The Concept of Voluntary Disclosure, Accountability, Legitimacy and Stakeholder Theories - Coursework Example

AFM301: Voluntary Disclosure College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: The Concept of Voluntary Disclosure Corporate governance is fortified by transparency and disclosure. The corporate world has experienced a number of scandals that have led to corporate failures owing to deficient or inadequate corporate disclosures. Moreover, the business environment has evolved and continues to evolve amid emerging developments such as financial liberalisation, globalisation, as well as technological improvements. These developments necessitate companies to ever more seek to connect with external parties to keep up with quick growth and competition. According to Healy and Palepu (2001), corporate disclosures play a vital part in disseminating information to the important parties out of the organisation (creditors, shareholders, analysts, potential investors, suppliers, and others) since they rely on such information to evaluate a company, inform subjective estimates, and make effective decisions on whether to invest their funds in a company. Therefore, disclosure is a very important tool that companies use to connect to different stakeholders and in guaranteeing effective resource allocation in society and shrinking the information asymmetry stuck between a company and its stakeholders. In the accounting literature disclosure is defined as “informing the public by financial statements of the firm” (Ağca & Önder, 2007) or “the communication of economic information, whether financial or nonfinancial, quantitative or otherwise concerning a company’s financial position and performance” (Owusu-Ansah, 1998). Corporate disclosure can either be mandatory and voluntary. Mandatory disclosure entails the information disclosed as demanded by legal requirements and legislations. Voluntary disclosure consist of any information released in addition to the mandatory disclosure. Meek et al. (1995) define voluntary disclosure as “free choices on the part of company managements to offer accounting plus other information believed to be relevant to the decision needs of users of their annual reports.” It may also include information “suggested by an authoritative code or organisation” (Hassan & Marston, 2010). In view of the fact that corporate reporting guidelines aim at providing users with the minimum amount of information that can facilitate effective decisions making, voluntary disclosure is intended to fill in the gap left by the mandatory reporting procedures that are ostensibly inadequate in satisfying the user’s needs. The conventional system of financial reporting generally provides historical information, and in some industries, this system may well not sufficiently represent the precise complexity of a firm’s actions. Therefore, managers ought to voluntarily disclose additional information that would gratify the requirements of different stakeholders. Moreover, voluntary disclosure aims to arrange for a rich interpretation to stakeholders regarding the company’s long-standing sustainability (Boesso & Kumar, 2007). This information is conveyed to stakeholders either directly (through financial reports and press releases) or indirectly (through financial intermediaries such as banks or information intermediaries such as financial analysts) (Healy & Palepu, 2001). Accountability, Legitimacy and Stakeholder Theories Accountability Theory Accountability has several meanings in ethics. As regards corporate governance, accountability refers to the ethical responsibility to account for the actions for which an individual is in charge. The corporate accountability theory defines the nature of the association among corporate managers and the rest of the social order. It sets out the debate as to why companies have a duty to report on their social, environmental, as well as economic performance besides financial performance. The theory emerged in the early `90s as a novel development of sustainability reporting was being introduced in corporate reporting and was adopted mainly by the multinational companies (MNC’s). MNC’s had restructured their disclosure policy and adjacent to the financial information, they started to publicise information as regards their environment, social economic performance (voluntary disclosure) (Ağca & Önder, 2007). Stakeholder Theory The stakeholder theory speaks of the relationships concerning an organisation and the different interested parties, both in and out of the organisation. It addresses the demands of particular groups in the public and their capacity to pressure the organisation. The stakeholder theory is centred on the principle that a company’s with stronger relations with stakeholders will easily be able to meet up its business objectives. The theory underwrites voluntary disclosure by conveying additional business opinions as to why a company is duty-bound to work in the direction of sustainable development. Moreover, stakeholder theory tries to communicate a vital enquiry in an orderly manner regarding the stakeholder groups that deserve or call for attention from the management attention, and which do not? (Yi et al. 2011). The stakeholder theory recognises the self-motivated and intricate dealings between companies and their stakeholders that as well take in accountability and responsibility. The two bases of accountability under the stakeholder theory are (1) ethical accountability, and (2) managerial accountability. The stakeholder theory contributes to the function of management in attending to the interests of the company, which may well be seen as keeping a balance between competing stakeholder groups. This depends on the status credited to the stakeholder, which, in turn, is dependent upon the level of stakeholder power. Essentially, the management perceives those on whom the company depends for resources to be more significant stakeholders (Magness, 2006). Legitimacy Theory Legitimacy theory explains the connection between an organisation and the society at large in terms of a “social contract” (Yi et al. 2011). The theory presumes that a company should not exist if its values are not being perceived to correspond to those of the society at large where it operates. Therefore, the management is required to disclose information that would change the external users’ perception as regards their company. This requires organisations to constantly seek to make sure that they operate within the constraints and values of their individual societies (Magness, 2006). According to Lightstone and Driscoll (2008), the annual report is a very the main basis of legitimation through voluntary disclosures provided in different segments of the report. The objective of accounting is to provide users with information that help in decision-making, that is, gratify social interests, therefore, legitimacy theory has been incorporated in accounting lessons as a “means of clarifying what, why, when and how certain objects are addressed by corporate management in their communiqué with external audiences” (Magness, 2006). There are three key strategies of legitimacy theory according to Dowling and Pfeffer (1975): (1) to acclimatise production, objectives and systems of operation to imitate social expectations; (2) to try to modify social descriptions to imitate the organisation’s practices, productions and standards; and (3) to support public ID with socially authentic symbols, morals and associations. Negative or Positive Voluntary Disclosures Positive. Lightstone and Driscoll (2008) state that based on the voluntary disclosure theory, companies most probably will disclose positive news and hold back negative news. Since market players are uncertain as regards the nature of management’s private information, managers will disclose or hold back negative information exceeding a particular threshold level. Positive disclosure is likely to ease the company’s disclosure to imminent social and environmental costs. The significance of voluntarily disclosed information is obvious to users in informing their decision-making process. The users identify and make decisions as to what information is essential and worthwhile, conforming to the observation that the worth and value of financial reporting lie in its helpfulness to users. Moreover, voluntary disclosure theory envisages positive connection between performance and voluntary disclosure (Clarkson et al., 2008). Socio-political theories, such as legitimacy theory and stakeholder theory, view voluntary disclosure as an instrument in managing the associations with stakeholders in addressing their demands or general demands. Cochlear Ltd.’s Voluntary Disclosure Voluntary disclosure Page number Identified theory/theories Positive or negative Historical summary of financial data for the last 10 years. This indicates how the company has been performing financially in the last 10 years. 4  Legitimacy Positive Mission statement. It outlines the purpose for which Cochlear exists. 6,8  Legitimacy Positive Introduction of new products. Outlines the innovative products introduced by the company as part of its strategy. 6,11  Legitimacy Positive Environmental and social reporting. It outlines the company’s accountability to the environment and society. 6 Accountability, Legitimacy Positive Information about employee workplace health and safety. Outlines the measures put in place to improve the workplace health and safety 10 Stakeholder Positive Information on community involvement. Outlines partnerships and support to the community. 9 Stakeholder Positive Name, age, education/qualifications and business experience of directors 12 Stakeholder Positive Senior management responsibilities, experience and background 13,14 Stakeholder Positive Indication of employee turnover. Indicates the rate at which employees leave the company. 10 Stakeholder Negative The first three disclosures can be linked to the legitimacy theory. This is to ensure that the company operates within the bounds and standards of society. Cochlear is using such disclosures are ‘public images’ to as a legitimisation strategy to prove its value to society and other stakeholders. The fourth disclosure can be explained by both the accountability theory and the legitimacy theory. By reporting on environmental and societal issues, Cochlear is showing responsibility, which also is a form of legitimisation. The last five disclosures can be linked to the stakeholder theory. By making these disclosure the management at Cochlear are trying to give attention to the groups within society that they consider to be the most important and that deserve their attention. The company considers their resources to be more critical, and therefore, endeavours to satisfy their demands. Conclusion Cochlear made more positive disclosures over negative disclosures with a very high proportion of 8:1. This proportion corresponds to my expectation regarding the voluntary disclosures the company would make. This implies that the company relies very much on voluntary disclosures. Accounting literature supports that voluntary disclosures are likely to have a positive impact on the performance of a company, and brings in many other benefits to the company. According to Healy and Palepu (2001), companies that make voluntary disclosures are likely to gain from perceived market benefits such as better stock liquidity, improved information intermediation, lower cost of capital, as well as investor attractiveness (Diamond & Verrechia 1991). The FASB (2001) report states that “effective voluntary disclosure can offer more transparency and understanding as regards the company to investors as well as creditors”. References Ağca, A., and Önder, S. (2007), Voluntary disclosure in Turkey: a study on firms listed in Istanbul stock exchange (ISE), Problems and Perspectives in Management, 5(3), pp. 241–286. Boesso, G., and Kumar, K. (2007), Drivers of corporate voluntary disclosure- a framework and empirical evidence from Italy and the United States, Accounting, Auditing and Accountability Journal, 20(2), pp. 269–296. Clarkson, P.M., Li, Y., Richardson, G.D. and Vasvari F.P. (2008), “Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis”, Accounting, Organizations and Society, 33(4-5), pp. 303-27. Diamond, D. W. and Verrecchia, R. E. (1991), ‘Disclosure, liquidity, and the cost of capital’, The Journal of Finance, 46(4), pp. 1325-1359. Dowling, J. and Pfeffer, J. (1975), “Organizational legitimacy: social values and organizational behaviour”, Pacific Sociological Review, 18(1), pp. 122-136. Financial Accounting Standards Board (FASB), (2001), Improving business reporting: insights into enhancing voluntary disclosure steering committee report, Business Reporting Research Project. Hassan, O., and Marston, C. (2010), Disclosure measurement in the empirical accounting literature: a review article, Economics and Finance Working Paper Series, Brunel University, Working Paper No. 10–18. Healy, P. M. and Palepu, K. G. (2001), ‘Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature’, Journal of Accounting and Economics, 31(1-3), pp. 405-440. Lightstone, K., and Driscoll, C. (2008). Disclosing elements of disclosure: a test of legitimacy theory and company ethics, Canadian Journal of Administrative Sciences, 25(1), pp. 7–21. Magness, V. (2006), Strategic posture, financial performance and environmental disclosure: an empirical test of legitimacy theory, Accounting, Auditing and Accountability Journal, 19(4), pp. 540–563. Meek, G. K., Roberts, C. B. and Gray, S. J. (1995), ‘Factors influencing voluntary annual reports disclosures by US, UK and Continental European multinational corporations’, Journal of International Business Studies, 26(3), pp. 555-572. Owusu-Ansah, S. (1998), The impact of corporate attributes on the extent of mandatory disclosure and reporting by listed companies in Zimbabwe, The International Journal of Accounting, 33(5), pp. 605–631. Yi, A., Davey, H., and Eggleton, I.R.C, (2011). Towards a comprehensive theoretical framework for voluntary IC disclosure. Journal of Intellectual Capital, 12 (4), 571 - 585. Read More