Sustainability Reporting and Shareholder Perspective

With the wake of industrialization in the twenty first century, fuelled by technology and globalization, there has been an unfortunate destruction of natural resources, social injustice and suppression of civil rights and the native knowledge of indigenous people (Collins, 2012) in more subtle manner than ever before. The man’s quest for economic wealth maximization led the unfair treatment to the environment and society the exploitation of natural and human resources. Owing to these reasons, the way in which a corporate operates is scrutinized more rigorously by all stakeholders including the regulators and the financial press (Martı´nez-Ferrero & Banerjee, 2016). Thus, pure economic or the profit motive has questioned over the last few decades.

Though the primary objective of an organization is to make profits, the society has recently challenged the profit motive. At the early stages of development of the concept of organization as a social entity they demonstrated their responsibility to society through corporate philanthropic activities (Abdeen, et al., 2016). Philanthropic responsibilities are those which society expects organisations to fulfil voluntarily and reflect a common desire to see organisations engaged in improving society (Carroll, 1979). Initially the corporate responsibility serves as a way of discharging the business’s responsibility by donating goods and providing other essentials to the needy without internalising the responsibility which stems within the organization culture, values and practices. Over the past few decades, there has been a shift in paradigm from external focus to more internal focus where socially responsible activity has been viewed as part of the daily business practice (Abdeen, et al., 2016).

As a discharge of social responsibility the business later not only engaged in corporate responsible activities but also inform their stakeholders. The later developments in business reporting have put the accent on the importance of non-financial disclosures with the conceptual shift from pure profit based responsibility reporting to the corporate responsibility reporting (Salehi & Azary, 2009; Abdeen, et al., 2016; Khaveh, et al., 2012; Gómez-Bezares, et al., 2016; Gozali, et al., 2002; Busru & Shanmugasundaram, 2016; Martı´nez-Ferrero & Banerjee, 2016; Kasbuna, et al., 2016). Many different theoretical arguments were articulated to provide rationale for corporate to elect voluntarily disclosure corporate social responsibility information to the external stakeholders.

Evolution of Corporate Social Responsibility

Though corporate social responsibility was widely researched agenda in the academic field there is no consensus on its definition. Salehi & Azary in 2009 refers it to as a company's commitment to operate in an economically and environmentally sustainable manner, while acknowledging the interests of a variety of stakeholders and maximizing economic, social and environmental value. Though currently this phenomenon has been viewed as a holistic concept embracing the importance of the stakeholders, the early scholars perceived it as a narrow concept which focused primarily on the shareholders.

Corporate responsibility concept was used for the first time by an American economist Howard Bowen in 1953.  Archie B Carroll, Professor of Management Emeritus, calls Howard R. Bowen the Father of Corporate Social Responsibility due to his landmark book published in 1953, Social Responsibilities of the Businessman. This was the regarded as the first attentive discussion of business ethics and social responsibility. Since then the focus of CSR is shifting from stockholder orientation to stakeholder orientation. ‘This ubiquitous aphorism is gaining momentum in directing the conduct of human affairs towards a stance in support of life for man and all living things’ (Collins, 2012, p. 28).

The concept off CSR gained its momentum in the late 1950s and 1960s.  In early days a responsibility of a corporate was perceived as giving the highest return to their owners (Bosch-Badia, et al., 2013). Early proponents of corporate social responsibility theories suggest that the primary purpose of business is to make profits, and it is not the function of business to get involved with social responsibility issues since such involvement would compromise profit maximisation (Abdeen, et al., 2016). This of responsibility is all about the pure economical field. Having the same conviction, the Nobel Prize winning economist Milton Friedman in 1970’s in his widely cited book ‘Capitalism and Freedom’, rejected the view that corporate managers have any moral obligations. The responsibility of business is to use resources to increase profits as long as it stays within the rules. Here he meant it stays within the rules as to engage in open and free competition, without deception or fraud. As explained by Bosch-Badia, et al. in 2013 Friedman held that those executives who imposed social expenses to the corporations they managed should be regarded as disloyal agents to their principals, the shareholders. Friedman propagated that the sole purpose of the corporation is to maximize the financial return to its owners. 

It was argued that by making a profit, corporations contributed to a growing, healthy economic system that provided employment and adequate incomes for all. In other words, corporate social responsibility was to operate portably, and the corporation could not survive without profits, much less play a social role. Carroll (1979) suggests that CSR is a multidimensional concept encompassing economic, legal, ethical and philanthropic responsibilities of a business. According to Abdeen, et al. (2016) the ultimate role of organisations to produce goods and services desired by society, be profitable and enable job creation. On the legal responsibility perspective the business should comply with the social agreements. However the ethical responsibilities goes beyond legal requirements and demonstrating the commitment of a business for the internal and external society and environment.

The perception of corporate social responsibility has been changed and it is continued to be changing. ‘It was not until the late 1970's that companies began to react more pro actively to corporate social responsibility issuing affirmative action guidelines’ (Salehi & Azary, 2009, p. 66). Currently it is becoming accepted that entities also have responsibilities to a broader group of stakeholders (e.g. local communities, customers, suppliers, employees, creditors, government and even future generations) and not restricted only to their owners. Entities are now being held responsible for their social and environmental as well as their financial performance. Changes in expectations about accountabilities in turn should lead to changes in corporate accounting.

Social Responsibility Reporting (SSR)

SRR can be understood as the provision of information about the performance of an organisation in relation to its interaction with its physical and social environment. The businesses are treated as key players of the society and do not exist in isolation. The employees depend on the business and also customers, suppliers and the local community are all affected businesses and what they do. Their products, and the way they make them, also have an impact on the environment. Accordingly, as a part of the environment the businesses have greater transparency and accountability in its reporting. This is reflected in a recent progress of reporting aspect in global context towards comprehensive disclosure of corporate performance to include environmental, social and economic factors. On this ground Corporate Social Responsibility CSR has become prominent in the language and strategy of business organisations globally as well as locally. According to a recent survey, 93% of CEOs regard sustainability as important. Similarly ninety-five percent of the 250 largest companies in the world now report on their corporate social responsibility (CSR) activities (Gómez-Bezares, et al., 2016).

When considering the reporting aspect of the corporate social responsibility, it is difficult to identify one accepted conceptual framework. One broad mechanism that companies can adopt is “Triple Bottom Line Reporting” (TBL). At present, companies are focusing on environmental and social dimensions rather than focusing on economic dimension itself. Reporting information on these three elements is referred to as TBL reporting.

Despite CSR is a voluntary reporting system having greater diversity in the degree and facets of reporting, different frameworks are in application to standardize the reporting. Among them Global Reporting Initiatives (GRI) is accepted to be superior. The Global Reporting Initiative (GRI) is a leading organization in the sustainability field. GRI promotes the use of sustainability reporting as a way for organizations to become more sustainable and contribute to sustainable development. In May 2013, GRI released the fourth generation of its Guidelines (extracted from the official website). GRI was introduced through GRI 1^st version in 2000. The second generation known as G2 was then introduced improving the disclosures in 2002. Followed by G2, G3 guidelines were launched in 2006. The latest release of the GRI guidelines would be the 4th generation introduced in 2013 and G4 guidelines have been superseded by the GRI Sustainability Reporting Standards (GRI Standards) launched in October 2016.

Corporate Social Responsibility Reporting in Australia

There are no legal requirement for sustainability reporting in Australia per se. However, there are number of reporting requirements for the publically listed companies in Australian Securities Exchange (ASX). Further there has been a greater compliance with voluntary reporting within the Australian companies listed in the stock exchange. According to Australian Council of Superannuation Investors (ACSI) seventy one cents in every dollar invested in the ASX200 is now invested in corporates which reports higher disclosure standards on their environmental, social and governance engagements. Thus, this trends reveals that the Australian investors place a higher value in the CSR activities as well as the disclosure of the same.

Since 2008, there has been a remarkable improvements in the level of corporate disclosure practices in Australian ASX listed companies, mainly due to the requirements introduced by second edition of ASX Corporate Governance Council Principles and Recommendations in 2007. The introduction of the third edition in 2014 further requires each ASX listed company to disclose material exposures to economic, environmental and social sustainability risks and how it intends to manage those risks. This corporate governance disclosure requirements have tied the governors’ (the management) actions to the environmental and social impact and making social responsibility part of the obligation of corporate governance. With the new initiatives the corporate risk has been linked to social and environment aspects going beyond the economic context. Having the same argument, Khaveh, et al., (2012) suggested that the companies need to assure shareholders about the risk and naturally potential investors look for lower risk and higher return. Thus sustainability reporting would increase share price and could be able to internalise the CSR activities of the business.

Even though there is a great momentum in the reporting practice, there are still a large proportion of corporates fail to report the sustainability related matters in a generally acceptable manner. ‘In 2015, there were still 57 companies – approximately 30% of the total ASX200 by number – that were assessed as providing either no reporting or only a basic level of information’ (Australian Council of Superannuation Investors, 2016, p. 4).

As of August 2017, there are 2,216 companies listed in ASX and the compliance of ASX Corporate Governance Council Principles (Third Edition) have been made mandatory for all listed companies in the ASX. There is no doubt that today CSR has become an important component of business strategy which emphasises transparency, responsiveness and accountability (Abdeen, et al., 2016) but the question is whether the shareholder, who are treated as the ultimate owners of the business, perceive the mere responsibility reporting as a value creation to the organization, to their own wealth and to the society at large. The recent research carried out on the area of shareholder perception of social responsibility reporting yielded a mixed results all over the world (Khaveh, et al., 2012;Gray, 2006; Nielsen & Thomsen, 2007).

Stakeholder Perspective of Responsibility Reporting

In the extant literature the customer and the shareholders have been considered as the main stakeholders and consequently it has been the subject of many studies in the responsibility reporting and stakeholder perspective. Thus, the consumer as a stakeholder plays a key role in influencing the nature of CSR strategies that organisations adopts (Abdeen, et al., 2016). In contrary, Nielsen & Thomsen (2007) argued that there are dissimlar prioriies in the Danish companies with repard to the CSR reporting and they further argued that this could be due to the interest stemming from different institutional associations, such as government, regional institutions and NGOs.

Under the customer perspective Luo & Bhattacharya in 2006 studied influence of CSR on perceived customer responses. It was found that the firms with low innovativeness capability, CSR actually reduces customer satisfaction levels and, through the lowered satisfaction, harms market value (Luo & Bhattacharya, 2006). Similarly, according to Abdeen, et al., (2016) there are broadly accepted four belives of CSR measures, namely, philanthropic ethical and legal aspects. In their study of consumers’ beliefs about firm’s CSR initiatives and their purchase behaviour, they found that only ethical beliefs have direct relationship with purchase behaviour.

In the attempt to link shareholders and CSR practices some authors perceived profit as a proxy of easuring shareholder reward. In a study of voluntary disclosure, revenue, and shareholders wealth in Singaporean companies, Khaveh, et al., (2012) found that there is a significant positive relationship between environmental and social performance disclosure as well as with revenue. Gómez-Bezares, et al., in 2016 examined the impact of corporate sustainability on stock market returns British Companies over the period 2006–2012 and showed that CS is negatively correlated with stock return volatility. Which means that investing in companies with CSR reporting not only generates higher returns during the booming period, but also reduces shareholders’ damages during period the market id declining. In the context of Maliasian companies, the economic, social and environmental sustainability reporting is positively associated with financial performance (Kasbuna, et al., 2016). In contrast, there has been a weak positive relationship between corporate gvernance and CSR disclosures with the share price companies in India and there is a negligible incluential power of CSR reporting on the share price (Busru & Shanmugasundaram, 2016).

On the other hand, there is one class of researches who argue that the CSR reporting is a mere fad and a fashion. Gray (2006) argued that social, environmental and sustainability reporting is superficial and cosmetic adjustments to that reporting through “new models of organisational reporting”. Holding a similar stance, Martı´nez-Ferrero & Banerjee (2016) argued that firms use CSR as a strategy against the negative perception received by the corporate from earnings management. They further stated that there is a favourable impact from CSR on cost of capital and the shareholders do not identify when CSR practices are used as a strategy to mask earning management. Thus, these studies have illustrated how CSR have been used as aploy to distort the market and the shareholders’ perception.

There has been many studies on the sibject of CSR reporting, corporate performance shareholder perception. The academic literature on the link between sustainable development strategies and firm performance is fragmented (Gómez-Bezares, et al., 2016) It is apparent from the review of previos litereture that there is no consensus amoung the researchers whether the CSR activities and disclosures lead to create positive impact towards shareholder perception on the corporate. With the introduction of the third edition of ASX Corporate Governance Council Principles and Recommendations mandatory disclosure requirements in 2014, there has been a gap in the literature as to whether the shareholders perceive the CSR disclosures as a value addition to the firm, their own wealth and as well as to the society and the environment, especially in the Australian context.

References

Abdeen, A., Rajah, E. & Gaur, S., 2016. Consumers’ beliefs about firm’s CSR initiatives and their purchase behaviour. Marketing Intelligence & Planning, 34(1), pp. 2-18.

Australian Council of Superannuation Investors, 2016. Corporate Reporting in Australia, Australia: Australian Council of Superannuation Investors.

Bosch-Badia, M. T., Montllor-Serrats, J. & Tarrazon, M. A., 2013. Corporate Social Responsibility from Friedman to Porter and Kramer. Theoretical Economics Letters, Volume 3, pp. 11-15.

Busru, S. A. & Shanmugasundaram, G., 2016. Corporate Disclosure Scores and Share Price Reaction: Empirical Study of Indian Listed Firms (Post Satyam Period). Research Journal of Finance and Accounting, 7(3), pp. 1-7.

Carroll, A. B., 1979. A three-dimensional conceptual model of corporate performance. The Academy of Management Review, 4(4), pp. 497-505.

Collins, N. C., 2012. Rethinking the Accounting Stance on Sustainable Development. Sustainable Development, 20(1), p. 28–41.

Gómez-Bezares, F., Przychodzen, W. & Przychodzen, J., 2016. Corporate Sustainability and Shareholder Wealth—Evidence from British Companies and Lessons from the Crisis. Journal of Sustainability, Volume 8, pp. 276-98.

Gozali, N. O., How, J. C. & Verhoeven, P., 2002. The Economic Consequences of Voluntary Environmental Information Disclosure. Lugano, Switzerland, International Congress on Environmental Modelling and Software, pp. 484-489.

Gray, R., 2006. Social, environmental and sustainability reporting and organisational value creation? Whose value? Whose creation?. Accounting, Auditing & Accountability Journal, 19(6), pp. 793-819.

Kasbuna, N. F., Tehb, B. H. & Ongc, T. S., 2016. Sustainability Reporting and Financial Performance of Malaysian Public Listed Companies. Institutions and Economies, 8(4), pp. 78-93.

Khaveh, A., Nikhashemi, S. R., Yousefi, A. & Haque, A., 2012. Voluntary Sustainability Disclosure, Revenue, and Shareholders Wealth- A Perspective from Singaporean Companies. Business Management Dynamics, 1(9), pp. 06-12.

Luo, X. & Bhattacharya, C. B., 2006. Corporate Social Responsibility, Customer Satisfaction, and Market Value. Journal of Marketing, 70(4), pp. 1-18.

Martı´nez-Ferrero, J. & Banerjee, S., 2016. Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices. Journal for Business Ethics, Issue 133, p. 305–324.

Nielsen, A. E. & Thomsen, C., 2007. Reporting CSR – what and how to say it?. Corporate Communications: An International Journal, 12(1), pp. 25-40.

Salehi, M. & Azary, Z., 2009. ‘Stakeholders’ Perceptions of Corporate Social Responsibility: Empirical Evidences from Iran. International Business Research, 2(1), pp. 63-72.