Melco Management Accounting Research
Discussion Paper Series
No.MDP2020-001

The Adoption of Integrated Reporting and Changes in Internal
Mechanisms in Japanese Companies

March 2020

Masahiro Hosoda
College of Humanities and Social Sciences, Ibaraki University
2-1-1, Bunkyo, Mito, Ibaraki, 310-8512, Japanmasahiro.hosoda.mn@vc.ibaraki.ac.jp

The Melco Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

The Adoption of Integrated Reporting and Changes in Internal
Mechanisms in Japanese Companies

Masahiro Hosoda

Abstract
Integrated reporting (IR) is a new reporting framework established by theInternational Integrated Reporting Council (IIRC) that proposes the integration offinancial and non-financial information in a single report. This study investigates theapproaches and internal mechanisms early adopters use to implement IR, and examines
whether it drives organizational change at this early stage. Data were gathered throughsemi-structured interviews and e-mail exchanges with the managers and employees
responsible for developing integrated reports in Japanese companies with the best IR
practices. The content analysis results did not uncover radical, transformative changes
to reporting processes, but rather incremental changes to processes and structures that
previously supported sustainability reporting. As Japanese companies traditionallyhold long-term business perspectives and practices to create sustainability reports, theadoption of IR is seamless, but it may not cause radical changes to their internalmechanisms. This study contributes to IR research that focuses on internal mechanisms
in the context of IR. This research also has practical implications as it highlights thebest practices of IR in Japan.

Key words: Integrated reporting, Sustainability reporting, Organizational change

11 Introduction
The debate around corporate social responsibility (CSR) and sustainability incorporate information disclosure has been diversifying recently. Until now, companies
published CSR and sustainability reports, and the number of companies publishingintegrated reports based on the International Integrated Reporting Council (IIRC)
framework is increasing. Against this backdrop, regulatory authorities and accounting
professionals, in addition to the IIRC, are advocating the application of integrated
reporting (IR) (de Villiers et al., 2017).
IR is “[a] process founded on integrated thinking that results in a periodic
integrated report by an organization about value creation over time and related
communications regarding aspects of value creation” (IIRC, 2013, p. 33). Integrated
thinking is “the active consideration by an organization of the relationships between its
various operating and functional units and the capital that the organization uses oraffects” (IIRC, 2013, p. 2). Integrated thinking “leads to integrated decision-making
and actions that consider the creation of value over the short, medium and long term”(IIRC, 2013, p. 2). IR “promotes a more cohesive and efficient approach to corporate
reporting and aims to improve the quality of information available to providers offinancial capital to enable a more efficient and productive allocation of capital” (IIRC,
2013, p. 4). Based on this objective, IR is a new framework for information disclosurethat combines financial and non-financial information in a single report. It incorporates
new ideas that could change how companies disclose information, improves investors’ability to evaluate firms’ prospects, and provides solutions to address the oft-repeatedcriticisms of traditional accounting reporting models (de Villiers et al., 2017).
The increase in companies’ use of IR has led to an increase in academic interestin the subject. Most early IR research argued for or against the idea and engaged in anormative discussion of application methods (Atkins & Maroun, 2015; Serafeim, 2015;
Stent & Dowler, 2015). On the other hand, research on IR from an internal corporate
perspective is limited, with the focus being on theoretical research and case studies (deVilliers et al., 2017; Jensen & Berg, 2012; McNally & Maroun, 2018; Stubbs &Higgins, 2014).
These research tendencies are the same for Japan, with no studies along the linesof Stubbs and Higgins (2014) and McNally and Maroun (2018), which were carriedout in Australia and the Republic of South Africa immediately after the initial adoptionof IR. Specifically, these studies investigate perspectives such as the reasonscompanies apply IR, the methods and use of internal mechanisms, and organizationalchange as a result of IR (Koga, 2015). As the IIRC states that the aim of IR is to2

“support integrated thinking, decision-making and actions that focus on the creation ofvalue over the short, medium and long term” (IIRC, 2013, p. 4), we can expect its
application to result in changes to organizational decision making and behavior.
However, there is a lack of research on Japanese companies in terms of the kindsof organizational changes that occur due to the application of IR given the changing
state of companies and markets. As managers decided to apply IR, there is still plentyof room to discuss the effect of IR on organizational change in the context of the movefrom traditional performance measures that focus on financial outcomes to a morecomprehensive set of indicators that express how companies manage diverse capital in
the creation of sustainable returns (de Villiers et al., 2017; McNally & Maroun, 2018;
Stubbs & Higgins, 2014).
In this context, we interview and exchange e-mails with the managers andemployees who create integrated reports to learn the approaches and internalmechanisms their companies employ in the application of IR. We aim to determine thecurrent organizational changes that are driven by IR. This study thus contributes to thegrowth of IR research that focuses on the internal aspects of the organization. By
focusing on companies with best practices in IR, this study specifically contributes
new knowledge on changes driven by the application of IR. The practical significanceof this study is that by focusing on companies that exemplify the best practices, we
may provide value for companies not only in Japan, but also worldwide.
The structure of this paper is as follows. Section 2 presents a review of theexisting literature. Section 3 discusses the methods used and Section 4 presents thefindings. Section 5 discusses the findings and the final section offers the study’s
conclusions, significance, and future research directions.

2 Literature Review
2.1 Internal Mechanisms of IR
In this section, we review the research on IR from an internal corporate
perspective. Through an interview study of managers responsible for the application of
IR in Australia, Higgins et al. (2014) find that such managers were cognizant ofchanges in the format, but not the quality of the reports. Managers understood IR as aform of storytelling that would provide system-level benefits. Higgins et al. (2014)
point out that IR clearly does not influence changes in corporate norms. Similarly,
Stubbs and Higgins (2014) find that the introduction of IR by early adopters inAustralia did not necessarily lead to innovations in disclosure mechanisms. Their study
demonstrates that no fundamental and innovative changes in reporting processes
3

occurred; rather there were incremental changes to the structures and processes that
previously supported sustainability reporting.
Prior studies also discuss the benefits of IR as an extension of sustainability
reporting. For example, Parrot and Tierney (2012) discuss the case of AEP (American
Electronic Power) and argue that in shining a light on the difficulty of balancing notjust the profits of multiple stakeholders, but also the financial and environmental,social, and governance (ESG) aspects, the long-term perspective that IR provides canhelp managers accept the difficulty of balancing multiple dimensions. Further, Knauer
and Serafeim (2014) find that engaging in integrated thinking and reporting supported
by increases in transparency and ESG performance attracts long-term investors in theircase study of Shire PLC. Furthermore, IR can lead to the formation of anorganizational structure that integrates economic, social, and environmental
responsibility. McNally and Maroun (2018) show that financial and non-financial
accounting processes can expand the scope of existing accounting systems andpromote broader management controls, as well as a more integrated conception of‘value’ in reporting, even in cases in which the individuals involved in the creation ofsuch reports did not support the changes at the early stage of its adoption.
While, as noted above, IR has both limitations and benefits, the expansion of
corporate information disclosures until now shows that it holds the potential to broaden
the scope of the function of financial reporting, develop a new sphere of responsibility
for the organization, and transform business thinking (Gray et al., 1995; Adams &Frost, 2008; Stubbs & Higgins, 2014). Existing research focuses on the management
and application of new approaches by early adopters of IR (McNally & Maroun, 2018;
Stubbs & Higgins, 2014), but the numbers involved are limited (de Villiers et al., 2017;
McNally & Maroun, 2018). Moreover, no studies focus on Japanese companies orcompanies with the best IR practices. We consider the lack of knowledge in this field
and apply Laughlin’s (1991) model of organizational change to investigate changes ininternal mechanisms in Japanese companies that resulted from the application of IR, as
in the existing literature (McNally & Maroun, 2018; Stubbs & Higgins, 2014).
2.2 Laughlin’s (1991) model
Laughlin (1991) states that the process of organizational change is due to a
disturbance in the external environment. Laughlin (1991) conceptualizes theorganization as consisting of two intangible components and one tangible component.
These components are the interpretative schemes (beliefs, values, norms, andmission/purpose related to the organization’s culture), design archetypes (structures,4

processes, and systems), and tangible sub-systems (buildings, people, behavior,machinery, and finances) of the organization.
The assumption is that these three components are in a coherent state with acertain degree of balance, with organizational norms being the inertia that works tomaintain the status quo once a balance has been achieved (Laughlin, 1991). Anotherassumption of the model concerns the relationship between the organization and its
external environment. Under normal circumstances, the organization acts to stay inbalance with the external environment; however, the environment changes periodically,
which acts as a disturbance to the organization. Laughlin (1991) points out that we canobserve organizational change when such a disturbance occurs.
The first-order change (morphostasis) that the disturbance causes results inchanges to the original design and subsystems. It does not change the core (i.e., theDNA) of the organization, but is a transition. The second-order change(morphogenesis) affects all components. This change permeates the DNA of theorganization. Laughlin (1991) posits four pathways of change: two first-order changes(rebuttal and reorientation) and two second-order changes (colonization and evolution).
The rebuttal pathway of the first-order change may include small changes to thedesign archetype, but the organization resists the disturbance, the design archetypereturns to its original form, the relationships with the existing interpretive schemes
remain, and the organization returns to its pre-disturbance state. In the reorientation
pathway, the organization internalizes the environmental disturbance, which leads to achange in the design archetype and sub-systems. However, the disturbance has alimited effect on the subsystem during reorientation, meaning that the interpretiveschemes at the core of the organization are not fundamentally affected.
In the second-order change, colonization occurs, whereby the design archetypeand sub-systems change as a result of the disturbance and then flow on to theinterpretive schemes, which a small group will force upon the organization. While a
new current (the new foundation for the whole organization) forms at this stage, theorganization can either welcome (evolution) or resist (colonization) the changes in theinterpretive schemes. Evolution can include the reformation of the design archetype orsubsystems and significant changes to the interpretive schemes. However, in contrast
to colonization, the changes chosen and accepted by the organization overall are notenforced.
This classification of change is useful, for example, to classify companies that
introduced environmental accounting to address changes in the external environment,such as environmental problems. The field of environmental accounting has a similar
5debate (Gray et al., 1995; Adams & McNicholas, 2007). Environmental accounting
research of this type describes how companies change during the process of addressing
environmental problems, specifically the question of whether the environmental
accounting leads to changes in the design archetype or sub-systems, or further, to theinterpretive schemes (da Silva Monteiro & Aibar-Guzman, 2010; Gray et al., 1995;
Larrinaga-González & Bebbington, 2001; Larrinaga-González et al., 2001).
McNally and Maroun (2018) and Stubbs and Higgins (2014), as discussed above,
also employ Laughlin’s (1991) model to investigate the organizational changes driven
by IR in the context of the move from traditional performance measures that focus on
financial outcomes to a more comprehensive system that expresses how companies
manage diverse capital in the creation of sustainable returns (McNally & Maroun,2018).
In line with previous research, we employ Laughlin’s (1991) model to investigate
the approaches and internal mechanisms companies adopt in the application of IR toinvestigate whether organizational change occurred in Japanese companies at this earlystage.

3 Methodology
We used data collected during detailed semi-structured interviews as wellintegrated reports, websites, and internal documents provided at the time of theinvestigation1 to check the details of the interviews. We created an interview report,
which we then had checked by the interviewee. This process strengthened the validity
and reliability of the study.
We referred to awards won for IR practices as reported by Nikkei and WICIJapan to select the participant companies to ensure that our sample included companies
with the best practices in IR. All companies were in the early stages (between three tofive years) of the application of IR.
Table 1 presents the details of the investigation. The interviewees belonged to arange of departments, including public relations, CSR, and corporate planning, but are
identical in that they were involved in the creation of integrated reports and embedding
them within their companies. In the case of Company C, we also exchanged two emails
1

The Investor Relations Department of Company B provided the meeting materials.

These materials included information on the concept behind and content of Company
B’s integrated report.
6and have their replies in addition to the interviews2. Company D permitted only email
interaction, with one email sent and one reply received.3
Table 1: Interview Summaries
Industry T ype

Dat e

Co. A Ret ailing and FinanceMarch 7, 2019

Co. B Parts Manufact urer

March 27, 2019

Co. C Public Sect orMarch 28, 2019

Co. D Food Manufact urer

March 12, 2019

Interview Durat ion (min) Division and Department
General Affairs Division
120 (Public Relations
Department )1. Investor Relations
90 Department
2. CSR OfficeFinancial Planning
75 Division (Invest or
Relations Department)
Corporate P lanning
Department

Interviewee (s)1. General Manager
2. Chief Leader
1. General Manager
2. LeadSenior Manager
Senior Manager

We used the interview reports and e-mails from interviewees for the data analysis.
We applied the content analysis method, which is a systematic coding andcategorization technique for unobtrusively examining large amounts of text todetermine the words and phrases, their frequencies, and their relationships, structures,and communication and discourse from the perspective of the research question(Vaismoradi et al., 2013). This method can be employed to describe the characteristicsof the content of a text by investigating “who” said “what” to “whom,” and with whatkind of effect (Vaismoradi et al., 2013). In the case of exploratory research of a
relatively little-known phenomenon, content analysis is appropriate to uncover thecommon themes in the data in a simple fashion (Vaismoradi et al., 2013; Stubbs &Higgins, 2014). As previous related studies employ content analysis (McNally &Maroun, 2018; Stubbs & Higgins, 2014), we can consider it as an appropriate method
for this study. We used Nvivo 12 (QSR International, Burlington, MA, USA) for the
analysis. Following McNally and Maroun (2018), we analyze the data by focusing on

2

We sent a request for participation on January 29, 2019, and exchanged e-mails

about the appointment and IR on January 30 and 31, 2019 prior to the interviews.
3

We sent a request for participation on March 5, 2019; however, in place of aninterview, we received an email response from the group senior manager for corporate
strategy in the corporate planning department.
7the issues the interviewees discussed and the changes in the organizational processes
that are noted in previous studies4.

4 Findings
From the analysis, we derive six themes related to changes in organizational
processes as applications of IR. The following presents the findings for each theme.
4.1 Background to the application of IR
The case study companies adopted IR to meet the environmental changes that it
faced and to present how the company intended to employ its strengths to achieve both
short and long-term goals to external actors. Company B, for example, discussed
environmental change and information disclosure as follows:
For example, the direct mechanism was The UN Sustainable
Development Goals (SDGs) and the question of how to disclose how futurebusiness risks and chances were understood and how that understanding
would be applied in the operations at management level was in the background.
The fact that there was a demand for reporting on how companies were going
to move from social responsibility to sustainability can be considered as the
background of the move to IR. (Company B, CSR Office, Lead, March 27,
2019)More detailed background information was also provided. Company A, forexample, decided to apply IR because in addition to recovering the company’s
performance going forward, there was a demand for information about management
policy from a long-term perspective.
Up until now, our company considered it a virtue not to blow our own
trumpet, but there was a demand from investors to know what kind ofmanagement practices were behind our results. …This is because there is atrend for stakeholders, including investors, to desire management that takes along rather than short-term approach. (Company A, General Affairs Division,
General Manager, March 7, 2019)4

In addition, a student provided support by checking the interview reports and resultsof the analysis.
8Furthermore, Company D adopted IR as part of a move to strengthen its groupvalues in their pursuit to realize social and economic value.
After the change in company President in 2016, the new President set out
a new policy to significantly strengthen Company D’s Creation of Shared
Value (CSV) as a core value of our various activities. Company D’s CSV is a
way of thinking that aims to address social issues and co-create social andeconomic value through business operations and refers to Company D’s groupvalues that have been cherished since its inception. The co-creation of socialand economic value is, in other words, the integration of non-financial andfinancial aspects, and the first integrated report was published in 2016.
(Company D, Corporate Planning Department, Senior Manager, March 12,
2019)
In addition, the management principles of Japanese companies may influence theapplication of IR. Company B, for example, discussed the past positions of Japanesecompanies and the corporate values they prioritized in relation to the publication of
integrated reports.
During the bubble, Japanese companies were on top of the world interms of their finances and stock prices, but they declined afterwards. In thatsituation, the intangible assets that were the strength of Japanese companies
were incomprehensible. This was true of the contribution of intangible assets
to value creation. IR discloses the activities related to financial data andfinancial performance. It is also an effective tool to explain that corporate
values and non-financial strengths and initiatives in a broad sense, such as
ESG, CSR, and sanpo-yoshi5, lead the sustainable growth of the company and5

Sanpo-yoshi “is a managerial philosophy and creed established by the Ohmi

merchants—who were active from the Edo period to the end of the Meiji period (17th–
19th century)—through their daily business activities (Ohmi is a region in Japan)”(Tanimoto, 2013, p. 2107). It “translates as ‘good for three parties’, meaning the seller,buyer, and society. Broken down, sanpo refers to urite (= seller), kaite (=buyer), andseken (≒ society), while yoshi means ‘good’ in Japanese” (Tanimoto, 2013, p. 2107).
9society in terms of value creation. (Company B, Investor Relations
Department, General Manager, March 27, 2019)
Company C also noted the concept of “sanpo-yoshi,” which was important inJapanese-style management and stated that the application of IR did not result inchanges to company values.
Many company presidents and managers in Japan have been with thesame organization for their entire careers, and we are at the stage now where
the importance of external directors is finally becoming recognized. While theimportant thing is whether or not value creation is sustainable, over half of thecompanies worldwide with a history of over two-hundred years are Japanesecompanies. Actually, it is my belief that the spirit of ‘sanpo-yoshi’ plays thegreatest part in sustainable growth. …IR was not the trigger for changes tocorporate philosophy and beliefs, it is something that has finally manifested
over space-time and many generations. (Company C, Financial Planning
Division, Senior Manager, January 31, 2019)
Similarly, the origin of IR in Company D was its past, and its application was a
method to present its current and desired future state to investors.
I view it as a valuable communication method that invigorates dialog
with institutional investors in order to sustain robust growth together bydelineating the spirit and values that underpin the company (also known as its
DNA), its current form as seen through financial and non-financial activities
from the past to the present, its desired future state, and the course to take torealize it. (Company D, Corporate Planning Department, Senior Manager,
March 12, 2019)
As illustrated above, the companies did not adopt IR because it can bring about
new value. Rather, as each company had a past imbued with the principles from theirtime of inception, they adopted it as a concrete framework for explaining to external
parties how the company will create value from a long-term perspective.

10

4.2 The role and value of integrated reports
Integrated reports have two roles. The first is to disclose financial and nonfinancial information concerning how the managers intend to run the business to create
value from a long-term perspective to external investors. Company B, for example,
discussed the role of IR as a method to disclose the company’s strengths to thoseoutside of the company.
In the context of the changing times in society and various companies
starting to produce integrated reports, it was suggested, at the practicalbusiness level, by the Investor Relations Department to the executive level.
There was no directive from the top. Up until then, we had expressed Company
B’s strengths in our annual reports, but I believe that, in accordance with thetimes, it become necessary to use a framework, such as the IIRC’s, to express
our strengths. (Company B, Investor Relations Department, General Manager,
March 27, 2019)
Second, the companies use integrated reports tocultivate employee

understanding of the company’s direction from a long-term perspective. Company A,
which discussed this aspect in detail, uses the integrated report to create a sense ofunity within the company.
In movements driven by “centrifugal forces,” such as the move to a pureholding company system and the various operating companies in industries
such as retail and finance increasing their own strengths, there was a need tofor the group as a whole to also possess a “centripetal force” to increase
company value. (Company A, General Affairs Division, General Manager,
March 7, 2019)

4.3 The relationship between CSR/sustainability reports and integrated reports
Integrated reports are not necessarily superior to other types of reports. They
supplement the content of CSR and sustainability reports. As the target audience
differs, the content of the reports differs accordingly. Rather than the integrated reportbeing comparatively superior, each type of report has a role for its intended audience.
For example, Company A issues an integrated report and a sustainability reportannually and presents the sustainability results in the integrated report. In addition, the11content that it cannot include in the integrated report is included in the sustainability
report.
Company A's IR is issued once a year (September) and its sustainability
report is issued once a year (December). For example, the items left out of theintegrated report are incorporated into the sustainability report, and thesustainability reports are incorporated into the integrated report. (Company A,
General Affairs Division, General Manager, March 7, 2019)
Company B states that the reports have different readers and describes therelationship between the integrated report and the CSR report as follows.
Since the readers of the two reports are different, we issue the integrated
report and the CSR report separately. The primary readers of the integrated
report are investors. We issue the CSR report to a wider range of stakeholders,
including employees. (Company B, Investor Relations Department, General
Manager, March 27, 2019)
Company C mentioned the relationship between the CSR, environmental, andintegrated reports in terms of their contents. While the CSR and environmental reports
disclose only non-financial information, integrated reports are positioned to show how
non-financial information and strategy are integrated.
Non-financials have been reported through the CSR report and theenvironmental report and shifted to reporting on ESG activities with a view to
the SDGs. It is characteristic of the integrated report. (Company C, Financial
Planning Division, Senior Manager, March 28, 2019)
Finally, Company D states that integrated reports are a superior way to show thepicture of corporate management itself based on financial and non-financial
information.
We practice non-financial and financial corporate communication using
the integrated report as a gateway. For this reason, it is excellent and it is thesimplest microcosm of corporate management that summarizes the essentials

12

of corporate management that lead to sustainable growth. (Company D,
Corporate Planning Department, Senior Manager, March 12, 2019)

4.4 The creation of integrated reports
The creation of integrated reports was smooth and carried out systematicallywithout hinderance. Specifically, the companies created the reports after collecting all
information from the relevant departments by the department in charge (e.g., Investor
Relations Department).
Company A is a characteristic example. We can surmise that for Company A,
this process was made smoother by the strong commitment of the company president
to the creation of the integrated report and Company A’s unique human resources
system.
It is formulated as a project that works across departments. Specifically,
the participants include the company president, corporate planningdepartment, investor relations department, sustainability department, generalaffairs department, financial department, and ESG development department.
Additionally, the reporting consultancy company participates from outside thecompany. The publication of the report was initiated as a coherent whole,including the corporate planning department, ESG development department,
and the company president, while still maintaining a diversity of perspectives.
The creation of the report in a collaborative way that traverses departments, ischaracteristic of the Company A group. … A characteristic of the publicationof our integrated report is that all employees involved are committed to thetask. In the background to this is an atmosphere in which employees feel they
can freely talk with one another, enabled by the company-wide support of job
rotation and the fact that many of our employees know one another by sight. In
these ways, the group company, departments, inter-departmental cooperation,
information sharing, and commitment from the company president came
together to enable the smooth creation of the integrated report in Company A.
(Company A, General Affairs Division, General Manager, March 7, 2019)
Additionally, Company D established a system for the creation of the integrated
report. Characteristic of Company D is that the people responsible are closer to the13development and execution of strategy. The support of people in these types of roles
may drive the practice of IR.
The global corporate headquarters was launched in 2017 byconsolidating the management responsible for the creation of the integrated
report in the global public relations department, investor relations department,
and corporate planning department under one managing director (executive incharge of financials). The director was responsible for the creation of
integrated reports and for the design of the medium-term corporate strategy.
Thus, the company established a structure by which both financial and nonfinancial information were coordinated in the process of the work being
carried out. (Company D, Corporate Planning Department, Senior Manager,
March 12, 2019)

4.5 The relationship between IR and official mechanisms
The integration of the content disclosed in the integrated report with strategic andcorporate planning is progressing. Rather than setting new Key Performance Indicators(KPIs) in line with the application of IR, all the companies in this study continued to
employ CSR and sustainability related KPIs that they were already working towards.
Additionally, they set new targets and KPIs based on things noticed during
strategic and corporate planning or IR, which they then reflect in the integrated report.
The setting of KPIs related to the SDGs, which is recently attracting attention, wasmentioned in the interviews. This does imply implementing completely new KPIs,
rather that new KPIs that apply to important aspects that existing KPIs do not cover.
Company C, for example, was integrating the content of the integrated report into themedium-term corporate plan, as described below.
The medium-term corporate strategy has a 5-year period set towards
2022. With regard to financials, non-financials, and the quantitative andqualitative analysis of the KPIs for such, if we think ten, twenty, or even one
hundred years into the future, then non-financials are indispensable. The aim
is to integrate non-financials into the medium-term corporate strategy, makecontributions with other companies in the same industry, and ultimately,
contribute to the SDGs. …The ES of the ESG were already practiced in thepast, with KPIs set and conformance with the medium-term strategy.

14

Governance is particularly important within the ESG. For example, anindicator relating to governance is set for external directors, but the indicator
is not a target; its ultimate purpose is the realization of our principles.
(Company C, Financial Planning Division, Senior Manager, March 28, 2019)
However, this situation is different for each company. Company D, for example,
is pursuing cutting-edge initiatives. Specifically, they are moving toward integrating
the content and strategy disclosed in their integrated report with the medium-term
corporate plan and objectives management.
Company D’s CSV was first expressed in 2014, when the current
President was in office, and from the 2014-2016 medium-term corporate plan,
which started in that year, non-financial indicators (ESG-related) linked todepartmental evaluation have been set for all departments within the company.
It is also compulsory to have a CSV indicator set as one item (which is not
linked to evaluation) in the objectives for individual employees. (Company D,
Corporate Planning Department, Senior Manager, March 12, 2019)
In contrast, while Companies A, B, and C integrated the content disclosed in theirintegrated reports with their medium-term corporate plans and set companywide KPIs,
there was a need to change official systems to make all employees aware of nonfinancial aspects and move them to act.
The KPIs in the medium-term corporate plan are mainly financial indicators.
These KPIs are employed as long-term indicators. They are also linked to
executive remuneration. …While ESG-related KPIs are reported for the entire
group, currently their practice has not filtered throughout the group company,
sub-organizations, and individual employees. This could be because it is difficult
to see how they relate to one’s everyday work, but going forward, the ideal is to set
KPIs and apply them so that initiatives, including ESG, become more familiar.
(Company A, General Affairs Division, General Manager, March 7, 2019)
Additionally, Company B in particular saw the question of how to set nonfinancial KPIs and roll them out through the entire company as a challenge.

15

In addition to information disclosure, there is a need to develop concrete
initiatives. Last year and the year before, the position on the SDGs was limited
to simply respecting them, but from April, it was decided that the new mediumterm corporate plan will include seven SDG-related indicators that will bedirectly linked with our operations. …Until now, responsibilities have differedacross the company as a whole, functional divisions, and operations
departments, but there is a need to allocate authority for the seven areas
across all organizations and set KPIs that can be responsibly achieved. The
setting of KPIs to accompany each objective is under discussion, but I expectthat the responsibilities and departments responsible for development will
depend on the respective objectives. Of course, there are initiatives that are
already under way that were selected according to the SDGs. It is not the casethat all initiatives selected via the SDGs will result in the setting of new
objectives. (Company B, Investor Relations Department, General Manager,
March 27, 2019)

4.6 The penetration of and challenges for integrated thinking
All companies made use of the integrated report to disseminate the long-term
management philosophy and integrated thinking presented in the report. A
characteristic initiative that was observed was the selection of employees to participate
in information sessions on the medium-term corporate plan. It was believed that having
motivated employees participate would help the management’s thinking disseminate to
all employees in the field.
Additionally, we try to develop an understanding of the company
direction through participation in the medium-term corporate planning
development meeting. All employees can participate in this meeting. We put
out a call for contributions and have employees write papers, with selected
employees from each rank being able to participate. It is not always the casethat employees in higher positions can attend these meetings. Sometimes, thestore manager cannot attend, and a general employee attends in their place.
Employees who participate in the meetings have a high desire to understandthe company’s direction and proactively share it in the field. (Company A,
General Affairs Division, General Manager, March 7, 2019)16

Even so, there is a gap between the IIRC ideals and the actual situation. In
contrast to the high level of penetration reported by Company D, the other companies
were striking in that they recognized the importance and necessity of embedding
integrated thinking, though faced challenges to achieving this outcome. Specifically,
managers and employees in the field tend to prioritize their core tasks, and thus thecompanies must work harder to address the situation. For example, Company A
distributes the integrated report to all employees and ninety percent of them read it (atleast in part). However, the degree to which the company’s philosophy that reflects
integrated thinking penetrates the organization differs. The reasons for this outcome
include differences in the amount of information for each organization, differences inthe temperament of each generation, and differences in thinking about companies andemployment.
The degree of penetration of Company A's concept of integrated thinking
differs depending on the organization. This is affected by differences in theamount of information. For example, there is a disparity in penetration andunderstanding between the head office, stores, and group companies. It also
differs for each generation. (Company A, General Affairs Division, General
Manager, March 7, 2019)
As in Company B, some managers and employees have an interest in integrated
thinking and the content of the integrated report, though it takes time for these ideas totake root in the form of organization-wide values.
The expansion of everyday operations based on integrated thinking is
still in progress. Specifically, the link between integrated thinking in the formof CSV-type ideas and business strategy is still under development. As thecompany needs to aspire to a form where it can guarantee and reinforce thesustainable growth of the world, society, and company (i.e., sustainability), theintegrated report does not represent the state of our company at this point intime. As a future-focused company, it will have little meaning without
sustainable activities that are connected with increases in the value of thecompany and the strengthening of such links. (Company B, Investor Relations
Department General Manager, March 27, 2019)17

Similarly, the characteristics of Company C’s business make the spread ofintegrated thinking throughout the company difficult due to the need for balance witheveryday operations.
Our staff in the field place the utmost priority on the short-term safety of
the customers right in front of them. In such a situation, the question of how tolink what they prioritize in the short term with a longer-term perspective inorder to realize our principles is a challenge. (Company C, Financial Planning
Division, Senior Manager, March 28, 2019)

5 Discussion
Despite the four companies having different objectives for introducing IR, theyused similar reports to disclosure to investors how they plan to use the company’s
strengths to meet their objectives from a long-term perspective. Furthermore, from aninternal standpoint, the results show that the companies published integrated reports forthe purpose of nurturing employee understanding of the direction that the company
needed to take.
We did not observe the obstacles that McNally and Maroun (2018) note, such as
resistance from employees responsible for producing the reports and problems withinformation collection systems. Conversely, incremental changes to the processes andstructures that support CSR and sustainability reporting were apparent (Stubbs &Higgins, 2014).
Company A, for example, has a structure that involves the active participation of
the company President in the multi-department project and the production of integrated
reports. Further, Company D also designed a system with a modified reporting
structure in which the employees involved with strategic planning and execution wereappointed to positions of responsibility (Burke & Clark, 2016). We can think of thisstructural development and improvement as promoting the application of IR (Stubbs &Higgins, 2014).
Additionally, each company integrated the content of the integrated reports into
the medium-term corporate strategy and plans, with KPIs set and modified to ensurethat the disclosed information was credible. The companies are currently at the stage
where they are aiming to set specific KPIs to deploy across the company to create
medium- and long-term value (Stubbs & Higgins, 2014). As seen in Company D,companies can link integrated thinking to management by objects in order to induce
individual employees to work for medium- and long-term value creation.
18

As the above shows, despite incremental changes to processes and structures, theapplication of IR did not result in changes to organizational values (interpretiveschemes) (Stubbs & Higgins, 2014). Consequently, as is the IIRC ideal, the companies
need to target changes in employee behavior to improve report content.
Taking our analysis into account, our results the findings of Stubbs and Higgins(2014) that only small changes to the design archetype occurred because the companies
were already engaged in activities related to IR out as an extension of sustainability
and CSR reporting. Furthermore, while initiatives to shift the companies’ values
toward creating value from a long-term perspective were underway, they were limited
to only some managers and regular employees. In cutting-edge companies (likeCompany D), which not only set KPIs, but also changed formal mechanisms likemanagement by objectives and even established the infrastructure to embed integrated
thinking, we can suppose that the spread of such values, as in McNally and Maroun(2018), are progressing smoothly.
Management practices (sanpo-yoshi, CSR) that take a long-term perspective are a
tradition in Japanese companies and for the background to our findings. Since the
Meiji Period, which saw a rebirth of Japanese industry, the company was regarded as asocial institution, and in 1956, the Japan Association of Corporate Executives declared
the company to be a public institution and that company management has a duty of
stewardship towards the society in which it operates rather than its stockholders(Demise, 2006). In addition, several practices6 stress the importance of taking a longterm perspective on the relationship between the company and its stakeholders (Eweje& Sakaki, 2015; Fukukawa & Moon, 2004). Until now, there was no means forJapanese companies to express their internal practices that take a long-term perspective
to contribute to society to outsiders, and that the aim of IR should be its application.
With the dawn of CSR in 2003 (Fukukawa & Teramoto, 2009) paving the way, all of
the sample companies engaged in environmental, CSR, and sustainability reporting aspart of their CSR and environmental management practices, which may explain why
the application of IR was smooth but did not result in any significant change.

6

For example, the system of lifetime employment, which maintains a long-term

relationship between the company and employee; the zaibatsu form of conglomerate,
which procures funds mainly from banks rather than stockholders; and the keiretsu,
which maintains cooperative and long-term relationships between major companies
and their suppliers (Fukukawa & Moon, 2004).
19

While it appears that Japanese-style company values, historical aspects, andpractices to create CSR and sustainability reports coalesced to enable the smoothcreation of integrated reports, there is still a need for various internal reforms, as the
IIRC points out because companies must still embed integrated thinking into theirorganizations. If managers and employees fail to understand integrated thinking andthe corporate direction outlined within the integrated report, and put them into practice,then the quality of the disclosed information will be affected (Burke & Clark, 2016).
Going forward, it may be necessary to consider the degree of integration between thecontent of the report and management control systems (MCSs) for motivating
managers and their subordinates (de Villiers et al., 2016; Fasan et al., 2016; Kerr et al.,2015).

6 Conclusion
This study investigated the approaches to and internal mechanisms employed in
the application of IR and the resulting organizational changes in Japanese companies
with the best IR practices. While companies adopt IR for many reasons, we did not
find the same resistance and barriers reported in previous studies in this research. We
can hypothesize that these companies could adopt IR practices smoothly based on
existing practices because the concept of integrated thinking that forms the basis of IR
is close to traditional Japanese-style management. However, we see that all sample
companies recognized the importance and necessity of embedding integrated thinking
in all levels of companies to put it into practice for value creation over time.
The theoretical significance of this study is that it contributes to the growth of the
IR research that focuses on the internal aspects of companies. Specifically, this study
provides new knowledge on the changes driven by the application of IR by focusing on
companies that have the IR practices. Additionally, we set our study in Japan, acountry for which research on IR is lacking. Furthermore, in terms of practicalsignificance, by focusing on the companies with best practices, we can offer valuable
insights for companies in Japan and worldwide.
Finally, this study has four limitations. First, the sample size is limited to four
companies. To reach generalizable conclusions, following Stubbs and Higgins (2014),
future research should continue interview studies to provide cross-industry
investigations, and adopt other research methods such as surveys.
Second, bias is unavoidable in this study because the interviews focused on the
managers responsible for creating the integrated reports. Accordingly, interviews with20

other managers involved in the practices of IR are required. Further, as Stubbs and
Higgins (2014) note, it is necessary to interview external stakeholders.
Third, the results represent only a specific point in time. As such, there will be aneed to conduct future interviews, perhaps with the subjects of this study, on a regularbasis. Further, case studies are required to delineate the details of the processes ofchange attributable to the application of IR.
Fourth, the relationship between ESG and the SDGs in the integrated reports and
MCSs has not been sufficiently examined. As MCSs are essential to realize thesetargets, future studies should investigate how to integrate MCSs and the contents ofintegrated reports, as well as the possible effects on the behavior of managers andemployees.

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