the influence of stakeholder engagement on sustainability reporting: evidence from italian local...

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The Influence of StakeholderEngagement on SustainabilityReporting: Evidence from ItalianLocal CouncilsGiulio Greco a , Nick Sciulli b & Giuseppe D'Onza aa Department of Economics and ManagementUniversity of Pisa , Pisa , Italyb Faculty of Business and Law Victoria University ,Melbourne , AustraliaPublished online: 30 May 2013.

To cite this article: Public Management Review (2013): The Influence of StakeholderEngagement on Sustainability Reporting: Evidence from Italian Local Councils, PublicManagement Review, DOI: 10.1080/14719037.2013.798024

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THE INFLUENCE OFSTAKEHOLDERENGAGEMENT ONSUSTAINABILITYREPORTINGEvidence from Italian localcouncils

Giulio Greco, Nick Sciulliand Giuseppe D’Onza

Giulio GrecoDepartment of Economics and ManagementUniversity of PisaPisaItalyE-mail: [email protected]

Nick SciulliFaculty of Business and LawVictoria UniversityMelbourneAustraliaE-mail: [email protected]

Giuseppe D’OnzaDepartment of Economics and ManagementUniversity of PisaPisaItalyE-mail: [email protected]

Abstract

This study investigates the motivations oflocal councils for producing a sustainabilityreport. Inter-connecting theories of legiti-macy, accountability, and the New PublicManagement are used to structure an inves-tigation that explains patterns of behavioursby Italian local councils. The projectassesses if, and how, stakeholder engage-ment can influence the local councils’ deci-sion-making process through the adoption ofsustainability reporting. Semi-structuredinterviews were conducted with the sustain-ability report preparers of a sample of Italianlocal councils. The findings demonstrate thatinitially sustainability reporting is introducedfor accountability and legitimacy reasons.However, over time traditional sustainabilityreporting was incidental to more sophisti-cated tools of policy-making and reporting,in which some of the stakeholders wereactively involved. The findings highlight thepolitical negotiations in which sustainabilityreporting finds itself. The stakeholderengagement projects implement legitimizingstrategies within the context of the search foran arrangement between political programsand stakeholder demands.

Key wordsSustainability reporting, local councils,legitimacy, accountability, stakeholderengagement

© 2013 Taylor & Francis

Public Management Review, 2013

http://dx.doi.org/10.1080/14719037.2013.798024

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INTRODUCTION

There has recently been an increased focus on Social and Environmental Reporting(SER) and sustainable development within the public sector (Ball and Grubnic 2007;Guthrie et al. 2010). However, it does now appear that the more contemporary termof Sustainability Reporting (SR) is being used more frequently in the literature.Sustainability reports are currently the vehicle used to inform stakeholders regardingthese activities.Whilst most research on SR is dedicated to the exploration of the disclosure content

in annual reports, this current research project focuses on why organizations undertakesuch reporting (Adams and Larrinaga-Gonzalez 2007; Bebbington et al. 2009; Farnetiand Guthrie 2009). There is also some disquiet in the community that SR has more todo with grandstanding and is used as a marketing tool rather than being a seriousattempt to inform stakeholders and improve practices to make them more sustainable(Aras and Crowther 2009; Banerjee 2008). This potential conflict is closely connectedto legitimacy theory which provides an understanding of what motivates an organizationto disclose social and environmental information (Archel et al. 2009).The GRI Sector Supplement for Public Agencies identifies several reasons for preparing

SR: to promote transparency and accountability; reinforce organizational commitmentsand demonstrate progress; improve their internal governance; meet disclosure expecta-tions and make information available to facilitate dialogue and effective engagementwith stakeholders (GRI 2005, p. 8). Thus, the engagement of stakeholders in theactivities of LCs could influence the decision to prepare sustainability reports.The definition of ‘stakeholder engagement’ for SR needs to be clarified. Engagement

could be measured in terms of the number and types of stakeholders to whom thereporting is addressed, the activities of the reporting process performed by thestakeholders and other forms of collaboration, consultation, and the delegation of thedecision-making power. According to Friedman and Miles (2006, p. 152):

Stakeholder engagement is defined as the process of effectively eliciting stakeholder views on their

relationship with the organization.

It is assumed that each LC will support a different intensity of stakeholder behaviour.This paper adopts a qualitative approach using semi-structured interviews with SRpreparers at 11 Italian LCs. The main issues covered are: the motivations for introdu-cing SR, the SR models, and tools adopted, the changes introduced over time regardingSR practices, the degree of the stakeholders’ engagement in SR practices, as well as themethods used to involve the stakeholders in the SR process. Hence, the objectives ofthis investigation are twofold:

1. to explain the motivations for sustainability reporting in a group of Italian LCsand analyse if, and how, these reporting practices changed over time; and

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2. to evaluate if the SR practices are influenced by stakeholders’ engagement withthe LCs.

The findings show that initially SR is introduced for accountability and legitimacyreasons. Over time, traditional SR was incidental to more advanced tools of policy-making and reporting, in which the stakeholder engagement plays a key role. It appearsthat SR was useful to preparers to understand the potential of greater stakeholderinvolvement in political negotiations with the local communities. The new stakeholderengagement projects still implement legitimizing strategies within the context of thesearch for an arrangement between the political programmes and the communities’demands.With reference to the New Public Management (NPM), we found little connection

with SR other than the broad concept of letting the ‘managers manage’. This meansthat SR provided greater scope for LC managers to influence the type and extent of SR.However, it must be remembered that NPM was a concept developed much earlierthan the more recent upsurge of interest in sustainability.This study can contribute to the academic literature in several ways. Extending prior

research on sustainability reporting, it investigates why public sector organizationsreport on such activities. The research provides evidence of a process in its earlystage, in which SR frameworks are being used into the LC planning, reporting, anddecision-making. The findings emphasize the strong context of political negotiationsthat SR operates within. The evidence also suggests that producing sustainability reportsis not a static activity and there is a case for further investigation into how legitimacyand accountability dynamics evolve over time and how these influence stakeholderengagement.The following section examines the literature and introduces the research questions.

Section 3 describes the institutional setting of reporting within the Italian public sector,while section 4 explains the research method. The results and findings of the study arediscussed in section 5 and final conclusions are put forward in section 6.

LITERATURE REVIEW AND RESEARCH QUESTIONS

Conceptual alignment between SR and stakeholders: Legitimacy, account-ability and the NPM

Notions such as legitimacy and accountability are not new and have been usedextensively as theoretical underpinnings in accounting and sustainability research(Unerman and O’Dwyer 2010a). The position taken in this investigation is that thetheories of legitimacy and accountability can add further insights into the motivationsthat LCs have for preparing sustainability reports when coupled with the constructs ofthe NPM. In fact, all three concepts are intrinsically linked as demonstrated in Figure 1.

Greco et al.: The influence of stakeholder engagement 3

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Figure 1 sets the scene for the current investigation and this framework is relevantfor gaining an understanding of the context of LCs in supporting stakeholder demands.Legitimacy is based on the notion that the legitimate organization is there to support theinterests of an individual and/or group and therefore, there is a general acceptance insociety for that organization. However, to maintain that legitimacy, organizations mustprovide accounts of their activities in order for legitimacy communities to continue tovalidate, moderate or expel the status of legitimacy (Black 2008). NPM is influencedby both legitimacy and accountability in the sense that if there is general consensus thatNPM tools are beneficial to the organization, then applying those tools will maintain orenhance legitimacy. In addition, NPM also influences accountability since its premise isthe clarification and building of organizational goals and building accountability relation-ships in support of those pre-set goals (Hood 1995, p. 107). NPM tools such as a focuson LC outputs and outcomes rather than inputs (what internal steps that are taken toachieve a desired outcome) or directly charging customers/citizens for particularcouncil services (user-pays) are examples of how accountability can influence NPM.Black (2008) explains that definitions, types and constructs of accountability are well

documented and can be applied pragmatically by public sector managers quite readily.However, legitimacy is a social construct which depends more on an individual ororganization’s mores, values and beliefs and consequently an organization can changerapidly from a legitimate to an illegitimate organization depending on a course of actionfrom government, a stakeholder group or inadvertently the organization itself. In the caseof LCs, the system of public forums and consultation can improve legitimacy. Comparingthe performance or activities of one LC with another to demonstrate to constituents thattheir behaviour is not outside the norm also adds to that sense of acceptability.Bovens (2007) provides a detailed analysis of accountability, but in essence, argues

one simple point i.e. accountability is an evaluation process based on a relationshipbetween an actor (the LC) and a forum (the stakeholders). Thus, it has parallels with

Accountability:

Justifying actions with

consequences (Bovens 2007)

Legitimacy:

Social creditability and

acceptability (Black 2008)

New public

management

(Hood 1991, 1995)

Figure 1: The relationship between accountability, legitimacy, and the new public management


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principal/agency theory. Bovens (2007) further explains that there are three distinctphases of accountability which we can use to illustrate the relevancy for our investiga-tion. First, the LC must explain and justify its conduct to stakeholders. Second, thestakeholders must have a forum within which to question the actions of the LCs.Finally, stakeholders must be able to pass judgement on the LC, and critically, thereshould be consequences applied to the LC based on that judgement.Of the many different types of accountability identified by Bovens (2007), it appears

that ‘Social Accountability: Interest Groups, Charities and other stakeholders’ is themost relevant for our analysis. This is partly because the nature of the obligation of theLCs to provide an account is done so voluntarily i.e. in the main, there are no currentlegal requirements to produce a sustainability report. The few exceptions are theSwedish Government's requirement for state-owned companies to develop sustainabilityreports using the GRI guidelines, and in Denmark, there is also a legal requirement forpublicly listed companies and state-owned enterprises to include corporate socialresponsibility details in their annual (rather than sustainability) report (GRI 2010).Therefore, explanations must be provided why LCs feel such a moral or social

obligation to produce one. Accountability can be used as a learning process compellingmanagers to review and improve on SR and public management in the context ofsustainability (Aucoin and Heintzman 2000). Equally, applicable are the terms used byUnerman and O’Dwyer (2010a) such as upward accountability where agencies arenormally compelled by a higher authority to provide an account in quantifiable termssuch as dollars spent or number of services provided. More recently, especially withrespect to SR, downward accountability refers to the idea that agencies should also beaccountable to the beneficiaries or in this case, the stakeholders.This then leads us to the contribution of the NPM. The work of Hood (1991, 1995)

provides a summary of the changes in public sector accounting that commenced in the1980s. Succinctly put, NPM refers amongst other things, to privatization/corporatizationof public sector agencies, deregulation, the decentralization of decision-making for theagency and consequently, the devolution of duties to public sector managers (that is, let themanagers manage), a move away from the cash-based accounting to an accrual basedsystem, an emphasis on outputs and outcomes, introducing a ‘user-pays’ system for servicesand restructuring the agency such as adopting outsourcing relationships with the privatesector. In summary, the rationale of the NPM was based on the ideology that private sectormanagement techniques were superior and led to enhanced performance compared withpublic sector management. Some of these ideas are already applicable in the context of LCsand in particular to SR. For example, benchmarking is a technique used to assess what aparticular organization is doing compared with its competitors in order to achieve ‘world’sbest practice’ (pointedly not defined here). Likewise, with reference to SR, LCs want toensure that they are not ‘left behind’ compared with other LCs in their region, and so setabout both formally (workshops/seminars) and informally (personal contacts/readingwebsite information) determining at what stage they are at in the sustainability discourse.


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In the Italian local government context, Reginato et al. (2011) suggests that whilstformal NPM tools have been adopted, substantial managerial change practices have notaccompanied these reforms. Some reasons for this are related to a model of NPM whichis legislation-driven, top-down and very prescriptive (Anessi-Pessina and Steccolini2005). It could be argued that LCs are in a favourable position to adopt NPM toolsgiven that many outputs and outcomes are easier to measure and could apply to specificsustainability objectives (Verschuere and Barbieri 2009).

Motivations for SR

There have been several ‘calls’ for research into SR in the public sector (Gray et al.2009; Guthrie et al. 2010; Lewis 2008). As stated earlier, the use of annual reports toassess social and environmental disclosures is not a new phenomenon and has been usedby several researchers to identify ‘favourable’ organizations (those with extensive socialand environmental disclosures) as opposed to ‘unfavourable’ ones which have limiteddisclosures (Campbell 2000; Deegan et al. 2000; Gray et al. 1995; Moneva andLlena 2000; Wilmhurst and Frost 2000).Farneti and Guthrie (2009) undertook in-depth interviews across seven different

public sector agencies in Australia. The study focussed on why organizations report onsustainability issues rather than what they report on. The findings suggest that sustain-ability reports were mainly directed towards internal stakeholders. However, theannual report was a key communication device for external users. In most casesthese agencies had commenced with either triple bottom line (TBL) reporting or thebalanced scorecard (BSC) before embarking on the GRI framework, the reason beingthat it had an international reputation which enhanced its legitimacy.Mussari and Monfardini (2010) highlighted that the practices of social reporting

which is a component of SR in Italian LCs were emerging and driven mainly bylegitimacy reasons (‘re-gain the lost trust’).The study by Greco et al. (2012) highlighted noticeable differences in SR motivations

and practices between different geographical contexts. In this comparative study, asample of Italian and Australian LCs were investigated. It was concluded that themotivation for SR appears to be affected by several political, social and cultural values,which characterize the national contexts in which these organizations operate.

Stakeholder engagement

Given that SR would be a comparatively new form of communication, it is reasonableto assume that LCs would actively engage with stakeholders to ensure that the form andcontent of the report satisfies their needs. Stakeholders are a generic term and includeboth individuals and groups. Clarkson (1995) separates stakeholders into two groups,


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namely primary and secondary. The organization in question relies on input from primarystakeholders for its continuing survival. Examples of primary stakeholders includeshareholders, employees, customers and suppliers. Secondary stakeholders are notactively engaged with the organization and include the media and other special interestgroups.The AccountAbility Stakeholders Engagement Standard points out that the engage-

ment of stakeholder is a fundamental step for developing meaningful reporting struc-tures (AccountAbility 2011). A successful engagement by an organization needs toanswer three questions: (1) why engage with stakeholders (the purpose); (2) what areasto engage in (the scope); and (3) who needs to be involved in the engagement, that is,which stakeholders (AccountAbility 2011).Historically, there have been concerns raised that public sector organizations adopt a

superficial form of stakeholder engagement in order to placate them or to demonstrateto other agencies that a consultation process is adopted, if only as a token gesture.Rixon (2010) argues that stakeholder engagement is a legitimate vehicle for enhancingthe accountability for the organization. Further, the engagement must be more than asession on information dissemination and responding to the ideas of the agency. Rather,meaningful consultation occurs when the stakeholders have the power to influence theagency’s strategic direction and advance new opportunities and proposals.As a theoretical framework related to the interaction between stakeholders and the

organization, Friedman and Miles (2006) developed a ladder of stakeholder managementand engagement. Twelve levels of management tools are identified each with an increas-ing level of stakeholder influence. At the two extremes, the ladder commences at thelower end (level 1) with manipulation, where there is no dialogue between theorganization and the stakeholders, rather one-way communication from the organiza-tion to the stakeholder. At the other extreme, level 12 refers to the management toolof stakeholder control, where the stakeholder has full decision-making power over theorganization. Reaching this level of stakeholder engagement would be very rare. Morecommonly, an organization’s engagement with stakeholders would be between levels 1and 12.Stakeholder engagement assumes that an individual or group from outside the

organization in question has a need for information. Therefore, managers can use theexpectations of stakeholders as the basis for preparing sustainability reports.Communicating with stakeholders thus has significant benefits such as having a clearunderstanding of their expectations and can actually improve the economic performanceof the entity (Schaltegger and Burritt 2005).In a similar vein, Manetti (2011) differentiates stakeholder engagement with stake-

holder management – the latter being an inferior form of consultation, where manage-ment controls the agenda and seeks legitimacy concurrently. In that study, a contentanalysis of 174 best practice sustainability reports prepared in accordance with the GRIGuidelines 3.0 was conducted. Manetti (2011) found that there was low stakeholder


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involvement in defining the content of sustainability reports and only when it wasrequired by law, was there any stakeholder representative with decision-makingauthority.Consistent with the findings of Rixon (2010), the study carried out by Foe et al.

(2011) found that the experience of the stakeholders’ engagement with schools thatused the private finance initiatives (PFI) with the agreement of local authorities wasproblematic. It did not produce positive effects on the decision-making processes. Thissituation occurred because stakeholders perceived that their involvement was a formalexercise to simply comply with pre-defined guidelines rather than a genuine attempt toreceive their views for improving LC policies. Based on the analysis of the aforemen-tioned studies, two research questions are formulated:

1. Why do LCs produce sustainability reports?2. To what extent does stakeholder engagement influence SR practices?

INSTITUTIONAL BACKGROUND

Italy is characterized by four levels of government: the central government, 20 regions,110 provinces, 8,092 local councils (or municipalities). Each level has a specificjurisdiction. The regions, the provinces and the local councils are addressed as localgovernments.Since the 1990s, the Italian public sector has been subject to increasing demand for

higher transparency about the use of resources and for more accountability about thequality of the services provided (Anessi-Pessina and Steccolini 2005; Verscheure andBarbieri 2009). The broad NPM ideas of adopting a ‘managerial culture’ and manage-rial practices inspired a long series of reforms [1]. With regard to the local govern-ments, Anessi-Pessina and Steccolini (2005) synthetize the three main objectivesunderlying the legislation issued in the period 1990–2005: (a) provide the localgovernments with greater organizational and financial autonomy; (b) achieve a higherlevel of separation between political decision-making and public management; and (c)encourage outsourcing and privatization of activities. Overall, this legislative processwidened the range of local governments’ powers and competencies, nowadays includ-ing: urban planning, local infrastructure building and maintenance, building authoriza-tion, utilities and waste management (often through controlled private companies),commercial activity authorization, local police and security, social and cultural services[2]. The LCs policies are critical to the development and welfare of local communities(Greco et al. 2012; Marcuccio and Steccolini 2005).It is mandatory for LCs to produce an annual report. Sustainability reports are

produced on a voluntary basis as a separate document. Despite the mandatory rulesgoverning annual reporting, LCs began including some social and environmental


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reporting practices in the Bilancio di Mandato (known as a ‘Term’ report), which is areport issued at the end of the Mayor’s five-year term. This report discloses informa-tion about the main achievements of the mayor’s programme (mostly public works) andhas often propaganda purposes.In early 2000s, environmental reporting inspired by Local Agenda 21 (LA 21) became

popular in a number of LCs in Italy. Subsequently, LCs developed an increasing interestin SR which led to the Prime Minister’s Office of Public Affairs issuing a guide for socialreporting for the public sector in 2006. The guide dealt mainly with social reportingand did not recommend environmental reporting. The following year, the FederalMinistry of Interior issued the document Guidelines for Social Reporting in LocalGovernments (2007), which sets out guidelines for social reporting in local governmentsand recommends that LCs provide disclosures regarding environmental policies andgreen public procurement. Both of these guidelines are only partially consistent with thoseof the GRI (Farneti and Siboni 2011).The growing diffusion of SR in Italian LCs offers the opportunity to investigate the

motivations for producing public reports that incorporate social and environmentalinitiatives and whether the reporting tools adopted are influenced by the goal to seekstronger stakeholder engagement in the policies of LCs.

RESEARCH METHOD

Sample selection

We initially consulted the ‘social reporting database’ of the Formez, (Centre forResearch, Education and Innovation in the Public Sector) of the Prime Minister’sOffice of Public Affairs [3]. We found 73 documents labelled as social or environmentalreports by LCs. For half of the LCs mentioned in the database, we were able todownload and examine the reports and related relevant SR material. We then contactedthe senior managers indicated as supervisors of SR in the reports. Eleven LCs gavefavourable responses to our request for a one-day field visit and were included in thefinal sample (Belal and Owen 2007).Table 1 summarizes the sample analysed. The population within each council ranges

from 11,500 to 356,000 inhabitants. The average LC population in our sample of 11LCs is above the average population of an Italian LC which is approximately 7,500inhabitants (ISTAT 2010). This national low average is due to the high number ofmicro and small LCs. Our sample, however, is located in the top 15% of the ItalianLCs with more than 10,000 inhabitants. (Anessi-Pessina and Steccolini 2005).Five out of 11 LCs issued SR for just one year in the decade 2001–2010. The

continued issuance of SR is usually encompassed within a government term. Themajority of the LCs (8) had political continuity in the decade 2001–2010, i.e. theyhad two terms of government of the same political colour.


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Table1:

Characteris

ticsof

Italia

nlocalc

ouncils

Coun

cil

Size

(num

berof

inhabitants)

SRmod

eladop

ted

(e.g.T

BL,G

RI,B

SC,

other?)

Sustainabilitycham

pion

(e.g.N

one,

accountant,

CEO,

Coun

cillor,other)

SRissued

Stakeholder

engagementin

SRissued

SRfuture

Politicalcontinuity

inthedecade

2001–20

10(tw

oterm

sof

the

samepo

liticalcolour)

Elections

T111

,500

OfficeforPu

blic

Affairs

guidelines

andMinistry

ofInterio

rgu

idelines

Coun

cillor(in

charge

ofthe

annu

alaccounts)

2005,2

006,

2007,2

008

Consultation

Planning

bilancio

parte

cipato

Yes

2004,

2009

T235

6,00

0Other

Environm

entalM

anager

Issued

2006

(covering

2004

and

2005)

Commun

ication

Abandoned

No20

04,

2009

T324

,500

None

Coun

cillors

2003

Consultation

Planning

bilancio

parte

cipato

Yes

2005,

2010

T426

,400

OfficeforPu

blic

Affairs

guide

ExternalRe

lations

Manager/Cou

ncillors

2006,2

007,

2009

Commun

ication

Continue

SR(plans

toadd

furth

ercontents)

Yes

2004,

2009

T5161,100

None

Mayor/Councillors

2003

Consultation

Planning

bilancio

parte

cipato

Yes

2004,

2009

T629

,000

Grup

podi

Studio

sulB

ilancio

Sociale(SR

mod

eldeveloped

inItaly)

Coun

cillor(in

charge

ofthe

annu

alaccounts)

2005,2

006,

2007,2

009

Commun

ication

Continue

SR(no

major

changes)

Yes

2004,

2009

(continued)


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Table1:

(Con

tinued)

Coun

cil

Size

(num

berof

inhabitants)

SRmod

eladop

ted

(e.g.T

BL,G

RI,B

SC,

other?)

Sustainabilitycham

pion

(e.g.N

one,

accountant,

CEO,

Coun

cillor,other)

SRissued

Stakeholder

engagementin

SRissued

SRfuture

Politicalcontinuity

inthedecade

2001–20

10(tw

oterm

sof

the

samepo

liticalcolour)

Elections

T728

,000

None

Coun

cillor(in

charge

for

Communication)/

GeneralM

anager

2007

Consultation

Planning

bilancio

parte

cipato

Yes

2004,

2009

T830

,400

None

Administra

tion&

FinanceManager

2007

,200

8,20

09Co

nsultation

Planning

bilancio

parte

cipato

Yes

2004,

2009

T967

,000

None

Coun

cillor(in

charge

oftheannu

alaccoun

ts)

2009

Consultation

Planning

bilancio

parte

cipato

No20

03,

2008

T10

61,000

OfficeforPu

blic

Affairs

guidelines

GeneralM

anager

2005

Commun

ication

Abandoned

No20

03,

2008

T11

33,900

Other

Mayor

2006

,200

7,20

08,2

009

Commun

ication

Abandoned

Yes

2004,

2009


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The degree of financial autonomy from the state is commonly calculated in Italy as apercentage of local revenue, over the total revenues (the indicator thus excludesfinancial funding from the state). In the years of sustainability reports issuance, severalsample LCs showed a level of financial autonomy slightly above the national average(ISTAT 2010). A high degree of financial autonomy could foster the demand for moretransparency and accountability on the resources gathered and the services provided(Marcuccio and Steccolini 2005). However, any association between the degree offinancial autonomy and SR behaviour would need to be tested.

Interviews

The use of interviews within the context of ‘engaging research’ has been stronglyencouraged within the academic community (Adams and Larrinaga-Gonzalez 2007;Ball et al. 2012). In-depth interviews were selected because this research methodelicits the sustainability report preparers’ perspectives, experiences and opinions(Silverman 2005). The in-depth responses, with nuances and contradictions, allowthe researcher to secure an interpretation of the linkages and connections the inter-viewee sees among particular events or phenomena (Gilham 2005). Also, in-depthsemi-structured interviews are regarded as appropriate given the research questionsposed, as well as having the opportunity to probe the interviewees if new issues aroseduring the course of the interview (Gilham 2005) [4].Seventeen officers from 11 LCs were interviewed during a one-day field visit at each

of the council sites (see Table 2). The majority (14) of the interviewees are identified aspreparers in the SR issued; others qualified themselves as preparers during the field visit.At two locations, we also had a mayor and a councillor attend the interview session.The interviews were conducted during March and April 2010 and were of one to oneand a half hours duration. The interviews were tape recorded, then transcribed andanalysed. To gain some background information on the respective LCs, we alsocollected in-house and publicly available documents, where these were labelled assustainability, social or environmental reports.A list of questions was prepared to be used as an interview guide on the topics to be

covered. The interview guide was designed based on two sources: (1) the literature onsustainability reporting and accounting and what has been used in prior research (Adamsand Larrinaga-Gonzalez 2007; Belal and Owen 2007; Greco et al. 2012; Lillis 1999;O’Dwyer and Unerman 2007); (2) the AA1000 Stakeholder engagement standard(AccountAbility 2011).The questions were used initially as conversation starters to make the interviewees feel

comfortable rather than following any regimented sequence that could impede anaturally flowing dialogue (Belal and Owen 2007). In the semi-structured interviews,the interviewees were, however, able to freely express themselves without specific


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limitations or restrictions. The interviewers occasionally had to steer the intervieweestowards relevant topics to ensure that the main substance of the discussion remainedspecifically on sustainability reporting and stakeholder engagement. Once all the topicswere covered, the interviewees were given the opportunity to raise any further issue(s)they thought relevant.The topic areas, included in the interview guide, related to:

1. Why does the LC produce a SR?2. Which (if any) reporting model was adopted for SR (e.g. GRI, BSC, TBL,

other)? Is there any coherence between the level of engagement and thereporting model adopted?

3. Who are the users of SR?3a) Is there any stakeholders group that is considered a primary SR user? Why?

4. Which were the feedbacks on SR by stakeholders?4a) Which stakeholders considered SR as an improvement of the LC reporting?4b) Which stakeholders considered SR as responsible and accountable LCbehaviour?

5. To what extent stakeholders are engaged in the SR process?5a) Who are the stakeholders involved?5b) What is the level of engagement?

Table 2: Overview of the sample of local councils analysed

Council code Main SR tool Job title of interviewees

T1 Social report General ManagerOrganization & HR Officer

T2 Environmental report Environmental ManagerT3 Social report Administration, Control & Finance OfficerT4 Social report and environmental

report (separated)External relations ManagerSocial Reporting Officer

T5 Social report Control & Finance ManagerDemographic Services ManagerEnvironmental Manager

T6 Social report Councillor for Annual AccountsCouncillor for Public Works

T7 Social report MayorFinance & Control ManagerT8 Social report Administration, Control & Finance ManagerT9 Social report General Affairs OfficerT10 Social report General Affairs OfficerT11 Environmental report Finance Officer


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6. What method is used to ensure stakeholders involvement in SR?7. What does the future hold for SR?

Guidance was also provided by the four levels of engagement referred to in theclassification provided by the AA1000 Stakeholder engagement standard. According to thisstandard, the engagement level is characterized by an increasing interaction whenmoving along from communication to partnership (AccountAbility 2011).A familiarization process of the interview transcripts was carried out so as to commence

building a structure to enable deeper analysis. After undertaking a thorough review, acatalogue of concepts was noted as they began to emerge from a reading of the transcripts.From this initial list, an indexing scheme was used to bring together and capture therecurring and/or dominant themes present in the interview transcripts – a process knownas thematic analysis (Ritchie and Lewis 2003). A hierarchy of main and sub-themes wascreated using thematic charts. Careful attention was paid to the use of terms drawn from thetranscripts so that this part of the analytical process became grounded in the data.

RESULTS AND FINDINGS

As part of the thematic analysis, four key themes were identified from the interviewtranscripts, namely; the reasons why LCs prepared some form of sustainability report,the SR models and tools adopted by the LCs, stakeholder engagement in SR and whatwas the possible future role of SR.

The reasons for sustainability reporting

A key issue addressed in our interviews is why LCs produce sustainability reports. InItaly, SR is not required by law and is usually disclosed through reports separate fromthe annual accounts. The sample of LCs issued sustainability reports between 2003 and2009 (see Table 1). Transparency appears to be the main reason behind voluntary SR asclaimed by the Italian LCs. Most interviewees mentioned as a primary objective theimprovement of transparency in the accounting for the activities and results achieved bythe organization.The interviewees indicated that the external users of sustainability reports were

normally addressed as citizens. Only in one LC case were the users of the sustainabilityreport addressed as stakeholders. In most other LC interviews, the words ‘citizens’ and‘stakeholders’ were used interchangeably. The interviewees appeared unaware that thedefinition of stakeholder is not limited to a political and/or social relationship with theLC, and that some subjects might not be considered as stakeholders and potentialsustainability report users (that is, suppliers or commuters residing outside the LC area).


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The use of the term ‘citizen’ seemed to underline the formal status of people whohave the right to vote and therefore, deserve a measure of transparency and account-ability from the LC.

The overall aim is to explain how the LC resources are used to all the citizen categories, following a

transparency principle [Quoted from T.4].

Following input from the general manager, the objective was to give more detailed information to the

citizens about the LC activities and the costs of the services offered. The three key areas were social

services, culture and education [Quoted from T.10].

We decided to produce a social report of the LC for several reasons: report the activities and the results

achieved, disclose non-financial information, improve communication and therefore, the dialogue with

external stakeholders and ensure transparent accountability toward the citizens [Quoted from T.6].

SR appears to be conceived as a legitimizing device for LC activities. The annualaccounts are not considered as a suitable tool to provide readable and accessibleinformation about the resources used for the stakeholders’ benefit. These findings areconsistent with those of Farneti (2011), who found that LCs engage in voluntarysustainability reporting, given the limited usefulness of annual accounts as a legitimizingtool.SR appears to be aimed at educating the public regarding the performance of the LC.

This is consistent with one of the main legitimizing strategies described by Lindblom(1993). The organizations seek to educate and inform its relevant publics about theirperformance and activities (Gray et al. 1995).In the sample of LCs, SR usually has political champions such as councillors/

mayors or top management on their behalf. The legitimizing strategy is implementedin the context of the negotiation between the organization and society, centred on thesearch for an arrangement between the political programmes and the citizens’demands.

In the social report we show how the citizens’ needs are taken into account and in the annual report,

a description of the LC activities – consequently, the political relationship with the city is explained.

These are two issues that co-exist and that I clearly distinguish: a political and administrative profile

and a social profile, dealing with the relationship with the community and the stakeholders [Quoted

from T.7].

The repeated issuance of a sustainability report is often encompassed within agovernment term, suggesting a strong relationship between SR and political leadership(see the respective columns, SR Issued and Elections in Table 1). Some reports wereintegrated in the Mayor’s five-year term report, usually presented before running for re-election.


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The reporting models and tools

Table 1 summarizes the main sustainability reporting tools used by the sample of LCs.In nine out of 11 LCs, the sustainability report is separated from the annual report andis called a Social Report. Environmental reporting is almost totally absent in seven ofthese social reports. In two cases, LCs issued a separate environmental report.The majority of LCs self-developed their SR model, often after benchmarking with

other LCs. The benchmarking activity is consistent with the propensity to imitate LCsconsidered to comply with best practice (Marcuccio and Steccolini 2005).The interviewees suggested that there was little knowledge of the GRI or the TBL

models. The guidelines issued by the Prime Minister’s Office for Public Affairs or bythe Ministry of Interior were considered as the most authoritative sources for SR, evenif applied on a voluntary basis.

We didn’t follow any particular model. We took some inspiration from the guidelines issued by Prime

Minister’s Office for Public Affairs [Quoted from T.4].

We created a model on the basis of some benchmarking activity. We considered SR by some LCs in

northern Italy, but none from our region [Quoted from T.5].

A primary objective for the LCs was the widespread distribution of SR. Significantresources were used to facilitate this objective.

The sustainability report was included in a daily issue of the regional newspaper to achieve the

maximum diffusion. We also included a feedback form and advertised on a dedicated website

[Quoted from T. 5].

The social report was presented in every suburb assembly. It was published in the LC quarterly

newspaper, sent to all the citizens and uploaded on the website [Quoted from T.4].

It can be deduced that the LCs draw on differing aspects of established reportingmodels to provide a sustainability report that they believe is desired by users. Thesustainability report produced also reflects the current limitations of the councils’internal reporting mechanisms to extract viable social and environmental informationfor inclusion in the sustainability report.

Stakeholder engagement

In Table 1 we frame the findings about the level of stakeholder engagement achievedusing the classification provided by the AA1000 Stakeholder engagement standard(AccountAbility 2011). The standard classifies four approaches to stakeholder engage-ment: communication, consultation, dialogue and partnership. At the very first level,


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the stakeholders are engaged only as users of the disclosures. Each successive approachrequires a greater commitment and interaction with stakeholders.The findings indicate that in about half of LCs (five out of 11) stakeholder engage-

ment was limited to communication activity. Six LCs engaged in consultation activities,in which the stakeholders were invited to provide feedback regarding the content of thesustainability report.From the interviews, it appeared that the preparers met significant difficulties in

receiving feedback regarding the sustainability report and a sense of apathy prevailed.Only on limited occasions did stakeholders show some interest in the activities of theLC. Some interviewees suggested that the individual stakeholder may not have theknowledge and background needed to provide constructive comments on the sustain-ability report, whereas some stakeholder groups, such as charities and trade unions,were able to use their organizational knowledge and resources to probe the LC on thecontent of the sustainability report produced.

There was little engagement in the meetings we organised. Perhaps there was little interest in the

topic of SR. We should try to make the citizens understand the importance of this issue [Quoted

from T.7].

The most significant difficulty is undertaking a dialogue with the ‘single’ citizen. During the meetings,

when left free to express his/her opinion little real interest was shown. There was not much interest by

the single citizens, but charities and trade unions showed some attention and interest during the

meetings [Quoted from T.6].

Hence, it may be that this general lack of interest was related to the belief thatindividuals would have little or no effect on how the LC addressed sustainabilityconcerns. Rather than addressing all stakeholders in the search for feedback, someLCs also tried to focus on specific stakeholder groups. However, there was limitedsuccess in this approach as well.

Every year we selected a specific stakeholder category, such as the charities and the retailer association,

asking for suggestions and proposals to improve SR. We distributed a questionnaire. Only a few

questionnaires were returned [Quoted from T.1].

The interviews suggested that the LCs failed to reach their legitimacy objectives.Some self-criticism began to emerge with respect to the content of the sustainabilityreport and how it was brought to the attention of the stakeholders.

I think that, despite the considerable efforts spent, the sustainability report did not produce a

satisfactory result. It is still a complex report and difficult to understand [Quoted from T.10].

There is the risk for the LC to appear interested only in propaganda. The sustainability report appears to

be a document issued by the LC just to promote itself and its activities [Quoted from T.10].


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It appears from the interviews that garnering interest in the content of the sustain-ability report is a particular challenge for LCs. Again, there is some evidence oflegitimizing behaviour on the part of the LCs.

The future role of SR

Several LCs discontinued the issuance of sustainability reports, in some cases, withinone year following initial implementation (see Table 1). Three of the 11 LCs suspendedSR activities. When asked why SR was interrupted, the interviewees claimed that theformer political champions withdrew their support because of the stakeholders’ lack ofinterest and poor demand for further information.Only two LCs will continue with their current sustainability reporting format. In this

case, the preparers appeared to be satisfied by the current status of SR practices and didnot believe it was necessary for further developments or significant changes in the nearfuture. Six LCs suspended the release of sustainability reports and are moving towardthe direct involvement of stakeholders in the sustainability policy-making and reportingprocess. This development into higher-order stakeholder engagement is consistentwith, and reflects, Friedman and Miles (2006) motivation towards connecting thecommunity with strategic decision-making.The new tool to be adopted is known as the ‘bilancio partecipato’ (literal translation

participated report). This SR allows the engagement of stakeholders in the resourceallocation decisions before the official approval of the annual budget. The stakeholdersare invited to provide feedback on how to spend a pre-determined percentage ofavailable resources, by submitting proposals on sustainability-oriented projects oractivities and/or choosing among pre-defined alternatives. The reporting then accountsfor the results obtained by identifying the activities selected by the stakeholders andthen reporting on how the resources were used on these projects. The adoption of theparticipated report is still consistent with legitimacy motivations (Gray et al. 1995;Lindblom 1993; Suchman 1995).The possibility to participate in sustainable decision-making is also conducive to

providing a vehicle for deeper changes at a political, social and cultural level. Someinterviewees suggested that these new activities are potentially able to modify thecultural and social approach to SR in a context of poor stakeholder engagement.

We had active engagement from citizens randomly selected to be included in focus groups with the task

to prepare proposals. The sample was not stratified, but included people with a disability. The

engagement and the initiative were above our expectations [Quoted from T.9].

Sustainability report preparers appear aware that the engagement projects may alsochange in the long term according to ‘the rules of the game’ in the political negotiationsbetween the LC political leadership programmes and the needs of stakeholders.


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SR is a useful step toward a new attitude of participated decision-making in local government politics

[Quoted from T.5].

SR is a first step toward the participated report. Besides being a reporting tool, we would like to use this

instrument for involving the stakeholders in institutional decision-making at a new level. [Quoted from

T.8].

Our plan is to include the stakeholder proposals about the priority of the actions to be taken in the

political programmes [Quoted from T.1].

The engagement projects received key support by the LC political leadership. Mostof the LCs undertaking plans for bilancio partecipato are featured by either politicalcontinuity during the decade 2001–2010 (that is, they had two governments of thesame political colour in the period) or prior experience of stakeholder consultationabout SR. It appears that the experience gained was useful to political leaders tounderstand the potential of greater stakeholder involvement in negotiating politicalprogrammes with the local communities. Whilst the political colour per se does notappear to influence the choice to commence new engagement projects, the politicalcontinuity in the governing coalition probably helped in transferring prior knowledgeand expertise into new projects.

DISCUSSION AND CONCLUSION

The reasons why LCs prepare sustainability reports and what influence stakeholders canhave in its production were key concerns in this investigation. Overall the results areconsistent with legitimacy theory. Initially, LCs introduced SR for transparency andaccountability reasons. This is consistent with the findings of Rixon (2010). However,championed by the LCs political leadership, SR is used to inform the stakeholders aboutthe LC activities and performance. This appears to be more about general consultation,rather than higher level engagement, where stakeholders can advance new proposals.In the majority of LCs, the findings confirm modest interest from stakeholders for

the sustainability report produced. Some possible explanations for this include thedifficulties to understand the reported contents, and a lack of understanding regardingwhat a sustainability report is supposed to represent. In addition, there was littleinformation provided to stakeholders on what influence (if any) their input could haveon LC activities and this fact may also inhibit stakeholders’ interest.Despite considerable effort in attempting to involve the stakeholders in SR through

the search for feedback and new proposals for SR content, the LCs were unable toexploit the benefits of SR. Black (2008) recognizes that organizations can constructtheir own narratives (in this case via the SR medium) in order to enrich their legitimacystatus and deliver the perception that the LCs are doing all they can in support ofsustainability. However, there may be other explanations as to why the LCs sought to


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‘deliver the message’ but were somewhat frustrated with the ‘response’ from stake-holders. From the LCs’ perspective, these participative forums may have been agenuine attempt to engage with the community. However, these same stakeholdershave had to endure many years of unfavourable events that have tainted the legitimacyof LCs in general. Poor service, unresponsiveness to customer concerns, corruption anda sense of not having the power to influence LC activities and performance may haveleft stakeholders with a belief that these public forums were simply another form ofpolitical propaganda (Reginato et al. 2011). Hence, the adoption of NPM techniquesby the LCs is not accepted as a genuine reform by a sceptical public. What may beneeded is time to demonstrate to the stakeholders that the NPM model and associatedaccountability relationships are long-term visions, and not a quick fix instrument toappease a dissociated public. In addition, the LCs need to demonstrate evidence of acommitment to NPM and its benefits to stakeholders. This is not an easy task, for, asnoted by Black (2008), within organizations there will be internal conflicts betweenvarious units, some of whom would be strictly opposed to the model of NPM and couldundertake behaviours that can stifle its successful application or manipulate others intojoining their NPM opposition. Although we did not find evidence of this activity in theLCs under investigation, it is nonetheless a consideration that should not be discountedin future studies.Our findings suggest that NPM reform in the LCs investigated has had little impact

on SR and stakeholder engagement because, as noted by Anessi-Pessina and Steccolini(2005), NPM at the local government level is still characterized by formal legislationand formal rules, something that is the antithesis of effective stakeholder engagement.Further, there is little evidence of educating the public in the political game

(Lindblom 1993). Promoting consultation with stakeholders without first engagingthem regarding the machinations of local government is a recipe for failure.Stakeholders need to be aware of the actual operations of the LC in order to havegenuine influence in evaluating and promoting sustainability programs. LCs are in aposition to offer this learning experience to stakeholders under the guise of account-ability. Importantly, education is a two-way street, and the LCs themselves could alsolearn from local knowledge and expertise from stakeholders. In essence, the LCs havecommenced downward accountability as suggested by Unerman and O’Dwyer (2010a).However, some evidence of reluctance on the part of stakeholders to question the LCsmay have more to do with trepidation, given that the very same stakeholders rely onthe continued services provided by the LCs (Unerman and O’Dwyer 2010b).The other explanation for a lack of engagement may also relate to accountability.

Whilst Bovens (2007) notes that accountability offers a mechanism for agencies toconfront their stakeholders and deem what was successful and unsuccessful, crucially,our findings suggest a missing link in the accountability chain, that is, no consequences(refer to Figure 1). Stakeholders may believe (and this assertion needs to be tested) thatgiven there is no recourse or no consequences for inaction by LCs, there appears little


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reason why they should actively engage with them. If no (or inadequate) explanationsare provided by the LCs to stakeholders for inaction on sustainability issues, then thisbehaviour will sow the seeds for disenfranchisement.The findings also explain how SR was used as a framework for direct involvement of

stakeholders in the LC policy-making and reporting process. The bilancio partecipato(literal translation participated report), rather than being a report, is instead a form ofconsultation involving the stakeholders in the resource allocation decision-makingbefore the approval of the annual budget. Hence, an indirect benefit of producing asustainability report was that it had developed a connection with the bilancio partecipato.At the very least, this demonstrates that SR can influence resource allocation decisionsof councils.SR practice was useful to preparers to understand the potential for greater stake-

holder involvement in negotiating political programmes with the local communities.Sustainability report preparers appear aware that the introduction of engagementprojects can produce major changes in the stakeholders’ cultural approach to SR.Political negotiations between LC leadership and the community can take place andbe integrated into the SR framework within the context of LC planning and decision-making.Overall, our findings reveal a change in sustainability reporting practices in LCs. In

the first instance, SR is introduced by the preparers motivated by accountability andlegitimacy concerns. Over time, LCs moved from traditional SR to more sophisticatedtools of policy-making and reporting, in which SR was used as a framework for a directinvolvement of the stakeholders in the LCs policy-making. This is consistent with thefindings of Archel et al. (2011), where the discourse with stakeholders changed rapidlyover time to include concepts such as sustainable development. However, radical viewsoutside the dominant discourse did not appear to gain traction, and therefore, debatethat is not within the bounds of the orthodoxy would be discouraged.Also consistent with Hood (1995), there does not appear to be any relationship

between the dominant political colour of the LC or the degree to which NPMtechniques have been implemented. In addition, NPM supported SR in so far asthere appeared to be more freedom for LC managers to set the sustainability agendaand promote their agenda as being inclusive of accountability. Consistent with thefindings of Reginato et al. (2011), a top-down approach from central government forSR and greater accountability through stakeholder engagement is problematic. Ourpersonal view is that installing a ‘champion’ manager who has the drive and passion forSR and stakeholder engagement would be a more prudent way of achieving sustain-ability outcomes for the LCs compared with additional bureaucratic reporting require-ments. This is akin to the champion CFO who drove financial NPM reforms at theGirotondo municipality in Italy (Caccia and Steccolini 2006), although using thisstrategy is not without risks such as growing internal legitimacy concerns from otherdepartments which do not subscribe to such managerial innovations. Moreover, we


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recognize, as have Verschuere and Barbieri (2009), that an important determinant inthe capacity for LCs to meet stakeholder expectations is the extent of political andmanagerial autonomy.This study can contribute to the academic literature in several ways. It extends prior

research on SR by investigating why public sector organizations report on suchactivities. It provides evidence of a process in its early stage, in which SR frameworksare being used to support the LC planning, reporting, and decision-making. Thefindings highlight the strong context of political negotiations that SR finds itself in.The evidence suggests that producing sustainability reports is not a static activity andthere is a case for further investigation into how legitimacy dynamics evolve over timeand how these influence stakeholder engagement.There are some limitations to this paper. The in-depth nature of the research

imposed a restriction in the sample. The findings cannot be generalized across allItalian LCs due to the relatively small number of LCs considered. Future researchinvolving an international comparison of the SR practices by LCs would also be valuableto assess the influence of contextual factors. Longitudinal studies would also add furtherinsights to highlight how SR is discussed in an evolving institutional and politicalcontext. Understanding how LCs extend their reach to effectively engage with stake-holders would also be a welcome addition to the literature.

NOTES1 For a comprehensive review see Marcuccio and Steccolini (2005).2 The Region key powers include healthcare system management and economic development. The Provinces

have traditionally lesser administrative powers and their existence is nowadays questioned.3 The database is available online at: http://bilanciosociale.formez.it/node/365 (accessed February 2010). In

one case, we did not find the report mentioned in the database, but a later issuance. In the interview, we weretold the report mentioned in the database was a draft.

4 We also considered other methods, but discarded them as they would not have achieved the same objectives.In the focus groups, the interviewees tend to avoid more sensitive topics, self-criticism and are biased by groupdynamics (Gilham 2005; Silverman 2005). Also, the focus groups limit the number of topics that can becovered and can reduce differentiations among the interviewees’ responses. Surveys are limited by the need toestablish an operational definition of the phenomena observed before investigating it (Gilham 2005).

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