What You Count, You Get

If we only account for benefits to shareholders, that's all we get

One of the articles in Business On A Small Planet (IC#41)
Originally published in Summer 1995 on page 23
Copyright (c)1995, 1997 by Context Institute

The problem with our current system of accounting is that it is a biased scorekeeper. By accounting only for the return to shareholders, it pushes corporate managers to perform against one major goal, when in fact the typical corporation exists to achieve at least several goals. General Electric, for example, identifies about 10 goals, which include being a good employer, providing good products and services at a fair price, and being a good citizen. Typically, there is no accounting for any of these goals; the only thing we are able to judge readily is the profitability to shareholders.

Most importantly, there is no accounting for the major purpose for which the corporation exists. A corporation is not chartered by society to provide a return to stockholders. We allow that. But the reason we give corporations valuable charters is because we expect corporations to serve the public purpose.

The history of this is intriguing. Like other major changes that occur over a long period of time, this perversion of corporate purpose occurred gradually. When Queen Elizabeth I and her successors and subsequently the American colonies granted corporate charters, it was understood that serving the public was the reason for granting the special benefits contained in the charters. (For more on the history of corporations, see Jon Rowe’s article, Corporations and the Public Interest, in this issue.)

Investors who invested in these corporations wanted an accounting for the investment – a perfectly reasonable desire, since the shareholders, more than other stakeholders, were often far removed from the operations of the corporation. So the stockholders hired auditors to listen for them, as the root of the word auditor suggests.

As years went by, accountants kept on providing performance reports to the investors. But the sovereign and the state didn’t keep asking for reports on how well the corporation was performing its public purpose. Employees, and until recently consumers, also failed to demand an accounting for how well corporations were performing for them. So we had a vacuum of accountability, and the only thing filling that vacuum was the accounting report to stockholders.

As a result, over the course of almost 300 years, we gradually turned from an understanding that the corporation is chartered to serve the public interest, toward a belief that it exists to serve stockholders and the bottom line.

Costs and Benefits

The new accounting system I’m proposing would report on how a corporation is serving its various constituents. Managers, who now make the decisions in contemplation of how they will look on that one-dimensional bottom line, would see that they are going to be held accountable for the cost to the other stakeholders as well. This would certainly affect their decisions.

I call this multi-dimensional system stakeholder accounting. Such a system would look much like the accounting income statement we have now, which has essentially one column that shows the revenues minus the expenses and the net – the bottom line. We should add about four sections – one for employees, one for customers, one for local communities, and one for the society at large. Each stakeholder’s section or column would show the benefits that occur for these stakeholders, the costs inflicted on them, and their net result or "bottom line."

At the outset, much of this accounting will not be translated into dollars. What we need is information. We need a reporting of the layoff record of a company so that workers can make informed employment decisions. We need a detailed reporting of statistics on hiring, placement, and promotion of women and minorities, so that women and minorities contemplating moving from one firm to another can assess their prospects. We need a reporting of the emissions, the toxic substances stored on site, the hazardous waste created in the community.

It’s not difficult to implement such a system; the first step is a very easy one. A corporation that wants to be accountable to its stakeholders need only make accessible to all the information it presently collects and files with various federal agencies. Right now, workers don’t have access to the corporation’s EEOC (Equal Employment Opportunity Commission) filings, for example. As a result, the people who are most affected by whether the corporation is discriminating are unable to judge for themselves whether they are going into an environment that is discriminatory.

Likewise with communities asked to provide tax breaks to corporations that promise to create jobs – what is the company’s actual job creation record in other communities that have given it favors. Or how many injuries, of what type and magnitude, have occurred in the department and workstation a potential employee would be joining? The company has ready access to the data in its files, the worker needs this information to make an informed labor market decision.

Reporting to the Public

Imagine that the corporate reports for all the corporations in your city or town are released each year by March 31. These are filed with the Corporate Accountability Commission (formerly the SEC) and also kept on file at the city clerk’s office, the labor district offices, and at corporate headquarters. The news media jumps on this information just like they do now when the annual stockholders’ report comes out. On the nightly business report, we have a detailed comparison of the pollution of all of the large corporations located in your city, and how their environmental performance has changed over the last year. The media seeks interviews with the CEOs and environmental protection officers of these corporations to get explanations of any changes in pollution levels.

A worker, a city council member, a member of Congress, anyone who wants to know what the corporation is doing in these important areas can get information simply by reading this annual corporate report.

With this kind of information public, managers would have good reason to make different decisions – it would be a different and a more responsible corporate America. And in fact, it would be one that corporate managers would rather work in, because it would free them to be as good as they want to be, instead of being bound to the tyranny of the bottom line.

We’ve got to remember that what these managers sometimes do is evil, but they aren’t evil people. They learned to accept the standards of a system that says this: If you are faced with a question of closing a plant in Dodge City, Kansas, that will put 5,000 people out of work and devastate a community, devastate a school system, devastate a police department, devastate the social fabric of that community, leaving many of these people never to work again, in order to move that plant to Juarez, Mexico, to earn a 0.5 percent higher return on investment for the stockholders and a few pennies more in earnings per share, then you’ve got to do it. You can feel sorry for Dodge City, but you’ve got to do it. Managers don’t like to do that, but they do it because the bottom line forces them to.

There are examples of companies trying to swim upstream against the tide and serve the needs and the interests of the whole set of stakeholders. But that inexorable pressure of the bottom line keeps drawing them back, and as soon as one CEO leaves, or as soon as times get a bit hard, they fall back on the same kind of behavior they were engaging in in the past.

By changing the accounting system and the accountability system, managers will be able to make more humane, more socially responsible decisions consistently, and will benefit from doing so.

Ralph Estes, is a professor of business administrations at American University and co-founder and resident scholar at the Center for Advancement of Public Policy in Washington, DC. He is a former president of Accountants for the Public Interest and was a senior accountant with Arthur Andersen & Co. Ralph Estes’ books include Corporate Social Accounting, and Accounting and Society. His forthcoming Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things, will be published by Berrett-Koehler. He is presently organizing a national grassroots coalition to promote corporate accountability to stakeholders. You can reach him at 1735 S Street, NW, Washington DC 20009 tel. 202/797-0606; fax 202/265-6245.

Ecological Audits

by Kathryn True

An ecological audit provides companies with a platform for change. By helping employees and managers find leverage points for action, the eco-audit supports the development of long-term, holistic business practices. As defined in the book EcoManagement: The Elmwood Guide to Ecological Auditing and Sustainable Business, an eco-audit is:

An examination and review of a company’s operations from the perspective of deep ecology, or the new paradigm. It is motivated by a shift in values within the corporate culture from domination to partnership, from the ideology of economic growth to that of ecological sustainability. It involves a corresponding shift from mechanistic to systemic thinking and, accordingly, a new style of management known as systemic management. The result of the eco-audit is an action plan for minimizing the company’s environmental impact and making all its operations more ecologically sound.

An important distinction between eco-auditing and environmental auditing is the eco-audit’s focus on a change in corporate culture. The eco-auditing process can create a foundation for a shift in corporate values from which employees and management can begin to shape a new way of doing business.

Another important aspect of an eco-audit is the concern for the company’s impact on the surrounding community and ecosystem. Like any living system, a business organization is defined by internal relationships as well as its relationship to the larger environment. Therefore eco-auditing is not only concerned with analyzing internal business functions; it also addresses the interactions between the company and the stakeholders outside its walls – its customers, suppliers, neighbors, the nearby river, and so on.

A Metabolic Check-up

The eco-audit can take many different forms and may include surveys, assessments, appraisals, and reviews. EcoManagement includes eco-auditing checklists based on a company’s "metabolism" – the movement of materials, people, and energy from the outside, through the company, and back to the outside.

There is no prescribed formula for how or where to begin an eco-audit. A company may choose to assess all its operations at the same time, or prioritize the areas to audit based on environmental impacts, employee safety issues, or other concerns. Recognizing the interdependence of the company’s functions, it is important for auditing teams from different areas to work together so that information that impacts more than one operation can be used to create shared approaches.

Almost as important as the audit itself is widespread involvement by company employees. A healthy company ecology depends upon motivated workers, and just as the eco-audit considers the whole business system, it needs to consider the whole person – what are employees’ feelings, needs, and fears around this process? How can eco-auditing best be integrated into their job description?

The eco-audit is not a quick-fix solution, in fact it should be repeated over and over again, like yearly employee evaluations or taking inventory of a supply room. It is a tool that takes companies one step closer to embracing a long-term approach to doing business, which will be a continual work in progress.

Source: EcoManagement: The Elmwood Guide to Ecological Auditing and Sustainable Business by Ernest Callenbach, Fritjof Capra, Lenore Goldman, Rudiger Lutz, and Sandra Marburg; Berrett-Koehler Publishers, San Francisco: 1993.

For information on how to perform an eco-audit, contact GreenAudit at 1220 Broadway, Suite 704, NY, NY 10001, tel. 212/971-0808.

Earth Day 2000 has developed a household environmental audit. Write: 116 New Montgomery St., Ste. 530, San Francisco, CA 94105; tel. 415/495-5987.

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