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“Environmental and sustainability reporting and assurance are becoming more main-stream as stakeholders demand information from companies beyond their financial performance.” Analyze and discuss the change of the corporation’s focus described above in the context of stakeholder theory and positive accounting theory.
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The statement that CSR reporting has become an established notion as a stakeholder of the organization demand more information from it holds very much true. The analysis of this statement has been done on the basis of two theories as explained below.
The stakeholder theory was introduced by SRI, i.e. Stanford Research Institute. This theory is based on the assumption that the success of an organization depends upon its ability to manage its relationship with its interested parties, i.e. its stakeholders (Elijido-Ten, 2005). A good relationship with the stakeholders is of extreme importance because, without their support, the very existence of the organization will be in danger. The firm will not be able to create value for the shareholders if the interest of stakeholders is not being protected. This theory criticizes shareholders theory which emphasizes upon maximization of shareholder's wealth as a key to the success of the firm and argues that the failure to consider the impact of an organization’s decisions, objectives, policies and strategies on its stakeholders can cause loss to it (Baumfield, 2016).
An organization is perceived as an accumulation of contracts whether explicit or implicit between the organizations and its interested parties, i.e. shareholders, customers, suppliers, government, media, proposed investors, creditors, employees etc. (Elijido-Ten, 2005). An organization can not survive if the interest of these parties' interest is not satisfied. Being a good corporate citizen, it becomes the moral responsibility of an organization to meet the interest of these parties (Baumfield, 2016). Freeman has discussed two basic approaches for an organization to act in a moral manner. One is a deontological ethical approach, and second is the teleological approach (Tony Ike Nwanji, 2005). The first approach states that an organization should act in a rational manner and should not harm any stakeholder in any way. It should be a self-imposed duty to act ethically. The second is a teleological ethical approach which states that judgement of a moral action should be done on the basis of its consequences. An action which is going to benefit the majority of stakeholders should be adopted than the one which benefits less number of stakeholders (Tony Ike Nwanji, 2005).
As cited in (Baumfield, 2016), Frooman has discussed the reason for following stakeholder theory. According to him if organization don't meet the needs of its stakeholders, they can gain power and use it in the way of resource control, usage strategies and influence pathways for the attainment of their objectives.
Stakeholder theory proposes the composition of the board of directors in such a manner so as to ensure good corporate governance as well as environmental and sustainability reporting and assurance. Since the board of directors is the highest governing body, therefore it becomes their duty to ensure the corporate governance in such a way that the legitimate rights of stakeholders, who have made an investment in the organization in various forms, are being protected (Silvia Ayuso, 2007).
There are a number of determinants of the social and environmental performance of an organization which are given below:
So stakeholder theory has a broader perspective than the shareholder theory. Since the very success of an organization depends upon the stakeholders so the organizations should serve the broader societal interest than creating value for shareholders only. It is because of the recognition of the importance of social and environmental performance only that the Corporation law of many countries has made mandatory for the companies to perform social activities. Ethically social performance should be a voluntary initiative on the part of companies.
Positive accounting theory has given a different perspective of an organization’s social and environmental disclosure. This theory is based on the concept of rational choice and emphasizes self-motive as a basis for all economic decisions. This theory claims that self-interest is a basic rationale for the organization's social performance (Setyorini & Ishak, 2012). The organization will indulge in social and environmental performance only if it would have a favourable impact on its wealth.
The researchers on the basis of positive accounting theory have identified three motives for an organization's social and environmental performance which can be
(i) Bonus Plan: According to Watts and Zimmerman, the managers of the firm with a bonus plan would want to increase the reported profits of the organization so as to increase their bonus. So they will always choose those activities which will shift future earnings to the current period. Some researchers have found a direct association between an organization’s social and environmental performance and bonus based compensation plans (Setyorini & Ishak, 2012).
(ii) Debt-equity hypothesis: According to this hypothesis, the managers of the organization having a large debt-equity ratio will choose those activities which will shift future earning to the current period (Milne, 2002). As mentioned in (Setyorini & Ishak, 2012), the justification for the same can be
(iii) Political cost and size hypothesis: The political cost is highly associated with the size of an organization (Milne, 2002). The companies with greater size in terms of its operations, as well as reported earnings, have a greater probability of drawing the attention of media and becoming the target of political action. So the managers of these firms are likely to choose the actions that shift their current profits to a future period. Investment in social and environmental activities is the best avenue to achieve this motive. Such investment, on the one hand, will decrease their reported profits, and on the other hand, they will also counter the effect of political actions and enable them to sustain them their reputation in the market.