Voluntary disclosure refers to issue of any information to the public that is non-mandatory. Such information may be an extension of the legal requirements e.g. extra financial information or in relation to subject matter for which there are no compulsory disclosure requirements e.g. non-financial information. The area of social and environmental accounting is governed by little, if any, legislation. Therefore, most of the disclosure made is voluntary. Disclosure is usually proposed by management and approved by directors. Thus, in studying why firms make these voluntary disclosures, we in effect study the behaviour of management and their motivation to make the disclosures. Scholars have advanced several accounting theories that attempt to explain the motivation of firms in making such disclosures. Some of these theories include the Legitimacy theory, Positive Accounting theory, Stakeholder theory and the Institutional Theory. They are discussed below.
The Legitimacy Theory
Woodward proposed that some firms disclose the minimum amount of information required for society to view them as legitimate. Such firms would disclose social and environmental information only in order to conform to societal norms. In the absence of societal expectations, the disclosures may not be made. These managers treat disclosure like a fire fighting exercise, disclosing only to prevent problems, clarify misunderstandings or counter negative developments. Toy manufacturer Mattel Inc. issued corrective information on the financial effect of toy recalls due to high lead content. This is a classic example of a preventive-corrective strategy under the legitimacy theory. Information that is highly descriptive is used by such firms. Their aim is usually defensive on certain issues or for differentiation purposes from other industry players. Oil companies employ this strategy a lot, especially when a 1competitor causes a major oil spill. Poorly performing companies also adopt this theory as they disclose minimal information to avoid reputational damage or litigation.
The Concession theory of the corporation proposes that a firm is a creation of the state and can be revoked by the state. It is thus subject to regulation by the state. Proponents of this theory argue that the firm owes the state/ society duties in return. This duty can be discharged by conforming to society’s norms and rules. If society expects firms to make such disclosures, then non-disclosure would be a breach of the social contract governing the relationship between the firm and society. Societal expectations are not static. They change rapidly and the firm has to keep up. Society also has to be kept informed of the firm’s efforts. This is the role of corporate social responsibility reporting in this theory.
The Positive Accounting Theory
This theory is based on the financial reporting choices available to management. Firms provide social and environmental disclosures in order to avoid political costs. This theory is based on the fact that managers are connected to debt holders and other stakeholders via a series of contracts. Political costs arise when any of the stakeholders believes that their contract has been breached. 4These costs can only be avoided by maintaining a good relationship with the stakeholders involved. Powerful stakeholders like activist groups should particularly be kept satisfied. Large firms also attract a lot of attention from regulatory bodies. This pressure can be compounded by activist groups promoting the view that the corporation is making excessive profits. Corporate Social Responsibility reporting helps the firm in demonstrating its social involvement. This serves to reduce political attention from disgruntled stakeholders hence reducing the associated political costs.2
The Stakeholder Theory
The Stakeholder theory proposes that firms engage in voluntary disclosure of social and environmental information in order to satisfy stakeholders’ information needs. There are various explanations for this. First, the communitarian theory of the firm states that a firm is part of society and should share information with other stakeholders. This information sharing could be motivated by the normative perspective. In this perspective, all the firm’s stakeholders are regarded as equal and the firm is required to treat them as such. 3The firm is equally accountable to all the stakeholders and should meet all their information needs. Voluntary disclosure is thus seen as an effort to meet the information needs of stakeholders. However, all stakeholders cannot be equally satisfied as they all have differing objectives. Alternatively, the management perspective may motivate disclosure. Unlike the normative perspective, managers are seen to concentrate on the interests of powerful stakeholders. Such managers engage in those social and environmental activities preferred by these powerful stakeholders. Afterwards, voluntary disclosure is used to communicate this to them.
3In cases of firms anticipating mergers or acquisitions, voluntary disclosure to satisfy the information needs of finance providers can be done hence effectively reducing the cost of capital. The effectiveness of this has however not been tested.
The Economic Rationality Theory
Friedman was the proponent of this theory. It was among the earliest explanations of voluntary disclosures. Managers are seen to be making voluntary disclosures with ulterior motives. They make disclosures where there is a prospect of economic gain. The major explanation is that businesses are formed to make a profit, and if making corporate social disclosures will result in a profit, then they should be done.3
Some companies provide management with share option schemes. These schemes provide incentives for voluntary disclosure to reduce the market’s misconceptions about the firm. This is based on the idea that the market value of a company represents investor’s views on its future prospects. If investors have a poor attitude towards the company or its management, then its stock will be undervalued. Stock that is undervalued is not beneficial to managers who are option holders. 1They therefore seek to project a positive image to investors through social and environmental disclosures in order to raise the value of the company’s stock. This in turn increases the value of their options.
Investors are becoming increasingly conscious about business ethics. Firms can therefore make voluntary disclosures in order to attract additional investment funds. This is so especially in the West where there are agencies that rate companies ethically.
The Institutional theory
This theory seeks to explain the motivation for social and environmental reporting from an industry perspective. It proposes that industry pressures can push a firm to 4disclose information voluntarily. In a very competitive industry, players will seek to downplay any differentiation between them and their competitors. Thus, if a competitor begins to make voluntary disclosures, then other industry players will most likely follow suit. 5This is mimetic. However, if the firm does not mimic the actions of the first movers, then it risks negative publicity or loss of the support of major stakeholders.
Industry players can also agree to make disclosures above the required threshold in order to ward off extra legislation or government control. They want to make their self regulation appear legitimate. This has worked in some industries, by minimising government legislation which would be expensive for the industry players to comply with. Alternatively, the firms might be seeking legalization of some actions. Providing voluntary disclosure on such will make them seem legitimate, hence drawing government attention.
The Capital Markets Transactions Theory
This motive applies to those firms that are stock exchange listed. Researchers discovered those investors’ perceptions about companies that were about to issue new equity or debentures were quite important to management. Managers of such firms would then be motivated to make additional disclosures in an attempt to do away with or reduce the information asymmetry. The voluntary disclosures also reduce the premium demanded by investors for information risk.
There are firms that make voluntary disclosures in order to win prestigious awards. These reporting awards make the firm seem professional and serve to increase its goodwill. Large customers may also be attracted by such awards. The most common of these awards is the ACCA award for reporting. Many firms would like to win this and other awards, motivating them to make voluntary disclosures.
Management could have a belief in accountability and reporting that prompts them to make the voluntary disclosures. Such managers believe that people’s information 5needs should be satisfied. 2Deegan cautions, “Unfortunately, it is unlikely that this view would be the most dominant view in most business organizations operating within the capitalist system.” Borrowing requirements are becoming more stringent by the day. Banks and other lending institutions may require the firm to provide certain information concerning their social and environmental activities. This may be part of the lender’s risk management principles and policies.
Voluntary social and environmental reporting is an aspect of management behaviour. Human behaviour is erratic and cannot be modelled. Therefore, none of these theories can comprehensively explain management’s motivation to make the disclosures. Often, it is a combination of various theories that explains the motivation. 2Deegan said, “Of course there could be several motivations simultaneously driving organizations to report social and environmental information and expecting that one motivation might dominate all others might be unrealistic. Indeed, many of the above mentioned are interrelated. “
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Hambrick, D, Upper-echelons theory: An update, Academy of Management Review, Vol. 32, no. 2, 2007, 334-343.
Skinner, D, Why Firms Voluntarily Disclose Bad News, Journal of Accounting Research, Vol. 32, No. 4, 1994. , Pp 38–61
Unerman, D, Financial Accounting Theory, Oxford University Press, Oxford, 2006.
Webb, H, The association between disclosure, distress and failure. Journal of Business Ethics, Vol. 75, no. 4, 2007, 301-314.
- D. Hambrick, Upper-echelons theory: An update, Academy of Management Review, Vol. 32, no. 2, 2007, 334-343.
- D. Skinner, Why Firms Voluntarily Disclose Bad News, Journal of Accounting Research, Vol. 32, No. 4, 1994. , Pp 38–61
- D. Unerman, Financial Accounting Theory, Oxford University Press, Oxford, 2006.
- H. Webb, The association between disclosure, distress and failure. Journal of Business Ethics, Vol. 75, no. 4, 2007, 301-314.
- D. Craig, The Legitimising Effect Of social Environmental Disclosures- A Theoretical Foundation, Accounting Auditing And Accountability Journal Vol. 15, No. 3, 2002, Pp 282-340