UNIT 16

Objectives

SOCIAL AUDIT

After reading this unit you should be able to:

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explain the meaning of social audit; state the scope and objectives of social audit; emphasise the need for social audit ; identify different types of social audit; highlight key developments in social transparency and reporting

Structure 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 Introduction Scope and Objectives CSR and Corporate Accountability Types of Social Audit Key Developments in Transparency and Reporting Summary Key Words Self Assessment Questions Further Readings

16.1

INTRODUCTION

The term social audit may be interpreted in several ways. As far as common understanding goes, it is an essential assessment of how well a company has discharged its social obligations. However experts see it as a systematic and comprehensive evaluation of an organizations social performance which is interpreted as organizational efforts in enriching the general welfare of the whole community and the whole society. The need for social audit arises because of various reasons. In order to reach the objective of enriching economic wealth for the shareholders, the firm do it at the cost of social and environmental disorder. And since many would not take into account the social costs of such negative implications, their prices do not reflect the real cost. The organizations do it more because of competitive reasons. However if the larger interest of society is to be preserved, there has to be some consideration for social good. The company is expected to behave and function as a socially responsible member of the society like any other individual. It cannot shun moral values nor can it ignore actual compulsions. There is a need for some form of accountability on part of the management which is not only limited to shareholder alone. In modern times, the objective of business has to be the proper utilization of resources for the benefit of others. A profit may still be a necessary part of the total picture but it sould not be the only purpose. The company must accept its obligation to be socially responsible and to work for the larger benefit of the community.

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Society expects businesses to share the fruits of progress and growth. Moreover, the social concern by the organization proves to be an asset for them in the long run especially under environmental distress because of the goodwill and the positive image earned all through these years.

Social Audit

16.2

SCOPE AND OBJECTIVES

Social audit tries to make the traditional economic and technical values as two subsystems within the larger social system. Social audit primarily tries to cover the following areas: i) Ethical Issues: They offer a basis for determining what is right and what is wrong in terms of a given situation. Ethics is best understood when we cite examples relating to unethical conduct. Few such examples can be price discrimination, unfair trade practices, cheating customers, pirating employees ideas, leaving the job without observing job contract. Equal opportunity: A second relevant social issue which comes under social audit is the equity of treatment in employment and a fair justice system in the organization. Employment decisions in an organization should be based on merit and ability and not on the basis of arbitrary quotas based on gender, race or religion.

ii)

iii) Quality of Work Life: Besides demands for safe, healthy and human work environment people are seeking greater meaning in their lives. Greater responsibility, growth, freedom and flexibility, fair reward system are few things which employees have preference for. There is also a growing demand for employee assistance programmes keeping in mind the present day stressful situations they are exposed to. iv) Consumerism: Business has a special obligation towards the consumer as the business exists to serve and satisfy the needs of the consumers. It is the principal duty of business to make available to the consumer items of daily needs in the right quantity at a right time, price and of the right quality. However many Indian products are not safe at all and the consumers suffer at hands of corrupt, and dishonest corporate houses. v) Environmental Protection: Growing water, air and environmental pollution by various industries in recent times has led to a public outcry demanding environmental protection at any cost.

16.3

CSR AND CORPORATE ACCOUNTABILITY

One of the most significant developments in the field of corporate social responsibility (CSR) over the past few years has been the growth in public expectations that companies not only make commitments to CSR, but also develop systems to manage, implement and systematically assess and report on progress relative to those commitments. Corporate accountability encompasses the systems a company establishes to develop policies, indicators, targets, and processes to manage the full range of its activities. The scope of operations for which companies are expected to be accountable has increased dramatically in recent years to include not only companies own performance but also that of business partners and other actors throughout the companys value chain. The mechanism a company uses to demonstrate accountability are varied and inevitably need to change and grow as a company evolves, but effective systems for increasing accountability generally allow a company to be inclusive, responsive, and engaged with its stakeholders.
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Corporate Social Responsibility

Corporate accountability today spans emerging CSR issues like business ethics, diversity, marketplace behaviour, governance, human rights, and labour rights as well as more and more traditional areas of financial and environmental performance. Interest in the inter-relationships between issues will also increase the complexity of the corporate accountability debate; in many areas of the world, social issues are now in ascendance, and these qualitative, complex issues are likely to be the ones against which companies find it hardest to measure and verify performance. Effective and accountable management systems help companies shape cultures that support and reward CSR performance at all levels. As part of this effort, many companies are working to increase accountability for CSR performance at the board level. This can lead to changes in who serves on the board, how directors handle social and environmental issues, and how the board manages itself and fulfills its responsibilities to investors and other stakeholders. Companies are also seeking to build accountability for CSR performance at the senior management level, in some cases by creating a dedicated position responsible for broad oversight of a companys CSR activities. Finally, many companies are working to integrate accountability for CSR performance into actions ranging from long-term planning to everyday decisionmaking, including rethinking processes for designing products and services and changing practices used to hire, retain, reward, and promote employees. Demand for increased corporate accountability today comes from all sectors. Evidence of this is found in the increasing number of sustainability-related market indices and by external demands for certification or labeling of certain products. Underpinning this demand for increased corporate accountability is the expectation that companies can and should be more transparent, which essentially means measuring, reporting on, and continuously improving social, environmental, and economic performance. These increased demands are in part a result of recent events that have contributed to erosion in the trust extended to companies. Stakeholders now expect companies to provide access to information on impact of their operations, to engage stakeholders in meaningful dialogue, and to be responsive to particular concerns unearthed in the dialogue process. To increase the credibility of what is disclosed, leadership companies are also investigating carefully the value of various types of assurance that might support their reporting efforts. Proliferation of Social and Environmental Reporting Standards: A variety of organizations and initiatives are attempting to standardize social and environmental reporting procedures to let stakeholders more easily compare companies performance across facilities, sectors, and borders. Most noteworthy is the Global Reporting Initiative (GRI), an international reporting standard for voluntary use by organizations reporting on the economic, environmental, and social aspects of their activities, products, and services. The GRI, convened by the Coalition for Environmentally Responsible Economies (CEREs) in partnership with the United Nations Environment Programme, incorporates the active participation of corporations, NGOs, accountancy organizations, business associations, and other stakeholders from around the world into the ongoing development of the reporting guidelines. Another example of a more local standard is one launched in Brazil by the Ethos Institute for Social Responsibility which has produced a set of indicators to help companies integrate CSR into their management practices and to track and monitor their progress. In 2001, a total of 71 Brazilian companies submitted reports to Ethos indicating their performance against 35 indicators in the areas of values and transparency, workplace, environment, suppliers, consumers/customers, community, and government and society.

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Activity 1 Enumerate examples where you see firms calculating the wealth generated, without taking into account the social and environmental costs.

Social Audit

16.4
1)

TYPES OF SOCIAL AUDIT

The various types of social audit may be listed as below: Social Process Audit

It tries to measure the effectiveness of those activities of the organization which are largely taken up to meet certain social objectives. Corporate executives in this case try to examine what they are doing and how they are doing. The method involves four steps: i) ii) Find circumstances leading to the starting of the social audit programme List out goals of the social programme

iii) State how the organization is going to meet such goals iv) Qualitatively evaluate what is actually done as against what has been planned 2) Financial Statements Format Social Audit

In this type, financial statements show conventional financial information plus information regarding social activities. About associates a management consultancy firm proposed that the balance sheet should show a list of social assets on one side and social commitments, liabilities and equity on other side. The income statement should reveal social benefits , social costs and the net social income provided by the company operations to the staff community, general public and clients. This approach has been criticized as many feel that it may create confusion of complicating issues further and defying easy understanding. 3) Macro-Micro Social Indicator Audit

This type of audit requires evaluation of a companys performance in terms of social measures ( micro indicators) against macro social measures. The macro social factors include the social goals expected by society in terms of health, safety, education, housing, accidents, pollution control measures, etc. The micro social indicators are measures of the performance of the company in those areas measured by macro social indicators. One of the important problems with this approach is the non-availability of reliable macro social indicators. Does an increase in family planning clinics indicate better medical facilities? Further it is not easy to specify whether the individual actions initiated by a company have actually improved the quality of life of a community, such individual actions may ultimately be labeled as irrelevant , insignificant and sometimes , even unnecessary. In any case this approach helps all companies to evaluate their contributions in improving social life on a rational basis.

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Corporate Social Responsibility

4)

Social Performance Audit

In developed countries, several interests groups including church groups, universities, mutual funds, consumer activists regularly measure, evaluate and rank socially responsive companies on the basis of their social performance. Regular opinion polls are carried out to find companies that initiate social efforts in a proactive manner and earn the goodwill of the general public. 5) Partial Social Audit

In this case, the company undertakes to measure a specific aspect of its social performance ( e.g. environment, energy, human resources) because it considers that aspect to be very important or because its social efforts for the time being are confined to the area:
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Environmental Audit: In developed countries people protest violently if the companies try to pollute the environment and the companies not only comply with regulations but also proactively explore opportunities to recycle wastes into useful products. An internal group constituted by the unit concerned prepares a report about the way the environmental issues of importance are being taken care of. This report is generally re-examined by an outside auditor to see whether air/ water pollution measures, release of toxic wastes, safety regulations have been complied with or not. Energy Audit: to conserve energy sources, energy audits are undertaken to investigate how energy is obtained, consumed and preserved. Human Resource Accounting (HRA): The basic philosophy of HRA is that human resources are assets and that the investment in acquiring, training, and developing these resources should be accounted for as an asset. Conventional accounting methods write off investments in human capabilities and values as operating expenses and thereby understate the profit. The current value of a companys human assets is not considered while computing expenses/revenues and, as a result, the balance sheet does not portray the true and fair picture of the companys state of affairs. Comprehensive Audit

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6)

It tries to measure, verify and evaluate the total performance of the organization including its social responsibility activities. It focuses mainly on management systems rather than on the actions or events which are not so important. It aims at evaluating the quality of processes and the information on which organizational decisions are taken. Difficulties in Social Audit Social audit presents numerous problems; its scope cannot be determined precisely. If we go for listing all activities undertaken by an organization, say in an accounting year it may be difficult to find out which activities are to be treated as social and which not. After all most of the activities of a company may have some sort of social relevance somewhere or the other. To avoid this if we take only those activities that have tangible social advantage, the scope of social audit is severely constrained. The requirements of various groups such as employees, customers, shareholders, general public, government, etc. may not be accurately and readily convertible into social rhetoric always. Another serious problem as explained previously is with regard to the determination of yardsticks for measuring the cost and accomplishment of activities shown in the social audit.
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Activity 2 Illustrate few examples of Indian companies who in your opinion care for environmental protection or are driven by ethical norms or are conscious of extending equal opportunity to its employees while pursuing their commercial activity of generating wealth.

Social Audit

16.5

KEY DEVELOPMENTS IN TRANSPARENCY AND REPORTING

The Growth of Corporate Social Responsibility: The increased visibility of corporate social responsibility has encouraged companies to better account for their actions in a wide range of areas, including corporate governance, labour practices and employee relations, environmental policies and practices, and community involvement. Increasingly, a broad range of stakeholder groups is seeking specific, quantifiable information from companies on these topics. These stakeholders expect companies to take a deeper look at the nature of their operations, and to publicly disclose both their progress and problems in addressing these issues. Increased Demand for Transparency: Government regulators, financial analysts, employees, nonprofit advocacy organizations, labour unions, community organizations, and the media are among the groups pressing companies to divulge greater amounts of information on CSR performance targets, decision-making, and results. These demands represent concern by stakeholders that companies will not hold themselves accountable for CSR commitments without public disclosure. For example, the Publish What You Pay, campaign, a coalition of non-profit groups, is calling for all publicly traded resource companies to be required by regulators to disclose aggregate information about taxes, royalties, fees and other transactions with governments and/or public sector entities for the products of every country in which they operate. Growth in Sustainability Reporting: According to current estimates, almost 500 companies now issue comprehensive reports on their social and environmental activities and impacts, a dramatic increase over the seven reports that were issued in 1990, while thousands of companies produce reports on aspects of CSR performance like the environment or philanthropy. At the same time that the overall number of reports issued is increasing, reports are becoming increasingly rigorous in their methodology, striving for consistency and relevance comparable to that enjoyed by annual financial reports. For example, to demonstrate the level of importance the company gives its sustainability report, Shell publishes its 2002 sustainability report under the same cover as its 2002 financial report. While many companies find that comprehensive reporting can satisfy many stakeholders informational needs, there is considerable debate over the relationship between reporting and actual changes in corporate behaviour. So, while sharing information is an important first step in creating an accountable culture, stakeholders are now looking at how the process of reporting creates change in company policies and practices.
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Corporate Social Responsibility

Greater Government Regulation: Government regulators at all levels are calling on companies to increase the quantity and quality of information they disclose to the public about their practices and performance. On the whole, European governments have been more active in advocating regulatory approaches than the U.S. government. For instance, newly amended French legislation, called the Nouvelles Regulations Economiques (NRE), require as of the beginning of 2003 that all companies listed on the French stock exchanges to report to shareholders and stakeholders on a range of social and environmental issues. Countries such as Denmark, Sweden, Norway, and the Netherlands also have enacted legislation requiring specified companies to report on aspects of their social and environmental performance. Increased Stakeholder Activism: Many stakeholder groups are engaging companies more directly, utilizing a wide range of tools, techniques, and technologies to bring their interests to companies attention. These activists are also working to educate lawmakers, the media, and the public about companies that are or are not deemed to be accountable. Among the tactics being used by stakeholder groups are public information campaigns, public protests, boycotts, and class-action lawsuits seeking action and redress for perceived company misdeeds. At the same time, stakeholders are developing new strategies that involve finding commonalities with other groups to create alliances that cross both geographic boundaries as well as issuearea divides. In doing so, they are able to directly engage companies with a much stronger voice and with a much broader agenda. Increased Shareholder Engagement: Company shareholders, both individuals and institutions, have become increasingly vocal and aggressive in pressing companies to be more accountable. Activist shareholders call for increased accountability have included resolutions promoting greater disclosure of environmental and social impacts, increased transparency in board actions and decisions, and requisitions for company commitments to abide by internationally accepted social and environmental principles. Whereas resolutions over the past few years often called for company endorsement of specific standards such as SA8000, the CEREs Principles or the UN Global Compact resolutions today most often use more general language on adhering to the highest and best social and environmental standards appropriate to the company so as to have broader/greater shareholder appeal. In addition, shareholder activists are pushing for public disclosure of companies voting guidelines as well as proxy votes by mutual funds. For instance, the U.S. Securities and Exchange Commission recently approved regulation that will require mutual funds to disclose how they vote on shareholder resolutions, a move that was strongly supported by shareholder activists. Many companies continue to engage shareholders at annual meetings or through the resolution process, a mechanism that shareholders use to access management on issues of concern. However, some companies now meet directly with shareholder activists and institutional investors in settings other than the annual meeting. Some companies have developed staff positions or departments responsible for addressing shareholder concerns on social and environmental issues. The Growth of Information Technology: The Internet has provided companies and those seeking greater corporate accountability an unprecedented ability to share and exchange information both accurate and inaccurate on a large scale. Given the largely unregulated nature of this form of communication, many companies are finding that they need to monitor and engage more actively in the information being disseminated. A number of companies now use the Internet to report proactively on their social and environmental activities. Increasingly, companies are using the Internet not only as a place to electronically post information originally developed for print, but also taking advantage of the medium to provide more periodic, interactive, and in-depth information about their performance. The Internet also allows companies to receive feedback from stakeholders on the information they are sharing. Some

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companies are finding that they can dilute or eliminate the impacts of negative, Internet-driven campaigns by engaging activists and other stakeholders directly, helping to ensure the information they receive is as accurate as possible. At the same time, a variety of non-governmental organizations, government entities, and for-profit enterprises have established Internet sites that provide detailed information about companies environmental performance, philanthropy, and other social impacts, in some cases on a facility-by-facility basis. Another growing use of the Internet is to allow shareholders to vote their proxies online, potentially enhancing the ability of activist institutions and individuals to mobilize fellow shareholders in order to influence company policy. Increased Media Attention: Corporate social responsibility, and accountability more broadly, have become topics of increased media attention and scrutiny, both in the business press and the mainstream media. A number of publications now feature regular articles on such accountability-related issues as board diversity and independence, CEO compensation, board performance evaluation practices, and company responses to shareholder concerns. Media attention has forced companies to examine, and in some cases revise, their policies and practices on a range of CSR issues. For example, in a case that is poised to set a significant precedent in the area of corporate transparency, the U.S. Supreme Court has agreed to hear a case against Nike, in which the company is accused of falsifying commercial speech in defense of the working conditions at its supplier factories overseas. Allegations against the companys overseas labour practices have received significant media attention over the past decade, leading to Nikes assertion that the company should be constitutionally protected to defend itself and highlight the human rights strides it has made. Roughly 30 news organizations, including ABC, CBS, NBC and top newspaper chains as well as organized labour and groups such as the American Civil Liberties Union, argued in court filings that reporters will not be able to get company executives to talk freely about the safety of products, racial discrimination or environmental concerns about their industry, because of the fear of future lawsuits if the case against Nike should be upheld. Greater Government Regulation: Government regulators at all levels are calling on companies to increase the quantity and quality of information they disclose to the public about their practices and performance. Particularly in the area of the environment, companies are facing new and growing amounts of regulation and legislation aimed at increasing their accountability to society. Activity 3 Discuss whether Indian companies should come forward in helping Tsunami victims. Do you consider they have any social responsibility towards this natural disaster?

Social Audit

16.6

SUMMARY

Social Audit in business intends to examine an organizations efforts in enriching the general welfare of the whole community and the whole society. In modern times, the objective of business is to provide benefits to others and the society expects businesses to share the fruits of progress and growth. Corporate accountability

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Corporate Social Responsibility

encompasses the systems which a company establishes in order to develop policies, indicators, targets and processes to manage the full range of its activities towards society. Demand for increased corporate accountability today comes from all sectors and various types of social audit system is being developed in order to take such accounts. Few key developments enabled by technology and information revolution has broadened the scope for such an audit to be made within organizations and shared in public.

16.7 KEY WORDS

Corporate Accountability Spans emerging CSR issues like business ethics, diversity, marketplace behaviour, governance, human rights, and labour rights as well as more traditional areas of financial and environmental performance. Comprehensive Audit It tries to measure, verify and evaluate the total performance of the organization including its social responsibility activities. Partial Social Audit In this case, the company undertakes to measure a specific aspect of its social performance ( e.g. environment, energy, human resources) because it considers that aspect to be very important. Social Audit It is an essential assessment of how well a company has discharged its social obligations. Social Process Audit It tries to measure the effectiveness of those activities of the organization which are largely taken up to meet certain social objectives.

16.8
1) 2) 3) 4) 5)

SELF ASSESSMENT QUESTIONS

What is social audit and what is its relevance for business organization? What is Corporate Accountability? What do you understand by business ethics and how it is important for the business? Explain the key developments in business environment which calls for better transparency and a comprehensive reporting from business organizations. How do you differentiate between Partial social audit and Comprehensive audit?

16.9

FURTHER READINGS

Johnson, Gerry & Scholes, Kevan. (2004) Exploring Corporate Strategy, Sixth edition, Prentice-Hall of India, New Delhi, Jr. Thompson A Arthur, III Strickland, A.J. (2003) Strategic Management, Concepts and Cases, Thirteenth edition, 2003, Tata McGraw Hill Publishing, New Delhi Rao, V S P and Hari, Krishna V. (2003) Strategic Management, Texts and Cases, First Edition, Excel Books New Delhi. Velasquez, G.Manuel. (2002). Business Ethics, Concepts and Cases, Fifth edition, Prentice Hall of India, New Delhi.
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