Is there a theory of the firm for non-financial reporting? The case of Integrated Reporting

Why do a firm exists and with which objectives are questions that have accompanied the conceptual and practical developments of the theory of the firm in similar albeit different disciplines, such as economics, business economics and finance. Foss (1993) distinguishes between theories of the firm rooted in the economics tradition and those linked to the business tradition. The economics-based theories of the firm originated to contrast the neoclassical view which conceives the firm as a production function, that is they aim to find a rationale for the existence of the firm. In this respect, starting form Coase (1937) contribution, the firm is seen as the result of the market failure. All economics-based theories are about transactions and their costs, and rely on the rejection of (some) fanciful assumptions about perfect and complete markets lying at the heart of neoclassical theory. Competence-based theories have a very different DNA as compared to economicsbased ones: they originated from the attempt to explain the different performances achieved by firms operating in the same industry, that is to answer the question ‘why companies operating in the same industry differ in their performance?’. In the group of competence-based theories it is possible to distinguish two main approaches. The first is the Resource-Based View (RBV) of the firm, as elaborated in the pioneering works of Wernerfelt (1984) and Barney (1986). The second is the Dynamic-Capabilities Theory (DCT) of the firm, often also referred to as Evolutionary Theory of the firm (Nelson and Winter, 1982; Teece, 1987 and 2007; Teece, Pisano, and Shuen, 1990 and 1997). Since these conceptualisations have been put forth, the reference to a theory of the firm has become essential for those interested also in financial reporting. In fact, a theory of the firm deals with fundamental aspects, such as the what is the nature of the firm (and its boundaries, in the economics tradition) and what are the firm’s main goal and primary stakeholder(s) to which the activity is referred to. The same three issues are also at the core of any reporting system. Reporting is indeed concerned with the nature and the boundaries of the reported object (e.g. the firm or entity) (Girella, 2018), as well as with the achieved goal of the firm for specific stakeholders (for example, earning and value creation for shareholders and other investors, or value added for communities and employees). Despite the significance of such a topic to understand and appreciate the role and objective of accounting and reporting, few studies have extended such investigation to the emergent forms of reporting practices, such as sustainability, intangibles and integrated reporting. Marzo (2014) represents an exception, which has started to problematise how the reference to a theory of the firm can assist the investigation of Intellectual Capital and of its reporting practices in a consistent way. Nonetheless this initial effort, a peripheral number of works have followed this path. This paper aims to fill this void. Starting from the analysis of a representative type of non-financial reporting, namely Integrated Reporting and its framework, it carries out two levels of investigation. First, it explores the theory of the firm which the International Integrated Reporting Council (IIRC) has referred to in developing the above mentioned document. Second, by relying on the results of the first level of analysis, the paper will also assess the internal (in)consistencies of the fundamental pillars at the core of the analysed types of reporting. Moving from this examination, the contribution that this work intends to provide to the literature and practice is twofold. This study is, in the authors’ knowledge, the first attempt to analyse non-financial reporting from a theory of the firm perspective. Accordingly, it can shed light on relevant aspects. First, using a theory of the firm perspective is useful to understand which are the explicit and implicit assumption upon the model of the firm lying at the core of reporting. Indeed, clarifying the theory of the firm at the core of reporting could help identifying and testing hypotheses about the relevance of reporting in many areas of study, such as its role in the value creation process. Moreover, scholars and practitioners could take benefit from understanding the sometimes hidden influence of taken for granted assumptions and therefore, challenge what they could believe to be the natural order of things, whereas it is merely the product of fertile but human minds. Second, the conceptual similarities and differences existing between the forms of reporting that populate the non-financial field will emerge, thus providing clarifications in a corporate reporting environment that appear nowadays complex and highly intermingled.