Corporate governance based on business reporting in accordance with IAS/IFRS accounting

A critical analysis of what information IAS/IFRS accounting provides for a holistic business reporting and its usefulness for value based management

Bachelor Thesis, 2006

128 Pages, Grade: 1,7


Table of contents

List of abbreviations

Table of figures

List of formulas

1 Introduction
1.1 Objective
1.2 Structure

2 Theoretical background
2.1 Corporate governance
2.1.1 Corporation Types of organisations Attributes of corporations Corporate capital structure Corporate management
2.1.2 Corporation’s need for governance
2.1.3 Governance Governance of a corporation Corporate governance objectives Shareholder value Stakeholder view Corporate social responsibility
2.1.4 Corporate governance system Shareholder-oriented corporate governance systems Stakeholder-oriented corporate governance systems . Integrated corporate governance systems
2.2 Accounting
2.2.1 Financial accounting vs. management accounting
2.2.2 Information asymmetry and principal-agent theory Problems of information asymmetry according to the principal-agent theory Hidden characteristics Hidden action and hidden information Hidden intention Application of the principal-agent theory on information asymmetry within accounting Solutions of the issues from the principal-agent theory Application of accounting on the solutions of the issues of the principal-agent theory
2.2.3 Accounting reporting Financial reporting vs. business reporting Holistic business reporting
2.2.4 Internationalisation of accounting Accounting choice Harmonisation and standardisation of accounting International Accounting Standards
2.3 Conclusive summary

3 Analysis of what information International Accounting Standards / International Financial Reporting Standards accounting provides for a holistic business reporting
3.1 Overview of International Accounting Standards / International Financial Reporting Standards
3.1.1 International Accounting Standards /International Financial Reporting Standards
3.1.2 International Accounting Standards Board
3.1.3 International Accounting Standards Board Framework
3.2 Information of International Accounting Standards / International Financial Reporting Standards
3.2.1 Financial information of International Accounting Standards / International Financial Reporting Standards Basic financial information Balance sheet and statement of changes in equity .. Income statement Cash flow statement Consolidated and financial information Individual financial statement and consolidated financial statement Interim financial reporting Segment reporting
3.2.2 Non-financial information of International Accounting Standards / International Financial Reporting Standards Notes Management commentary
3.3 Conclusive summary

4 Analysis of the decision usefulness of information from holistic business reporting in accordance with International Accounting Standards / International Financial Reporting Standards accounting for corporate governance
4.1 Business case
4.1.1 Organisational structure
4.1.2 Institutionalisation of corporate governance
4.1.3 Financial reporting in accordance with International Accounting Standards / International Financial Reporting Standards Consolidated financial statement Consolidated balance sheet Consolidated statement of changes in equity Consolidated income statement Consolidated cash flow statement Notes to the consolidated financial statement Liquid assets Accounts receivable and other assets Property, plant and equipment Revenue Information Sales and marketing Income taxes Supplementary cash flow information Segment report Management commentary Nature of business Objectives and strategy Key resources, risks, opportunities and relationships Results and prospects Key performance indicators
4.2 Information needs of corporate governance
4.2.1 Entrepreneurial information needs Types of entrepreneurial information Supplying the entrepreneurial information needs
4.2.2 Environmental information needs Types of environmental information Supplying the environmental information needs
4.2.3 Information needs due to interdependence and comparability .
4.3 Corporate governance based on holistic business reporting in accordance with International Accounting Standards / International Financial Reporting Standards
4.3.1 Supplying the entrepreneurial information needs of corporate governance by holistic business reporting in accordance with International Accounting Standards / International Financial Reporting Standards
4.3.2 Supplying the environmental information needs of corporate governance by holistic business reporting in accordance with International Accounting Standards / International Financial Reporting Standards
4.3.3 Supplying the information needs of corporate governance due to interdependence and comparability by holistic business reporting in accordance with International Accounting Standards / International Financial Reporting Standards
4.4 Conclusive summary

5 Conclusion

6 Sources
6.1 Internet sources
6.2 Literature sources
6.3 Law sources

List of abbreviations

illustration not visible in this excerpt

Table of figures

Figure 1 - Types of organisations

Figure 2 - Fundamental pillars of corporate social responsibility in accordance with sustainable development

Figure 3 - Diagram of the current International Accounting Standards Committee Structure

Figure 4 - Exemplary balance sheet in accordance with International Accounting Standards / International Financial Reporting Standards

Figure 5 - Exemplary income statement in accordance with International Accounting Standards / International Financial Reporting Standards

Figure 6 - Exemplary cash flow statement in accordance with International Accounting Standards / International Financial Reporting Standards

Figure 7 - Information of holistic business reporting based on International Accounting Standards / International Financial Reporting St andards

Figure 8 - Organisational structure of the business case

Figure 9 - Business case - Consolidated balance sheet

Figure 10 - Business case - Consolidated statement of changes in equity

Figure 11 - Business case - Consolidated income statement

Figure 12 - Business case - Consolidated cash flow statement

Figure 13 - Business case - Note to income taxes

Figure 14 - Business case - Segment report

Figure 15 - Business case - Key performance indicators

List of formulas

Formula 1 - Shareholder value estimation

1 Introduction

In recent years standard setting bodies as well as users such as capital markets have increased their demands for developing external reporting towards a holistic business reporting. Along with the requirement that listed companies located in Europe as of 1 January 2005 should prepare their consolidated financial statement in accordance with International Accounting Standards (IAS), more and more companies all over the world (freely or by obligation) are preparing and publishing their consolidated accounts applying International Financial Reporting Standards (IFRS).[1]

Using international accounting systems like IAS / IFRS[2] with its central principle of “decision usefulness”[3] makes it possible respectively obligatory to meet the information needs of a holistic business reporting by “ ... reducing the information asymmetry between providers and recipients of capital ... ”[4]. “To be relevant to investors, creditors, and other for investment, credit and similar decision, [IAS / IFRS] accounting information must be capable of making difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm correct expectations.”[5]

By calling for “decision useful” information within IAS / IFRS accounting one could ask why the collected information is only used for external business reporting. With its holistic approach, business reporting and its underlying informative basis determined by the principles and rules from IAS / IFRS provides the opportunity to use it as an internal control system in order to support managerial decisions as well. Or, to see it from a different angle, if “decision useful” information to prepare IAS / IFRS consolidated accounts are already gathered, it is to be questioned how corporate governance can use them within the decision-making processes.

1.1 Objective

The main goal of this elaboration is to figure out to what degree and how corporate governance can benefit from “decision useful” information that holistic business reporting in accordance with IAS / IFRS holds.

Therefore the present thesis, as the title already suggests, primarily deals with the analysis of 1. what information holistic business reporting on the basis of IAS / IFRS accounting provides and 2. to what extent information from holistic business reporting is useful for corporate governance.

This is carried out in order to evaluate the “decision usefulness” of IAS / IFRS accounting information for value based management and governance tasks because corporate governance is a means of controlling and directing a corporation and managing a corporation for value respectively.[6]

1.2 Structure

This thesis consists of five chapters.

The first of the following four chapters provides the theoretical background of the thesis. At first, the spirit and purpose of corporate governance will be discussed. Thereby, a corporate governance system will be derived that will comprise the objectives of corporate governance and thus its information needs in the decision making process. Then, the whole purpose of accounting will be clarified in order to provide an understanding of accounting reporting and the main features of holistic business reporting. In order to refer the provided information to holistic business reporting under IAS / IFRS, this chapter ends with an explanation of the internationalisation of accounting.[7]

This subject will be pickup in the following chapter, where the analysis of what information IAS / IFRS accounting provides for a holistic business reporting is set on focus. Therefore, the chapter starts with an introduction in the development and structure of IAS / IFRS. Then, the information of IAS / IFRS financial reporting will be explained and conclusively analysed referring to their adequacy for holistic business reporting.[8]

The forth chapter will use this information in order to build a business case that provides a holistic business reporting in accordance with IAS / IFRS. Later, the information of the business case will be analysed in order to prove the “decision usefulness” of this information of holistic business reporting in accordance with IAS / IFRS for corporate governance. Therefore, the information needs of corporate governance will be ascertained and conclusively compared with the information IAS / IFRS holistic business reporting provides.[9]

Finally, this thesis will draw a conclusion on the analysis whether corporate governance can be based on holistic business reporting in accordance with IAS / IFRS accounting and summarize its new insights in the topics of corporate governance and holistic business reporting. [10]

2 Theoretical background

The subject matter of this thesis is corporate governance based on business reporting in accordance with IAS / IFRS accounting. In order to get access to the topic, this section will develop the theoretical background addressing the two key areas of this body of research: corporate governance and accounting.

First, a common understanding of the meaning of the expression “corporate governance” will be established. Therefore, the single words of the expression “corporate governance” will be successively defined and explained in the context of this thesis. Subsequently, the definitions will be brought together and lead to the definition of a corporate governance system approach applicable to this thesis.

Then the topic of accounting will be illustrated by setting the focus on the spirit and purpose of accounting with regard to its informational function to support decision making of corporate governance based on holistic business reporting in accordance with IAS / IFRS accounting. Therefore, basically the two categories of accounting financial accounting and management accounting are described. Afterwards, aspects of information asymmetry in principal-agent relationships are explained and applied on accounting as a possible method of resolution for this issue. This leads to different types of accounting reporting, from which the information to resolve the problem of information asymmetry can be obtained. As the underlying information of reporting has to be harmonized and standardized in order to be useful as well as comparable, the aims and mechanisms of internationalisation of accounting are discussed, too, closing with the implementation of IAS.

2.1 Corporate governance

The expression “corporate governance” is a frequently discussed topic in economic science, politics, law, and practice. Nevertheless, the corporate governance concept is poorly defined because it covers a lot of distinct phenomena and its definitions have drawn a sophisticated picture depending on the perspective of corporate governance.

Some authors dealing with the subject of corporate governance suppose it at its core as an economical approach to optimise business processes and structures.[11] Others believe that corporate governance is a legal and jurisprudential method to analyse and control business management. Furthermore, there are attempts to compare the meaning of corporate governance with business management, business control or business constitution.[12] This has led to a large number of various definitions which basically reflect special interests in a particular field and make it hard to define corporate governance generally and specific at the same time.

The general question determining an adequate definition of corporate governance is which scope is applicable respectively whether the business management should be based on economic or jurisprudential[13] aspects. The scope of corporate governance predominantly depends on the underlying governance object and its environmental influence factors as well as its aims and its purpose. As the first part of the corporate governance term already indicates, this is the business object corporation.

Therefore, the underlying governance object corporation as well as its special attributes concerning corporate governance are defined first. Subsequently, the need for governance of corporations is affiliated. This leads to the definition of governance in general as well as to the objectives of governing a corporation and finally concludes the definition of an appropriate understanding of a corporate governance system applicable to this thesis.

2.1.1 Corporation

A corporation, derived from the Latin term “Corpus” (body), represents an organisation as a formal body of people with shared goals who are authorized to act as an individual. According to the purpose of an organisation, different types of organisations can be distinguished. Types of organisations

Concerning the evolutionary history of organisations, firstly one can identify governmental and non-governmental organisations as detailed in the following figure:

illustration not visible in this excerpt

Figure 1 - Types of organisations14

This elaboration deals with non-governmental organisations, more precisely for-profit-organisations[14] [15] to refer to the economic background of this thesis. These modern business organisations can be defined as a “ ... bundle of resources and capabilities ... ”[16] created for business ventures assuming some accountability for the inherent risks. Attributes of corporations

Regarding the academic discussion of corporate governance, the subject matter of corporate governance is almost solely referenced to listed capital companies.[17] For this reason, the present thesis will also deal with companies quoted on the stock exchange, henceforth referred to as corporations, because mainly within those organisations there is the necessity and, to a certain extend only there, the possibility for corporate governance.[18]

A corporation, as one common form of for-profit-organisations, is founded by entrepreneurs or investors in order to incorporate joint stock companies to facilitate a business. This type of organisation is characterized by the limited liability of its owners who remain separate, the issuance of easily transferable shares, and the existence as a going concern.[19] Like a real person, a corporation can conclude contracts, sue or be sued, pay taxes separately from its owners and do everything else that is necessary to conduct efficient business. Corporate capital structure

Looking at a corporation as a public investment company trading shares on the capital market, one can distinguish between two types of corporations in accordance to their funding by the capital market.

On the one hand, there are corporations whose capital structure is characterized by a few major shareholders, the so called blockholders[20], like families, other corporations or the state.[21] These blockholders usually hold a big share on the corporation that is granting them certain rights such as the power of veto or blocking minority.[22] Consequently, blockholders have a definite opportunity to control corporate management or even influence the way the corporation is directed.[23] On the other hand, there are corporations whose shares are owned by diverse shareholders.[24] Due to the large number of minority shareholders within a corporation with a high free float ratio, henceforth referred to as free float corporation (FFC), none of the shareholders holds a sufficient number of shares to exert an appreciable influence on the corporation s management.[25] Corporate management

As no shareholder has an appreciable power of influence on the corporation’s activities, especially FFCs deal with the problem of managing and controlling the corporation.

Shareholders of a corporation certainly have a specific return assumption of their financial investment in the corporation. They expect the corporation to compete and even to succeed on the market in order to create some added value. However, for many reasons[26], a single shareholder of a FFC is not able to ascertain that his financial investment yields a good return.

The corporation has to be controlled and directed for the purposes of all shareholders. This proportion eliminates the possibility of an individual shareholder managing a corporation. If, on the other hand, all shareholders were allowed to be control and direct the corporation, an extensive democratic voting would be required every time a decision has to be made. This would not only be very time-consuming but also assume that all shareholders are always well-informed about the corporation and capable to make economically useful decisions, too, whenever necessary.

As this is not realistic and this way of managing a business would not be very rational,[27] a superior authority has to be established inside the corporation in order to manage the corporation by aligning the interests of its shareholders.[28] This task is assigned to the corporate management which consists of a few experts and managers respectively and their staff controlling and directing the corporation. These people form the executive board as a part of corporate management.

Accordingly, the shareholders put their trust into corporate management hoping for the corporate management to dispose their property successfully. The problem of separation of property and authority to dispose caused by the falling apart of ownership and control of the underlying business object corporation has actually lead to the need of corporate governance.[29]

2.1.2 Corporation’s need for governance

The difficulties of directing and controlling the corporation on behalf of its shareholders are to be solved by corporate management. However, this delegation of power of influence generates other problems because of that the corporate management does not perform its job correctly.

It is not only complicated for the shareholders to manage a corporation, but also problematic to judge and ensure that corporate management acts agreeing with their objectives. Time and effort to gather and analyse all the necessary information to be able to judge the tasks and activities of corporate management is extremely high and even multiplies, when thinking of every single shareholder trying to supervise the corporation’s actions.[30] As this way of acting would also not be very rational, an intermediary has to be found in order to supervise corporate management and to ensure that the corporation is managed on behalf of the shareholders. Therefore, every corporation installs a so called board of directors (BoD), whose members oversee the affairs of the corporation and ensure that every action of the corporation corresponds to the shareholders’ objectives.[31]

In order to be able to influence corporate management and the executive board respectively the corporation or the shareholders, as the corporation’s owners who elect the BoD,[32] entitles the BoD a certain right of co-determination. This is achieved by giving the BoD, as the second part of corporate management, the opportunity to vote and drop the members of corporation’s management and hence, to force the executive board to act in accordance with the goals of the shareholders and not in their self-interest. Nevertheless, as a number of “corporate scandals”[33] of the 1990s revealed, most BoD’s tend to be ineffective as the governance of a corporation is a very complex subject.

2.1.3 Governance

K. Shedler and J. P. Siegel generally describe governance as follows:

“Governance is a phenomenon, which is cause, result, and general conditions of changes. 4

This very wide definition of the term “governance” indicates that governance is not about the operational governing in the sense of managing a corporation.

According to S. Bell, the concept of governance refers to the processes and systems by which an organization or society operates by using “ ... institutions and structures of authority to allocate resources and coordinate or control activity in society or the economy”[34] [35] in order to achieve their objectives. Hence, the main task of the governance is the coordination and control of the underlying governance object to ensure it is achieving its aims.[36] Governance of a corporation

In this thesis, the underlying governance object is given by a corporation and thus determines the task of its governance.[37] It has been revealed that a corporation is a type of for-profit business organisation.[38] Such organisations act in a very complex environment as they have to deal with a lot of surrounding factors, e. g. economic, legal, political, environmental or even social factors,[39] to compete on the market. All those factors influence the corporation concerning its business decisions and actions on the market.

Hence, the governance of a corporation, which has to oversee the affairs of the corporation, has to take into account all aspects of the corporation’s environment determining its success or failure in wealth creation. The success of a corporation is defined by the objectives it wants to achieve and to what degree they are achieved. This indicates that governing a corporation is strongly connected with the corporation’s objectives as these objectives are also the objectives of its governance. Corporate governance objectives

Every corporation’s ultimate objective is to create sustainable value.[40]

In order to understand and organise the corporation’s objectives different theories attempting to explain corporation’s value creation and to create guidelines for strategic management have been developed. The shareholder value theory, as an example which gained much publicity, argues that the maximisation of the so called shareholder value should be the corporation’s primary intention. The objective in view is foremost financial value creation to increase profits and the welfare of the corporation’s shareholders. Other approaches, like the stakeholder view,[41] state that a corporation not only generates an economic surplus and should not only be focused on the shareholders. Hence, also other interest parties of the corporation are considered.

Corporate governance, on the one hand, has to be aware of such corporation’s primarily economic objectives because the governance’s duty and objective respectively is to control the activities of its corporation in order to achieve them. On the other hand, there are additional aims to be reached from corporate governance which have to be brought in line with the other objectives of the corporation.

To understand what these objectives are and what effects they have on the corporation’s orientation, on corporate management and finally on corporate governance, firstly the shareholder value theory will be presented, followed by its further development of the stakeholder view. Both approaches were especially evolved to explain corporation’s strategy making as well as objective allocation. They represent the first part of the objective framework of corporate governance from an economical point of view. Concluding, special objectives concerning the corporate social responsibility of a corporation are discussed which will also build up the framework to develop a definition of the corporate governance system. Shareholder value

The shareholder value (ShV) approach has been introduced by A. Rappaport[42] in 1986 and aims, in its simplest form, at managing a public investment company to achieve enhanced share price performance and dividend growth. According to this, corporate management first and foremost considers the interests of shareholders in its business decisions in order to facilitate the maximisation of profits and shareholder value creation.[43] The economic justification of the ShV model concept derives from the assumption of a perfectly competitive market and that there exist no other stakeholders of the corporation, except the shareholders.[44] These assumptions result in the premise that the maximisation of the welfare of shareholders causes no welfare losses of other stakeholders[45] because they are all unaffected by the corporation’s operations.[46]

At its core, the ShV approach represents the financial valuation of an investment “ ... by discounting forecasted cash flows by the cost of capital. These cash flows ... serve as the foundation for shareholder returns from dividends and share-price appreciation.“[47] The following formula shows the calculation of the ShV:

illustration not visible in this excerpt

Formula 1 - Shareholder value estimation[48]

Looking at the mathematical ShV estimation, the ShV is made up of four subparts which are influenced by the seven ShV macro[49] drivers:[50]

- the percentage annual sales growth rate,
- operating profit margin,[51]
- cash income tax rate,[52]
- fixed capital needs,
- working capital needs,
- cost of capital, and
- planning horizon.

The formula as well as the above mentioned value drivers indicate that the ShV is an expected value based on hardly predictable matters of fact and only refers to financial aspects of corporate valuation. Especially the latter leads to predictable actions of corporate management which is only intended to assure high dividend payouts. It also aims at stabilising and augment respectively the extremely volatile corporation’s share price. The corporate strategy aims just at a wealth creation on behalf of the shareholders in order to be competitive on the financial markets[53] and to avoid hostile takeovers if the corporation’s market capitalisation decreases.[54] Stakeholder view

In order to improve the limited perspective of the shareholder theory, J. E. Post, L. E. Preston, and S. Sachs introduced the stakeholder view (StV).[55]

From the stakeholders’ point of view, the exclusive consideration of residual claimants[56] as the only resource contributors to receive the value created by a corporation is insufficient and incomplete since the corporation’s actions involve consequences for all stakeholders. Therefore, the StV proposes not only to declare the expectations of the shareholders with their sole aim of economic wealth creation to the corporation’s sole objective, but to consider the expectations of diverse constituents and interests who contribute to the corporation’s existence and success, too.

In order to understand what objectives the StV suggests for a corporation and thus for its governance, it is evident to define the so called stakeholders. Therefore, J. T. Mahoney’s definition of stakeholders will be quoted because it presents a complete explanation as well as comprehensive examples of the term “stakeholder” in the context of a corporation:[57]

“ ... stakeholders [are] ... persons and groups who contribute to the wealth-creating potential of the firm and are its potential beneficiaries and/or those who voluntarily or involuntarily become exposed to risk from the activities of a firm. Thus, stakeholders include shareholders (preferred and common), holders of options issued by the firm, debt holders, (banks, secured debt holders, unsecured debt holders), employees (especially those investing firm-specific human capital), local communities (e. g, charities), environment as “latent” stakeholders (e. g., pollution), regulatory authorities, the government (as tax collector), inter-organizational alliance partners, customers and suppliers.[58]

As all the stakeholders mentioned above “ ... affect or .. [are] affected by the achievements of the .. [corporation’s] objectives”[59] and therefore .. [are] to be concerned by corporate management, the StV portrays a pluralistic objective framework. This diversification compared to the ShV meets the concerns that a corporation, on the one hand, “... owes special and particular duties to its investors ... [(as the shareholders who are also stakeholders) and, on the other hand,] also has different duties to the various stakeholder groups.”[60]

By giving up the pre-eminent status of the shareholders, additional values which are worth to be created and considered as corporation’s objectives play a central role. Besides the objective to ensure a fair return on investment for the shareholders, who are just another stakeholder in the StV, the corporation also aims at non-financial objectives like employee satisfaction or generating a high customer value[61].

This pluralistic approach complicates the tasks of corporate management as the interests of the different stakeholders might conflict. In that case, “ ... the demands and interests of some stakeholders, including shareholders, must be moderated or sacrificed in order to fulfil basic obligations to other stakeholders.”[62] Corporate social responsibility

By including different stakeholder groups, the number of actors involved with a corporation cover a wide range of actors. According to the ShV, those stakeholders are in particular economical contributors. The concept of corporate social responsibility (CSR) expands the ShV’s perspective once again as it assumes that corporation’s “ ... activities, like any other economic activity, are influenced by the societal structures in which their operations take place, they in turn affect the socioeconomic developments.”[63]

The social responsibility of a corporation derives from the awareness of businss organisations that they need a so called license to operate from society. A prominent example is the corporation Shell plc.[64] which ran the risk of losing its license to operate from society caused by its plan of deep-sea dumping of the oil rig Brent Spar in the early 1990’s. Shell plc. underestimated the impact of public insurrection against sinking Brent Spar at the bottom of the North Atlantic. A Greenpeace campaign against the deep-sea dumping of Brent Spar gained the support of thousands of people as well as several governments and initiated a boycott of Shell plc. products. Eventually, society forced Shell plc. to abandon its plans[65] and caused Shell plc. losses of reputation and sales between £ 60 million and £ 100 million.[66]

In order to avoid such situations with such consequences,[67] the concept of CSR is about finding a way to consider the needs of all stakeholders with their aim to make a profit and taking into account the impact on all stakeholders, on the society as well as on the environment. Accordingly, most definition describe it [(CSR)] as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”[68] Though, the World Business Council for Sustainable Development (WBCSD) has come to the conclusion to treat CSR as a more intended subject. The WBCSD defines CSR as follows:

“Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.’[69]

The commitment of CSR within the preceding definition refers to the CSR’s underlying idea of sustainable development[70] which, in turn, rests on the following fundamental pillars:

illustration not visible in this excerpt

Figure 2 - Fundamental pillars of corporate social responsibility in accordance with sustainable development[71]

The objective framework of a corporation according to the CSR approach should include the three indicated aims of sustainable development: economic growth, ecological balance and social progress. Hence, the concept of CSR enhances the StV as it enlarges the perspective by comprising environmental factors holistically. Moreover, it emphasises their effects on as well as from the corporation’s value creation.

2.1.4 Corporate governance system

The interdependence of all the mentioned governance’s objectives, confers corporate governance the character of a system,[72] including all influencing factors as well as actors and interest groups of the corporation with their relationships.

According to J. R. Franks and C. Mayer, one can distinguish

corporate governance systems (CGS), e. g. by the corporation’s capital structure[73] and the allocation of power to shareholders in insider- and outsider- systems respectively.[74] Others differentiate CGS by focusing on takeover regulations in shareholder-oriented CGS and stakeholder-oriented CGS[75].

These distinctions of CGS and others finally hearken back to the differences between Anglo-American and Continental European developments referring to political changes, market formation or social and cultural evolution across the nations. Shareholder-oriented corporate governance systems

For example, the USA, Australia as well as the United Kingdom are referenced to shareholder-oriented CGS and outsider-systems respectively because they are the most liberal market economies.[76] In these nations, the (financial) market is characterised by widespread holdings while the shareholders have less influence on the corporation’s activities as well as on corporate management; therefore the shareholders are called outsiders in such CGS.[77] However, the shareholders have an impact on the stock exchange price of a corporation because the share price reflects the expectations of the market participants of the future trend of the corporation. Hence, the market represents a continuous benchmark of the corporate value and is also an indicator of the appreciation of corporate management. Consequently, corporate management tries to increase the ShV[78], resulting in a preferably high share price, which also increases the takeover premium[79] as well as the takeover risk.[80] This is why these CGSs are also referred to as shareholder-oriented CGS or as shareholder-value governance approach.[81]

The predominant understanding of CG in shareholder-oriented CGS can be taken from the definition from A. Shleifer and R. W. Vishny who describe CG from the perspective of the pure ShV concept as follows:

“Corporate Governance deals with the ways in which suppliers of finance to corporations [its shareholders respectively] assure themselves of getting a return of their investment.’[82] Stakeholder-oriented corporate governance systems

By contrast, A. Demb and F. F. Neubauer conceive CG as “ ... the process by which corporations are made responsive to the rights and wishes of stakeholders’[83] and obviously support the view of stakeholder-oriented CGS and insider systems respectively. These CGSs are characteristic of e. g. Germany or Japan[84] where the ownership structures of corporations are more concentrated[85] and banks, the state, works councils and trade unions limit the power of shareholders.[86] So, insider-systems pursue a policy concerning pluralistic interest groups. They do not consider the ShV’s maximisation as the predominant aim of a corporation. Hence they do also impede hostile takeovers, and adopt a stakeholder-oriented objective framework.[87] Integrated corporate governance systems

Moreover, there are attempts to combine the “ ... two basic models of corporate governance systems ... ”[88] in order to use the strengths of the “ ... ‘market based’ model which emphasizes the maximization of shareholder value ... [as well as] the ‘relationship based’ model”, which emphasizes the interest of a broader group of stakeholders.”[89] By adopting both the global relevance of aspects of the Anglo-American best-practice and the local governance best-practices of international firms operating in countries around
the world, M. Hilb developed the model of “New Corporate Governance” which he defines as follows:

“New Corporate Governance is a system by which companies are strategically directed, integratively managed and holistically controlled, in an entrepreneurial and ethical way, and in a manner appropriate to each particular context.,[90]

This definition of a CGS is, on the one hand, independent of national conditions as well as the associated ShV or StV perspective and, on the other hand, allows for the effective institutionalization of the CSR context. Nevertheless, as M. Hilb definitely does not include the concept of CSR in his definition, although it should naturally go hand-in-hand with good CG, his thesis suggests a more comprehensive definition of a distinct CGS integrating CSR. Additionally, M. Hilb supports the view that CG should both direct and control a corporation[91], which is based on M. Hilb's understanding of the BoD's role which carries out CG tasks. In his definition of CG[92], M. Hilb mixes the concept of CG with the tasks and duties of a particular BoD,[93] which also has executive rights to direct the corporation's activities.[94] Hereby, the BoD and CG respectively is put on a par with corporate management at all. As CG is (only) a concept to supervise corporate management, CG itself has no executive rights and functions respectively. Nevertheless, to implement the concept of corporate governance, the institution that puts CG into practice, usually primarily the BoD together with the executive board, has to have certain possibilities for directing the affairs of a corporation so that it can fulfil its job responsibilities.

In the context of the present thesis, the focus is set on CG itself which is to be understood as a key concept to control and coordinate the activities of the corporation including the above-mentioned objectives of CG. This leads to the following definition of integrated CGS:

Corporate Governance is a system defining continuing processes by which corporations are strategically coordinated and holistically controlled, in an entrepreneurial way and in a manner appropriate to corporate social responsibility to improve the quality of life in each particular context.

2.2 Accounting

Accounting is a diverse and constantly growing body of research, which is as old as civilization. Its history can be traced back to the Italian Renaissance, when F. L. B. de Pacioli[95] introduced the double-entry accounting system and firstly described the accounting cycle with its main tasks, rules and aims. In the course of time various developments of historical, cultural and socioeconomic changes reflected in the advancement of accounting systems.[96] Along with social transformation by industrialisation and urbanisation, accounting developed to a numeric gathering, preparing, and mapping of operational structures, processes and occurrences that influence financial and assets position as well as result situation.[97]

Distinct accounting instruments, e. g. the individual financial statement or consolidated financial statement with their elements of balance sheet, profit and loss account and notes as well as the management report and additional accounts,[98] were established to build up financial reporting.


[1] IAS / IFRS accounting is applied outside the U. S. and Europe, too. For example IAS / IFRS accounting is used in China. This emphasises its relevance for international accounting within modern economics. See Werner et al. (2005), p. 1

[2] Moreover, with regard to the latest progresses in convergence project for US-GAAP and IFRS, IAS / IFRS obtains more and more acceptance by the American Securities and Exchange Commission and should allow a listing on the U.S. market by 2009 at the latest. See Süddeutsche Zeitung (2006), p. 24.

The acronym IAS refers to International Accounting Standards, issued by the International Accounting Standards Committee until 2001. In 2001 the International Accounting Standards Committee was replaced by the International Accounting Standards Board, which endorsed all the existing

International Accounting Standards and interpretations, and started issuing new standards, called International Financial Reporting Standards. Please also see chapter 3.1.1 International Accounting Standards / International Financial Reporting Standards, p. 39.

In this thesis, for the sake of clarity, the expression IAS / IFRS will be used, referring to the entire set of standards currently issued by the International Accounting Standards Committee and International Accounting Standards Board.

[3] See Framework 12.

[4] Herrmann et al. (2004), p. 2.

[5] SFAC 2.7.

[6] As it will be revealed, corporate governance is a part of the corporate management. Therefore, the support of value based management is referenced to the support of governance tasks in accordance to the applied corporate governance system defining its objectives in accordance with value based management.

[7] See chapter 2 Theoretical background, p. 5.

[8] See chapter 3 Analysis of what information International Accounting Standards / International Financial Reporting Standards accounting provides for a holistic business reporting, p. 38.

[9] See chapter 4 Analysis of the decision usefulness of information from holistic business reporting in accordance with International Accounting Standards / International Financial Reporting Standards accounting for corporate governance, p. 62.

[10] See chapter 5 Conclusion, p. 101.

[11] E. G. see Werder (1996), p. 1-5.

[12] See Peltzer (2003), p. 30-31.

[13] The jurisprudential aspect can additionally be separated in corporate law and legal aspects of capital markets. See Assmann (2003), p. 1-17 and see Merkt (2003), p. 126-136.

[14] Own figure.

[15] There also exist non-profit-organisations. See Hopt et al. (2005), p. 15-46. The differ from for-profit organisations as “the principle purpose of a nonprofit organization is (1) not to make a profit, and (2) not to benefit individuals as owners, but to advance the welfare of society”. Bryce (1992), p. 3.

[16] See Amit; Shoemaker (1993), p. 39.

[17] E. g. see Peltzer (1999), p. 55.

[18] History shows that the problem of corporate governance is not only applicable for corporations. According to R. Nagy the problem of corporate governance can be traced back to the formation of the United East India Company in 1602. See Nagy (2002), p. 75. Nevertheless, regarding the recent years, corporate governance is mostly referred to corporations. See fn. 17.

[19] See Roumiantsev et al. (2006),, n. p.

[20] See Haussmann (1928), p. 18-21.

[21] About half the blockholders are corporations and a fifth part are families. See Köke (2001), p. 274-278 or Faccio; Lang (2002), p. 365-393.

[22] An analysis in 1990 found out that 85% of the 171 biggest listed industrial companies were dominated by one major shareholder. Those blockholders hold more than 25% of the rights to vote. See Franks; Mayer (2001), p. 946-947.

[23] Moreover, blockholders aim at „ ... complex webs of holdings and pyramids of intercorporate holding ... “ in order to facilitate long-term business connections between them and the corporations management. Franks; Mayer (2001), p. 944. See Siebert (2004), p. 37 for an illustration of the mutual corporate integration.

[24] This type of corporation referring to the widespread shareholdings is typical for the Anglo-American area like the U. S. and the U. K. See Booking (2003), p. 253.

[25] See Schmidt; Grohs (2000), p. 149 or Moxter (1962), p. 86-87.

[26] See the next chapter of this section.

[27] M. Olson Jr. affiliates that single shareholders act rational when they remain passive concerning the overseeing of the corporation because if an individual shareholder would take it upon himself to oversee the corporations affairs, the other shareholders would benefit without sharing the costs of the supervision. See Olson (1965), p. 9-22, p. 55-56 and Shleifer; Vishny (1986), p. 461-462. This behaviour is called free-riding problem, also referred to as collective action problem that also is derived from legal barriers. See Black (1990), p. 530-566.

[28] The establishment of a superior managing organ is related to respectively proved by a lot of theoretical approaches. See Gerum (2005), p. 19-24.

For example, supporters of the property right theory suppose a business organisation as “... the nexus of [individual] contracts, written and unwritten, among owners of factors of production and customers”. See Fama; Jensen (1983), p. 239. These contracts are disposed because of the advantages of division of labour and specialisation. See also fn. 29. However, the structure of team production bears the risk of shirking. See Alchian; Demsetz (1972). To solve this problem of information asymmetry, the principal-agent theory supposes the supervision of the agent by a principal. The supervision of the agents should be arranged at lowest agency costs. See Jensen; Meckling (1976). In association with the transaction costs theory, this leads in the present case to the creation of a secondary control organ. See Williamson (1985).

[29] See Dutzi (2005), p. 11. Also see Audretsch; Weigand (2001), p. 84 who identify the cause of separation of ownership from control of an inefficient allocation of resources. This is also consistent with the neo-institutional approaches mentioned in fn. 28.

[30] The principle is the same as when thinking of a so called „labor managed firm“, where the employees, who may also own the company, take over the management. See also Fn. 41. Labor managed firms also deal with the problem of increasing complexity to let participate all the employees of an organisation in managing the firm if the number of employees increases. See Nutzinger (1976), p. 570.

[31] The underlying argumentation of the establishment of the board of directors is the same as the argumentation for the creation of corporate management. See chapter Corporate management, p. 9. This also goes along with the widely accepted goal of corporate governance that is to economise agency costs. See Williamson (1985).

[32] In most market societies shareholders are given the exclusive right to elect the board; the German and Japan market are exceptions.

[33] The two most public corporate scandals were the accounting frauds of Enron involving Arthur Andersen and Worldcom, when fraudulent accounting methods were used to mask the declining financial condition by painting a false picture of financial growth and profitability to prop up the price of the corporations stocks. For an overview as well as more detailed information please see BBC (2003), n. p.

[34] See Schedler; Sigel (2005), p. 59 i. c. w. Budäus (2005), p. 2.

[35] Bell (2002), p. 134.

[36] The tasks of (corporate) governance, the control and coordination of corporation’s actions, should not be mixed up with the task of institutions within the corporation, e. g. the board of directors which executes governance tasks but also may have the opportunity to influence respectively direct the corporation’s activities.

[37] The underlying governance subject could be determined by other economical or political organisations. Indeed, the term “governance” has been defined first by the World Bank against a political background as the exercise of political power to manage nations affairs. See Hill (2004), p. 1-15.

[38] See chapter Types of organisations, p. 7.

[39] See chapter Corporate social responsibility, p. 17.

[40] See Post et al. (2002), p. 9

[41] With reference to corporate governance other approaches such as the concept of „labour managed firm“ or the concept of „workers’ participation“ could also be considered. See Witt (2003), p. 37-40 and p. 41-52. Here, only the stakeholder view will be discussed because it includes respectively combines and expands the ideas of the two before-mentioned concepts.

[42] See Rappaport (1986).

[43] See Boatright (1999), 190-191.

[44] This assumption e. g. implies that employees are indifferent about finding a job because they only receive market wages and can get immediately equivalent jobs if they are released or suppliers as well as consumers can choose between similar corporations. See Booth (1998), p. 2-3.

[45] The term stakeholder is defined in chapter Stakeholder-oriented corporate governance systems, p. 21.

[46] See Booth (1998), p. 3.

[47] Rappaport (1998), p. 32.

[48] See Rappaport (1998), p. 32-36.

[49] A. Rappaport mentions also the existence of preliminary micro value drivers which may be used for the operationalisation of the seven macro value drivers but never explains exactly how they are connected. See Rappaport (1998), p. 171.

[50] See Reed (2002), p. 114.

[51] The operative profit margin is estimated before non-operating items such as interest payable and tax.

[53] This ShV driver is to be estimated excluding deferred tax.

[54] “If a company is unable - over the long-term - to earn a return on its capital that covers the cost of its capital, then ultimately, it will fail due to the inability to attract the capital needed to replace its assets.” Grant (1998), p. 33. This implies that a corporation has to be competitive on the financial markets to be sustainable. See Heath; Norman (2004), p. 260.

[54] See Schlussbericht der Enquête-Kommission (2002), p. 86. Also see chapter Shareholder-oriented corporate governance systems, p. 20

[55] Post et al. (2002).

[56] The group of residual claimants within a corporation describes its shareholders.

[57] As J. T. Mahoney’s elaborated from numerous definitions of the term stakeholder the presented definition, his definition is used.

[58] Mahoney (2006), p. 3. Other quotations removed.

[59] See Freeman (1984), p. 25.

[60] Gibson (2000), p. 247.

[61] Even the god-father of the shareholder value mentions other original causal value creating and receiving factors, which indeed according to A. Rappaport only underlie the shareholder value drivers. See Hachmeister (2000), p. 78. To consider those other causal factors influencing as underlying value drivers of the shareholder value drivers is from A. Rappaport’s point of view comprehensible because the maximisation of the shareholder value is the only aim of the corporation from the shareholder’s perspective. Nevertheless, from another point of view like the stakeholder perspective, this annotation already indicates that the shareholder value is not the only measure of corporate valuation and it might be favourable to additionally increase the other values driving the worth of the corporation.

[62] See Heath; Norman (2004), p. 248.

[63] Kuhndt et al. (2004), p. 12.

[64] For more information see

[65] See BBC News (1998), n. p.

[66] See Anon (1999), p. 9.

[67] Other consequences than consumer boycotts due to social and environmental injustice could be attacks on fixed assets, such as farmland and buildings, failure to attract good employees and loss of employee support, extra spending to remedy past mistakes, diversion of management attention away from core activities, restrictions on operations, such as new legislation and regulation, obstacles in raising finance and insurance, difficulties with life cycle (customers downstream and suppliers upstream in the supply chain). See WBCSD (1999), p. 4.

[68] European Commission (2001), p. 8.

[68] WBCSD (1999), p. 3.

[70] The World Commission on Environment and Development (WCED), defines sustainable development as “... a development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” See WECD (1987), p. 43. Reinterpreting this definition to requirements of a corporation’s governance one can identify the three fundamental pillars of corporate social responsibility. See Figure 2, p. 19.

[71] Own figure i. c. w. WBCSD (1999), p. 3.

[72] See Cadbury Committee which describes corporate governance as a „ ... system by [which] companies are directed ... “. See Cadbury Committee (1992), Rz. 2.5.

[73] See chapter Corporate capital structure, p. 8.

[74] See Franks; Mayer (1995), p. 183-184.

[75] In this case the so called stakeholder-oriented corporate governance systems also stand for corporate governance system focussing on social responsibility.

[76] See Höpner (2003), p. 5, Dutzi (2005), p. 15 or Hilb (2005), p. viii.

[77] Dutzi (2005), p. 15.

[78] See chapter Shareholder value, p. 13.

[79] The takeover premium result from the difference between former and recent company price.

[80] See Hall; Soskice (2001), p. 27-28.

[81] See Hilb (2005), p. viii.

[82] Shleifer; Vishny (1QQ7), p. 737.

[83] Demb; Neubauer (1QQ2), p. 187.

[84] See Dutzi (2005), p. viii.

[85] The capital structure is characterised by blockholders who have a big influence on the corporation and thus are called insiders. See Dutzi (2005), p. 1Q and see chapter Corporate capital structure, p. 8.

[86] See La Porta et al. (2000) i. c. w. Höpner (2003), p. 7.

[87] See Höpner (2003), p. 7. Also see chapter Stakeholder view, p. 15.

[88] Hasan (2002), p. 488.

[89] Hasan (2002), p. 488.

[90] Hilb (2005), p. 9.

[91] See Hilb (2005), p. 9.

[92] Here, CG is referred to the delimited concept of „New Corporate Governance“ from M. Hilb.

[93] For the demarcation of governance tasks and the tasks and duties of corporation's institutions please also see Fn. 36.

[94] There are also other comprehensions of the tasks and duties of the board of directors. For example the German equivalent to the BoD, the “Aufsichtsrat”, per se has only supervising functions.

[95] F. L. B. de Pacioli, who is widely regarded as the "Godfather of Accounting", published his mathematical work “Summa de arithmetica, geometrica, proportioni et proportionalita” in 1494. He was the first to codify the double-entry accounting system.

[96] See Nobes; Parker (2000), p. 16-27 or also see Glaum; Mandler (1996), p. 26.

[97] See van der Tas (1988), p. 157 and see Lappalainen (1999), p. 19.

[98] See Raderschall (2003), p. 1. The elements of financial statements differ from country to country. For comparing for example the requirements of Finnish and German regulations see KPL 3:3.1 or see §264 Abs. 1 HGB i. c. w. §242 Abs. 3 HGB.

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Corporate governance based on business reporting in accordance with IAS/IFRS accounting
A critical analysis of what information IAS/IFRS accounting provides for a holistic business reporting and its usefulness for value based management
University of Applied Sciences Essen
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Corporate, IAS/IFRS, Reporting, Corporate Governance, risk, compliance, IAS, accounting, holistic business reporting
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Dipl. Wirt.-Inf. (FH), Dipl. Kfm. (FH), BBA Andreas Schutt (Author), 2006, Corporate governance based on business reporting in accordance with IAS/IFRS accounting, Munich, GRIN Verlag,


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