Making Values Work by Tania Gobena

Simon Zadek Harry Hummels

Making Values Work

Introduction This special issue of the Journal of Business Ethics deals with the subject of social and ethical accounting, auditing, and reporting (SEAAR). It offers a selection of papers presented first at an international conference on social and ethical accounting, auditing, and reporting held at Nijenrode University in the Netherlands in September 1997, co-hosted by the European Institute of Business Ethics, the Institute for Social and Ethical AccountAbility, and the New Economics Foundation. The event brought together leading thinkers in the field; representatives of major multinationals exploring the way forward – intend on exploring the implications of developments in the field for their own companies – such as Grand Metropolitan (now Diageo), Levi Strauss, Novo Nordisk, Shell, and Unilever, key non-profit organisations from Brussels (Ethibel) to New York (Council on Economic Priorities) to Johannesburg (Development Resources Centre); and consultants and other professional practitioners. This very unusual mixture of participants came together for two days to discuss, share experience, and to brainstorm the current state and future development of the emerging field. The event was a landmark event in the evolution of contemporary social and ethical accounting, auditing, and reporting. The diverse and distinguished group of participants ensured a high quality of papers, presentations and discussions. The four themes pursued during the event – the stakeholder company, standards, non-profit practice, and sustainability auditing – allowed for a deepening of understanding of both where the field had reached and what were

its major challenges in years to come. Most important, perhaps, was that the event marked an acknowledgement that practice in the field was emerging into both the corporate and public and private non-profit mainstream. The wealth of contemporary cases offered up for examination confirmed that practice had caught up with, and indeed had in many ways taken the lead from, theory. Like any leading edge field, social and ethical accounting, auditing, and reporting, has a history, and also a set of contemporary manifestations that both builds on and is distinct from that history.1 The conference reflected key aspects of that history, but focused principally on more recent trends in the field. The papers selected for presentation brought out and aired many methodological strands that have emerged as central to contemporary practice and thinking. Selecting papers and therefore perspectives from the wealth of material emerging from the event has not been an easy affair. However, to achieve both a manageable process and final product in the form of this special issue, choice was indeed necessary. We are immensely appreciative to those whose papers have been included, and to those whose insights and material have not been included due to limitations in time and space. Also we would like to thank those who have made the event, and so also this volume, a practical possibility, particularly Barbara Hoekstra, Claudia Gonella, Allison Pilling, Patrice van Riemsdijk, Henk van Luijk, Katherine Howard, Maria Sillanpää, Peter Pruzan, Peter Raynard, and Richard Evans. The remainder of this short introduction summarises issues that have been selected for closer examination in this volume.

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A terminological prologue Like any newly-emerging area, the field is beset with problems of terminology. There is “ethical accounts”, “intellectual capital” “social audits”, “ethical audits”, “social performance reports”, “human accounts”, and “social reviews”, just to name a few. In some cases these methodologies appear very similar. The “ethical audit” advocated by the European Institute for Business Ethics (EIBE) and Nijenrode University, the Netherlands Business School, 2 for example, is similar in many respects to the “social accounts” method developed, adopted, and applied by Traidcraft and the New Economics Foundation.3 The Body Shop’s “ethical audit” is, on the other hand, quite different, since it represents a combination of social, environmental, and animal testing audits.4 This in turn is only comparable in parts to the “ethical accounting” developed at the Copenhagen Business School and adopted by Sbn Bank and other companies and public sector organisations across Scandinavia.5 Much of the diversity in practice can be attributed to at least four significant differences in: (a) interests on the part of those initiating the process; (b) types of organisations; (c) context, and; (d) theoretical and philosophical roots. Many of these differences are therefore entirely acceptable in that they reflect varied needs for which different methods are required. For example, most organisations using Ethical Accounting in Scandinavia start with an emphasis on the evolution of “shared values”. On the other hand, a company with a concern that it meets the challenge of public accountability may well place far greater emphasis on securing adequate comparison with other companies or accepted social norms and benchmarks, and would need to ensure that the process is audited or verified to the satisfaction of key, particularly external, stakeholders, including staekholder representatives such as human rights organisations. For example, the move by companies in the textiles, sportswear, and toys sectors to adopt and comply with labour codes of conduct in their

production in, and purchases from, the South (“third world”), will focus on external verification precisely because the pressure comes from public consumer campaigns.6 Such legitimate differences go some way to explaining and justifying the use of varied terminology. In broad terms there is a tendency to use the term “ethical” where the focus is on the deepening of shared values, and the exploration, and refinement of, individual behaviour and indeed intentions. The term “social” tends to be used where the emphasis is on the impact of the organisation on key, and particularly external, stakeholders. Similarly, the term “accounting” is used principally to describe a process of discovery, including the process of through which useful qualitative and quantitative measurement can take place, including through dialogue. The term “auditing” tends to be used more where the overall intention of the process is to demonstrate performance, although this clearly includes what in other circumstances would be termed “accounting”. These differences often arise through coincidence, or by virtue of the separate paths of development that have taken place. As a result, meaningful similarities can be shrouded in confusing terminological differentiation, as can real differences through the mistaken use of identical terms. The result is, in short, messy, particularly for those unfamiliar with the field, and in some ways even more so to those with the knowledge of the more precise use of some similar terminology in the financial and indeed the environmental spheres. There is on-going work to establish a set of base terms in the field of SEAAR,7 which will serve to ease confusions arising through the varied and somewhat ad hoc use of different terms. For the purposes of this journal, however, we would note that the individual authors have in the main used the terms with which they are most comfortable, rather than referring to a lexicon consistently applied throughout the volume. In this paper, we have used terms in italics when referring to a term used by one or other author or practitioner, thereby highlighting its specific rather than suggesting its generic application.

Making Values Work Why pay attention to SEAAR? The starting point for any understanding of this emerging field is to address the question of why companies and other organisations are developing practices in this field. Two papers, those by Curtis Verschoor and Simon Zadek, discuss this in some depth, although in practice all of the papers address this theme to some degree. Verschoor starts by asking and seeking to answer the ageold question of whether ethics is good for business. Drawing on recent research, he seeks to demonstrate the positive link between measures of positive social performance and traditional business success. However, whilst offering persuasive argument and data, Verschoor is quick to point out that such approaches in assessing this relationship do not prove causality. Indeed, there is a strong case that can be argued that profitable companies are more likely to invest in explicit ethical standards and behaviour. Zadek takes a more qualitative approach in addressing the question of why companies in particular are engaging the practice of social and ethical accounting, auditing, and reporting. Central to his argument is a combination of macro shifts, including globalisation and related changes in the organisational and technological dynamics of corporate performance, and companys’ micro-environment, which drives them to respond to particular forms of public pressures, and to develop new styles of value-based leadership, management and associated quality assurance systems and processes. Stakeholder dialogue Central to the emerging field is “stakeholder dialogue”, understood as both a means of “accounting” for an organisation’s performance, but also a route for deepening shared values between the organisation and key stakeholder groups. Three papers offer insightful and complementary theoretical perspectives on this theme, those of Peter Pruzan, Craig MacKenzie, and Harry Hummels. Peter Pruzan’s article focuses on this latter aspect. His paper in this volume offers a synthesis of method and practice drawing on the Danish experience of imple-

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menting Ethical Accounting, an approach developed by Peter Pruzan and Ole Thyssen in the late 1980s at the Copenhagen Business School. Craig MacKenzie’s paper is a natural complement to Peter Pruzan’s perspective in that he stresses the importance of “ethical knowledge” in the overall equation. In his short and thoughtprovoking paper, he proposes that social and ethical accounting and auditing will have little real impact on company practices unless it enriches the accumulated ethical knowledge that guides their practical decision-making processes. Harry Hummels draws these two papers together in introducing the language of debate. He stresses the importance of understanding the nature of moral dilemmas in organisational decisionmaking processes that require interpolation and mediation between distinct, value-based perspectives.

Making it practical The papers by Pruzan, MacKenzie, and Hummels offer broad conceptual frameworks for thinking about the underlying rationale and methodological foundations of the field. Five papers, by Simon Zadek, Maria Sillanpää, Elsa Dawson, Peter Raynard, and finally Wan Ying Hill, Ian Fraser and Philip Cotton, go to the next stage in providing a framework for operationalising some of these foundations. Zadek’s paper follows the route taken by the New Economics Foundation for some years in setting out their understanding of the eight key principles of quality in the practice of social and ethical accounting, auditing, and reporting.8 The papers of Maria Sillanpää and Elsa Dawson demonstrate how two organisations – a business and a private non-profit organisation (NGO) – go about auditing their policies, practices and actions on the basis of these eight key principles. Maria Sillanpää draws particularly on her work with The Body Shop International in developing social auditing as an integral element of its overall approach to ethical auditing.9 Of all the papers, this offers the most detailed operational view of one possible mechanism for systematising stakeholder dialogue within an

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overall quality assurance process covering social dimensions of an organisation’s activities. Maria Sillanpää focuses particularly on a set of systematic procedures that have been developed and trailed for a number of years, much of which is based on The Body Shop’s experience in implementing the European environmental standard, the Eco-Management and Audit Scheme (EMAS). Elsa Dawson takes a quite different approach in exploring the relevance of social auditing for the non-profit organisation, Oxfam. With a strong focus on existing “silent accounting” and structures for stakeholder representation, Elsa Dawson argues that many of the elements that make up a sound social audit process are already in place at Oxfam, particularly in the whole area of participative decision-making and governance.10 Peter Raynard’s paper also focuses on social audits for non-profit organisations (NGOs), and offers up a broad description of the relevance of the approach being used by the New Economics Foundation with NGOs in the U.K. and internationally, including membership organisations such as housing associations and retail cooperatives. Hill, Fraser, and Cotton draw on trials in implementing stakeholder-based social audit processes in a hospital environment in Scotland. Their findings broadly suggest that patients respond positively to the direct form of involvement explicit in the approach adopted, and that these responses exceed the equivalent benefits of a more traditional, representative structure. These findings are consistent with more extended operational trails in Denmark and Norway in implementing ethical accounting in health care institutions.11 Without additional learning strategies the organisation is not likely to develop any “ethical knowledge” – to use the words of Craig MacKenzie – and it will hardly show any improvement with regard to its (unethical) behaviour.

Is it sensible to introduce SEAAR? The introduction of social and ethical accounting, auditing, and reporting is a sensible

thing to do from an ethical point of view. To many managers that may not be a sufficient reason for introducing it. The papers by Curtis Verschoor and by Len Brooks and David Nitkin shed some light on the motives for introducing or indeed not introducing, SEAAR. In his paper, Curtis Verschoor offers evidence that there is a link between a corporation’s ethics – as an aspect of corporate governance – and its overall financial performance. Using the 1997 Business Week ranking, he demonstrates that 134 corporations (out of the best 500) expressed in their annual reports their commitment to the use of ethical practices in dealing with stakeholders or to their code of ethics as part of the internal control structure of the organisation. Statistical analysis shows that the mean financial performance of companies with a stated commitment to ethical behaviour is higher when compared with the mean rank of companies that either published no management report or did not make any reference to ethics. In brief, the implied relationship between ethical intent and behaviour and business performance confirms an increasing array of findings that stakeholderinclusive companies tend to perform better financially, especially but not exclusively over the long term. Len Brooks and David Nitkin offer a different picture. They report on the experience of 174 of Canada’s largest public and private sector corporations thereby addressing the reasons (not) to introduce sustainability auditing, the progress that has been made during the last few years, and the required leadership. Although the authors are not over optimistic regarding the chances of sustainability auditing becoming a mainstream management practice, the direction is clearly in favour of better management of environmental impacts and corporate social performance.

Conclusion The collection of papers in this special issue of the Journal of Business Ethics do not constitute any representative overview of work in the field, either in terms of topics covered, cases and examples given, or in terms of authors and insti-

Making Values Work tutions involved. There is an exploding richness of work in this field internationally, and any attempt to describe it or represent it in its entirety would be doomed to failure. The papers do, however, we feel, highlight through illustration some of the more interesting developmental strands, and raise some of the most important – albeit often uncomfortable – challenges for the times ahead. From this latter perspective, this special issue more than anything offers a menu of work to do, and a challenge for professionals from many fields to engage in and contribute to this exciting area.

Notes 1

Aspects of the history of the field, and its relationship to contemporary developments, have been most recently examined in Zadek, S., P. Pruzan and R. Evans: 1997, Building Corporate AccountAbility: Emerging Practices of Social and Ethical Accounting, Auditing, and Reporting (Earthscan, London). 2 Nijenrode University, The Netherlands Business School/European Institute for Business Ethics: 1995, The Technology of Ethical Auditing: An Outline (Nijenrode University, Breukelen). 3 Zadek, S. and R. Evans: 1993, Auditing the Market: the Practice of Social Auditing (Traidcraft/New Economics Foundation, Gateshead). 4 The Body Shop Approach to Ethical Auditing, The Body Shop International, Littlehampton, 1996. See also the entire Values Report (1996) which contains all three audits. 5 P. Pruzan: 1995, ‘The Ethical Accounting Statement’, World Business Academy Perspectives 9(2), 35–46. 6 Burns, M., M. Forstater, D. Osgood, A. Mong and S. Zadek: 1997, Open Trading: Options for Effective Monitoring of Corporate Codes (New Economics Foundation/Catholic Institute for International Relations, London).

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The Institute of Social and Ethical AccountAbility is currently evolving such a set of terms through an electronic dialogue between key practitioners and theoreticians around the world, the preliminary findings of which are published in Zadek, S., C. Gonella, A. Pillingz: 1998, Making Values Work (Association of Chartered and Certified Accountants in association with the Institute of Social and Ethical Accountability, London). 8 The earliest version of the principles framework is documented in Zadek, S. and R. Evans: 1993, Auditing the Market: The Practice of Social Auditing (Traidcraft/New Economics Foundation, Gatehead). This approach has been further developed most recently in Zadek, S., C. Gonella, A. Pilling (1998). 9 As well as drawing on other experiences documented in Wheeler, D. and M Sillanpää: 1997, The Stakeholder Corporation: A Blueprint for Maximising Stakeholder Value (Pitman, London). 10 The term ‘silent accounting’ was originally coined by Professor Rob Gray at the Centre for Environmental and Social Accountancy Research to descibe existing although fragmented social/ethical accounting processes. For a further explanation of this and Gray’s construction of a set of consolidated ‘silent accounts’ of the company Glaxo, see Gray: 1997, ‘The Practice of Silent Accounting’, in Zadek, Pruzan and Evans (1997): 201–217. 11 See, for example, Nørgaard, L.: 1997, ‘Building Dialogue Culture: Woyen Mølle’, in Zadek, Pruzan, and Evans (1997): 157–170.

New Economic Foundation/NEF, Vine Court, 112–116, White Chapel Road, London E1 12E, U.K. European Institute for Business Ethics, Nijenrode University, Straatweg 25, 3621 BG Breukelen, The Netherlands.