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The effects of stakeholder engagement on the
reporting process:
The reliability of social
disclosure
Universiteit van Amsterdam
Sander Boom 10220712
Name of Supervisor: Conor Clune Bachelor Thesis Accountancy & Control
29-06-2015 Final Version
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Statement of Originality
This document is written by Sander Boom who declares to take full
responsibility for the contents of this document.
I declare that the text and the work presented in this document is original
and that no sources other than those mentioned in the text and its references
have been used in creating it.
The Faculty of Economics and Business is responsible solely for the
supervision of completion of the work, not for the contents.
3 Table of Content Summary in Dutch………p.4 Abstract………..p.6 1.Introduction……….p.7 2.Background………..p.9 2.1.Background Introduction………p.9 2.2.License to operate………p.9 2.3.Social disclosure and stakeholder engagement………..p.10 2.4.Stakeholder theory………..p.11 2.5.Legitimacy theory………..p.12 2.6.Closing Summary………p.14 3.Literature Analysis..……….p.15
3.1 Reasons to perform stakeholder engagement………p.15 3.1.1.Stakeholder Power………p.15 3.1.2.Legitimacy………p.17 3.1.3.Cultural differences………..…..p.19 3.1.4.Financial benefits………p.20 3.2 The engagement and disclosure process……….p.22 3.2.1.The stakeholder engagement process………...p.22 3.2.2. Effects of social disclosure on CSR……….p.24 4.Conluding discussion………..p.27 5.References……….p.29
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Summary in Dutch
Het voornaamste doel van bedrijven is om winst te behalen en daarmee waarde te creëren voor de aandeelhouders. In de laatste jaren is het idee dat niet alleen aandeelhouders, maar alle
belanghebbende van een bedrijf, belangrijk zijn sterk gegroeid. De reden hiervoor is dat zonder de goedkeuring van alle ‘stakeholders’ het bedrijf niet haar operationele taken kan uitvoeren. Alle bedrijven hebben daardoor, naast de wettelijke licentie, ook een ‘social license to operate’ nodig. Deze sociale licentie kan door managers bereikt worden als zij de wensen van de stakeholders aanhoren en het resulterende MVO proces in een apart rapport weergeven, genaamd ‘social
disclosure’. De motivatie voor de scriptie is om een oordeel te geven over de huidige vorm van social disclosure. Wanneer de huidige vorm van social disclosure namelijk niet betrouwbaar is, zal het hele proces van stakeholder engagement niet resulteren in het gewenste MVO beleid.
Deze scriptie zal een antwoord geven op de vraag: Heeft de stakeholder engagement in het duurzame audit proces invloed op de kwaliteit en aard van de social disclosure van organisaties? Het proefschrift is gericht op het vinden van de redenen voor managers om stakeholders te betrekken bij het bedrijf, het opstellen van richtlijnen om stakeholder engagement zo goed mogelijk uit te voeren en een overzicht te geven van zowel positieve als negatieve effecten van het huidige social disclosure proces op het MVO beleid. De centrale vraag wordt beantwoord aan de hand van een
literatuuronderzoek.
De algehele conclusie is dat stakeholder engagement wel degelijk effect heeft op de manier van rapporteren. Verschillende motieven zijn gevonden voor managers om stakeholders invloed te laten hebben op beslissingen. Deze motieven en de afwezigheid van wettelijke regelgeving zijn de basis voor verschillen in social disclosure. Hierdoor wordt het onmogelijk voor om het MVO beleid van organisaties te vergelijken.
De belangrijkste redenen voor bedrijven om met hun stakeholders om te gaan zijn in het onderzoek weergegeven. Ten eerste, de mate waarin de belanghebbende informatie en middelen bezitten die voor managers essentieel zijn in het maken van beslissingen wordt gezien als de voornaamste reden om met deze groep in gesprek te gaan. Dit criterium is gebaseerd op de stakeholder theory. Dit is een theorie die ervan uitgaat dat er verschillende groepen stakeholders bestaan die niet allemaal dezelfde invloed kunnen uitoefenen. Volgens deze theorie moeten alleen de belangrijkste groepen voor het bedrijf een stem krijgen ten aanzien van bedrijfsbeslissi ngen.
Daarnaast is de staat van legitimiteit een belangrijke reden om stakeholders bij het bedrijf te betrekken. Een bedrijf kan activiteiten uitoefenen die niet overeenkomen met de normen en
waarden van de gemeenschap en zo de legitimiteit aantasten. Dit kan ook voorkomen wanneer de normen en waarden van de gemeenschap veranderen en de bedrijfsuitvoering hier niet op reageert.
5 Managers zullen dan een strategie moeten vormen die de legitimiteit kan repareren, behouden of in eerste instantie verkrijgen. Wanneer deze strategie niet werkt of de acties kunnen niet
gecommuniceerd worden via social disclosure zal de publieke opinie niet veranderen en kan een bedrijf uiteindelijk de social license to operate kwijt raken.
Financieel voordeel en culturele verschillen zijn niet zozeer op zichzelf staande redenen maar meer een andere benadering van stakeholder power en legitimiteit. Een causaal verband kan
namelijk niet gevonden worden tussen financieel voordeel en MVO. Daarnaast zorgt globalisatie ervoor dat multinationals, met activiteiten in opkomende economieën, te maken hebben met eisen van stakeholders in de westerse wereld.
Vervolgens geeft de scriptie richtlijnen voor het zo goed mogelijk uitvoeren van de
stakeholder engagement. Het eerste criterium waaraan moet worden voldaan is dat stakeholders zo vroeg mogelijk in het proces betrokken moeten worden. Als de beslissingen ten aanzien van de bedrijfsuitvoering meteen al overeenkomen met de wensen van de stakeholders zal dit een langdurige relatie bevorderen. Daarnaast moeten stakeholders over de benodigde kennis beschikken anders zullen zij eerder misleid worden door managers. Als laatste moeten, voordat managers en stakeholders kennis uitwisselen, basisregels voor de deelneming opgesteld worden. Deze kunnen per groep en per bedrijf verschillen en zijn bedoeld om wantrouwen en egoïstisch handelen te voorkomen.
In de laatste paragraven wordt de kwaliteit en de effecten van social disclosure en MVO in het algemeen besproken. De conclusie is dat social disclosure vaak de benodigde kwaliteit mist. Dit komt doordat MVO veel verschillende activiteiten kan bevatten die moeilijk te meten zijn. De rapporten kunnen daardoor niet met elkaar vergeleken worden. Ook neigen managers naar een vorm van MVO waarin alleen de eigenbelangen behartigt worden door middel van manipulatie. Op deze manier wordt MVO niet gebruikt om de samenleving te bevoordelen maar als hulpmiddel om het bedrijf economisch te laten profiteren.
Toekomstig onderzoek naar de mogelijkheid om social disclosure te reguleren is nodig. Alleen dan kunnen de problemen, die besproken zijn in dit literatuuronderzoek, worden opgelost. Nieuwe accounting methodes moeten onderzocht en getest worden omdat traditionele regels niet voldoen. De huidige methodes zijn namelijk gebaseerd op het financiële aspect en falen in het meten van MVO.
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Abstract
The idea that a company needs to engage with their stakeholders in order to stay or become an operating business is a growing concept. In order to achieve the social license to operate companies must participate in a process of stakeholder engagement to find out their stakeholders demands and produce a social disclosure to communicate the CSR activities resulting from the engagement. If the current social disclosures aren’t reliable, the whole process of engagement and CSR will fail.
The thesis will contribute to the literature in providing a judgement about this process. Particularly, this thesis aims at finding all the reasons for managers to engage with their stakeholders, giving guidelines to perform the engagement and outline the effects of current social disclosure and CSR. Therefore, the central question of the thesis is: Does stakeholder involvement in the
sustainability reporting process influence the quality and nature of organizational disclosure? An answer to this question is provided by a literature review.
The overall conclusion of the thesis is that the stakeholder engagement does influence the process of social disclosure. Attempt to provide guidelines for disclosing the CSR activities have failed because a broad set of environmental actions can’t be measured by traditional accounting standards. Thus, due to missing overall standards, certain key aspects influence the stakeholder involvement and social disclosure.
First, managers can have very different motives to engage with their stakeholders and therefore change the nature of the disclosure. The company’s legitimacy and the power of
stakeholders groups are the main reasons for the engagement. Also, financial benefits and cul tural differences have an impact on the engagement process. These reasons result in a social disclosure process that isn’t comparable and, due to conflicting interests of managers and stakeholders, is often used as a manipulating tool for organizations.
Because social disclosure is still the only way to communicate if stakeholders demands and the action towards them are in compliance, future research need to focus on how to regulate this process properly. Overall standards can overcome the problems that this thesis has examined. Research is necessary because the CSR process can’t be disclosed by traditional accounting methods and therefore, a whole new accounting concept should be created and tested.
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1.Introduction
The widely accepted goal of an organization is, in the first place, creating a positive return for their shareholders. An increasing perception however, is that management need to focus not only on their shareholders but also on a wide group of people who can have other than financial in terests. These stakeholders need to be satisfied in order to remain an operating business. Different theories are developed to explain the importance of stakeholder engagement. They are both based on the idea of the social license to operate (Wilburn & Wilburn, 2011). This means that corporations need to involve with their stakeholder to remain an operating business. The decisions that managers make, based on the stakeholders information, can be communicated trough social reporting.
The importance of social reporting has increased in recent years because social responsibility is an overall growing concept. Public opinion is socially aware that business on a global scale can destroy most of the planets resources (O’Donovan, 2002). The stakeholder engagement, social disclosure and management’s social decisions are all related to one another. Stakeholder
engagement is the foundation for managers to make appropriate decisions and the reporting process is the way of communicating the outcomes to the stakeholders and make sure that companies can held responsible for their actions.
In traditional financial accounting, regulations about independent third party involvement resolves the information asymmetry. This information asymmetry, which leads to selfish acting, also exists in the stakeholder/manager relationship (Hill & Jones, 1992). However, the accountability of the environmental actions are still not regulated and social disclosure is a voluntary practice. The motivation for the thesis is to find out if current practices of social disclosure can resolve the information asymmetry problem and make sure that stakeholder engagement results in the desired outcome. In other words, this research will find out if social disclosure can overcome the problems involved with corporate social responsibility and stakeholder engagement.
The thesis aims to provide an answer to the question: Does stakeholder involvement in the sustainability reporting process influence the quality and nature of organizational disclosure? This will give us the effects of stakeholder engagement on the social disclosure in the annual report. Also, the importance of the social disclosure and corporate social responsibility in general will need to explained and evaluated in order to formulate a descent answer. The used method to achieve the goal of the thesis is a literature review.
The contribution of the thesis is to provide a review of the existing literature on stakeholder engagement and social disclosure. First, the reasons for managers to engage with their stakeholder are examined. Second, the effects of the engagement on social disclosure and the corporate social responsibility process are evaluated.
8 The main reasons for companies to engage with stakeholders are : the amount of power stakeholders have and the legitimacy of the company. Stakeholder engagement is highly influenced by the resources that different groups of stakeholders own. If their resources are valuable to the company, managers have a strong desire to engage with them. The overall strategy of management towards the perception of the whole community can have three different purposes: to gain, maintain or repair legitimacy. Cultural differences are becoming less influential because globalisation results in a global society with a similar opinion towards multinationals. At last, financial benefits can’t be considered a reason to involve with stakeholders because causal relations between performance and engagement are not considered reliable.
The effects of stakeholder engagement can be explained by the shortcomings of the current practice of social disclosure. The disclosure itself lacks the quality to communicate environmental actions and existing guidelines doesn’t help to resolve it. The reason is that corporate social
responsibility is almost impossible to measure due to the wide variety of activities. Therefore, social reports can’t be compared amongst companies. This lack of standardisation leads to the problem that managers can capture the CSR definition and use it to achieve only their financial goals through manipulation of the social disclosure.
The current traditional accounting standards doesn’t provide any solution and research indicates that social accounting needs a whole new foundation with new accounting measures. Therefore, further research about the correct way to disclose social activity is necessary. Only then will stakeholder engagement be a fair play between managerial decisions and stakeholder demands.
The thesis will first have an explanatory section called the background. In this section stakeholder and legitimacy theory will be discussed. After that, the key findings are written in the literate review with four reasons why stakeholder should be engaged, the best way to perform stakeholder engagement and the positive and negative opinions on CSR. The thesis will end with and overall conclusion.
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2. Background
2.1 Background Introduction
In this section certain key aspects of the thesis will be explained. The following two paragraphs includes the social license to operate, stakeholder engagement and social disclosure. After that, two different theories, who are based on the importance of stakeholders, are discussed. These theories are called stakeholder theory and legitimacy theory and provide different views of the company’s attitude towards their stakeholders. Finally, a short summary will end this section including the differences between the theories.
2.2 License to operate
Central to the idea that stakeholders are important to a company is the concept of a social license to operate. Wilburn and Wilburn (2011) defines the process of social license to operate as:
A company can only gain a Social License to Operate through the broad acceptance of its activities by society or the local community. Without this approval, a business may not be able to carry on its activities without incurring serious delays and costs (p.4)
It goes beyond the basic regulations and restrictions enforced by law. Evidence comes from different examples of companies, like the Coca Cola division in India, who failed to meet their stakeholders demands (Gunningham et al., 2004). They noticed an increase in costs when companies in different industries failed to react appropriate towards the public opinion. These costs included adjustments to the operating process in order to satisfy the stakeholders expectations. Accordin g to Wilburn and Wilburn (2011), this could result in reduced profits and sometimes even forces a company to leave a specific area in which they operate.
Stakeholders consist of a wide variety of groups. Every individual with an interest in the company can be considered a stakeholder. This means that, in order to achieve a social license to operate, managers must target different groups of stakeholders and decide whether or not to
engage with them. This results in different approaches to the stakeholder engagement in the existing literature.
On the one hand, the stakeholder theory which is based on the concept of finding the groups with the most valuable resources. It means that the small groups of stakeholders doesn’t have to agree with the outcome of the engagement as long as the valuable groups are satisfied (Wilburn & Wilburn, 2011). They found out that, in achieving a social license to operate, the local communities have a strong influence in the decision making process. They are considered the first group that can affect the operating activities of the business.
10 can affect the license to operate (Prno & Slocombe, 2012). It is the managers responsibility to
develop a strategy conform the stakeholders perception as a whole, especially if the company decides to move into a new area (Wilburn & Wilburn, 2011). Thus, the theory makes the difference in the effort it takes from managers to achieve the legitimacy and creating a social license to operate towards society as a whole.
2.3 Social disclosure and stakeholder engagement
Corporate social disclosure is a way of communicating the organizations action towards social responsibility. According to Patten (1992) social disclosure is explained best by non -profitable variables and communicates the pressure stakeholders put on management decisions. This is in the same line as the study of O’Donovan (2002), who uses empirical evidence to explain corporate social disclosure with the main goal of becoming or remaining legitimate (explained in section 2.3). The level of social disclosure also depends on the social awareness of the community, for example stakeholders demand for environmental information . Furthermore, Hunt et al. (2001), argues that the evolvement of social accounting can lead to more transparency, stakeholder accountability and democracy in organizations.
The overall definition of stakeholder engagement is the relationship between companies and their stakeholders to find out what social issues are important. This definition is based on the idea from Reich (1998) that an organization can only exist if society is willing to let them. So both,
stakeholders and organizations, have their reasons to engage. This means that social disclosure is the way of reporting the social decisions that results from the stakeholder/management
communications.
The need for stakeholder engagement and social disclosure can be explained based on the agency theory. This theory states that information asymmetry between managers and shareholders of a company exist because managers can have different goals or interests than, for example, maximizing the shareholders profit (Anderson et al., 2003). The way of communicating these differences is through the company’s results and statements. This partially explains the need of independent disclosure because it can assure that information asymmetry doesn’t exist.
The stakeholder engagement and the agency theory are linked together by Hill and Jones (1992) by their stakeholder-agency model and argue that the same assumptions apply. In this model managers need to monitor all their stakeholder. Both can, as in the agency theory, act in their own best interest if correct information and knowledge is not available. The engagement in this theory has its main focus on finding the most efficient way to optimise the goals of a company and provide this information.
11 involved (Donaldson & Preston, 1995) and play an important role in accomplish these goals.
Stakeholders thus differ in both power and importance and causes friction in the negotiation process of the engagement. The result is that management need to make the most valuable decisions for the company considering the interests of different groups of stakeholders. There are two different theories that describe this process of the stakeholder engagement: The stakeholder theory and the legitimacy theory.
2.4 Stakeholder theory
Stakeholder theory is a model that is based on who the stakeholders of a company are and put them into different groups: internal and external stakeholders. The difference lies in the connection with the firm: internal stakeholder have a financial interest (suppliers, employees and customers), while external have different connections with the firm(governments and political groups). The distinction is made because, according to the theory, not all the stakeholders of a firm possess valuable
resources that a company need and therefore, not all should have the same impact on the firm’s decisions (Donaldson & Preston, 1995).
According to this study, the stakeholders theory’s main function is to describe organizational behaviour, structure and operation throughout its lifetime. Donaldson and Preston (1995) combined different purposes of stakeholder theory in the existing literature and put them into three different types: Empirical/Descriptive, Instrumental and Normative.
First the descriptive uses of the stakeholder theory. This means that the theory is used to describe organizational structure and managerial behaviour, which Donaldson and Preston (1995) called stakeholder management. Some very broad definitions are tested with stakeholder theory like, the company’s essence and what position managers need to take in the process of engaging with the stakeholders. Also, the literature has described and empirically tested the board members and their stakeholder orientation ( Dewhirst & Wang, 1992). They concluded that directors have different stakeholder groups, high stakeholder orientation and are influenced by the function of director itself (CEO or not). At last, stakeholder theory is used to describe the way how firms are actually managed with the fact that stakeholder groups influences the managers decisions in mind.
The descriptive way of stakeholder theory is important because it changed the way managers looked at them. Donaldson and Preston(1995) found out that almost 80 percent of the companies who participated, believed that ethical management included both shareholder and stakeholder involvement. This means that, according to the stakeholder theory, certain groups of stakeholders are involved but that a variety of large groups, for example employees or public groups, still can be left out. At last the descriptive function of stakeholder theory have played an important role in certain laws and opinions (Donaldson & Preston, 1995). This resulted in the fact that a company can
12 now be judged by affairs against both shareholders and stakeholders. The descriptive method can’t explain why stakeholders should be involved in the process and why the relationships are relevant.
Therefore, the instrumental view of stakeholder theory is examined. It means that the theory can be used to determine a relationship of cause and effect. The cause and effect relations are mostly tested on stakeholder engagement and the effect on the company’s financial results (Graves & Waddock, 1997). According to Donaldson and Preston (1995), many statistical principles and direct observations are used to link the results of the company to their decisions towards corporate social responsibility. The overall conclusion is that organization who adopted stakeholder management have the same or better financial results.
Obviously, this does not mean that without the stakeholder engagement, these companies would have had worse results. Without the corporate social responsibility the company’s results can still go either good or bad. This is the reason why the direct influences of stakeholder management on financial results are hard to prove. Still, with the limitations, it has been commonly integrated in the literature that involvement with the stakeholders have correlation with the positive financial performance (Donaldson & Preston, 1995).
With the limitations of the instrumental way of defining stakeholder theory in mind, Donaldson and Preston (1995) outlined the normative approach to stakeholder theory. The main difference with the instrumental view is that the normative approach is used for what a management should do because it is the right way, instead of only explain cause and effect relationships. This means that stakeholder theorists believe that it should provide ethical guidelines on how managers should engage or act towards stakeholders and corporate social responsibility.
This approach basically extends the group of internal and external stakeholders to the ones that have influence on management decisions towards corporate social responsibility and the one s that don’t possess the resources to be meaningful to the company. Also, managers are argued to be stakeholders themselves and tend to act in their own selfish interest (Hill & Jones, 1992). The conclusion of Donaldson and Preston (1995) is that the moral and ethical standards of stakeholder management is to find out all the different groups of stakeholders as well as their different interests and then decide whether or not to engage with them.
2.5 Legitimacy theory
The legitimacy theory is based on the idea that companies can only exist, operate and become a going concern if society as a whole is willing to let them. Like stakeholder theory, legitimacy theory focusses on the play between managers and the company’s stakeholders. This approach differs from stakeholder theory because the attitude towards society means that all the stakeholder can be equally important to the company. The stakeholder engagement process in this theory is more from
13 the managers point of view, who can choose different strategies towards legitimacy. Being legitimate means that the company is in a certain state where values and actions of a company are
corresponding with those of society (Dowling & Pfeffer, 1975).
Companies can lose their legitimacy if a shift of perception in society has taken place and managers fail to react correctly towards them. Also, according to Deegan et al. (2000), if
organizations don’t disclose their actions and values in annual reports, it is questionable if they can reach legitimacy.
O’Donovan (2002) mentions three different ways a company can lose its legitimacy. First, organizations performance is changing while the expectation of society stays the same and, second, if performance stays the same while society’s expectation changes. At last, legitimacy can be affected if the perceptions of both the companies and society change but not in the same direction. The theory suggest that if one of these events have taken place, managers will search for potential stakeholders that influence their legitimacy and engage with them to equal the performance and social expectations (O’Donovan, 2000). This engagement can have three different underlying tactics of the managers: Main, gain or repair legitimate.
First, the way of managers to make sure the company reaches legitimacy. This situation particularly occurs if the company is classified as a new entrant in an industry or area. Ashforth and Gibbs (1990) called this the ‘liability of newness’ against stakeholders. Because the company operates in either a new area or new industry they should gain legitimacy relatively easy because of their leading knowledge (Ashforth & Gibbs, 1990).
Second, managers could react to possible changes of perception of the targeted
stakeholders. If they react before the shift has taken place they adopt the maintaining legitimacy strategy. In order to do this, organisation need to evaluate their former performances to be able to make the right decisions when necessary (Suchman, 1995). For this strategy there are diff erent levels of difficulty. If a company is legitimate and society and stakeholders consider the company as a good social responsible player, they will have greater expectations of the actions a company will make to maintain legitimacy. This means that the lesser legitimate a company is, the fewer action are required to maintain it (Oliver, 1992).
The last strategy management can adopt is to repair the legitimacy ones it has been damaged by a mismatch in societal and managerial believes. O’Donovan (2002) mentions that this strategy is also considered as the most difficult one because in many cases it is caused by an unexpected crisis against their legitimacy. Also, prior to the crisis, certain strategies to gain or maintain legitimacy already have been adopted and failed. These crisis’s are often huge events or social shifts that are broadly discussed in the media. O’Donovan (2002) concludes that, in order to perform this strategy,
14 managers of organizations need to make social decisions towards the l egitimacy gap, whereas the former two strategies required action before the social shift had taken place.
2.6 Closing Summary
This section provided the main theories in the development of stakeholder engagement in the existing literature. The foundation of the relationship is based on the idea of a social license to operate, which means that companies need to response to the demands of their stakeholders. If a company fails to achieve the social license to operate, it can result in losing profit or forcin g the company to leave an area in which it operates.
The stakeholder engagement itself is used by managers to find out what social issues are important to their stakeholders. They use this engagement to remain, gain, or repair their legitimacy and receive the license to operate from society. The social disclosure reports the outcome of the environmental actions the firm has taken. This means that the disclosure is the company’s way of communicating the results of the stakeholder engagement process. Both stakeholder theory and legitimacy theory aim at stakeholder management and how it should be performed.
However, stakeholder theory requires management to put their stakeholder in two different groups: internal and external. Unlike external stakeholders, the internal stakeholders have a financial interest in the firm. The theory then states that management need to focus on the group which possess the most valuable resources to the firm. The group without valuable resources should not be engaged with and therefore, only one license to operate exists.
Legitimacy theory differs from stakeholder theory in the sense that all stakeholders are considered an important group that can affect the legitimate state of the firm. Management should engage with stakeholders if they need to repair, maintain or gain legitimacy. Management need to engage if societal norms and values doesn’t comply with the business operations. This means that the social license to operate can be achieved with different groups of stakeholders who are, according to legitimacy theory, considered equally important.
At last, both stakeholder and legitimacy theory will fail in meeting their goals if social disclosure can’t communicate the actions of the company to their stakeholders. For example, if stakeholders can’t find out if their demands are taken into account, the company can never reach legitimacy.
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3 Literature Analysis
3.1 Reasons to perform stakeholder engagement
Now the stakeholder and legitimacy theory are explained in the background section, the next task is to find the key items that can change the interaction between stakeholder and managers. Research from Gao and Zhang (2006) indicates that this engagement should be performed through dialogue in order to create trust, cooperation and commitment amongst companies and their stakeholders.
According to Foster and Jonker (2005), this dialogue form of engagement means that the concerns of both managers and stakeholder need to be taken into account. Thus, in order to re ach a positive outcome from the engagement both parties shouldn’t be acting selfish. If one party tends to deviate from the social responsible actions, companies must be punished to make sure future relationships remain valuable (Keim, 1978). According to Hill and Jones (1992) this punishment can be reach by law or the problem must be prevented by social disclosure. Because this dialogue is a two way approach to reach social responsible actions, both sides need to be examined to find the influences on the stakeholder engagement.
In this section the stakeholder side will be discussed first, then the managers actions that need different engagement processes. Next, the cultural differences that could affect social awareness and at last, the financial motivations for stakeholder engagement.
3.1.1 Stakeholder power
Stakeholder power is considered a powerful influence on engagement and is supported by the stakeholder theory purposes. This theory concluded that in order to manage the company properly not only the amount of return for shareholder or other financial goals are important, but also seeking the stakeholders who have an interest in the company is a main task. The reason is that the
stakeholder with certain resources can influence the decisions of management (McGuire et al., 1988).
Because these managerial decision where not operated by McGuire et al. (1988), Roberts (1992) decided to test the influences of stakeholders specifically on the amount of social responsible behaviour. For this empirical test he used a conceptual framework based on Ullmann’s (1985) findings. This concept uses stakeholder power, economic performance and the amount of reactions an organization have against social demands and is based on the foundation of stakeholder theory. The significant effect of stakeholder power on social activity is considered the most important.
Based on the stakeholder-agency problem, managers tend to make selfish actions and will try to manipulate the engagement process. Because no standards are required for social disclosure, a
16 company can report past environmental events to mislead stakeholders (O’Donovan, 2002). This means that the stakeholders can’t influence the engagement process because it will be misguided by the disclosure. Supported is provided by the evidence of O’Donovan (2002) that social disclosure often lack quality and can’t be used for comparison between different companies.
One way to deal with this problem is to enforce legal requirements for social disclosure in annual reports, but overall standards are far from being integrated yet. The second way comes from the stakeholders itself. If they are important to the company, management will not adopt a strategy to mislead them. Roberts (1992) acknowledge this relation by mentioning that higher power of stakeholders will lead to an increase in management meeting their demands. With the right amount of power, these demands are then considered as part of the company’s overall strategy.
In the background section we concluded that stakeholder theory divided the stakeholder in groups of financial interest and non-financial interest. This distinction is important because the way stakeholder power can be measured will be different amongst the groups.
At first, the influences of government and political groups towards in the engagement process. A firm who is doing well in creating value with positive financial results as well as having social responsible actions is averse against legal control by these stakeholder groups ( Roberts, 1992). The reason for this is that they suffer the most if legal enforcement changes the way a company needs to act. Roberts (1992) then concluded that firms with low economic performance tend to have less interest in social disclosure. This means that governments and political groups will have more power if organisations are doing better. Power of governance will lead to an earlier and proactive response of management towards their demands (Roberts, 1992).
Second, the financial group of stakeholder, like investors and suppliers, have a different and important measurement of stakeholder power. This group is in the overall literature acknowledged as a fundamental group with great influence in the engagement. For example, Ullmann (1985) noted that without support from this group an organization can’t proceed with their normal operations. Their influence on the engagement could, according to Roberts (1992), be measured by the amount of debt a company has. If a company has a high debt to equity ratio it means that they have many liabilities to investors and can’t change from suppliers in the short run. He also found evidence that management could resist supplier power if no further relation between them existed. This concludes that the higher the amount of financial interest stakeholder have, the higher their power to influence the engagement and thus see the company answering their demands.
At last, Roberts (1992), summarized a couple of measurements of stakeholder power from the managers point of view. These measurement are reversed from the just mentioned financial and non-financial influences. Some actions, for example donations, will give a signal to users of social disclosure reports. The stakeholder who will receive these donations can then be con sidered
17 relatively powerful because they have an impact on social decisions of the company.
For example if companies give donations to educations it can be interpreted that employees are scarce. This gives them a valuable resources to the company and makes them a powerful stakeholder group.
Overall, the amount of power can be seen as a main reason to engage with stakeholder and therefore influence the companies decisions toward stakeholder engagement and the social reporting process. While monitoring the stakeholders with valuable resources, it should be taken in considerations that differences among groups exist and that they require different approaches to find these resources.
3.1.2 Legitimacy
After the establishment of the influences of stakeholder power in the engagement process, it is important to see if the different approaches of management will also influence this process. Legitimacy theory is the foundation for this perspective of the stakeholder engagement and means that organization and society have a so called social contract (Blomquist & Deegan, 2006). The social contract is the liability that organizations have toward society to meet their demands and comply with the norms and values in order to be an operating company. According to Blomquist and Deegan (2006), a legitimacy gap exist if the norm or value of society change and the company is unable to react in the appropriate manner.
As described, the three actions of management towards this legitimacy gap will have different influences on the stakeholder engagement process. The three strategies of legitimacy where to gain, maintain or repair the organizations legitimacy. The actions also show the importance of social disclosure because a legitimacy gap can also arise if the company changes its actions in order to legitimacy but society fails to receive the information (Blomquist & Deegan, 2006).
In their research, Blomquist and Deegan (2006), stated that the strategies in practice needed more actual techniques that could help explain them. O’Dwyer et al. (2011) followed his advice and found that the three types of legitimacy of Suchman (1995), pragmatic, moral and cognitive
legitimacy give another dimension to the gain, maintain or repair process. In order to explain these dimensions they will be linked to the strategies one by one.
First, the strategy to gain legitimacy and the effect of managements decisions on the stakeholder engagement process. Pragmatic legitimacy is the type that best fits the need to gain legitimacy because, according to O’Dwyer et al. (2011), the aspects of pragmatic legitimacy are its focus on the short term legitimacy and the stakeholder with the most operating influences. These are the same conditions that a manager need to adopt if it seeks to gain legitimacy in a new industry (O’Donovan, 2002).
18 In the stakeholder/management relationship the company can choose three different tactics that apply to pragmatic legitimacy. It can conform with the requirements of the stakeholders by let them influence the new operating process or show how their demands are in compliance with the social values. The second way is the exact opposite and basically means that the company will select a new environment where the social values will comply with its new operations. At last, O’Dwyer et al. (2011) noticed that a company can gain legitimacy by manipulation. This means that management seeks the stakeholders by communication to create new legitimating values that can influence the new actions. To put it all together, if management choose to gain legitimacy it will influence the stakeholder engagement by conform with their standards to operate, select new stakeholders in compliance with the companies operation or manipulate stakeholders to create new legiti macy towards new actions.
The second strategy, discussed in the background section, is if management chooses to maintain legitimacy. This strategy is best linked to the dimension of moral legitimacy. The moral obligations, that are pointed out by Suchman (1995), means that the practices of a company are, according to the stakeholders, the right thing to do. The activities can be judged to see if they comply with societal values. When they appear to deviate, the operations can be adjusted to maintain legitimacy. It is important that managers react quickly in the stakeholder involvement before the legitimation is affected.
Again, if a new action is introduced, three different reactions to the engagement process are considered legitimate. Management can convince the stakeholders that the outcomes of the operate are conform their beliefs, the can select new stakeholder groups who share the same moral values or companies can cooperate to create a new image for the operations (O’Dwyer et al., 2011)
The final strategy, to repair the affected legitimacy, is best comparable with Suchman’s (1995) cognitive attitude against legitimacy. This means that actions and outcomes are taken for granted because the company is considered to be socially aware . Although, this state is the hardest to reach it is also the best response to repairing legitimacy because it’s an action against the overall public opinion. Management can get cognitive legitimacy if they can communicate and change their new actions to be in accordance with existing standards, like the law and especially society’s opinion (O’Dwyer et al., 2011). Or they can try to manipulate the stakeholder relationship by convincing that the company’s actions are already in compliance with society values and thus defending their own operations.
Although these actions are best linked theoretically towards a chosen strategy of the
managers, in practice these legitimacy differences are tend to merge together ( O’Dwyer et al., 2011). This means that if the company needs to gain, main or repair their legitimacy all different approaches to pragmatic, moral and cognitive legitimacy can be of certain value. So, from the managers point of
19 view, the stakeholder engagement will be influenced by the tactic used in the communication. This can be either conform with stakeholders demand, select new groups who will support their social values or manipulate the stakeholders to change their opinion towards the actions of the company (O’Dwyer et al., 2011).
Despite these three overall tactics, the repair legitimacy strategy requires the most commitment because it has to deal with crisis management (O’Donovan, 2002). This management includes actions against social incidents, public opinion or negative media influences (Deegan & Islam, 2008). We can conclude that this strategy requires the most time to be legitimate and need to engage with the most powerful stakeholders to the company.
3.1.3 Cultural differences
The last critical aspect of stakeholder engagement is the differences of society in cultures around the world. The first two requirements, stakeholder power and legitimacy, are researched within western developed countries. In this section is it important to find out if culture differences could affect the stakeholder engagement process in a different way. According to Foo (2007), the community in which a business operated is considered a significant stakeholder with the ability to influence the operations. This means that the community in which a company choses to operate could influence the stakeholder engagement in a different way.
Foo explains that large organizations can’t have the same strategy if they tend to operate in in multiple countries with different cultures. The cultures are considered community’s with the same expectations, norms and values (Foo, 2007). The country in which it will choses to operate can have different labour, social and overall regulations which can lead to different, financial and social, expectations of the stakeholders involved. Therefore, the conditions of emerging countries and non-western cultures need to be evaluated.
For example in emerging countries there are relatively less legal acts and therefore
stakeholder power could rise further than in western countries. The result is that the outcome of the engagement will be that all the stakeholder demands will be addressed, including those who do not comply with the corporate sustainability process (Jones, 1995). Foo (2007), concludes that long term relationships are more important in emerging countries then the social outcomes. This means that ethics and social conducts are considered less important and traditional financial goals are the main focus in the stakeholder engagement.
Deegan and Islam (2008) have tested the motivations for companies in emerging countries to engage with stakeholders and to report the outcomes. They came up with different conclusions than Foo showed before. The lack of social responsibility in emerging countries are ack nowledged but the pressure of western society should be examined to provide better inside. Managers in these
20 countries should develop their legitimating strategies in compliance with their stakeholders (Foo, 2007).
The results where that international stakeholders, like multinational suppliers, can put pressure on the strategy and management decisions. The power of the western influenced stakeholders are thus considered an important aspect of influencing the stakeholder engagement. For example, if a western supplier have the power to shut down the operations, managers will need to address to their demands. Due to changing expectation in western culture towards products from emerging countries, from only interested in the product to where and how it’s made (Deegan & Islam, 2008), managers need to take global social requirement into account. These changes are thus caused by the uprising of multinationals and the social requirements of their stakeholders. Without the pressure from outside cultures, emerging country’s would not disclose their social actions and engage with all the stakeholders (Deegan & Islam, 2008)
Besides the influences of multinationals and their consumer concerns, the global society is considered influential in the social activities of emerging countries. This comes from the perspective that the multinational concerns are driven by their need to be legitimate and thus reacting to their stakeholders demands. This leads to the conclusion that multinationals have the power to inf luence companies in emerging countries and to remain operating, managers seek legitimacy by react to the expectations and values of the global society.
The overall conclusion is that culture is not a different aspect of stakeholder engagement and social disclosure but more a different way to explain stakeholder power and legitimacy. These both aspects are influencing the stakeholder engagement process in a different way than just in the western countries. But due to multinationals and globalisation, stakeholder groups are considered as a worldwide society. Local norms and values are standing right against the global expectations. The society as a whole is considered the new target group for remaining legitimate, which means that managers choose their actions based on global opinions.
3.1.4 Financial benefits
It is argued that companies need to involve with their stakeholders and communicate through a social report in order to remain an operating business. However, to benefit financially is still the main reason for shareholders, stakeholders and employees to involve with the operating business. It is therefore necessary to find out if the whole corporate social responsibility process could have a positive influence on the financial performance of organizations. If this is indeed the case, management will have another reason for engagement with their stakeholders and react to their demands.
21 have less trouble to find investors and to raise capital. The conclusion was that financial markets tend to move towards companies with successful corporate social responsibility programs. However, many reactions followed on his research to disprove the correlation. They argued that the relation was based on the wrong assumptions and that no causal relation was noticed (Chen & Metcalf, 1980). Also, the opposite results were found by Anderson and Frank (1978). They claimed that organizations who weren’t socially involved performed significantly better than companies who did. The overall conclusion came from Mills and Gardner (1984). They acknowledged a positive
correlation between social and financial performance, but noticed that companies disclosed their social performance only when the financial statements were positive. This indicates that social responsibility is not the cause for positive financial results but it is only interesting when financial performance is already satisfactory.
Graves and Waddock (1997) also acknowledged the problems with finding the causal relations for positive financial performance and social activities. They argued that the main reason for the different outcomes of different empirical studies was the measurement problem. Corporat e social responsibility doesn’t have restricting boundaries. This means that actions towards own employees but also actions towards public opinion and media are considered social responsible. The results is that costs that are involved in the process also widely differ among management strategies. As we concluded in legitimacy section, gaining legitimacy requires much less involvement as repairing legitimacy. According to Roberts (1992), all these different aspects towards social responsibility will result in the fact that no causal relationship, positive or negative, between financial and social performance can be found.
However, Graves and Waddock (1997) empirically tested the relationship with the measurement problem taken into account. The internal stakeholders and the most important environmental actions gained a higher weight in the analyses while non-essential actions received a lower index. The result is that positive financial performance and social activity does indeed have a causal correlation. This relation however runs in both directions. They concluded that the higher financial performance lead to more social activity but better corporate social responsibility also leads to better financial results. This means that financial performance is in fact a reason for management to engage with their stakeholders because management decisions will comply better with
stakeholder demands trough the engagement process.
The negative results on financial performance and social activities does not lead to a reason not to involve with stakeholders. The reason is that, although CSR is not proven to be causing better financial performance, negative results are also still not found. This means that social responsible actions can be taken without the concern of losing value or profit (Donaldson & Preston, 1995). When financial performance doesn’t seem an significant factor other aspect like power and
22 legitimacy will be the main reason to engage with stakeholders as they also concluded that moral standards will take over if other factors are indifferent.
3.2 The engagement and disclosure process
Now that the reasons for the stakeholder engagement process are examined and stakeholder power and legitimacy are considered as the dominant factors, it is time to find out if the engagement and reporting process actually benefit from one another and if corporate social responsibility have more advantages or disadvantages. In the first subsection the stakeholder engagement and how it should be performed is examined. Then, in the next sections the effects of social disclosure and corporate social responsibility towards society and corporations will be explained.
3.2.1 The stakeholder engagement process
The reasons for stakeholder engagement are explained but how the process should be performed is not included. So in this section different views on this process will be outlined and discussed. To give the process an overall standard is difficult because stakeholder power and strategies towards legitimacy require different approaches. Even if these differences could have an overall engagement process then, according to Foo (2007), the engagement will still have others problems to overcome. This means that stakeholder engagement is an interactive play that is different i n each situation. However, certain basic relationship tactics can be used to keep managers decisions effective and social aware. In his research, Foo (2007), mentioned three problems towards stakeholder relationships.
The first one is the so called stakeholder-agency theory introduced by Hill and Jones ( 1992). Foo explained that if the stakeholders and managers have conflicting goals, costs are involved for the principal. These costs include monitoring the demands of stakeholders and find out w hen
stakeholders and managers act in different ways.
Second, Foo (2007) called the transaction costs involved with the stakeholder/manager relationship the next issue it need to overcome in order to remain effective. These costs occur if managers need to find the stakeholders with the relevant influence or resources. Also, the
engagement process itself requires cost based on the negotiation and enforcing the appointments. The last cost of stakeholder engagement is called the free-rider problem. According to Foo (2007), if team members are involved in a process of decision making they will not contribute effectively. The reason for this problem is that in a team process each individual performance will be difficult to measure. Therefore, members can easily make less effort than they are capable of.
To make sure these costs will not be the main reason for managers not to engage with their stakeholders, certain approaches in the process must be followed to avoid or minimize the costs.
23 Reed (2008) claims that the way in which stakeholder engagement is performed can have a great impact on the quality of the outcome. He found the approaches that, although the engagement will never be the same for different companies, can be the foundation of how stakeholder engagement can lead to the desired decision making process. Also, despite the presence of stakeholder power, every group of stakeholders must be involved and communicated with to get the right information.
Now, with respect to the stakeholder power, decision can be made based on the different information sources. Habermass (1987), agrees with this theory by noticing that all relevant stakeholders should be engaged based upon their competence from decision making to providing information about the public opinion. To provide this outcome of information for decision making, the stakeholder engagement should take the following standards into account (Reed, 2008).
The first requirement for the engagement is that the stakeholder have enough competence and power to influence the decision. If they don’t know enough about the subject they can’t create any value through participation. Once a group is considered worthy of participating, in terms of competence, the dialogue between them should be based upon equality, thrust and managers and stakeholders should be able to learn from each other. With this basic requirements in mind a long term relationship might be the outcome.
Second, the stakeholders should be engaged in the operating process as early as possib le. According to Reed (2008), if stakeholder can be a part in planning the operations all the way to evaluating the results, then the highest change of being legitimate will be achieved.
Furthermore, Reed (2008) mentioned the importance of stakeholder screening to find the appropriate resources they have. Managers will only complete the dialogue in the proper way if they need the stakeholders for information and decision making. Roberts (1992) reflections of the
stakeholder theory results in the same conclusion that managers are likely to engage with stakeholders if they have enough power.
At last, certain basic rules are needed for the engagement to avoid conflict. The goals of the engagement and the methods used for the decisions should be known by both parties before the dialogue starts. Both parties need to have the appropriate knowledge and certain ground rules for the dialogue need to made. Also, to become meaningful in the long term, Reed (2008) concludes that stakeholder engagement need to be institutionalised because outcomes will always be uncertain.
These basic rules are the foundation for stakeholder engagement to reach a desired outcome with more benefits than costs. With thrust, early participation and long term relationships the costs of monitoring on the stakeholder-agency problem will be minimized. The transaction cost are important because they occur when management find the stakeholder with the needed resources. These cost will remain because these stakeholders are needed for the stakeholder engagement process in order to make appropriate decisions. The third mentioned cost of Foo (2007) was the free
-24 rider problem. This problem will not be fully avoided but Reed (2008) based the dialogue upon thrust, competence and learning. This means that individuals need to engage actively in order to learn from each other.
3.2.2 Effects of social disclosure on CSR
The effects of social disclosure on the company need to be evaluated be cause the social disclosure is seen as the manner to communicate the outcome of the stakeholder engagement. According to O’Donovan (2002) the social disclosure is not as effective as it seems to be. He noticed that
organizations include social disclosure in the annual report to create a positive opinion and that it is just used for symbolism. But does this mean that social disclosure fails to report the decisions made based on the stakeholder engagement?
In the research of O’Donovan (2002) he found out that managers who have a strategy towards legitimacy doesn’t know how to disclose and communicate their actions properly. The environmental statements are often obscure and far too long with different interpretations as a result. According to O’Dwyer et al. (2011), assurance services lack the objectivity in the process and have insufficient expertise. The result is that an information gap between managers and stakeholder can arise and there are no standards for environmental disclosure to resolve this problem. Hunt et al. (2001) concludes, in their research amongst different managers in the financial sector, that if no rights can be derived from the reporting it leads to a reputation building contest with only financial stakeholders included. Although the Global Reporting Initiative (GRI), introduced in 2000, provide companies with guidelines on sustainability reporting, they are not institutionalized.
According to Deegan (2013), the standards are far from being integrated because the classic double entry accounting doesn’t apply to social accounting. The reason for this problem is that environmental actions and stakeholder engagement itself can’t be measured in the traditional ways. It is, for example, almost impossible to put numbers on the legitimacy of the firm. Also, financial accounting fails to recognize the benefits for society as a whole. At last, Deegan (2013) thinks that the GRI initiative will not overcome these problems because they are based on the traditional financial accounting. For the quality of disclosure it is best that new concepts will be the foundation of the accountability of corporate sustainability (O’Dwyer et al., 2011).
Cooper and Owen (2007) shared this opinion in their research and concluded that mandatory disclosure wouldn’t provide a better solution as the voluntary guidelines. They think that only the stakeholders with enough power and resources to influence the legitimacy will be correctly disclosed based on dialogue and the resulting decisions. The overall conclusion is that social disclosure in annual reports fails to report the corporate sustainably process correctly.
25 and disclosure but also on the corporate social responsibility process as a whole. Gray and Milne (2002) claim that organizations are not responsible for environmental and social issues at all because no boundary’s really exist. For example Burrit and Schaltegger (2010) noticed that nothing will be sustainable in the long term because effects on local system or even the entire universe can’t be proven. This results in the fact that accountable standards are impossible to reach as long as no clear definition of a social responsible organization exists. Burrit and Schaltegger (2010) therefore, make the assumption that without standards in the social disclosure it is threatened by managers who manipulate the statements to remain legitimate.
Also, environmental risks are not included if the effect of compani es actions can’t be
measured precisely. This results in the fact that investments are made without the considerations of future environmental costs. Does this conclusion about social responsibility mean that companies shouldn’t report their actions towards stakeholders at all?
The answer to this question is simply no because, despite of the flaws of the social disclosure, it is still the only possible way for stakeholders to find out if managers made the right decisions based upon the outcomes of the dialogue between them (Hunt et al., 2001). They also interviewed managers from different financial sectors and concluded that, although mandatory disclosure is not efficient with today’s accounting standards, they need a form of regulation in order to compare environmental performance between companies. The regulation for corporate social responsibility must be enforced by democratically chosen authority’s. In this case the rules and standards will lead to the best legitimating changes without the possibility that stakeholder demands from the weakest groups will be ignored.
Also different examples of benefits of the disclosure are given in Burrit and Schaltegger’s (2010) literature review on social reporting. To keep writing about the pros and cons wi ll eventually lead to more sophisticated approaches towards the disclosure. He mentioned that as long as
managers need information about social issues, they will disclose the stakeholder engagement process. Because stakeholder management can improve decisi on making, managers do not have an incentive to report in a self-interesting way.
Deegan (2013) concluded that corporate social responsibility is very difficult to measure in specific numbers. Despite this conclusion Burrit and Schaltegger (2010), succeeded in designing a framework for collecting appropriate data for decision in the stakeholder management process. They mentioned that, although dialogue and legitimacy are still difficult to report, other aspects, like financial issues, can easily be operated. Also pollution can be measured in numbers and most nations have tax reductions if companies reach certain standards towards it. For disclosure to be reliable these social decisions need to be included in the reporting process. This results in th e conclusion that social disclosure can, despite its limitations, contain information that is useful for both managers and
26 stakeholders in making desired decisions.
Based on the foundation of the stakeholder theory, another reason for the importance of social accounting can contribute to social responsibility. In the background the theory was explained with the founding rule that companies can only operate if society is willing to let them ( Wilburn & Wilburn, 2011). This means that for managers to make the right decisions they will have to
participate with the stakeholders that can affect the operations. The fact that managers always tend to report the most auspicious outcomes and act in their own interest doesn’t make a difference if stakeholder have the resources that managers need. Appropriate decisions will only be made if the demands and expectations of the stakeholders will be taken into account. Unfortunately, Burrit and Schaltegger (2010) makes the assumption that this only applies to the internal stakeholders because they hold the financial resources that are needed for operations.
According to O’Dwyer (2003), the stakeholder power and managers selfish acting can result in a total new problem. He builds on the idea of managerial capture, which he defines as:
The means by which corporations, through the actions of their management, take control of the debate over what CSR involves by attempting to outline their own definition which is primarily concerned with pursuing corporate goals of shareholder wealth maximisation (p.524).
The company then decides the extent to which it chooses to involve with stakeholders instead of the stakeholders who influence the process of decision making. Bowerman et al. (2000) mentioned that this development of the CSR process could lead to nothing more than a control function for
managers. It is caused by the assumption that the disclosure of stakeholder engagement focusses more on the quantity, instead of the quality, of information. This results in controlled disclosure methods where an average opinion of stakeholders is presented rather than a separate engagement with different groups. If stakeholders demands are satisfied and their opinion about the company is valuable, it more likely that the company will engage with them for the next social reporting process. Ultimately, the stakeholders groups with the most valuable resources will have a stronger vote in the disclosing opinion. This leads to the problem that stakeholders with less valuable resources doesn’t get the opportunity to engage properly (Bowerman et al., 2000).
In the stakeholder agency problem, not only managers but also stakeholder seek self
-interesting solutions. This means that the reporting can fail to provide information in both directions. According to Baker (2010) stakeholders are not legitimate at all and if managers have insufficient knowledge about the environmental issues stakeholders can manipulate the truth in their self -interest. Future solutions need ethical rules as a foundation for the stakeholder engagement and the motivations for both stakeholders and managers to act in their own interest need to be removed.
27 Only the law has the ability to regulate stakeholder demands, for example employee versus
management rules, in order to reduce the amount of problems involved.
4. Concluding discussion
This section will provide an overview of the main conclusions made throughout the thesis and provide an answer to the research question in general. The research question, mentioned in the introduction was: Does stakeholder engagement in the sustainability reporting process influence the quality and nature of organizational disclosure?
The overall conclusion of the thesis is yes because the interactive play between managers and stakeholders had some major influences on the social disclosure. For example the legitimacy theory noticed that managers can have different strategies to their attitude towards legitimacy. Repairing legitimacy involved crisis management and required a longer process of engaging with stakeholders that could influence the public opinion while gaining legitimacy required much less effort because with this strategy, management will have excessive knowledge about the new operations that stakeholder do not possess.
The next major reason for stakeholder engagement and the ability to influence the social disclosure is the amount of power stakeholders have. This means that stakeholders have resources that managers need to remain an operating business. This group often consist of the internal stakeholders, like suppliers and customers. Because of the differences in power of stakeholder groups, managers can have a different attitude towards the engagement process. This can eventually result in an reporting process where internal stakeholder are presented fairly while external
stakeholders are excluded or the outcomes are misleading.
The last influences on stakeholder engagement doesn’t consist of a significant reason to engage but will lead towards different interpretations. For example, different culture aspect will require a different attitude in the engagement process. However, the ongoing globalisation results in a global society who seems to be diminish these cultural differences. The financial performance of a company doesn’t seem to effect the social disclosure because no causal relationship between them can be found. Although, different empirical studies showed a positive relationship between financial performance and social activity, positive financial performance can still be the cause of social
involvement instead of the other way around.
The stakeholder engagement itself require a couple standard procedures that need to be followed in order to have a positive influence on the social disclosure process. Stakeholder need the appropriate competences to engage otherwise they will be easily mislead. Also resourced can’t be shared effectively without knowledge about the subject. Second stakeholders and managers should engage in the operating process as early as possible. In this process, goals and ground rules should be
28 established to prevent both parties to act in a selfish way. This is the foundation for a long term, honest relationship with reducing costs for the company.
At last the social disclosure and the CSR process as a whole are discussed. The overall conclusion is that despite of the lack of quality, incapability of measuring social activity and conflicting interest between managers and stakeholders, social disclosure is still the only way to communicate the actions towards stakeholders. It is argued that in order to resolve these problems, social disclosure need to be regulated but without the traditional financial accounting standards.
Therefore, the contribution of the thesis is that it explains the reasons for managers to engage with their stakeholders, provide guidelines about how to perform stakeholder engagement properly and discuss the incapability of the current methods of the social disclosure process.
Future research need to have its main focus on how to regulate social disclosure. Regulation is the only way to provide CSR with an overall definition and to make it measurable. In order to be useful it needs to solve the problem of managerial capture, find a way to disclose CSR without current financial accounting standards and to make sure that social disclosure can be used to compare the social activities between organizations.
