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In this Dec 2004 issue of On Target :
Certifying the Triple Bottom Line: A Job for the Management Accountant?
What's On
Bookshelf
TBL Accounting arose out of the sustainability agenda which was long understood as Environmental Accounting”, i.e. an attempt to harmonise the traditional financial bottom line, with the environmental bottom line. However, it is turning out to be not a double bottom-line, but instead a 'triple bottom line', focusing on :
Economic prosperity
Environmental quality, and also
Social justice (overlooked in the past)
To achieve the balance implicit in the 'triple bottom line' concept, we not only need: new forms of accountability, but also new forms of accounting. This does not mean that every aspect of a company's performance can - or should - be reduced to a 'common currency' of money values. But if we as a profession are to manage a given company's performance effectively, then we need to be able to measure it. TBL accounting provides a bridge between the conventional or mainstream means of demonstrating corporate success, and the more unconventional but increasingly demanding call for acceptance of a corporation's implied contract with society.
There is ample evidence of mainstream adoption of ethical investment principles, both in Australia and worldwide, such as the :
Establishment of the Dow Jones Sustainability Index.
Publication of stand-alone social reports by organisations such as The Body Shop, Shell (UK), and BP (UL).
Publication of sustainability reports by organisations such as Baxter International, The Body Shop, Electrolux, Shell, Ford Motor Company, British Airways, General Motors and TXU Europe.
Establishment of ethical investment funds in Australia by Rothschild Australia, Westpac, Tower, AMP, HESTA, UniSuper and VicSuper.
Reported assets in ethical investments in the USA and UK growing by 50% per annum for the past decade with $US2.16 trillion invested in ethical funds.
The question that must be asked, therefore, is, “What comprises an organisation's social responsibility?” Most organisations acknowledge today that they have an implied social contract, i.e. a "community licence to operate”. Logic dictates that a corporation's acceptance of its part in an implied social contract then extends to an acceptance of accountability for breach of that social contract. As accountability necessarily requires a system of recording and reporting performance, then such reports must also be ‘certified’ by independent professionals as to their veracity. As such a role looks at future impacts of current actions, it is a role very suited to management accountants.
Some examples of the elements of an organisation's social responsibilities are found in its record pertaining to the :
Protection of health and safety of workers.
Equal treatment of employees.
Avoidance of bribery and corruption.
Environmental protection.
Use of child labour.
Profit generation and payment of tax.
Provision of secure jobs for its workforce.
Uniformity of application of standards around the world.
Responsiveness to public views and concerns about its performance.
Willingness to assist with resolution of social problems.
Support for charities and community groups.
Support for indigenous groups.
Product safety.
Typical measures used in TBL accounting would be profitability measures such as Economic Value Added (EVA) and Market Value Added (MVA) where EVA calculates the profits a company after adjusting for the costs of the capital employed, and MVA calculates how much value a company has created since it was founded. In addition to such economic measures, the environmental measure of Environmental Value Added (EnVA) could be reported, which among other things, organisations must adjust their measurements of wealth creation and profit with a charge for the natural capital employed. Natural capital is a combination of renewable and non-renewable resources that are utilised in the generation of economic wealth. Note that in the case of non-renewable resources, they are often consumed for a once-off benefit. Even in the case of renewable resources, the most important values are not in the timber produced by a forest or in the fish produced by a sea, but in the ongoing capacity of such ecosystems to produce yields on a sustained basis. It must be remembered that some types of natural capital may be substitutable by technology and other forms of man-made capital, but most are not.
Due to such calculation difficulties in linking economic results to its impact on natural capital, even companies pioneering in the environmental accounting field have typically not yet integrated environmental accounting into their mainstream accounting, although some are working in this direction.
Key barriers include :
the lack of a standard methodology,
the fact that accountants and auditors lack environmental experience,
the difficulties involved in identifying environmental costs (particularly in companies pursuing integrated investment strategies), and
the valuation of liabilities.
The third bottom line is society measures, i.e. the reporting of Social Value Added (SocVA). Here, it is recognised that the ultimate bottom line for any project or business must not only be adjusted for environmental impact, but also must be adjusted for impacts on human and social capital. In the case of human capital, organisations must account for knowledge and skills developed or lost. For example, in the case of social capital, the focus might be on the levels of resilience, and the mutuality and trust in communities be they villages, mega-cities or world regions.
The likelihood that a credible standard for simultaneously measuring and reporting against all three 'bottom-lines' will be available in the near term is good, given, the continued demand for “Sustainable development”, the extent of public scrutiny of organisational performance reports, and the numbers and standing of corporations that have already published social and ethical reports. Once such standards have been established, the next logical step is ‘certification’ via some form of an external audit process. Obviously, the qualification and training of such professional auditors would need to encompass techniques and skills far beyond that possessed by tradition auditors of financial statements. Perhaps, the training undergone by management accountants best fills this role.
What's On
December 16, 2004
ICMA Executive Seasonal Dinner
December 18-19, 2004
Advanced Management Accounting & Advanced Strategic Management Accounting Exams conducted in Sri Lanka by ICMA and The Institute of Chartered Accountants, Sri Lanka.
January 15-April 9, 2005
Advanced Management Accounting & Advanced Strategic Management Accounting 12-day Seminars (2nd Batch) in the Philippines by Business Sense Inc. and ICMA
February 14-21, 2005
Advanced Management Accounting & Advanced Strategic Management Accounting 7-day Seminars (2nd Batch) in India conducted by First Canvas and ICMA
Book Shelf
There are two ways of viewing staff – as a cost or as “human capital”. The first can prompt the idea of “downsizing” to “improve the bottom line” and the share price. Two articles this month may resonate with those of us who feel as though they are regarded as a cost by their employer.
In “Market reactions to announcements of corporate downsizing actions and implementation strategies” in the November 2004 issue of Strategic Management Journal (from p. 1121), Robert D. Nixon, Michael A. Hitt, Ho-Uk Lee and Eui Jeong report on a study which examines the effects of downsizing on market performance. The study shows that downsizing can have a negative effect on market returns as the size of the downsizing grows. However, markets can react more positively when reallocation strategies and disengagement incentives are applied.
In the December 2004 issue of Strategic Management Journal, Nile W. Hatch and Jeffrey H. Dyer in “Human capital and learning as a source of sustainable competitive advantage” (from p. 1155) report on the “inimitability of human capital”. After researching the semiconductor manufacturing industry, they find that investments in firm-specific human capital can have a significant impact on learning and firm performance. Improved performance derives from development through training rather than acquiring human capital from external sources, with firms having high turnover significantly under-performing their rivals.
You will recall that the first few issues of On Target this year discussed Resource Consumption Accounting. I hope you saw the articles on this topic in the October, 2004 issue of Strategic Finance that accompanies this newsletter: “Do You Want to Participate in a Scorecard Study?” (anonymous) and “RCA at Clopay” (by B Douglas Clinton and Sally A Webber). I’m sure the On Target editors would be happy to receive correspondence discussing the difference between RCA and ABC. Those readers interested in quality will also have noticed “The Management Accountant's Role In Six Sigma” (by Frank Rudisill and Diana Clary) in that issue.
Bill Richardson
Please feel free to share anything that you have found interesting. You can send your ideas to: Bill Richardson, Dept of Accounting & Finance, Monash University, PO Box 197, Caulfield East VIC 3145.
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