Disclosures on Business Models and Strategies (Research Paper Sample)

2.1 Business model and strategy disclosures
Annual reports are important for information disclosure or for communicating with the organizations’ stakeholders. Due to globalization and competition among various businesses, stakeholders are becoming more interested in reviewing the financial statements of the companies in order to make informed financial decisions. However, the stakeholders do not need to review financial information only, but they want other information regarding the business strategy and model of a company. According to Aulia, Djakaman, and Lusia (2018), the company that reveal its activities in detail in its annual reports, it provides its stakeholders with valuable information. The information provided in annual report can help the stakeholders to understand the strategy of the company as stated by Morris and Tronnes (2017). Strategic disclosure of a business provide insights to the report users about the financial position and performance of a firm.
Furthermore, Brown and Mylonas (2019) note that, with companies adopting International Financial Reporting Standards (IFRS), there was an increased in the stock exchanges in European markets in the year 2005. Also, in European countries, corporate disclosures increased in complexity and volumes. For example, in U.K., it was established that annual reports pages increased from 85 pages in 2008 to 155 pages in 2017. However it is not easy to determine the quality of these disclosures despite the increase in volume since the reports users may find it difficult to extract the information they need to make their investment decisions. Kilic and Kuzey (2018) argue that, the information in report should be designed to benefit every stakeholder including policymakers, regulators, suppliers, customers and employees since they are interested in understanding the capability of the company in creating value in long-term, short-term or medium-term and this can be achieved through disclosing the strategy. So, to meet the expectations and needs of all stakeholders, firms are highly encouraged to voluntarily increase their transparency. This is because, when a firm publishes an integrated report that discloses the business model and strategy, it increases its legitimacy and stakeholders can assess the prospects of the company concisely.
South Africa is a young country but has a reporting regime which is well established. It has clear requirements for disclosures and benchmarks for transparency in regard to financial information. Strategy disclosure in reports provides the stakeholders with information on strategic direction of the company, performance and risks. Ungerer and Vorster (2015) investigated six industries in South Africa for sustainability and integrated reports. They assessed the disclosure of each company based on three baselines. The first baseline was on guidelines of GRI G3 (Global Reporting Initiative), the second one was on elements regarding the framework of strategic architecture and third one was on framework of business model. They argued that, transparency and quality of reporting improved among the companies in the country. Santema and Van de Rijt (2001) also established that firm in Dutch were disclosing their strategies in their annual reports and almost every company described its strategy and reflected on the course of action it undertook to accomplish its strategies in previous year. This study focused on the listed companies in Dutch without comparing strategy disclosure in other companies that were not listed in Dutch.
Moreover, Beattie and Pratt (2002) argue that private shareholders highly regard data on financial return such as data on major shareholders’ identity, compensation of directors, human capital, catastrophic loss’ risk, customer service and social items than the experts. They also highly regard the information on financial performance and other values. Therefore, the report preparers should include the information that is useful to the stakeholders. Since there is a connection between the financial results and business strategies, firms should disclose their strategies in their annual reports because that information is useful to the report users. However, there are noted barriers that affect the disclosure but with development of internet, it is easy to provide the interested users with the necessary information they require. However, according to Abed, Al-Najjar, and Roberts (n.d.), disclosure is a concept which is abstract such that it cannot be adequately measured and therefore there are various debates on how disclosure can be measured. The approaches that are widely used are content analysis and disclosure abundance which refers to the space devoted to cover the relevant disclosure. Therefore, it is not sufficiently agreed upon on how to determine the amount of strategic disclosure to suggest that a particular company offers more information than the other. Hoque (2017) suggests that the use of integrated reports can improve the business model and strategy because there is a support of decision making and integrated thinking processes. The integrated reporting which covers business model and strategy provides stakeholders with company’s holistic picture. These findings were important because they laid ground to conduct similar researches, for example, on the implication of integrated reporting and narrative disclosures particularly business strategy.
2.2 Disclosures’ economic theory
Aulia, Djakaman, and Lusia (2018) mention three theories applied in disclosure. These theories include legitimacy, signaling and agency theory. The legitimacy theory refer to disclosure that has social meaning. That is, a disclosure that deals with social and political pressure. By disclosing the business strategy, the company tries to inform the stakeholders that it meets the objectives of the society thus reducing the pressure from the public. The second theory which is signaling theory refer to voluntary information disclosure by the enterprise and this helps the management or the company to differentiate itself from other companies or competitors. This is can also be termed as a strategy for the company to differentiate itself through disclosing of its strategies. The third theory, the agency theory states that shareholders would engage in price protect in order to avoid the fraud that management might commit. Therefore, companies take preventative measures which include strategic disclosure to avoid price protect by the shareholders. Dumay (2016) argues that, on perspective of agency theory, problem of information asymmetry that would be created by the managers failure to disclose information would only be corrected by releasing such information for them to benefit from such information. In this case, the company or management would disclose information regarding the business strategy in order to reduce shareholders information asymmetry which would affect the profitability of a business. Other theories according to Habbash, Hussainey, and Ibrahim (n.d.) include capital need and stakeholder theory. The theory of capital need suggests that, companies disclose more information on strategy if they want to attract more investors especially from financial markets or banks to provide more funds into the business. The stakeholder theory on the other hand suggests that, firms need to satisfy the needs and interests of every stakeholders and this can be done by providing them with information on enterprise’s strategy. Therefore, large companies are likely to provide more information because they have high number of stakeholders. Additionally, Al-Bassam et al (2018) argue that, from the perspective of agency theory, closer monitoring of managerial activities and reduced asymmetry of information which is related to block ownership can improve the company’s financial performance thereby reducing the need for increased disclosures in order to obtain legitimacy as defined in legitimacy theory. The legitimacy is offered by the stakeholders of the corporate as stakeholder theory states. These powerful stakeholders include employee unions, shareholders, government, creditors and contractors. Furthermore, agency theory states that institutional shareholders who are influential stakeholders can monitor the strategic disclosure by the corporate because they have large ownership stake. So, the managers have to prepare strategic disclosures that would meet the shareholders needs and seek to earn their support to legitimize their company’s stewardship and resources. The findings from U.K., U.S. and Dutch show that institutional ownership increases disclosure by the organizations.