Enhancing Corporate Image and Credibility with Stakeholders - Essay Example

Corporate Social Reporting According to Adams (2002, 244-245), the main purpose of corporate social and environmental reporting is to enhance corporate image and credibility with stakeholders. Reviewing literature on the factors affecting the extent and nature of ethical, social and environmental reporting, Adams identified key internal contextual factors that influenced corporate social and environmental reporting. Some of the factors that influence corporate social and environmental reporting include internal processes of reporting and view and attitudes of important corporate people to the corporate reporting aspects. The finding of Adam’s study was that the above internal factors affect the quality, quantity, completeness and extensiveness of corporate social and environmental reporting. Regarding the attitudes of corporate leaders in organizations, corporate ethical reporting is considered to be a motivating factor in enhancing corporate image and credibility with stakeholders. In this essay, I agree with this argument. Although some accounting theories suggest that reporting on some bad news would impact negatively on corporate image, this essay suggests that companies have corporate social responsibility to disclose all information about the company to stakeholders even if it is bad news. This responsibility improves the corporate image and credibility of the company before its stakeholders whether the company is reporting bad news or good news. The key requirement of corporate social and environmental reporting is to be sincere, honest, transparent and accountable to the stakeholders as much as possible in order to maintain a long lasting relationship with the stakeholders and create a good corporate image and credibility before them. The first argument of accounting theory that supports this view is the fundamental foundation of accounting principles which suggests that financial accounting information, which is usually provided through financial statements, provide information that can be used by stakeholders to make economic and business decisions. In contrast to Adam’s focus on internal factors affecting financial reporting, some theories suggest that because the purpose of financial reporting is to make business and economic decisions, it should be treated as an externally focused process. In accounting theory financial reporting should provide information used for economic decision making; so it should not be practiced outside the legal, political, economic and social environment. Therefore, various stakeholders should be taken into consideration when preparing financial statements. In other words, companies should provide financial reporting that contains relevant financial information for effective decision making among stakeholders. Accounting theory also suggests that accounting practices should be flexible in order to meet the changing needs of stakeholders. The role of corporate social reporting can also be analyzed using the four assumptions of accounting theory: going concern, periodicity, economic entity, and monetary entity assumptions. According to the economic entity assumptions, it is assumed that business activities of an entity should be separate from the entity and independent of the owner’s actions. In this case, the corporate image and credibility of the entity depends on the independence of the business activities from the activities of the owner. Providing financial reporting that reflect the true financial position of the business allows the stakeholders to understand the performance of the business in order to make appropriate economic decisions regarding their engagements with the business. According to the principle of corporate social responsibility, managers should protect the interests of stakeholders; and one of the ways of doing so is reporting financial performance of the organisation independently in order to enhance the entity’s credibility and corporate image successfully. In terms of the going concern principle, financial managers should prepare financial statements based on the assumption that the business will continue for a long period of time without becoming bankrupt or being dissolved. Stakeholders, especially shareholders, make investment decisions that will guarantee them long term benefits. Therefore, corporate reporting through accounting takes care of interests of stakeholders by using the going concern principle. By assuming that the business will operate for a long time in future, corporate reporting assures stakeholders that their stakeholders that their investments are safe; hence the entity achieves corporate image and credibility in the eyes of stakeholders. The third assumption of accounting theory – monetary unit assumption – suggests that businesses should denominate their financial statements in terms of numerical currency rather than product units or other non-monetary basis. This assumption ensures that it is easier for stakeholders to determine the value of their engagement with the business and evaluate whether their economic decisions on the company are beneficial to them. Therefore, corporate reporting in terms of monetary units enhances corporate image and credibility of entities because stakeholders are able to determine the benefits and costs they gain from their engagements with the company. Lastly, the assumption of periodicity suggests that business activities of an entity are broken down into fiscal periods whereby financial reporting is provided on an annual or monthly basis. This allows stakeholders to examine the performance of a company periodically and analyze the trend of financial performance for the company in order to make appropriate decisions. Stakeholders use periodic financial reports to compare the current performance of the company with the previous years’ performance, and predict the performance of the company in future. If the financial reports provided by the company allows for such periodic comparisons, then the image and credibility of the company with stakeholders will increase because stakeholders will trust the company for good financial reporting statements needed for effective decision making. Corporate social reporting is also considered as a form of corporate social responsibility which is viewed by McGuire et al (2006) as an important determinant of improved financial performance. These authors use the stakeholder theory to argue that low social responsibility leads to poor corporate image and credibility of organisations because stakeholders doubt the ability of the firm to honour its implicit claims and increase explicit costs. Alexander and Bucholtz (1978) also argue that corporate social reporting by entities encourage stakeholders to see the company’s management as a skillful team with their interests at heart. McGuire et al (2006, p.855) further argues that higher corporate social reporting improves the management’s image and allows managers to exchange the costly explicit claims with less costly implicit claims. On the other hand, if the perception of stakeholders about the corporate social reporting of the company declines, the company will experience reduced reputation and credibility in the eyes of the stakeholders. Social corporate reporting also affects the corporate image and credibility of organisations with stakeholders through its affect on firm risk (McGuire et al, 2006, p.868) further. In this case, organisations with low social reporting face significant risks in terms of lawsuits, and fines. Stakeholders perceive these risks as potential causes of failure of the company; hence stakeholders’ perception on the reputation and credibility of the firm will decline. Therefore, instead of considering the financial benefits and costs of corporate social reporting, organisations should focus on the reduced risks associated with corporate social reporting. McGuire et al (2006, p.868) also suggest that accounting measures of return in companies should be sensitive to the perceptions of corporate social responsibility. Since market indexes are subject to manipulation, organizations should use corporate social reporting to provide trusted accounting measures that reflect the true financial performance of the organization. This improves the perception of stakeholders about the corporate social responsibility of the organization; hence increasing the organization’s corporate image and credibility. This is supported by Lev and Zarowin (1999, p.383) who argue that financial reporting deficiencies affect the welfare of firms and investors; hence stakeholders will perceive a poor corporate image and credibility of the firm. Bebbington et al (2004, p.352) argue that there are certain legitimacies, stakeholder benefits and firm reputation achieved through corporate social reporting. One aspect of corporate social reporting is corporate social disclosure which is used by a company to communicate changes of goals, methods and outputs of the company. This ensures that the company meets the company’s expectations. The company provides information about its performance in line with the perception of stakeholders about corporate responsibility of the company. Through corporate reporting, a company brings the perceptions of stakeholders into conformity with organisational performance; hence enhancing corporate image and credibility of stakeholders. Despite the arguments for corporate image and credibility with stakeholders, some authors argue that corporate reporting is motivated by other factors and not corporate image and credibility. Lev and Zarowin (1999, p.383) argues legitimacy theory can be used to explain motivation of corporate reporting. Legitimacy of the company’s performance is the main motivation of corporate reporting (Lev and Zarowin 1999, p.384). A company does not provide corporate reporting to improve its image but to gain legitimacy of its activities and performance. In this case, stakeholder perception is manipulated or deflected using corporate reporting in order to win the trust of the stakeholders and other members of the community. Corporate reporting is also considered by some authors as a costly practice which reduces the profitability of organisations. Such arguments support the idea that companies should only work hard to boost profits without a lot of considerations on corporate image, and in the end such companies will improve the welfare of the society through profits (Lang and Lundholm 1996, p. 481). Company executives suggest that doing the right thing is a product of making profits. Corporate reporting is financial calculation of managers like other business aspects which aim at achieving business objectives, and the main objective of business is to make profits. In conclusion, it is clear that several authors and theories have supported the suggestion that corporate social and environmental reporting is important in enhancing corporate image and credibility with stakeholders. Those who oppose this view suggest that corporate social reporting is just like any other business activity aimed at making profits. However, corporate social reporting influences the perception of stakeholders about the image and credibility of the organization. This is also in the interest of profit-making in the organisation because improved image of the company encourages stakeholders to invest in the company to increase its profits. References list Adams, C.A. 2002. Internal Organisational Factors Influencing Corporate Social and Ethical Reporting beyond Current Theorizing. Accounting, Auditing and Accountability Journal, 15(2), pp. 223-250. Alexander, G., & Bucholtz, R. 1978. Corporate social responsibility and stock market performance. Academy of Management Journal, 21, pp. 479-486. Bebbington, J., Larrinaga, C. and Moneva, J.H. 2008. Corporate social reporting and reputation risk management. Accounting, Auditing and Accountability Journal, 21(3), pp. 337-361. McGuire, J.B., Sundgren, A. and Schneeweis, T. 1988. Corporate Social Responsibility and Firm Financial Performance. The Academy of Management Journal, 31(4), pp. 854-872. Lang, M.H. Lundholm, R.J. 1996. Corporate Disclosure Policy and Analyst Behaviour. The Accounting Review, 71(4), 467-492. Lev, B. and Zarowin, P. 1999. The Boundaries of financial Reporting and How to Extend Them. Journal of Accounting Research, 37(2), pp. 353-385. Read More