UNIT 16 SOCIAL AUDIT

Objectives
After reading this unit you should be able to:
! 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 Introduction
16.2 Scope and Objectives
16.3 CSR and Corporate Accountability
16.4 Types of Social Audit
16.5 Key Developments in Transparency and Reporting
16.6 Summary
16.7 Key Words
16.8 Self Assessment Questions
16.9 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 organization’s ‘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
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to work for the larger benefit of the community.
Society expects businesses to share the fruits of progress and growth. Moreover, the Social Audit
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.

16.2 SCOPE AND OBJECTIVES

Social audit tries to make the traditional economic and technical values as two sub-
systems 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.
ii) 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.
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 company’s 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 Corporate accountability today spans emerging CSR issues like business ethics,
Responsibility
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 company’s
CSR activities. Finally, many companies are working to integrate accountability for
CSR performance into actions ranging from long-term planning to everyday decision-
making, 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 Social Audit

Enumerate examples where you see firms calculating the wealth generated, without
taking into account the social and environmental costs.
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16.4 TYPES OF SOCIAL AUDIT

The various types of social audit may be listed as below:
1) 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) Find circumstances leading to the starting of the social audit programme
ii) 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 company’s 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. 33
Corporate Social 4) Social Performance Audit
Responsibility
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:
! 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
company’s 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
company’s state of affairs.
6) Comprehensive Audit
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 Social Audit

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.
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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 Greater Government Regulation: Government regulators at all levels are calling on
Responsibility
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 issue-
area 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
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to receive feedback from stakeholders on the information they are sharing. Some
companies are finding that they can dilute or eliminate the impacts of negative, Social Audit
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
company’s overseas labour practices have received significant media attention over
the past decade, leading to Nike’s 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?
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16.6 SUMMARY
Social Audit in business intends to examine an organization’s 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 37
Corporate Social encompasses the systems which a company establishes in order to develop policies,
Responsibility
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 SELF ASSESSMENT QUESTIONS

1) What is social audit and what is its relevance for business organization?
2) What is Corporate Accountability?
3) What do you understand by business ethics and how it is important for the
business?
4) Explain the key developments in business environment which calls for better
transparency and a comprehensive reporting from business organizations.
5) 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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