June 11, 2019

ASU professor says firms are embracing social accounting as a business strategy

In its May newsletter, Salt River Project gave tips to consumers on how to save money using its new pricing plans and what to do in case of an outage. They also listed where they gave more than $3.6 million in donations to 358 different organizations last year.

Businesses, companies and large organizations like SRP are investing in a larger responsibility toward society by putting their money — and kind deeds — where their mouths are.

Ten years ago, examples of such corporate social responsibility would merely be publicity. Now, however, a fairly new concept called “social accounting” helps firms explain how generosity relates to their business strategy. It builds consumer trust, increasing investor confidence in its decision-making and business model.  

Social accounting accomplishes that goal by communicating how a firm’s operations create value for the organization and the community. This increases organizational transparency, strengthens stakeholder trust and provides an indicator of future performance.

Arizona State University’s Elizabeth Castillo, an assistant professor in organizational leadership with the College of Integrative Sciences and Arts, spent 20 years in management and is an expert on social accounting.

Castillo spoke to ASU Now about this new business tool, which is taking hold around the globe.

Woman in glasses with pendant

Elizabeth Castillo 

Question: What is your definition of social accounting?

Answer: Social accounting is a business tool to track and report a company’s performance along multiple dimensions — financial, environmental and social. Besides financial statements, it includes qualitative analysis and quantitative measures for assets like human resources, such as employee satisfaction, diversity, training and development; environmental impacts such as carbon emissions and water consumption; and intangibles such as intellectual capital, reputation and governance.

Tracking all these dimensions in an integrated way enables a firm to understand and evaluate its decision-making systematically and to show how its choices impact employees, investors, suppliers, regulators and the community. In sum, social accounting is a holistic way for the firm to strategize and communicate how it creates value for its stakeholders and society.

Q: When and how did this movement gain traction?

A: Businesses have long recognized they must hold themselves accountable to the community to remain viable. In previous centuries, this was easy to do because consumers, investors and businesses were geographically proximate. As business became more global and complex, more sophisticated methods for accountability were needed and developed, primarily financial accounting and auditing. However, in the last half of the 20th century, the negative impacts of this purely financial focus became more visible. Through media coverage, the public became aware of harmful systemic practices like environmental destruction and racial discrimination. Social audits emerged in the 1970s as a way to publicize and remedy these practices. In the 1980s, social audits began to be standardized so results could be compared. In the 1990s, business started to use social audit data to improve their operating performance. This led to frameworks and concepts such as the Balanced Scorecard, triple bottom lineThe triple bottom line looks at benefits to people, profit and planet. and corporate social responsibility reporting.

In the last decade, social accounting has become increasingly sophisticated. Standards-based models include the Global Reporting Initiative and the Sustainability Accounting Standards Board framework. Principles-based models include integrated reporting which tracks six types of resource inputs — human, natural, financial, manufactured, relational and intellectual — and depicts how a firm transforms those into outputs, outcomes and societal impact. Dr. Laurie Mook and Dr. Sandra Cherie Henderson are doing important work on similar social accounting models.

Q: What are the benefits and value added to companies who incorporate this practice?

A: Social accounting, particularly integrated reporting (IR), provides benefits at multiple levels. It gives organizations information to understand how their resource allocation decisions produce organizational success and profitability. This detailed, relational understanding enables them to devote attention to what matters most to their long-term performance. IR’s focus on capitalsResources that endure and can produce more resources. also conveys future value creation potential, providing helpful insights for investors. Finally, IR improves internal management and decision making by fostering holistic understanding of the firm’s operations and its interdependencies with stakeholders and the environment. This strengthens accountability and illuminates the company’s positive and negative impacts on society, or externalities.

At the societal level, integrated reporting promotes transparency, trust and legitimacy in the eyes of the public. It also gives investors information they need to more accurately assess future prospects for profitability and sustainability. For example, some companies report on the number of their internal ethics investigations. This gives investors a more accurate picture of risk exposure. Perhaps most importantly, social accounting connects organizational actions to community and planetary indicators such as the U.N.’s Sustainable Development Goals. By illuminating intangible resources like relationships, knowledge, ecosystem services, and trust, integrated reporting makes the foundations of sustainable commerce visible and actionable. It also makes businesses accountable. For all these reasons, IR is widely regarded as an enabler of financial stability for firms and the entire economy.

Q: The cynic in me says it sounds like a lot of extra work and is labor intensive.

A: That’s a common concern, yet people who use integrated reporting say the amount of work is not burdensome. For example, two researchers developed an integrated report for Exxon in about 40 hours. Thus, time and information availability are not barriers. The hard part — at least initially — is changing a company’s mindset about what it means to manage. Rather than the conventional approach where departments act in silos, IR calls for holistic understanding of the firm, internally across departments and externally by recognizing interdependencies with stakeholders and the operating environment.

As firms become familiar with the IR process, they report enhanced capacity for integrative thinking and better comprehension of their value creation ecosystem. For example, 2014 research by BlackSun and the International Integrated Reporting Council found that 96% of responding firms experienced increased cross-departmental collaboration, respect and communication when they used IR. Other benefits included broadening perspectives, enhancing shared understanding of their company’s value creation process and improving their decision-making. This integrative understanding is also beneficial to new organizational forms such as B Corps and social enterprises, and government agencies and nonprofit organizations.

Q: Which countries are leading the way in this practice, and which companies in the United States are successfully incorporating social accounting?

A: South Africa is the world leader in social accounting. This is because integrated reporting is required there for firms listed on its stock exchange. Japanese companies are rapidly adopting IR because their government recently encouraged its use. Integrated reporting is also gaining traction in the United Kingdom, where it has been adopted by the Crown Estate.

The big four accounting firms have all published papers and guidance on integrated reporting, including Deloitte, Ernst Young, KPMG and PwC. The International Integrated Reporting Council’s U.S. Community has presented webinars on American companies that have adopted IR. You can watch these videos to get a better understanding of these organizations’ experiences, including Clorox, Etsy, Coca-Cola, Intel and the American Institute of CPAs (AICPA). For companies interested in learning more about Integrated Reporting, the IIRC has a library of “how-to” guides and a database of exemplar reports sharing best practices.

Top photo: Photo illustration courtesy of Getty Images/iStock. 

Reporter , ASU Now

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