Carrolls Pyramid Of Corporate Social Responsibility Model Accounting Essay

Carrolls Pyramid Of Corporate Social Responsibility Model Accounting Essay In the past, the common perception of a business responsibility was to maximize their firms profit. This is because businesses were perceived to always put the shareholder interests first. However, businesses are moving towards impacting the socials and environments. Several research have found that businesses now have direct responsibilities to various other stakeholders which include preventing the harm of human rights and ensuring that there are solutions available if abuses occur (Smith, Wokutch, Harrington, and Dennis, 2001). The modern view of business responsibility demands companies to help in problems relating to public welfare. As firms have no utmost responsibility for these unpleasant situations, philanthropic responsibilities are still not mandatory. However, due to a decrease of social institutions that provide help to the communities, people have higher expectations towards company and believe that they should take part in filling up the shortages (Carroll, 1979). Carroll has proposed a CSR concept, which states the organizations 4 business responsibilities (i) economic, (ii) Legal, (iii) Ethical, and (iv) Discretionary (as shown in diagram 1). These four components are complementary to each other (not mutually exclusive). Diagram 1: Carrolls Pyramid of Corporate Social Responsibility Model Source: Chaisurivirat, 2009. The Effect of Corporate Social Responsibility: Exploring the Relationship among CSR, Attitude toward the Brand, Purchase Intention, and Persuasion Knowledge. The economic and legal responsibilities are the basic and essential element in a business. There are a few researches done to further enhance the importance of these elements (Jamali and Mirshak, 2006). Basically, economic responsibility is similar to the traditional view of a business role; which is to maximize the firms profit for their shareholders. Carroll (1979) stated that business itself is an economic unit to the society. In addition, legal responsibility is where companies are required to obey the laws and regulations set by the government or respected authorities. The conventional profit-maximizing view explored in Albert Carrs article Is Business Bluffing Ethical (Velentzas and Broni, 2010). Carr stated that making money out of a product is the businesses main role. Business is said to be like a poker game, whereby organization are to play within the set of rules of the game (Carr, 1968). Those who do not comply will not be successful in their business. The duty that they had towards employees and shareholders surpasses the other moral obligation as long as it does not go against the law (Carr, 1968). Besides that, Milton Friedmans also explained that it is essential for a firm to maximize the revenues of a shareholder by overcoming all the environmental challenges (Cheers, 2011). Similarly, Friedman (1970) reemphasize that, There is one and only one social responsibility of business is to use its resources and engage in activities designed to increase its profit so long as it stays within the rule of the game. This can be further supported by a case of Dodge v. Ford Motor Company (Cheers, 2011). The Ford founder, Henry Ford aims to provide Ford vehicle for everyone by reducing the price. The shareholders were dissatisfied and claimed that the company should not make a profit-reducing decision. Court held that firms are primarily to bring profit to the shareholders. The company should not exercise any choices which will bring disadvantage to the shareholders. However, nowadays, the perception of a business role has changed. The businesses concern should not include only the shareholders, but also other parties or entities that would be affected by the organizations action, which refers to stakeholders (Fassin, 2008). Freeman (2012) defined stakeholders as (i) people or institutions that are affected by the corporate action, practices and decisions and also (ii) those who are related to the success of the corporation. Firms are expected to transform the profit maximization mindset to trusteeships or multifiduciary stakeholders concept, whereby the business role is now to achieve balance among the stakeholders interest by avoiding doing any harm to any individuals or groups (Goodpaster and Mathews, 1982). In addition, Carroll introduced the ethical and philanthropic responsibility. Carrolls ethical aspect refers to the societys perspective of a good behavior (Carroll, 1979). Corporation must comply with the rules and regulation set while operating. Moreover, it also includes the norms or expectations which are not written in law; in other words, the moral value and rights (Carroll, 1991). Furthermore, firms are obligated to act voluntarily beyond their business scope and rational ethical acts. This is known as the philanthropic responsibility, such as organizing or participating in charity event (Carroll, 1979). Bowen (1953) mentioned that social and philanthropic responsibility would serve as a guideline for the business in the future. Nowadays, most businesses believe that they should be more social responsible towards the society and environment and hence, criticisms arises over the traditional perspective. For example, some critics disagreed that business is a game, as it is a needed component in the society. Besides that, the competitions between different businesses are involuntary, which would involve and influence many other stakeholders, such as government and local communities (Kirkpatrick, 2002). Therefore, institutions are said to be accountable to the stakeholders. They need to pay back to the society for what they have done and thus, provide reasonable explanation to the stakeholders. Accountability vs Accounting According to Blagescu, Casas, and Lloyd (2005), accountability is the processes through which an organization makes a commitment to respond to and balance the needs of stakeholders in its decision-making processes and activities, and delivers against this commitment. As mentioned before, todays corporations also have responsibilities to other stakeholders, such as the society. Therefore, corporations have the obligation to be accountable to those stakeholders (Brennan and Solomon, 2008). An accountability framework, Global Accountability Project (GAP) (as shown in diagram 2), was developed by One World Trust with a purpose of generating wider commitment to the values and principles of accountability among global organizations (Blagescu, et.al, 2005). In the case of GAR, it can be seen that they have indeed put in efforts to increase their accountability to their stakeholders, especially in relation to social and environmental aspects. Diagram 2 Global Accountability Project (GAP) Framework Source: Blagescu, Casas, and Lloyd (2005). Pathways to Accountability: The GAP Framework. According to GAP framework, there are four dimensions that are important for increasing and evaluating accountability of organizations. First is the transparency. Transparency is that stakeholder can access to credible and timely information about the organizations operations (Blagescu, et.al, 2005). To be transparent, organizations must do more than simply disclose commonly standardized information. In other words, it needs to provide more useful and needed information for the stakeholders for decision-making. Organizations should be focusing on the quality of the information disclosed, instead of the quantity (Hassan and Marston, 2010). GAR disclosed important information for their stakeholders. For example, they announce that they will partner with TFT for forest conservation while building shareholders value (Golden Agri Resources Ltd, 2011b). The second dimension is participation. It means that the organizations allow those key stakeholders to be involved in the decision-making process and activities which would influence them (Blagescu, et.al, 2005). GAR does fulfill their accountability obligation in this dimension. They have been working hard to engage with their stakeholders, such as their customer, Nestle, in order to improve the performances (Harvey, 2011). Furthermore, evaluation is another essential part of organizations accountability. It involves the evaluation and monitoring of both end results and the ongoing progress of the organizations activities (Blagescu, et.al, 2005). This dimension plays two significant roles in accountability. It reports the performances against expectations after an event in order to supply crucial information to stakeholders; it also increases accountability by learning and increasing organizational responsiveness to stakeholders (McKenna, 1983). In fact, GARs performances in relation to sustainability development are evaluated and monitored by few external independent organizations, such as Greenpeace (Harvey, 2011). Additionally, the dimension of complain and response mechanisms is for both organizations and stakeholders to seek and receive feedbacks from each other in order to increase accountability (Blagescu, et.al, 2005). For instance, GAR takes into account the responses of customers, such as Nest le (Harvey, 2011). Although the interpretations of accountability are very wide and are limited only by imagination, accountability is always found to have links with the provision and receipt of financial information in many accounting literatures (Narasimha Rao and Raghavendra, 2011). Due to the rapid climate change, undeniably, accounting and the environment are no longer mutually exclusive (Andrew, 2001). In fact, accounting had long been treated as just a technique used to provide financial information for stakeholders (Bushman and Smith, 2001). Normally, people will assume that all the accounting information is just financial. However, a modern accounting concept should also include some green issues in order to increase organizations transparency (Andrew, 2001). Besides, accounting system can also help the stakeholders in evaluating the organizational performances as it could provide them with relevant information (Perrini and Tencati, 2006). It is not surprising that accounting can actually be used to increase organizations accountability. Overall, increasing accountability is important for organizations, including GAR. GAR was required to increase their degree of accountability, especially to those external key stakeholders. This is because According to The Straits Times (2010), GAR had deforested illegally before in Indonesia. In order to meet the expectations of the stakeholders, GAR started to be committed in the conservation of forests and peatlands in Indonesia. There are two main actions taken by GAR to do so. Firstly, GAR has signed a forest-conservation agreement with TFT, a non-government organization (NGO). Also, GAR starts to disclose their social and environmental performances in annual report (Golden Agri Resources Ltd, 2011b). GAR published their inaugural sustainability report in 2011, after their illegal deforestation activity was discovered to the society (The Straits Times, 2010). All these signs indicate that GAR is bowing to the pressure from the NGOs and external stakeholders (Harvey, 2011). In fact, there are some conceptual theories which could provide an explanation for the sudden changes made by GAR. These organizational practices changes in GAR could be explained using Legitimacy Theory. This theory asserts that organizations seek to ensure that their activities and operations are perceived to be legitimate by the society and stakeholders (Deegan, 2011). Legitimate could be said as a social construct based on cultural norms for organizations behaviors (Suchman, 1995). Therefore, organizations have to be committed to the social contract between the companies and the society to gain recognition. Social contract could be roughly defined as the implicit and explicit expectations that the society has on the organizations (Deegan, 2011). In fact, failing to commit to the social contract would be perceived as not legitimate, and eventually will bring negative impacts to the companies, such as difficult to obtain resources and supports from the society to continue the operations. Thus, legitimacy is an important component for the organizations as it is considered as a precious intangible resource which organizations rely on in order to survive (ODonovan, 2002). Corporations could actually establish their legitimacy by information disclosures (Suchman, 1995). Through the disclosure of information in relation to social and environmental performance, the company would gain the societys trust. Consequently, it will be beneficial to the company in ways, such as improving companys reputation and establish competitive advantages (Porter and Kramer, 2006). As a result, GARs changes their organizational practice by starting the publication of sustainability report. Besides that, Stakeholder Theory could also be used to gain an understanding of why GAR responds to NGOs in this manner. One of the branches of Stakeholder Theory, ethical perspective, adopts a normative position; that organizations should consider the rights and interest of all the stakeholders, regardless of their powers and influences on the company (Deegan, 2011). According to Freeman and Reed (1983), stakeholders are any parties that are affected by the organizations operations. Usually, organizations would try to meet the stakeholders expectations and be accountable to them by providing and disclosing organizational information (Gray, Kouhy, and Lavers, 1995). Therefore, it is believed that this might be one of the reasons why GAR alters their organizational practice. Undeniably, bowing to the pressure from stakeholders is a good start for GAR. Committing to CSR, disclosing social and environmental performance records, and being more accountable are indeed beneficial to GAR themselves and also their stakeholders. It is also important to note that accountability and transparency are one of the essential factors in enhancing the organizations sustainability development (Global Public Policy Institute, 2005). Sustainability development is generally defined as to meet the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development, 1987). Golden-Agri Resources Ltd (GAR)s Sustainability Report Currently, there is no any legal law or regulation states that organizations have to disclose their social and environmental aspects. However, voluntary disclosures would bring favorable impacts to both internal and external stakeholders. Therefore, many corporations start making voluntary disclosures, so does GAR (Cheynel, 2012). In fact, GAR published their inaugural sustainability report for a purpose of providing the stakeholders a better understanding of the companys priorities, performances, and stakeholder engagement process (Golden Agri Resources Ltd, 2011b). GARs sustainability reports standard was assessed at application level B, based on an internationally established reporting framework (shown in diagram 3) developed by Global Reporting Initiative (GRI) (Golden Agri Resources Ltd, 2011c). This framework was designed to provide organizations with a set of principles for defining report content and ensuring the quality of the reported information (Global Reporting Initiativ e, 2000). Diagram 3 Global Reporting Iniative (GRI) Framework Source: Global Reporting Initiative, Sustainability Reporting Guidelines (https://www.globalreporting.org/resourcelibrary/G3.1-Sustainability-Reporting-Guidelines.pdf) Diagram 4 Global Reportive Initiative (GRI) Principles for Reporting Source: Institut fur Wirtschaftsinformatik, GRI Principles (http://www.iwi.uni-hannover.de/upload/lv/sosem10/Seminar_SS_2010/SS10/Seminararbeit/torres/www/measuring2.html) According to the GRIs framework, there are 4 principles (Materiality, Stakeholder Inclusiveness, Sustainability Context, and Completeness) (shown in diagram 4) for defining the report content (Global Reporting Initiative, 2000). The materiality principle requires corporations to address the most important and concerning issues to their stakeholders. The major current concerning issue for GAR and their stakeholders is deforestation in Indonesia (Harvey, 2011). This is because GAR had cleared the forests illegally before in Indonesia, as mentioned before. In addition, this deforestation act is destroying the livelihood of the habitat there. The stakeholders, such as Indonesia government, local communities, and even those NGOs are therefore showing their concerns on this issue badly (Harvey, 2011). In GARs sustainability report, it focused on disclosing information about policies of preventing deforestation. For example, they state that they would have a no-deforestation footprint in In donesian rainforest by partnering with NGO, TFT to launch Forest Conservation Policy (FCP) (Golden Agri Resources Ltd, 2011b). Overall, it is believed that the report content is fairly material. Furthermore, GARs sustainability report does fulfill the principle of stakeholder inclusiveness. One of the main disclosures is their multi-stakeholder engagement process (Golden Agri Resources Ltd, 2011b). For examples, engaging NGOs, customers, and local communities to address the interests those stakeholders have in order to achieve their expectations and sustainability development. Moreover, the underlying question of a sustainability report is how organizations plan to contribute in the future to improve economic, environmental, and social developments at both local and global level (Global Reporting Initiative, 2000). This is related to the principle of sustainability context. The report discloses that GAR is committed to a holistic approach towards sustainability, as it is always looking at methods to increase productivity while reducing negative impacts on its land. One of its sustainability policies, Yield Improvement Policy (YIP), is focused on plantation management and land suitability (Global Reporting Initiative, 2000). This shows that GARs voluntary disclosures do meet the requirement of sustainability context. Besides that, the information GAR discloses includes all significant actions or events within the reporting period; which fulfills the principle of completeness. However, it can be seen in the report that data and statistics regarding to enviro nment and sustainability performances are insufficient. Furthermore, there is limited alignment between the sustainability report and overall business strategy. Lack of all these information could affect the completeness of the report (KPMG, 2008). Apart from the content aspect, the quality of the sustainability report is also an important element. Balance, comparability, timeliness, accuracy, and reliability are the 5 principles used to test the report quality (shown in diagram 4). GARs report does not really meet the balance principle as they mostly disclose favorable aspects of the organizations performance while there is lack of unfavorable results and topics. This could affect stakeholders assessment and decision making adversely. Besides that, the comparability principle is irrelevant to the report as this is the inaugural sustainability report for GAR. Therefore, it cannot be used by the stakeholders to compare with its past performance (Global Reporting Initiative, 2000). Other than these, the report does meet the accuracy and reliability principle. Qualitative statements in the report are valid only if it is based on the basis of other reported information and evidences (Global Reporting Initiative, 2000). GAR does pro vide other evidences and information to increase the accuracy and reliability of their reports. Overall, GARs sustainability report is believed to have met the reporting standard requirements set by GRI. Nevertheless, the quality of the report can be improved through the compliance of accounting standards. Accounting Standards Accounting standards (AS) are defined as a policy set by authorities such as accounting body, government or regulatory body to regulate the accounting transactions in the financial statement (The Institute of Chartered Accountants of India, 2011). As globalization emerges, the business world realizes the importance of having a common standard in the financial aspect. A survey conducted by the International Federation of Accountants (IFAC) shows that majority of the leaders from accounting fields support the idea of having common international standards as part of economic growth (Private Company Financial Report, 2008). Thus, the International Accounting Standard Board (IASB) developed the International Financial Reporting Standard (IFRS) (Cellucci, 2011). IFRS aims to serve as a regulation for financial reporting which can be exercised equally throughout the world (Ball, 2006). One of the advantages of IFRS is that it provides a principle-based framework with better quality. In addition, there are lesser regulation and exception as compared to the other standards such as General Accepted Accounting Principle. By adopting IFRS, a more professional judgment is being introduced which helps to reduce the risk faced by the company. There is also more transparency in the economic transactions (PricewaterhouseCoopers, 2007). However, the Security and Exchange Commission (SEC) states that the standards in IFRS are highly inadequate compare to some accounting standards (Cellucci, 2011). For instance, the General Accepted Accounting Principle (GAAP) is considered to be the gold standard in US (Private Company Financial Report, 2008). The Staffs interpretation of GAAP includes some disclosures of environmental issues on contingent liabilities. This is to recognize the contingent losses and to acknowledge the different accounting practices and disclosure on contingent liability (Roberts, 1995). However, IASB reported that environmental issues reporting are not within the scope of IFRS (Yara C, Nelson, and Bruna, 2008). Thus, it shows that IFRS are still not compatible with other standards like GAAP in the social and environment accounting aspect (Center for Audit Quality, 2009). Besides that, there are several studies which reported that there are limitations in the role of accounting standards. This includes ensuring the reporting quality as well as the emphasis on the firms incentive in reporting (Ball, Kothari, and Robin, 1998; Ball, Robin, and Joanna, 2002; Leuz, 2003; Ball and Shivakumar, 2004). The application of the accounting standards involves significant judgments and usage of private data. Thus, substantial discretion is provided by any accounting standards to a firm. However, the quality of how the firm behaves depends on the incentive in reporting, such as the market forces and legal institutions (Daske, Hail, Leuz, and Verdi, 2008). The institutions have the right to choose the information that they want to disclose. Hence, an accounting standard for better sustainable development should meet the needs of the users by encouraging feedbacks and comments. Similarly to other accounting standards, IFRS do not record all the effect of economic action (SIGMA, 2003). For instance, externalities, such as the costs and benefit which do not affect the organization directly, are not included in the financial reports. Costs and benefit should be included to provide a better market-based decision making (SIGMA, 2003). For example, the emission of petrol will cause climate changes and air pollution. These consequences are considered as the original cost to the society in the present and future. However, these costs are not reflected in the fuel price. Positive externalities are those that would be beneficial to the society. This shows that the present accounting standard does not have sufficient regulation that enables the firms to relate to the sustainable development aspect. For a company to achieve sustainable development, one should balance the economic, social and environmental impacts in their decision-making. This includes the analysis of the positive and negative impacts of the three dimensions on policy changes, and identifying the outcomes which would benefit one party and harm the other parties as well as the proper precaution steps to minimize negative impact (Bebbington, 2000). The analysis on past principles focuses more on economic impact (Kirkpatrick, George, and Curran, 2001). Rio Principle 4 states that it is essential for environmental aspect to be integrated as part of the development process while Organization for Economic Co-operation and Development (OECD) principle 3 recognized the importance of integrating the 3 dimension policy and purpose (Janeiro, 1992). Overall, the current accounting standards are inadequate in maintaining a companys sustainable development. Therefore, many efforts have been done to integrate the economic, social and environment policy. For instance, Global Reporting Initiative, the United Nations Principles for Responsible Investment, Global Initiative for Sustainable Rating and others have been created. This shows that our current standards are not capable to ensure companies, such as GAR, to commit to sustainability development. Hence, Sustainability Accounting Standards Board (SASB) is launched to create sustainable accounting standards for the users (Deloitte, 2012). This will include the disclosures of sustainability issues which enable investors and public to have a better decision making. The SASB developed a Sustainable Industry Classification System (SICS) to create a sustainable accounting standards that suits different industry (Deloitte, 2012). As a conclusion, apart from profit maximization, organizations play a major role in the community. Organizations should also disclose social and environmental factors in their financial reports. Thus, GAR is held accountable to the Indonesian forests and peats as well as all the stakeholders. They should maintain environmental disclosure in their financial reporting for all stakeholders. However, besides GAR, the regulators and professional bodies also play a big role in ensuring organizations to be more committed to sustainable development. This can be done by creating adequate sustainable accounting standards for the organizations.