Chapter 2

Learning objectives

After studying this chapter you should be able to:

1. Describe business sustainability, outline its key drivers and principles
and compare key theories in the area
2. Appraise corporate social responsibility (CSR) reporting frameworks
and the accountant’s role in CSR
3. Explain the concept of corporate governance
4. Outline corporate governance guidelines and practices
5. Outline the role of ethics in business and compare ethical
philosophies relevant to business decision making
6. Explain the use of codes of ethical conduct and apply ethical
decision-making methods to business situations.

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 Business sustainability

“Sustainable development is development that

meets the needs of the present without
compromising the ability of future generations to
meet their own needs.”
Brundtland (1987)
• Key Concepts in the above quote
– Needs of the world’s poor
– Limitations of the environment

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 Business sustainability
Key drivers

• Competition for Resources

– The worlds population is continuously growing
• Climate Change
– We have a fossil-fuel based economy
• Economic Globalisation
– The integration of national economies into the global
economy
• Connectivity and Communication
– Increases in connectivity has led to less time to both build
reputations and/or destroy reputations
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 Business sustainability
Principles
1. Ethics
2. Governance
3. Transparency
4. Business relationships
5. Financial return
6. Community involvement/economic development
7. Value of products and services
8. Employment practices
9. Protection of the environment

Source: Epstein and Roy (2003) ‘Improving Sustainability Performance’ as cited in Epstein (2008), p.
37.

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 Theories of business sustainability
Corporate social responsibility

• Corporate social responsibility (CSR) refers to the

responsibility an entity has to all stakeholders,
including society in general and the physical
environment in which it operates.

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 Theories of business sustainability
Corporate social responsibility continued

• Reasons?
– entities act in a socially responsible manner because
there is ultimately some benefit to their profits.
– entities want to limit interference from governments
or other groups
– managers are motivated simply by the desire to do the
right thing, and that there is no economic motive
behind acting in a socially responsible manner

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 Theories of business sustainability
Shareholder value

• An corporation has many stakeholders

– Individuals or groups who have an interest in the
corporations affairs.
• Shareholder Value
– Shareholder (owner) returns are the primary focus of
an organisation
– Agency Theory
• Managers act on behalf of shareholders

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 Theories of business sustainability
Stakeholder theory

• Stakeholder theory holds that the purpose of the

entity is to work for the good of all stakeholder
groups, not just to maximise shareholder wealth.
• Estes (1990, p. C1) argues that:
– “These forgotten investors are owed an accounting
because they, too, invest by committing valuable
resources, including not only money but their work,
their careers, sometimes their lives to the
corporation.”

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 Theories of business sustainability
Stewardship theory

• Stewardship theory
– Directors act in the interest of a group(s) of stakeholders
and not shareholder value
– Contributes to the rise of independent non-executive
directors
• Peter Weinberg (former Goldman Sachs executive):
– “Serving on a board is like taking on a position in public
service . . . It is not (and should not be) a wealth creation
opportunity but a chance to play a role in the proper
workings of our marketplace. (Nordberg 2008, p. 43).”
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 Theories of business sustainability
Legitimacy theory

• Theory that entities must conduct operations in

accordance with societal expectations

• Society allows the entity to operate (pursue its

objectives and rewards) so long as the entity
agrees to act in a socially acceptable manner

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 Reporting and disclosure

• In addition to required financial reporting,

organisations are voluntarily reporting on their
sustainability practices.
• One approach to sustainability reporting is the
GRI reporting framework which is comprised of
– Reporting Principles and Standard Disclosures
– Implementation Manual

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 Reporting and disclosure

• The GRI reporting principles relate to:

– content (stakeholder inclusiveness, sustainability
context, materiality and completeness) and
– quality (balance, comparability, accuracy, timeliness,
clarity and reliability).

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 Triple bottom line reporting

• Triple Bottom Line refers to:

1. Economic performance
2. Environmental performance
3. Social performance
– Pillars of Sustainability

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Triple bottom line reporting
continued

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 The role of accountants in
sustainability

• Reporting
– Report the entities sustainability performance,
includes environmental and social information
• Cost Analysis
– Include economic, environmental and social
information in decision making processes
• Audit and Assurance
– Internal controls to ensure the integrity of the
information
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 Corporate governance

• Corporate governance refers to the direction,

control and management of an entity. This
includes the rules, procedures and structure upon
which the organisation seeks to meet its
objectives.
• People who make decisions have power, but they
also have responsibilities and are accountable for
their actions

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 Legal duties

• Specifically, directors owe the following legal

duties to their company:
– to act in good faith, in the best interests of the
company
– to act with care and diligence
– to avoid improper use of information or position
– to avoid conflicts between their role as a director and
any of their personal interests.

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 Structure of
corporate governance

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Corporate governance principles,
guidelines and practices

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 Ethics

• The key to governance for sustainability may be

determined by the extent of ethical
consciousness.
• Morality vs Prudence
– Prudence
• Acting in one’s self-interest.
– Morality
• Acting as one ought to by taking into account the interests
of other people

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 Ethical theories

• Ethical philosophies have been central to the

study of humankind for centuries.
• Teleological theories
– Consequences of decisions and actions
• Deontological theories
– Examine the decision and/or action in terms of
morality
– i.e., is this the right thing to do?

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 Teleological theories

• Utilitarianism
– All individuals maximising their utility will lead to
society’s utility being maximised also
– Utility = happiness
– Who gets the most utility? Individual or Society?
– Provides justification for profit maximisation
• "It is the greatest good to the greatest number of people
which is the measure of right and wrong.“ Jeremy Bentham

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 Teleological theories continued

• Ethical egoism
– individual decision maker decides what is best for
himself or herself.
– Agency Theory (Nordberg 2008)

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 Teleological conclusion

• “There is one and only one social responsibility of

business — to use its resources and engage in
activities designed to increase its profit so long as
it stays within the rules of the game, which is to
say, engages in open and free competition
without deception or fraud” (Friedman 1970, p.
126).

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 Deontological theories

• Accountants or managers taking actions based on

their sense of duty would subscribe to this
approach. That duty may be based on a set of
rules or professional guidelines.
• Kantianism
– Categorical imperative (Kant 1964)
• An action is morally right if it is motivated by a good will
that stems from a sense of duty

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 Ethics, regulation,
sustainability and politics

• There are no hard and fast rules when it comes to

ethics in business.
• Four key responsibilities of business
1. Economic
2. Legal
3. Ethical
4. Discretionary

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 Ethics, regulation,
sustainability and politics

• Why consider the role of ethics?

– The free market vs the community
– Nordberg’s Framework

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 Professional codes of ethics

• APES110 Code of ethics for professional

accountants, issued by the Accounting
Professional & Ethical Standards Board (APESB)
and established by CPA Australia and the Institute
of Chartered Accountants Australia
• Members of the two professional bodies above
MUST comply with the code of ethics

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 Professional codes of ethics continued

• Five fundamental principles espoused in the code to

guide a member's decision making:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

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Ethical decision making methods

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 Summary

• “Sustainable development is development that

meets the needs of the present without
compromising the ability of future generations to
meet their own needs.”
• Four key responsibilities of business
1. Economic
2. Legal
3. Ethical
4. Discretionary
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 Summary continued

• Corporate social responsibility (CSR) refers to the responsibility

an entity has to all stakeholders, including society in general and
the physical environment in which it operates.
• An corporation has many stakeholders
• Stakeholder theory holds that the purpose of the entity is to
work for the good of all stakeholder groups, not just to maximise
shareholder wealth.
• Corporate governance refers to the direction, control and
management of an entity. This includes the rules, procedures and
structure upon which the organisation seeks to meet its
objectives.

Prepared by Nicole Beatson

 Summary continued

• The key to governance for sustainability may be

determined by the extent of ethical consciousness.
• Teleological theories
– Consequences of decisions and actions
• Deontological theories
– Examine the decision and/or action in terms of morality
– i.e., is this the right thing to do?

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 References

Brundtland, G 1987, Our Common Future: Report of the World Commission on

Environment and Development, Oxford University Press, Oxford.
Epstein, MJ 2008, Making Sustainability Work: Best practices in managing and
measuring corporate social, environmental and economic impacts, Berrett-
Koehler Publishers, Inc., San Francisco.
Friedman, M, 1970, ‘The social responsibility of business is to increase its profits’,
New York Times Magazine, September 13, pp. 32–33, 122, 124, 126.
Kant, I, 1964, Groundwork of the metaphysic of morals, transl. Paton, KJ, Harper
and Row, London as cited in Chryssides, GD & Kaler, JH 1995, An Introduction to
business ethics, Chapman & Hall, London, pp 80-107
Nordberg, D 2008, The ethics of corporate governance, Journal of General
Management, vol 33, no. 4, pp 35-52.

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