ABSTRACT. Practical mechanisms for aligningperformance, ethics, and accountability are urgentlyneeded. The context for this includes the organisa-tional, technological, and regulatory transformationsunderlying current patterns of globalisation. Thesefactors, combined with the associated emergence ofcivil action concerned with corporate accountabilityand deeper value-shifts, make such realignments apractical possibility.

Social and ethical accounting, auditing, andreporting provides one of the few practical mecha-nisms for companies to integrate new patterns of civilaccountability and governance with a business successmodel focused on deepening stakeholder relationshipsaround core non-financial as well as financial valuesand interests.

Experience over the past decade has enabled viableand effective methods to evolve and to lay the foun-dation of “standards-in-practice” against which futureaccounting, auditing, and reporting, will be bench-marked. Institutions are emerging to regularise thisarena of actions, in the first instance through volun-tary codes and process standards.

A number of challenges exist in securing social andethical accounting and auditing as a legitimate andeffective framework within which organisations canachieve an appropriate balance of financial and non-financial interests, aims, actions, and outcomes. Theemerging experience, expertise, methodologies, andinstitutions provide the basis for these challenges tobe effectively met.

Why ethics?

The inclusive company

The emergence of social and ethical accounting,auditing, and reporting as a common practicewithin the corporate community is likely to have

a major influence on the competencies, direc-tion, and basis of viability of companies as wemove into the next century. It may also enhancethe corporate sector’s positive social, ethical, andindeed environmental impact – but, then again,it may not.

To understand the emerging pattern of socialand ethical accounting, auditing, and reporting(SEAAR), and its possible range of substantiveeffects, requires first that one appreciates whythere is a burgeoning interest in the field, andfrom that gain some understanding of whatapproaches to SEAAR are emerging as bestpractice today, and how this experience is likelyto shape up in the future.

It is useful to start with the age-old question,“why ethics?”. What may be expensive proce-dures and processes to understand social andethical performance are not taken on lightly byany organisation. Most companies faced with thepressure to show healthy financial returns willwant to see new activities contributing to, or atleast not significantly detracting from, financialprofitability.

One answer to the question of “why ethics?”is that the business community is recognisingthe value of, and is responding to increasingconcern about, its ethical performance. TheRoyal Society for the Arts study, “Tomorrow’sCompany”, examined what kind of companiesare likely to be successful in tomorrow’s businessclimate.2 In the study report, a number of ChiefExecutives set out a vision of their own compa-nies. Typical of these visions is that of the GroupChief Executive of Grand Metropolitan, GeorgeBull:

Increasingly, business people are recognising that

Balancing Performance,Ethics, and Accountability1 Simon Zadek

Journal of Business Ethics 17: 1421–1441, 1998.© 1998 Kluwer Academic Publishers. Printed in the Netherlands.

BUSI ART NO. HUM5 PIPS. NO. 181901

their prosperity is directly linked to the prosperityof the whole community. The community is thesource of their customers, employees, their sup-pliers and, with the wider spread of share owner-ship, their investors.3

The study concluded that tomorrow’s companywill be “inclusive” in forming deeper relation-ships with key stakeholders as a means ofachieving financial success. Here then is the“stakeholder economy” espoused by such con-temporary figures as the British journalist andeconomist, Will Hutton, and the Prime Ministerof the United Kingdom, Tony Blair.4 This viewis then that the company which ignores its stake-holders does so at its peril, and that similarlythose who take them into account will form thebedrock of an inclusive society.

Professor Henk Van Luijk and others from theEuropean Institute of Business Ethics (EIBE)reinforces this perspective in summing up thebusiness case by drawing a link between inclu-sivity and reputation:

High ethics companies such as Texas Instruments,IBM, or Marks and Spencer . . . know thatbehaving ethically is integral to their success. Theyknow that their reputation – a reputation forfair dealing, which gains them the trust of theircustomers, suppliers, and the community at large– is crucial to their bottom line.5

This view conforms with an increasing numberof studies into the foundations for successfulbusiness, whether for the multinational or thecorner shop: reputation counts.6 Relationshipsmatter in seeking business success. Values-in-action that results in trust, integrity, and com-mitment are integral to making long termrelationships work, and hence also profitable.

When do people care

The argument underlying the simple “inclusivecompany” approach is that: “Deepening rela-tionships is good for business; deepening rela-tionships means being good to each other; Goodbusiness is therefore about being good to eachother.” This argument is, to say the least, prob-

lematic. This is not because it cannot be right,and is certainly not because it should not beright. It is a problem because it often is not rightin practice in the short run, and the short run(as John Maynard Keynes pointed out) can last ahell of a long time.

Companies can and do seek to profit fromdoing things that are deemed negative by society,such as making people unemployed, damagingthe environment, behaving in corrupt or under-hand ways, and selling products which harmpeople. The case of tobacco companies makingprofits by producing products which kill someof their customers and undermine the health ofthe rest, is an extreme, but poignant, demon-stration of this fact. Less melodramatic butequally significant is the simple fact of compa-nies increasing profitability through makingpeople unemployed (as opposed to companieshaving to shed labour to survive, which is not atall the same situation, although it is often pre-sented as such). As the Institute for Policy Studiesreports, whilst annual worker layoffs across theU.S. corporate sector increased by 39% between1990 and 1995, corporate profits over the sameperiod increased by 75%.7 As the editors of themagazine, Business Week, concluded:

It doesn’t take a brain surgeon to see why millionsof people who worked hard to make their com-panies competitive feel shafted.8

Behaving in ways that in most situations to mostpeople would seem “unethical” can pay, at leastin the short run, if stakeholders do not penalisethe company through, for example, lower staffproductivity, lower consumer interest, or invest-ment realignments.

It is therefore problematic to argue the viewthat the “inclusive” company is necessarily a moreprofitable business model. It is certainly true insome cases. For example, the Centre for To-morrow’s Company together with the merchantbank, Kleinwort Benson, have argued that whatthey deem to be “inclusive” companies from theFTSE100 tend to perform better financially.However, to argue on this basis either that inclu-sive companies are “good to people” or that onlyinclusive companies will survive, is clearly eitherwrong or in some sense tautological.

1422 Simon Zadek

What we can say, however, is that the ethicsof a company influences its business performancewhen stakeholders who count say they thatshould. “Business ethics” can only become areality if stakeholders that do or potentially haveleverage over a company’s business performance– which might include managers, directors, andshareholders as well as the “political consumer”– decide that their views need to be heard andtaken into account. The fascinating and centralquestions then become: “when do people chooseto care, why, and what do they do about it”.

There is growing evidence that the failure tobehave ethically in the eyes of key stakeholderscan and in cases does pose a threat to the finan-cial health of some companies.9 This is particu-larly the case with retail companies who arepotentially vulnerable to direct consumer action.A recent study commissioned by the Co-opera-tive Wholesale Society in the U.K. highlightedthe rise in “ethical” or “vigilante’ con-sumerism”.10 The survey of a sample of 30,000of their food retail customers found that:

✔ 35% answered “yes” to the question, “Haveyou boycotted any product because you areconcerned about animal rights, the envi-ronment, or human rights”.

✔ 60% answered “yes” to the question, “Inthe future, would you boycott a shop orproduct because you are concerned withthese issues”.

Now clearly the results of “quicky street surveys”should be treated with care – it is a little likeasking someone whether they think ethics isgood. However, substantive practice seems toback up the view that these figures, if not quan-titatively correct, are broadly accurate in identi-fying the basic pattern of response. There isgrowing evidence that people respond positivelyto a more ethical stance being adopted by com-panies, as witnessed by the success of companiessuch as the Co-operative Bank and The BodyShop in the U.K. to attract customers and highquality staff on this basis. Similarly, the willing-ness of very mainstream companies to respond to“consumer ethics” suggests that their own, highlysophisticated research suggest that the “ethicaleffect” is not to be taken lightly.

Attempts by companies to “keep their headsdown” have more recently met with plummetingreturns, as corporate responsibility initiatives, andthe sophistication of the organisations managingsuch processes, has increased. As Shell discoveredto its cost over first the Brent Spa fiasco, and thenthrough the disclosures over its approach tobusiness in the Ogoni region of Nigeria, theviews either that social and ethical performancecan remain private or that the public do notcare about what happens beyond their backyards,are both very wrong. Furthermore, companiesare finding themselves victims to the excesses oftheir competitors. Shell’s revealed performancein Nigeria led quickly to a far higher profileof the campaigns against the activities, forexample, of the French oil company Total inBurma, and of British Petroleum’s operations inColombia. The consumer campaigns launched atparticular textiles and toys companies regardinglabour standards of their suppliers in the “South”(the “third world”) has now cascaded across keysectors that sell retail products produced in theSouth, textiles, sportwear, toys, food, and flowers.

The consuming public is clearly an important,but by no means only, stakeholder group whoseethical views may encourage companies torethink their approach to doing business. In arecent seminar held for a major oil company, asenior staff representative offered the followingview:

The company has downsized in recent years withmassive redundancies. You have to understandthat people are disillusioned and frustrated. Theycannot be driven to work harder through fear alone– they need to know that the company does care,and does hear what they are saying, even althoughwe all know all about business imperatives. Theview that staff are disposable will eventually makefor a disposable company.

The British standards organisation, Investors inPeople (IIP), have for long argued that high pro-ductivity requires committed staff, which in turnrequires a company that can earn that commit-ment. In offering evidence to support this asser-tion, IIP has sought to show that companieswhich have gone through the IIP process of staffconsultation, staff-related systems and procedures

Balancing Performance, Ethics, and Accountability 1423

development, improved staff training, etc, simplyperform better in financial terms, whethermeasured in terms of return on capital or pre-tax profit.

So the corporate sector has good reason toshow concern for its social, ethical, and envi-ronmental performance. Beyond any possiblepersonal views of managers and investors thatcompanies do indeed have a social and ethicalresponsibility, there is the more hard-bitten viewthat social and ethical responsibility is good forbusiness. It consolidates market positions, or atleast protects the business from public interestcampaigning, and it can also strengthen thesolidarity, commitment, and productivity of acompany’s staff (and also, by extension, the pro-ductivity and quality of its suppliers and advisors).

Globalisation and technological drivers

The argument that “relationships” count is ofcourse not new. What is new, however, are theeconomic and social conditions under which thismost recent cycle of thinking and practice is hap-pening. Most important are the organisationaland market changes associated with contempo-rary developments in technology and the processof globalisation.

With respect to the former, we are seeingthe most radical shift in the manner in whichcommerce is organised since Taylorian mechanicsentered our organisational vocabulary. Thedownsizing and flattening of the main rump ofmost organisations, and the dispersal of many oftheir core functions into market networksthrough, for example, franchising and out-sourcing, all raise new demands with regard toquality at every level. The combination of tech-nological developments in the area of computingand communications – and increasingly theirrelationship – has vastly reinforced the tenden-cies towards “functional dispersal”, whilst at thesame time tightening market and cost-basedcompetition in such a manner as to placeenormous pressure on the need to make thesedispersed operations work at their peak ofpossible performance.

Globalisation has both enabled and driven

these tendencies further. Opportunities for costreduction and accessing new markets throughphysical and cultural extensions of the businessprocess has placed further pressures on the tradi-tional business unit. For example, this has focusedthe source of value-added and profit on supplyrather than production, and brand rather thanproduct leadership. Globalisation, however, hasnot been only the perogative of the corporations.Civil groups previously focused on narrow localor perhaps national agendas have increasinglyfound voice at international levels through takingadvantage of the same rack of technological andorganisationall shifts, and by seeing how tochallenge the globalised brands by “ethical inter-mediation”, for example, by showing people inEurope what a company is doing in LatinAmerica.11

A “stakeholder-based company” that is able tobuild trust and integrity into its key relationshipsthereby lowers the cost of establishing and main-taining increasingly complex networks of sup-pliers, franchisees and agents, physically dispersedstaff, and indeed multiple levels of actual andpotential regulators from the local town councilto the World Trade Organisation. A stakeholder-based company is one that in many respects ismost fit to take advantage of the technologicaland regulatory changes that underpin and enablethe globalisation of trade, production, and mar-keting. A stakeholder-based company, however,is also one that has come to grips with theirchanging civil environment.

Non-instrumental values

It would be unfortunate to attribute all interestin “ethics” to the instrumental reasoning ofprofit-oriented managers operating in increas-ingly complex and competitive markets. Anyoneworking with the business community willhave been impressed by the commitment ofmany people working within this community toimproving the social and environmental footprintof the companies in which they work. Theannouncement by British Telecom (BT) inDecember 1996 that it intended to undertake acomprehensive “ethical audit” was welcomed

1424 Simon Zadek

with some astonishment by those campaigningfor greater corporate accountability. BT is cer-tainly not a much-loved company, but was underno particular pressure at the time to take this step.The more cynical commentators pointed to BT’sinterest in gaining from its regulator, OFTEL,increased room for new commercial initiatives,and also the possible link between this commit-ment and the subsequent move by BT to forma global alliance with MCI. The commitmentto an ethical audit may indeed have improvedBT’s relationship with both the government atthe time and the in-coming Labour government.However, there is little doubt that a major factorbehind the decision was the personal interest andcommitment of BT’s leadership. Ethical leader-ship is not the prerogative of the public andprivate non-profit sectors.

At the same time, such leadership tends toflounder unless it can anchor it’s arguments to,and practice within, a sound business model. AsDavid Korten argues, any company that seeks tobehave ethically against the flow of competitivepressures and sources of profitability will tend tobe penalised by the market, either through a lossof market share arising from reduced competi-tiveness, or through the financial markets, or –most probably – both.12

Ethical leadership can, of course, changethe terms on which profitability is securedthroughout the market, and thereby offset thedangers of reduced competitiveness through“ethical innovation”. For example, it is unlikelyin today’s climate that a clothing retailer couldimprove its market position by cutting coststhrough the exploitative use of child labour.On the other hand, companies are increasinglypointing out to their customers, staff and otherstakeholders where they have chosen to invest inthe education or health and safety of peopleworking for them. Similarly, most mass-consumerbody and hair care products are now explicitlynot tested on animals. These developments are atribute in part to the decision by particular com-panies such as Levi Strauss and The Body ShopInternational to lead the way in introducing anew ethos in a particular aspect of the waybusiness is done. This is true irrespective of whythese companies made such decisions.

Balancing Performance, Ethics, and Accountability 1425

Value Shift /Base

Pub licInterest/Accountabili ty

Managerialist/Stakeholder Management

The ‘Rationale Triangle’

why do social andethical accoun ting &

auditing ?

The Managerialist Rationale: that to survive andprosper in society, business needs to know what ishappening, what people think about them, and howbest to influence those perspectives. At the simplestlevel, this speaks to the need for good market researchand public relations. At the more sophisticated level,this highlights the need for managers to have abroader understanding and appreciation of stakeholderneeds and views, and the patterns of demands onbusiness that are likely to arise in the future.

The Public Interest rationale at the second end ofthe triangular spectrum concerns the ability of societyto make business respond to changing interests andneeds. This public interest perspective emerged partic-ularly in the 1970s, but has become institutionalisedmore recently in the growing ethical consumer andinvestment movements. Here, businesses are notmerely choosing to undertake some form of social andethical accounting, auditing, and reporting as a meansof understanding and manipulating their social envi-ronment, but are rather being forced to respond todemands from the actors that make up that environ-ment.

The third corner of the triangle is the most con-tentious, since it refers more to a Value-Shift inbusiness than a compliance or managerialist-basedresponse to new pressures. Here lies the view thatbusiness can evolve and take on a different historicrole in society, at the same time as the roles tradi-tionally taken on by the state are increasingly underthreat. Leaders are tending to question the raisond’etre of their company’s and their own activities andare searching for an expanded repertoire of explana-tions and measures of success that are provided by thebottom line.

Why measure it?

Companies need to know the social, ethical, andenvironmental views of stakeholders who docount. They also need to know how these viewsare changing over time, and how they are likelyto determine attitudes and actions by stakeholders– whether individual or collective – towards thecompany. Thus, companies seek to measure anddisclose their social and ethical performance inorder:

u✔ to understand what they are trying toachieve and how best to measure perfor-mance against their aims;

u✔ to know what they are doing; u✔ to understand the implications of what

they are doing; u✔ to understand in what ways if any they

can explain their actions to increasinglysceptical and aggressive stakeholders.

u✔ to understand whether there are practicaloptions for improving their social perfor-mance in ways that will not harm theirbusiness performance, and may in manycases improve it.

The recent report on corporate governance pub-lished in the U.K. as a follow-up to the Cadburyreport – the Hempel Report – made absolutelyclear the need to count non-financial dimensionsof business activities,

Directors should maintain and review controlsrelating to all relevant control objectives, and notmerely financial controls.13

Surely, you might argue, senior managers at leastknow what they are doing? The worrying answerto this is: not always, and often not in criticalareas where “soft” information is required. Inone recent internal seminar run for a majormultinational, an overhead was shown of anarticle about people demonstrating against theemployment of child labour. The seminar’sfacilitator laughingly said, “of course, you don’tdo this sort of thing”. A nervous silence wasfollowed by one of the more outspoken partici-pants blurting out:

But that is the whole point. We don’t know. This

whole downsizing and decentralisation has meantthat we no longer get information about thesesorts of things. And even if we did, we wouldnever get a chance to look at it, or do anythingabout it.

This proved a prescient statement. Just a fewmonths later, the company was subjected to anaggressive challenge in the national press over itssocial, ethical, and environmental record in andaround one of its major facilities in the South,a facility that had the reputation within thecompany of having “best practice” communityrelations and environmental programmes.

Managers need to understand the factorswhich influence their company’s performance.These include an increasingly complex matrixof non-technical, non-financial factors – exactlythe kinds of factors which they and their com-panies are ill-equiped to find out about, andeven less equiped to understand. Hence the“Tomorrows Company” initiative concluded:

tomorrow’s company is able to develop a frame-work of measurement that . . . will include finan-cial components but will also feedback on thevalues (and) the health of key relationships.

Understanding climate rather than weather conditions

This is not just a question of more market surveyscovering a wider range of issues. Shell hasbeen supporting environmental issues for severaldecades, and until the Brent Spa fiasco was seenas a reasonably “green company”. No amountof traditional market research would havebeen likely to predict the public response toGreenpeace’s call not to sink the Brent Spa.Similarly, it is very unlikely that the managers oftoys, sportswear and textiles companies in the late1980s would have believed that the consumingpublic would respond as they have in the lastcouple of years to concerns about labour condi-tions in suppliers in the South. After all, theywould have argued, it has always been this way,and consumers benefit from poor labour condi-tions in terms of cheaper products. The evolu-tion of people’s ethical positions are, perhaps

1426 Simon Zadek

thankfully, not purely guided by such thought-less logic.

Companies are increasingly realising thatmerely asking people their opinion about thingsdoes not reveal the dynamic process of how andin what directions people develop their thinkingon the basis of deeply rooted values. “Counting”in the traditional sense of polling people’s viewsmay work in choosing between different flavoursof ice-cream, but it rarely helps in understandinghow people develop a sense of moral concern,and how this concern is voiced. Understandingstakeholder’s views requires much more thansimple survey work. Some deeper social contractis needed to go beyond inaccurate counting to apoint where stakeholders begin to feel that theirviews count.

Companies understand now that they needto understand the “climatic conditions” thatunderpin people’s values if they want to be ableto predict how they will respond to any partic-ular situation. This has dramatic implications. Inmoving away from the conventions of traditionalmarket surveying that do little more than observethe “weather” at any point in time, companiesare faced with a far more complex dynamic thatcan only really be understood if they actuallyengage and gain people’s trust.

So companies understand now the need to“count ethics”. Most importantly this is tounderstand things that are going on that were notpreviously considered important to the daily lifeof a busy manager. What follows from this accep-tance of the need to measure is the realisationthat conventional approaches do not always work.Measuring turns out to be far more than a purely“subject-object” phenomena, a “we measure it”situation. It turns out that insofar as measuringis about understanding the deeper patterns thatinform people’s attitudes and actions, alternativeapproaches to measurement are needed.

But why disclosure?

Companies are finding in a growing number ofcases that they need to respond to stakeholderconcerns not only by changing their practices,but by being more open in reporting how they

have performed against key social, ethical, andenvironmental criteria.

For stakeholders to be willing to offer insightsinto their own deeper interests and concerns,they need an environment of trust and honesty.This in turn means that managers have to thinkquite differently about what they need to revealabout their own operations and practices. It isnot possible to demand commitment fromemployees where the future of their own jobs isshrouded in secrecy. Suppliers are less likely tocomply with codes of conduct imposed by theirprime clients where they sense that these com-panies are less than concerned and even less openabout their own behaviour. Consumers willsimply not believe anymore the claims of com-panies without a more systematic, rigorousapproach to disclosure.

Companies seek to influence public percep-tions as to their social, ethical, and environmentalperformance. Whilst this is a task that all com-panies take to with considerable relish andvigour, the ways in which they have done thishas generated considerable scepticism and indeedcynicism towards corporate claims of goodbehaviour. Despite a veritable outpouring ofinformation from companies about their social,ethical, and environmental performance, there isample evidence to suggest that stakeholders rarelybelieve what they are told by companies, cer-tainly not beyond basic technical product-relatedinformation.

The clothing retail chain, The Gap, under-stood this when it agreed to adopt a code ofconduct covering the factories in the South fromwhich it purchases the products its sells. It under-stood that its customer base was open to beinginfluenced by the growing number of non-profitorganisations campaigning around labour condi-tions in these factories, particularly those focusedon the emotive issue of child labour. The Gap,furthermore, along with an increasing number ofcompanies throughout the clothing, sportswearand toys industries, have also come to accept thatthose stakeholders who are willing to penalisethem for not behaving according to norms thatthey consider acceptable want “proof ” that theyare keeping their promises. The fig leaves ofcodes of conduct are in themselves not enough.

Balancing Performance, Ethics, and Accountability 1427

What is in addition demanded are reports ofperformance against these codes, externallyverified by organisations in which stakeholdersbelieve.14, 15

Reporting on social and ethical performanceis not, therefore, only a matter of disclosure. Itis an integral element of the process of commu-nication between the company and key stake-holders. In this sense, reporting is a way in whichstakeholders can see if the company “listened” totheir concerns, and over time whether they haveresponded in practical terms. Further, reportingis an essential element of the process of deep-ening the understanding of managers as to whatis going on and how people view it. Reporting,seen in this sense as a link in the chain of eventsthat secures high quality feedback, is an obviousrequirement. In conclusion, therefore, reportingis essentially an element of the communication,dialogue, learning, and decision-making process,rather than the endpoint in a retrospectiveanalysis.

A side note on silent reporting

Companies are of course accustomed to adoptingan extensive array of procedures, including arange of forms of “accounting and auditing”.Financial accounting, for example, started orig-inally because of the need for managers to havesome basic records of cash flows, to provide ameans whereby shareholders could hold thestewards of their investments to account, and asa means of working out how to divide the profitsat the end of the day. It was only subsequentlythat the requirement to audit accounts becameenshrined in law, principally as a means ofprotecting shareholders against unscrupulousmanagers and directors of the companies thatthey had bankrolled.16

Financial accounting was (and is still) there-fore seen as a tool for seeing how the organisa-tion was doing, for being accountable to oneparticular stakeholder group – the shareholders– and for working out who should get what shareof the financial surpluses generated by thecompany. Auditing was similarly seen as a meansof ensuring that the financial accounts reported

to shareholders (and subsequently the govern-ment for regulatory and tax purposes) wereaccurate.

Environmental assessment was extremely rareonly a decade ago, but now is common practiceby increasing numbers of companies. A recentsurvey carried out by the International Institutefor Industrial Environmental Economics atLund University, Sweden, concluded that 23% ofEurope’s largest companies in 1995 producedsome sort of environmental report, compared to15% in 1993.17

The reasons for companies being willing toundergo such exercises varies to a considerabledegree, as does therefore the content and formof environmental assessment. One reason con-cerned the acquisition of knowledge to enablethe avoidance of legal liability, and in some casesto avoid confrontation with increasingly assertiveand effective environmental campaigning organ-isations. Over time, the more positive businesscase for environmental auditing, as distinct fromsimply environmental reporting has for manyindustries and contexts been proven many timesover, particularly the “win-win” arguments forcost-savings through eco-efficiency measures.18

Unlike in the financial sphere, statutory regu-lations guiding environmental accounting andauditing are not yet common. In Europe,for example, the Eco-Management and AuditScheme (EMAS) is set out in non-mandatorylegislation, and has been adopted and advocatedas a “best practice” standard by the EuropeanCommission. As such, it is gradually being takenup by an increasing number of companies oper-ating in Europe.19

A range of quality assurance systems have beendeveloped over the last two decades to meet theneeds of large organisations to organise and ratio-nalise their change processes to achieve themaximum possible quality throughout their oper-ations. Possibly the most well-known of thesehas been Total Quality Management (TQM),arguably (as its name suggests) the most com-prehensive approach developed to date. Whatmatters here is not so much the details of howor whether TQM works in practice, but that itis an entirely voluntary process completely devoidof any external pressure, such as campaigning

1428 Simon Zadek

organisations in the case of environmental per-formance.

The widespread adoption of TQM and othersystem-level quality assurance systems (such asISO9000 and BS5750) by parts of the corporatesector illustrates the fact that companies willcommit considerable resources to securing theinformation required to know what is going onin a systematised manner. It is worth noting,furthermore, that approaches such as TQMinclude not only quantitative “output” data suchas the technical failure rate of a particular productor process, but also subjective “outcome” data,such as the views of staff or indeed of the widerpublic of the organisation.

So it turns out that companies invest heavilyin procedures and processes that yield complexsets of quantitative and qualitative, and objectiveand subjective, data covering issues both withinand outside of the organisation. From this per-spective, social and ethical accounting, auditing,and reporting is not a “future proposition”,but a reality today. Professor Rob Gray fromthe Centre for Environmental and SocialAccountancy Research at the University ofDundee alludes to the existing although dispersedforms of existing social and ethical accounting,auditing, and reporting as “silent accounting”.20

All companies today, he argues, particularly thelarger corporations, are already offering ever-

increasing volumes of information about theirsocial, ethical, and environmental performance,albeit in a fragmented form, of varying quality,and often with quite inadequate or at leastunclear levels of external verification.

This should of course, hardly be surprising,since it is precisely these combinations of viewsand facts that make or break a company at theend of the day. Indeed, it turns out that a majorreason for mainstream company’s increasedinterest in social and ethical accounting, auditing,and reporting is exactly to cope with theincreasing complexity of their situation and asso-ciated management processes. As one seniormanager of a major oil company said during aninternal seminar introducing the topic:

We are having to cope with so many differentquality issues at the same time, some technical, butmany of them dealing with “soft” issues. If socialauditing helps us to deal with them more ratio-nally, then we really could use it.

So whilst companies love to hate proceduresbecause of their time and financial costs, the mostsophisticated and widespread systems have beendeveloped for use principally by the businesscommunity, particularly larger-scale corporations.So the key issue becomes more than a questionof “how to do it” in a cost effective way.

Balancing Performance, Ethics, and Accountability 1429

Silent reporting by companies in U.K. company annual reports

Voluntary Required Mandatory

✔ Environmental protection; ✔ Charitable donations;✔ Energy saving; ✔ Employment data;✔ Consumer protection; ✔ Pension fund adequacy;✔ Product safety; ✔ Consultation with employees;✔ Community involvement; ✔ Employee share ownership schemes;✔ Value-Added Statement; ✔ Employment of the disabled;✔ Health and Safety; ✔ Health and safety or environmental remediation.✔ Racial & sexual equality;✔ Redundancies;✔ Employee training;✔ Mission statement/statement of social

responsibility.

Adapted from R. H. Gray, Trends in Corporate Social and Environmental Accounting (London: British Institute ofManagement) 1991b, p. 3.

The need for standards?

Language variations

There is a growing body of experiences incorporate social and ethical accounting, audit-ing, and reporting, particularly across Europeand North America.21 Associated with thisdevelopment has been the emergence of variedterminology and differing approaches. Thereare “ethical accounts”, “social audits”, “humanaccounting”, “intellectual capital”, “ethicalaudits”, “social performance reports”, “socialbalances”, “ethical budgets”, and “socialreviews”, just to name a few. As with any newor re-emerged field of work, we are faced witha veritable outpouring of new terminology. Thequestion is whether this is helpful. How can wetell when terminological differences are a cover-up for sameness, imprecise thinking, or a delib-erate muddying of the waters; or when on theother hand it signifies real diversity, and indeedproductive innovation?

In some cases, different words seem to describemethodologies that appear on closer inspectionto be very similar. The “ethical audit” advocatedby the European Institute for Business Ethics andthe Nijenrode Business School,22 for example, issimilar in many respects to the method devel-oped, adopted, and applied by Traidcraft and theNew Economics Foundation, which the formercalls “social accounts”, and the latter organisa-tion calls “social auditing”.23 The Body Shop’s“ethical audit” seems, on the other hand, quitedifferent from that the “ethical auditing” ofNijenrode University, since it represents a com-bination of social, environmental, and animaltesting audits.24 The “ethical audit” of TheBody Shop is, on the other hand, only invery particular areas comparable to the “ethicalaccounting” developed at the CopenhagenBusiness School and adopted by Sbn Bank andother companies and public sector organisationsacross Scandinavia.25

What some are calling social accounting orauditing is increasingly incorporating financialand environmental data, and is slipping headlongtowards what might be called “sustainabilityauditing”.26 These dimensions of sustainability in

turn look quite similar in principle to what TheCo-operative Bank is calling the “PartnershipApproach”. British Telecom variously refers toits commitment as a social or an ethical auditwithout being entirely clear (at least to others)as to whether they are seen as equivalent. GrandMetropolitan has announced that it is piloting“social audits”, but as yet has not clarified whatis and what is not included in their approach.Recently, we have seen the drafting of an auditmodel by the audit firm, SGS, in collaborationwith the U.S. corporate responsibility non-profitorganisation, the Council on Economic Priorities(CEP), for dealing only with suppliers that hasbeen called a “social accountability” audit. Thenthere are approaches that use entirely differentlanguage, but in some respects are quite similarto the mainstream of what is emerging, suchas the Intellectual Capital model developed atSkandia in Sweden.27

Finally, there is intense work going on insidethe closed portals of many of the larger “blue-chips”, particularly but not exclusively thosesubjected to public criticism over recent monthsand years. Shell International has formed aSocial Accountability Group, including seniormanagers, and are exploring how best to enhanceits social reporting. Shell U.K. has alreadyannounced that it will publish a “Shell inSociety” report during 1998. The Danishpharmeceutical company, Novo Nordisk, hasrecently embarked on a three year enquiry intowhat it calls “human and social accounting” withthe support of the Danish Ministry of SocialAffairs. In many of these cases, the principles ofsocial and ethical accounting, auditing andreportins are being taken on-board in themethods deployed, although the companies aretaking great care to avoid the use of suchlanguage that still seems to them to be associ-ated with too extensive a public commitment toon-going and verified disclosure.

Acceptable variations

Much of the diversity in practice can be attrib-uted to at least four significant differences in:

1430 Simon Zadek

(i) interests on the part of those initiating theprocess;

(ii) types of organisations; (iii) contexts, and; (iv) theoretical and philosophical roots.

Many of these differences are entirely acceptablein that they reflect varied needs for whichdifferent methods are required. For example,organisations like Sbn Bank in Denmark andWoyen Molle in Norway start with an emphasison the evolution of “shared values” throughethical accounting.28 Not surprisingly, they there-fore focus on dialogue with key stakeholders,rather than third party verification. On the otherhand, a company with a concern that it meetsthe challenge of public accountability may wellplace far greater emphasis on securing adequatecomparison with other companies or acceptedsocial norms and benchmarks. For example, themove by companies in the textiles, sportswear,and toys sectors to adopt and comply with labourcodes of conduct in their production in, and pur-chases from, the South, will focus on externalverification precisely because the pressure comesfrom public consumer campaigns.29

Similarly, a company principally concernedwith public accountability may focus exclusivelyon the production of a report for external pub-lication, whereas a company with an interest insocial and ethical accounting and auditing as atool to facilitate internal change may have littleor no interest in the published document, butmay instead focus on the process of accounting,and the reports generated for internal use.

Identifying the “right” approach to social andethical accounting, auditing, and reporting istherefore intimately related to why the particularorganisation is engaging in the exercise. Thisimplies that there is no single approach that iscorrect for all situations: that there is somestrength in diversity for diverse needs.

Unacceptable variations

At the same time, there are variations betweenmethods and practice that are not justified by anyobjective difference in circumstance and need.

These are variations that are rooted in one orboth of two reasons for poor practices:

u

X an under-specification of the accounting,auditing, and reporting process because ofinsufficient knowledge, skills, experienceand/or resources applied to the process,and/or;

uX a deliberate attempt to under-specify theaccounts and the verification process inorder to report in a less-than-accurate,incomplete, or unintelligible, manner.

For example, a company may forgo a dialoguewith staff to determine key issues of concern tothem because of inadequate resources, and as aresult develop a survey that omits a range ofcritical issues that would profile the company ina negative light. It would not be appropriate, forexample, for a “fair trade” organisation (e.g. oneseeking to offer a better deal to communitysuppliers in the South by offering a better dealthan in the fully commercial market) to carry outa social and ethical accounting, auditing, andreporting exercise without adequate consultationwith Southern suppliers.30

Similarly, a company may seek to undertakean externally verified exploration of the socialimpact of one area of their operations knowingfull well that there is a critical problem associ-ated with an area of their work that they havechosen to omit from the assessment. A social andethical accounting or auditing exercise under-taken by a bank that did not deal with the natureof its investment portfolio, or an exercise by anadvertising company that did not consider withcare the nature of the images they were pro-moting and their effect, could not really be seenas being of adequate quality.

The challenge is to be able to distinguishbetween acceptable and unacceptable reasons formethodological (and terminological) differences.The failure to meet this challenge effectively willallow the “bad to chase out the good” as com-panies and consultants alike find good reason tocut corners to save costs, and to omit difficultareas from accounting, auditing, and reporting.The ability to distinguish good from bad practicetherefore provides a foundation on which stan-dards can be set.

Balancing Performance, Ethics, and Accountability 1431

Many things can undermine what we under-stand as quality in social and ethical accounting,auditing, and reporting. Economic downturn,for example, places pressure on resources, andmight also lessen the interest of some key stake-holders in the non-financial dimensions ofcorporate behaviour. Consumer’s interest in“green” products and services declined sharply,for example, after the onset of the economicrecession of the late-1980s. Bad practice can alsochase out the good. If some companies “getaway” with producing superficial or indeeddeceptive social and ethical reports and state-ments, others will tend to turn away from themore costly quality processes. This will be all themore so if bad practice gives the whole field abad name. It would only take a few demonstrablypoor audits and accounting processes that had notbeen picked up on by external verifiers to under-mine the credibility of the process.

It is not adequate for corporate social andethical accounting, auditing, and reporting to beonly a “fair weather” practice. For it to be mean-ingful, it needs to be a practice in which acompany engages as automatically as it wouldwith a financial audit irrespective of their levelof profits. Neither is the practice going to giveany reliable indication of corporate social per-formance if a company or their consultants candesign the process entirely to their needs andinterests, and name it and the results in any waythey choose. For it to be meaningful requires thatthe quality of a company’s practice of social andethical accounting, auditing, and reporting is asclear to all interested parties as is the technicalquality of the goods and services they produce.

The consolidation of the practice of social and ethicalaccounting, auditing, and reporting in a way thatimproves corporate social performance requires a mecha-nism for protecting the practice from such underminingconditions.

There is therefore a need for agreed standards ofcorporate social and ethical accounting, auditing,and reporting. Whilst experimentation has andcan in some areas continue to yield a wealth ofexperiences, there is equally a need to limit thedanger of a fragmentation of efforts and direc-tions leading to considerable confusion as to what

different methods are being used, and to whateffect. As Rob Gray explains:

The long history of social and ethical accountinghas been characterised by a disturbing variety ofapproaches and standards. . . .31

Although there are clearly dangers in seekingto determine standards for social and ethicalaccounting, auditing, and reporting, there arealso clear potential gains. First, divergent termi-nology and method can be a sign of flourishingcreativity in the early stages of the life-cycle ofan innovation of any kind. For the innovationto mature in terms of more widespread use ortake-up, however, requires that it becomes lessdynamic, more stable, and more recognisable.There is already evidence of resistance to take-up associated with a confusion as to whichapproach is more effective, or more generallywhich will “win-out” in the end.

Second, one of the reasons for organisationsundertaking some kind of social and ethicalaccounting and auditing is that it allows them tomake claims about their openness, and hopefullyabout their sound social practice. Such claims canonly be made of course where their basis is seento be legitimate in the eyes of the intendedaudience. It is interesting to note that thereappears to be little or no challenge of thoseorganisations preparing Ethical AccountingStatements, possibly in part because of the moreopen culture of Scandinavian countries, or the(perhaps associated) lower level of social conflict.In the U.K. and the U.S.A., on the other hand,organisations have invested heavily in securingsome form of explicit legitimising process in theform of an external audit or verification.

There is ample evidence that a strong “assur-ance label” aids take-up where it is underpinnedby robust standards that are widely acceptable,such as in the area of financial and environmentalauditing, or product labels for organic, safety, or“fair trade” qualities. As the CEO of one majorcommercial bank stated quite bluntly:

Come back to talk to me about social auditingwhen you have a quality label that is recognisablein the market that I can put on all of our litera-ture.

1432 Simon Zadek

Rightly or wrongly, the value of social andethical accounting and auditing in building anorganisation’s public profile is an important factorin determining take-up, and an agreed set ofstandards is an essential element of making thisfactor count.

By far the most important reason for standards,however, is to ensure quality in the process ofaccounting, auditing, and reporting to supportimproved corporate social responsibility. This isnot merely a question of what gives a methodrespectability, or what gives an organisation somemarket gain from adopting such a method. Thisis about what methods seem to work best inachieving the underlying aim of assisting organ-isations in achieving continual improvementagainst agreed social and ethical aims, and indeedof challenging and raising the aspirations of thoseaims themselves.

Routes to standards

Standards can be achieved in a number of dif-ferent ways. At one extreme is the benchmark ofpractice, where leadership in quality is establishedthat others must follow if they want theirattempts to be taken seriously. Leadership bench-marking has a critical role to play in the take-upof any innovation, itself a major reason foradopting the sort of five stage corporate socialreporting model outlined above.32

There are many good examples of leadershipbenchmarking in this field. Sbn Bank’s annualEthical Accounting Statement has certainly cometo be seen as a benchmark against which corpo-rate social reporting in Denmark and elsewherein Scandinavia is judged. Traidcraft’s SocialAccounts have set a standard in the Britishcontext, as evidenced by the companies that have

sought to draw from and be measured againstTraidcraft’s standards of quality. The latter caseis interesting in the way that it has precipitatedan escalation of standards. The Body Shop hasdrawn from both Traidcraft’s and Sbn Bank’sexample, but has also sought to set new andhigher standards. Ben & Jerry’s Homemade is afurther case in point, having undertaken somekind of social reporting for seven years. As theUnited States Trust Corporation, a sociallyresponsive investment firm, stated in the August1995 edition of its newsletter Values:

Ben & Jerry’s, which publishes unedited conclu-sions of its independent social auditor, remainsthe “gold standard” in open, self-critical evalua-tion. . . .

Skandia, with its focus on “intellectual capital”,has established a very different kind of leader-ship in carving out a very different language andapproach that is likely to prove a critical newelement in the next round of evolution of socialand ethical accounting and auditing more gen-erally. Most recently, the position taken by BritishTelecom has provided a new form of leadership,if only at this stage by virtue of the fact that BTis the first “blue chip” which has committed itselfto following in the emerging tradition of socialand ethical accounting, auditing, and reporting.It is clear that now BP and other companies aresimilarly seeking for ways to take a leadershiprole in their social accounting, auditing, andreporting.

Leadership benchmarking does, however,have its limitations. A proliferation of differentapproaches, for example, can undermine thequality push of leadership benchmarking. It ispossible, furthermore, for a concerted effort onthe part of “followers” which do not wish tofollow to marginalise the example set by theleader. Representatives of large, mainstreamcorporations attending seminars on social andethical accounting and auditing, for example,have argued that it is only relevant for “weirdcompanies that try to mix ethics with business”.

The more radical the innovation in question,the more likely is it that a serious attempt tomarginalise it will occur. So leadership bench-marking is important at early stages in the life of

Balancing Performance, Ethics, and Accountability 1433

the standards spectrum

• mandatory legislation• non-mandatory legislation• private external screening• voluntary codes• leadership benchmarking

•••••

an innovation, but can be of less use at thecritical stage where serious mainstream adoptionis being sought.

At the other extreme are standards establishedthrough the force of legislation. Clearly theadvantage of legislation is that the standardscannot be simply ignored. This is most obviouslythe case with financial accounting and auditing,where extensive legislation exists. Over recentyears, this has increasingly been the basis forstandards in environmental auditing, althoughstill to a far lesser extent than financial auditing,and with far greater variation between countries.Some countries have legislation covering someaspects of social and ethical accounting andauditing. In the U.K., for example, corporationsover a particular size are obliged to report ontheir charitable giving, as well as having toprovide certain information regarding staffconditions and employment practices, such asthe proportion of staff who are registereddisabled.

There are, however, also disadvantages torelying on the law to secure standards. First andforemost is the sheer time involved in getting tothe point of legislation. Clearly a part of thisprocess is very productive, involving an iterativeprocess of distilling the required standards into aform that can be reasonably expected to holdacross many different organisations in differentsituations. Much of the process, however, isdecidedly unproductive time spent in endless,bureaucratic, and extremely costly debates.Underlying this is a potentially far more seriousobjection to seeking legislation to secure stan-dards. This is the danger of down-grading underpressure from strong vested interests. There islittle doubt, for example, that any attempt toenshrine key principles of social and ethicalaccounting and auditing in law would elicitserious objection from many parts of the corpo-rate sector. It is very likely, furthermore, that anylegislation that was agreed upon would repre-sent a watered-down compromise compared tothe original vision. It is this weak legislation thatwould then become the basis for standards. Thequestion is then whether weak legislation isbetter or worse than no legislation.

Between the extremes of leadership bench-

marking and legislation are a range of othermeans through which standards can be set,including for example voluntary codes andprivate external screening. Those options thattend towards voluntarism and self-policing havethe dangers of becoming confused over time, andalso of degrading in the face of pressure fromthe main body of organisations which do notwish to follow the examples set.

The most productive approach to standards isto see the various options as complementaryrather than exclusive. It is necessary to set qualitystandards through leadership “in practice”. Thesestandards then need to form the basis for nego-tiation on voluntary codes, and ultimately forlegislation of some kind. Leadership standardscreate pressure for codes and legislation, and canhelp in resisting any watering down of whatthose standards might be. Voluntary codes andlegislation ultimately help in preventing a gradualerosion of standards through the abuse of methodand its use for crude public relations exercises.

The development of standards must thereforebe skilfully managed by those wishing themto count. There is no reason to assume a priorithat formal standards are better than nostandards, whether set through voluntary codes,or embedded in legislation. A key determiningfactor of whether the formalisation of standardshelps or hinders in building real quality (and inthis case, real accountability) is who is “at thenegotiating table”, and their relative strengths.The more open and public the debate, the morelikely it is that the watering-down process can beavoided or at least minimised. At the same time,negotiation-by-confrontation is an inadequateroute to agreeing standards that need to be bothrelevant and feasible, particularly in the businesscontext.

Developing standards

There are clear signs of a convergence of stan-dards taking place in the practice of social andethical accounting, auditing, and reporting. Therelevance of both external benchmarks and stake-holder dialogue is confirmed in most currentpractice, albeit to differing degrees in each case.

1434 Simon Zadek

Even those approaches which have focusedexclusively on one or other element are nowmoving towards some combination. The origi-nators of the Ethical Accounting Statement, forexample, are actively exploring how externalbenchmarks as well as verification might be usedwhere the approach has to date focused exclu-sively on stakeholder dialogue. Companies suchas British Telecom which are known for theirenvironmental reporting and activities related tothe European Total Quality Management, arenow actively exploring how best to integratethese experiences with the emerging standardsin social and ethical accounting and auditing.Within the public33 and private, non-profit com-munities,34 increasingly attention is also beinggiven to this emerging body of experience.

A similar convergence is taking place in theunderstanding of the need for and roles of theexternal agent, although again with differentemphases. Ben & Jerry’s, for example, has in itsrecent history of social performance reports seenthe external agent essentially as an “evaluator”,asked to pass personal judgement on thecompany’s social performance. More recently,however, they have been experimenting with amove away from this personalised judgementprocess more towards a view of the external agentas “auditor”, charged with the duty of ensuringthat the published statement is a correct descrip-tion of what happened over the period, ratherthan his or her view of those events.

There is a gradual consensus emerging as towhat constitutes some of the key principles of“good practice” that need to be reflected in anysound approach. This understanding is focusedon three key areas. First, to ensure that socialand ethical accounting, auditing, and reportingbecomes an increasingly bounded and hencedefined set of activities; it needs to become lessand less possible for anyone to describe anythingas being the practice of social and ethicalaccounting and auditing. Second, that not onlythe activity and outcomes, but their quality,become subject to assessment as a part of the“professionalisation” process. Third, there is aneed to ensure that what skills and experiencesare required to support the process of socialand ethical accounting, auditing, and reporting

becomes more and more precisely specified andtestable.

This emerging consensus is being driven inthe main by the Institute of Social andEthical AccountAbility, and the individuals andorganisations which have come together aroundAccountAbility’s networks of activity. Far fromclosing the door to further experimentation, thisemerging consensus allows for a more system-atic assessment of different approaches, a clearerdialogue between them and their users, and adeeper appreciation of what skills and experienceare required to make any process effective inachieving the understanding, transparency, andaccountability.

Principles of “quality”

There are therefore good reasons for establishingways to compare different approaches with a viewto judging quality relative to the needs of theparticular situation. There is a need, in short,to ask the question, “In short, how can onetell if a specific exercise in social and ethicalaccounting, auditing, and reporting is worth thecandle?”.

Below is offered a simple framework forexploring the quality of initiatives in social andethical accounting, auditing, and reporting.Given the sheer scale of experimentation in thisarea, and its increasing quality across many dif-ferent contexts, this framework should be seen asa first stab at what needs to be further developedover the coming period. The framework offersa means of categorising experiences or initiativesby:

u✔ principles of quality social and ethicalaccounting, auditing, and reporting;

u✔ the elements into which the principles canbe sub-divided to enable more detailedanalysis through an assessment of the dis-closed documentation.

The key objectives against which quality needsto be assessed have been drawn together to takeaccount of a number of factors:

✔ the need to secure appropriate levels and

Balancing Performance, Ethics, and Accountability 1435

forms of stakeholders dialogue to ensuregood quality information and an “inclu-sive” approach based on method ratherthan the discretionary interests of theorganisations involved;

✔ the interests of key stakeholders in com-paring the organisation’s performance overtime and with other organisations;

✔ the pragmatic need to establish a methodthat is technically and financially feasible;

✔ the need to ensure that the method helpsthe organisation and its stakeholders tolearn and change for the better;

✔ the need to secure legitimacy of the overallprocess.

With these criteria in mind, a grouping ofeight “quality principles” have been evolved andtested.35

The Eight Principles

InclusivityComparabilityCompleteness

Regularity and EvolutionEmbeddedness

Externally VerifiedCommunication

Continuous Improvement

1 Inclusivity. The principle of inclusivity meansthat the social and ethical accounting andauditing must reflect the views and accountsof all stakeholders, not only the particularstakeholders who have historically had themost influence over the evolution of theorganisation’s formal Mission Statement.What this means, furthermore, is that theassessment cannot be based on a single setof values, or a single set of objectives.Whilst over time the various stakeholdergroups may come to agree on many things,the assessment process cannot assume this tobe the case, and must therefore be able toaccommodate such diversity.36 It is impor-tant to distinguish “consultation” in theform of one-way surveying, i.e. essentiallymarket research, and “dialogue”, which canbe understood as a two way process that

brings the views and interests of all partiesto the table.37

Inclusivity does not only refer to theneed for people to be included in thedialogue and broader process. Also ofimportance are other dimensions of whatmay concern people, such as the indirectand direct treatment of animals, and ofcourse the environment. These aspectsof an integrated audit are reflected inthe assessment of reporting discussedbelow.

2 Comparability. The principle of comparabilityis quite simply that social and ethicalaccounting, auditing, and reporting enablesthe performance of the organisation tobe compared as a basis of assessment.Comparison may be of the performance ofthe same organisation in different periods,or with external benchmarks drawn fromthe experience of other organisations, statu-tory regulations or non-statutory norms.38

It is important that external benchmarks areselected for their relevance and legitimacy,not only for their accuracy. For example,comparisons of wage rates with outsideorganisations need to select the appropriatetypes of organisations, and also need to drawthe comparative data from sources thatwould be considered to be legitimate (suchas government statistics, or labour researchbodies).39

3 Completeness. The principle of completenessmeans that no area of the company’sactivities can be deliberately and systemat-ically excluded from the assessment. Thisprinciple is important to ensure that thecompany is not “cherry-picking” the areasof its activities that on inspection will showthe most positive social and ethical perfor-mance. Comprehensiveness in combinationwith the principle of inclusivity raisesmajor practical problems given the poten-tial magnitude of the assessment process. Atypical supermarket chain, for example, mayhave 10–20 million different individual cus-tomers, and 5,000 or so suppliers. What thismeans in practice is that not everything canbe covered at once, or more specifically

1436 Simon Zadek

during any one cycle. The essence ofthis principle is therefore that no area ofthe organisation’s activities are necessarilyexcluded from any particular cycle becauseof any unwillingness on the part of theorganisation, i.e. no “malicious exclusion”.Over several cycles, furthermore, all of theprinciple stakeholder groups would becovered through an exploration of all theeffects of all of the organisation’s activities.40

4 Regularity and Evolutionary. Not only mayit not be possible to cover an entirecompany’s “social footprint” at the sametime, but it is likely that this footprint willvary over time. Furthermore, the impactand meaning given to its footprint will alsovary, as the composition and expectations ofkey stakeholder groups change over time.The implication of this is that one-offaccounting exercises are not adequate to theneeds of either management in seeking tounderstand what is happening, or in termsof the company’s accountability to thewider public. A key principle against whichthe practice of social and ethical accounting,auditing and reporting needs to be judgedis therefore whether the exercise is repeatedin a manner that demonstrates “learning”and continual challenge. That is, the processmust follow an evolutionary path over time.

5 Embeddedness. As with both financial andenvironmental auditing, it is not enough foran organisation to get a snapshot of its per-formance to secure its learning processes inthese areas. It is essential for any systematicprocess that the organisation develops clearpolicies covering each accounting area. Inaddition it needs procedures that allowaccounting to be regularised and the organ-isation’s awareness and operationalisation ofpolicies and commitments to be assessedthrough an audit.

6 Communication. The question of whetherthe social and ethical accounting andauditing processes are intended primarily foran internal audience, i.e. as a managementtool, or whether it is a means of strength-ening public accountability, is a tension thathas figured in both the reasons why compa-

nies engage in the process, and the meansby which the accounting is undertaken.Clearly the focus on an internal audienceobviates any need to disclose the results tothe public, or even perhaps within theorganisation beyond the management andboard. At the same time, an interest instrengthening the company’s legitimacy inthe public domain would require some sortof disclosure. Where a disclosure route ischosen, the matter of quality concerns thenthe extent to which disclosure is a formalityor an active means of communication withkey stakeholders and the wider public.Merely publishing a document – howevercomprehensive – does not constitute “goodpractice” if the document is difficult toobtain, costly, or unintelligible to key stake-holders. Disclosure is essentially about com-munication, which in turn must be rootedin meaningful dialogue for it to be effective.

7 Externally Verified. The need for externalverification concerns again the relativeemphasis between social and ethicalaccounting as a management tool and ameans of strengthening accountability andlegitimacy. Clearly an emphasis towardsthe latter implies the need for externalverification of some kind. The challenge is,of course, what kind of “external verifica-tion” process will be of a sufficiently highprofessional quality and independence forit to have its desired effect of validating thepublished material. In broad terms thereappear to be three dimensions of externalverification that need to be taken intoaccount:• the professional competence that we

would normally identify with auditorsand verifiers;

• the professional competence associatedwith management consultants who canunderstand process, risk assessment, andstrategic management;

• the quality associated with it beingawarded a sense of civil legitimacy, whichis normally a role taken on by non-com-mercial organisations with a recognisedpublic interest mandate.

Balancing Performance, Ethics, and Accountability 1437

8 Continuous Improvement. The aim of anysocial and ethical accounting, auditing, andreporting system must be to assess and con-tribute to substantive progress, rather thanonly deal with retrospective performance,or focus exclusively on process achievementsin terms of monitoring, measuring, auditingand reporting. That is, any relevant systemmust be able to identify whether the organ-isation’s performance has improved overtime in relation to the values, missions, andobjectives set by the organisation, its stake-holders, and established as broader socialnorms. Moreover, beyond the measurementof progress is the need for a method thatitself supports improvement of social andethical performance.

These eight principles seem to represent themost basic dimensions of quality against whichany social and ethical accounting, auditing, andreporting process can and should be judged. Thatdoes not mean to say that a case where severalprinciples are not being adhered to is necessarily“poor” in quality. For example, the Scandinavianapplications of “Ethical Accounting” reported ondo not include external verification (principleseven), yet this may well be because it is notrequired given the societal context or the par-ticular applications. So the principles cannot inisolation be a basis for inter-case judgement,although they can provide a checklist of thingsto look for in any assessment or selection process.

Scoring quality

The eight principles are relevant in offeringan initial basis for assessing the quality of anyexercise in social and ethical accounting,auditing, and reporting. They are, however,too general to be of use in anything but themost basic assessment process. For example, howcan one distinguish between stakeholder “con-sultation” (essentially limited, one-way) andan approach to stakeholder “dialogue” that itintended to be more deeply participative? Whenis a questionnaire-based survey acceptable as aform of dialogue, and when is it an imposition,

or simply an inappropriate means of collectinggood quality information? There are clearly manypossible ways in which “external verification”,“comprehesiveness”, and “disclosure” can beinterpreted. Similarly, there is a need to be ableto distinguish between a basic treatment ofthe environment, such as the application ofISO14000, and more sophisticated “total system”approaches such as the Natural Step.

The approach taken in recent times hasbeen to consider in more depth the possibleelements that define the quality of each principleset out above. Specifically, work undertakenby the Institute of Social and Ethical Account-Ability and the New Economics Foundationhas broken down the eight principles intoelements against which any particular social andethical accounting and auditing process can bejudged.

The elements and methods for scoring havebeen based around the view that it must bepossible to score the quality of an accounting,auditing, and reporting process based only on thepublished, i.e. disclosed, information. Drawinginspiration and method from work on environ-mental reporting undertaken by the UnitedNations Environment Programme and the envi-ronmental consultancy, SustainAbility Ltd., wehave therefore constructed a five stage develop-mental model for social and ethical reporting, asset out pictorially below.41

This five stage model clearly does take the stepof defining to a large degree what principles andelements are more important than others. Whilstcaution is needed in seeking to rank the initia-tives of different organisations in often quite dif-ferent contexts, the model does illustrate hownecessary it is for the whole assessment of thequality of social and ethical accounting, auditing,and reporting to develop in the future.

The Institute of Social and Ethical Account-Ability, in association with the New EconomicsFoundation, has more recently taken this scoringsystem one further stage in defining a morespecific method for a quantitative scoring of anyparticular social and ethical accounting, auditing,and reporting exercise. Building on the five-stagemodel, the approach has involved the develop-ment of a comprehensive set of questions that

1438 Simon Zadek

Balancing Performance, Ethics, and Accountability 1439

need to be answered in assessing the accounting,auditing, and reporting process through an exam-ination of the disclosed documents. Score areassociated with the answer to each question,which taken together give an overall scorethat allows a rating along the five stages. Thisapproach, currently being trialed, will formthe basis for an award for the best social andethical accounting, auditing, and reporting to belaunched during 1998 by the Institute.

Accountable futures

There are, and always have been, fine examplesof organisations that go beyond the norm inseeking to demonstrate social and environmentalresponsibility in their practices. These organisa-tions, with their driving mission statements andvisionary leaders, show that it is possible to besocially responsible as well as financially viableand indeed profitable. These organisations, par-ticularly those that are commercial businesses,find the spaces in the pipeline between investorsand consumers where some choice in behaviour

is possible. Furthermore, they take on the farmore ambitious agenda of shifting the basicboundaries by raising public awareness towardssocial and environmental agendas, and supportingthe emergence of new forms of investors thattake non-financial criteria into account.

These organisations, be they companies, char-ities, or non-profit organisations, are the exper-imental laboratories of the future. Just as Nissanor Ford invest billions in the search for the mostmarketable car for the millennium, some com-panies choose to invest in the design of ethicalaspects of “tomorrow’s company”. Social andethical accounting, auditing, and reporting hasbeen nurtured and developed in these businesslaboratories in recognition of the need for con-scious, mindful action to ensure that the corpo-rate sector plays a positive role in securing ourfuture. Measurement is not a passive, neutralactivity. If we want social and environmentaldimensions of business activity to be taken moreseriously in decision-making, we must work outhow to count them as one part of a complexand often difficult process of making them count.

Notes

1 This paper draws on material from Zadek, S.,P. Pruzan and R. Evans: 1997, Building CorporateAccountAbility: Emerging Practices in Social and Ethical Accounting, Auditing, and Reporting (Earthscan,London). The author gratefully acknowledges thepartnership, inspiration, and efforts of his co-editorsin this documentary venture. All views, errors, andomissions are, however, the exclusive responsibilityof the author. Comments are welcomed to theauthor at the New Economics Foundation, 112–116Whitechapel Road, London E1 1JE, U.K.; Email:neweconomics@gn.apc.org.2 Royal Society for the Encouragement of ArtsManufacture & Commerce: 1996, Tomorrow’sCompany: The Role of Business in a Changing World(RSA, London).3 Ibid.4 Will Hutton: 1995, The State We Are In ( JonathanCape, London).5 van Luijk, H. J. L., S. M. Carmichael, G. J. A.Hummels and A. C. ten Klooster: 1995, TheTechnology of Ethical Auditing, Nijenrode University,The Netherlands Business School, and the EuropeanInstitute of Business Ethics, Breukelen: 1.6 See, for example, a discussion of this in theRoyal Society for the Encouragement of ArtsManufacture & Commerce: 1996, Tomorrow’sCompany: The Role of Business in a Changing World(RSA, London).7 Anderson, S. and J. Cavanagh: 1996, Top 200: AProfile of Global Corporate Power (Institute for PolicyStudies, Washington DC).8 Business Week, April 22, 1996.9 A good summary of this argument can befound in Wheeler, D. and M. Sillanpää: 1997, TheStakeholder Corporation: A Blueprint for MaximisingStakeholder Value (Pitman, London).10 Cooperative Wholesale Society: 1995, ResponsibleRetailing (CWS, Manchester).11 Zadek, S., S. Lingah and S. Murphy: 1997,Consumer Works! Consumption, Civil Action, andHuman Development, paper prepared for the UNHuman Development Office.12 D. Korten: 1996, When Corporations Rule the World(Earthscan, London).13 Reported in the Financial Times, Thursday 28thAugust: 10.14 Research was being undertaken at the time ofwriting this book into which monitoring and verifi-cation systems would be relevant and practical in thesesorts of contexts. See, for example, Burns, M.,

M. Forstater, D. Osgood and S Zadek: 1996, OpenTrading: Monitoring Corporate Codes of Conduct (NewEconomics Foundation and the Catholic Institute ofInternational Relations, London).15 Similarly, the Ethical Trading Initiative in the U.K.involves a group of major retail companies workingtogether with campaigning and specialist NGOs informulating supplier-related codes of conduct andsuitable approaches to external verification. SeeAccountAbility Quarterly, Issue 4 for a description ofthis initiative.16 Thanks to Professor Rob Gray for this simplifiedbut cogent summary of the origins of financialaccounting.17 International Survey of Environmental Reporting:Results Presented at Press Conference September 10th, 1996, International Institute for IndustrialEnvironmental Economics.18 Cairncross, F.: 1996, Green Inc.: A Guide to Businessand the Environment (Earthscan, London).19 R. Hilliary (1996).20 See Gray, R.: 1997, ‘The Silent Practiceof Corporate Social Reporting in Companies:Reconstructing the Silent Account’, in Zadek, S.,P. Pruzan and R. Evans (eds.): 1997, Building CorporateAccountAbility: Emerging Practices of Social and Ethical Accounting, Auditing, and Reporting (Earthscan,London).21 Published information on corporate social andethical accounting and auditing almost exclusivelycovers Western Europe and the U.S.A. Research hasrevealed, however, that other experiences exist. Oneof the most important of these is probably theground-breaking work of the Indian industrial con-glomerate, Tata Industries, which is covered inGonella, C. and Evans, R. (eds.): 1997, The WindsorBusiness Roundtable on Social and Ethical Accounting andAuditing: Summary of Proceedings (Institute of Socialand Ethical AccountAbility, London).22 Nijenrode University, The Netherlands BusinessSchool/European Institute for Business Ethics:1995, The Technology of Ethical Auditing: An Outline(Nijenrode University, Breukelen).23 Zadek, S. and R. Evans: 1993, Auditing the Market: the Practice of Social Auditing (Traidcraft/NewEconomics Foundation, Gateshead).24 The Body Shop Approach to Ethical Auditing, TheBody Shop International, Littlehampton, 1996. Seealso the entire Values Report (1996) which containsall three audits.25 Pruzan, P.: 1995, ‘The Ethical AccountingStatement’, World Business Academy Perspectives 9(2),35–46.

1440 Simon Zadek

26 See, for example, Zadek, S.: 1997, ‘SustainabilityAuditing’, in AccountAbility Quarterly (Winter),Issue 5.27 Edvinsson, L. and M. Malone: 1997, IntellectualCapital (Harper Collin, London).28 See Pruzan, P.: 1997, Ethical Dimensions of Banking,and Lise Nørgaard: 1997, Ethical Accounting AndDialogue Culture: Worker Rehabilitation In Norway, inS. Zadek, P. Pruzan, and R. Evans (editors) (1997).29 See for example, the paper prepared on this subjectby a group of Northern non-governmental organisa-tions, New Economics Foundation and the CatholicInstitute for International Relations (1996), London.30 See for some discussion of this, Zadek, S. and P.Tiffen: 1996, ‘Fair Trade: Business or Campaign’, inDevelopment (Autumn): 3, 48–53.31 AccountAbility Quarterly, No. 1 Summer 1996: 5.Italics as emphasis added.32 The first volume of the UNEP/SustainAbilityreport Engaging Stakeholders offers a benchmark surveythat seeks to set out what the leaders are in environ-mental reporting, and in this manner to encourageothers to follow.33 There has been a relatively weak link to datebetween the quality standards approaches within thepublic sector and social and ethical accounting,auditing, and reporting. With the commitment of,for example, the Department for InternationalDevelopment of the British Government to explorethe possibilities of undertaking a social audit, however,this may change in the future. Also, a significantnumber of cases of Ethical Accounting in Denmarkhave been applications within the public sector.34 This paper has not really explored the practice ofsocial and ethical accounting, auditing, and reportingin the private, non-profit sector. There is a great dealof work going on in this area, some of which isdescribed in Mayo, E.: 1996, Social Auditing in theVoluntary Sector (City University, London).35 The first version of these principles were estab-lished in 1993 in a paper written by myself andRichard Evans in our preparations for the first socialaudit of Traidcraft plc. Zadek, S. and R. Evans: 1993,Auditing the Market: Practical Approaches to SocialAuditing (Traidcraft/New Economics Foundation,Gateshead).36 The principle of inclusivity can also be understoodas being the equivalent of the standard accountingprinciple of materiality. That is, the rights of stake-holders to choose performance indicators associatedwith their interests – in conjunction with the rightof the organisation to measure its performance alsoagainst its own mission statement – is part of what

secures information that is not only accurate butrelevant, or “material”.

There is an interesting connection with FourthGeneration Evaluation here, which suffers from themethodological defect of requiring balanced powerconditions from the outset of the evaluation process.See Zadek, Simon: 1995, Beyond Fourth GenerationEvaluation, unpublished paper (New EconomicsFoundation, London).37 There have been enormous strides forward inthe last decade in developing more participativeapproaches to dialogue between institutions and theirstakeholders. Much of the most interesting work hasbeen in the “development” field, where “participa-tive learning” methods have been developed to copewith gross inbalances of power between the dia-loguing partners, such as for example that existingbetween development agencies and village commu-nities in the South. See, for example, Pretty, Jules,Irene Guijt, John Thompson and Ian Scoones:1995, Participatory Learning and Action: A Trainer’sGuide (International Institute for Environment andDevelopment, London).38 As for the principle of inclusivity, this principlecan be understood in the context of the accountingprinciple of materiality.39 There has been intense activity in the area of socialindicator development over the last decade, particu-larly since the Rio Summit under Local Agenda 21. A good review of some of this material isprovided by MacGillivray, Alex and Simon Zadek:1995, Accounting for Change: Indicators for SustainableDevelopment (New Economics Foundation, London).40 Note too that this may mean that it may be morerealistic and relevant for a large, diversified companyto develop different social and ethical accounts etc.For different sub-units instead of trying to developone single accounting, auditing and reporting systemfor the whole organisation.41 See in particular United Nations EnvironmentProgramme: 1994, Company Environmental Reporting:A Measure of the Progress of Business & Industry TowardsSustainable Development, Technical Report 24,UNEP, Paris, and UNEP/SustainAbility: 1996, TheBenchmark Survey: The Second International ProgressReport on Company Environmental Reporting (UNEP,Paris).

New Economics Foundation/NEF,Vine Court, 112–116,

White Chapel Road,London E1 12E, U.K.

E-mail: zadek@compuserve.com

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