CHAPTER 2 Business Sustainability

BUSINESS SUSTAINABILITY & ITS KEY DRIVERS AND PRINCIPLES Entities need to account for all resources used & outputs produced. To cope with this expectation, new frameworks & techniques are developed & adopted under business sustainability (development that meets the needs of the present w/o compromising the ability of future generations to meet their needs)
Principles of business sustainability performance - Ethics, governance (resources are

managed conscientiously & effectively), transparency (timely disclosures), business relationships (fair trading) etc THEORIES OF BUSINESS SUSTAINABILITY Appraise corporate social responsibility (CSR), shareholder value, stakeholder theory & stewardship theory CSR = An entitys obligations to society in general & to the environment Shareholder value The Corporations Act + constitution of an entity acknowledges the owners of the entity to be the primary focus. It is the shareholders who vote at the annual general meeting and who choose the directors. Agency theory = theory which describes the relationship where one party (the principal) employs another (agent) to perform some activity on their behalf. Shareholder value = A view which sees the purpose of the corporation is to maximize

Stakeholder theory = Theory that supports the view that the purpose of an entity is for the good of all stakeholder groups (not just for the purpose of maximizing shareholder wealth) Stewardship theory = theory that espouses that managers, left on their own, will indeed act as responsible stewards of the assets they control. Reporting & Disclosure components of the GRI reporting framework Global Reporting Initiative (GRI) reporting framework provides guidance on how organizations can disclose their sustainability performance. It contains: Sustainability reporting guidelines principles & standard disclosures Technical protocol details definitions, methodologies & scope of content Sector supplements

Triple Bottom Line Considers the economic, social & environmental performance of an entity. o Economic performance traditional profit & return on capital performance

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Environmental performance an entitys activities relating to natural capital & whether its activities are environmentally sustainable

Social performance both human capital + societys wealth creation potential (i.e. trust in one another is essential and that organizations have to accept a common set of ethical norms greater efficiency & +ve social relationships) E.g. fair salaries, not exploiting supplier r/ships, safe working conditions etc.

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CORPORATE GOVERNANCE What is corporate governance? = direction, control & management of an entity. The law sets forth a corporations rights and responsibilities - ASIC1. It also considers best practices & business ethics. Corporate governance responsibilities rest with the board of directors. Corporate guidelines & practices A number of corporate governance guidelines help to foster improved governance practices. It generally covers the structure of board of directors, their conduct, role of shareholders, financial reporting etc. Principle 4 of the guidelines address the need to safeguard the integrity of FS & is specifically relevant to accountants & the info they provide to decision makers. ETHICS The role of ethics in business Acting w/ prudence is considering ones self interest, while acting with morality is acting as one ought to by taking into account the interests of other people. Ethical philosophies
Teleological theories concerned with the consequences of decisions

Board of directors need to consider a range of stakeholders when making decisions.

Utilitarianism the need for individuals to max their utility & by doing so would lead to societys utility being maximized

Ethical Egoism where individual decision maker decides whats best for himself underlies agency theory & relevant to modern corporate governance. E.g. it is assumed that CEOs will act in their own self interest therefore 1 of the board of directors job is to set up mechanisms that will allow the entity to propser

Deontological theories concerned with the action/decision itself

Accountants/managers taking actions based on sense of duty may be based on a set of rules/professional guidelines e.g. religion / Marxism etc.

Ethical behaviour & professional codes of ethics This code is issued by APESB2, established by CPA & Institute of Chartered Accountants in Australia. The 5 principles: integrity, objectivity, professional competence & due care, confidentiality & professional behaviour.

Australian Securities & Investments Commission

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Independence vs. Financial planning commissions Cons of the the financial planning industry financial planners are paid via commissions from manufacturers (of investment products) rather than from direct fees for services rendered to clients e.g. doctors receiving commissions from pharmaceutical companies. E.g. Storm Financial collapse during GFC, where thousands of Australians lost life savings & homes due to risky nature of their highly leveraged investments (cant possible have understood it). A large # of people were placed into high-risk plans & products that didnt fit their risk profiles. Storm Financial had many links to institutional product suppliers. Ethics, regulation, sustainability & politics Debate surrounds the use & amount of regulation to ensure the overall public utility is maximized. For instance, Hobbes suggests a highly regulated state is needed while Smith & Friedman suggest a free economy w/ little regulation. Regulation has been used to alter behaviour with regards to carbon emissions, whistleblowing, insider trading, bribery & corporate governance.

Accounting Professional & Ethical Standards Board