Centre for Innovation in Management

Social Audits Good for the Bottom Line

Published in The Globe & Mail Business Ethics Column
Thursday, February 12, 1998
by: Ann Svendsen

          Companies today confront an ever-growing demand to be more accountable. Financial success, as reflected in dividend payments, is no longer enough, not even for increasing numbers of shareholders. They, together with the wider community of stakeholders--employees, customers, and community interests--are insisting that corporations be socially and environmentally responsible. And this wider community is becoming more assertive about the right to be informed and to influence corporate decisions.

          Faced with these relatively new demands, managers and boards of directors are casting about for new ways to evaluate their performance. Some undertake "social audits" to monitor and verify their social performance claims. The Body Shop and Ben & Jerry's (ice cream), and VanCity Credit Union have recently conducted stakeholder-oriented audits with The New Economics Foundation (NEF), a London-based non-profit organization acting as their external auditor to verify the accuracy of the social accounting data and the fairness of the audit process. Stakeholders are heavily involved in setting performance indicators and evaluating how the company measures up.

          While this form of social audit provides useful information for consumers and shareholders, it does not provide the kind of data that corporate management and boards require to adequately monitor and improve their companies' social and ethical performance. To start with, performance measures are based on stakeholder views and social norms rather than corporate goals and industry standards. Moreover, the social audit process is not adequately integrated into corporate decision-making. What companies need is a well-integrated monitoring and management system to evaluate their social and ethical bottom line.

          The balanced scorecard concept and the strategic management system developed by Robert Kaplan and David Norton in their book The Balanced Scorecard: Translating Strategy Into Action (Harvard Business School Press, 1996) offers a useful framework for such a system although it doesn't go far enough. Kaplan and Norton's scorecard includes financial performance, customer satisfaction, business processes and employee learning and growth. It should be extended to include such indicators as a positive reputation, strong community linkages, trusting relationships with suppliers and sustainable use of resources.

          When it comes to defining the company's social mission, employees and management should be involved in determining values and goals. Performance measures should take account of the views of external stakeholders, but be not be set by them. Stronger connections need to be made between social accounting, strategic planning and budgeting to ensure that the company's spending supports its social as well as financial goals; and internal performance review and compensation structures should be aligned with social performance goals to foster commitment and change.

          Finally, in addition to setting up an integrated social accounting system, companies need to put more emphasis on building mutually beneficial, collaborative relationships with their key stakeholders. This will go a long ways towards producing greater customer loyalty, an improved reputation and a stronger, more resilient organization.

          Lacking a structure to measure their companies' social and ethical results, executives are like pilots trying to land a plane in turbulent conditions, using only an altimeter. Today's CEOs know this; that is why they are looking for new non-financial-based measures of performance. Those charged with responsibility for corporate governance are also demanding that managers of the companies on whose boards they sit provide them with data on such subjects as environmental management, employee and community relations and ethical performance generally.

          In today's business environment, the Milton Friedmans who believe that the only goal of a corporation should be to maximize profits, are a rapidly vanishing breed. These dinosaurs may cringe when they are told that the concerns of other stakeholders must be taken into account if a business is to survive and flourish. But the fact is that the earth has moved since Mr. Friedman proclaimed his limited vision of corporate purpose.

          Today, companies, their officers, and even individual directors, are having to accept responsibility for corporate transgressions covering an increasingly wide field of activity. Moreover, in the "information age", studies show that more than 70 percent of corporate value is tied up in intangible assets like good will, employee know-how and stakeholder relationships.

          The conclusion is inescapable: Profits and social ethics go hand in hand.

Ann Svendsen is a senior partner with CoreRelation Consulting, specialists in stakeholder relations based in Vancouver. She can be reached via email : svendsen@istar.ca