INTRODUCTION
This work studies the use of graphs, the selection of variables to graph and the construction of
graphs in the sustainability reports of a sample of Italian, Spanish and UK companies quoted
in the STOXX 600. The purpose is to verify if companies adopt impression management
strategies in their disclosure of information with graphs. Two main interpretative shading
devices are analysed, i.e. selectivity and measurement distortion. In the specific, chapter one
explores the role of graphs in companies‟ disclosure, with a particular attention to graphs‟
characteristics and correct construction. Chapter two provides an exhaustive description of
the field of study called impression management, presenting examples and examining why
this strand of financial disclosure has been so widely used by companies‟ management.
Moreover, the theoretical background gives a picture of the various branches of impression
management, its different perspectives of investigation and the related theories, with a
particular focus on presentational management. The chapter finally shows a few examples of
pictures‟ use in the financial statements of some large companies and with a brief presentation
of the core of this research, i.e. interpretative shading in graph‟s disclosure, an argument that
is widely examined in chapter three. In particular, this chapter analyses the diverse
manifestations of interpretative shading in the financial graphs, and for each form of graphical
distortion a review of the empirical studies is provided: the evidence is that the various
authors share the same basic theoretical assumptions, but obtain different results in their
empirical researches. Chapter four discuss the ascent of sustainability reports in the last
years as a new form of information disclosure adopted by the corporations. The companies‟
motivations for reporting on their environmental, social or sustainability policies are
investigated, and the concept of legitimacy theory is introduced. In addition, the chapter
includes a theoretical background on impression management in sustainability reports, in
order to understand how the environmental and social disclosure is affected by management‟s
interests in showing to the public a positive image of the company. The work is concluded
with chapter five, which regards the empirical study conducted on the sustainability reports
of the companies of the sample. This chapter is divided in two parts: the first part is about the
formulation of the hypotheses (selectivity in the use of graphs and distortion in the
construction of graphs) and the descriptive analysis of the results, which provides evidence of
the extent use of graphs and examines their characteristics; in the second part instead the
hypotheses are tested, the results are discussed, and ultimately the final conclusions are
drawn.
CHAPTER 1
GRAPHS IN COMPANY REPORTS
1.1 Why using graphs?
For over 200 years, graphs have been used in many technical and everyday contexts to
communicate information effectively. Voluntary presentation graphics are increasingly used
in the financial reports of large companies in many countries.
This increase in graph usage can be attributed mainly to the changing role of the corporate
report: from a formal, statutory document for shareholders to a major advertising and public
relations document, serving multiple purposes and multiple audiences (Beattie, Jones 2002a).
That is to say, the effectiveness of communication in external financial reporting (such as
corporate annual report) is affected by the difficulties of the various stakeholders in
understanding completely the wide range of information included in the reports: evidence of
this problem of communication is provided by surveys of shareholder‟s use of annual reports,
which demonstrate that, although the annual report is a primary information source, it is not
read thoroughly (Beattie, Jones, 1992). According to Squiers
1
(1989), in fact, the 40% of the
users spend only a few minutes reading an annual report.
This tendency is strictly connected with the growing importance of the visual communication
in the everyday life, since the 50‟s of the last century: a large proportion of the world‟s
population has been exposed to years of visual stimuli such as televisions, movies, computer
games, and advertising.
In a speech in March 1996, President Clinton was alleged to have observed that the average
young person will be exposed to approximately 25000 hours of television during the first 18
years of his or her life: this is the evidence of the pervasive television epistemology of the
late-twentieth-century English-speaking world, whereby “for any discourse to be perceived as
valid, it must be presented in a television format, that is, one that is at once kaleidoscopic,
glamorous and entertaining” (Graves, Flesher, Jordan, 1996)
1
.
As a result, while the art of reading remains important, the pressures which impact daily life,
especially for adult individuals with interests in the financial world, encourage a desire for
summary forms of communication (Courtis, 1997).
In these circumstances, the graphs contained in the reports, being visually appealing, are most
likely to be noticed by the companies several interests group: these interests groups include
1
(Cited in Beattie, Jones, 2000a)
Graphs in company reports
3
investors, lenders, and creditors, but extend to environmental and consumer groups,
employees, and the public at large.
Within the context of corporate annual reporting, chart graphics are often an integral part of
the communication package of information presented to investors and others.
Graphs visually communicate statistical data and relationships using the simultaneous
presentation of symbols, numbers, and words.
These type of graphs are so called user-friendly, because they highlight the most important
and relevant aspects of the firm‟s report, with the aim of minimizing the time the stakeholder
spent on reading the report.
In other words, the visual nature of graphs serves to capture and retain the attention of a
reader who might otherwise pay less attention to a dull looking report.
As Courtis (1997) observed, the probability of accurately conveying messages from sender to
receiver is increased if the appearance of the graphics (including colour, shading, and
dimension) create or expand interest in text and tabular financial information.
Moreover, a reader's perception skills are helped to absorb and understand summary financial
data, which in turn should assert that the messages reinforce and confirm one another. The
ability to understand information can be enhanced through the summarizing effect of graphs.
Information presented in this form reduces the likelihood of information overload. For most
readers, graphical information can be processed by the brain much faster than the same
information presented in quantitative tables.
In addition, readers are generally able to perceive, absorb, and retain information presented in
graphs more easily and more quickly than through either narrative discussions or numerical
tabulation; in practice, information presented graphically is declared to be remembered more
clearly than that presented in numerical tabulation. That is to say, graphs allow the essence of
the meaning to be grasped more quickly.
The advantage of this occurs especially when the subject matter is not particularly familiar.
Nevertheless, when comparisons were extended to consider also the combination of graphs
and tables, research has shown that decision accuracy was significantly higher when tabular
information was accompanied by graphs. These results suggest that when graphs do not
substitute for but are added to tabular information (the usual case in corporate reports), they
facilitate the utilization of information.
By means of graphs, users seem to be able to process a higher number of information and/or
process them more accurately, so that their decision performance is improved.
In addition, the graphical presentation of flows, sequences, and relationships takes less space
than narrative, therefore, reduces the time needed to absorb the data.
Selectivity and measurement distortion of graphs in sustainability reports: a comparative study
4
The spatial aspect of a graph helps to provide memory recall of the information because the
reader can visualize the message or relationship being communicated. Spatial perception is
especially improved when only limited time is available to study the information.
Relationships between variables can be highlighted in graphs through the use of symbols,
colour, and dimensions. Graphs can also reveal patterns, cycles, and underlying trends that
may not be obvious from tables.
For example, think about the graphs of a trend representing the earnings of a firm: it is easy to
notice that this kind of trend is most likely to be remembered if represented as a graph with
historic series; on the contrary, if the trend is expressed only as numbers value, it takes the
reader a larger time of memorization.
In conclusion, graphs can focus attention on and accentuate some aspect of a report: in this
way a richer perspective of data can be achieved, understanding can be improved, and
informed decision-making can be facilitated.
It is clear that under these circumstances the role of the designer, responsible for the
presentation of chart graphics, and the experience of the reader (i.e. his technical knowledge)
are two fundamental factors for the effectiveness of communication through graphs.
As Beattie and Jones (2002a) observe, the communication advantages of graphs are well-
established and are fourfold:
1. graphs attract the reader’s attention: graphs are a voluntary presentational medium
that may be used either to summarize or to present mandatory or voluntary
information. Graphs often repeat, in an good-looking and accessible format,
information that is presented elsewhere in the financial report in tabular form. Such
redundancy reflects the importance placed by management upon these messages.
Moreover, differences in visually perceptible properties, such as length of column or
colour, are readily noticed. Graphs, which are not regulated, can be used to add colour,
interest, and originality to an otherwise tightly controlled financial document. In
conclusion, they can enrich the presentation of the corporate annual report (such visual
representations become “graphical sound bites”);
2. graphs are memorable: pictorial and graphical representations are remembered more
easily and accurately than numbers. As Kosslyn (1989) observe, graphs effectively
exploit the natural perceptual, cognitive, and memory capacities of individual readers;
3. graphs are very effective at communicating financial information: in fact, they
summarize and distil data trends and identify numerical relationships. Patterns, trends,
relationships, and anomalies become more apparent, facilitating comparisons and
Graphs in company reports
5
projections. For the unsophisticated reader, in particular, they may allow easier
understanding than the traditional financial statements;
4. graphs are able to capture the essence of a company’s performance by
highlighting a few key financial indicators such as sales, earnings, earnings per share
(EPS), dividends per share (DPS), cash flow, and return on capital employed (ROCE).
The graphical representation has basically two main purposes: to analyse data and to
present/communicate information to an audience. In this study, we will focus on the
communication of information, although both purposes are important.
1.2 Graphs characteristics
As Kosslyn (1989) observe, there are numerous and varied ways in which people illustrate
ideas or concepts graphically.
In this study we will consider only graphs, as the most constrained form, with at least two
scales always being required and values being associated via a “paired with” relation that is
always symmetrical. Graphs represent greater quantities of the measured substance by greater
area, longer lines, or more of some other visual dimension; more along a visual continuum
represents more of the symbolized entity. Thus, by this usage a “pie chart” is actually a graph.
A graph is described in terms of a set of components and relations among them.
We will consider only the basic level of analysis of the graphic constituents because it is the
one that is as general as possible while still having as many similar members as possible.
The constituents used in this level are called:
the background: it is a pattern over which the other components of the display are
presented. The background serves no fundamental role in communicating the specific
information conveyed by a chart or graph; if the background were removed, the chart or
graph would still communicate the same information. Although a given background is not
a necessary part of a chart or graph, sometimes a patterned background, such as a
photograph , can serve to emphasise the information in a chart or graph (e.g. dead soldiers
in a graph about the horrors of war). A patterned background can also interfere with ability
to read a display, as will be discussed shortly;
the framework: the framework represents the kinds of entities being related (e.g. year and
waste generated), but does not specify the particular information about them
communicated by the display (e.g. the amount of waste generated per year). The
Selectivity and measurement distortion of graphs in sustainability reports: a comparative study
6
framework often has two parts: the outer framework extends to the edges of the display
and serves the role just described, the inner framework is nested within the outer one and
often intersects elements of the specifier that indicated specific values of the outer
framework (e.g. the function in a line graph);
the specifier: the specifier conveys the particular information about the entities
represented by the framework. The specifier serves to map parts of the framework to other
parts of the framework. In graphs the specifier is often a line or bars which pair values on
the x and y axes delineated by the framework. In charts the specifier material often consists
of directed arrows connecting boxes and nodes;
the labels: the labels are formed of letters, words, numbers, or pictures and provide an
interpretation of a line or a region (which is a component of either the framework or the
specifier).
So these elements are the graph‟s necessary components and need to be designed properly for
its correct construction.
FIGURE 1.1 – The basic level constituents of graphs
Source: adapted from Kosslyn (1989, pag. 4)
1.3 Principles of graph design and construction
Courtis (1997) underlines how many of the problems that can arise with graphs result from
improper construction. Missing or imprecise titles, axis labels, and legends, as well as non-
horizontal lettering, full capitalization of words, and varying type-face and type-size can
induce misinterpretation to the reader. The absence of gridlines can make it difficult to
identify data values while too many gridlines can cause the background to become distracting.
The use of multiple scales or non-arithmetical scales on the vertical axis can confuse non-
Graphs in company reports
7
sophisticated readers about their true meaning. Similarly, readers can be easily deceived if the
vertical axis on a column chart is not adequately labelled with negative scale numbers, or if
negative value data markers are presented in the same direction as positive value data
markers. Another problem which can alter the visual impression is the width of a data marker
(for example, a bar or column) and the relative width of the space between data markers. A
further difficulty arises if data markers do not begin at the zero baseline. Changes in what is
being represented from one period to the next are exaggerated, and relatively unimportant
changes will be given disproportionate emphasis. Confusion and misinterpretation can also
arise when the absence of numerical labels on axes and gridlines cause readers to suppose the
correct interpretation of the subject matter.
Highly patterned, brightly coloured, or pictorial backgrounds used in graphical presentations
can distract and confuse the reader, and obscure the data. Certain types of shading of data
markers, such as cross-hatching and shadows, can produce optical illusions which obscure or
modify the real message of the data and complicate comparisons.
Even though colour is capable of enhancing communication, the choice of highly contrasting
colours can be a complication. Some colours, such as red, yellow, and purple may have an
emotional significance to the readers from some cultures. The use of too many colours or
various shades of the same colour can make a graph incomprehensible. A pie chart
presentation can be especially confusing where too many segments and too many colours
make it difficult to differentiate relative values. The use of creative visual effects may capture
the attention of readers, but are often impossible to decipher and reconcile with the underlying
data. Finally, the viewing angle can emphasise or de-emphasise the last series of numbers, and
thus alter the data display.
In conclusion, a misleading graph is one which violated any of the five construction
guidelines:
1. use of proper balance scales and a single zero baseline;
2. time values in a time series chart moving from left to right on the horizontal scale, or pie
sectors in a descending sequence;
3. use of clear negative numbers;
4. use of creative visual effects cautiously;
5. careful choice of the number of years and number of sectors to be presented.
CHAPTER 2
IMPRESSION MANAGEMENT
2.1 Impression management: definition
Like we have discussed in the previous chapter, the extent of voluntary information disclosed
in the corporate annual report has increased over the last two decades as managers have
exploited the annual report‟s potential as a major public relations and promotional
opportunity. Voluntary information is particularly important because management is provided
with an occasion to partially set their own financial reporting agendas (Beattie, Jones, 1997,
pag. 33-34): in practice, management has an incentive to manipulate the corporate annual
report to present a self interested view of corporate performance, and this phenomenon is
called impression management.
TABLE 2.1 – Some definitions of impression management
SOME DEFINITIONS OF IMPRESSION MANAGEMENT
“Impression management is the conscious or unconscious attempt to control images that are
projected in real or imagined social interactions” (Schlenker, 1980)
2
“Impression management refers to the process by which individuals attempt to control the
impressions others form of them” (Leary, Kowalsky, 1990)
3
“Impression management is a strand of the financial disclosure literature that examines
manager’s attempts to manage the interpretation of financial reports” (Neu, 1991)
4
“Impression management is the attempt to present and highlight by visual and textual strategy
only the memorable facts or message the company wishes to portray” (Preston, Wright, Young,
1996, pag. 119)
“Impression management is a field of study, within social psychology, studying how individuals
present themselves to others to be perceived favourable by others” (Hooghiemstra, 2000)
5
“Impression management is an attempt to control and manipulate the impression conveyed to
users of accounting information” (Clatworthy, Jones, 2001)
5
“Impression management is a vehicle to strategically manipulate the perceptions and decisions
of stakeholders” (Yuthas et al., 2002)
5
“Impression management can be viewed as the tendency for individuals or organisations to use
data selectively so as to present themselves in a favourable light” (Clatworthy, Jones, 2006,
pag. 494)
2
(Cited in Hooghiemstra, 2000, pag. 60)
3
(Cited in Clatworthy, Jones, 2006, pag. 494)
4
(Cited in Godfrey, Mather, Ramsay, 2003, pag. 96)
5
(Cited in Merkl-Davies, Brennan, 2007, pag. 3)
Impression management
9
The opportunity for impression management in corporate reports is increasing. Narrative
disclosures have become longer and more sophisticated over the last few years: according to
the Arthur Andersen (2000) survey of 100 listed UK companies, narrative material occupies
57 percent of the annual report in 2000, as compared with 45 percent in 1996. Narrative
annual report sections provide “almost twice the amount of…information as do the basic
financial statements” (Smith, Taffler, 2000)
6
.
This growing importance of descriptive sections in corporate documents provides firms with
the opportunity to overcome information asymmetries by presenting more detailed
information and explanation, thus increasing their decision-usefulness. However, they also
offer an opportunity for presenting financial performance and prospects in the best possible
light, therefore leading to the opposite effect. Moreover, impression management is also
facilitated in that corporate narratives are largely unregulated.
2.1.1 Impression management: examples
There are three very peculiar examples of impression management, one different from
another, that explain clearly how a company tries to emphasize a particular information
instead of another to influence the reader‟s perception.
In “Beyond the boring grey: the construction of the colourful accountant” (Jeacle, 2007),
the author examines the recruitment literature of the big four accounting firms (Deloitte and
Touche, Ernst and Young, KPMG, PricewaterhouseCoopers) and six of the professional
institutes (the American Institute of Certified Public Accountants, the Institute of Chartered
Accountants in Australia, the Institute of Chartered Accountants in England and Wales, the
Institute of Chartered Accountants in Ireland, the Institute of Chartered Accountants in
Scotland and the Chartered Institute of Management accountants) in an attempt to find out the
techniques deployed by the profession to hide the ghost of the stereotype.
This research starts from a basic assumption: popular culture, in the form of hit television
shows, has firmly entrenched the accountant in a traditional caricature as the stereotype of the
dull and grey suited worker.
In consequence, the accounting profession, in the shape of both the firms and the institutes,
may face somewhat of a battle in the construction of a more colourful character.
In order to do that, companies developed some strategic actions, such as the visual appealing
brochure: the recruitment brochures present a literal image of the trainee as a high flyer, a
“jet-setting” business advisor. The brochures are high quality, glossy and colourful, and give
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(Cited in Merkl-Davies, Brennan, 2007)
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