Amy Cortese

 


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March 24, 2002

The New Accountability: Tracking the Social Costs


By AMY CORTESE



THE Enron-Andersen debacle has cast an unforgiving light on corporate bookkeeping, but the growing demand for accountability could extend far beyond financial statements. Pressure from investors, customers, consumer activists and even some governments is pushing more companies, particularly multinational ones, to report their nonfinancial performance, detailing the impact of their businesses on the environment and human rights.

This so-called social reporting has been under way since the late 1980's, when corporations, reacting to the growing environmental movement, began publishing brochures about reducing pollution. But many of those early efforts produced little more than glossy propaganda.

In the last few years, the forces of globalization and increased access to information via the Internet have helped to expand the scope of social reporting. In addition to providing environmental, health and safety reporting, companies are beginning to report on all aspects of their social performance, from the amount of waste they reuse to the wages they pay to workers abroad.

Advocates of this more rigorous reporting, which they call ''sustainability reporting,'' say it provides the most accurate appraisal of a company's potential and risk.

''As your number of suppliers and the number of people looking at you goes up, you need new tools for measurement,'' said Robert Massie, a founder and director of the Global Reporting Initiative, a group based in Boston that has been working with the United Nations to devise internationally accepted standards for social reporting. ''Leading indicators are not just financial.''

More companies may decide that such reporting is good for business. A 1999 survey of 25,000 people worldwide by Environics International, a research firm, showed that 56 percent formed opinions of a company based on its social behavior, versus 34 percent based on financial fundamentals like profits. Forty percent said they had boycotted or considered boycotting companies they viewed as irresponsible.

A handful of companies, like Royal Dutch/Shell, Minnesota Mining and Manufacturing, General Motors and Ford Motor, have been producing sustainability reports since the middle to late 1990's. A Web site that tracks social reporting, CorporateRegister.com, counts 487 sustainability reports published last year, up from 194 in 1995 and 7 in 1990. (Social reports of all kinds, including environmental and afety, number in the thousands.)

The biggest new entry is McDonald's, which plans to release its first sustainability report the week of April 15. With operations in 121 countries, McDonald's symbolizes the expansion of American business and has been a lightning rod for activists protesting everything from American culture to genetically modified food.

Bob Langert, the company's senior director for social responsibility, said the publication of a sustainability report was not prompted by any one incident. ''There is more interest in what companies like McDonald's are doing with social-type issues,'' he said. ''We want to provide a full view of where we've been, where we're at and where we're going.''

Its 50-page report will address issues like beef safety, a suppliers' code of conduct and the company's treatment of overseas employees and franchise owners.

Other companies working on such reports for the first time include Alcoa, International Paper and Siemens. ''There's no doubt that the world at large is looking at the broader imprint that companies leave on society,'' said Jake Siewert, a vice president at Alcoa.

In another sign that social reporting is growing, some large accounting firms are jumping in, looking to expand their auditing and consulting services. Only 40 percent of social reports are now audited. ''A lot of our clients and our clients' clients are asking for this,'' said Sunil Misser, partner in charge of a new practice for corporate social programs at PriceWaterhouseCoopers.

Still, there are no common standards or oversight groups, leaving wide variability in the reports and audits. For auditors, the conflicts on the financial side -- relationships that provide more than one service to clients -- can be true on the social side as well.

A bigger problem to overcome may be public skepticism of corporations fed by scandals, such as the collapse of Enron and indictment of its auditor, Arthur Andersen.

VOLUNTARY self-reporting by corporations lacks credibility, said David C. Korten, the author of ''When Corporations Rule the World,'' a 1995 book considered the bible of the movement against globalization. ''If we cannot trust management to put out an honest report to shareholders,'' he said, ''it would be silly to put any credibility in these social reports.''

Many companies may view social reports as an opportunity to ''greenwash'' -- to highlight the good and omit the bad -- with glossy images of employees planting trees, butterflies or cupped hands holding a globe. ''We want to see specific targets that can be measured year to year,'' said Paul Scott, director of NextStep Consulting, a British firm that helps companies create these reports and runs the CorporateRegister.com database. Still, he said, ''producing a report is a good way to get management to sit up and take notice.''

Indeed, social reporting, once a squishy exercise, is becoming more serious. The Global Reporting Initiative drafted guidelines a few years ago, and 100 big companies are following them. In Europe, some countries -- the Netherlands, Denmark, Norway and France -- require some sort of social reporting. More than 200 companies have signed the United Nations Global Compact, which commits them to a code of conduct that includes abolition of child labor and slave labor, recognition of union rights and responsibility for preventing environmental damage. The code has no enforcement provisions, but supporters say it is symbolically important, much as the Sullivan Principles were in pressuring South Africa to end apartheid.

AT Shell, which will publish its fifth sustainability report next month, there is a conspicuous sensitivity about consulting with local groups in the planning of new projects. A pipeline completed last fall in the Philippines, for example, was routed to avoid sacred burial sites, coral beds and fishing grounds. That contrasts with Shell's old behavior, which caused a public backlash that hurt its reputation. In 1995, for example, when the company announced plans to sink an oil platform in the North Atlantic and worked with a repressive regime in Nigeria, protesters denounced the company and Shell's European sales plummeted.

Mark Wade, the sustainable-development manager at Shell, said those protests ''triggered our understanding of the importance of building relationships.''

In Shell's sustainability report, the company offers an annual measure of how it is doing on its commitments, like reducing emissions that many scientists say contribute to global warming. Shell's upcoming report, it said, would show the company had reduced such emissions by nearly 10 percent from 1990 levels. In contrast, the Kyoto treaty to stop global warming, which the United States has not signed, sets a 2002 goal of a 5.2 percent reduction from 1990 levels.

In a move that advocates of social reporting say foreshadows corporate reporting to come, Shell will include its sustainability report in the same binding as its annual financial report for the first time this year, underscoring the message that the two go hand in hand. Most companies that publish social reports now do so separately from their financial reports.

The Centre for Tomorrow's Corporation, a business-sponsored research group in London, said Shell's move portended an overhaul of the corporate annual report. ''The future is inclusive reporting,'' said Mark Goyder, the group's director. ''We want the finance director, not the environmental director, lying awake at night wondering if he has the right social performance metrics.''

 

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