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Lecture

AYB311 W12 L.docx

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Department
Accountancy
Course
AYB311
Professor
All Professors
Semester
Fall

Description
LECTURE 12 – ENVIRONMENTAL AND SOCIAL REPORTING AND ACCOUNTING What is Corporate Social Responsibility?  Interpreted very broadly  Generally viewed as impact of a company’s activities on the welfare of society  Can differ between regions in a nation (ie. Differences between Brisbane and Melbourne) and across countries  Has only emerged in the last 20 years The Social Responsibilities of Business  The economic view o “There is only one and only one social responsibility of business to use its resources and engage in activities designed to increase profits as long as its stays within the rules of the game.”(Friedman, 1962)  Only role of business is to maximize shareholder investments in a legal manner o Voluntary disclosures only necessary to maximise profits (e.g. reduce political costs)  Profit maximization and voluntary disclosure are no longer mutually exclusive  Most firms realize they need to have CSR to make profits  The (broader) stakeholder view o Organisations earn their right to operate within the community, with that right being provided by the society in which they exist, not solely by parties with a financial interest o A “stakeholder” is any identifiable group or individual who can affect, or is affected by the achievement of an organisation’s objectives (Freeman & Reed, 1983) CSR and Shareholder Wealth Maximisation  Traditional view of role of a company’s management o Formulation and execution of policies leading to the maximisation of shareholders’ wealth:  This view widely criticised o Frequently suggested management should act in a ‘more socially responsible manner’  Advocates of wealth maximisation argue socially responsible activities should not be undertaken unless they are consistent with shareholders’ best interests  Difficult to justify CSR activities costs on purely financial grounds o Unless can be recovered from customers  Justifications for incurring CSR costs: o ‘enlightened self-interest’ o stakeholder management o corporate legitimacy Enlightened Self Interest  Costs that appear to be motivated by a desire to promote society’s best interest o 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 o You will never know if the company achieved what they wanted to do – no way to tell whether or not company lost or gained people  Philanthropy may still be justified if the perceived benefits exceed the costs o Market researchers would analyze the benefits to produce reports – influence future decisions Shareholder Management  Stakeholder theory o Company is part of a broader environment with complex and dynamic relationships with its many stakeholders:  E.g. internal: customers, creditors and external: environmentalists, consumer advocates, media, governments and global competitors o Major role of management is to assess the importance of meeting stakeholder demands to achieve the company’s strategic objectives  Stakeholder importance derives from the power to control critical resources Corporate Legitimacy  Legitimacy theory o Relationship between a company and society is formed by a “social contract”  Implied social contract o Company’s legitimacy and survival are assured if the company’s activities are consistent with society’s values  Legitimacy of company called into question when society’s expectations do not match corporate behaviour o McDonalds – have introduced McCafe and healthy options to their menu to adapt to the expectations of society. They have changed their packaging to reflect the content of the food.  Company’s management is motivated to close a legitimacy gap because of legal, economic or other social sanctions on the company: o E.g. consumer boycotts of products, limited provision of resources, government intervention etc o Had fast food companies not altered their menus, they would have had significant troubles  Corporate strategies to close a legitimacy gap: o Changing corporate performance and activities to conform to legitimacy standards and communicating change to stakeholders o Attempting to change external expectations about corporate performance through communication o Using communication to direct attention from the legitimacy gap or to reinforce the community’s perception of management’s responsiveness Additional Considerations  Some suggest that ‘internalisation’ of social costs would force company management to include them with other costs in making its decisions o Sale of cigarettes – not everyone gets lung cancer yet advertising suggests this o Difficult to determine what the social costs are  Mechanisms for ensuring internalisation of some social costs: o Increased costs imposed on companies who shirk their social responsibilities o Several companies may jointly undertake socially responsible activities  Industrial estates sometimes have huge bins which they put their refuse in – the costs are shared around  It is naïve to think that these costs are not passed onto to customers. o Government may take the initiative to ensure that companies act in a socially responsible manner, e.g. legislation, penalties and subsidies  Work place health and safety – roof painting: used to just have a ladder. Now you are required to have appropriate safety precautions and if they are not applied then you will be prosecuted  This is part of the legislation. Tax breaks are provided for compliance. Conclusions  Companies should analyse proposed expenditure on socially desirable projects with the same care that would be devoted to the analysis of other projects  Where it is not in a company’s private interest to act in a socially responsible way, three possible approaches to ensuring that it is socially responsible: o Consumer and lobby groups exerting pressure on the company o Companies to act together to achieve social ends o Government to intervene Limitations of Traditional Financial Reporting  Focuses on financial information needs  Entity assumption distinguishes between owners and other stakeholders – excludes reporting to other stakeholders o This is problematic because it draws the distinction between these parties  Adopts the concept of control & measurability – causes problems o Expense definition excludes recognition of items not controlled by the entity o Externalities cannot be reliably measured, so social cost/benefits are not recognised Accounting for 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 requires: o Companies to include in their Directors’ Report information about whether the entity’s operations are subject to any particular and significant regulation; and o If so, details of the entity’s performance in relation to the regulation  Possible reasons for voluntary disclosure of environmental and social performance: o Internal decision making o Product differentiation  Show how your products are different to other organisations ie. The Body Shop and not testing cosmetics on animals  Also provided organisational legitimacy o Enlightened self-interest/stakeholder management/ attainment of organisational legitimacy Early corporate social responsibility reporting trends in Australia  Various surveys of reporting practices of Australian companies to identify level and type of corporate social responsibility reporting: o Trotman (University of NSW):  69 of 100 companies on Sydney Stock Exchange made social responsibility disclosures in 1977  Smaller than now, annual reports were not as large due to less legal requirements  Majority of disclosures were qualitative rather than quantitative  Most disclosures related to human resources and the environment o Guthrie and Parker:  56% of 50 companies in Australia in 1983 disclosed socially responsible activities  Majority of disclosure were in areas of human resources, community involvement and the environment  Community involvement – how the organisation is contributing to the community  No company provided ‘bad news’ about its activities  Area which receives al ot of criticism – it is a ‘marketing’ exercise and they only tell you the good things not the bad actions. o No different from a resume – put “your best foot forward: o Deegan and Gordon:  71 of 197 companies in 1991 disclosed environmental information  Companies in mining, building materials, fertiliser, chemicals and timber industries provided the most environmental information  Two issues around this: all companies would be subject to environmental legislation (therefore, obliged to report information) and these companies are also most likely to have environmental information.  Firms disclose more positive than negative information  Significant increase in disclosures during the period 1988-91  Global Reporting Initiative (GRI) formed in 1997 o develop and disseminate globally applicable sustainability reporting guidelines  In Australia: o BHP first company to release a public environment report in 1994 o Placer Pacific Ltd published Australia’s first sustainability report in 1998 o In 2003, Telstra Corporation released the first corporate social responsibility report by a company listed in the S&P/ASX 100 index Impetus for change and recent reporting practice  Most international public accounting firms established a sustainability division o To provide accounting services to clients seeking to undertake CSR reporting  Development of corporate responsibility rating by RepuTex 
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