SBL Notes – 2020-2021

Attempt Sir Hasan Dossani

– tfIFHE

Chapter 7
Governanc e
(Stakeholders Portion)

Organization

Share Holders (B1) Stake Holders (B2)

Agency Theory Introduction
Board of Stakeholder Mapping Model by
Directors Mendelow CSR
Corporate Reporting to Stakeholders:
Governance Integrated Reporting
Environment and Social
Reporting EMAS & ISO 14000
Public Sector Governance

Stakeholders
‘Stakeholders’ are individuals or groups who are either interested in or affected by the activities of the
Organization. There are numerous stakeholders of an organization. Shareholders are one of the stake
holders. Each stakeholder has a different expectation from the organization (called stakeholder
claims in conflicts):

Stakeholders Expectations from the Organization

Internal:

Directors & Salary, bonus, promotion, job satisfaction, job security, career
employees growth
Shareholders Increase in shareholder’s wealth

Trade Unions Salary, bonus, health and safety

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE
External:

Customers Good quality, low price

Suppliers Profitable sales, timely payments, long term relations

Banks Security of loan, timely repayment

Auditors Low risk, better internal controls, no fraud

Government Taxes, legal compliances

Public / society Job opportunities, CSR

Pressure Groups Pollution, environment

Voluntary stakeholders are those that engage with the organization out of their own choice and can
ultimately discontinue their stake-holding if they wish too. E.g. includes customers, suppliers,
employees, etc.

Involuntary stakeholders are those that get engaged with organization due to their position or physical
location,
i.e. not by their own choice. They cannot discontinue their stake-holding if they wish too. E.g. includes
society, government, etc.

Stakeholder Mapping Model by Mendelow

Keep Satisfied Key Players

(handle with care)
(obtain consent)
High e.g. institutional
e.g. major shareholder
investors
Power
Minimum Keep Informed
Low
Efforte.g. individual (obtain views)
shareholders, pressure e.g. lenders, trade
groups unions,
employees
Low High
Level of interest

▪ Stakeholders have three options (by Mendelow):

▪ Voice (influence)
▪ Loyal (no influence, do as they are told)
▪ Exit (leave)

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Corporate Social Responsibility

Corporate Social Responsibility
Corporates have primary responsibility to maximize wealth for its shareholders. However, corporates
also have to consider their impact on social and environmental aspects. CSR means extent to which
Organization recognizes its responsibility for social and environmental aspects. These includes
organization’s behavior towards:
▪ Employees
▪ Customers / suppliers
▪ Society / community
▪ Environment (scarce resource, waste disposal, pollution)
▪ Long term sustainability

It is possible to adopt a range of behaviors in the above areas hence it depends on the organization’s
approach
and policy towards CSR

CSR Strategy & Strategic CSR

CSR Strategy:
CSR strategy means having formal policies which guides organization’s CSR activities. There is a
big range of CSR activities which an organization can pursue, hence having a CSR strategy will help
organization select and focus on preferred CSR activities in a structured and planned manner.

Strategic CSR:
Strategic CSR means organization undertakes those CSR activities which ultimately aligns with
organization’s business and core strategies. For e.g. a bank gives scholarships to bright young
students to pursue a banking degree.

Corporate Citizenship
Corporate Citizenship is an approach in which organization includes social and environmental aspects
in its core values and principles. All key business decisions considers the impact on society and
environment, i.e. business decisions are closely aligned with social and environmental aspects. The
goal is to improve standard of living and quality life of the community around it while maintaining
profitability for stakeholders.

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE
Under corporate citizenship, organization has certain rights as well as responsibilities. Rights include
the right to exist, do business and maximize wealth for shareholders. Responsibilities include
compliance with all laws as well as compliance with social and environmental norms and
expectations of the society.

There are three principles of corporate citizenship:

1. Minimize harms to the society / environment, e.g. pollution
2. Maximize benefits to the society / environment, e.g. all raw materials purchased from local
suppliers, using recyclable resources
3. Remain fully accountable to wider stakeholders (society, environment, etc.) thereby
balancing business interest with society interest

Arguments In Favour Of Social Responsibility

▪ Organizations are social citizens hence should contribute to the Society
▪ Society provides resources to Organization, e.g. educated workforce, infrastructure, etc.
▪ Organization should compensate Society for causing pollution, etc.
▪ Helps in building a positive image of the company

Arguments Against Social Responsibility

▪ Organization exists for profits and CSR reduces profits
▪ Organization are not human, hence not responsible for Society
▪ Organization pays taxes to Govt so that Govt takes care of the Society

Reporting to Stakeholders
Introduction
Organizations disclose a wide variety of information, both mandatory and voluntary.

Mandatory Disclosure means information that must be publicly disclosed as per Law or Rules.

Voluntary Disclosure means information which may be publicly disclosed if the Organization
wishes to do so, i.e. it is not legally binding to disclose. E.g. includes:
▪ Business Position & Reviews
▪ Future Outlook & Forecasts
▪ CSR Reports (covered below)
▪ Integrated Report (covered below)
▪ Social & Environmental Footprints Reports (covered below)

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Advantages of Voluntary Disclosure

▪ Enhances organization’s image and reputation for transparency
▪ Open and transparent communication with shareholders and wider stakeholders
▪ Shareholders and stakeholders have deeper insight into the organization
▪ Gives competitive edge over other companies
▪ Better understanding and decision making by shareholders, stakeholders and potential investors
▪ Attracts investment at a lower cost of capital (due to availability of greater information)

CSR Report
CSR report discloses initiatives taken by an organization to fulfil its social responsibilities. It facilitates
shareholders, customers, employees, governments, etc. to assess CSR activities of an organization.
The CSR report consist of initiatives relating to the following and includes both monetary and non-
monetary activities:
▪ Employees
▪ Customers and Suppliers
▪ Society and community
▪ Environment (scare resources, waste disposal, pollution)
▪ Long term sustainability

Integrated Reporting
Backgroun
d
In case one wants to decide whether or not to invest in a particular company, the starting point
would be the latest Annual Report and Financial Statements. However, there are certain drawbacks
of these documents. The financial statements show historic performance only (i.e. not forward
looking). Also, it lacks certain information such as core business strategies, competitor analysis,
social and environment factors, etc.

Integrated reporting was developed in 2013 by International Integrated Reporting Council (IIRC)
and is a ‘principle’ based framework aimed at achieving a balance between flexibility and
prescribing strict headings. Just like financial accounting and reporting follows IFRS, Integrated
reporting follows International Integrated Reporting Framework.

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Definition
An Integrated Reporting is a concise communication demonstrating the link between:

▪ Governance (Mission / objectives)

▪ Strategy
▪ Financial performance; and
▪ Social and environmental context

And shows how organization creates ‘value’ in short, medium and long term. By integrating these
areas, organizations are in a better position to allocate scarce resources more effectively and make
decisions which are more socially and environmentally friendly.

An Integrated Report enables investors and other stakeholders to understand how an organization
is really performing and hence would enable them to assess organization’s long-term strategy. In
some jurisdictions, Integrated Report is now a primary report replacing Annual Reports.

The aim of an Integrated Reporting is to:

▪ Enable more effective decision making at board level
▪ Improves information available to investors
▪ Encourage ‘integrated’ thinking and strategies

Contents of An Integrated Report

▪ Organization’s overview
▪ External environment (PESTEL / P5F)
▪ Opportunities and risks
▪ Strategies and resource allocations
▪ Business model (e.g. value chain, technology, E-business, etc,)
▪ Future plans
▪ 6 capitals

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

The Six Capitals

All organizations depend on various forms of capital for their success. These capitals increase or
decreases over passage of time. Hence organizations should be able to measure and monitor the
use these capitals:

▪ Financial Capital
Overall financial performance and position of the company with focus on availability of sources
of funds (i.e. equity financing or debt financing) so that it can be used to acquire other capitals
such as manufactured capital or intellectual capital

▪ Manufactured Capital
Tangible assets used by an organization to create value. E.g. plant & machinery, infrastructure,
fixed assets, inventories, etc.

▪ Intellectual Capital
Includes R&D, innovation, brand, patents, etc. as well as technical / skilled staff. This is critical to
organization’s future earning potential.

▪ Human Capital
Knowledge, skills and experience of the management and employees of the organization.
Includes productivity, efficiency, staff turnovers, etc.

▪ Social Capital
Relationship and trust built with key stakeholders i.e. customers, suppliers, government,
communities, employees etc. Build long term relationship, e.g. loyal customers, motivated
employees.

▪ Natural Capital
Availability of natural and environmental resources to be used in operations, e.g. water, oil,
metal, minerals, forests, chemicals, carbon footprint, climate change, etc.

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Difference Between Financial Statements and Integrated Report

Financial Statements Integrated Reporting

Focus on financial information
performance Focus on share capital
Focus on historic performance
Less emphasis on social
and environmental
aspects
Short term results
Focus on overall business
Focus on 6 capitals
Focus on future strategies
Integrates social and
environmental aspects in strategies
and decision making
Long term value creation

Advantages Of Integrated Reporting

▪ As IR is voluntary disclosure, it enhances organization’s image and reputation for transparency
▪ Focus on 6 capitals of the organization
▪ Demonstrate how organization creates value
▪ Integrates social and environmental aspects in strategies and decision making
▪ Better understanding and decision making by shareholders, stakeholders and potential
investors
▪ Attracts investment at a lower cost of capital (due to availability of greater information)
▪ Gives competitive edge over other companies

Audit of Integrated Reports

▪ In conventional financial statements, the measurement and presentation are strictly regulated
by accounting and reporting standards.
▪ However Integrated Reports are much more subjective, for e.g. how can an organization
reliably measure value of human capital or social capital?
▪ This subjectivity of measurement reduces the value of Integrated Reports and poses
considerable challenges for the auditing process

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Social & Environmental Footprint

Org’s Economic Activities has

Social Footprints Environmental Footprints

Means impact on People & Means impact on Natural Environment:

Society: 1. Depletion of scarce resources
1. Employees 2. Disposal of wastage
2. Customers / Suppliers 3. Emission, pollution & spillage
3. Society / Community

Social Footprint
Social footprint assesses the impact organization has on people and society. Impacts could be
positive such as jobs creation or it could be negative such plant closure leading to unemployment. It
covers impact on:

Employe Customers / Suppliers Society / Community

es
▪ Gender equality ▪ Ingredients used ▪ Job opportunities
▪ No discrimination in product ▪ CSR
▪ Diversity ▪ Product safety
▪ Working ▪ Personal data and
conditions privacy
▪ Health and safety ▪ Fair play with suppliers
▪ Better pay ▪ Fair business practice

Social Report & Audit

A Social Report is prepared which includes details about Organization’s social policies, social
objectives and actual performance there against. It also includes measures taken by the
Organization to restrict or reverse negative social impacts caused through its business activities.

As with any other audit, the purpose of a Social Audit is to assure that the information given in
Social Report is true and fair. Social Audit provides additional information on corporate activities
over and above those disclosed in the traditional financial statements.

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE
Social Report / Audit and Integrated Report
The inclusion of Social Audit Reports in Integrated Report would provide users greater assurance
that the actions claimed by the organizations are verified through independent audits. The Social
Audit Report will be placed under ‘Social Capital’ headings.

Environmental Footprint
Environmental footprint assesses the impact of organization on the natural environment in variety of
ways including:
▪ Depletion of scarce resources (e.g. oil, energy, trees, etc.)
▪ Disposal of wastages (e.g. re-cycling)
▪ Emissions, pollutions and spillage (carbon emission, smoke, etc.)

Ideally every organization should target for zero environmental footprint by restoring the natural
resources consumed and taking steps to remove emission and pollution.

To assess the environmental footprint, core activities are reviewed, such as delivery/storage of raw
materials, production processes, delivery/storage of finished goods, overall infrastructure, etc.

Environmental Report
Environmental Report is a voluntary initiative taken by an organization to publish details of its impact
on the natural environment (environmental footprint). The Report contains:
▪ Environmental policies and procedures
▪ Information on company’s ‘direct’ environmental affect (through its own manufacturing and
distribution)
▪ Information on company’s ‘indirect’ environmental affect (through forward and backward supply
chain)
▪ Actual performance against targets relating to:
 Consumption of scarce resources (oil, energy, trees, etc.)
 Disposal of wastages (e.g. re-cycling)
 Emission, pollution & spillage (carbon emission, smoke, etc.)

Environmental Audit
As with any other audit, the purpose of an Environment Audit is to assure that the information given
in Environmental Report is true and fair. It assesses the impact an organization has on the
environment and involves measurement against pre-determined environmental standards, such as
EMAS or ISO 14001.

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

An Environment Audit has 3 elements:

▪ Agreeing what should be measured and how (i.e. suitable metrics)
▪ Measuring and verifying actual performance against agreed measures (on sample basis)
▪ Reporting findings and any significant deviations

Advantages of Social or Environmental Reports

▪ As these are voluntary disclosures, it enhances organization’s image and reputation for
transparency
▪ Demonstrates organization’s commitment to society and environment
▪ Shareholders and stakeholders have detailed insight on organization’s social and
environmental initiatives
▪ Strengthens relations with wider stakeholders and society
▪ Helps in reduction of risks relating to society and environment aspects (e.g. legal compliance,
fines, etc.)
▪ Enhanced monitoring and accountability
▪ Gives competitive edge over competitors

Environmental Audit Report and Integrated Report

The inclusion of environmental Audit reports in Integrated Report would provide users greater
assurance that the actions claimed by the organizations are verified through independent audits.
The Environment audit report will be placed under ‘Natural Capital’ headings.

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE
Environmental Accounting
Introduction to Environmental Accounting
Environmental Accounting means maintaining systems for assessing organization’s impact on the
environment. As financial accounting has its own Framework (i.e. IFRS), similarly Environmental
Accounting has few frameworks:

▪ ISO 14000
▪ Eco-Management And Audit Scheme (EMAS) by European Commission

ISO 14000 EMAS

Series of International Standards on It’s a voluntary EU initiative to

environmental management and supporting
audit program
Specify an Environmental Management
System and organization is evaluated against
this Standard through audit and then certified if
meets Standard
Need to implement ISO 14000 requirements
and then demonstrate compliance through
audits
Organizations produces a plan for compliance
with the Standards and then monitors
performance
improve Organization’s
performance
Rewards organizations who go beyond
minimum legal requirements to improve
environmental performance
Comply by initially implementing ISO 14000
and then implementing EMAS
standards
Organizations required to improve
their environmental performance
over time

Sustainability
Introduction
Sustainability means that needs of present are met without compromising the needs of future
generation. In simple words, it means that organization should have positive impact on economy,
social and environment in the long-run.

Economic Sustainability means that organizations are able to grow and maximize shareholders wealth
in long term. The balance between economic sustainability and environmental / social sustainability is
quite delicate as these contradict with each other and most of the time economic sustainability is given
more importance.

Social Sustainability means that organizations are able to improve their positive contribution on the
society in the long run.
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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE
Environmental Sustainability means resources should not be taken from the natural environment (or
emission should not be made to the natural environment) at a rate greater than that which can be
corrected or replenished. The impact on the natural environment should not exceed the ability to
replace used resources or clean up emission.

Input resources must only be consumed at a rate at which they can be reproduced or replaced.
Outputs (such as waste and products) must not pollute the environment at a rate greater than can be
cleared or offset. Business activities must take into consideration the carbon emissions, other pollution
to water, air and local environment, and should use strategies to neutralise these impacts by engaging
in environmental practices that will replenish the used resources and eliminate harmful effects of
pollution.

Accounting for Sustainability

A number of reporting frameworks have been developed to help in accounting for sustainability
including

EFCA (Environment Full Cost Accounting):

It’s a method of accounting in which also all costs and benefits to the Society and Environment is
calculated

TBL (Triple Bottom Line Sustainability Framework):

TBL expands traditional financial accounting to include environmental and social performance as well.
This reporting is encouraged by international body called Global Reporting Initiative (GRI).

There are three areas of performance under TBL – Financial, Social and Environment. They are also
called 3Ps (Profit, People, Planet). There is some degree of subjectivity / assumptions involved in TBL
as the three areas of performance do not have common unit of measure.

Financi Soci Environment

al al
▪ Profitability ▪ Employees ▪ Scares resources
▪ ROI  Gender equality ▪ Disposal of wastages
 No discrimination ▪ Emission, pollution,
 Diversity carbon footprint
 Working conditions ▪
 Health & safety
 Better pay
▪ Customers / Suppliers
▪ Society / CSR

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Public Sector Governance

Types of Organizations
▪ Commercial: Profit seeking organizations
▪ Not for profit: Charitable organizations or NGOs
▪ Public sector: Organizations owned and funded by State or Government, providing goods or
services not normally provided by commercial organizations. Primary objective is public service
i.e. social wellbeing of the people, hence measuring performance and output is more complex
because the usual profitability or financial criteria cannot be used.

Difference Between Commercial, Charitable and Public Sector Organizations

Commercial Org Charitable Org Public Sector Org

Mission Maximize profit Social wellbeing Public delivery

Measure of success Profitability / ROCE Social targets Social indicators / Value

for Money (VFM)

Source of funding Equity, debt Donations, Tax payers’ money /

financing grants Govt funding and
subsidies
Pay scales Market based / high Restricted / low Restricted / low

Principal Shareholders Owners / Public / Tax payers

Donors
Agent Director Trustees Govt Officials

Governance Board of Directors Board of Ministry / Board of

Structure Trustees Trustees
Accountability To shareholders Owners / To tax payers / citizens
Donors

Agency Relationship in a Public Sector Org

In a commercial organization, the shareholders are principals and directors are agents. In a public
sector organization:
Principal: Tax payers /
citizens Agent: Government
/ Ministry
Sub-agent: Board of Trustees or Directors who are accountable to the Ministry and the public
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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Governance Structure and Role

The governance structure and roles vary from country to country. Normally a public sector organization
will have a Board of Governors or Board of Trustees or an Oversight Committee, with the following
roles:

▪ Comply with government rules and instructions

▪ Performance measurement and ensuring objectives are achieved (effectiveness)
▪ Organization if well run (efficiency and economy)
▪ Appoint / replace senior officials
▪ Report back to Government

Problems of Public Sector Organizations

▪ Multiple objectives (e.g. prevent heart diseases as well as cancer)
▪ Difficulty in measuring outputs (e.g. how you measure if people are healthy)
▪ Financial constraints (limited budgets)
▪ Democratic appointments
▪ Political influences and popularity
▪ No direct competition
▪ No profit motivation

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 SBL Notes – 2020-2021
Attempt Sir Hasan Dossani
– tfIFHE

Value for Money (VFM) – 3 Es Framework

Public sector organizations normally use Value for Money (VFM) framework to select between
projects as well as to demonstrate the performance. It is important to demonstrate value for money as
public sector organizations uses public funds and tax payer money, which is limited in supply.

▪ Effectiveness: Measures whether the desired objectives are achieved or not

▪ Efficiency: Measures productivity or how well scarce resources are used (maximum output with
minimum input)
▪ Economy: Measures actual cost and time spent time (e.g. budgetary aspects)

Practice Questions
P1 – Jun 2015 Q2: Institutional Sh Holder | Strategic CSR | Stakeholder Conflict
(Rosey & Atkin) P1 – Sep/Dec 2016 Q3: Env Risk | Risk Mgt Framework | IR & Six
Capital (Osaka Petroleum)
P1 – Sep/Dec 2017 Q4: Public Sector VFM | Tucker 5 Question Model (Livermouth)

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