Hide-and-seek in corporate disclosure: evidence from negative corporate incidents

• DOI: https://doi.org/10.1108/CG-05-2018-0164
• Pages: 158-175
• Published date: 05 October 2018
• Date: 05 October 2018
• Author: Bradley Rudkin,Danson Kimani,Subhan Ullah,Rizwan Ahmed,Syed Umar Farooq
• Subject Matter: Corporate governance,Strategy

Hide-and-seek in corporate disclosure:

evidence from negative

corporate incidents

Bradley Rudkin, Danson Kimani, Subhan Ullah, Rizwan Ahmed and Syed Umar Farooq

Abstract

Purpose –This paper investigates the legitimacy tactics used in the annual reports of UK listed

companiesin the aftermath of major corporate scandals.

Design/methodology/approach –We carried out a content analysisof annual reports of 19 companies

that have been involved in corporate scandals with a view to understand how firms communicate

negativescandals affecting them.

Findings –The findings revealthat firms use a wide range of legitimisation strategiesin the manner that

contribute to shapedisclosure communications concerning negativeincidents. For instance, some firms

may offsetthe negativity linked to an incident by renderingsuch explanations amidst positiveinformation.

Originality/value –Contrary to earlier studies conducted on accounting scandals, the authors

incorporated extensive corporate scandals such as human rights violations, controversies concerning child

labour, environmental scandals, corruption, financial embezzlement andtax evasion.

Keywords Corporate governance, Corporate disclosure, Corporate scandals, Legitimacytactics

Paper type Research paper

1. Introduction

This study investigates the legitimisation strategies used by companies duringdisclosure of

negative information within theirannual reports. Many studies have focussed on compliance

of firms with codes of corporate governance (CG) practices (Albu and Gı

ˆrbin

a, 2015;

Nerantzidis and Tsamis, 2017;Lepore et al., 2018), as opposed to the quality or type of

disclosures made by such firms. Thus, our study contributes to the disclosure research

within CG literature. Accordingly, companies in several parts of the world are increasingly

confronted with numerous regulations and CG practices that obligate managers to declare

disclosures regarding various activities of the firm. Accordingly, managers find themselves

bewildered either to disclose certain information or retain it and may sometimes end up

paying lip service to protect firm reputation (Laufer, 2006).

Accordingly, such situations may occur where firms are deliberately engaged in unethical

activities which may lead to severe consequences if unearthed, such as annulment of

operating licence or imprisonment of managers. In some cases, firms may unintentionally

commit acts that pose adverse effects on their reputation or their surroundings (Hahn,

2012). As an instance, BP suffered an accidental oil spill in 2010 which caused a large-

scale havoc in the Gulf of Mexico (Lin-Hi and Blumberg, 2011). This caused damage to the

ecosystem in the Gulf of Mexico, with an estimated 5000 barrels of oil spillage per day.

Subsequently, BP acknowledged the huge impact of this tragic event and undertook the

responsibility to clean up the spillage. In addition to costly litigation, BP’s share price

plummeted in the aftermath of the devastating environmental disaster (BBC, 2010a,2010b,

Bradley Rudkin is based at

the Reckitt Benckiser, Hull,

UK. Danson Kimani is

Lecturer in Accounting at

the Buckingham Business

School, University of

Buckingham, Buckingham,

UK. Subhan Ullah is

Lecturer at the Department

of Accounting and Finance,

University of Hull, Hull, UK.

Rizwan Ahmed is Lecturer

at the School of Economics

Finance and Accounting,

Coventry University,

Coventry, UK. Syed Umar

Farooq is Vice Chancellor

at Abasyn University,

Peshawar, Pakistan. He is

currently a visiting

(postdoctoral) researcher

at the University of Hull,

Hull, UK.

Received 1 May 2018

Revised 30 July 2018

13 August 2018

Accepted 22 August 2018

PAGE 158 jCORPRATE GOVERNANCE jVOL. 19 NO. 1 2019, pp. 158-175, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-05-2018-0164

2010c;Lin-Hi and Blumberg, 2011). This isan example of how such incidents can be costly

to firms. On the other hand, Volkswagen had forged emissions testing for its vehicles by

disguising them as low emission vehicles with the intention to increase sales. This was a

deliberate action which resulted in severe erosion of the firm’s credibility amongst its

stakeholders notwithstanding lawsuits which were instigated by its consumers and

environmental campaigners. Other poor practices perpetrated by firms include tax

avoidance and labour exploitation (Dowling, 2014 and Lewis et al.,2015). According to

Hahn (2012) when such incidents catch the attention of firms’ stakeholders, the affected

firms often respond by denying them, or covering their acts to minimise reputational

damage, or admit the guilt with a pledge not to repeat the same again.

In addition to internal whistleblowing, country-level institutional factors and the media

continue to play a key role in exposing negative incidents and scandals affecting firms

globally (Petra, 2006;Adams et al.,2018;Ullah et al.,2018). Such exposures often incite

regulatory scrutiny and public reactions resulting in abstention of firm’s products or service

by customers (Dash, 2012). To overcome such risks, firms adopt various strategies to

protect and/or repair their corporate reputation. Extant evidence suggests that firms use

various legitimisation strategies to neutralise the consequences of a negative incidents or

scandals which threaten their survival (Pollach, 2015;Li et al., 2016). In this paper, we

analysed the strategies adopted by firms to dispel negative publicity corporate reputation

followed by negative incidents and scandals. We performed content analysis of annual

report disclosures provided by UK-based multinational enterprises (MNEs) that exhibit the

common themes and strategies embraced by firms to rationalise incidents arising from

accounting, social and environmental issues. By doing so, we unveiled strategies used by

the firms to sustain legitimacy in the aftermathof big scandals and other negative incidents.

This study elucidates insights into the responsive strategies adopted by firms for each

category of incidents faced by individual firms, i.e. accounting, social and/or environmental

issues. As this paper uncovers, many firms provide voluntary disclosures concerning

incidents which affect them (see also Elmagrhi et al., 2016). We also observed that most

firms provide disclosures of such corporate incidents within their corporate social

responsibility (CSR) statements. Consistent with Martı

´nez-Ferrero et al. (2016), we argue

that the choice of CSR statements for disclosing corporate incidents is intended to boost

stakeholder confidence in the affected firms as well as to safeguard firm reputation within

the capital market.

Finally, the findings obtained in this study contribute to literature by providing evidence

concerning responses of UK-based MNEs to negative incidents. The paper espouses the

approach used by Hahn and Lu

¨lfs (2014) in examining corporate disclosure strategies

selected by US-based firms to legitimisenegative events incidents.

This paper is organised as follows: Section 2 includes discussion of literature review and

theoretical framework underpinning this study, Section 3 explicates research methodology,

Section 4 that elaborates the findings obtained in this paper and Section 5 discusses

conclusion.

2. Literature review and hypothesis development

2.1 The media and political costs

Electronic and print media reports play a significant role in reducing information asymmetry

through sharing information with stakeholders (Dash, 2012). The media can influence the

information disclosed within firms’ annual reports. Firms thus include information within their

annual reports to rebut or express regret for claims made by the media. Stakeholders and

consumers would be averse to such negativemedia exposure. Han and Wang (1998) argue

that firms tend to provide certain disclosures to minimise political costs. This ensures that

firms are not exposed to any scrutiny or scandals. Lemon and Cahan (1997) examined the

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