Essay: Research objectives question relevance methodology limitations

1. Introduction

The present chapter will describe the thesis subject. This is followed by the research objectives, research question, relevance, methodology and limitations. Last, the thesis structure is outlined.

1.1 Background

In the last few years, the numbers of companies that are reporting about sustainability have been increasing. Corporate Sustainability Reporting has two goals: organizational transparency (the “right to know”) and stakeholder engagement. For example, the leading standard on social reporting, the GRI’s (Global Reporting Initiative) Corporate Sustainability Reporting guidelines, state,

“A primary goal of reporting is to contribute to an ongoing stakeholder dialogue. Reports alone provide little value if they fail to inform stakeholders or support a dialogue that influences the decisions and behavior of both the reporting organization and its stakeholders” (Global Reporting Initiative 2002:9).

By providing stakeholders with the information they demand, it is argued, that these groups will become empowered and will hold corporations accountable for their actions.

In addition, the relevance of sustainability particularly for investors is driven by the relative financial outperformance of certain sustainability investments and by recent corporate scandals such as Enron, Parmalat and Ahold (Bleischwitz 2007). After several financial reporting scandals such as Enron, Parmalat and Ahold, reporting transparency is very important. Need for transparency and disclosure is increasing in non-financial statements. Companies that fall short in transparency will be in risk for damage to management credibility. Greater transparency improves creditability and thereby policy outcomes (Faust and Svensson 2001). As PricewaterhouseCoopers notes:

“In the post-Enron world, reporting transparency is critical. A growing body of evidence indicates that companies that fall short of the transparency benchmark risk significant damage to management credibility. In the worst case, companies face an erosion of shareholder confidence that can, in turn, do damage to market capitalization, credit, and liquidity.” See “Increased need for transparency and disclosure in financial statements,” at www.pwcglobal.com. On the other hand stakeholder engagement has become of increasing importance in recent years in identifying and responding to social and environmental issues faced by companies (Post, Preston et al. 2002). This has resulted from increased attention and pressure placed upon organizations to manage performance and stakeholder perceptions of performance through external reporting (Patten 1992).

1.1.1 Social accounting

According to literature, social accounting (or corporate social accounting) can have different meanings. The most common meaning is the presentation of financial information, usually in an income statement and balance sheet format, of the costs and benefit impact of an organizations’ social behavior. An another one and less common meaning of social reporting refers to the regular presentation of a formal social report by the accountable organization, like a ‘social’ statement in the organizations’ annual report. It is usually obvious from the context which meaning is intended (Gray, Owen et al. 1987). Gray et al. defines social accounting as:

‘…the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large. As such it involves extending the accountability of organizations (particularly companies), beyond the traditional role of providing a financial account to the owners of capital, in particular, shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities than simply to make money for their shareholders.’

Social accounting is often used as an umbrella term to describe a broad field of research and practice. Social accounting is used as a generic term for social and environmental accounting, corporate social reporting, corporate social responsibility reporting, non-financial reporting, or sustainability accounting. This means that social accounting had always struggled to find its place in the present accounting theory. According to literature, social accounting is neither a part of conventional accounting, nor an obvious part of the research literature in which that accounting is addressed, analyzed and critiqued (Gray 2002). According to the Association of Chartered Certified Accountant (ACCA),social accounting is the process whereby organizations (of any size or sector) account for their social, environmental and economic impacts. External social accounting or reporting seeks to demonstrate how the reporting organization integrates (or wishes to be seen to integrate) with the society and systems within which it operates. According to these definitions, it is important to notice that social accounting covers social, environmental and economic aspects. It is also important to notice that social accounting is used as a broader term for a broad audience.

1.1.2 Banking sector

A largely neglected sector for analysis with respect to sustainability issues is the financial sector (Jeucken 2004). The financial community has a very important part to play in the development and promotion of corporate social reporting. The financial services sector plays a critical role in promoting sustainable development through its financial intermediation (Moyo and Rohan 2006). Financial institutions often have a catalytic role in influencing the environmental behavior of other industries (Douglas, Doris et al. 2004). Reporting priorities for financial services companies differ from those of other sectors, reflecting the very different scope of activity. They tend to focus their reporting on corporate social responsibility activities and product or service sustainability. Many of the reporting firms have set up a charitable foundation to carry out philanthropic and community based projects. The number of companies now discussing socially responsible investment in their reporting indicates the increasing importance of the future sustainability of their services and their indirect environmental and social impacts through investment decisions (Line, Hawley et al. 2002). According to literature the banking sector has been quite slow in considering the consequences of the issue of sustainability, despite of the fact of their exposure to risk having an intermediary role in the economy. Referring to the relevant literature from 1990 to 2000, banks began addressing the issue of sustainability by considering firstly environmental and then social issues and attempting to incorporate them by established policies for the environment and society (Bouma, Jeucken & Klinkers 2001).

1.2 Research Objectives

Need exists of transparency in reporting. Sustainability reporting is used by organizations to communicate voluntarily information on environmental and other non-financial performance like social and economic performance to their stakeholders. It is recognized as an important mechanism for improving corporate sustainability performance. If there is a lack of transparency in reporting, by stakeholders a problem can existing in their decisions. On the other hand organizational transparency through sustainability reporting is the key to meaningful stakeholder engagement. This thesis focuses on sustainability reporting and stakeholder engagement by cooperative and listed banks.

The purpose of this thesis is: to assess stakeholder engagement within sustainability reports between cooperative and listed banks.

To eliminate differences in stakeholder engagement caused by differences among industries, only the banking sector will be analyzed. This thesis tries to get insights in the differences in stakeholder engagement within sustainability reports by cooperative and listed banks.

In scientific research cooperative banks are neglected. Research on report disclosures focuses on commercial companies. It’s interesting to find out whether possible differences in stakeholder engagement are being caused by the different types of organizations like cooperative and listed banks.

1.3 Research Question

In order to reach the above-mentioned research objective, a research question is formulated. In this, the central research question translates the ultimate objective of this research, whereas the sub-questions outline al the steps necessary in order to be able to effectively answer the central question. The central question of this research is: What are the differences in stakeholder engagement between cooperative and listed banks within sustainability reports? In addition, to get a broader understanding of the level of stakeholder engagement within sustainability reports, the level of stakeholder engagement between cooperative and listed banks will be investigated. To answer the above-formulated main question the following sub questions need to be answered:

1. What is corporate sustainability, sustainability accounting and reporting?
2. What is the theoretical background of voluntary reporting?
3. How is sustainability reporting regulated?
4. What are the differences and similarities between cooperatives and listed banks?
5. What is the effectiveness of stakeholder engagement within sustainability reports in the banking sector?
6. How can possible differences and similarities between (the level of stakeholder engagement of) sustainability reports in the annual reports of listed and cooperative banks be explained?

1.4 Relevance

For several reasons this research is relevant within Accounting, Auditing & Control. First and most important contribution of all, this thesis focuses on banks. This research contributes to the scarce literature on social responsibility disclosure by financial institutions, like banks (Manuel Castelo and L�cia Lima 2006). Second, with the credit crunch there, the discussion elaborated on the role of business in society. It is argued whether cooperation would be a better organization form to support stakeholder value. At the same time this would influence disclosure. Award schemes in the United Kingdom and the Netherlands the cooperative banks score high in their disclosure of corporate sustainability reporting performance. For example, in a national Transparency Benchmark for 2007 conducted by PriceWaterhouseCoopers on behalf of the Dutch Ministry of Economic Affairs, the Dutch Cooperative Rabobank was found to be the most transparent company with regards to its corporate social responsibility practices. In scientific research this type of organizations however is neglected as research on report disclosures focuses on commercial companies. So far, research on sustainability reporting has mainly focused on investor-owned firms while other organizations forms have received only little of scholarly attention. Cooperatives are a specific form of economic enterprises in which economic, social and societal aims and purposes are integrated (Nilsson 2001).

1.5 Methodology

Transparency is considered to be a crucial element in corporate sustainability reporting. Measuring transparency is difficult. In this research, a kind of unobtrusive research method will be used of studying social behavior without affecting it. Corporate sustainability reporting has two goals: organizational transparency (the “right to know”) and stakeholder engagement. In that case, through comparative research the differences will be investigated in the level of stakeholder engagement on sustainability reporting by assessing stakeholder engagement in the banking sector. The differences between cooperative and listed banks will be outlined. Comparative research is usually a qualitative method. For answering the main question, the content of annual reports of CSR reports, and of sustainability reports and/or environmental reports (qualitative data) will be used. The focus is on best practices.

To narrow this research, only companies in the banking sector will investigate. The dataset is all in 2009 in the banking sector published report for year 2008. To measuring and assessing stakeholder engagement, the Stakeholder Score will used. The Stakeholder Score is a best practice guide and an evaluation tool that can be used by corporate social responsibility practioners to guide their stakeholder engagement and CSR reporting.

1.6 Demarcation & Limitations

1.7 Structure

The remainder of this final paper is structured as follows. Chapter two will give an introduction to corporate sustainability, sustainability accounting and reporting. Chapter three extents the literature discussion with the different voluntary disclosure theories and its theoretical background. This chapter contains an expounding of relevant theory that is related to (corporate) sustainability reporting. Chapter four discusses the stakeholder theory and the shareholder theory. This will be discussed separately in this chapter because of its importance for developing the hypotheses. Chapter five extents the literature discussion with the different approaches to regulations and guidelines for sustainability reporting. In chapter six the institutional setting of cooperatives and the differences and similarities with commercials are outlined. Chapter seven uses the different insights form the chapters one to six to develop hypotheses about stakeholder engagement in sustainability reports of banks. Chapter eight will provide the empirical results and the analysis of this research. Finally, chapter nine will present the conclusions and limitations applicable to the research that has been done in chapter eight.

2. Corporate sustainability

2.1 Introduction

In recent years there has been significant discussion in the business, academic, and press about corporate sustainability. This term is often used in conjunction with, or synonym for other terms like sustainable development and corporate social responsibility. Corporate sustainability and also corporate sustainability reporting, refers to a company’s activities which demonstrates the inclusion of social and environmental concerns in business operations and in interactions with stakeholders. Corporate sustainability is a broad and a vague term. Jacques Schraven, chairman of VNONCW, the Dutch Employers Association, stated that “there is no standard recipe: Corporate sustainability is a custom made process”. Van Marrewijk supports this view by concluding that the “one solution fits all” definition for Corporate Sustainability Reporting and Corporate Sustainability should be abandoned (Van Marrewijk, Werre 2003). According to Wilson the concept of corporate sustainability borrows elements from four more established concepts. These concept are sustainable development, corporate social responsibility, the corporate accountability theory and the stakeholder theory (Wilson 2003). The first three concept and its relationship to corporate sustainability, will be discussed in the next paragraphs of this thesis. The stakeholder theory will be discussed in chapter 3 shortly and broader in chapter 4.

2.2 Sustainable Development

Sustainable development is a broad, dialectical concept that balances the need for economic growth with environmental protection and social equity. In 1987, the United Nations, specifically the World Commission for Environment and Development (WCED), released the Brundtland Report “Our Common Future”. The WCED describes sustainable development as:

“development that meets the needs of the present without compromising the ability of future generations to meet their own needs”

The report deals with sustainable development and the change of politics needed for achieving that. The definition of this term in the report is quite well known and it contains within it two key concepts. The first concept of “needs”, in particular the essential needs of the world’s poor, to overriding priority should be given and the second concept is the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs. Sustainable development, as described in “Our Common Future”, can also be seen as “a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations.” Sustainable development is a broad concept and it combines a broad fields like economics, social justice, environmental science and management, business management, politics and law. In Our Common Future, (Oxford University Press, 1987) the WCED recognized that the achievement of sustainable development could not be simply left to government regulators and policy makers. It recognized that industry had a significant role to play. The authors argued that while corporations have always been the engines for economic development, they needed to be more proactive in balancing this drive with social equity and environmental protection, partly because they have been the cause of some of the unsustainable conditions, but also because they have access to the resources necessary to address the problems.

The relation or contribution of sustainable development to corporate sustainability is twofold. First, it helps set out the areas that companies should focus on: environmental, social, and economic performance. Second, it provides a common societal goal for corporations, governments, and civil society to work toward ecological, social, and economic sustainability. However, sustainable development by itself does not provide the necessary arguments for why companies should care about these issues. Those arguments come from corporate social responsibility and stakeholder theory.

2.3 Corporate Social Responsibility

Like sustainable development, corporate social responsibility is also a broad, dialectical concept. The concept of corporate social responsibility was introduced in the 1950’s and has received a lot of attention during the pas decades. According to Franklin, there is a lack of a clear definition of corporate social responsibility (Frankental 2001). It is very difficult to define corporate social responsibility in detail in this thesis, because the meanings and practices of business responsibility are different. Certainly, there is plenty of research and evidence in history that corporate social responsibility varies in terms of its underlying meanings and issues. While there is no single, commonly accepted and a clear definition of corporate social responsibility, it generally refers to business decision-making linked to ethical values, compliance with legal requirements, and respect for people, communities and the environment (Douglas, Doris & Johnson 2004).

In the most general terms, corporate social responsibility deals with the role of business in society. Its basic premise is that corporate managers have an ethical obligation to consider and address the needs of society, not just to act solely in the interests of the shareholders or their own self-interest. This, in contrast to opponents of corporate social responsibility. Opponents argue that the business of business is making money and that a company’s only responsibility is to maximize profits for its shareholders (Douglas, Doris & Johnson 2004). In many ways corporate social responsibility can be considered a debate, and what is usually in question is not whether corporate managers have an obligation to consider the needs of society, but the extent to which they should consider these needs (Wilson 2003).

Corporate social responsibility is much a longer concept than sustainable development and other underlying concepts of corporate sustainability. According to Frankental, corporate social responsibility implies that an organization is responsible for its wider impact on society (Frankental 2001). Thus corporate social responsibility was concerned with understanding and managing a company’s social performance, which is all of those economic, environmental and social impacts on society, positive and negative, actual and potential. Carroll had divided the societal responsibilities of an organization into four categories (Carroll 2008):

1. Economic;
2. Legal;
3. Ethical; and
4. Philanthropic responsibilities.

The first and foremost social responsibility of an organization are the economic responsibilities (1). Before anything else, the business institution is the basic economic unit in our society. As such the business institution has a responsibility to produce goods and services that society wants and to sell them at a profit. All other business roles are predicated on this fundamental assumption. The second social responsibility of an organization are legal responsibilities (2). Legal responsibilities are those that are defined by the authorities. Legal responsibilities are rules; the laws and regulations, under which business is expected to operate. The society expects the business to fulfill its economic mission within the framework of legal requirements. The third social responsibility of an organization is the ethical responsibility (3). Ethical responsibilities mark societal beliefs of “good behavior”. According to Carroll, organizations must observe ethical standards when operating (Carroll 1979). Economic and legal responsibilities embody ethical norms, but there are additional behaviors and activities that are not necessarily codified into law but nevertheless are expected of business by society’s members. Society has expectations of business over and above legal requirements. Ethical responsibilities are voids in the legal system and allow firms to act with humanitarian values in mind. The last social responsibility of an organization are philanthropic or discretionary responsibilities (4). Philanthropic or discretionary responsibilities are voluntary obligations of an organization. Philanthropy encompasses those corporate actions that are in response to society’s expectations that businesses be good corporate citizens. This includes actively engaging in acts or programs to promote human welfare or goodwill.

Corporate social responsibility contributes to corporate sustainability. According to Wilson, the main arguments of corporate managers having an ethical responsibility to society draw from four philosophical theories. In the next paragraphs the four philosophical theories will be discussed shortly.

2.3.1. Social contract theory

According to Donaldson, the business and the society relationship from the social contract tradition, mainly comes from the philosophical thought of John Locke. In this philosophical thought the assumption is made that a kind of implicit social contract between business and society exists. The social contract implies some indirect obligations of business towards society (Donaldson 1982). These social contracts can evolve over time so that exchanges could be made between parties in an environment of trust and harmony. According to social contract theory, corporations, as organizations, enter into these contracts with other members of society, and receive resources, goods, and societal approval to operate in exchange for good behavior (Wilson 2003).

2.3.2. Social justice theory

Social justice theory, which is a variation (and sometimes a contrasting view) of social contract theory, focuses on fairness and distributive justice. Distributive justice deals with the allocation of goods (wealth, power, and other intangibles) in a society and how it is distributed amongst the members of society. Social justice theory argue that a fair society is one in which the needs of all members of society are considered, not just those with power and wealth. As a result, corporate managers need to consider how these goods can be most appropriately distributed in society (Wilson 2003).

2.3.3. Rights theory

Rights theory, is concerned with the meaning of rights, including basic human rights and property rights. One argument in rights theory is that property rights should not override human rights. From a corporate social responsibility perspective, this would mean that while shareholders of a corporation have certain property rights, this does not give them license to override the basic human rights of employees, local community members, and other stakeholders (Wilson 2003).

2.3.4. Deontological theory

Deontological theory deals with the belief that everyone, including corporate managers, has a moral duty to treat everyone else with respect, including listening and considering their needs. Every person would consider the basic duties and rights of individuals or groups and act in accordance with those guidelines.

This is sometimes referred to as the “golden rule”. Corporate social responsibility contributes to corporate sustainability by providing ethical arguments as to why corporate managers should work toward sustainable development. If society in general believes that sustainable development is a worthwhile goal, corporations have an ethical obligation to help society move in that direction (Wilson 2003).

2.4 Corporate Accountability

The third, but not the last concept underlying corporate sustainability is corporate accountability. Corporate accountability often refers, in a managerial sense, to issues of disclosure, auditing, and monitoring of business practices. An important basis for the concept of corporate accountability is the idea of organizational legitimacy. Organizational legitimacy is well expressed in the study of Hurst, The Legitimacy of the Business Corporation in the United States, 1780 – 1970. According to Hurst, organizational legitimacy is:

“An institution which wields practical power, which compels men’s wills or behavior must be accountable for its purposes and its performance by criteria not in the control of the institution itself” (Hurst 2004).

A logical consequence of organizational legitimacy is the introduction or the call for corporate social responsibility. Accountability is the legal or ethical responsibility to provide an account or calculation of the actions for which one is held responsible. Accountability differs from responsibility. Responsibility refers to one’s duty to act in a certain way, where- as accountability refers to one’s duty to explain, justify, or report on his or her actions. The term corporate of corporate accountability refers to the different accountability relationships. The most relevant relationships in this thesis is the relationship between corporate management and shareholders. This relationship is based on the fiduciary model (see also chapter 4, paragraph 4.2 Stakeholder theory), which in turn is based on agency theory. The agency theory will be discussed in chapter 3 of this thesis. The contribution of corporate accountability theory to corporate sustainability is that it helps define the nature of the relationship between corporate managers and the rest of society. It also sets out the arguments as to why companies should report on their environmental, social, and economic performance, not just financial performance (Wilson 2003).

2.5 Sustainability accounting

Sustainability accounting is related to social accounting. According the literature, social accounting is an umbrella term. Sustainability accounting is a much more narrow term to express a specific interest. Environmental accounting refers specifically to the research or practice of accounting for an organization’s impact on the natural environment and sustainability accounting is often used to express the measuring and the quantitative analysis of social and economic sustainability. According to literature, sustainability accounting is referred to the triple bottom line (TBL), which aims to report on an organization’s economic, social and environmental impacts (Elkington 2004) . Elkington, called this type of accounting on environmental, social, and economic performance as ‘triple bottom line’ reporting. According to common definitions of the triple bottom line (TBL), there are three dimensions of sustainability. The economic, the social and the environmental are these dimensions of sustainability. These three dimensions can be used of measuring sustainable development. For example, the economic dimension might be the effect on local employment and livelihoods by the organizations operations. The social dimension might include staff terms and conditions or projects in the community. The environmental dimension might include greenhouse gas emissions or the quality of waste water discharged from operations accounting for the financial dimension of an organization’s performance is a statutory requirement.

2.6 Sustainability reporting

According to the Global Reporting Initiative, sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development. Accounting for sustainability is currently a voluntary activity. In the recent years the number of companies reporting publicly on various aspects of their social and environmental performance increased (Kolk 2003, Network 2003). So far, the most common organizations response to reporting on sustainability performance has been to publish a sustainability report, either in conjunction with, or separately from, the company’s annual report (O’Dwyer, Owen 2005). This is encouraging, but several major companies have emerged. Sustainability reports are not often integrated with conventional economic reports, because sustainability accounting as a much more narrow term of social accounting, is neither a part of conventional accounting, nor an obvious part of the research literature in which that accounting is addressed, analyzed and critiqued (Gray 2002). However, publishing sustainability reports increased in the last decades. An increased number of companies have recognized the sign of the times and are beginning to devote more attention to environmental and social issues in their reporting.

According to sustainability accounting and reporting and its definitions, it is important to notice that sustainability accounting refers to the triple bottom line (TBL). However, sustainability accounting refers to the triple bottom line, sustainability reports, which aims to report on an organization’s economic, social and environmental impacts, are also known by a number of other terms. In that case, the Global Reporting Initiative states:

Sustainability reporting is a broad term considered synonymous with others used to describe reporting on economic, environmental, and social impacts (e.g., triple bottom line, corporate responsibility reporting, etc.).

In practice, reporters often tend to refer to a number of other kinds of sustainability reports like triple bottom line reports, corporate social responsibility reports but sustainability reports may include also community reports, environmental reports and environmental, health and safety reports. It is also important to notice that sustainability reports include a number of different kinds of reports within the umbrella of sustainability reports. In the strictest sense of the term there are three different types of reports defined:

Annual reports

The first type of report is the annual report. Annual reports are mentioned as a forerunner of sustainability reports. Since the mid-1990s there has been a trend for annual reports to include more information on ethical, social and environmental aspects of the company’s activities under key terms such as corporate citizenship or corporate social responsibility. This applies in particular to companies that not to publish a separate sustainability report (Daub 2007) . The annual report includes the profit and loss account, the balance sheet and the statement of cash flows. Ratios and indicators should be included in order to check the corporate competitiveness in the finance, marketing, operations, technology and quality fields. Significant information form a social and environmental point of view is already presented in annual reports with regard to issues related to risk management, potential liabilities, research and development policies etc. It is important to mention that every country has a specific regulation on this topic. The last financial downfalls brought policy-makers to strengthen the rules regarding the financial accounting in order to ensure higher levels of transparency and fairness in financial accounting and reporting activities.

Environmental reports

The second type of report is the environmental report. At the end of the 1980s, the first environmental reports were published. Publishing environmental reports became quickly widespread, especially among multinationals. In 1998 producing environmental reports or publishing brochures on environmental issues or incorporated the subject in annual reports increased (Kolk 2003). Social issues integrated systematically, as the environmental report’s closest relative. Heath and safety became issues as a content of an environmental report. (Daub 2007). In general, the environmental report or the corporate environmental report is a tool a company uses to manage and control corporate activities and support communication with stakeholders, especially those interested in environmental issues (Azzone, Maccarrone 1997). Although a single, definitive model of environmental report does not exist because of the special features of the tool. The special features of the tool are that, it is still a prevailing voluntary approach and it focuses on the national, industrial, corporate specificities etc. (Perrini, Tencati 2006). Environmental reports moved in the direction of the sustainability report.

Social reports

The third type of report is the social report. In social reports companies addressed the social aspects of their activities. Publishing social reports was relatively infrequently, however, and can be seen as a response to 1970s demands on companies to introduce social accounting or produce a social balance sheets. Companies that have traditionally attached high importance to the social aspects of their activities are forerunners in the role for sustainability reporting. It is not surprising that many different report types currently exist. All of such companies had their own forms of reporting and something to do with integration in its social and ecological environment. Many companies had their own basic approach and something to do with sustainability (Daub 2007). The social report measures the impact of the company and its activities on the different stakeholder groups. Social reporting supports the management decision-making process and the corporate communication and engagement policies (Perrini, Tencati 2006).

According to the literature Andersen & Frankle described social and environmental reporting as a ‘communication’ of a corporation’s community involvement activity, human resources, environmental impact and other social activities through the annual report to the stakeholders. Such reports may provide qualitative and/or quantitative information regarding a firm’s environmental activities (Anderson, Frankle 1980). Environmental and social reporting has increased considerably among companies over the last three decades. The term social and environmental reporting is becoming less frequently used, with organizations more likely to adopt the ambiguous term “sustainability reporting” (Adams, Whelan 2009).

The question as to why report on social and environmental activities has generated several theoretical perspectives. These theoretical perspectives will discussed in chapter 3 of this thesis. For now, it is important to figure out what the trends are in types of reporting and the reasons for and against reporting.

2.7 Trend in types of reporting

According to an international survey of Corporate Responsibility Reporting 2002 conducted by the KPMG, four main report types exist. These reports were environmental reports, sustainability reports, combined environmental and social reports and social reports (KPMG/WIMM 2002). In that case all types of reports can therefore be considered sustainability reports in the broader sense (Daub et al. 2003). According to an international survey of Corporate Responsibility Reporting 2005 conducted by the KPMG, the most remarkable change since 2002 has been in the type of reports companies are issuing as separate (stand-alone) CR reports. In 2005, almost 70 percent of the global G250 and almost 50 percent of the N100 reports are published as sustainability reports. In 2002, however, almost 70 percent of both global and national reports were environmental, health and safety reports (KPMG 2005). According to an international survey of Corporate Responsibility Reporting 2008 conducted by the KPMG, the context within which companies were reporting was being shaped by the following developments (KPMG 2008):

– Worldwide demand for transparency and accountability at an all time high.

– Expansion of corporate governance expectations and a renewed commitment to ethics.

– Demand for a more complete picture of the health and stability of a company, where not only financial results are considered but also risk management practices and value-creation in the environmental and social arena.

– Significant discussions around regulation and mandatory transparency on governance, ethics, and other non-financial issues.

2.8 Reasons for and against reporting

Companies can have a range of reasons for publishing a sustainability report or not. There are various motivations, mentioned in a study by Sustainability and UNEP in which reporters and non-reporters were interviewed. According to this study, companies’ motivations for reporting and non-reporting are as follows (Kolk 2009):

Reasons for reporting

– enhanced ability to track progress against specific targets

– facilitating the implementation of the environmental strategy

– greater awareness of broad environmental issues throughout the organization

– ability to clearly convey the corporate message internally and externally

– improved all-round credibility from greater transparency

– ability to communicate efforts and standards

– license to operate and campaign

– reputational benefits, cost savings identification, increased efficiency, enhanced business development opportunities and enhanced staff morale.

Reasons for non reporting

– doubts about the advantages it would bring to the organization

– competitors are neither publishing reports

– customers (and the general public) are not interested in it, it will not increase sales

– the company already has a good reputation for its environmental performance

– there are many other ways of communicating about environmental issues

– it is too expensive

– it is difficult to gather consistent data from all operations and to select correct indicators

– it could damage the reputation of the company, have legal implications or wake up ‘sleeping dogs’ (such as environmental organizations).

The much more dominant reasons or motivation for non reporting are as follows: the absence of demand for the information; the absence of a legal requirement; costs outweigh benefits; data availability and related costs; secrecy; wait and see; never thought about it (Gray, Bebbington & Walters 1993).

2.9 Summary

Corporate sustainability is a new and evolving corporate management paradigm. Although the concept acknowledges the need for profitability, it differs from the traditional growth and profit-maximization model in that it places a much greater emphasis on environmental, social, and economic performance, and the public reporting on this performance.

The definitions given in this first chapter are very broad, and in some cases very vague. Nevertheless, at least two aspects of these definitions are important for the remainder of this thesis. First, it’s important to notice that social accounting covers social, environmental and economic issues. Second, it’s important to keep in mind that social accounting is related to a broad audience, i.e. a broad group of stakeholders. These are two important characteristics of social accounting in this thesis.

Corporate sustainability borrows elements from four other concepts. Sustainable development sets out the performance areas that companies should focus on, and also contributes the vision and societal goals that the corporation should work toward, namely environmental protection, social justice and equity, and economic development. Corporate social responsibility contributes ethical arguments and stakeholder theory provides business arguments as to why corporations should work towards these goals. Corporate accountability provides the rationale as to why companies should report to society on their performance in these areas.

Not all companies currently subscribe to the principles of corporate sustainability, and it is unlikely that all will, at least not voluntarily. However, a significant number of companies have made public commitments to environmental protection, social justice and equity, and economic development. Their number continues to grow. This trend will be reinforced if shareholders and other stakeholders support and reward companies that conduct their operations in the spirit of sustainability.

3 Theories on voluntary disclosure

3.1 Introduction

Within the environmental and social disclosure literature, several theoretical perspectives have been discussed, why companies voluntary disclose social information (e.g. sustainability reports). These theoretical perspectives are categorized by Gray, Kouhy and Lavers (Gray, Kouhy & Lavers 1995). Gray, Kouhy and Lavers pointed out the difficulties in doing research on sustainability reporting. In this study is the broad scope of sustainability reporting also confirmed. Several authors have attempted to place empirical investigation of sustainability reporting in some sort of theoretical context. According to Gray, Kouhy and Lavers these attempts can be related to three broad groups of theories concerning organization-society information flows. They also structure corporate social disclosure research and classified theoretical perspectives into three areas like decision-usefulness studies, economic theory studies, and social and political theory studies. The empirical investigations of CSR practices have produced a very diverse body of academic literature which engages different theoretical perspectives in support of corporate social reporting, such as the agency theory, the legitimacy theory, and the stakeholder theory, among others.

The remainder of this paragraph is about the different theoretical perspectives that are discussed in the literature. It’s important to keep in mind that these theories have all been employed to justify the disclosure of social and environmental information although there has been no consensus among scholars as to the best theoretical explanation for the disclosure of this information. It is not clear, however, whether these three theories offer overlapping or competing explanations. Hackston and Milne pointed out, serious doubts exist whether the empirical evidence available to date is enough to establish the superiority of one theory over the others (Hackston, Milne 1996). The final purpose within this thesis is to assess stakeholder engagement, in that case most attention will be paid to social and political perspective, especially to the stakeholder theory.

3.2 Decision-usefulness

The decision-usefulness theory was introduced in 1980 by Staubus as a base for

making accounting choices. The theory was based on the decision-usefulness objective which specified investors as the defining class of the user of financial statements. As a consequence, the investors’ cash-flow oriented decisions had a profound impact on the choices of measurement and reporting (Staubus 2000). The decision-usefulness theory is based on the theory that companies release information on their social and environmental activities. This because users find this information useful for their investment decisions (Kirk 2000). The theory, as argued by Gray, Owen and Adams, attempts to describe accounting as a process of providing the relevant information to the relevant decision makers (Gray, Owen & Adams 1996). According to the decision-usefulness perspective, companies publish a sustainability report because it might be useful for decision makers. For example, there is extensive evidence that social and environmental information is useful for decision-making by financial stakeholders (Reverte 2009). This implies there could be demand for sustainability reports from the market, because these reports could convey information that is new for market participants (Gray, Kouhy & Lavers 1995). Gray makes a distinction between two types of research for decision-usefulness. The first one are ranking studies. For example, in these ranking studies were found that socio-economic accounting information is relevant for the bankers under any investment strategy and that the disclosure of social-economic information is useful for decision makers. The second one are studies which investigate the relation between social disclosure and stock market participants. One of the conclusions in studies which investigate the relation between social disclosure and stock market participant was that the disclosure of environmental data leads to abnormal earnings (both positive and negative). This finding indicates that social disclosures convey information that is new for stock market participants and that is useful for their decision making.

Despite the results of these studies, the decision-usefulness theory to sustainability reporting is mis-specified and under-theorized (Gray, Kouhy & Lavers 1995). The results of these studies tend to be inconsistent and/or inconclusive. The main problem is the interest in sustainability reporting is not motivated by a concern with the needs, wants and whims of financial participants themselves. The results might only refer to a possibility that social and environmental information influence financial behavior. However, the decision-usefulness theory is mis-specified and under-theorized, Gray argues that the decision-usefulness literature has a potentially important effect of raising the visibility of non-financial and non-economic factors in sustainability reporting of companies (Gray, Kouhy & Lavers 1995).

3.3. Economic theory

The economic theory is an another theoretical perspective that is discussed in the literature to explain why companies voluntary disclosure information. At first the agency theory developed by Jensen and Meckling will be described. Second the positive accounting theory (PAT) developed by Watts and Zimmerman will be described and outlined within voluntary disclosure.

3.3.1Agency theory

In 1976 Jensen and Meckling developed a key paper of the agency theory. Agency theory focused on the relationships between principals and agents (for example, the relationship between shareholders and corporate managers), a relationship which, due to various information asymmetries, created much uncertainty. Agency theory accepted that transaction costs and information costs exist. Jensen en Meckling defined the agency relationship (Jensen, Meckling 1976) as:

“A contract under which one or more (principals) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent”.

The agency relationship is defined as a contact but this contract does not have to be a written contract. In other simply terms, that is how the principal (shareholder) expects the agent (manager) to behave. Agency theory proposes that, the firm is based on a relationship between manager (agent) and owner (principal), where the agent is hired to manage the company on behalf of the principal.

Jensen and Meckling considered the relationships and conflicts between agents and principals and how efficient markets and various contractual mechanisms can assist in minimizing the cost to the firm of these potential conflicts. Jensen and Meckling considered a well-functioning firm as a firm that minimizes its agency cost. These costs are inherent in the principal/agent relationship. In the absence of contractual mechanisms, it is assumed that the agent or manager have an incentive to consume many personal benefits, as well as to use confidential information for personal gain at the expense of the principals or owners. Within traditional economics literature and also the agency theory accepts assumptions such as that all individuals are driven by desires to maximize their own wealth. On the other hand it is assumed within the agency theory that principals will assume that the agent (like the principal) will be driven by self-interest, and therefore the principals will anticipate that the agent (manager), unless restricted from doing otherwise, will undertake self-serving activities that could be causing harm to the economic welfare of the principals (shareholders). If there is no contractual mechanism to restrict the agents’ potentially opportunistic behavior, the principal will pay the agent a lower salary in anticipation of the opportunistic behavior actions. For example, if shares are being sold in a company, the shareholders will pay a lower price for the shares in the organization. The lower salary will compensate the owners for the adverse actions of the managers (price protection). The perspective is that it is the agents (managers) who pay for the princiapals’ (shareholders’) expectations of their opportunistic behavior. The agents are therefore assumed to have an incentive to enter into contractual arrangements that appear to be able to reduce their ability to undertake actions causing harm to the interest of the principals.

Summarizing the work of Jensen and Meckling (Jensen, Meckling 1976), it can be concluded that the contracts lead to two agency problems. At first there are conflicting goals between principal and agent together with the difficulty for the principal to check agent’s actions and opportunistic behavior. Secondly, there are differences in risk attitude between principal and agent that possible lead to different behaviors. An important assumption within the principal-agency theory is that the theory is based on self-interested rational choices by both of the actors.

In a lot of literature the conclusion is made that the findings stated above are not valid in explaining why companies voluntary disclosure information. Within the principal-agency theory the separation of the ownership and control give rise information asymmetries between managers and shareholders where manager have better information on the companies current and future performance than shareholders (owners). Several empirical researches examined how agency problem can be mitigated through increased disclosure. According to several studies, increasing transparency and disclosure will contribute to a better convergence of managers with those of shareholders (Ball, Kothari & Robin 2000). Reducing information asymmetry or reducing information risk through increased voluntary disclosure can reduce the cost of capital of firms (Diamond, Verrecchia 1991) and increasing voluntary disclosure reducing information asymmetry between uninformed and informed investors, and thus increases the liquidity of a firm’s stock (Kim, Verrecchia 1994).

3.3.2.Positive Accounting Theory

The positive accounting theory or the political cost hypothesis is an another theoretical perspective within the economic theory literature to explain why companies voluntary disclosure information. The positive accounting theory is founded by Watts and Zimmerman during the late seventies of the previous century. Watts and Zimmerman seeks to explain and predict actual accounting practices. This contrasts with normative accounting, that seeks to derive and prescribe “optimal” accounting standards. Positive accounting theory can be associated with the contractual view of the firm like the principal-agency theory of Jensen and Meckling (Jensen, Meckling 1976) or the transaction costs theory of Coase which introduces the concept of transaction costs to explain the nature and limits of firms (Coase 1937). As Watts and Zimmerman state, Positive Accounting Theory (hereafter referred to as PAT):

…is concerned with explaining accounting practice. It is designed to explain and predict which firms will and which firms will not use a particular method… but it says nothing as to which method a firm should use.

PAT is a theory that seeks to explain and predict managers’ choices of accounting methods. PAT focuses on relationships between various individuals within and outside an organization and explains how financial accounting can be used to minimize the costly implications associated with each contracting party operating in his or her own self-interest. Watts and Zimmerman assume that individuals are acting to maximize their own utility and consequently the management lobbies on accounting standards based on its own self-interest (Watts, Zimmerman 1978). All individual behavior motivated by self-interest is central to PAT. A key part of this task is to examine how accounting standards affect management’s wealth. Management wealth is argued, as a function of changes in share prices (via stocks and stock options), and changes in cash bonuses (via compensation plans). Ordinarily, managers are predicted to have greater incentives to lobby for accounting standards that lead to increases in reported earnings and thereby management wealth. This refers to the positive character of PAT rather than normative accounting (Milne 2002).

3.4. Political economy theory

Instead of the previous theories takes the Political Economy Theory (hereafter referred to as PET) a wider view in explaining why companies voluntary disclose social information. According to Gray et al., corporate social disclosure incorporates “the social, political and economic framework within human life takes place” (Gray, Owen & Adams 1996). PET regards social systems as “interacting sets of major economic and socio-political forces which affect collective behavior” (Stern, Reve 1980), and economic exchanges as the interplay of power and the objectives of power wielders (Arndt 1983). In other terms PET considers that economics, politics and society are inseparable, and economic issues cannot be investigated in the absence of considerations about political, social and institutional framework in which the economic activity takes place. Economics, politics and society should all be considered in accounting research. PET looks into the political, economic, social and institutional framework, under which the reporting organization operates (Gray, Kouhy & Lavers 1995, Gray, Owen & Adams 1996). The reporting organization is not only subject to social demands, especially from stakeholders. PET proposes many other factors including the economic objectives of internal agencies, legal institutions, government regulatory entities, business culture and industry environment. Sustainability reporting is used as a means to maintain the favored position of the business sector in controlling scarce resources or capital within the PET context. According to Gurthrie and Parket corporate reports cannot be considered as neutral, unbiased documents, but rather are, a product of interchange between the corporation and its environment and attempt to mediate and accommodate a variety of sectional interests (Guthrie, Parker 1990).

Political economy can be either classical, which is concerned with structural conflict, inequality and the role of the state (for example within the radical paradigm), or bourgeois, which takes these aspects as a given and is concerned with interactions between groups in a pluralistic world (Gray, Owen & Adams 1996). Before discussing theories belonging to political economy, it might be relevant to distinguish the classical political economy theory versus the bourgeois political economy theory.

3.4.1.Classical versus Bourgeois political economy theory

Political economy has a very long historical tradition and has multiple twist to its meaning. The political economy theory can be derived in history in two perspectives; the classical perspective of the political economy theory and the bourgeois perspective of the political economy theory. These two perspectives can help explaining conflicts or different conclusions in literature. The distinction between classical versus bourgeois perspective of political economy theory was made for the first time by Karl Marx. Karl Marx reserved a central role for ‘sectional (class) interest, structural conflict, inequity, and role of the State at the heart of the analysis, within the classical perspective of the political economy theory. The bourgeois perspective of the political economy theory largely ignores these elements and, as a result, its content to perceive the world as essentially plurastic (Gray, Kouhy & Lavers 1995). The classical perspective tends to perceive accounting reports and disclosure as means of maintaining the favored position of those who control scarce resources (capital), and as a means of undermining the position of those without scarce capital. The classical perspective “focuses on the structural conflicts within society” while the bourgeois perspective of the political economy theory does not explicitly consider structural conflicts and class struggles but rather tends to be concerned with interaction between groups in an essentially pluralistic world. With this in mind, legitimacy theory and stakeholder theory are derived from bourgeois political economy theory. The world is seen from the organization as part of a broader social system in these theories, and not from the central role of the state or in the light of structural inequity (Milne 2002, Deegan 2002). The definition of political economy theory, mentioned at the beginning of this paragraph falls under the bourgeois perspective of political economy theory.

3.4.2.Stakeholder theory

The stakeholder theory, as mentioned above, is typically derived from bourgeois political economy theory. In the world of bourgeois perspective, the stakeholder theory is seen from the perspective of the management of the organization who are concerned strategically with the continued success of the firm. The continued existence of the firm requires the support of the stakeholders and their approval must be sought and the activities of the corporation must be within that approval. The more powerful the stakeholders, the more the company must adapt. Social disclosure is seen as a part of the dialogue between the company and its stakeholders and corporate social reporting has been a relatively successful medium for negotiating these relationships (Roberts 1992). The next chapter will pay more attention to the stakeholder theory.

3.4.3. Legitimacy theory

The legitimacy theory is derived from bourgeois political economy theory and can be seen in the same light. The legitimacy theory concerns itself with organization-society negotiation in a pluralistic world. The legitimacy theory is also derived from the concept of organizational legitimacy. The organizational legitimacy has been defined as:

…..a condition or status where organizations seek to establish congruence between the social values associated with or implied by their activities and the norms of acceptable behavior in the larger social system of which they are a part. Insofar as these two value systems, there will exists a threat to organizational legitimacy. These threats take the form

of legal, economic, and other social sanctions (Dowling, Pfeffer 1975).

In other terms, within the legitimacy theory, the organization is seen as a part of a broader social construct whose expectations it must met if it is to have ongoing operations without excessive societal sanctions being imposed. The assumption of legitimacy theory stems from the notion that organizations do not have an inherent right to exist but only do so with the sanction of society.

The illustration in Figure 1 adopts the perspective that threats to present or potential legitimacy emanate from a corporation’s negative association with an issue/event. The area marked X in Figure 1 represents congruence between corporate activity and society’s expectations of the corporation and its activities, based on social values and norms. Area Y and Z represents incongruence between a corporation’s actions and society’s perceptions of what these actions should be. These area’s represents “illegitimacy” or legitimacy gaps X. The aim of the corporation is to be legitimate, to ensure area X is as large as possible, thereby reducing the legitimacy gap. A number of legitimation tactics and disclosure approaches may be adopted to reduce the legitimacy gap.

Central to legitimacy theory is the concept of a social contract, implying that a company’s survival is dependent on the extent that the company operates “within

the bounds and norms of the society” (Brown, Deegan 1998). However, as the societal bounds and norms may change over time, the organization continuously has to demonstrate that its actions are legitimate and that it behaved as a good corporate citizen, usually by engaging in corporate social reporting. Therefore, corporate social reporting may primarily be considered as a reaction to factors in the company’s environment (Guthrie, Parker 1989) and as a reaction on public pressure (Patten 1991, Walden, Schwartz 1997, Neu, Warsame & Pedwell 1998). Many prior studies indicates that the amount of environmental and social disclosures increases when the organization or industry has to face a predicament, for example violation of human rights, environmental pollution etc. Organizations’ responses to such public pressure and /or negative media attention, by increasing the amount of their disclosure, so they can reduce the organizations’ social and political environmental exposures (Patten 1992).

Following Lindblom companies can adopt four possible strategies to respond to such public pressure:

1. Organizations may seek to educate and inform the relevant parties in society about their current corporate performance and operations.
2. Organizations can try to change society’s perception without changing its current behavior.
3. Organizations may seek to manipulate society’s perception by deflecting attention from the issue of concern; prioritize other issues.
4. Organizations can take actions to change the external expectations (society) of its corporate performance.

As Lindblom demonstrates, social disclosure can be employed in each of these strategies (Lindblom 1994). Publishing corporate disclosures can be in the light of this theory a tool for a firm to legitimize its corporate strategy. Many prior studies on corporate disclosures have provided evidence that firms do voluntary disclose information in their annual reports as a strategy to manage their legitimacy (Deegan, Gordon 1996, Deegan, Rankin 1996, Nasi et al. 1997). Thus, sustainability reporting can be viewed as a constructed image or symbolic impression of itself that an organization is conveying to the outside world to control its political or economic position (Neu, Warsame & Pedwell 1998). An important point of attention is that organizations use corporate social disclosures to establish and maintain their legitimacy. An another important point of attention is that organizations have an incentive to conceal negative information and report only positive information. According to Lindbloms’ third strategy, this information must be positive in society’s perception to achieve legitimacy. This kind of studies is not relevant for this thesis, and therefore will not be discussed. A last note to the legitimacy theory is about the term society or relevant publics. When terms like society or relevant publics are used, there can be referred to the term stakeholder. This thesis discusses the stakeholder theory in a very detail in the next chapter. For now, it’s important to see the overlap in theories.

Geef hier aan dat in het volgend hoofdstuk ook een vergelijking wordt gemaakt tussen de 2 perspectieven.

3.5. Summary

Stakeholder theory recognises that there are a number of stakeholders in society who interact in a dynamic and complex manner. Stakeholder theory explains corporate social disclosure as a way of communicating with stakeholders, and has two branches; the ethical/normative branch and the positive/managerial branch (Deegan, 2000). The positive branch explains corporate social disclosure as a way of managing the organisation’s relationship with different stakeholder groups. The more important the stakeholders are to the organisation, the more effort will be made to manage the relationship (Deegan, 2000). The ethical branch argues that "all stakeholders have the right to be treated fairly by an organisation, and that issues of stakeholder power are not directly relevant" (Deegan, 2000, p. 268). This view is reflected in the Gray et al. (1996) accountability framework, which argues that the organisation is accountable to all stakeholders to disclose social and environmental information.

Gray et al. (1995a) believe that limited insights can be made using this paradigm. Studies informed by social and political theory (which would be within the interpretative and radical paradigms) however offer the potential for "far more interesting and insightful theoretical perspectives" (Gray et al., 1995a, p. 52). Gray et al. (1996) divide the theories in this area into three overlapping categories: stakeholder theory, legitimacy theory and political economy theory. These theories take a systems perspective, recognizing that businesses interact with and affect entities beyond their artificial boundaries (Gray et al., 1996). Although these theories provide a useful framework to study corporate social disclosure, they are not fully developed theories for explaining corporate social disclosure (Gray et al., 1996)

4 Stakeholder model versus Shareholder model

4.1. Introduction

Within this chapter, the most important elements and characteristics of stakeholder theory will be discussed. In the previous chapters the term stakeholder and the stakeholder theory has been used to describe other essential theories on voluntary disclosure theories like the legitimacy theory. This chapter pay more attention to the stakeholder theory than the previous chapters. This chapter provides also a theoretical foundation of stakeholder theory. After explaining the most important issues of stakeholder theory, stakeholders definitions, identification and classification, a stakeholder framework will be constructed that will be applied to sustainability reporting. This chapter also pay attention to the stakeholders model which will be discussed as an alternative for the shareholders model. The theoretical findings will be used to develop a set of hypothesis in chapter seven. These hypotheses investigate whether differences in stakeholder engagement within sustainability reports can be explained by the differences between the stakeholders perspective and the shareholders perspective or not.

4.2. Stakeholder theory

The stakeholder theory or the concept of stakeholder was introduced in 1984 by

R. Edward Freeman into strategic management. In his book, Strategic Management: A Stakeholder Approach, Freeman describes stakeholder concept as “a set of propositions that suggest that managers of firms have obligations to some group of stakeholders”. Freeman drew on various literatures including corporate planning, system theory and corporate social responsibility to develop a stakeholder approach. Freeman argued that existing management theories were not equipped to address “the quantity and kinds of change which are occurring in the business environment”. He described the quantity and kinds of change which occurring in the business environment as increasing takeovers, activism, foreign competition, new industrial relations, a worldwide resource market, government reform, supranational agencies, a rising consumer movement, increasing environmental concerns and changes in communication technology. Freeman defined these changes as the environmental “shifts”. He argued that these environmental “shifts” were occurring among both internal stakeholders (owners, customers, employees, and suppliers) and external stakeholders (governments, competitors, consumer advocates, environmentalists, special interest groups and the media). Freeman cautioned that managers need to “take into account all of those groups and individuals that can affect, or are affected by, the accomplishment of the business enterprise” (Freeman 1984). The organizations itself should be thought of as a grouping of stakeholders and the purpose of the organization should be to manage the interest, needs and viewpoints. A particular group stakeholders, in this case the top-level managers of the organization, are thought of as the focal group, charged with fulfilling the role of stakeholder management. Later, Freeman elaborated with Evan his concept. This resulted in the following two principles (Evan, Freeman 1988):

1. Principle of corporate legitimacy
2. The stakeholder fiduciary principle

Within the first, the corporation should be managed for the benefit of its stakeholders. The stakeholders are its customers, suppliers, employees and local communities. The rights of these groups must be ensured and the groups must participate in decisions that substantially affect their welfare. Within the second principle the management bears a fiduciary relationship to stakeholders and to the corporation as an abstract entity. A fiduciary relationship is a relationship in which one party places special trust, confidence and reliance in and is influenced by another who has a fiduciary duty to act for the benefit of the party. In that case, the management must act in interest of the stakeholders as their agent, and it must act in the interest of the corporation to ensure the survival of the firm, safeguarding the long-term stakes of each group.

The definition of a stakeholder, characterization of the organization and its purpose and the characterization of the role that managers do take on or should take on are all contested in later work by Freeman (Edward Freeman, Wicks & Parmar 2004). Freeman uses a different definition of stakeholders as “those groups who are vital to the survival and success of the corporation”. Freeman altered an renamed the two principles in three other principles:

1. The stakeholder-enabling principle.
2. The principle of director responsibility.
3. The principle of stakeholder recourse.

Within the first principle, the stakeholder-enabling principle, Freeman describes that corporations shall be managed in the interest of stakeholders. In the second one, Freeman describes that directors of the corporation shall have a duty of care to use reasonable judgement to define and direct the affairs of the corporation in accordance with the stakeholder-enabling principle. The third principle, the principle of stakeholder recourse, was added by Freeman to gave the stakeholder theory a relatively new tendency. The principle of stakeholder recourse is that stakeholders may bring an action against the directors for failure to perform the required duty of care.

According to the work of Donaldson and Preston, these elaborations of the stakeholder concept are versions of normative stakeholder theory. In this meaning normative, because the theory describes how managers and stakeholders should act and should view the purpose of the organization, based on some ethical principle. An another approach on the stakeholder concept, like the descriptive stakeholder theory, describes how managers and stakeholders actually behave and how they view their actions and roles. The instrumental stakeholder theory, a more strategic one, is more concerned with how managers should act if they are to further their own interests or what theorists conceive as the interests of the organization, usually viewed as profit maximization or maximization of shareholder value. According to Donaldson and Preston the three aspects are nested within each other (Donaldson, Preston 1995).

4.3 Stakeholder definitions, identification and classification

There is not much disagreement on what kind of entity can be a stakeholder. Despite the “apparent clarity” and general applicability of the stakeholder concept (Antonacopoulou, Meric 2005), there is a continuing lack of agreement about who should be regarded as a stakeholder (Freeman 1984). According to Fassin, a stakeholder refers to any individual or group that maintains a stake in an organization in the way that a shareholder possesses shares (Fassin 2009). Other numerous definitions are in line what it is to be a stakeholder, a claimant or an influencer. The most common one is the combinatory definition of Freeman of a stakeholder: any group or individual that “can affect or is affected by the achievement of an organization’s objectives”. This can be seen as the classical and the most accepted definition of a stakeholder with greater precision. The shorter version of the definition is “those who can affect or can be affected by the firm” (Freeman 1984).

The literature includes many attempts at classifying stakeholders using various criteria. According to the work of Clarkson, stakeholders can be divided in primary and secondary stakeholders. Primary stakeholders are stakeholders without whose continuing participation the corporation cannot survive as a going concern. Primary stakeholders consist of employees, customers, investors, suppliers and shareholders that provide necessary infrastructure. To complement the list of stakeholders, the governments and communities that provide infrastructures and markets, whose laws and regulations must be obeyed, and to whom taxes and obligations may be due, forms the primary stakeholder group. Secondary stakeholders are not usually engaged in transactions with the focal organization and are no essential for its survival. Secondary stakeholders include the media, trade associations, non-governmental organizations, along with other interest groups. According to Clarkson, the secondary groups are defined as “those who influence or affect, or are influenced or affected by he corporation, but they are not engaged in transactions with the corporation and are not essential for its survival (Clarkson 1995).

The primary and secondary stakeholder definition may not be sufficient. Another way of defining stakeholders is to look at the power, legitimacy and urgency of the stakeholder (Kolk 2000). Within a given theory, there is no single attribute to identify stakeholders. Only a few attributes can be used to identify different classes of stakeholders in a firm’s environment. Classes of stakeholders can be identified by their possession or attributed possession of one, two or all three of the following attributes: (1) the stakeholder’s power to influence the firm or in other terms an actor has power if it is able to impose its will in the relationship, (2) the legitimacy of the stakeholder’s relationship with the firm or other terms a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, beliefs and definitions and (3) the urgency of the stakeholder’s claim on the firm or in other terms the degree to which stakeholder claims call for immediate attention (Mitchell, Agle & Wood 1997). An additional compelling basis for classification considers the level of the environment (Post, Preston & Sachs 2002). The level of environment can be classified in: (1) the resource base like investors, employees and customers, (2) the industry structure like supply chain associates, joint venture partners and alliances, regulatory authorities and unions and (3) in the social political arena like governments, communities/citizens and private organizations.

The definitions given in this paragraph for stakeholder, the stakeholder identification and classification are very broad and in some cases very various. In the current literature, the academics are not able to give one uniform definition of the term stakeholder, or to identify and classify stakeholders. Despite this lack of clarity about who should be regarded as a stakeholder and limited subsequent action to classify stakeholders, organizations undertake stakeholder engagement programs. In the next paragraph stakeholder relationships will be discussed which is characterized by dialogue and engagement. In the next paragraph there will be also a stakeholder framework constructed that will be applied to sustainability reporting.

4.4 Stakeholder management, engagement and relationship

One of the definitions of stakeholder engagement is that stakeholder engagement describes a range of practices in which organizations take a structured approach to connection with its stakeholders (Thomson, Bebbington 2005). An another much more specific definition of stakeholder engagement is from the study of Greenwood (2007). Stakeholder engagement has been defined as a practice that an organization undertakes to involve stakeholders in a positive manner in organizational activities (Greenwood 2007).

Some companies undertake only what stakeholders are asking of them and do little with the given information and other companies have responded to demands of these stakeholders by taking a stakeholder management approach that requires, “simultaneous attention to the legitimate interest of all appropriate stakeholders, both in the establishment of organizational structures and general policies” (Donaldson, Preston 1995). According to Low and Cowton (2004), there are two forms of stakeholder management. The first one is stakeholder engagement and the second one is stakeholder participation (Low, Cowton 2004). According to Andriof et al. (2002), stakeholder relationship is preferable in usage to stakeholder management. He argue that companies can manage their relationships with stakeholders, but frequently cannot actually manage the stakeholders themselves. This meaning will run throughout his work even where the term stakeholder management is used. Stakeholder relationship can be used interchangeably with stakeholder engagement (Andriof 2002).

In recent years stakeholder theory begun focus to attention on the importance of the relationships that companies have with its stakeholders. Effective stakeholder relationship management is characterized by dialogue and engagement (Phillips 1997, Swift 2002). It is the act of managing the relationship between the firm and different stakeholders in order to make the effectiveness of the firm’s decisions and strategies better. This engagement at the core of effective stakeholder relationship management is essential to realizing the goals of sustainable development, especially as the main issue for sustainable development concerns primarily the choices companies make between the conflicting interest of stakeholders (Amaeshi, Crane 2006).

The previous paragraph concluded that in current literature, the academics are not able to give one uniform definition of the term stakeholder, or to identify and classify stakeholders. Despite this lack of clarity about who should be regarded as a stakeholder and limited subsequent action to classify stakeholders. To distinguish between different stakeholders, an another approach will be used as a framework that will be applied to sustainability reporting.

This another approach to distinguish between different stakeholder types is from the work of Friedman and Miles (2002). Friedman and Miles argue that current stakeholder theory literature is very divergent (Friedman, Miles 2002). They argued that previous literature paid less attention to the relationship between organization and stakeholder. According to Friedman and Miles, extremely negative and highly conflicting relations between organizations and stakeholders have been ignored or under-analyzed. Friedman and Miles also argue that the extent to which organization/stakeholder relations can change over time, together with analysis of how and why such changes occur, has also been neglected. Friedman and Miles constructed a quadrant that makes it possible to classify different variants of the relation between organization and stakeholder, based on a realist theory of social differentiation developed by Archer (Archer 1995). According to the work Archer, the quadrant is based on two distinctions (see figure X).

The first distinction is the left side of the quadrant. The left side of the quadrant makes a distinction whether the relation between organization and stakeholder is compatible or incompatible in terms of sets of ideas and interest associated with social structures: whether they help or hinder each other.

The second distinction is the top side of the quadrant. The top side of the quadrant makes a distinction whether relationships between groups are necessary or contingent. Necessary relationships are internal to a social structure (such as an organization) or to a set of logically connected ideas. Contingent relations are external or not integrally connected (Friedman, Miles 2002).

Organizations engage in relationships with their stakeholders based on a framework of contracts (Susnienė, Vanagas 2006). According to work of Friedman and Miles (2002), the implicit contract theory has been applied in their model. The demonstrated model in figure X focuses on the relations between organization and stakeholder. The four relations between organization and stakeholder (A, B, C and D) refer to a different contractual relationships (Friedman, Miles 2002).

Implicit contracts are relationships between organization and stakeholder whereby there are no intentions to contract, although all elements of a contract may be present. Friedman and Miles assume a world of imperfect information, imperfect mobility and small numbers. Friedman and Miles linked the imperfect information to information asymmetry. According to Friedman and Miles there are no ideal contracts because ideal contracts require perfect and complete markets. Friedman and Miles mention four different contractual forms (Friedman, Miles 2002):

1. Explicit recognized contracts (written or verbal, can be via a third party).
2. Implicit recognized contracts (recognized by parties involved and/or significant others, such as governments or regulators or partners).
3. Implicit unrecognized contracts (not recognized by the parties involved, but recognized by certain “sensitized” others, such as academics, novelists and activists). If the parties involved went through some process of sensitization it is likely that recognition would follow.
4. No contracts.

(A) Necessary compatible relations are relations between shareholders and corporations, between top managers and corporations and among partners. The set of ideas and interests are compatible and the relation is necessary. Different types of shareholders and different levels of management will have different forms of contracts. These relationships are created whereby all parties have something to lose when the relationships ends. All interest is served by the continuation of the relationship by both parties. This relationship can be seen as a recognized explicit and implicit contracts. An example of an explicit contract in this case are contracts between institutional shareholders and the organization or top management and the organization. An example of an implicit contract is the indirect relations between small shareholders and the corporate organization, whereby small shareholders are not able to influence the corporate strategy.

(C) Contingent incompatible relations are the opposite of necessary compatible relations. The set of ideas and interests are incompatible and the relation isn’t necessary. Here the stakeholder and the corporation have separate, opposed, and unconnected sets of ideas, which only come into conflict if someone insists on counterpoising them. This type of relation between the stakeholder and the corporation doesn’t deal with contracts, explicit nor implicit. Examples of contingent incompatible relations are activists, terrorists and pressure groups.

(D) Necessary incompatible relations occur when material interest or sets of ideas are necessarily related to each other, but their operations will lead to the relationship itself being threatened. Necessary incompatible relations can be linked to both explicit and implicit contracts and to the term compromise. Organizations are encouraged to answer stakeholder claims, in spite of incompatible interests, because there is recognition by both parties. The relation is necessary, because both parties want to continue the relation. Ending the relations means unprofitable for both parties and causes high opportunity costs. The organization will act in such a way that it will reach a kind of compromise with its stakeholders. Explicit long-term contracts that cover relations such as the employment relation and long-term financing or supplier relations are examples.

(B) Contingent compatible relations between stakeholders and organization refer to implicit and unrecognized contracts. Contingent compatible relations are the opposite of necessary incompatible relations. The sets of ideas or interest are compatible and the relation isn’t necessary. This covers relations where there is no formal contract and no direct relationship between the parties. Sometimes, the compatibility of interest may lead to a formal recognized contract because the contract can bring advantages to both parties (opportunistic). In other situations there can be compatibility of ideas or circumstances. In these cases, the contract is implicit rather than explicit. Organizations connected through common trade associations or joined by national initiatives are examples of implicit contracts.

The explanation mentioned above summarizes the framework of Friedman and Miles (2002), which has been discussed in this paragraph. In this paragraph the four different stakeholder types based on the contractual relationship between the organization and its stakeholders has been discussed. The different stakeholder groups are listed in figure X. For now, it was important to classify different stakeholder groups.

4.5 Stakeholders and Shareholders Debate

4.6 From stakeholder model to shareholder model

4.7 Legal system: Common-law versus Code-law

Stakeholder

theory (Freeman, 1984; Donaldson & Preston, 1995) is often used as a framework for

various CSR related studies (Berman, Wicks, & Jones, 1999; Clarkson, 1995; Maignan, Ferrell, & Hult, 1999; Roberts, 1992; Turner, 2004). Stakeholder theory and its limitations are reviewed in Stakeholder Theory in Chapter 2.

R. Edward Freeman is the prominent scholar who introduced the concept of

stakeholder into strategic management (Wood, 1991). In his landmark book, Strategic

Management: A Stakeholder Approach, Freeman describes stakeholder theory as “a set of

propositions that suggest that managers of firms have obligations to some group of

stakeholders” (1984, p. 602).

The Current State of the Art

The most commonly referenced categories of stakeholder theory are those

developed by Donaldson and Preston (1995): descriptive, instrumental, and normative. Descriptive aspects of stakeholders include: (a) the nature of the corporation, (b) the way managers deal with managing, and (c) the way board members consider the interests of corporate constituencies. The instrumental dimension of stakeholder theory “establishes a framework for examining the connections, if any, between the practice of stakeholder management and the achievement of various corporate performance goals” (Donaldson & Preston, 1995, p. 67). The normative aspect of stakeholder theory provides its fundamental basis by submitting that stakeholders’ interests have intrinsic value, and thus those who have an interest in a company become stakeholders regardless of the company’s interest in them. Donaldson and Preston assert that descriptive, instrumental, and normative stakeholder theories are mutually supportive.

The classification of stakeholder theory by Donaldson and Preston (1995) later

led to further discussions on convergent and divergent stakeholder theories among

theorists. For example, Jones and Wicks (1999) argue that instrumental and normative

perspectives are incomplete without each other, and thus recommend a combination of instrumental and normative stakeholder theories. In contrast, Freeman (1999) suggests a divergent stakeholder theory as there are multiple approaches for stakeholder management. Freeman emphasizes the need for studies to link stakeholder management and corporate performance, which have been discussed in instrumental theories, for example, by Jones (1995). Jones claims that firms with mutually trusting cooperative relationships with their stakeholders can achieve competitive advantage.

A group of stakeholder theorists address a common question: What is the purpose

of the firm and to whom is the firm obligated? These theorists include Donaldson and

Preston (1995), Freeman (1999), Jones and Wicks (1999), and Jones, Wicks, and

Freeman (2002). Jones et al. (2002) suggest that connecting stakeholder theory to “the

value creation of trade” and to “the foundation of entrepreneurship” (p. 34) will be

important for future research. Jones et al. also suggest the possibility of having more than one theory and the need for a typology of stakeholder theories.

Limitations of Stakeholder Theory

Friedman and Miles (2006) emphasize the following limitations of the current

stakeholder theory:

1. Lack of consistency in normative stakeholder theory.
2. Descriptive stakeholder theory is at too early a stage of
   development.
3. The descriptive basis of much normative stakeholder theory needs to be recognized and developed (pp. 136-138).

Friedman and Miles (2006) argue the need for a descriptive and analytical

stakeholder theory that is “sensitive to values and norms, through explicit consideration of ideas, belief systems, and identities” (p. 137). The authors state that descriptive stakeholder theory can change into normative stakeholder theory when it is value-attuned. Phillips (2003) points out that the current stakeholder theory does not specify who are included or excluded as stakeholders. Phillips affirms that a company nonetheless has a moral relationship also with those who are not identified as its stakeholders. He argues that the absence of a rigorous normative theory not only creates a gap in the theory, but also causes other theoretical ambiguities including the problem of stakeholder identification. Phillips asserts the importance of the principle of stakeholder fairness based upon a theory of justice by Rawls (1971), who submits that those who cooperate with one another have obligations of fairness in proportion to the benefits of the cooperation they receive.

Goodpaster (1991) asserts that analyzing stakeholders to strategize companies’

plans may not necessarily be ethical if companies analyze stakeholders for their own

benefit. Goodpaster proposes the term “multi-fiduciary stakeholder synthesis” (p. 61) by means of which companies care for stakeholders’ interests as much as they do for those of their stockholders, and also reflect stakeholders’ interests in companies’ decision making. Goodpaster points out the “stakeholder paradox” (p. 63), implying that considering stakeholders can result in neglecting companies’ fiduciary duty to

shareholders, whereas serving only shareholders ignores morally significant obligations to stakeholders. By recognizing this paradox, Goodpaster suggests morally significant non-fiduciary obligations that companies need to be aware in their decision-making processes and business practices.

Donaldson and Dunfee (1994) submit that stakeholder theory does not provide a

useful normative guidance in the actual business contexts where there is moral

complexity. They propose an integrative social contracts theory, which assumes that

companies should consider the norms of stakeholders as social contracts because

companies can operate their businesses in exchange for the promotion of social interests. As discussed by Friedman and Miles (2006), linking stakeholder theory with

companies’ values might be the key to developing a more comprehensive stakeholder

theory. The consideration of diverse organizational values in stakeholder theory implies that there might be further divergent stakeholder theories because every corporate value is unique and contextual. It is noteworthy that the notion of the value-laden aspect of stakeholder theory is parallel to the conceptualizations of CSR by Johnson (1971), van Marrewijk (2003), and the World Business Council for Sustainable Development (2002). Stakeholder theory calls our attention to the importance of companies’ inclusiveness of and consideration for stakeholders and their interests in their business strategies, operations, and management. However, the sole application of stakeholder theory to CSR-related studies and practices tends to limit their foci because CSR practices encompass not only stakeholder engagement but also the following multiple dimensions that are presented in Table 1: (a) organizational culture, (b) organizational learning, (c) HRD in CSR, and (d) motivation and commitment. It is noteworthy that stakeholder theory alone does not provide a holistic theoretical foundation to map out these emerging linkages concerning CSR. The following sections examine the mechanism of CSR excellence from the perspectives of organizational culture, organizational learning, and stakeholder engagement, as well as the interrelations among these constructs. The challenges in CSR practices are also reviewed.

Stakeholder theory, which is short for stakeholder theory of the firm, is a relatively modern concept. It was first popularized by R. Edward Freeman in his 1984 book Strategic Management: A Stakeholder Approach(Pitman Books, Boston, Mass, 1984). Freeman defined a stakeholder as “any group or individual who can affect or is affected by the achievement of the organization’s objectives.” The basic premise of stakeholder theory is

that the stronger your relationships are with other external parties, the easier it will be to meet your corporate business objectives; the worse your relationships, the harder it will be. Strong relationships with stakeholders are those based on trust, respect, and cooperation. Unlike CSR, which is largely a philosophical concept, stakeholder theory was originally, and is still primarily, a strategic management concept. The goal of stakeholder theory is to help corporations strengthen relationships with external groups in order to develop a competitive advantage. One of the first challenges for companies is to identify their stakeholders. There appears to be general agreement among companies that certain groups are stakeholders — shareholders and investors, employees, customers, and suppliers. Beyond these, however, it becomes more challenging because there are no clear criteria for defining stakeholders. Most authors agree that if the term ‘stakeholder’ is to be meaningful, there must be some way of separating stakeholders from nonstakeholders. Some authors have suggested that stakeholders are those that have a stake in the company’s activities – something at risk. Other authors have suggested that if you consider the global impacts of industry – such as climate change or cultural changes due to marketing and advertising – everyone is a stakeholder. The issue of qualifying criteria for stakeholder status is currently being debated. Assuming that the main stakeholders have been identified, the next challenge for corporate managers is to develop strategies for dealing with them. This is a challenge because different stakeholder groups can, and often do, have different goals, priorities, and demands. Shareholders and investors want optimum return on their investments; employees want safe workplaces, competitive salaries and job security; customers want quality goods and services at fair prices; local communities want community investment; regulators want full compliance with applicable regulations. However, there is a general acknowledgement that the goals of economic stability, environmental protection, and social justice are common across many stakeholder groups. Few groups would argue against these goals, although they may debate the level of priority or

urgency. The contribution of stakeholder theory to the corporate sustainability is the addition of business arguments as to why companies should work toward sustainable development. Stakeholder theory suggests that it is in the company’s own best economic interest to work in this direction because doing so will strengthen its relationship with stakeholders, which in turn will help the company meet its business objectives.

6. Regulation and guidelines for sustainability reporting

6.1 Introduction

6.2 Standards versus No standards

6.3 Mandatory versus Voluntary standards

6.4 Regulation in different countries

6.5 Reporting standards and guidelines

6.5.1 OECD Guidelines for Multinational Enterprises

6.5.2 The AA1000 Standards

6.5.3 The European Corporate Sustainability Framework (ECSF)

6.5.4 The GRI Sustainable Reporting Guidelines

6.5.5 SA8000

6.5.6 RJ 400

6.6 Summary

5. Cooperative Business Model

7. Measuring stakeholder engagement

8. Stakeholder engagement in the banking industry

9. Conclusion Discussion and limitations References

Research Erasmus University Rotterdam

Proposals for master’s thesis

Supervisor: dr. Nancy Kamp-Roelands RA MA

Students work in a group on this topic

C. Shared value approach

Background

With the credit crunch there the discussion elaborated on the role of business in society. It is argued whether cooperation would be a better organization form to support stakeholder value. At the same time this would influence disclosure. Award schemes in UK and the Netherlands the cooperative banks score high in their disclosure of CSR performance. In scientific research this type of organization however is neglected as research on report disclosures focuses on listed companies.

Therefore research on the difference between listed companies and cooperatives to obtain an insight in the influence of stakeholder involvement on disclosure.

Theories/Hypothesis:

Cooperatives form a different business model that may lead to a different form of accountability. It is a more natural environment for stakeholder value; the wider stakeholder perspective leads to accountability to more different stakeholders and therefore more disclosure on CSR topics.

Stakeholder perspective (creating shared values and moral oblogation) vs. Shareholder perspective (legitimacy).

Research design:

1. Content analysis of reporting on CSR in annual reporting, website and sustainability reporting and comparing cooperatives with commercial organizations
2. Country influence: Danko etc Descriptive explanation on difference between US and Europe.