Why a Government Might Enact a Non-Financial Performance Disclosure Regulation

Non-financial reporting refers to the act of collecting and disseminating information on non-financial features of the company such as environmental impact, compliance with ethics and employee matters. Hence, it is imperative to investigate the reasons why a government might enact a non-financial disclosure legislation. As well, it is essential to decipher the various benefits that will accrue to the various stakeholders as a result of a disclosure regulation on corporate governance and environmental impact. Furthermore, understanding the extent to which a non-financial disclosure will promote accountability in corporate governance and environmental impact is of great importance.

Why a Government Might Enact a Non-Financial Performance Disclosure Regulation

To Promote Business Ethics in the Operations of a Business

Ethics has become a significant aspect of business operations, and with the increase in cases of insider trading and conflict of interests, it is essential to have law requiring companies to disclose how it runs its operations. For instance, the law would require the company to reveal how it awards tenders to the various contractors and suppliers so that the government can determine whether the process is fair and devoid of the conflict of interests that usually face the tendering process (Schopp & Huefner 2015, p.574).

To Promote Employee Welfare and Human Rights

In any form of government, the state has a responsibility to safeguard the rights of its citizens and to do this, it must intervene in the operations of other players of the economy to ensure that the interests of the economic operators are well aligned with its interests. This is per the positivist theory of regulation that states that one of the main rationales why the government indulges regulation is to ensure that the interests of the players in the economy are well aligned with that of the state (Dhaliwal et al. 2014, p.335). Furthermore, a regulation of non-financial corporate reporting would help the government to promote the welfare of the employees since the firms would have to reveal the measures they have taken to promote employee safety and welfare Dias, Rodrigues & Craig 2017, p.88).

To Eliminate Information Asymmetry

According to normative theories of regulation, the government should minimize the costs of information asymmetry through obtaining information and providing operators with incentives to improve their performance. By reducing the costs of information asymmetry, the government promotes transparency, predictability, and legitimacy hence promoting efficiency in the economy (Bushman &Landsman 2010, p.260). In this light, the government might require disclosure on a corporate governance aspect such as the procurement process to ensure that all the stakeholders in the firm have similar information hence instilling trust and confidence among stakeholders.

To Promote Diversity in Executive Positions and Composition of the Board

Globalization has increased diversity in today’s workplaces and therefore there is a need to ensure that this diversity is reflected in executive positions and composition of the board. However, this is not the case in many companies since a study by Pew Research Centre reveals that 7 out of 10 senior executives in the United States are white men and that only 14.9% women hold executive positions in fortune 500 Companies (Bebbington, Unerman & O’Dwyer 2014, p.104). Therefore, the government might enact a law on non-financial performance to track how the company promotes diversity in executive positions. More importantly, the government may give directions regarding the composition of the Board to promote gender and racial diversity.

To Promote Environmental Sustainability

In the course of their operations, many businesses cause one or more forms of pollution such as air and water pollution. Pollution is a negative externality that emanates from business operations and in most cases, firms follow the profit maximization approach hence they do not take into account the negative impacts of their operations on other stakeholders (Dhaliwal et al. 2014, p.329). This is why most governments feel obliged to chip in and ensure that companies reveal the impact of their operations on their environment and the efforts that businesses are taking to address pollution.

Beneficiaries of Disclosure Legislation on Corporate Governance and Environmental Impact

Beneficiaries of Disclosure Legislation on Corporate Governance

Shareholders. Disclosure on corporate governance is likely to create shareholder value since a transparent organization will attract more investors. When a firm can attract investors, it is able to raise equity capital more easily, and this significantly lowers the cost of financing (Farvaque, Refait-Alexandre & Saidane 2011, p.7). This gives the firm financial capability to take advantage of growth opportunities in the environment hence maximizing shareholder’s wealth. Furthermore, a transparent business will have a better reputation than the competitors.

Employees. A law that requires the company to reveal the HR practices such as hiring and compensation, as well as the measures that the company has put in place to protect the employees from harm, promotes the welfare of the employees (Dhaliwal et al. 2014, p.333).

The suppliers. Suppliers play an integral role in the operations of a business and are usually victims of unfair business practices. For instance, the tendering process is usually flawed as the executive management strive to award tenders to their friends or family (Dhaliwal et al. 2014, p.330). Therefore, a disclosure legislation on corporate governance would ensure that there is fairness in the tendering process hence eliminating the conflict of interests which locks out many deserving suppliers.

Beneficiaries of Disclosure Legislation on Environmental Impact

The Community. The neighboring community to a company usually bears the brunt of environmental pollution. To illustrate, the Deepwater horizon oil spill which occurred in 2011 claimed more than 11 lives while injuring seventeen others (Dhaliwal et al. 2014, p.331). Therefore, the community would reap big if the government passed a law requiring companies to reveal the environmental impacts of their operations and the efforts that the companies are taking to combat the negative impacts on the environment

Shareholders. Increased transparency on environmental impact is likely to position the company as a socially responsible citizen hence increase public trust, market base and ultimately, increase the share value (Jizi et al. 2014, p.610).

Customers. Legislation on environmental impact reporting would also require the company to reveal the health effects of the product or packaging material on the customers (Schopp & Huefner 2015, p.570). Therefore, customers would benefit from such legislation since companies would provide safer products and package them in environmentally friendly materials.

Prospects of Increased Corporate Accountability due to Regulation

The success of legislation is measured by the extent to which such a policy achieves the intended results. This success is determined by various factors such as the costs and benefits that firms will accrue as a result of compliance as will pay as a result of complying to the (Hung & Wang 2014, p.99). As well, incentives available to various parties determine the success or failure of legislation. The principal-agent theory which is mostly used in incentive regulation views the government as the principal and the operator as the agent. The theory perceives the agent to be more knowledgeable than the principal, and therefore, the agent determines to a great extent the success or failure of a legislation (West, Pennell &Hind 2009, p.790).

To evaluate if a disclosure regulation on non-financial performance will promote accountability on corporate reporting and environmental impact, one should first evaluate the benefits and costs of implementing such a legislation. As the previous section has illustrated, a disclosure legislation on non-financial aspects of the business will attract more customers, improve the reputation of the company and increase the employees’ satisfaction and productivity. The result is an unrivaled competitive advantage that improves shareholder value. On the downside, the cost of collecting and disseminating non-financial information is costly and time-taking. This occurs since a disclosure regulation requires companies to reveal qualitative and quantitative information about corporate governance and environmental impact (Bushman & Landsman 2010, p.260). Also, disclosure may lead to unfair competition since small firms are hit the hardest by regulations since the compliance costs negatively affect the competitiveness of SME’s (Farvaque et al. 2011, p.30). Therefore, the implementation of a disclosure regulation could have varying impacts on corporate accountability. On the one side, it could foster accountability while on the other hand, it could make the business to be more secretive about its operations (Hřebíček et al. 2014, p.110). However, by demonstrating to businesses the benefits of disclosure on the firm, the government can establish a common ground with companies hence increasing the prospects of accountability on non-financial reporting.

Secondly, considering the incentives for regulation by the government is vital in establishing if a regulation on non-financial reporting will lead to increased corporate accountability. One of the major incentives of government is to keep interest groups such as lobby groups and investors happy. Besides, legislators make laws to secure another term in office and also because they do not bear the costs of regulation (Farvaque et al. 2011, p.17). Therefore, motivated by these incentives, the legislators are keen to ensure that companies implement the non-financial disclosure to the letter. Furthermore, the regulatory bodies and law enforcement agencies will see to it that companies observe the legislation hence increasing accountability on corporate governance and environmental impact (Hung & Wang 2014, p.78). For instance, if an oil company’s environmental impact report reveals that the oil spill amounted to 10 gallons in a certain year, the environmental agency in a particular nation would want to know how the company is addressing the situation. Also, if a social audit reveals that there is only one female in a board with 11 members, the lobby groups would be seeking an explanation for this disparity (West et al. 2009, p.789). For these reasons, a regulation on non-financial corporate reporting is likely to increase accountability on corporate governance and environmental impact to a great extent.

Conclusion

To sum up, the discussion above reveals the reasons why a government might enact a non-financial performance disclosure regulation, such as promoting diversity in executive positions and fostering environmental sustainability. Secondly, the report highlights the benefits that employees, customers, shareholders and the community are likely to reap from a disclosure regulation on corporate governance and environmental impact. Finally, the report indicates that a regulation on non-financial reporting is likely to lead to accountability on corporate governance and environmental impact to a great extent. For this to happen, regulatory bodies and lobby agencies must ensure that companies comply with the legislation. Furthermore, the implementers must explain to the operators the benefits of disclosure of environmental impact and corporate governance since it is until then that the firms will cooperate.

References

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Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G., 2014. Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, vol.33, no.4, pp.328-355.

Dias, A., Rodrigues, L.L. and Craig, R., 2017. Corporate governance effects on social responsibility disclosures. Australasian Accounting Business and Finance Journal, vol.11, no.2, pp.3-22.

Farvaque, E., Refait-Alexandre, C. and Saidane, D., 2011. Corporate disclosure: a review of its (direct and indirect) benefits and costs. Economie internationale, vol.4, no. 128, pp.5-31.

Hřebíček, J., Soukopová, J., Štencl, M. and Trenz, O., 2014. Corporate key performance indicators for environmental management and reporting. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, vol.59, no.2, pp.99-108.

Hung, M. and Wang, Y., 2014. Mandatory CSR Disclosure and Shareholder Value: Evidence from China. University of Southern California Working Paper.

Jizi, M.I., Salama, A., Dixon, R. and Stratling, R., 2014. Corporate governance and corporate social responsibility disclosure: Evidence from the US banking sector. Journal of Business Ethics, vol.125, no.4, pp.601-615.

Schopp, D. and Huefner, R.J., 2015. Comparing the Evolution of CSR Reporting to that of Financial Reporting. Journal of Business Ethics, vol.127, no.3, pp.565-577.

West, A., Pennell, H. and Hind, A., 2009. Quasi-regulation and Principal—Agent Relationships: Secondary School Admissions in London, England. Educational Management Administration & Leadership, vol.37, no.6, pp.784-805.