Accounting Management Decisions - Part A

Niall Fitzgerald, the Former CEO at Unilever, correctly quoted that "Corporate social responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it... because it is good for our business". It simply says that corporate social responsibility is good for the business and this is what the aim of formulating the policies of CSR at managerial and regulatory levels.

Stakeholder Engagement

The above statement can be better understood with the concept of stakeholder engagement. It is a process through which an organization establishes communication with its main stakeholders which not only includes the shareholders, investors, creditors and clients of the company but also the society and the environment as a whole. The primary purpose of the stakeholder engagement theory is enhancement of accountability and achievement of desired goals and targets. The growth in the corporate social responsibility (CSR) activities is evident and thus the companies are essentially required to remain social proactive by considering that proper and efficient engagement with stakeholders can enhance the profitability as well as sustainability of the company.

The concept of stakeholder engagement aims at identification of important matters related to the stakeholders and that impacts them substantially. Therefore, management is required to provide feedbacks and updates on corporate strategies and performance. It requires management to discover the ways things can be changed to the key stakeholders. Apart from this, stakeholder engagement also includes managing and monitoring satisfaction levels and contributions of stakeholders.

Corporate Social Reporting

Corporate social responsibility is a self regulatory and implemented concept that makes a for-profit entity to become socially accountable including all of its stakeholders. By implementing CSR guidelines into the entity, also known as corporate citizenship, corporations acknowledges the impact they are make on various aspects of the society which duly includes economics, social aspects, environmental measures, etc.

CSR engagement means, an entity in the ordinary course of their business are required to operate in a way that not only harm the environment and the society, but enhance it. Also, if some negative impacts are caused, then it is required to make disclosures to the stakeholders through various means including financial reports. CSR is a broader concept and through CSR programs, volunteer efforts and philanthropy, the businesses can benefit the environment and the society and boost their brands at the same time.

Benefits of Engaging with Stakeholders

  • Trust Building: Genuine efforts towards stakeholders engagement results in improving relations amongst the stakeholders and the management of the company. It can help in diffusing the prevailing tensions and thus the potential problems can be solved more easily.
  • Risk Management: Engagement with company’s stakeholders’ results in a smoother operating environment for the company. It reveals critical information which is substantially important in the decision-making process of the company.
  • Brand Enhancement: With active stakeholders’ engagement, the corporation will be able to improve its reputation and visibility. Stakeholders including investors, customers, etc. positively see such engagement in the market.
  • Improved Productivity: Better engagement with stakeholders helps in identifying the areas where entity can perform more efficiently. Moreover, the employees with greater voice at work place started generating higher morale.
  • Strategic Opportunities: Efficient stakeholders’ engagement helps the entity in identifying fresh market segments and business opportunities.
  • Partnerships: With better engagement with stakeholders, companies become able to pool various resources that help in achieving a mutual goal.
  • Increased Investment: Effective stakeholder engagement and greater transparency can result in investors trust building and generates easy funds for the company.

Methods of Engagement

  1. Disclose or Communicate: Sharing of material data information with stakeholders, helps in trust building, influencing employees and seducing investors. It also demonstrate a willingness to engage with greater transparency
  2. Participate or Consult: The corporations that asks their stakeholders’ opinion and consider while making decision for the company demonstrates that it values the feedback and advice of its stakeholder.
  3. Negotiation and Partnership: It is important to create collaboration amongst various parties on an area of mutual interest. Through this, the stakeholders and company reduce risks and achieve synergies by combining areas of expertise and resources.
  4. Empower: Company provides its stakeholders the responsibility to influence the operational decisions or the corporate governance

Identification of Stakeholders to Whom Management Should Address

The term stakeholder is referring towards an individual or a group of individual or entities that have the capacity to impacts the organization either positively or negatively. They are generally categorized in two criteria based on the impact which can be either direct or indirect. Stakeholders include the following:

Economic or Primary Stakeholders

Direct impact through entity’s decisions

External or Secondary Stakeholders

Indirect impact through entity’s decisions

  • Owners
  • Employees
  • Shareholders or Investors
  • Creditors
  • Suppliers / Vendors
  • Clients or Consumers or Customers
  • Distributors and Contractors
  • Governments and Community
  • NGOs or Civil Society
  • Unions and Cooperatives
  • Trade and Industry Associations
  • Competitors
  • Media and Academic Institutions

The list mentioned above is not an exhaustive list, because every entity has a differential set of stakeholders which is based on entity’s industry, business model, size, stage of growth, geography, etc.

Accounting theories addressing stakeholder engagement

  • Stakeholder Theory: It has dual branch including both managerial and ethical. The theory aims at addressing various issues that are in association with the relationship with the stakeholders of the organization.
  • Institutional Theory: This theory explains various processes, organizational forms and practices that have eventually become institutionalized or similar within social infrastructure. It says that entities exists in a specific institutional environment are prone to show similarities due to existence of various normative, mimetic and coercive, pressures. The process of showing similarities is called isomorphism.
  • Legitimacy Theory: This theory proposes that business entities are required to conduct their operations within the limitations and rules and regulations of their respective societies. It is the responsibility of the organization to comply with societal rules and regulations and respect their bounds and this is referred to as the ‘legitimacy’.

Responsibility of the Firm

The above discussed three accounting theories impose the relevant responsibilities of the business organizations towards society, environment and their stakeholders. The stakeholder’s theory talks about ethical duties while fulfilling managerial responsibilities which include providing nonfinancial disclosures like information about the impacts the company is making upon environment as result of various corporate activities.

The legitimacy theory talks about business entities needs to conduct their operations within the norms and bounds of their societies and environments. It is the responsibility of the organization to comply with societal rules and regulations and respect their bounds and this is referred to as the legitimacy.

Accounting Management Decisions - Part B

Milton Friedman’s statement “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”, seems to be very controversial as it just bother about the profits of the company and totally avoids the corporate social responsibility which is not an obligation rather a responsibility to return back to the society and environment that you has taken from them.

Friedman with the above statement introduced the theory called stockholder theory or shareholder theory which holds that a firm's main responsibility is to its shareholders. He said shareholders are the primary economic engines to run a business entity and thus the entity is socially responsible to the group of shareholders only. And to serve the shareholders properly, it is required to provide them with greater returns and while generating greater returns, the firm can put the society and the environment at cost. IT was argued that the when the shareholders get their returns, they can decide about social initiatives that are required to taken, and management in between has no responsibility which has been appointed or formulated by the shareholders explicitly for the purpose of business.

At this point it will be best to quote Mahatma Gandhi which states that “Earth provides enough to satisfy every man’s need, but not every man’s greed” and the views of Freidman reflect greed. According to him CSR activities are undertaken by the management of the company and its executives for their personal interest at the expense of the shareholders of the entity, and he even went on to say that in a free enterprise society, CSR reflects an inappropriate use of corporate funds.

However, Freidman intentionally or unknowingly missed various facts, also these facts might not considered relaxant in that period of time (around 5 decades before) for example taking the example of climatic risk which is not only relevant but are asked by the investors and stakeholders as it has the capacity to potentially affect the business.

Climate risks are the changes in the climatic patterns or the natural disasters that are capable of causing substantial damage and harm to properties and assets. Thus the business organizations have started considering, measuring and calculating the risks related to climate and nature. Broadly the financial risk related to climate can be divided into two categories: transitional risks and physical risks.

With climate related risks, the executives measures the possible damages that can be happened to the infrastructure, the crops, etc. and the assessment of risks that are going to be arise in the form of like shortage of resource, migration, political disruptions, supply chain disruption and more. 

But the theories Freidman propagated as agency theories were totally neglected since the early 1980s and started adopting the framework known as ‘Corporate Social Performance’ (CSP) which was combining the philosophy and principles of societal and environmental needs while considering and fulfilling the economic responsibilities towards business and its stakeholders.

Humans and humanity has witnessed substantial progress and development over periods, but it is evident that all such development has occurred at the cost of key elements of the life support system of the earth. The degradation of environment is unprecedented on scale that has altered the primary characteristics of the dynamics of ecosystems. The current human era belongs to technology and digitalization and to consumerism where wealth and growth are being achieved at the expense of greater social inequality, in fact social disintegration. It is evident that the paths of such transformations are non-sustainable and are able to cause substantial threats to societal norms and bounds. Therefore, it is required to understand that the economic and financial measures cannot go in isolation without environment and social wellbeing and should be collectively considered as three pillars for sustainable development which are inter-dependent. The sustainability or sustainable development can be defined as a concept with three pillars including social, environment and economic as shown in the below figure (Figure 2). That means sustainable development cannot be achieved in isolation because it is based on an integrated framework of the above mentioned three pillars that are linked together in an imperative manner that helps in achieving organizational goals while taking care of society, environment and creating strong relationships with stakeholders.

The concept of Sustainability is imperative for all the organization whether profit or not for profit, because it ensures that an organizations are complying the societal norms, bounds and expectations while gaining competitive advantage in the market. Organizations are required to remain focused and motivate social initiatives at workplace that ensure safety and health of workers. Programs should be initiated that foster stable livelihoods and enhance the skill sets of the employees and workers. The transportation infrastructure must be developed in a more sustainable way that produces lesser carbon foot print while delivering higher economic values. It is required that organizations encourage their employees to remain active partners and volunteers in their respective communities and societal surroundings and ensure that measure have been taken towards providing a healthier and sustainable world to the future generations

In order to resolve the constraints in the corporate social responsibility and sustainability (or civil corporation), 5 phases of learning curve has been provided as follows:

  1. The defensive phase: the organizations rejects taking up the tasks which are non ethical or breaks the compliance norms and societal bounds.
  2. The compliance phase: safeguards the business from the risks related to organization’s reputation and legal issues using sustainability rules and regulations.
  3. The managerial phase: it discussed about constraints that are associated to society and environment which are incorporated within the corporate governance framework.
  4. The strategic phase: it is an important phase that basically addresses the societal constraints by displaying organizations’ position in the global level competition and motivates them to implement important corporate strategies.
  5. The ultimate phase: is basically the civil phase where an organization acts as “first-movers” in dealing the social and environmental constraints and exhibit the contributions to resolve such constraints.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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