Disclosure of Non-Financial Measures - Literature review Example

Disclosure of non-financial measures Non-financial measures in business include factors such as corporate governance, social and environmental impacts that affects the organization during its daily operations. The term disclosure refers to the process whereby all the significant information regarding an organization is exposed especially if it could influence other parties or individuals to invest in the business (Rezaee, 2011). Rezaee (2011) noted that in the current society, most organizations focus more on disclosing their financial reports and ignore other business aspects that could be of concern to the investors and governments. Cohen et al. (2012) noted non-financial performance normally affect investment decisions and management behavior and should be disclosed to the public. The governments can help prevent this by introducing legislations that require organizations to disclose both financial and non-financial information so that those interested in investing in the business can be aware of what they are dealing with. This paper is going to critically discuss the rationale for the government introducing specific disclosure legislations, explain who will benefit in the end from corporate governance, social and environmental impact disclosure legislations and then critically assess the prospects of increased corporate accountability in matters of governance, society and the environment because of introducing the disclosure legislations. All these will be discussed in relation to the three main theories of corporate disclosure regulation, which consist of the public interest theory, private interest theory, and capture interest theory. Rationale for specific disclosure legislations The government has the power to make laws and regulations that govern how businesses should be operated. This fact enables the government to determine the specific disclosure legislations that organizations should display to the investors. The U.S Securities and Exchange Commission (SEC) enforces and monitors all the disclosure laws and regulations. Kieso et al. (2010) stated that the requirements from SEC are of statutory authority and these regulations are subjected amendments and changes. This being the case the government can influence businesses to disclose all the information about their organizations and hence not focusing on financial statements only. The frameworks created by the government enable the businesses compete against one another hence improving the quality of products brought to consumers in the market. As the government changes policies, the organizations have to find a way to change their operations in order to run the business without political interference. Dunning and Lundan (2008) stated that the government can introduce specific disclosure legislations controlling the economic policies in their own large corporations where they act as an example to other businesses by disclosing both financial and non-financial information to the public. This will encourage other enterprises to display all other important information to the investors together with their financial documents. The government can control what is disclosed by businesses by ensuring that all the private shareholders who purchase or invest in large corporations promise to share all the information about their business and ensure that it is published for the public read. This will improve the businesses around the world because of healthy competitions among businesspersons. Bhattacharyya (2006) stated that taxation policies could be implemented by the government to ensure that businesses introduce specific disclosure legislation. This can be done by ensuring that organizations that do not publish all the information about their businesses are highly taxed hence causing an increase in the cost of Company products which lead to low sales. The government through the Monetary Policy Committee can control businesses that do not disclose some information by increasing their interest rates hence raising the costs for the organization to borrow funds hence reducing customer expenditures, which leads to a fall in sales (Ryan and Ryan, 2008). Theories of corporate disclosure relation Public interest theory The public interest theory was developed by Arthur Cecil Pigou who argues that regulation is applied when there is need for the government to save the citizens from unfair or inequitable prices in the market (Maynard, 2013). The public interest theory encourages creation of monopolies in order to protect some large public corporations from competition. According to this theory, the government is the neutral arbitrator since they believe that markets are fragile and hence require regulation. This theory promotes development of regulations that aim to benefit the community members hence reducing cases of unfair market prices. Private interest theory Bailey et al. (2012) stated that individuals involved in the private interest theory are those that own successful organizations in the society. These individuals have the same motivations as the government since they have narrow concepts of self-interests such as fame, power, and wealth. Capture interest theory A Nobel laureate economist known as George Stigler formulated the capture interest theory. This theory shows how a regulatory agency ends up being dominated by the very organizations they are entrusted to regulate. Bangemann (2005) stated that capture interest occurs when an organization formed to act in the public’s interest eventually decides to act in other ways that benefit the business its entitled to regulate rather than the community. Benefits Many individuals in society will gain from the disclosure of non-financial measures hence leading to an increase in economic benefits in successful organizations. Corporate governance Droms and Wright (2010) stated that when the corporate governance is disclosed, investors and governments are able to know the processes, relations, and mechanisms by which organizations are directed and controlled. Disclosure of this information benefits the managers, as they are able show the world the kind of leaders and employees they have. Those who benefit from corporate governance disclosure legislation in the end include community members, shareholders, government institutions, auditors, creditors, and regulators among others (Bushman and Landsman, 2010). Bushman and Landsman (2010) added that disclosure of corporate governance benefits other businesses especially the competitors since they can acquire information from the organization on how to improve their mechanisms to be successful. Social Rich (2012) stated that disclosing social aspects of the business for instance, the number of workers in the organizations, their functions, business values, and ethics enables more investors to be interested in the Company. Businesses that disclose their policies, bribery and anti-corruption issues, high opinion for human rights, and diversity in their managers benefit their organization in the long run because more individuals would interested to work with them hence being ranked among the successful businesses (Langran and Schnitzer,2007). Langran and Schnitzer (2007) also noted that according to the public interest theory, stakeholders value organizations that promote the needs for people in the society by eliminating unfair business practices in the market. Environmental impacts Kourilsky and Walstad (2007) stated that organizations should disclose environmental matters especially information about how they conserve their surrounding environment. Disclosing this information will benefit the business, as this would attract both foreign and local investors, and environmentalists who wish invest in the business, employees, government institutions, non- formal organizations, and industries that would need to use raw materials, recycle waste materials, or use finished products of the business. Achievements of disclosing non-financial measures Vogel and Vogel (2003) stated that disclosing non-financial information to the public increases corporate accountability in matters of corporate governance, societal issues, and environmental matters hence improving economic growth in businesses. Corporate accountability is increased when organizations are supposed to disclose all information about their businesses because they strive to ensure that they have the interests of the community members at heart. According to Bailey et al. (2012), European companies are working towards this directive in order to increase organization’s transparency and performances on social and environmental matters and hence contributing to high rates of employment and economic growth in the end. According to the public and private interest theory, organizations strive to ensure that they meet the needs of the society markets and provide a good environment for the consumers to be interested in the business goods and services. Maynard (2013) noted that disclosing non-financial information enhances corporate accountability and therefore attracting more investors and governments to work with the business. According to the research studies done by Dunning and Lundan (2008), successful governments are those that require their large companies to disclose their relevant management reports, information on policies, risks and outcomes, together with the due diligence they execute and appropriate non-financial indicators that concern social, environmental aspects, employee matters, respect for human rights, diversity and anti-corruption issues. Disclosing financial statements only does not show the real picture of the Company because they may be encouraging corrupt deals and bribery as displayed in the capture interest theory by George Stigler (Droms and Wright, 2010). Transparency and corporate accountability leads to improved economic benefits since they have low finance costs, appeal more investors and retain a talented workforce. Conclusion Disclosure of non-financial measures in business for instance corporate governance, social and environmental impacts leads to improved economic benefits. This is because investors, citizens, and governments interested in the business are able to investigate all aspects of the business using the disclosed information hence confident in the business. The main theories that explain corporate disclosure regulations include the public interest, private interest and capture interest theory. Disclosure of non-financial measures benefits the business itself in the end, investors, creditors, auditors, employees, and customers. These benefits come about due to improved performance in business, low funding costs, reduced disruptions in business operations and better relationships among shareholders and consumers. Individuals in the society benefit from enterprises that manage social challenges and environmental influences in efficient and effective ways. It is therefore clear that introducing disclose legislations in non-financial matters increases corporate accountability in matters of governance, society, and environment. References Bailey, J. A., Gaulin, D. E., Kolodziejczak, S., and Quinn, J. P. (2012). Law firm accounting and financial management. New York, N.Y., Law Journal Press. Bangemann, T. O. (2005). Shared Services in Finance and Accounting. Aldershot, Gower Pub. Bhattacharyya, A. K. (2006). Financial accounting for business managers. 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