Similar conflicts between the information needs of financial
investors and those of other stakeholders become evident from
a closer look at various consolidation mandates and proposals.
The principle accounting standard governing consolidation practices
in the US is represented by the Accounting Research Bulletin 51,
"Consolidated Financial Statements". Here, we find a
reference to the presumption "that consolidated statements
are more meaningful than separate statements and that they are
usually necessary for a fair presentation when one of the companies
in the group directly or indirectly has a controlling financial
interest in the other companies" (quoted after
Ernst & Whinney 1987, p.4).
In a more specific vein, Ernst & Whinney's
(1987, p.ii) introduction to a proposal by the Financial Accounting
Standards Board (FASB) states: "The FASB wants full consolidation
mainly because of the increasing diversity of corporate business.
Because of this diversity, it believes consolidation of all subsidiaries
will improve consistency and completeness in financial reporting."
Consolidation also supports other preferences for secrecy;
"...suppliers, employees, customers and foreign governments
would use the figures to extract concessions from the company
and .. competitors would use the information to invade the (company's)
profitable markets"
(SEC 1977, p.383). By the same token,
the parent corporation may have an interest in disclosing the
poor performance of a local unit in order to avoid excessive local
claims against non-local corporate resources. Transfer pricing
and unitary taxation practices represent related issues. Similar
conflicts may arise when corporations simultaneously cooperate
and compete. A breach of competitive secrecy may result from the
need to share information to assure cooperation
(Bresser 1988).
There are other (marketing, political, good will) motivations
for geographically more detailed disclosures. Firms want to release
good information but withhold bad news
(Diamond 1985); good news
improve the evaluation of the firm by investors or other stakeholders
which, in turn, may impact the manager's compensation (Trueman
1986) or social status in the community. If management yields
to this lure, the better performing facilities will more often
be highlighted.
Laulajainen (1987) found that small and/or young
department store firms were proudly disclosing facts about individual
stores and the addition of outlets. However, larger chains, for
whom the detailed descriptions become unwieldy, tend to downplay
location-specific information.
Stakeholder perspectives -- Corporate constituents may also
have an interest both in consolidation or segmentation, but generally
for opposite reasons. Consolidation helps to reveal the overall
performance and global resources of the corporation, knowledge
which tends to be appreciated, for example, in local collective
bargaining. Segmentation, on the other hand, may assist the community
in understanding the operations of regional plants, their productivity,
problems, and opportunities, thereby making it more difficult
for the corporation to justify or to hide resource transfers to
other locations. Proponents of segmented information suggest that
consolidation plays into the hands of secrecy- minded executives
by obscuring internally differentiated performances. Thus, it
would be in the interest of the community to have access to both
consolidated and segmented information inasmuch as the combination
of the two helps to "connect" information.
Given that a growing corporation will ultimately tend to
issue stocks and thereby subject itself to mandatory financial
disclosures, it can also be argued that growing economic concentration,
internationalization and organizational interdependence extend
physical, political and organizational distances between local
facilities and corporate headquarters (HQ) and reduce the visibility
of local corporate activities to local stakeholders. Thus, local
comprehension of the totality of the corporate system and of
the role of local facilities in this system will tend to deteriorate.
Therefore, it would be no contradiction to favor both more segmented
and more consolidated information. Indeed, more information covering
intermediate organizational and geographic levels would assist local
stakeholders in reconnecting local and HQ level information.
The cost of providing both segmented and consolidated information
will depend in part on the structure of the organization. For
highly centralized and/or integrated firms, segmented performance
information, beyond what is needed for control and accounting
purposes, could be costly. Such information may also be of mere
historical value to stakeholders, since HQ's plans and intentions
for specific segments may have little to do with past performance.
Consequently, segmented corporate plans and forecasts would be
more useful for segment- oriented stakeholders. Constituents of
decentralized, polycentric firms, on the other hand, may find
segmented historical performance information a more reliable indicator
of what is to come and also would have relatively little use for
consolidated information.
This discussion of informational segmentation is influenced
by the accounting views of financial disclosure in MNEs. Yet,
disclosure segmentation is becoming much more of a geographic
theme in the context of social and environmental issues. Plant-
and locality specific information is important for collective
bargaining, social reports, employment projections, occupational
planning, training and health contexts, and a variety of environmental
concerns. The fact that many segmented disclosure mandates and
voluntary practices are already in place in industrialized countries
has to be kept in mind when questioning the emphasis given to
consolidated information disclosure by the (EC) Vredeling proposal,
in the (EC) Seventh Directive on Consolidated Accounts or in
the OECD Guidelines for Multinational Enterprises
(
Blanpain, 1985;
Emmanuel et al. 1988;
Streeck, 1997)
Return to Table of Contents
Segmentation of "soft" information -- Inasmuch as corporate
disclosures affect constituents' own plans, there ought to be
a strong interest in information related to the corporation's
assessments of future opportunities, plans to exploit such opportunities
and prediction as to the implications of such plans for the performance
of the corporation or its components, that is in "soft"
information. Most of the attention has been focused on the prudence of
disclosing short-term earnings forecasts. Supporters argue that
performance estimates will assist shareholders' allocation decisions and
thereby lead to more efficient capital markets; moreover, the danger of
uneven disclosure benefiting some at the expense of other investors
would best be countered by timely and full disclosure. On the
other hand, there are those who argue that, without equal access
to the underlying premises or equal ability to evaluate their
significance, users are too easily mislead (SEC 1977). Fear of
liability for damages resulting from wrong or misleading forecasts
has discouraged such disclosures. Not surprisingly, it was found
that firms with more volatile performances are less likely to
disclose their internal forecasts
(Waymire 1985).
Other suggestive findings relate to enhanced predictability
of corporate performance through disclosure of segmented information
(
Hopwood et al, 1982;
Scherer 1979). Studies of data use by financial
analysts have led to the conclusion that "segment reporting
allows the majority of analysts to improve their predictions and
their confidence about those predictions"
(Emmanuel et al. 1988, p.282).
However, many segment-oriented constituents are
likely to be more interested in performance forecasts for individual
segments in their own rights. This applies particularly to geographically
segmented constituent groups given the interests of planners and
policy makers in such forecasts. It would seem that the disclosure
of projected local investments, product developments, process
innovations or employment changes would be particularly useful
for local, non-investor constituents.
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Segmentation -- Geographic Perspectives
While local or regional stakeholders are primarily interested
in geographically explicit disclosures, other forms of segmentation
may also be of value. Disclosures by legal entities, organizational
divisions, "lines of business", or classes of customers
are more frequent and can yield geographic insights for alert
constituents able to merge such information with independent knowledge
of corporate location patterns. Nevertheless, the overall usefulness
of segmented disclosures is limited by the fact that the purpose
of most cases of segmentation (e.g. in annual reports) is to improve
the information detail for the investor who has a stake in the
company as a whole and not for the regional constituent (such
as governments or labor unions).
It is not surprising, therefore, to find segmentation rules
which serve to simplify the evaluation of the whole. In the United
States, for example, a reportable corporate 'segment' is defined
by the Financial Accounting Standards Board (FASB) as one which
represents more than ten per cent of the consolidated total (revenues,
operating profit or loss, and identifiable assets appropriate
to foreign operations) for the enterprise as a whole. More specifically,
FAS 14, paragraph 34, states: "Each enterprise shall
group its foreign operations on the basis of the differences that
are most important in its particular circumstances. Factors to
be considered include proximity, economic affinity, similarities
in business environment, and the nature, scale, and degree of
interrelationship of the enterprise's operations in the various
countries" (after
Prodhan 1986, p.43).
It is evident that for large MNEs even ten geographic segments
would not reveal much useful information. Nevertheless, an authoritative
text on international accounting suggests that even investors
might become more sensitive to the geographic detail of their
risk exposure: "While researchers have not studied the question
as it relates to financial data disaggregated by geography, it
stands to reason that such information might also improve investors'
predictions. After all, not all areas of the world have equally risky
business environments or present equal business opportunity"
(Mueller et al. 1987, p.59).
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Geographic segmentation practices -- Empirical studies confirm
that corporate annual reports and the regionalizations used in
such disclosures do not provide much geographic detail which might
be of interest to noninvestor constituents. Gray and Radebaugh
(1984) found that only 31% of Fortune 500 firms provided geographic
analyses of new investment activities, while only 10 firms disclosed
geographic employment patterns. Moreover, regionalization criteria,
including criteria for the scale of geographic segments, are diverse
and include: (i) the significance of an area's contribution to
the total company's performance; (ii) the coincidence with legal
entities within the group; (iii) the need to avoid the host government's
or other regional stakeholders' scrutiny; (iv) the need to disguise
dependence on politically unstable markets
(Emmanuel & Garrod 1987, p.237).
In the empirical part of Emmanuel and Garrod's study of six
U.K. companies with world wide operations, the number of geographic
segments varied between three and six. This author's analysis
of 12 mainly European corporations belonging to the oil, steel,
chemical, electrical/electronics and banking industries shows
a range from 4 to 8 regions (Table 4). In most cases, geographic
segments coincided with continents or were recognized on the basis
of countries of corporate origin, countries of primary corporate
involvement or economic blocs of countries. However, definitions
varied greatly consistent with well-known geographic ambiguities
of global and continental regiona]izations. Australia and Asia
have particular identity problems. The absence of any agreement
on a region dominated by Japan is striking but explained by the
European bias in the sample and by the fact that foreign firms
have generally not yet been able to establish significant operational
footholds in Japan. One would also expect that the redrawing of
the European map and economic change in Eastern Europe will create
additional regionalization ambiguities.
Sales volumes dominate the data disclosed on a regional basis.
However, several firms release employment, gross income levels
and, in the case of Royal Dutch N.V. Koninklijke Nederlandsche
Petroleum Maatschappij, even profit figures and tax payments by
regions. Royal Dutch N.V. also disaggregates the total crude oil
production of the Royal Dutch/Shell group of 5.7 million barrels
per day (1988) by (in %)
- "Europe" (28.3),
- "Africa" (12.2),
- "Middle East" (23.7),
- "Far East and Australasia" (6.0),
- "USA" (22.7),
- "Canada" (3.7),
- "Remainder of Western Hemisphere" (3.4).
Among other regional data,
there is also information on the nationality of stockholders,
ranging from Great Britain (40%) down to Belgium holding 1% of
the stocks. The diversified West German steel corporation Mannesmann
AG discloses its total DM 22.3 billion sales volume for the following
markets (in %, for 1989):
- "FRG" (36.4);
- "Other EEC Countries" (21.3);
- "Rest of Europe" (13.6);
"Africa" (3.8);
- "Asia" (6.0);
- "North
America" (10.1);
- "Latin America" (7.9);
- "Australia and Other Regions (.9).
Siemens AG segments regional
information only for revenues
and investments; the following regionalization is used (% of total
investments for 1987/88):
- "FRG" (54.6);
- "Europe without FRG" (20.7);
- "North America" (18.8),
- "Latin America" (3.6);
- "Asia" (1.6),
- "Other Regions" (.7).
Siemens' major European competitor, Philips, is geographically
slightly more articulate. It publishes "deliveries"
and gross income figures for the following regions (% of value
of deliveries, including intra-corporate deliveries, for
1988):
- "Netherlands" (21.7);
- "Rest of Europe" (46.3);
- "USA and Canada" (16.6);
- "Latin America" (4.2);
- "Africa" (.8);
- "Asia" (9.2),
- "Australia and New Zealand" (1.2).
Like many other firms, Philips publishes
sales and income data also by line of business, however without
further geographic disaggregation.
While many firms disclose their external markets, few identify
any geographic dimensions of their i n t r a - corporate trade.
43% of 1979 Fortune 500 corporations did not even disclose their
aggregate intra-enterprise sales
(Gray & Radebaugh 1984). Due
to the increasing importance of such global, non-market interdependencies,
this lacuna frustrates many constituents.
Return to Table of Contents
Segmentation and the Unitary Taxation Debate
A case in point involves the "unitary taxation"
of income of firms operating in multiple jurisdictions. Intra-corporate
and inter-affiliate trade has become a significant part of the
international trade scene. For the U.S., such trade accounts for
approximately 40% of all exports and imports
(Little 1987). For
individual corporations, these percentages can be much larger.
There are many opportunities to price such transactions so as
to shift income into low- or no- tax jurisdictions
(Dunning 1988).
Thus, tax collectors need consolidated data to "recalculate"
regional segments' fair share of total (unitary) corporate assets,
sales, earnings or profits.
In the U.S., where most states collect their own corporate
income tax, unitary taxation has long been an issue
(
Rothschild 1986;
Wasson & Weigand 1988). Apportionment methods and formulae
vary from state to state in terms of (i) weights given to property,
payroll and sales; (ii) the inclusion of income of subsidiary
or holding companies (rather than just the parent) and worldwide
(rather than just domestic) operations. Corporations frequently
claim that a worldwide combination is not just an accounting nightmare,
but may also lead to tax inequities and double taxation. "A
unitary tax is extraterritorial; the state claims a right to tax
profits earned, property owned, or some other aspect of operations
that occur hundreds or even thousands of miles away"
(Wasson & Weigand 1988, p.46).
Partly as a result of strong foreign
protests notably from Japan and the U.K., there are moves favoring
a "water's edge" form of domestic consolidation which
limits the permissible scope of a unitary business to the domestic
operations of affiliates incorporated in the U.S..
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Harmonization versus Local Identity
Given the global nature of the modern corporate economy and
the diversity of disclosure and accounting standards, calls for
voluntary or mandated harmonization come as no surprise. Simplification
and comparability of disclosures across jurisdictions are the prime motives
for harmonization, here defined as the process of reducing differences of
disclosure practices between regions or jurisdictions.
Harmonization has become compelling as an integral
part of economic integration of jurisdictions and the desire to protect
the rights of corporate constituents after integration.
Inasmuch as this 'leveling of the playing field' means stricter
disclosure requirements in some regions or a regulatory shift
to higher governmental levels (and thereby political and legal
clout), it is opposed by business proponents, as witnessed in
the debates surrounding the disclosure related Directives of the
European Community. Business lobbyists have learned to use the
politically effective argument that any tightening of disclosure
requirements reduces a jurisdiction's competitiveness by increasing
the cost of 'doing business' and the information available to
competitors in other, less regulated jurisdictions. Other opponents
of harmonization stress the uniqueness of economic, political,
social and cultural environments arguing that imported standards
do not fit a country's informational needs. Finally, stakeholders
in disclosure friendly environments may feel informationally
privileged and have no interest in harmonization.
Arguments for more uniform and explicit corporate accountability
and informational safeguards can largely be traced to increased
organizational and capital mobility. The European Community drafted
its fourth directive (on accounting harmonization) in view of
avoiding a European version of the "Delaware Phenomenon",
i.e. "legal havens where systematic 'laisser faire' could
be used to secure economic advantage"
(Coleman 1984, p.5).
Most supranational bodies have issued their guidelines in order
to protect the interests of corporate constituents in host countries.
However, national regulatory safeguards may be instituted on behalf
of either home- or host-country constituents. A plant-closing
notification requirement designed to stem the exodus of industries
is a home-country regulation, while a special disclosure requirement
for foreign owned plants represents a host-country mandate. Disclosure
of information necessary to implement unitary taxation schemes
could fall into either category, since both the home- and host country
may have an interest in an unambiguous (or a more favorable) numerical
basis for corporate income tax calculations.
As the United States, a traditional home country, is increasingly
also becoming a host country for MNEs, calls for more stringent
and uniform disclosure rules are more sympathetically received
than they were when the U.S. opposed UN disclosure guidelines
and the EC's Vredeling proposal
(Samuels & Piper 1985).
Even the chairman of the (U.S.) Financial Accounting Standards Board
(FASB) acknowledged that the Board's attitude toward international
accounting standards has changed from 'benign neglect', 'uninterested,'
'uncooperative' and 'less than enthusiastic'" to endorsing
further internationalization
(JA 1988). The more recent calls
for instituting tougher reporting requirements for foreign investors
to the U.S. would corroborate this change.
Finally, whose standards are to be adopted by whom and to
what extent? The U.S. and U.K. have been standard- setting leaders
in financial accounting while other European countries are at
the forefront of social disclosures. In the field of financial
accounting, there have been additional "zones of influence"
such as the Franco - Spanish Portuguese zone; German - Dutch
zone; and the East European area now looking for new international
guidance. Some countries with well developed accounting and disclosure
standards are willing to adjust them, for example, in recognition
of the 4th and 7th EC Directives; a fitting example is the case of the
German
consolidation rules which had to be adjusted from domestic to
world-wide consolidation. Finally, there are Third World countries which
are building entirely new disclosure systems and are learning from the
experience of countries other than or in addition to their former
colonial masters
(Samuels & Piper 1985). Factors facilitating the
spread of accounting standards include the colonial traditions of
training accountants; the influence of local subsidiaries of
multinational corporations and of large American and British accounting
firms (supported by the World Bank's and other international financial
institutions' use of these firms for project audits); the spread of English
as a second language; foreign aid; and the availability of scholarships
for, and popularity of, a business education at British or American
universities
(Belkaoui 1988).
While one would expect that international accounting firms
work towards greater uniformity of accounting standards, it would
also be plausible that the existing complexity favors those large
firms whose decentralized expertise is invaluable to multinational
corporations. Harmonization, on the other hand, would make it
easier for the mid-sized, second-tier auditing firms to survive.
It would seem that the industry which, through mergers, was recently
whittled down from the "Big Eight" to the "Giant
Five", does not anticipate a major sim~lification of international
accounting standards any time soon.
[Footnote]
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Toward Empirical Disclosure Research
Last, not least, we come to the litmus test of respectable
geographic inquiry: Is there any hope for empirical tests of meaningful
hypotheses? Given the pivotal role of the large corporate organization
in the modern economy, we need to know more about the nature,
process, effects and limitations of information sharing. Two types
of research are suggested. First, there are questions related
to the conditions under which corporations disclose different kinds
of information voluntarily. How do managers respond to external
pressures for more or less disclosure by unions, governments,
or the media?
Waymire's (1985)
finding that management's willingness
to disclose earning forecasts decreases with earnings volatility
suggests that managers are aware of the benefits and costs of
publicizing more or less accurate forecasts.
Secondly, economic geographers have an interest in information
disclosure as the explanatory variable: How do different disclosures
satisfy the information needs and impact the behaviors of constituents?
Two groups of studies have already addressed such questions: (a)
research on the impact of earnings forecasts and other financial
and non-financial information on investment decisions; changes
in stock prices are usually taken as evidence for investor responsiveness
(
Hoskin et al. 1986;
Waymire 1985). (b) Studies tracing relationships
between corporate disclosures and benefits derived by employees
or other social or environmental stakeholders through early warnings
in cases of plant closure, health hazards or other important risks
and events
(
Ingram & Frazier 1983;
Freedman & Jaggi 1986;
Ullman 1985; Viscusi et al. 1986).
Whi]e these studies are highly
suggestive, few consider geographic dimensions explicitly (See
schema in Table 5).
Table 5. RELATIONSHIPS BETWEEN DISCLOSURE AND PERFORMANCE