1. CORPORATE REPORTING REGULATION AND CORPORATE SCANDALS
Topic
Lecture-16
CORPORATE REPORTING REGULATION AND CORPORATE SCANDALS 8
Readings Reference :
Text chapter 8: Unregulated Corporate Reporting Decisions; Financial Accounting Theory; McGraw-Hill; 2nd Edition; 2006; pp

2. How management determines society’s expectations
Legitimacy Theory proposes a relationship between corporate disclosure and community expectations
Management has been found to rely on the media to provide an insight into community perceptions, with the media being observed to shape community expectations (O’Donovan 1999)
O’Donovan (1999) provided evidence that corporate managers believe that:
the media shapes public concerns
annual report disclosures are a means of winning back the support of the community after adverse media coverage

3. Impact of media attention
Islam and Deegan (2008) reviewed the social and environmental disclosure practices of Nike and Hennes & Mauritz from 1987 to 2005
found a direct relationship between the extent of global news media coverage of a critical nature directed towards particular social issues and the extent of social disclosure in the annual report
Their findings supported a view that:
the media is able to influence community concerns in relation to unobtrusive issues (creates a legitimacy gap)
managers will make disclosure responses to the media attention

4. Legitimacy Theory versus Positive Accounting Theory
Legitimacy Theory has been compared to the Political Cost Hypothesis of PAT
Legitimacy Theory relies on the notion of a ‘social contract’
It does not rely on the economics-based assumption that all action is driven by self-interest and wealth maximisation or make assumptions about the efficiency of markets

5. Ethical (normative) branch of Stakeholder Theory
Two branches of Stakeholder Theory
ethical (moral) or normative branch
positive (managerial) branch
Many similarities between Legitimacy Theory and Stakeholder Theory
should not be treated as two separate theories but two (overlapping) perspectives of the issue set within a ‘political economy’ framework
Ethical (normative) branch of Stakeholder Theory
All stakeholders have the right to be treated fairly by an organisation
Issues of stakeholder power are not directly relevant
Management should manage the organisation for the benefit of all stakeholders
Firm is a vehicle for coordinating stakeholder interests
Management have a fiduciary relationship to all stakeholders

6. Ethical branch of Stakeholder Theory (cont.)
Where interests conflict, business managed to attain optimal balance among them
Each group merits consideration in its own right
Also have a right to be provided with information, even if not used
This perspective of corporate responsibilities is not validated (or rejected) on the basis of empirical observations (that is, these researchers are providing argument about what should be and not what is)

7. Definition of stakeholders
Any identifiable group or individual who can affect the achievement of an organisation’s objectives, or is affected by the achievement of an organisation’s objectives (Freeman & Reed 1983)
There are two branches to the above definition
Proponents of the ethical branch of stakeholder theory would include both branches when identifying stakeholders
Proponents of a managerial perspective of stakeholder theory would only consider the first branch (that is, those stakeholder who can affect the achievement of the firm’s objectives)

8. Primary versus secondary stakeholders
Primary stakeholders
ones without whose continuing participation the corporation cannot survive as a going concern
Secondary stakeholders
those who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival
Ethical branch does not differentiate between primary and secondary stakeholders
In considering rights to information accountability is considered
the duty to provide an account or reckoning of those actions for which one is held responsible
Accountability involves two responsibilities
to undertake certain actions
to provide an account of those actions
Reporting is assumed to be a responsibility rather than demand driven

9. Testing of ethical branch of theory
As the ethical branch embraces normative perspectives about how the organisation should act, it cannot be validated by empirical observation As Donaldson and Preston (1995, p.67) state:
In normative uses, the correspondence between the theory and the observed facts of corporate life is not a significant issue, nor is the association between stakeholder management and conventional performance measures a critical test. Instead a normative theory attempts to interpret the function of, and offer guidance about, the investor-owned corporation on the basis of some underlying moral or philosophical principles.

10. Managerial branch of Stakeholder Theory
By contrast, this branch of stakeholder theory attempts to explain when corporate management will be likely to attend to the expectations of particular (powerful) stakeholders
More organisation-centred
stakeholders identified by the organisation
extent to which organisation believes relationship needs to be managed in interests of the organisation
Research undertaken under the managerial branch of stakeholder theory can be tested with empirical observation
unlike normative ethical branch
Specifically considers the different stakeholder groups within society, and how they should best be managed
not society as a whole like Legitimacy Theory
Expectations of stakeholders considered to impact on operating and disclosure policies

11. The role of information
Stakeholder Power
Organisation will not respond to all stakeholders equally, but to the most powerful
Stakeholder power is a function of the stakeholder’s degree of control over resources required by the organisation
e.g. labour, finance, influential media, ability to legislate, ability to influence consumption of the organisation’s goods and services
Major role of management is to assess the importance of meeting stakeholder demands so as to achieve strategic firm objective
Expectations and power relativities of various stakeholders change over time
Organisation must continually adapt operating and disclosure strategies
The role of information
Information, including financial accounting and social performance information, is a major element employed to manage stakeholders
Used to gain support or approval
Also used to distract their opposition or disapproval

12. Examples of empirical studies
Roberts (1992)
found measures of stakeholder power and their related information needs can provide some explanation of levels and types of corporate social disclosures
Neu, Warsame and Pedwell (1998)
firms more responsive (in terms of corporate environmental disclosure) to the concerns of financial stakeholders and government regulators than to environmentalists
Islam and Deegan (2008)
Garment suppliers in a developing country (Bangladesh) responsive to the expectations of multinational buying companies, with the multinational buying companies in turn being responsive to the expectations of western consumers (who’s expectations about working conditions, child labour, and so on – which are unobtrusive events - are influenced by the western media)

13. Ethical view versus managerial view
By separately considering the two perspectives of Stakeholder theory, it could be construed that management might either be ethically aware, or focused on the survival of the organisation
Management will arguably be driven by both ethical and performance considerations
We need to understand the complementary roles normative and descriptive research play

14. Institutional Theory
Provides an explanation about why organisations tend to take on similar characteristics and form
Particular organisational forms might be adopted in order to bring legitimacy to the organisation
‘Organisations conform because they are rewarded for doing so through increased legitimacy, resources and survival capabilities’ (Scott 1987, p.498)
Provides a complimentary perspective to both legitimacy theory and stakeholder theory
Links organisation practices to societal values
Organisational form tends towards some form of homogeneity
‘deviants’ will have problems gaining or maintaining legitimacy

15. Isomorphism and decoupling
Two main dimensions of Institutional Theory are isomorphism and decoupling
Isomorphism refers to ‘a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions’ (DiMaggio & Powell 1983, p.149)
Three different isomorphic processes
coercive
mimetic
normative

16. Coercive isomorphism
Arises where organisations change their institutional practices because of pressure from those stakeholders upon which the organisation is dependent
Related to the managerial branch of stakeholder theory
Because powerful stakeholders might have similar expectations of other organisations, there will tend to be conformity in practices across organisations, including their reporting practices
Consider how the World Bank has been able to influence reporting practices in developing countries (Neu and Ocampo 2007)

17. Mimetic isomorphism
Organisations often copy other organisation’s practices for competitive advantage and to reduce uncertainty
‘Uncertainty is a powerful force that encourages imitation’ (DiMaggio & Powell 1983, p.151)
Organisations within a particular sector adopt similar practices to those adopted by leading organisations—enhances external stakeholders’ perceptions of the legitimacy of the organisation
Without coercive pressure from stakeholders, it would be unlikely that there would be pressure to mimic others—hence linkage between mimetic and coercive isomorphism

18. Normative isomorphism
Pressures from ‘group norms’ to adopt particular institutional practices
Particular groups with particular training will tend to adopt similar practices—non-compliance could result in sanctions being imposed by ‘the group’
Again, provides a rationale for why reporting approaches, and other corporate processes, tend to take on similar form
Outcomes of isomorphism
Tendency towards similar corporate structures and processes
Isomorphic processes do not necessarily make the organisations more efficient
In practice it is not easy to differentiate between the three types of isomorphism
Strategies might be more about ‘show’ or ‘form’, rather than about substance

19. Decoupling End of topic-8 Thanks for kind participation For example
The practice is not integrated into the organisation’s managerial and organisational process.
Although managers might see a need to be seen to be adopting particular structures and practices, actual organisational practices can be very different from the formally sanctioned and publicly pronounced processes and practices
For example
The organisational image constructed through corporate reports and other disclosures might be one of social and environmental responsibility when the actual managerial imperative is maximisation of profit or shareholder value
End of topic-8
Thanks for kind participation