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The Three Pillars of Corporate Social Reporting as New Governance Regulation: Disclosure, Dialogue, and Development

  • David Hess

Abstract

In this article I examine corporate social reporting as a form of New Governance regulation termed “democratic experimentalism.” Due to the challenges of regulating the behavior of corporations on issues related to sustainable economic development, New Governance regulation—which has a focus on decentralized, participatory, problem-solving-based approaches to regulation—is presented as an option to traditional command-and-control regulation. By examining the role of social reporting under a New Governance approach, I set out three necessary requirements for social reporting to be effective: disclosure, dialogue with stakeholders, and the moral development of the corporation. I then assess current social reporting practices against these requirements and find significant problems. In response, I propose one option for solving those problems, and encourage future researchers to consider the demands of these three requirements and the possible trade-offs between them when attempting to find ways to improve social reporting practices.

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1 KPMG Global Sustainability Services, KPMG International Survey of Corporate Responsibility Reporting 2005, at 4 & 11 (2005), available at http://www.kpmg.nl/Docs/Corporate_Site/Publicaties/International_Survey_Corporate_Responsibility_2005.pdf. The average was brought down by United States corporations. One hundred of the Global 250 corporations are based in the United States, but only 35 percent of those companies published a social report. Id. at 11.

2 See Dhooge, Lucien J., Beyond Voluntarism: Social Disclosure and France’s Nouvelle Regulations Economiques, 21 Arizona, J. of Int’l & Comparative L. 441 (2004).

3 Hendrik, Garz & Claudia, Volk, GRI Reporting: Aiming to Uncover the Truth, at 7 (Sept. 2007), available at http://www.siran.org/pdfs/WestLB_GRI_reporting.pdf (stating that social reporting is “on the way to becoming the norm, rather than the exception” among large, public corporations”).

4 For recent arguments that corporations’ claims of social responsibility divert attention from potentially more effective means of attaining truly socially responsible behavior by corporations, see Robert, B. Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (2007); Aaron, Chatterji & Siona, Listokin, Corporate Social Irresponsibility, Democracy, Winter 2007, at 52.

5 See William, S. Laufer, Social Accountability and Corporate Greenwashing, 43 J. Bus Ethics 253 (2003).

6 John, M. Conley & Cynthia, A. Williams, Engage, Embed, Embellish: Theory Versus Practice in the Corporate Social Responsibility Movement, 31 31 J. Corp. L. 1, 5 (2005).

7 Id. at 5.

8 Wade-Benzoni, et al., Barriers to Resolution in Ideologically Based Negotiations: The Role of Values and Institutions, 27 ACAD. Mgmt Rev. 41, 48 (2002).

9 The GRI refers to reports issued under their guidelines as “sustainability reports” and states the goal of these reports as furthering “sustainable development.” Global Reporting Initiative, Sustainability Reporting Guidelines 3 (2006), available at http://www.globalreporting.org/NR/rdonlyres/ED9E9B36-AB54-4DE1-BFF2-5F735235CA44/0/G3_GuidelinesENU.pdf.

10 Stuart, L. Hart and Mark, B. Milstein, Creating Sustainable Value, 17 ACAD. Mgmt. Exec. 56, 56 (2003).

11 World Council for Economic Development, our Common Future 43 (1987).

12 World Council for Economic Development, supra note 11, at 40; Robert, W. Kates et al., What is Sustainable Development?, Environment, April 2005, at 8, 11.

13 For general reviews of these criticisms, see David, Hess, Corporate Social Responsibility and the Law, in Corporate Social Responsibility (José, Allouche, ed.) 154, 158–63 (2006); Christine Parker, The Open Corporation: Effective Self-Regulation and Democracy 8–12 (2002).

14 Lester, M. Salamon, The New Governance and the Tools of Public Action: An Introduction, 28 Fordham Urb. L. J. 1611, 1635 (2001).

15 Bradley, C. Karkkainen, “New Governance” in Legal Thought and in the World: Some Splitting as Antidote to Overzealous Lumping, 89 Minn. L. Rev. 471, 471 (2004–2005).

16 Orly, Lobel, The Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Legal Thought, 89 MINN. L. Rev. 342, 442–43 (2004).

17 Karkkainen, , supra note 15, at 472–74.

18 Lobel, supra note 16, at 343–45.

19 Id. at 357–58.

20 Id. at 443.

21 Karkkainen, , supra note 15, at 478 (stating that “in its sheer novelty, the recent profusion of New Governance scholarship has not yet settled upon a common nomenclature, leaving even the most dedicated reader with the daunting task of sorting through and translating a bewildering babel of unfamiliar, competing, and possibly incompatible terminology, which may or may not describe similar phenomena in different terms, or different phenomena in similar terms.”)

22 Michael, C. Dorf & Charles, F. Sabel, A Constitution of Democratic Experimentalism, 98 Colum. L. Rev. 267 (1998).

23 Lobel, supra note 16.

24 Katherine, R. Kruse, Instituting Innocence Reform: Wisconsin’s New Governance Experiment, 2006 WIS. L. Rev. 645, 677–79 (2006).

25 Id. at 679–80.

26 Dorf and Sabel, supra note 22, at 350–51.

27 Id.

28 Id. at 382–85.

29 Freeman, , Collaborative Governance in the Administrative State, 45 UCLA L. Rev. 1, 55 (1997).

30 Id. at 55–56.

31 Id. at 77–81.

32 Dorf, and Sabel, , supra note 22, at 383–88.

33 Id.

34 Jennifer, S. Lerner & Philip, E. Tetlock, Accounting for the Effects of Accountability, 125 Psych. Bulletin 255, 255 (1999). Those that provide “compelling justifications” may enjoy positive consequences. Id. See also Rubin, supra note 40, at 2119 (“As used in ordinary language, accountability refers to the ability of one actor to demand an explanation or justification of another actor for its actions and to reward or punish that second actor on the basis of its performance or its explanation.”).

35 Kruse, , supra note 24, at 680.

36 Dorf, and Sabel, , supra note 22, at 383–84.

37 The TRI is part of the Emergency Planning and Community Right-to-Know Act in the United States. Emergency Planning and Community Right-to-Know Act of 1986, §§ 301–30, 42 U.S.C. §§ 11001–50 (1994).

38 See Dorf, and Sabel, , supra note 22, at 379–81 (discussing the Massachusetts Toxics Use Reduction Act (TURA)).

39 Id. at 380.

40 Edward, Rubin, The Myth of Accountability and the Anti-administrative Impulse, 103 MICHIGAN L. Rev., 2073, 2108–09(2005).

41 Id. at 2109.

42 U.S. Sentencing Guidelines Manual §8B2.1(a)(2) (2006).

43 See generally Susan, Sturm, Second Generation Employment Discrimination: A Structural Approach, 101 Colum. L. Rev. 458 (2001).

44 Id. at 465–69.

45 Id. at 522.

46 Id at 523.

47 Id. at 523–24.

48 Id. at 523–37; see also Lobel, supra note 16, at 422–23.

49 Sturm, supra note 43, at 548–53 (discussing current problems related to transparency and providing suggestions for solutions).

50 David, Hess, Regulating Corporate Social Performance: A New Look at Corporate Social Accounting, Auditing, and Reporting, 11 Bus. Ethics Q. 307, 308 (2001).

51 Archie, B. Carroll and George, W. BeilerLandmarks in the Evolution of the Social Audit, 18 ACAD. Mgmt. J. 589, 590 (1975). Although they recognize Kreps as originator of the term in this context, they acknowledge that the term may have a prior history. Id.

52 Id. at 591–93.

53 Id.

54 Id. at 593–94.

55 Id.

56 Id. at 596.

57 Some of the major works of the 1970s included Clark, C. ABT, The Social Audit for Management (1977); Raymond, Bauer & Dan, H. Fenn, The Corporate Social Audit (1972); David, Blake, William, Frederick & Mildred, Myers, Social Auditing (1976); and Ralph, Estes, Corporate Social Accounting (1976).

58 See Raymond, A. Bauer, The Corporate Social Audit: Getting on the Learning Curve, 16 CAL. MGMT. Rev. 5, 78 (1973); see also Simon, Zadek, Peter, Pruzan, & Richard, Evans, Building Corporate Accountability 17 (1997) (identifying the tensions between social auditing as a “management tool” or an “accountability mechanism”).

59 Hess, , supra note 50, at 311.

60 Bernard, L. Butcher, The Program Management Approach to the Corporate Social Audit, 16 CAL. Mgmt. Rev. 11, 13 (1973).

61 Hess, , supra note 50, at 311.

62 Meinolf, Dierkes, Whither Corporate Social Reporting: Is it Time to Legislate?, 28 CAL. Mgmt. Rev. 106, 107 (1986).

63 Hess, , supra note 50, at 311; Zadek et al., supra note 58, at 18.

64 Id. at 312.

65 Id. at 311–12.

66 Zadek, et al., supra note 58, at 18.

67 Global Reporting Initiative, Our History, available at http://www.globalreporting.org/AboutGRI/WhatWeDo/OurHistory/.

68 Id.

69 Id.

70 Global Reporting Initiative, Press Release, Heading into the 1000+ reporters, April 26, 2007, available at http://www.globalreporting.org/NewsEventsPress/LatestNews/2007/NewsApril07NewReporters.htm.

71 Global Reporting Initiative, Sustainability Reporting Guidelines (2006), available at http://www.globalreporting.org/NR/rdonlyres/ED9E9B36-AB54–4DE1-BFF2–5F735235CA44/0/G3_GuidelinesENU.pdf

72 Id. at 3.

73 Global Reporting Initiative, Sustainability Reporting Guidelines 1 (2002).

74 Global Reporting Initiative, supra note 71, at 67.

75 Id. at 7. In addition, there are additional core indicators for members of certain sectors (e.g., apparel and footwear, electric utilities, financial services) that are published in separate supplements.

76 Id. at 8.

77 Id. at 7.

78 Id. at 10.

79 Id. at 11–13.

80 Id. at 13–17.

81 Id. at 16.

82 Id.

83 Id. at 17–24.

84 Id. at 24.

85 Id. at 25–36.

86 Id. at 5.

87 Id.

88 The SBN Bank used the term “Ethical Accounting Statement” rather than “social report.” Peter, Pruzan, The Ethical Dimensions of Banking: Sbn Bank, Denmark, in Building Corporate Accountability 63, 67 (Simon, Zadek et al. eds., 1997).

89 Id. at 68.

90 See id. at 69 (describing the minimum requirements of an ethical accounting statement).

91 Don, Tapscott & David, Ticoll, The Naked Corporation: How the Age of Transparency will Revolutionize Business (2003).

92 David, Weil et al., The Effectiveness of Regulatory Disclosure Policies, 25 J. Policy Analysis & Mgmt. 155, 156 (2006).

93 Id. at 157.

94 See Id. at 158.

95 The TRI is part of the Emergency Planning and Community Right-to-Know Act in the United States. Emergency Planning and Community Right-to-Know Act of 1986, §§ 301–30, 42 U.S.C. §§ 11001–50 (1994).

96 Lobel, supra note 16, at 376–77.

97 Id. at 377.

98 Freeman, , supra note 29, at 1822; Lobel, supra note 16, at 377.

99 Id. at 22.

100 Id. at 23.

101 Id. at 27.

102 Brendan, O’Dwyer, Stakeholder Democracy: Challenges and Contributionsfrom Social Accounting, 14 Business Ethics: A European Review 28, 2930 (2005).

103 Archon, Fung, Deliberative Democracy and International Labor Standards, 16 Governance 51, 52 (2003).

104 Id. at 55.

105 Pruzan, , supra note 88, at 69.

106 Titus, Fossgard-Moser, Social Performance: Key Lessons from Recent Experiences within Shell, 5 Corp. Gov.: Int’L J. Bus. Soc. 105, 112 (2005).

107 Id.

108 See The Shell Report 2004 24 available at http://www.shell.com/static/envirosoc-en/downloads/sustainability_reports/shell_report_2004.pdf (indicating the importance of stakeholder engagement to determine the key performance indicators included in the report).

109 Fossgard-Moser, , supra note 106, at 112.

110 Id. at 113.

111 Hess, , supra note 50; Eric W. Orts, A Reflexive Model of Environmental Regulation, 5 Bus. Ethics Q. 779 (1995).

112 Michael Power, Constructing the Responsible Organization: Accounting and Environmental Representation, in Environmental Law and Ecological Responsibility: The Concept and Practice of Ecological Self-Organization 369. (G. Teubner et al., eds, 1994)

113 Rubin, , supra note 40, at 2107–08.

114 Id. at 2108.

115 See Edward Freeman, R. & Daniel, R. Gilbert Jr., Corporate Strategy and the Search for Ethics 104 (1988). The authors argue against the idea of corporate social responsibility simply meaning responsive to social pressures by stating that it “perverts the connection between ethics and strategy. In doing so, it represents a paradigm case of how not to do ethical reasoning. It is simple and easy, and wrongheaded.” Id.

116 Christopher, D. Stone, Where the Law Ends: The Social Control of Corporate Behavior 121 (1976).

117 Id. at 201.

118 Id. at 202.

119 Environmental Protection Agency (Office of Environmental Information, Toxics Release Inventory Program Division), How Are the Toxic Release Inventory Data Used?: Government, Business, Academic, and Citizen Uses, EPA-260-R-002–004, May 2003, at 9, available at http://www.epa.gov/triinter/guide_docs/pdf/2003/2003_datausepaper.pdf.

120 Irene, M. Herremans & Sandy, Herschovis, Sustainability Reporting: Creating and Internal Self-Driving Mechanism, Envtl. Quality Mgmt., Spring 2006, at 19.

121 Id. at 23.

122 Id. at 23–24.

123 Id.

124 Id. at 28.

125 David, Hess, Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness, 25 J. Corp. L. 41, 6768 (1999).

126 See Josh, Dowse, Making CR Measurement Meaningful to the Rest of Business, Corp. Responsibility Mgmt., June/July 2005, at 14.

127 Id. at 17.

128 Id. at 21.

129 See generally, Christine, Oliver, Strategic Responses to Institutional Processes, 16 ACAD. Mgmt. Rev. 145 (1991).

130 See Neil, Gunningham et al., Shades of Green: Business, Regulation and Environment 95–134 (2003).

131 Bauer, 1973, supra note 58, at 7.

132 For reviews of the empirical literature supporting these conclusions, see Sylvie, Berthelot et al., Environmental Disclosure Research: Review and Synthesis, 22 J. Accounting Lit. 1 (2003); David, Hess & Thomas, W. Dunfee, The Kasky-Nike Threat to Corporate Social Reporting: Implementing a Standard of Optimal Truthful Disclosure as a Solution, 17 Bus. Ethics Q. 5 (2007).

133 Hess, and Dunfee, , supra note 132, at 810.

134 Lori, Holder-Webb et al., The Supply of Corporate Social Responsibility Disclosures Among US Firms 38 (November 30, 2007), available at SSRN: http://ssrn.com/abstract=970330.

135 See supra note 6 and accompanying text.

136 Hess, and Dunfee, , supra note 132, at 810.

137 Bansal, P. & Clelland, I.Talking Trash: Legitimacy, Impression Management, and Unsystematic Risk in the Context of the Natural Environment, 47 ACAD. Mgmt. J. 93 (2004)

138 Kimberly, D. Elsbach, Managing Organizational Legitimacy in the California Cattle Industry: The Construction and Effectiveness of Verbal Accounts, 39 ADMIN. SCI. Q. 57 (1994).

139 James, D. Westphal & Edward, J. Zajac, Decoupling Policy from Practice: The Case of Stock Repurchase Programs, 46 Admin. Sci. Q. 202 (2001); The Symbolic Management of Stockholders: Corporate Governance Reforms and Shareholder Reactions, 43 Admin. Sci. Q. 127 (1998); Substance and Symbolism in CEOs’ Long-term Incentive Plans, 39 Admin. Sci. Q. 367 (1994); Edward J. Zajac & James D. Westphal, Accounting for the Explanations of CEO Compensation: Substance and Symbolism, 40 Admin. Sci. Q. 283 (1994); The Social Construction of Market Value: Institutionalization and Learning Perspectives on Stock Market Reactions, 69 AMER. Sociological Rev. 433 (2004).

140 Garz, & Volk, , supra note 3, at 61, 141 & 147.

141 Id. at 64.

142 Id. at 146.

143 Hess, and Dunfee, , supra note 132, at 23.

144 Thomas, P. Lyon & John, W. Maxwell, Greenwash: Corporate Environmental Disclosure under Threat of Audit (2005), available at http://ssrn.com/abstract=938988.

145 Id. at 32.

146 Id.

147 For a review of the empirical studies, see Berthelot, et al., supra note 132.

148 KPMG, supra note 43, at 21.

149 David, L. Owen et al., The New Social Audits: Accountability, Managerial Capture or the Agenda of Social Champions?, 9 European Accounting Rev. 81, 87 (2000).

150 KPMG, supra note 43, at 21.

151 Parker, , supra note 13, at 157.

152 See Shamir, R.Minding the Gap: The Commodification of Corporate Social Responsibility, 28 Symbolic Interaction 229 (2005).

153 Neu, D. et al., Managing Public Impressions: Environmental Disclosures in Annual Reports, 23 Accounting, Organizations and Society 265 (1998).

154 See Owen et al., supra note 149.

155 Conley, and Williams, , supra note 6, at 6.

156 O’Dwyer, , supra note 102, at 31.

157 Conley, and Williams, , supra note 6, at 6.

158 Owen, et al, supra note 149, at 85.

159 For a review, see O’Dwyer, supra note 102.

160 Laufer, supra note 5; Power, supra note 112

161 Gweneth, Norris & John, Innes, Corporate Social Responsibility: A Case Study Guide for Management Accountants (2005).

162 Markus, Palenberg et al., Trends in Non-Financial Reporting, 15 (2006), available at www.gppi.net.

163 Ann, Hironaka & Evan, Schofer. 2002. Decoupling in the Environmental Arena: The Case of Environmental Impact Assessments, in Organizations, Policy, and The Natural Environment: Institutional and Strategic Perspectives 214 (A. J. Hoffman & M. J. Ventresca, eds., 2002).

164 Bradley, C. Karkkainen, Toward a Smarter NEPA: Monitoring and Managing Government’s Environmental Performance, 102 Colum. L. Rev. 903, 906 (2002).

165 Robert, W. Hahn et al., Assessing Regulatory Impact Analyses: The Failure of Agencies to Comply With Executive Order 12,866, 23 Harvard, J. L. & Public Policy 859 (2000).

166 See Linda, C. Forbes & John, M. JermierThe Institutionalization of Voluntary Organizational Greening and the Ideals of Environmentalism: Lessons About Official Culture from Symbolic Organization Theory, in Organizations, Policy, and the Natural Environment: Institutional and Strategic Perspectives 194 (Hoffman, A. J. & Ventresca, M. J., eds., 2002).

167 See Laufer supra note 5.

168 See Laufer supra note 5; Shamir, supra note 152.

169 Zajac and Westphal (2004), supra note 139.

170 Conley, and Williams, , supra note 6, at 6..

171 Sustainability, Risk & Opportunity: Best Practice in Non-Financial Reporting (2004), available online at http://www.sustainability.com/insight/research-article.asp?id=128.

172 Guido, Palazzo & Ulf, Richter, CSR Business as Usual? The Case of the Tobacco Industry, 61 J. Bus. Ethics 361, 392 (2005).

173 Moerman, L. C. & Van Der Lan, S. L., Social Reporting in the Tobacco Industry: All Smoke and Mirrors?, 18 Accounting, Auditing & Accountability J. 374 (2005)

174 Fung, , supra note 103, at 66.

175 Hess, and Dunfee, , supra note 132, at 2123.

176 Garz, & Volk, , supra note 3, at 147.

177 Ronald, E.Berenbeim and Sophia Muirhead, Business Conduct Codes: Why Corporations Hesitate, Conference Board, Executive Action, January 2002, at 4.

178 Palenberg, et al., supra note 162, at 30.

179 KPMG, supra note 1, at 10.

180 KPMG, International Survey of Sustainability Reporting 2002, at 14 (June 24, 2002).

181 Garz, & Volk, , supra note 3, at 21.

182 David, Hess, Social Reporting and New Governance Regulation: The Prospects of Achieving Corporate Accountability through Transparency, 17 Bus. Ethics Q. 455, 461 (2007).

183 Palenberg, et al., supra note 162, at 21.

184 Id. at 21–22.

185 Id. at 23–24.

186 Garz, & Volk, , supra note 3, at 8. This study goes on to state that they cannot reject the null hypothesis that “for the financial analyst CR/Sustainability reports are useless.” Id. at 148. The authors reached this conclusion even though they had an admitted bias toward supporting the use of sustainability reports. See id. at 3 (stating “The hope of this report is to support and encourage the relatively nascent field of sustainability reporting.”)

187 Hess, , supra note 182, at 467–68.

188 Fung, , supra note 103, at 62.

189 Id. at 56.

190 See Susan, Fox-Wolfgramm et al., Organizational Adaptation to Institutional Change: A Comparative Study of First-order Change in Prospector and Defender Banks, 43 Admin. Sci. Q. 43, 87 (1998).

191 See Jane, E. Dutton & Janet, M. Dukerich, Keeping an Eye on the Mirror: Image and Identity in Organizational Adaptation, 34 ACAD. Mgmt. J. 517 (1991).

192 Scott, Sonenshein, Business Ethics and Internal Social Criticism, 15 Bus. Ethics Q. 475 (2005)

193 For a review of the literature stating these concerns, see Brendan, O’Dwyer & David, Owen, Seeking Stakeholder Centric Sustainability Assurance, 25 J. Corp. Citizenship 77, 79 (2007). For a complete review of auditing concerns, including an analysis of the GRI’s second guidelines, see Carol, A. Adams & Richard, Evans, Accountability, Completeness, Credibility and the Audit Expectations Gap, 14 J. Corp. Citizenship 97 (2004).

194 O’Dwyer, and Owen, , supra note 193, at 8789.

195 KPMG, supra note 43, at 30.

196 Id. at 31. In the United Kingdom, by contrast, 38 out 71 companies reporting use of assurance. Id.

197 AccountAbility, Accountability Rating 2006: Summary Report of Results 2 (2006). This was a study of the 50 largest global corporations and 14 other large corporations that were used to ensure the researchers had at least ten companies in certain key industries. Id. at 3.

198 Palenberg, et al., supra note 162, at 15.

199 Id. at 15.

200 International Chamber of Commerce, Commission on Business and Society, ICC views on economic, environmental and social reporting (March 4, 2005), available at: http://www.iccwbo.org/policy/society/id599/index.html.

201 The exact number would depend on the criteria selected for the mandatory requirement, such as mandating disclosure only for corporations of a certain size.

202 See Owen, et al, supra note 149.

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The Three Pillars of Corporate Social Reporting as New Governance Regulation: Disclosure, Dialogue, and Development

  • David Hess

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