Accounting and finance for
managers: a decision-making
approach
Chapter 4:
Financial analysis: Part II
Learning outcomes

After studying this chapter, the reader will
be:


Able to understand that financial information is
communicated through varying means and in
different forms.
Aware that corporate communication may be
factually accurate but it might be presented,
written or distributed in a way that sends out
information signals.
Topics covered


Different forms of corporate
communication.
Examples and an overview of corporate
communication use, misuse and abuse.
Beyond the financial
statements!



The annual report is a critical piece of corporate communication – and
the financial statements in particular allow users to assess the financial
position, performance and strategy of a business.
In the previous chapter we considered how to undertake an analysis of
the financial statements.
But there is more information contained within this document which
could be helpful to you, including:






Reflections from members of the senior management team on position,
performance and strategy
Operating and Financial Review/Management Commentary/Management
Discussion and Analysis (title varies dependent upon geography)
Directors’ remuneration report
Corporate social responsibility report
Corporate governance procedures, practices and policies
Background information on company directors.
Beyond the annual report!

When we look at analysts’ assessments of the level of importance
placed on various forms of corporate communication, it is clear that
there is a world beyond this document (source: Abraham, Marston and
Darby, 2012):
Information source
Mean
Meetings with management
Results announcements
Trading statements
Peer companies
Annual report and accounts
Industry experts
Analysts
Interim statements and quarterly reports
Interim reports and accounts
Market news
Newspapers
Financial news channels
Internet bulletins
4.5
4.2
4.1
4.0
3.9
3.8
3.6
3.6
3.4
3.2
3.0
2.8
2.3
Standard
deviation
0.7
0.9
0.8
0.5
1.0
1.0
1.1
1.0
1.0
1.0
0.9
0.9
1.1
Stakeholder management



An organization faces information demands from a wide
variety of stakeholders and must try to manage these
efficiently and effectively.
One way to do this is to build a stakeholder salience model.
Indeed, Mitchell, Agle and Wood (1997) proposed three
underpinning attributes to salience:



Power (ability to levy power upon an organization)
Legitimacy (the legitimacy of the claim on the organization)
Urgency (the degree to which a stakeholder can call for immediate action)


The higher the stakeholder’s relative level(s) of power, legitimacy and urgency,
the greater their level of prominence.
They built a salience framework (next slide) based upon this assessment.
Stakeholder salience
Stakeholder management
Latent stakeholders – possess one (of the three) attributes.
Owing to the limited time and resources available to managers, it is likely
that they will do very little about stakeholders whom they believe
possess only one of the three attributes. It is possible that their
existence (ie the latent stakeholders) will not be acknowledged. Note
that this relationship cuts both ways, and these stakeholders are unlikely
to pay attention to the entity.
Attribute(s)
Description
Power
Possess power to impose their will on a
firm, but by not having a legitimate
relationship or an urgent claim, their
power remains unused.
Legitimacy
Possess the attribute of legitimacy, but
they have no power to influence the firm
and no urgent claims.
Urgency
Those with urgent claims but having
neither power nor legitimacy are the
‘mosquitoes buzzing in the ears’ of
managers: irksome but not dangerous,
bothersome but not warranting more than
passing management attention, if any at
all.
Stakeholder management
Expectant stakeholders – possess two attributes.
Stakeholder salience will be moderate where two of the stakeholder attributes – power,
legitimacy, and urgency – are perceived by managers to be present.
4. Dominant
Power and
In the situation where stakeholders are both
legitimacy
powerful and legitimate, their influence in the firm is
assured, since by possessing power with legitimacy,
they form the ‘dominant coalition’ in the enterprise
(Cyert and March, 1963). The expectations of any
stakeholders perceived by managers to have power
and legitimacy will ‘matter’ to managers.
5. Dangerous
Power and urgency When a stakeholder lacks legitimacy but has urgency
and power, that stakeholder will be coercive and
possibly violent, making the stakeholder ‘dangerous’,
literally, to the firm. ‘Coercion’ is suggested as a
descriptor because the use of coercive power often
accompanies illegitimate status.
6. Dependent
Legitimacy and
Dependent stakeholders lack power but have urgent
urgency
legitimate claims; they depend upon others (other
stakeholders or the firm's managers) for the power
necessary to carry out their will. Because power in
this relationship is not reciprocal, its exercise is
governed either through the advocacy or
guardianship of other stakeholders, or through the
guidance of internal management values.
Stakeholder management
Definitive stakeholders – possess all three attributes.
Stakeholder salience will be high where all three of the
stakeholder attributes are perceived by managers to be
present.
Power,
legitimacy
and
urgency
By definition, a stakeholder exhibiting both
power and legitimacy already will be a member
of a firm's dominant coalition. When such a
stakeholder's claim is urgent, managers have a
clear and immediate mandate to attend to, and
give priority to, that stakeholder's claim.
Corporate social responsibility
reporting

CSR reports place emphasis on issues such as:
community matters
 health and safety
 diversity and human resources matters
 environmental programmes.
CSR reporting research suggests that corporate disclosures of policies,
practices and strategies are designed to achieve one of the following
four, sometimes intertwined, objectives:






Reputation risk management
Legitimacy
Image restoration
Impression management
Earnings announcements, conference
calls and investor presentations


The annual report has recently come to be regarded as a
confirmatory (or regulatory) document…
…mainly because large companies have regular (normally
quarterly) results/earnings announcements, sometimes
referred to as press releases, accompanied by conference
calls and/or investor presentations:




These provide summarized (adjusted) accounting numbers.
They also include a summary of the material movements during the
period plus an analysis of the position and performance.
These range in complexity and in content.
Importantly, they also commonly provide an outline of the company
strategy and the possible impact this might have on future
performance.
Media relations: press releases and
newspaper coverage


Communicating with, and through, mass media has become
central to organizations and the investor relations role.
There is evidence that links a favourable representation in
the media with improved performance.


To achieve success, however, companies need to get their message
out and have it adopted in the way they would like.
Newspapers and news organizations are vital to generating
publicity.

However, they are also important to preserving and enhancing
reputational capital and transmitting information to stakeholders
who might otherwise be hard to reach (or influence). The mass
media therefore essentially act as a conduit.
Social media and internet bulletins

As yet, nobody really knows how social media and internet bulletins will impact
on corporate communication. In the meantime, we can only comment on what
has happened.




We have observed three major changes as a result of this new media
technology (although there are bound to be many more):
1.
2.
3.

The majority of the world’s corporate household names maintain social media accounts, such as
Facebook, YouTube and Twitter.
The audiences are different, not just in terms of the demographic but also the information needs.
There are all sorts of other internet-based means that allow companies to transmit information to
stakeholders in a more accessible way eg blogs, bulletin boards and so forth.
the immediacy of information availability;
the reach of this information; and
the ability for users to comment on content.
The advantages are that companies can be first to frame an event and set the
news agenda. However, the immediacy means that an inappropriate lead, a lack
of thoughtfulness in the communiqué or an inaccurate reflection of the events
can have serious effects.