Social Reporting in Ireland and Germany - A Comparison

Table of ContentS

List of abbreviations

List of figures

List of tables

Abstract

Introduction

1. CORPORATE SOCIAL RESPONSIBILITY
1.1 Historical Perspective
1.1.1 The Origin
1.1.2 The changing scope of Corporate Responsibilities
1.1.3 The introduction of the term ‘Corporate Social Responsibility’
1.2 Definition
1.2.1 Different schools of thought
1.2.2 Carroll’s Model of CSR
1.3 Stakeholder Approach
1.3.1 The Business Environment
1.3.2 Framework of Stakeholder Pressure
1.4 Summary

2. SOCIAL REPORTING
2.1 Why Social Reporting?
2.1.1 What does accountability mean?
2.1.2 Limitations of traditional accounting
2.1.3 Justifications for additional disclosures
2.2 Definition of Social Reporting
2.2.1 Systematic corporate social accounts
2.2.2 The internally and externally focussed approach
2.2.3 Principles of a reporting system
2.3 Operational Models of Social Reporting
2.3.1 International reporting and accountability initiatives
2.3.2 European reporting and accountability initiatives
2.4 Summary

3. PRINCIPLES OF IRISH REPORTING
3.1 Legal Regulation
3.1.1 Summary of company law
3.1.2 Summary of Accounting Provisions of Legislation
3.1.3 Additional legislation influencing the content of published accounts
3.2 Irish Accounting Profession
3.2.1 Organisation of the Accounting Profession
3.2.2 Auditing requirements
3.2.3 Audit Reports
3.3 Form and content of published financial statements in Ireland
3.3.1 General overview
3.3.2 Directors’ report
3.4 Irish Stock Exchange
3.5 Summary

4. Principles of German Reporting
4.1 Legal regulation
4.1.1 General Accounting Rules
4.1.2 The purpose of annual accounts
4.1.3 The German Accounting Standards Committee
4.1.4 Additional Legislation influencing the form and content of published accounts
4.2 Supplementary Reports
4.2.1 The management report
4.2.2 The interim report
4.2.3 The Segment Report
4.2.4 The Cash-flow Statement
4.3 The German Accounting profession
4.3.1 The Wirtschaftsprüfer
4.3.2 Audit of the individual accounts and group accounts
4.4 Summary

5. Analysis of Social Reporting Practises in Ireland
5.1 Overview of Fyffes plc
5.2 Analysis of the Annual Report
5.3 Conclusion

6. Analysis of Social Reporting Practises in Germany
6.1 Overview of Douglas Holding AG
6.2 Analysis of the Annual Report
6.3 Conclusion

7. Conclusion

Reference

Further Reading

Appendix A

Appendix B

List of abbreviations

illustration not visible in this excerpt

list of figures

Figure 1 ‘Top Down’ Approach

Figure 1.1 Carroll’s (1991) Pyramid of Corporate Social Responsibility

Figure 1.2 Stakeholder and Societal Pressures on Corporations

Figure 2.1 A generalised accountability model

Figure 2.2 Issues/events and corporate legitimacy

Figure 2.3 The Rationale Triangle

Figure 2.4 GRI’s Reporting Principles

Figure 4.1 Purposes of the annual accounts

Figure 6.1 Overview of the Douglas Holding AG

list of tables

Table 2.1 The basic principles of a reporting system

Table 2.2 Stages in the AA1000 Process Model

Table 2.3 Objectives of EMAS

Table 3.1 Company Acts and Primary Purpose

Table 3.2 Summary of the accounting provisions of the Company Acts

Table 3.3 Auditors’ Reporting Requirements under Legislation

Table 3.4 Required content of the directors’ report

Table 3.5 Stock Exchange Accounting and Governance Disclosures

Table 4.1 Summary of German GAAP

Table 4.2 Summary of changes due to the introduction of KonTraG

Table 4.3 Summary of changes due to the introduction of TransPuG

Table 4.4 Content of the management report

Table 4.5 Future oriented content in the management report

Abstract

Social Reporting in Ireland and Germany – A comparison by René Rumpelt

Worldwide political and economic changes within the last two decades openend the way to increased globalisation. The existence of multinational organisations, together with their increasing power and influence put a threat on the political and social system. Against this background the social responsibilites of companies together with their social reporting practice must be re-examined in order to guarantee transparency and equality between all members of society. The following work compares the social reporting practice of two European countries – Ireland and Germany. As it is not possible to conduct a representative analysis within the limiting framework of this paper, the annual reports of Fyffes and the Douglas Holding AG, issued in the same year (2002), are analysed and compared. Two Interviews were also conducted in order to show additional opinions of the current reporting practice.

To describe social reporting, the underlying idea, which is corporate social responsibility, is presented at first. Different theoretical approaches to the concept of social reporting are introduced, as well as a few operational models. The legal accounting framework of the two countries is also briefly introduced in order to show possible mandatory elements of social reporting within the legal system.

The conclusion of this paper shows that both companies report very little on their corporate social responsibility due to various reasons. Both interviewees support this finding and give additional explanations. As mentioned above, this research is not representative concerning the Irish and German social reporting practice in general and therefore is limited in its conclusions.

Introduction

The aim of this paper is to compare social reporting practices in Ireland and Germany. In order to achieve this goal, this paper follows a ‘Top-Down’ approach (Figure 1).

Figure 1 ‘Top Down’ Approach

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First of all, the origin of the Corporate Social Responsibility concept is introduced as this serves as a basis for further argumentation. This part of the work stays relatively abstract because the purpose is to deliver the underlying idea of Social Reporting only. Part of this chapter is the presentation of some definitions and the introduction of the stakeholder model as a central pillar for the following chapters of this paper.

Chapter two reduces the grade of abstraction by introducing some theories to the concept of Social Reporting. Here, Social Reporting is related to the business case as justifications for additional disclosures are given. There are also different definitions presented in order to clarify the meaning of Social Reporting. Finally this chapter introduces operational models of Social Reporting to show the different approaches to the concept. Nevertheless, Social Reporting as a concept stays relatively vague as all models are of voluntary nature and lack a common structure or methodology thus leaving room for interpretation.

Chapters three and four present the regulatory accounting framework of Ireland and Germany. The reporting framework of both countries is analysed for traces of mandatory social disclosures. The grade of abstraction is minimised within these chapters as specific rules or laws that deal with the disclosure of socially related information are presented.

Chapters five and six analyse the annual reports of an Irish and a German company. The purpose of these chapters is to see whether or not Irish and German social reporting practices can be linked back to the theory that was introduced in chapter two. Moreover, as the rationale behind this paper is to compare social reporting practices of both countries, differences and similarities are shown.

Due to the fact that the findings of chapters five and six are not representative, two interviews were conducted to partially overcome this disadvantage. An Irish accountant and a German financial analyst were interviewed on the topic. The conclusions from these interviews are brought together in chapter seven to form the conclusion of the whole paper.

The following chapter now introduces the concept of Corporate Social Responsibility.

1. CORPORATE SOCIAL RESPONSIBILITY

1.1 Historical Perspective

Despite the increasing academic and business interest in Corporate Social Responsibility, it is not a recent phenomenon. According to Balabanis et al. (1998) social responsibility has been present in commercial life over the centuries but it is the modern era that is putting more pressure on corporations to play a more explicit role in the welfare of society.

1.1.1 The Origin

Smith (2003) agrees on that view and adds that the idea of business having societal obligations was evident at least as early as the 19th century. He argues that during the time of the Industrial Revolution in Britain industry magnates like George Cadbury and Sir Titus Salt showed the first signs of philanthropic behaviour. By providing their employees with houses, schools, hospitals and parks they wanted, at least to a small extent, to do good. However they were primarily motivated by enlightened self-interest as they realised that content workers were more productive and less likely to revolt.

Lantos (2001) traces corporate responsibility back to the works of the Scottish philosopher Adam Smith. According to Lantos, Smith created a framework for modern business and its relation to society. Smith claimed that capitalism, by enforcing the individual pursuit of gain and efficiency, is able to create greater wealth than any other economic system. Capitalism allows individual freedom of choice in employment, purchases and investment thus maximising liberty and therefore benefiting the common good.

Starck and Kruckeberg (2003) even define another point of origin of corporate social responsibility. In their opinion the idea that business serves a public interest emerged in the early history of the United States of America. It was the time when large corporations began to form itself and started to embrace organisations like municipalities, colleges and churches. Their special status was granted by society that, in return, demanded from these large entities to act in a social manner thus serving public interest. Corporations evolved during the 19th century by increasingly focusing on economic issues. At some stage they were granted the natural rights of persons, i.e. they were free to enter into contracts on whatever terms the market allowed. Starck and Kruckeberg cite Menand (2001) who points out that while society grants these rights, ‘those rights do not exist for the good of the individual but for the good of society’ (p. 33). Considering the above points one can say that today’s corporations have their roots fixed in concepts associated with community, society and public interest.

1.1.2 The changing scope of Corporate Responsibilities

The understanding and the scope of corporate responsibility have been changing since the very beginning. There have been some differences in the development in the United States and Europe although the constitutional development in the US was mostly mirrored in the rest of the developed world (Cannon 1994).

Due to the rapidly increasing economic, political and social power of large corporations in the United States between the late stages of the 19th century and the great depression in the thirties of the 20th century there was growing popular concern. Consequently there were numerous attempts to render these ‘corporate giants’ formally accountable to public authority (Epstein 1987). The economic depression in the 1930’s forced corporations to work closely together with the US government which introduced laws that should help US citizens to overcome the negative consequences. As example, Cannon (1994) mentions Roosevelt’s ‘New Deal’ which constituted a major change as it was the basis for government interaction to deal with social and economic problems that cannot be solved by the market or corporations. Additionally the ‘New Deal’ signalled the end of a laissez-faire economy and opened the way to a more restricted economy with an active governmental role.

The end of World War II brought a broad re-examination of the relationship between the industry, the state and the community world-wide. Social justice movements were growing and increasingly vocalised their demand in issues like racial and gender equality. Although corporate philanthropy was well established there was a call for corporations to incorporate social responsibilities into their business philosophies in the long term (Patel 2000).

1.1.3 The introduction of the term ‘Corporate Social Responsibility’

It was 1953 when, for the first time, the term ‘corporate social responsibility’, henceforth referred to as ‘CSR’, was used. With the publication of ‘Social Responsibilities of the Businessman’, Howard Bowen (1953, cited in Balabanis et al. 1998) sets the scene in this field. Bowen argued that businesses exist at the pleasure of society and that their behaviour must concur with the standards set by society. He goes on to claim that businesses act as ‘moral agents’ within society.

During the 1960’s and 1970’s there evolved the idea of the corporate social contract which is one of the underlying assumption on the CSR concept as we know it today. Social and economic theorists noted the implied relationship between society and business as actions of one part certainly affect the other one as well^[1]. This theoretical approach came along with the increasing realisation of society that the majority of businesses at that time acted unethically by, for example, selling unsafe products, destroying the natural environment, exploiting third world countries and bribing on a large scale (Lantos 2001).

From the 1980’s until today concern about CSR prevailed. According to Lantos this is due to the increasing leisure time and a higher disposable income that allow the public to address issues that are beyond ‘earning a living’. Furthermore he points out that technical developments like satellite and internet technology promoted a more transparent coverage of world-wide problems.

Smith (2003) claims that CSR has never been under this frequent discussion as it is today. The difference to former approaches to CSR is, that calls for CSR today are more widely articulated, specific and urgent. He states that the criticism of business is more ‘far-reaching’ than ever before due to globalisation and the perceived failure of governments concerning social issues. Smith also discovers that the calls for greater social responsibility come from ‘mainstream quarters of society as well as protesters at global meetings’ (p. 55). He concludes that the focus of the discussion on CSR has changed as it is no longer on whether business should commit to CSR or not, but the question of how is gaining importance.

1.2 Definition

As one can see form the above points made, it becomes clear that the concept of CSR has evolved during the time as each time period requested different issues to be considered by CSR. As opinions and attitudes regarding the relationship between business and society are changing so is the concept of CSR, making a definition elusive (Hill et al. 2003).

The consequence is that CSR still remains vague and ambiguous. Hitchkin reflects this by saying: “It [CSR] is too narrow in its aims to engage management attention, too broad and unquantifiable to be taken seriously by the financial community, and just to woolly enough to be exploited by charlatans and opportunists” (Hitchkin 2002, p. 312).

1.2.1 Different schools of thought

Schwartz and Carroll (2003), however, distinguish two general schools of thoughts of CSR. According to them one school consists of those who argue that business has only one obligation, that is to maximise profits. The other school understands business as having a broader range of obligations towards society.

One famous supporter of the first group is the distinguished monetarist economist Milton Friedman who argues that ‘[in] a free economy [...] there is one and only one social responsibility of business – to use its resources and to engage in activities designed to increase its profit so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud’ (Friedman 1970, cited in Lantos 2001, p. 603). In his point of view it is the role of governments and social agencies to solve social problems as social values lie beyond the role of business which is to maximise shareholder wealth.

1.2.2 Carroll’s Model of CSR

Carroll (1979) is a proponent of the view that business is responsible for the necessities of society. In his definition of CSR there are four parts that embody the four categories of business performance: economic, legal, ethical and philanthropic. It is as follows: ‘The social responsibility of business encompasses the economic, legal, ethical and discretionary [philanthropic] expectations that society has of organisations at a given point in time’ (p. 500).

With this definition he closes a gap between economists and others defining CSR as he includes both economic and ethical obligations. Carroll later incorporated this four-part categorisation into a “Pyramid of Corporate Social Responsibility”. The pyramid of CSR is presented in Figure 1.1.

Figure 1.1 Carroll’s (1991) Pyramid of Corporate Social Responsibility

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Source:

A. B. Carroll (1991) ‘The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organisational Stakeholders’ Business Horizon, p. 39-48

While this pyramid suggests a hierarchy of CSR domains, this is not intended by Carroll. Instead Carroll postulates that the economic and legal domains are the most fundamental ones (Carroll 1991). Additionally this model can not fully capture the ‘overlapping’ nature of the different CSR domains, a disadvantage, as this is an integral characteristic of CSR (Schwartz and Carroll 2003).

The economic domain embraces all direct or indirect activities that maximise profit or share value. As examples for direct actions Carroll names, for example, the intention to increase sales. As examples for indirect activities Carroll names actions that are designed to increase employee moral or improve corporate image. Thus it is to be expected that the majority of corporate activities will be of economic nature (Carroll 1979).

The legal domain comprehends business’ responsiveness to legal constraints. Carroll distinguishes three categories within the field of legal issues which are: (1) compliance, (2) avoidance of litigation and (3) anticipation of law.

So as society permits business to assume the productive role in the economic domain it also creates the regulatory framework within the legal domain that business is required to operate in (Schwartz and Carroll 2003).

The ethical domain refers to the ethical responsibilities that are expected by the stakeholders of a business. Ethical norms are partly included in the two domains mentioned above but this domain adds behaviours and activities that are not necessarily codified into law but are still expected by society. As ethical behaviour is ‘ill-defined’, ethical responsibilities are the most difficult one to deal with (Carroll 1979).

The philanthropic domain relates to corporate actions that make businesses a good corporate citizen. It includes voluntary activities that are not expected but desired by the public which is the distinguishing factor between the ethical and the philanthropic domain. As examples Carroll mentions programs that promote human welfare or contributions to charitable organisations (Carroll 1991).

In his attempt to enumerate social areas to which the above responsibilities are tied to, Carroll (1979) admits that this attempt can not be exhausting as these issues are likely to change. Moreover these topical areas differ for different industries. He claims, that, for example, the issues of product safety or occupational safety and health have not been ‘of a major interest’ until recently. He concludes that the degree of organisational interest in social issues is fluctuating and as the times change, so does the emphasis on the range of social issues that businesses must refer to.

1.3 Stakeholder Approach

The previous part of this chapter defined the context of Corporate Social Responsibilities. Nevertheless it lacks a detailed description of the audience of CSR as it summarises the target under society or the general public, which is insufficient. This part describes the involved groups of CSR in more detail although it will not touch the different existing theories of the Stakeholder Approach as they lie beyond the scope of this work^[2].

1.3.1 The Business Environment

Every business has relationships with many people, groups and organisations in society. Some are intended and desired, others are unintentional and not desired. Whether desired or not, voluntary or involuntary, these groups with which business is involved have an interest or stake in the decisions and actions of a company as they are affected by its economic performance (Post et al. 2002).

On the other hand stakeholders also may affect the company making stakeholder relations bi-directional. In this case there is the need to manage those interests in a way that business is still able to achieve its aims (Frooman 1999).

Hendry (2001) agrees and adds that these relations are interdependent and complex as they are dynamic in nature. He goes on to claim that people occupy different roles at different times which has consequences to the individual relations of a company.

The identification of relevant stakeholder groups raises problems as it is difficult to decide who is and who is not a stakeholder, because potentially anyone can be affected by the activities of a company (Lea 1999).

One possible solution to this dilemma is to subdivide different kinds of stakeholders into different groups. Post et al. (2002) form two groups of stakeholders which are primary and secondary stakeholders. Primary stakeholders are people or groups that affect the company’s ability to carry out its primary purpose which is to provide society with goods and services. Post et al. claim that these stakeholders such as shareholders, employees, customers and suppliers are critical to the existence of a company. However there are relationships that go beyond these primary involvements. Secondary stakeholders are people and groups in society that are, directly or indirectly, affected by the company’s primary activities. So the distinguishing factor between primary and secondary stakeholders is the fact whether relationships occur as a consequence of business activities or not. Post et al. admit that it is not always possible to sharply distinguish between primary and secondary. Quite the reverse, often one shades into the other.

1.3.2 Framework of Stakeholder Pressure

In their efforts to describe the pressures which business is exposed to from all possible angles, Waddock et al. (2002) created a framework which highlights the key demands facing companies today to be more responsible. They expanded the idea of the primary and secondary stakeholder by adding a third group which is society or institutions in general. In their point of view all three groups may affect companies as opposed to Post et al. The framework is presented in Figure 1.2.

Figure 1.2 Stakeholder and Societal Pressures on Corporations

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Source:

Waddock S.A. et. Al (2002) Responsibility: The new business imperative Academy of Management Executive Vol. 16 No. 2, p.134

Owners or investors naturally expect a reasonable return on their investment through dividends or increases in share value thus economic performance pressures are a normal part of corporate life. However, social investment movements represent another source of pressures by investors. Waddock et al. (2002) claim that this undermines the fact that long-held assumptions in the financial community regarding the trade off between returns and responsible investment practices do not hold up anymore.

There are also pressures from employees. According to Waddock et al. (2002), employees are the source of competitive advantage, particularly in an information- and knowledge based environment. As employee perceptions about a corporation’s management of its workforce influence their decision about where to work, companies are forced to reform their labour practices to meet certain standards.

Metcalfe (1998) argues that the only way to ensure that stakeholder views are effectively represented, is to let stakeholders represent themselves. Within the field of employer-employee relation, as an example for participation, he mentions that employees in Germany have “workers’ councils” to represent themselves. Metcalfe goes on to claim that stakeholders should acquire ‘quasi-governance rights’ which correspond to the extent of their stake in the company. In the case of employees, he suggests employee share schemes as a means to give employees additional rights without having to change company law.

Customers are also a source of pressure due to increasing purchasing power. Moreover Waddock et al.(2002) claim that customers are becoming increasingly aware of company practices due to improving transparency.

Globalisation has increased the number of suppliers making the supplier an integral part of corporate operations. Pressures for corporate responsibilities throughout the supply chain have culminated in an anti-globalisation movement thus making the choice of suppliers particularly important regarding labour practices in suppliers’ facilities (Waddock et al. 2002).

In addition to pressures from primary stakeholders companies also face pressures from secondary stakeholders. Of particular relevance are non-governmental-organisations (NGO’s) and activists, communities and governments.

Increasing transparency via electronic communication and increasing speed of information flow via the Internet supported the growth of pressures from NGO’s and activists. These groups emerged to demand that companies adhere to human rights standards and national sovereignty. They also pressure companies for better environmental management and more sustainable practices (Waddock et al. 2002).

Governments and communities are another source of pressure. Governments and states demand compliance to the regulatory framework. They also expect companies to economically develop the area where they are situated. Communities are becoming increasingly aware of the negative consequences of eroding tax bases and the lack of company commitment to a locale. Therefore companies may find it necessary to act as ‘neighbours of choice’ living up to high standards with respect to their communities (Waddock et al. 2002).

In the face of several collapses of well known companies due to obscure practices and financial conditions, a number of institutional developments led to new pressures. According to Waddock et al. (2002) these developments stem, inter alia, from (1) a growing number of principles and global standards promoted by international bodies and (2) related reporting and accountability initiatives that expand corporate responsibility.

Waddock et al. go on to say that it is necessary to consistently report on these issues to gain respect and credibility and thus creating transparency which is prerequisite to the implementation of standards or codes of conduct.

1.4 Summary

This chapter serves as an introduction to the topic as it describes the underlying basis for the following chapters. It gives an overview on the history of Corporate Social Responsibility and shows that this concept has been evolving in time. The chapter makes clear that different time

periods emphasised or added different aspects of or to CSR. In the business community the perception has developed that it is no longer a question of whether a company should commit itself to CSR or not but instead the question now is how to implement it.

This chapter also reflects some views on the concept of CSR. It becomes clear that the concept of CSR is still vague and ambiguous due to the lack of a unified definition. The works of Carroll are presented as they are more extensive than others. By embracing social, ethical, philanthropic and economic issues, Carroll closes or gap or creates a compromise between the opposing sides. His definition of CSR will be frequently referred to throughout this work and, as already mentioned above, will serve as the underlying basis for the subsequent argumentation.

Finally the last part of this chapter deals with the stakeholder approach. It identifies the audience of CSR in a more detailed way. However, the identification of a stakeholder of a company is difficult. To clarify this issue, a division into primary and secondary stakeholders is used. The chapter also shows that business’ relationships to stakeholders are complex and interdependent. It also makes clear that different stakeholder groups have different demands, each putting the involved company under pressure to satisfy these diverse needs.

The next chapter is related to the issues of social reporting as a means to inform stakeholders of how the company is committed to Corporate Social Responsibility.

2. SOCIAL REPORTING

2.1 Why Social Reporting?

The following paragraphs build on the foundations created by the previous chapter. The concept of Corporate Social Responsibility as well as the stakeholder model will be used to explain the rationale for Social Reporting (SR) by showing the limitations of traditional accounting. Moreover there will be given a definition of the term and finally some operational models of Social Reporting will be introduced.

2.1.1 What does accountability mean?

A general and simple definition of accountability is delivered by Gray (2001) who states that accountability refers to the identification of what one is responsible for and then provide justification to whom one is answerable. He goes on to say that within the organisational context the ones that are answerable to, are typically the stakeholders of that organisation.

Swift (2001) claims that narrower definitions understand accountability to be pertinent to contractual arrangements, declaring that without contractually bound accountability there can be no act of accountability. She argues that definitions vary between different academics, however, the essence of accountability is about the provision of information between two parties, where the accountable side explains actions to the one whom the account is owed.

Gray et al. (1996) take the context of accountability one step ahead and state that accountability involves two responsibilities: (1) the responsibility to undertake certain actions and (2) the responsibility to provide an account of those actions. He names the annual report and the financial statements as an example for a mechanism to discharge accountability from directors of a company to its shareholders. According to Gray et al. this process of discharge arises from a relationship between the directors and the shareholders, a relationship that is defined by society, in this case through, inter alia, the company law. Figure 2.1 clarifies this issue by providing a general framework or model of accountability.

Figure 2.1 A generalised accountability model

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The two parties in an accountability framework are described as the principal and the agent. Whereas the principal refers to the side who holds the account, the term agent is related to the side which is held accountable. The underlying assumptions of this framework are rooted in the economic agency theory which constitutes that agents, if they remain unchecked by a regulatory body, are vulnerable to opportunism (Swift 2001). Opportunism is defined as “self interest seeking with guile” (Williamson 1985 cited by Swift , p. 17). Looking back at the stakeholder approach that was introduced in the first chapter, one can notice an overlap between the information rights of stakeholders determined by the stakeholder approach and those determined by the accountability model (Gray et al. 1997).

2.1.2 Limitations of traditional accounting

After having reviewed the principles of accountability it is now time to examine traditional accounting with regards to the requirements imposed by the stakeholder approach.

Modern accounting has its roots firmly planted in the industrial and commercial development of the 19th and 20th century. The development of modern accounting has therefore been concerned with the reporting to investors, i.e. shareholders and creditors, on the stewardship of managers. Other interests of other groups in society have been largely ignored. Moreover the method of reporting traditionally uses monetary terms with little concern for non-monetary accounting and socially related measurements (Mathews 1993).

Zadek et al. (1997) go further and argue that financial accounting was born out of a need (1) of managers to have some basic records of cash flow, (2) to provide a means whereby shareholders could hold the stewards of their investment, i.e. the management, to account and (3) to work out how to divide the profits at the end of a financial year. Like Mathews, Zadek et al. therefore see financial accounting as a tool for identifying how the organisation is doing, for being accountable to one particular stakeholder group, i.e. the shareholders.

Additionally, traditional accounting only recognises activities that take place within the organisation itself or between it and its suppliers or customers thus placing the organisation ‘at the centre of its world’. The only connections with the external world are related to (1) the acquisition of resources at the beginning of the processing cycle or supply chain and (2) selling the wares at the end of that cycle. This view is particularly relevant for management accounting that is essentially concerned with the transformational process within the organisation (Crowther 2000). Crowther goes on to claim that this fact is the crux of accounting, i.e. the results of certain actions are relevant and therefore need to recorded while others are not and need to be ignored. In this context Mathews (1993) refers to the issue of ‘public costs’. According to him, due to the historical developments of accounting and the difficulties inherent in measurement, the calculations used to capture the costs of production and operation do not take public or external costs into account. Mathews is backed up by Crowther (2000) who argues that the effects of an organisation’s activities that impact upon the external environment are not reflected in the traditional accounting. While these actions may impose benefits or costs, they are externalised, spatially or temporarily, and therefore excluded from the organisation’s area of responsibility. This subsequently leads to an overstatement of a company’s value creation as more costs than benefits have been externalised.

2.1.3 Justifications for additional disclosures

As one can see from the above points made, traditional accounting or reporting is not sufficiently capable of addressing issues that are of interest to stakeholders others than shareholders or creditors. The following paragraphs will give reasons why additional disclosures are needed to satisfy the needs of other stakeholders.

Mathews (1993) distinguishes three broad groups of arguments which may be brought forward to justify the use of additional company resources in making further accounting disclosures. These are (1) market related, (2) socially related and (3) radically related arguments.

The essence of market-related arguments is that shareholders and creditors will benefit from a more responsive market which is influenced by the information content provided by additional disclosures. Mathews bases his argumentation on empirical research about the linkage between economic performance and SR. He argues that a measure of social responsibility by management correlates with a higher corporate income. Mathews is partly backed up by Gray et al. (1995) who constitute that a high degree of SR is not necessarily connected to higher profitability in the same period, but there is some evidence to suggest that SR might be related to lagged profits.

Socially related arguments, in essence, are about additional disclosures that establish the ‘moral nature of the corporation’ (Mathews 1993, p. 9), that is, firstly, to fulfil the implicit social contract between society and business and secondly to legitimate the organisation’s actions. According to Mathews, market-related arguments are not necessarily relevant to non-equity holders, employees or the general public. It is therefore necessary to enter a moral debate on the social contract in order to interest those groups in SR^[3]. As already stated in chapter one, the discussion about the existence of a social contract started in the late 1960’s and 1970’s. Mathews (1993, p. 23) cites Shocker and Sethi (1974) who define social contract as follows:

Any social institution – and business is no exception – operates in society via a social contract, expressed or implied, whereby its survival and growth are based on:

(i) the delivery of some socially desirable ends to society in general and,
(ii) the distribution of economic, social, or political benefits to groups from which it derives its power [...].

Following this definition Mathews argues that the notion of a social contract stems from a political philosophy point of view where it is argued that society accepts an overriding control over individual freedoms in order to achieve collective goals. The underlying arrangements of the social contract, however, are a bit different as they justify a ‘revolt’ on the part of society whenever the part of business fails to deliver the expected outcomes. In other words, the productive organisation exists to satisfy certain social interest. Considering these thoughts one could draw some parallels to the development of corporations in the United States as described in the first chapter.

Regarding the justification for additional disclosures, Mathews concludes that any technique that enables society to measure the performance of an organisation is both legitimate and desirable. However, if management is unwilling to consider the social contract as a reason for additional disclosures, they may consider organisational legitimacy as an alternative to which we turn now.

While the idea of the legitimacy theory can be seen as being directly related to the concept of the social contract (Deegan 2002), Lindblom (1984, cited in Mathews 1993) argues that the legitimacy theory is a logical conclusion from the idea of the social contract. It is defined as follows (Dowling and Pfeffer 1975, cited in Mathews 1993, p. 30):

Organisations seek to establish congruence between the social values associated with or implied by their activities and the norms of acceptable behaviour in the larger social system of which they art part. Insofar as these two values are congruent we can speak of organisational legitimacy. When an actual or potential disparity exists between the two value systems, there will exist a threat to organisational legitimacy.

The illustration in Figure 2.2 adopts the perspective, that threats to legitimacy derive from an organisation’s negative association with an issue or event.

Figure 2.2 Issues/events and corporate legitimacy

illustration not visible in this excerpt

The area marked X represents congruence between corporate activity and societal expectations. Areas Y and Z show incongruence and therefore illustrate “illegitimacy or legitimacy gaps. The goal of an organisation, following the theory, is to ensure that area X is as large as possible, thereby reducing the gap (O’Donovan 2002). Lindblom (1984, cited in Mathews 1993) stresses that organisations can only legitimate themselves by referring to the norms and values of society. Obeying legal requirements or being profitable does not establish organisational legitimacy. To concur with this theory, better communication with society is needed as this ‘enlarged accounting or accountability’ ensures the continued existence of a corporation. Lindblom (1984) identifies four strategies that an organisation can use to deal with different legitimisation threats (cited in Deegan 2002, p. 297). The organisation can seek to:

1. educate and inform its “relevant publics” about actual changes in the organisation’s performance and activities
2. change the perceptions of the “relevant publics” – but not change its actual behaviour
3. manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols; or
4. change external perceptions of its performance.
According to Lindblom (1984, cited in Mathews 1993), the public disclosure of information in annual reports can be employed by organisations to implement the above strategies.

The last group of arguments to support additional disclosures, formulated by Mathews (1993), refer to the radical paradigm approach. This radical point of view understands accounting as a support activity for a certain view of society. It is associated with capitalistic production and marginalistic economics which does not allow for ‘problematic’ relationships between the organisations that accounting serves and society. Theorists following the radical or critical theory are critical of the approaches which were discussed above as they are based on evolution of accounting and the acceptance of capitalism.^[4]

In their efforts to capture the reasons why companies have begun to show interest in SR, Zadek et al (1997) came up with a ‘Rationale Triangle’. Although this triangle is not derived from the limitations of traditional accounting, it nevertheless gives a good overview for the general justification of SR. It indirectly addresses the issues mentioned above thus serving the role of a summary. The first principal reason is essentially managerialist, that means, to survive and prosper in society, the management of an organisation needs to know what society thinks about the organisation and how best to influence those views. At a simple level this involves the need for market research and public relations. At a more sophisticated level, it means that management needs a broader understanding and appreciation of stakeholder needs. The second principal reason relates to the issues of public interest and accountability. These issues were addressed above and need no further clarification. The last reason is a value-shift that is taking place in business. Here lies the view that business can evolve and take on a different historic role in society. This is increasingly happening as the traditional roles taken on by governments are under a threat. The ‘Rationale Triangle’ is presented in Figure 2.3.

Figure 2.3 The Rationale Triangle

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2.2 Definition of Social Reporting

After having reviewed the existing theories in the context of Social Reporting it is now time to define the term trying to reflect what the theory teaches us. To do so constitutes some difficulties as the understanding of the term, despite its theoretical foundation, seems to vary over time by changing the emphasis according to the actual needs. Moreover issues and concerns are likely to be different across industry sectors thus leading to different social responsibilities and public exposures (Clarke and Gibson-Sweet 1999).

2.2.1 Systematic corporate social accounts

Despite these difficulties, Gray et al. (1997) attempt to define Social Reporting, by seeking a synthesis of the different approaches mentioned above. They do not differentiate between social accounting and social reporting as both terms relate to the presentation of information about organisational activity. Therefore both terms will be used interchangeable. In their point of view, social accounting is the ‘universe’ of all accounting. It is what happens, if the constraining principles of traditional accounting, as discussed earlier, are removed. As this understanding of social accounting is certainly infinite they restrict themselves to certain issues. Gray et al. understand SR with focus on the formal account that is prepared by an accounting entity and externally reported or disclosed to parties other than the internal audience of an organisation, although this does not prelude these parties from receiving and using such an account. The account should be formal as Gray et al. assume a certain grade of complexity and size in the relationship between the accounting entity and those to whom the account is presented. The restriction to externally disclosed reports is driven by the commitment to accountability, as discussed above. The matter of who should prepare the accounts is driven by pragmatic and economic concerns. These concerns include inter alia (1) the access to the necessary data and (2) the close connection between conventional financial accounting and social accounting, thus showing that the accounting entity, i.e. the organisation, itself should prepare the social accounts and not some external institutions.

The above three elements, i.e. (1) the formal account, (2) the accounting entity and the intended recipient of the account lead, under the consideration of the theory mentioned earlier, to ‘Systematic corporate social accounts’ and include:

1. stakeholder reporting
2. describing the characteristics of the stakeholder relationships
3. accountability reporting
4. reporting of the voices of the stakeholder (Gray et al. 1997, p. 332)

2.2.2 The internally and externally focussed approach

While Gray et al’s definition of SR emphasises the importance of stakeholders and accountability, Colle and Gonella (2002) distinguish two general approaches to SR, i.e. the internally focussed approach and the externally focussed approach, and therefore deliver two different definitions, although the definition that relates to the latter approach is similar to Gray et al’s definition.

The internally focussed approach concentrates on the deepening of internal shared values and establishing systems within the organisation to ensure the alignment of the company’s policies, processes and individual behaviours with the stated values. The role of SR within that context is defined to ‘[...] create a strong corporate culture that fosters homogeneous and coherent behaviours at individual and organisational level [...]’ (Colle and Gonella 2002, p. 87). In this definition the stakeholder dimension is present only in an indirect way, mediated by the primary stakeholder group: the employees.

The externally focussed approach relates to the public accountability of companies and is similar to the approach chosen by Gray et al. The role of SR in this specific context is ‘[...] to define indicators and measurements to assess – and possibly compare with respect to market, national or international best practices – the economic, environmental and social impacts of the organisational activities’ (Colle and Gonella 2002, p. 89). This definition emphasises the role of the different stakeholder groups as it, first, defines the objectives of the organisation and, secondly, evaluates its success in achieving these objectives.

2.2.3 Principles of a reporting system

Crowther (2000), in his attempt to characterise the key principles of social reporting, uses the definition given by Mathews (1993), which defines SR as ‘voluntary disclosures of information, both qualitative and quantitative, made by organisations to inform or influence a range of audiences. The quantitative disclosures may be in financial or non-financial terms’ (Mathews 1993, cited in Crowther 2000, p. 26). Based on this definition and on his own perceptions, Crowther identifies three principles of SR:

1. It is an attempt to report upon the effects of the actions of the firm upon the societal environment which is external to the firm itself.
2. It is aimed at an audience external to the firm, and which has no legal ownership of that firm.
3. It is voluntary in nature.

He claims that, especially due to the voluntary nature, not all firms feel the need for SR and such SR that takes place is by no means uniform in its approach. Crowther adds that there are several attributes a reporting system must have to be successful. These attributes are presented in Table 2.1.

Table 2.1 The basic principles of a reporting system

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Comparing the above definitions one can recognise some essential elements of SR. First, SR serves as a tool that discharges accountability to an external audience, i.e. stakeholders (Gray et al.). Secondly, SR can also be used as a communication tool between the organisation and its employees, thus creating a strong corporate culture (Colle and Gonella 2002). Thirdly, SR is voluntary in nature.

So, for the purpose of this work one can define Social Reporting as a voluntary means to report about the commitment to the corporate social responsibilities of a company in a comprehensive, verifiable, complete and comparable way. The discharge of accountability embraces the relevant economic, legal, ethical and philanthropic domains of a company thus satisfying the needs of a broad range of internal and external stakeholders.

Despite the efforts to define SR it still is a relatively abstract term. Although there are noticeable essential elements, organisations may, by reading the definitions alone, misinterpret the goals of SR thus exclude relevant information. On the other hand, there may be organisations that utilise the context of CSR to engage in SR as part of their reputation building process thus using SR as another means for enhancing public relations (Owen and Swift 2001). To counteract these issues there are European and International standards, rules and guidelines that help organisations to employ the right strategy in SR. These developments will be introduced in the next part.

2.3 Operational Models of Social Reporting

The preceding part of this work explained the underlying assumptions and introduced the theoretical foundations of the concept of SR. This part introduces European and International developments of the operational concept of SR in order to assist organisations to employ SR in the right manner.

2.3.1 International reporting and accountability initiatives

The pressing need to create common frameworks to redefine the performance and sustainability of organisations has led to the development of a new standard, AccountAbility 1000 (AA1000). This global standard, developed by the Institute of Social and Ethical Accountability (ISEA), aims to make clear how principles of accountability and sustainability are related and complementary (Beckett and Jonker 2002). Moreover, it operationalises and standardises an approach to SR in order to increase the quality in reporting. In other words, the AA1000 employs a SR process undertaken in an organisation within a hierarchy of principles aimed at assessing the quality of the process (O’Dwyer 2001). The main categories of action within a SR process are as follows: planning, accounting, collecting information, auditing and reporting and embedding. These are shown in Table 2.2:

Table 2.2 Stages in the AA1000 Process Model

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These stages form the key components of the standard. According to Beckett and Jonker (2002) the AA1000 is unique in its character as a method to link the internal and external organisation relationships. Furthermore Beckett and Jonker find it particularly interesting to mention that the AA1000, as a business model, broaches the gap between the organisation as an instrument and the organisation being a social entity. Through the design and the innovation of the process, as well as the review of it outcomes, the AA1000 enables strong connections with stakeholders. O’Dwyer (2001) adds that by emphasising on an association between accountability to stakeholders and corporate financial performance, the adoption of the AA1000 is advanced as a ‘win-win’ type scenario thus enhancing long-term corporate financial performance.

Another standard that was introduced to put SR into concrete terms is the SocialAccountability 8000 (SA8000). It originated in the USA and has been developed by the Council on Economic Priorities Accreditation Agency. According to Stittle (2002) the SA8000 promotes social accounting or SR as ‘a standardised global system for companies interested in evaluating and improving the social accountability of their facilities and those of their suppliers and vendors’ (p. 352). The SA8000 is based on ‘the principles of international human rights norms as described in International Labour Organisation conventions, the UN Conventions on the Rights of the Child and the Universal Declaration of Human Rights’ (SAI 2001, p. 4). By the use of the SA8000 organisations are able to assess their performance on issues such as child labour, forced labour, health and safety, free association and collective bargaining, discrimination, disciplinary actions, working hours and compensation (Stittle 2002). Stittle goes on to say that the application of the standard is intended for independent third-party verification.

The Global Reporting Initiative (GRI) also attempts to reduce the inconsistency in the information content of social disclosures. In 1999 the GRI published an exposure draft with guidelines to link economic, social and environmental performance issues (Raar 2002). The GRI (2002) claims that the published guidelines ‘represent a global framework for comprehensive sustainability reporting, encompassing the “triple bottom line^[5] ” of economic, environmental and social issues’. The aim of the GRI is to assist reporting organisations in articulating and understanding contributions of the reporting organisations to sustainable development. The reporting principles of the GRI guidelines are presented in Figure 2.4:

Figure 2.4 GRI’s Reporting Principles

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The principles in Figure 6 are grouped in 4 clusters. Those that:

1. Form the framework for the report (Transparency, Inclusiveness, Auditability);
2. Inform decisions about what to report (completeness, relevance, sustainability context);
3. Relate to ensuring quality and reliability (accuracy, neutrality, comparability); and

[...]

^[1] The social contract will be dealt with in chapter 2 in more detail.

^[2] For more in depth information on Stakeholder Theory please refer for example to (Tricker, 1983; Roberts, 1992; Ullman, 1985)

^[3] Due to the fact that a complete and in depth presentation of the social contract theory and the legitimacy theory would surely go beyond the scope of this work there will only be given a more or less short introduction to these two theories. For more information see for example (Shocker and Sethi, 1974; Manning, 1984; Donaldson, 1982)

^[4] Due to the “extreme” point of view of the radical theory and the questionable support for this work, it will be excluded from further analysis. For additional information see for example (Tinker et al., 1982)

^[5] For more information on the “triple bottom line” concept see Elkington (1997)