How stakeholders drive accountability in corporate sustainability reporting

How might changes in sustainability reporting aimed at improving accountability for corporate performance to key stakeholder group be brought about?

This post is relevant to stakeholders wishing to effect change towards greater corporate accountability for material social and environmental impacts.  And it is relevant to corporate leaders wishing to understand their stakeholders.

The post contains edited extracts of an article written by Carol Adams and Glen Whelan (full reference below). The basic idea put forward by Adams and Whelan is that, when there is a change in a pattern of ESG (Environmental, Social and Governance) disclosure, we have to assume that the senior management of the company in question think that, by making this change, they are most likely to maximise shareholder wealth.

The “basic rules of society” referred to by Milton Friedman (1997) play at least some role in the decisions that managers make regarding disclosures on ESG issues.

“In a free enterprise, private property system, a corporate executive is an employee of the owners of the business. He [sic] has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society . . .” (Friedman, 1997, pages 56-7, originally published in the New York Times Magazine, September 13, 1970).

These “rules” can be changed by conscious action. For example, the government, academics, the media and scientific community can potentially change societal views by consciously engaging in public debates.  They do this by being involved in non-governmental organisations, by advising governments, and so on.

The discussion here very briefly summarises the argument in the Adams and Whelan paper without reference to the extensive literature drawn on in making it and listed in the full paper (reference below).

When we find that our ideas about a given state of affairs do not match up with the actual state of affairs in question, we experience what Festinger (1957) termed a “cognitive dissonance”. This idea of cognitive dissonance is a powerful one when trying to understand a change in the behaviour of a person or an organisation.  Simply put, a cognitive dissonance occurs when two or more cognitions about the “same” thing, are “out-of-sync”. This makes us feel uncomfortable and we take action to remove the discomfort.

The paper identifies five corporate stakeholders and their potential to give rise to a “cognitive dissonance” that would result in managers altering the way they disclose ESG issues.

Governments

Many academics, NGOs, and others have argued in favour of making corporate reporting of social and environmental impacts mandatory seeing legislation as an important driver of change. However, legislation, while being an important catalyst for change, will not necessarily diminish the corporate concern to maximize shareholder wealth so long as institutional pressures and remuneration mechanisms remain intact or mandatory reporting requirements are not enforced. Furthermore, governments are often believed to be somewhat restricted when it comes to issuing regulations that might result in decreased returns on invested monies due to the possibility of “capital flight” and the purported existence of a “race to the bottom”.

Many believe that the ideas of “capital flight” and a “race to the bottom” diminish the extent to which governments can regulate capital in a globalised world. The importance of such phenomena however are significantly overstated. It has been convincingly argued that, rather than being attracted to countries with minimal regulative and fiscal regimes, multinational corporations are actually attracted to countries characterized by democratic institutions with redistributive social welfare policies (among other things).

Governments can still effectively regulate the activities of corporations in our globalized world – providing such regulation can be enforced.  Indeed it may be desirable on issues where corporate reporting activities cause harm or deplete natural resources, but may not be considered desirable on issues where innovation in reporting needs to be encouraged.

Academics

Academics are a potential source of cognitive dissonance for managers involved in sustainability reporting. Research and teaching that is critical of sustainability reports could give rise to a perceived need to change reporting frameworks. Adams (2004), for example, details the manner in which one company’s patterns of disclosure regarding social and environmental impacts were at best inconsistent with a great deal of other information available in the public domain, and, at worst, deliberately misleading resulting in a reporting-performance portrayal gap which would not be tolerated in financial reporting.

NGOs

NGOs are often involved in shaping both the formal and informal rules that govern one aspect of social life or another and can be considered civil society actors. In their campaigning and advocacy activities, NGOs try to impact on corporate activities both directly and indirectly through encouraging governments and multi-lateral organisations around the world to change regulation.

NGOs have pushed to get the regulations surrounding corporate governance changed to ensure that corporate management manages in the name of all stakeholders. The World Wildlife Fund has engaged with the Australian mining industry giving rise to at least some change in sustainability reporting.

It is difficult to imagine that the activities of groups like People for the Ethical Treatment of Animals (PETA) and the Animal Liberation Front (ALF) have not been the source of at least some cognitive dissonance within the fast food industry. For example, PETA’s  Kentucky Fried Cruelty campaign will have probably played at least some minimal role in KFC’s (2007) decision to publish information about their Animal Welfare Program.

Campaigning and advocacy NGOs are also commonly involved in Global Public Policy Networks (GPPN). Such networks come into being when corporations, NGOs and governments are involved together in the formation of various institutions. The Global Reporting Initiative is an example of a GPPN focussing on sustainability reporting.

NGOs therefore often play a role in changing corporate approaches to reporting.

Media

In their paper on the social disclosure patterns of BHP, Deegan et al. (2002) suggested that the media has a more or less clear and direct impact on what corporations do and do not disclose in regard to their ESG activities. They suggest that corporations will often try to defend the legitimacy of their activities when it is called into question by media reports which might damage their reputation by changing their patterns of ESG disclosures.

McDonald’s is an example of a company changing its reporting following negative media coverage.

In the McLibel film the story is told of two anarchist activists who take on the legal might of McDonald’s and win. They were taken to court for handing out leaflets in front of one of McDonald’s stores in London. The leaflets suggested that McDonald’s were not being nice to animals; that they were producing food that was not necessarily nutritious; and, that they were responsible for a considerable amount of environmental destruction. McDonald’s objected to this information being distributed in front of one of their London stores and took the “The McLibel Two” to court (with little success). The case itself, and the release of two films, have received massive media attention over the years, and have generated a large anti-McDonald’s web-presence, including McSpotlight.

In the film Super Size Me (2004) the filmmaker Morgan Spurlock embarks on an experiment that requires him to eat three meals a day at McDonald’s for a month. In the process, Spurlock has periodic health check-ups that suggest the food he is eating is having a significant negative impact on his overall health – he gets fatter, his blood pressure goes up, and so on. McDonald’s in the UK countered the claims of Super Size Me with a web site at www.supersizeme-thedebate.co.uk (the domain for which is now up for sale) and What Makes McDonald’s (previously www.makeupyourownmind.co.uk).  McDonald’s ESG disclosures were clearly influenced by the media.

These filmmakers, producers and directors can be considered civil society actors in that their aim is to impact on both the formal and informal rules governing social life and the actions by McDonald’s to maximise shareholder wealth.

Corporate social responsibility (CSR) industry

Owen (2005) used the notion of a CSR industry to refer to a host of people and organizations (consultants, NGOs, professional bodies, governmental bodies and public relations experts) who are promoting the idea that socially responsible behaviour and sustainability reporting will enhance shareholder value. This growing industry arguably has its roots in that body of academic literature concerned to link what can be termed corporate social performance (CSP) with corporate financial performance (CFP). This literature, which can be traced at least as far back as 1972 was largely driven by the pragmatic recognition that:

  • corporations seek to maximize profits in Anglo-American countries; and
  • this means that if corporations were to legitimately engage in activities concerned with the social good, then such activities had to be profitable.

The full article by Adams and Whelan provides references and discusses the vast body of research which has examined the relationship between corporate social performance and corporate financial performance which can be understood as “supporting” the CSR industry.

The ideas of instrumental CSR are beneficial in their ability to help maintain shareholder returns.

One of the issues of course is that managers, directors and investors often are not aware of the long term benefits of CSR activity or that which cannot be measured in financial terms.  They also cannot know of the full and long term cost of risks of not getting it right – such as those which impacted on McDonalds.

This page contains edited extracts from Adams CA and Whelan G (2009) Conceptualising future change in corporate sustainability reporting Accounting Auditing and Accountability Journal 22(1): 118–143. DOI 10.1108/09513570910923033

References

Adams CA (2004) The ethical, social and environmental reporting – performance portrayal gap Accounting, Auditing and Accountability Journal 17(5): 731–757.

Deegan, C., Rankin, M. and Tobin, J. (2002), “An examination of the corporate social and environmental disclosures of BHP from 1983-1997”, Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, pp. 312-43.

Festinger, L. (1957), A Theory of Cognitive Dissonance, Stanford University Press, Stanford, CT.

Friedman, M. (1997), “The social responsibility of business is to increase its profits”, in Beauchamp, T.L. and Bowie, N.E. (Eds), Ethical Theory and Business, 5th ed., Prentice-Hall, Englewood Cliffs, NJ.

Owen, D. (2005), “CSR after Enron: a role for the academic accounting profession?”, European Accounting Review, Vol. 14 No. 2, pp. 393-404.

Share this article

Speak Your Mind

*

Enter your email address to receive the latest posts