PART 10: CORPORATE SOCIAL-RESPONSIBILITY REPORTING

Chapter 37
Accounting for corporate social responsibility
37.1

There is no precise definition of social-responsibility reporting. It refers to the provision of

information to enable others to determine whether an entity has fulfilled its social
responsibilities. It is directly tied to notions of accountability. A discussion of socialresponsibility reporting requires some consideration of the social responsibilities of business.
There are many alternative perspectives on what these are.
The textbook provides one definition of social-responsibility reporting. It defines it as the
provision of information about the performance of an organisation in relation to its
interaction with its physical and social environment. This would include information about an
organisations:

interaction with the local community;

37.2

level of support for community projects;

level of support for developing countries;

health and safety record;

training, employment and education programs; and

environmental performance.

The textbook adopts the definition of accountability provided in Gray, Owen and Adams
(1996, p. 38), this being that accountability is:
the duty to provide an account (by no means necessarily a financial account) or
reckoning of those actions for which one is held responsible.
Accountability involves two responsibilities or duties: the responsibility to undertake certain
actions (or refrain from taking certain actions); and the responsibility to provide an account
of those actions.
It would be useful for instructors to discuss the relationship between accounting and
accountability with the students. As notions of accountability change, one would expect
accounting to change. If we were to adopt a view that the only accountability of management
was to increase the profits of a business (a view that appears to have been adopted by many
regulators) then we might decide that the only accounts required are financial accounts.
However, if we adopt a view that management has an accountability for the social and
environmental performance of an entity, then we would accept that they have a duty to
provide social and environmental accounts.

37.3

There is no real consensus on the social responsibilities of business. The generally-held

perspectives about the social responsibilities of business will arguably change across time (for
example, in recent years there has been a greater acceptance that organisations must take care
with regard to their impact on the environment, as well as consider the rights of the people

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living in the various areas in which the organisations operate). Different cultures/countries
will also tend to have different views about the responsibilities of business. If we accept that
businesses are accountable for their social performance (including the requirement to report),
and if we accept that different individuals and cultures have varying perspectives about the
social responsibilities of businesses, then differences in views can, in part, explain differences
in perceived accountabilities, and in social responsibility reporting practices.
In considering the social responsibilities that a business owes to others, numerous issues must
be considered. As the textbook indicates, issues to consider include:

Whether businesses are responsible to their direct owners (shareholders) alone, or

whether they owe a duty to the wider community in which they operate.

Whether the responsibility of business is restricted to current generations, or whether

the implications for future generations should be factored into current management
decisions.

Whether profitability, using established financial accounting techniques, is the best

guide to the success, legitimacy, or otherwise, of business operations.

Answers to such questions are varied and very much dependent upon an individuals value
systems.
As the textbook also indicates, there are various views about the responsibilities of
businesses, and these views can take extreme positions. Some researchers argue that a
business entity owes a responsibility to all individuals that are impacted by the operations of
the entity (perhaps through noise, greenhouse gas emissions, resource consumption etc.)
regardless of whether those individuals have any apparent power to impact the operation of
the business. At the other extreme are the views of the famous economist, Milton Friedman.
In his widely cited book, Capitalism and Freedom, Friedman rejects the view that corporate
managers have any moral obligations. In relation to the view that organisations have moral
responsibilities, he notes (1962, p. 133) that such a view:
shows a fundamental misconception of the character and nature of a free economy.
In such an economy, there is one and only one social responsibility of business to
use its resources and engage in activities designed to increase its profits as long as
it stays within the rules of the game, which is to say, engages in open and free
competition, without deception or fraud.
The newspaper clipping reproduced on page 1272 of the text (Being socially responsible
pays dividends) provides a view about the social responsibilities of a specific business: the
Sydney Harbour Casino.

37.4

This is an interesting question that has been included to stimulate debate among the students.
The quote from the Group of 100 provided in the chapter seems to embrace a much broader
concept of accountability and associated responsibility than would be embraced by Milton
Friedman. G100 appears to accept that corporations must operate for the benefits of all
stakeholders, rather than just for the shareholders (Milton Friedman would consider that the
focus should be totally on increasing the wealth of shareholders). While the position of G100
might appear commendable, it should be noted that G100 has opposed moves for the
disclosure of social and environmental information to be enshrined in law. They have tended

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to prefer the disclosure regime to remain voluntary, with corporations themselves being in
charge of the information they desire to disclose. This preference has also been embraced by
many other parties, such as accounting regulators, the ASX, and the accounting profession
generally.
While not required within this question, it might be interesting to consider how the views of
the accounting profession might compare with the views of Milton Friedman. In terms of
mandatory external reporting requirements, the provision of information pertaining to the
financial performance of business entities is quite heavily regulated. There are many
Accounting Standards, developed with extensive input from the accounting profession, which
address various financial accounting issues. There is, however, a general lack of guidance
emanating from the accounting profession pertaining to social-responsibility reporting issues.
(Some accounting bodies in various countries are devoting some resources to developing
guidance pertaining to social-responsibility reporting issues, particularly environmental
reporting issues, but relative to the attention they give to financial reporting issues, this is
minimal.)
If we accept that the reporting requirements being produced by the accounting profession are
related to perspectives held pertaining to the accountability of reporting entities (which
appears to be a reasonable assumption), and as the focus tends to be on financial accounting
and related issues of revenues, expenses and therefore, profitability, there is some basis for
arguing that the views about the social responsibilities of businessas held by the accounting
professiongenerally are not inconsistent with the views held by economists such as Milton
Friedman.

37.5

Chapter 3 of the textbook provides a definition of a theory, this being a coherent set of
hypothetical, conceptual and pragmatic principles forming the general framework of
reference for a field of inquiry. This is a general definition of a theory, which can be applied
to the study of accounting. For example the US Financial Accounting Standards Board
defined its Conceptual Framework Project (which is a normative theory of accounting) as a
coherent system of interrelated objectives and fundamentals that is expected to lead to
consistent standards. Accounting theories have typically been dichotomised into positive
theories and normative theories of accounting.
As we would appreciate, there are various theories of accounting. In part these theories are
different because those who have been involved in developing the theories have different
perspectives about such issues as the role of an accounting theory; the objectives of
accounting; and the qualitative characteristics that accounting information should possess. As
noted above, accounting theories are often classified as being either positive or normative.
Normative theories indicate how accounting should be undertaken, whilst positive accounting
theories do not seek to provide prescription but, rather, seek to explain and predict particular
accounting-related phenomena.

37.6

It is interesting to find that those accounting researchers that appear to have the highest
profile in terms of research pertaining to social-responsibility reporting tend to reject Positive
Accounting Theory. As we know, theories are abstractions of reality, which tend to be based
on various assumptions about human behaviour. The acceptance of one theory in preference
to another will, in part, be due to differences in personal views and values.

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As Chapter 3 of the textbook indicates, Positive Accounting Theory is based on a central

premise that all individual action (whether accounting-related or otherwise) is based on
notions of self-interest. Some people argue that considerations of the social responsibilities of
business, and the acceptance that self-interest drives all action, are not mutually compatible.
What do the students think on this issue?
Further, the focus of a great deal of the research in the area of social-responsibility reporting
is on issues associated with corporate and global sustainability. The notion of self-interest
(which favours the accumulation of maximum levels of wealth by individuals) and the notion
of sustainability are really not very compatible.
Whilst it is conceded that PAT provides some useful predictions from time to time, PAT has
been rejected by various social responsibility researchers as being morally bankrupt. As
Gray, Owen and Adams (1996, p.75) state in relation to PAT:
All parties are assumed to be rational economic men (sic) and to be acting in their
own financial short-term self-interest (i.e. to be selfish, gambling and greedy). In
this, we are once again back into a liberal economic world. There is little doubt
that these theories have provided some useful insights in the way in which they
model the world. There is equally little doubt that some company management and
many gambling investors may appear to act in line with these theories. It is also the
case that some authors have found the form of analysis employed in these theories
useful in examining corporate-social reporting; but apart from the limitations
which must arise from a pristine liberal economic perspective on the world and the
profound philosophical limitations of the approach, the approach cannot offer any
justification for why we might accept this description of the world as a desirable
one. It is a morally bankrupt view of the world in general and accounting in
particular.
There is also a view that if we espouse the virtues of particular theories in explaining human
action then, in a sense, teaching/using these theories becomes a self-fulfilling prophecy. For
example, if we teach accounting students that all action can be explained by self-interest, then
self-interest may be deemed to be the normal motivation for business decisions. This,
arguably, would not be helpful for teachers who are seeking to impart a view that the
students should embrace a perspective that business has various social responsibilities to the
wider community. When students that have been taught PAT subsequently find employment
and are confronted with particular accounting-based choices then, having been taught that
self-interest drives all activity, they may find nothing wrong in selecting an accounting
method on the basis of self-interest. After all, this is what they have been taught to expect of
others.
Students should be encouraged to consider whether being taught a particular theory of
accounting can actually impact how they subsequently act. Is this a realistic or a naive view?
37.7

As is discussed in Chapter 37, it has been argued that one function of accounting reports is to
legitimise the existence of an organisation. Legitimacy is based on community or stakeholder
perceptions. These perceptions about an organisation will change as a result of a number of
factors, a major factor being available information about an organisation. What is important is
that the community knows about changes in an organisations operations. Hence, if an
organisation implements new, perhaps environmentally friendly practices, then if people do
not know about the developments then their perceptions of the organisation will not change.
Information is vital to changing perceptions. Hence, perhaps in terms of establishing and
maintaining (or perhaps, repairing) legitimacy, it is just as important to do the right thing as

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it is to communicate that it is doing the right thing (perhaps the organisation could make
public disclosures about its new operating procedures).

37.8

Legitimacy Theory is based on an assumption that the continued operations and viability of
an entity are contingent upon continued compliance with its social contracta contract
negotiated between the entity and the community in which it operates. The terms of this
contract (mostly implied) will change across time as community expectations change. The
entity can also undertake various activities/strategies in an endeavour to alter the terms of the
contract. Shocker and Sethi (1974) provide a good description of the social contract. As they
explain (p. 67):
Any social institutionand business is no exceptionoperates in society via a social
contract, expressed or implied, whereby its survival and growth are based on:
(1)
(2)

the delivery of some socially desirable ends to society in general, and

the distribution of economic, social, or political benefits to groups from which
it derives its power.

In a dynamic society, neither the sources of institutional power nor the needs for its
services are permanent. Therefore, an institution must constantly meet the twin tests
of legitimacy and relevance by demonstrating that society requires its services and
that the groups benefiting from its rewards have societys approval.
Failure to comply with the social contract is deemed to be costly to the organisation and will
lead to various sanctions being imposed upon the entity. These sanctions may be in the form
of restrictions on the entitys operations, limited provision of resources such as financial
capital and labour, and reduced demand for the entitys products. Compliance with the social
contract (and therefore with the expectations of the community relating to how the entity
should operate) is considered to be consistent with the status of organisational legitimacy.
Organisations that operate successfully are assumed to be those that have been able to
interpret and react to the terms of the social contract, and changes therein. If an organisation
perceives that its legitimacy is in question it can adopt numerous strategies. Lindblom (1994)
identifies four courses of action an organisation can take to obtain, or maintain, legitimacy.
The organisation can:

seek to educate and inform its relevant publics about (actual) changes in the
organisations performance and activities;

seek to change the perceptions of the relevant publicsbut not change its actual
behaviour;

seek to manipulate perception by deflecting attention from the issue of concern to

other related issues through an appeal to, for example, emotive symbols; or

seek to change external expectations of its performance.

The public disclosure of information is one strategy that an organisation can undertake to
establish or maintain its state of legitimacy. Disclosure of information concerning the
organisations effect on, or relationship with, society can be employed in each of Lindbloms
four strategies. Consistent with this view, Hurst (1970) suggests that one of the functions of
accounting, and subsequently accounting reports, is to legitimate the existence of the
corporation.

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37.9

See the answer to Question 37.8

37.10 See the answer to Question 37.8. The social contract is at the foundation of Legitimacy
Theory. Legitimacy relies upon organisational compliance with community expectations, and
these expectations form the basis of the social contract negotiated between the entity and the
community.
37.11 (a) With an overriding commitment to health, safety, environmental responsibility and
sustainable development it is difficult to think of any stakeholders who would not be
positively influenced by a true commitment to these areas of performance. Health and
safety issues would be important to employees and customers. Environmental
responsibility would be of importance to all parties who share the physical environment
in question. Sustainability will be particularly important to future generations
(particularly if the definition of sustainable development being adopted is development
that meets the needs of the present world without compromising the ability of future
generations to meet their own needsBrundtland Report, 1987). Because the
organisations licence to operate will be impacted by how it performs in these areas,
investors would benefit from such commitments. Depending upon what motivates
particular stakeholders, there can be conflicts of interest. For example, a shareholder
with short-term wealth maximising ideals might oppose initiatives being put in place that
reduce the long-term environmental impacts of the organisations products. However,
shareholders with longer-term perspectives might not hold the same concerns. Indeed, all
individuals with a longer-term focus should accept the value of sound commitments to
sustainability-related issues.
(b) There are various reasons why sound social and environmental performance should
translate to relatively better financial performance. See the answer to Question 37.33 for
an overview of some of the reasons for the linkage. Because there are very real reasons
why commitments to sound social and environmental performance can translate to
improved financial performance it should even be easy to persuade those parties with a
fixation on financial performance (perhaps consistent with the views of Milton Friedman)
that it is wise to be socially and environmentally responsible.
37.12 The term public licence to operate (or sometimes organisations use the term community
licence to operate) is a term that is tending to be used by quite a number of companies
within Australia (and elsewhere). Interestingly, such terminology did not appear to be used
until recently (for example, the last 5 to 10 years). For various possible reasons, companies
now appear to, at least publicly, embrace the view that to be successful they must embrace
community expectations. The term public licence to operate would appear to hold the same
meaning as what we refer to as a social contract.
37.13 This is an interesting question to stimulate debate amongst students. Developing countries
would not typically appear to consider this an achievable goal because frequently in such
countries there is a focus on improving economic performance at the expense of social and
environmental implications. Short-term priorities and needs come at the expense of longerterm impacts. With this said, various studies have shown that at a corporate level, efforts
undertaken to reduce the environmental implications of business (for example, the use of
energy, water, paper, and the generation of waste) can actually lead to real cost savings.
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Interested parties should consider reviewing the Cleaner Production Case Studies, which are
available on the website on the Department of Environment and Water Resourcessee
http://www.environment.gov.au/settlements/industry/corporate/eecp/case-studies/index.html .
This website shows how initiatives to improve environmental performance translate into real
financial benefits.
37.14 Both Stakeholder Theory and Legitimacy Theory would be considered to be systems-oriented
theories. The organisation is seen to be embedded within a broader social system in which the
organisation is impacted by, and is able to impact on, the community in which it operates.
Legitimacy Theory relies upon the central notion of a social contract between the
organisation and the society in which it operates. Successful operations (organisational
legitimacy) are contingent upon complying with the terms of the social contract.
Organisational legitimacy is threatened whenever an organisations activities are construed as
being in conflict with the expectations embodied within the social contract. Accounting
disclosures are considered to be a means towards establishing or maintaining the legitimacy
of an organisation. In many research studies, accounting disclosures are frequently explained
on the basis of a strategy to maintain or bring legitimacy to the disclosing entity. In
considering the relationship between the entity and society, society is typically considered as a
whole, rather than considering the needs of particular stakeholder groups individually.
In considering Stakeholder Theory, it should be noted that there are actually various
Stakeholder Theories in existence. Some are normative in nature whilst others are positive in
nature. Yet they all tend to be called Stakeholder Theory. Normative Stakeholder Theories
tend to be embedded with various moral/ethical considerations in which it is argued that
various stakeholders have a right to information or that all individuals have rights and
organisations should not undertake activities that benefit some stakeholders at the expense of
others. Such theories provide prescriptions in terms of fairness, equality, and so on. Positive
Stakeholder Theories, on the other hand, seek to explain why an entity might respond to the
needs of particular stakeholders in preference to others. Issues such as the stakeholders
command of necessary resources are considered. It is frequently argued that stakeholders that
command resources necessary to the firm have power and it is the powerful stakeholders that
will have their needs attended to first. This can be contrasted with the ethical branch of
Stakeholder Theory.
37.15 There is an ethical/moral branch of Stakeholder Theory that prescribes that all stakeholders
should be treated fairly and equitably and that those with a command of scarce resources
should have no unfair advantages over others. Under this perspective, a stakeholder would be
a party that is impacted on or affected by the operations of the organisation. There are other
branches of Stakeholder Theory that seek to explain which stakeholders will be of greatest
concern to a business entity. These branches, often referred to as the managerial branch of
stakeholder theory, typically see notions of survival and profitability as being at the core of
business decisions (rather than moral/ethical considerations). Within this perspective it is
those stakeholders that have command of necessary scarce resources (from the organisations
perspective) that are deemed to be powerful and it is the powerful stakeholders who are
considered to have the most impact on the strategies being adopted by the business entity.
Powerful stakeholders would be the stakeholders that the organisation will have most
concern with satisfying and, hence, who might be the major focus of corporate disclosures.

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37.16 There is an argument that if an entity is considered to provide particular information in a

biased manner (such as biased environmental-performance information) then this will impact
the credibility of the other information being provided by the entity. As noted within
Chapter 37, KPMG (1993, p. 16) state:
Disclosing the bad news as well as the good news is very important if companies want
to gain credibility for their reports. Otherwise, the reports can appear biased and akin
to public relations tools. Even if there is considerable data, an otherwise good report
will invite suspicion on all its disclosures if companies are not up front about the
problems they are facing, including fines and prosecutions.
This view is also reflected in a document released by the International Institute for
Sustainable Development (1993). In its document, Coming Clean: Corporate Environmental
Reporting, it states that:
Some of the most effective report makers have been those that have been prepared to
adopt a warts-and-all approach. Those that have taken this path have found that
stakeholders are much more likely to believe the good news where there is also a
frank, detailed discussion of the remaining problems (p. 46).

37.17 One explanation, and the explanation provided by Deegan and Rankin, is that the disclosure
of positive environmental performance information (information that projects the company in
a positive light) is undertaken to offset the implications that might arise as a result of the
public disclosure (from other sources) of negative information about the company. (The
negative information relates to news about the environmental prosecutions.) That is, the
disclosures are made by the company as part of a strategy to boost public support for the
entity, with a view towards maintaining or re-establishing its legitimacy. The disclosure of
positive environmental information to counter negative environmental information is
consistent with one of the four strategies provided by Lindblom (see page 1321 of the
textbook). Specifically, it is consistent with Lindbloms third strategy, which is to manipulate
perception by deflecting attention from the issue of concern to other related issues through an
appeal to, for example, emotive symbols.
37.18 This is consistent with the perspective adopted within Legitimacy Theory, in which it is
argued that the public disclosure of information is one of the strategies entities can employ to
maintain or establish organisational legitimacy. The support for, and continued viability of, an
organisation is dependent upon a societal perspective that the organisation is operating in a
legitimate manner.
In practice, for large companies, a great deal of time is spent on determining the layout of an
annual report and the information to be included in it. What we must remember is that annual
reports are often over 50 pages in length, with a great deal of the disclosures being voluntary
in nature. Directors Reports are often 1520 pages in length, yet to comply with the
requirements of the Corporations Act they would typically only need to be a page or two in
length. It is not uncommon for the public relations departments of large companies to spend
considerable time on the development of the annual report. Considerable time can be spent
considering issues such as the inclusion of a photograph; whether indigenous people should
be included in the photograph; whether there is an acceptable mix of males and females and
various nationalities; whether somebody should be seen cuddling a koala at the restored site
of a previous mine, and so on. Whilst this may sound rather flippant, these issues are often
canvassed prior to the release of the annual report. The annual report is a document that is
distributed more widely than any other document produced by a company, and it is used by a
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wide cross-section of users. As such, it is probably a very useful document for the purposes
of attempts at gaining widespread support.

37.19 The arguments embodied within Brown and Deegan (1999) are based upon arguments that
emanate from both Legitimacy Theory and Media Agenda Setting Theory. Legitimacy Theory
argues that the disclosure practices adopted by companies will be influenced by community
expectations and concerns. Media Agenda Setting Theory argues that the media can actually
set the public agenda. That is, media coverage of various issues can increase the perceived
importance of those issues from the perspective of the media audience. Results of tests of
Media Agenda Setting Theory show that the media can be particularly powerful in influencing
what people think are important environmental issues. (The environment is deemed to be an
unobtrusive issue.)
Hence, if the extent of coverage devoted to specific issues in the media (the media agenda) is
considered to impact the publics concern about particular issues (from Media Agenda Setting
Theory), and if companies disclosure policies are based on community concerns (from
Legitimacy Theory) then we can argue that an increase in the media coverage relating to a
particular issue will lead to an increase in corporate disclosures pertaining to that issue.

37.20 (a)

Consistent with the results of Patten (1992) and Deegan and Rankin (1996), we
would expect the company to react by providing information of a positive nature to
offset the negative implications that will relate to the news of the disaster. Such an
expectation is consistent with the predictions that emanate from Legitimacy Theory.

(b)

As the textbook indicates, Patten (1992) focused upon the change in the extent of
environmental disclosures made by North American oil companies, other than Exxon
Oil Company, both before and after the Exxon Valdez incident in Alaska in 1989. He
argued that if the Alaskan oil spill resulted in a threat to the legitimacy of the
petroleum industry, and not just to Exxon, then Legitimacy Theory would suggest
that companies operating within that industry would immediately respond by
increasing the amount of environmental disclosures in their annual reports. Pattens
results indicate that there were increased environmental disclosures by the petroleum
companies for the post-1989 period, consistent with a legitimation perspective. This
disclosure reaction took place across the industry, even though the incident itself was
directly related to one oil company. Drawing upon Pattens findings, we would expect
the other companies within the industry to also alter their disclosure practices as a
result of the environmental disaster.

37.21 One argument that is commonly accepted is that companies are tending to produce improved
environmental-performance disclosures because the community is continuing to increase its
concern for issues associated with corporate-environmental performance. (There are various
surveys that indicate that community concern for the environment has increased greatly over
the last two decades.) If we rely upon a logical view that disclosure practices are tied to
issues of accountability, and if we accept that the community is expecting organisations to be
more accountable for their environmental performance, then we can explain why

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environmental-performance reporting appears to be improving across time (although there is

still plenty of room for more improvement!).

37.22 (a)

Target-based reporting involves the reporting of environmental performance against

predetermined targets. These targets are determined in advance. The selection of
particular targets in preference to others will be dependent upon various professional
judgements. These judgements will require consideration of such things as the
condition of the environment; the significant environmental impacts of the
organisation; stakeholder expectations; legal requirements, and so on. Where targets
have not been met, many organisations attempt to provide adequate explanations as
to why the targets have not been met and any remedial actions that have been taken.

(b)

The eco-balance approach (also called the mass-balance approach) is a reporting

approach that is more commonly used in Europe. As the textbook states, the ecobalance approach is a systems-based approach used to describe the functioning of an
organisations operations, with all physical inputs to an organisation being traced
through to their eventual end within the organisation, whether as product, packaging,
emissions or waste. The flow is typically disclosed in diagrammatic form.

37.23 The basic reason that environmental costs (or externalities) are ignored by traditional
financial accounting practices is due to our definitions of the elements of accounting. As we
know, the definition of expenses is decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants. Hence,
the definition of an expense relies in part on the definition of assets. As we know, assets are
resources controlled by the entity as a result of past events and from which economic benefits
are expected to flow to the entity. The environment itself is not controlled by an entity; hence,
it cannot be considered an asset of any entity. As it cannot be considered an asset, its use or
abuse cannot be considered to be an expense, unless associated fines are incurred or unless
the entity commits to remedy the damage.
A further reason why traditional financial accounting practices typically ignore the
environmental externalities generated by a reporting entity is tied to measurability. As we
have previously learned, for an asset, expense or other element of accounting to be reported
it must be measurable with reasonable accuracy. Can we really measure the costs of
pollution with reasonable accuracy?

33.24

(a)
Nike has been the subject of a great deal of criticism for its social practices.
Nike out-sources most of its manufacturing and does not directly employ the factory
labourers. Nevertheless, there is a growing perception that Nike should take
responsibility for the poor conditions provided to the people in the factories, many of
which are located in developing countries. Throughout the world there have been
many demonstrations in front of Nike stores and there have been many high-profile
campaigns by various groups, which aim to get people to boycott Nike products.
Clearly, this activity has been damaging to Nikes reputation, and its profitability.

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We would expect, consistent with Legitimacy Theory, that Nike would attempt to
undertake activities to repair its damaged reputation and legitimacy. (Consider the
four legitimisation strategies suggested by Lindblom as described in Chapter 37.) One
such activity would be the public disclosure of some of the more positive aspects of
Nikes activities, perhaps to divert attention away from the poor conditions of the
workers. Perhaps Nike will try to align itself with popular symbols, such as respected
sporting personalities. We would also hope that Nike would take actions to require
improvements in the working conditions of the people manufacturing its products.
What is important is that if Nike wants to improve the perception the community has
about its operations, then any operational changes Nike makes must be publicised
(perhaps through the media, on its website, or in its annual report). Public perceptions
will only change if people are informed about changes: the public disclosure of
information is central to the legitimisation process. Any changes at Nike or its
suppliers which are unknown by the community will not have a positive impact on
Nikes perceived legitimacy.
(b)

If we go to Nikes website we can actually find details of the Global Alliance social
audit. (The process of social auditing occurs when an organisation attempts to assess
its performance in relation to societys requirements and expectations.) The fact that
Nike is cooperating with the Global Alliance as well as providing the report of the
social audit on its own website would demonstrate to the public, perhaps, that Nike is
taking the concerns of the public seriously and that it is attempting to have an
independent assessment provided of the various workplace conditions. Such actions
would be consistent with the view that Nike has accepted that its past operations are
no longer acceptable and, consistent with community concerns (and the terms of the
social contract), it is endeavouring to make changes.
Whether organisations such as Nike take such actions and make such changes
because of an acceptance that their social performance was wrong and below
morally-acceptable standards, or whether they change their activities simply to
increase profitability (through improved public image), is not something that we can
be sure about. Perhaps it is a bit of both.

37.25 This is an interesting question. The eco-balance approach typically involves a diagrammatic
representation of the resource inflows and the resulting products and services produced,
together with a depiction of the various emissions and other wastes. This approach is often
used within Europe. Its use within Australia is rare. To prepare an eco-balance sheet, an
organisation needs a very sophisticated environmental management system which is able to
capture all the inputs and record the various outputsincluding the various emissions.
Perhaps Australian companies do not have the same extensive knowledge of the outputs of
their manufacturing and operating systems.
37.26 The view that company directors have a duty to maximise profits and deliver the largest
possible returns to shareholders is an interesting one. Certainly, directors have a legal
requirement to use the resources entrusted to them in the interests of the legal owners (the
shareholders). However, it is becoming accepted that organisations also have a responsibility
to other groups of stakeholders in the community. Indeed, it is becoming accepted that
successful organisations will provide positive benefits for not only the owners of the
organisation, but also for the communities in which the organisation operates. Disregarding
community needs and expectations has been the cause of much media criticism for various
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organisations throughout the world and, arguably, this criticism has damaged the reputation,
profitability and share prices of the organisations involved. This view is reflected in a number
of public comments made by corporate executives. For example, in North Ltds 1998
Environment, Safety and Health Report, the company states:
North recognises that as a company we have a responsibility to conduct our
affairs in a way which benefits society as a whole. We also believe that our
commercial objectives will best be achieved and enhanced by understanding
community values and taking them into account in all of our activities.
This is also consistent with a comment by Shell (UK). In Shell UKs Report to Society 1998 it
is stated that:
The days when individual companies were judged solely in terms of economic
performance and wealth creating have long disappeared. Today, companies have
far wider responsibilities to the community, to the environment and to improving
the quality of life for all.
A focus on tax minimisation, and using offshore tax havens, would arguably not be seen
positively by the community if it is construed that the behaviour maximises the returns of
shareholders at the expense of providing funds, via taxation, for community purposes.
Organisations do not have any inherent right to exist; in effect, they exist because the
community allows them to exist (by providing capital and labour, by consuming the products
and services, and so forth). It is conceivable that media attention on the use of offshore tax
havens is not likely to have a positive impact on the reputation of the organisation, given the
generally negative stigma associated with tax minimisation strategies. What should be
appreciated is that it is community perceptions of particular activities that are deemed to
influence corporate legitimacy, and not whether management considers that the actions are
appropriate.

33.27 As the chapter discusses, due to such factors as the generally accepted definitions of the
elements of accounting (particularly, that assets must be controlled), and the requirement that
expenses and the other elements of accounting must be able to be reasonably measured prior
to recognition, environmental externalities are typically ignored in financial accounting
reports generated by reporting entities. Relying upon a rather extreme example, the textbook
states that under traditional financial accounting, if an entity was to destroy the quality of
water in its local environment, thereby killing all local sea creatures and coastal vegetation,
then to the extent that no fines or other related cash flows were incurred, reported profits
would not be directly impacted. No externalities would be recognised and the reported
assets/profits of the organisation would not be affected. Adopting conventional financial
reporting practices, the performance of such an organisation could, depending upon the
financial transactions undertaken, be portrayed as being very successful.
There is an acknowledgment by a number of entities throughout the world that new systems
of accounting must be developed if we are going to make reporting entities more accountable
for their financial performance, as well as social and environmental performance. What must
be appreciated is that our current system of financial accounting is heavily based on a system
of accounting that was developed in the 15th century by Pacioli, a Franciscan monk.
Arguably, at that time, issues such as the environmental externalities and other social costs
generated by business entities were not the focus of attention they are today.

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The textbook briefly described one such approach, which is called triple bottom line
reporting. This approach attempts to incorporate attributes of an entitys economic, social,
and environmental performance to ultimately yield a combined bottom line result. At this
stage, work in this area is very much in its infancy.
Further, mindful of the limitations of traditional financial reporting, many entities are
voluntarily providing additional information that is not required by conventional financial
accounting practices. For example, some entities are providing environmental information on
a performance-against-targets approach, whilst other entities are providing information on
the basis of the mass-balance approach. This information is provided as a supplement to the
information required to be presented pursuant to generally accepted accounting principles.

33.28 Environmental and social reporting really is not about being green, fluffy, and friendly.
Rather it is about accountability. The central reason for accounting is to allow an
organisation to demonstrate its accountability: to provide an account of those actions for
which the stakeholders of the organisation believe the organisation is responsible.
Traditionally, it might have been considered by the vast majority of people that business
entities were primarily responsible to the owners (financial stakeholders) for their financial
performance. The accounting profession has focused on this accountability. However, across
time there has become an acceptance that organisations are accountable to a broader group of
stakeholders and for a broader range of performances, including both social and
environmental performance. Whilst the accounting profession has been slow to respond to the
expanded notion of accountability, it nevertheless is responding. (In Australia, both CPA
Australia and the Institute of Chartered Accountants in Australia have devoted funding to
various social and environmental reporting initiatives.)
The view that the market is not taking social and environmental reporting seriously is quite
wrong. More and more risk assessments of organisations are taking into account their social
and environmental performance and policies. Banks, for example, will often not loan funds
for particular projects unless they are provided with information about an organisations
environmental policies and performance. The recent upsurge in interest in ethical investment
has also increased the demand for information about social and environmental performance. It
is expected that the demand for social and environmental performance information will
continue to grow.
It is true that there are limited social and environmental disclosure regulations, such that most
social and environmental disclosures being made are currently voluntary (or perhaps tied to
the requirements of particular Codes to which the organisation might be a signatory). Within
Australia there are limited disclosure requirements for companies in respect of their
compliance with environmental legislation (disclosures are required to be made in the
Directors Report). Organisations such as pension funds are also required to make disclosures
about how or whether environmental considerations impact on their investment strategies.
Apart from these requirements, however, there is very little regulation related to corporate
social and environmental disclosures. (Some organisations make disclosures to respective
State Environmental Protection Authorities, but this information is not terribly easy to access.
A limited number of organisations also make emission and release disclosures as required by
the National Pollutant Inventory, but details of these disclosures do not have to appear in an
organisations annual report.) Across time, it is reasonable to expect an increase in regulatory
requirements pertaining to the public disclosure of social and environmental performance
information.
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33.29 Financial accounting treats distributions to employees (wages) as an expense, whereas

distributions to owners (dividends) is an appropriation of profits. The media often portrays
profitable companies as being good companies. Financial accounting practices ignore the
majority of social and environmental costs (and benefits) generated by companies. It is true
that cutting the workforce of a company will decrease financial costs and perhaps increase
reported profits, but this ignores the social costs associated with unemployment. Social costs
are generally ignored by financial accounting (and indeed, it would be difficult to put a cost
on unemployment).
As is demonstrated in Chapter 37, financial accounting uses definitions of the elements of
accounting, which require control and measurability. If an organisation does not control a
resource then its use or abuse is typically ignored and not reflected in reported profits. Hence,
financial profitability is only one facet of organisation performance. To gain a more rounded
picture of organisational performance, information should also be collected about the
organisations social and environmental performance. This relates to the notion of triple
bottom line and sustainability reporting. A number of organisations are now publicly
producing stand-alone social and environmental reports, which are distributed in both hard
copy and via corporate Internet sites. Students should be encouraged to go to corporate
websites to see the types of social and environmental reporting being undertaken.

33.30 This media attention would not be welcomed by BHP, given the negative impacts it would
have on its reputation and perceived legitimacy. Consistent with a number of previous
research studies, it would be expected that BHP would provide some form of disclosure,
perhaps in its annual report, about efforts being undertaken to ensure that such damage
would not occur again. Information might be provided about new environmental policies and
new environmental operating standards. The aim of the disclosures would be to repair the
damaged legitimacy of the organisation.
Ignoring the fines, the destruction of the fish habitats would not directly impact on BHPs
reported profits. The fish and their habitats were not controlled by BHP, hence they would
not be considered to be BHPs assets. As such, their use or abuse would not be reflected in
the expenses of BHP (unless a fine was imposed, which would impact on the resources
controlled by BHP). It is important to look beyond reported profits to gain a more holistic
perspective of the performance of an organisation.
37.31 This question should stimulate a great deal of discussion with the students. In terms of the
costs and benefits of disclosure we can initially consider the costs. Such costs would include:

The costs of setting up appropriate systems to collect the required information.

The costs associated with producing the reports.
The costs associated with having the reports verified.
In the short-run there may also be some costs associated with stakeholder reaction to
various items of bad news (however, there is a general expectation that bad news will
become known sooner or later and it is probably a good idea for the organisation to tell
its stakeholders as early as possible rather than leaving it to someone else to reveal the
adverse news).

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In terms of the benefits of reporting, it is a general principle that an organisation with

effective reporting mechanisms will be deemed to be of lower risk than other organisations.
This should translate to lower costs of capital. Because business risk is very much a function
of social and environmental risks, an assessment of business risk requires knowledge of the
social and environmental policies of an organisation. Given increased demands for corporate
accountability, an organisation with a sound reporting approach will be able to maintain its
community licence to operate. Further, collecting information about the social and
environmental costs associated with an entitys operations should highlight opportunities for
managing and reducing such costs (the adage being that you cannot manage what you do not
measure).
Students should be encouraged to consider the sorts of approaches that might be used for
reporting. In making decisions about reporting formats, consideration should be given to the
needs of stakeholders. Reference might also be made to various authoritative reporting
guidance documents (such as the Global Reporting Initiative Sustainability Reporting
Guidelines), as well as to corporate reports deemed to represent current best practice (and
the best practice reports might be determined by referring to the winners of some of the
various sustainability reporting awards operating throughout the world).
In determining to whom the reports should disseminated, such a decision will be based on
determinations of who the stakeholders are and whether management is focusing on the
rights of all stakeholders, or only those stakeholders that are in control of those resources
upon which the entity is dependent (that is, the powerful stakeholders). The reporting
approach will also depend upon why management is reporting. For example, are they
reporting because they believe in properly demonstrating accountability to all affected
stakeholders; or because they are seeking direct economic benefits for the organisation; or for
themselves (the opportunistic perspective)?
37.32 (a) Various stakeholder groups (such as investors, consumers, employees, government) base
their decisions about how or whether they will support an organisation on the social,
environmental and financial performance of the entity. Often it is difficult and costly to
gather information on social and environmental performance. Organisations like Reputex
put in place various mechanisms to collect and summarise information on various
corporations (for example, the largest Australian organisations) social and environmental
performance. This information is then sold to various interested parties who consider that
it is less costly to buy the information relative to what it would be to collect the
information themselves. Obviously, the amount to be paid for such information would be
impacted by perceptions about the relevance and reliability of the information (which in
turn will be impacted by such factors as the timeliness of the information, and the
methods in place for collecting and summarising the data).
(b) Various stakeholder groups would be interested in such information. For example,
various investors would be interested in such information either because social and
environmental performance issues are important to them in determining whether they
want to be an owner of an organisation, or because they consider there is a very real
link between corporate social and environmental performance and profitability and share
price growth. Other stakeholder groups, such as employees, employee groups, lending
institutions, media and government would also have an interest in such information, so as
to inform various decisions about whether they will support particular organisations.

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(c) The answer to this part obviously can be related to the answers provided in parts (a) and
(b) above. If it is accepted that stakeholder support is influenced by an organisations
social and environmental performanceas some of the quotes from senior management
provided earlier in this chapter reflectthen corporations will want to gain a relatively
high ranking in any process that measures social and environmental performance. We can
speculate on the relative impacts of companies that ranked highly and poorly in the
Reputex ratingsparticularly given that various high-readership newspapers carried
stories about the results of the ratings process.
37.33 There are various reasons why companies that have a reputation for sound social and
environmental performance might outperform other entities. Such reasons would include:
Adherence to the community licence to operate. If it is accepted that society is
increasingly expecting corporations to operate at high standards of social and
environmental performance, then corporations that have inferior social and environmental
performance will find it relatively more difficult to attract support from various
stakeholder groups, such as from customers, lenders, employees, government, the media,
and so forth. That is, corporations that do not conform might be considered to be
illegitimate, and this legitimacy gap will impact their operations until such time that the
community considers that the corporations operations are legitimate (from legitimacy
theory).
Cost of finance. Flowing on from the above point, organisations with a relatively poor
reputation for their social and environmental performance would arguably find it more
difficult to attract debt or equity capital. This will in turn impact the cost of attracting
capital. For example, in relation to banks, Deni Greene Consulting (2001, p. 9) states:
Lloyds TSB feels that it is better placed to assess a customers all-round creditworthiness if it understands the environmental risk the business faces and the
measures it puts in place to counter those risks. Other banks in the United States
and United Kingdom are beginning to take this approach, and Australian banks
are following. It is quite common for due diligence procedures to be required as
part of major financial transactions, to demonstrate to a bank or other lender that
there are no hidden environmental liabilities that could become the responsibility
of the lender or that could diminish the value of the property or organisation.

Impacts on share prices. Also related to the above point, there is evidence to suggest that
following significant social and environmental events of a negative nature there will be
negative impacts on share prices. As an example, we can consider the following
comments by Deni Greene Consulting (2001):
The experience of the Exxon Valdez oil spill in 1988 showed how vulnerable a
share price is to a damaged reputation, at least in the short term. After the oil
spill, Exxons share price plummeted. The substantial depression of share price
persisted for at least four months after the accident. At the same time, other firms
with poor reputations for environmental performance also suffered declining share
prices, and firms with good environmental reputations saw their share prices rise.

Organisations seeking to operate in new markets will arguably find it more difficult to
gain support in those markets if they cannot demonstrate sound social and environmental
performance. This will particularly be the case where standards or codes of conduct are in
place that demand high levels of social and environmental performance.

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Impact on the value of tangible assets. If an entity, for example, does not have proper
environmental performance standards in place then it is possible that various
contaminants might flow to the land, such that across time high levels of contamination
will undermine the value of the land. Various other assets might also be impacted, for
example buildings, by poor environmental operating standards.
Impact on the value of intangible assets. A valuable resource of companies is their
reputation. Sound reputation builds support from various stakeholders, including
customers, employees, government and media. As Ernst and Young (2002, p. 5) state:
Companies are increasingly acknowledging that corporate ethical, environmental
and social behaviour can have a material impact on business value. The great
majority of companies (79 per cent) forecast the importance of this issue to rise
over the next five years as companies across a range of industry sectors recognise
its relevance to their business. Research has found that a companys reputation in
respect to issues pertaining to CSR is a factor in purchasing decisions for 70 per
cent of all consumers.

Legal liability considerations. Poor social and environmental performance can lead to
outcomes involving legal actions from various stakeholder groupsfor example from
disadvantaged employees, nearby landowners, governments etc. We can reflect on the
costs incurred by BHP Billiton Ltd in relation to damage caused to river systems in Papua
New Guinea.
Insurance costs. Organisations with poor social and environmental governance systems in
place, or with a history of poor social and environmental performance, will find it
increasingly costly to insure various aspects of their operations.
Impact on operating margins. There is mounting evidence that organisations that control
and minimise their use of various environmental resources, such as energy or water, will
be able to minimise their costs associated with such resources, relative to organisations
that do not carefully manage the use of such resources.

The above discussion is obviously far from comprehensive. But what it hopefully
demonstrates is that there are many reasons why organisations that perform well in relation to
various social and environmental issues will tend to outperform those entities with poor
performance.

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