The trends and strategies of doing business have revolutionized in the past few years. At present, the corporate executives and the general public put the question on the old shareholder primacy model while advising corporations to identify a purpose that could serve all stakeholders equally, instead of just focusing on the investors. To deal with this shifting perception in the market regarding corporations’ roles, the Securities and Exchange Commission recently developed a new rule that requires all firms to present information regarding human capital. Stakeholders and investors can have clearly understood employees’ role in the success and risks associated with the firms.
Now the most critical question in every mind must be about what those disclosures can be and how effective they can be to influence the firm’s behavior. Here we are talking about disclosures that are constructed more carefully so that they cannot backfire or lead to worse outcomes. For instance, a study conducted by Alexander Mas in the year 2016 shows that a disclosure made by the CEO in 1934 was supposed to lower the executive compensations. However, the lower-paid CEOs used that information to grab higher salaries, and the higher paid CEOs experienced no considerable change in their compensations. In this scenario, if companies think of making new disclosures, they need to follow carefully examined procedures to harm their business negatively.
While past situations tell us about cautionary tales, it also guides us to lead a well-planned roadmap for future reporting. The professionals recently examined the annual reports of more than 88 companies that were a part of the S&P 500 from 1957. Stats reveal that almost one-third of these companies designed a pie-chart to describe how the company utilized each dollar to grow the business. With this, stakeholders could get a better understanding of dividends, wages, and taxes. However, this type of disclosure disappeared by the 1980s.
As per the in-depth analysis conducted by the professionals at Global Investment Strategies, this type of disclosures declined in the lockstep as the organizations’ view started shifting more towards its shareholders. With time, the firm’s resources started working more towards the firm than the stakeholders and employees. As the prevalence of the firm’s disclosure declines, the revenue shares towards taxes and employees also decreases.
Another aspect of the utilization of revenue affects a firm’s behavior by a considerable level. At that time, firms used to show a transparent portion of the income going into employee wages were believed to be more trustworthy than others. Moreover, these disclosures could help companies behave more responsibly towards their employees, instead of focusing only on their profits. Hence, it is essential to set up a broader mindset for potential disclosures in the organization to lead brand authority in the market.
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