What does the notion of legitimacy and social contract have to do with corporate disclosure policies?

 

This chapter divided Stakeholder Theory into the ethical branch and the managerial branch. Explain the differences between the two branches in terms of the alternative perspectives about when information will, or should, be produced by an organisation.

In publicly released reports a number of organisations are referring to their 'licence to operate'. What do you think they mean by this, and is there a theoretical perspective that can explain what this term means

If a major Australian mining company reports record profits, is this profit figure misleading if the same company has polluted various river systems and has emitted various toxic substances into the air, but has not placed a cost on these externalities?

When an organization decides to enter in a competitive business market it needs to set general objective of achieving its goal along with social impact in society, to sustain. Legitimacy theory focuses on organization's social and environmental reporting. To build trust in society, the organization needs to follow socially constructed regulations. It suggests, records and discloses information that will enhance their organization's image to be more legitimate.

Social contract theory acts as a binding force between an organization and society. It provides mutual interest and regulation by disclosing organization's true activities and society providing with capital and availability of resources for its smooth operation. Whereas, Legitimacy theory provides with rules and procedures to build and implement social and environmental disclosures in order to meet social contract objective.

The stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. Stakeholder theory looks at the relationships between an organization and others in its internal and external environment. It also looks at how these connections influence how the business conducts its activities. Stakeholder acts as a person or group that can affect or be affected by an organization. Stakeholders can come from inside or outside of the business. Examples customers, employees, stockholders, suppliers, non-profit groups, government, and the local community, among many others.

Stakeholder theory suggests that the purpose of a business is to create as much value as possible for stakeholders. In order to succeed and be sustainable over time executives must keep the interests of customers, suppliers, employees, communities and shareholders aligned and going in the same direction. Innovation is required to keep these interests aligned is more important than the easy strategy of trading off the interests of stakeholders against each other. Therefore by managing stakeholders, executives will also create as much value as possible for shareholders and other financiers.

There are two branches of stakeholder theory:

·        Ethical (moral) or normative branch and.

·        Positive (managerial) branch.

The ethical branch of Stakeholder Theory

The moral and normative perspective of Stakeholder Theory argues that all stakeholders have the right to be treated fairly by an organization, and that issues of stakeholder power are not directly relevant. All stakeholders have rights to get fair treatment by an organization, and it have no direct relationship with stakeholder's power. Any identifiable group or individual who can affect the achievement of an organization's objectives, or it is affected by the achievement of an organization's objectives.

The Managerial Branch of Stakeholder Theory

The managerial branch of stakeholder theory perspectives attempt to explain when corporate management will be likely to attend to the expectations of particular stakeholders. Within the stakeholder theory, the organization is also considered to be part of the wider social system, but this perspective theory specifically considers the different stakeholder groups within society and how they should best be managed if the organization is to survive.

License to operate. Grant of permission to undertake a trade or carry out a business activity, subject to regulation or supervision by the licensing authority. Licenses are granted by state or federal agencies, and also by private concerns, as when a business authorizes another to use its name as a franchise operator.

Meaning of Externalities-

Externalities are the impact, whether positive or negative, of any activity, on the party who is not associated with the activity. Externalities may be in the form of cost or benefit.

Reason for the ignorance of externalities in financial accounting practices is -

1. The nature of financial accounting that is the subject is more concerned about financial data.

2. If it does not affect the company / organization directly or indirectly, it is not recognized in the accounts. Since, externalities are not affecting the organization, they are not accounted for.

If a major Australian mining company reports record profits, this profit figure is MISLEADING, if the same company has polluted various river systems and has emitted toxic substances into the air, and has not placed a cost on these externalities.

Keeping in mind, the effect of the pollutants, it is very important to penalize the company if it crosses the standards. The company is also obligated towards the society and environment.

The profits are also misleading as there are chances that the company may suffer the legal implications in near future. Though financially, the profits are not misleading but considering the social obligation, the profits are misleading.