Accounting Theory

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2. 'Value for society' or 'value for investors' - which of these should a listed company consider when making business decisions

Today, companies are faced with challenges to provide information to the corporate report users of companies’ potential to value creation. On one hand organisations are required to provide information on future economic development to their investors. Accordingly, organisations also have to deal with stakeholders expectations, which require to incorporate sustainability concept in organisations report for long term success (Chris van Staden, 2014). Value created by an organisation is financial returns for its capital providers as well as others i.e. stakeholders and society at large ( Flower 2014). IR provides the information on prospects of organisation in short, medium and long term to the stakeholders regarding organisations ability to survive in future (Holder-Webb et al., 2009)

The value to society concept is more concerned with the impact of a firm’s activities on social and environmental aspects on the society at large. If the firm is concerned of social and environmental aspects of its operation, this increases the value for society but on the other hand reduces the value for its capital providers. But this may improve the image of the firm in the society as a good citizen and may increase the regulatory and monitoring costs of its activities which is a saving for its owners. (Flower, 2014).

The value to investors concept refers to how management can satisfy the interest of their shareholders. Investors are more concerned of higher return for their investment, recovering their investment quicker the better and to reduce exposing to adverse risks of losing their investments. Therefore investors’ rational expectation is the firm to create value for them than to others (Flower, 2014).

Usually, organisations only go for value to investors but recent public awareness and consciousness regarding sustainability, organisations have been directed towards looking into value towards society. The stakeholder theory "views an enterprise as a coalition of different interest groups, and therefore a firm's value creation as a result of collective effort" (Chris van Staden, 2014,p 1196). Therefore, it can be considered that IR's concept of value is more than the concept of shareholders value as it includes more than financial capital. The disclosure of organisational information to stakeholder regarding environment and society enhances transparency of organisation thus, improving relationship between stakeholder and organisation. However, for organisations to be successful must satisfy all the stakeholders, it must be able to create value so that investors as well as other stakeholders are satisfied (Chris van Staden, 2014).

The legitimacy constitutes the acceptance of organisations behaviour by society, therefore, organisation's face threat where there is conflict of interest. Organisations with high levels of pollution and carbon emissions are required to disclose their information to society. Therefore, it is important that organisations value sustainability and legitimately associate organisation in the social system in which they operate (Comyns et.al 2013). National Australia Bank (NAB) included natural capital in development of accounting, disclosure and reporting frameworks. NAB's significant customer segment being agricultural sector to manage physicals risks like drought and natural assets, the bank evaluated its impacts to understand risks and opportunities for customers (IIRC, 2013b).

In contrast, Shareholder value theory (the value for investors), the purpose of a company is to maximise shareholder value and to pursue social activities only as long as they generate value for shareholders in the form of profit. Hence, managers are expected to only undertake activities those create or add value to the shareholders of the firm and pursue social activities if they consider they will add value to ultimate owners of the company (EY 2013).

Capitalistic theory states that there is identity of interest between the owners of organisation and the society (Flower, 2014). For example, agricultural giant Archer Daniels Midland in US, continuously ignored the environmental caused by its activities but continue to pay higher dividends to its shareholders. But now it’s faced with multimillion law suit as a results of its environmental pollution. Therefore, an organisation shouldn’t only value to its investors, but also should look into other stakeholder requirements. Ignoring this will have a long term impact long shareholder value. (Business insider Australia, 23 Sep,2009-Worst 15 Companies For The Planet)

Therefore, based on the above discussion while decision usefulness both “value to investors” as well as "value to society" needs to be considered by the publicly listed companies.

3. Given that the primary users of IR is providers of financial capital -

do you think the focus of IR should be "value for investors" rather than "value for society"

In an organisation the providers of financial capital can be listed as following: equity investors (shareholders), debt providers (financial institutions) and trade creditors (Cascasino, et.al, 2013). These capital providers have different needs of information to decision usefulness. Equity investors will require information on amount, timing and risks of future cash flows. Debt providers are more concerned about the downside risk of their investment. Trade creditors have to rely on intermediaries for the investment decision (Cascasino, et.al, 2013). Therefore, the main focus of capital providers are long-term prospects of their capital, good return on investment provided with lower level of risks (Cascasino, et.al, 2013).

According to IIRC the financial capital is the pool of funds and is internal to organisation (Flower, 2014). "IR's primary purpose is to explain its providers of financial capital how an organisation creates value over time" (Flower, 2014, p.5). The financial capital providers are interested in the value organisation creates for itself and also the value an organisation it creates for others (i.e. stakeholders and society at large) if they affect the ability to create value (Flower, 2014). Thompson states IR should report on the unsustainable actions by organisations and integrate values of different communities and the natural world. The IR's concept is to create value for society however, value to society would not be achieved unless it is aligned with value for investors (Adams,