Interest in Corporate Social Reporting - Assignment Example

Part 1: Explanation of silent and shadow accounts in corporate social reporting As a result of increased interest in corporate social reporting, influenced by the rapidly increasing, widespread awareness of the overwhelming global influence corporations have on everything from human rights to environmental integrity, various stakeholder groups have sought ways to encourage corporate entities to report items related to stakeholder accountability, democracy, and transparency in operations. “For them, the overriding purpose of social accounting revolves around making visible the workings of organisations for stakeholders thereby potentially empowering stakeholders to seek more benign organisational activity” (O’Dwyer, 2004). There is an obvious conflict of interest in expecting information that might ultimately produce pressure by external sources to modify or forego otherwise economically gainful – and for the most part legal - activities, and corporations have been reluctant to adopt non-mandatory disclosure related to such items. “There has, however, also been a long history of organisations independent of the accountable organisation producing social and/or environmental reports about the accountable organisations. These are typically known as 'external social audits'” (Gibson, Gray, Laing, and Dey, 2002). “Social audits act as a ‘balancing view’ in the face of the considerable resources that organisations have at their disposal to put their own point of view and to offer their own emphasis on their activities” (Gibson, et al., 2002). Gibson, et al, undertook to find out how much of the desired information was already disclosed, albeit hidden, in the usual annual and various other company-produced reports. They found corporations already supply much of the information being sought. Using a simple “cut and paste” approach extracted much information relevant to social and environmental issues. The product of such an effort is called a “Silent Account”. It is a concise selection of information, without commentary, assembled without being taken out of context, and then evaluated. It often reveals more than the corporations suspect, and can be a valuable source of raw data from which to explore issues to follow up. The information used for the compilation of a “Shadow Account” is compiled in a similar way, without commentary or analysis, but entirely from public but non-company produced sources. No effort is made to distinguish between good news and bad news, and it’s a given that “It is very likely...that a number of the items in the Shadow Report are, in actuality, company-produced items which journalists have simply adapted” (emphasis in the original) (Gibson, et al., 2002). For the purposes of comparability in evaluation, categories of information not supplied by the corporation, and therefore not available for the Silent Account, were also excluded from the Shadow Account. The project is ongoing, and the fact that Non-Governmental Agencies and Socially Responsible investment professionals “have expressed genuine interest in the project and this encourages us to believe, at least, that the experiment has some merit” (Gray, et al.). Back in 1992, R. Estes of Management and Accounting Web, frankly acknowledged that “neither management accounting nor traditional accounting meets the information needs of corporate stakeholders…The information needs of these stakeholders have stimulated the revival of social accounting” (Estes, 1992). In a 2004 review of Estes’ work, Velynda Wickerson of the University of South Florida looked at the future of social accounting, beyond the ring of consumer and other advocate groups that have sprung up to do the work that corporations have failed to do on their own. “Corporate executives are not immune to concerns about racism, environmental damage, equal opportunity, sexual harassment, and unsafe products” (Wickerson, 2004). Under increasing pressure from stakeholders who feel “exploited,” Estes predicted three possible outcomes: Governmentally imposed regulations, the failure of the corporate system and the restoration of power to the people, or that corporations will clean up their own act (Estes, 1992). Today we see a dual strategy being undertaken by some corporations. A consumer accuses McDonald’s of knowingly selling unhealthy food. McDonald’s denies the claim while simultaneously bringing out a line of healthier foods. As claims of worker exploitation mount against Wal-Mart, public relations oriented commercials with employee testimonials about how great the company is to work for begin to saturate the airwaves. Charitable giving and community involvement commitments increase, but never without the accompanying publicity that makes such an effort economically worthwhile. We’ve long been accustomed to oil companies highlighting their environmental protection activities, restoring wetlands, etc., however ironic this claim may be. Historically, corporations have done nothing that wasn’t in their best interests. When bad publicity makes good behavior in their best interests, they can be counted on to at least claim they are performing in a socially responsible way. But it will always be up to outsiders, independent observers and analysts, to verify the veracity of such claims. (783 words total, minus 37 words in titles, headings, and in-text citations = 746 words net) Part 2: Risk and philanthropy disclosure and share price movement Risk disclosure (1). “In some regions HIV/AIDS poses a serious risk to our employees and communities.” According to the Linsley and Shrives disclosure grid, I would categorise this disclosure as 2B; a health and safety risk falling under the Operation Risk category, with a Monetary/Bad news/Future rating. I didn’t choose C: Monetary/Neutral/Future because the word “serious” implies near certainty that at some point at least one employee or community member will become infected. Signaling Theory: “…occurs in competitive environments. The interests of the sender and the receiver seldom align exactly, and often they are quite at odds with each other. The answer is costs: a signal will be reliable if it is beneficial to produce truthfully, yet prohibitively costly to produce falsely. There are two main sources of these costs: the signal itself may be costly to produce or the punishment if caught cheating may be high” (Donath, 2005). It would be advantageous to signal this risk in order to minimize future liability based in any part on failure to disclose the risk. This signal could be directed at current and prospective employees, and current and potential investors. It could even be intended to defend the company against future claims of over-valuing by independent analysts in the event that a large event related to HIV/AIDS does occur. It is advantageous for the company to do so; it sounds prudent, but does far more for the company than it does for any recipient of such “signal”. Agency theory, which involves addressing any potential conflict of interest between principals and agents (Investopedia, 2006), would seem to have little to do with this disclosure. Legitimacy theory, particularly the macro-theory of legitimation, known as Institutional Legitimacy, “deals with how organisational structures as a whole…have gained acceptance from society at large” (Tilling, 2006). However, this particular disclosure would be more closely related to Strategic Legitimacy Theory, “by which an organization seeks approval (or avoidance of sanction) from groups in society” (Kaplan, 1991) – in this case, those who might devalue the company or sue for personal damages in the event of an HIV/AIDS outbreak. Risk disclosure (2). Immediately following the above disclosure regarding the risk to employees or community members of contracting HIV/AIDS, the company report goes straight into this disclosure: “In 2005 we launched a searchable database where consumers can find out exactly what ingredients are used in our Home and Personal Care products in Europe (listed on the website) and there is additional information on our website about the chemicals Unilever uses in its products” (Annual Report, 2005). I would assign the same Linsley and Shrives ranking of 2B as for the HIV/AIDS disclosure, in that the company seeks to put out something to which it can point in the future under a similar scenario as the one discussed above. As to the relationship of this disclosure to agency theory, signaling theory, and legitimacy theory, my comments would be the same as for the HIV/AIDS disclosure: that is, it has more to do with signaling – or “going on record as having disclosed” – and legitimacy – not misrepresenting to any group what its potential risks are, and little to do with agency theory – any conflict of interest between agents and shareholders. Risk disclosure (3). “[Pension plan] investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets.” On the Linsley and Shrives scale, I would categorise this disclosure as 1C; that is, a Financial Risk with a Monetary/Neutral/Future rating. Portfolio diversification is a ubiquitous, almost stereotypical risk-reduction strategy, and it would be difficult for anyone affected adversely in the future to argue that the company could have done anything other than diversify in order to protect the pension plans it holds in trust for its employees. In this disclosure, agency theory might play a part, in that a standard approach to pension investment management can hardly be connected with any special interests on the part of company management. Signaling theory probably plays a weaker part in this disclosure, since this kind of disclosure is practically a boilerplate statement of general risk, except for the attention mismanagement of pension funds has recently received. Legitimacy theory wouldn’t play much of a part in this disclosure, in my opinion, because shareholders would not be as affected by a failure of the pension plan as would current and former employees, and where pensions are insured, as they are in the U.S., the burden of paying out some percentage of benefits from a bankrupt pension plan falls to entities outside the company itself. Corporate philanthropy disclosure(1). “Unilever collates the cost of its community involvement activities using the London Benchmarking Group model” (Annual Report, 2005). This sentence is both descriptive, especially for those familiar with the model to which it refers, and a statement of policy regarding their method of making voluntary disclosures of charitable donations. Corporate philanthropy disclosure(2). “The model recommends the separation of charitable donations, community investment, commercial initiatives in the community and management costs relating to the programme of activity” (Annual Report, 2005). This sentence is primarily descriptive, further explaining the implementation of the London Benchmarking Group model in their disclosure of charitable donations. Corporate philanthropy disclosure(3). “During 2005 UK group companies made a total contribution of £7.4 million, analysed as follows: Charitable donations - £1.5 million; community investment - £1.3 million; commercial initiatives in the community - £3.9 million” (Annual Report, 2005). This is a descriptive statement of the factual total amount of charitable donations, collated according to the policy outlined in the second charitable donation disclosure. In comparison, the company’s profit before taxes for this year, in € million, was 5314. Corporate philanthropy disclosure(4). Regarding the [Viscount] Leverhulme (company founder) Trust: “The first Viscount wanted the trustees of the trusts he established to be Directors of PLC.” This is more a descriptive statement than a statement of policy, but it also has an agency angle; that is, why it is that the trust established for the heirs would be administered by officers of the corporation when such an arrangement might be viewed by some as containing the potential for conflicts of interest, especially when it is also noted that dividends were to be paid to the heirs only under certain (unspecified) circumstances, and since his death in 1925, no dividends have been paid. Corporate policy regarding charitable giving. The Annual Report includes no section outlining a policy regarding charitable giving. This would lead one to believe that public perception regarding the company’s charitable giving level is either not a driver of value, or that charitable giving is not a priority of the directors or managers, or ultimately the stockholders themselves. Share movement. Date Open High Low Close Volume Adj Close 4-May-06* 570.00 570.00 556.00 560.50 38,230,024 560.50 3-May-06 593.50 593.50 575.50 576.00 30,133,664 576.00 2-May-06 582.00 592.00 577.00 591.50 21,346,060 591.50 28-Apr-06 590.50 591.00 582.00 582.50 10,562,592 582.50 * Preliminary. On May 4, 2006, Unilever announced an 8.0-percent first quarter net earnings gain (AFP, 2006). Analysts had expected more. The three-month average daily volume for the stock is 12,254,700, but ahead of the announcement volume soared to 30 million plus, and post announcement volume surpassed 38 million, with a drop in price from 576.00 at close on May 3 to 560.50 at close on May 4, or –2.68-percent change. Market efficiency is a little hard to discern in this small sample. The run-up in volume and price two days before the announcement seemed to anticipate meeting or exceeding forecasted earnings, but the day before the announcement, the price fell 2.62-percent. The market reacts quickly, but the market also moves on expectations, positive and negative surprises, and apparently on some insider information of the content of the earnings release. Part 2 word count: 1294 – 63 for titles, headings, subheadings, and in-text citations (chart figures, including the word “preliminary”, not included in total to begin with) = 1231 net words References AFP Wire Service (2006). Unilever reports profit gain but disappoints market. Retrieved May 4, 2006, from http://uk.biz.yahoo.com/04052006/323/unilever-reports-profit-gain-disappoints-market.html Donath, Judith (2005). Notes on Signaling Theory. Retrieved May 3, 2006, from http://smg.media.mit.edu/classes/IdentitySignals05/NotesOnSignaling.pdf Estes, R. 1992. Social accounting past and future: Should the profession lead, follow – or just get out of the way? “Advances in Management Accounting” (1): 97-108. Reviewed by Valynda Wickerson, University of South Florida, 2004. Gibson, K., Gray, R., Laing, Y., Dey, C. (2002). The Silent Accounts Project: Draft Silent and Shadow Reports/Accounts. Retrieved Apr. 22, 2006, from http://www.st-andrews.ac.uk/~csearweb/aptopractice/silentacc.html Investopedia.com (2006). Agency Theory.. Retrieved May 3, 2006, from http://www.investopedia.com/terms/a/agencytheory.asp Kaplan, S. E. and R. G. Ruland (1991). “Positive Theory, Rationality and Accounting Regulation,” Critical Perspectives on Accounting, Vol. 2, No. 4, pp. 361 – 374. O’Dwyer, Brendan. (2004). “The University of Nottingham International Centre for Corporate Social Responsibility,” Stakeholder Democracy: Challenges and Contributions from Accountancy, No. 18-2004 ICCSR Research Paper Series. Tilling, M.V. (2006). Refinements to Legitimacy Theory in Social and Environmental Accounting. Retrieved May 3, 2006, from www.ssn.flinders.edu.au/commerce/researchpapers/04-6.pdf 2005 Annual Report, Unilever PLC. Retrieved Apr. 22, 2006, from http://www.unilever.com/ourcompany/investorcentre/financial_reports/annual_report_Form.asp Read More