Analysis Of JB Hi-Fi’s Profit Downgrade: Using Classical Political Economy And Managerial Stakeholder Theories

Overview of the Case Study

As discussed by Fuenfschilling & Truffer (2014), the conceptualisation of Institutional theory deals with various aspects of social structure. The main consideration under this theory incorporates processes by which routines, structures, authoritative guidelines, and schemes are established as an authoritative guideline for social behaviour. Several components in the institutional theory is conducive in stating how these components are diffused, created and adopted over time. Some of the other theorists have stated that institutional theory can be considered as a widely accepted theoretical posture which lays an augmented focus on “rational myths, legitimacy and isomorphism”. There are two main trends which are associated to this theory namely institutionalism and new institutionalism. Some of the emerging roles of organisations in the new institutionalism is seen as a rejecting rationale for the characteristic models included in the classical economies (Cook & Hodges, 2015).

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Based on the new institutionalism theory that organisations must conform to the prevailing belief system and rules in a particular business environment. For instance, the multinational corporations in different countries face various pressures. Some of these are based on home while other relate to international pressures. The particular consideration of the decision taken by JB hi-fi for downgrading its profit can be related with classical political economy theory which is based on a resource-based view and argues that creating value strategies need to be based on profit potential. Instead, the resource and capabilities include tangible inputs like property, capital, people and know how. The company was seen to be unapologetic for downgrading its profits as the company acted in favour of the present market situation.

The main rational for lowering the annual profit forecast can be also depicted with the Good Guys driving shares down by almost 10% low since late November. Moreover, the electronics retailer reduced its overall profit outlook to $ 230 which was previously expected to be ranging between $ 235-$240 (Forecast, 2018). According to the institutional theory, in several instances business corporations tackle the decreasing earnings by avoiding additional payment of tax. In this particular situation, the statutory reports clearly showed that the company earned more amount of profit after tax however in the consolidated report it reduced down by $ 5 to $ 10 million so that it can survive in the challenging competitive environment by paying less amount of taxes in compared to other companies. Some of the other evidence of challenges to the company can be depicted with performance of Good Guys whose profit will be sent to be impacted by unfavourable price competition. Therefore, as the overall market for the experiencing a drop-in sale it was more feasible for companies like JB hi-fi to release its profit to downgrade so that it did not have to pay the additional amount of tax in a legitimate manner and still stay in the competition (Cornelissen et al., 2015).

Classical Political Economy Theory and Institutional Theory

As stated by Fernando & Lawrence (2014), the managerial branch of stakeholder theory attempts to explain the situation when the corporate management is likely to be attended to the expectation of particular stakeholders. This theory is organisation centred and identifies the stakeholders as per the company. As per this theory, the organisation believes that relationships need to be managed as per the interests of the organisations. Various theories under this can be tested with empirical observations unlike the normative ethical branch. It specifically relates to those views of the stakeholders who can be best managed with self-independency rather than as a society in case of legitimacy theory. In addition to this, the expectations of the stakeholders are taken into account based on the operating and disclosure policies (Pérez, López & García-De los Salmones, 2017). The several types of other considerations of managerial branch states that organisation shall not necessarily respond to all the stakeholders in an equal manner rather it will respond to only the powerful stakeholders. In addition to this, the stakeholder power is identified as a function of the stakeholder’s degree for taking control over the existing resource of a company. This is identified with resources such as Finance, Labour and the ability to legislate. The important role of the management is depicted in assessing the stakeholders demand in achieving strategic objectives of the firms (Omran & Ramdhony, 2015).

Based on the particular consideration in the case of JB hi-fi it can be clearly seen that the company revised its net profit after tax as per various guidance which has been observed with the managerial branch of stakeholders. It needs to be observed that based on the guidance in the section 7.3 of the guidance note 8 published by the ASX, a company is expected to treat its variation in earnings as per the guidance equal to 5% less than being material and presume the guidance therefore does not need updating. However, JB hi-fi overlooked this consideration of optional updating and looked on the positive side of bringing into consideration that makes real effect of price or value into the entity’s security. Therefore, the application of managerial branch of stakeholder theory is evident in this case as JB hi-fi attempted to meet the expectation of expectation of particular stakeholders by taking into account the maturity aspects stated in the section 7.3 of guidance note 8 issued by ASX. In addition to this, the overall application of managerial branch of stakeholder theory is evident with several types of other considerations of managerial branch states that organisation shall not necessarily respond to all the stakeholders in an equal manner rather it will respond to only the powerful stakeholders (Lu, Abeysekera & Cortese, 2015). In this particular situation, JB hi-fi decided to act in favour of the materiality guidelines which were issued by the ASX.

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Managerial Stakeholder Theory

As discussed by Al-Qenae Li & Wearing (2015), some of the main tools of anticipating future earnings with current share prices needs to be considered with concepts such as plough back and reserve, book value per share, earnings per share, price-earnings ratio and dividend yield ratio. The main assessment from the dividend yield ratio is able to depict that several investors who involved in buying the shares have the objective of earning regular income from investment. The primary concern is based on the dividends which is given by the company and capital appreciation is only the secondary consideration. Based on the anticipation of dividend yield ratio companies with high dividend is not only have a poor growth record but often show for future growth. On the contrary, high-growth companies generally have records of bleak dividend pay-out. Investors are interested in the relationship of dividend during as per the market price of the company’s share rather than that they are more interested in the relation of dividends which beer to the market’s price of company’s share (Li & Sloan, 2017).

Earnings per share is another ratio which is well identified in the anticipation of company’s performance and future earnings. This particular ratio provides the earnings of the company as per share basis. For getting a clear idea of significance of this ratio, the total profit after tax obtained by the company is divided with total number of equity shares issued.

With particular consideration for JB hi-fi, the earnings per share increased from 153.8 cents per share to 154.3 cents per share. This shows an underlying growth of 22.4% in compared to the previous year. Similarly, if we compare the net profit after tax obtained by the company in 2016 it can be clearly seen as $ 152.2 million in 2016 which increased to $ 172.4 million in 2017. This suggests an underlying growth of 36.5% in the NPAT value. Therefore, EPS cannot predict on future earnings of the company. Similarly, if we compare the dividend pay-out ratio, it can be clearly depicted that the dividend payout ratio of JB hi-fi in 2016 was 88.27% which increased to 101.4% in 2017. Therefore, it does not necessarily suggest that the increasing nature of dividend pay-out ratio and EPS have been depicted with some increasing earnings for the company (, 2018).

However, certain indications about the share price at the end of 2017 can predict certain aspects of the declining profit after tax. Based on the annual statement of JB hi-fi it can be clearly discern that the company’s share price at the end of reporting period in financial year 2015 was $ 19.4 a dollar with significantly increased to $ 24.10 per share. This increase in the share price of the company was evident with an increasing NPAT. Likewise, when we compare share price at the end of financial year 2016 it can be clearly seen as $ 24.10 which increased to $ 23.37 in 2017. This decrease in share price by 3% can indicate that company lost some of its earnings during the course of previous year’s activity. This decrease in the share prices of the company has further anticipated the rational for declining future earnings (Berge, Consigli & Ziemba, 2016).

Anticipating Future Earnings with Current Share Prices

The Lens model is identified as a way of thinking which describes the various relationships among the environment and behaviour of companies in that particular environment. The fundamentals to this theory was designed by Egon Brunswik and the concept was later on popularised by Kenneth Hammond by including various components of social judgements. It is known as lens model because it looks like the framework of this model is passing through a convex lens including the attributes of cues, judgement, achievement and criterion. This model helps in clarifying the scope of items with a greater understanding (Orquin, 2014).

  Based on the theory, there are certain things in the environment which relates to dependent variable. The cues are identified as independent variable as per the lens model terminology. The main decision-making criteria helps in determination of human decision process as an involvement of various mathematical indexes. Majority of the research studies have applied this theory to indicate many realistic settings which relates to the basic information of division situation, actual decision which is identified by the decision maker and in a particular situation (Laukka et al., 2016)

The application of the lens model in the particular case of JB hi-fi needs to be identified with investor psychology and relating the same with behavioural decision theory. The investors need to identify the investment criteria based on three level analysis which includes input level, information processing level and output decision level. Therefore, the investors need to first prefer the historical cost consideration of JB hi-fi and form a graphical presentation of the financial performance. Based on the significant analysis of financial performance as per annual report published by the company in 2015, 2016 and 2017, it can be clearly depicted the company performed moderately well in terms of generating more revenue and stock market performance (Bristow, Mowen & Krieger, 2015).

The next step of the investors should be viewing the investment decision based on two sides of the lens model. Firstly, the investors need to make the decisions as per the cues used in the model and then compare the same with the actual outcomes. Based on the significant level of comparison of statistic modelling provided in the lens model it will be ideal for the shareholders to hold the shares of JB hi-fi and wait for future market indications to take the final decision of buying or selling of shares. The present decision taken by the company to downgrade its profit has been done in a very competitive and volatile market environment and therefore it is not suggested for the investors to buy or sell shares in such a volatile situation. In addition to this, the various depiction on the improving performance of financial aspects that investors need to wait for future market performance which may imply a completely different scenario and then the decision to sell the shares can prove to be profitable in nature (Hamm & Yang, 2017).

Explaining Investors’ Decisions with the Brunswik Lens Model

As discussed by Bakre & Lauwo (2016), there are several studies which argues or intends to find out whether the accounting profession is working in favour of public interest or capital interest. Based on several academic literature it has been identified that as an integral face it to the society, the accounting profession has a part to play in both state and corporate sector and is also expected to serve the public interest. It has been seen that in general the capacity for Australian accounting profession to serve for the public interest is taken into context with accounting standards setting process. In previous literatures, there have been certain relevance made with “CLERP Act 1999 and ASIC Act 2001”. In many instances, it is argued that the combination of these acts is to legitimise the accounting standards in favour of the holders of capital or capital interest. The significant as a nation of capital markets are further surrogate for public interest is contested (Artiach et al., 2016).

In terms of serving the public the various domains of the accounting profession have demonstrated systematic knowledge. Over the past 50 years the importance of systematic knowledge has been considered to remain axiomatic for defining various constraints of accounting profession. In addition to this, based on various events it can be argued that state has accommodated multinational corporate interests instead of public interest as per the section of CLERP Act 1999 and ASIC Act 2001. At present, these acts are reflected in the Accounting Professional and Ethics Standards Board which can be compromised in a considerable manner for serving the public (Morales & Sponem, 2017).

The case study cannot be regarded to support the critical view of this notion as that based on the guidance in the section 7.3 of the guidance note 8 published by the ASX, a company is expected to treat its variation in earnings as per the guidance equal to 5% less than being material and presume the guidance therefore does not need updating. However, JB hi-fi overlooked this consideration of optional updating and looked on the positive side of bringing into consideration that makes real effect of price or value into the entity’s security. Moreover, the company took into consideration several aspects of safeguarding its materiality disclosures by even downgrading its profit. Some of the significant discussions of the study have been further conducive in stating that JB hi-fi has continued to work in favour of the public since its initiation in 1974. With more than 44 years of formation of the company, there has been no instance that the company has depicted capitalist interest. Therefore, based on the significant consideration of the excerpts of information given in the case study it cannot be stated that JB hi-fi accompanies with the statement of accounting profession legitimising the capitalist system (Faulconbridge & Muzio, 2017).

Analysis of Accounting’s Role in Legitimizing the Capitalist System


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