How well a business corporation performs in financial terms is significant for a broad group of people that includes potential/existing investors, creditors, employees or managers. With differing information needs and purposes, each category of stakeholders should be provided with data that is comprehensive, relevant and reliable, so as to allow an informed opinion to be reached on the corporation’s financial performance. However, all too often, the general public is left out of this equation. A corporation’s operations have direct and indirect effect on the general public, who don’t have a “stake” in the company in the conventional use of the term. Yet, business corporations are purely economic structures, whose sole purpose is profits and whose foresight stops with the next quarter. This essay tries to discuss the existing norms of accountability, its deficiencies and areas that need improvement.
What Financial Reports do not reveal:
First of all, financial reports have their limitations. While they can accurately evaluate the values of tangible assets, more often than not the measure of intangible consequences of the company’s operations are not accounted for. For example, let us take a company that manufactures cosmetics. The manufacturing and packaging of the company’s products involves chemical processes, the residues of which are purged into a nearby river stream or sea. The discharged residual matter is highly toxic and hence harmful for the aquatic life in the waters. This leads to the diminishing in numbers of many species. Those that survive this hazard and land in fishing nets are consumed by human beings. So, now the citizenry of the area surrounding the company’s processing unit get affected. The affectation could be of varying degrees and can manifest slowly over a long period of time. These are all costs alright, but not for the corporation. These “externalities” are not accounted for in the annual reports.
Who pays for Externalities?:
So who pays for the “externalities”? Well, let us say the sickened citizenry are hospitalized for treatment. The treatment costs could be imposed on the patients themselves (in a highly privatised economy) or by the government (if a public health-care system is in place). Either way, the corporation that was the culprit in this case goes Scot-free. This is just one externality. There are others such as “contribution to global warming”, “contribution to the erosion of ozone layer”, “depleting fertile soils by industrial production policies”, “contribution to air and noise pollution”, etc. The economic structures of many countries (including the advanced ones like the United Kingdom) are not designed to make business corporations pay for the damages induced by them. This blatant unfairness had gained better awareness over the last decade or so – mainly through the persistent efforts of activists and intellectuals. The efforts of devoted activists are finally having an impact on the regulatory and legislative branches of governments to improve existing standards of accountability.