payments in the form of fines and environmental taxes and cause detriment to the company. For example,

CityGas works in areas that are mostly farmlands and forests. For example, the whole territory of the

municipality of Gurkovo is 70% forest, 24% agricultural lands, and planted with roses for industrial purposes.

The activity of CityGas in Northeast Bulgaria is in the “Granary of Bulgaria”: Dobrudja region. Bulgarian

society is predominantly sensitive to the exploitation of land in Dobrudja.10 It continues to oppose the mining

of shale gas there by Chevron, assuming that the extraction of shale gas will harm the fertility of agricultural

lands in this region.

CityGas operates in Thrace (Trakia) and Northeast Bulgaria (Dobrudja). The licensing activities

of CityGas place it in 28 municipalities. The Thrace region is a territory that has been inhabited since

ancient times and there are artefacts of one of the most ancient European civilizations, the civilization of

the Thracians. The Valley of Thracian Kings area is filled with about 1,000 mounds and the necropolis of

the kings and many other archaeological sites of ancient Thracian civilization. Bulgarian society values its

heritage and realizes that different groups protest against the passage of infrastructure projects in archaeological

sites.

Demographic forecasts for Bulgaria are unfavourable. According to them, the country’s population will

continue to decline. CityGas works in two regions, which have mixed populations. Bulgaria is placed at the

227th position out of 231 countries by rate of growth of population. Among the Bulgarian population, there are

many Muslims, Turks-Muslims, and Roma. There is a certain risk of ethnic worry in certain political

8 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC. Official Journal of EU, 14.08.2009, L 211/55. 9 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC and of the Council of 13 July. Official Journal of EU, 14.08.2009, L 211/55. 10 Bulgarian citizens and non-governmental organisations (NGOs) continue to oppose the extraction of shale gas there by “Chevron”, assuming that the extraction of shale gas will harm the fertility of agricultural lands in this region.


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circumstances. There is a low labour mobility due to weak transport infrastructure inside the region. The last

factor may lead to labour shortages and as a result, to an increase of wage discrepancies to increasing labour

productivity. Cited data show a level of risk for CityGas that cannot be ignored. The main types of risks facing

the company show that there are serious risk factors for its sustainable development. Some of them have an

institutional nature, which requires an institutional analysis of the sustainable development of the company.

Except for general political and institutional terms, external institutions, which can provide risks for the

sustainability development of CityGas, must be studied and investigated. The influence of “internal

institutions”, which have core differences in Italy and Bulgaria with respect to ethics, rules of conduct, and

values that govern the behaviour of people in both countries, should be investigated, too. Such a study would

provide a better understanding of the need for SR for the holding as a whole, including its Bulgarian

companies.

Internal Institutional Factors Like “Rules of the Game”

Analysis of the major external and internal institutional factors and emerging risks to the sustainability

performance of the CityGas Company leads to a number of thoughts.

The compiling of CityGas sustainable accountability can be successfully performed only by the coercive

isomorphism mechanism. It will be an institutional change in domestic institutions that are significantly more

stable than external. Most likely, it will first be seen by the Bulgarian society, or may be adopted with

confidence. According to the “European Values Survey”11, trust is a “scarce commodity” in Bulgaria.

Application of a normative approach is impossible, and mimetic would result in only “green-washing”. Due

to risks of institutional nature, CityGas needs a compilation of records as a sustainable source of objective

information on the status of these risks is minimized. SR of CityGas has not copied entirely the SR of

SGR Rimini, but it takes into account the particularities of the institutional environment in which the company

operates. When it comes to a company that has been given an institutional opportunity to expand its scale,

we think of the overall analysis of Williamson who recognized the need for a category of non-tangible asset

specificity and coined the phrase “human capital asset specificity”. This includes a range of assets such as skills

created through specialized training, learning-by-doing, expertise, and new knowledge created in the context of

exchange as well as standard operating procedures (Christiaanse & Venkatraman, 2002).

Hofstede’s research on the cultural dimensions shows that Bulgaria is a kind of “halfway” between east

and west, created by public institutions to ensure future risks. His study shows greater proximity between

the Bulgarians and the Italians, rather than between them and Americans and Russians. The indicator “power

distance”, however, shows greater authority of government in Bulgaria than in Italy. For Bulgarians

(70 points) as compared with the Italians (50 points), “The state is responsible”. In “socialism”, “everything

belongs to the state, everything comes from the state” and all actions and decisions are expected.

The “socialist period” has negatively affected the “individualism” of Bulgarians. From the point of view of

long-term sustainability, the proximity between the Bulgarians and Italians indicator “uncertainty avoidance”

(UA) (Hofstede, 2012) is important. UA index for Bulgarians is 85 and for Italians, 75, in contrast with

Americans and Russians.

11 “European Values Study” is the most comprehensive research project on human values in Europe. The application of the results of this study determines the comparative human values characteristic of “internal institutions” that determine the rules of the game and govern the behaviour of people and companies in developed European economies, in the example of Italy and the emerging markets in the example of Bulgaria.


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For a more thorough analysis of internal institutional factors prevailing “rules of the game”, we will use

the large European survey for 2008-2009 (fourth wave), covering 44 countries, including Bulgaria (European

Value Survey 2009). The study raises the question of “transit of values” among European countries. This is

otherwise provided by the Di Maggio-Powell thesis of institutional isomorphism: “Isomorphism is a

constraining process that forces one unit in a population to resemble other units that face the same set of

environmental conditions” (Di Maggio & Powell, 1983, p. 149). In short, institutions that are for excellence in

Europe, there is no trace in “Bulgarian adaptations” (Fotev, 2009, p. 15).

User groups of information for SR are: creditors (EBRD); suppliers (Bulgarian Energy Holding and

Contracts for gas supply at a governmental level); customers; investors (SGR Group); internal users (managers,

staff); tax and insurance authorities; NGO’s environmental, social, cultural, trade unions, local authorities; and

state authorities of economy, society, and environment.

Interests of the groups/users of SR should be provided in the following SR functions: (1) information;

(2) monitoring; and (3) capitalization, accounting policy, depreciations, depletions, and amortizations.

The stages of accounting process can include: description of the facts of business; documentary substantiation

of the facts; recording of facts based on GRI; accumulation and systematization of information; public

verification report; and structure of sustainable report based on principals of reliability, safety, regional cultural

and ecological policy, investments in intellectual capital, and social investments.

Among the most important conditions for the “isomorphism” (Di Maggio & Powell, 1983; 1991) is

“the profession”. This requires investment in intellectual capital per employee for development of SR.

Considering the creation of sustainability accounting, CityGas has an investment in an asset.

Firstly, this is an investment in capital-unique knowledge of staff that will establish sustainable accounting

and reporting (i.e., this is an investment in an intangible asset). Secondly, this is an investment in human capital,

which includes training staff and creating new jobs.12 Thirdly, it is, in Bulgarian conditions, an investment in

highly specified asset rather than an inherent investment. Fourthly, it is an investment that can be viewed as an

investment in energy efficiency and environmental effectiveness. This is because that the basis of sustainability

accounting can be achieved through better results in energy efficiency, which can be evaluated over time through

emission trading. This is because that the basis of sustainable accountability can be achieved through better

results in the environmental impact of company activities and through creating added value in natural resources.

Table 7

Value Added Intellectual Capital (VAIC) From Investment in Accountant for SR

No. Item Hypothetical year Year 2011 Year 2010 Year 2009

1 Earnings before interest and tax (ЕBIT) 4,201 4,201 5,340 3,070

2 Value added (VA) 8,147 8,121 8,009 5,141

3 Potential of human capital (HCE) 10.89 11.25 11.95 8.76

4 Potential of structural capital (SCE) 0.91 0.91 0.92 0.89

5 Potential of intellectual capital (ICE) 11.800 12.159 12.870 9.644

6 Potential of employed capital (CEE) 0.076 0.075 0.12 0.08

7 VAIC 11.88 12.23 12.99 9.72

12 It assumes that because of the achieved high performance in CityGas, which enjoys decades of experience of the SGR and where 25 employees profit from the tens of millions of Lev, an employee will be sufficient. If the company decides to use outsourcing for this purpose but Bulgaria does not have accounting firms that are able to draw sustainable reporting, and it is not advisable in this case.


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We can calculate the potential added value of intellectual capital of CityGas in this investment. VAIC is

calculated in conservative accounting environments, based on data from financial reporting of CityGas. For its

determination in comparison with the potential of structural capital and capital employed in the hypothetical

first year of the investment, assuming the presence of all the other conditions of 2011, which are, using

Ricardian principle, the “most unfavourable conditions” according to which the potential of VAIC can be

explored (see Table 7 above).13

The test on CityGas showed the following results: (1) correlation HC/VA = 0.936 (Strong); (2) correlation

SC/VA = 0.999 (Strong); and (3) correlation CE/VA = 0.538 (Average).

The positive correlation between the added value and the three indicators showed that the investment is

helpful in the value creation process. The observed VAIC for the 20 Bulgarian companies, for a 7-year period

according to Kasarova, Yovogan, and Dimitrova (2011), showed that companies examined produce a

pronounced U-shaped curve. The correlation also shows that human capital is important for CityGas such as

structural one. The explanation for this U-shaped curve situation can be found in the restructuring of companies

in connection with the crisis according to the authors. In our case of investment in intellectual capital in

CityGas, a slight VAIC drop is also experienced in the “hypothetical year”. This is not only due to the fact that

in this case, the proposed investment in human capital is made but has not worked as intellectual capital and has

not produced returns but also because that the hypothesis is tested on 2011 data. This means that investment in

human capital for the needs of sustainable accounting and reporting in CityGas not only is not risky but can

also be expected to give very good returns for the company.

The stages of institutional changes in accounting policy and adopting sustainable reporting can be seen in

the following scheme: analyses of non-formal (internal) institutions; self-choice rules; analyses of formal

institutions; self-choice rules of sustainable reporting; compliance with laws; characterization of the regulatory

authority, SEWRC; corruption; effectiveness of the mechanisms of sanctioning; institutional analyses and

synthesis; and preparation of CityGas sustainable reporting for institutional changes.

Table 8

Synthesis of Institutional Mechanisms in CityGas Mechanism (Di Maggio & Powell, 1983) SR: Institutionalisation (Inst) or (of) change (Ch)? Coercive: External institutional factors: external regulation of consumption and gas sales in Bulgaria; and the investment risk of companies in the gas sector (direct financial and currency risks; direct production risks associated with delivery of natural gas of CityGas activity; ecological risk; and cultural, social, and demographics risks).

The CityGas’s SR will be an institutional change in domestic institutions, which are significantly more stable than external. Most likely, it will first be seen by the Bulgarian society, or may be adopted with confidence.

Normative: Application of normative approach is impossible in CityGas from “outside”—from society or external professional and regulatory sides: based neither on the state of internal institutions nor on the state of external ones. “Capitalism” in Bulgaria is still at the stage of initial accumulation. Institutional environment is motivated solely by profit.

The CityGas’s SR: Intrinsic motivation for social responsibility and sustainability can only come from the policies of its parent company.

Mimetic: (1) The study of values in Bulgarian society shows that the “trust” is a “scarce commodity” in Bulgaria; (2) Internal institutional factors.

The CityGas’s SR: In “CityGas case”, mimetic mechanism would lead only to a “green-washing lack of adjustment in domestic institutions”.

13 Note: VAIC = ICE + CEE. ICE = HCE + SCE. HCE = (EBIT + DA + HC)/HC. VA = ЕВІТ + DA + HC. SC = VA – HC.


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The function and principles of institutional changes of sustainable reporting can be: functions of

sustainable reporting as a prerequisite of its development; answer to the interests of users; balancing the

interests of users; consistency with the amendment of rules; principles of fair information; opportunity for

correction; efficiency through open information; dependent regulator, regulations, and standards; principle of

gradualism amendments; rapid implementation of changes; opportunity for complementary and gradual shift to

change the regulatory framework; principle of innovative change; stimulate innovation; and preserving the

balance of interests in the implementation of accounting innovation. A summary of the issues discussed above,

relating to CityGas, is shown in Table 8 above.

Discussion

In the SGR Group mission, we can mainly observe the normative structure, which develops from the

background of values and specific attributes (in particular, the centrality of relationships and the rootedness to a

local community) which have led to the sustainability orientation.

In the governance of SGR Rimini, we can observe both the coercive mechanisms (regulative structure) and

normative mechanisms/structure (respectively named by Di Maggio & Powell, 1983; Scott, 1995). This latter

settles at the drive exerted by values which orientate the top management towards the sustainability and the

adoption of tools which are suitable to start up and consolidate the process.

The former (coercive mechanisms/regulative structure) is a result of the fact that the introduction of the

code of ethics and the organisational model came about in compliance with legislative measures, while

implementation of the SR and the various stages of the procedure outlined above came about on purely

voluntary bases, as a consequence of the decision-making process of top management.

The sustainability awareness raising process, launched by SGR since 2008, has produced results at the

organisational level, influencing the micro-organisational processes and the corporate structure.

The introduction of both the ethical code and the SR took place on the basis of a modality of participation

and is centred on a stakeholders dialogue which has permitted the sharing of the values, objectives, and

corporate choices and a reinforcement of cohesion and social capital. In the process of SR implementation,

problems emerged which could be interpreted from both normative and mimetic structure viewpoints. In the

first hypothesis, the specific organisational role of the head of CSR and sustainability can be appreciated as a

relevant organisational change.

Nevertheless, at the same time, such a role can also be considered closely connected to the mimetic

structure, since it is a matter of a role and a figure normally present in medium- and large-sized organisations in

the multi-utility sector, in which the SGR Group faces competitors, which are usually bigger and structured

(like Hera) and which adopt accountability tools, such as SR, often with the purpose of increasing transparency

for its stakeholders and strengthening image and reputation. Therefore, the prevalence of a component

(normative structure) or the other one (mimetic structure) depends on the level of consolidation and authenticity

of the organisational structure towards sustainability, rather than the opportunism tied to emulating competitor

behaviour.

Both interpretations are possible and a carrying on of the analysis by way of a survey over an extended

time (at least a 5-year period) may make it clear and allow for the verification of the prevalence of coercive

mechanisms against the normative ones. This is also true for the co-existence of the two different mechanisms

singled out in governance and, more generally, for the whole process of the implementation of SR in the


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SGR Group, in that it will be the evolution of the same, in time, which make a more precise framework

structure possible, also in relation to the evolution of the structure of governance. Therefore, only

by considering these “limitations” has it been possible to develop the thoughts below. Such limitations,

on the other hand, are underlined in the literature (Bebbington et al., 2009; Contrafatto, 2011) which agrees

on holding that in the choice of adopting SR, both internal and external institutional factors converge,

so that often various institutional mechanisms are there, which makes process complex and

dynamic/changeable.

In the sustainability implementation process of the SGR Group, the dynamics demonstrate an adhesion to

the coercive/normative and mimetic/cognitive structures.

We are able to observe that the coercive aspect is present since the pre-implementation stage. This is due

to the management’s choice of introducing a whole series of new tools, including new management and control

models, certifications, the ethical code, etc.. Both the law and the market rules force the company to adjust to

the behaviour of the leading companies in the sector to obtain the level of legitimization necessary for survival.

These reasons have influenced the choice of subsequently adopting the SR.

At the same time, we can also observe the normative dimensions, which are highlighted in the numerous

activities aimed at various categories of stakeholders and designed to raise awareness and create a culture of

sustainability at internal and external organisational levels through a relational network with the different

categories of stakeholders. That is in so far as the drive to activate a more “formalized” process is concretely

applied, and the SR is the expression of such a process, based on preordained values shared by the company

and key stakeholders (legitimate authority of norms and values; Scott, 1995). This aspect is observed in a

profound way in the company mission (see Section 3.3).

The third structure, mimetic/cognitive, is concretised in the case in question through an attempt at

social construction in the consolidation of relations with stakeholders and a reinforcement of the reputation

(Baldarelli & Gigli, 2012), which is based both on the image of a pro-active company and on the required

path of sustainability. In this case, the fundamental motives are, in the current phase of research, difficult

to identify clearly. In particular, it is difficult to verify, in this first phase of the study, if these are based

on a strategic orientation with ethics foundations, which emanates from the top management, or rather if

we are dealing with a simple imitation of the sector market leader (Hera Group) and other competitors.

Below, these dynamics are analysed with reference to the mission, governance, and accountability of

SGR Rimini.

SGR’s SR is a tangible sign of how the principles of accountability and inclusion have been making

headway—the latter implies not only stakeholders involvement but also stakeholders engagement, which are

both the results of dialogue and reciprocal ability to listen. From the CEO’s words, a value component

emerges which demonstrates the presence of the normative structure. Furthermore, the balance of

sustainability has been started up by a process entirely internal to the company involving everybody in the

company.

The result obtained up to now seems to go beyond the mimetic structure, although the coercive influence

remains due to the tie with the company that is territorially close to the market leader, which in this case is the

Hera Group.

A summary of the issues discussed above is shown in Table 9.


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Table 9

Synthesis of Institutional Mechanisms in SGR Rimini Mechanism (Di Maggio & Powell, 1983, p. 164) SR: Institutionalisation (Inst) or (of) change (Ch)? Coercive: SGR group produces the social report, because there are coercive normative pressures as well as pressures from the consumers, end-users, and competitors: (1) Coercive market pressures: Among the competitors, Hera is a company listed on the stock exchange, with institutional investors and end-users to which it must account. On the other hand, SGR is a family-managed business which had been building its own defined and cohesive corporate culturefor the last 50 years, the result of a continuous family management of the business. The original values (dedicationto work, attention to the end-users) have been conserved in time and with the latest generation (the third generation), the company has become enriched by other values (the positive treatment of employees, the principle of the open door and dialogue, etc.); (2) Coercive sector pressures: rules related to work safety, climate, environmental emissions, etc..

SGR Rimini SR of SGR: Institutionalisation (Inst) or (of) change (Ch)? Institutional--------------SGR Rimini--------------- Change Even though there are coercive mechanisms which lead to standardisation, there are also present seeds of change as the SGR’s SR is different in form and content to Hera’s and the implementation process leads to different results compared with Hera. Such differences are necessary in part as we are dealing with the first edition, while the Hera Group is in its sixth edition (http://www.gruppohera.it/). Furthermore, there is stakeholders commitment and dialogue in SGR, while Hera has developed stakeholders engagement.

Normative: The SR is the answer to a background of social responsibility and possible intrinsic motivation. The values foundation, summed up in the mission and governance, leads to the process of drawing up the SR.

SGR Rimini (Italy) SR of SGR: Institutionalisation (Inst) or (of) change (Ch)? Institutional--------------SGR Rimini--------------- Change This position is due to a series of decisions including the following: (1) SGR did not choose to employ an external consultant but to create an internal committee in order to develop the process over time and facilitate continuous change; (2) SGR did not choose to have assurance (as on the other hand Hera did) initially for economic reasons and subsequently (or principally) because that authenticity is considered important in the bottom-up type process rather than the formality of the “pigeonhole” which could have the exclusive value of image; (3) SGR for the territory is the leading actor in the evolution and innovation of many small communities where previously,there was no gas network. SGR wishes to be the leading actor in the improvement of the quality of life of a community; (4) It chooses, as a partner to facilitate the process of development of SR and sustainability process, the local universities of the territory which have reinforced the intrinsic motivation and informally validated the various stages through interviews, exchange of ideas, and comparisons with other companies; (5) SGR favours changes which it can develop over time.

Mimetic: SGR’s SR is the answer to a determined trend: (1) Hera and other companies in the sector who have published the SR to make management transparent and reinforce legitimation by pushing SGR to do the same inorder to have the same legitimation of the other companies in the sector; (2) It is imitation, but not “pure” (vogues imitation), since itimplies a rational choice and a will developed over time to make management transparent, to establish and reinforce stakeholder dialogue and engagement inside and outside the group.

SGR Rimini SR of SGR: Institutionalisation (Inst) or (of) change (Ch)? Institutional--------------SGR Rimini--------------- Change We do not have further elements to assess how much institutionalisation and change are present, and hence the process is stuck in the middle.


1098

Conclusions

Our study suggests a number of reflections in terms of institutional theory. Firstly, it reveals that

organisations do not simply acquiesce to institutional pressure; secondly, it demonstrates that what happens

inside organisations is as important as what happens outside the institutionalisation process; thirdly, by

studying institutionalisation at the organisational level, it provides a picture about how businesses shape the

institutionalisation process and on how the activities of both innovative organisations and the interactions of

field participants contribute to the development of institutions. Finally, it illustrates the balanced nature of

institutional change (Larrinaga-Gonzàlez, 2007).

Both in SGR Rimini and CityGas, the process of implementation/institutionalisation of the SR seems to

have two speeds. Indeed, the three dimensions of the institutional theory through which we have read about the

cases highlight two different approaches.

In the Italian company, despite being in the presence of an approach which is still focused on

weak sustainability (Gray et al., 2010; Bebbington, 2007; Bebbington & Contrafatto, 2006; Gray et al., 1993),

SGR Group is progressing towards strong sustainability and change. In this way, forces are present which push

towards institutionalisation but there are also forces which orientate towards innovation and specificity

generating possible changes (institutional change).

In the case of CityGas, the external factors prevail in the coercive structure and the diversity of culture in

addition influences the process of sustainable development of the company. The diversity of culture explains

the absence of a formal document of synthesis such as the SR. Sustainability, in this case, is only an element of

marketing and image, in which the mimetic dimension prevails, triggering vicious and not virtuous

mechanisms.

The first challenge is thus played in the SGR Group, which is the unit from which the institutionalisation

process must get its force in order to later “push” and sustain the process in the subsidiary company in Bulgaria.

The resistance to change is still present even in the SGR Group and so the real challenge is that there should be

a shift from the “formal” document (SR) to changes in the decision-making process towards a stronger

sustainability and an increased motivation, which would be based on the knowledge of connected problems,

which the SR can only set off.

The second challenge will be played out in CityGas, where that baggage of values, which the SGR Group

carries, must be able to overcome cultural fossilisation desired intentionally by part of the ruling poker in

Bulgaria, where a situation of contrast exists. In fact in Bulgaria, it is “convenient” to talk about sustainability;

it is part of an opportunist and instrumental approach, which panders to the expectations of a group

of stakeholders. In the future, to push changes in CityGas’s SR implementation, it should be possible to

use coercive and mimetic mechanisms of isomorphic change and less normative mechanisms, as Figure 8

shows. The data show that Bulgaria is still significantly behind the business, public, and political awareness

of Italy in the field of environmental protection, as demonstrated significantly by the really bad performance

in energy depletion, mineral depletion, CO2 emission, and PM10 damage that threaten human health

and nature.

One of the most important roles of businesses is connected to the reception, processing, and formatting of

information. Accounting plays a key role in the modern world; companies and their management structures are

overwhelmed by information flows.


1099

Government regulations in Italy and Bulgaria, supra-national EU norms, and the characteristics of the

profession of accounting community are crucial to case studies of adoption of sustainable reporting by CityGas

as part of the Italian SGR Group, but inserted in the Bulgarian institutional environment. “Institutional”

literature in Bulgaria is very scarce. The Soviet paradigm in Bulgaria was replaced entirely by neoclassical

economic theory, which began to carry out its role as the only correct theoretical formulation. Institutionalism

is still exotic in Bulgaria, even in the general economic theory. Research in institutional economics has been

developed mainly on the basis of macroeconomics and microeconomics, as a theory. Therefore, the institutional

paradigm is ranked in the Bulgarian research in the field of accounting. It also presents problems regarding the

efficiency of transaction costs, reducing their uncertainty by defining them in accounting matters as well as

treating them in management accounting.

Figure 8. Indicators of Human Development Index (HDI) for Italy and Bulgaria.

Institutional research work in the field of accounting is also developed in Bulgaria and in collaboration

with Italian scientists (Baldarelli & Nesheva-Kiosseva, 2011). Bulgarian accountancy profession traditionally

continues to be under the influence of Russian literature. Russian scientists have already made a significant

contribution to the practical application of institutional theory in accounting and even in teaching accounting

courses. Researches of Chaikovskaia should be noted in the area, where she developed institutional models for

financial accounting (Chaikovskaia, 2007a; 2007b; 2009). Following the basic principles of institutional theory,

sustainable accounting can apply the institutional model of accounting, whose main functions and principles,

based on institutional theory, are: the principle of innovative changes in accounting; the principle of gradual

change in accounting; the principle of openness of information flow; and the functions of institutional changes

in accounting as a condition for its further development. All challenges, in the order they have been presented,

must be borne in mind until the institutionalisation process is orientated towards change.

From the analysis of the literature and reflections which have emerged through the case, we can give the

answer to the research question: The institutionalisation process prevails on the change in SGR Group and

in CityGas as well (see Tables 8 and 9). CityGas’s sustainability process will be an institutional change

in domestic institutions. Most likely, it will first be seen by the Bulgarian society, or may be adopted

Gross national saving

(various methods

used)

Consumption of fixed capital

Net national saving

Education expenditure

Energy depletion

Mineral depletion

Net forest depletion

CO2

PM10 damage

(2002 and 2004 WHO

data)

Adjusted net saving

(including PM10

damage)

Adjusted net saving

(excluding PM10

damage)

Bulgaria 14.11 11.57 2.54 4.05 1.15 0.81 0.00 0.87 0.88 2.88 3.76

Italy 18.46 13.98 4.48 4.52 0.22 0.00 0.00 0.16 0.08 8.55 8.63

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00


1100

with confidence. We continue to discuss the second mechanism of isomorphism, that is, the normative one.

The SGR Group’s SR is the answer to a specific background of social responsibility orientation of the founder

and the leaderships of the enterprise. The core-values foundation is summed up in the mission and governance

and they lead to the process of drawing up the SR. In SGR Group, the degree of change prevails

on institutionalisation process. The application of a normative approach is impossible in CityGas from

“outside”, i.e., from society or external professional and regulatory sides: based neither on the state of internal

institutions nor on the state of external ones. Intrinsic motivation for social responsibility and sustainability can

only come from the policies of its parent company.

Finally, we end by analysing the third mechanism of isomorphism, that is, mimetic. SGR Group’s SR is

the answer to a determined trend which is involving Hera and other companies in the sector which have

published the SR to make management transparent and reinforce their reputation and legitimacy. It is imitation,

but not a “vogue” imitation, since it implies a rational choice and a will developed over time to make

management transparent, to establish and reinforce stakeholder dialogue and engagement inside and outside the

group. We do not have further elements to assess how much institutionalisation and change are present, and

hence the process is stuck in the middle.

In CityGas’s case, mimetic mechanism would lead only to a “green-washing lack of adjustment in

domestic institutions”. To make a synthesis of the three mechanisms in “action” that are useful to more

completely reply to the research question, we especially made use of Larrinaga-Gonzàlez’s (2007) results.

From an empirical point of view, we are aware of the need to a further consolidation of our analysis that

requires more time for observation of the SR process both in Italy and Bulgaria, in order to develop our

reflections. Therefore, the orientation of future research will include both the monitoring of relational dynamics

that have been started by the SGR Group’s SR and checking how SR translates into a change of organisational

behaviour. We will proceed also by way of analysing the company of the gas sector belonging to nearby

territorial contexts and institutional fields characterised by shared cultural elements (such as Multiservizi

Pesaro, Hera Group). Finally, it will be fundamental to monitor the cultural and organisational evolutions of

CityGas Bulgaria and verify whether these seeds of induced sustainability will translate into actions and

documents of sustainability implementation and check how they could be translated into cultural changes and

governance processes.

The results achieved at this stage of the study may thus be summarized.

Firstly, the present study gave a positive answer to the need highlighted in scientific literature to aim some

research work at further investigating the issues related to the potential and actual role of SEAR of mobilising

profound organisational change (Gray et al., 1995; Larrinaga-Gonzàlez, 2007; Contrafatto, 2011). In particular,

this study represents a second step of a more contextualized, in-depth, and prolonged research project that has

been conducted (and will be continued in the future in order to investigate how and to what extent the different

organisational and institutional factors combine to create the “pre-conditions” to stimulate more benign and

profound changes in organisations). In doing so, the research projects would continue to contribute to the

existing literature by addressing some of the contradictions in current explanations about the organisational

effects of SEAR interventions.

Secondly, the study has investigated entrepreneurial as well as managerial attitudes, views, and

perceptions about SR and external institutional factors, in order to explore whether and to what degree these

have a relevant impact on the decision-making concerning SEAR and contributing to institutional changes.


1101

In this regard, the study has pointed out the relevance of values held by the entrepreneur, which is typical of

entrepreneurial and family-based companies, as well as the influence of external institutional factors in

different contexts, like the Bulgarian subsidiary, which can slow down and/or favour the process of

implementation of SR.

Thirdly, the study has contributed to extending the location where SEAR has been conducted, as there is

actually a prevalence of research in the UK, Australia, and New Zealand. Specifically, it has provided further

elements of knowledge on contingent factors which influence SR in countries like Italy, and especially Bulgaria,

where the process is still at its early stages and where the organisational change has yet to manifest itself.

Therefore, it contributes to pointing out how research work in the field of social and environmental

accounting conducted in different contexts, other than the Anglo-Saxon one, which is characterized by different

conceptions of business and the mixed role of decision-making about SEAR and of external contingent factors

within it, would be beneficial.

Notwithstanding the interest shown by literature for adopting the research cases to analyse the SR

implementation, the present work has several limitations. The first limitation regards the restricted context

under consideration, which is partly overtaken by the long and persistent presence in the Rimini area of the

company. The second limitation concerns the timeframe wherein the company has drawn up the SR, which,

however, we have been able to analyse since its very initial stages. Indeed, in order to better understand the

dynamics at its base, it would require monitoring this process for a greater length of time. Notwithstanding this,

the culture, which is strongly oriented towards sustainability, we have met with ever since the first interviews,

has encouraged us to continue on to this second stage of research.

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Usefulness and Effectiveness of Related Party Transactions

(RPTs) Disclosure: Empirical Evidence From Italy

Amedeo De Cesari

University of Manchester, Manchester, United Kingdom

Oscar Domenichelli, Martina Vallesi

Università Politecnica delle Marche, Ancona, Italy

Related party transactions (RPTs) can be used by corporate insiders (e.g., managers, controlling shareholders)

to expropriate corporate outsiders (e.g., minority shareholders). We argue that effective disclosure of RPTs can

eliminate or at least reduce expropriation phenomena by letting corporate outsiders assess the fairness of the

transactions and identify the underlying conflicts of interest. We consider a sample of large RPTs carried out by

listed corporations in Italy, a country that has been affected by significant corporate scandals in recent years.

In particular, we analyse the content of several compulsory informative documents, required by CONSOB

(the Italian Securities and Exchange Commission), concerning large RPTs. The focus of our content analysis is on

the “warnings” sections of these documents that should convey clear and comprehensive information on potential

risks and conflicts of interest. Our empirical results show that, while the “warnings” sections of the studied

documents generally contain all the information required by existing rules, the depth of the information provided is

often unlikely to be sufficient to communicate the implications of the RPTs. Thus, readers may not find the

disclosed information adequate to evaluate the fairness of the transactions. Moreover, visual representations are

rarely used in the informative documents. The use of such representations could allow companies to convey the

structures and features of complex RPTs in a simpler and more direct way.

Keywords: related party, related party transactions (RPTs), conflicts of interest, disclosure

Introduction

It is often argued that the expropriation phenomenon, defined as “the process of using one’s control

powers to maximize own welfare and redistribute wealth of others” (Claessens, Djankov, Fan, & Lang, 1999,

p. 2), is frequently linked to related party transactions (RPTs). As for these transactions, identified as the

“… transfer of resources, services, or obligations between related parties, regardless of whether a price is

charged” (International Accounting Standard (IAS) 24, 2009 version), the existing literature puts forward two

different views: the conflicts of interest view and the efficient transaction view. The first view assumes that

Amedeo De Cesari, assistant professor of Finance, Manchester Business School, University of Manchester. Email:

[email protected]. Oscar Domenichelli, assistant professor of Corporate Finance, Faculty of Economics, Department of Management, Università

Politecnica delle Marche. Martina Vallesi, research fellow of Corporate Finance, Faculty of Economics, Department of Management, Università

Politecnica delle Marche.

DAVID PUBLISHING

D

USEFULNESS AND EFFECTIVENESS OF RELATED PARTY TRANSACTIONS DISCLOSURE

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corporate insiders (e.g., managers) are affected by moral hazard and that RPTs are generally carried out to

expropriate wealth from outsiders (e.g., shareholders). The second view sees RPTs as sound business

exchanges satisfying economic needs of the firm (Pizzo, 2013; Pozzoli & Venuti, 2014). In light of prior

empirical evidence (e.g., Gordon, Henry, & Palia, 2004; Cheung, Jing, Lu, Rau, & Stouraitis, 2009; Kohlbeck

& Mayhew, 2004; Black, Kim, Jang, & Park, 2010), this second view does not appear to be a persuading

alternative to the conflicts of interest theory.

We argue that timely disclosure of comprehensive information on RPTs may ensure that these transactions

are carried out to maximize firm value rather than to allow corporate insiders to enrich themselves at the

expense of other stakeholders. For instance, the disclosure of compulsory information on RPTs could allow

corporate outsiders to understand the implications of such transactions, evaluate their fairness, and monitor the

actions of corporate insiders. In turn, effective disclosure of information could make corporate insiders

reluctant to carry out RPTs that only benefit themselves.

In this study, we focus on the compulsory disclosure of large RPTs (“relevant RPTs”) carried out by Italian

listed companies. To be more specific, we use a content analysis method, which is a process of systematically

analysing messages in any type of communication (Kondracki, Wellman, & Amundson, 2002), to examine

25 informative documents on particularly relevant RPTs published by Italian corporations in 2011. Based on

existing rules, the documents should include “warnings” sections that should explain the conflicts of interest that

may affect the transactions and the risks that they may pose to company stakeholders. After analysing the

documents carefully through content analysis, we draw the following main conclusion: The information reported

in the “warnings” sections of the informative documents is not generally suitable to properly describe the risks

and conflicts of interest of the RPTs. The disclosed information, in fact, is often limited and superficial, lacking

transparency and a focus on items that are arguably of significant importance to understand the implications of

the RPTs. Further, visual representations of the transactions, which we believe could enhance and facilitate

readers’ understanding, are rarely used. Overall, by reading the “warnings” sections of the studied informative

documents, it is unlikely that corporate outsiders can evaluate the fairness of the RPTs.

This paper contributes to the existing literature on RPTs in several ways. First, it provides an empirical

analysis of the content of informative documents on large and relevant RPTs together with a critical evaluation

of the usefulness of the information included in such documents. Second, this study produces a comprehensive

list of categories of information that corporate outsiders would find useful when assessing the fairness of an

RPT. This list is used as a benchmark to evaluate whether the “warnings” sections of the informative

documents contain information that is broad and deep enough. Finally, from a practical perspective, companies

could rely on this list of categories of information when preparing their informative documents.

The remainder of this paper is structured as follows. In Section 2, we provide a summary of the literature

on RPTs, expropriation of minority shareholders, and disclosure of RPTs. Section 3 describes some Italian

regulations on RPTs. The data and the research methodology used in this study are explained in Section 4.

In Section 5, we describe the main findings and discuss them. Section 6 provides some concluding remarks.

Literature Review

RPTs and the Expropriation of Minority Shareholders

Previous literature has highlighted the existence of agency costs caused by the self-serving behaviour

of corporate insiders (e.g., Berle & Means, 1932; Jensen & Meckling, 1976; Roe, 1994; Johnson, La Porta,


1107

Lopez De Silanes, & Shleifer, 2000). Further, recent Italian corporate scandals (e.g., Cirio and Parmalat)

support the perception that corporate insiders engage in tunnelling activities (Bianchi, Ciavarella, Enriques,

Novembre, & Signoretti, 2014).

Via complex pyramidal structures, which are common in Italy (Becht & Mayer, 2000), controlling

shareholders may accumulate significant shares of voting rights with minimal equity investments. Hence, Italian

majority shareholders can control their companies without holding large ownership stakes and without formally

receiving significant flows of cash whenever dividend payments and other cash distributions are made. This

creates a conflict between majority and minority shareholders, because majority shareholders have an incentive

to extract cash from their companies before it can be paid out to all the shareholders. Transactions that benefit

controlling shareholders at the expense of minority shareholders can be particularly significant within groups of

companies. As highlighted by Johnson et al. (2000), majority shareholders can engage in tunnelling activities by

setting up RPTs among group companies in order to obtain assets and cash of the group. Hence, RPTs may be

detrimental to groups when compared with similar unrelated party transactions.

IAS 24 offers a comprehensive list of RPTs that may affect a firm’s financial position and profits. The

standard mentions the following transactions: purchases or sales of goods; purchases or sales of property and

other assets; rendering or receiving of services; leases; transfers of research and development; transfers under

license agreements; transfers under finance arrangements (including loans and equity contributions in cash or in

kind); provision of guarantees or collateral; commitments to do something if a particular event occurs or does

not occur in the future including executor contracts; and settlement of liabilities on behalf of the entity or by the

entity on behalf of that related party. Additionally, CONSOB1 resolution No. 17221 of March 12, 2010 also

includes: mergers or spin-offs carried out with related parties and any transaction which would lead to any

economic benefit to any member of the board of directors, the board of statutory auditors, or key management

personnel of the company. Regarding the types of RPTs that are commonly carried out in Italy, evidence

gathered by CONSOB for the period of 2003-2007 shows that the majority of disclosed RPTs were associated

with transfers of assets between a listed company and its subsidiaries or insiders (most of these transactions

were with controlling shareholders or with entities controlled by them). In the period of 2008-2010, CONSOB

found that disclosed RPTs were mostly disposals of assets and to a lesser extent financing transactions and most

of them were with controlling shareholders and directors (Organization for Economic Cooperation and

Development [OECD], 2012).

Some previous empirical studies provide evidence on the expropriation of minority shareholders achieved by

majority shareholders through the execution of RPTs. For example, the following RPTs have been studied: loan

guaranties (Berkman, Cole, & Fu, 2009; Xiao & Zhao, 2011); loans to related parties (Shastri & Kahle, 2004); and

acquisitions and sales of assets (Cheung, Qi, Rau, & Stouraitis, 2009). Moreover, Deng, He, and Gan (2006)

highlighted other types of transactions, such as transfer pricing of goods and services and extracting trade credits.

Besides tunnelling, a less developed part of the literature recognizes propping as another motivation

behind RPTs (e.g., Cheung et al., 2009; Cheung, Rau, & Stouraitis, 2006; Jian & Wong, 2010). Propping

happens when, for example, controlling shareholders carry out some activities utilizing their private resources

to satisfy the needs of their company.

1 CONSOB “… is the public authority responsible for regulating the Italian securities market” (Retrieved from http://www.consob.it/).


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The Effects of Corporate Governance and Disclosure on Expropriatory RPTs

According to the Cadbury Committee (1992, p. 15):

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

A good corporate governance system should mitigate agency conflicts.

Most studies highlight the detrimental effects of RPTs on the wealth of corporate outsiders, particularly in

firms and countries with weak corporate governance. For example, Gordon et al. (2004) and Cheung et al.

(2009) found evidence in support of the notion that RPTs are used by controlling shareholders and/or managers

to engage in self-serving behaviour, especially in the context of weak corporate governance mechanisms.

Furthermore, Kohlbeck and Mayhew (2004) reported an inverse relation between the magnitude of RPTs and

the strength of corporate governance. Similarly, Black et al. (2010) found that better governance is associated

with reduced levels of RPTs. Thus, the effectiveness of corporate governance mechanisms is particularly

important in the context of RPTs. Indeed, even when conflicts of interest are present, in a well-functioning

corporate governance system, managers are prevented from engaging in transactions that penalize their

shareholders, also because that they are forced to disclose exhaustive information on such transactions to

outsiders.

In line with this notion, Cheung et al. (2009) showed that RPTs that benefit controlling shareholders at the

expense of other shareholders are accompanied by less information disclosure compared with those transactions

representing propping activities. Hence, the reliability, depth, and timeliness of disclosed information may

influence the extent to which expropriatory RPTs are carried out. Overall, a legal system that protects minority

shareholders from detrimental RPTs should oblige companies to disclose exhaustive and timely information on

RPTs, especially when the transactions are inherently problematic.

In order to improve the effectiveness of the Italian regulation on RPTs, on March 12, 2010, CONSOB

enacted a new set of rules through resolution No. 17221 aimed at safeguarding the “presence of fair conditions”

in RPTs. The new rules apply to Italian companies with shares listed on regulated markets in Italy or in any

other country in the European Union (EU) and Italian companies with shares that are widely distributed among

the public. The rules oblige parties involved in RPTs to follow several procedures and to disclose and explain

the reasons why they have entered into the transactions. More importantly, when large transactions (“relevant

transactions”) are carried out, an informative document must be produced and disclosed. Such a document

should include a “warnings” section that describes the conflicts of interests that may affect the RPT and the

risks that the transaction poses.

Since large, relevant transactions may produce significant financial and economic impacts on the subjects

involved, in this study, we focus on the content of the informative documents on such transactions published by

Italian companies. More specifically, we analyse the “warnings” section of the informative document and

investigate whether companies are generally compliant with the new rules and disclose the necessary

information. We also evaluate whether the information included in the “warnings” section is sufficient to allow

readers to understand the risks posed by the transaction and its main consequences.

Indeed, through forms of accounts, business organizations could legitimate their activities (Hopwood,

2009) and users of the disclosed information could assess transactions’ fairness. Moreover, communication is


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central to accounting (Paker & Guthrie, 2009) and, in accounting reports, a tool to communicate is represented

by visual representations that can comprise pictures, photographs, maps, charts, and diagrams in addition to

financial graphs (Davison & Warren, 2009). In a continually changing society with a “visual culture” (Heller,

1996), the impact of a picture on readers’ understanding is often more immediate than a page full of words.

The usefulness of disclosed information on RPTs could benefit from the inclusion of visual representations.

For example, while it may be hard to explain the complex relationships among the parties that may be involved

in an RPT using words, a simple graph could explain such relationships far more directly. Thus, as part of our

analysis of the “warnings” sections of the informative documents, we verify whether companies use visual

representations to describe their RPTs.

Disclosure of Significant RPTs in Italy

As discussed in the previous sections, RPTs may be promoted and executed by company insiders in order

to enrich themselves and expropriate other stakeholders. Self-serving behaviour by company insiders through

RPTs is more likely to happen when transparency on such transactions is lacking. Hence, disclosure of

information on RPTs may allow company outsiders to evaluate the fairness of these transactions and, possibly,

prevent the carrying out of those transactions that do not benefit the company.

In Italy, when an RPT is carried out, the entities involved have to provide information to explain the

reasons why they have entered into such transaction. Moreover, in the financial statement, an entity must

include: (1) the amount of the transactions; (2) the amount of outstanding balances: (a) their terms and

conditions, including whether they are secured, and the nature of the consideration to be provided in settlement;

and (b) details of any guarantees given or received; (3) provisions for doubtful debts related to amounts

included in the outstanding balances; and (4) the cost recognised during the year, relating to bad or doubtful

debts due from related parties (IAS 24, Paragraph 18).

On March 12, 2010, CONSOB, through resolution No. 17221, enacted new regulations for RPTs to ensure

the “presence of fair conditions”. These new regulations comprise procedural and transparency rules that came

into force in January 2011. Based on the CONSOB resolution, when a listed company carries out an RPT, there

are specific procedures to follow. In case of relevant transactions (the object of our analysis), there is a special

procedure to adhere to that is aimed at guaranteeing the fairness of the transactions. The procedure requires

companies to prepare informative documents that are the main sources of information in our analysis. These

informative documents, which must be made public and submitted to CONSOB, have to disclose the

transactions’ economic rationales. The main purpose of the documents is to let readers understand the economic

and financial implications of the RPTs.

Based on CONSOB resolution No. 17221, the informative documents should contain at least two main

parts:

(1) A “warnings” section that should include a summary of the risks for potential conflicts of interest

arising from the transaction;

(2) A second section disclosing the following specific information on the transaction:

(a) A description of the characteristics, procedures, terms, and conditions of the transaction;

(b) The names of the related parties involved in the transaction, the natures of the relationships, and the

natures and interests of these parties;


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(c) An explanation of the economic motivation and benefits for the company. The negative opinion of

executive directors and/or non-executive directors on the transaction should be disclosed;

(d) The method used to determine the transaction’s settlement and evaluations about its adequacy in

relation to the values of similar transactions in the market;

(e) A description of the economic and financial effects of the transaction;

(f) The effects of the transaction on the remuneration of the directors of the company and/or directors of

the company’s subsidiaries;

(g) Information about the company’s financial instruments held by the members of the administrative and

control board, executives, and directors, possibly involved in the transaction and the interests of these

stakeholders in the transaction;

(h) Descriptions of the procedures followed to approve the transaction and the transactions carried out

during the same year.

Data and Research Methodology

Sample

We exploit information from Thomson Datastream to create an initial sample of the Italian companies

listed on the Italian stock market with the exclusion of financial companies with Standard Industrial

Classification (SIC) codes from 6000 to 6999, utilities companies with SIC codes from 4900 to 4949, and

companies for which the SIC codes are not available. Then, we use the listing and delisting dates of the

companies in our sample to identify a total of 192 companies that were listed on the Italian stock market on

December 31, 2011. Lastly, for each company, we search for the existence of disclosed informative documents

related to relevant RPTs that took place in 2011 on the website of the Italian stock exchange. The documents

must be deposited by law at the companies’ registered offices, published on the companies’ websites, and

simultaneously transmitted to the CONSOB. We find 25 documents related to 18 companies, representing the

final sample we use in our study.

Each informative document can contain information, explanations, and descriptions concerning one or

more relevant RPTs.2 In Table 1, we report brief descriptions of the 25 RPTs grouped by listed companies.

Table 1

Descriptions of Transactions Company Description of transactions

Company 1 1.1 The related party renounces the company’s credits

1.2 The related party obliges itself to purchase the company’s equity

Company 2



2.3 The company renegotiates the guarantees on a loan provided by the related party

Company 3 3 The company acquires the related party

Company 4 4 The company obliges itself to purchase the related party’s equity

Company 5 5 The company transfers a fully controlled subsidiary to the related party

Company 6 6 The related party provides funding to the company

2 The documents we analyse are in Italian even though the empirical findings are reported in English. When translating Italian terms and sentences into English, we always attempt to preserve the original meaning of the Italian text.


1111

(Table 1 continued)

Company Description of transactions

Company 7

7.1 The company acquires equity of the related parties

7.2 The company agrees on a contract with the related parties to build machinery


Company 8 8 The related party purchases equity issued by the company

Company 9 9 The company agrees to finance the related party

Company 10 10 The company agrees on a funding contract with the related party

Company 11 11 The company agrees on a short-term funding contract with the related party

Company 12 12 The company provides funding to the related party

Company 13 13 The company provides funding to the related party

Company 14 14.1 The related party purchases equity issued by the company


Company 15 15 The related party agrees on an investment and financing contract with the company

Company 16 16 The company acquires a contract of the related party

Company 17 17.1 The related party extends the term of a short-term credit facility for the company

17.2 The company terminates early a contract with the related party

Company 18 18 The company agrees on a tenancy contract with the related party

CONSOB defines relevant transactions as those that have a value in excess of 5% of at least one of the

following different ratios, which are applicable depending on the features of the RPT: the transaction’s value

over the listed company’s equity; the total assets of the related party involved in the transaction over the listed

company’s total assets; and the total liabilities of the acquired related party over the listed company’s total

assets.

Content Analysis of Informative Documents

We use content analysis to study the informative documents published by companies engaging in relevant

RPTs. We argue that this qualitative method is appropriate for several reasons. First of all, one needs to

consider the quality of the information provided in these documents rather than simply its quantitative

dimension in order to evaluate the fairness of the RPTs. Similarly, the analysis of qualitative information is

necessary to discuss whether an RPT is disclosed in a transparent way. More pragmatically, the use of a

qualitative method is suitable for the small size of our sample.

The empirical analysis comprises three main parts and we try to achieve three main objectives. First, we

investigate whether the informative documents include the required section on “warnings”, in compliance with

the structure required by CONSOB regulation which is described in the next section. Second, we evaluate the

quality and usefulness of the information provided in the “warnings” section to corporate outsiders (e.g., small

shareholders). In particular, according to CONSOB, the content of the informative documents should let readers

understand “the transaction’s risks for potential conflicts of interest”. We analyse whether the informative

documents satisfy this requirement. Finally, we check whether there are any visual representations in the

“warnings” section. We argue that these representations could potentially enhance and facilitate readers’

understanding of the RPT.

While the first and the third research objectives are easy to achieve, the second is far more complex. It is,

in fact, unclear what information is needed by corporate outsiders to fully understand an RPT. Further,

understanding complex transactions may require better and deeper information than comprehending simple


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transactions. Notwithstanding these challenges, when analysing an informative document, we proceed with the

following two sequential steps. First, we identify the different items of compulsory information companies are

required to disclose in the “warnings” part. Then, assuming that these required items enhance readers’

understanding of “the transaction’s risks for potential conflicts of interest”, we check for the presence of these

items in the “warnings” section.

Table 2

Categories and Sub-categories of Information on RPTs Category Sub-category Type of information

Risks Risks Qualitative

Description of the risks Qualitative

Conflicts of interest

Conflicts of interest Qualitative

Description of the conflicts of interest Qualitative

Transaction

Description of the characteristicsa Qualitative

Procedures Qualitative

Terms Qualitative/quantitative

Conditions Qualitative

Method to determine the settlement price of the transaction Qualitative/quantitative Considerations about the valuation of the transaction in relation to the values of similar transactions in the market

Qualitative/quantitative

Subjects involved in the transaction

Names of related parties involved in the transaction Qualitative

Nature of the relationshipb Qualitative/quantitative

Nature of the parties Qualitative

Interests of the parties Qualitative Company’s financial instruments held by the members of the administrative and control board, executives, and directors, possibly involved in the transactionc

Quantitative

Interests of the members of the administrative and control board, executives, and directors, possibly involved in the transaction

Qualitative

Effects of the transaction for the subjects involved

Indication of the economic motivation and benefits for the company Qualitative/quantitative

Description of the economic and financial effects of the transaction Qualitative/quantitative Effect of the transaction on the remuneration of the directors of the company and/or directors of the company’s subsidiariesd

Qualitative/quantitative

Procedures to approve the transaction

Explanation of the procedures followed to approve the transaction Qualitative

Notes. a: Any transaction among related parties according to IAS 24 (such as purchases or sales of goods, purchases or sales of property and other assets, rendering or receiving of services, etc.) and CONSOB resolution No. 17221 of March 12, 2010. b: Any kind of relationship among related parties involved in the transaction according to IAS 24 and CONSOB resolution No. 17221 of March 12, 2010. c: We also refer to information about a company’s financial instruments held by the members of the administrative and control board, executives, and directors which are required by Article 114-bis TUF. d: We also use the information required by Article 123 ter of the TUF.

In terms of methodology, in order to achieve our second objective, we use content analysis. This method

allows researchers to codify the content of a piece of writing into different categories depending on selected

criteria (Weber, 1988). In general, such a method can follow a mechanistic and/or an interpretative approach.

The mechanistic approach concentrates on disclosure volumes and/or frequencies, by considering word counts,

sentence counts, frequency of disclosure, and so on, while the interpretative approach tries to capture meaning by

dividing descriptions into elements and then explaining the contents of each element (Beck, Campbell, &

Shrives, 2010). In some parts, we only check for the presence of the words “risk” and “conflict of interest”,


1113

which represent, respectively, the translations of the words “rischio” and “conflitto di interesse”, according

to the original language of the law. Other analyses are based on several categories and sub-categories

of information and attempt to investigate whether the information is provided. These categories and

sub-categories are generally identified using the items requested in the second part of the informative document

(see Section 3) and the specific information for each category and sub-category is primarily based on the

requested disclosure by national and international laws (IAS, TUF3, and CONSOB resolutions—see notes of

Table 2) in the case of RPTs. We only focus on the “warnings” part instead of on the other sections of the

informative document, because such part is meant, by itself, to offer enough information to let the reader

immediately assess the fairness of a transaction.

Categories of Information

Based on our three main research questions, the empirical analysis is developed as follows. First, we

assess whether the “warnings” section is available in the selected informative documents. Second, we study the

information given in this section to evaluate whether it is comprehensive enough in relation to the existing

regulatory requirements. Finally, we check for the presence of any visualization technique that can be used to

explain and describe an RPT.

Regarding the second point above, we identify the information required by CONSOB rules and classify it

into the categories and sub-categories presented in Table 2. In particular, two sets of CONSOB rules are

considered. The first set of rules concerns information that companies are explicitly obliged to report in the

section on warnings, namely, information on risks and conflicts of interest. The second set has to do with the

information that companies must disclose in the second part of the document. We assess whether this

information is disclosed, or at least mentioned, in the “warnings” section to facilitate readers’ understanding of

the risks of conflicts of interest. To be more specific, the categories of information we analyse are: transaction,

subjects involved in the transaction, effects of the transaction for the subjects involved, and procedures to

approve the transaction.

Finally, since graphic representations and visualization techniques could be suitable to clarify complex and

ambiguous situations (Huff & Jenkins, 2002; Montemari & Nielsen, 2012; D’Andrea, Vallesi, & Montemari,

2012), we check whether they are used in the “warnings” sections of the informative documents to shed more

light on conflicts of interest and risks.

Findings and Discussion

The findings of the empirical analysis are presented in Table 3. This table contains the findings for each

category and sub-category of information in Table 2. In Table 3, for each informative document and each

sub-category of information, we report a “Yes” if the relevant information can be found in the “warnings”

section of the document. Otherwise, we report a “No”. If the relevant information cannot be found in the

“warnings” section, but there is a reference to the second part of the document, the table shows the word “Ref”.

We find that out of the 25 informative documents, only two documents do not include a separate section on

“warnings”. The word “risks” (or similar words) can be found only in the “warnings” section of 15 informative

documents. Further, in only few of these 15 documents, there is a satisfactory description of the type of risk that

goes beyond the statements “no risk”, “no particular risk”, “no specific risk”, and “no significant risk”.

3 Consolidated law on finance, Legislative Decree No. 58 of February 24, 1998.


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Table 3

Empirical Findings

Category Sub-category Relevant RPT

1.1 1.2 2.1 2.2 2.3 3 4 5 6 7.1 7.2 7.3 8 9 10 11 12 13 14.1 14.2 15 16 17.1 17.2 18

Risks Risks Yes Yes No No No Yes Yes Yes Yes No No No No Yes Yes Yes Yes No No Yes Yes No Yes Yes Yes

Description of the risks

No No No No No No Ref Yes Yes No No No No Yes Yes Ref Yes No No No No No Yes Yes Yes



Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No Yes Yes Yes No Yes Yes No

Description of the conflicts of interest

No No No Yes Yes Yes Yes Yes Yes No No No Yes No Yes No No No Yes No No No Yes Yes No

Transaction

Description of the characteristics

Yes Yes Yes Yes Yes No Yes Yes Yes Yes No No Yes Yes Yes Yes Yes No Yes No Yes No Ref Ref Yes

Procedures Yes Yes No Yes Yes No No Yes Yes No No No No No Yes No No No Yes No No No Yes Yes Yes

Terms No Yes Ref Ref No No No No Ref No Ref Ref No No Yes No No No No No No No No No Yes

Conditions No No Ref Ref No No No Yes Ref No Ref Ref No No Yes No No No No No No No No No Yes

Method to determine the settlement price of the transaction

No No No No No No No No No No No No No No No No No No No No No No No No No

Considerations about the valuation of the transaction in relation to the values of similar transactions in the market

No No No No No No No No Yes No No No No Yes No No No No No No No No No No No

Subjects involved in the transaction

Names of related parties involved in the transaction

Yes Yes No Yes Yes Yes Yes Yes Yes Yes No No Yes Yes Yes No Yes No Yes No No No Yes Yes Yes

Nature of the relationship

Yes Yes No Yes Yes Yes Yes Yes Yes No No No Yes Yes Yes No No No Yes No No No No No Yes

Nature of the parties

Yes Yes No Yes Yes Yes Yes Yes Yes Yes No No Yes Yes Yes No Yes No Yes No No No Yes Yes Yes

Interests of the parties

Yes Yes No Yes Yes Yes Yes Yes Yes Yes No No Yes No Yes No No No Yes No No No Yes Yes No

Company’s financial instruments held by the members of the administrative and control board, executives, and directors, possibly involved in the transaction

No No No Yes Yes Yes No No Yes No No No Yes No No No No No Yes No No No No No No

Interests of the members of the administrative and control board, executives, and directors, possibly involved in the transaction

No No No Yes Yes Yes No No Yes No No No Yes No No No No No Yes No No No No No No


1115

(Table 3 continued)

Category Sub-category Relevant RPT

1.1 1.2 2.1 2.2 2.3 3 4 5 6 7.1 7.2 7.3 8 9 10 11 12 13 14.1 14.2 15 16 17.1 17.2 18

Effects of the transaction for the subjects involved

Indication of the economic motivation and benefits for the company

Yes Yes No Yes Yes Ref No No No No No No Yes No Yes No No No Yes No No No No No No

Description of the economic, patrimonial, and financial effects of the transaction

Yes Yes No Yes No No No No No No No No Yes No No No No No Yes No No No No No No

Effect of the operation on the remuneration of the directors of the company and/or directors of company’s subsidiaries


Procedures to approve the transaction

Explanation of the procedures followed to approve the transaction


There seems to be a low correlation between the use of the word “risks” and the presence of the sentence

“conflicts of interest” (or similar sentences) in the informative documents. The sentence “conflicts of interest”

is included in 20 documents that are not always the same as those previous 15 containing the word “risks”.

Moreover, not all the documents that contain this sentence also provide a description of the conflicts of

interest.

Even if a brief description of the characteristics of the RPT is included in most documents, there is often a

lack of information on the other items that are part of this category. Indeed, procedures are described and

explained in 11 documents, terms in eight documents (with five of them referring to the second part of the

document), conditions in eight documents (with five of them referring to the second part of the document),

method to determine the settlement price of the transaction in no document, and considerations about the

valuation of the transaction in relation to the values of similar transactions in the market in two documents.

As for the subjects involved in the transaction, we get the following results: 17 for names of related parties

involved in the transaction, 13 for nature of the relationship, 17 for nature of the parties, 14 for interests of the

parties, six for the company’s financial instruments held by the members of the administrative and control board,

executives, and directors, possibly involved in the transaction, and six for interests of the members of the

administrative and control board, executives, and directors, possibly involved in the transaction.

Furthermore, we have a count of eight (with one reference to the second part of the document) for indication

of the economic motivation and benefits for the company and five for description of the economic and financial

effects of the transaction, while we do not have any disclosure about the effect of the transaction on the

remuneration of the directors of the company and/or directors of the company’s subsidiaries and explanation of

the procedures followed to approve the transaction. Finally, only one company uses a graphic representation to

describe the risk of conflicts of interest.


1116

We can conclude that most companies use informative documents to publish information about risks and

conflicts of interest, often stating the absence of significant and specific risks and conflicts of interest. As for

the other categories and sub-categories of information, we note a tendency to describe the type of transaction

and sometimes the procedures followed, but rarely the terms and the conditions. We generally find information

concerning the identities of the subjects involved in the transactions but not many details on the transactions’

effects for these subjects. Furthermore, the procedures followed to approve the transactions are not mentioned

in the “warnings” section. As for the presence of visual representations, they are used only in one of the

documents. An increased use of these representations could make the “warnings” sections of the documents

more informative and useful to company outsiders.

Based on these findings, we argue that the information disclosed in the “warnings” sections of the

informative documents is generally not sufficient to let readers’ understand the implications of the RPTs, their

conflicts of interest, and the risks they pose to the different classes of stakeholders.

Conclusion and Recommendations

The main risk of an RPT is that the transaction is not carried out in the interest of all the shareholders of

the company, but in the interest of specific subjects who may have a tendency to expropriate the company’s

resources for personal use. Such expropriation can happen in the United States due to the separation

of ownership and control and in most other countries due to the presence of powerful controlling shareholders

(La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1999; Claessens, Djankov, & Lang, 2000; McCahery &

Vermeulen, 2005).

We argue that the disclosure of comprehensive and detailed information on RPTs in a timely way can

make such transactions more transparent and ensure their fairness. This is because that disclosed information

allows corporate outsiders, who can be damaged by RPTs, to better understand the critical aspects of the

transactions.

We study a sample of informative documents on “relevant RPTs” published by Italian companies.

In particular, we use a content analysis method to extract information from the documents and evaluate the

usefulness and quality of the information provided. Information disclosed in the informative documents should

primarily allow readers to understand the conflicts of interest that may affect the RPTs and the risks posed by

such transactions to corporate outsiders. Overall, our empirical results show that, while compulsory information

required by existing regulations is generally disclosed, the depth of the information provided is often unlikely

to be sufficient to fully communicate the implications of the RPTs. Moreover, visual representations are rarely

used by companies in their informative documents. We argue that the use of such representations would allow

companies to convey the structures and features of complex RPTs in a simpler and more direct way.

One of the limitations of this study is that it is an investigation of the current state of disclosure using

qualitative methods. Thus, the findings of the study cannot be generalised. Moreover, the robustness of the

findings could be tested by replicating the investigation in subsequent years.

However, this paper provides a significant contribution to the research on RPTs and offers insights on how

better disclosure could limit the expropriation of minority shareholders through such transactions. In particular,

by forcing companies to disclose more comprehensive and intelligible information on RPTs, possibly through

the use of visual representations, regulators could reduce the occurrence of RPTs that transfer wealth from

corporate outsiders to corporate insiders.


1117

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Shadow Banking Credit Intermediation: Determinants of Default

Risks in Securitization and Collateralization

Mohd Yaziz Mohd Isa, Md. Zabid Haji Abdul Rashid

Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia

The growth in shadow banking system over the past few years is acknowledged as the key risk to Malaysia’s

financial stability. This is because that it is associated with growth in the household debts extended by the shadow

banks. In line with initiatives by the Bank Negara Malaysia (the Central Bank of Malaysia) to enhance surveillance

on the activities of the shadow banks in Malaysia, this study attempts to examine the determinants of default risks

of shadow banks restricting to focus on their two main activities: securitization and collateralization. The results

provide empirical evidence that future methodology to examine the systemic risks in the shadow banking system

may need to account for additional explanatory variables that measure collateralized assets that are being

intermediated.

Keywords: household debts, shadow banks, securitization, collateralization

Introduction

The growth in shadow banking system is partly attributed to filling the gap left by traditional banks whose

balance sheets lately are increasingly being scrutinized by regulators. As such, the traditional banks have

deleveraged their balance sheets, or when they become temporarily impaired, as Ghosh, Gonzalez del Mazo,

and Otker-Robe (2012) of the World Bank wrote, non-banks have filled in their shoes. The latter lends to

borrowers who could not obtain borrowing from the traditional regulated banks.

The Central Bank of Malaysia (Bank Negara Malaysia) defines the shadow banking system as a system of

credit intermediation involving entities and activities outside its regulatory parameter. This definition

encompasses non-bank financial institutions, leasing companies, factoring companies, national mortgage

corporations, building societies, and major non-bank credit providers. There seems to be a niche spot for them

in the financial system. Thus, their importance in credit intermediation has grown over the past few years.

It is acknowledged that the key risk to Malaysia’s financial stability is associated with the growth in household

debts extended by the shadow banks. The Financial Stability and Payment Systems Report 2013 of the

Bank Negara Malaysia (2013a) reported, for the first time, that prudential measures are extended to include

the activities of the shadow banks. This is because that they provide personal financing with a share of 60%

(57% in 2012), accounting for the largest total personal financing to households. Table 1 below shows the

figures in the household sector: new approvals of personal financing.

Mohd Yaziz Mohd Isa, senior lecturer, Center of External Programme & Bank Rakyat School of Business & Entrepreneurship,

Universiti Tun Abdul Razak. Email: [email protected]. Md. Zabid Haji Abdul Rashid, president & vice-chancellor, Universiti Tun Abdul Razak.

DAVID PUBLISHING

D

SHADOW BANKING CREDIT INTERMEDIATION

1120

Table 1

Household Sector: New Approvals of Personal Financing

Credit provider Number of borrowers Amount (RM million)

1st half of 2013 2nd half of 2013 1st half of 2013 2nd half of 2013

Banks 304,967 270,024 9,303 7,652

Non-bank financial institutions 286,215 213,318 20,422 6,508

Note. Source: Bank Negara Malaysia (2013a, p. 21).

The figures in Table 1 show the current size of the credit intermediation of the shadow banks as a

percentage of total assets in the financial system is estimated at over-half of the total household debts. In view

of their significant role in complimenting the role of traditional banks, the Bank Negara Malaysia is currently

looking to gauge and monitor the growth of the shadow banking activities and monitor the risks they pose to

the financial industry as a whole.

In addition, in the household balance sheet, the composition of the household debts grew annually by

12.75% from 57% of the gross domestic product (GDP) in 2002 to 86.85% of the GDP at the end of 2013

(Bank Negara Malaysia, 2013b). Further, within the figures in 2013, close to 45% are loans for properties, an

increase from 30% in 2002. Previously, in 2011 and 2012, the loans for properties of the household debts were

40% and 41%, respectively. Figure 1 below shows the household debts as a percentage of the GDP.

Figure 1. Household debts as a percentage of the GDP. Source: Bank Negara Malaysia (2013b, p. 70).

There is a need to examine the determinants of default risks in securitization and collateralization activities

of the shadow banks. This is in line with the initiatives by the Bank Negara Malaysia to enhance surveillance

on their activities, as their main customers are mainly from middle- and lower-income groups. Generally, they

are at higher risks of defaulting on their loans. It prevents the household balance sheets from becoming a source

of systemic risks. In this regard, the Bank Negara Malaysia is currently working with the Financial Stability

Board (FSB) Regional Consultative Group for Asia and is expected to come out with a report in October 2014

on profile, issues, challenges, and risks of the shadow banks in Malaysia.

0

20

40

60

80

100

120

140

2002 2011 2012 2013

Per

cent

age

of G

DP

Years

Loans for properties

Household debts


1121

This study attempts to examine the determinants of default risks of the shadow banks restricting to focus

on their two main activities: securitization and collateralization. This study is structured as follows. The next

section is the literature review. In Section 3, we present the methodology used in this paper, and Section 4

presents the results and discussion. Finally, Section 5 concludes this study.

Literature Review

The relationship between a well-functioning financial intermediation—the process of channeling savings

or funds into productive investment in the economy—has been well documented. Banks played important

roles in channeling funds from savers to investors for their investing activities (Rajan & Zingales, 1998;

Levine, 1998; 2004). According to Adrian and Ashcraft (2012), the term “shadow banking” was coined

by McCulley (2007) at the Federal Reserve Economic Symposium in 2007. However, Claessens,

Pozsar, Ratnovski, and Singh (2012) observed that Rajan (2005) had discussed some of the vulnerabilities

of what constitute the term, without actually using it, at a conference in Kansas City two years earlier.

The first articles on shadow banking system were published in 2008 by Pozsar (2008) and Adrian and

Shin (2009).

In a broad definition, “shadow banks” intertwine and interconnect with core regulated banks in

intermediating funds among savers, investors, and borrowers. Instead of trading claims such as bonds and

equity (typical activities), shadow banks create and distribute financial assets. Adrian and Ashcraft (2012) hold

the view that in the shadow banking system, “the intermediation chain always starts with origination and ends

with wholesale funding, and each shadow bank appears only once in the process” (p. 16). Further, the authors

added that shadow banks are without any direct and explicit access to any financial backstops. And, Zabala and

Josse (2014) identified that the key players in the shadow banking system are investment banks. In a study of

Claessens et al. (2012), the authors categorized activities of shadow banks to be outside a regulated banking

system. Even though their activities are outside a regulated banking system, they pose similar financial risks

just as the traditional banks. Moreover, Ghosh et al. (2012) explained that significance activities of shadow

banks in emerging economies may pose greater systemic risks. The activities of shadow banks are a source of

systemic risks to a banking system at large because in the intermediation process, they ignore aggregate risks

arising from credit, maturity, and liquidity transformation. Because their activities intertwine and interconnect

with the operations of a regulated and core banking system, they create a source of systemic risks to the

financial system as a whole. After all, the global financial crisis in 2008 originates in the shadow banking

system. A key difference between bank-based intermediation and securitization in a regulated banking system

versus that of the shadow banking is that banks transform risks in a single balance sheet. In the shadow banking

system, the risks are supported by a chain of multiple balance sheets and through various sources of capital

and puts.

The two main intermediation functions in the shadow banking system are securitization and collateral

intermediation (CI). The first function is securitization, when the shadow banks originate, re-pack, and re-sell

pools of credit; and henceforth, in the process they transfer credit, maturity, and liquidity risks. But to

hold securitized debts rather than to transfer risks to the rest of the financial system would be to negate

the benefits of securitization, as Shin’s (2009) study suggests. Moreover, Watkins (2011) expanded that

financial innovation technique of “originate to distribute” in the shadow banking system will remain a


1122

critically important part of the financial system. This process increases the velocity of money circulating

through the economy by creating money-like instruments. The process increases productivity, Watkins (2011)

defended.

The second function in the shadow banking system is CI, when the shadow banks intensively re-use scare

collaterals to support as large as possible, volume or chains of transactions. The stock of collateral and its

velocity, that is, the intensity that it is used, both lead to a source of systemic risks in the financial system. Ghosh

et al. (2012) explained that this practice amplifies pro-cyclicality in the financial system. The authors explained

that in securities financing transactions, it is the assets of shadow banks rather than deposit sources that are

usually used as collaterals to raise more funds, which can then be used to buy more assets. In turn, they can be

used as collaterals to raise additional funds. The process amplifies pro-cyclicality of the financial system, as a

consequence.

Whilst previous studies provide answers to inadequate assessment of tail risks, Adrian and Ashcraft (2012)

observed that because of information opacity, no study has attempted to measure the impact from the two

activities in the shadow banking system, securitization and collateralization, on quality of assets of shadow

banks.

Methodology

The methodology to measure the systemic risks in the shadow banking activities posed to the financial

system as a whole has not yet been well understood. There is no specific systemic risk determinant

that may explain the interconnectedness of the shadow banking activities. The methodology is still a

work in progress. Further, because the study on shadow banks is yet to catch up fully with the issues

and is further hindered by data challenges (because unregulated shadow banks are not subject to statistical

reporting), this study is restricted to focus on measuring the default risks of the shadow banks from

the two main activities, i.e., deposits of securitized debts (DSD) and CI. This is the same approach to

measure the default risks in the shadow banking activities as proposed in a recent report published by

the FSB on measurement of assets held by non-banks and shadow banking activities. In the report,

“Global Shadow Banking Monitoring Report 2013” dated November 14, 2013, the FSB narrows down

the broad shadow banking estimates by filtering out the non-bank activities that have no direct relation

to credit intermediation. These activities are related to self-securitization; henceforth, the securities remain

on the bank’s balance sheet, with no third party involvement in credit transformation or activities that

have already been prudentially consolidated into a banking group for an existing prudential regulatory

purpose.

Theoretical Framework

Because of this categorization, the activities to be included in the measurement of the default risks in the

shadow banking activities are confined in this study to: “deposits and placements at other financial

institutions”, “investment securities”, and “derivative financial instruments”. This category excludes other

activities such as, “loans, advances, and financing”, “property assets”, “plant, property, and equipments”,

“investment in subsidiaries”, and “investment in associates”. The two approaches of the FSB are shown

in Figure 2.


1123

Figure 2. The two approaches of the FSB to mapping default risks in shadow banking. Source: FSB (2013, p. 6).

Based on the two approaches to measure the default risks in the shadow banking system as proposed in the

report, a theoretical framework to measure the default risks of the shadow banks is as follows:

it it itNPL DSD CI= +

where:

NPLit (Non-performing loans): Risks of default to shadow bankers from their transformation activities;

DSDit (Deposits of securitized debts): Securitization by unbundling and repacking, creating assets from

debt obligations, and in the process transferring risks (credit, maturity, and liquidity). In this category, the main

accounts are “deposits and placements at other financial institutions”, and “amount due for guarantees” for a

guarantee corporation, such as the Credit Guarantee Corporation (CGC) of Malaysia;

CIit (Collateral intermediation): The efficient use of scare collateral to support a large volume of

transactions, whose main accounts are “investment securities” and “derivative financial instruments”.

The Ordinary Least Squares (OLS) model regression equation is as follows:

0 1 2log log logit it it itNPL DSD CIβ β β ε= + + +

Data

This study tested data on all shadow banks in Malaysia. The list of the shadow banks is shown in Table 2.

The banks are analyzed until 2013 and their figures are reported in RM’000. There are three categories of the

banks: (1) development financial institutions; (2) other development financial institutions; and (3) non-bank

financial providers.

Whilst in other countries, the activities of their shadow banks may be either lightly regulated or not

regulated at all, Mohd Farid (2013) of the Bank Negara defended that most of the shadow banks in Malaysia

are subjected to some form of oversight by various authorities. Further, the author revealed that although it is

beneficial for the authorities to monitor the shadow banking industry from a macro prudential perspective,

it may not be necessarily helpful if the authorities are unable to focus on specific activities or components in the

shadow banking system that are likely to emit and transmit the systemic risks to the financial system.

Step 1

Macro-mapping

Step 2

Risk-focused

Nar

row

ing

dow

n

• More granularity in sector information

• More information on interconnections

• More breakdown information on assets

• More information on maturity, liquidity,

credit transformation, and leverage

Non-bank financial

intermediation

Non-bank credit intermediation

Non-bank credit intermediation

with bank-like systemic risks


1124

Table 2

Shadow Banks in Malaysia Development financial institution Other development financial institution Non-bank financial provider Bank Pembangunan Malaysia Berhad 2008-2012*

MIDF 2010-2012* Malaysian Building Society Berhad (MBSB) 2002-2013*

SME Bank Berhad 2009-2012* CGC Berhad 2005-2012* RCE Capital Group Berhad 2003-2013* Export-Import Bank Berhad (EXIM) 2008-2012*

Lembaga Tabung Haji 2011-2012(excluded from analysis)

AEON Credit Berhad 2010-2013*

Bank Kerjasama Rakyat Malaysia Berhad 2007-2012*

Sabah Development Bank 2009-2012* Courts Mammoth Berhad (excluded from analysis)

Bank Simpanan Nasional (BSN) Berhad 2005-2012*

Sabah Credit Corporation 2005-2012*

Agrobank Berhad 2006-2011* Borneo Development Corporation (Sabah) (excluded from analysis)

Borneo Development Corporation (Sarawak) (excluded from analysis)

Notes. Source: Bank Negara Malaysia. *: The years when figures are available and thus are included in the analysis.

Results and Discussion

The descriptive statistics and the results of regression equations from using Stata are tabulated in Table 3,

and the logged descriptive statistics are tabulated in Table 4.

Table 3

Descriptive Statistics

Variable Mean Std. dev. Min. Max. Observation

DSD

Overall

421,776.1

741,767.6 0 3,515,000 N = 88 n = 15 T-bar = 5.86667

Between 662,004.6 0 2,371,584

Within 408,556.1 -807,577.6 2,535,453

CI Overall

1,874,129

3,485,194 0 1.80e+07 N = 88 n = 15 T-bar = 5.86667

Between 3,070,616 0 1.01e+07

Within 1,580,836 -1,995,008 9,746,250

NPL Overall

1,036,384

1,519,006 0 5,412,194 N = 88 n = 15 T-bar = 5.86667

Between 1,173,141 13 4,418,987

Within 426,977.6 -1,450,071 2,029,591

Table 4

Logged Descriptive Statistics

Variable Mean Std. dev. Min. Max. Observation

logDSD

Overall

11.71714

2.04215 7.072422 15.07255 N = 73 n = 15 T-bar = 5.86667

Between 1.668733 8.716264 14.66066

Within 1.329115 8.252453 15.2384

logCI

Overall

11.89324

2.998396 6.481577 16.7069 N = 79 n = 14 T-bar = 5.64286

Between 2.781722 7.75698 16.04866

Within 1.210706 7.6533 16.32916

logNPL

Overall

12.01723

2.868567 2.484907 15.50416 N = 87 n = 15 T-bar = 5.8

Between 3.259571 2.561982 15.27097

Within 0.8769774 8.104577 13.88296


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The above results indicate that NPL varied more between the shadow banks (“between” standard

deviation = 1,173,141) than within the shadow banks (“within” standard deviation = 426,977.6).

Further, DSD varied more between the shadow banks (“between” standard deviation = 662,004.6) than

within the shadow banks (“within” standard deviation = 408,556.1). The same is for CI where it varied more

between the shadow banks (“between” standard deviation = 3,070,616) than within the shadow banks (“within”

standard deviation = 1,580,836).

The results show that the two variables seem to be significant to determine the NPL of the shadow banks

as the calculated R-squared that assesses the goodness of fit is 0.5205 (see Table 5); however, between the two

variables, DSD is less significant (its calculated P > [t] = 0.866) than CI (see Table 6). In other words, the

variable CI is more significant, because its calculated P > [t] = 0.000.

The fixed effect: least square dummy variable (LSDV) estimation method with a dummy dropped is

shown in Table 7.

Table 5

Pooled OLS Estimators for the NPL Equation

Source Sum of squares Degree of freedom Mean square

Model 196.629795 2 98.3148977

Residual 181.139325 62 2.92160202

Total 377.76912 64 5.90264251

Number of observations = 65

F (2, 6) = 33.65

Prob. > F = 0.0000

R-squared = 0.5205

Adjusted R-squared = 0.5050

Root mean square error = 1.7093

Table 6

Fixed Effects: LSDV

Variable Coef. Std. error t P > [t] [95% conf. interval]

logNPL 5.115712 1.175091 4.35 0.000 2.772647 7.458778

logDSD 0.0211497 0.1249193 0.17 0.866 -0.2285603 0.2708597

logCI 0.5795617 0.0880145 6.58 0.000 0.4036232 0.7555001

_cons 4.776332 1.231005 3.88 0.000 2.315587 7.237077

The results compute each of the shadow banks different from the other shadow banks. The results show

that deviation of shadow bank No. 3 (EXIM Bank) from shadow bank No. 1 (Bank Pembangunan Malaysia

Berhad) is -0.838153 (see Table 7). Further, deviation of shadow bank No. 14 (MBSB) is 1.02549 from Bank

Pembangunan Malaysia Berhad, shadow bank No. 1.

Meantime, the fixed effects (within) estimation uses variations within each individual shadow bank.

The parameter estimates of regressors of the “within” estimation are identical to those in the LSDV in Table 7,

thus, the coefficient of logDSD is also equal to 0.0838638, and the coefficient of logCI is also equal to 0.000223

(see Table 8).

The results of the fixed effects (within) estimation are listed in Table 8. The results indicate that the fixed

effects estimation better explains the differences “between” the shadow banks (R-square between = 0.0711)

than differences “within” the shadow banks.


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Table 7

Fixed Effect: LSDV: Dummies

Source Sum of squares Degree of freedom Mean square

Model 334.489756 14 23.8921254

Residual 43.2793648 50 0.865587296

Total 377.76912 64 5.90264251

Number of observations = 65

F (14, 50) = 27.60

Prob. > F = 0.0000

R-squared = 0.8854

Adjusted R-squared = 0.8534

Root mean square error = 0.93037

Coef. Std. error t P > [t] [95% conf. interval]

logNPL 5.115712 1.175091 4.35 0.000 2.772647 7.458778

logDSD 0.0838638 0.1023786 0.82 0.417 -0.1217696 0.2894972

logCI 0.000223 0.1816524 0.00 0.999 -0.3646365 0.3650825

2 (SME Bank) -0.7526825 0.674497 -1.12 0.270 -2.10745 0.6020846

3 (EXIM Bank) -0.838153 0.7503618 -1.12 0.269 -2.345299 0.6689931

4 (Bank Rakyat) -1.368613 0.6154143 -0.22 0.825 -1.372957 1.099235

5 (BSN) -0.8919834 0.6252837 -1.40 0.166 -2.167988 0.3840214

6 (Agrobank) -1.487365 0.5967732 -2.49 0.016 -2.686019 -0.2887107

7 (MIDF) -3.837627 0.9880317 -3.88 0.000 -5.822147 -1.853107

8 (CGC) -1.62869 0.9401924 -1.73 0.089 -3.5171122 0.2597418

10 (Sabah Development Bank) -2.325027 0.8699781 -2.67 0.010 -4.072429 -0.5776243

11 (Sabah Credit Corporation) -6.190557 1.205778 -5.13 0.000 -8.612434 -3.76868

14 (MBSB) 1.02549 1.08936 0.94 0.351 -1.162554 3.213534

15 (RCE Capital) -5.631419 0.9010572 -6.25 0.000 -7.441246 -3.821593

16 (AEON Credit) -3.186761 1.384927 -2.30 0.026 -5.968468 -0.4050535

_cons 13.25764 2.256892 5.87 0.000 8.724542 17.79075

Notes. No. 1 (Bank Pembangunan) is not computed in LSDV. No. 9 (Lembaga Tabung Haji), No. 12 (Borneo Development Corporation Sabah), No. 13 (Borneo Development Corporation Sarawak), and No. 17 (Courts Mammoth) are excluded.

Table 8

Fixed Effects (Within) Estimation

Fixed effects (within) regression

Group variable

R-square Corr. (u_i, Xb)

No. of obs.

No. of groups

Obs. per group min.

Avg. Max. F (2, 50) Prob. > FWithin Between Overall

Shadow banks

0.0185 0.0711 0.1867 0.3950 65 13 1 5.0 8 0.47 0.6265

Coef. Std. error t P > [t] [95% conf. interval]

logNPL 5.115712 1.175091 4.35 0.000 2.772647 7.458778

logDSD 0.0838638 0.1023786 0.82 0.417 -0.1217696 0.2894972

logCI 0.000223 0.1816524 0.00 0.999 -0.3646365 0.3650825

_cons 10.91713 1.824185 5.98 0.000 7.25315 14.58112

sigma_u 2.1755601

sigma_e 0.93036944

rho 0.84539355 (fraction of variance due to u_i)

Notes. F-test that all u_i = 0. F (12, 50) = 13.27. Prob. > F = 0.0000.


1127

Table 9

Random Effects

Random effects Generalized Least Squares (GLS) regression

Group variable

R-square Corr. (u_i, X)

No. of obs.

No. of groups

Obs. per group min.

Avg. Max. Wald chi2 (2)

Prob. > chi2Within Between Overall

Shadow banks

0.0057 0.5477 0.5204 0 (assumed) 65 13 1 5.0 8 7.58 0.0226

Coef. Std. error z P > [z] [95% conf. interval]

logNPL 5.115712 1.175091 4.35 0.000 2.772647 7.458778

logDSD 0.0041184 0.0965966 0.04 0.966 -0.1852075 0.1934443

logCI 0.3146591 0.1314317 2.39 0.017 0.0570578 0.5722604

_cons 8.397248 1.501919 5.59 0.000 5.45354 11.34096

sigma_u 1.5294395

sigma_e 0.93036944

rho 0.72990679 (fraction of variance due to u_i)

The Wald chi2 (2) = 7.58 indicates the overall significance of the two variables (“DSD” and “CI”)

in explaining the NPL of the shadow banks (see Table 9). By comparing the different estimates above on the

NPL of the shadow banks, the following question arises: “Which is more preferred from among the pooled

OLS, fixed effects or random effects?”. The results of the Breusch and Pagan Lagrangian multiplier test for

random effects are as follows in Table 10.

Table 10

Estimated Results: lnpl(bank, t) = Xb + u(bank) + e(bank, t)

Var. Sd = sqrt (Var.)

lnpl 5.902643 2.429535

e 0.8655873 0.9303694

u 2.339185 1.52944

Test: Var. (u) = 0

chibar2 (01) = 82.90

Prob. > chibar2 = 0.0000

The null hypothesis is that variance across the shadow banks is zero, that is, there is no significant

difference across the shadow banks. However, here we reject the null hypothesis and conclude that the random

effects model is a more appropriate model.

Based on the above results, the two explanatory variables, “DSD” and “CI”, are determinants of default

risks in shadow banking activities. Apart from this, the positive coefficients of the variables against the NPL

provide suggestive evidence that the higher the DSD and collaterals intermediated in financial transactions, the

higher the levels of NPL.

Further, the above results indicate that the random effects model is more preferred than the fixed effects

model as the former explains variations “within” and “between” the shadow banks. And, the variations

are mainly attributed to the “between-banks variations”, rather than the “within-banks variations”

(or “time-series variations”). This is because that the R-squared “between” = 0.5477 is higher than R-squared

“within” = 0.0057 (see Table 9).


1128

More importantly, future methodology to measure the systemic risks in the shadow banking industry may

need to account for additional explanatory variables particularly that measure collateralized assets being

intermediated. This is because that the results show that between the two variables, the DSD is less significant

than the CI.

This argument is further supported by the facts that:

(1) First, because of the diverse nature of financial services in the shadow banking industry, the total assets

represent stability of the whole industry that is being examined. This is in the same vein with a previous study

on bad debt provisions of financial institutions in China by Shan and Xu (2012) who also examined total assets

and used it as the denominator;

(2) Second, it is because of the fact that shadow banks in the shadow banking industry accumulate assets

that are sensitive to tail events when they take advantage of mispriced tail risk, whereby it is referred to as

“neglected risk”; and in this respect, market participants are biased against the rational assessment of tail risk.

Adrian (2014) referred to Gennaioli, Shleifer, and Vishny (2012) that this behavioral theory is rooted in the

psychological study. Also, Rajan (2005) earlier had questioned whether financial innovations had made the

world riskier;

(3) Third, because in the shadow banking system, it is the assets, rather than the deposit sources, that are

used (as collaterals) to raise more funds that in turn can then be used as collaterals to raise additional funds.

Henceforth, this practice amplifies pro-cyclicality in the shadow banking financial system as explained by

Ghosh et al. (2012).

Conclusion

This study attempts to examine the determinants of default risks of shadow banks restricted to focus on

their two main activities: securitization and collateralization. The results provide empirical evidence that

future methodology to examine the systemic risks in the shadow banking system has not yet been well

understood to explain the interconnectedness of the activities, but it may need to account for additional

explanatory variables that measure collateralized assets being intermediated. This study itself also suggests

that a further line of work in terms of a better survey of data is needed to capture systemic risks in the shadow

banking system.

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No. 664. Adrian, T., & Ashcraft, A. B. (2012). Shadow banking: A review of the literature (pp. 1-36). Federal Reserve Bank of New York,

Staff Reports No. 580. Adrian, T., & Shin, H. S. (2009). The shadow banking system: Implications for financial regulation. Banque de France Financial

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http://www.bnm.gov.my/files/publication/fsps/en/2013/fs2013_book.pdf Bank Negara Malaysia. (2013b). Annual report 2013 (pp. 1-160). Retrieved from

http://www.bnm.gov.my/files/publication/ar/en/2013/ar2013_book.pdf Claessens, S., Pozsar, Z., Ratnovski, L., & Singh, M. (2012). Shadow banking: Economics and policy priorities (pp. 1-36).

International Monetary Fund, Staff Discussion Note No. SDN/12/12. Financial Stability Board [FSB]. (2013). Global shadow banking monitoring report 2013 (pp. 1-46). Retrieved from

http://www.financialstabilityboard.org/publications/r_131114.pdf


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Gennaioli, N., Shleifer, A., & Vishny, R. (2012). Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics, 104(3), 452-468.

Ghosh, S., Gonzalez del Mazo, I., & Otker-Robe, I. (2012). Chasing the shadows: How significant is shadow banking in emerging markets? Economic Premise, 88, 1-7.

Levine, R. (1998). The legal environment, banks, and long-run economic growth. Journal of Money, Credit, and Banking, 30(3), 596-613.

Levine, R. (2004). Finance and growth: Theory and evidence. Working Papers 10766, National Bureau of Economic Research. McCulley, P. A. (2007). Teton reflections. PIMCO. Mohd Farid, M. A. (2013). Monitoring shadow banking and its challenges: The Malaysia experience (Unpublished manuscript,

Bank Negara Malaysia (BNM) Financial Surveillance Department). Pozsar, Z. (2008). The rise and fall of the shadow banking (pp. 133-154). Federal Reserve Bank of New York. Retrieved from

https://www.economy.com/sbs Rajan, R. (2005). Has financial development made the world riskier? Proceedings of the 2005 Jackson Hole Economic Policy

Symposium (pp. 313-369), Federal Reserve Bank of Kansas City. Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88(3), 559-586. Shan, Y. G., & Xu, L. (2012). Bad debt provisions of financial institutions: Dilemma of China’s corporate governance regime.

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trends, and two examples of private, non-bank lending. The Journal of Risk Finance, 15(3), 214-233.


Organizational Learning (OL) and Organizational Innovation

(OI): The Case of Information and Communication

Technology (ICT) Industry in Malaysia∗

Gholamreza Zandi

SEGi University, Kuala Lumpur, Malaysia

Mohamed Sulaiman, Islam Mohamed Salim

International Islamic University Malaysia, Kuala Lumpur, Malaysia

The progression through which a person acquires skills, understanding, and opinions regarding a particular

organization or company is called organizational learning (OL). In this study, the connection between

organizational innovation (OI) and OL within the information and communication technology (ICT) industry in

Malaysia is surveyed. These relationships are examined, because various previous inquiries have shown that an

imperative precursor to firm performance is OL. Two hundred and seventy-eight surveys were completed by small

and medium organizations across Malaysia. The connections existing between the causes of OL and the causes of

OI were ascertained by using structural equation modeling (SEM). Amongst the Malaysian small- and

medium-sized enterprises (SMEs) that participated in the study, OI and OL are considerably linked.

Keywords: information and communication technology (ICT) industry, innovation, organizational learning (OL),

small- and medium-sized enterprises (SMEs)

Introduction

Simply defined, organizational learning (OL) is the on-going practice of pursuing tactics that

may offer one organization a rivaling edge over another. OL takes place in stable environments, which

are typically attained via uniform workouts, departments of work, and in addition, sound operations

management (Grant, 2005; 2010). Due to recent transformations in the business world making orthodox OL

practices out of date, companies have been required to find totally new methods in order to preserve a

realistically competitive advantage over their peers (Chirico & Salvato, 2008). Standardized workouts and

departments that are connected with labor and management can help to attain efficacy and balanced

environments (Grant, 2005; 2010). Nevertheless, recent adjustments available atmosphere have got motivated

corporations to find new strategies for aggressive side since the traditional methods have grown to be obsolete

(Chirico & Salvato, 2008).

∗ This paper was presented at the 4th International Conference on Business and Economic Research (4th ICBER), March 4-5, 2013, Golden Flower Hotel, Bandung, Indonesia.

Gholamreza Zandi, associate professor, Dr., Graduate School of Business, SEGi University. Email: [email protected]. Mohamed Sulaiman, emeritus professor, Dr., Department of Business Administration, International Islamic University Malaysia. Islam Mohamed Salim, Dr., Department of Business Administration, International Islamic University Malaysia.

DAVID PUBLISHING

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OL AND OI: THE CASE OF ICT INDUSTRY IN MALAYSIA

1131

A mixing of operations and markets in a borderless economic space, an increasing amount of knowledge,

and further expansions in technology define globalization. Globalization is one of the dominant economic

dynamisms faced by businesses today (Hanna, 2010; Roy, 2005; Johnson & Turner, 2003). Companies must

deal with current outside opportunities as well as threats. In order to do so, they must acquire new knowledge

and skills that can improve their current situation as well as their future and they must do this as efficiently as

possible (Child, Faulkner, & Tallman, 2005).

De Geus (1988) said that for the business of the future to maintain its competitive advantage, it will have to

have the ability to work with its managers to find information out faster than their competitors. The idea that OL is

the best practice for increasing a firm’s cut-throat edge and performance is held by various researchers (Mavondo,

Chimhanzi, & Stewart, 2005; Senge, 1990; Sinkula, Baker, & Noordewier, 1997). Despite this evidence, growing

internal competition in the product and service markets is generally driving the value of OL down in spite of the

dynamic requirements of the market pertaining to a firm’s reputation for innovation (Abonyi, 2007).

These characteristics create a challenging and spirited setting for companies that do not adhere to

the changes and regulations associated with business. Compared to domestic small- and medium-sized

enterprises (SMEs), those participating in global markets find that their difficulties are compounded by their

dimensions and limited resources while well-established businesses enjoy the advantages of economics-based

scale (Audretsch, 2009). Given these facts, in Malaysia, SMEs are faced with various challenges including

limited use of engineering, lack of associated skills and knowledge, and global competition (Ahmad, Abdul Rani,

& Mohd Kassim, 2010).

With regard to the increasing cooperation between OI and OL, small and medium corporations are trying

to develop new innovations to advance their level of performance in a competitive environment. Most

researchers who have chosen to investigate SMEs have done so, because SMEs generally occupy an interesting

position in any country’s economy where they are responsible for both producing and establishing towns and

cities (Turner, Ledwith, & Kelly, 2010). In addition, SMEs create work, support and diversify economies, and

play a role in the ability to export, because they are mobile and can swiftly adapt to altering current market

ailments (Kamel, 2010). This study theorizes and hypothesizes that there is a significant positive relationship

that exists between OL and OI among SMEs in Malaysia.

Literature Review

OL

The method through which an entity attains intelligence, abilities, views, and opinions is conventionally

deemed to be learning (Illeris, 2004; 2011; Pauleen & Gorman, 2011). The complications ordinarily found with

OL are outlined by Argyris and Schon (1978). A study of previous publications on OL reveals many distinctive

viewpoints regarding the topic which diverge depending on personal notions.

A majority of these notions combine logically the make-up of the organization with its atmosphere.

Likewise, this atmosphere encompasses the character of the organization’s reality, whether this is an objective

reality or a skewed interpretation of reality. Additionally, there is a focus on the specific tasks that make up OL

including cognitive ones (Pawlowsky-Glahn & Egozcue, 2001). The first methodical differences amongst the

various viewpoints of OL are considered to have been made by Shrivastava (2007). Within companies in

Malaysia, the type of OL championed by Neilson (1997) was the first to be integrated. This gave it a lead over

the earlier work of Cyert and March (1963).


1132

Shrivastava (2007) said that OL should be classified as implementation, ideas of sharing, knowledge

expansion, results, and established know-how. Action-oriented perspectives are usually rooted in based on

sociological theories of knowledge (Pawlowsky-Glahn & Egozcue, 2001). These perspectives look incremental

based on experience and have a clear focus that explains why OL is going on (Blackman & Henderson, 2005).

Persons with an established understanding generate standards that become psychological models while a

combination of frameworks which make up the knowledge gained by repeatedly practicing the same skills

make up institutionalized experience (Blackman & Henderson, 2005).

This study takes an approach to OL originally noted by Weick and Westley (1996) that can be linked with

a cooperative perspective of learning that places emphasis on the communal education of the organization. This

view allows analysts to focus much less on the rational characteristics of individual minds and more on the

combined ideas of the group. Additionally, this outlook on OL draws a distinction between insight and error

correction as well as acclimatization to situational changes and systems-theory-infused metaphors

encompassing knowledge (Yanow, 2000).

Organizational Innovation (OI)

An assortment of innovation categorizations and classifications has been yielded from existing studies.

Standards to varying degrees are utilized to illustrate development and what precisely comprises development

by realizing standard philosophies about the thinking associated with progress in innovation (Berchicci, 2009).

Schumpeter (1934) identified progression as establishing new creation purposes.

According to Slappendel (1996), it is necessary to create a model to organize the prevailing studies in an

effort to focus on innovation in three different ways. These ways include individualism, structuralism, and an

interactive course of action perception. The key method to obtain creativity within firms is based on the average

individual perspective and cultural mindset according to Fagerberg and Godinho (2005) and Higgins (2007).

This is based on individual employee characteristics. For example, an employee’s personal profile made up of

their demographic characteristics as well as their own ingenuity and creativity is representative of

individualism.

Individualism is explicitly based on theory while structuralism, which can be seen throughout the same

corporations practicing individualism, is typically explored in order to cognize and evaluate the systems linking

the inter-dependent aspects of the organization (Lam, 2004). Highlighting the link that exists between the

employee of the firm and the other various stakeholders, chiefly those with external interests such as directors,

dealers, and consumers is the objective of a structuralism approach to organizational theory. Linear

measurements are used to identify the attitude of individualists and structuralists whereby innovation is

predicted to materialize through conforming phases of growth, procedure, and communication (Aledda, 2010).

The drive to work together in order to expand innovation could be self-motivated. Additionally, the persistent

individuality that encompasses the constant exchange of engagements of characters as well as the structures

influence could have an effect on this approach (Harkema, 2003). These beliefs underline the significance of

the group as a whole and its attitude towards the transformation of the company as a whole.

A collaborating attitude where invention is seen as a complex and non-linear occurrence is the approach

taken by this study. Therefore, this study examines the benefits of information technology for both the

individual employee and the organization. Finally, this study looks at the structural variables based on

interconnection theories (Zendejas & Chiasson, 2008).


1133

Conceptual Framework

The conceptual model in Figure 1 is utilized to explore the interactions concerning OL.

Figure 1. Research conceptual framework.

It is readily understood that learning is indispensable in order to promote innovation. Those organizations

that display noticeable attributes of OL have a positive relationship with OI as well (Alegre & Chiva, 2008;

Kokoglu, Imamoglu, & Ince, 2011). Correspondingly, Hurley and Hult (1998) referenced Stata (1989) in

pointing out that the key progression that OI derives from is OL. Finally, it is generally recognized that there is

a link between the evolution of individuals and the evolution or transformation in a distinct culture in a

particular environment. Put another way, the more an organization supports the advancement of individuals, the

more those individuals are able to influence the group, which in turn cultivates the innovation of the

organization. Thus, the following hypothesis is adopted:

H1: OL has an explicit noteworthy and progressive affiliation with OI.

CL

A shared dedication to learning means that the OL taking place among employees and that of the managers

has a spirit of open-mindedness towards organizational information sharing in common. There are various

stages that make up OL, but the stage where there is a determination to assist in the knowledge development of

the organization will most likely to be that stage that lends to valuable exchanges and encourages a pleasing

atmosphere (Calantone, Cavusgil, & Zhao, 2002). Based on this evidence, the following hypothesis is

developed:

H1a: A shared dedication to learning has an explicit noteworthy and progressive affiliation with OI.

SV Learning

A shared aspiration towards learning and developing the generally contributed perspective, in addition to

the relationships among the employees of a firm, builds up the positive changes in knowledge gained by an

organization. This also develops the shared mind models of a firm (Akgün, Keskin, Byrne, & Aren, 2007).

This shared aspiration is perpetuated by dialogue and change of the proficiency of the firm’s staff. It presents

the organization with a practical and viable benefit while offering them the power to uphold their standing in a

competitive marketplace. These ideas show that the reinforcement of teamwork, especially group

problem-solving, is a benefit to the overall state of the organization. It can be deduced from these premises that

supported teamwork and team problem-solving, in other words a shared aspiration to learning, reduce the level

of dependency on top management and operational neglect (Goh & Richards, 1997). Thus, the following

hypothesis was developed:

H1b: A shared aspiration to learning has an explicit noteworthy and progressive affiliation with OI.

OL

Commitment to learning (CL)

Open-mindedness

Shared vision (SV)

Intra-organizational knowledge sharing (KS)

OI

Product

Process

Administrative

H1 + (H1a to H1d)


1134

Open-mindedness is concerned with a firm’s capacity for accepting new recommendations and also the

initiative to alter outlooks and behaviors while adjusting to new possibilities (Akgün et al., 2007). Putting

together an atmosphere that embraces openness is one where cultural and functional constraints are

disconnected and self-determination of all kinds, including opinions typical of a single-minded attitude that

involves self-praise are exhibited (Jerez-Gomez, Cespedes-Lorente, & Valle-Cabrera, 2005). Therefore, an

immediate effort towards adjusting and re-engineering antiquated know-how and courses of action helps

organizations to better understand dated issues. A sound open-minded firm evolves with fresh and up-to-date

innovation practices and turns it into concrete successes by growing competitive advantage. Thus, the following

hypothesis was developed:

H1c: Open-mindedness has an explicit noteworthy and progressive affiliation with OI.

Intra-organizational KS

Attitudinal exercises that are shared for studying by stakeholders internally can be classified as

intra-organizational knowledge (Moorman & Miner, 1998). These practices along with the information

collected from various distinct resources serve the best intentions for future success (Lukas, Hult, & Ferrell,

1996). Know-how more often than not is present within individuals (Nonaka, Byosiere, Borucki, & Konno,

1994). Employee turnover leads to a loss of information. KS helps companies, and it is necessary for companies

to prevent this loss (Lukas et al., 1996). Thus, it is hypothesized that:

H1d: Intra-organizational KS has an explicit noteworthy and progressive affiliation with OI.

Research Methods

This research is quantitative in nature. Structural equation modeling (SEM) was used to analyze the data.

A survey questionnaire was distributed to the chief executive officers (CEOs) or managing directors of the

nominated organizations. The motivation for picking these administrators as participants is because of their key

prominence in making decisions and fostering the culture of learning within the organization. This concept is

evaluated using a 7-point Likert scale, extending from 1 (strongly disagree) to 7 (strongly agree). The sample

was intended to be extracted from 2,520 SMEs registered in the Multimedia Super Corridor (MSC). Probability

sampling was utilized with stratified chance sampling to improve the efficiency of the statistical figures.

Because of limited time and funds, the sample size was 450.

Data Analysis and Results

The characteristics of the data and the hypotheses determined the selection of the appropriate method to

analyze the said data. This study set out to examine the structure of the relationship between OL and OI. To test

the hypotheses of this study, a multivariate analysis was utilized. The SEM technique is applied using the

Analysis of Moments Structure Program (AMOS 18.0) to test the hypotheses involving the affiliation between

OL and OI.

Profile of Respondents by Position

Table 1 lists the profile of the survey participants according to their title. Table 1 reveals that a majority of

the respondents were CEOs, general managers, vice presidents, and managing directors. This suggests that most

of the respondents were senior administrators and were thus of a rank to offer pertinent responses to the survey

questions.


1135

Table 1

Profile of Respondents by Position Respondent Frequency Percent (%) Cumulative percent (%)

Valid

Chief operating officers 4 1.4 1.4

Managing directors 59 21.2 22.7

CEOs 163 58.6 81.3

General managers 47 16.9 98.2

Others 5 1.8 100.0

Total 278 100.0

Reliability Test

Cronbach’s alpha is the most broadly utilized indicator of dependability and internal reliability (Salkind,

2010). Internal reliability is the degree to which singular items compare with one another or the test

total (Brown, Hendrix, Hedges, & Smith, 2011). The alpha coefficients for each subscale are shown in

Table 2.

The alpha values displayed in Table 2 for each of the subscales are within the range of 0.71-0.90 as

recommended by Nunnaly (1978) and DeVellis (1991). According to Streiner and Norman (2008), scales with

alpha values above 0.90 are prone to suffer from disproportionate redundancy, while those with an alpha less

than 0.70 are liable to be unpredictable.

Table 2

Cronbach’s Alpha for the Measurement Scales Research construct Dimension No. of items Cronbach’s α

OL

CL 4 0.83

SV 4 0.74

Open-mindedness 4 0.88

KS 5 0.81

OI

Process innovation (PROCIN) 5 0.75

Product innovation (PRODIN) 5 0.90

Administrative innovation (ADMIN) 5 0.71

Total 32 0.80

Hypotheses Testing

The first hypothesis stated that there is a noteworthy and progressive affiliation between OL and OI.

The structural path for H1 (OL-OI) is in the expected direction (positive), and the affiliation between the

two concepts is significant (t = 2.602, p < 0.01). This finding, therefore, provides empirical support for H1 that

OL has a noteworthy and progressive affiliation with OI. Figure 2 shows the path diagram for the structural

model.

We also examined the magnitude and significance of the factor loadings. Table 3 provides the values of the

path coefficients and t-values of the factors. Table 3 shows that all factor loadings are noteworthy (p < 0.01),

and all except one factor loading are above 0.50. The factor with a low loading estimate is CL which loads on

OL at 0.20. However, examination of the standardized residual covariance for CL shows that all correlations are

close to zero, and therefore, the low factor loading for CL is not considered as a serious problem given its high

significance. Therefore, the hypotheses H1a, H1b, H1c, and H1d are supported.


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Figure 2. Path diagram for structural model with standardized loadings.

Table 3

Factor Loadings and T-values for Structural Model

Model relationship Parameter estimate

t-value Standardized Unstandardized

OL-OI 0.38 1.46 2.602**

OI-ADMIN 0.91 1.00 _a

OI-PRODIN 0.97 1.05 26.17***

OI-PROCIN 0.76 0.85 16.77***

OL-CL 0.20 1.00 _a

OL-SV 0.66 2.44 2.87**

OL-KS 0.72 3.22 2.88**

Notes. Fit indices χ2 (17) = 37.284; χ2/df = 2.19; Comparative Fit Index (CFI) = 0.978; Root Mean Square Error of Approximation (RMSEA) = 0.066; _a: Fixed parameter; *: p < 0.05; **: p < 0.01; ***: p < 0.001.

Conclusions

This study finds that OL positively influences an organization’s capacity to innovate. It can also be

concluded that effective innovation is not wholly a result of environmental factors. It is also a consequence of

an executive dedication to learning. Therefore, the idea that innovation is a learnable pursuit is upheld (McKee,

1992). For organizations to change in this way, they have to let go of earlier assumed dogmas. This leads to an

even greater level of innovation (Corso & Pellegrini, 2007). Firms involved with OL focus their internal

environment to guarantee that there is a high degree of SV, commitment, and KS that facilitates the

decision-making process. All in all, this leads to innovation, and firms are assessed in terms of their adeptness

to innovate.

The implications of this study are especially relevant to SMEs that function in very competitive and

technology-driven industries, for instance, the information and communication technology (ICT) industry.

Because they are the rank holders in their companies, senior administrators and officials should be accountable

for enhancing the culture of KS within the firm and be responsible for developing and growing a climate of

learning. They do this by improving and facilitating managerial support for building the necessary knowledge

to benefit the organization.

In conclusion, future research should consider circumstantial factors such as age, type of industry, market

share, organizational structure, leadership, and human resource management that may be necessary for

assessing the overall effect of OL on innovation as the present research does not take this into account.

e4

e5

e6

KS

SV

CL

OL OI

ADMIN

PRODIN

e1

e2

e3 PROCIN

0.52

0.44

0.04

0.72

0.66

0.20

0.91

0.97

0.76

0.83

0.95

0.58


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