the state of disclosures on stakeholder engagement in sustainability reporting in australian local...

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The state of disclosures on stakeholder engagement in sustainability reporting in Australian local councils Amanpreet Kaur and Sumit K. Lodhia University of South Australia Business School, University of South Australia, Adelaide, Australia Abstract Purpose – This study aims to examine the state and extent of disclosures on stakeholder engagement in sustainability reporting in Australian local councils. Design/methodology/approach – Content analysis was used to analyse 23 sustainability/state of environment/annual reports out of a total of 563 local councils (city, shire, district, borough and regional) in Australia for the year 2009-2010 – those found to be using stakeholder engagement in the development of sustainability reports. A stakeholder engagement index was developed on the basis of the literature review to examine the extent of disclosures on stakeholder engagement. Findings – This study identifies: the Australian local councils that are engaging with their stakeholders in the development of sustainability reports; key stakeholders for sustainability reports; extent of engagement; media and approaches used for engagement; and difficulties in the engagement process. The results suggest that stakeholder engagement is an essential component in the development of sustainability reporting as it informs reporters of material concerns, issues and aspirations of key stakeholders. Research limitations/implications – The focus of this paper is the state of disclosures on stakeholder engagement in sustainability reporting. The findings of the paper are limited to only one level of governance of the public sector, that is, local councils. Originality/value – International standards such as Global Reporting Initiative and AccountAbility (AA) 1000 have signified the role of stakeholder engagement in the development of sustainability reports. However, there has been a little research that demonstrates whether or not organisations engage with their stakeholders for reporting purposes. This paper provides evidence of stakeholder engagement in sustainability reporting in Australian local councils. Keywords Sustainability reporting, Disclosure, Stakeholders, Stakeholder engagement, Local councils Paper type Research paper 1. Introduction Since the Brundtland (1987) Report on sustainable development, the importance of environmental issues and the pursuit of sustainable development have been on the agenda of both the government and corporate sectors (Bebbington and Gray, 1993). Stakeholders from organisations require greater transparency and accountability than ever before. In order to demonstrate an organisation’s contribution towards sustainable development, sustainability reporting is considered by many to be necessary to fully inform stakeholders about the activities and performance of an organisation (Lamberton, 2005; Milne and Gray, 2007; Guthrie and Farneti, 2008). The Global Reporting Initiative (GRI, 2004, p. 20) defines sustainability reporting as: The current issue and full text archive of this journal is available at www.emeraldinsight.com/0114-0582.htm Pacific Accounting Review Vol. 26 No. 1/2, 2014 pp. 54-74 q Emerald Group Publishing Limited 0114-0582 DOI 10.1108/PAR-07-2013-0064 PAR 26,1/2 54

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The state of disclosures onstakeholder engagementin sustainability reportingin Australian local councils

Amanpreet Kaur and Sumit K. LodhiaUniversity of South Australia Business School,

University of South Australia, Adelaide, Australia

Abstract

Purpose – This study aims to examine the state and extent of disclosures on stakeholderengagement in sustainability reporting in Australian local councils.

Design/methodology/approach – Content analysis was used to analyse 23 sustainability/state ofenvironment/annual reports out of a total of 563 local councils (city, shire, district, borough andregional) in Australia for the year 2009-2010 – those found to be using stakeholder engagement in thedevelopment of sustainability reports. A stakeholder engagement index was developed on the basis ofthe literature review to examine the extent of disclosures on stakeholder engagement.

Findings – This study identifies: the Australian local councils that are engaging with theirstakeholders in the development of sustainability reports; key stakeholders for sustainability reports;extent of engagement; media and approaches used for engagement; and difficulties in the engagementprocess. The results suggest that stakeholder engagement is an essential component in thedevelopment of sustainability reporting as it informs reporters of material concerns, issues andaspirations of key stakeholders.

Research limitations/implications – The focus of this paper is the state of disclosures onstakeholder engagement in sustainability reporting. The findings of the paper are limited to only onelevel of governance of the public sector, that is, local councils.

Originality/value – International standards such as Global Reporting Initiative and AccountAbility(AA) 1000 have signified the role of stakeholder engagement in the development of sustainabilityreports. However, there has been a little research that demonstrates whether or not organisationsengage with their stakeholders for reporting purposes. This paper provides evidence of stakeholderengagement in sustainability reporting in Australian local councils.

Keywords Sustainability reporting, Disclosure, Stakeholders, Stakeholder engagement, Local councils

Paper type Research paper

1. IntroductionSince the Brundtland (1987) Report on sustainable development, the importance ofenvironmental issues and the pursuit of sustainable development have been on theagenda of both the government and corporate sectors (Bebbington and Gray, 1993).Stakeholders from organisations require greater transparency and accountability thanever before. In order to demonstrate an organisation’s contribution towards sustainabledevelopment, sustainability reporting is considered by many to be necessary to fullyinform stakeholders about the activities and performance of an organisation(Lamberton, 2005; Milne and Gray, 2007; Guthrie and Farneti, 2008). The GlobalReporting Initiative (GRI, 2004, p. 20) defines sustainability reporting as:

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0114-0582.htm

Pacific Accounting ReviewVol. 26 No. 1/2, 2014pp. 54-74q Emerald Group Publishing Limited0114-0582DOI 10.1108/PAR-07-2013-0064

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[. . .] a vehicle to assess the economic, environmental and social impacts of the organisation’soperations, products, and services, and its overall contribution to sustainable development.

During the preparation of a sustainability report, stakeholders’ reasonable expectationsand interests are a key reference point for many decisions involved, such as the scope,boundary, application of indicators and assurance (GRI, 2006, 2011; Herbohn andGriffiths, 2007). International accountability guidelines such as the GRI and the Instituteof Social and Ethical Accountability’s AA1000 place a major emphasis on stakeholderengagement as the primary means for developing sustainability reporting structures.Stakeholder engagement is critical for sustainability reporting because it facilitates theidentification and understanding of the material concerns, issues, perceptions, needs andexpectations of stakeholders in relation to sustainability issues (AA, 2005, 2011;GRI, 2006), and thereby enhances stakeholder receptivity and the usefulness of thereport (GRI, 2006, 2011). Adams and Larrinaga-Gonzalez (2007, p. 385) argue that:

[. . .] stakeholder engagement, an important aspect of many organisations’ sustainabilityreporting process, has the potential to be a particularly powerful driver for change, becauseits purpose is to challenge the company’s role in social and environmental sustainability.

The importance of stakeholder engagement as an overall interactive mechanism and moreprecisely as a part of the reporting process has become increasingly critical in both thecorporate and public sectors (ACCA, 2005). However, the position of the public sector inthis regard has been discounted, in spite of the indispensable need and scope forstakeholder engagement in public sector organisations (PSOs). This is especially the casein the local government sector, which shares a close relationship with the community andother stakeholders. Being at the level of governance which is closest to people, localgovernments have a critical role in educating the public and responding to social andenvironmental issues in their local areas (Sitarz, 1993). Local governments wereacknowledged as a focal point for the implementation of Local Agenda 21, which is part ofthe primary policy document that emerged from the Rio conference on sustainabledevelopment (Gray, 2001). Local Agenda 21 (1993) recognised that environmental issuesand solutions have their roots in local activities and encouraged local governments todevelop stronger partnerships and networks with their communities to advance social,economic and environmental sustainability. In line with this, the change in performanceexpectations of local governments has extended their accountability from merecompliance with spending mandates to overall performance reporting (Ryan et al., 2002).This implies that local governments are expected to engage with stakeholders onsignificant sustainability issues in their areas, and report to them in order to demonstratetheir contribution in advancing sustainable development (Lamprinidi and Kubo, 2008).

Although stakeholder engagement and dialogue is a critical aspect of sustainabilityreporting, there is a lack of evidence for such engagement and dialogue actuallyhappening in current sustainability reporting practices. Further, where stakeholderengagement and dialogue is happening, evidence is required of what sort of mechanismsare in place (Gao and Zhang, 2001; ACCA, 2005; Unerman, 2007). This study aims torespond to this gap in the sustainability accounting and reporting literature by examiningthe state and extent of disclosures on stakeholder engagement in sustainability reportingby Australian local councils. These findings should be of interest to policymakers who areconcerned with formulating policies and strategies related to stakeholder engagement insustainable development programmes, particularly those in the public sector.

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The paper is organised as follows. The next section presents an overview ofsustainability reporting in Australian PSOs. This is followed by a review of stakeholdertheory with a particular focus on stakeholder engagement and its relevance in thesustainability reporting process. Section 4 outlines the research method used in thisstudy and discusses the development of the stakeholder engagement index for analysingdisclosures. Sections 5 and 6 present findings of this study and discuss them in light ofthe literature review before drawing conclusions.

2. Sustainability accounting and reporting in the Australian public sectorResearch studies on the social and environmental disclosure practices of AustralianPSOs first emerged in the mid 1990s. Since then, numerous studies have been conductedto explore: the state of sustainability accounting and reporting practices; trends insustainability reporting; and influences on sustainability reporting in Australian PSOs.This section of the paper highlights the findings of prior studies to identify gaps in theexisting literature.

An increase in the uptake of sustainability reporting in the Australian public sectorhas been reported in several studies (Burritt and Welch, 1997; Dickinson et al., 2005;Lynch, 2010; GRI, 2005). Sustainability reporting in Australian PSOs is driven by arange of factors such as: sustainability performance monitoring; public relations;regulatory requirements; leadership; concerns about climate change, population andurban growth; a high level of interest in sustainability issues within local councils; andnational and international pressures (Dickinson et al., 2005; Herbohn and Griffiths, 2007;Farneti and Guthrie, 2009; Sciulli, 2011; Lodhia et al., 2012). In addition to these factors,the quantity and type of sustainability disclosures in the majority of PSOs includinglocal councils is related to their perceived importance by internal stakeholders such asemployees (Frost and Toh, 1998; Dickinson et al., 2005; Herbohn and Griffiths, 2007;Farneti and Guthrie, 2009) external pressure by mandatory stakeholders such asministers (Farneti and Guthrie, 2009), and level of the community engagement(Sciulli, 2011). However, prior research shows a low level of involvement of externalstakeholders in sustainability reporting (Herbohn and Griffiths, 2007).

Australian PSOs are embracing the GRI reporting guidelines to report onsustainability issues (Dickinson et al., 2005; Farneti and Guthrie, 2009). Moreover, themajority of local governments’ reports are consistent with the GRI sustainabilityreporting guidelines (Burritt et al., 2009). The key elements included in sustainabilityreports comprise: indicators/data; business strategy and objectives; performanceoutcomes; stakeholder engagement and strategies; and disclosures on corporategovernance (Dickinson et al., 2005). Disclosures on stakeholder engagement indicate thatalthough sustainability reporting is internally driven, PSOs are engaging with theirexternal stakeholders. However, it is still not clear how and to what extent thisengagement is taking place in public sector entities.

Prior literature suggests that although there has been a substantial increase in thepublic sector’s sustainability reporting practices over the last two decades, it is still in itsinfancy when compared to private sector reporting practices (Gibson and Guthrie, 1995;Dickinson et al., 2005; Ball and Grubnic, 2007; GRI, 2005). Guthrie and Farneti (2008) intheir study examined disclosures on social and environmental issues by sevenAustralian PSOs. The study revealed that these organisations “cherry picked” the GRIindicators they wished to disclose, and their reports lacked complete disclosures on

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the social, environmental and economic impacts of their activities. Relatively similarfindings were made by Sciulli (2009) in an examination of sustainability disclosures inAustralian local councils in six coastal regions. He found an overall low level ofdisclosures on sustainability issues in these councils and recognised stakeholders’ needsas an influence for encouraging disclosure on social and environment issues.

The other issues concerned with sustainability reporting in the Australian publicsector are: insufficiency of environmental performance standards and accountabilityassessment frameworks (Burritt and Welch, 1997); heterogeneous reporting practices inrelation to scope, format and quality (Ryan et al., 2002; Jones et al., 2005; GRI, 2005); andassurance and verification (Dickinson et al., 2005). Recently, Lynch (2010) examinedannual reports of 18 state government departments in four Australian states over theperiod from 2000-2001 to 2007-2008. She noticed a low level of external stakeholders’participation in sustainability reporting, as there were few stakeholders’ commentson the reports and only occasional enquiries were received. She argued that lack ofdisclosure in some departments could be due to lack of pressure from externalstakeholders, as, unless external pressures exist, departments may find little benefit inreporting on sustainability issues.

Given the current state of sustainability reporting practices in the Australian publicsector, prior research has not explored elements that could accelerate sustainabilityreporting practices among PSOs. Hence, there is a need to take a step back and study thekey elements in structuring a sustainability report. One such crucial element isstakeholder engagement (GRI, 2006; Unerman, 2007; Manetti, 2011). Althoughstakeholder engagement is critical to the sustainability reporting process, theseprevious studies have examined it in a limited manner. It is argued that low levelstakeholder engagement could be the reason for the low level of sustainabilitydisclosures on the presumption that PSOs have not yet managed to identify theinformation needs and expectations of their stakeholders and report accordingly. Anin-depth study is required to explore the current state of stakeholder engagement insustainability reporting by PSOs. This paper adds to the literature by examining howstakeholder engagement mechanisms function during the development of sustainabilityreports for Australian local councils and to what extent this engagement takes place. Thefocus of this paper is to analyse stakeholder engagement through document analysis.

3. Theoretical frameworkStakeholder theoryStakeholders are broadly defined as “any group or individual who can affect or areaffected by the achievement of the organisation’s objectives” (Freeman, 1984, p. 46).Stakeholder theory asserts that organisations should consider the concerns of individualsand groups that can affect or are affected by their activities (Clarkson, 1995; Gibson, 2000)while making decisions and achieving organisational goals. Organisations are expected todo so because they are responsible and accountable to a broad range of stakeholders fortheir social and environmental impacts, rather than just shareholders (Hillman and Keim,2001). In effect, recent literature suggests that shareholders are also concerned about andcould be the key drivers for organisational responses towards social and environmentalissues (De Villiers and Van Staden, 2011, 2012).

Stakeholder theory recognises the existence of a dynamic and complex relationshipbetween organisations and their stakeholders (Gray et al., 1996) and, emphasises the

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management of these relationships (Friedman and Miles, 2002). Therefore,stakeholder theory plays a significant role in understanding stakeholders’ influenceson organisations’ actions and how organisations respond to these influences.

Organisations can have a broad range of stakeholders with different interests and itis not possible for them to address the issues and concerns of all their stakeholders.Therefore, identification of stakeholders which can impact or are impacted by anorganisation’s actions becomes essential (Clarkson, 1995). In the absence of stakeholderidentification, the effectiveness of stakeholder engagement becomes questionable ordoubtful (Belal, 2002). The key criteria for identifying and prioritizing stakeholdersinclude attributes of power, legitimacy and urgency, and the stakeholders’ ability toaffect or be affected by the organisation’s actions (Mitchell et al., 1997).

In order to explain how organisations respond to stakeholders’ pressure andexpectations, Donaldson and Preston (1995) recognise descriptive/empirical,instrumental and normative as the three distinct but supportive features ofstakeholder theory. Descriptive/empirical stakeholder theory is used to describe whatorganisations actually do to manage their relationships with stakeholders ( Jones, 1995)and whether or not stakeholder interests are taken into account by organisations(Gibson, 2000). Instrumental stakeholder theory has been used to explain that“the predicted outcomes are contingent on behaviour of a certain type” ( Jones and Wicks,1999). It emphasises the role of management to achieve a balance between the interests ofall stakeholders (Shankman, 1999). Normative stakeholder theory is used to explainmoral and philosophical principles to state how an organisation should deal with itsstakeholders (Donaldson and Preston, 1995).

Stakeholder theory provides the foundations for studying stakeholder engagement.Its descriptive variant involves studying the extent of and how stakeholders aremanaged. It therefore provides the basis for studying the extent of and approach taken tostakeholder engagement in local councils. The rest of the section discusses stakeholderengagement, drawing upon the insights offered by descriptive stakeholder theory.

Stakeholder engagementIn recent years the focus of stakeholder theory has shifted from a stakeholdermanagement approach towards more of a network-based, relational andprocess-oriented approach of stakeholder engagement (Andriof and Waddock, 2002).The main reason why organisations are moving towards stakeholder engagement is toincrease trust, transparency and accountability and to provide better communicationon their activities and impacts (Burchell and Cook, 2006). Stakeholder engagementaims at enhancing mutual understanding and alignment between organisations andtheir stakeholders (Gable and Shireman, 2005).

According to Andriof and Waddock (2002, p. 42) stakeholder engagement can bedefined as a “trust-based collaboration between individuals and/or social institutionswith different objectives that can only be achieved together”. Advancing sustainabledevelopment is one such goal that needs the trust-based collaborative effort of both theorganisations and their stakeholders to ensure its success (Andriof and Waddock, 2002;Gao and Zhang, 2006). While pursuing sustainable development objectives,organisations realise that they cannot act alone to develop a sustainability report(Isenmann and Kim, 2006), and they require the cooperation of their stakeholders toidentify the social and environmental issues perceived by stakeholders.

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Stakeholder engagement has emerged as an important tool for understanding thereasonable expectations and interests of different stakeholders (ISEA, 1999). Stakeholderengagement facilitates organisations to recognise stakeholders’ information demandsregarding content, form and media to prepare a sustainability report that meets theirspecific needs (Isenmann and Kim, 2006). A meaningful engagement demonstratesorganisational accountability towards stakeholders and ensures that organisationaldecisions are based on an accurate and full understanding of stakeholder aspirations andneeds (ISEA, 1999). The basic purpose to engage stakeholders is to:

[. . .] drive strategic direction and operational excellence for organisations and to contribute tothe kind of sustainable development from which organisations, their stakeholders and widersociety can benefit by [. . .] learning, innovating and performing (AA, 2005).

Stakeholders can be involved in the planning, accounting, auditing and reporting stagesto bring transparency and enhance mutual understanding on the sustainability actionsof corporations (Gao and Zhang, 2006). During the sustainability reporting processstakeholders can be engaged in the following manner (Isenmann and Kim, 2006):

. at the beginning of the reporting process, to involve stakeholders to articulatetheir needs and expectations as to reporting;

. during the reporting process, to obtain feedback and criticism of reports; and

. during publication and release, to get consultation on future efforts onsustainability issues and the coming reporting cycle.

A range of media can be used for engaging stakeholders in all these activities. Theseinclude: questionnaires; telephone; blogs; media releases; interviews; magazines andinternet bulletin boards; public meetings; round table discussions; community forums;seminars; conferences and workshops; and briefing sessions (Cummings, 2001; Gao andZhang, 2001; Belal, 2002; Gable and Shireman, 2005; Thomson and Bebbington, 2005).However, the selection of the appropriate engagement method is dependent upon thesize, geographical location, resource availability and nature of stakeholders to beinvolved (Gao and Zhang, 2001; Belal, 2002).

Stakeholder engagement is not often comfortable; sometimes it can raise complexissues for organisations (Thomson and Bebbington, 2005). The key complexities thatcan interrupt stakeholder engagement and dialogue processes include: heterogeneousstakeholders’ views and expectations; conflicting interests between the organisationand its stakeholders; difficulty in stakeholder identification and prioritisation; and theimpossibility of engagement with certain stakeholders such as the naturalenvironment and future generations (Thomson and Bebbington, 2005; Unerman, 2007).

Moreover, a majority of organisations interpret stakeholder engagement as a one-sidedprocess, by not involving stakeholders in their decisions and simply communicating thedecisions, in the belief that this will best serve their needs (Belal, 2002; Foster and Jonker,2005). This one-way dissemination of information to stakeholders is often regarded as arelatively weak form of engagement (Burchell and Cook, 2006). The effectiveness ofstakeholder engagement lies in engaging stakeholders in a two-way relationship so that thedecisions are made after considering the conflicting interests of the organisation and itsstakeholders (Foster and Jonker, 2005; Burchell and Cook, 2006). The existing stakeholderengagement practices are not designed to give stakeholders control and delegated power indecisions on social and environmental issues (Cummings, 2001). Belal (2002) in his study

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found that a majority of organisations do not identify their stakeholders clearly andsystematically in order to engage them in the social and ethical reporting process. He alsofound that social and environmental issues are addressed unilaterally on the basis offeedback from stakeholders without incorporating them in the decision-making process.

Stakeholder engagement modelsThe quality of the engagement outcome depends on the extent of involvement ofstakeholders. This section of the paper reviews stakeholder engagement frameworks forassessing and evaluating the extent and quality of stakeholder engagement in sustainabilityreporting. The frameworks include: Arnstein’s Ladder of Participation, AA1000, the GRIand The Environment Council’s (TEC’s) stakeholder evaluation and benchmark criterion.Arnstein’s Ladder of Participation and the Environmental Council have been extensivelydiscussed in prior literature. A study by ACCA on stakeholder engagement reportingutilised the Environmental Council framework (ACCA, 2007). Moreover, the GRI andAA1000 are widely accepted practice based standards and these provide useful insights intostakeholder engagement. Taken together, these frameworks provide a comprehensiveaccount of the available benchmarks for assessing stakeholder engagement.

Arnstein’s (1969) Ladder of Citizen Participation has eight rungs, each explaining adifferent form of engagement technique that can be applied to engage withstakeholders. These rungs are:

(1) manipulation;

(2) therapy;

(3) informing;

(4) consulting;

(5) placation;

(6) partnership;

(7) delegated power; and

(8) citizen power.

The manipulation and therapy rungs are levels of non-participation, aiming at enablingpower holders to educate the participants through public relations (Cummings, 2001).Informing, consulting and placation are regarded as first steps to participation. Theseare one-way communication processes wherein stakeholders can be heard, however,decision and veto lies with the power holders (Cummings, 2001). The partnership form ofparticipation enables participants to negotiate and trade-off with traditional powerholders (Arnstein, 1969). In the delegated power and citizen power rungs stakeholderspossess full managerial power and can make decisions in their own right (Figure 1).

Cummings (2001), in a UK study, found most organisations used the third, fourthand fifth rungs of the ladder to involve stakeholders. Only a few organisations used thesixth and seventh rungs (partnership and delegated power), to engage with theirstakeholders. Relatively similar findings were made in Manetti’s (2011) study ofsustainability reporting. He found that Italian companies have reached the first fiverungs of the Ladder of Participation. Only a few companies that were subject to legalrequirements were using delegation of power and citizen control to involvestakeholders.

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AA1000 is an international accountability standard that focuses on securing thequality of social and ethical accounting, auditing and reporting. AA1000’s stakeholderengagement guidelines aim at improving accountability and ensuring the quality ofdialogue between an organisation and its stakeholders. The AA1000 stakeholderengagement assessment criteria are discussed in Table I.

Figure 1.Eight rungs on a ladder

of citizen participation

Citizen control

Delegated Power

Partnership

Placation

Consultation

Informing

Therapy

Manipulation

Non-participation

Degrees oftokenism

Degrees ofcitizen power

Source: Arnstein (1969, p. 217)

Component of reportInclusion ofcomponent?

Quality ofcomponent

Stakeholder commentary on social and ethical performanceStakeholder commentary on the social and ethical accounting, auditing andreporting processSurvey of stakeholder viewsEvidence of stakeholder participation in the social and ethical accounting,auditing and reporting process – in definition of valuesEvidence of stakeholder participation in the social and ethical accounting,auditing and reporting process – in definition of objectives and targetsEvidence of stakeholder participation in the social and ethical accounting,auditing and reporting process – in identification of issuesEvidence of stakeholder participation in the social and ethical accounting,auditing and reporting process – in identification of indicatorsProcess for stakeholder feedback on report

Source: ISEA (1999, p. 115)

Table I.AA1000 stakeholder

engagement assessmentcriteria

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The GRI is the widely used sustainability reporting framework. It emphasises theimportance of engaging stakeholders in the sustainability reporting process. The GRIguidelines (G3) identify key reporting principles to produce a balanced and reasonablereport on an organisation’s social, environmental and economic performance. One ofthese principles is “stakeholder inclusiveness” which recognises stakeholderengagement as an essential element to determine the scope and enhance the quality ofa sustainability report. In order to provide evidence of stakeholder engagement practicesin sustainability reporting, GRI’s Public Agencies Sector Supplement (2005) offersan indicator under the sub-section “Governance structure and management systems”.This indicator requires the PSOs to disclose items such as: the basis for identificationand selection of stakeholders with whom to engage; approaches to stakeholderengagement, including type and frequency; key issues identified through stakeholderengagement and how organisations used this information. Moreover, G3 highlights fourkey areas for disclosing stakeholder engagement initiatives as given below:

GRI stakeholder engagement indicators

4.14 List of stakeholder groups engaged by the organisation. Examples of stakeholdergroups are:

. Communities;

. Civil society;

. Customers;

. Shareholders and providers of capital;

. Suppliers; and

. Employees, other workers, and their trade unions.

4.15 Basis for identification and selection of stakeholders with whom to engage.

This includes the organisation’s process for defining its stakeholder groups, and fordetermining the groups with which to engage and not to engage.

4.16 Approaches to stakeholder engagement, including frequency of engagement by type andby stakeholder group.

This could include surveys, focus groups, community panels, corporate advisory panels, writtencommunication, management/union structures, and other vehicles. The organisation shouldindicate whether any of the engagement was undertaken specifically as part of the reportpreparation process.

4.17 Key topics and concerns that have been raised through stakeholder engagement, andhow the organisation has responded to those key topics and concerns, including through itsreporting (GRI, 2006, p. 24).

TEC has developed evaluation and benchmark criteria for stakeholder engagement inpractice and reporting. TEC is a UK based charity, whose main goal is to pioneer theuse of more collaborative and interactive techniques to co-create or informdecision-making in the sustainability arena (ACCA, 2007). These criteria have beenused by ACCA Australia (2007) to study disclosures on stakeholder engagement in theAustralian Securities Exchange (ASX) Top 50 companies in Australia. The TECcriteria include the following six sections:

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(1) stakeholder identification;

(2) evidence of engagement;

(3) target and metrics;

(4) integration of engagement programmes;

(5) use of engagement results in report development; and

(6) opportunities for feedback.

ACCA (2007) examined social and environmental reports, web sites and annual reportsof the ASX top 50 corporations. The study revealed that only a few companies wereproviding high quality disclosures on stakeholder engagement. Given that reportingon stakeholder engagement is a voluntary practice, the study stressed that insufficientstakeholder engagement disclosures do not always imply that stakeholder engagementis not taking place; rather sometimes efforts remain unnoticed by readers due to thelack of disclosure on stakeholder mechanisms and results.

4. Research methodData was collected from the sustainability/State of Environment (SoE)/annual reports of563 local councils’ web sites, from six states and one mainland territory in Australia, forthe year 2009-2010. Data collection limitations included inaccessibility/non-availabilityof web sites for 16 local councils and non-availability of 2009-2010 reports in 24 localcouncils. These local councils were mainly from regional and outback areas. The contentanalysis of reports aimed at identification of local councils that were engaging with theirstakeholders in the development of the sustainability reports and, investigation of theextent of stakeholder engagement in sustainability reporting disclosures. In order toidentify such local councils, a general overview of 523 local councils’ reports wasundertaken. This general view in the first instance identified the local councils who werereporting on their sustainability issues and, subsequently, the local councils thatengaged with their stakeholders in the sustainability reporting process.

Having identified the local councils that were engaging with their stakeholders in thedevelopment of sustainability reports, a further study was undertaken on these localcouncils to determine the extent of their disclosures. This study involved the construction ofa stakeholder engagement index (Table II). The index was comprised of seven stakeholderengagement indicators. This index is comprehensive as it is based on the majorframeworks identified in prior literature as discussed in the preceding section. In providingthe first available empirical evidence of stakeholder engagement in sustainability reportingin the public sector, the elements of this framework were considered adequate and completebut flexible enough to enable their expansion in light of different contexts and subsequentdevelopments in engagement and reporting approaches. The analysis focused on the“inclusion/exclusion” of stakeholder engagement indicators in the sustainability reports.Each of the seven stakeholder engagement indicators are discussed below.

Stakeholder identificationThis indicator considers whether or not an organisation defines and identifies itskey stakeholders. The indicator also seeks disclosures on stakeholders involved, thenumber of groups involved, key attributes of stakeholder groups and the relationshipof each stakeholder group with the local council.

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Basis for stakeholder identification and selectionThis indicator examines disclosures on the process and method ofidentification and selection of stakeholders for sustainability reporting. The variouscategories of stakeholders are, for example: primary or secondary; key or wider; andlevel of interest (perceived) noticed.

Approaches/media used for stakeholder engagementThis indicator seeks disclosures on the range of media/methods being used by local councilsto involve stakeholders such as surveys, community forums, focus groups, advisory panelsand meetings. It also records the frequency and degree of stakeholder engagement.

Key concerns and issues raised through stakeholder engagementThis indicator categorises disclosures on the nature of key concerns and issues raisedthrough stakeholder engagement; how these concerns and issues were addressed; andwhether or not stakeholder comments, concerns and questions were quoted insustainability reports.

Evidence of stakeholder engagementThis indicator identifies evidence of stakeholder engagement in the sustainabilityreports of the local councils. This evidence can be in the form of case studies describingthe purpose of stakeholder engagement, how stakeholders were engaged, thenumber of participants involved and the outcomes of stakeholder engagement.This indicator includes other evidence such as photographs and assurance ofstakeholder engagement.

No. Stakeholder engagement indicators Sub-components of each indicator

1. Stakeholder identification Definition of “stakeholder”Stakeholder listKey attributes of stakeholder groupsRelationship to the reporting organisation

2. Basis for stakeholder identification andselection

Differentiation: key/widerMethod of identificationLevel of interest (perceived) noticed

3. Media and approaches used for stakeholderengagement

Media used for engagementDegree of stakeholder involvementFrequency of stakeholder engagement

4. Key concerns and issues raised throughstakeholder engagement

Nature of issues and concernsStakeholder comments/concerns/questions quotedConcerns and issues addressed

5. Evidence of stakeholder engagement Case studies on stakeholder engagementPhotographs/picturesAssurance of stakeholder engagement

6. Future targets for stakeholder engagement Future target settingReport on last year’s targets

7. Opportunities for feedback Feedback welcomedFeedback form providedContact details/email/web siteExplanation on use of feedback

Table II.Stakeholderengagement index

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Future targets for stakeholder engagementThis indicator evaluates whether or not the local councils set targets for stakeholderengagement and thereafter measure and report their performance against set targets.

Opportunities for feedbackThis indicator is measured by determining whether or not the local council has aprocess for stakeholders to provide feedback. It also focuses on different feedbackopportunities provided to stakeholders such as a feedback form, contact details,encouragement for feedback and an explanation on feedback use.

5. Findings and discussionAnalysis of state-wide disclosures on stakeholder engagement in sustainability reportingby local councilsThis section analyses the disclosures on stakeholder engagement in the development ofsustainability reports in Australian states and territories. The initial finding is that avery small percentage of local councils currently report on stakeholder engagement inthe sustainability reporting process (Table III). In most cases, engagement with thestakeholders was found to be in relation to planning, policy formulation,decision-making and sustainability actions. Local councils in four states providedinformation about their initiatives to involve stakeholders only while preparingsustainability reports. NSW was found to have the highest number local councils(13.42 percent) that were making these disclosures. Queensland, Victoria and WesternAustralia each had one local council reporting on the involvement with stakeholders inthe development of their sustainability reports.

Twenty-three local councils throughout Australia were found to be reporting onstakeholder engagement for sustainability reporting. All of these local councils

State

No. of localcouncils inAustraliaa

No. of localcouncil reportsstudied in each

state

No. of localcouncils

reporting onsustainability

issues

No. of localcouncils

reporting onstakeholder

engagement insustainability

reports

Percentage oflocal councilsreporting onstakeholderengagement

NSW 152 150 149 20 13.42Queensland 73 63 33 1 3.03South Australia 74 68 67 0 0Tasmania 29 29 28 0 0Victoria 79 79 79 1 1.26Western Australia 140 122 35 1 2.85Northern Territory 16 12 11 0 0Total 563 523 402 23 5.72

Source: aState and territory local government association web sites; Queensland figures fromDepartment of Local Government, Queensland Government; NSW figures from Division of LocalGovernment, Department of Premier and Cabinet; Western Australia figures from Department ofLocal Government, Government of Western Australia; Northern Territory figures from Department ofHousing, Local Government and Regional Services, Northern Territory Government

Table III.Local councils reporting

on stakeholderengagement in

sustainability reporting

Disclosures onstakeholderengagement

65

highlighted in their reports the significance of involving stakeholders during thedevelopment of sustainability reports. Some examples of disclosures by local councilsthat underpinned the role of stakeholder engagement in the preparation of asustainability report are:

Community involvement is an integral component in the development of SoE reporting [. . .]In partnership with the local community; Council has developed 31 sustainability indicatorsthat best represent how the community wants progress toward environmental sustainabilitymeasured.

[. . .] City Council recognises that the SoE is a useful environmental reporting tool thatbenefits from the input of the other organisations, groups and the general public. Counciltherefore encourages community input and consultation for the compilation of the report.

Analysis of level of disclosures on stakeholder engagement indicatorsAfter the identification of local councils that are disclosing their initiatives onstakeholder engagement for sustainability reporting, an extensive analysis of the levelof stakeholder engagement disclosures was conducted in terms of what and howinformation was being reported. This analysis was undertaken for 23 local councilsidentified in the state-wide analysis of disclosures on stakeholder engagement insustainability reporting.

Table IV highlights the percentage of local councils disclosing information againsteach stakeholder engagement indicator and its sub-components. This percentage hasbeen calculated on the basis of the total number of local councils out of 23 local councilsfound to be disclosing information on various aspects of stakeholder engagement insustainability reporting. The overall disclosure percentage indicates the percentage oflocal councils reporting on each of the seven indicators. An overall indicator wasconsidered to be disclosed when one or more of the sub-components of an indicatorwere present in the reports.

Stakeholder identificationThe findings highlight that the majority of local councils were identifying theirstakeholders in their reports. Of the local councils, 82.60 percent explicitly identifiedtheir stakeholders. Therefore, local councils seem to be aware of the audience for theirsustainability reports. However, the reports did not include a definition of “stakeholders”.

The key stakeholders recognised for sustainability reports include: community,local environmental groups, community organisations, employees, local businesses,councillors, suppliers, state and federal government, universities and ratepayers. Ouranalysis also provided evidence of a number of graphical presentations, such asstakeholder mapping being utilised. However, only one council disclosed informationabout the relationship of various stakeholder groups to the organisation and the keyattributes of these stakeholder groups.

Basis for stakeholder identificationOf the local councils, 60.86 percent were found to be disclosing information onstakeholder identification issues related to the basis of stakeholder identificationand selection. Fourteen local councils differentiated between their key

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and wider stakeholders. However, not one local council provided any informationabout the method of stakeholder identification and selection.

Approaches/media used for stakeholder engagementThe study of approaches/media for stakeholder engagement indicator highlights that arange of media are being used by a majority of local councils for engaging withstakeholders. These media included: surveys, workshops, public forum, focus groups,meetings, face-to-face discussions, “bang-the-line” online forums and panels,e-newsletters, local newspapers and direct mail. Some councils were also found to be

No.Stakeholder engagementindicators

Overall percentage of localcouncils disclosing on

indicators

Percentage of local councilsdisclosing on each of theindicator sub-components

1 Stakeholder identification 82.60 Definition of“stakeholder”

4.34

Stakeholder list 82.60Key attributes ofstakeholder groups

4.34

Relationship to thereporting organisation

4.34

2 Basis for stakeholderidentification and selection

60.86 Differentiation: key/wider

60.86

Method of identification 0Level of interest(perceived) noticed

0

3 Media and approaches usedfor stakeholder engagement

91.30 Media used forengagement

91.30

Degree of stakeholderinvolvement

91.30

Frequency ofstakeholder engagement

8.69

4 Key concerns and issuesraised through stakeholderengagement

78.26 Nature of issues andconcerns

78.26

Stakeholder comments/concerns quoted

0

Concerns and issuesaddressed

65.21

5 Evidence of stakeholderengagement

4.34 Case studies onstakeholder engagement

4.34

Photographs/pictures 4.34Assurance ofstakeholder engagement

0

6 Future targets for stakeholderengagement

0 Future target setting 0Report on last year’stargets

0

7 Opportunities for feedback 65.21 Feedback welcomed 13.04Feedback form provided 8.69Contact details/email/web site

65.21

Explanation on use offeedback

8.69

Table IV.Detailed analysis of

stakeholder engagementindicators and its

sub-components

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67

using peer review within the council and public exhibition of a draft report to involveemployees and staff in the preparation of the report. In relation to the degree ofstakeholder involvement in sustainability reporting, the majority of local councils werefound to be undertaking consultations with their stakeholders for reporting.

The councils were also found to be involving the community through communitypartnerships and community education programmes. However, these approaches weremainly used to involve the community in planning, policy formulations andsustainability actions.

Key concerns raised through stakeholder engagementThe findings highlight that the key concerns raised through stakeholder engagementare being reported by the majority of local councils. These concerns were usuallyrelated to social and environmental issues and concerns of the community and otherkey stakeholders. These issues were well addressed by local councils while reportingon sustainability issues.

Findings related to the study of this indicator also suggest that stakeholderengagement was not convenient for all the local councils.

Disclosures of this type indicate the unwillingness of stakeholders to participate inengagement programmes. In this case the council appears to have made sincere efforts,first through sending an invitation to participate in focus group and second, by puttingthe document on exhibition for feedback. However, the council failed to obtaincommunity support in the reporting process in either of these attempts.

Evidence of stakeholder engagementOnly one local council presented evidence of stakeholder engagement in its sustainabilityreport. This evidence included detailed information on how stakeholders were engaged,graphic presentation of community surveys and photographs of community engagement.

Future targets for stakeholder engagementNot one local council disclosed any information on future targets for stakeholderengagement. Thus, local councils appear to be less directed and motivated by futurestakeholder engagement goals.

Opportunities for feedbackThe findings suggest that 65.21 percent of the local councils provided feedbackopportunities to stakeholders in their sustainability reports. Most of these localcouncils provided contact details for feedback or enquiry facilities about sustainabilityreports.

Only two local councils provided an explanation as to why stakeholders shouldrespond and how feedback will be used, and encouraged their stakeholders to providefeedback on the quality of their sustainability reports.

The number of local councils offering a feedback form to their stakeholders was alsofound to be very low. Only two local councils provided a feedback form to theirstakeholders in order to get feedback on various issues related to the sustainabilityreport.

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DiscussionFrom the results of this study it appears that there exists a very low level of disclosureson stakeholder engagement in the development of sustainability reports. However, wecannot conclude that stakeholders are not being engaged by these local councils. It ispossible that stakeholder input is being included in the preparation of sustainabilityreports; it is however, as ACCA (2007) found, going “largely unnoticed by readers dueto lack of disclosures on stakeholder engagement mechanisms and results” because ofthe voluntary disclosure practice. Local councils should make public the process theyuse to gain stakeholder input to provide an account of engagement outcomes.

The study identified 23 Australian local councils that were disclosing their efforts inrelation to stakeholder engagement in the development of sustainability reports. Theshire and regional local councils were found to be more involved with their communityand key stakeholders than the city councils. However, the linguistic approach used indisclosures was found to be relatively similar in local councils. Such similarity couldexist because of regulatory influence and use of consultancy services in developing thereports.

A further examination of disclosures in the identified local councils highlighted theimportance and role of stakeholder engagement in sustainability reporting. Descriptivestakeholder theory was applied to explain who the key stakeholders for local councilsare and how and to what extent this engagement is taking place. The findings of thestudy suggest that the majority of local councils do recognise their key stakeholders. Inaddition to internal stakeholders such as employees, this study highlights theinvolvement of external stakeholders such as the community, environmental groups,ratepayers, universities and local community organisations. Our analysis of councilreports indicates that most of the local councils considered the community as their keystakeholder for the purpose of sustainability reporting. This could be anticipated dueto council’s direct accountability towards residents and ratepayers as mentioned inthese reports. This finding is inconsistent with the key stakeholders recognised byFarneti and Guthrie (2009) in their study of sustainability reporting in AustralianPSOs. They found that sustainability reporting in PSOs is mainly driven by internalstakeholders.

Although stakeholder identification and prioritisation has been highly regarded asan embarking point for the stakeholder engagement process, not one local councildisclosed the specific methods for stakeholder identification. The only informationdisclosed in relation to identification was in the form of a distinction made on whetherthey are addressing key stakeholder groups or the wider audience.

In reference to Arnstein’s Ladder of Participation, the findings of this researchsuggest that the local councils are positioned at the third (informing), fourth (consulting),and fifth (placation) rungs of the ladder (Table V). The stakeholder engagementapproaches included informing techniques such as newsletters, e-newsletters, direct

Rungs of Arnstein’s ladder Stakeholder engagement techniques used

Informing (third) Newsletters, e-newsletters, direct mails and local newspapersConsultation (fourth) Surveys, online forums, peer review, workshops and meetingsPlacation techniques (fifth) Focus groups, public forums and face-to-face discussions

Table V.The position of 23 localcouncils on the basis of

Arnstein’s ladder

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mails and local newspapers; consultation techniques such as surveys, online forums,peer review, workshops and meetings; and placation techniques such as focus groups,public forums and face-to-face discussions. Online forums are emerging as new andefficient media for stakeholder engagement in local councils.

The majority of the local councils used a consultative approach to identify keyconcerns and issues of their stakeholders and gather the feedback on their sustainabilityreports. Cummings (2001) in the study of stakeholder engagement in UK organisationsalso observed consultations as the commonly used level of engagement along withinforming and partnership. However, this form of engagement could restrict theimplementation of suggestions and recommendations provided by stakeholders becausein such a form of engagement, decision and veto lies with the power holder (Arnstein,1969). Not one council reported on the frequency of their stakeholder engagement.

Furthermore, engagement strategies and frameworks were found to be guided bystate-wide legal requirements. A low level of use of international frameworks such asAA1000 and GRI was observed in the reporting practices of these councils. Thisdiversity in engagement and disclosure practices in local councils could reducecomparability. This study also finds that disclosures on stakeholder engagement werehigh in the local councils where state legislation made it mandatory to involvestakeholders in the reporting process. Manetti (2011) in his study of the quality ofstakeholder engagement in sustainability reporting also observed the same regulatoryinfluence on engagement policies. This implies that the majority of local councils engagewith their stakeholders to comply with the mandatory requirements rather thanrecognising them as a key means to attain sustainability goals.

This analysis also highlights complexities and difficulties in the engagementprocess. A lack of stakeholders’ interest to engage was the major difficulty observed inthis study. This contributes to the list of complexities and difficulties identified byUnerman (2007).

6. ConclusionLocal government is the level of governance closest to the people and therefore it canplay a vital role in educating and responding to sustainability issues of the public(Sitarz, 1993). This study highlights the stakeholder engagement initiatives of localcouncils in relation to sustainability issues and the importance of stakeholderengagement in the identification of material sustainability issues and the developmentof sustainability reports.

The research explored the state and extent of stakeholder engagement insustainability reporting in Australian local councils and argued that stakeholderengagement is a critical component in the development of sustainability reports(Gao and Zhang, 2001; GRI, 2006; Unerman, 2007; Manetti, 2011). The findings of thisstudy suggest that the community is the key stakeholder in the local councils inrelation to sustainability concerns, issues and reporting. Stakeholders are beingengaged using two-way communication tools such as consultation and placation. Ourstudy also suggests that stakeholder engagement strategies and processes in localcouncils are driven more by state regulations than international accountabilityframeworks. Hence, there is a need for mandatory regulations nation-wide toencourage local councils to involve stakeholders in sustainability issues in order toattain the goal of sustainable development.

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This paper applied stakeholder theory to observe the extent of and mechanisms forstakeholder engagement in the development of sustainability reports. The findings ofthis study provide information about the current stakeholder engagement mechanismsto practitioners and the engagement opportunities available to stakeholders. Our studyhighlights current stakeholder engagement practices in Australian local councils andextends the limited literature on the role of stakeholder engagement in sustainabilityreporting by providing evidence of stakeholder engagement in Australian local councils.A further in-depth study is required to explore the role of stakeholder engagement insustainability reporting and the motivations for stakeholder engagement insustainability reporting in PSOs. Such a study through the use of research methodssuch as interviews would provide insights into the stakeholder identification andselection process, the extent to which stakeholders’ concerns and issues are incorporatedin sustainability reports, and barriers to stakeholder engagement.

There is scope for expansion of the stakeholder engagement index developed in thispaper with changes in council reporting and engagement in the future. The index canbe adopted and extended in other contexts such as other public sector jurisdictions oreven corporations.

Our study is not without limitations. The non-availability of web sites and reports incertain regional and outback regions suggests that we cannot generalise our findings tosome of these regions. However, we can draw reasonable conclusions from our sample,which represents the majority of local councils in Australia (523 out of 563).

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Tort, L.E. (2010), GRI Reporting in Public Agencies, Global Reporting Initative, Amsterdam.

Corresponding authorSumit K. Lodhia can be contacted at: [email protected]

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