Corporate Social Responsibility and Environmental Management Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002) DOI: 10.1002/csr.5
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT: A REVIEW OF UK FIRMS’ SOCIAL AND ETHICAL ACCOUNTING, AUDITING AND REPORTING (SEAAR) PRACTICES Ataur Rahman Belal* Sheffield University Management School, UK The main aim of this study is to undertake an evaluation of the initial wave of stand-alone social reports issued by the major market players in the UK using AA1000 as an evaluative tool, or benchmark, in order to ascertain the extent to which they conform to the provisions of AA1000, in particular the core principles of accountability and inclusivity. Applying the lens of the stakeholder model the paper examines to what extent contemporary SEAAR practices in the UK are likely to promote stakeholder accountability, or whether they are simply exercises in stakeholder management. Copyright 2002 John Wiley & Sons, Ltd and ERP Environment. * Correspondence to: Ataur R. Belal, Sheffield University Management School, 9 Mappin Street, Sheffield S1 4DT, UK. E-mail:
[email protected] Contract/grant sponsor: Sheffield University Management School. Copyright 2002 John Wiley & Sons, Ltd and ERP Environment.
Received 30 October 2000 Revised 16 August 2001 Accepted 10 October 2001
INTRODUCTION or many years there has been a tradition of different organizations reporting on their social and ethical impacts. The nature of such social accounting and reporting practices varies. In a review of developments in social accounting, reporting and auditing Gray (2001) identifies three main strands: the ‘social audits’, the ‘silent social accounts’ and the ‘new wave’ of social accounting. The ‘social audits’ refers to ‘those public analyses of accountable entities undertaken (more or less systematically) by bodies independent of the entity, and typically without the approval of the entity concerned’ (p. 9). The over-riding objective is to hold powerful economic organizations to account (Harte and Owen, 1987; Geddes, 1992) and to promote the ideals of democracy, accountability and transparency (Medawar,
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STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT 1976). The second strand – the ‘silent social accounts’ – refers to the generally scattered and somewhat sketchy social disclosures currently made within many corporate annual reports (see Gray, 1997). Finally, the ‘new wave’ of social accounting refers to the social accounting initiatives undertaken initially by the values-based organizations such as Traidcraft, Body Shop and the Co-Operative Bank. More recently, big players such as Shell, BP Amoco and BT have come on board in publishing separate stand-alone social and ethical reports (Cowe, 1999; Owen et al., 2000). From the later part of the 1990s this new initiative has become increasingly popular under the acronym of social and ethical accounting, auditing and reporting (SEAAR) (Gonnella et al., 1998; ISEA, 1999; Zadek et al., 1997). It is the ‘new wave’ of social accounting, which has been of particular academic, professional and corporate interest in recent times (Owen et al., 2001; Owen and Swift, 2001), that forms the focus of analysis of this paper. The new social accounting and auditing practice has been strengthened by the Institute of Social and Ethical Accountability’s foundation standard AA1000 (ISEA, 1999), which has accountability and inclusivity as its core principles. One of its key differences from the early social audits is that the activity is being undertaken by the company itself rather than by an external third party such as Social Audit Limited1 . Significantly, companies are undertaking this new form of social accounting because it is apparently good for business. Indeed, some commentators have argued that with its overriding focus on promoting the ‘business case’ SEAAR is being captured by management for the sole benefit of business instead of promoting accountability to stakeholders (Owen et al., 2000, 2001). 1
Social Audit Limited led by Charles Medawar was formed in 1971 as an independent non-profit-making organization concerned with improving governance and corporate responsiveness to the public in general. It carried out a small number of high profile independent social audits in the early 1970s. For more details on Social Audit Limited see Gray et al. (1987) and Medawar (1976).
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A number of recent studies have examined SEAAR practices (for example, Gonella et al., 1998; Owen et al., 2000; PIRC, 1999; Wilson, 1998; Zadek et al., 1997; Zadek and Evans, 1993). The pioneering study by Gonella et al. (1998) provided a review of contemporary practice exploring the conceptual and the practical roots of current SEAAR practice, the main drivers of contemporary SEAAR and the common elements of ‘best practice’ based around eight quality principles that were later included in AA1000. The study concluded by identifying an agenda for future action. By reviewing materials and websites for the FTSE 100 companies PIRC’s (1999) report provided an overview of current trends in social reporting. It considered social reporting issues from the perspective of long-term ‘responsible’ shareholders such as pension funds, insurers and their investment managers. The study by Wilson (1998) considered various theoretical perspectives on social auditing and then illustrated the practical applications of social audit with reference to a number of companies including Co-Operative Retail Services Limited (CRS), The Body Shop and Ben & Jerry. The study by Zadek et al. (1997) provided nine case studies on social audit from different countries. Finally, Zadek and Evans (1993) offered a practical approach to social accounting and auditing in describing the development of such practice within Traidcraft. Clearly, none of the above studies had the opportunity of utilizing AA1000 to inform the analysis. However, very recently Swift and Owen (1999) examined the key criteria of completeness and credibility of the 1999 Novo Nordisk Social Report using AA1000 as an evaluative tool. In contrast, this study attempts to evaluate the overall quality of recently published UK social reports across all the key dimensions of AA1000. The main aim of this study is to undertake an evaluation of the initial wave of standalone social reports issued by the major market players in the UK using AA1000 as an evaluative tool, or benchmark, in order to Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
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A. R. BELAL ascertain the extent to which they conform to the provisions of AA1000, in particular the core principles of accountability and inclusivity. Given the central importance of stakeholders in contemporary SEAAR and AA1000 a stakeholder model is utilized to inform the analysis in order to examine whether current social reporting practices are more likely to lead to stakeholder management or stakeholder accountability. The rest of the paper proceeds as follows. The second section of the paper explains the sample design and provides justification for the sample utilized. The third section briefly examines the stakeholder model in the light of the stakeholder management versus stakeholder accountability argument. The issue of standardization in SEAAR is examined in the fourth section with particular reference to AA1000. The fifth section analyses recent social reports using the provisions of AA1000 as an
evaluative tool. Finally, the paper offers some conclusions.
SAMPLE DESIGN AND JUSTIFICATION From our study of extant literature and the newly developed Corporate Register Website (2000) we have identified (see Table 1) UK companies currently engaged in SEAAR practice via issuing separate stand-alone reports addressing a range of social and ethical issues. The reasons for focusing on UK companies include lack of access to non-UK companies and also the constraints of time and resources at the disposal of the author. Many of these reports contain more information on environmental matters than social matters such as issues concerning employees, consumers, suppliers and communities. We focus on printed reports published in 1999 that contain
Table 1. List of UK companies undertaking SEAAR Name of company
Report title
1. Railtrack (1)
Corporate Responsibility Report 1998/99
2. BT (2)
BT’s Social Report 1999
3. NatWest (3)
Social Impact Review 1998/99
4. British Airways
Changing for Good (World Community Relations)
5. Co-Operative Retail Services Limited (CRS)
Social Audit Report 1997
6. Co-Operative Bank (4)
The Partnership Report 1998
7. BAA (5)
Environmental, Social and Economic Performance Report 1998/99
8. BP Amoco (6)
Environmental and Social Report 1998
9. Cable and Wireless (7)
Environment and Community Report
10. United Utilities (8)
Social Partnership Report 1999
11. Diageo (9)
Corporate Citizenship Guidelines
12. Shell UK/Shell Group (10)
Report to Society, May 1998 (Shell UK) The Shell Report 1999 (People, Planet & Profits–an Act of Commitment)
13. The Body Shop
Values Report 1997
14. Rio Tinto (11)
Social and Environmental Report 1998
15. Traidcraft (12)
Social Accounts 1999
16. NorthWest Water (13)
Impact on Society Report 1999
17. Eastern Group (now TXU Europe Group)
Sustainability Report 1998
The figures in parenthesis indicate the code number of companies used in this study Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
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Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT at least some social and ethical data, in order to capture the recent picture. Therefore, reports of Body Shop and Co-Operative Retail Services are excluded for two reasons. Firstly, both of these reports were dated at the time of writing with the next cycle of reports due to be issued very shortly. Secondly, both of these reports are extensively analysed in the earlier studies noted above. The author feels that Eastern’s (now TXU) report should be evaluated against GRI guidelines instead of AA1000 as the report very closely followed the GRI guidelines and contains very few social or ethical disclosures. Finally, also excluded is British Airways, as it is essentially a community report rather than a social report. Therefore, we shall limit our analysis to 13 reports published in the year 1999 to evaluate the initial wave of SEAAR using the provisions of AA1000 as an evaluative tool. The sample is interesting because this is the first wave of social reports that may be evaluated by reference to AA1000, the first published draft of which appeared in February 1999. Moreover, it could be argued that a particular confluence of social, political and economic forces created an environment conducive to such reports at that juncture. In the changed socio-political environment, where calls are being made for more and more corporate transparency and accountability, it can be expected that some firms will anticipate that paying attention to wider social and ethical concerns offers them a competitive edge over their rivals. Thus, they may be expected to incorporate some form of stakeholder involvement. However, unless the purpose of this involvement is to discharge accountability to all stakeholders it is more likely to promote stakeholder management.
STAKEHOLDER MANAGEMENT OR STAKEHOLDER ACCOUNTABILITY? The landmark work on stakeholder theory can be credited to Freeman (1984), who argued that, in addition to shareholders, there are Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
many other interest groups who can affect or be affected by the firm’s behaviour such as employees, customers, suppliers, government and the public in general. The issue of stakeholder involvement assumes central importance in reporting standards such as AA1000 and the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines (GRI, 2000). It is, therefore, felt that the stakeholder model will help us to examine the extent to which current SEAAR practice is centrally concerned with the issue of stakeholder management or stakeholder accountability. However, it should be noted that like all models or theories the stakeholder model has limitations, which should be acknowledged. Perhaps most fundamentally it is argued that current conceptualizations of stakeholder theory do not meet the requirements of scientific theory. According to Key (1999), ’While stakeholder theory has received significant attention, no specific theory logic has been identified which explains the relationships between stakeholders and the firm’ (p. 326). Trevino and Weaver (1999) even suggest that it should be called a research tradition rather than a theory. In fact Freeman (1984) himself outlined his study as an ’approach’ instead of claiming it as a ’theory’. However, despite these criticisms, stakeholder theory continues to attract the attention of business and society scholars as it has the potential to provide an appropriate, and robust, alternative model to explain a firm’s behaviour as opposed to the traditional economic model of the firm. In view of the above arguments, and given the importance of stakeholders in the reporting standards and current practice, the present author believes that the stakeholder model will help to inform the results of this study. Since the publication of landmark work by Freeman (1984) we have seen a large growth in the stakeholder literature. This literature is diverse and contains contradictory evidence and arguments (Donaldson and Preston, 1995). However, it is possible to identify two key visible strands. According to Gray et al. (1996) the first strand (or variant) is concerned with Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
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A. R. BELAL the accountability of the organization towards all stakeholders (the normative stakeholder accountability model). This model explains how organizations should deal with the stakeholders (Berman et al., 1999) and proposes that since a firm’s activities affect the well being of a wide range of stakeholders in addition to shareholders the firm is morally responsible, and therefore accountable, to all these stakeholders. Considerable academic and corporate interests can be found in this model (see, for example, Collins and Porras, 1994; Freeman, 1994; Paine, 1994; Wijnberg, 2000). The second variant discusses the identification of key stakeholders by the organization itself, which then makes efforts towards effective management of those stakeholders with a view to achieving improved financial performance (the stakeholder management model). The work of Ullmann (1985) and Roberts (1992) refers to the stakeholder management model in that corporate social activities (including social reporting) may be used by the firm as a tool to negotiate its relationship with stakeholders. Ullmann (1985) developed a conceptual framework for corporate social activity based on a stakeholder theory of strategic management whilst Roberts (1992) empirically tested the ability of stakeholder theory to explain social reporting activity, finding that stakeholder power, strategic posture and economic performance were significantly related to levels of social disclosure. Berman et al. (1999) similarly derived two distinct stakeholder models based on existing literature. The first model, the strategic stakeholder management model, suggests that firms are interested in stakeholders because of perceived benefit in terms of improved financial performance. The second model, the intrinsic stakeholder commitment model, suggests that ‘managerial relationships with stakeholders are based on normative, moral commitments rather than on a desire to use those stakeholders solely to maximise profits’ (p. 492). Freeman’s (1984) definition of stakeholders noted above also suggests a two-way relationship Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
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between the organization and its stakeholders. The first element, whereby stakeholders can affect the firm, is related to the first model of Berman et al. (1999) and the second element, whereby stakeholders are affected by the firm’s activities, is related to the second model. Empirical testing by Berman et al. (1999) of both models supported only the first, i.e. firms are motivated towards adopting stakeholder management practices because of their positive impact on the ultimate bottom line profit figure. The results of Berman et al. (1999), thus, provide concrete support for an argument long advanced by stakeholder theorists (e.g. Freeman, 1984; Freeman and Gilbert, 1988). Owen et al. (2000) applied the stakeholder model in order to make a critical appraisal of contemporary developments in SEAAR. Based on a review of recent literature in the field, together with a series of interviews with leading practitioners and opinion formulators, they concluded that current SEAAR activities tend to be more of a stakeholder management exercise. The above, necessarily brief, review suggests that while some empirical evidence can be found for the stakeholder management model, little or no support can be found for the normative accountability model. Since accountability towards stakeholders was at the heart of early social audit and is also central to AA1000, which, however, tends to conflate notions of stakeholder accountability or management, it will be worthwhile to see whether SEAAR practice of UK companies included in this study promotes stakeholder accountability or stakeholder management.
STANDARDIZATION IN SEAAR AND AA1000 SEAAR is still in very much a nascent stage as compared with environmental accounting and reporting, which has gained maturity in the last ten years due to the relentless efforts of both academics and practitioners. One of the problems in the development of SEAAR Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT lies in the absence of any common agreed framework that can be used for reporting purposes (Gonella et al., 1998; Owen et al., 2000). A number of companies have indeed acknowledged this problem within their published social reports. For example, United Utilities in its Social Partnership Report 1999 notes that Social reporting is new for business and there are no common standards. However, there are many different views on what those standards could be. What should be in a social report? How comprehensive should it be? Should it be a legal requirement or should it be voluntary? (inside front cover). Concerns over lack of standardization have led to a number of initiatives in this regard. Of these, the best known attempts are SA8000, GRI’s Sustainability Reporting Guidelines issued in June 2000 and ISEA’s draft standard published in February 1999 followed by a revised version in the form of an exposure draft (AA1000) in November 19992 . SA 8000 is not as comprehensive as the GRI guidelines or AA 1000. It confines its attention to supply chain issues relating to employees and communities, for example, forced labour, child labour, freedom of association and collective bargaining, health and safety, living wage, discrimination and disciplinary practices, working hours and working conditions. It does not address the firm’s responsibility to other stakeholders such as customers, investors, natural environment and the wider society (Owen et al., 2000). By contrast, the GRI’s Sustainability Reporting Guidelines are based on the notion of Elkington’s (1998) ‘triple bottom line’, encompassing economic, environmental and social performance dimensions. Focus is placed on six key elements for sustainability reports – statement by chief executive, company profile, executive summary and key indicators, vision and 2
For a summary of other social accounting standards see Henrique and Raynard (2001).
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strategy, policies, organizations and management systems and finally performance data. It is primarily a disclosure standard and is less concerned with the reporting processes. Although the guidelines call for stakeholder engagement they provide little guidance regarding the mechanisms for such engagement (Adams, 2001). AA1000 comprises a foundation standard, several guidelines and a section on professional qualification. The foundation standard consists of two main parts. The first part establishes core principles for SEAAR and the second comprises a set of process standards. The core principles include, amongst others, accountability and inclusivity. ‘To discharge its accountability, an organization will account for its acts, omissions, risks and dependencies. However, in addition to this accounting requirement of transparency, accountability also entails a broader obligation of responsiveness and compliance’ (ISEA, 1999, p. 8). The standard goes on to point out that ‘inclusivity defines an organization’s accountability as an accountability to all stakeholders’ (ISEA, 1999, p. 10, emphasis in italics added). The remaining principles are divided into three groups as follows. (i) Principles relating to the scope and nature of the organization’s process. (a) Completeness. Inclusion of all activities, stakeholders and reasons for exclusion, if any. (b) Materiality. Inclusion of significant information required to assess social performance. (c) Regularity and timeliness. Need for regular, systematic and timely action. (ii) Principles relating to the meaningfulness of information. (a) Quality assurance. Audit by an independent and competent third party. Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
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A. R. BELAL (b) Accessibility. Easy and cheap access to social and ethical information by stakeholders. (c) Information quality. In terms of comparability, reliability, relevance and understandability. (iii) Principles relating to the management of the process on an ongoing basis. (a) Embeddedness. It should not be a oneoff exercise but rather should be part of the firm’s management system. (b) Continuous improvement. In performance and the SEAAR process itself. The second part of AA1000 introduces process standards addressing planning, accounting, auditing and reporting, embedding and stakeholder engagement. ISEA (1999, p. 13) describes the process model as follows. (i) The organization commits to the process, and defines and reviews its values and social and ethical objectives and targets (planning). (ii) The scope of the process is defined, information is collated and analysed, and performance targets and improvement plans are developed (accounting). (iii) A report(s) (written or verbal communication) on the organization’s systems and performance is prepared, the process (including social and ethical reporting) is externally audited, the report(s) is made accessible to stakeholders, and stakeholder feedback is obtained (auditing and reporting). (iv) To support each of these stages, structures and systems are developed to strengthen the accounting, auditing and reporting process and to integrate it into the organization’s activities (embedding). (v) Each process stage (from (i) to (iv)) is permeated by the organization’s engagement with its stakeholders (stakeholder engagement). Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
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From the above overview of AA1000 we can see the following distinctive features: (i) stakeholder engagement; (ii) inclusivity and completeness; (iii) embeddedness and continuous improvement; (iv) independent third party verification; (v) quality of information provided and (vi) other reporting issues. Of course, like all other standards AA1000 has limitations that need to be acknowledged. Firstly, as we have noted stakeholder engagement is at the heart of AA1000 in the recommendation that stakeholders should be involved at every stage of the social reporting process. Concerns are being raised that promoting stakeholder dialogue in this way could be risky. Due to an imbalance of power between stakeholders and corporations, organizations might use stakeholder dialogue as a legitimization device (Adams, 2001; Cowe, 1999). AA1000 does not address this concern explicitly. Secondly, although the social and ethical audit model proposed by AA1000 is based on the financial audit model, unlike the latter it recommends that organizations should appoint the auditor and specify the scope of work undertaken. In our opinion, this would seriously threaten the independence of auditors. We shall come back to this point again later. Finally, AA1000 is primarily a process standard. It does not identify reporting issues. These criticisms do not preclude us from using AA1000 as an evaluative tool for our analysis. ISEA is an international, multi-stakeholder organization and arguably AA1000 is likely to be acceptable to the concerned parties as it was developed over a two-year period of wide consultation with business, government and civil society. Moreover, because of its UK origin it is likely to have a significant influence on the UK companies, which form the basis in this study. Therefore, in this study we use AA1000 as a reasonably appropriate point of reference, consistent with Swift and Owen (1999). Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT
AN ANALYSIS OF CURRENT SOCIAL AND ETHICAL REPORTS Having introduced the key features of AA1000 it is now possible to analyse current SEAAR practices and evaluate the extent to which these match up to the requirements of the standard examining whether stakeholder accountability or stakeholder management is being promoted. Stakeholder engagement Stakeholder engagement is at the heart of AA1000 and it is this feature that makes the standard distinct from others in the field. According to AA1000, the aim of stakeholder engagement should be to promote accountability to stakeholders. Its main features include anticipation and management of conflict, improved decision-making, consensus, creation of stakeholder identification and building trust (ISEA, 1999). The standard notes that these five factors are key to improving an organization’s overall performance. In order to discharge accountability to stakeholders and to engage them in the reporting process it is necessary to first identify them. As can be seen from Table 2 only a minority of companies studied make identification clear on the face of the report (BT, Co-Operative Bank, United Utilities and Traidcraft) whereas in other cases identification is less clear. For example, in the former case, Co-Operative Bank identified its seven partner groups (in other words stakeholder groups) as shareholders, customers, staff and their families, suppliers, local communities, national and international society and past and future generations of co-operators. Similarly, BT defined its stakeholders as customers, employees, suppliers, shareholders and the community at large. On the other hand, a majority of the organizations (nine out of 13) have not clearly identified their stakeholders. For example, in the case of Rio Tinto, identification of stakeholders does not appear until page six of the report under the heading ‘Developing better Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
understanding’ when discussing ‘engagement with a range of parties interested in Rio Tinto’s activities’. It is difficult to pick up this point unless one goes through the report carefully. The spirit of AA1000 requires that in order to involve stakeholders in the social accounting and reporting process it is essential to have a clear identification of stakeholders made as explicitly as possible. Furthermore, it appears that in a number of cases it is the organization unilaterally that is identifying the stakeholders and also the issues to be addressed, with little or no involvement from the stakeholders themselves. For example, in the case of Cable and Wireless data collection was carried out by sending questionnaires to the General Managers and Chief Executive Officers of each business unit without necessarily involving the stakeholders in the process. Having examined the identification of stakeholders it is now necessary to examine the methods employed in stakeholder engagement. The principal methods of stakeholder engagement include interviews, focus groups, workshops and seminars, public meetings and questionnaire surveys (see Table 2 above). Our analysis shows that questionnaire survey seems to be the most popular method followed by focus groups and interviews. Other methods used by the companies include briefing sessions, meetings, in-house magazines, dialogue events, conferences, workshops and open forums. While we note that the particular method to be chosen depends on the size, geographic location, resource availability and nature of stakeholders involved, we feel that focus groups and interviews are more interactive as compared with questionnaire. In order to promote a two-way dialogue it is therefore desirable that in cases where questionnaires are used they are supplemented by interactive focus groups and interview methods. Traidcraft seems to be a good example of using all these three mechanisms. To engage with their employees they used questionnaires followed by focus groups and interviews, incorporated Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
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A. R. BELAL Table 2. Stakeholder engagement 1
2
3
4
5
6
7
*
*
*
*
* * *
8
9
10
11
*
*
*
12
13
Stakeholder identification: Clear Unclear
* *
* *
*
* *
Engagement methods: Focus groups Interviews Questionnaire survey Others
*
* * * *
* * *
*
* * *
* *
*
*
Feedback: Business reply card/formal form Electronic form Other written form
*
* *
*
* *
employees’ views and opinions and reported their planned action in the light of those opinions. We note, however, that in this case the Head of Personnel of Traidcraft facilitated focus group meetings. To promote meaningful dialogue with employees, focus group meetings should have been facilitated by an independent third party rather than by a person inside the organization so that employees might feel free to express their opinions. By contrast, NatWest and Diageo apparently do not employ any stakeholder dialogue. For example, Diageo states ‘We want to engage with, and listen to our many communities. We welcome comments and feedback on these guidelines and on how we are doing’, but the company’s sincerity in this regard may be questioned in the absence of clear identification of stakeholders and primary targeting of one stakeholder only (employees) without any mention of others as to when and how they will be covered, engagement methods to be employed and feedback mechanism to be used. Inside its front cover NatWest notes that ‘. . . To create understanding, we must establish and sustain dialogue. To start talking, there must be information. This is why we have prepared this, our first Social Impact Review. . .’, but according to AA1000 stakeholder engagement aimed at accountability requires stakeholder involvement from the very inception and then Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
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*
* *
* *
* *
*
*
* * *
at every stage of the process. Otherwise, the whole process risks becoming simply a public relations exercise. Another point to note here is that in order to have meaningful dialogue there should be some sort of matching of power between the apparently powerless stakeholders and the mighty corporations, a point we return to later. A meaningful engagement ‘requires that the organisation is accountable and in particular that its leadership makes decisions based on an accurate and full understanding of stakeholder aspirations and needs’ (ISEA, 1999, p. 63). It also requires that there should be a dialogue, not a one-way information feeding exercise. Our review suggests little evidence of dialogue. In the majority of cases studied we simply have one-way stakeholder consultation in the guise of dialogue, as the example of Railtrack (Exhibit 1) illustrates. In the absence of clear identification of stakeholders it is doubtful how meaningful the dialogue can be. Railtrack have identified employees as the primary stakeholders and intend to build dialogue with them, but the above extract suggests it is a one-way information feeding exercise as there is no mention whatsoever as to the extent to which employees were involved in the identification of issues reported and how their views and opinions have been taken into consideration. Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT Exhibit 1. An example of a stakeholder consultation process.
Dialogue We aim to work more effectively within the company, raising awareness of environmental and social issues among our own people and responding to their views and suggestions. We also need to continue working with a wide range of external partners and other organizations to tackle these issues most effectively together.
Within the company We mentioned in the Roles & Responsibilities section that all new Railtrack employees are briefed on our policies when they join the company, and that a series of handbooks is available for reference and guidance. Environmental and social issues are communicated to all staff through the company briefing process, local newsletters and the company newspaper ’Track Record’. We also aim to include consideration of social, environmental and equal opportunities issues in all new Railtrack development programmes, such as leadership, management and project planning programmes.
In this connection the issue of feedback is noteworthy. It is important to have feedback from stakeholders on social and ethical performance. While all 13 organizations invited feedback using different methods such as business reply card/formal feedback form, electronic form (on-line form/e-mail) and other written forms, in most cases the reports do not tell us clearly about the feedback received on the earlier year’s report (where appropriate) and the action taken on the basis of such feedback. This casts doubt on the willingness of the companies to listen to the stakeholders with the aim of discharging accountability. Thus, we see that at the moment companies are using the notion of ‘stakeholder engagement’ as a legitimization device instead of a means of extending corporate accountability and transparency (Owen et al., 2001). This assertion can be supported by the fact that, as is revealed earlier in this section, stakeholders Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
Externally We work with external organizations at a number of levels. We work with our partners within the rail industry to find solutions to issues that face us all. We meet with the Office of the Rail Regulator to discuss environmental issues. In developing our systems, we have followed their guidance on environmental management in 1996. Railtrack is represented on the International Union of Railways Environment Co-ordinators’ Forum, networking with environmental colleagues in European, Japanese, American and Australian railway organizations. Railtrack is participating in several environmental research projects co-ordinated by the International Union of Railways. We are hosting a rail industry Conference on Safety and the Environment in September 1999. Following a successful conference on safety in September 1998, delegates will include representatives from train operators and our contractors, both to raise awareness and to identify areas for joint action across the industry. We will report on this next year. . .. (Source: Railtrack’s Corporate Responsibility Report 1998/99, p. 43.)
are not identified clearly and systematically in order to engage them in the reporting process, issues to be addressed are decided unilaterally and feedback from stakeholders not fed into the decision making process.
Inclusivity and completeness The aim of stakeholder engagement with a view towards discharging accountability to stakeholders requires that the SEAAR process should be all-inclusive and complete as far as possible. This means that the process should not be selective but rather should ensure systematic inclusion of all stakeholders and all significant important issues affecting the social and ethical performance of the company. In the case of any exclusion, the external verifier should disclose the reasons for exclusion and the future plan for inclusion. Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
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A. R. BELAL By way of example, rail safety has become a very important controversial issue in the context of the several accidents in recent times. Unfortunately, of the 21 issues that it covered in its report Railtrack failed to address the issue of rail safety generally and signalling systems in particular. Such a significant omission points out the necessity of an all-inclusive and complete process. For its part, BT limited its scope to UK operations only and excluded suppliers together with disclosure of reasons for such exclusion. Additionally, it failed to indicate future plans for inclusion of non-UK operations and suppliers. This is evident from Exhibit 2. Similarly, BAA excluded suppliers without offering any reason for such exclusion whilst Traidcraft did not address all stakeholders and also did not indicate future plans for inclusion. Finally, NorthWest Water failed to identify one important stakeholder, the regulators of the water industry (the Drinking Water Inspectorate and Environment Agency), whilst also failing to address the crucial employee dimension. Another important issue concerning inclusivity and completeness relates to stakeholder inclusion in the process of social accounting and auditing. Sampling in this case can be acceptable for pragmatic considerations, particularly if the population size is large. Exhibit 2. The process of stakeholder inclusion. Other aspects of our business – our relationship with our suppliers, for example – are not covered this time. This is because the measurement indicators we have are new and are still being developed. . . . Its prime focus is on BT’s UK operations, though some data relates to the Group as a whole. The reason is that, whilst we have significant historical data for our UK operations, this is not the case with our relatively young international and global operations, although these are, of course, covered by our Statement of Business Practice. The report does not cover the activities of our subsidiaries or joint ventures. (Source: BT’s Social Report 1999, p. 3.)
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However, in the case of sampling, the population should be clearly defined and the sample should fairly represent the population. Unfortunately, this was not the case in the majority of reports analysed. For example, BT applied sampling techniques to collect information on stakeholders without detailing the sampling procedures adopted. Moreover, given the sample size (shareholders 0.01%, customers 0.4% and employees 12%) used for measurement of stakeholders’ satisfaction, it is questionable whether the sample fairly represents the population covered. Similarly, United Utilities claims that 54% of its stakeholders agree that the company meets its social responsibilities without defining the population, specifying the sample size or explaining the sampling procedures adopted. Co-Operative Bank and NorthWest Water stand accused for similar reasons. However, there are exceptions to this general pattern. Traidcraft, for example, seems to have tackled the sampling issue reasonably, probably largely due to the small population being addressed. For the purpose of seeking opinions through questionnaire survey, it included all of its 42 overseas suppliers, six overseas partners and all of its 116 employees. Thus, the company covered the entire small population without the necessity of resorting to sampling. However, they used sampling to seek the opinions of fair traders, retailers, shareholders and donors. This is illustrated in Exhibit 3. The above discussion leads us to the conclusion that present social reporting processes of UK companies are far from being inclusive Exhibit 3. Use of sampling and the issue of completeness. Questionnaires were sent to 280 Fair Traders selected at random and to Traidcraft’s 78 top retail customers. 109 responses were received from Fair Traders and 41 from Retailers. 250 Traidcraft Shareholders who are also donors to Traidcraft Exchange were selected at random and sent questionnaires. 107 responses were received. (Source: Traidcraft’s Social Accounts 1999, p. 19.)
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STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT and complete as stakeholders are not included systematically, issues identified selectively and appropriate justification for excluding important stakeholders and issues not given. This conclusion is consistent with the work of Adams (2001) and Swift and Owen (1999). Embeddedness and continuous improvement AA1000 requires that SEAAR should be seen as an integral part of the organization’s operations, systems and policy making. It should not be treated simply as a one-off exercise. Based on knowledge and learning its aim should be continuous improvement by assessing progress, reporting performance and setting targets for the future. Traidcraft complied with these principles by reporting performance through various performance indicators and setting clear targets for the future. The report acknowledges that social accounting ‘should not just be a matter of acting, measuring, and reporting. The loop should be completed by learning from the social accounting process and allowing this learning to affect future action’ (p. 4). Similarly, Co-Operative Bank’s compliance can be seen from clear setting of objectives/targets, objective assessment of performance against those objectives and setting new targets for the future (see Exhibit 4). A number of other companies such as Railtrack, BAA, BP Amoco, Cable and Wireless, Shell and Rio Tinto seem to have gone some way to meet the requirements of embeddedness and continuous improvement by integrating SEAAR into the overall organizational system, setting targets and benchmarking the performance. However, there are exceptions to this general rule; notably, BT, NatWest3 and Diageo did not report on any future targets aimed at continuous improvement. Finally, although a number of companies included in this study seem to have set themselves to incorporate the social and ethical
Exhibit 4. Performance against targets OBJECTIVE
Fair handling of contracts and prices To maintain our excellent record of behaving fairly with regard to contracts and prices, and to explore further opportunities to source products bearing the Fair Trade Mark. TARGET ACHIEVED? Yes
PERFORMANCE LEVEL OF AGREEMENT WITH THE STATEMENT THAT THE BANK IS FAIR REGARDING CONTRACTS AND PRICES Agree strongly 45% Tend to agree 45% Tend to disagree 3% Disagree strongly 0% Not applicable 7% (Source: Supplier Survey 1999)
COMMENTARY The vast majority of suppliers (90%) agree that the bank is fair to them in its handling of contracts and prices. This is considered an excellent result. Furthermore, as we stated in last year’s Partnership Report, if the bank is to expect progress from suppliers with regard to the purchase of ’Fair Trade’ products and the like, then the onus is on us to create the right conditions, via paying a fair price for goods and services, to start with. Unfortunately, beyond the use of Caf´edirect in our vending machines we have been unable to source further products bearing the Fair Trade Mark simply because very few currently exist. However, as detailed in the Special Project ’Fair Trade Coffee Challenge’ we have been actively campaigning to encourage other businesses to switch to Caf´edirect coffee.
NEW TARGET To ensure that more than 85% of suppliers continue to be satisfied that the bank is fair to them in its handling of contracts and prices. John Sheerin, Purchasing and Facilities Manager (Source: Co-operative Bank, The Partnership Report 1998, Page 28)
3
Except in the case of disclosure of percentage cost saving for energy consumption.
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A. R. BELAL issues into their organizational systems, in no cases have we found mention of clear governance structures for the purpose of embedding social and ethical values. Significantly, Adams (2001) drew a similar conclusion in her case study of ICI. The issue of independent third-party verification In order to enhance the credibility of social reports, in addition to meaningful stakeholder engagement, independent third-party verification of the social accounting and auditing process is essential as AA1000 stresses. This verification exercise usually follows the tradition of financial audit in terms of wording and structure of the report as illustrated. Of the 13 reports that we reviewed, eight were externally verified with three of these verifications provided by accounting firms. The audit report of Traidcraft clearly followed the financial audit model as evident from its structure and wording used: ‘. . . in our opinion the Social Accounts give a true and fair view of the companies’ social and environmental impact on the stakeholder groups reported upon’. Whilst, in this case, the ISEA standard was also specifically referred to, in other cases (e.g. BP Amoco and Shell), where the verifications were carried out by Big Five accounting firms, reference was made to the Federation des Experts Comptables Europeans (FEE) guidelines and international standards for financial auditing. Verification statements by non-accountants varied in content and format but in a number of cases these were in line with the financial audit model as evidenced from the fact that they followed a similar audit report structure and wording style. For example, ‘On the basis of the audit work carried out I believe that the Partnership Report fairly represents the bank’s economic, social and ecological impact on its. . . stakeholders’ (Richard Evans, Ethics etc., auditor of Co-Operative Bank, emphasis added). Railtrack, NatWest, Cable and Wireless, Diageo and NorthWest Water did not have Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
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Exhibit 5. Personal commentaries. . . . NatWest was the first of the high street banks to produce an environmental report regularly – and it’s good to see that it’s still maintaining that advantage by starting to integrate its reporting on environmental, social and community issues. Integrated reporting is no easy task. Although a lot of progress has been made on the environmental side, there’s still a lot to be done to establish useful indicators and metrics for social performance. . . (Source: NatWest’s Social Impact Review 1998/99, p. 24.)
any external verification. While Diageo simply ignored the issue, Railtrack, NatWest and NorthWest Water included comments by third parties on the SEAAR process seemingly with the purpose of achieving some degree of credibility. The personal commentary given by Jonathon Porritt on NatWest Report is shown in Exhibit 5 as an example. Cable and Wireless included a validation statement by an environmental consultant, which is considered as an ‘independent opinion’ on completeness and objectivity with the reservation that they ‘have not undertaken a formal verification of the accuracy of claims or data’. The credibility it adds to the report is, therefore, limited. All these exercises may only be considered as supplementary, rather than as alternatives to a formal verification exercise. As is the case with financial audit reports it is important to clearly specify the addressee of the external verification report. We observed that out of eight external verification reports only four noted the addressee of the report, which in each case included directors and/or management of the company. This can be contrasted with the traditional financial audit model, which requires that the auditor’s report should be addressed to the shareholders of the company (not to the directors). However, it is interesting to note that of the above four verification reports, the auditors of CoOperative Bank addressed their audit report to the partners (i.e. stakeholders) as well as the Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT directors of the company whilst the verifiers of Shell, BP Amoco and Rio Tinto addressed their reports to the directors and/or management. What the verifiers are attesting to (e.g. true and fair view of social and ethical performance) is another important consideration here. Out of eight verification statements only in two cases did verifiers make ‘true and fair view’ statements. For example, in the case of CoOperative Bank the auditor states ‘. . .. The Partnership Report fairly represents the bank’s economic, social and ecological impact on its. . . (stakeholders/partners)’. Similarly, the auditor of Traidcraft states ‘in our opinion the Social Accounts give a true and fair view of the companies’ social and environmental impact on the stakeholder groups reported upon’. Although the title of BT’s verifiers’ report is ‘Independent Verifiers’ Report’ it can be questioned whether it is truly a verification report when it says ‘Ashridge has made no attempt to verify either the data collection systems or the information generated by them’. It then goes on to note, On the basis of our involvement, Ashridge is satisfied that the information presented in this social report meets two key requirements: • The reported data reflect the concerns, issues and expectations raised in the stakeholder dialogue; • The reported data present a far-reaching picture of the way in which BT activities impact upon UK society. In other cases the opinions expressed varied and can be summarized as follows: (i) opinion as to the completeness and accuracy of reflection of progress against targets and accuracy of key performance indicator data (BAA); (ii) opinion as to the consistency of information reported with the data obtained (BP Amoco); Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
(iii) opinion as to the fairness of assertions made regarding the adopted general business principles (Shell) and (iv) opinion as to the relevance and the objectiveness of the evidence compiled (Rio Tinto). Thus, we see that although Guideline 10 of AA1000 requires a clear audit opinion on the quality of the SEAAR process, the opinions expressed above are far from being clear. Indeed in one case (United Utilities) the verifier did not express any opinion and left us with the vague statement: ‘Overall, we feel that United Utilities has made a real contribution not only to its own social reporting practice, but to that of industry more widely’. Finally, the issue of auditors’ independence needs to be addressed. It is highly desirable that throughout the process independence is maintained. The way the exercise is presently carried out raises question as to whether this independence can be achieved4 . Under the present AA1000 framework, it is management who appoints the auditors to issue an audit opinion concerning management performance on social and ethical issues and, at the end of the exercise, the auditor’s responsibility is to report back to management. In this process audit independence is lost. Another constraint on independence is the selection of the audit scope and method by management rather than the auditor. This differs significantly from the financial audit model, where management cannot restrict the scope of audit. Practitioner respondents in the Owen et al. (2000) study argued that the independence question could be addressed by the use of an audit panel consisting of independent experts from whom auditors can derive support in the case of disputes with management whilst overall responsibility for the social audit process remains with the social auditor. In the present study, no company used an audit panel. In 4
The examination of the issue of independence in verification statements on environmental reports by Ball et al. (2000) drew a similar conclusion. Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
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A. R. BELAL the process of audit, the auditor can always seek an expert opinion from a third party but the ultimate responsibility lies with the auditor. Therefore, unless present corporate governance procedures are restructured to empower the social auditor, auditors’ independence will continue to remain in jeopardy, hence undermining the accountability and credibility of the whole SEAAR process. From the above discussion it appears that under the current framework it is difficult for the verifier to work independently. Moreover, auditors are refraining from expressing clear opinions on the social reporting process as per the requirements of AA1000. Therefore, the value added to the social reporting process by the verification exercise appears somewhat limited. Quality of information provided According to AA1000 the quality of information provided depends, inter alia, on its comparability, understandability and verifiability. Information may be made comparable through internal and external benchmarking. We have found limited evidence of this in the reports reviewed. For example, Railtrack compared its cost impacts, land use and CO2 emissions against the external benchmark of its competitor, road transport, whilst BT benchmarked its performance against the internal benchmark of previous years performance. Similarly, Co-Operative Bank, United Utilities, Traidcraft and NorthWest Water carried out a benchmarking exercise by using internal benchmarks (e.g. budget and previous year’s figures) as well as external benchmarks (e.g. competitors and industry standards). Social reporting is still in a nascent stage in terms of the development of quantified performance indicators, but quantification is highly important for the understandability and verifiability of the information provided. We observed that the majority of organizations still prefer to report in terms of qualitative measures. However, in some cases we have Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
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found highly developed quantitative reporting (for example, Co-Operative Bank, BAA and Traidcraft). Co-Operative Bank disclosed 59 performance indicators covering economic, social and environmental aspects. In the social areas, for example, it measured its performance on ethical policy implementation for lending decisions by reporting the number of referrals to its ethical policy unit, nature of referrals (in terms of percentage shown under headings such as human rights, arms trade, unfair trade, ecological impact, animal welfare and others) and outcome of referrals. BAA also reported several quantified performance indicators mainly in the environmental area, for example breakdown of cost of environmental projects, noise pollution data, total airport wastes in tonnes, average wastage per passenger, water quality and water consumption. Similarly Traidcraft disclosed several quantified performance indicators. Some indicators reported by Traidcraft on employee issues are shown in Exhibit 6. Finally, in spite of the better examples of the minority companies noted above providing comparable, understandable and verifiable information, in majority other cases the quality of information provided did not match the requirements of AA1000 as evidenced by the limited attempts of benchmarking and scarce quantified performance indicators. Other reporting issues AA1000 requires clear definition of the scope of the reporting process in terms of time period covered, stakeholders and issues included. One common problem observed in the majority of the reports is that there is a lack of clear definition of scope of reporting process. The reporting period was only defined in the reports of Railtrack, BT, Co-Operative Bank and Traidcraft. The importance of reporting period cannot be overemphasized in any accounting exercise. It is essential that this should be clearly defined at the very outset such as in the case of Railtrack, where it is Corp. Soc. Responsib. Environ. Mgmt 9, 8–25 (2002)
STAKEHOLDER ACCOUNTABILITY OR STAKEHOLDER MANAGEMENT Exhibit 6. Examples of quantitative indicators.
Permanent and fixed-term contracts Of the 35 staff in TX, 32 were on permanent and 3 on fixed-term contracts at 31/3/99. Of the 81 staff in Tplc, 74 were on permanent and 7 on fixed-term contracts at 31/3/99.
Training TX: 20 staff (57%) received 74 person days Tplc: 62 staff (77%) received 382 person days A substantial amount of in-house IT training is not included here.
Absence through illness Registered disabled Target DFEE minimum is 3.0% of staff. TX: Actual was 1 person out of 35 (2.9%) Tplc: Actual was 3 people out of 81 (3.7%)
Ethnic minorities TX: Actual was 1 person out of 35. Tplc: Actual was 1 person out of 81. Overall this was 2 out of 116 (1.7%).
clearly stated that the reporting period is 1 April 1998 to 31 March 1999. According to the materiality principle of AA1000 all significant information, which might influence the stakeholders in their assessment of the social and ethical performance of the company, should be included. Many reporters failed to comply with this principle. For example, we observed in the case of BT that although the customer was identified as a major stakeholder, the company failed to report its performance on the issue in terms of number of customer complaints received during the reporting period, action taken and future plans to deal with such complaints. Similarly, NatWest identified financing armaments deals and animal testing as issues whilst admitting that they do finance in these areas but highly selectively (see Exhibit 7). However, it did not tell us how much financing is provided in these areas in terms of percentage of total finance or in absolute figures. This information is very important for ethical stakeholders. Withholding of such an important piece Copyright 2002 John Wiley & Sons, Ltd and ERP Environment
TX: 233.5 person days (2.7%) – 1.8% in 1997/98. Tplc: 320 person days (1.6%) – 1.6% in 1997/98.
Overseas trips to developing countries 38 trips were made by 12 travellers within TX. 9 trips were made by 7 travellers within Tplc. A number of additional trips were made by consultants. (Source: Traidcraft’s Social Accounts 1999, pp. 24–25.)
of information and lack of external verification seriously limits the credibility of the entire report of NatWest.
Exhibit 7. (Non-) disclosure of material information.
Do you fund armaments deals? We do – but highly selectively. Each transaction is considered on the basis of nature of the goods, the human rights record of the destination country and the integrity of the borrower concerned. For example, we do not provide trade finance transactions to governments who abuse human rights and we never knowingly provide finance for anti-personnel landmines.
What is your stance on animal testing? Before financing any enterprise involved in animal testing, we make in-depth investigations. We aim to satisfy ourselves that potential customers can meet the standards set by the appropriate regulatory and supervisory bodies. (Source: NatWest Group’s Social Impact Review 1998/99, p. 19.)
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SUMMARY AND CONCLUSIONS Within the last couple of years SEAAR practice has become significantly more widespread. From being the minority sport of a handful of values-based companies in the early 1990s it is increasingly finding its place in current mainstream business thinking. This is, for example, evident from increasing number of entrants to the new ISEA/ACCA Social Reporting Award Scheme, willingness by a number of companies to participate in the SIGMA project5 , and increasing involvement of Big Five accounting firms in the field. Every year more and more companies are joining the existing cohort of companies undertaking SEAAR. While this trend is likely to continue academic observers such as Owen et al. (2000) caution that unless the important issue of corporate governance is urgently addressed, SEAAR is likely to be monopolized by a few vested interests and will fail to live up to the democratic ideals of its founding fathers. Recent research suggests that organizations are motivated to be involved in stakeholder engagement only to the extent that it can have a positive impact on the bottom line profit figure (Berman et al., 1999). It appears that a desire to manage stakeholders, not discharging accountability, is the driving force behind the current initiatives (Adams, 2000; Owen et al., 2000). This is evident from the present study in the poor quality of stakeholder involvement and unwillingness to implement feedback received. Furthermore, we observed that in a number of cases companies failed to address the key issues of social and ethical performance with reporting focusing on selective issues in a selective manner. Additionally, under the present system, where audit scope and method are defined by management, the credibility of external verification can be questioned. Such 5
SIGMA is a multi-stakeholder initiative led by ISEA exploring the research theme of social sustainability. It is currently engaged in the development of a sustainability management system standard. For more details on the project see the work of Henrique and Raynard (2000).
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credibility can be achieved by giving more powers to the auditors and this can only come about via meaningful reform in the corporate governance structure. Therefore, we conclude that present SEAAR practice, as revealed by this study, does not promote the ideal of stakeholder accountability; rather corporations are seen to be using it as a legitimization device and for managing the stakeholders effectively. Accountability is unlikely to be achieved unless reforms are brought to the governance structure to give powers to stakeholders enabling them to participate in the social reporting and decision making process6 . However, the findings of this study are subject to a limitation that it is based on an analysis of printed stand-alone social reports. Future research could verify the issues further by gathering evidence from primary sources. In this regard, interviews with the company managers might be undertaken to explore further the motivations behind the ‘new’ wave of social accounting.
ACKNOWLEDGEMENTS The author is grateful to Professor Dave Owen and Dr. Bill Lee of Sheffield University Management School for their help in the preparation and revision of this paper, and also acknowledges critical comments by two anonymous reviewers, which helped to improve the paper substantially. Earlier versions of the paper have been presented to the Doctoral Colloquium of the Interdisciplinary Perspectives on Accounting Conference at the University of Manchester, 2000, and to the Business Strategy and the Environment Conference at the University of Leeds, 2000.
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