Deborah Doane argues the impending introduction of OFRs is unlikely to improve the reporting and management of businesses’ social and environmental impacts.
In January 2006, UK companies will start to compile the first Operating and Financial Reviews to be published under the 2005 regulation requiring all listed companies to issue such a report. NGOs will probably be among the first to scrutinise this new wave of reports to see if they have had an impact on business behaviour and transparency in the wider interests of society.
The OFR requires companies to report some information on social and environmental impacts to shareholders, in so far as they present a financial risk to the company. This, in the government’s eyes, is the first step to making ‘Enlightened Shareholder Value’ (ESV) – the preferred policy of driving ethics forward in business — a reality. Shareholders, the argument goes, will necessarily be concerned about ethics, as issues such as reputation or employee relations mean that socially responsible decisions will be the only decisions that make good business sense. If only this was true.
NGOs have been sceptical about ESV for some time, urging that it is unlikely to deliver a wholesale change in corporate behaviour. One needs only look at the persistence of the use of gangmasters in the supermarkets sector, as identified by Action Aid. Or, according to Amnesty International, the use by companies in the extractives industries of contractual agreements that actually prohibit the implementation of human rights laws in the countries where they conduct business. Only recently, the CBI complained that the government hasn’t done enough to ensure “affordable” provision of energy supplies, dismissing renewable energy as pie-in-the-sky. As the Financial Times noted, business has done little to curb its own consumption of energy in the past few years. So much for ESV.
This is why NGOs have made a compelling case that social and environmental accounting should be aimed at more than simple “risk management”. Indeed, reporting in the interests of stakeholders other than shareholders may be one of the only ways for us to understand the full impacts that business has on society and to start to internalise these costs.
The regulation behind the OFR remains weak and uninspiring. Not only does it require just limited reporting in the interests of shareholders, the accountancy standard that was developed by the Accountancy Standards Board to support the regulation provides no set of common indicators from which business can report. As a result, the regulation is likely to fail to effectively manage the massive impacts that companies have on society and the environment. Businesses’ role will continue to be seen in the narrow and strict interests of financial gain. Regardless of the occasional alignment between company and social good, money still trumps all else.
Mandatory reporting is certainly not the answer to all of our woes and there will always be room for innovation above and beyond regulatory protocols. But just as scholars have found that the science of accounting drove the evolution of commerce and enabled modern business to grow and flourish, standardised social and environmental accounting will provide us with the opportunity to enable a sustainable society to grow and flourish.
Of course, business still has an opportunity to prove NGOs wrong. If companies begin to miraculously report on the significant impacts that business has on factors like poverty, conflict or climate change, and demonstrate how these impacts will be managed, then the OFR would have done its job. But for now, this remains wishful and unenlightened thinking.
Deborah Doane is a director of the Corporate Responsibility (CORE) Coalition, a group of over 130 organisations campaigning on corporate accountability.
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