Accounting Is One Part of the Overall Management of a Business

Accounting is one part of the overall management of a business

The way a business operates can impact on

Environment

Society

Corporate Social Responsibility

There is growing pressure on firms to act ‘ethically’ and reveal effects of their choices

Effect their activities have on society

Several events have put companies’ behaviour under the spotlight:

Nike child labour

Brazil Dam disaster

Meaning of Corporate Social Responsibility (CSR):

--The impact of a company’s activities on the welfare of society

Socially responsible activities:

--Result from policies and procedures that have been put in place by an entity to ensure that it is an acceptable, ethical citizen

--Include attitudes towards, and practices associated with, customers, employees, the environment and the community

Social responsibility and the maximisation of shareholders’ wealth：

Literature on theory of the firm suggest primary role of a company’s management:

--Formulation and execution of policies leading to the maximisation of shareholders’ wealth

Advocates for maximising shareholders’ wealth suggest that:

--Socially responsible activities should not be undertaken unless they are consistent with shareholders’ best interests

There is potentially conflict between:

--The decision that serves best interest of the shareholder; and

--The decision that serves best interest of society

Management will often find the costs of socially desirable projects difficult to justify on purely financial grounds

Justifications for companies voluntarily undertaking socially responsible activities:

--‘Enlightened self-interest’

--Useful stakeholder management strategy

--Strategy to maintain organisational legitimacy

Motivations for corporate social responsibility reporting:

Enlightened self-interest:

--Costs that appear to be motivated by a desire to promote society’s best interest:

But which are also incurred in the hope of generating benefits for the company that exceed those costs

--No guarantee that corporate philanthropy achieves the desired benefits for the organisation involved

--Philanthropy may still be justified if: The perceived benefits exceed the costs

Stakeholder management:

Stakeholder theory suggests that: An organisation is part of a broader environment with complex and dynamic relationships with its many stakeholders

Stakeholder:

--Any group or individual who can affect, or is affected by, the achievement of the organisation’s objectives

--Includes environmentalists, consumer advocates, media, governments and global competitors, as well as shareholders, customers, suppliers

Corporate social responsibility disclosures are viewed as:

--Part of a strategy to negotiate stakeholder relationships

Corporate legitimacy:

Legitimacy theory suggests:

--The relationship between a company and society is subject to a social contract

The implied social contract provides that:

--As long as the company’s activities are consistent with society’s values, the company’s legitimacy and survival are assured:

--The legitimacy of a company is called into question when: Society’s expectations do not match corporate behaviour

--Corporate strategies to close a legitimacy gap and avoid sanctions by society include:

Changing corporate performance and activities to conform to legitimacy standards and communicating change to stakeholders

Attempting to change external expectations about corporate performance through communication

Using communication to direct attention from the legitimacy gap or to reinforce the community’s perception of management’s responsiveness

Additional considerations:

Internalisation of social costs:

--Would force the management of a company to include them with other costs in making its decision

Mechanisms for ensuring internalisation of some social costs:

--Increased costs imposed on companies who shirk their social responsibilities

--Several companies may jointly undertake socially responsible activities

--Government may take the initiative to ensure companies act in a socially responsible manner; e.g. legislation, penalties and subsidies

Reporting on corporate social responsibilities:

No accounting standards in Australia requiring companies to report on their environmental and social performance

Section 299(1)(f) of the Corporations Act 2001 requires:

--Companies to include in their Directors’ Report information about whether the entity’s operations are subject to any particular and significant regulation; and

--If so, details of the entity’s performance in relation to the regulation

Additional voluntary corporate responsibility initiatives:

GRI Guidelines:

Sustainability reporting guidelines developed by the Global Reporting Initiative for voluntary use by organisations to report on the economic, environmental and social dimensions of their activities, products and services

Carbon Disclosure Project