The Background of the Situation
a) Article 11: NAB to face backlash on executive pay
A record-breaking rebellion was faced by the National Australian Bank (NAB) over the bank’s executive pay management. It was mainly because of the inappropriate remuneration framework implemented by NAB’s Board of Directors. In September, a revamped executive pay regime of the bank was revealed by its chairman, Kent Henry, and this new executive remuneration model provided the Board of Directors with more freedom of choice but failed in meeting many shareholders’ expectations. A series of problem has also been exposed by the royal commission regarding the bank’s response to the fees charged for financial services that the bank never provided and a fraud ring in the bank’s mortgage lending business. The Board of Directors of the bank faced the first strike because of allowing generous bonuses even in the years where the bank registered poor performance. As per the fund managers, the Board of Directors of the banks should enforce more variability in executive pay.
b) Theory: Positive Accounting Theory (Bonus Plan Hypothesis)
The main concern of the Positive Accounting Theory is to explain the accounting practices. This theory pursues explaining the observed accounting practices on the basis of the reasons that contributed to the incidence of an event. Therefore, the positive accounting theory anticipates to explain and predict the consequences that takes place in case certain choices are made by the managers (Patty, et al., 2021, page 187). The positive accounting theory does not prescribe what should take place as it concentrates on predicting or explaining what does take place. This theory states that self-interest drives the actions of all individuals and they will act opportunistically so that their wealth can be increased by those actions.
One of the three hypotheses of the positive accounting theory is the Bonus Plan Hypothesis. As per this hypothesis, managers of the companies with bonus plans are more probable to use accounting method that lead to the increase in the income of the current period (Wiratama & Asri, 2020, page 5). It is also called management compensation hypothesis since it refers to the actions that increase the present value of bonus paid to them. This hypothesis states that the managers of the companies with bonus plans have a propensity of selecting accounting procedures with alterations in the reported earnings to the present period from the future periods. As a result, the managers choose those accounting policies that increase reported earnings and profits. Under the bonus schemes, remuneration can be tied to sales, profit, or return on assets.
c) Analysis
The selected article can be analysed with the help of the positive accounting theory. As discussed earlier, the Board of Directors of NAB faced a strike because of the shareholders’ dissatisfaction on the bank’s current revamped executive remuneration regime. The present executive remuneration pay regime is bonus based. The bank faced the record-breaking revolt because of paying generous bonuses to its executives even in the years of poor performance. As per the positive accounting theory, self-interest of the bank’s Board of Directors to maximize the amount of bonuses can be regarded as the prime reason for adopting the accounting practices which led to the increase in bonus. Variable Reward outcomes for Executives of NAB are based on achieving the performance measures like cash earnings, cash ROE, ROTAE and transformation (“ANNUAL FINANCIAL REPORT 2018”, 2022, page 42). Therefore, the main aim of NAB’s Board of Directors behind adopting specific accounting policies is the maximization of the bank’s earnings so the bonus is increased.
The Positive Accounting Theory
As mentioned in the article, the royal commission has revealed some serious problems in the bank’s response to the charges of fees for the financial services that the bank never provided, along with a fraud ring in the mortgage lending arm. As per the Bonus Plan Hypothesis of the positive accounting theory, members of the Board of Directors of NAB adopted this particular strategy of recognizing income from the services that were never provided to increase in the bank’s present income, and increase in the present income would lead to the increased bonus (Santoso & br Sebayang, 2017, page 72). The same is applicable for the bank’s mortgage lending arm also because income from fraudulent mortgage lending would lead to the increase in income which eventually would increase bonus. The whole situation also implies that the Board of Directors of the bank worked in an opportunistic manner as they used the opportunity to manipulate earnings for ensuring increased bonuses.
d) Conclusion
The senior management of NAB chose to recognize the income from the services that were never provided to increase the bank’s earnings so that they can receive increased bonus.
a) Article 14: Korea’s largest dairy company criticized for depicting women as cows in ad
A leading dairy product brand of Korea, Seoul Milk, encountered a huge criticism from the public because of a controversial online commercial. The commercial appeared to compare women to cows. It also showed that a man filming secretly and it reminded the public of the illegal spycam crimes that have been afflicting Korea in recent years. The company received strong criticism from the public over the commercial as they mentioned it ‘disgusting’ because of how it compares women to cows and the man with the camera retells the Korean people the crimes related to hidden spycam. This commercial also provides the proof that the gender sensitivity in South Korea is still at a very low level. Due to the criticism, the commercial was removed by Seoul Milk and an apology was posted from the company’s end.
b) Theory: Legitimacy Theory
The Legitimacy Theory is largely applied in the context of social and environmental accounting, and it is based on the central assumption that the maintenance of successful organizational operations needs the managers to make it sure that their organizations seem to be operating as per the expectations of the community, and hence, is accredited the status of being legitimate (Deegan, 2019, page 2315). As suggested by the theory, the relationship between a company and society is subject to a social contract. As per the implied social contract, the survival and legitimacy of a company are assured as long as the activities of the company have consistency with the society’s value.
There is doubt on the legitimacy of a company when corporate behaviour fails to match the society’s expectations. As a result, legitimacy gap is developed. The legitimacy gap can be referred to as the difference between the firm’s perceived behaviour and that the company expects. There will be an increase in the legitimacy gap if the company does not bring change in its actions. Certainly, as there is change in the relevant public’s expectations, changes must be brought by the companies or there will be increase in the legitimacy gap as there will be increase in the level of conflict along with the decrease in the level of positive and passive support. The companies can legitimise their actions by attempting through communication to become identified with values or symbols with a strong base of legitimacy (Velte & Stawinoga, 2017, page 7).
c) Analysis
As per the chosen article, Seoul Milk received huge backlash because of one of its commercials where women were compared to cows and secret filmmaking was portrayed that reminded the Korean people of the recent time plaguing spycam crimes. As per the legitimacy theory, Seoul Milk failed to establish a proper social contract as it failed to ensure consistency in its business operations with the valued and norms of the society (Patten, 2019, page 3). As a result, the operations of the company failed to meet the expectations of the people of Korea. Since the expectations of the people of Korea did not match the corporate behaviour of Seoul Milk, it contributed to the development of a legitimacy gap.
Gender sensitivity is a process which makes people aware of how gender plays a role in life through the treatment of others. It states that people of all genders have equal responsilities, opportunities and rights. Seoul Milk failed to promote this notion regarding gender sensitivity by comparing women to cows. Furthermore, portraying the secret filmmaking in the commercial was considered as the promotion of spycam crime that Korea has been largely witnessing in recent times. These acts of Seoul Milk failed to ensure their business operations seemed to be operating as per the norms, beliefs and expectations of the society. As a result, the Korean public refused to perceive Seoul Milk as legitimate company to continue its operations in the society. This aspect was understood by the company and it acted quickly to regain legitimacy. It took down the video and posted an apology on its website. These actions of the company can be regarded as the attempts of becoming identified with the values with a strong legitimacy base through proper communication (Qian & Schaltegger, 2017, p4).
d) Conclusion
Legitimacy to operate in the society cannot be obtained by conducting business operations against the social values and norms.
References
Deegan, C. M. (2019). Legitimacy theory: Despite its enduring popularity and contribution, time is right for a necessary makeover. Accounting, Auditing & Accountability Journal.
NAB ANNUAL FINANCIAL REPORT 2018. (2022). Retrieved 19 January 2022, from https://capital.nab.com.au/docs/2018_NAB_Annual_Financial_Report.pdf
Patten, D. M. (2019). Seeking legitimacy. Sustainability Accounting, Management and Policy Journal.
Patty, T. F. Q., Lamawitak, P. L., Goo, E. E. K., & Herdi, H. (2021). Positive And Normative Accounting Theory: Definition And Development. INTERNATIONAL JOURNAL OF ECONOMICS, MANAGEMENT, BUSINESS, AND SOCIAL SCIENCE, 1(2), 184-193.
Qian, W., & Schaltegger, S. (2017). Revisiting carbon disclosure and performance: Legitimacy and management views. The British Accounting Review, 49(4), 365-379.
Santoso, M. R., & br Sebayang, M. M. (2017). A glimpse of positive accounting theory (PAT). Junior Scientific Researcher, 3(2), 70-77.
Velte, P., & Stawinoga, M. (2017). Integrated reporting: The current state of empirical research, limitations and future research implications. Journal of Management Control, 28(3), 275-320.
Wiratama, R., & Asri, M. (2020). A literature review: Positive accounting theory (PAT). Available at SSRN 3523571.
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