Accounting-Corporate Social Responsibility - Essay Example

Accounting-Corporate Social Responsibility Table of Contents 1.Historical Development 2 2.Interpretation (& understanding), disclosure and theoretical debate 4 2.1.Achieving Corporate Sustainability through Business Ethics 4 2.2.Relationship between Business and Corporate Social Responsibility 6 2.3.Understanding and Disclosure 8 2.4.Principles and Theories of Corporate Social Responsibly 9 2.4.1.Corporate Social Performance Theory 10 2.4.2.Stakeholder Theory 11 3.Challenges and issues in social and environmental accountability and reporting 12 4.Model design 15 5.Evidence of Corporate Governance and ethics embedment 18 6.Conclusions 22 7.Reference 24 1. Historical Development In last few years, the nature of trade and business has experienced tremendous changes. The modernization and globalization are the two prime reasons for such changes in the business world. The market size, competitions, innovation, ethical concern etc have increased significantly in business. The modern business organisations have expanded their areas of responsibilities. The increasing concern for social and environmental sustainability leads to develop a strong corporate sustainability. The corporate sustainably is a new concept in the business that has been developing since 1990s. According to Dyllick and Hockert, corporate sustainability can be defined as “meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders, employees, client, pressure groups, communities etc.), without compromising its ability to meet the needs of future stakeholders as well” (Wankel and Stoner, 2009, p.118). During 1990s, business organisations started to feel the necessity of corporate social responsibility (CSR) within the organisation as it became very necessary for corporate sustainability. The organisations for CSR and their initiatives made the CSR as an international agenda. This can be interpreted as the first transition period of CSR. The CSR concept entered into new stage in 1990 as the international organisations like OECD developed specific code of conduct for maintaining CSR activities within organisation (Segerlund, 2005). Behind the development of CSR, the business ethic movement has played very crucial role. In this respect, the non-profit organisation called ‘Defense Industry Initiative on Business Ethics and Conduct’ (DII) presented a proper model for meeting the primary objectives of business ethics. The DII was established in 1985 and, this organisation keeps revising the principles of business ethics as per the business scenario (Defense Industry Initiative on Business Ethics and Conduct, 2010). OECD had identified different issues in corporate social responsibly. During 2000, the business world has experienced considerable number of mergers and acquisition. In this respect, the most of the organisation neglected their moral development. A report published by OECD in 2001 discussed the importance of CSR activities for small and large scale of business and it also indentified several areas of CSR activities. OECD defined the CSR as “a core business value and strategy, integrated into all aspects of the company's operations from research and development to purchasing, production and supply” (OECD, 2001). With time the agendas of CSR kept expanding, the organisations for CSR and business organisation realized the importance of social and environmental cost. By the end of 2005, the increasing global warming due to carbon emission and pollution became a major issue for CSR. The measures for developing healthy society and environment through CSR activities are the most recent development in CSR. The increasing exploitation of environment by business organisation alerted the government and other CSR organisations. The civil regulation imposed certain essential guidelines to save the health of society and environment. The leading international organisations like OECD, United Nations and World Bank started to conduct conferences and published many publications for promoting environmental concerns (The Brookings Institution, 2010). At present, the CSR activities include various areas that are related to business ethics. The modern business organisations develop their CSR programs for betterment of stakeholders, society, community, environment and profit. Today, business organisations and other non-profit organisations aim to develop better society and environment by with the organisational growth. 2. Interpretation (& understanding), disclosure and theoretical debate The previous section has discussed the development of CSR within the existing business world. Now, it is very necessary to analyse the major aspects of CSR that has led to increase its interest and demand. The corporate sustainability is major reason behind this development of CSR. In order to present critical analysis of CSR, a detail study of corporate sustainability is required. 2.1. Achieving Corporate Sustainability through Business Ethics A business organisation is unable to move without considering the interest of its stakeholders, its society and environment or specifically the ‘business ethics’. A company faces several challenges due to differences in stakeholders and their separate social, economic and environmental goal. In such condition, managing a balanced corporate sustainability becomes a major issue for companies. In order to deal with these challenges, they aim to design an effective sustainability management system within the organisation. In this process, they need to specify the desirable benefits and goal for corporate sustainability that leads to enhance the value of a business (Rezaee, 2007, p439). According to Stephen A. Roosa, sustainability programs help to achieve tangible as well as intangible benefits for a company. The tangible benefits can be measured financially and it directly influences the profitability of company. The tangible benefits include “the potential of reducing operating costs and expenses, especially recurring costs” (Roosa, 2008, p.202). This improves the ‘cost effective management’ that enhances the profitability. The intangible benefits cannot be measured financially as its deals with improvement of organisation’s quality. The intangible benefits mainly focus on CSR activities. The intangible benefits include the improvements of employees’ life, perception of stakeholders towards the company, and overall value enhancement of a company. In this process, a company has to take necessary steps for improving the safety level for employees, environment, and community (Roosa, 2008, p.203). Schaltegge, Bennett and Burritt had identified a number of specific goals and benefits of corporate sustainability. The companies, who are concerned for social and environmental issues, determine their goals and activities for social responsibility. Some of the most important goals and benefits are given below. The enhancement of corporate brand value and reputation is one of the primary goals of organisation. Corporate sustainability programs also help an organisation to gain competitive advantage over its key competitors. It also helps to increase the internal and external accountability and transparency. This lead to increase the trustworthiness of a company among its employees and stakeholders. Corporate sustainability also enhances the quality of product, services and operations. At present companies are trying to develop products and services that have least impact of society and environment. By reporting corporate sustainability, companies aim to indicate the market and its competitors for superiors and healthy competitiveness. It has become a vital tool for market signalling. It supports the control and motivation process within the organisation. Employee motivation and internal control process are inevitable tasks for a company for bringing organisation growth (Schaltegge, Bennett and Burritt, 2006, p.302). 2.2. Relationship between Business and Corporate Social Responsibility Many scholars have tried to explain the relationship between CSR and business. However, in this respect, it is necessary to analyse and explain the relationship between the society and business. These two terms ‘society and business’ are interrelated with each other. Society can affect the nature of business and the activity of business can influence the characteristics of society. However, society is more broad and superior concept than business as business activities are held within a society. According to Davis and Blomstrom, the relationship between business and society is institutional and it “specifies what is expected of any business simply because it is a member of the business institution” (Wartick and Wood, 1998, p.71). Traditionally, the business organisation did not use to consider the social and environmental cost in their operational activities. However, at present, the relationship between business and society has become more specific and gradually, business organisations have realized the valuable contributions of society towards their organisational growth. The ‘Corporate Social Responsibility’ has been derived by this realization. Cramer and Bergmans have tried to explain the different factors that help to relate the CSR and business. For achieving corporate sustainability, the companies include CSR in their strategic planning process. In the process of developing strategic framework for CSR, a company must focus on three factors. The following figure shows a model that present these three factors. Figure 1: PPP Triangle (Source: Cramer and Bergmans, p.2) The above figure shows three P’s of CSR i.e. profit, planet and people. These three factors help to relate the business and society. Profit, people and planet are social factors that must be taken care by business organisations. The business operations directly can influence the people, profit and planet for serving society. 2.3. Understanding and Disclosure The above section has explained about the major principles of CSR for meeting objectives of business ethics. Disclosures of financial sustainability reports are another major task of CSR activities. The proper reporting system is mandatory in maintaining the transparency within the organisation. Higher level of transparency leads to develop the confidence of stakeholder regarding the company’s performance and validity. Retaining stakeholders’ interests should be the prime objective for an organisation. As per the stakeholders’ theory for CSR, the authority of the company is responsible for to act according to requirement of stakeholders. According to Bhimani and Soonawala, “corporate conformance and corporate performance are linked” and “the more companies conform to the best practices of corporate governance, the better the disclosure of their corporate responsibilities” (Aras and Crowther, 2008, p.111). Therefore, the companies must develop a proper condition and organisational structure that will encourage disclosure method. The disclosure method and practises varies country to country. The nature and characteristics of CSR activities are depends upon the business culture of a country. Therefore, there some technical differences also. According to Chambers (1966), “unique social, economic and political environment should play a vital role in moulding its accounting system and, hence its corporate reporting and disclosure practices” (Abu-Baker and Karim, n.d.). Prior to GAAP, different countries and companies used to follow their own specific accounting disclosure standards. These standards were not capable to produce effective results in meeting the stakeholders’ interests. However, international organisations developed accounting disclosures for international standard. GAAP (Generally Accepted Accounting Principle) is the first internationally accepted accounting disclosure standard developed by US. Manu countries modified the GAAP as per their business environment and convince (Fan, 2006). However, later, many scholars and international organisation found that GAAP is insufficient in enhancing corporate governance. IFRS Foundation developed IFRS (International Financial Reporting Standard) and other corporate governance and accountability. This organisation has been working for sustainability development (IFRS Foundation, 2010). 2.4. Principles and Theories of Corporate Social Responsibly The first task for maintaining CSR activities is to understand the contribution of society towards organisational goal. The second step in this process is to identify and understand the various principles of CSR. According to Post, Fredric and Lawrence, the principles of CSR can be divided into two major segments. The principle deals with improvement of society by providing necessary charity. The companies often donate money or resources to the unprivileged section of society. A companies who are active in charity principles, develops proper financial budgets to donate for social cause. The second principle CSR is meant to serve the society by stewardship. The business managers and entrepreneurs see themselves as a steward of society and they work for social cause. In this respect, they need to think beyond the financial success of their companies (Sunita, 2005, p.256). These two principles are prime and fundamental principles of CSR that must be managed by companies. A company can follow charity or steward principle of CSR. However, many large scale and multinational organisations are active in both types of CSR principles. The large scale and multinational corporations have enough resource and man power to bringing higher improvement in society. The international organisations like OECD and World Business Council for Sustainable Development (WBCSD) have developed their proper and specific guidelines for its members to follow standard principles of CSR. For example, WBCSD have identified four major areas for sustainable development i.e. ‘energy and climate, development, the business role and ecosystems’. There are nearly 200 members in WBCSD who follow their CSR activities by taking these four areas into account (World Business Council for Sustainable Development (WBCSD), 2010). Basic principles of CSR are primarily dependent on two theories. These theories are corporate social performance theory and stakeholder value theory. These two theories are discussed below. 2.4.1. Corporate Social Performance Theory This theory deals with behaviour of a corporate for social responsibility. The corporate social performance (CSP) can be identified by the three main factors. According to Sethi (1975), these three factors are “social responsiveness (proscriptive), social responsibility (prescriptive) and social responsiveness (anticipatory and preventive)” (Salzmann, 2008, p.6). Woods have developed a specific model to evaluate the CSP. The following figure portrays this. Figure 2: Wood’s Corporate Social Performance Model (Source: Salzmann, 2008, p.11) According to above figure, the social responsibilities are the principles of CSR. Woods has identified three principles i.e. public responsibility, legitimacy and managerial discretion. These three principles affect processes of social responsiveness and finally the corporate behaviours can be explained. 2.4.2. Stakeholder Theory The stakeholder theory of CSR considers the various groups of people who are directly related to a business. The stakeholders include shareholders, employees, customers, suppliers & distributors and government. This theory was first explained as managerial theory that strives to resolves the conflict between the managers and stakeholders. The primary objective of stakeholder theory is to protect the interest of stakeholders. As per the CSR goal and objectives, the welfare of stakeholders should be one of the prime concerns for a business organisation. By following this theory, an organisation will be able to create value for its stakeholders. According to Evan and Freeman (1988), “the corporation ought to be managed for the benefit of its stakeholders: its customers, suppliers, owners, employees and local communities and maintaining the survival of the firm” (Melé, n.d.). 3. Challenges and issues in social and environmental accountability and reporting The companies develop their specific goal and objectives of CSR. In this process, the organisations try to identify several challenges that can affect their social and environmental accountability and reporting. The non-profit organisations regulate and guide companies to implement standard business ethics with organisations and they have identified the basic challenges faced by business world and accordingly, they have developed proper code of conducts. These codes of conduct include important areas of corporate governance and other CSR activities (Mamic and International Labour Office, 2004, p242). In CSR activities, accountability and reporting are major code of conduct of corporate governance for an organisation that helps to maintain the transparency. The corporate governance strives to maintain a healthy relationship with the stakeholders. Accountability is one of the key elements that offers “transparent template for governing critical decisions, procedures, and activities” (Luo, 2004). Companies face a number of governance issues while maintaining accountability within the organisation. The internal mechanism is a major issue in this respect. The internal mechanism can pose challenges in meeting the objectives of accountability due to board members’ negligence, ownership concentration and lower executive compensation. Other factors affecting corporate governance and accountability are unbalanced business ethical behaviour and opportunism nature of top level managers. In case of multinational corporations, the organisational structure and managerial decision making process is more complex and time consuming. They also have to deal with several overseas stakeholders and their demands and perceptions vary significantly causing conflicting situations in organisation. Such contradictory situations also affect the entire decision making procedures. In case of corporate governance, the primary responsibility of shareholders and Board of Directors are to maintain accountability. Monks and Minow identified the relationships of accountability with the board of directors and with society. The leading shareholders of a company appoint board of directors who are legally responsible to control the entire organisation and act for shareholders’ interest (Davies, 1997, p.40). The organisation like the Institute for Social and Ethical Accountability (ISEA) or AccountAbility has developed proper code of conduct for maintaining accountability. The Code of Conduct for accountability developed by this organisation is known as ‘AA1000’. This organisation was established in 1955 and it is committed to help business organisations and other non-profit organisations for sustainability development. This organisation works for developing ‘stakeholder engagement’, ‘responsible competitiveness’ and ‘sustainability standards’. AA1000 codes of conduct are based on three main principles i.e. responsiveness, inclusivity and materiality. To maintain materiality, top level managers, directors and decision makers should identify the clearly state issues. Responsiveness denotes that the organisations should be transparent and stakeholders must be informed regarding the company’s prevailing condition. Inclusivity means that “people should have a say in the decisions that impact on them” (AccountAbility-a, 2010). AA1000 helps the organisations in promoting the globally accepted standard for reporting and measuring the business ethic behaviours. It is a framework for improving the ethical performance of organisation. Primarily, it assists the business organisation in setting the goals, targets, objectives and definition of business ethics. A company can implement AA1000 for measuring and evaluating the targets of corporate governance. It is a useful and effective stand alone system for auditing internal and external ethical issues of an organisation. It can be also applicable to any size and any types of firms. AA1000 is very effective for the multinational companies as it helps to identify the major issues in the complex system of multinational enterprises. AccountAbility tries to bring improvements in AA1000 by revising and upgrading it on a yearly basis. AA1000AS 2008 & AA1000APS are the revised and upgraded version of AA1000 and it has been expanded to cover the emerging issues. According to Simon Zadek, the chief executive of AccountAbility, “AA1000AS (2008) effectively takes the integration of sustainability into organisations’ norms and practices to the next level, providing the crucially needed bridge between advanced sustainability practices and traditional financial accounting, reporting and auditing” (AccountAbility-b, 2008). Another major issue in meeting the objectives of CSR is the environmental challenges. For sustainability development, an organisation has to consider the environmental issues. The operational activities of business directly affect ecosystem and its living and non-living system. In order to measure the environmental performance of a company various input and output factors should be considered. Organisations make the use of inputs like water, material and energy for production process and outputs like carbon emission, pollutions, wastes etc affect the environment. Due to civil regulations related to environmental issues, companies have to maintain a proper operational process that has the least impact on society. However, many companies failed to identify the major issues related to environment and finally they become unable to meet their CSR objectives (Barrow, 2006, p164). The Global Reporting Initiatives guides the organisations in various areas for maintaining accountability and reporting. This organisation has developed proper guidelines known as G3 that covers social, environment and economic issues. A company must disclose its management approach for environmental activities. The management disclosure should include CSR activities related to materials, carbon emission, energy and waters. In this respect, companies need to develop proper policies for safety of environment. However, the managements often face challenges in resolving the environmental issues due to lack of motivation and lack of better technology. The G3 guidelines monitor companies in resolving these issues and in proper management disclosure (Global Reporting Initiatives, 2006). 4. Model design Corporate social responsibilities are important and complicated task for multinational organisations. Multinational companies generally face challenges due to cultural dimensions and difference in legal policies. The issues related to CSR vary as per conditions of country or particular regions. Many developing or under developing countries experience the issues related to unemployment, instable economic growth, pollutions etc. However, the multinational companies often fail to realise such areas of improvement as they have lack of experience and knowledge regarding the new country. In this respect they must develop its internal model for meeting CSR activities and it should be of international standard. According to Winderm, organisations often find difficulties to decide CSR codes. CSR code may consider ethical issues or economic consideration (Edwards et al, 2007). The global framework for CSR must consider the entire CSR related issues. According to Archie Carroll, the hierarchy for CSR should include responsibilities relating to economic, legal, ethical and discretionary. Archie Carroll has put the economic responsibility as the most fundamental responsibility (Werther and Chandler, 2010, p.6). However, the business ethics are primary essence of healthy business and society. Therefore, organisations should make business ethics as its prime responsibility. The following figure shows the model hierarchy for CSR applicable for multination organisation. Figure 3: Hierarchy of CSR Model for Multinational Corporations. After considering the various factors of multinational companies, the above model has been developed. The business ethics are important for all business. Legal factors are major issues for multinational corporations and hence, they must comply with the legal policies of their host country. By meeting the ethical and economical issues, company will be able to meet its economic responsibility. Finally, the management can easily identify the discretionary issues within the organisation in respect of CSR activity. On the basis of above CSR hierarchy, a model for CSR implementation can be formulated. The following model has been designed to implement effective and efficient CSR activity in multinational corporations. Figure 4: CSR Implementation Model for Multinational Corporation. The above model includes all the necessary areas and aspects that should be considered in CSR development. As per the above model, the shareholders or board of directors are responsible to form a separate department for CSR activities. The department of CSR should build a team or committee for CSR and this committee will consist of several experts in corporate governance, ethics and compliance. Each committee member should look after each area of responsibilities with separate teams. A company must consider the specific areas of CSR like legal issues and compliances, environmental related issues, labour and employment policies and regulation, financial reporting, community development programs and maintenance of organisational health and safety level. There should be an internal auditors’ team who will measure and evaluate the validity and reliability of activity of the entire CSR teams. The internal auditors’ teams should be assigned by the CSR committee who is in-charge of entire CSR programs. The auditors’ reports need to be approved by Board of Directors and finally, the company must publish its entire corporate sustainability report. However, for maintaining a proper standard, the Board of Directors and CSR Committee must develop its code of conducts as per the social, environmental and legal factors. 5. Evidence of Corporate Governance and ethics embedment Corporate governance guides an organisation in making balance between the social and economic goals and objectives and between communal, individual and organisational goals. The framework for corporate governance strives to encourage effective utilization of human and other resources. There is very in-depth relationship between the business ethics and corporate governance. The base of corporate governance is the business ethics. The regulators of corporate governance are responsible for maintaining proper system within the business world by maintaining ethical issues. The failure of corporate governance may lead to bring fatal consequences for entire economy. The effective disclosure of financial sustainability report is a necessary criterion for ideal corporate governance. The disclosure based regulation involves a greater level of responsibilities for managers, board of directors, decision makers and regulators of financial disclosure (Madura, 2006, p.573). Financial crisis of 2007-2008 is an example of governance failure. According to Professor Arturo Bris, the financial crisis of 2007 was purely a result of failure of corporate governance. The US financial institutions and other lending companies including the leading banks neglected their corporate governance responsibilities. During 2007, the US lending firms and regulatory authorities avoided corporate responsibilities for making profits. The banks like Lehman Brothers did not take any necessary steps for measuring and avoiding the increasing risk of company. Besides, the management of the company misguided its stakeholders and government by providing misleading financial disclosure. The company used the ‘repo 105’ to reduce its financial risk that did not show the real picture of its financial conditions. (Bris, 2010). For developing effective and efficient corporate governance, inclusion of cross-functional teams is very necessary. Monitoring, disclosure, auditing etc are inevitable tasks for developing a proper corporate governance model. The above sections have discussed about the various areas of CSR and each of these is integral part of corporate sustainability. The interest of stakeholders, society, community and government must be catered. In this respect, Toyota’s corporate governance model is an ideal and effective model that emphasizes on frontline operations and multidirectional monitoring. The following model shows Toyota’s corporate governance. Figure 5: Toyota’s Corporate Governance (Source: Toyota, n.d) Toyota focuses on five major areas for following above model i.e. international advisory board, accountability, compliance and social responsibility. The international advisory board assist Toyota in meeting its business ethics in different countries (Toyota, n.d.). Multinational companies often enter into a developing country for achieving cost effective operations. The developing countries like China, India, and Pakistan etc are very cost effective for running buiness as labours and other material are available at a very cheap rate. Sometimes, the multinational companies try to exploit the market and society of host country by engaging in unfair business practices. Nike a US based leading global sportswear company is operating in many developed and developing countries. During mid 1990s, the company was blamed for unfair labour practises in India, Pakistan and other Asian countries. Nike was accused of child labour in Pakistan for production of footballs. It was also criticized for its labour practices in China, South Korea, Indonesia and Vietnam. The company has developed its own code of conducts but it was failed in Asian countries. Nike was accused for providing poor working conditions to its workers (Hobbs, n.d.). However, gradually, the company has been able to resolve such issues by following business ethics. Nearly 36% of Nike’s shoes are manufactured in China in 113 factories and the company has successfully revised its labour practises and took strict steps for fair labour policies (Mukherjee, 2005). The large scale companies have enough resources and technology for executing fair and higher CSR programs. The environmental issues have become important area of concerned for many companies. The automobile companies like Fords, General Motors, Toyota, Fiat etc are trying to develop fuel-efficient cars that have the least impact on environment. In this respect, the Tesco Plc, the third largest retailer of the world has contributed towards environmental safety and growth. The company has realized the increasing problems due to high carbon emission and global warming. The company aims to become a zero-carbon organisation by 2050. It has also opened the world’s first zero carbon supermarket in UK. This is a very appreciating attempt for CSR programs in resolving a serious environmental issue (Tesco Plc, 2010). The new ‘zero-carbon’ supermarket is situated in Ramsay, Cambridgeshire and it “cost 30% more to build, but it uses 50% less energy, and with oil at $70 a barrel it is a business case in itself” (Finch, 2010). 6. Conclusions The corporate social responsibility and corporate governance are two major factors that determine the corporate sustainability. The increasing demand of corporate sustainability has led to popularize the essence of CSR and corporate governance. This paper has dealt with the various aspects of CSR activities in context of business world. There has been a significant development in CSR activities due to changing nature of the management styles and initiatives taken by government and other international organisations. This paper has identified crucial areas and theories of CSR. A company has to understand the relationship and importance of society for a business for implementing CSR within an organisation. The basic principles and theories are necessary to evaluate and measure the different perspective of CSR. In multinational companies, the implementation of CSR programs is quite difficult due to complexities in structure of organisations. Therefore, an ideal CSR model for multinational companies has developed by considering major aspects of CSR. Unlike the traditional CSR hierarchy, the new hierarchy model for CSR is primarily based on business ethic responsibility followed by legal considerations. The next has provided the evidence of CSR in different companies. To understand the consequences of corporate governance failure, the example of the latest financial crisis and the US bank Lehman Brothers have been explained. Toyota’s corporate governance model is an appropriate example of corporate governance model. Nike had to face difficulties die to unfair labour practises in Asian countries that affected their global reputed brand. However, finally the company had to bring ethical labour practises in Asian counties to bring back its respectable image. Tesco has shown its smart initiatives for promoting healthy and safe environment by developing zero-carbon supermarket store in UK. 7. Reference Abu-Baker, N. I. and Karim, N. M. A. No Date. Corporate Social Responsibility and Accountability as a Comprehensive Approach for Developing Reporting and Disclosure Practices in Jordan. [Pdf]. 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