A Reflection of Corporate Social and Environmental Reporting on Websites

Oct 20, 2006
BY Professors P.L. Joshi, Dr. Jawaher Al-Mohadki & Dr. Amal Wakil

The Need

These days, communities and regulatory bodies are increasingly concerned about social and environmental related issues. Apart from various environmental activist groups, in its 1987 report by the United Nations World Commission on Environment and Development had discussed the issue of sustainability.

At the same time, the stakeholders not only are demanding information on financial performance, but also there are increasing demands for information on social and environmental performance. This is more expected from large size firms, like Multinational Corporations (MNCs) because such firms being visible targets, face potentially higher political costs, and have more investors than other firms. To meet this ever growing demands of stakeholders, several companies around the world have established a corporate responsibility Promotion Department to ensure that they uphold all their economic environmental and social responsibilities as a corporation.

Furthermore, companies are ensuring that their programs reach across organizational boundaries to manage their activities in the areas of environmental conservatism, corporate compliance and social contribution and their goal to win public trust and esteem. Giant organizations, such as Coca Cola, Pepsi, Colgate, Unilever, ABB, Pfizer, Intel, Motorola, SBC , Genentech, Cemex etc. have citizenship programs in this direction. Therefore, social and environmental reporting is a very important component of "triple bottom line reporting' that also includes the communication of social and economical issues.

KPMG in its 2005 International Survey of Corporate Sustainability Reporting found that 52 per cent of the world's 250 biggest companies issued separate reports on corporate social information, compared to 45 per cent in 2002. The survey – which looks at the reporting practices of the top 100 companies in 19 countries, found that 72 percent of Japanese companies, 49 percent of UK companies and 36 percent of the US companies issue environmental, social or sustainability reports in addition to their financial reports. Health, Safety and Environment (HSE) are the most common types of reports. In other studies, it was found that the voluntary reporting of environmental impacts and initiatives in company’s annual reports has become widespread among organizations accepting an obligation to extend their environmental responsibilities beyond regulatory compliance.

Conceptual Framework

The corporate financial reporting model, economic agency theory or positive theory of accounting has some appeal as a rationale for environmental disclosures. Some researchers believe that these theories though mostly related to the efficient capital market system, disclosure of social and environmental information may also be considered useful for determining the managerial compensation. However, many users of social and environmental information may not come from the capital markets e.g. many pressure groups such as Greenpeace. Therefore, it is believed that social contract theory and legitimacy theory as well as stakeholder theory provide a more comprehensive perspective on social and environmental disclosure because they recognize that organizations evolve within a society that encompasses many political, social and institutional framework. Some researchers argue that social and environmental disclosure are considered as a constructed image in which a firm is conveying to the outside world to control its political or economic position.

Driving Forces

Some of the drivers pushing MNCs toward corporate responsibility include:

• In several countries, governments have relied on legislation and regulation to deliver social and environmental objectives in the business sector. Shrinking government resources, coupled with a distrust of regulation has led to the exploration of voluntary and non-regulatory initiative instead.
• There is a growing demand for corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors and activist organizations.
• It is argued that ethical conduct of companies exerts a growing influence on the purchasing decisions of customers. In a recent survey, it was stated that one in five consumers reported having either rewarded or punished companies based on their perceived social performance. Another survey shows that more than 25% of shareholders took into account ethical considerations when buying and selling stocks. Similarly, some companies have introduced codes of conduct for their suppliers to ensure that other companies' policies or practices do not tarnish their reputation.
• It is also seen that employees are looking beyond paycheck and benefits. They seek out employers who philosophies and operating practices match their own principles. To hire the best skilled and talented employees, companies are being forced to improve working conditions.

A survey by KPMG in 2005 showed that economic considerations, ethical considerations and innovation and learning are the main business forces for the MNCs to disclose corporate social information.

Motivated from the above arguments, this article describes the disclosure practices on social and environmental information by MNCs through their Websites. It also explains which characteristics are are inspiring them to be more accountable in this regard.

Results

We examined the disclosure of social and environmental information by multinational companies in their Websites and data on a number of variables, such as total assets, profits, equity, total debts, auditors, industry type etc. were collected from the websites of 49 multinational companies (http://www.geneva.ch/multinationals.htm). This website provides information about 128 MNCs and 50 percent of them were selected randomly. However, 15 companies websites could not be accessed because of error messages. The data was collected during April-May 2005. We used Discriminant analysis method to analyze the results.

This article classifies the amount of disclosure both for social and environmental as detailed, summarized and none. A numeric value of 3 (detailed), 2 (summarized) and 1 (none) was assigned to the data. It was that 27 (55.1%) of total companies in the sample disclosed detailed environmental information, while 12 (24.5%) provided summarized information in their websites. This indicates that MNCs are more conscious towards environmental issues and seems to be fully aware of the fact that customers will be avoiding what they see as socially and environmentally irresponsible products or the products of companies that have allegedly not acted in society's best interest.

On the other hand, 30 (61.2%) companies disclosed detailed socially related information, and only 13 (26.5%) of companies provided summarized information. This clearly indicates that MNCs tend to disclose detailed social and environmental information in their websites. Companies have been following this practice because they believe that if investors think that managers are withholding information, they will view the undisclosed information as negative and will lower their estimation of the firm's value. Hence, to gain public trust, managers have started disclosing detailed information on social and environmental related issues.

Furthermore, the results show that more than 60 per cent of companies undertake health care, medical scholarships and funding rising and charity activities. On the other hand, 67 per cent of them spend most of their expenditures on water and energy conservation and air pollution prevention.

Type of information disclosed by the sampled companies

Social related information- Environmental related information
1 Health care activities- Water and energy conservation
2 Medical research programs- Air pollution prevention
3 Education (scholarship) Waste reduction and recycling
4 Helping handicapped and orphans- Land management protection and enhancement
5 Child hunger Greenhouse campaigns
6 Red cross Animal welfare
7 Fund raising campaigns and charity
8 Sponsoring sports teams

Discriminant Analysis

Discrimination analysis was performed on the collected data to determine which variables influence the MNCs to disclose such information. The explanatory variables tested were: log of total assets (size), log of total equity, (size), return on assets (profitability), debt ratio (risk), auditor (Big4 and non-Big4), country effect, and industry effect.

Social Disclosure

The findings show that there is a strong bond of relationship between disclosure of social information and the company size as well as the profitability of the company. The reasons are that as the size of the firm increases and it is more profitable, the more amount of information is disclosed. There is greater ability of such a firm to engage in social activities. Our results are very much in line with other studies findings that social and environmental disclosures are positively associated with corporate profitability. It can be argues that the profitable firms can use social disclosure to deviate attention from their weaknesses and to project the image of a company with future prospects. The predictive power of social disclosure model was 89. 1 per cent.

Environmental Disclosure

The predictive power of environmental model was 79.2 per cent. It was found that companies with strong equity base ( size) and in good financial condition have a propensity to voluntarily disclose more environmental information since the potential costs to be incurred following the release of such information is likely to be less. A company is more likely to release information on environmental incidents when it lessens outside stakeholders' uncertainty. Hence large size companies disclose more environmental related information.

Conclusion

Some activists have argued that adopting corporate responsibility standards allow companies to build brand values by improving their brands with ideas, emotions and belief that appeal to consumers. Furthermore, It is argued that costs of building brand value through social responsibility initiatives is usually cheaper than trying the same effect through advertising and public relations. In addition to the above, a conference of the Center for Corporate Citizenship, Boston College in 2004 cited the reasons that pressures are for greater transparency and disclosure about environmental and social practices aimed at long-term ecological, social, and business sustainability have been growing in the wake of the growth of power of multinational corporations, the array of scandals that have plagued business institutions since the collapse of Enron and Arthur Anderson.

The MNCs, generally, are much ahead in disclosing social and environmental related information because of their size advantage. Our findings support the empirical evidence that size and profitability are important variables in voluntary disclosure of financial and non- financial information related to social and environmental activities. In this regard, the PriceWaterhouseCoopers survey of 2001 reported that the increasing level (quality and quantity) of voluntary public disclosure by industry and the finance sector has resulted in:

o environmental and social performance becoming a competitive business issue

o increased analysis of environmental and social business risks by financial sector institutions.

Corporate sector companies in Bahrain are seem to be somewhat slow and lagging behind in voluntarily disclosing the social and and environmental informations though some companies like National Bank of Bahrain, BATELCO, ALBA, ALCOA etc. have been engaged in disclosing such information. Other companies may be preparing for internal management and regulatory purposes. A future research may be aimed at investigating the extent of disclosure of corporate social and environmental reporting in Bahrain and the reasons for slow progress in this regard.

• Professor (Dr.) Prem Lal Joshi, University of Bahrain . The author is also Editor-in-Chief: IJAAPE, UK and on the Board of Directors of World Accounting Forum. He is listed in Maquis Who's Who in the World (23rd ed.) and International Who's Who (2005-06)
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