Conflicts of Interest and Measurement Issues and Their Effects on Reporting of Environmental Liabilities

There are many decisions for which management must consider the broad interests of society at large (all stakeholders) in addition to the interests of the stockholders. One such situation is management's handling of decisions that could cause environmental damage. This paper will discuss the nature of the conflicts of interest between management and all stakeholders and how these conflicts affect the firms' incentives to disclose their responsibility for environmental liabilities. When faced with the choice of acting in the interest of current shareholders or society at large, management appears unwilling to disclose its responsibility for environmental cleanup in order to convince society that its interests are being protected. Businesses, as a group, have a massive responsibility to clean up environmentally damaged, hazardous sites. This responsibility leads to a large expected aggregate obligation (estimated in the hundreds of billions of dollars) for cleanup of environmental damage; however, there are many questions regarding how this responsibility is being accepted and communicated (reported) by the individual firms. Therefore, there is a discrepancy between the expected aggregate environmental obligation and the sum of the individual obligations as reported by firms.