The financial crisis of 2008 opened our eyes to the importance of corporate accountability. The event raised numerous red flags and suspicions about whether the financial reports that corporations were disclosing were worth the paper they were printed on. Such major earthshaking events give us pause to consider some new questions like, “What is corporate accountability?” and “Can we devise a corporate accountability definition?” These questions also bring us to the question of whether corporate accountability can be measured and whether it can be measured in a credible fashion.
What Is the Definition of Corporate Accountability?
The definition of corporate accountability is the act of a corporation being accountable to its stakeholders, which may include shareholders, employees, vendors, customers and the local community, and may also include the country that the business operates in. In most jurisdictions, state or local governments serve as the body of law that determines the formal requirements for a corporation’s operations, responsibilities and activities.
As part of the fallout from the financial crisis, for-profit companies are facing greater demands to disclose more than revenues and expenses on their financial reports. To date, there’s not necessarily much consistency on what they should be reporting. That said, many corporations use disclosures as a means for positively impacting their reputations by adding disclosures about initiatives within the community, environmental issues and other positive contributions.
While it’s relatively easy to define corporate accountability, in answering the question, “What is corporate accountability?” it’s not as easy to evaluate its usefulness in a meaningful way. If that were possible, it would certainly have new meaning for customers, bondholders, employees and communities. As of today, it’s unsure how an evaluation could be used for decision-making and enhancing shareholder value, and how it could improve the social value to society.
Could There Be a New Approach to Best Practices for Corporate Accountability?
Karthik Ramanna is an associate professor at Harvard Business School who studies the political economy of corporate accountability and financial reporting. Ramanna studied the question of “What is corporate accountability?” and he has his own corporate accountability definition, which is “the obligation of a corporation entrusted with a duty to others to explain its performance of that duty.” Ramanna suggests that risk management best practices in financial accounting can be leveraged to test and improve the quality of corporate accountability reporting.
Ramanna explains the basis for his theory by stating that for the preceding 30 years, accounting experts have worked diligently to build a system of frameworks and theories to comprehend and project financial reporting practice, where they’ve worked to increase the value of information and improve financial reporting practices, generally, in the capital markets. Ramanna believes that it’s possible to use some of the insights and principles of the accounting field that have been developed over the last three decades and apply them to the difficult topic of accounting for externalities.
In a paper titled “A Framework for Research on Corporate Accountability Reporting,” Ramanna draws three concepts from accounting theory that he considers to be the Three Gold Standards. They include:
- Ramanna’s paper outlines how corporate accountability best practices have the potential to give stakeholders the ability to verify what corporations are telling them about corporate accountability activities. Bondholders, shareholders and the local community fall under the category of stakeholders. Ramanna believes that audit and financial reporting technology could help to join the disconnect between companies and stakeholders to support accountability.
- Accounting theory can help businesses to list their accountability reporting into what is called “stocks” and “flows” as they appear on a balance sheet. This type of tool provides a visual image of how the company is progressing toward its goals. Clear accountability reporting gives stakeholders an opportunity to see how well the company manages the resources within its control.
- Ramanna believes that a sound system of accountability must compare benefits with costs over time. Accounting theory also helps companies to develop technologies that work to clearly compare actions and results in corporate accountability with what is termed “matching” technologies. Stakeholders lose some degree of confidence when they have trouble visualizing trends and metrics over time.
Using Technology to Monitor Insight and Intelligence
Digital software solutions are the modern way to monitor corporate insight and intelligence. For example, Diligent’s Governance Intel is a software solution that eliminates the barrier between open web news, subscription news and proprietary data. The product combines and aggregates subscription sources and internal data with over 70,000 authoritative open-web business new sources using a single powerful research and discovery tool.
Governance Intel makes it possible for board directors and executives to target the latest news on information such as corporate accountability best practices and new developments. Board directors and executives will more easily be able to consolidate market research and competitor insights to promote greater innovations in accountability and transparency.
Wrapping Up the Topic of Corporate Accountability Best Practices
Ramanna believes that there is much potential for improvement in corporate accountability if companies are open to it and they are willing to step outside the box of the minimums that regulators require and the methods that they’re accustomed to using. Corporate accountability best practices are evolving, and technology may advance to develop new practices even further, making corporate accountability an exciting field for continued development.
Existing accountability practices pave the way for driving new changes for technologies in financial reporting. If there is one concern about new ways of looking at corporate accountability, Ramanna cautions that this theory is something that is outside the price system and that it has the potential to make some accountants leery or uncomfortable. Some accountants reason that there is no common basis for measuring carbon emission units, water usage and measures of quality of life outside the price system.
Moving into the future, technological advances could easily eliminate many of the processes and practices that corporations have relied on for so many years and replace them with practices that are far more accurate and transparent. How well companies utilize the new advancements could give big advantages to companies that are open to using them.