Why Do Companies Struggle for Voluntary Reporting on Their Non-Financial Performance - Term Paper Example

ADVANCED CORPORATE REPORTING Companies are under tremendous pressure from public at large to be socially responsible as their actions leave a significant impact on the environment and the society as well. While there are no set standards available as of now to report issues related to these, some guidelines have been prepared by the Global Reporting Initiative (GRI). However these are voluntary in nature and not mandatory for the organizations. The triple bottom line approach theory to sustainability stipulates that profit is not the only parameter, based on which performance of a company need to be evaluated and judged. This is a narrow way of performance evaluation. There other “bottom lines “which should be taken into consideration for effectively measuring performance of a company. These are: economic, social and environmental performance. John Elkington first coined the term triple bottom line approach in 1997 (Elkington,, 1997). The most important question that comes to mind is why do companies provide information about their role in preserving environment and social responsibility? According to the Committee for Economic Development (1971), it is important for an organization to take care of the demands of its stakeholders which consists of its employees, customers and other sundry shareholders. These demands should be met with by the organizations, within the acceptable limit of legal framework and the one which is socially acceptable in the society. One has to examine whether the provisions of non – financial information is compatible with the view that the social responsibility of a business is to increase profits. This needs to be examined in terms of specific theories. The corporate social reporting is done on the basis of two theories that are Stakeholder theory and Legitimacy theory. According to Stakeholder theory, any group which is part of the organization can influence its decision. The organization and the stakeholders are interconnected and are accountable for their actions to the society. Organization and the stakeholders are also interconnected to take care of the interests of the organization (Villiers, 2006). The legitimacy theory has a different view on the reporting of social responsibility. According to this theory, organizations continuously make attempts to make sure that they work within the parameters of and customs lay down by the society they work in. In other words, their focus is on carrying out those activities which are perceived as legitimate by forces existing in the external environment. (Degan 2000). The legitimacy theory further states that an organization can adopt the following strategies for reporting its social responsibilities. The first one is, educate the stakeholders. This is done by explaining to them, specific tasks being performed by the organization in meeting their obligations towards the society. Advertising and public relations activities play a significant role in fulfilling this task. Educational programs, specifically designed for this purpose would be quite helpful in educating the stakeholders. The second option available with the organization is bring out change in the external expectations of its performance. By continuously publishing in the media, stories of its achievements the expectations of its performance can be changed to a large extent. For example, if a company releases advertisement in the newspaper (and other electronic media) about declaring dividends on a regular basis, then the expectations in the mind of investors would also change and they would expect the company to perform well, year after year. This can have dangerous repercussions for the company because if it is not able to perform well in a particular year, then its image would suffer greatly. By following the strategy of changing the stakeholders’ perceptions of the events, organizations can carry out their responsibilities. These events can range from positive to negative. For example in case of negative event such a report published in the media about discharging of effluents in the environment, the image of the company can get tarnished. This perception of an event can be changed by the company by focusing on measures taken by it to take care of its processes and ensuring compliance with the rules laid down by the regulatory bodies. In the case of positive events, such as an award won by the company for meeting safety standards, an image can be created in the minds of external public about the responsible behavior of the company towards its employees. Another strategy is to distract the attention of public from issue of concern. This is basically a negative strategy and as far as possible, the company should avoid this. The reason is that sooner or later, the public or society would come to know of the issues at hand and in that event, the image of the company would get spoiled further. It may also reach a point of no return (Everingham, 2008). The annual accounts of a company’s balance sheet invariably include profits earned in a financial year. The question is why should companies include information about the social and environmental information in its reports? Such information is aimed to inform three types of entities, Current shareholders, and potential corporate and individual investors (Elliott, 2010). The last one needs further explanation. In case the company wishes to acquire another unit, it must know how socially responsible that company is. If it is not so, then the company which is aiming to acquire it would also have its image tarnished. Further, messages need to be conveyed to public at large that the company is not just interested in short term profits but interested in long term sustainability in the environment. In any normal business terms, the word “steward “ means a relation between the director and the shareholder wherein the director is assigned the resources to manage the show on behalf of the shareholders. In this context, the annual reports published by the company (which necessarily include the statutory financial statements) are a method through which the directors report the performances of these resources on a regular basis. The same analogy can be extended to environmental issues in the sense that companies have been assigned the resources available in the environment and it becomes their duty to report to the stakeholders ( on a regular basis ) how these resources are being used in the most effective manner (Choi, 2003). Corporate Social Responsibility (CSR) or Corporate Social Disclosure (CSD) and Environmental Disclosures are increasingly being used as the buzz word in the corporate world. People engaged in the conventional accounting procedures are increasingly becoming aware of the need for Disclosures and Responsibility towards the society. In recent times, the concept of “triple bottom line reporting “has acquired a strong place for corporate social reporting within the acceptable terms of sustainable growth. Environmental reporting / disclosure (popularly termed as “green accounting “ ) is a vital part of the Corporate Social Responsibility (Visser et al., 2010). From the perspective of society and government, environmental disclosures indicate that the companies are having a social contract and there exists a bond between the companies and the society. This can benefit the companies as they can use the disclosure of environmental information to their advantage in the sense that it can enhance their image in the mind of stakeholders and create a kind of legitimacy in the society. With the help of these disclosures, companies can project themselves as a good and responsible citizen. On the negative side, whenever a company violates a particular environmental standard or regulation, purposely or inadvertently , the news is spread over like wildfire and the officials of the company try to do a “ firefighting “ to control the damage to the minimum by disclosing its environmental policies and actions. It is strongly felt that companies can gain a lot by following a positive approach to the environment disclosures. This can be done by voluntarily declaring in the annual report actions being taken by them to improve the environment (Roberts, et al., 2008). Ethical investors are now laying more stress on the social and environmental information provided in the annual reports published by the companies to undertake their investment decisions. In this context indices of Dow Jones Sustainability Indices and the FTSE4 Good Index are quite useful. However the problem is that social and environmental information is outside the purview and knowledge of the accountant. The current status of legislation states that disclosures are mandatory by law only in Sweden, Norway, the Netherlands and Denmark. However in the USA and Europe these disclosures are voluntary. In Europe as per the Recommendation on the Recognition, Measurement and Disclosure of Environmental Issues in the Annual Accounts and Annual Reports of Companies, two problems exist side by side that is lack of explicit rules and a low level of voluntary disclosure. The later is even dangerous in those sectors where it has a great impact on the environment. The Global Reporting Initiative (GRI) has taken some important steps to develop guidelines for reporting on voluntary basis on the three elements which are linked to sustainability. These are economic, environmental and social dimensions of the activities, products and services of an organization (GRI, 2009). The Economic dimension includes traditional financial and non – financial information about the company, expensed incurred on R &D, expenditure incurred on staff and productivity achieved. The Environmental dimension includes unfavorable impact on pollution (land, water and air) and also on human beings and bio- elements of the environment by the emissions produced by the organizations process of manufacturing products or offering services (Elkington & Burke, 1987). The rationale for social, environmental, and economic reporting is very simple. Several companies have realized that that just reporting of financial results is not enough for their employees, customers, shareholders and the communities in which they operate .In fact there are other stakeholders who are equally interested the performance of the organization and would want to access the information about it. It is expected of the companies to complement their financial reporting with non- financial reporting also. These non – financial indicators could be economic, social and environmental factors. By making sure that these factors are also considered at the time of financial reporting, the companies have been able to augment their standing in the market, boost morale of the employees, and also draw more candidates for recruitment. Additionally they have been able to have the benefit of public sympathy and good will. All this has facilitated the companies to gain easy access to the working capital which in turn helped them in improving their bottom line. Taking example of Mark and Spencer, according to Richard Gillies Director of, CSR and Sustainable Business the company has made an excellent progress in several areas outlined by them in a particular plan. These areas are Climate change, Waste disposal and management, Use of natural resources, being a fair partner and taking care of Health and well being of its employees. This has been possibly only by following a continuous effort of improvement and initiatives these initiatives were monitored strictly by top management with the result that 62 of their original commitments have been achieved. Social dimension which is the third dimension includes information about the safety and health of employees and recognizing their basic and fundamental rights, which are guaranteed by the constitution. Conclusion There is strong support and view amongst companies for voluntary and flexible reporting on their non- financial performance, which they regard as part of their desire to communicate about their activities with their key stakeholders and society in general. In fact it is suggested that governments and others should refuse to accept the temptation to introduce mandatory reporting requirements, overly detailed standardized reporting frameworks or other structures that limit flexibility. Such a prescriptive approach would be counter-productive and would risk seriously undermining efforts by business around the world to continue to develop innovative, effective and manageable reporting practices. References Choi, F.D.S., 2003. International finance and accounting handbook. 2nd ed. USA: John Wiley and Sons. Elliott, B., 2010. Financial Accounting and Reporting with MyAccountingLab. 14th ed. U.K.: Financial Times Press. Elkington, J, 1997. Cannibals with Forks: The Triple Bottom Line of 21st Century Business. 1st ed. U.K.: Capstone Publishing. Elkington, J. & Tom Burke 1987. The Green Capitalists: How Industry Can Make Money - and Protect the Environment. 1st ed. London: Victor Gollancz. Everingham, G, 2008. Corporate Reporting. 8th ed. U.K.: Juta and Company Ltd. GRI (2009). What is GRI? [ONLINE] Available at: http://www.globalreporting.org/AboutGRI/WhatIsGRI/. [Accessed 27 May 11]. Villiers, C., 2006. Corporate reporting and company law. 1st ed. U.K.: Cambridge University Press Roberts, C.B., Weetman, P. & Gordon, P. (2008). International Corporate Reporting: 1st ed. U.K: Prentice Hall. Visser, W., Matten, D., Pohl, M. & Tolhurst, N. (2010). The A to Z of Corporate Social Responsibility. 1st ed. U.S.A: John Wiley and Sons. Read More