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AAAJ2006 Gray New Reporting
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Organisational
Social, environmental and value creation
sustainability reporting and
organisational value creation?
793
Whose value? Whose creation?
Rob Gray
Centre for Social and Environmental Accounting Research,
School of Management, University of St Andrews, St Andrews, UK
Abstract
Purpose – The objective of this essay is to examine the extent to which social, environmental and
sustainability accounting and reporting (SEA) can or should contribute to shareholder value and,
correspondingly, to consider the challenge that SEA can offer to the conventional views of “value” that
underpin traditional financial accounting. The essay is then used as a vehicle to introduce some
relatively new data about sustainable development that has implications for our consideration of
“value”.
Design/methodology/approach – Although drawing from a wide range of secondary contextual
data, the paper is primarily argumentative and seeks to challenge a number of implicit assumptions
within both conventional and more “critical” accounting.
Findings – Substantive social and environmental reporting and, especially, high quality reporting on
(un)sustainability will demonstrate that modern international financial capitalism and the principle
organs which support it are essentially designed to maximise environmental destruction and the
erosion of any realistic notion of social justice. This paper seeks to demonstrate this contention and the
powerful and fundamental implications that this has for conventional financial reporting and for the
superficial and cosmetic adjustments to that reporting through “new models of organisational
reporting”.
Research limitations/implications – The paper questions whether any research which is not
either cognisant of or directed towards sustainability and/or sustainable development makes any real
sense in the context of current data about the planet. More especially, the paper asks whether any
notion of “value” employed in the accounting (and wider) literature can be anything other than
self-delusional and empty if it ignores a crucial wider context.
Originality/value – Apart from taking debates about “value” and, especially “shareholder value”
into another dimension, the paper is one of the first (at least in accounting as far as I am aware) to
formally introduce and confront data about planetary sustainability.
Keywords Sustainable development, Shareholder value analysis, Social accounting
Paper type Research paper
The assistance of Jorgen Randers was essential to the inclusion of the figures taken from Limits
to Growth: The 30 Year Update. It is a privilege to be able to acknowledge his help. The author
thanks James Guthrie for his comments on an earlier draft of the paper and without whom this Accounting, Auditing &
Accountability Journal
paper would not have been necessary. The author is pleased to also acknowledge very helpful Vol. 19 No. 6, 2006
comments from participants at European Accounting Association Symposium on New Models of pp. 793-819
q Emerald Group Publishing Limited
Business Reporting, Goteburg, May 2005; Crawford Spence, David Owen and David Collison, 0951-3574
and an especially thorough and supportive anonymous reviewer. DOI 10.1108/09513570610709872
AAAJ 1. Introduction
19,6 Few ideas could be more destructive to the notion of a sustainable planet than a system
of economic organisation designed to maximise those things which financial reporting
measures. Conversely, few notions could be more fundamentally antagonistic to
financial reporting and all its cosmetic adjustments than a planet wishing to seek
sustainability[1]. It is these tensions which inform and motivate this paper.
794 The objective of this essay is to examine the extent to which social, environmental
and sustainability accounting and reporting (SEA) can or should contribute to
shareholder value and, correspondingly, to consider the challenge that SEA can offer to
the conventional views of “value” that underpin traditional financial accounting. The
essay is then used as a vehicle to introduce some relatively new data about sustainable
development that has implications for our consideration of “value”.
Addressing the issues of social, environmental and sustainability reporting,
predicated as an extension to the financial reporting model and as a potential source of
“value creation” has been a considerable challenge[2]. As the implicit assumptions of
financial reporting and those of social, environmental and sustainability reporting (as
understood here) derive from fundamentally different views of the world, those views
must be exposed before we even begin to consider social, environmental and
sustainability reporting in any sensible way. This, in turn, involves raising and
communicating a range of issues which are not, arguably, part of the usual argot of
mainstream accounting literature. So this paper takes two issues as its departure point.
First, it considers whether the question of how SEA might contribute to “shareholder
value creation” is “the wrong question” or not and, in doing so, raises a broader
question as to whether or not such “value creation” is in any way feasible and/or
desirable. The second departure point is the belief that social, environmental and
sustainability reporting has (or will normally have) a quite different, even antagonistic,
relationship with the normal assumptions of corporations as “value creating entities”.
These concerns have made this paper more of a challenge to write – and, quite
probably, more of a challenge to read.
The paper is structured as follows. The next subsection explains why it is
necessary, in Section 2, to address some of the fundamental questions which underlie
financial reporting itself. This proves to be an essential precursor to the rest of the
paper’s (albeit brief) exploration of accounting’s relationship with the assumptions of
liberal free market capitalism. Consequently, Section 3 drives deeper into questions
about the nature of accounting itself before we get to the heart of the matter in Section
4. Section 4 offers some recent insights from the “Limits to growth” project and uses
this as an empirical basis for arguing that the relationships generally assumed in
accounting between corporations, capitalism and, consequently, accounting, are
mis-specified, addressing that mis-specification is (one of) social accounting’s
motivation. Section 5 offers a tri-partite conception of approaches to social,
environmental and sustainability reporting while Section 6 seeks to identify what
each of these might mean for “value creation”. Section 7 offers some brief conclusions.
But first, we need to get back to basics and reconfigure how we might examine
financial reporting and why some reporting might be thought of as “good” or “bad”. To
do this, it seems necessary to take a longish detour – a peregrination around the
context of our taken-for granted assumptions concerning accounting. The purpose of
this is to lift our heads in order to see more expansively the vast context that lies
outside the detail and problem-solving that characterises so much of accounting debate Organisational
and concern. This is because it is only at this level of resolution – on a global, societal value creation
scale, informed by imagination – that it is possible to really question what it is that
financial reporting achieves, what financial reporting could achieve, and,
correspondingly, why attempts to reform it are, at best, typically ill-advised. And it
is only from this lofty height that it is possible to see why measures that drive towards
accountability and sustainability are profoundly and substantively different in every 795
regard from problem-solving enquiries and teasingly querulous examinations of
relatively trite and unimportant matters like the balanced score card (BSC) and
intellectual capital[3].
Figure 1.
World ecological footprint
1961-2001
Organisational
value creation
801
Figure 2.
GDP and well-being, USA
1950-1997
and “wealth”, in this case gross domestic product (GDP) and “genuine progress” based
on the work of Herman Daly. There are many such attempts to adjust GDP for matters
as diverse as defensive expenditure, measures of social dislocation and environmental
damage. The essence of the measure is to challenge whether a simple economic
calculation can be used as the principal gauge of approximate well-being and, in doing
so, to question our typically implicit assumptions about “progress” and the benefits we
derive from current forms of capitalism.
Figures 3 and 4 are just two of the examples that could be extracted from the detail
of Limits to Growth: The 30 Year Update. The core of “The limits to growth” project
and, especially that of Meadows et al. (2004), is a series of “runs” of detailed, modelled,
interactive data under different assumptions. They use these runs to produce a range
Figure 3.
Scenario 2 – pollution
crisis
AAAJ
19,6
802
Figure 4.
Scenario 9 – sustainability
Figure 5.
State of the art in social,
environmental and
sustainability reporting?
AAAJ One might, indeed, be tempted to conclude that the difficulties that GRI is having in
19,6 encouraging a higher proportion of companies to adopt the GRI guidelines, getting a
higher level of compliance among those who adopt their guidelines; and advancing the
guidelines to embrace fuller social and environmental responsibility, suggest that the
business-case for reporting anything much beyond the trivial is still proving
elusive[29]. However, what is underlying the TBL is a matter of much greater
808 substance. At its heart is the notion that all major organisations must be held
accountable for their social and environmental, as well as financial, activities. There
seems little question that to undertake accountability-based reporting would expose
the extent to which conflict might exist between social accountability and the pursuit
of economic self-interest. The extent to which such conflict exists at the moment is
shrouded, often obfuscated in fact (although it seems likely that such conflict must be
inevitable and significant). But the potential of the TBL lies, arguably, in tantalising
glimpses it offers us of the decreasing importance placed on financial information and
a significant increase in the data relating to an organisation’s interactions with society
and the natural environment. The price of that accountability may well be a reduction
in what we currently judge to be economic well-being, but whether that is so and
whether it actually matters are issues which remain unresolved.
Such musings are important because they bring us closer to the questions which
are, or should be, at the heart of any concern with reporting. These questions relate to
the discharge of accountability (What is the relationship between power and
responsibility?) and the pursuit of sustainability (Is the present system of economic
organisation likely to threaten this or any future generation’s ability to sustain itself?).
The TBL opens up such questions but does not address them fully. For that, we need to
develop a sustainability accounting system.
It is relatively clear that the basic conditions of sustainability are not being met by
corporations (see Table I), and so corporations must be reformed if they are to be
moved even a little more towards sustainability. Moving organisations towards
sustainability (and ergo away from unsustainability) would involve, at a minimum: the
systematic reduction in the organisation’s ecological footprint, i.e. a reduction in the
resources used in total and not just as efficiency gains; a systematic attempt to increase Organisational
the access which disadvantaged sections of society have to environmental resources; value creation
and a systematic attempt to reverse the increasing disparities in wealth and
consumption. Such an approach would clearly be exceptionally unattractive to
corporate strategists and investors because it challenges the major tenets of current
corporate life including growth of profit and perhaps even capitalism itself (Gray and
Bebbington, 2000). 809
Thus, it seems perfectly clear that an organisation in serious pursuit of
sustainability will, in almost every likelihood, be significantly unpopular with most, if
not all, conventional financial participants. Whether reporting on the blatant
un-sustainability of economic performance would also lead to the financial rats
abandoning the economic ship is still an open question.
In a move of some optimism, a number of individuals and organisations have
sought to explore what such (sustainability) reporting might actually look like. In so
doing the question of how society might respond and whether such honesty would
necessarily fatally disadvantage companies is kept alive. Current experiments are
currently underway, or have been undertaken, in the UK by, inter alia, Forum for the
Future, CSEAR and BP (Howes, 2004; Gray and Bebbington, 2001; Bebbington and
Gray, 2001; Baxter et al., 2004), and these demonstrate the economically significant
extent to which organisations are failing to meet the exigencies of sustainability. These
experiments do, however, make it explicitly clear that there is other “value” than that of
money – the value of life, the value of society, the value of quality and, if one is of a
religious bent, the value of creation itself.
7. Conclusions
If we look to, say, “release shareholder value” or in some other way seek out increased
profit potential from substantive accountability and/or “sustainability”, reporting we
are either misguided, entirely missing the point or thinking about something which is
blatantly not substantive accountability or “sustainability reporting”. Insofar as
additional forms of social and environmental management and reporting can, at the
margins, proxy for risk, stakeholder management and morale issues, then there are
win-win situations to be had – some improvement can be found for both society and
the environment and the profit figure. But this is not accountability and it is not about
sustainability.
The evidence is mounting that sustainability is a pressing and demanding issue
which we, as a species, are failing to address with sufficient diligence. And, it should be
said, there are strong a priori cases in support of a non-negotiable requirement for
substantive accountability anyway. In these circumstances, significant social
accounting becomes an essential, but as yet unfulfilled, component in
business-society interaction (Lehman, 2001). By contrast if, indeed, the data on the
Elements of sustainability The needs of the present generation The needs of future generations
Table I.
Social justice X X A simplified view – are
Eco-efficiency X(?) A (??) the conditions of
Eco-effectiveness X X sustainability being met?
AAAJ state of the planet and social dislocation has even potential credence and if the case that
19,6 these factors bear a direct, if perhaps complex, relationship with the very things that
we pursue in our accounting and in our businesses, looking for new ways to “release
shareholder value”, etc. is just about the worse thing we could do.
It may be, of course, that you do not find this scenario utterly compelling and it may
be that the planetary crisis is unavoidable but it certainly deserves our attention and it
810 deserves that attention soon. Addressing accountability through substantive
accountability reporting, i.e. substantive social accounting, and sustainability
through substantive sustainability reporting would be a first significant and
sensible step to begin to expose the extent to which the potential doomsday scenarios
are worthy of our attention or not. The action that such accountability might prompt
could, in turn, actually “release shareholder value” in the sense that it might lead to
activities that ensured shareholders might still be alive. The lifeworld of economics is a
very strange place indeed!
So how might we as scholars respond to such concerns? Offering “research
agendas”, even when disguised as areas of future research, is always fraught.
Nevertheless, it may be worth spelling out a few thoughts. At its simplest we have
exhausted the analysis of annual report disclosures and our research needs to tease out
more substantive data sets, such as the stand alone reports and national social data.
Such data sets, together with research questions more clearly motivated by issues that
matter, that have “cash value” in the pragmatist sense, that address matters of life and
death, will, arguably, demand considerable imagination and free play imaginings. So
perhaps the first requirement is a more imaginative social accounting, (Gray, 2002a).
The second issue we need to work more on is engagement. In particular, there seems to
be an essential need to challenge the utterances of organisations and representative
bodies. Whether this be in direct engagement, or through active reconstruction like that
undertaken in Adams (2004) or through the construction of “silent” and “shadow”
account (see, for example, the CSEAR web site for discussion and illustration of these),
possibly matter less than the act of confrontation and the active design of research
questions motivated by a desire to facilitate change.
Whatever else, we certainly need more good and imaginative social accounting
research and less repetitive and predictable work, but it was probably ever thus.
Notes
1. The focus of what follows is almost exclusively on business entities and, more obviously,
companies. Indeed, the primary focus of these comments is large companies. There are many
reasons for this, not least the power and size of these companies and the ubiquity of
international capitalism. However, the principal reasons for this focus are that financial
reporting has its primary moment in commercial capitalistic organisations (for all the
obvious reasons) and that the issues arising with social, environmental and sustainability
reporting in non-commercial organisations are quite different. (For an introduction to these
issues see, for example, Pearce, 1993, 1996; Dey, 2002; Dey et al., 1995; Gray et al., 1997.)
2. This paper was commissioned for the European Accounting Association Symposium on
New Models of Business Reporting in Goteburg, May 2005 and this implication that SEA
may have “value creation” potential was an element of the commission that needed to be
addressed as an essential precursor to the essay. It is worth recalling that the early social
accounting debates (see especially Solomons, 1974) tended to assume that social accounting
was a possible addendum to conventional financial accounting.
3. An important,but by no means solitary, exception to this slight is the paper by Roslender and Organisational
Fincham (2004) which explores not only the relationship between BSC and intellectual capital
(and was an important stimulus for the present paper) but also the emancipatory potential of value creation
intellectual capital accounting through, what it calls “intellectual capital self-accounts”. In
essence, the distinction here is a tautology based on whether or not the research question
addressed recognises the state of humanity or other species and its/their habitat.
4. Accounting in all its forms receives considerable critique in the literature, of course. See, for
example, Tinker (1984a, b, 1985); Tinker and Gray (2003); Gambling (1985); Mouck (1994);
811
Cooper (1992); Puxty et al. (1997); Mitchell et al. (1991). And see also more critical themes
which occasionally surface from more mainstream analyses such as Page and Spira (1999).
5. There may also be a motivist authority deriving from the economic authority, that is,
financial reporting is “a good thing” because the law requires it. We will deal with that
question shortly. See Gray et al. (1994) for a simple introduction to these arguments, and
Donaldson (1988) and Jacobson (1991) for more detail.
6. The “efficient capital market hypothesis” plays a very important role in the argument here
but that need not detain us as it will complicate the story further and it is a complication
which has even less factual evidence or persuasiveness behind it than does the broader case
discussed here. See, for example, Hines (1984).
7. These arguments are rarely spelt out but they are more clear than is typically the case in
Benston (1982a, b) and Walker (2004).
8. Other arguments in support of liberalism derive their moment, not from their economic
generosity but from the central placing of individual freedom. See, particularly, Hayek (1960,
1982).
9. There has been a range of attempts to either measure some other factor like “welfare” or to
adjust current measures of GDP so that they better represent “welfare” or something like it.
The issue is an enormous one and too large for proper treatment here.
10. Again, an over-simplification. There are many different models of capitalism but the key
difference tends to be whether or not the system is controlled by the people which, in turn,
seems to be a function of the extent to which financial markets hold sway over corporations.
For a simple introduction see Porritt (2005).
11. One should offer some caution here as there are famous and profound analyses of liberal
society that have sought to rescue liberalism from itself. Particularly significant examples
include Rawls (1972) and Sunstein (1997), but see also Chwastiak (1996).
12. If the data (as will be reviewed below) suggest that there is something fundamentally wrong
with the planet, and society and business and accounting are central components of the sort
of society we are building, then business and accounting must be, by definition, implicated in
the ills of the society and the planet. And yet we maintain a concern for “progress”, for more
profit (as opposed to less), and accede to a business-led PR machine that tells us about our
increasingly glorious world. The tale of the Lotus Eaters springs to mind.
13. This argument is developed with great learning and wit in Bakan (2004). It is at its most
manifest in two quotations: “The performance of companies implementing sustainability
principles is superior because sustainability is a catalyst for enlightened and disciplined
management . . . ”; and “The concept of corporate sustainability has long been very attractive
to investors because of its aim to increase long term shareholder value . . . ” Dow Jones
Sustainability Group Indexes Report Quarterly 3/99.
14. That is, as financial markets become more ubiquitous and as the zones of discretion left to
management decline, as more reward is given for greater and greater “efficiencies” squeezed
from ever more “competitive” situations, then the “bad” must drive out the “good”. Some of
this is hinted at in Estes (1996) and Schwartz and Gibb (1999).
AAAJ 15. Parkinson (see, for example, Parkinson, 1997, 2003) a lawyer, argues that organisations can
either have their activities closely regulated or they can have their disclosure about those
19,6 activities regulated. Both are not needed but no democracy can exist without either area
being controlled.
16. The issue of scale is difficult to resolve. A vegetable patch in one’s garden seems a fairly
benign activity, while industrial scale agriculture has much malign influence. Trade between
equals in the market seems an unremarkably benign activity but the World Trade
812 Organisation might well be the consort of Beelzebub. Deadfall branches for firewood versus
clear-felling, stream versus floods, warmth of fires versus firestorms. And yet a simple
technology like gunpowder can so easily be malignant at almost any level of scale. The
concern may be an existentialist one and derived from loss of closeness, intimacy and
integrity in social interaction (see again, for example, Thielemann, 2000; Rawls, 1972).
17. This is partially intentional hyperbole. Most reading this – and certainly most reading this
in the West – will be wealthy by any ordinary standards. Those who own shares, directly or
not, are wealthy, and it is for the wealthy that the corporation “creates” its surplus and to
whom that surplus is passed in due course.
18. The indispensable support and help of Jorgen Randers (one of the principal authors of the
report) is very gratefully acknowledged. The four figures are all drawn directly from a public
lecture given by Jorgen Randers in November 2004 sponsored by the Dow Chemical
Company, Midland, Michigan, USA. The first figure (World Ecological Footprint 1961-2001)
does not appear in the book but the data on which it is based does, and that in turn is based
on Wackernagel and Rees (1996). The second figure (GDP and Well-being, USA 1950-1997)
does not appear in the book but can be derived from any study with Herman Daly’s work
(Daly and Cobb, 1990) or that of the New Economics Foundation (2000), for example.
Figures 3 and 4 (Scenarios 2 and 9) appear on pages 173 and 245, respectively, of Limits to
Growth: The 30 Year Update.
19. Of course, there is a range of issues and concerns that one must have with all of these
assumptions but these lie outside the parameters of this paper (see, for example, Tinker et al.,
1991; Cooper, 1992; Lehman, 2001; Power, 1997; Cooper et al., 2005; Gray and Milne, 2004.)
20. It should be emphasised that the use of the word “trivial” does not refer to the effort that
some individuals and groups have taken to promote and develop this reporting nor does it
refer to the commitment that organisations have often had to provide to take a significant
step in undertaking an innovative approach to reporting. (See, for example, Bebbington et al.,
1994; Gray et al., 1995; Gray and Bebbington, 2001; Gray et al., 2001.) Rather, “trivial” here
relates to the extent to which the reporting fully, honesty and completely addresses the
societal interaction, the environmental stewardship or the social and environmental
sustainability of the reporting entity. In that case, the reporting is trivial – see even ACCA
(2005) for an illustration of this. See also Shah and Marks (2004).
21. The GRI is a multi-stakeholder initiative intended to derive best practice guidelines for
organisations wishing to report on their iterations towards sustainability. See ICAEW (2004)
and www.globalreporting.org. See also Figure 5 in this paper.
22. I have been informed by close colleagues that I should make a confessional on this point. It is
true that until nearly ten years ago I clearly and firmly fell into this camp. I no longer believe
that a comfortable, reformist agenda will be sufficient or even possible. However, neither do I
believe (as a pacifist) that revolution is desirable – but that does not mean that revolution
may not be essential. This would depend on two questions: How viciously will the vested
interests fight to retain their privilege? And how stupid will the demos really turn out to be?
Will it be capable of taking decisions that involve more than single, pre-packaged ideas
about celebrity face-lifts? I reluctantly wonder if we do not already know the answers to
these questions.
23. This claim derives from a number of sources. First, if the data reviewed above is correct then Organisational
current systems of economic organisation are not sustainable. This probably means that
some combination of population and that populations’ economic engagement are
value creation
un-sustainable. Companies, and especially MNCs, are a major component of economic
engagement and therefore, a priori, we may be justified in assuming that they are
unsustainable. Second, simple calculations of sustainable costs suggest most, if not all,
companies pay dividends out of environmental capital (Gray, 1992). Third, there is no 813
evidence, despite protests to the contrary, that explains how a company can be sustainable,
let alone actually achieves this.
24. Recognising that there are different profit figures and that such figures differ from other
financial performance measures (such as share price returns) does not deflect us from the fact
that success is being motivated by a combination of periodic economic numbers which
emphasise the short- (to perhaps medium-) term, albeit numbers which may allocate at the
margin to different accounting periods. Other measures, whether customer-, sales-,
reputation-driven or not all, boil down to a variant on these economic numbers. They are all
virtually identical when compared with a performance measure for, say, happiness or
contribution to social justice. By way of comparison, a really successful business might be
one which does not grow, but just breaks even and makes lots of people happy. There are
many small businesses which fall into this category.
25. It is necessary to record a profound scepticism and distaste for this notion of managers and
companies as “creators of wealth”. It adds such an aura of magical power (as in
“Abracadabra, look I have created some wealth!”) to the mantle of the directors and so helps
justify the awe in which they are held and the ludicrous remuneration packages that they
seem comfortable in negotiating and accepting. Whilst it is impossible at this stage to be
certain, and there seems a fairly plausible case that human ingenuity and effort can make a
value where previously there was none, a great deal of “value created” is almost certainly the
appropriation of environmental capital, the appropriation of someone else’s capital, and/or
the appropriation of somebody else’s effort and income. It is relatively easy to demonstrate
that a considerable proportion of current profits are the result of the appropriation of
environmental capital and therefore entirely fictitious (see, for example, Howes, 2004; Gray,
1992; and Bebbington and Gray, 2001).
26. There are still attempts, both local and global, which are intended to cajole more companies
into this approach to voluntary reporting. However, the limits of any “business case” in the
current climate appear to have been reached as voluntary reporting seems to have reached a
plateau (KPMG, 2002, 2005). Innovation in both annual report and stand-alone reporting
seems to be ebbing. There is also an absence of any serious likelihood of substantial
advances in compulsory reporting and other regulation-driven developments in the field (at
least in the UK) at the moment.
27. The UK organisations of the Cooperative Bank, Traidcraft and FRC have all come close,
however. Consultation of the ACCA website will introduce readers to the reports of these
organisations – one of which (FRC) is a non-commercial organisation and the other two are
“values-based” companies.
28. It should be noted that the GRI Guidelines were undergoing revision at the time of writing
and new Guidelines may have been issued by the time this paper is published.
29. At March 2006 there were 823 companies worldwide that had signed up to the GRI
guidelines and of these 150 had produced reports “in accordance” with the guidelines. And
these are pretty undemanding guidelines in the face of the path from TBL to sustainability.
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Corresponding author
Rob Gray can be contacted at: rob.gray@st-andrews.ac.uk