Building Corporate Accountability

Emerging Practice in Social and Ethical Accounting and Auditing

Simon Zadek, Richard Evans, Peter Pruzan

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781134178179
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Gestión

The practice of social and ethical accounting is emerging as a key tool for companies in the 1990s in response to calls for greater transparency and accountability to different stakeholders, and as a means for managing companies in increasingly complex situations where social and environmental issues are significant in securing business success.

This is the first book to address the practice of social and ethical accounting, auditing and reporting, and its implications for the development of corporate social, ethical and environmental responsibility. It includes ten case studies, as well as an historical overview of the development of social and ethical accounting and reporting. The editors introduce a methodological framework that allows emerging practice worldwide to be analysed, understood and improved; and the case studies are written by the practitioners, giving insight into the experiences described.

This innovative book, written by internationally acknowledged leaders in the field, will be of enormous value to business managers, particularly those with responsibility for corporate affairs, human resources, environmental management, financial management, or planning. It will also be a useful text for business students.

PART 1

Why, How and Where To

1

Introduction

This book is about the evolution of social and ethical accounting, auditing and reporting (SEAAR), and its implications for the practice of corporate responsibility. We examine why and how increasing numbers of companies are measuring and reporting on their social and ethical behaviour and impact. We throw light on some of the methodological difficulties in achieving rigour and objectivity by examining how it has been done in practice, rather than how it might be done in theory. Finally, we explore what is likely to happen in this area over the coming years, in particular the basis on which standards are going to be set for SEAAR, and the people and institutions involved in these activities.

We have focused here on the emerging practice of SEAAR within the business community. However, there are two senses in which this book also speaks to the wider community of organizations, including public and private non-profit organizations.¹ Firstly, these latter types of organizations are just as, if not more, concerned about their social and ethical impact and behaviour. Secondly, the methods described in this book have also been widely applied to non-profit organizations.² It is largely because of the need to demonstrate this point that we have included two public sector case studies in Part 2 of this book.

This book is for people facing the practical task of handling, developing and implementing corporate, social and ethical responsibility agendas. These are the managers who have been given the job of ‘making it happen’. These managers come from diverse backgrounds and locations within their companies, including corporate affairs and reputation management, marketing, environmental management, human resources and personnel, strategic planning, and community affairs. They have an understanding of one particular area of corporate responsibility. They therefore know what constitutes good practice in dealing with staff, in terms of environmental performance or in the area of corporate philanthropy. The quandary they face, however, is that the concerns they find themselves grappling with cannot be contained within these narrow boxes. Environmental issues turn out to have as much to do with the social and ethical concerns of the communities in which the company works as, say, the biophysical effects of production. Meeting the needs of the market increasingly means going beyond the delivery of technically superior products and services as consumers show a growing concern with the social and ethical dimensions of production – such as in relation to the use of child labour, senior citizens or the handicapped.

As these many dimensions of social and ethical responsibility pervade an increasing proportion of a company’s activities, those nominally responsible for ‘the social and ethical responsibility’ of the company find themselves outflanked and often quite overcome by their own company’s numerous and fragmented initiatives. The purchasing department may be developing an ethical supplier relations policy, whilst the human resource department is establishing whistleblowing systems for staff, and the reputation team is trying to cope with the latest environmental campaign by non-governmental organizations (NGOs). This decentralized approach might be acceptable if there were not so many unavoidable linkages between the different initiatives. Most large companies do indeed have a corporate-level ethical code of conduct that is intended to embrace their entire operations: but do these different initiatives add up to their overall ethical claims and postures? Who is to know, and who is responsible for finding out? This occurs amidst the realities of downsizing, delayering, and more generally stripping to the bone people, systems, and procedures that do not seem to contribute directly to the financial bottom line.

Faced with the new challenge of handling a complex and often volatile blend of social and ethical issues, responsible managers turn to the outside to seek information, expertise and guidance. What they find is a sea of information generated by communication consultants, business ethicists, and campaigning organizations. Just keeping up with the proliferation of literature, and dealing with people offering a myriad of related services, can entirely absorb a manager’s time and energy. Far from providing a sound foundation for developing coherent initiatives that meet best practice industry standards, this information often leaves the manager confused and more likely irritated, despondent or outright cynical.

These managers need to implement a change process that addresses both expected short- and long-term needs and can handle unexpected external pressures and events as they develop. At the same time, an approach is required that remains rooted in the prevailing organizational culture and imperatives. Without finding a way of achieving this juggling act, managers are likely to fail – buried under their colleagues’ resistance and ineffective in dealing with the ever-changing and more complex environment within which the company exists.

The challenge taken up by this book is to assist these managers in their difficult task by providing a window onto the one essential element of any change process – a mechanism for learning as a basis for improvement. An organization without a systematic way of understanding what it has or has not achieved is unlikely to succeed, irrespective of its aims or determination. This is obvious to anyone focused on financial success, who would walk away from a company that had inadequate financial accounting systems. Similarly, anyone interested in social and ethical performance would first look to see how an organization records, interprets and acts on its understanding of its previous actions as a basis for improving its social and ethical performance in the future.

What this book, therefore, offers managers is an insight into how their organization can develop processes that enable them to understand what has and is likely to happen, what key people think about it all, and what might be done to improve social and ethical performance. While writing principally for corporate managers, the editors are aware of the burgeoning interest in the subject of SEAAR to people in other institutional settings. The natural counterpart of the manager’s concern in social and ethical responsibility is the interest of other corporate stakeholders: notably, staff and workers’ organizations, shareholders, consumer groups, the ethical investment community, regulators, consultants and accountants, and community and campaigning organizations. Each of these groups has an interest in knowing more about companies’ social and ethical performance, as well as wishing to make their views better known and have them taken into account. These corporate stakeholders, who need to distinguish public relations hype from sound relationship-building through social and ethical accounting, auditing and reporting constitute the second target audience for this book.

The third audience are the stakeholders of other types of organizations (including their managers), particularly public and private non-profit organizations with overt commitments to pursuing non-financial goals. These organizations – often given statutory rights on the basis of their commitment to address non-financial goals (eg tax exemption) – are in many ways under even more pressure than the commercial sector to demonstrate their social and ethical performance.

Lastly, this book anticipates an audience of students and researchers. We make no conscious attempt to review the deeper theoretical dimensions of the subject. In this sense, students and researchers with an interest in the area will need to look at the literature that is more deeply rooted within the academic tradition, some of which is referred to in the following chapters and the concluding annotated bibliography. At the same time, students and researchers alike would do well to be aware of the emerging practice of SEAAR that is described in this book, since it is this practice which is likely to form the basis of those conventional wisdoms in the future on which strong theoretical foundations will certainly be built. In this sense, Building Corporate AccountAbility offers students and researchers a unique source of information, such as case studies produced by the people involved in them, or with a close involvement in the processes they describe.

THE BASIC DILEMMA

One common concern arises from the increased disclosure of corporate social and ethical performance; there is a need to establish methods for assessment, verification and disclosure that meet the requirements of both companies and outside parties. ‘Glossy’ social reporting no longer satisfies the demands of groups that have the power to support or undermine a company’s market position, through organizing consumer boycotts or blocking planning permission. Nor does a gloss over a company’s ethics help in attracting creative, dedicated and responsible employees who feel a strong sense of identity with the company and whose commitment is vital for overall business success. Shareholders themselves are also demanding to know more about social and ethical performance as an increasing number of high-profile cases highlight the financial consequences of unethical business behaviour. So, whether in response to the needs of single-issue groups, actual and prospective staff, or shareholders, glossy offerings are failing to build good reputations and relationships. Something else is needed if social and ethical reporting is to effectively consolidate a company’s viability, whilst at the same time edging it towards improved standards of social and ethical performance.

Recognizing the need to go further in assessing and reporting on social and ethical performance is a critical step that most companies have now taken, if only to secure their licence to operate. With the recent experiences of such leading companies as Shell, Texaco, Nike and others, there is a growing acceptance that reputation cannot be sustained through a culture of secrecy. Rather, there is a recognition that relationships in the future will rely more on balanced, systematic sharing of information as a basis for dialogue. This is what lies at the heart of SEAAR. As a senior executive of a major multinational declared in discussing whether the company he worked for would move towards a rigorous approach to social auditing: ‘It is no longer a matter of whether, but of when, and how’.

Knowing that you need to move forward is one thing: knowing how to move forward is an altogether different matter. There are many issues to resolve before it becomes possible to report on social and ethical performance in a way that is accurate, complete, understandable, and useful. Firstly is the matter of measurement. It is reasonably straightforward to report on how much a company gave away through its charitable programmes and philanthropic activities. In the UK, for example, British Telecom is the largest corporate giver, donating at a rate of £15 million per annum at the last count. It even makes some sense to compare the performance of different companies, usually by ranking their charitable donations as a percentage of some measure of net income or profit before tax.

But such input indicators tell us little more than that some monies have been spent or profits used. They do not tell us the effect of that expenditure, whether on the recipients or on the company itself. Should philanthropic spending be valued by its financial volume? Or should its value take account of whether, for example, the donation contributed to the company obtaining critical planning permission for a new petrol station or supermarket; or whether it went to sponsoring a photographic exhibition or to training youths for future employment; or whether it provided out-of-date produce to community functions that were of little real value to the company? Is a million dollars of ‘giving’ to be valued the same way irrespective of its use or its effectiveness for the intended beneficiaries and the company itself? Clearly not.

The question of what to measure, and how to measure it, is therefore not straightforward. Our simple example in the previous paragraph easily illustrates the magnitude of the dilemma. Input data (such as financial costs or time) have absolute and relative dimensions; there is a difference between input and output data (the costs of training unemployed youths as opposed to its results); output data can be measured in different ways depending on what is seen to be important. Different outputs are not really comparable. Measuring in an accurate and useful way is clearly not straightforward.

The question of how to produce social or ethical assessments is not only a matter of finding some objective form of measurement, but also concerns how measures are understood and responded to by their intended audiences. It is one thing to report on the staff wages and the employment of women and people from disadvantaged minority groups. Despite controversies, there are more or less accepted approaches to measuring these aspects of a company’s performance, and acceptable approaches to comparing between companies and against local, regional and national norms. Beyond this, however, lies an ocean of issues where neither the basis for measurement or judging the resulting performance report can be agreed upon. The heated debate about the use and treatment of child labour in Third World countries – or the South – provides a good case in point. Consumers in industrialized countries may be horrified to hear that young children have stitched the shoes they wear, or have woven the carpets they walk on. But easy judgements are confounded by the fact that voices from those countries where child labour is used highlight the need for children to work to support the very lives of their families.

Which view is correct – the concern for children, their role in supporting their families, or both? Similarly, it is one thing to compare wages between similar companies in the same geographical locality, but what of the financial needs of employees? Is it acceptable that a company pays low wages because they are comparable to those paid by other companies? The short-term commercial view of this question is likely to be a straightforward ‘yes’. However, the consumer response to information about the measly wages being paid by companies from which they buy their bedlinen or their children’s schoolbooks may be very different. If people who buy a company’s produce are concerned about the nature of the production and trading process, then business survival may depend on whether and how the company is seen to respond to these concerns.³

So the problem with SEAAR is not merely a question of measurement but of how those measures are viewed by stakeholders who can determine a company’s future. The values of key stakeholders cannot be ignored, even when they conflict with the company’s social, ethical and environmental mission and aims. Whilst a company clearly cannot take account of everyone’s views all of the time – let alone respond to these views – equally they are ignored at the company’s peril. Some mechanism is needed to measure and report on performance in relation to different views and interests.

The extent and type of SEAAR is itself a function of how the particular company sees itself and its relationship with the outside world. Many companies have a culture of secrecy that extends well beyond any grounded rationale of commercial confidentiality.⁴ There is often a presumption that any disclosure which takes the company beyond compliance is an unnecessary risk. Equally, there is often an assumption that the disclosure of what appears to be relatively harmless information can lead to a company being pressurized to release potentially more damaging information. ‘Why should we’, companies argue, ‘stick our heads above the parapet and risk being shot at?’. Underlying this is a view that...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• List of Illustrations
• Acronyms and Abbreviations
• Preface
• Part 1 How, Why And Where To
• 1. Introduction
• 2. Why Count Social Performance?
• 3. How to Do It
• 4. Accountable Futures
• Part 2 The Briefings
• 5. The Ethical Dimensions of Banking: Sbn Bank, Denmark
• 6. Accounting for Ethics: Traidcraft plc, UK
• 7. Integrated Ethical Auditing: The Body Shop International, UK
• 8. The Expert View: Ben & Jerry’s Homemade Inc, USA
• 9. Co-ordinating Expectations: Municipality of Aarhus, Denmark
• 10. Building Dialogue Culture: Wøyen Mølle, Norway
• 11. Constructing the Social Balance: Consumer Co-operative, Italy
• 12. Ranking Disclosure: VanCity Savings & Credit Union, Canada
• 13. The Practice of Silent Accounting
• Annexes
• Key Contact Names
• Contributors
• Annotated Bibliography
• Social and Ethical Accounting, Auditing and Reporting: Principles and Key Elements
• Index