Dr Camilla Maclean

Principal Teaching Fellow

November 2018

Governance, Politics, and

Corporate Accountability
IB 2480: Non-Financial Reporting
Lecture Objectives

Volkswagen’s NFR 2017

Recap: Accountability

Non-Financial Reporting (NFR)

NFR Purpose and Audience

Limitations and Challenges

Volkswagen NFR 2017

https://www.volkswagenag.com/presence/nachhaltigkeit/documents/sustainability-
report/2017/Nonfinancial_Report_2017_e.pdf
Shift 2017

“Whatever happens, I hope

that Volkswagen shows
compassion. And that, instead
of secrecy, we have clarity.”
Astrid Bremer assembly worker

Questions:
Will it be sufficient for Volkswagen
to act independently of the sector?
Do car manufacturers have a
responsibility to influence
consumer preferences?
Lecture Objectives

Volkswagen’s NFR 2017

Recap: Accountability

Non-Financial Reporting (NFR)

NFR Purpose and Audience

Limitations and Challenges

Accountability: What Does it Mean to be
‘Accountable’?

“Corporate accountability refers to whether a corporation is answerable in some

What way for the consequences of its actions”
It Is...
Crane and Matten, Business Ethics, 2nd edition

• Critics of corporate responsibility argue that firms are exclusively accountable

to their shareholders (i.e. financial accountability)

Key • Accountability calls for transparency of corporate actions related to its

Facts financial bottom line, but also social and environmental issues

• The expanded view on accountability is called for because of the increasing

influence of corporations on social and environmental issues

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Accountability: Constituting Parts

Transparency: provision of accessible and

timely information, and the opening up of
organizational processes and structures

Evaluation: process by which an

organization monitors and reviews its
progress against goals

Complaint & Response: processes by

which an organization enables stakeholders
to address complaints

Participation: process through which an

organization enables key stakeholders to
play an active role in decision-making

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Mechanisms of Accountability: Recap

Information (transparency)

Exchange (one side calling the other for an account)

Capacity to impose sanctions on agents

Implies rights of authority

Mulgan, R., 2000. ‘Accountability’: An Ever‐Expanding Concept?. Public administration, 78(3),

pp.555-573.

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 Mechanisms of Accountability: Recap

ACCOUNTABILITY Agency theory (shareholder Stakeholder approach

approach)

To whom (internally)? Management accountable Board meaningfully

to board for performance accountable to staff

To whom (externally)? Board accountable to Board accountable to

shareholders multiple stakeholders

How? Annual General Meeting CSR, stakeholder

(AGM), Annual Report and engagement and
Accounts (by auditors); transparency beyond AGM,
Shareholder voting/sales non-financial reporting
For what? Financial performance, + Value-based , ‘triple
long-term strategy, legal bottom line’ considerations
compliance (e.g. ethical investment);
Corporate responsibility

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Mechanisms of Accountability: Recap

Accounting Auditing Reporting

to bridge credibility gap

Financial / Social / Environmental Issues

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Mechanisms of Accountability: Recap

Accounting Auditing Reporting

to bridge credibility gap

Financial / Social / Environmental Issues

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Lecture Objectives

Volkswagen’s NFR 2017

Recap: Accountability

Non-Financial Reporting (NFR)

NFR Purpose and Audience

Limitations and Challenges

Non-Financial Reporting

Many names, similar concepts

• Sustainability
• Corporate Social Responsibility
• Corporate Citizenship

Common theme: Information about contributions to sustainable

development : economic, environmental, and social

>15,000 Sustainability Reports

BUT the doubts of financial analysts, investors and stakeholders in

general focus on reliability i.e. a credibility gap.
https://www.globalreporting.org/Pa
ges/default.aspx

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The Rise of Non-Financial Reporting

Focus: Top 100 Companies in the World

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Standards for Sustainability Reports
ISAE 3000 (IAASB, 2004) is addressed to qualified accounts
auditors who undertake external verifications of non-
financial reports. Issued by the International Auditing and
Assurance Standard Board (IAASB), the issuing agency of
the International Federation of Accountants (IFAC), this
standard entered into force on 1 January 2005.
AA1000 AS (ISEA, 2003) issued in 2003 by a UK not for
profit, The Institute of Social and Ethical Accountability
(ISEA), and is addressed to anyone who provides external
verification services.
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Assurance Standards & Bodies
AA1000 AS: Accountability 1000 Assurance Standard;
GRI: Global Reporting Initiative;
G3: Sustainability Reporting Guidelines Version 3.0;
IAASB: International Auditing and Assurance Standard Board;
IFAC: International Federation of Accountants;
ISA: International Standard on Auditing;
ISAE 3000:International Standard on Assurance Engagement
3000;
ISEA: The Institute of Social and Ethical Accountability.

WHICH TO USE?

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The Global Reporting Initiative (GRI)

Reporting Principles Standard Disclosures

(How to report?) (What to report?)

Defining Report Content: e.g.: Economic: e.g. economic

responsiveness, relevance, performance, financial assistance by
completeness governments

Defining Report Quality: e.g.: Social: e.g.: employees covered by

positive and negative issues, allow unions, cases of discrimination, anti-
for comparisons over time corruption

Reporting Boundaries: include Environmental: direct energy

entities which are controlled or consumption, percentage of
significantly influenced recycled materials

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Differentiating Adopters – GRI Application Levels

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Lecture Objectives

Volkswagen’s NFR 2017

Recap: Accountability

Non-Financial Reporting (NFR)

NFR Purpose and Audience

Limitations and Challenges

Question

Does NFR “offer[s] stakeholders what financial

reporting alone fails to offer: a window on the
character and competency of the reporting
company”?
(White 2005:5)
Advanced Reporting by Shell

• Clear performance
metrics

• Longitudinal analysis
possible

• GRI awarded A+ for

this report

• Data still quite

aggregated

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‘‘A+ Ranking
The rank ‘‘A+ GRI checked’’
involves:
Compliance with sustainability
reporting guidelines 2006 (G3);
An assurance service by external
independent auditor;
A formal check of the report
contents by GRI.

https://www.globalreporting.org/Pages/default.aspx

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NFR Purpose: Regulation?

Hard Law Soft Law

• South Africa: listed

• Global Reporting Initiative
companies have to
sets out principles and
produce integrated report
indicators that
(since June 2010)
organizations can use to
measure and report on
• Denmark: listed and state-
their social and
owned firms have to
environmental
report (since January
performance
2009)
• The third version, the G3
• UK: British Companies Act
guidelines, were launched
requires listed firms to
in 2006 as a free standard
report (since 2008)

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NFR Purpose: Social Justice?

Accounting academics have been at the forefront of research and

theory on social and environmental accounting.

Practitioners, professional associations regulators and others taking

an increasing interest in the topic.

Increasing standardisation in NFR reporting.

A role for accountants in improving social justice and contributing

to social and environmental benefits on a global level?

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 NFR Purpose: Persuasion?

Many studies on CSR treat lack of consistency between organizational CSR talk and action as
a serious problem that needs to be eliminated.

But… are differences between words and action are not necessarily a bad thing?

Can such discrepancies have the potential to stimulate CSR improvements?

Can we regard communication as performative to challenge the conventional assumption

that CSR communication is essentially superficial, as opposed to CSR action?

Is aspirational CSR talk an important resource for social change, even when organizations do
not fully live up to their aspirations?

Christensen, L.T., Morsing, M. and Thyssen, O., 2013. CSR as aspirational talk. Organization, 20(3), pp.372-393.
NFR and External Assurance

• External assurance is
growing

• Much dependent on
country context

• Much dependent on
firm size

• Assurance key driver

of trust

• Assurance statement
are often low quality

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 NFR and External Assurance

Third party assurance introduced in the 1990s to increase the credibility of the results.

To assess the completeness of the report.

To check the accuracy of the figures in all report sections.

To analyse data at the group level and at the site level.

To recommend future improvements.

In 2006, 52% of sustainability reports from mining companies analysed by KPMG were
independently verified.

Perez, F. and Sanchez, L.E., 2009. Assessing the evolution of sustainability reporting in the mining sector.
Environmental management, 43(6), pp.949-961.

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NFR Audience?

Asset Owners /
Risk Management / Investment Decisions
Asset Managers

Consumers / Critical Screening of Companies /

NGOs (Civil Society) Identification of Problems

Identification of Contractors for Public Contracts /

Governments
Enhancing Market Transparency

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 NFR Reporting in the Mining Sector

Third party assurance introduced in the beginning of the

1990s to increase the credibility of the results disclosed.
Some critical elements in assurance are:
• To assess the completeness of the report.
• To check the accuracy of the figures in all report sections.
• To analyse data at the group level and at the site level.
• To recommend future improvements.

In 2006, 52% of sustainability reports from mining companies

analysed by KPMG were independently verified.

Perez, F. and Sanchez, L.E., 2009. Assessing the evolution of sustainability reporting in the
mining sector. Environmental management, 43(6), pp.949-961.
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Lecture Objectives

Volkswagen’s NFR 2017

Recap: Accountability

Non-Financial Reporting (NFR)

NFR Purpose and Audience

Limitations and Challenges

However, Non-Financial Reporting still fail…

• Portraying corporate • Admit mistakes

responsibility too positive and problems
Positive,
Upbeat Tone • Picking good examples and • Show areas of
neglecting core business improvement

• Reports written for top- • Let stakeholders comment

management as a PR tool
Report not for
• Let others be your judge
Dialogue • One way vehicle with
limited distribution

• Reporting on isolated “CSR • Reporting on impact of core

projects” e.g. BAT business processes
Reporting on
Isolated Actions • Strong philanthropic • Use of performance metrics
perspective in report and benchmarking

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 Limitations & Challenges?
Determination of the level (or levels) of assurance.
‘‘nothing has come to our attention that causes us not to believe that the
report is not fairly stated’’
Defining the role and responsibilities of external experts.
Its relation with financial audit.
11 out 34 mention consistency of the information in the sustainability
report with information published in the annual financial report
Compliance with national laws and regulations.
Only 3 out of 34 mentioned them.
Relevance and the materiality of the information given / involvement of
external stakeholders in verification process. ….yet incorporating
1 out 34 mentioned stakeholder consultation. stakeholder concerns of critical
concern in the 1990’s debates
Manetti, G. and Becatti, L., 2009. Assurance services for sustainability reports: on non-financial reporting.
Standards and empirical evidence. Journal of Business Ethics, 87(1), pp.289-298.

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Limitations and Challenges

https://www.theguardian.com/sustainable-
business/2015/oct/09/vw-bp-corporate-scandals-emissions-
tests-oil-spill-horsemeat-rana-plaza

Mena, S., Rintamäki, J., Fleming, P. and Spicer, A., 2016. On the
forgetting of corporate irresponsibility. Academy of
Management Review, 41(4), pp.720-738.
Summary
Key Question
Is / can ‘social reporting’ be an important form of New
Governance regulation to achieve stakeholder accountability?

Answer
It appears that social reporting practices have fallen short of
achieving stakeholder accountability; it may actually work
against it; but further evidence is required.

Hess, D. (2007). Social reporting and new governance regulation: The prospects of achieving corporate
accountability through transparency. Business Ethics Quarterly, 17(03), 453-476.

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Summary
Continuing evidence of
corporate irresponsibility leads
activists, academics, and some
governments to call for
corporate accountability rather
than responsibility.
Non-financial reporting and 3rd
party assurance is one
mechanism to improve
accountability.
However, problems with non-
financial reporting and quality
and independence of 3rd party
assurance remain.
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