Chapter 7 Ethics and Social Responsibility PDF

**CHAPTER 7 Ethics and Social Responsibility** A diagram of a company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\' Description automatically generated ![A screenshot of a computer screen Description automatically generat...

**CHAPTER 7 Ethics and Social Responsibility** A diagram of a company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\'s company\' Description automatically generated  - In the current age of social media, **corporate reputation** can be damaged instantly, requiring businesses to go beyond traditional efforts to mitigate risks. - **Corporate Social Responsibility (CSR)** refers to businesses voluntarily adopting high **moral** and **ethical standards** that exceed legal requirements. - CSR focuses on **stakeholders** such as consumers, employees, communities, and the environment. - CSR emphasizes that **profits** and **social responsibility** are not mutually exclusive; both can improve through creative initiatives. - **Society** and **environmental issues** are seen as important stakeholders in CSR strategies. - CSR has been around for decades and is also known as the **3Ps** (people, planet, profit) or the **triple bottom line**. **Key Areas of CSR in Accounting:** 1. **Environmental accounting** 2. **Environmental costing** 3. **Social ethics** **7.1.1 Environmental Accounting** - **Environmental accounting** involves incorporating key environmental data (mainly cost-related) into a company\'s information systems. - Businesses historically lacked accountability for environmental damage, leading to **cost externalities**, where others bear the costs of pollution. - Governments impose taxes, fines, and **effluent fees** to transfer environmental degradation costs to industries, reducing pollution incentives and assisting in cleanup efforts. - This accounting method helps identify **market failures** linked to public goods depletion (e.g., air, water) and aims to address these through more accurate cost assessments. **Components of Environmental Accounting:** - **Goal setting** and **policy formulation** related to environmental performance. - Regular **performance assessments** and revisions. - Conducting **environmental audits** to evaluate the company's environmental performance, focusing on: 1. **Environmental policy** 2. **Environmental objectives** 3. **Environmental control system** 4. **Environmental risk assessment** 5. **Compliance** with environmental laws. - The **ISO 14000** family of standards helps organizations minimize negative environmental impacts and supports the trend towards creative, profitable solutions. **Environmental Accounting Goals:** - **Identify** and **quantify** all relevant environmental costs. - Identify key environmental facets (e.g., air, water, land quality). - Measure these facets. - Assess damage or quality loss to these facets. - Quantify the costs of environmental damage or quality erosion. **7.1.1.1 Reporting on CSR Compliance and Risks:** - **Social accounting** measures and reports on an organization\'s social, ethical, and environmental impacts. - This reporting is **voluntary**; no mandated rules or principles exist. - Common frameworks include: - **Carbon accounting** - **Triple bottom line reporting** - **Global Reporting Initiative (G4) Sustainability Reporting Guidelines** **Carbon Accounting:** - **Carbon accounting** measures greenhouse gas emissions as **carbon dioxide equivalents**. - Example: UK\'s mandatory carbon reporting requires firms to disclose greenhouse gas emissions. - **Air Canada**: Carbon-offset program allows passengers to calculate flight emissions and pay to support environmental projects. - **Climate Smart** (British Columbia): Helps small and mid-sized businesses measure and reduce carbon emissions. **The Triple Bottom Line:** - Measures performance in **three pillars**: **people**, **planet**, and **profits**. - Challenges include developing metrics for non-monetary factors like environmental and social performance. - **Corporate environmental performance** is assessed by pollution levels, resource use, air/water/soil quality, and biodiversity efforts. - Many organizations exceed **minimum compliance levels**, branding themselves as socially or environmentally responsible for competitive advantage. - **Social performance** metrics include employee well-being, and engagement in local education, health, and crime prevention. **Global Reporting Initiative (G4) Sustainability Reporting Guidelines:** - The **G4 framework** provides comprehensive guidelines for reporting on economic, environmental, and social impacts. **7.1.1.2 Environmental Management and Reporting:** - **Environmental management** in CSR includes responsible practices in both strategy and governance. - **Strategic motivations**: Operational, reputational, and financial reasons for improving environmental performance. - **Governance**: Monitoring environmental performance to inform policy, ensure compliance with laws, and support strategic decision-making. **Beyond-Compliance Behavior:** - **Compliance** requires meeting minimum legal standards. - **Beyond-compliance behavior** is when organizations exceed minimum requirements, positioning themselves as socially and environmentally responsible for competitive advantage. - Stakeholders often expect organizations to exceed basic compliance, influencing support based on perceived responsibility. A blue and white grid with text Description automatically generated - **Beyond-compliance behaviors** often overlap, such as when a company adopts higher standards in anticipation of future regulations, potentially benefiting from **government incentives** like industry-specific environmental certifications. **Environmental Costing:** - The **quantitative aspect** of environmental accounting, with two main categories: 1. **Managerial (internal use)**: Focuses on environmental cost control and aligning business with environmental performance. 2. **Financial (external use)**: Governed by **ASPE/IFRS**, involving financial reports to stakeholders. - Benefits of environmental costing include: 1. **Informed stakeholders** 2. **Integrated business and environmental planning** 3. **Improved product and process design** 4. **Guidance in selecting value chain partners** 5. **Heightened awareness** of environmental protection 6. **Guidance in budget planning** and resource management - Environmental costs fall into four categories: 3. **Prevention**: Costs to avoid negative events (e.g., maintenance). 4. **Assessment**: Costs to evaluate potential issues (e.g., testing). 5. **Control**: Costs to enforce safety measures (e.g., supervisors). 6. **Failure**: Costs incurred from negative events (e.g., lawsuits, lost sales). **Social Ethics:** - **Social ethics** involves meeting or exceeding social performance standards as part of the business model. - Organizations may engage in socially beneficial activities even when they don't directly benefit the company. - Benefits of integrating **social ethics** into a company's model: - Balances **sustainable strategic objectives**. - Enhances **public image** and brand reputation. - Boosts **employee engagement** and connection. - Improves **customer perception** and satisfaction. - Positively impacts the **environment**, **communities**, and **society**. **7.1.4 Justifying CSR:** - A strong focus on **CSR** can protect and enhance brand reputation, drive sustainability, and improve overall performance. - **CSR reporting** differentiates companies by promoting stakeholder engagement and consumer trust. - Like other risk areas, CSR must align with the organization's **mission, vision, and values**, and resources should match the risks and opportunities involved. - Public awareness of **greenwashing** (false claims of social responsibility) is rising, with examples like the **Volkswagen clean diesel scandal**. **Management Incentives:** - **CSR objectives** should be linked to **management incentives** to encourage progress. - Methods include **peer nomination**, **points programs**, **360-degree reviews**, and the **balanced scorecard**. - CSR achievements can be measured and integrated into the **balanced scorecard**. - **Strategy mapping** can help prioritize where CSR efforts should be focused. **Code of Conduct:** - A company's **code of conduct** establishes behavioral standards for employees, emphasizing social responsibility from senior management down to all staff. - It can also play a role in **strategic governance** and contribute to assessing the **control environment** for assurance purposes. **Reporting Mechanisms for Compliance and Risk:** **Whistleblower hotlines**, operated by third parties, are commonly used for reporting non-compliance and risks. Reports are communicated to the **board of directors** or a **sub-committee**. **7.5 Sustainable Organization:** - **Corporate sustainability** recognizes that businesses must operate in ways that sustain the resources, communities, and markets they depend on. - Effective CSR integrates **sustainability strategies** into management, with measurable, verifiable, and reportable practices used in products, services, and operations. **The stakeholder model**  **Creating Sustainable Stakeholder Value:** - **Stakeholder theory** emphasizes the importance of considering the interests of all stakeholders affected by an organization's activities, including community groups, labor organizations, environmental groups, and regulators. - Ignoring these stakeholders can lead to **negative consequences** like adverse public opinion, loss of customers, or legal action, affecting long-term profitability. - **Long-term benefits**: - While actions like increasing employee benefits or improving environmental performance might reduce short-term profits, they contribute to **long-term value** through increased employee productivity and corporate reputation. - These efforts may be difficult to quantify but are recognized for their role in building **organizational sustainability** and creating lasting value for both shareholders and other stakeholders. - In North America, there is **lag** in CSR and environmental initiatives compared to other regions like the **European Union**, where stakeholder interests (such as employee conditions and environmental impact) are integrated into corporate governance. - For example, Germany mandates **employee representation on corporate boards**, and France requires companies with over 300 employees to report on wages, health, safety, and family impacts. **Sustainability and Reputational Capital:** - A history of **ethical behavior** significantly contributes to an organization's **reputation**, which in turn builds **reputational capital**. - Although not reflected in financial statements, reputational capital is a **strategic asset** that offers long-term benefits and plays a key role in building **sustainable stakeholder value**. - Organizations with strong reputations experience numerous benefits, including: - **Attracting high-quality employees** - **Earning trust** from suppliers, investors, customers, and other stakeholders - Easier navigation of political, financial, and social barriers - **Reduced scrutiny** from regulatory bodies due to the organization\'s demonstrated integrity and transparency. - **Reputational capital** needs to be grown, nurtured, and managed over time. - It becomes part of an organization's **brand**, giving it **socio-moral legitimacy** and increasing the probability of **forgiveness** if responsible risks lead to mistakes. - **Maintaining trust**: - A solid reputation allows organizations more flexibility for **minor lapses** in ethical behavior, provided they do not break the trust they have built. - A strong reputation encourages **consistent ethical behavior**, reinforcing the organization's values. - The real value of **reputational capital** is realized through its **use and management**, contributing to: - **Building trust** - **Strengthening relationships** - **Opportunities** for growth and innovation - **Name recognition and branding** - **Mitigating negative reactions** to minor issues, maintaining the organization\'s positive image.