Report dealing with various concerns raised by the Finance Director in a recent report issued to the Senior Accountant, 2000 words

 

From: The Senior Accountant

To: The Finance Director

Re: Corporate Social Responsibility

 

Executive Summary

 

This report deals with various concerns raised by the Finance Director in a recent report issued to the Senior Accountant. The Finance Director’s main concern is whether the company’s public reputation may have a material impact on its Balance Sheet. To clarify the Finance Director, this report deals with the following issues: firstly, the report provides a discussion as to whether there are differences in between social performance and environmental performance as well as whether there is any connection between the two. Secondly, the report provides a discussion of the regulation that governs the disclosure of social and environmental performance by public companies. Thirdly, the report provides a discussion as to whether there is any relationship between share value and corporate social responsibility. Finally, the report provides the accountant’s opinion on whether the disclosure of a positive statement on CSR issues has any effect on the net worth of the company.

 

 

  1. Social Versus Environmental Performance

Social performance refers to “the results of the interaction of an organisation’s activities, products or services with the social environment (including social perceptions of environmental performance) and relevant stakeholder wants within it” (Bennett et al., 1999: 17). Environmental performance refers to “the results of the interaction of an organisation’s activities, products or services with the natural environment (for example, carbon dioxide (CO2) emissions, which create global warming)” (Bennett et al., 1999: 17). Based on the foregoing definitions for social and environmental performance, one can observe that the difference between the two lies in the words “social” and “natural”. Both social performance and environmental performance have to do with the interaction of the organisation’s activities, products or services with the environment. The environment can be divided into two groups: the social environment and the natural environment. Both environmental performance and social performance can be grouped under corporate social performance (CSP). According to Wood (1991) CSP can be divided into three components. The first component deals with the level of corporate social responsibility which is based on legitimacy within society, public responsibility within the organisation, and managerial direction by each individual within the organisation (Wood, 1991). The second component refers to the processes of corporate responsiveness which includes environmental assessment, stakeholder management and issues management; and the third and last component refers to the outcomes of corporate behaviour and includes social impacts, social programs, and social policies (Wood, 1991). Social performance can be categorised under the third group while environmental performance can be placed under the second group. The environmental performance of a firm is a critical component in measurement of its CSP. For example, Poduska et al. (1992) and Reilly (1992) provide evidence that environmental performance is a critical success factor of CSP. Poduska et al. (1992) suggest that Kodak’s CSP improved following its conscious effort to reduce the level of pollution emissions through technological innovations. In like manner, Reilly (1992) observe a positive relationship between environmental performance and CSP in a study examining the pollution reduction activities at Minnesota Mining and Manufacturing. It is therefore also obvious that the social performance of an organisation has a significant impact on the measurement of its CSP.

  1. Regulations Governing social and environmental Performance Disclosure

Until recently, most social responsibility disclosures were voluntary and unaudited. Few efforts were being made to monitor firms’ social activities or to validate their disclosures. (Ingram and Frazier, 1980). A number of regulations around the world govern the disclosure of environmental performance. For example, in the U.S the Toxic Release Inventory (TRI) reports information on toxic chemical releases and waste management activities reported annually by certain industries and other federal agencies. It is a legal requirement for all companies operating in particular industries to file Toxic Release Inventory reports by 1st July of each year (http://www.epa.gov/TRI/). In Norway, the Norwegian Enterprise Act enacted in 1989 requires corporations to include information relating to emission levels and contamination as well as proposed environmental clean-up measures in the directors report. Under the Norwegian Accounting Act 1998, companies are required to report any pollution emissions, as well as remedial or preventive actions taken (Richardson, 2002). Other European countries such as Denmark, the Netherlands and Sweden have instituted mandatory environmental reporting. In the United Kingdom a new framework of statutory accounts and reports has been proposed by the Company Law Review Group (Richardson, 2002). The framework is expected to cover environmental issues as part of the objective to increase the scope of reporting to cover qualitative, or “soft”, or intangible and forward looking information (Richardson, 2002). Despite this regulation, the business sector has not embraced the consolidation of regulations regarding environmental regulation into mainstream company law statutes. Rather, they have preferred the retention of the voluntary approach (Richardson, 2002). The Australian Society of Certified Public Accountants and the Institute of Chartered Accountants, for example, in 1998 opposed an attempt to amend the Australian Corporation Law to provide for environmental disclosure. The Accounting Bodies held that it was best for such measures to be narrowly confined to the requirements under environmental regulation per se (Richardson, 2002).

 

  1. Corporate Social Responsibility and Firm Value

Managers continually encounter demands from multiple stakeholder groups to devote resources to corporate social responsibility (CSR). CSR is defined “actions that appear to further some social good beyond the interests of the firm and that which is required by law” (McWilliams and Siegel, 2001: 117; Carroll, 1999). According to Dr Deborah Anderson, President of Farsight Associates Inc. and former vice president for environmental quality worldwide at Procter and Gamble, stakeholders include “anyone who can help or hurt a business” (cited in Chris, 2003: 5). This definition indicates that stakeholders are not only shareholders but also customers, employees and business partners; local communities; government; worldwide public opinion; NGOs; and activists who represent the natural environment (Chris, 2003: 5-6).

The issue as to whether corporate social responsibility provides benefits to a firm or not is a controversial one. On the one hand it can been argued that corporate social responsibility leads to increased firm value since stakeholders perceive a firm that that is socially responsible as being a good corporate citizen and as such reward the firm with a good reputation. On the contrary, it can also be argued that corporate social responsibility does not lead to an increase in firm value because of the costs incurred by the firm in meeting the requirements of stakeholders. In the final analysis this paper argues that corporate social responsibility leads to increased firm value. Before reaching its conclusion, the paper reviews literature on the relationship between CSR and firm performance. Various arguments have been made with regards to the relationship between shareholder value and social responsibility of firms. These arguments have taken two opposing view. One view suggests the presence of a trade-off between social responsibility and financial performance. Proponents of this view hold that firms incur cists from socially responsible actions that put them at an economic disadvantage compared to other firms that are less responsible. (Aupperle et al., 1985; Ullman, 1985). A contrasting viewpoint suggests that the explicit costs of corporate social responsibility are minimal and that firms may actually benefit from socially responsible actions in terms of employee morale and productivity. (Moskowitz, 1972; Parket and Eibert, 1975). As earlier mentioned, this paper argues in favour of the positive view which suggests that socially responsible firms tend to benefit from their socially responsible actions. According to Davis (1960) some socially responsible business decisions can be justified by a long-run complicated process of reasoning as having a good chance of bringing long-term economic gain to the firm, as well as paying the firm back for its socially responsible outlook. McGuire et al. (1988) employed Fortune Magazine’s ratings of corporate reputations to analyse the relationship between social responsibility and measures of firms’ performance. The results suggest that a firm’s prior performance, assessed by both stock market returns and accounting-based measures, is more closely related to corporate social responsibility than is its subsequent performance (McGuire et al., 1988). Roberts (1992) in another study investigated the explanatory power of stakeholder theory of one specific corporate social responsibility activity (i.e., social responsibility disclosure). The study provides evidence that measures of stakeholder power, strategic posture, and economic performance are significantly related to levels of corporate social disclosure (Roberts, 1992). This indicates that firms are motivated to disclose social responsibility reports because of the positive reaction they anticipate receiving from such disclosure.

  1. Effects of a Positive Statement on CSR issues on the Net Worth of a Company

A positive statement on CSR issues in the annual report is normally expected to have positive impact on a company. Corporate reputation is an important source of competitive advantage. When a company discloses a positive statement, this increases its corporate reputation and thus its sales potential. Higher sales potential will reflect positively on the company’s share price. By issuing a positive statement reflects the company’s commitment to meeting the needs of the different stakeholders and not just those of shareholders. As earlier mentioned, the different stakeholders include employees, customers, local communities, government, NGOs and activists. Each of these stakeholders has its own expectations from the company. By demonstrating a commitment to meeting their various requirements through the issue of a public statement on corporate social responsibility, the company gains more trust from the different stakeholders. For example, customers can be more confident that the goods and services provided by the company are in line with regulatory requirements. For example, companies are increasingly required to disclose the calorie content of their food products so as to enable customers determine whether these products suit their individual needs. A company that fails to disclose such information will witness declining sales because customers concerned about their calorie intake will not buy from such companies. For example a Muslim cannot buy a product if he/she is not clear whether the product contains pork. Thus it is essential for companies to make such disclosures. In addition, NGOs and activists usually confront organisations with regards to their actions to the society and the environment. By disclosing positive information, NGOs and activists can be more convinced that the organisation is committed to meeting minimum requirements with regards to CSR. examples of CSR actions that go beyond legal requirements include adopting progressive human resource management programs, developing non-animal testing procedures, recycling, abating pollution, and embodying products with social attributes or characteristics. (McWilliams and Siegel, 2001). An organisation that demonstrates a commitment toward improving the living standards of society as a whole rather than satisfying only the interests of shareholders is more likely to remain competitive as opposed to one that fails to act in this manner. Thus disclosing this information in the annual report can greatly enhance the organisation’s performance. For example an organisation that adopts progressive human resource management programs aimed at helping employees achieve personal development is more likely than not to attract skilled labour as opposed to one that fails to adopt such strategies. As Chris (2003) states:

“Companies that make the transition from focusing exclusively on shareholders to managing for stakeholder satisfaction will survive consolidation and attrition in today’s market place and become leading actors in the global world of the twenty-first century” (p. 6).

In addition, Ryzaburo Kabu, Honorary Chairman of Canon Inc:

“Global corporations rely on educated workers, consumers with money to spend, a healthy natural environment, and peaceful existence between nations and ethnic groups…. At this watershed period in history, it is in the interests of the world’s most powerful corporations to work for the advancement of global peace and prosperity. To put it simply, global companies have no future if the earth has no future” (cited in Chris, 2003: 5).

 

It should be noted that firms’ social efforts are not closely monitored. Moreover, few efforts have been made to validate the CSR disclosures by firms. (Ingram and Frazier, 1980: 614). As a result management can be motivated to distort disclosures to ensure that they are in line with stakeholder expectations irrespective of whether they actually represent what they purport to represent. Disclosures are only useful if there is a correspondence between the disclosures and actual events. Consequently if the different stakeholders do not perceive such a correspondence, then the social responsibility disclosures will be discounted and thus lead to a negative relationship between corporate social responsibility reporting and firm value. Thus, a company should only disclose information if it is confident that this information represents a true and fair view of its CSR activities. Otherwise, it will not benefit from the increase in value associated with the disclosure of positive information.

 

Bibliography

 

Aupperle, K. E., Carroll, A. B., and Hartfield, J. D. (1985). An Empirical Examination of the Relationship Between Corporate Social Responsibility and Profitability. Academy of Management Journal, 28: 446-463.

 

Carroll, A. B. (1999) “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders”, Business Horizons, Vol. 34, No. 4, pp. 39-48.

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McWilliams, A., Siegel, D. (2001), “Corporate Social Responsibility: A Theory of the Firm Perspective”, The Academy of Management Review, Vol. 26, No. 1, pp. 117-127; Academy of Management; available online at: http://www.jstor.org/stable/259398

 

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Parket, R. and H. Eibert: 1975, ‘Social Responsibility: The Underlying Factors’, Business Horizons 18, 5-10.

 

Poduska, R., R. Forbes and M. Bober (1992), ‘The Challenge of Sustainable Development: Kodak’s Response’, Columbia Journal of World Business 27, 286–291.

 

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http://www.epa.gov/TRI/