Topic 4

1. Topic 4 Lecture: Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013

2. Topic 4 - Corporate Social Responsibility - Objectives Dr. Lynn Barkess, S2, 2013 Overall unit objectives 4. relate three theories to explain corporate social responsibility reporting. 6. critically evaluate contemporary external company reporting practices

3. Topic 4 Corporate Social Responsibility - Objectives Dr. Lynn Barkess, S2, 2013 1. define corporate social responsibility (CSR) 2. apply legitimacy, stakeholder and agency theories to explain voluntarily disclose of CSR information and incorporate CSR impacts in their decision-making processes 3. explain the ‘business case’ ‘and enlightened self-interest’ case for CSR 4. briefly describe one example of an empirical test of the above theories 5. explain the challenges associated with accounting for CSR performance 6. describe two to three global social and/or environmental performance rating systems.

4. Topic 4- Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Suggested study time Study learning materials 2.0 hrs Read supplied readings 12.0 hrs Undertake activities and review activities 10.0 hrs Total 24.0 hrs

5. Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Define corporate social responsibility (CSR) What responsibility do corporations have to society?

6. Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Milton Friedman- Nobel prize winner and perhaps the most influential economist of the second half of the 20th century argued that a corporation’s responsibility was to return a profit while operating within the law – responsibility to shareholder Stakeholder theorists- responsibility to all stakeholders Perceived responsibility and accountability go hand in hand

7. Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Sustainable development “…generally accepted that companies have a significant role to play in working towards a solution to the sustainability question…” Henderson (2006) Reading 4.1

8. Brundtland Report –Sustainable development, commissioned by thee United Nations Dr. Lynn Barkess, S2, 2013 ‘… development that meets the needs of the present world without compromising the ability of future generations to meet their own needs’ (World Commission on Environment and Development, 1987)

9. Corporate Social Responsibility Adams, W.M. (2006). "The Future of Sustainability: Re-thinking Environment and Development in the Twenty-first Century." Report of the IUCN Renowned Thinkers Meeting, 29–31 January 2006 Dr. Lynn Barkess, S2, 2013 Sustainable development

10. Sustainability Dr. Lynn Barkess, S2, 2013 Sustainable business and a company’s ongoing “licence to operate”

11. Accountability Dr. Lynn Barkess, S2, 2013 The responsibility to: Undertake certain actions (or to refrain from taking actions); and Provide an account of those actions.

12. Accountability Dr. Lynn Barkess, S2, 2013 Reporting to stakeholders is Responsibility driven not Demand driven

13. Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Advantages to companies of voluntary CSR disclosures Increased information for decision making More accurate product or service information Enhanced image management and public relations Identification of social responsibilities Identification of market development opportunities Maintaining legitimacy

14. Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Advantages to society of CSR disclosures Honouring stakeholders rights of information Balancing corporate power with corporate responsibilities Increasing transparency of corporate activity Identifying social and environmental costs of economic success

15. Theories of Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Theories that explain why companies incorporate social and environmental impacts in their decision making processes.

16. Theories of Corporate Social Responsibility Dr. Lynn Barkess, S2, 2013 Legitimacy Theory Stakeholder Theory managerial (positive) branch ethical (normative) branch Positive Theory

17. Legitimacy theory Dr. Lynn Barkess, S2, 2013 Is a positive theory because this theory seeks to explain and understand corporate activities A major tenant of Legitimacy theory is that corporate activities must be consistent with the norms and expectations of the community in which it operates. The society grants businesses the privilege to operate In return the business must comply with the Social Contract.

18. Legitimacy theory Dr. Lynn Barkess, S2, 2013 The Social Contract • Represents the implicit and explicit expectations that society has about how the organisation should conduct its operations • legal requirements might provide the explicit terms of the contract, while other non-legislated societal expectations embody the implicit terms • Traditionally the optimal measure of performance was profit maximisation • Public expectations have changed so that organisations are now required to address human, environmental and other social issues

19. Legitimacy theory-Why do companies provide voluntary sustainability reports Dr. Lynn Barkess, S2, 2013 1. CSR disclosures seek to provide evidence that the entity is complying with the expectations of society. 2. Another aim is to educate and inform the community about changes in an entity’s performance and activities 3. Entity may be seeking to change societal perceptions but not in fact change corporate behaviour. Substance v. Form

20. Legitimacy theory-Why do companies provide voluntary sustainability reports (cont.) Dr. Lynn Barkess, S2, 2013 4. Corporations may try to manipulate public perceptions by deflecting attention from one issue to other maybe less important related issues that reflect well on the firm 5. Corporations may be seeking to change societal expectations. Manage the expectation gap.

21. Stakeholder theory Dr. Lynn Barkess, S2, 2013 • Two branches of Stakeholder Theory • ethical (moral) or normative branch • positive (managerial) branch • Many similarities between Legitimacy Theory and Stakeholder Theory • These theories should not be treated as two separate theories but as two (overlapping) perspectives set within a ‘political economy’ framework • Political economy theory examines the relationships… between government, law, property rights and the economy. (Rankin et al., 2012, p 142)

22. Stakeholder theory -ethical or normative branch Dr. Lynn Barkess, S2, 2013 All stakeholders have the right to be treated fairly by an organisation Issues of stakeholder power are not directly relevant Management should manage the organisation for the benefit of all stakeholders Firm is a vehicle for coordinating stakeholder interests Management have a fiduciary relationship to all stakeholders

23. Stakeholder theory -ethical or normative branch Dr. Lynn Barkess, S2, 2013 Where interests conflict, business managers should strive to attain the optimal balance among these conflicting interests. Each group merits consideration in its own right Also each stakeholder group has the right to be provided with information, even if this information is not used

24. Stakeholder theory -ethical or normative branch Dr. Lynn Barkess, S2, 2013 Ethical branch disclosures are responsibility driven All stakeholders that are impacted Have a right-to-know

25. Stakeholder theory- Managerial Branch Dr. Lynn Barkess, S2, 2013 Is a positive theory-seeks to explain how stakeholders might influence organisational actions. Examines the relationships between the firm and various stakeholder groups within society Managers will determine which stakeholder groups are important to the firm’s goals Stakeholder power is related to the control that stakeholder group has over the resources required by the organisation to achieve its goals.

26. Positive Theory Dr. Lynn Barkess, S2, 2013 Individual action is ‘economically rational’ and based on self-interest

27. Theories - PAT. Dr. Lynn Barkess, S2, 2013 CSR disclosures depend on positive wealth implications Milton Friedman—CSR reporting is about enhancing business profitability not about responsibilities to society

28. Corporate Accountability - Friedman Dr. Lynn Barkess, S2, 2013 rejected the view that corporate managers have any moral obligations responsibility only to increase profits while operating within the law

29. Corporate Accountability - An alternative view Dr. Lynn Barkess, S2, 2013 • corporations earn their right to operate in the community • Corporations are artificial entities that society chooses to create • corporations do not have an inherent right to resources • Therefore corporations are accountable to society for how they operate • societal expectations may exceed profitability

30. Corporate Reporting Responsibilities Dr. Lynn Barkess, S2, 2013 A broader view regardless of the impacts on profitability, stakeholders have a right to know about the social and environmental implications

31. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 If managers are overwhelmingly motivated by the desire to increase shareholder value then reporting will be aimed primarily at satisfying the expectations of powerful stakeholders

32. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 If we adopt a broader ethical perspective then disclosures would be aimed at stakeholders impacted by the operations of the entity—but still cannot address all information needs, so some prioritisation will be necessary

33. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 the decision about whom to report to is directly related to resolving the issue of accountability.

34. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 Establish that there is a demand for information Identify information needs through dialogue with stakeholders Negotiate a consensus among competing stakeholder needs and expectations

35. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 From Tuesday 1 July, 2008 businesses emitting large amounts of greenhouse gases are required to monitor and measure the emissions and report them to the Greenhouse and Energy Reporting Office as part of Australia’s National Greenhouse and Energy Reporting System. The Department of Climate Change has developed an online calculator for business to use to assess whether they are caught by these laws.

36. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 From August 2011- US Greenhouse Gas reporting program requires large emitters (over 25,000 metric tons P.A) to repot to EPA annually These regulations in Australia and elsewhere are designed to provide data to inform future policy decisions And, of course the Carbon Tax is a major contribution in forcing entities to address issues of environmental accountability

37. Corporate Reporting and Accountability Dr. Lynn Barkess, S2, 2013 Conventional financial accounting frameworks do not provide a foundation for social and environmental disclosures

38. Limitations of traditional financial accounting Dr. Lynn Barkess, S2, 2013 Financial accounting focuses primarily on the information needs of those involved in resource allocation decisions. By contrast, sustainability concerns all stakeholders

39. Limitations of traditional financial accounting Dr. Lynn Barkess, S2, 2013 Reporting entities frequently discount environmental liabilities to present value, which tends to make future clean-up expenditures appear trivial.

40. Limitations of traditional financial accounting Dr. Lynn Barkess, S2, 2013 Financial accounting adopts an entity assumption where the entity is treated as distinct from its owners and other stakeholders • transactions that do not directly impact on the entity are ignored • externalities caused by the reporting entity, some relating to social and environmental implications of the entity’s operations are ignored • sustainability and the ‘entity assumption’ are mutually exclusive

41. Limitations of traditional financial accounting Dr. Lynn Barkess, S2, 2013 Externalities caused by the entity cannot be reliably measured, and so typically are not recognised given the recognition criteria provided in such documents as the IASB Framework

42. Limitations of traditional financial accounting Dr. Lynn Barkess, S2, 2013 Expenses are defined to exclude the recognition of any impacts on resources not controlled by the entity

43. Triple Bottom Line Reporting Dr. Lynn Barkess, S2, 2013

44. Triple Bottom Line Reporting Dr. Lynn Barkess, S2, 2013 Disclosure of information about the social, economic and environmental performance of an entity in terms of; People - social justice, Planet - environmental issues Profit - economy prosperity But… is the bottom line metaphor appropriate—can social and economic impacts be measured through a ‘bottom line’ approach?

45. Triple Bottom Line Reporting Dr. Lynn Barkess, S2, 2013 TBLR seems to indicate that we must manage all the bottom lines in a similar manner Is this appropriate? TBLR also seems to suggest that social, economic and environmental performance are separate to one another— this is not really the case in practice

46. Triple Bottom Line Reporting Dr. Lynn Barkess, S2, 2013 Triple bottom line reporting Not the same as sustainability reporting. A true sustainability report considers such issues as the carrying capacity of the eco-system, impacts on future generations and so forth

47. Global social and environmental performance- Rating systems Dr. Lynn Barkess, S2, 2013 The Global Reporting Initiative (GRI) Established 1997 The GRI Sustainability Reporting Guidelines is one of the most comprehensive frameworks for ‘how to report’ that is currently available Third version—G3—was released in 2006

48. Global social and environmental performance- Rating systems Dr. Lynn Barkess, S2, 2013 The Global Reporting Initiative (cont.) Made up of various ‘core’ and ‘additional’ performance indicators Not mandatory and hence many organisations are selective about what information they select for disclosure Apart from the GRI, a number of other organisations have produced reporting guidelines

49. Global social and environmental performance- Rating systems Dr. Lynn Barkess, S2, 2013 GRI- Corporate Responsibility Index (CRI) developed in UK 2002 by BITC International Organisation for Sustainability (ISO)- network of national standards institutes in 162 countries- NGO applied by both private and governments Social Accountability International (SAI) global standard setting human rights organisation. Based on United Nations and International Labor Organisations

50. Global social and environmental performance- Rating systems Dr. Lynn Barkess, S2, 2013 Corporate Register.Com Provides reference points for Corporate Responsibility (CR) and sustainability reports. Mostly free of charges- some fee for service