Companies look for payoff from triple bottom line

By Dr Rodger Spiller

This article first appeared in the NZ Herald in January 2000. It is reproduced here as part of the Money Matters tribute to Rod Oram, who as then Business Editor of the NZ Herald, invited Rodger to write this and two other columns that are shown as separate blogs on the Money Matters website.

Following the international trend that has seen companies such as British Telecom, Shell and BP produce ethical accounting reports in 1999, leading New Zealand companies have committed themselves to producing in the coming year reports that account for not only traditional financial results but also environmental, social and ethical performance.

This represents a significant development for ethical business in New Zealand.

Ethical accounting provides independently verified researched information about how a company is performing, enabling management to improve business and overall ethical performance.

It shows what stakeholders - including shareholders, employees, customers, suppliers and the community - expect from the company and how they perceive its performance.

It strengthens the loyalty and commitment of these stakeholders by providing a forum for the company to listen and learn, communicate what is being achieved and make specific commitments for continuous improvement.

Ethical accounting was the focus of Building Stakeholder Relations, the third international conference of the Institute of Social and Ethical AccountAbility (ISEA), held in Copenhagen in November.

Increasing international interest was reflected in the attendance at this conference by most of the world's leading accountancy firms along with specialist consultancies, academics, private and public sector organisations and non-governmental organisations.

Companies from Italy to India, from multinationals to small businesses, are now producing these reports. This is in stark contrast to the situation I observed while training with ISEA in London when it was launched in 1996 at a time when there was far less interest in this field.

Reflecting increasing local interest, plans are being made for the establishment of a New Zealand ISEA chapter to promote best-practice ethical accounting.

The conference featured the launch of ISEA's new global standard for ethical accounting, AccountAbility 1000. The standard is intended to offer a way of learning from best practice in ethical accounting and to assist improvement in business performance.

It will also provide a common basis for comparing performance between businesses and within a business over time.

The AccountAbility 1000 standard specifies processes that a business should follow to account for its performance, not levels of performance that a business should achieve.

The processes fit into five broad categories: the accounting, auditing and reporting process is planned (planning); information for the report is collated and the report produced (accounting); it is externally verified (auditing) and then disclosed (reporting).

To support each of these stages, information systems and other internal systems and processes are designed and implemented (embedding).

The business then begins planning for the next cycle, incorporating the experience from the previous cycles. The entire process is permeated by engagement in dialogue with the business and its stakeholders.

British Telecom (BT), a founding member of ISEA, produced its first report last year.

Addressing the conference, BT's manager of social and environmental measurement, Chris Tuppen, said that it aimed to be a successful organisation and regarded stakeholder dialogue as a key way to make this happen.

BT viewed ethical accounting as a competitive advantage for the leading companies implementing it. It enabled them to protect and build their reputation and therefore their financial bottom line.

He did, however, note that it appeared that some stakeholders did not understand the rationale for ethical accounting.

For example, a customer commented that "customer care is the be-all-and-end-all." However, when Mr Tuppen explained the link between employee satisfaction and customer service and that the ethical accounting process was designed to improve both of these, the customer appreciated BT's work on this.

A shareholder described it as "a waste of shareholders' money" but changed his mind when Mr Tuppen explained the link between stakeholder satisfaction and financial performance.

In the introduction to BT's ethical accounting report, entitled An Issue of Responsibility, BT chairman Sir Iain Vance said the company had produced the report "because we believe there is more to our business than can be revealed in a conventional annual report and accounts, but which could usefully be put into the public domain."

His introduction included the point that "we also believe that there is value to be created in maintaining a sound reputation as a company which behaves with integrity and which takes a holistic view of its role in society. The value of reputation is like brand value. It is a reservoir of goodwill which supports the prime purpose of the business."

The report sets out BT's mission and aims. It describes its commitments to four key stakeholders: shareholders, customers, employees and the community. It reports on how BT has gone about meeting these commitments and how these groups view its performance.

The report addresses areas of concern and includes commitments for future performance. It includes an independent verifier's report.

The report includes both quantitative and qualitative data. For example, employee satisfaction is measured through focus groups and attitude surveys. Completed anonymously, the survey asks more than 80 questions and results are grouped into categories, such as leadership, teamwork and meaningfulness of work, and averaged out.

Managers are given feedback reports and then work with their teams to explore any issues that may need action, and to formulate and carry out action plans.

Results are benchmarked across high-performing companies and compared with previous years. Considerable senior management attention is directed to those areas where employees are least satisfied and progress is monitored regularly.

Examples of survey questions are the extent to which employees are satisfied with their benefits package, training and development and the information they receive about what is going on in the company.

Speakers at the conference discussed the correlation between the satisfaction of stakeholders, such as employees, and a company's financial performance. These measures of satisfaction are not included in financial accounting reports.

Flemming Pedersen, managing director of the leading Danish energy and environmental consultancy Ramboll, said that only one-quarter to one-third of the total market value of a company is accounted for by traditional accounting.

He presented ethical accounting as a tool for measuring and managing intangible aspects and providing the multiple indicators that management, investors and others required.

Reflecting this need for more information than that provided by purely financial accounting, the ethical scorecard has been created to assist with evaluating company performance.

This and other ethical accounting tools can be used not only for investment and other stakeholder requirements but also by management as a tool for organisational transformation and achieving optimal business performance.

For further information about ethical accounting, the ethical scorecard and the work of the New Zealand Centre for Business Ethics and New Zealand Businesses for Social Responsibility contact: [email protected]

* Dr Rodger Spiller is managing director of the personal investment firm Money Matters, NZ financial planner of the year, director of the NZCBE, and a director of NZBSR.