Corporate Social Reporting and Theories - Literature review Example

CORPORATE SOCIAL REPORTING: TOOL TO DISCHARGE CORPORATE ACCOUNTABILITY OR TO ENHANCE MANAGERIAL CAPTURE? Corporate Social Reporting: Tool to Discharge Corporate Accountability or to Enhance Managerial Capture? Course Instructor Date Executive Summary Today, most of the firms are voluntarily submitting annual sustainable reports, depending on their goals. This discourse focuses on explaining whether or not corporate social reporting guarantees corporate responsibility or improves managerial capture. In providing rational justification, the stakeholder, legitimacy, and institutional theories have been utilized and discussed in length. In that case, the main section of the paper discusses the theories, their advantages and drawbacks, and how they relate to corporate social reporting. It also gives a limelight to how the theories have been used in explaining the concept of accountability to the stakeholders and the managerial capture. Finally, the last section sums up the entire paper and the findings. Table of Contents Corporate Social Reporting: Tool to Discharge Corporate Accountability or to Enhance Managerial Capture? Introduction The modern environment is characterized by an increase in corporate social responsibility (CSR) reporting and related activities. There has been immense interest with regard to reporting and accounting on environmental and social issues. It is widely understood that non-financial related reporting heightens environmental concerns and scandals based on corporate governance increased organization’s need to be accountable. Consequently, most firms have prioritized on publishing sustainable reports that aim at integrating the financial, economic, social, as well as environmental performance. They have become more aware on their effect on the environment and the society; hence, they report more on topics such as safety, health, child labor, emissions of carbon dioxide, and the working conditions (Deegan & Unerman 2011). There are numerous reasons why firms need to offer a sustainability report. For instance, research reveals that investors who invest in firms that are socially responsible require those organizations to publish a related report; hence, attracting more investors since there is mutual benefit. There are also trending standards and rules with regard to sustainable reports that offer guidance on how they can be compiled. Some of the guidelines include the Eco Management and Audit Scheme and the International Organization for Standardization among others. Moreover, when companies report on environmental, economic, and social related issues, they are able to monitor their goals as well as progress; hence, compare them with the objectives of sustainability. The legitimacy theory also posits that disclosures in the corporate realm legitimize actions; thus, a firm provides social corporate reporting in an attempt to prove that it is an exemplary corporate citizen. Corporate reporting is also related to accountability as firms have a moral and ethical responsibility towards the stakeholders. This goes to reveal the need to have an assurance statement and why the assurance providers, the management, and the stakeholders need to cooperate (Gray, Owen & Adams 1996). Therefore, this paper focuses on analyzing the concept of corporate social reporting, detailing on whether it is a tool aimed at discharging corporate accountability or enhancing managerial capture. In examining the aforementioned concept and its use, various theories such as legitimacy, institutional, and stakeholder will be discussed in length. The theories reveal that corporate social reporting helps in both guaranteeing accountability and improving on managerial capture. Corporate Social Reporting and Theories This section details various theories that are related to sustainability reporting. It addresses on the need for firms to disclose information regarding environmental, social, and economic issues. The theories will help in explaining on why organizations should offer a sustainability report as well as attach assurance statements. They also explain on whether corporate social reporting is a tool that is aimed at ensuring accountability or enhancing managerial capture. Legitimacy Theory Apart from nations such as Netherlands and Denmark, corporate social reporting is a voluntary activity in other countries that require firms to disclose their environmental concerns publicly. Despite the voluntary nature, there has been a growing trend towards increased social disclosure, begging the question on why firms report on the social issues even when regulation is absent. In that case, the legitimacy theory helps in explaining on the reason and the need for accountability (Brown & Deegan 1998, pp. 22-24). Brown and Deegan (1998) assert that legitimacy theory is based on the notion that corporate disclosure legitimizes actions and reacts to political, social, and economic factors. The model posits that organizations operate in an environment and a society through a social contract that it forms with its stakeholders. In the agreement, the firm agrees to perform desired actions that are accepted in the society to guarantee accountability, survival, and fulfillment of its objectives. The legitimacy theory is important since it reveals that when firms offer social related information, they reduce the legitimacy gap between how they operate and how they would like to be perceived. However, one of the main drawbacks of the theory is that it assumes that the firm perceives a gap or a threat to its legal status. It is also focused more on the perceptions of the management and not necessarily on the accountability to the main stakeholders (Campbell 2000). Deegan, Rankin and Tobin (2002) found strong support for legitimacy theory by using the rate of media attention. They tested on the hypothesis that lower or higher rates of coverage in the print media of the BHP’s environmental and social performance was associated with lower or higher levels of particular related disclosures that were made by the company in their annual report. The findings also supports O’ Donovan’s (2002) conclusion that the corporate management often reacts to print media’s coverage by ensuring that they make social disclosures. More support with regard to the legitimacy theory can be explained using the Exxon Valdez Oil Spill incident. In 1989, the Exxon tanker spilled approximately eleven million gallons, spending six pages in their yearly report explaining on the cleaning expenses and other environmental related issues. Scholars avow that because of such an accident, the public could change their attitude on the oil industry. In that case, the legitimacy theory does suggest that other firms should respond to such an accident by disclosing their environmental aspects and affairs. For that reason, it is sound to argue that legitimacy theory advises businesses to offer social information in an attempt to legitimize their activities. Consequently, they are able to enhance on managerial capture. This means that social reporting is a voluntary means that highlights on the commitment of a firm towards sustainability in a verifiable, comparable, inclusive, and comparable way. By legitimizing their actions, the company provide insights into its managerial motivation with regard to disclosure; hence, embracing the relevant legal, ethical, philanthropic, and financial domains. For that reason, they satisfy the needs of the external as well as the internal stakeholders; thus, achieving an economic advantage and long term success (Deegan & Blomquist 2006). Stakeholder Theory Unlike the legitimacy theory that focuses on voluntary disclosures as a process of legitimating, the stakeholder theory helps in explaining how corporate social reporting helps in discharging corporate accountability to the external audience or the stakeholders. The theory helps in resolving problems related to identifying the goals of corporations and considers the ethical and economical issues that make companies disclose or provide social reporting. Therefore, the theory is advantageous since it enables firms to grow and enhance social wealth. However, one of the main disadvantages is that it has ambiguous features and is unable to clearly define who the stakeholders are, what they expect, their interests, and fails to guide the management on how they can achieve balance between the stakeholders, causing an enforcement challenge. The theory acknowledges the complex as well as the dynamic relationships that involve accountability as well as responsibility. It also enables the identification of the interest groups to whom diverse businesses might be seen to be accountable. Scholars affirm that social reporting or disclosure are used in strategically managing the underlying relationships with the internal as well as the external stakeholders by influencing the rate of demands that originate from diverse constituencies (Laan 2009) Moreover, Deegan and Blomquist (2006) linked the concept of legitimacy with the stakeholder theory, acknowledging the interconnectedness in analyzing social reporting. In their article, they examined the disclosures that were found in the reports of the firms and determined that the type and level of environmental reporting was influenced by the relevant publics in the firms. However, it ought to be understood that the stakeholder approach to social reporting gains, restores, and maintains legitimacy to only the stakeholders whose needs are fully addressed. Institutional Theory The institutional theory focuses on the environmental factors that are such as the societal norms, external norms, requirements, and rules that firms ought to conform to in order to guarantee support as well as legitimacy. The theory depends immensely on social constructs that helps in defining the processes as well as the structure of a firm. One of the main advantages of the theory is that it is promising since it bridges the gap between the firm’s actions and the societal perceptions. However, it has various drawbacks since it places considerable constraints on the management to conform to the requirements, rules, norms, which is deleterious to the firm as it inhibits ingenuity, innovation, diversity, and versatility (Deegan & Unerman 2011). The theory is a rewarding concept and can help in explaining corporate social reporting since the stakeholders play an essential role in determining the legitimacy of the firm. Therefore, according to the theory, social reporting aims at guaranteeing accountability among the stakeholders since they are responsible for setting standards and have more power. Such observations denote that the modern stakeholder practices and involvements are characterized by more responsibility as well as transparency by means of stakeholder dialogue and engagement. This means that the stakeholders have a rational reason to trust their firms because of their sound engagement through comprehensive dialogues with regard to issuing corporate social reports (Gray, Kouhy & Lavers 1995, pp. 56-59). Social reporting a tool to discharge accountability or enhance managerial capture? The aforementioned theories are interrelated and multifaceted perspectives that embody diverse assumptions. Increased research with regard to sustainable reporting has tested and utilized the legitimacy theory. However, the theory has been critiqued since it perceives a gap to its legal status. Nevertheless, if, as literature on corporate social responsibility suggests, the legitimacy theory focuses more on the perceptions of the management and not necessarily the accountability to the stakeholders, then the solicited disclosures require another redefining of the theory that does contrast the power relationships in situations where information is offered rather than demanded (Deegan, Rankin & Tobin 2002). By broadening and developing the scope of corporate social reporting and introducing solicited disclosure, the question on whether voluntary reporting is a guarantee of accountability to the internal as well as the external stakeholders or part of enhancing managerial capture can be best answered with the regard to the type of disclosure. It ought to be understood that seeking managerial motivations to disclose or report information is mostly in relation to human behavior and there is no single theory that can fully explain the decision making constructs as well as processes (Deegan, Ranking & Tobin 2002). In that case, while institutional, legitimacy, and stakeholder theories may compete in explaining in length on the managerial motivation to have voluntary sustainable reporting, they can also help in explaining the phenomenon. In identifying the solicited and the voluntary reporting, the theoretical views critiqued and offered can help in offering a conclusive explanatory power if they are tailored to the type of disclosure (Brown & Deegan 1998). It is undoubtedly that corporate social reporting aims at guaranteeing accountability. According to the stakeholder theory, it helps the companies to deal with the stakeholders and gain a competitive edge. The firms cope with the perceptions of the stakeholder’s views through social reporting, accounting, as well as auditing to build affirmative reputation and ensure trustworthiness. Belal and Roberts (2013) state that recent literature in the corporate social reporting have focused on the need to give voice to the non-managerial stakeholder parties in the process of reporting. In an interview that was conducted in Bangladesh, various semi-structured interviews were carried out. The interviewees believed that the motivation as well as the practice of social reporting in the region was developing due to pressures from global markets. However, concerns were expressed, alleging that due to the social, political, and economic conditions in the country, ineffective as well as premature adoption of strict standards of reporting would lead to corruption and other unfavorable impacts. In that case, most of the people criticize the process of imposing social standards and codes while others support the disclosure concept, which heightens accountability and transparency. This means that although social reporting to an extent may lead to unintended effects such as corruption, it is also important in making sure there is some level of honesty and responsibility (Belal & Roberts 2013). In addition, from the legitimacy and institutional theories, it is obvious that corporate social reporting helps in enhancing managerial capture. Managerial capture is the policy of a firm, which directs to the activities and actions of the management, regarding issues of social reporting. There are two distinct definitions of corporate social responsibility, which are labeled as CSR1 and CSR2. In the former, businesses are seen as activities that are integrated in the society, with an aim of ensuring sustainability. However, CSR2 is based on notion that the society directly impacts on the business. Various scholars have found out that managers interpret CSR in distinct ways and mostly as a means of maximizing the wealth of the shareholders. Most of the managers argue that it is their duty to engage in CSR whereby corporate social responsibility is dependent and not independent of financial or economic success. Therefore, such notion makes social reporting manageable (Gray, Own & Adams 1996). The managerial capture conception has also been supported by Gray, Owen and Adams (1996) who scrutinized the environmental reports as well as the verification statements that had been listed by the Association of Chartered Certified Accountants Environmental Reporting Awards. Through content analysis, they found out that the environmental reports were an additional chore that was derived from the organization’s internal exercises of management. Most of the reports were geared towards managerial capture since they stated that the reports were prepared purposely as a managerial aid. Owen et al (2000) in their survey also revealed that there is managerial capture perspective and conception in corporate social reporting. The survey which included opinion formulators and leading practitioners in the ethical, environmental, and social realm was based on interviews where it was determined that stakeholder communication was present. Consequently, there were impressive statistics in the social reports that supported the statements of the management about corporate performance. According to Adams (2014), this cannot be said to be consistent with the stakeholder inclusion notion under the guidelines of AA1000. Therefore, apart from guaranteeing accountability among and for the stakeholders, corporate social reporting improves managerial capture. Conclusion Various studies have focused on discussing the assurance statements as well as corporate social reporting in the environmental and economic reports. The findings reveal that there is an essence of managerial capture in the process of assurance that causes the providers not to be independent. Numerous theories have been used in explaining on whether corporate social reporting improves managerial capture or guarantees answerability. For instance, the legitimacy theory explains on the reasons why organizations socially report. It is believed that companies that have legitimate actions are more accountable and have an economic advantage over their rivals. The stakeholder and the institutional theories explain further on how organizations are accountable to their stakeholders and vice versa. They conjecture that the stakeholders have more influence and are highly engaged through constructive dialogue. In that case, whether corporate social reporting aims at ensuring accountability towards the stakeholders or improving managerial capture is highly dependent on the type of disclosure and the nature of the firm. Although most scholars argue that social reporting does not increase the rate of accountability in all the firms, there is a bit of evidence to support that it does. However, more research should be conducted on the subject and there is a need for firms to disclose their information in order to heighten trustworthiness and make sure there is a competitive edge. Therefore, it is indubitably that corporate social reporting is a tool that aims at improving managerial capture and heightening the rate of accountability. Reference List Adams, C, 2014, “The Ethical, Social and Environmental Reporting- Performance Portrayal Gap”, Accounting, Auditing, & Accountability Journal, vol. 17, no.5, pp. 731-757. 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Deegan, C & Blomquist, C, 2006, “Stakeholder Influence on Corporate Reporting: an Exploration of the Interaction between WWF-Australia and the Australian Minerals Industry”, Accounting, Organizations and Society, vol. 31, pp. 343-372. Deegan, C & Unerman, J, 2011, Financial Accounting Theory: Second European Edition, Maidenhead, New Delhi: McGraw Hill. Gray, R., Kouhy, R & Lavers, S, 1995, “Corporate Social and Environmental Reporting: A Review of the Literature and a Longitudinal Study of UK Disclosure”, Accounting, Auditing and Accountability Journal, vol. 8, no.2, pp. 47-77. Gray, R.H., Owen, D & Adams, C, 1996, Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Reporting, London, UK: Prentice Hall. Laan, S, 2009, “ The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs “Solicited’ Disclosures”, Australian Accounting Business and Finance Journal, vol. 3, no.4, pp. 14-29. O’ Donovan, G, 2002, “Environmental Disclosures in the Annual Report: Extending the Applicability and Predictive Power of Legitimacy Theory”, Accounting, Auditing & Accountability Journal, vol. 15, no. 3, pp. 344-371. Owen et al, 2000, “The New Social Audits: Accountability, Managerial Capture or the Agenda of Social Champions?,” The European Accounting Review, vol. 9, no. 1, pp. 81-98. Read More