Reporting to Stakeholders
There have been a lot of arguments on reporting to stakeholders by different scholars. There have emerged two schools of thought. The first school is the shareholder concept in corporate responsibility advocating for managers to concentrate on the maximising shareholder value. The second school of thought advocates for managers to concentrate on various stakeholders that affect and are affected by the company. I will discuss why the company should use the stakeholder model of reporting.
Thesis Statement: Reporting to stakeholders is the superior and sustainable concept that the company should practice.
The stakeholder approach has been contested by many scholars. They argue that the only stakeholder the management should consider is the shareholder. When the management ensures the company makes profit by practices that are honest, fair and legal then that is sufficient. (Coelho, McClure & Spry, 2003). To mix capitalism or the importance of profit-making with other goals is confusing to managers. A strong argument put forward is that there is no definite definition on the term stakeholder. The term is not limiting and even extends to non-human entities. In fact the stakeholders are so many that they are divided into two, primary and secondary stakeholders. Furthermore the company does not have social or moral obligations as it is not a human being. The company only has a legal obligation to make profit through fair and honest market practices. By the company concentrating on profit-making, the country benefits since the competitive environment forces the companies to be efficient. The customers have access to cheaper and high variety products. The companies end up using lesser resources in production as they are efficient
Another argument put forward is that reporting to various stakeholders causes managers to be corrupt. They end up being charitable but with ulterior motives. When charity is done with ulterior motives it becomes unethical. Finally, they argue that when managers do not concentrate on making profit it causes great chaos. Questions arise such as how the interests of different stakeholders should be weighed. In times of conflict of stakeholder’s interest, which stakeholder should be highly considered? Focusing on the shareholder removes all these contentious issues. Focusing on the stakeholders by managers may aggravate further the shareholder-manager or the principle-agent method as the manager can take advantage of the shareholders. In schools, the lecturers focus on the stakeholder concept since the school that is more vocal is more likely to receive higher funding.
Focusing on the shareholder as the only stakeholder is not right however. As much as managers have a fiduciary obligation to increase the shareholder’s wealth, there are dangers in using the approach. If the company fulfills only its legal obligations it is dangerous as the law may be immoral or unethical (Post, 2003). The market has flaws such unfair competition barriers to entry into markets and lack of full information to all the parties involved in the transaction. Managers have known the loopholes in the law and realized, they may not be found and the fines and penalties for irresponsible behavior are manageable. In fact the company will pay the penalties. Secondly, the shareholders are investors who can sell their shares in the company and leave. The managers and employees may not have such a portfolio of employees to choose from at any time. Changing jobs is hard and hectic. In considering the stakeholders, the managers do not have to get confused. They should merge or reconcile all the stakeholder’s interests for the long-term sustainability of the company.
It is not true that there is no definite meaning of the term stakeholder. The Stakeholder is a person with a moral legal claim on the company to have his interests considered. The company should be managed for the benefit of its stakeholders namely the customers, suppliers, employees, local communities and owners. Economic considerations should not be the leading factor for managers. The long-term growth of the company is what should be the motivating factor. Immoral decisions by the company lead to the company losing its good reputation and consumer goodwill. There are companies that have had to close down and start afresh with a new name and staffs. Considering all the stakeholders is beneficial. This is due to the increased good reputation in the society once people realize that the company is socially responsible. It helps to increase the customer’s confidence in the company (Defra Editors, 2006). The company gets motivated to cut down its use of energy resources that are not green. The business is more careful in the disposal of its waste and the impact it has on the environment.
In the United Kingdom market, there has been an increasing demand by large companies to have their suppliers give them environmental performance information. The companies require the information in order to satisfy their shareholders. A company that report to all the stakeholders becomes an attractive supplier in the market place. The investor community has also been recently been demanding, at a higher rate, for stakeholder reporting information from companies seeking funding. Investors want to invest in companies that are sustainable in the long-term. Investors feel that stakeholder reporting gives a great indication of how a company is managing its risks and opportunities.
Stakeholder reporting drives a company to be innovative in the production of new goods and services and securing or retaining their customers. There are also advantages in the labor market since the company with great community goodwill is able to secure high caliber employees. There is a great relationship that develops between the company and the government.
Stakeholder Reporting Methods
As the information needs of the different stakeholders came to be recognised, stakeholder reporting was born. This is where a company chooses to regulate itself on its impact on the environment, customers, employers and the community as a whole. It is where a company decides to comply with the ethical and moral obligations of the society. The management wants to be accountable and responsible in their actions to the different stakeholders. It is about promoting the public good or interest. The company actively decides to remove the practices that would adversely affect the environment whether the practices are legal or not. It can be said the company is following the spirit of the law. However, the different stakeholders have to identify the acceptable social behavior. Secondly, there has to be guidelines on the measures and appropriate reporting and techniques (Colman, n,d).
A company at the end of each year releases an annual report to shareholders. The report contains financial information and disclosures that are used by the three primary users, the shareholders, creditors and investors. The requirements and disclosures of these reports are protected by law. In recent years there have been steps made in corporate circles to include issue reports on non-financial information so that all the stakeholder information needs are taken care of (The Stakeholder Alliance Editors, n,d). There are different kinds of information that these stakeholders need. For the community, they are interested in knowing who owns the companies in terms of shareholding so as to know whether related parties or companies adhere to ethical and moral standards. They are also interested in environment and sustainability information such as material usage and waste, emissions of gases and chemicals that are dangerous, radioactive emissions and water consumption. The community is also interested in charitable initiatives undertaken by the company.
There are also certain kinds of information that employees require such as the course of action that a company takes for the staff in the event a plant is closed down. The employees are interested in the company’s future plans on expansion, downsizing and mergers. The employees and even potential employees will be interested in the company policy on retrenchment and layoffs. They will also be interested in unemployment compensation that will be offered to the retrenched staff. The company should also display to employees and the public, the steps they have taken to ensure employee safety in the workplace. How does the company ensure they are not exposed to dangerous elements such as radiation, chemicals, extreme temperatures, smoke and dust? There are other details like compensation rates that employee are interested in, whether the company pays competitively in the market.
The customers of the company are interested in information such as the product information and results of public surveys on product satisfaction from using the product. Do the products have warranties? Are there any risks associated with the use of the product? Are the products and the packaging biodegradable? They are interested in product reviews of the product by media and consumer organisation. The consumer is also interested in items such as after sales service whether it is offered or not by the company and to what extent. The customers are also interested in how the company ensures it takes care of the environment as it conducts its economic activities. The company should assess and identify its stakeholders to see whether they are other stakeholders apart from the ones that are mentioned. The management chooses the kind of information to include in its stakeholder reports. This is after fully assessing and understanding the information needs of the different stakeholders (Stittle, 2003, pp 189).
In the United Kingdom, companies release annual reports to stakeholders highlighting how the year has been in several areas such as business, employment practices, corporate social responsibility, environmental practices and future projects. It is a separate report from the annual report. The reports are usually highly graphic or visual with companies displaying their projects and the people touched directly by the company initiatives. A brief summary usually accompanies the graphs and pictorial data. The report is mainly for the consumers, employees and the community. People usually ask several questions when they look at the stakeholder reports. “The company is doing great things but where is the supportive data?” The company reports need to be comprehensive, giving all the relevant data to the end-users. The people should also not be confused on what the company is communicating. It should be clear. On reading the report the people should be satisfied and consumer goodwill secured by the company. Many companies release the reports and give their employees and customers in hard copy to read. Other stakeholders such as potential investors and the government also have access to the reports. With the wide use of the internet, several companies have opted to put all their stakeholder reports in their websites for anyone to download and get to know what is happening in the company. The report can be supplemented when they are ad hoc disclosures to be made to the public.
The UK government encourages the businesses to engage in CSR reporting in a number of ways. The government has issued guidelines on the corporate social reporting. The government principles advocate for transparency, accountability and credibility in reporting social responsibility. The government gives the guidelines for the key performance indicators that the company will use. The KPI’s have to be quantitative, relevant in terms of impact on the environment, and in terms that are comparable in the whole industry.
Secondly, the government supports the ACCA Sustainability Reporting Awards. These are awards that the ACCA have been giving companies for the last 15 years (ACCA Editors, n, d). The awards seek to reward the companies that have engaged in transparent environmental, social and sustainability reporting and they have excelled at it. The awards are given to the companies that have been innovative in their reporting in CSR. The awards seek to improve reporting on completeness, credibility and the communication of the information presented.
The government supports the Forge 1 and Forge 2 guidelines for financial institutions. FORGE, is a group of the country’s leading financial companies. The guidelines provide financial institutions with a framework for setting up an environmental management system. At the end of the Forge report, the financial companies are also provided with environmental labeling, sustainable development and climate change information and how it affects financial institutions widely used standard for sustainability reporting. The GRI guidelines are widely accepted as they have been formulated by many different stakeholders all over the world. GRI offers guidelines that the companies should follow in Sustainability Reporting.
The government has also enhanced its business review requirements. The enhanced requirements have worked to advance the concept of the enlightened shareholder who understands that the business is more likely to be long-term and sustainable if it pays attention to the way it interacts with the environment. It is now mandatory for companies to prepare a business review. This review will form part of the director’s annual report.
The businesses therefore have all the mechanisms in place to assist them prepare a comprehensive and quality reports to the stakeholders.
ACCA Editors (n, d) “ACCA Sustainability Reporting Awards”. ACCA. Accessed 23rd
April, 2011.< http://www.accaglobal.com/vpalgore/acca_approach/asra>
Coelho, P., McClure, J. and Spry, J. (2003) “The Social Responsibility of Corporate
Management: A Classic Critique” American Journal of Business, Spring, Vol. 18, No. 1, pp 15-24
Colman, Robert(n, d). “Satisfied Stakeholders.” CMA Management. Accessed 23rd April, 2011.
Defra Editors (2006) “Environmental Performance Key Indicators: Reporting Guidelines
for UK Business”. Accessed 23rd April, 2011. www.defra.gov.uk
Post, F. (2003) Response to “The Social Responsibility of Corporate Management: A Classical
Critique” American Journal of Business, Spring, Vol. 18, No. 1, pp 25-36.
Stittle, John (2003). Annual Reports: Delivering your Corporate Message to Stakeholders.
United Kingdom: Gower Publishing Company.
The Stakeholder Alliance Editors (n, d) “The Sunshine Standards” Accessed 24rd April, 2011.