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  1. 1. BA606 FINANCIAL ACCOUNTING Professor Garry Carnegie Lectures 21 & 22
  2. 2. Lectures 21 and 22 : Accounting for corporate social responsibilities <ul><li>Introduction </li></ul><ul><li>Social responsibility and the maximisation of shareholders’ wealth </li></ul><ul><li>Methods of accounting for and reporting corporate social responsibilities </li></ul>
  3. 3. Introduction <ul><li>Corporate social responsibility (CSR) is increasing commanding attention in the media, the markets and in society in general </li></ul><ul><li>CSR has been broadly interpreted and is generally thought to relate primarily to identifying and assessing the impacts of a company’s operations on the welfare of society </li></ul><ul><li>Society may be local, state, national or international communities </li></ul><ul><li>Its meaning varies across countries and cultures </li></ul>
  4. 4. Introduction <ul><li>Socially responsible activities result from putting into place effective policies and procedures to ensure an entity is an acceptable, ethical citizen </li></ul><ul><li>These activities include attitudes towards, and resultant practices associated with, customers, employees, government, the environment and the wider community </li></ul>
  5. 5. Introduction <ul><li>In a global CEO survey (2002), there was considered to be three broad levels of responsibility: </li></ul><ul><li>- an internal focus on a healthy and safe working environment and an external focus on acting responsibly towards all stakeholders (the main tier) </li></ul><ul><li>- an orientation towards shareholder value, environmental performance and support for community projects </li></ul><ul><li>- charitable contributions and external endorsements </li></ul>
  6. 6. Introduction <ul><li>One of the key matters under CSR is to deliberate upon the extent to which entities are responsible to society for all costs of their operations, such as pollution of the environment </li></ul><ul><li>From an accounting perspective, our prime focus is upon methods of accounting for and reporting corporate social responsibilities </li></ul>
  7. 7. Social responsibility and shareholder wealth <ul><li>Literature on the theory of the firm and on financial management strongly supports that the objective of the firm is to maximise shareholder wealth </li></ul><ul><li>For a listed corporation, this translates to the maximisation of the company’s share price </li></ul><ul><li>Investment, financing and dividend decisions are made to achieve this aim </li></ul>
  8. 8. Social responsibility and shareholder wealth <ul><li>This rationalist interpretation of the role of the firm has been repeatedly challenged in recent times as being too narrow and entities are increasing expected to act “in a more socially responsible manner” </li></ul><ul><li>Opinions vary as to what this means and how this “good feeling” is operationalised for effectiveness </li></ul>
  9. 9. Social responsibility and shareholder wealth <ul><li>Should socially responsible activities be undertaken if they are not regarded as consistent with the shareholders’ best interests? </li></ul><ul><li>Best interests may be viewed as short-term or long-term </li></ul><ul><li>Socially responsible activities may involve corporate reputational issues </li></ul>
  10. 10. Social responsibility and shareholder wealth <ul><li>Management will often find it hard to justify the costs of socially desirable, if not socially essential projects, purely on financial grounds </li></ul><ul><li>Such costs may be justified, however, on the grounds of “enlightened self-interest”, such as under a strategy to maintain organisational legitimacy </li></ul>
  11. 11. Social responsibility and shareholder wealth <ul><li>There are three key motivations for voluntarily undertaking corporate social responsibility activities: </li></ul><ul><li>- Enlightened self-interest </li></ul><ul><li>- Stakeholder management </li></ul><ul><li>- Corporate legitimacy </li></ul>
  12. 12. Social responsibility and shareholder wealth <ul><li>Enlightened self-interest </li></ul><ul><li>This phrase relates to those costs that are incurred by an entity which 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 entity that exceed those costs </li></ul><ul><li>Corporate philanthropy often falls into this category </li></ul>
  13. 13. Social responsibility and shareholder wealth <ul><li>Stakeholder management </li></ul><ul><li>Stakeholder theory suggests that an organisation is part of the wider environment with complex and dynamic relationships with its many stakeholders </li></ul><ul><li>A stakeholder is anyone who is affected by the continual push by entities of all types to achieve their objectives </li></ul>
  14. 14. Social responsibility and shareholder wealth <ul><li>Stakeholders include groups and individuals such as environmentalists, consumer advocates, media, government and global competitors </li></ul><ul><li>Stakeholder theory suggests that a key role of management is to assess the importance of meeting stakeholder demands in order to achieve the entity’s strategic objectives </li></ul>
  15. 15. Social responsibility and shareholder wealth <ul><li>Stakeholder importance derives from the capacity to control resources that an entity requires to use in order to achieve its objectives </li></ul><ul><li>Corporations are required to strategically manage relationships with important stakeholders in order to continue to have access to key resources </li></ul><ul><li>CSR reporting is seen to be undertaken as part of a stakeholder management strategy </li></ul>
  16. 16. Social responsibility and shareholder wealth <ul><li>Corporate legitimacy </li></ul><ul><li>Under legitimacy theory, the relationship between an entity and society is subject to a “social contract” </li></ul><ul><li>Broadly, the implied social contract provides that, so long as an entity is operating in ways which are consistent with society’s values, the entity’s legitimacy and ultimately its survival are assured </li></ul>
  17. 17. Social responsibility and shareholder wealth <ul><li>The legitimacy of an entity is called into question when that entity infringes or even breaks its social contract </li></ul><ul><li>In other words, the behaviour of the entity does not match society’s expectations of appropriate behaviour </li></ul><ul><li>This disparity creates threats to corporate legitimacy, known as “legitimacy gaps” </li></ul><ul><li>Consider the case of Arthur Andersen where the firm irreparably broke its social contract </li></ul>
  18. 18. Social responsibility and shareholder wealth <ul><li>There are three ways to close a legitimacy gap: </li></ul><ul><li>- change corporate performance and activities to conform with social standards </li></ul><ul><li>- change external expectations about corporate performance </li></ul><ul><li>- direct attention away from the legitimacy gap or reinforce management’s responsiveness to social and environmental issues </li></ul>
  19. 19. Social responsibility and shareholder wealth <ul><li>There is support for the contention that an unless the benefits of a socially responsible activity flow to an entity and exceed the costs, then legitimate reasons exist, from an entity’s point of view, not to act in a socially responsible manner </li></ul><ul><li>Accordingly, social costs arsing from an entity’s activities tend to be borne by the rest of the community </li></ul>
  20. 20. Social responsibility and shareholder wealth <ul><li>The “internalisation” of social costs makes an entity more conscious of them and, accordingly, includes them (rather than excludes them) with other costs in decision making </li></ul>
  21. 21. Social responsibility and shareholder wealth <ul><li>Internalisation of certain social costs can occur in three key ways: </li></ul><ul><ul><li>Imposing increased costs on entities which tend to shirk their responsibilities </li></ul></ul><ul><ul><li>Entities may jointly undertake socially responsible activities </li></ul></ul><ul><ul><li>Governments may command entities to act in particular socially responsible ways </li></ul></ul>
  22. 22. Accounting and reporting methods <ul><li>Accounting for corporate social responsibilities is unregulated in Australia </li></ul><ul><li>The other related legal requirement is found in sec 299(1)(f) of the Corporations Act 2001 with respect to Directors’ Reports </li></ul><ul><li>Accounting for such responsibilities is, therefore, unregulated and what accounting and reporting takes place is undertaken on a voluntary basis </li></ul>
  23. 23. Accounting and reporting methods <ul><li>Possible reasons for accounting for such responsibilities are as follows: </li></ul><ul><li>- Cost benefits analysis for internal decision making </li></ul><ul><li>- Cost disclosure for product differentiation purposes </li></ul><ul><li>- Enlightened self-interest/stakeholder management/corporate legitimacy </li></ul>
  24. 24. Accounting and reporting methods <ul><li>Early corporate social responsibility reporting trends in Australia are reviewed by H, P & P, pp. 998-999 </li></ul><ul><li>Impetus for change and recent reporting practice are addressed by H, P & P, pp. 999-1002 </li></ul>
  25. 25. Accounting and reporting methods <ul><li>Key methods of accounting are as follows: </li></ul><ul><li>- Descriptive performance reporting </li></ul><ul><li>- Quantitative reporting </li></ul><ul><li>- Full cost reporting </li></ul><ul><li>- Triple bottom line reporting </li></ul>
  26. 26. Accounting and reporting methods <ul><li>Descriptive performance reporting </li></ul><ul><li>Such disclosures are the most commonly made by entities </li></ul><ul><li>They appear in a stand-alone report </li></ul><ul><li>Take the form of an “inventory” of CSR </li></ul><ul><li>Typically contains “good” news </li></ul><ul><li>May be regarded as the “smiling faces” approach to CSR </li></ul>
  27. 27. Accounting and reporting methods <ul><li>The inventory commonly includes: </li></ul><ul><li>- Physical resources and environmental contributions </li></ul><ul><li>- Energy </li></ul><ul><li>- Human resources </li></ul><ul><li>- Product or service contribution </li></ul><ul><li>- Community involvement </li></ul><ul><li>- Other </li></ul>
  28. 28. Accounting and reporting methods <ul><li>Problems with this approach: </li></ul><ul><li>- The list of headings and related issues is virtually limitless </li></ul><ul><li>- Difficulty in obtaining benchmarks by which to compare and contrast an entity’s performance </li></ul><ul><li>- Captured by marketing departments and reflects a “feel good” (i.e. soft) approach </li></ul>
  29. 29. Accounting and reporting methods <ul><li>Quantitative reporting </li></ul><ul><li>Reporting is based on attempts to quantify an entity’s social and environmental interactions </li></ul><ul><li>An entity may, for example, attempt the quantify the environmental impacts of its products over their life cycles </li></ul><ul><li>Review Figure 30.4, H, P & H, pp. 1006-1007 </li></ul>
  30. 30. Accounting and reporting methods <ul><li>Full cost reporting </li></ul><ul><li>Such systems are intended to include in accounting and economic numbers all the potential/actual costs and benefits including environmental and social externalities </li></ul><ul><li>Ideally, reported profit is adjusted to reflect costs and benefits which would normally sit outside the limits of the reporting entity </li></ul>
  31. 31. Accounting and reporting methods <ul><li>Various approaches used in full cost experiments from the 1970s include: </li></ul><ul><li>- Early full cost experiments </li></ul><ul><li>- Maintenance cost approach </li></ul><ul><li>- Asset valuation approach </li></ul><ul><li>- Damage cost approach </li></ul>
  32. 32. Accounting and reporting methods <ul><li>Impediments to implementing a dependable full cost social responsibility reporting system include: </li></ul><ul><li>- Measurement of financial values </li></ul><ul><li>- Data availability </li></ul><ul><li>- Additivity of measurement unit </li></ul><ul><li>- Reliability of measurement </li></ul><ul><li>- Suitability of certain estimates </li></ul>
  33. 33. Accounting and reporting methods <ul><li>Triple bottom line reporting (TBL reporting) </li></ul><ul><li>Given concerns relating to each of the above methods, attempts have been made to incorporate qualitative, quantitative and financial data into a single accounting method </li></ul><ul><li>Known as “triple bottom line” or “sustainability reporting”, the focus is widen to embrace the economic, environmental and social performance of entities </li></ul><ul><li>Otherwise known as “the three Ps”: people, profit, planet </li></ul>
  34. 34. Accounting and reporting methods <ul><li>“Economic bottom line” refers to the traditional bottom line as well as to issues relating to the long-term sustainability of an entity’s costs, of the demand for its product, profit margins and so on </li></ul>
  35. 35. Accounting and reporting methods <ul><li>“Environmental bottom line” encompasses the sustainability of the entity’s use of natural, renewable or substitutable resources and its restoration performance </li></ul>
  36. 36. Accounting and reporting methods <ul><li>“Social bottom line” is concerned broadly with social capital with a focus on human capital, such as in the form of public health, skills and education, and more generally with society’s health and wealth creation capabilities </li></ul>
  37. 37. Accounting and reporting methods <ul><li>TBL reporting involves disclosing a range of qualitative, quantitative and financial data about an entity’s economic, environmental and social performance to key stakeholder groups </li></ul><ul><li>The information reported typically includes a range of performance indicators </li></ul><ul><li>Aim is to derive a range of benchmark indicators across time and across entities </li></ul>
  38. 38. Accounting and reporting methods <ul><li>The Global Reporting Institute (GRI) guidelines for TBL reporting are: </li></ul><ul><li>- Vision and strategy </li></ul><ul><li>- Profile </li></ul><ul><li>- Governance structure and management systems </li></ul><ul><li>- GRI content index </li></ul><ul><li>- Performance indicators </li></ul>
  39. 39. Accounting and reporting methods <ul><li>For a useful guide to TBL reporting, see the Group of 100 web site: </li></ul><ul><li>For general information, also see Wikipedia: </li></ul>
  40. 40. Accounting and reporting methods <ul><li>The implementation of a TBL reporting approach to CSR is an incremental process, dealing with the complex and contestable issues involved in attempting to effectively integrate economic, environmental and social performance measurement into a single report </li></ul>