The role of the EU non-financial reporting directive and employee representation in employee-related disclosures

ABSTRACT This study investigates how the European Union (EU) Directive (2014/95) on Non-Financial Reporting and employee representation within the board affects the extent and quality of employee-related disclosures. Using a sample of Swedish firms listed on the Nasdaq OMX Stockholm Exchange, we find that both the Directive and employee representation on the board positively affect the extent and quality of disclosures on employee-related matters. We document that employee-related disclosures are more precise and less uncertain among firms with employee representatives, although the level of uncertainty increases after implementing the Directive. Moreover, our interaction analysis indicates that the Directive and employee representatives affect employee-related disclosures independently. This finding suggests that both internal corporate governance and external regulation are important, and that the Directive ensures a minimum extent of disclosures at firms that lack internal governance mechanisms (i.e. employee representation on their corporate boards).