Classical Political Economy Theory and Institutional Theory
Discuss about the Constraints and Implications of Balancing Stakeholder.
The role and importance of a company’s financial statements disclosure in the dynamic world of today cannot be underestimated. There have been a lot of recent developments when it comes to the disclosure of a company’s financial statements. This trend has seen a lot of companies trying to make use of a number of ‘‘favorable accounting techniques’’ including making use of appealing profits estimates with the motive of attracting potential investors and ensuring the value of its shares gain value. When it comes to the issue of shares of a company, there have been diverse issues touching on the management of a number of multinational companies in the world. These issues range from poor corporate governance practices, manipulation of the company’s books of account, lack of transparency in financial reporting and exaggerated forecasts of future profits. Most of the aforementioned factors together with ethics in decision making are part of the most important matters that every corporation ought to observe when it comes to managing a big company. Despite the fact that companies are usually given a discretion of choosing which accounting policy to use, good management practices should compel the managers to consider those policies that would give the true and fair view of the financial affairs of the company. This paper intends to examine the case study of JB Hi-Fi Ltd with an aim of exploring and relating a number of theories of management to the case.
Use Classical Political Economy Theory to explain JB Hi-Fi’s decision to release its profit downgrade in the way it did. Make sure you explain what Institutional Theory is, and support your observations with evidence from the case study.
The classical political economy theory is a school of thought developed by great economists Adam Smith David Ricardo, Thomas Robert Malthus and Jean – Baptiste Say. This theory is based on the argument that a market economy is usually largely self-regulating system such that all the components of the system are governed by laws of the ‘‘invisible hand’’ (laws of production and exchange) (Toporowski, 2015). The classical political economy theory has been widely used in the contemporary world to describe the nature, causes and effects of good and bad governance on the organization. The theory has a number of assumptions including the belief that a ‘‘regime’’ affects the quality of human life in any given society ("The Classical School of Political Economy - Online Library of Liberty", 2018). The classical political economy theory work hand in hand with the institutional theory.
Managerial Branch of Stakeholder Theory
The institutional theory gives more resilient and deeper aspects of the social structure. The theory believes that a social structure is made up of schemes, norms, rules and routines to which every component of the social structure has to conform to (Ahlvik, 2016). The processes in which every aspect of the aforementioned factors gives an authoritative guideline for social behaviour. The institutional theory further propounds that every element of a social structure is usually created, adopted, diffused and adapted to by entities over a given period of time (Reverte, 2011). The same elements can also fall into a decline and can disuse if not adhered to by an organization. According to the institutional theory, therefore, organizations should consider giving explanations on certain issues for the sake of bringing some level of legitimacy to the organization.
The case of JB Hi-Fi Ltd of downgrading its profit figure by 3% can be suitably related to the propositions of the classical political theory and the institutional theory. The fact that the management of JB Hi-Fi Ltd considered a voluntary downgrade of its forecasted profits by such small immaterial percentage after being asked by the ASX to ‘‘please explain’’, shows that a system has its own rules to follow (Greenblat, 2018).The concept of voluntary disclosure is a strategy that has been used by a number of corporations in the world to try and portray themselves as transparent and integral companies in a market .We consider the move by JB Hi-Fi Ltd to announce a decrease in its forecasted profits in 2018 as a move to portray the management of the company as ethical and morally upright (PASH, 2018).
The company’s management might have had a wide knowledge about the political environment of the market such that by announcing the profit downgrade, they were conforming to the rules of the system ("Political Environment in International Business: Definition, Factors & Impact - Video & Lesson Transcript | Study.com", 2018).
They never wanted to be blamed later on for failing to disclose the inability of the company to attain its targeted profits due to reasons that were known and unavoidable to them including challenging weather conditions, operating environment and increased competition in the home appliances products (Foye & Foye, 2018).
The company might have thought that it was better for them to voluntarily disclose the immaterial profit downgrade than to wait until it happens to do so. It is usually a general norm to get large companies being more vulnerable to regularity as well as financial analyst’s intervention and thus would have to be more interested in disclosing more detailed information in their reports so as to justify their financial performance and reduce any political costs that could be incurred if voluntary disclosure could not have been done. ("Voluntary Disclosure in Financial Reporting | Investor | Financial Statement", 2018)
Case Study: JB Hi-Fi Ltd
The company might have opted to voluntarily announce the profit downgrade to show the customers and potential investors that the company's management has good corporate governance attributes (Rouf, 2017).
Use the Managerial branch of Stakeholder Theory to explain JB Hi-Fi’s reporting decisions. Make sure you support your observations with evidence from the case study
The managerial branch of the stakeholder’s theory attempts to explain the existence of a certain level of influence on a company’s management by some group of stakeholders who are likely to be more powerful than others hence forcing the management to attend to them first. This theory considers the existence of different levels in a group of stakeholders in the society some of whom requires ‘‘best’’ management practices to deal with them (Lusambo, 2017)). Since the expectations of the powerful stakeholders carry more weight than the other stakeholders, the organization's management is usually unlikely to respond to all the corporation's stakeholder's desires and expectations, but only to a few of the most powerful (Scott, Schult & Hekman, 2006). The sentiments given by the managerial branch of stakeholder's theory have been supported by management researchers who have identified that stakeholders power is the main function of the degree of control of the company's resources.
According to the stakeholder’s theory, the management of a corporation usually has a duty of assessing the importance of certain courses of action for the sake of meeting the demands of the stakeholders in the process of pursuing the firm's objectives. Since the expectations and power relatives of stakeholders usually change over time, it is most probable that some part of the shareholders/stakeholders at JB Hi-Fi Ltd might have championed for full operating disclosure at all times. Another element of the managerial branch theory applicable to the case of JB Hi-Fi Ltd is the issue about the role and importance of information on the image of the company (Truong, 2012). Both financial and non-financial information has been considered to be one of the major elements used in managing stakeholders in an organization. It can, therefore, be inferred that is possible that some part of JB Hi-Fi Ltd.’s stakeholders might have championed for the announcement of the profits downgrade of the company during the Macquarie Australia Conference.
From the case, we can also see the possibility that JB Hi-Fi Ltd might have used the announcement of the profit downgrade as a way of gaining support or approval from a number of regulators. Good management practices usually require managers to try any means possible to distract any form of disapproval or opposition from authorities (Hossain, 2013). As a multinational firm, JB Hi-Fi Ltd might have disregarded the impact that the announcement could have on the value of shares for the sake of appearing more responsive in both financial and environmental disclosure. From an ethical point of view, it can be argued out that the management of JB Hi-Fi Ltd might have been construed to report the profits downgrade as a show of ethical awareness or for the sake of ensuring the survival of the organization (Trong Tuan, 2012). While it can be said that JB Hi-Fi Ltd might have been driven by both performance and ethical considerations, it is also possible that the decision might have arrived at trough normative complementary roles from the side of the various stakeholders.
In a dynamic business world of today, it is usually common to find a number of companies trying to ‘’dress up’’ the financial performance of a company as a way of showing the potential investors that the organization is performing well financially thereby persuading them to buy shares from the company. The prospectus for selling shares for a publicly listed company usually provides a section of including all the relevant information and material issues that can potentially alter the performance of the company in future. Many financial pieces of research done in the past have shown that there many ‘‘evils'' that companies usually do in the choice of information to include in the prospectus. The main reason behind such acts are usually aimed at trying to conceal the true financial and operational state of the company so that the value of the shares does not get affected in future (Truong, 2012) This shows that the current share price of a company has a big impact on future anticipations of earnings.
Corporate reporting and disclosure is usually a communication process that is aimed at sharing a corporation’s financial statements with the stakeholders of an organization. These stakeholders usually range from employees, customers, existing and potential investors. To the potential investors, the corporate disclosure is usually aimed at sharing the financial situation of the company for the sake of convincing them to buy shares from the company (Syed & Bajwa, 2018). For a public listed company, the firm’s equity ownership section is usually separated and given to the stock market. In this case, it usually means that a firm is given the discretion on what issues to disclose and not to disclose. Since the efficient functioning of the capital market is dependent on its corporate disclosure practices is undoubtedly true to say that the current price of shares for a company usually have a big impact on future earnings. The demand for relevant, complete and timely disclosure is usually one of the ways of reducing information asymmetry between the principles who are the shareholders and the agents who are the management (Healy and Palepu, 2001).
Several normative models for investors decision making have been brought forth by different scholars. These models differ in terms of their complexity and emphasis. One of the models that have been considered to present more details on investor decision making is the Brunswick Lens model developed in 1956. Brunswick Lens Model gives a relevant conceptual framework for appreciating and viewing the decision-making process (Baronia, 2018). The model furthers gives us the view of the decisions that people(investors) make and how they go about making them. The model assumes that the decision making process is composed of three essential elements namely: the basic information in the decision situation, the actual decision made by the decision maker and that the most optimal or correct decision which should have been made in that particular situation.
On the element of basic information, the Brunswick Lens model propounds that a person will at all times make decisions based on a number of indicators or cues that are at his or her disposal and may or may not use them as aids (Baronia, 2018). Relating this element to the case of JB Hi-Fi Ltd, we can infer that the existing investors at the company may not be compelled by the profit downgrade to sell their shares. Instead, more prudent investors will see the opportunity of purchasing more shares when the share price has gone down so that when the prices go back to the normal level, he or she is going to get a capital gain. Since the potential cue of the profit downgrade by JB Hi-Fi Ltd is immaterial in the eyes of ASX and financial analysts, I find it hard that existing investors would be willing to sell their shares at such a low price. Instead, some of them will opt at buying more due to the favourable price.
When it comes to the element of the correctness of the decision made, the Brunswick Lens Model coins out the fact that there is always a course of action that a decision maker would make which is associated with the decision he or she thinks is the most preferred(Baronia, 2018).The principal of Optimal decision making requires that the best course of action that could possibly have been selected by the decision maker in any particular situation should be taken. This means that the most fundamental criteria for evaluation of the decision to be made should be used. Despite the fact that it is usually hard to determine the optimal choice in many decision-making situations, the optimal response to any situation by a decision maker must always exist. As for the case of JB Hi-Fi Ltd, we can rule out that its investors would not be willing to sell part of their shares on the grounds that the company has announced a profit downgrade (Editorial et al., 2018). Instead, this would be a good opportunity to buy more shares at a low price share.
Having defined the essential elements of the Brunswick Lens model, it would be important to identify the dynamic issues that surround the interrelationships between these elements. The interrelationships between the elements is an indication that the decision-making process is full of complexity and dynamic characteristics. Relating this to the case of JB Hi-Fi Ltd, we can infer that the cue validity of the profit downgrade announced by the company was represented by predictive and diagnostic powers of the capital market such that both financial analysts and ASX were perplexed by the company's move to announce a profit downgrade by 3% (Foye & Foye, 2018).
Some academics have criticised the accounting profession for acting to legitimise the capitalist system (supposedly by supporting the “haves” against the “have nots”. Indicate whether the case study supports the critical view of accounting, or whether it doesn’t. Use the case study to support your answer.
A capital system is an economic system in which the factors of production are acquired, owned and distributed privately at a corporation’s level. The system provides for a number of developments inside the company through the process of accumulation and reinvestment of the company’s profits earned in a free market economy firm's growth. The capitalist system, therefore, gives organizations the freedom of operating and making profits amid competitive market conditions. Since the most dominant economic system in the world of today it the capitalist system, there are various influences that the system has had on a number of professions including that of accountancy.
One of the ways in which the capitalist system influences the accounting profession is through the existence of problems touching on the provision of asymmetric information with a motive of capturing and presenting a much better view of the company’s state of affair ("3 Trends That Are Affecting The Accounting Profession", 2018) s. In the context of good governance practices, accounting professions are usually torn between going against their bosses or sticking to the accountant's codes of conduct. In many instances, because of the threat of being fired, many accountants across the whole world have been forced to bow down to the expectations of the management. It is therefore very common to find out accountants supporting the members of the management in doing what could not have been permissible had the accountants stick to the codes of the profession. Furthermore, the capitalist system tends to disregard the principal-agent relationship so that in many instances the decisions that are being made under the system tends to violate the rules of the profession.
Relating the effect of the capitalist system on the accounting profession draws us some conclusions about what might have happened at JB Hi-Fi Ltd. Having considered the fact that a system has a big influence on the operational affairs of company, it would be most probable that the accountants at JB Hi-Fi might have been compelled to disregard the codes of their profession and act as per the management requirements("Future of Accounting Profession: Three Major Changes and Implications for Teaching and Research | IFAC", 2018). This is evident from the fact the company considered announcing a profit downgrade for a percentage at which according to ASX and financial analysts were immaterial. It can, therefore, be argued that the accounting profession has been acting towards legitimizing the capitalist system in one way or another.
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