Prior to beginning work on this discussion, review Chapters 3, 6, and 9 from your textbook, the

New York Stock Exchange (Links to an external site.)

website, and the

Week 4 Weekly Lecture

. In a minimum of 200 words, define, while citing the text, shareholder activism and stock screening. Defend your position using at least one example. 

3 Looking Inward: Employees, Suppliers,

Investors

Monkeybusinessimages/iStock/Thinkstock

Learning Objectives

After reading this chapter, you should be able to:

1. Understand the three ways to become “vested” in a company and differentiate between the three kinds
of stakeholders.

2. Analyze employee types, strategies to motivate employees, and employees’ rights as described by inter-
national agreement and U.S. law.

3. Describe the various kinds of suppliers, ways to motivate suppliers, and suppliers’ rights.

4. Summarize the types of investors, ways to motivate investors, and the rights of shareholders and
owners.

5. Summarize shareholder activism.

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Section 3.1Vesting and Corporate Ownership

Pretest Questions

1. Suppliers are not internal to a company and are therefore not “vested” in the
corporation. T/F

2. Research shows that employees of companies with employee stock ownership plans are
more committed to their company. T/F

3. Suppliers are solely motivated by profit margin in deciding to whom they will sell. T/F
4. An investor cannot be an employee. T/F
5. A B corporation is a simple tax designation for a type of corporate structure. T/F

Answers can be found at the end of the chapter.

Introduction
Chapters 1 and 2 introduced the idea of stakeholders and stakeholder analysis and showed
how corporate social responsibility can originate from or spread through social networks.
This chapter examines stakeholders who are internal to the corporation. Specifically, it
focuses on three different kinds of stakeholders: employees, suppliers, and owners/market
stockholders. To reflect the complex nature of business, the chapter also addresses how the
lines blur between different types of stakeholders who are financially or emotionally con-
nected to the modern corporation. For example, some employees are also owners, and some
owners are also suppliers. These arrangements can create complex governing problems for
the corporation. Such complexity increases when owners and employees have certain legal
rights. To illustrate how CSR includes—and sometimes begins with—taking care of internal
stakeholders, the chapter examines how various regulations and laws currently protect both
owners and employees. In order to deal with the complexities of corporate governance and
the desire for many corporate stakeholders to create more than just wealth, we also examine
different corporate offerings. Specifically, we look at programs such as employee stock own-
ership plans that enable employee-owned firms, and we investigate benefit corporations as
a new form of corporation. These two options alter the corporate governance scene and the
way that firms relate to communities and stakeholders. Taken together, the information in the
chapter begins to define the current context for CSR and sustainability efforts and reveals key
CSR and sustainability opportunities for leaders and managers.

3.1 Vesting and Corporate Ownership
What does it mean to “vest” in a company or to “have a vested interest”? A vested inter-
est refers to having personal stake or involvement in a firm. Often, having a personal stake
means being or becoming an owner or part owner. Of course, anyone working with or for a
firm can have a vested interest if the person has a chance to benefit when the firm succeeds.
For example, employees and suppliers can have a vested interest in a company because they
receive payment or another benefit from the company. However, to be vested in a firm has an
additional meaning that is typically associated with purchasing stock. Most large companies

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Section 3.1Vesting and Corporate Ownership

are publicly traded—meaning that small pieces of company ownership in the form of stock
can be exchanged in return for cash. In such cases the many and varied individuals and insti-
tutions that own shares in the company actually own the company together.

Before the rise in new employee incentives related to stock ownership, there were only two
kinds of stakeholders vested in corporations: financial investors and owners. Now, in the age
of globalization and with an increase in firms where managers reward employees with a mix-
ture of wages plus the promise of staged future ownership with stock options, there are at
least three categories of people vested in corporations: employees, owners/investors, and
suppliers (see Figure 3.1).

Figure 3.1: Three types of corporate ownership

f03_01

SuppliersEmployees

Investors

Such ownership distinctions matter in a book on sustainability and CSR for several reasons.
First, by definition, people vested in a firm tend to care more deeply about how it behaves.
Secondly, people who are vested in a firm become partially responsible (legally and mor-
ally) for how it behaves. Some people (typically employees) have a vested interest in the firm
even if they do not technically own the firm outright or have stock or stock options. Finally,
people vested in a firm also comprise key stakeholders (see Chapter 2), so considering their
voice is part of running a sustainable and socially responsible business. The following sec-
tions describe different types of vested stakeholders.

Vested Employees
Employees constitute the first type of people vested in a corporation. One way employees vest
in the corporation is by bringing talent, skills, labor, time, and in the best cases, loyalty and
commitment to the workplace. Another way employees vest in a corporation is by purchasing
stock, a topic discussed later in this chapter. Most companies pay employees every 2 weeks
or monthly, with bonuses paid out quarterly, annually, or semiannually. The anticipation of

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Section 3.1Vesting and Corporate Ownership

future benefits (financial, social, reputational, learning, or other) allows employees to commit
to giving their time and talent to a commercial enterprise.

Vested Suppliers
Suppliers represent another type of entity that can become vested in a company. A supplier
is another company or corporation that provides the company with the appropriate parts,
inventory, and/or service inputs required for the company to create its products and services.
It may sound surprising to suggest that a supplier would be vested in a client, but this is cer-
tainly the case if you follow the financial logic. The supplier vests in the future of a client’s
company in anticipation of ongoing financial reward in the form of continued sales, increased
sales, or sales referrals. Suppliers (or the parent companies that own and manage supplier
companies) can purchase a formal stake in the future of the companies they serve by buying
large amounts of stock or by forming legally binding partnerships. Thus, suppliers have a
range of options in terms of their degree of vested interest; but by definition, any supplier to
a firm has a vested interest in it.

Vested Owners or Investors
Another way individuals develop a vested interest in a company relates to investing money
as owners, part owners, or nonequity investors (investors with no ownership rights but with
other rights as negotiated at the time of investment). Investors provide a business or project
with funding or other resources, and in return they expect a financial benefit. An owner of
a company invests in the company for a variety of reasons, but the most common relates to
securing rights to future financial benefits in the form of increased stock price. Investors and
owners provide capital, absorb risk, and over time expect a return on that investment. Inves-
tors also provide resources because they believe in the company’s mission or vision or its
product or service, and they want to see the venture succeed—not every investor is focused
solely on financial returns.

One defining feature of CSR and corporate sustainability relates to how both topics expand
the idea of “value” and “responsibility” to spheres beyond the financial. As mentioned, inves-
tors, employees, and suppliers invest in, work for, or supply a firm for financial reasons, or for
nonfinancial reasons such as believing in the mission, the management, or the technology or
service. In many businesses, owners and investors work in the business, or at the very least
actively advise the firm. A typical image of an investor is a Wall Street tycoon, distant from
the place where work is done. However, most businesses in the United States are small busi-
nesses, and owners and investors often work alongside employees to enhance the business’s
product or service.

Each category of person possibly vested in a corporation differs in relationship to the com-
pany, and perhaps in terms of the amount invested or the ease of access to speak with and
influence management. In the following sections, we look at the unique relationships each
group has with the corporation; the relationships differ by category, and thus the opportunity
and best ways to engage each one differs too.

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Section 3.2Employees

3.2 Employees
In the 21st century, corporate managers view workers differently than they typically did
in the past. Also, employees increasingly have different types of commitments to firms. For
example, in technology firms and many new nontechnical startups, employees are seen as
family, essential members of a work community. Employees often feel the same way about the
firm (AFL-CIO, 2015). Modern companies show more commitment to employees than they
did in previous decades, in part because there are fewer choices for substitutes—at least in
sectors that employ skilled workers. Many technological problems require specific technical
expertise that is rare or unavailable in the broader market.

Consider the skills of computer programmers, coders, and systems engineers—these skills
are specialized and not evenly distributed among the job-seeking population. Other indus-
tries face similar situations: Medical personnel have technical training and are currently in
high demand by employers. Over time, specific industries create specialists and subspecial-
ists, and employees and employers in these industries develop new interdependencies—one
worker can no longer be easily substituted for another. Employees in such situations also per-
sist in working for the company’s success, because the employee’s financial future depends on
it—especially when his or her specialization is so specific that the employee cannot find other
work without significant retraining. The employer needs the relationship to persist because
firms cannot easily or inexpensively find a replacement in the labor market. For example,
many software companies and medical service firms continually adjust to market needs by
training current employees on anticipated future needs and providing employees with incen-
tives to stay at the company.

Types of Employees
Most firms categorize employees in ways that relate to federal employment regulations. In
most firms there are four basic categories of employees: full-time, part-time, independent
contractors, and informal employees.

Full-Time Employees
Full-time employees work either hourly or on a salary. Hourly employees in the United States
are typically required by law to spend 30 to 40 hours a week performing their work duties.
Salaried full-time employees differ from hourly full-time employees in that they have a con-
tractually defined responsibility. They must manage that responsibility and complete asso-
ciated tasks in exchange for a monthly paycheck no matter how many hours they work—
sometimes they might be able to complete requirements in under 30 to 40 hours a week,
and at other times they may work more than this amount. Unlike hourly employees, salaried
employees generally do not track work time in any formal way and typically cannot earn more
by working more hours. Another difference between the two relates to the fact that full-time
salaried employees generally receive health, retirement, and other benefits paid for or par-
tially subsidized by the company.

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Section 3.2Employees

Part-Time Employees
The second kind of employee is a part-time employee; he or she is generally paid by the hour.
Part-time employees generally work less than 30 hours per week and do not receive com-
pany-provided or company-subsidized benefits, although there are some exceptions. For
example, the Starbucks Corporation has received significant press coverage for its decision to
offer health benefits and tuition reimbursement to part-time employees. Part-time employ-
ees have a variety of reasons for choosing to work part time, including preferring the work
arrangement and the flexibility or wanting to sample work environments at different places.
Employers who take better care of part-time (and full-time) employees can become employ-
ers of choice and can likely select from a large applicant pool.

Independent Contractors
The third kind of employee is an independent contractor. An independent contractor works
when contacted for a specific skill or project. He or she works for a specific amount of time
and for a specified salary or hourly wage; there is typically no expectation that the employ-
ment arrangement will extend past the life of the project or specified time.

Note that when someone builds a house or other structure with a specific builder, the builder
then contracts (or subcontracts) with skilled people (or many different ones) to complete
the various specialized tasks related to building the structure within a specified time frame
and quality level. In most cases, no builder can possibly perform all required tasks with equal
skill, speed, and precision as what can be accomplished by various specialists hired for the
tasks. The same logic applies to building a corporation or other organization, and the rea-
sons a corporation might seek contract employees are the same: Some people have a specific
skill set for doing a certain job, and they should be paid to perform that job but not remain
associated with the company once the job is complete. A contract employee is not consid-
ered an employee in current U.S. legal terms, but in modern (nonconstruction) firms, contract
employees may provide accounting, payroll, janitorial, marketing, consulting, or other spe-
cialized services. An independent contractor might also be someone who works seasonally.

Informal Employees
The fourth and final kind of employee is the informal consenting employee. This person might
be a friend, spouse, intern, or volunteer. Regardless of the relationship, the informal employee
also comes to the corporation to help complete a task. Informal employees are not legally
considered employees, and thus have fewer rights and protections than formal employees.
Note that informal employees are not the same as illegal ones. Illegal employees are those
who do not have legal documentation to work in the United States or the country of interest.
Therefore, any firm that accepts, demands, or pays for such labor is breaking the law. Often,
informal employees with legal documentation do not receive wages (such as in the case of
unpaid internships, where people work in exchange for experience rather than money), or
they receive minimal wages. Informal employees may receive nonwage benefits such as insur-
ance coverage (as is the case with volunteer firefighters in most U.S. states) or benefits such
as experience and industry exposure or positive personal references (common benefits of
unpaid internships).

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Section 3.2Employees

Every type of employee has a differ-
ent relationship with the corpora-
tion, and the working assumption is
that the closer and more financially
direct the relationship with the
employee, the deeper the engage-
ment. It can generally be assumed
that the full-time employee has a
deeper engagement with the corpo-
ration and that a part-time, infor-
mal, or contract worker has less of a
commitment to the corporation’s
future. Full-time employees tend to
stay longer, be paid more, and have
financial and promotion futures
more directly tied to the future of
the corporation.

Figure 3.2 shows the range of rela-
tionships that corporations have
with the types of employee stake-
holders vested in the corporation.
As the figure indicates, many dif-
ferent options exist. An employee
might be a partial owner. A contract
employee might also be a supplier.
A part-time employee might have a
spouse or partner who is employed
full-time at the same place. It is
important people understand the wide number of options that now exist in the modern work
environment. Anyone interested in CSR and sustainability, particularly regarding employees
and employee rights, needs to keep a close eye on the many different ways firms define the
concept of “employee” and “owner.”

Motivating Employees
Corporate managers understand the importance of motivating their highest quality workers
to have a long-term commitment to the firm. The costs to attain new talent vary by job and
industry type, but the costs associated with turnover can be avoided when committed people
stay with the firm. Similarly, many workers prefer a stable, reliable, and involved connection
with a firm. In some ways, many corporate actions that fall into the category of being socially
responsible or sustainable stem from this mutual desire to increase the quality, reliability,
and longevity of the connection between employee and employer. One innovation that results
from this mutual interest relates to experiments and innovations with employee ownership.

Figure 3.2: Types of Employee Stakeholders
and Typical Engagement Levels

f03_02

Higher
Employee owner

Employee stockholder

Employee (with bene�ts)

Part-time employee

Contractor/supplier

Intern or informal worker
Lower

Engagement
Level

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Section 3.2Employees

Employee Stock Ownership Plan
In 1956 the owners of Peninsula Newspapers wanted to exit from ownership of the company;
at the same time, the employees wanted to become owners themselves to be more tightly
coupled to the organization. Political economist Louis Kelso enabled the employees to pur-
chase the company by creating a legal category known as an employee stock ownership
plan (ESOP). As the idea of the ESOP emerged, it required authorization through legislation
and tax code changes. In the United States an ESOP is a qualified pension plan (another way
of saying it offers a type of retirement benefit). Because of this designation, employees do not
need to pay taxes or any contribution to the firm until they “cash in” on their vested amount
when they leave the company. When employees cash in, they can also roll over any ownership
shares into an individual retirement account if they qualify (Doucouliagos, 1995). In refer-
ence to stock options, vesting is the amount of time employees must wait to exercise or fully
own their stock options (which is known as being fully vested). Stock options usually come
with terms that provide more ownership or more stock the longer an employee stays with a
firm. Usually, the terms include milestones related to time. For example, if an employee stays
5 years, he or she can be 25% vested in the amount of stock in question; in 7 years he or she
can be 50% vested in the amount of stock in question; and so on (the exact time and percent-
ages vary by company and industry).

Over time, employees with vested interest in their company can become fully vested as part
owners. Initially, employees’ small compensation in stock won’t give them much say in the
company’s operations. However, over time, employees with options could amass consider-
able influence in its future and governance.

The philosophy behind an ESOP includes at least three parts: broaden ownership of capital,
create financial security and incentives, and urge better employee productivity. The California-
based National Center for Employee Ownership (2016) claims that 13 million employees in
the United States work in places where they are encouraged to participate in ESOPs. In some
cases, employees own and manage these companies, and there are no external investors. In
other cases, employees own a smaller portion of the corporate stock shares, and external
nonemployee investors have greater control. ESOPs are common in the service industry but
can be found in many other industries too. Several high-profile companies that have ESOPs
include United Airlines and W. L. Gore and Associates (Gimein, Lavelle, Barrett, & Foust, 2006;
Paton, 1989).

Why do companies go through so much trouble to create a plan that allows employees to
become owners? Scholars have studied this idea extensively, and their conclusions are not
always clear. Some studies suggest that ESOP programs make the company more profitable
and competitive because employees are more dedicated and have a stronger sense of commit-
ment to it (Gates, 1999; Blais, Kruse, & Freeman, 2010). Other studies show that ESOP com-
panies are in fact more successful than comparable firms and offer more competitive salaries
(Hoffmire, 2015). Perhaps ESOP companies attract a higher quality of worker because the
benefits are better.

However, there are some potential downsides to ESOPs. The first is that employees tend to
have a large portion of their retirement tied to a single company. This is contrary to the long
accepted principle of investment diversification. If an employee has most of his or her net
worth tied up in a single company, he or she is vulnerable if that company fails, performs
poorly, or is at a low value when the employee needs to sell the stock. One study showed that

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Section 3.2Employees

ESOP participants generally had about 60% of their retirement savings invested in a single
employer (Rosen, Case & Staubus, 2005; Cornforth, Thomas, Spear, & Lewis, 1998).

Another criticism of ESOPs is that they are excessively ideological, whereas the marketplace
is more practical. For example, companies that are forced to downsize because of changes
in the marketplace often lay off workers—such decisions make financial sense and help the
organization survive for the remaining employees and customers. However, if through an
ESOP an employee participates in the company’s management, then he or she is put in a posi-
tion to protect employee jobs, making it less likely the company will take the cost-cutting/
job-cutting steps that are sometimes needed to survive. Managing ESOP companies can thus
occasionally become problematic (Stumpff & Stein, 2009; McDonnell, 2000).

Other Stock-Related Options
In the United States there are other ways that companies can reap the advantages of ESOPs
without completely changing the company’s legal structure. One way is to offer stock to
employees under very specific conditions. While these are mostly found in highly competi-
tive sectors, it is also true that progressively minded companies such as Starbucks use stock
options to benefit employees. In such companies workers do not have management control
associated with the highest levels and type of stock ownership (there are various levels), but
they do have a long-term financial tie to the company created by the option to purchase stock
at a fixed price.

Other companies allow employees to directly purchase shares in the company on their own.
In some countries, including the United States, tax-qualified plans allow employees to buy
stock at a discount or with matching contributions from the company, which means that
employees can purchase stock at an employee price that is set below the normal market price.
The employee can make the purchase with cash or with money the company provides that
can only be used for stock purchases.

Non-Stock-Related Options
Non-stock-related benefits offer another
way for corporations to engage their
employees in a benefit under the company
umbrella. For example, most life sciences
companies (such as Procter & Gamble, Nike,
and Johnson & Johnson) and many fast-
moving consumer goods manufacturing
companies operate company stores where
employees can buy products created by
that company at a deeply discounted price.
Other companies extend travel discounts to
employees or allow them to use company
facilities for exercise or social service. All
of these benefits are designed to enhance
the employee’s life and deepen his or her
commitment to the corporation. Some firms

Photodisc/Thinkstock
The ability to work from home is one exam-
ple of a benefit that companies can offer to
increase employee engagement.

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Section 3.2Employees

motivate and retain employees by offering flexible hours, work-from-home telecommuting
options, and unlimited no-questions-asked time off and sick leave.

Many employees work for the promise of future income and bonuses, but many people select
employers based on nonfinancial criteria too. Employers of choice tend to be places where
the culture supports learning, work–life balance, health and wellness, flexibility, growth, a
supportive work environment, safety, and a sense of purpose or meaning (Dill, 2015). Thus,
a firm’s employment policies and the general way it treats its workers (its human resource
policies and practices) influence employee engagement and become a point of consider-
ation when candidates apply for jobs and when firm managers build or rebuild policies and
practices.

Employee Rights
Thus far, we have discussed employees and some options provided to those employees fortu-
nate enough to quality for certain benefits. This section examines the rights and protections
that government regulations and social standards provide for all employees. While employee
rights vary, there is general agreement on the basic rights of workers, despite the fact that
enforcing these rights differs by region and industry. The most basic rights include safety,
freedom of participation, collective bargaining, free speech, protection from honesty tests,
and protection and privacy of information.

The Right to Safety
The first right covers basic workplace safety while acknowledging that different industries
have different safety concerns. Certainly, almost all work has a reasonable risk associated
with it. For example, flying in an airplane is generally safe, but there are occasions when acci-
dents occur. Likewise, truck drivers, taxi drivers, emergency services workers, factory work-
ers, farmers, and many others absorb a certain amount of risk when they enter the workplace.
All workers should ask themselves what level of risk they are willing to absorb, and every
manager and owner should determine whether they are providing the safest possible work
environment. All safety issues are associated with a cost–benefit analysis, and it is under-
stood that perfect safety can rarely be achieved. There are always limited resources within
which companies operate that affect the amount they can spend on safety procedures. But
worker safety is and should always be an overriding question and pursuit in any workplace.
Workers, labor unions, managers, leaders, owners, and investors should ask if all reasonable
risk is being illuminated and properly managed. An important law that protects worker safety
is the Occupational Safety and Health Act of 1970, which regulates the safety and health con-
ditions of the majority of industries. This act and its associated department, the Occupational
Safety and Health Administration (OSHA), protect workers from unsafe conditions—OSHA
violations are expensive and can result in a firm’s closure.

The Right to Participate in Work
The second basic right is related to participation in the workplace. Issues related to these
rights include the age at which it is appropriate for people to begin or stop working; what
constitutes child labor or taking advantage of the elderly; and how can everyone be treated

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Section 3.2Employees

fairly in the workplace. Broadly framed, these are issues that all stakeholders in the work-
place should consider. There is not necessarily a right answer, but work conditions are gener-
ally better when all parties engage in an ongoing dialogue about them. In other words, these
questions will likely not ever be settled, but should rather produce an ongoing discussion.
Part of the job of an informed employee and a socially responsible leader is to ensure that
such conversations take place and that all interested and affected parties are aware of the
conversations and are included in them. Some significant laws related to protecting employ-
ees’ rights to participate in the workplace include the following:

• The Federal Employees’ Compensation Act, which offers workers a compensation
program that pays for a federal employee’s disability or death if it occurred while
performing work duties. This act indirectly protects workers because some of the
expense for workplace injuries become the responsibility of the employer. It also
provides workers with a sense of security; if they are hurt while doing work, they
have options to seek health care and will not lose their job if they cannot work while
recovering.

• The Employee Retirement Income Security Act of 1974, which ensures that pen-
sions or welfare benefit plans offered to employees meet financial, disclosure, and
reporting requirements. In large part, this act protects employees’ retirement money
more than it protects their physical safety. The act also includes requirements for the
Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance
Portability and Accountability Act of 1996. These acts keep employee health infor-
mation private so that employers cannot discriminate based on it; these acts also
provide ways for employees to continue to obtain health insurance after they are no
longer employed.

• The Family and Medical Leave Act of 1993, which allows eligible employees to take
up to 12 weeks of unpaid leave after the birth or adoption of a child or for a severely
ill child, spouse, or parent. This act protects employees from losing their job during
this time.

• The Davis–Bacon Act of 1931, which protects government subcontractors from
being underpaid and attempts to set a minimum bar for other firms and industries
to follow. Several other acts similarly protect government employees.

• The Migrant and Seasonal Agricultural Workers Protection Act of 1983, which exists
to protect migrant workers, farm labor contractors, and seasonal workers by regulat-
ing hiring and employment practices.

The Right to Organize and Collectively Bargain
The third basic right relates to gathering in unions or other groups and then participating
in collective bargaining. It is assumed in most modern societies that workers have a right to
organize labor unions that will bargain collectively on their behalf. Governments do not have
the right to suppress these unions, nor do owners have the right to ignore them. Western
society has long struggled for workers to gain recognition and have the right to collectively
bargain. However, this does not mean that labor unions have the right to control access to
work. In the United States, right-to-work laws protect workers who do not want to partici-
pate in labor unions. Such laws allow everyone to participate in the labor force without being
compelled to join unions. For example, the Fair Labor Standards Act (FLSA) of 1938 offers a
more extensive mandate that examines worker safety, fair compensation, and worker rights

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Section 3.2Employees

in U.S. firms. The FLSA includes the right of organized labor to collectively bargain and the
right of some workers to opt out of the collective bargaining system. The FLSA also provides
standards for the federal minimum wage and overtime pay.

Each of the rights discussed indicates how some cultural norms about fair and safe work
practices have been translated into law. Firm managers and owners interested in enacting
socially responsible and sustainable activities must start by evaluating where the firm stands
in terms of compliance with current laws and norms. However, compliance represents no
more than following the minimum standards. Thus, once compliant, firms with CSR ambi-
tions can work with stakeholders and analysts to move beyond the minimum and toward a
more responsible and sustainable state.

The Right to Free Speech and Protection After Whistle-Blowing
The term whistle-blowing refers to the act of reporting illegal or unethical behavior. Whistle-
blowing usually refers to when an employee notices an illegal or unethical behavior at work
and alerts management or outside agencies about the violation. Some firms are noncompli-
ant by accident and some by choice; laws exist to help move such firms toward compliance
and beyond. In the United States constitutional rights protect free speech, and speaking out
against internal firm practices is one type of free speech. Governments and other entities such
as corporations cannot restrict the right of an individual to speak except in very exceptional
circumstances. Of course, corporations and individuals within them also have some degree of
right to privacy.

Research suggests that whistle-blowing in the workplace can be very risky. There are many
examples of whistle-blowers who revealed wrongdoing by managers and leaders and were
subsequently shunned, demoted, abused, and fired, even though laws exist to protect them
(Tsahuridu, 2011). Whistle-blowers are protected by two bills. The Sarbanes–Oxley Bill,
passed in 2002, makes it illegal for employers to initiate retaliation against whistle-blowers.
The Dodd–Frank Bill, passed in 2010, also prohibits unions or former employees from retali-
ating against employees. Such protections for whistle-blowers remain important elements
of the corporate operating environment, because whistle-blowers do society a service when
they signal wrongdoing and help initiate change. In some ways, whistle-blowers provide data
about how and when corporate practices fail, as the information about one violation can be
used to help entire industries become more responsible and sustainable (Hilzenrath, 2011).
The Internal Revenue Service offers a multimillion-dollar reward for whistle-blowers who
provide credible and actionable information—but experts suggest that unemployment also
tends to follow the winners of the high-paying prizes (Sullivan, 2012).

Protection from Honesty Tests
There are also occasions when the employer becomes the victim of dishonesty and abuse.
Many businesses, especially retail operations, deal regularly with employee theft or damage
of company property by negligent employees. Research suggests that about half of all theft
that occurs in retail organizations is done by employees (Matos & Galinsky, 2012). Theft can
include shoplifting, vendor fraud, or accounting malpractice. The total value of goods stolen
by employees in the United States is estimated to be more than $17 billion a year (Matos &
Galinsky, 2012). Historically, many companies used lie detector tests to investigate suspected

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Section 3.2Employees

employee theft, but in 1988 passage of the Employee Polygraph Protection Act stopped this
practice. This law severely limits the use of polygraphs in the workplace, in part because they
are largely seen as unreliable. While not illegal, honesty tests may also generate unreliable
false positives. They are ill advised for effective organizations, because simply asking employ-
ees to take the test can breed distrust and offense. Interestingly, some companies reduce theft
and associated losses by taking a more fair, inclusive, sustainable, and holistic approach to
managing employees. In return, these firms see employees “return the favor” by being more
responsible and watchful of company property (Lindon, 2010).

The Right to Privacy
Companies must identify the line or time of day where formal work ends and personal life
begins. This can introduce questions about privacy and the boundaries of private time. For
example, should an employee be reachable at any time of the day? How do companies mea-
sure productivity when people log less face time (time at the office in front of others) but more
computer time? There is also the ongoing question of whether romance is appropriate in a
work setting. Can two consenting adults agree to have a relationship if they work together,
especially if one supervises the other? Organizations take different approaches to this issue,
and the options range from asking employees to notify the human resources department to
obtain official permission to engage in a relationship, to firing employees for inappropriate
behavior. For instance, in 2016 the CEO of Priceline, Darren Huston, lost his job and his sever-
ance package because he had a relationship with an employee (Fitzgerald & Lublin, 2016).

Another area where this balance comes into question is in the area of substance abuse or
addiction. Alcohol abuse causes twice as many problems in the workplace as drug addiction.
About 9% of all employees identify themselves as heavy drinkers, meaning they drink five or
more drinks on five or more occasions a month. Studies show that up to 40% of all industrial
fatalities are linked to alcohol (Zezima & Goodnough, 2010; Wogan, J. B., 2011). Currently, in
states where marijuana has been legalized, U.S. companies are wrestling with the problem of
marijuana use by employees not only during work hours, but also the effects of marijuana use
outside the workplace (Zezima & Goodnough, 2010; Wogan, 2011).

Many companies require mandatory drug testing to help with initial employee screening; still
others provide confidential and subsidized access to addiction counseling as part of employee
support programs. Leaders and managers interested in advancing social responsibility and
sustainability need to consider the strength and supportiveness of the internal workplace as
part of the effort; keeping the workplace safe and developmental is a long-term goal rather
than a one-time achievement.

International Declaration for Worker Rights
In 1988, after years of debate and deliberation, the International Labour Organization (ILO), a
United Nations organization, adopted the Declaration on Fundamental Principles and Rights
at Work. This document is intended to protect all workers in all nations from abusive work
environments. The rights provided in that document are similar to the rights of U.S. work-
ers. There are four components to the declaration. The first eliminates all forms of forced or
compulsory labor. This means that workers can refuse to work or do something they think
is unsafe, and they cannot lose their job because of exercising this right. The second right

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Section 3.3Suppliers

abolishes child labor, or the practice of employing children to do adult jobs. This right sug-
gests that younger children should not work in order to support a family, although the docu-
ment states an exception whereby adolescents may work in certain circumstances. The third
right described by the ILO is the elimination of discrimination in respect to employment and
occupation. This means that hiring and managerial practices should not discriminate based
on race, gender, tribe, religious affiliation, or any other factor. In delineating this right, the ILO
hopes that people will be hired, promoted, and rewarded based on their contributions and
not on their identity or affiliation.

The final right afforded by the document is the freedom of association and effective recogni-
tion of the right to collectively bargain. This right suggests that all workers can ban together in
labor unions and demand changes in work conditions, improvements in safety, and increases
in benefits and pay (ILO, 2016). Given the scope of this book, discussing employee rights and
ongoing debates helps set the stage for finding and developing opportunities. We argue that
people cannot improve upon the current work situation until they understand it fully, and
when people design a new plan for workers, they should not remove the basic rights that
employees deserve. Thus, opportunities to create more socially responsible firms may be
found in enforcing employees’ rights. In the following section, we expand the definition of
who is impacted by firm behaviors to include the suppliers.

3.3 Suppliers
To maintain flow through any business, the corporation depends on any number of supplier
entities to accomplish tasks. Needs may include raw materials, specialized parts, skilled labor
(such as design or marketing support or programmers), and transportation. Once a product
is made or a service is provided, the corporation may need transportation, communication,
marketing research, customer service, repair, and any number of other supplier services. Data
suggests that the largest businesses in the United States do not sell directly to any consumer,
but instead sell to other businesses (Demery, 2014). This relationship is called business-to-
business sales and marketing.

Types of Suppliers
Like in the case of employees, there are different types of suppliers. Recall that suppliers are
increasingly seen as stakeholders and that sometimes, suppliers can also own stock in the
firms they supply. As more firms offer products and services both regionally and internation-
ally, it becomes even more essential for firms to understand and map all the types of supplier
relations that exist with the firm. The following section defines the four types of suppliers,
which include manufacturers, distributers, independent craftspeople, and import sources.

Manufacturers
Manufacturers provide a final product of some type; it may be just one component among
many used in another company’s product (consider that air bag manufacturers supply a
finished product, but it is just one of many products supplied to car manufacturers). Most

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Section 3.3Suppliers

retailers or resellers buy through a manufacturing company’s sales team or through indepen-
dent representatives who offer products from multiple and even competing manufacturers
(suppliers). Prices from manufacturers’ representatives are usually lowest, unless the retail-
er’s location makes shipping costly.

Distributors
Also known as wholesalers, brokers, or jobbers, distributors buy in quantity from several
manufacturers and warehouse the goods to sell to retailers or service providers. Although
prices are usually higher than a manufacturer’s, distributors can supply retailers and service
providers with small orders from a variety of manufacturers. Lower transportation costs and
quick delivery time often compensate for the higher per-item cost from distributors.

Independent Craftspeople
Exclusive distribution of unique goods is frequently offered by independent craftspeople, who
sell their products through representatives or directly at trade shows (industry events where
people gather in one location and multiple vendors display wares and try to win business)
or via Internet sites. The goods from independent craftspeople are often one-of-a-kind or
come in smaller batches; sometimes they are made in international locations. Types of goods
range from handmade jewelry to custom vehicles. Thus, the costs of goods from independent
craftspeople can vary greatly—if components are inexpensive and if labor is inexpensive at
the manufacturing site, then the products may be low cost. However, if the components are
expensive, if the labor costs are high, or if transportation costs are high, then goods supplied
from independent craftspeople can be costly.

Import Sources
Many retailers buy foreign goods from a domestic importer, which is someone who charges a
fee to get products out of one country and into another and thus operates much like a domes-
tic wholesaler. Sometimes import sources directly supply products to a firm; other times a
supplier such as an independent craftsperson uses an import agent to supply his or her goods
to other firms.

Suppliers’ Motivations
Suppliers have their own motivations for selling to and engaging with client companies; some
of their motivations are financial and some are not. Suppliers often share the same motiva-
tions as employees, meaning that they may prefer one customer over another because one
firm has a better final product, a more compelling mission or vision, and/or a more attrac-
tive price. Suppliers may also benefit when their components are used in popular and well-
received products and services. Suppliers can rightfully see themselves as part of another
company’s success if they supply components to it. Supplier motivation relates to CSR and
sustainability because success and good (or bad) press for one company’s products can also
bring success and publicity to the companies that supply inputs for the product.

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Section 3.4Investors

Supplier Rights
As a general rule, suppliers do not have basic rights like employees or investors do. Instead,
they have invested in the corporation by virtue of their relationship in supplying parts or
skills. Their relationship with the corporation is generally determined by contract and prac-
tice rather than a description of rights. Further, suppliers may have more options than do
full-time employees for severing a tie with any particular company, since product suppliers
can simply find another customer and send goods to the new customer. In contrast, employ-
ees may not be able to leave one job and find a similar job in the same regional area. Supplier
rights are not as formal as employee rights, and there are fewer laws and regulations that
specifically protect suppliers.

3.4 Investors
Small companies are usually owned by one person, while large companies are typically owned
by more people. This situation is often (but not always) correlated with company size, as small
firms are started by enterprising individuals who own the business. As these individuals need
more money to expand their business, they reach out to others and sometimes offer partial
ownership in return for funds. People can offer others an ownership stake even without for-
mally offering stock or selling shares of stock via the stock market. Whether funders became
owners via the stock market or a private arrangement, these funders are stockholders or
shareholders; they are also investors because they have invested money. Investors can also
provide money or other resources to an organization without receiving stock in return—in
such cases they are called simply “investors” because such people do not own public or pri-
vate stock. According to Bloomberg, almost $60 trillion worth of stock is owned worldwide
(Gimein et al., 2006). But who are the stockholders?

Types of Stockholders
Two kinds of stockholders own shares of corporations. One type refers to institutional share-
holders and the other to individual shareholders. The main reason that individuals and insti-
tutions invest in stocks is to obtain a return on their investment. Many people believe it is
better to buy stocks than to put money in the bank to accrue interest. The value of stocks rises
and falls over time, but on average the stock market goes up at a faster rate than other kinds
of investments and thus attracts a lot of people to invest in such opportunities.

Institutional and Individual Stockholders
One kind of stockholder is known as an institutional stockholder. When institutions purchase
shares, the shares are not held by one individual or family; instead, the shares are purchased
and held on behalf of specialized groups. Examples include pensions, mutual funds, insurance
companies, and university endowments. These institutions are the intermediaries of invest-
ment; they often pool the money of the people they represent and then buy large amounts of
stock. The returns, if any are accrued, are often shared among the people whose money cre-
ated the original pool of money. Thus, institutional stockholders are similar to companies that
buy stock on behalf of others.

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Section 3.4Investors

The other kind of stockholder is known as an individual stockholder, meaning that a single
individual or family directly buy shares that are issued by the company through stock market
websites or from a stockbroker (U.S. Census Bureau, 2011).

Motivating Stockholders
Historically, people are motivated to buy stock for financial reasons—they believe that the
company that issues the stock will be successful, and the investor wants to play a role in
enabling that success by investing money and receiving money in return. Of course, not all
stock shares appreciate, or increase, in value.

Another reason people invest is because they hope to influence a company’s decisions. In
today’s society, such influence is difficult to achieve, as one investor cannot usually afford to
buy enough shares of stock to make demands of company leaders. Another reason people
invest in firms is to show support for the mission or the product.

Stockholder Rights
In the following sections, we discuss stockholders’ legal rights and investment safeguards
that enable markets for stock and other forms of ownership to function. We examine the role
of government and discuss corporate governance (how companies manage themselves), as
well as shareholders’ activism in protecting their interests.

Government Protection
In the United States the Securities and Exchange Commission (SEC) is a federal agency
that is generally responsible for protecting stockholder interests. The SEC was established
in 1934, just after the stock market crash that led to the Great Depression. The SEC consists
of five presidentially-appointed commissioners that have staggered 5-year terms. For equal
representation, the SEC cannot have more than three commissioners from the same political
party. The responsibilities of the SEC include issuing and enforcing federal securities laws.

In 2008 the SEC and the Federal Communications Commission, along with other federal
investigators, unveiled one of the largest ever tax frauds in U.S. history. The name of Bernie
Madoff exists in the annals of crime as being associated with one of the largest thefts in his-
tory. Estimates suggest that Madoff, through his investment firm, stole as much as $65 bil-
lion from prominent university charities, cultural institutions, and individual investors. SEC
chair Christopher Cox admitted to Congress that his agency had failed to see the patterns of
deceit coming from Madoff ’s firm, which dated back to 1999. But his admission provided little
consolation for the many people who lost their retirement funds, pensions, life savings, and
charitable contributions in a scheme that was far reaching and very personal. Many people
think the benefit of the Madoff scandal is that it “woke up” the SEC, and as a result the SEC
now more aggressively watches banking transactions and financial managers for all types of
fraud, including insider trading.

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Section 3.5Corporate Governance

Insider trading is the illegal practice of manipulating or deceiving the public in stock trading.
In other words, it is illegal to manipulate the stock to create an artificial value (people do this
by creating false news reports, hiding information, or generating false information). It is also
illegal to use nonpublic information to trade the stock. For example, if an employee knows
about an upcoming change that will dramatically affect the value of shares, the employee can-
not buy or sell more shares of the company without being investigated for possible insider
trading. The public is entitled to transparency and openness related to stock value, and peo-
ple who have hidden information have an unfair advantage—thus, insider trading laws aim
to prevent that from happening. It is the SEC’s responsibility to ensure that stockholders have
the same company information as corporate officers. Stockholders should be able to make a
fully informed decision before making an investment. Stockholders have the right to know
about the company’s management and the challenges it faces in the marketplace. They espe-
cially have rights to financial information. While most of this information is provided at annual
meetings and in the form of an annual report, it is also made public through press releases in
the media and direct conversations with research analysts from important brokerage houses.

All parties must comply with insider trading rules. In addition, company leaders and own-
ers must minimally conduct themselves, and business, in full compliance. When leaders and
owners (those who “govern” the organization at its highest levels) seek to be more socially
and environmentally responsible and sustainable, they have several options because of their
positional power from their position. CSR activities and sustainable decisions and products
must usually be approved and supported by top management. The way that firms choose to
treat employees, invest corporate profits, and direct employee efforts stems directly from the
governance decisions made by the top management team.

3.5 Corporate Governance
Corporate governance refers to the structure and relationships that determine corporate
direction and performance; the term describes both the act of governing and the way in which
an organization makes and follows its own rules. If corporate leaders enact rules and regu-
lations that encourage CSR, then the entire firm must comply with the rules, and CSR and
sustainability have a higher chance of success. On the flip side, if corporate leaders create
rules and regulations that discourage or deter CSR and sustainability, then CSR and sustain-
ability will be more difficult to enact. The idea behind corporate governance is that corpora-
tions must comply with certain leader-prescribed regulations and use transparent processes
while operating. The assurance that leaders are in compliance with government and internal
regulations (meaning they are enacting good corporate governance) allows investors to make
judgments about the quality of investments. This fact also allows some firms to stand out as
exemplars of sustainable and responsible governance (while others stand out for horrendous
violations). Here, we argue that understanding these extremes can help leaders and investors
decide how to improve firms’ sustainability and social responsibility.

Board of Directors
The board of directors is the group of people who typically govern an organization. As a result,
it has power and oversight over company behaviors and leaders. A board is an elected group

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Section 3.5Corporate Governance

that has a legal duty to oversee the establishment of corporate objectives and to select leader-
ship to carry out these objectives. The board regularly reviews the company’s performance
and oversees stockholder interests. Boards generally meet four to six times a year. Corporate
boards vary in size and composition, but most large companies try to keep the number of
board members to around 12. Usually 10 or 11 of these members, or 90%, are from outside of
the company. The New York Stock Exchange, for example, requires listed companies to have
at least a majority of their board members from outside the company. Other board members
from the inside may include chief executives, presidents, founders or major stockholders, and
financial officers from within the company. In Europe board composition is different. Most
European companies have two different boards. The first is an executive board made up of
members of the company. The second is an external board that supervises the executive board
and represents the interests of shareholders, stockholders, and even employees.

One of the most important things a board can do is conduct an audit, or contract someone
else to do so. The audit committee on a U.S. board of directors must annually examine the
company’s financial well-being. It is thus required that board members be financially literate
and able to make the judgments required of high-end accounting and finance.

Challenges for Corporate Boards
Boards often struggle with transparency in terms of what information to release to the media,
employees, and the public. Board meetings are confidential, which leaves a considerable
amount of confusion and hidden or partially hidden information in terms of how they oper-
ate and manage.

Another important corporate governance issue relates to salary and wages, particularly sal-
ary and wage differentials between management and employees. Publicly held corporations
are generally run not by their owners, founders, or boards, but by hired professional execu-
tives. This creates what is known as the agency problem. Executives in corporations act as
agents for the founders or owners (stockholders), and while such executives are mandated
(and paid) to look after corporate interests, there is little to prevent them from looking after
their own interests instead. In some ways, salaries play a role in mitigating the agency prob-
lem, since higher pay can incentivize the executives to do what is best for the owners who,
in essence, pay the salary. Yet because boards meet a few times a year while executives work
at firms daily, executives have more opportunities to take actions that may not benefit cor-
porate leadership. Large corporations typically pay board members a high salary for their
work; companies may pay in cash, stock, or stock option rights. Some critics believe board
compensation sometimes taints the ability of a corporate board to oversee leadership and
appropriately represent stockholders (Twaronite, 2013).

Regarding salary and compensation, many people feel that board member and executive pay
is excessive, particularly in the United States. Corporate senior leadership in the United States
receives almost twice the salary as an equivalent position in France, Belgium, and Sweden. In
the United States, CEOs typically make 325 times more than the average worker. Since 1990
the ratio of average executive to average worker pay has increased every year (Statista, 2016).
Executive compensation has been the subject of some government regulations. For exam-
ple, a provision in the 2010 Dodd–Frank Act required major corporations to disclose execu-
tive compensation to the public; companies must reveal compensation packages for at least
the top five executives. Firms must also report all of the financial and nonfinancial benefits

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Section 3.5Corporate Governance

received. These benefits might include access to a corporate aircraft, gifts received from cli-
ents, or tickets to sporting or cultural events. In addition, conflicts over executive compensa-
tion are common in boards. One view holds that corporate leaders have such an important
influence on the success of the company (and the talent pool for top executives is so small)
that high compensation is warranted. Those in favor of high compensation for executives also
argue that overall, the amount given to a corporate executive represents a small percentage
of the overall corporate value. The other side points out that such high wages are extreme,
unwarranted by the workload, and possibly inflammatory to employees and the public. Oth-
ers in favor of more restrained executive compensation argue that high executive compensa-
tion creates a corporate culture of greed and short-term decision making and undermines
transparency. They also argue that providing a living wage to all employees is a moral obliga-
tion, though defining this can be problematic. Essentially, the issue of compensation remains
an area in which firms have considerable discretion; the compensation choices firms make
send signals about their commitment to social responsibility and sustainability (Gerstein,
Connelly, Lightdale, & Rowen, 2015).

Wages and executive compensation have been a social responsibility issue for decades, but
Ben & Jerry’s in Vermont made the issue famous when, upon founding their company, CEOs
Ben Cohen and Jerry Greenfield committed to keep the ratio between executive wages and
the lowest paid employee no higher than 5 to 1. The company adjusted the ratio in a transpar-
ent way over the years, moving it to 7 to 1 and then 17 to 1 when it could not attract talented
management without the increase. When the company was purchased by a large corporation
in 2000, the salary information was no longer made public (Weiss, 2013). The topic of sala-
ries represents just one of the difficult and controversial decisions that boards and executives
must address; CSR and sustainability represent other topics that often require board-level
action. When boards and executives remain unresponsive to such issues, shareholders some-
times attempt to encourage change through behaviors known as shareholder activism.

Shareholder Activism
Frustrations with executive compensation, environmental concerns, and other issues related
to corporate strategy cause many shareholders to become more active in corporate gover-
nance. Shareholders need not rely on the board of directors to make changes in corporate
direction, as institutional and individual shareholders have the option to work together to
protect their interests.

Shareholder activism is a strategy for shareholders to influence the decisions of the corpo-
rate board and other leaders of the firm. Shareholder actions may include lawsuits or nega-
tive media campaigns that are intended to influence corporate leaders. Shareholder cam-
paigns often cause the stock price to decline, making owners and managers more willing to
bargain with the activists or comply with the shareholders’ demand. In addition, corporate
boards typically work with shareholders to avoid going to court and paying related expenses.
Choosing to consistently make socially responsible and sustainable decisions is one way firms
can avoid shareholder activism. When leaders decide to pay fair wages, treat employees and
suppliers fairly, manage water and electricity use with a stewardship mind-set, and follow
other pro-CSR and sustainability behaviors, then pro-CSR shareholders have fewer reasons
to complain and less incentive or need to turn to activism.

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Section 3.5Corporate Governance

Stock Screening
Another way stockholders try to exert influence over corporate governance is through stock
screening. Socially responsible investing (SRI) describes investors who choose stocks
based on environmental or social issues. SRI allows investors to reward firms that sell prod-
ucts they admire (environmentally conscious investors might be attracted to solar start-ups,
for example) or punish firms that sell products of which they disapprove (so-called sin stocks
traditionally include alcohol producers, gun manufacturers, and tobacco companies). A grow-
ing number of professionally managed funds also have social filters to help select companies
that deserve investment. A socially responsible investment fund might screen out companies
that have an excessive impact on the environment, overpay executives, or have a history of
discriminating against employees. Socially responsible investors can be as varied as the num-
ber of fund managers and the causes they espouse, but estimates suggest that when screening
and selection strategies are considered, more than 1 of every 9 dollars under investment is
invested in an SRI fund; the total size of the SRI market is in excess of $4 trillion (Forum for
Sustainable and Responsible Investment, 2016). This fact means that social responsibility
concerns have become mainstream enough to affect Wall Street; it also means that socially
responsible and sustainable firms looking to attract capital can identify themselves with the
SRI movement.

Stock screening is a kind of social activism that has an indirect impact on board decisions,
but it may have a direct impact on a stock’s price and value. Many companies have initiated
social responsibility resolutions to guide corporate decisions in the hopes that such moves
will increase the value of shares to certain investors.

Apply Your Knowledge: Stock Screening

Develop a list of five criteria for activist stock screening. These might include social, political,
or environmental issues that are meaningful to you, such as child labor, solar energy, or
compliance with certain government regulations.

Then, list 20 commonly traded stocks from the New York Stock Exchange: https://www.
nyse.com/index. Research event information for each stock, paying close attention to their
products, or management processes, and how they do business. Rank the stocks based on
their compliance with the stock screening criteria developed.

Based on your activist portfolio, select which of the stocks you would purchase. Then
determine what portion of your portfolio each selected stock should constitute. For example,
you may choose one particularly positive stock to be 50% of your portfolio while some mix of
other stocks will represent the other 50%.

Benefit Corporations (B Corporations)
In response to the call for firms to behave in more socially responsible ways, a small group
of innovators created a new corporate form intended to break the paradigm that corporate
managers have a binding duty to put shareholder interests above all other decisions. This

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Chapter Summary

new form is called a benefit corporation (B corporation). A B corporation is a for-profit
corporate entity with one significant difference from a traditional corporation: It has a legally
binding mandate to positively impact society and the environment, in addition to making a
profit. A B corporation’s board of directors makes the same decisions as leaders in a tradi-
tional corporation but goes one step further by considering the impact that decisions have on
society and the environment. According to the B Corporation (2016), about 1,600 B corpora-
tions exist in 43 different countries.

An example of a certified B corporation is Patagonia, the outdoor clothing manufacturer. The
corporate website describes in detail how it tries to be different from other companies:

We learned how to make fleece jackets from recycled plastic bottles and then
how to make fleece jackets from fleece jackets. We examined our use of paper
in catalogs, the sources of our electricity, the amount of oil we consumed driv-
ing to work. We continued to support employees with medical insurance,
maternity and paternity leave, subsidized child-care and paid internships
with non-profit environmental groups. As we have for many years, we gave
one percent of sales to grassroots activists. This one percent commitment
isn’t typical philanthropy. Rather, it’s part of the cost of doing business, part
of our effort to balance (however imperfectly) the impact we have on natural
systems—and to protect the world on which our business, employees, and
customers rely. (Patagonia, n.d.)

Benefit corporations expand directors’ duties to include consideration of nonfinancial and
social interests. It is often hard to assess the actual impact of a B corporation on the commu-
nity, environment, or other social environment. In cases where firms are not ready to become
a B corporation, there is also the option to become B certified. Such certification is a way
for standard corporations to signal they are on the move toward social responsibility and
sustainability.

Chapter Summary
This chapter investigated those stakeholders who are closest to a firm, such as employees,
and those who are immediately and directly connected, such as suppliers and investors. It
examined the differences between shareholders, employees, and suppliers in terms of vest-
ing, motivations, and opportunities for increased social responsibility and sustainability.
Each of the discussions built the foundation for an increased understanding of why business
runs as it does today, as well as how business norms and practices can improve and innovate
toward a more responsible and sustainable future. Upcoming chapters further illustrate how
different stakeholders relate, behave, and innovate.

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Chapter Summary

Posttest
1. All of the following are ways in which people can be vested in a corporation EXCEPT

as a(n) .
a. employee
b. supplier
c. investor
d. regulatory agency member

2. According to the text, what is another reason—aside from financial considerations—
that individuals might invest in a company?
a. believing in its mission
b. faith in its employees
c. desire to increase their personal reputation
d. personal advisors suggest the investment

3. Frank works for a company where he receives health insurance and other benefits,
but he does not track his hours. What kind of employee is Frank?
a. casual
b. part-time
c. salary
d. hourly

4. One of the most important workers’ rights, as acknowledged by international accords,
is the right to a .
a. better salary
b. safe work environment
c. clear set of work instructions
d. fair and living wage

5. All of the following are examples of a supplier EXCEPT .
a. a transportation company that trucks goods from factories to distribution centers
b. a factory that makes circuit boards for computers
c. a freelance graphic designer
d. a customer of a company that sells computers for home use

6. According to the text, a domestic importer (for a U.S. company) is someone who
.

a. supplies a company with goods that come from inside the United States
b. moves products from a different country to inside the United States
c. sells products from the United States to other countries
d. moves products from the United States to other countries

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Chapter Summary

7. One of the most important functions of a board of directors is to .
a. audit the company
b. endorse day-to-day decisions
c. approve all promotions
d. review marketing plans

8. An institutional investor is:
a. An investor who blocks others from owning shares of the corporation.
b. An investor who controls a majority share of the corporation.
c. A mutual fund, pension fund or insurance company that purchases corporate

shares.
d. An individual who invests in institutions.

9. A corporate board of a publicly traded company has a single important interest, that
is to:
a. Look after shareholder interests.
b. Manage day to day operations of the institution.
c. Keep the public informed about corporate functions.
d. Keep corporate secrets

10. B corporations are different from traditional C corporations in that .
a. they are not-for-profit
b. they are taxed differently
c. they take on social and environmental causes
d. their investors are more aggressive with their funds

Answers: 1(d); 2(a); 3(c); 4(b); 5(d); 6(b); 7(a); 8(c); 9(a); 10(c)

Critical-Thinking Questions
1. What is the difference between an employee and a shareholder? Why has the line

blurred?
2. What are the advantages and disadvantages of an ESOP?
3. Why are whistle-blowers frequently punished for such potentially positive actions?

What are additional steps government and companies can take to prevent whistle-
blowers from being punished?

4. What rights do shareholders have to control administrative action in a corporation?
5. Why should corporations maintain good relationships with suppliers?
6. If a person uses substances such as drugs or alcohol that impact work performance,

does the employer have the right to hold the person accountable? If drug use impacts
employee performance, what is the employer’s obligation to help the employee over-
come the disease of addiction? What do you think is the firm’s obligation to protect
investors and other employees from potential safety hazards posed by their employ-
ees’ choices?

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Chapter Summary

7. If you were building a stock portfolio that was socially active, in which kinds of stocks
would you actively invest? Which kinds of stocks would you avoid? Explain your
reasoning.

Additional Resources
For more information on the size and composition of the socially responsible investing mar-
ket, visit: http://www.ussif.org/sribasics

Additional information on the Family and Medical Leave Act can be found here:
https://www.dol.gov/whd/fmla/

Additional information on the Employee Retirement Income Security Act can be found here:
https://www.dol.gov/general/topic/health-plans/erisa

Additional information on the Federal Employees’ Compensation Act can be found here:
https://www.dol.gov/owcp/regs/compliance/ca_feca.htm

Answers and Rejoinders to Chapter Pretest
1. False. Just because suppliers are external does not mean they do not have an interest

in the corporation. For example, if the company goes bankrupt, the supplier may not
get paid and additionally will lose a source of revenue.

2. True. Employee stock ownership plans give employees an investment in the company,
which is one reason researchers think employees who have them are more engaged.

3. False. Like other stakeholders, suppliers often look at which company has the most
compelling product or vision, in addition to taking price into account.

4. False. Employee stock ownership plans and pension plans often mean employees are
also investors in a company.

5. False. B corporations have a legally binding mandate to have a positive impact on
society and the environment.

Rejoinders to Posttest
1. A member of a regulatory agency should be unbiased and not have a vested interest in

a corporation.
2. Believing in a company’s mission might lead someone to invest in that company.
3. Salaried employees rarely track their hours and generally receive benefits such as

health insurance and paid leave.
4. The right to a safe work environment is fundamental and internationally recognized

and is protected by organizations such as the ILO and OSHA.
5. The customer who bought the computer is not a supplier, as he or she will most likely

not turn around and sell the computer to anyone else.
6. A domestic importer is someone who charges a service fee to move products out of

one country and into another.

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Chapter Summary

7. Auditing—critically examining a company’s financial well-being—is the single most
important function of a board of directors.

8. An institutional investor is an institution, like a mutual fund, insurance company, pen-
sion, or university endowment that invests on behalf of an institution.

9. The major and most important function of a corporate board is to look after share-
holder interests. It selects and advises corporate leadership with this goal in mind.

10. B corporations are socially minded and do business to make a profit and make a
difference.

Key Terms
benefit corporation (B corporation) An
organization that is for-profit but has legally
protected social and environmental goals.

business-to-business Sales that take place
between two businesses.

corporate governance Both the structure
of a corporation and the act of oversight and
control.

employee stock ownership plan (ESOP) 
A program that compensates employees in
the form of corporate stock and gives them
a voice in governance according to their
proportion of ownership.

insider trading Illegal stock trading moti-
vated by confidential information.

investors People who contribute money or
other items of value to a corporation.

Securities and Exchange Commission
(SEC) The government body that regulates
the acquisition and sale of investments such
as corporate stocks.

shareholder A strategy by which share-
holders can influence the decisions of corpo-
rate boards and other leaders of firms.

shareholder activism A strategy by which
shareholders can influence the decisions of
corporate boards and other leaders of firms.

socially responsible investing (SRI) The
act of choosing investments based on envi-
ronmental or social issues; often refers to
screening out some types of firms while
purposefully selecting others.

supplier A company that sells specific
parts, services, or raw materials to a
corporation.

vested interest Having a stake or involve-
ment in a firm, especially of a financial
nature.

vesting The legal right to a future benefit.

whistle-blowing The act of reporting illegal
or unethical behavior.

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6 The Corporation as Steward

Hxdyl/iStock/Thinkstock

Learning Objectives

After reading this chapter, you should be able to:

1. Compare and contrast the responsibilities of fiduciaries and corporate stewards.

2. Assess the impact on the environment and how a life cycle assessment can identify a product’s,
process’s, or service’s true cost to society.

3. Describe government regulatory agencies in the United States, the European Union, and the global
environmental movement.

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Section 6.1Corporate Fiduciary Stewardship

Pretest Questions

1. A fiduciary is another term for owner. T/F
2. Unit process data only considers the economic cost of production. T/F
3. Yellowstone National Park was created during the Industrial Revolution. T/F

Answers can be found at the end of the chapter.

Introduction
In this chapter, we examine the notion of financial and nonfinancial stewardship and examine
how the corporation can be a steward of people, profits, and the environment while managing
and even repairing environmental impact and damage. Firms interact with (and sometimes
extract from and pollute) the natural environment in multiple ways. Buildings use wood and
metal from forests and mines; companies require electricity (from coal, wind, solar, nuclear,
or other sources of energy); and computers use components from mines and fabrication
plants. Firm employees who drive to work use energy and likely create pollution in the pro-
cess. Manufacturing companies use natural and human-made inputs to create new products
for sale.

This chapter examines the relationship between the natural environment and the corpora-
tion. It addresses the environmental issues introduced in Chapter 5 and explores the true
social, environmental, and financial cost of certain corporate activities. Part of addressing
how companies relate to the environment includes discussing how they comply with legal
regulations, best practices prescribed by nongovernmental agencies, and international orga-
nizations (such as the United Nations). This chapter describes analytical tools that allow peo-
ple to identify risks, rewards, and impacts related to creating, using, and disposing products
and services. These tools also provide data for companies that want to create less damag-
ing or more restorative products. The discussion then turns to communitarianism, the green
movement, and the formation of environmental regulatory agencies in the United States and
European Union. It closes with a short discussion of how strategic concerns about risk man-
agement and human welfare issues related to water rights and water supplies may dominate
corporate conversations going forward.

6.1 Corporate Fiduciary Stewardship
Building on the environmental issues described in Chapter 5, this chapter examines the role
and responsibilities of a corporate leader. Central to this discussion is a pressing dilemma
of conflicting incentives that leaders in most publicly held corporations face. By definition,
a publicly held corporation has multiple partial owners who likely invested to gain a maxi-
mum return on their investment. Return on investment (ROI) is a tangible, objective measure
of an investment’s quality. ROI measures the amount of return relative to cost. To calculate
ROI, divide the return or benefit of an investment by its cost. The result is a ratio that allows
investors to compare different types of opportunities so they can evaluate the efficiency and

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Section 6.1Corporate Fiduciary Stewardship

effectiveness of each choice and select the most profitable (or otherwise ideal) option. Most
publicly held corporations are expected to deliver a high ROI; otherwise, investors will take
their money elsewhere. By law, corporate leaders in public firms have a legal responsibility to
provide a return on investment in both the short and long term. This means corporate leaders
are required to manage trade-offs. Specifically, leaders of public firms manage the trade-off
between protecting and restoring the environment (which can have costs that reduce ROI in
the short term) and using the environment with less care in order to improve ROI for owners
in the near term.

A fiduciary refers to a person who holds a legal relationship of trust with one or more par-
ties (such as shareholders). Typically, a corporate fiduciary prudently takes care of money or
other assets. Corporate leaders by default become fiduciaries, or people with a special duty to
owners/shareholders to protect and keep assets safe but also efficiently and effectively use
assets. By law, a corporate leader cannot profit at the expense of corporate shareholders; he
or she can also be fired for not managing funds to maximize profits. In other words, leaders
are morally and legally bound to seek profit on behalf of owners (Inc., n.d.). Thus, fiducia-
ries are stewards, or caretakers, of the financial side of business. However, seeking profit for
shareholders is not the only aspect of the complex notion of stewardship.

Peter Block is a thought leader in the world of business who spent the past 40 years advocat-
ing for an expanded notion of corporate stewardship; one that goes beyond fiduciary con-
cerns. Rather than just representing the interests of shareholders, Block (2013) advocates
that corporations should adopt a stewardship model of management whereby they treat
people and natural resources as assets to be cared for, nurtured, preserved, and respected.
Stewardship commonly refers to the responsible care and management of an asset over time
that allows for sustainability and growth. Some argue that stewards are caretakers who bal-
ance all interests in the hopes of sustaining the life and value of an asset (Inc., n.d.). For Block,
stewardship is a mind-set that changes the fundamental way corporate managers and leaders
behave. Block suggests that not only are managers and leaders stewards of what happens
within the corporation, they are also stewards of the corporation’s social and environmental
impacts.

Block (2013) says that corporate leaders are responsible for ethical communication and for
providing a quality good or service. He challenges corporate leaders to tend to environmen-
tal issues while simultaneously being fiduciaries of the financial bottom line. Block makes a
compelling argument that most corporations act in immediate self-interest and do not have
the capacity to balance long-term environmental needs with demands for short-term profit.
Stewardship involves listening and weighing multiple interests, including long-term financial,
social, and environmental interests, in addition to short-term financial ones.

Religious, social, and environmental movements have long advocated the notion of steward-
ship over resources, which suggests that human and natural resources have intrinsic and
long-term value and thus should be viewed with a long-term mind-set. But Block’s version of
environmental stewardship suggests going one step further—to restore environments. Such
restorative behaviors include removing trash, planting trees, leaving nature as you found it,
and actively caring for people and places. Stewards have a wide range of choices in how to
act and may often feel squeezed between the short-term wants of people and the longer term
needs of future generations and place or the environment.

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Section 6.1Corporate Fiduciary Stewardship

According to Block (2013), good stewardship often means choosing service over self-interest
and creating long-term value over short-term gain. He suggests that stewardship can protect
the earth from harm by making people accountable for the outcomes of an act or institution,
without forcing, controlling, or taking unwanted charge of others.

In other words, good corporate stewards commit to the long-term well-being of their region,
society, and environment. They also recognize the interdependencies between four spheres:

1. Economy
2. Livable community
3. Social inclusion
4. Governance

Regarding economy, a good steward attempts to take into account financial factors previously
discussed, such as shareholder investments, expectations, and profits. But these interests can
best be sustained within a livable community, one that is capable of providing well-trained
and empowered employees who are able to lead healthy and productive lives. This means that
good stewards attempt to practice inclusion by involving all stakeholders in communication,
and they practice, submit to, and attempt to exemplify appropriate governance.

In order to embody this view, good stewards consider and work across boundaries of juris-
diction, sector, and discipline to connect these four spheres and create opportunity for the
region.

It should be noted that people who are not necessarily corporate leaders are also considered
stewards. For example, educators and students exercise important stewardship over society,
the environment, and future generations when they study the world’s various interconnec-
tions. Society also entrusts politicians and civil servants to be stewards of regions, resources,
and people’s well-being. Citizens can remove these privileges (by vote or impeachment) if
government leaders do not practice stewardship. Owners can also remove corporate stew-
ards (managers) if they are not acting in the corporation’s best interests.

In some way, we all have stewardship roles. To be sure, corporate leaders have macro stew-
ardship responsibilities, but employees at all levels are accountable for many of the same
issues. People who work for firms come face-to-face with stewardship issues if they waste
resources, are asked to dispose of toxic waste inappropriately, take safety shortcuts, or lie on
a financial report. Stewardship is a shared responsibility. To better understand our own stew-
ardship responsibilities, it is critical to discuss the concepts of ownership and responsibility.

Types of Ownership and Responsibility
There are many different conceptualizations of ownership, and different kinds of owners feel
different levels of stewardship vis-à-vis the organization. The concept of private and transfer-
able ownership lies at the core of most functioning capitalist societies. People in functioning
capitalist societies typically understand that a person or entity who owns something can
transfer that property to another person through a sale or through inheritance. A person who
owns a piece of property (or a company) also has a stewardship over that property or firm;

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Section 6.1Corporate Fiduciary Stewardship

such stewardship can be formally trans-
ferred to another person. Essentially, own-
ership carries with it the opportunity to be
a steward.

In a totalitarian state, ownership of private
property is disallowed or carefully con-
trolled—this makes it harder to be an effec-
tive steward because owners usually have
more power than other stakeholders. In
Communist states, such as the former Soviet
Union and contemporary North Korea, the
concept of ownership is totalitarian, and
the state owns most businesses and other
factors of production. In contrast, the United States and European democracies conceive of
ownership as a state in which assets can be held privately or by different government entities,
including on national, state, and local levels. For example, governments may own transporta-
tion systems, such as Amtrak in the United States or British Rail in the United Kingdom. Many
of the older European airlines, such as Air France, KLM, and Swissair, began as government-
owned businesses. They have since been privatized or are semiprivate, which means they are
jointly owned by government entities and private companies.

Partial ownership creates stewardship and legal challenges; it is difficult to determine who
is responsible for performance when both shareholders and elected governments own part
of a corporation. This state of affairs is further complicated when an owner needs to be held
responsible by a court of law. When legal entities hold someone responsible for environmen-
tal damage, for example, it is difficult to prosecute or defend owners when the owner is the
same government that manages the regulatory agency.

Extending Ownership and Responsibility
When a corporate stakeholder sees a poorly calculated decision or one that has a negative
environmental impact, it may not be easy for him or her to signal concern; nor are such warn-
ings necessarily welcomed. It is clearly documented, for example, that engineers from the
Morton Thiokol corporation foresaw the failure of the space shuttle Challenger and tried
unsuccessfully to block its launch (Atkinson, 2012). When the Challenger exploded on Janu-
ary 28, 1986, all seven astronauts on board were killed.

The first person to convincingly sound the alarm about social and environmental concerns
(also known as a whistle-blower) serves as an early warning system for the larger commu-
nity. While many people think of themselves in the role of steward, many others believe they
are powerless to change systems and organizations. However, this is not necessarily true, as
many important voices have pointed out. Among them is former Czech Republic president
Vaclav Havel, who was a political organizer during the Soviet occupation of his country dur-
ing the 1980s. In 1985 he wrote a compelling essay about the powers of the seemingly weak.
In it, Havel (1985) argues that even those in the most oppressive situations have power and
responsibility to change the system for the better. Similarly, Margaret Wheatley (1996, 2003),

Frank Duenzl/picture-alliance/dpa/AP Images
Amtrak is an example of state ownership.

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Section 6.2The Cost of Failed Stewardship

a thought leader in the world of business and an expert on complexity theory and leadership,
believes that stewardship resides in everyone, regardless of the social and leadership envi-
ronment in which they live.

This stance illustrates how some people, such as Wheatley, consider individual workers and
actors to be quite powerful. Such a mind-set suggests that one need not wait to have a leader-
ship position or be deeply experienced and highly credible to guide an organization to sus-
tainability. Everyone has the capacity to be a good steward and advance the interests of the
organization and the greater good.

How can stewards at all levels of an organization take appropriate stances on critical con-
cerns? By respecting, encouraging, and considering multiple voices.

Extending the ideas of Havel and Wheatley, Max De Pree, the longtime leader of the Her-
man Miller corporation (manufacturers of office furniture), publicly fostered the idea of an
inclusive corporation, or one in which all voices are heard and given credence. He wanted
to create a caring organization that was also financially successful. Because of that belief, he
opposed business ideas that only benefited senior management. He suggested that good lead-
ers and stewards are open to communication. But most of all, he was known for talking and
listening to anyone and considering and enacting ideas from all levels of the company (De
Pree, 1987). Unlike Wheatley and Block, who are consultants and idea leaders, De Pree was a
manager and corporate actor. His ideas focused less on what a steward is and more on what
he or she does.

6.2 The Cost of Failed Stewardship
Up to this point, stewardship has been described as both a mind-set and a set of behaviors
that can be distributed or enacted from inside or outside an organization. Equally important
to cover are stewardship failures; indeed, examining failures creates another way to motivate
action. Most instances of failed corporate stewardship go far beyond harming financial stake-
holders. Such failures impact the social community, the environment, employees, the legal
system, and the banking system (Clarke, 2004). For example, the potential failure of the U.S.
auto industry in the 2008 recession triggered Congress to offer massive financial aid to top
manufacturing companies. The subsequent financial “bailout” was justified for a variety of
reasons, including to preserve jobs and national security. However, the same bailout cost tax-
payers; cost the firms in reputational capital; and cost citizens and investors stress, in terms
of uncertainty and fear.

What are the additional costs when stewardship fails? These can be seen in the blunder by
Atlas Minerals, a now closed industrial site near the entrance of the Arches National Park in
Moab, Utah. Driven by a demanding client and a perceived threat, members of management
did not consider the longer term environmental impacts when they decided how to mine and
store uranium. Atlas Minerals was not considering sustainability, which involves meeting the
needs of the current generation without compromising the needs of future ones.

Arches National Park is a tourist destination for visitors from all over the world; they come
to see beautiful red rocks that have been hollowed by wind erosion. But in contrast to these

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Section 6.2The Cost of Failed Stewardship

natural wonders sits Atlas Minerals. When Atlas operated between 1960 and 1990, it stored
large piles of tailings, or leftovers from the extraction process from the region’s uranium
mines, at the edge of the Colorado River. The Atlas Minerals mine and industrial site primar-
ily provided fuel for the nation’s nuclear reactors and helped create fuel for nuclear weapons
used to defend the United States. As the need for uranium dwindled, however, scientists and
the general public learned more about the toxicity of the uranium tailings. Not only was the
dust from the tailings contaminating the population near Moab, but water seeping through
the tailings was also flowing into the Colorado River, Lake Powell, and the Grand Canyon.
What was once thought of as an acceptable risk and normal by-product of manufacturing was
finally seen as an environmental disaster. With such discoveries and related changes, Atlas
Minerals entered Chapter 11 bankruptcy, and in so doing dodged liability for undertaking
a massive cleanup that cost many times more than the company was worth. Since then, the
DOE has taken over the site (Grand County Utah, 2016) and is now tasked with cleaning up
all such sites that contributed to pollution related to the creation of nuclear weapons (Yahoo!
Finance, 2016).

After the DOE assumed ownership of the land, it set up a trust to fund the site’s cleanup.
As of 2016, only 50% of the tailings had been removed. Trainloads of radioactive tailings
are continuously removed from the site—about 5,000 tons each week. The tailings are taken
approximately 40 miles away to a location considered less environmentally sensitive because
it is not at the edge of the Colorado River (Yahoo! Finance, 2016). The project will cost taxpay-
ers many times the amount that Atlas Minerals made in profit during its years in production.
In fairness, corporate leaders who in the 1950s endorsed the plan to build a uranium mill and
store tailings near the Colorado River did so with the approval of, and even encouragement
from, government agencies. They operated using the best science of the time, although there
were environmental engineers, local workers, and others who could see the folly of putting
a radioactive tailings pile so close to the Colorado River. However, their concerns were dis-
missed, ignored, or discounted.

For the sake of short-term cost savings and expediency, and due to a narrow definition of
impact, a river was polluted, the life expectancy of nearby humans and animals was reduced,
and the cost of conducting a massive cleanup was passed on to taxpayers. In contrast, cor-
porate leaders of today and the future, especially those who take a stewardship mind-set,
research the impacts of location, sourcing, and product ingredients on current and future
generations before making decisions.

If we agree with Havel, Wheatley, and De Pree, then most (but not all) of the blame goes to
those who own the corporation. The bad planning, failed science, poor execution, and bank-
ruptcy are not just the failure of corporate leaders, but also of regulatory agencies, govern-
ment, and even local citizens and employees. We all share in the blame for poor stewardship if
we are connected to a community. But as problems get larger and involve more stakeholders,
it becomes increasingly difficult to reach agreement and take collective action.

In addition, it may seem difficult to foresee the impacts of large-scale corporate activities
on future generations. However, several tools can help assess the environmental impact of
a product, process, plant, or any other activity in which an organization may engage. One is
the life cycle assessment (LCA), which provides a way to measure a corporation’s environ-
mental impact and includes energy costs and material usage information. An LCA describes
the process of evaluating the social and environmental implications associated with creating,

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Section 6.2The Cost of Failed Stewardship

consuming, and disposing of a product, process, or activity (American Center for Life Cycle
Assessment, 2016).

The LCA allows corporations to examine waste, reduce costs, and innovate products and ser-
vices. In other words, it can lead to both short-term and long-term fiscal and environmental
benefits if firms utilize its data to innovate.

It is often assumed that LCA projections are approximate and should be adjusted when more
exact information becomes available. However, leaders should not avoid LCAs or leave them
half finished due to lack of perfect information—instead, leaders should make solid assump-
tions, state what these are, and continue with the LCA process.

LCAs can be extensive, comprehensive, and therefore costly, depending on their level of detail
and accuracy. But they can also be enlightening, even in their simpler and less expensive forms.
Whether extensive or simplistic, such analyses evaluate energy inputs, environmental emis-
sions, and the social implications of business operations. In contrast, the cost of not doing an
LCA can also be extensive, as seen in the Atlas Minerals case; it can result in firms mistreating
stakeholders, wasting resources, incurring internal expenses, or receiving bad publicity. Run-
ning an LCA would help managers identify and address weak spots and risky areas.

When managers do not assess impacts, they may fail to see risks as well as opportunities to
evolve products to mitigate environmental and social impacts. For example, after performing
an LCA, Levi Strauss & Company implemented changes to mitigate the environmental impact
of its jeans.

CSR and Sustainability in Action: Levi Strauss & Company

An LCA done by Levi Strauss & Company in 2016 showed that approximately 1,003
gallons of water are used to make a single pair of jeans. Producing the material accounts
for 680 gallons, and the washing and cleaning of machines and manufacturing facilities
account for the rest. Almost 70 pounds of carbon dioxide are produced to create each
pair of jeans, mostly during fabric production. The LCA, which follows the product from
birth to end of use, also found that Americans wash jeans, on average, after wearing
them 2 times. Europeans wear them 2.5 times, while Chinese wear them 4 times before
washing. The LCA suggested that if consumers wear their jeans 10 times before washing
them, they could reduce the environmental impact of jeans by 77%. Using cold water
and air-drying them would further reduce jeans’ environmental footprint (Levi Strauss &
Co., 2016).

Using these findings, Levi Strauss implemented the Project WET Foundation to train
employees to save water and educate others on ways to conserve water. The company
also used the LCA results to partner with Goodwill and implement a special tag on
Levi’s products encouraging consumers to consider the planet before washing the item.
The tag also suggested which washing settings to use to reduce environmental impact
and encouraged those who buy jeans to donate clothes rather than throwing them out.
Because of the LCA findings, Levi Strauss found innovative ways to reduce its product’s
environmental impact and to encourage others to become stewards of the environment.

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Section 6.2The Cost of Failed Stewardship

The LCA Process
While there are several different approaches to undertaking an LCA, the cradle-to-grave
assessment (the approach used by Levi Strauss) offers comprehensive data and is most accu-
rate, because it looks at the complete process of making a product. Cradle-to-grave is a term
that refers to the time from initial manufacture or “birth” of a product or service to its dis-
posal or “death.” The cradle period for a car, for example, involves the extraction of metals,
chemicals, and minerals for car parts and electronic components, and the extraction of petro-
leum for plastics and the gasoline or electricity that will power the car. Performing an LCA
for a car also means considering its end-of-life destination, which for many cars is either a
junkyard, a landfill, or a recycling facility, where some or all of the parts are extracted and
reused. As another example, consider the cradle-to-grave LCA of a newspaper. Harvesting and
grounding trees into pulp is an energy-intensive process. Paper is produced from the pulp;
the paper is shipped to suppliers and then sent on to printing facilities that print ink on it. The
same facilities fold and prepare the paper to ship to vendors. The paper is then delivered to
homes and offices in cars and trucks that produce pollution and are powered by fossil fuels. At
this point, the paper has left the cradle stage and is now moving through the life stage, where
it is consumed (read). It is then disposed of and heads toward the grave stage. Newspapers
(those that still exist in this digital age) can be burned, used as wrapping or protective cover,
be recycled, or thrown away to decompose in landfills. The impacts of each grave can also be
analyzed. If papers are recycled, one possible outcome is to create cellulose insulation, which
can be installed in homes and offices. It is also possible to calculate the fossil fuel savings
from the insulation, along with the effects of most other steps in the life cycle. Conversely, if
the papers are burned, then the release of carbon can also be measured and assigned to the
product LCA measurement tally.

When recycling costs and benefits enter the picture, some people suggest that the LCA
becomes a cradle-to-cradle analysis. Cradle-to-cradle was discussed in Chapter 5.3; the term
was coined by design advocate Bill McDonough, who suggested that when the output of one
cycle can be the input for another cycle, then materials need never enter landfill or junkyard
“graves.” When the process of making and using a newspaper ends with landfill expenses and
impacts, then the analysis is a cradle-to-grave analysis. If, however, the analysis includes data
on recycling and finding alternative uses for the product, then it begins to resemble a cradle-
to-cradle analysis (McDonough & Braungart, 1998).

Note that there is an entire industry of firms and practitioners interested in conducting LCAs.
As these needs have increased, so has the need to standardize and develop processes that
enable comparisons and ensure accuracy. There are widely accepted standards in place that
are managed by the International Organization for Standardization (ISO). Specifically, stan-
dards such as ISO 14040 and 14044 explain how to conduct LCAs. Both sets of standards
recommend that the process include four distinct phases (as illustrated in Figure 6.1). These
phases, or steps, are interdependent, which adds to the complexity of the analysis. Further
complicating matters is the back-and-forth nature of this process, where, for example, changes
in goal and scope impact inventory analysis, and changes in inventory analysis impact goal
and scope.

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Section 6.2The Cost of Failed Stewardship

Figure 6.1: Major components of a life cycle assessment

f06_01

InterpretationInventory
Analysis

Goal and Scope
De�nition

Impact
Assessment

Phase 1: Goal and Scope
An LCA begins with the statement of scope and a goal for the study. The statement establishes
the context for the study and explains what added value to expect from the project—it gives
the project a framework, purpose, and context. Some managers might want to do an LCA to
understand carbon-related issues, while others might want to understand labor, landfill, or
water-use concerns. Thus, all parties need to agree on the scope and purpose of the LCA at
the outset. The goal is both general and specific. It is general because it lays out the study’s
boundaries. It is also specific because it includes the technical details that guide the subse-
quent work. The goal and scope statement describes the functional units being studied, the
system boundaries, the study’s system limitations, and the impact categories that have been
chosen. System boundaries comprise the limitations of the study, and the boundaries differ-
ent managers choose can vary from company to company or product to product. For instance,
in the Levi Strauss example, the company defined the “system” by looking only at production
of the 501 model of jeans, thus limiting the study to one style. That study’s impact categories
are also clear. Analysts looked at water usage and carbon footprint but did not look at other
impacts such as hazardous waste.

Phase 2: Inventory
The next phase of an LCA involves creating an inventory of all relevant inputs, processes,
and outputs related to a good or service. For example, an LCA can apply to a cup of coffee, a
sweater, or a consulting assignment. Inputs may include energy, water, materials, and labor.
They might also include required plants, factories, and equipment, including land. This part

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Section 6.2The Cost of Failed Stewardship

of the study examines all of the things that go into making a product (or providing a service or
creating a process). The inventory also includes outputs, and analyzing these involves answer-
ing questions such as, “What specific products or services are provided?” “What waste is cre-
ated?” “What pollution is created?” “What secondary benefits—such as recycled newspapers
becoming insulation—are created?” “What is the value added when this product comes into
existence?” All of these data are needed to create an illustrative flowchart of the entire pro-
duction process and the relevant supply chain.

If done correctly, inventory analysis yields a complete list of all activities within the system
boundary, including the supply chain, the inputs, and the outputs. The inventory analysis also
provides a complete map of all the activities in the production system boundary, giving a clear
picture of what data can be presented to analyze the production and distribution system. The
LCA shows how inventory flows into the system, how it is changed, how it leaves the produc-
tion system, and what value is added (or destroyed) along the way.

Phase 3: Impact Studies
An impact study searches out data to quantify the expense and impact of each step in the LCA.
This phase of the LCA is designed to evaluate the significance of social and environmental
impacts based on the system flow (how a product or service moves through its life cycle). If
you are going to complete an LCA, begin with the following questions:

• What are the impact categories (water usage, carbon footprint, landfill space and cost,
mining activities, human toll of mining, fossil fuel use, and so on)?

• What model will you use to measure impact (cradle-to-cradle or cradle-to-grave)?
• How will you classify each stage of production? Where and how are the inventory

parameters sorted and assigned to specific impact categories?
• What is the impact measurement? Will it be in dollars, carbon output or usage, or

some other unit of measure?
• What is the overall impact category total? What assumptions are included in that

number?

Data validity is an ongoing concern for LCAs because processes change regularly, as does
the environment. Data must be accurate and current. Common metrics must be used so that
data between systems is fair, accurate, and comparable. There are two types of LCA data. The
first is unit process data, which is determined from direct surveys of companies or plants that
produce the product of interest, and is carried out at a unit process level and defined by the
study’s system boundaries. Unit process data is the actual cost of producing a single unit—not
just its monetary cost, but its cost in gallons of water or carbon consumption, for example.
The second type of data is environmental input–output data, which is based on national eco-
nomic input–output data rather than data directly from company sources and instruments.
Sometimes an analyst will need to use mixed sources; if this is the case, it must be stated in
the report. Of course, it is ideal to gather all data from the same type of source; however, at
times it is better to use mixed-source data than to ignore or omit data.

Phase 4: Interpretation
The interpretation stage of the LCA is important and represents the most subjective stage.
In this stage, the analyst, or team of analysts, assess and decide whether some impacts are

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Section 6.2The Cost of Failed Stewardship

“good” or “bad,” value adding or wasteful, and then determine how to compare such results to
baseline or competitive data. In this step, analysts return to the study’s goals and consider the
intended users of the results. They then make reporting and summary decisions accordingly.
As with the entire process, the best way to protect the integrity of the process and its results
is to state assumptions in footnotes or the body of the report. Consumers of the report can
decide for themselves whether they want to rerun the report (or parts of it) based on differ-
ent assumptions, or whether the assumptions hold as more data become available.

The Value of the LCA
With sustainability and social responsibility as goals, stakeholders are looking for ways to
understand how our collective activity impacts the course of humans and nature. The reports
and assessments relate to CSR because they represent concrete ways to analyze the actual
resource-level impacts of a company or a product. LCAs offer those interested in CSR a tool to
analyze, compare, investigate, and measure corporate behaviors. LCA reports conducted over
time and based on raw data also allow those interested in CSR the opportunity to analyze
long-term improvement or decline in a more objective manner than is offered by assessments
based on public opinion. An LCA is an excellent conceptual tool that is used both nationally
and internationally to study the impact human systems have on natural systems—in this way,
an LCA is both an environmental and social CSR tool. An LCA offers a narrow view of how one
set of activities impacts one part of nature. Organizations such as the American Center for Life
Cycle Assessment have created larger databases that offer a more complete picture of the life
cycle costs of various processes. As people continue to conduct LCAs and contribute to data-
bases, the impact, trade-offs, and valid (or invalid) assumptions will grow increasingly clear
and useful for CSR and sustainability practitioners.

The value of pursuing an LCA lies in the fact that considering linkages and impacts enables
managers to see connections and possible risks in time to take action. An LCA provides stake-
holders with data on how some aspects of the company impact the environment. It also pro-
vides government and regulatory agencies with data they can use to create or avoid legisla-
tion. An LCA can reveal where firms can expect problems and reveal places to focus on in
terms of innovation, resiliency, or alternatives. For instance, in the Levi Strauss example, the
manufacturer recommends washing jeans less often to reduce water usage and thus mini-
mize the product’s carbon footprint.

As another example, consider an LCA that Procter & Gamble (P&G) scientists performed on
Tide laundry detergent. In so doing, they learned that the greatest impact on the environment
was not from the manufacturing process or the product’s chemicals. It was also not from
shipping and disposing heavy plastic bottles and paper boxes around the country. Rather,
the heaviest environmental impact came from customers using hot water to use the product.
Depending on the cost of fuel and energy, the environmental impact of using electricity or
natural gas to heat water can be quite high. P&G could have given up on the goal of steward-
ship and sustainability by pointing out that the greatest impact of laundry soap came from
user behaviors, which is not under the company’s control. Instead, however, P&G chose a
more innovative path. The company reformulated the detergent to be effective in cold water
and found that doing so increased market share and profits while decreasing the product’s
environmental impact (Procter & Gamble, 2008).

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Section 6.2The Cost of Failed Stewardship

The example of P&G working with LCA data
to create a better and less damaging prod-
uct reflects how LCA relates to resiliency
and social responsibility.

Resiliency
The concept of resiliency is typically treated
as an individual quality. It is often regarded
as a personal and psychological characteris-
tic of a strong person who can “bounce back”
after setbacks and difficulties. But resiliency
is also an important characteristic of strong
communities and of sustainable systems.

In nature, resiliency describes an ecosys-
tem’s capacity to absorb a disturbance and
still maintain its basic structure and viability. The system theory makes resiliency more dif-
ficult to attain because it suggests that in an open system we cannot control nor see all of the
aspects that impact an area of stewardship. That said, resiliency remains a valuable charac-
teristic in an open system because a more resilient (open) system is more able to adapt to
change without catastrophic impact. For example, in 1988 a wildfire burned 36% of the trees
in the Yellowstone National Park ecosystem. U.S. Forest Service policy demanded that workers
quickly put out the fires, and news coverage suggested that Yellowstone might be destroyed.
However, fire is part of any forest’s life cycle, and thus wildfires are part of its longer term and
resiliency story. The resilient forest sprouted millions of new trees in the next season (trees
that could only sprout under intense heat), and 25 years later those trees form the habitat for
many resurging species of birds and small animals (Schullery & Despain, 1989).

Just as maintaining a forest requires accepting natural periods of stress (wildfires) that result
in a stronger and more resilient ecosystem, humans and organizations can also build resil-
iency. In building a sustainable organization that has a strong relationship with social, gov-
ernmental, and environmental partners, resiliency is the desired characteristic. One of the
most extensive discussions of resiliency in the history of mankind pertains to global warming.
The notion of sustainability combined with the idea of resilience forces a discussion about
how much our human systems, including corporations, governments, militaries, and agri-
cultural practices, can impact planetary ecological systems. The threat from global warm-
ing raises many questions, including, “How much of an assault on resources can our planet
take?” “What is the impact of human activity on global water and air temperatures, and thus
on climate, water levels, weather patterns and long-term survival?” “How much do human-
constructed systems impact natural ecosystems?” “How can policy makers, government, and
international organizations impact human behavior in order to reduce the footprint on the
natural environment?”

The answers to these questions are still under investigation, and exploring the available data
is outside the scope of this text. In terms of social responsibility and sustainability, current and
future leaders (and consumers) need to know that these questions matter at the highest lev-
els of management. The search for answers continues, but as data emerges, the implications

Danny Johnston/AP
After performing an LCA, Procter & Gamble
offered consumers cold-water laundry deter-
gent to help reduce the environmental impact
of heating water.

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Section 6.3The Cooperative Culture

vary for different industries. Thus, leaders must train themselves to ask the questions, request
the data, and analyze it to enable action—whether that means innovating (like P&G), taking
responsibility, ceasing or transferring activities (like Atlas Minerals) or cocreating solutions
with communities and stakeholders (like Levi Strauss).

Being resilient can also drive business opportunities. The Honest Company, the ecofriendly
consumer products manufacturer founded by actress and entrepreneur Jessica Alba, is val-
ued at $1.7 billion (Howell, 2015a). Alba suffered asthma-related allergies that afflicted her
in childhood, and she worried that her baby would suffer the same plight. She therefore
launched the Honest Company to create products free of toxic chemicals and artificial ingre-
dients. Alba has been on the cover of Vanity Fair as “Founder of the Year” and has been listed
by Forbes as one of “America’s Richest Self-Made Women” (her estimated net worth is $200
million; Howell, 2015a). This success shows how the quest for sustainable business and resil-
iency in both humans and corporations can be good for the environment, consumers, and the
firm. It also underscores how understanding and cultivating resiliency for both economic and
natural systems is one of the single most important questions—and sources of opportunity—
for upcoming generations. Alba wanted children to be healthy (a form of resilience), and she
wanted her firm to stand for health and sustainability.

Apply Your Knowledge: Perform an LCA

Draw a map that represents the LCA of a common product. Include all inputs, processes, and
outputs. Consider the outcomes of the LCA. What are some suggestions you could make to
reduce the product’s environmental impact?

6.3 The Cooperative Culture
There is at least one philosophical school that attempts to explain the relationship between
humans, their social systems, and nature—communitarianism. As the name implies, com-
munitarianism describes a philosophy that emphasizes community, or the association and
affiliation of entities at individual, social, and ecological levels. As a philosophy, communitari-
anism forces us to look at our relationship with others. It requires knowing how individual
behaviors affect others, including families, neighborhoods, communities, and countries.

Particularly when applied to corporations, a communitarian philosophy constitutes yet
another element of sustainability. In order to become stewards of sustainability, we must see
and understand our impact on others, the environment, and the government. One route to
creating a more sustainable world is for corporate actors to adopt the mind-set of communi-
tarianism. Communitarianism poses questions about how we relate to each other and makes
us inquisitive about the relationship between the firm and other people, groups, cultures,
and the environment. In the communitarian world, resiliency is achieved when individuals,
corporations, and other entities can absorb a disturbance and still maintain basic structure
and viability. In some ways, communitarian ideals sparked the green movement in the United
States and internationally.

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Section 6.3The Cooperative Culture

The Green Movement in America
The early environmental movement in the United States embodied many tenets from com-
munitarian ethics. Literary figures from the 19th century such as Ralph Waldo Emerson and
Henry David Thoreau often wrote about the value of wilderness, nature, and the environment
in laudatory and venerating terms. They suggested that these natural creations were gifts;
they were even a means by which humans could access the divine (Atkinson, 2000; Thoreau,
1995). These ideas were a form of practical communitarianism that emphasized resilience
and sustainability. Many people were influenced by these ideals, and thus it became popular
to believe that humans need nature for a variety of reasons. As these ideas took hold of the
national consciousness in the 19th century, the eastern United States was being rapidly domi-
nated by human consumption. The Industrial Revolution pushed nonagrarian businesses fur-
ther west, eliminating the wilderness. As a result of these and other influences, the United
States created the National Park Service to preserve and protect the natural environment.

For example, Yellowstone National Park was created in
1872 to preserve that unique ecosystem from the exploi-
tation underway in other parts of the West. Later, other
national parks, such as Yosemite, Grand Teton, and the
Grand Canyon, were created. Visionary leaders like John
Muir and Theodore Roosevelt were associated with this
movement. These people gave voice to the wilderness,
nature, trees, and the ecosystem. Treating nature and
green space as valuable and worth preserving for future
generations is a key hallmark of what is called the green
movement. A key goal of this movement is to preserve
parks, and other goals stem from that premise.

The green movement has not been without controversy.
There are some political groups that claim environmen-
talism is tied to a political party; others want to repudi-
ate it because of this very association. However, environ-
mentalism is an issue shared by multiple political parties
and people of different races, genders, and socioeco-
nomic status, and it has taken various forms over gen-
erations (Whittaker, Segura, & Bowler, 2005).

Whether environmental issues are politicized or not,
they affect many people at a deep and visceral level;
when people care deeply about preserving nature and
the environment, they often formally organize in favor of some kind of change (or against
change, in some cases). The next sections of this chapter look at organizations and activism
within communities at the local, national, and global levels.

Organizing in and for Local Communities
Communities usually face environmental issues that are unique to an area’s geographical and
ecological composition. While national and state governments seek to regulate corporations

Thinkstock/Stockbyte/Thinkstock
Establishing Yellowstone National
Park to preserve nature is an
example of the green movement’s
work.

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Section 6.3The Cooperative Culture

and mitigate impact on the environment, local communities in which businesses operate
often live with the consequences of those regulations (consider again the example of Atlas
Minerals). For example, environmental regulations may inhibit local economic growth, such
as when a protected species inhabits land that farmers traditionally cultivate or loggers desire
to harvest. Irresponsible behavior by local corporations may also negatively affect the local
population’s health, damage property values, and reduce the economic viability of a particu-
lar area. The Atlas Minerals example describes a major environmental problem at the Grand
Canyon, one of the most attractive tourist destinations in the United States. Local leaders
initially denied the problem and then tried to blame it on the corporation; eventually, they
were grateful that the federal government stepped in to mitigate the situation. However, such
intervention is not always possible or viable. Certainly, some environmental problems have
multiple causes and broader effects that require multisectoral (even international) commit-
ment to address.

The International Council for Local Environmental Initiatives
Many local governments have become frustrated by the inability of state and national gov-
ernments to quickly and appropriately address local environmental issues. One way to cope
with such frustration involves organizing and partnering with others in similar situations. In
1990 the International Council for Local Environmental Initiatives (ICLEI) was founded as
an international organization of local governments committed to sustainable environmental
practices, including sustainable community development. The membership focuses on edu-
cation and advocacy to encourage corporations to implement sustainable practices into their
corporate culture. Today more than 1,000 towns, cities, counties, and regions make up the
ICLEI’s growing membership (ICLEI, 2016).

The ICLEI advocates that local governments work through international performance-based,
results-oriented campaigns and programs, such as the LCA described earlier in this chapter.
Yet the ICLEI does not work directly with corporations. Instead, members network with and
support local governments in solving environmental problems through consulting and edu-
cation. In other words, the ICLEI encourages local governments to form collaborative rela-
tionships with corporations to mitigate the economic effects of government environmental
regulation while protecting the health of the environment and the population.

The ICLEI is an excellent example of how the environmental movement has promoted the
idea of thinking globally but acting locally. The existence of such an organization underscores
the importance of corporations having an environmentally themed dialogue with the commu-
nities in which they operate. Corporations that operate manufacturing plants and factories
leave the largest impact in the communities in which they operate. Ignoring these impacts
and the resulting behavior is no longer acceptable, nor is it advocated by corporate leaders
who are themselves often environmentalists (Heaps, 2010).

National Organizations and Activism
Environmental problems are often difficult to see without scientific investigation and espe-
cially difficult to address without support from industry, corporations, nonprofit advocacy
groups, and citizens in partnership. Most nations have empowered a government agency to

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Section 6.3The Cooperative Culture

oversee and enforce environmental regulations. While the strength of such agencies varies
from sovereignty to sovereignty, it is clear that with each passing generation, environmental
regulators are increasingly stronger advocates for environmental causes. In the United States
one such advocate is the Environmental Protection Agency, or EPA.

Environmental Protection Agency
The EPA was established in 1970 following a series of environmental problems in the United
States and in response to the federal government’s inability to regulate environmental
impacts. President Richard Nixon established the EPA as a regulatory body to enforce envi-
ronmental policy. In a message sent to the U.S. House of Representatives and Senate, Nixon
outlined that the EPA was established to develop and enforce environmental protection stan-
dards consistent with national goals. In addition, the EPA was to conduct research that was
both general and specific. For example, in the case of pollution, general research would inves-
tigate the adverse effects of pollution, while specific research would investigate the impact of
a specific polluter on a specific population in a specific city. Thus, the EPA is both an enforce-
ment agency and a research agency (EPA, 2016c).

The EPA’s current strategic plan includes five goals:

• Goal 1: Address climate change and improve air quality
• Goal 2: Protect America’s waters
• Goal 3: Clean up communities and advance sustainable development
• Goal 4: Ensure the safety of chemicals and preventing pollution
• Goal 5: Protect human health and the environment by enforcing laws and assuring

compliance (EPA, 2016c)

Note the difference between the EPA’s approach, which involves regulation, and the ICLEI’s
approach, which involves collaboration. The EPA has a long list of regulations for corpora-
tions and operates on the premise that compliance with legal regulations requires oversight,
fines, and sometimes enforced compliance. In contrast, the ICLEI approach is more in line
with the communitarian philosophy of working together to build resilient communities.

Both the ICLEI and the EPA have been the focus of criticism about the value and appropriate
limits of government regulation. Criticism has come from moderates and extremists, depend-
ing on the issue. While some have described the ICLEI as a toothless tiger, unable to enforce
anything, others have accused the EPA of mission creep and overreach. Criticism from the
National Review and similar entities suggests the EPA has strayed from its original mission
(Hildebrand, 1993). As one critic has put it:

Over most of its 40-year history, the EPA has strengthened environmen-
tal standards in a relatively incremental manner, allowing some measure of
balance between environmental and economic needs. Using this strategy,
the agency has effected much genuine environmental improvement. But for
today’s EPA, no economic impact is too onerous. The agency is issuing edicts
of unprecedented scope at breakneck speed, and with little justification and
few identified benefits (White, 2010, para. 5).

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Section 6.3The Cooperative Culture

An example of possible EPA overreach may be activities like the Partnership for Sustainable
Communities. This is a collaboration between the U.S. Department of Housing and Urban
Development, the U.S. Department of Transportation, and the EPA. The three agencies col-
laborate with the goal of supporting environmental justice and equitable development in
neighborhoods and regions. Some critics fear that three government agencies collaborating
will curtail private sector efforts to make a profit in the housing and real estate marketplace.
While the goals of such an effort might be noble, the application of policy and regulation
toward those goals might indeed be overly economically limiting to communities and corpo-
rations (EPA, 2016c).

While different stakeholders may disagree about the appropriate scope and reach of such
agencies, the fact remains that the agency’s mandates must be taken into account when man-
agers consider environmental and other CSR issues.

European Union Environmental Policy
Following the formation of the EPA in 1970, the European Economic Community began hold-
ing summit meetings in Paris that resulted in a declaration on environmental and consumer
protection. At the time, European nations were independent in terms of currency, regula-
tions, and lawmaking; as such, most were notorious for not working together despite the
relatively small size and close proximity of European nations. However, European countries
were also experiencing rapid expanse of industry and growing concern over the impact of
environmental pollution. Among the various countries of Europe, there were vastly different
standards for vehicle emissions, the lead content of gasoline, and the use of pesticides. In
addition, political movements such as the Green Party in Germany pointed out that pollution
does not stay within human-made borders, and some activists threatened political action if
one country’s pollution spread to another country without reparations or other compensa-
tory action (Johnson & Corcelle, 1989).

As a result, the EU inherited significant environmental regulation and enforcement abilities
from the constituent countries that had strong regulations when they were independent. The
EU is considered to have some of the most extensive environmental laws of any government.
For some, this fact indicates positive progress for CSR goals; for others, it makes the EU a less
appealing place to establish new businesses. The EU’s environmental policies are intertwined
with the international and national environmental policies in its member nations and have
had significant effects on its member states. The EU’s environmental legislation addresses
core issues that include acid rain, the ozone layer, air quality, noise pollution, waste, and
water pollution. The Institute for European Environmental Policy estimates the body of EU
environmental law amounts to well over 500 directives, regulations, and decisions (Jordan &
Adelle, 2012).

For example, the EU has taken dramatic steps to reduce waste in all member countries. This
includes regulating recycling, prohibiting the discharge of wastewater, and regulating pro-
duction processes so they do not produce waste. The Waste Framework Directive (WFD)
is a regulation passed by the EU in June 2008 that hopes to turn the EU into a recycling soci-
ety. One of the unique and compelling features of the WFD is the European Waste Hierarchy,
which classifies the waste production and disposal system as follows:

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Section 6.3The Cooperative Culture

Step 1. Prevention—preventing and reducing waste generation.
Step 2. Reuse and preparation for reuse—giving the products a second life before they

become waste.
Step 3. Recycle—any recovery operation by which waste materials are reprocessed into

products, materials or substances whether for the original or other purposes. It
includes composting and it does not include incineration.

Step 4. Recovery—some waste incineration (burning) ; ideally in a situation that works
to eliminate or replace less inefficient incinerators.

Step 5. Disposal—processes to dispose of waste including landfilling, incineration,
pyrolysis, gasification and other finalist solutions. (European Commission, 2016)

The European Waste Hierarchy suggests that prevention is the most important step because
it prevents waste in the first place. Therefore, this step investigates and helps determine
the market need for a product in order to ascertain whether it should be made and which
resources should be used in the process. The hierarchy then suggests that if the product is
made, the manufacturing processes should be lean and result in as little waste as possible.
The hierarchy further suggests that waste, once generated, should be reused or prepared for
reuse. If that is not obtainable, it should be recycled. However, some waste cannot be recycled
or reused, and so it is incinerated. This is defined as recovery. The least desirable step is the
fifth step in the hierarchy, which is to dispose of waste in a landfill (Johnson & Corcelle, 1989).

International Organizations and Nongovernmental Organizations
The previous sections described the creation of government regulatory bodies that enforce
environmental regulations. Before the creation of the ICLEI, the EPA, and the European envi-
ronmental regulations, the Sierra Club—formed in 1882—represented one of the first col-
lectives created explicitly to advocate for environmental preservation. The Sierra Club is an
example of a nongovernmental organization (NGO), which is an organization that is not
part of a government nor funded by governments, foundations, schools, or businesses. Since
the formation of the Sierra Club, other NGOs with similar focuses have emerged, and each
organization differs in the level of political and social extremism it espouses. Organizations
such as Earth First!, Greenpeace, the Audubon Society, and many others exert differential lev-
els of local and international influence.

Green Party
The world’s first political parties to adopt environmental platforms were the Tasmania Group
in Tasmania, Australia (1972), and the Values Party of New Zealand (1972). The Popular
Movement for the Environment, founded by the Green Party in Europe in 1972, has captured
voter attention since its inception (Bevan, 2001). The first national green party in Europe was
founded in Britain and called the Ecology Party, which later became formally known as the
Green Party. In India the Chipko movement, formed by Mohandas Gandhi, featured the act of
hugging trees to protest deforestation (which led to the term tree huggers). Peaceful methods
of protest and the slogan “ecology is permanent economy” were very influential in India and
elsewhere thereafter (Dann, 2011).

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Section 6.3The Cooperative Culture

This list of organizations indicates the wide geographic range of environmental issues and
emphasizes their long-standing historical and political roots. Contemporary leaders and con-
sumers can use this knowledge to jump-start conversations around the environment. As a
result, business leaders can become better informed about the contexts in which they make
decisions as they work for a more sustainable future.

Environmentalism and CSR
In 2015 a haze settled over the western part of the United States. It came from wildfires in
Asia, specifically Indonesia (Plait, 2015). Indeed, the United States routinely absorbs pollu-
tion from China; it has also experienced moderate increases in radioactivity following nuclear
weapons testing or nuclear reactor accidents, such as the one that followed a 2011 earth-
quake in Japan and a 1986 reactor meltdown in the former Soviet Union (Plait, 2015). Global
warming, the ozone layer, air pollution, and other large-scale environmental issues may cause
international social and military conflict in the future, as people come to realize that we are all
part of one global community. Such reports illustrate how pollution does not stop at national
borders.

However, it is most likely that future environmental conflict will not be centered on these
issues, but rather on the problem of water. The Organisation for Economic Co-operation and
Development (OECD) reports that at least 30 nations will be water scarce by 2025, up from 20
in 1990 (OECD, 2008). Eighteen of the 30 are in the Middle East and North Africa, including
Egypt, Israel, Somalia, Libya, and Yemen (OECD, 2008).

As an example of how and why water issues relate to food security and national security, con-
sider the fact that some political analysts see the conflict between Palestinians and Israelis
as partially a fight over water and water resources, as well as a cultural or religious war. Adel
Darwish, journalist and coauthor of Water Wars: Coming Conflicts in the Middle East, sug-
gests that modern history has already seen such wars. “I have [former Israeli prime minister]
Ariel Sharon speaking on record saying the reason for going to war [against Arab armies]
in 1967 was for water” (Bulloch & Darwish, 1993). The OECD (2008) further supports the
idea that water shortages enhance the impact of climate change and other kinds of pollution.
“Fundamentally, these are issues of poverty and inequality, man-made problems” (Arsenault,
2012, para 8).

These findings suggest that environmental issues are critical strategic concerns for consum-
ers, citizens, governments, communities, and corporations. Achieving a balance between cor-
porate activity and environmental impact poses an ongoing question for all communities and
generations. The “right policy” may never exist or achieve perfect balance; yet failing to con-
sider or create policy certainly offers a nonviable path. Leaders interested in sustainability
and CSR can address environmental concerns by actively creating and inviting others to par-
ticipate in ongoing conversations and strategy sessions. Doing so can have positive outcomes
on the present, lay the foundation for longer term impacts, and in many cases contribute to a
strong personal legacy.

For example, consider how at the mouth of a granite canyon in Yosemite National Park, one
can find a bust of Steven Mather, the founder of the National Park Service. The monument
depicts a simple likeness of his face, with his name and life span, and memorable words about

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Chapter Summary

the impact of his work, which involved protecting unique natural wonders found in the United
States. Under the statue it simply says, “The good he has done will never die.” With strategic
intent and active policies that unite or at least include constituents from many sectors, the
same can be said for responsible corporate leaders who avoid taking environmental short-
cuts. Indeed, history will remember those who carefully examine processes, products, waste,
and other factors required to create a sustainable organization in the context of a sustainable
environment.

Chapter Summary
This chapter examined the role of a corporate fiduciary and contrasted the role with that of a
steward who accepts responsibility for sustainability (financial and otherwise). Stewardship
involves listening and weighing multiple interests beyond short-term financial ones. The case
of Atlas Minerals was discussed to highlight how ultimate organizational failure on steward-
ship results in government bailouts and irreversible damage to the environment and human
health. Leaders can use several tools to combat negative outcomes, including the cradle-to-
grave, cradle-to-cradle, and LCA approaches. When individuals and firms use analysis tools to
widen the conversation about sustainability and social responsibility, they can achieve goals
that are more closely aligned with those of the green movement. Creating a cooperative cul-
ture can help address environmental concerns, provide resources, and preserve nature for
future generations.

Posttest
1. A life cycle assessment provides an end product that is .

a. unit process data
b. required by the EPA
c. a waste-reduction plan
d. a cost-reduction plan

2. Resilience is a corporate characteristic that .
a. decreases with a corporation’s age
b. increases with a corporation’s age
c. includes the ability to absorb disturbance
d. includes the ability to resist change

3. A fiduciary is not an owner, but is someone who .
a. has all the legal rights of owners
b. has no legal rights or obligations
c. has a legal obligation to protect the owners’ property
d. is a lawyer for the corporation

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Chapter Summary

4. Stewards are different from a fiduciary in all of the following ways EXCEPT .
a. they take a longer term view
b. they see a wider range of accountabilities
c. they balance financial gains with environmental costs
d. they are responsible for the effective use of shareholder assets

5. Which of the following organizations have no formal authority to regulate but use
only research and consulting?
a. Environmental Protection Agency
b. International Council for Local Environmental Initiatives
c. U.S. Department of Energy
d. National Park Service

6. Henry David Thoreau and Ralph Waldo Emerson are said to be the philosophical
founders of .
a. the green movement
b. the Industrial Revolution
c. the Green Party
d. the national parks

Answers: 1(a); 2(c); 3(c); 4(d); 5(b); 6(a)

Critical-Thinking Questions
1. How does the idea of stewardship change or challenge your ideas about leadership in

contemporary corporations? Where have you seen good examples of stewardship?
2. Is it possible to have environmental regulations that enhance economic opportunity,

rather than limit it? Provide examples that support your response.
3. What are some of the environmental impacts you might find if you did an LCA of:

a. The oil used in your car engine
b. A plastic soda bottle
c. A printed newspaper

4. The U.S. Environmental Protection Agency was formed to regulate and control pollu-
tion and prevent environmental harm. What are some of the challenges the EPA faces
when it works within states? What about within the global environment? What strate-
gies might you suggest to address these challenges?

5. Consider your personal behaviors and list some that you might change to positively
impact the environment. What are some challenges you might face in changing these
behaviors? How would you encourage others to adopt similar behaviors?

6. Consider current events and discuss how local and global water issues relate to CSR
and/or security concerns.

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Chapter Summary

Additional Resources
LCA of industrial packaging for chemicals:
http://www.dantes.info/Publications/Publication-doc/Packaging-public

LCA of wood-based ethanol-diesel blends (e-diesel):
http://www.dantes.info/Publications/Publication-doc/LCA%20of%20E-Diesel-public

For information on national and international NGOs, including controversy that surrounds
some of them, see the following:

U.S. Environmental NGOs: Media Moles or Moguls In Drive for Power in Changing Media Landscape

http://www.eco-usa.net/orgs/

For more information on the Green Party and the green movement, see this site:
http://broom02.revolvy.com/main/index.php?s=Green%20Parties%20
worldwide&item_type=topic

Answers and Rejoinders to Chapter Pretest
1. False. A fiduciary is any person who holds a legal relationship of trust with another

person or entity.
2. False. Unit process data takes into account all costs, including both the economic and

natural resources that go into creating every aspect of a product.
3. True. Yellowstone National Park was created in 1872 to preserve that unique ecosys-

tem from the industrialization that was taking place elsewhere in the country.

Rejoinders to Posttest
1. A life cycle assessment of a product takes into account the entire production process

and supply chain as well as the impact on the environment and community, which
results in unit process data.

2. Systems that absorb and leverage disturbance are resilient.
3. A fiduciary is someone who has a special duty to owners or shareholders to take care

of money or other assets and to use these effectively and efficiently.
4. Both fiduciaries and stewards have a duty to use shareholder assets effectively, but

only stewards have the added responsibilities of taking a longer view and balancing
environmental costs.

5. The International Council for Local Environmental Initiatives is an organization of
international governments committed to sustainable practices, but it does not have
the power to regulate or legislate.

6. Writing about the value and the beauty of the wilderness in the 19th century, lit-
erary figures such as Thoreau and Emerson inspired the green movement in the
United States.

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Chapter Summary

Key Terms
communitarianism A philosophical school
of thought that emphasizes the creation
of community in harmony with a natural
environment.

cradle-to-grave A process that allows a
product’s birth, life, and end of use to be
examined.

fiduciary A person who agrees to accept
temporary legal responsibility and control
of an asset owned by someone else and
who has a duty to maintain and expand the
asset’s value.

inclusive corporation The type of corpora-
tion advocated by Max De Pree that advo-
cates flat, open communication that sup-
ports stewardship for all.

life cycle assessment (LCA) A formal
process that allows a corporation to examine
the environmental impact of any process or
product.

nongovernmental organization (NGO) 
An entity that is neither a part of a govern-
ment nor funded by governments, founda-
tions, schools, businesses, or private citizens.

stewardship Refers to the management
and care of an asset in such a way that it
maintains and even increases in value over
time.

Waste Framework Directive (WFD) A
regulation passed in June 2008 by the Euro-
pean Union regarding waste prevention,
waste disposal, and recycling.

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9 CSR Reporting Standards and Practices

Shironosov/iStock/Thinkstock

Learning Objectives

After reading this chapter, you should be able to:

1. Understand the history of CSR reporting and past attempts to standardize the process.

2. Explain how to use Global Reporting Initiative standards to verify CSR and sustainability reports.

3. Summarize the challenges and benefits that organizations face in creating CSR reports.

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Section 9.1Financial and CSR Reports

Pretest Questions

1. Firms can legally report company earnings numbers in just one way. T/F
2. Offering CSR or sustainability reports remains optional in all industries. T/F
3. Publicity is the major leverage point for externally motivating corporations to

report CSR. T/F

Answers can be found at the end of the chapter.

Introduction
Customers and other stakeholders (even employees) cannot usually become aware of socially
responsible behaviors without some effort on the organization’s part. Thus, accurate and
timely reporting of CSR efforts can engage stakeholders and provide concrete evidence of
sustainability attempts and successes. However, not all firms report the same way, and con-
sumers are not always able to protect themselves from false or misleading reports. Also, some
firm managers still choose to only report financial returns and don’t discuss the social or
environmental aspects of or contributions to those returns.

This chapter addresses types of financial and CSR reporting. It discusses reasons why compa-
nies make the effort to report and describe standards and general practices that, if adhered to,
can help such reports be maximally useful to customers and other stakeholders.

9.1 Financial and CSR Reports
Today the most common type of corporate reports are financial reports. Interestingly, com-
panies can legally present investors with two types of financial reports: (a) those that strictly
adhere to generally accepted accounting principles (GAAP) and (b) those that include
some simplifications or leave out some facts from the main body of the report. The first type
is well known to accountants; such reports follow a standardized format that make them easy
to compare to reports from other companies that use the same standards. Thus, the GAAP
format enables the financial situation of two or more companies to be compared. In contrast,
non-GAAP reports feature adjusted figures known as pro forma or non-GAAP numbers. Com-
pany leaders have significant freedom in reporting such adjusted numbers, in part because
there are no rules about what they can strip from the reporting. This allows executives to
paint a simplified or idealized picture of the corporate situation (Morgenson, 2015). Even
within the same industry, companies can differ on what they include or exclude from the
nonstandard report. For example, one company may exclude facts about how employees are
compensated, while another company in the same industry may include such numbers. When
these differences occur, it makes it challenging for investors or other stakeholders to compare
companies’ performance.

The existence of such different types of reporting means that investors and reporters may pay
more attention to the nonstandard and adjusted numbers when making investment decisions

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Section 9.1Financial and CSR Reports

(probably because they are typically and purposefully easier to understand). This has ethical
implications, should people invest money based on what could be misleading information.

For example, in the case of pharmaceutical company Valeant, there were dramatic differences
between the company’s real earnings and its adjusted numbers (and these differences were
more dramatic than differences in competitors’ reports). Under GAAP reporting, the com-
pany earned $912 million in 2014, but its other report showed “cash” earnings of $2.85 bil-
lion for the same year (Morgenson, 2015). Valeant stripped out many expense items from
its non-GAAP revenue reports, including costs related to stock-based compensation, legal
settlements, and costs associated with acquisitions. In fairness to the company, Valeant did
present a list of excluded expenses, but not in a format that was accessible to many investors
(Morgenson, 2015). In the last half of 2015, Valeant’s market value dropped by almost $60
billion, largely as a result of investor reactions to the discovery of the variance between the
two versions of the report (Morgenson, 2015).

What are government and exchange regulators doing about this issue? In 2003, when pro
forma or non-GAAP earnings first became popular, the SEC instituted Regulation G to help
investors. Regulation G requires companies that use adjusted non-GAAP figures in regulatory
filings to present comparable numbers calculated using GAAP. However, the regulation does
not cover news releases, a major source of information for investors.

According to many, this kind of market deception reflects the need for transparency and stan-
dardization in reporting, not just for accounting measures (which are only one part of the
triple bottom line), but also for CSR (Howell, 2015b). Transparency means being open, hon-
est, and direct about a company’s past, present, and future. Standardization means using a
common system that allows people to make fair comparisons between similar corporations.
Transparency and standardization are a foundational element of sustainability because they
allow companies to fairly measure and compare shareholder value, return on investment in
finance, and environmental impact and social contributions to CSR. CSR reports are a rela-
tively new phenomenon, and making sure they are useful requires understanding the history
of reports, the standards related to reporting, and cases of reporting use and abuse. Doing so
also helps explain why some firms continue to resist the practice and why so much variety
exists in how and why firms report. It also illustrates how one disaster indirectly led to the
creation of a global movement.

History of CSR and Sustainability Reports
On March 24, 1989, an oil tanker named the Exxon Valdez, bound for Long Beach, California,
ran aground in Prince William Sound, Alaska, spilling 15 million to 40 million gallons of crude
oil into the ocean (Skinner & Reilly, 1989). Considered one of the most devastating human-
caused environmental disasters in history, the spill eventually spread to cover 1,300 miles of
coastline and 11,000 square miles of ocean. Prince William Sound is a remote location acces-
sible only by helicopter, plane, or boat. This isolation made government and industry response
efforts slow and expensive, which only further devastated local salmon, seals, and seabird
populations (Skinner & Reilly, 1989). The fishing industry in that part of Alaska still has not
fully recovered from this disaster. The public’s outrage over the event grew as investigations
and reports revealed that the crew was overworked and underrested, and that some safety
monitoring equipment was broken and deemed too expensive to fix (Skinner & Reilly, 1989).

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Section 9.1Financial and CSR Reports

The Exxon Valdez became a symbol of how the drive for
profit can conflict with environmental and social respon-
sibility, with devastating results. The short-term media
and social response was significant, and public outrage
and concern continued for years.

Some of the disaster’s long-term implications relate to
corporate transparency. The spill instigated new pres-
sures for firms to report how they were (or were not)
protecting workers and the environment. Groups of
activists began to push for accountability through vol-
untary corporate reporting. One of the leading orga-
nizations responsible for demanding more corporate
transparency was the Coalition for Environmentally
Responsible Economies (Ceres), which was formed in
response to the spill.

The Coalition for Environmentally
Responsible Economies
Ceres was formed by a small group of investors who
believed that if firms like Exxon had to publicly admit
they were overworking people (a social CSR issue),
were failing to invest in safe equipment (another social

CSR issue), or lacked the policies to protect the environment in the event of an emergency,
they might find reason to fix such irresponsible and unsustainable behaviors. Essentially, the
founders of Ceres believed that transparency could herald change.

Over the organization’s 25-year history, its mission has expanded. It has introduced report-
ing tools to help organizations weave environmental and social challenges into company and
investor decision making. It has inspired a reevaluation of companies’ roles and responsi-
bilities as stewards of the global environment when it published the Valdez Principles, later
named the Ceres principles. These consist of 10 points of environmental conduct that Ceres
encourages companies to publicly endorse (Lubber, 2014):

1. Protection of the biosphere: How well does the corporation protect the general bio-
sphere, including by reducing greenhouse gases?

2. Sustainable use of natural resources: Does the corporation strive to use renewable
resources and reduce the consumption of nonrenewable ones?

3. Reduction and disposal of wastes: Does the corporation practice lean manufacturing
and seek to reduce or eliminate waste?

4. Energy conservation: Does the corporation conserve energy?
5. Risk reduction: Does the corporation have safety and accident-reduction programs

in place?
6. Safe products and services: Does the corporation create products and packaging that

are safe for consumers? Are consumers safe when they use the product?
7. Environmental restoration: Does the corporation take steps to renew and restore

the environment when damage is done?

John Gaps III/AP Images
In 1989 millions of gallons of oil
spilled from the Exxon Valdez
tanker, harming the surrounding
water, coastline, and wildlife in
Prince William Sound, Alaska.

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Section 9.1Financial and CSR Reports

8. Informing the public: Is the corporation transparent and open in decision making?
Does the corporation alert the public to CSR progress and setbacks?

9. Management commitment: Is the corporation’s management and leadership knowl-
edgeable and committed to sound Ceres practices? To general CSR and sustainability
principles?

10. Audits and reports: Does the corporation audit, report, and generate data on envi-
ronmental compliance and CSR?

In 1993, after lengthy negotiations, Sunoco (an oil and gas company) became the first For-
tune 500 company to publicly endorse the Ceres principles. Since then many others have
signed similar agreements to follow the principles, and Ceres is now the largest environmen-
tal monitoring data service for companies (Ceres, 2014), although it is not used by all firms.
The creation of the principles and the requirement for supporters to publicly declare support
ushered in renewed pressure to make public data on where companies stand in regard to CSR
and sustainability. Ceres spearheaded a movement to get firms to publicly report and state
sustainability and CSR goals, progress, and setbacks.

Recent research suggests that 93% of the top global companies publish CSR or sustainability
reports (KPMG, 2013). The statistic indicates how far sustainability and CSR reporting have
come, but the journey was not easy. As Bob Massie, Ceres’s executive director from 1996 to
2002, stated in 2014:

The whole idea of having an environmental ethic, or measuring your perfor-
mance above and beyond your legal requirements, was considered completely
insane. Sustainability was considered to be a shockingly difficult thing that no
company would ever take on as a goal. (Ceres, 2014)

As Ceres pushed reporting, it also spearheaded a worldwide effort to standardize and system-
atize disclosure on environmental, social, and human rights performance. In the late 1990s
Ceres launched a separate entity known as the Global Reporting Initiative (GRI), the aim
of which was to create a standardized and transparent accountability process that ensures
compliant companies follow the Ceres principles (GRI, 2015).

The Global Reporting Initiative
The GRI is the most widely adopted framework for sustainability reporting. It was originally
created in 1997 to help leaders and managers navigate the process of reporting—there were
no standards and very few examples to follow at that time. One of the first steps organiza-
tional leaders took was to expand the conversation and terminology so that more industries
could participate in the effort. For example, GRI leaders broadened the focus beyond the envi-
ronment to also include social, economic, and governance issues. The addition of more topics
and keywords served to strengthen the relationship between GRI and basic CSR principles
and enabled more organizations to participate. In 2000 the GRI published the first official
guidelines for corporate compliance reporting and created a framework for comprehensive
sustainability reporting. The GRI team offered consulting services for those who needed
advice on how to provide exemplary reports.

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Section 9.1Financial and CSR Reports

For the first 3 years, GRI kept track of which firms used the guidelines and included links to
examples of all types of reports on its website. Over time, enough firms began offering reports
that GRI stopped keeping track—a sign it had effectively helped launch a movement.

In response to the GRI guidelines, the leadership at Ceres decided to spin off the reporting
efforts from the rest of the organization. Thus, GRI became a separate and independent non-
profit institution in 2001. The organization moved to Amsterdam and became part of the
United Nations under its environmental program (the UNEP). That same year, in 2002, the
second generation of guidelines (G2) was unveiled at the World Summit on Sustainable Devel-
opment in Johannesburg, South Africa. The summit was the most important international
convention related to climate change, and being part of it was another sign of the organiza-
tion’s value and prestige.

Over the next 4 years, demand for CSR reporting guidance grew dramatically, and the third
generation of the guidelines (G3) was launched with the help of more than 3,000 experts
from multiple sectors, including packaged goods, shipping, agribusiness, and more (GRI,
2015). However, it was not until 2007 that GRI created a product for mass consumption and
utility—Pathways I. This publication provides a step-by-step procedure for report makers. To
create a regional presence and learn how different regions responded to the document, GRI
set up regional offices around the world, beginning with Brazil. Today it has offices in many
countries.

To encourage the use and enforcement of the current guidelines (G4), GRI launched a
60- question multiple-choice exam that enables individuals to be accredited to use the G4
guidelines. The exam is available in more than 70 countries; successful participants receive
a certificate and get their name published on the GRI website for 3 years. While this kind of
recognition may seem narrow, it has significant weight with environmentally and socially
conscious investors who have come to expect transparent reporting and this kind of standard
measurement. Also, certified people can go into business for themselves (or be selected by
employers) to help others create better CSR and sustainability reports—this provides a way
for CSR and sustainability skills to be turned into financial benefits. The more people who are
accredited to the GRI standards, the more the GRI brand grows and the more the reporting
movement gains momentum and standardization. GRI’s vision is for organizations to con-
sider sustainability throughout their decision-making processes (GRI, 2015). Such a goal puts
them in partnership with corporate leaders and individuals who are interested in increasing
CSR and sustainability.

The emergence of Ceres and GRI illustrate how a small group of individuals can form a collec-
tive and ultimately drive major change. The ability of individuals to report, support report-
ing efforts, and engage with standardized guidelines has moved from nonexistent in 1992 to
being the purview of a few experts to being readily accessible by almost all interested parties.
What have companies done with this ability, and what are the consumer and competitive
pressures to conform? As stated earlier, data suggests that each year, more companies report
and that these reports are becoming more accessible, detailed, and useful to stakeholders.
The following section highlights this progression.

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Section 9.1Financial and CSR Reports

The Progression of CSR Reports
The three historic phases of CSR reporting clearly show the gradual mainstreaming of envi-
ronmental issues, which were once seen as the concern of only a few. Measuring and transpar-
ently reporting environmental impacts in a standardized way has become common practice.
However, the journey to get to this point featured several phases, each of which is impor-
tant because they illustrate how CSR efforts move in stages. This information can encourage
people who want to start a movement related to a different CSR and sustainability issues.
The phases are also important because they illustrate how people come to accept new CSR
ideas—and some firms or managers may still be stuck in a mind-set of an earlier phase. The
ability to recognize how people and ideas mature can help future leaders and managers work
with people of varied mind-sets.

Phase 1
In the earliest phase of CSR and sustainability reporting, corporations were more focused on
public image in order to impress shareholders, who mostly expected annual financial reports.
During the 1970s and 1980s, CSR messages (if they existed at all) were based on public rela-
tions goals more than truth or adherence to standards. One important breakthrough came in
1972, when a consulting firm named Abt & Associates added an unexpected environmental
report to its typical annual financial statements. This pioneering effort focused strictly on
sharing data on air and water pollution by the company and its affiliates. Abt & Associates’
financial auditor certified the financial data. But since he was only trained to evaluate finan-
cial reports, he disclaimed any responsibility for the environmental data, since no standards
existed for such audits. In response, John Tepper Marlin (1973) wrote an article for the Jour-
nal of Accountancy suggesting ways accountants could measure pollution; the article included
a model environmental report, which was subsequently adopted by a few accounting and
auditing firms around the nation (Marlin & Marlin, 2003). Still, neither the practice of report-
ing nor the practice of having auditors measure environmental pollution gained much trac-
tion until the 1980s.

Phase 2
In the second phase of CSR reporting, Mar-
lin continued to innovate and improve on
his original ideas. He found an interested
innovation partner in gourmet ice cream
purveyor Ben & Jerry’s. In a groundbreak-
ing deviation from standard practice, Ben
& Jerry’s commissioned a social auditor to
work with its staff on a report covering the
previous year’s activities. This was unusual
because most firms only hired financial
auditors, not auditors to evaluate social and
environmental practices. For 2 weeks, the
company’s founders gave the social auditor
full access and permission to interview any-
one in the company. The auditor visited not

Toby Talbot/AP Images
Companies such as Ben & Jerry’s, the Body
Shop, and Shell Canada were among the first to
conduct environmental reports.

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Section 9.1Financial and CSR Reports

only the main ice cream factory but also the smaller facility where the company made special
products, such as its Peace Pops. The auditor was encouraged to speak with dairy industry
officials and public and private community representatives—essentially anyone in the supply
chain or any stakeholders in the industry. In many ways, by commissioning the audit, Ben &
Jerry’s leadership was requesting a fully transparent 360-degree view of the company, prior
to the common usage of the term and practice.

The social auditor recommended the resulting document be titled Stakeholder Report. Schol-
ars suggest that this may have been the first report directed to and for stakeholders, includ-
ing financial shareholders as well as other stakeholders. That first stakeholder report was
divided into categories that represented different audiences, including communities (out-
reach, philanthropic giving, environmental awareness, global awareness), employees, cus-
tomers, suppliers, and investors (Marlin & Marlin, 2003). This was notable because it marked
the first time that Ben & Jerry’s considered suppliers to be a stakeholder. The report was also
a landmark because it was commissioned by Marlin.

This report, as well as others from similarly progressive companies such as the Body Shop
and Shell Canada, helped introduce a new model of corporate reporting—a precursor to the
GRI standards. After the first social audit, Ben & Jerry’s continued to issue social reports,
using different social auditors to refine the concept and practice of CSR reporting. While these
audits still lacked a set of generally accepted standards by which to measure CSR, they were
transparent and offered a road map for improvement (and inspired others).

It is important to note that it was not just awareness and goodwill that led to the rise in CSR
reporting during the 1980s. Legal issues were also at play in the United States. The open
records and meeting laws passed in the 1970s as a result of the Watergate scandal increased
the volume of environmental pollution emissions data that entered the public record. In 1987
“right to know” legislation was extended by Congress to establish the Toxic Release Inventory
and the Pollution Prevention Act of 1990, which created a database that is used by investors
to document environmental progress. It is also a standardized measurement that shows the
history of compliance (or noncompliance) to environmental regulation (Katsoulakos, Kout-
sodimou, Matraga, & Williams, 2004).

Phase 3
In the third phase of CSR reporting, the need for third parties to verify reports emerged as a
requirement (see Chapter 8). Verification bodies such as Ceres and GRI accredit and certify
organizations’ behaviors, products, and practices using transparent environmental and social
standards, though these had to be created. This newer phase of CSR reporting makes the
social auditor stronger and less idiosyncratic and independent, meaning that social auditing
individuals and teams follow more standards and produce reports that are more consistent
across and between industries.

The third phase introduced advances that continue to define CSR reporting. Now, when social
auditors identify a violation, they record the situation, and the facility has an opportunity to

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Section 9.2CSR Reports and Audits

take corrective action. Violations range from small infractions such as a minor waste problem
that does not endanger certification, to egregious concerns that jeopardize the environment
and the possibility of achieving report certification. Auditors are generally solution oriented
and tend to give the corporation time to address any violations before the problems affect
certification. Reporting in general, and the role of auditors in that process, has matured into
an industry where auditors receive standardized training and follow specific CSR standards
before certifying a company and its reports.

Several agencies and organizations stand out as early leaders in the final phase of CSR
reporting. Among them is Social Accountability International, which was founded in 1997
(Marlin & Marlin, 2003). Other auditing pioneers include the FSC, the International Foun-
dation for Organic Agriculture, and the Fairtrade group. Together, these groups formed a
larger organization called the International Social and Environmental Accreditation and
Labelling, which sets reporting standards internationally and provides uniform training to
thousands of social auditors. This group uses GRI standards as well as others that change
by industry.

Such agencies help companies assess, measure, and certify CSR and environmental compli-
ance. The very existence of such a wide number and variety of certifying organizations indi-
cates how CSR and sustainability reporting has become an established feature of modern
organizational life. Such reports provide customers, employees, competitors, governments,
and other stakeholders the ability to evaluate whether firms are moving toward CSR and sus-
tainability or not. Reports provide a way for people to better understand and engage with the
CSR journey. However, reports are only valuable if they represent the truth, and third-party
certification helps ensure such honesty.

9.2 CSR Reports and Audits
Reporting and obtaining certification via an audit is a complex process that requires sup-
port and expertise. For organizations interested in starting or dramatically improving
sustainability reports, the GRI offers guidelines on how to start. As companies begin to
create CSR reports—and as these become more accessible, valuable, and informative—
new formats and publishing platforms emerge. For example, most reports are published
on paper, but a company named Symantec published both a paper and an online CSR
report in 2015.

A detailed outline of how to create and publish a viable CSR report is outside the scope of this
chapter, but every employee and future leader will likely need a high-level understanding of
the process (see Figure 9.1).

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Section 9.2CSR Reports and Audits

Figure 9.1: GRI outline for CSR reports

f09_01

Step 1:
Identify

Step 2:
Prioritize

Step 3:
Validate

Step 4:
Review

CSR Report

Principles

Materiality

Stakeholder
Inclusiveness

Sustainability
Context

Completeness

Source: Adapted from “How to Define What Is Material,” by G4 Online, 2013 (https://g4.globalreporting.org/how-you-should-report/how-
to-define-what-is-material/Pages/default.aspx

To begin, a publisher would focus on the steps of the process—identification, prioritization,
validation, and review—to determine the organization’s most significant economic, environ-
mental, and social impacts. The next task is to utilize four reporting principles that define
report content. These include the following:

1. Materiality: Information must relate to the firm and its operations and cannot be
unrelated or distracting.

2. Stakeholder inclusiveness: The report must not leave out key participants in the
value chain or stakeholder set.

3. Sustainability context: Reports need to be clear about what is and is not included for
evaluation.

4. Completeness: Report authors need to clarify how thoroughly they followed an issue
or topic (GRI, 2015).

The principle of materiality refers to the data’s relevance to day-to-day operations. Think back
to the discussion of greenwashing in Chapter 8—when reports offer interesting but noncen-
tral data, companies end up reporting on nonmaterial aspects of the business that might be
misleading. The principle of stakeholder inclusiveness is foundational to the process—recall
how the early report from Ben & Jerry’s revealed to the company the then radical idea that

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Section 9.2CSR Reports and Audits

suppliers were stakeholders. This type of awakening is possible in every industry as leaders
fine-tune the definition of stakeholder inclusiveness. The principle of sustainability context
ensures that reports include how an organization’s performance influences sustainability
in a wider context (locally to globally). Finally, completeness ensures the report’s topics are
adequately covered to provide stakeholders with sufficient information about the organiza-
tion’s economic, environmental, and social performance. The report should also detail its own
process and methodologies used, as well as mention any trade-offs or assumptions involved
in creating the report. Once the report is ready, many companies ask a third-party agency to
verify and validate it.

CSR Report Auditors
Earlier in this chapter, we discussed the way GAAP guidelines inform the financial audit of
any publicly traded firm. While corporate financial audits were and are a standard practice,
CSR audits are less common—a fact that began to change in 2002. That year, two of the then
major accounting firms, PricewaterhouseCoopers and KPMG, jointly signed and verified a CSR
report from Shell Oil. This represented a landmark event for CSR and sustainability efforts
because it marked the moment when mainstream financial auditors became willing and able
to offer CSR audits, too.

It is important to note this change, because even GRI representatives cannot consult on the
verification of reports, as doing so would be a conflict of interest and violate the GRI mandate
to remain independent and impartial. Thus, GRI does not recommend or endorse any audi-
tors or consultancies. However, it does suggest guidelines on where to find auditing agencies
and how to engage with them. In selecting service providers, organizational managers should
primarily consider the level of expertise and competency with sustainability disclosures. To
ensure results are objective, managers should choose an external provider who is indepen-
dent of the hiring organization.

External auditing firms generally fall into three categories: accountancy, engineering, and
sustainability services. There are different advantages to each type. Accounting firms typi-
cally connect to global networks; they usually have a business focus and expertise in finan-
cial and nonfinancial reporting. Engineering firms, on the other hand, may be able to offer
technical certifications and assurance, including the ability to conduct important tests and
other scientific and technical verifications related to, say, toxicity (or lack thereof ) of ingredi-
ents. Furthermore, engineering firms understand complex processes and are typically famil-
iar with risk-based analyses. Finally, sustainability services firms understand sustainability
issues. They are typically smaller than the other two types of firms and are often locally based
and well versed in stakeholder management issues. Each type of provider has a different but
compatible value proposition, and some firms may need to hire more than one, depending on
operational and manufacturing factors. This means that a technology firm might employ both
an engineering firm and a sustainability services firm to provide different stakeholders the
assurances they desire.

According to the GRI Sustainability Disclosure Database, a large majority of GRI reports are
assured by accounting firms, less than a quarter are assured by sustainability services firms,
and slightly over 10% are assured by engineering firms. While this breakdown illustrates
that accounting firms dominate the category, the fact is that all three types of providers

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Section 9.2CSR Reports and Audits

have paying customers and an ongoing value proposition in the auditing and third-party
validation space.

Verification and Assurance Standards
One of the first decisions that leaders of any organization seeking to validate reports must
make is which reporting standard to adopt. This decision can impact the type of report, the
choice of assurance agency, and the focus of report-related research. (GRI, 2015). While there
are multiple approaches, three international standards are the most widely used—ISAE 3000,
AA1000AS, and ISO 26000.

ISAE 3000
The International Standard on Assurance Engagements (ISAE) standard known as ISAE 3000
offers guidelines for any assurance engagements other than financial audits or reviews of
historic financial information. The standard came from the International Auditing and Assur-
ance Standards Board of the International Federation of Accountants; it was formed in 2003.
It emphasizes comprehensive procedures for evidence-gathering processes and assurer
independence (GRI, 2015). Assurance reports in accordance with ISAE 3000 standards can
only be issued by a certified accountant, as they must also comply with the International
Ethics Standards Board for Accountants Code of Ethics for Professional Accountants. Non-
accountants can use the assurance methodologies or combine elements of ISAE 3000 with
other methodologies, but they cannot certify the results. There are related ISAE standards
between 3000 and 3999, depending on the specificity of the topic (for example, ISAE 3410
relates to assurance of greenhouse gas emissions). Leaders in some industries will value that
accountants have verified and issued the company report; in other industries the extra effort
to obtain this certification may not matter. Different types of certification exist because some
firms value one kind of certification or assurance over another.

AA1000AS
The AA1000AS certification standard leans a bit more toward sustainability issues, as it relates
to a document called the Accountability Principles Standard that many organizations use to
guide their approach to sustainability. AccountAbility, an advisory firm famous for being an
early provider of certification, published the 2008 version. In response to foundational con-
cerns of AccountAbility principals, the AA1000AS standard focuses heavily on whether the
organization and its sustainability reporting respond to stakeholder concerns. This certifica-
tion matters most to firms that want to be associated with AccountAbility and its brand or to
firms that really want to signal they care about stakeholders.

ISO 26000
After 5 years of negotiations between multiple stakeholders around the world, the ISO
launched ISO 26000:2010. While not widely used, it is an extension of EMSs. The resulting
document provides guidance rather than requirements, so unlike most well-known ISO stan-
dards (such as the more famous quality standards known as ISO 9000), organizations cannot

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Section 9.2CSR Reports and Audits

be certified for being compliant. However, the guidelines clarify the concept of social respon-
sibility, help translate key principles into effective action, and provide examples of best prac-
tices in CSR from around the world. The document also helps organize and unify activities
and verbiage, which is helpful as more organizations adopt the principles and guidelines. ISO
26000 was developed by a working group of more than 500 experts (ISO, n.d.b). According to
the ISO, the working group disbanded after the standard was published, but the leaders were
retained to provide support and expertise for those who adopt the standards.

The United Kingdom’s Marks & Spencer provides an example of how a major retailer inte-
grated ISO 26000 into its operational strategy.

CSR and Sustainability in Action: Marks & Spencer

In late 2015 Marks & Spencer introduced ISO 26000 standards to its largest suppliers.
By voluntarily adopting ISO 26000, suppliers agree to conduct business in a more
transparent and accountable manner, which helps them comply with the sustainability
goals to which Marks & Spencer has publicly committed. In this way the standard helps
Marks & Spencer nudge suppliers in a new direction and gives the suppliers a head
start in meeting goals that Marks & Spencer has set. In particular, given the volume of
clothing the retailer sells, the company uses ISO standards as part of its effort to track
the supply chain and check the source of raw materials and labor conditions in supplier
organizations. Although ISO 26000 is not an approved GRI standard, it still provides useful
information for companies that want to improve CSR and sustainability. After voluntarily
implementing the standard, the firm garnered free publicity, gained additional industry
attention, and learned where it was weak and strong in terms of CSR goals and progress.
Since the firm sells a wide range of product categories, the ISO 26000 data can be used to
appease a wide range of stakeholders, which offers Marks & Spencer a strategic market
advantage.

For managers deciding which reporting standards to follow, it is important to consider that
GRI recommends using external third-party validation for sustainability reports. However,
GRI does not require third parties to prepare reports in compliance with the G4 guidelines.
This means that various reports approved by GRI associates may have a different look and
feel. As a result, reports continue to differ widely, and there is likely to be continued variety in
terms of what constitutes a “good” report—this is because even with third-party validation,
subjectivity surrounds the issue. This means there is a real opportunity for different orga-
nizational leaders to help improve and standardize CSR reporting. If companies voluntarily
follow GRI report guidelines and validate reports, they can make them easier to compare and
understand. Essentially, those firms that provide validated reports that stand out to stake-
holders have a real opportunity to set the tone for multiple firms and industries.

The next section discusses reasons leaders should validate reports with external auditors and
use third-party verification.

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Section 9.2CSR Reports and Audits

Benefits of Verified CSR Reports
Some leaders might argue that CSR reporting simply poses another cost, possibly one that
lacks a clear benefit. Additionally, adding CSR compliance to GAAP compliance can overwhelm
management. Even though CSR reporting and standards are not universally accepted, they
are widespread enough that scholars and practitioners are beginning to see the advantages
of CSR compliance. This section documents reasons to create CSR reports that are certified by
auditing agencies.

The mere act of seeking external validation can increase a report’s recognition, trust, and
credibility. Given that reports cost time, talent, and resources, it makes sense to follow the
right process to get reliable results that can be benchmarked each year to chart improve-
ment. Organizational stakeholders—including investors, employees, or neighboring commu-
nities—are more likely to have confidence in an audited and validated report. In an era of
increased cynicism toward business, verification can prevent corporate claims from being
dismissed or discounted. Also, seeking verification indicates that the company believes its
own story; it reflects a seriousness about the topic that investors, customers, employees, and
other stakeholders may value highly. Rating agencies and analysts increasingly look for audits
and verification when making investment and rating decisions (Corporate Register, 2008).

Reduced Risk and Increased Value
The top international accounting and auditing firm, KPMG (2011), reported that one third
of the 250 largest global companies amended reports after auditors identified errors in the
company’s CSR compliance. This statistic feeds the cynicism that companies issue untrue
or confusing data that they only correct once caught. Using a qualified third-party reviewer
means there is a greater chance that the report reflects the truth about a company’s efforts;
auditing reduces data-quality risks. Given how quickly news can spread in our connected
age, firms can take extra steps to ensure that information is checked before going public. GRI
documents also suggest that when firms make the effort to produce robust, audited, and cred-
ible documents, the reliability and value of the entire reporting process increases (GRI, 2013).

Improved Board and C-suite Engagement
Decision makers at all levels should evaluate choices based on the best available data. This fact
about decision making holds for CSR and sustainability decisions as much as for other invest-
ment and personnel decisions. Thus, when top management teams must decide whether to
enact or otherwise support CSR and sustainability efforts, they are more likely to consider
data from competitors and others if that data is verified as reliable. In particular, members of
the company board of directors and top-level managers across the C-suite (the chief executive
officer, or CEO; chief financial officer, or CFO; chief information officer, or CIO; and so on) are
more likely to utilize audited documents to make CSR improvements to organizational strat-
egy. The logic is that the higher the quality of decision-making inputs, the higher the quality
of decisions that flow from those inputs. Audited and verified documents have a high value for
market stakeholders as well as nonmarket ones. If you want to convince upper management
to enact a policy or product change, you may have an easier time doing so if you show evi-
dence from the CSR and sustainability reports of other firms that had success with the idea.

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Section 9.2CSR Reports and Audits

Gathering, reading, and sharing the verified CSR and sustainability reports of other compa-
nies is one strategy to help you and others make sound CSR-related comparisons.

Improved and Stronger Internal Reporting and Systems
As an extension of the benefit of improved board and C-suite engagement that stems from val-
idated reports, such robust reporting systems can also help employees at all levels improve
results. If the validation process includes feedback on errors, it can lead to learning, training,
and improved behaviors. External validation can also confirm the presence of good practices
and processes, which further encourages and supports positive efforts. For these reasons, the
process of reporting on CSR efforts and getting third parties to verify constituent data can
offer a firm many benefits, even if it is in the early stages of enacting CSR and sustainability
projects.

Improved Stakeholder Communication
As mentioned before and as evidenced in the Ben & Jerry social audit, many (but not all)
report validation processes involve the review (or inclusion) of stakeholder engagement
efforts. Once such processes are examined, they can be complimented and broadcasted or
criticized and improved upon. Publishing results allows others to copy good processes and
practices, which can improve the status quo across multiple industries and organizations.
Some organizations even use reporting processes as an entry point into conversations with
stakeholders; the reporting process can be an icebreaker that helps start a conversation that
may not otherwise take place. For example, if a firm wanted to create its first CSR report,
managers could contact key stakeholders and request a meeting to learn which CSR topics
concern them. Managers could then use the information to tailor the reporting process.

Apply Your Knowledge: Plan a CSR Report

Suppose you have been named the CEO of a midsize company in a small community that
manufactures automobile parts. The plant sits in what were once wetlands next to a
large river. The company has 125 plant employees and 17 administrative and sales staff.
All manufacturing processes take place in the plant, where raw materials are shipped in
and product is shipped out. You were named CEO because of your willingness to accept
responsibility for CSR reporting. No one in the plant has any experience with this, but the
accounting department has filed an annual report using GAAP principles. You are being
required to launch CSR reporting by the owners of the plant. How do you begin?

Identify the following:

1. State what issues you will be addressing.
2. Describe how you will measure each of these issues.
3. Prioritize the issues.
4. Describe how you will get third-party verification for each of the issues.
5. Identify any shortcomings or barriers to providing a complete report.

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Section 9.3Using CSR Reports

9.3 Using CSR Reports
Thus far, this chapter has addressed the history of CSR reporting and introduced the concept
and benefits of third-party assurances for CSR and sustainability reports. What remains to be
covered is how both the organization and the public can interpret and use CSR reports.

Publicity
Organizations that create CSR and sustainability reports have the power to influence readers
and stakeholders—and it is safe to assume that most people create CSR reports to garner
stakeholder goodwill. However, reactions to reports can be positive or negative.

An example of positive publicity comes from a study done by Reputation Institute, a New
York–based consulting firm. In early 2015 the institute invited approximately 55,000 con-
sumers to participate in a study that ranked the world’s 100 most reputable companies (“The
10 Companies,” 2015). It found that 41% of how people feel about a company is based on
their perception of the firm’s CSR. As a result of this finding, Reputation Institute separately
ranked the top 10 firms with the best CSR—and it did this in part by focusing on CSR and
sustainability reports.

This example also portrays how CSR rankings and reports remain vulnerable. After the rank-
ings came out, at least two of the companies, Sony and Volkswagen, experienced dramatic
events that called into question their ranking and that no doubt will result in lower rankings
from future polls. Sony experienced a computer hacking incident that compromised confi-
dential data, including information about the company’s unfair hiring and salary practices
(Phelan, 2015). Volkswagen faced reports of fraud, including how the firm purposely misled
consumers by cheating on emissions tests and lying about its vehicles’ fuel efficiency (Phelan,
2015). Consumers and leaders must work harder than ever to continuously monitor firms as
they progress in the pro-CSR and sustainability journey.

It is also common for companies to experience some negative publicity when they report
early CSR efforts. Sometimes, early efforts seem small or insignificant, given the organiza-
tion’s size, or early reports mention baseline numbers that draw criticism. Some stakehold-
ers may interpret the report data negatively. In these situations, it is best to continue on the
path toward CSR and sustainability, so that with time naysayers can come to realize that early
efforts were real and part of a longer commitment to CSR and sustainability.

In other cases reports about CSR or sustainability efforts do not originate from companies
themselves. Nongovernmental organizations also monitor corporate behavior and may
report on findings that benefit larger society but that companies may prefer to downplay or
ignore. Many organizations feel they have an ethical duty to reveal and advertise negative
corporate activities as a way to motivate change. For example, the Business & Human Rights
Resource Centre, a nonprofit organization dedicated to advancing human rights in business,
tracks more than 6,000 companies and works to help eradicate abusive corporate behavior.
Part of the organization’s mission is to broadcast when companies fail to protect and advance
sustainability. The organization creates an annual report titled “The Public Eye Awards,” an
account of companies with the worst CSR records for the year. The following are the 2014
Public Eye Award “winners,” including the allegations against companies:

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Section 9.3Using CSR Reports

• BASF, Bayer, Syngenta: Used pesticides to kill bees, which are vital for the environ-
ment, agriculture, and food production.

• Eskom: Negatively affected South Africa’s health and environment by using coal
power stations.

• International Federation of Association Football: In preparation for the World Cup,
forcefully evicted local communities in Brazil.

• Gap: Not being committed to effectively protecting the health and safety of workers
in Bangladesh.

• Gazprom: Responsible for oil spills that negatively impact the environment.
• Glencore Xstrata: Negatively impacted the rights of local communities and indig-

enous groups.
• HSBC: Provided funding to companies that do not uphold CSR ideals, such as Sime

Darby & Wilmar, a company accused of human rights abuses.
• Marine Harvest: Caused damage to the environment and negatively influenced the

livelihoods of the indigenous people of Chile (Business & Human Rights Resource
Centre, 2014).

Lists such as these can make the public more aware of problems and also bring negative public
attention to offending companies. When this happens, managers and leaders may react more
quickly or choose a more sustainable response than they might have without the reports and
related negative press. In the long term, such reports can benefit society. Changes that firm
leaders eventually enact have the potential to succeed in the future and avoid being criticized
for poor CSR efforts.

Overcoming Challenges
Negative publicity is not the only risk faced by companies in creating CSR reports. A study
undertaken by the accounting firm Ernst & Young and the Center for Corporate Citizenship
at Boston College offers some insight into why firm managers might resist reporting. Survey
respondents disclosed three primary challenges (Ernst & Young, 2013):

1. Availability of data: Sometimes the data that stakeholders want requires extra time
or money to acquire. It may warrant new tests on chemical composition, worker
welfare, or end-of-life product treatment,—information that may not be readily
available.

2. Accuracy or completeness of data: Sometimes data is available but is insufficient, as
it only covers some portion of the product or some aspect of use. In such cases firms
need to work harder to obtain more data, and this process can take time and money.

3. Internal buy-in: Sometimes people within a firm do not understand or support
the logic behind obtaining more information; in such cases people may resist data
collection.

An added challenge for some larger organizations is to find subsidiaries and suppliers that
are large enough to help them implement sustainable practices and support sustainability
reporting.

Given that CSR reporting can be a challenge and, in some cases, be used against a firm, what
are the arguments in favor of it? The next section addresses this question.

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Chapter Summary

Benefits of Creating CSR Reports
The four primary motivations for reporting are:

1. Transparency: reports can improve investor confidence, trust, and employee loyalty.
2. Competitive advantage: reports serve to differentiate the company from its

competitors.
3. Risk management: reports allow managers to identify and address potential envi-

ronmental and social risks.
4. Stakeholder pressure: reports can appease certain stakeholders or alert new ones to

key firm accomplishments or goals. (Ernst & Young, 2013)

Reporting CSR and sustainability efforts can
also help recruit and retain employees.
There is also a financial advantage to shar-
ing CSR reports. Research shows that the
most transparent companies tend to have
higher cash flow (Margolis, Elfenbein, &
Walsh, 2007).

In addition to the survey results, data from
other sources suggest ways that CSR and
sustainability reporting benefit a firm’s
bottom line. GRI Chief Executive Ernst Lig-
teringen has seen companies change their
practices as a result of increased report-
ing. General Electric (GE) and Siemens, for
example, focused on increasing energy effi-

ciency and lowering emissions, both of which have helped the company grow. GE’s “ecoimag-
ination” initiative is a company-wide effort to use sustainability concepts to drive innova-
tion. The initiative has brought more than $160 billion in revenue since 2005, while lowering
greenhouse gas emissions 34%, reducing freshwater use 47%, and saving the company $300
million (Ceres, 2015).

Ceres (2015) finds that sustainability reporting is becoming more mainstream in the United
States and abroad. Further, some governments even require mandatory reporting—the Euro-
pean Union and India, for example, are in the process of adopting mandatory sustainability
disclosure requirements. The integration of financial and sustainability data by many firms
creates an opportunity to enhance the data on CSR and sustainability practices (Ceres, 2014).
It also can lead to more CSR behaviors by a greater number of organizations.

Chapter Summary
This chapter discussed the history of CSR and sustainability reporting to clarify how the prac-
tice has changed over time. It also discussed the need for CSR and sustainability reporting and
its benefits. As more companies provide reports, scholars and practitioners learn more about
how to report and how communities and shareholders benefit. In particular, all stakeholders

Manuel Balce Ceneta/AP Images
Companies that prioritize CSR and sustain-
ability can be profitable. For example, GE and
Siemens create innovative products that are
energy efficient.

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Chapter Summary

benefit when reporting standards are fully developed and deployed. While the GRI standards
have inspired many firms’ reports, there remains to be one standard that is adopted by all
firms. Furthermore, CSR reporting remains a voluntary activity in the United States and most
other countries, aside from India and some parts of the European Union. Accordingly, there
are several common reporting standards used in different industries, and some fragmenta-
tion in how and even why firms report.

Finally, this chapter described the value of third-party verification and assurance of compli-
ance to CSR standards and closed by describing a few uses for CSR reports.

Posttest
1. Best transparency practices involve .

a. keeping important company information secret
b. opening all files to all employees
c. proactively publishing all relevant information about the corporation
d. hiring a public relations firm to release information that makes the company

look good

2. CSR reporting standards were indirectly born as a result of .
a. the publication of Silent Spring by Rachel Carson
b. the founding of the U.S. Environmental Protection Agency
c. the work of several major accounting firms
d. the Exxon Valdez disaster

3. Which of the following is currently a leading reporting method for CSR?
a. ISO 6000
b. AA1000AS
c. ISO 1000
d. GRI G2

4. According to a survey by Ernst & Young, which of the following is a motivation for
reporting CSR?
a. risk management
b. reducing environmental impact
c. gaining goodwill
d. government pressure

5. All of the following are difficulties in the CSR reporting and assurance process
EXCEPT .
a. availability of data
b. accuracy and completeness of data
c. internal buy-in
d. external pressure

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Chapter Summary

6. According to the GRI, the following are all principles that should define the content of
a CSR report EXCEPT .
a. stakeholder inclusiveness
b. materiality
c. completeness
d. prioritization

Answers: 1(c); 2(d); 3(b); 4(a); 5(d); 6(d)

Critical-Thinking Questions
1. Discuss the overall advantages of CSR reporting. When can transparency be a liabil-

ity and expose a company to risk?
2. How is reporting CSR similar to a publically held corporation’s responsibility to

report finances using GAAP? How are they different?
3. What are the three kinds of CSR auditor, and what are the advantages and disadvan-

tages of each?
4. Suppose a small company would like to create a CSR report. What are some sug-

gestions you could make to the company regarding how to start the report? What
strategies would you recommend to ensure accuracy and prevent negative publicity?

5. What are some ways CSR reporting can become more standardized for all companies
on a global scale?

6. What does the history of CSR and sustainability reporting illustrate about the power
of a small group of individuals to instigate positive change?

7. What kinds of value does sustainability/CSR reporting create inside a firm? What
kinds of value does it potentially create outside a firm? How might your answer
change based on a report’s content?

Additional Resources
Learn more about GRI by visiting:
https://www.globalreporting.org/Pages/default.aspx

For an example of a Symantec CSR report, see:
http://www.symantec.com/content/en/us/about/media/pdfs/2015-corporate
-responsibility-report-en-us

Review the Public Eye Awards 2014 and corporate responses here:
http://business-humanrights.org/en/documents/public-eye-awards-2014

Answers and Rejoinders to Chapter Pretest
1. False. Non-GAAP members have considerable freedom and can report earnings in

various ways.
2. True. There are no government or industry requirements.
3. True. There are few actual requirements enforced globally, but good public relations

motivates many corporations to report CSR.

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Chapter Summary

Rejoinders to Posttest
1. Best transparency practices include making sure all relevant information about the

corporation is published in a timely manner.
2. Among the long-term consequences of the Exxon Valdez oil spill was a push for more

accountability through voluntary corporate reporting, which eventually led to the
creation of CSR standards.

3. The AA1000AS is a certification that focuses heavily on whether the organization
responds to stakeholder concerns.

4. Ernst & Young found that the four main motivations for reporting CSR were risk
management, transparency, competitive advantage, and stakeholder pressure.

5. External pressure is not a difficulty in the process, but should rather motivate com-
panies to report on CSR.

6. According to the GRI, prioritization is part of the process of creating a CSR report,
but not one of the principles that should guide its content.

Key Terms
AA1000AS CSR standards based on
AccountAbility principles that focus heavily
on whether the organization and its sustain-
ability reporting respond to stakeholder
concerns.

Coalition for Environmentally Respon-
sible Economies (Ceres) An organization
that supports reporting tools that include
environmental and social responsibility.

Exxon Valdez An oil tanker that ran
aground in Prince William Sound in Alaska
in 1989, causing one of the worst environ-
mental disasters in history.

generally accepted accounting principles
(GAAP) Accounting standards and proce-
dures defined by the accounting industry
and adopted by nearly all publicly traded
companies in the United States.

Global Reporting Initiative (GRI) A
framework for sustainability reporting that
was originally created to help leaders and
managers start reporting.

ISAE 3000 The ISAE standard for any assur-
ance reporting that is not a financial audit or
review of historic financial information.

ISO 26000 The ISO standard that provides
guidelines for corporate social responsibility.

social auditor An external expert charged
with certifying annual progress on social
issues within a corporation.

standardization Using a common system
that allows for fair comparison between like
corporations.

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