Web 2.0 initiatives for business reporting: the case of EU financial institutions

Web 2.0 initiatives for business reporting: the case of EU financial institutions Enrique Bonsón, Tomás Escobar and Francisco Flores. University o Huelva, Spain.

Overview • Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure • EU perspective on banks under Basel II and after the recent crisis • An exploratory study • Proposal for a simple index (SI) of web metrics • Lines for further research & Conclusions

Overview • Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure • EU perspective on banks under Basel II & after the recent crisis • An exploratory study • Proposal for a simple index (SI) of web metrics • Lines for further research & Conclusions

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Web 2.0 initiatives, such as the blogosphere, citizen journalism, online participation and voting, content syndication, widgets, social networks and wikis are modifying the delivery of information, products and services in the modern economy. But, at the moment, it seems institutions are not taking advantage of these new instruments for corporate reporting. Tentative usefulness…

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Mashups • A mashup is a coherent combination of pre-existing web services. • For example, an entity would create a Youtube channel and a Facebook account and would then create links to and from them, or include materials in its own corporate website.

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Social networks • Are new platforms for exchanging personal and professional information. • Can constitute a new discussion forum and a special marketplace. • Management can obtain opinions, feedback, e.g. from actual and potential customers or depositors, about the design of financial products, or e.g. from shareholders and the public, about the distribution of profits.

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Blogs … also known as citizen journalism • Managers can follow selected blogs and so monitor the public image of the bank. • Blogs also offer feedback from customers and other stakeholders.

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Popular tagging or folksonomies • Social bookmarking or tagging is the process of assigning one or more freely-selected terms or descriptors to a piece of information; such tags are then shared among users. • From this procedure a form of user-generated metadata is produced. • These sets of metadata or folksonomies are dynamic dictionaries, in contrast to the previous hierarchical concept of taxonomies. • A good example of photo tagging is Flickr.com. • Tagging could be used by the banking industry to rename and classify financial instruments and could be a new approach for assigning External Credit Assessments.

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Wikis • A wiki is a special kind of “reference” website, configured to support entries contributed by many specialist users, which can then be amplified, modified, corrected and amended by other users. • Wikipedia, the on-line open encyclopedia, is the best known of such initiatives. • To contribute, no previous demonstration of expertise is needed: theoretically, any “incorrect” information entered will be identified, revised and corrected, in real time, by a more knowledgeable user. • A financial entity could start its own wiki project on corporate social responsibility actions, asking the users to create the content, register opinions and suggest new initiatives or changes.

Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure Content syndication • The Web offers a new way of broadcasting, which is useful at general shareholders meeting, and for communicating corporate news such as periodic results. • Content of various kinds can be downloaded by users after the event, and re-used in different devices like a cellular phone, an i-pod, etc. • A variety of different instruments are being used, including RSS feeds, widgets, podcasting, webcasting.

EU perspective on banks under Basel II and after the recent crisis Why use Web 2.0 for corporate reporting? Recent studies have shown that • Companies can reach out and build new and strong relationships with old and new stakeholders, by using Web 2.0 tools. • They can also improve the quality of their websites, increasing the levels of transparency.

EU perspective on banks under Basel II and after the recent crisis Why study the banking industry first? • Banks need to reinforce trust and rebuild their public image. • The content of the banks´ corporate websites is regulated under the Basel II agreement, in the EU context, but banks can exploit other web functionalities to generate competitive advantage. • In the current environment of crisis, banks can improve their image and get valuable feedback from the public, for creating new products, changing managerial attitudes and increasing transparency. • They can also transform shareholders, depositors and other stakeholders into co-developers of Web content and opinion. • These Web 2.0 initiatives are already generating great interest in today’s banking industry.

From an EU perspective: banks under Basel II and recent crisis • Several banks report that they are already doing banking 2.0 • Why won´t they do reporting 2.0 as well?

More examples: banking 2.0

Overview • Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure • EU perspective on banks under Basel II and after the recent crisis • An exploratory study • Proposal for a simple index (SI) of web metrics • Lines for further research line & Conclusions

An exploratory study • To date, there have been no systematic studies of the specific disclosure needs of the banking and investment community related to Web 2.0. • It is necessary to get an overall idea of the current status of Web 2.0 corporate disclosure by EU banks, if it exists in any form. • The sample studied comprises the 56 principal EU financial entities operating in the banking and investment industry, corresponding to the Banks Supersector of the DJ Stoxx 600 for Europe

Proposal for a simple index (SI) of web metrics

Proposal for a simple index (SI) of web metrics • In compiling information on the corresponding websites, each corporate website (j, j=1,56) has been rated according to the following non-exhaustive Sophistication Index (SI(j)= i, i=0, 14), each component of the SI being a dichotomous (yes/no) variable. • different specific parts of the corporate group website have been analyzed, like Press Rooms, Investor Relations and Sustainability.

Proposing a simple index of web metrics: SI Two classic variables are used to test different hypotheses: the influence of the size of each entity and also its market capitalization float. • H1: The level of Web 2.0 sophistication is positively associated with the size of the entity: The greater the size of theentity, the more resources the company is able to deploy in the development of a high quality website (Bonsón et al., 2008). In fact, when a company reaches a certain level of size, then it tends to formulate a particular strategy of web development and design, and takes into account various dimensions like content, accessibility and navigation quality, among others. ASSETS is the selected proxy for size. • H2: The level of Web 2.0 sophistication is positively associated with the float factor of the entity’s shares: Pirchegger and Wagenhofer (1999) have reported that the float factor is significant for Austrian companies. The more widely dispersed the share ownership of a company, the greater the need for better reporting. FLOAT is the value for the free float shares factor offered by Stoxx (% of shares in hands of shareholders who each individually account for less than 5% of the total share capital).

Proposal for a simple index (SI) of web metrics So, the resulting model proposed for these tests is: SI = 0+1FLOAT+2ASSETS+ε where: SI = total score for a particular company FLOAT = Value of the float factor (%) reported by Stoxx (2009). ASSETS = Size of the company, for which the proxy is “Total assets at 31st December 2008”.

Proposal for a simple index (SI) of web metrics Additionally, we use a Logit model to predict the likelihood of a particular financial entity having a SI value above the average, using the model described below: BINARY_SI = 1 . 1 + e –0-1FLOAT-2ASSETS where: BINARY_SI = Probability of a financial entity having a value of SI above the average.

Proposal for a simple index (SI) of web metrics Discussion: • The results show that, in general, the level of usage of the described Web 2.0 mechanisms is low; a significant proportion of the sample report a value of zero for the entire checklist. • The application of many of these mechanisms is limited. For example, few use Webcasting and on-demand videos, since many companies prefer to use external servers, such as Thomson Reuters services; instead, or additionally, they could use free access websites like Youtube, where they would be able to obtain feedback from the public for each communication.

Proposal for a simple index (SI) of web metrics Discussion: • The results of the logistic estimation support the hypotheses, at a confidence of 93%. There is a positive relationship between size and float and the SI scored. It can be said that the size of the company and the degree of dispersion of its share ownership have some influence on the degree to which it exploits Web 2.0 tools and facilities, or at least on its use of RSS and webcasts. • One of the limitations of this exploration is that the Web 2.0 tools have been searched only in corporate websites. Our findings do not necessarily mean that there are no Internet opinion communities operating outside the corporate site of the entity. For example, it is possible to find public discussions on particular companies at Google Finance, or unofficial Youtube channels. External forums of this kind should be also monitored and evaluated by company management.

Overview • Brief survey of Web 2.0 tools and their potential value to financial institutions for corporate disclosure. • EU perspective on banks under Basel II and after the recent crisis. • An exploratory study. • Proposal for a simple index (SI) of web metrics. • Lines for further research & Conclusions

Lines for further research & Conclusions • The main finding of this exploratory study of the banking sector is that there is a clear lack of strategy in corporate websites now that the Web 2.0 is gathering momentum. • Web 2.0 initiatives exist, but are not associated with other web quality initiatives like navigability or accessibility. This is not a question of resources or technology: some entities that score SI=0 offer a good level of accessibility and e-voting in shareholders meetings. • At first sight, and in agreement with the previous literature, this situation seems due to management’s perceived potential inability to control the information disclosed and to respond to the public feedback potentially generated.

Lines for further research & Conclusions More research questions for the near future: • Is it possible to obtain from the leaders of this sector a list of prospective competitive advantages available from Web 2.0 ? How could such a list be created and validated with the opinion of the main parties involved? Could the Delphi approach be a good research technique for this? • Is it possible to detect synergies or, alternatively, contradictions between the various Web 2.0 mechanisms? How could the inter-dependences between these technologies be detected and managed in a multi-channel reporting perspective? How can we measure and weight the relative importance of each Web 2.0 mechanism for a bank’s reporting strategy?

Lines for further research & Conclusions More research questions for the near future: • Is Web 2.0 more likely to be used for voluntary or compulsory disclosures? • How can we measure the situation (cross-section approach) and also the evolution (time series approach) of the implementation of Web 2.0 by the banks? Could we use the same kind of Sophistication Index in both scenarios? • Can the regulatory authorities and central banks (Federal Reserve, European Central Bank, Bank of Basel, Bank of Japan…) also use these initiatives? Could we have a more participative monetary policy?

Lines for further research & Conclusions More research questions for the near future: • How could the objectives and operations of Working Groups on standards like XBRL, based on qualified consensus around taxonomies, be changed to promote the popularization of folksonomies? Could such integration help to change a situation in which “the fundamentals of accounting—and accounting research—remain as they were a decade earlier” (Vasarhelyi and Alles, 2008)? • What issues arise for a company or institution in administering intellectualproperty rights and managing corporate responsibility in the context of collaborative Web 2.0 reporting and related projects?

Lines for further research & Conclusions • Many challenges will need to be faced in respect of this new online philosophy. For example, there is the question of expertise – how far can online communities be trusted in tagging information and in formulating relevant opinions ,…. • Another aspect will be how to manage intellectual property, legal responsibility, ethics and similar issues in this context. These and other challenges arising from the enhanced “democratization of the WWW”, must be faced in future research and discussion.

Your comments are more than welcome! This is also an invitation to you to collaborate with us. franflores1982@gmail.com Many thanks for your attention!

Web 2.0 initiatives for business reporting: the case of EU financial institutions