CORPORATE SOCIAL REPORTING AS A SUBSTANTIAL ELEMENT OF SUSTAINABLE DEVELOPMENT

PhD Petya Dankova

VarnaUniversity of Economics

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Introduction

The concept of sustainable development gained publicity in 1987 when areport called Our common future was published by the World Commission on Environment and Development. The report was planned to be “a global agenda for change” and at its core laid the concept of sustainable development, defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”[17, 1987]. Furtheron, in1992intheframesoftheUnitedNationsConferenceonEnvironmentandDevelopmentheldinRiodeJaneiro, Agenda 21wasadoptedasalong-termstrategyforachievingsustainabledevelopmentinthebreakingtwentyfirstcentury[6, 1992]. The fundamentalideaof these documents was the pursuit of balanced economic, social and environmental development – a balance which lies also at the core of the currently popular triplebottom lineconcept[15, 2006; 21, 2006].

More and more companies are currently engaging in working out and publishing a corporate social report, considering it as a substantial element of their corporate reporting process. The popularity of these reports is reinforced by the growing number of ethical investment funds which reflect the interest for the sustainable development principles within the society as a whole. Anumberofinternationalstandardsand requirements related to corporate social reporting are being worked out and introduced, such as the OECD Principles of Corporate Governance, the Principles of the UN Global Compact, the GRI sustainability reporting framework. ISO 26000 Social Responsibility is planned to be introduced in 2009.

The aim of thispaper is to present and summarize the main international principles and standards on corporate social reporting,considering it as an instrument of achieving long-term sustainable development of the companies. Some empirical data concerning the level of corporate social reporting of the Bulgarian corporations is also presented.

Corporatesustainabledevelopment

The broadly accepted definition of sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs assumes various interpretations according to the level of analysis. Our aim is to define sustainable development of corporations in their capacity of significant active elements of the global economic system. In our globalizing world, big corporations are gaining more and more influence upon the societies’ life, as well as more important role in the enforcement of business ethics.

This problem is closely related to corporate social responsibility and to the question asked by Milton Friedman many years ago: What does it mean to say that "business" has responsibilities?[9, 1970].Friedman’sanswerisbroadlycited – thesocialresponsibilityofbusinessistoincreaseitsprofits. Manyauthorshowevertake the view that corporate social responsibility should be addressed at the society as a whole [5, 1999; 11, 2003; 12, 1992; 19, 2001]. EvenFriedmanhimselfwritesthatthecorporateexecutiveasanemployeeoftheownersofthebusinesshastheresponsibilitytomakemoneyforthemwhileconformingtothebasicrulesofthesociety, boththoseembodiedinlawandthoseembodiedinethicalcustom.

We consider corporations as complex systems which are very much dependent on their stakeholders’ inputs, and on the other hand exert very strong influence upon the state of those stakeholders as well as upon the whole society. The corporation is a complex socio-economic system which concentrates the contributions of various stakeholders and provides synergy between them, thus achieving significant social and economic outcomes. The stakeholders include: corporate shareholders, personnel, suppliers, clients and any other business partners, the local community and local authorities, as well as the society as a whole.

We believe that the long-term survival of the business requires dialogue and collaboration with the company’s stakeholders. Without the participation and the support of the stakeholders it is not possible to meet the interests of the company and vice versa – the interests of the stakeholders cannot be met without the company’s contribution. The common ground of these two different spheres of interest forms the sustainability sweet spot(see figure 1). Therefore, corporate sustainable development requires permanent dialogue with stakeholders, a substantial element of which is the social report. It is our opinion that the social report should be regarded not only as a written document through which the company informs the stakeholders and the society about its economic, social and economic outcomes. This report is also a significant instrument to formulate the corporate strategy, to implement the operational plans and to evaluate the outcomes, thereby keeping up the stakeholder dialogue.

Figure1.The sustainability sweet spot, source: Savitz, A., K. Weber, The Triple Bottom Line, 2006

International corporate social reporting standards

Currently no universal internationally accepted social reporting standards exist. However the major part of the published corporate social reports is based on the OECD Principles of Corporate Governance, the Principles of the UN Global Compact and the GRI sustainability reporting framework. High hopes are set on ISO 26000 Social Responsibility, the target date for publication of which is year 2009. It is important to underline that the principles and standards presented below do not have obligatory character, i.e. observing them is only advisable. Therefore their observance by the companies depends on market mechanisms.

OECDPrinciplesofCorporateGovernance

The OECD Principles of Corporate Governance were developed by the OECD member states governments, relevant international organisations and the privatesector. The Principles were agreed in 1999to assist OECD and non-OECDgovernments in their efforts to evaluate and improve the legal, institutionaland regulatory framework for corporate governance in their countries, and toprovide guidance and suggestions for stock exchanges, investors,corporations, and other parties that have a role in the process of developinggood corporate governance. The Principles focus on publicly tradedcompanies[17, 1999]. InBulgariatheOECDPrincipleswereendorsedbytheFinancialSupervisionCommissionasstandards for goodcorporate governanceof the Bulgarian publicly traded companies.

The OECD Principles of Corporate Governancecover the following areas:

  1. Ensuring the basis for an effective corporate governance framework;
  2. Therights of shareholders and key ownership functions;
  3. The equitabletreatment of shareholders;
  4. The role of stakeholders;
  5. Disclosure andtransparency; and
  6. The responsibilities of the board.

It is our opinion that a corporate social report based on the OECD principles cannot fully disclose the company’s sustainable development level.Putting these principles into practice mainly contributes to protect the shareholders’ rights related to: secure methods of ownershipregistration; convey or transfer shares;obtainrelevant and materialinformation on the corporation on a timely and regular basis; participate and votein general shareholder meetings; elect and remove members of the board; and share in the profits of the corporation.Special attention is paid to the equitable treatment of all shareholders, the insider trading prohibition and the efficient andtransparent markets for corporate control.

The Principles enforce strict disclosure and transparency by requiring the companies to disclose the following material information: (1) Financial and operating results; (2) Company objectives; (3) Major share ownership and voting rights; (4) Information about board members, including their remuneration; (5) Related party transactions; (6) Foreseeable risk factors; (7) Issues regarding employees and other stakeholders; (8) Governance structures and policies.

In the last section of the Principles are formulatedthe responsibilities of the corporate board, with the aim of ensuring strategicguidance of the company, effective monitoring overthe management, and accountability to the company andthe shareholders.

UnitedNationsGlobalCompact

The Global Compact was announced by United Nations Secretary-General Kofi Annan in 1999. This is the world's largest, global corporate citizenship initiative, which integrates a variety of stakeholders in a united voluntary network: governments, who defined the principles on which the initiative is based; companies, whose actions it seeks to influence; labour, in whose hands the concrete process of global production takes place; civil society organizations, representing the wider community of stakeholders; and The United Nations, as an authoritative facilitator[1].All these stakeholders share the common goal to achieve sustainable development by embracing ten fundamental principles concerning human rights, labor standards, protection of the environment and anti-corruption. The ten principles are formulated as follows:

  1. Support and respect the protection of internationally proclaimed human rights;
  2. Make sure that you are not complicit in human rights abuses;
  3. Uphold the freedom of association and the effective recognition of the right to collective bargaining;
  4. Uphold the elimination of all forms of forced and compulsory labour;
  5. Uphold the effective abolition of child labour;
  6. Upholdthe elimination of discrimination in respect of employment and occupation]
  7. Support a precautionary approach to environmental challenges;
  8. Undertake initiatives to promote greater environmental responsibility;
  9. Encourage the development and diffusion of environmentally friendly technologies;
  10. Work against corruption in all its forms, including extortion and bribery.

To realize the Principles, the UN Global Compact, being a voluntary initiative, does not rely on formal regulatory instruments. The companies which have joined the Compact are obliged to publish an annual report discovering how the Principles are put into practice. Throughthe UN Global Compact website these reports are given publicity, as well as the names of the companies not published the respective annual report are announced. Today 3505 business companies from all around the world are participating in this initiative, 33 of which are from Bulgaria[2].

As for the substantial question about how exactly companies should report on their sustainable development and on the observance of the ten Principles, the UN Global Compact recommends the reportingguidelines of Global Reporting Initiative.

Global Reporting Initiative

The Global Reporting Initiative was convened in 1997 by the Coalition for Environmentally Responsible Economies (CERES), a non-profit coalition of investor, environmental, religious, labour and social justice groups based in USA. Its vision was that "reporting on economic, environmental, and social performance by all organizations is as routine and comparable as financial reporting”. In 1999 the UN Environment Program joined the initiative and the first reporting guidelines were published in 2000. In October 2006 the Global Reporting Initiative and the UN Global Compact united in a strategic alliance aimed at providing the global private sector with an opportunity to embrace a responsible business strategy.

The Global Reporting Initiativewas defined as “a long-term, multi-stakeholder, internationalprocess whose mission is to develop and disseminate globally applicable SustainabilityReporting Guidelines” [22, 2002]. These Guidelines are for voluntary use by organisationsfor reporting on the economic, environmental, and social dimensions of theiractivities, products, and services. The aim of the Guidelines is to assist reporting organisationsand their stakeholders in articulating and understanding contributions of thereporting organisations to sustainable development.The Guidelines comprise Principles for defining reportcontent and ensuring the quality of reportedinformation (see table 1).

According to the Guidelines, the report should include the following three main sections:

  • Strategy and Profile of the company: Disclosures that set the overall context for understanding organizational performance such as its strategy, profile, and governance.
  • Management Approach: Disclosures that cover how an organization addresses a given set of topics in order to provide context for understanding performance in a specific area.
  • Performance Indicators: Indicators that elicit comparable information on the economic, environmental, and social performance of the organization.

Thehugecontribution of the Global Reporting Initiative consists in having developed concrete indicators which make it possible to measure and assess the company’s performance. The performance indicators are arranged in the following six groups:

(1)The economic performance indicators measure theorganization’s impacts on the economic conditions of itsstakeholders and on economic systems at local, national,and global levels. They refer to:

  • Economic performance;
  • Market presence;
  • Indirect economic impacts.

(2)The environmental performance indicatorsmeasure the organization’s impacts on the natural systems, the performance related to inputs (e.g. material, energy, water), outputs (e.g. emissions, effluents, waste), biodiversity,environmental compliance, and other relevantinformation such as environmental expenditure and theimpacts of products and services. They cover the following:

  • Materials;
  • Energy;
  • Water;
  • Biodiversity;
  • Emissions, effluents, and waste;
  • Products and services;
  • Compliance;
  • Transport.

(3)Thelabor practices and decent work performance indicatorsare based on internationally recognizeduniversal standards and they refer to the following aspects:

  • Employment;
  • Labor/management relations;
  • Occupational health and safety;
  • Training and education;
  • Diversity and equal opportunity.

(4)Thehuman rights performance indicatorsmeasure the extent to which human rights areconsidered in organisation’s practices in relation to the following:

  • Investment and procurement practices;
  • Non-discrimination;
  • Freedom of association and collective bargaining;
  • Child labor;
  • Forced and compulsory labor;
  • Security practices;
  • Indigenous rights.

(5)Thesociety performance indicatorsrefer to the following aspects:

  • Community;
  • Corruption;
  • Public policy;
  • Anti-competitive behavior;
  • Compliance.

(6)Theproductresponsibilityperformanceindicatorsmeasuretheorganisation’sperformancerelated to:

  • Customer health and safety;
  • Product and service labeling;
  • Marketing communications;
  • Customer privacy;
  • Compliance.

Table 1. GRIReportingPrinciples. Source: Sustainability reporting guidelines, Global Reporting Initiative, 2006

PRINCIPLE / DEFINITION
Reporting Principles for Defining CONTENT / MATERIALITY / The information in a report should covertopics and indicators that reflect the organization’s significant economic, environmental, and social impacts,or that would substantively influence the assessmentsand decisions of stakeholders.
STAKEHOLDER INCLUSIVENESS / The reporting organization should identifyits stakeholders[3] and explain in the report how it hasresponded to their reasonable expectations and interests.
SUSTAINABILITY CONTEXT / The report should present the organization’s performance in the wider context of sustainability.
COMPLETENESS / Coverage of the material topics andIndicators and definition of the report boundaryshould be sufficient to reflect significant economic, environmental, and social impacts and enablestakeholders to assess the reporting organization’sperformance in the reporting period.
Reporting Principles for
Defining QUALITY / BALANCE / The report should reflect positive andnegative aspects of the organization’s performance toenable a reasoned assessment of overall performance.
COMPARABILITY / Issues and information should be selected,compiled, and reported consistently. Reportedinformation should be presented in a manner that
enables stakeholders to analyze changes in theorganization’s performance over time, and couldsupport analysis relative to other organizations.
ACCURACY / The reported information should besufficiently accurate and detailed for stakeholders toassess the reporting organization’s performance.
TIMELINESS / Reporting occurs on a regular schedule andinformation is available in time for stakeholders to makeinformed decisions.
CLARITY / Information should be made available ina manner that is understandable and accessible tostakeholders using the report.
RELIABILITY
. / Information and processes used in thepreparation of a report should be gathered, recorded,compiled, analyzed, and disclosed in a way that could be
subject to examination and that establishes the qualityand materiality of the information.

ISO 26000 Social Responsibility

The International Organization for Standardization plans to introduce ISO 26000 Social ResponsibilityinNovember 2009. Since 2005 a working group of various stakeholders from 61 countries from all over the world has been working on the development of this standard. Each participating country has 6 representatives in the following groups: industry, government, labor, consumers, nongovernmental organizations,service, support, research and others, as well as a geographical and gender-based balanceof participants. Thirty-four international organisations are also participating in this process, among which are: Organisation for Economic Co-operation and Development (OECD), United Nations Industrial Development Organization, Global Reporting Initiative, UN Global Compact and others.

The aim of the International Organization for Standardization is to achieve terminological uniformity in the field of social responsibility and to raise the trust in the companies’ social reports. The main accents of ISO 26000 are expected to refer to [14, 2006]:

  • Humanrights(incl. freedom of association and collective bargaining, non-discrimination, child laboretc.);
  • Labor practices (incl. occupationalhealthandsafety, payment, working time etc.);
  • Corporategovernance (incl. shareholderrights, participation in the decision-makingprocess, disclosure etc.);
  • Consumer issues Consumerrights (incl.information, health, advertisement, labeling etc.);
  • Community Involvement (incl. employment, education, technology transfer, taxes, cultural heritage, infrastructure, philanthropy etc.);
  • Fair Operating Practices (incl. fair competition, corruption, money laundering etc.);
  • Environment (incl. pollution prevention, greenhouse gas emissions, sustainable land use, protection of ecosystems etc.).

ItisimportanttounderlinethatISO 26000 will be voluntary to use. It will not include requirements and will thus not be a certification standard[4]. Thisfactentailssomediscussionsconcerningthestandard’spractical implementation[14, 2006].

Some empirical data from the Republic of Bulgaria

InBulgariatheOECDPrinciplesof Corporate Governance have beenendorsedbytheFinancialSupervisionCommissionasstandards for goodcorporate governanceof the Bulgarian publicly traded companies. The FinancialSupervisionCommission requires these companies to enclose to their annual financial report a Programme for application of the internationally recognised standards for good corporate governance. ThisProgramshoulddiscover the concrete measures undertaken by the company to put the OECD Principles into practice.

In 2006 the author of this paper conducted an empirical study in one hundred Bulgarian publicly traded companies which found out that only 44 per cent of the companies have developed a Program for application of the internationally recognised standards for good corporate governance. The Programs do not content procedures for communication with the stakeholders nor for protection of the stakeholders’ interests. The content analysis of those Programs shows that their implementation could not considerably contribute to the companies’ sustainable development, as well as that the reporting on the implementation of the Program could not have the nature of a social report.

Our study has also revealed that 58 per cent of the publicly traded companies maintain a website. Only 12 per cent of the existing websites contain the company’s Programme for application of the internationally recognised standards for good corporate governance. Of the corporate managers and investor relations directors who were questioned during the empirical study, 45 per cent believe that developing and implementing such a Program does not contribute to improve the corporate governance process or to introduce the international standards into the Bulgarian companies.