Managers’ Perceptions On Stakeholder Power In Relation To Esg Reporting

Abstract

Environmental, social and governance (ESG) issues are becoming everybody’s concern not only to companies, but also for a large stakeholder group. ESG is important for stakeholders because it could be a risk management concern which impacted their decision making. For companies, it has become an emerging part of competitive strategy and lead to corporate sustainable development. The objective of the study is to investigate managers’ perceptions of stakeholder power across different stakeholder groups in relation to ESG reporting by Malaysian companies. The data are obtained using questionnaire survey. There are sixty eight questionnaires collected from top managers of Malaysian public listed companies. The stakeholder theory underpinned this study. Employing analysis of variance, the result report a significant difference in managers’ perceptions of stakeholder power across different stakeholder groups. Employees, shareholders and the government are perceived to have more power than customers, community and media in relation to ESG reporting. The findings help to provide a better basis for understanding on how managers' perceived on stakeholder power of different stakeholders with regard to ESG reporting.

Keywords: StakeholderpowerESGmanagerstakeholder theory

Introduction

Companies engage with environmental, social and governance (ESG) practices in their business strategy as they believe this to be the way forward and that there is benefit in promoting improvement in their overall corporate performance (Ferrero-ferrero et al., 2016). ESG factors reflect risk and opportunities (Kocmanová & Dočekalová, 2012), which would help not only companies, but also shareholders and stakeholders at large in business decision-making (Eccles & Viviers, 2011). Commonly, the ESG term is employed in socially responsible investment (SRI) (Eccles & Viviers, 2011) and also in corporate social responsibility or sustainability (Buallay, 2018; de la Cuesta & Valor, 2013). Companies recognise that engaging in ESG reporting is the way forward in fulfilling the various stakeholder expectations of ESG information from companies around the world. Moreover, ESG reporting meets stakeholders’ heterogeneous expectations and demands for information (Van der Laan et al., 2008).

This study is motivated by an awareness of the importance of stakeholders of a company with regard to ESG factors. The existence of a social contract with stakeholders results in the companies’ responsibility to report multiple interests of various stakeholder groups. Furthermore, ESG information is important not only to shareholders but also to a wide variety of stakeholders. Stakeholder theory highlights creating value to stakeholders as an essential matter to ensure the success of a company, because stakeholders influence a company’s survival (Freeman et al., 2010; Freeman, 1984). The application of stakeholder theory helps corporate managers identify which stakeholders actually count to companies in relation to ESG reporting. From the perspective of stakeholder identification and salience theory, stakeholder power identifies stakeholders that have an ability to influence companies’ behaviour, direction, process or outcomes (Mitchell et al., 1997). Moreover, stakeholders’ power relatively influences companies in meeting their demands (Clarkson, 1995). In fact, stakeholder power over a company motivates and results in its disclosure of environmental information (Gallego-alvarez et al., 2017). Corporate managers are motivated to disclose in order to overcome the pressure they receive from powerful stakeholders. Hence, ESG information is disclosed for strategic reasons and for certain incentives to indicate that companies are supporting and conforming to various particularly powerful stakeholders (Gray et al., 1996).

Problem Statement

Most of the past studies discussed ESG in the investment field, which focuses merely on the interest of shareholders. For example, studies on the impact of ESG information on firm valuation (Bassen & Kovacs, 2008) and influence of institutional investors (Boerner, 2007). However, ESG information is related to multiple stakeholders that may also have a vested interest. Therefore, managers should find ways to satisfy the claims of multiple stakeholders simultaneously, and it should not only be limited to fulfilling the shareholders’ needs.

With regard to ESG reporting, companies engaged with main stakeholder groups rather than addressing stakeholders on a single basis, which included internal stakeholders, transient stakeholders, professional bodies, local communities, and regulators (Kaur & Lodhia, 2018). Thus, this present study examines a wider group of stakeholders which include shareholders, employees, customers, government, and community, the commonly examined stakeholder groups (Freeman, 1984) with the addition of media groups (Blanc et al., 2017; Deegan & Islam, 2014; Elijido-Ten, 2011; Gillet-Monjarret, 2015; Manetti & Bellucci, 2016). Media is included because of their important role in disseminating information, especially in the development of information and communication technology nowadays.

Research Questions

How do managers perceive stakeholder power across different stakeholder groups (i.e. shareholders, employees, customers, government, local community and media) in relation to ESG reporting?

Purpose of the Study

The main aim of the study is to obtain how managers’ perceptions of stakeholder power differ for different stakeholder groups in relation to ESG reporting.

Research Methods

Findings

Table 02 reports a significant difference in managers’ perceptions on stakeholder power across different stakeholder groups (i.e., shareholders, employees, customers, government, local community and media) in relation to ESG reporting with F value 4.762 and thus, supports the hypothesis developed.

Based on the mean score, employees (3.770), shareholders (3.765), the government (3.745) and customer (3.705) were among the most powerful stakeholders as perceived by the managers. This finding is consistent with past studies, which found that the employees (Neville et al., 2011), shareholders (Lu & Abeysekera, 2014) and government (Elijido-Ten, 2009; Gago & Antolin, 2004; Liu & Anbumozhi, 2009) were among the most powerful stakeholders. These groups were perceived to have power in corporate disclosure for several reasons. For instance, employee power can be derived in part from the ability of employees to apply force on a corporation with the support of a trade union (Neville et al., 2011). For shareholders, their power is based on their ability to have a direct economic impact on corporations, as they constitute a substantial entity being in most cases the crucial provider of capital (Elijido-Ten, 2009). For government, the information is reported to minimize government interference and at the same time satisfy government needs. Meanwhile for customers, they were seen as powerful drivers of corporate social activities (Belal & Owen, 2007). It has been evidenced that customers expect information related to ESG to reassure them that the company is responsible, has no main liabilities, and, most importantly, the products have no essential litigation risk (Azzone et al., 1997).

The least powerful stakeholder was found to be media (mean score 3.368) and community (mean score 3.411). In the same way, Henriques and Sadorsky (1999) found that managers perceive all stakeholders except the media as important. However, their findings were limited to companies that were considered proactive or leaders in the environmental field, and corporate management regard environment as an important business function. Consistently, the community is not seen as a powerful group in influencing reporting related to ESG due to lack of strength, participation and consultation regarding ESG (Dong et al., 2014).

Table 03 shows the descriptive statistics for the stakeholder power based on the three items relating to how managers perceived the stakeholder power of six selected stakeholder groups. With regard to P1, the first item measuring power, managers perceived that shareholders have the highest ability to apply a direct economic impact to obtain their will (i.e. ESG reporting); this item had the highest mean score of 4.03. For P2, the second item that measures power, managers perceived that employees have the highest ability to apply a physical force to obtain their will (i.e. ESG reporting) with the highest mean score of 3.59. Customers are perceived to have the highest ability to apply a social influence to obtain their will (i.e. ESG reporting) with the highest mean score of 3.81. In terms of the least power possessed by stakeholder groups, managers perceived that media has the least power for both P1 and P2, with mean scores of 3.37 and 2.97 respectively, and community is perceived to have the least power for item P3, with a mean score of 3.6.

Based on descriptive statistics, managers perceived that shareholders’ power exists most in their ability to apply direct economic impact (P1). Shareholder power can be assessed in various forms, such as the use of formal shareholder rights through resolution and provision or withdrawal of capital (Gifford, 2010). This is consistent with Elijido-ten (2009), who stated that shareholders’ power is based on their capacity to have a direct economic impact on companies in their crucial role as provider of capital. In a later study, Elijido-Ten et al. (2010) suggested an interdependent relationship between shareholder and company. This interdependent relationship is constituted by shareholders’ power to threaten company survival by virtue of their investment that depends on corporate performance for capital growth; at the same time, the company is equally dependent on shareholders for funding. ESG information is also found to be important for shareholders in their investment decision process (Boerner, 2007; Sultana et al., 2017), and ESG practices impact corporate value that attracts shareholders (Crifo et al., 2014). This is consistent with Peiris and Evans (2010), who revealed that shareholders or potential investors accept the impact of ESG factors on their investment return.

Managers perceived that employees have the highest power in regard to their ability to apply a physical force (P2) to obtain their will. This confirms the conclusion of Neville et al.'s (2011) that employee power can be derived in part from their ability to apply force on a company with support of trade unions. Mallin et al. (2012) reported a significant positive relationship between employees’ performance and the extent of disclosure. In particular, employees are most relevant to social issues such as safety and health at work, development of employees’ skills, well-being and satisfaction of employees, quality of work and social equity.

Government power is also ranked as among the highest power compared to other stakeholders. This is consistent with Liu and Anbumozhi (2009) and also with Gago and Antolin (2004), who rank government power first. From the descriptive statistics, the highest government power is perceived in its ability to apply direct economic impact (P1) by intervening via regulation and penalising companies that fail to comply (Elijido-Ten, 2009; Gago & Antolin, 2004; Liu & Anbumozhi, 2009). Amran and Devi (2008) highlight government power in the form of economic and financial support, especially to government-linked companies in Malaysia whereby companies are highly reliant on the government in terms of jobs, market protection and financial support.

Customers’ power is perceived to be lower than employee, shareholder or government power; this is consistent with Nyahas et al. (2018). Descriptive statistics show that the highest customer power is perceived to be in form of their social influence (P3). However, this ability is limited in a market where customers possess a certain level of awareness of ESG factors (Goettsche et al., 2016). The communication of a company’s commitment to ESG may enhance its reputation and brand value, which can improve the positioning of its products (services). In turn, customers’ power may be derived from their intention to purchase products (Sen et al., 2006) and even influence an increase in sales. Therefore, customer power may also exist in form of direct economic impact.

Local community is perceived to rate low in their power. Following Kaur and Lodhia (2018), local community is regarded as a generic term that includes, for example, ratepayers, indigenous people, residents and local businesses. From descriptive statistics, local community power is perceived higher in terms of social influence (P3) than in terms of direct economic (P1) and physical force (P2). Dong et al. (2014) reported similar findings and revealed that low community power is indicated by the weakness of local community demands regarding ESG matters

For media, their power are perceived to be lower than that of other stakeholders. Similarly, Henriques and Sadorsky (1999) revealed that managers perceive all stakeholders except the media as important. However, their findings were limited to companies that were considered leaders in the environment and corporate management. Following Yusoff et al. (2018), media includes several different forms, such as print media (e.g. newspapers and corporate bulletins), electronic media (e.g. television and radio) and the internet (e.g. company websites). Descriptive statistics reveals that the highest form of power is perceived in the form of social influence (P3), in particular related to a company’s reputation and image. Media’s power is seen to lie in its role of disseminating information about companies (Deegan & Islam, 2014; Elijido-Ten, 2011) and it may be an influential player in addressing aspects of certain social issues (Blanc et al., 2017); the attention given by the media to certain issues increases community concerns and influences corporate activities. Although media is perceived to have low power, it can be significant.

Conclusion

The results have important practical implications for corporate managers and stakeholders at large. For managers, the results provide insights into how they perceived their stakeholder power in relation to ESG reporting. As asserts by stakeholder theory, managers should responsible and accountable to multiple stakeholders. For stakeholder, the efforts should be apply to improve their power towards ESG matters. For example, the need for a government initiative to transform local communities into powerful stakeholder and become an important players in ESG reporting. This will contribute to a better situation if companies and communities work hand in hand concerning a sustainable livelihood. The public sector considers all types of government agencies, should responsible in inculcating awareness to the communities about their rights in order to be an effective change agent relating to the responsibility of companies operating within their areas. Clearly, managers play a unique role in stakeholder relations and are involved in decisions to communicate relevant information to the company’s stakeholders in the manner they perceive about stakeholder power on their claims on ESG information.

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