Corporate responsibility regarding environmental issues

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

As it has been said before, the growing concern for environmental issues around the globe induced organisations to engage in socially responsible behaviours. The corporate responsibility (CR) or corporate social responsibility (CSR) is not a new issue. In fact, it happens to be a relevant topic not only for the companies but also for the society at large.

There no generally accepted definition of CR; but still, several attempts were made to describe such strategy which effectively confines its meaning. In the green paper (2001) of the Commission of the European Communities, CSR is defined as:

"[. . .] a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis."

For Hopkins (2004), CSR relates to the fulfillment of a firm's responsibility towards the society while maintaining its profitability. Moreover, it entails treating the stakeholders, including the natural environment, in an ethical or responsible manner.

The term corporate responsibility and corporate social responsibility are usually used synonymously; however, not all authors share the same opinion. Webb (2002) argues that the word CSR is rather 'confusing'. By removing the word 'social' and using corporate responsibility instead, people are more able to understand that it includes the environmental and financial aspects of corporate performance. Hopkins (2004) believes just the opposite; employing the term CR as an alternative for CSR alters the nature of what the idea of social responsibility is all about. He believes that the word 'social' stresses on the other aspects of corporate responsibility is used to persuade companies to consider their social responsibilities including their usual responsibility which is; generating profits for shareholders.

Despite the different critics put forward, many practitioners still use the expression CR or CSR to refer to corporate response that addresses economic, social and environmental issues.

2.2 Corporate Environmental Reporting

The emphasis on 'green' issues has induced corporations to bring out their ecological contribution through environmental reporting (Subramaniam, 2008).

Environmental reporting (ER or CER) relates to the collection, measurement and publication of 'green' information to the community. Edu (2009, p3) defines such practice as:

"the use of environmental information to disclose the impact of corporate activities on the natural environment to stakeholders of the corporate entity or organisation."

Gray (1995) stated that the reporting of environmental information spread out mainly in an ad hoc manner and it was observed that it was known under different labels. It currently includes terms such as: triple-bottom-line reporting1, corporate responsibility reporting, corporate social reporting, corporate environmental reporting and sustainability reporting. These terms are often employed interchangeably when it comes to refer to environmental disclosures but it is important to stress that there are some differences between those terminologies.

Theoretical framework

Over time, there were several theories which have emerged to explain the reasons behind environmental reporting. Some examples are; legitimacy theory, stakeholder theory, media agenda setting theory and accountability. (U've stopped here- u've checked if there were any plagiarism too)

Legitimacy theory

Suchman (1995, p574) describes legitimacy as:

"a generalised perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values beliefs and definitions."

At the heart of legitimacy theory, lies the concept of a social contract. This implies that corporations have to "operate within the bounds and norms of their respective societies" (Brown and Deegan, 1998, p22) to ensure their continued existence. Matthews (1993) added that organisational legitimacy is not only obtained by making profit and complying with legal requirements but also, by considering the norms and values of society.

However, as the bounds and norms tend to change, what will be considered as acceptable to the society will vary from time to time. As a result, firms engage themselves in corporate reporting to show that they deserve their status of legitimacy.

Deegan and Gordon (1998) claim that the amount of environmental information available in annual report is somehow linked with the process of legitimation. Reporting of environmental information is said to be a strategy adopted by management to influence the public's perception about the legitimacy of the company especially when the organisation has to confront problems such as prosecution due to environmental pollution. Investigation carried out by Patten (1992) reveals that the level of environmental disclosures is rather high in such situations.

According to Deegan and Rankin (1996), businesses can lose their rights on the community's resources if they fail to meet societal expectations. In this case, different strategies- including the disclosure of favourable information- are employed to divert the attention of the public away from the main issue (Lindblom, 1994).

Evidence exists that managers do recognise the need to respond to the public expectations so as to preserve legitimacy of their respective organisations. However, the medium used, that is, corporate reports have been criticised for providing good news that are rather self-laudatory. (Hackston, 1996).

Stakeholder theory

The fundamental idea in stakeholder theory is that an organisation's success relies on the successful management of the relations that the company has with its stakeholders (Freeman, 1983).

Stakeholders are usually any individual or group who may affect or be affected by a corporation's activities (Freeman, 1984; Carroll, 1996). They typically include shareholders, employees, consumers, environmentalists, government and other parties who may have a 'stake' in the business. Most stakeholder theories have developed to the point in which the natural environment is given stakeholder status. Some academics consider stakeholders as those who are in "a mutually dependent or exchange relationship with the firm" (Evan, 1990, p58). The natural environment has, in fact, a mutually dependent or exchange relationship with businesses as companies normally rely on the local ecosystems for the supply of natural resources (Gladwin, 1995).

However, the relevance of each stakeholder group varies. Mitchell and Wood (1997, p58) argue that the importance of any group will depend upon "its power to influence the entity; legitimacy of a relationship and urgency of a claim." Roberts (1992) declares that the more dominant the stakeholder is, the more the company needs to adjust. As such it was found that organisations are more receptive to the claims of financial stakeholders and government regulators rather than environmentalists (Neu, 1998) or the nature. But the increased level of ecological awareness provides a motive for corporations to consider nontraditional stakeholders like environmentalists so as to cope with varying social demands.

It is important to strike a balance between the conflicting demands of the different stakeholders as they have direct influence on the organisational survival. The stakeholder framework has been advanced to assist managers in both identifying a firm's social obligations and managing relationships with its stakeholders. Ullmann (1985) stated that corporations use social disclosures, including environmental disclosures, as a tool to manage relationships with their stakeholders.

Media agenda setting theory

Media agenda setting theory is concerned with:

"the relationship between the relative emphasis given by the media to various topics and the degree of salience these topics have for the general public" (Ader 1995, p300; cited in Brown et al., 1998).

People tend to rely heavily on the media for information concerning issues such as the environment. As such organisations which are exposed to extensive media coverage- as a result of their environmental impact- tend to increase the amount of environmental disclosures in their annual reports (Brown and Deegan, 1998).

Besides, in the work undertaken by O'Donovan (1997), it was found that companies' disclosures of environmental performance are, in fact, a way to fix misconceptions reflected by media. This is particularly true, for corporations that are in situations where their legitimacy is threatened.

Accountability

Accountability is simply an obligation to provide an account to the intended audience (Perks, 1993).

Gray (1996) has put forward a model which aims at encouraging accountability. This very model states that there is a set of relationships between members of the society as if they were tied to a social contract. As organisations from part of the social system they are faced with the responsibility and duty to account for their actions to the community and not just to the fund providers. (Kisenyi, 1999).This concept, therefore, develops and improves the social relationships that exist between different actors in the society as it established that, the public (stakeholders) has a right to information.

According to Gray (1996) accountability can increase the transparency of businesses especially if they disclose accounting information (including social and environmental information) to a wider range of stakeholders.

Drivers for environmental reporting

After having discussed about the different theories, there is a need to consider the various motives that encourage companies to embark in ecological disclosures.

Economic performance

Most businesses operate in a view to yield profits. Discharging good environmental performance has proved to contribute to the increased revenues. Empirically, Bragdon and Marlin (1972) observed that there was a positive relationship between good environmental performance (or environmental disclosures) and good economic performance. It was further supported by later studies such as those of Porter and Van der Linde (1995) and Al- Tuwaijiri et al. (2004).

Yet, it seems that the findings obtained have been diverse for different researchers and some studies have shown that the correlation between environmental reporting and good economic performance is very immaterial (Rockness et al. 1986).

Compliance with environmental regulations

According to Cordano (1993) rising penalties, fines, and other legal costs instituted the importance of acting in accordance with legislation. Businesses are increasingly aware of the need to conform to green regulations in order to avoid the threat of environmental liabilities2. Thus, through environmental reporting companies are able to show their compliance with regulations that are imposed by relevant authorities. Yet, acting in accordance with legal requirements is unlikely going to be the primary motive, given the scarcity of requirements regarding environmental disclosures and related verifications (Deegan, 2000).

Ethical duty

Companies have also an ethical duty to behave in a socially responsible manner (Shocker and Sethi, 1973). Lampe et al. (1975) stated that ethical organisations are responsive to environmental issues as it is seen to be the "right thing to do". Research has proved that businesses that feel concern for the environment and demonstrate good CR practices enjoy increased consumer purchase preference. (Gildea 1994, Zaman et al.1996).

Attract ethical investors

The growth in ethical investment has persuaded corporations to give attention to CR (Lydenberg and Grace, 2008). As a matter of fact, various stock exchanges- such as the Johannesburg Stock Exchange and the Paris Stock Exchange- require listed companies to disseminate CSR information in their annual report. Such initiative aims at capturing more ethical investors who usually look for companies with positive reputation.

Improve or maintain good reputation

CSR reporting is a way for firms to improve their image and maintain their license to operate. Indeed, it can be considered as a promotional campaign to enhance corporate reputation and public relations (KPMG, 2005).

Research demonstrated that the majority of information available in the reports is more of a positive nature. For instance, in a study by Deegan and Rankin (1996), it was found that the average amount of positive environmental disclosures made by their sample firms totaled to 270 words compare to negative disclosures which amounted to 6 words.

Increase competitive advantage

Competitive advantage can be achieved through environmental accountability (Roth, 2000). Through reporting, firms are able to show their commitment towards the environment and as such gain a real advantage- in terms of market share- over competitors that do not exhibit any such practice.

Stakeholder activism

Pressure groups such as customers, environmental groups, investors, and employees are said to well aware of the environmental performance of different firms; they are interested in knowing how natural resources are being used and if there is a need to, they may take actions against organisations which they believe are environmentally irresponsible (Post et al,1994).

Cost savings

As part of CR reporting, companies have to assess their environmental performance. This process allows management to identify inefficiencies in operations and 'spot' where to improve. In doing so, they may identify opportunities for cost savings (United Nations Division for Sustainable Development, 2001).

Attract personnel

Environmentally-aware corporations are more able to attract quality staff. The workforce usually demonstrates greater loyalty and job satisfaction in a business which is embracing environmental protection (Wehrmeyer, 1996). An annual study of the top management graduates in Europe countries has graphed the increase of 'green' criteria over the past decade. The environment is currently positioned among the four most significant factors for these former students (Management Development Review, 1997).

Good corporate governance

As per the Cadbury report (1992), corporate governance is the mechanism by which organisations are directed and controlled. Good governance makes sure that the business environment is reasonable and transparent and that corporations can be held accountable for their activities. Disclosure of ecological data forms part of sound corporate governance. For instance, in the Code of Corporate Governance of Mauritius (2004, p40), section 7 Integrated Sustainability Reporting, it is stated that:

"every company should regularly report to its stakeholders on its policies and practices as regards to environment, social issues, ethics, health and safety."

The code also mentioned (p7) that:

"Mauritius' smallness brings with it a fragile ecosystem. This means that corporations need to pay special attention to the environmental aspects of corporate governance."

Contribute to sustainable development

Sustainability or sustainable development highlights environmental and society stewardship (Porter and Kramer, 2006). It is concerned with meeting the present needs of the community without compromising future generations to meet theirs (World Business Council for Sustainable Development, 1987). Indexes such as the Dow Jones Sustainability Indexes help to assess sustainable performance of companies by ranking them on the basis of their economic, environmental, and social performance.

The list of motivations is rather long and it is noted that some of them are also categorised as benefits for firms.

Barriers of environmental reporting

There are still companies which are reluctant to disseminate CSR information. Some of the obstacles are highlighted below.

Measurement problem

KPMG (2005) ascertained that the measurement of social and environmental performance is rather a complex task. Besides, it has been noted that there is difficulty in measuring environmental costs and benefits objectively. Conventional accounting system allocates many of the green costs to general overhead accounts and thus, some less tangible environmental costs remain hidden from management (UNDSD, 2001). This problem is particularly due to the fact that until date, no specific accounting standard has been developed to deal with environmental matters but there are provisions made such as those in the IAS 37 Provisions, Contingent Liabilities and Contingent Assets that provide some guidelines relating to the environment.

Lack of consistency and comparability

There is actually no disclosure technique or proper standardisation of environmental reports and this usually result in diverse reports from different corporations (Souther June, 1999). In other words, it produces a lack of consistency and comparability. Such lacuna has restricted the ability of the stakeholders to use the information for decision making purposes (O'Rourke, 2004).

Expose to criticism

Companies that disseminate environmental information are expected to face criticism which represents potential cost from public reactions to firms' disclosures. Costs also seem to rise as reporting becomes more thorough and comprehensive (O'Rourke, 2004). These costs generate considerable incentives for organisations to release CR reports that are purely public relation tools or to avoid reporting. In addition, firms may be unwilling to publish environmental information especially if it is confidential data that can be used by their competitors.

Lack of government's policy on the issue

Environmental reporting is basically a voluntary disclosure (Shivaji and Subramaniam, 2008). Although governments of different countries are trying to bring their contribution by inducing businesses to disclose ecological information, legal requirements on the issue are relatively limited.

Profit motive

Corporations usually have profit maximisation at the top of their objectives' list. In fact, Friedman (1970) stated that a firm's sole responsibility towards the society was to increase returns. As such the natural environment is not always relevant to management except if powerful stakeholders use their power to back the natural environment or if the company is embracing a green orientation (Driscoll and Starik, 2004).

Medium for environmental disclosure

There are mainly two medium used by corporations to disseminate information about the ways in which they interact with the natural world; annual reports and stand-alone reports.

Annual Report

The annual report is a statutory document which has long been regarded as the major communication means for companies (Gray et al., 1995; Unerman, 2000). Released on a yearly basis, it offers an effective way of managing external perceptions and reactions (Neu et al. 1998). Such statement is possibly the most important document employed by a business to build its own 'social imagery' (Hines 1988; Gray, Kouhy et al.1995b).

It has been seen that organisations publish ecological data in the annual report to convey messages to community about their environmental actions and activities as it is the primary source of information used by stakeholders. Research undertaken by Rankin (1996) supports this argument; her survey revealed that 68 percent of the target population in Australia looked for environmental data from the annual report in the first place, with 43 percent looking for this data from other sources. Further, the annual report is said to hold a degree of credibility that other communication channels do not possess (Neu et al., 1998).

The location of green disclosures is another issue that is taken into account in the literature (Guthrie and Mathews 1985; Guthrie 1989; Gray, Kouhy et al. 1995b). The common place for environmental disclosures, within the annual report is; in the financial statement, notes to financial statement, corporate governance and director's report.

Stand- Alone Report

Although reporting was primarily undertaken within the annual reports (Gray et al., 1996), the last ten years have witnessed a growth in 'stand alone' environmental reports (see, for example, Sustainability/UNEP 1996, 1997, and 2000). In fact, environmental information is also displayed in stand-alone reports such as environmental reports, social reports, social and environmental reports, corporate responsibility reports and sustainability reports.

The appearance of separate environmental reports (KPMG, 1999) has questioned the significance of annual report as 'the mode' a company opts for to publish environmental information (Unerman, 2000). But research carried out by O'Donovan (1999) revealed that managers consider that users of stand-alone reports are not the same as those of annual reports. Thus, it implies that the need for annual report disclosures is not likely to lower. Besides, the study highlighted that corporate environmental reports will result in more in depth reports which will be often cross referenced to annual reports.

Investigation performed by Crowther (2002) shows that corporations which communicate ecological information in a separate environmental report are very nominal and vary between industry-sectors. Such behaviour could be attributed to the fact that some firms either believe that there is not enough demand for such reports, there is no convincing proof to show that the benefits of producing such documents exceed their costs or the usefulness of such reports still remains unclear (Case, 2000).

Annual reports and stand-alone reports are certainly the main vehicles employed by firms to discharge accountability to the society. However, it was noted that organisations' environmental communications address to the public also comprise of other media (Fallan and Fallan, 2008) such as the internet web pages, firms brochures and advertisements. The use of the internet allows companies to have quicker, less expensive and interactive reporting while reaching more stakeholders (Siljala, 2008). Also, firms are able to target different groups of users and be expected to obtain feedback from them (Branco and Rodrigues, 2006) and at the same time promoting stakeholder dialogue. More information can also be displayed about a particular topic and discussed in detail when using web pages and this benefit can apply to brochures as well. Brochures are preferred mainly because of their lower cost of production and distribution. Research analysing brochures and advertisements as instruments for conveying information and social responsibility disclosure vehicles, identified that brochures were commonly used channels for disclosing social information but on the other hand advertisements were not widely used for such purposes (Ze´ghal and Ahmed, 1990).

Voluntary reporting or mandatory reporting?

There have been various debates on whether disclosure of firms' environmental impacts should be left in the hands of businesses or in that of the government. Should it be wiser or imprudent to let companies decide on such issue?

Voluntary disclosure

The voluntary approach to environmental reporting asserts that corporations will meet the requests of their stakeholders without any legislative instructions (Maltby, 1997). It is argued that this system would persuade better corporations to attain 'best practice' and that market pressure will induce companies to disclose environmental information (cited in Mitchell et al., 2006). In the same line, research undertaken by Fallan and Fallan (2008) indicates that Norwegian companies will voluntarily satisfy the stakeholders' requirements regarding ecological information. Besides, it has been argued that firms will assure that their environmental disclosures and performances are sufficient to supply appropriate information to relevant audiences (Wilmhurst and Frost, 2000).

Organisations favour voluntarism because it is believed that environmental regulations inflate costs (Porter and van der Linde, 1995a). For instance, mandatory disclosure may expose firms to environmental costs like those incurred when not complying with environmental laws. As such the voluntary disclosure appears as a matter that should stay under the entire discretion of companies (Boesso, 2002).

There have been several moves by international organisations to introduce environmental frameworks that provide some standard reporting guidelines for firms engaged in voluntary reporting. The most popular framework for CSR reporting is the Global Reporting Initiative (GRI). In fact, KPMG (2008) identified that there are more than 75 percent of the G250 and almost 70 percent of the N100 that use the GRI Guidelines for their reporting. Such framework offers guidelines for environmental reporting which in turn help to produce a sound representation of social performance of the reporting entity including positive and negative contributions. However, companies are not obliged to conform to the GRI and it happens that firms choose to report on what is convenient to them. Consequently, voluntary reports are often found to lack materials to allow assessment and benchmarking of businesses' environmental performance.

Moreover, several studies shown that there is a tendency for firms to release positive information which are not always related to the corporations' actual environmental progress. (Guthrie and Parker, 1990; Deegan et al., 1996; Deegan, Rankin and Voght, 2000).

Voluntarism alone will not consistently inform interested parties about organisational environmental performance. Stakeholders have the 'right to know' about the ecological outcomes of an entity's activities and hence regulation might be the solution to ensure that this 'right to know' is met (Deegan, Rankin and Voght, 2000).

Mandatory disclosure

Advocates of regulated environmental information declare that at least a minimum of information needs to be 'compulsory' (Fallan and Fallan, 2008). This will provide a basic standard for reporting as voluntary disclosures tend to create diverse reporting practices which lead to difficulty in comparisons.

According to KPMG (1999), mandatory reporting requirements contribute in increasing corporate environmental disclosures. Environmental reporting grew considerably in all the European nations surveyed, particularly in those countries with binding reporting rules (Denmark 29% in 1999 compared to 8% in 1996). Moreover, the quality of ecological information published is also positively affected by mandatory reporting and this was evidenced through research undertaken by Bebbington (1999) in Denmark.

The disclosure of corporate responsibility data has been imposed by several states around the world. For instance in Australia, section 299(1) (f) of its Corporations Law compels companies to include in the director's report information relating to compliance with environmental regulations. In US, organisations in some industries have to publish their releases and transfers of toxic chemicals.

Statutory environmental disclosures usually motivate companies to comply with regulatory regimes (Mobus, 2005) as these forms of publication place reporting firms under increased scrutiny (Cowan et al., 2005). As such, compulsory reporting permits stakeholders to obtain a more objective view of corporate environmental performance compare to voluntary reporting which depends largely on the discretion of the managers. Thus, more mandatory disclosures will probably result in more transparent reports (Subramaniam, 2008).

Nevertheless, mandatory reporting cannot prevent the tactical use of voluntary corporate disclosures (Larrinaga et al., 2002 and Mobus, 2005) to disseminate information aimed at promoting the firm's image. Thus, it can be said that statutory environmental disclosure can act as a potential tool for counter-balancing the voluntary disclosure system.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.