World Affairs Social Audit

This article details the different aspects of a Social Audit (AKA Ethical Audit, AKA Monitoring), and its benefits (not only preventing lawsuits and boycotts, but also increasing productivity, market shares and long term investment).


Social Audit
by J.R. Breton, Ph.D.

  I -  Definitions.
 II -  Scope of a Social Audit.
III -  Importance of the Social Policy.
IV -  Creation of a Social Policy.
 V -  Rules.

    Business in the information age is experiencing a complete transformation. The revolution is two-fold. First, the use of Internet and Intranet has created a new way of making and selling products. Second, corporate policies toward a whole range of stakeholders (employees, consumers, suppliers, investors, community, and society) have become an essential element of the company's long-term growth.

    While most companies are aware of the new situation, very few have fully integrated it into the way they are conducting business. For many, the use of the Internet is limited to advertising a corporate page instead of tailoring the product to each customer, and the relationship with stakeholders is viewed as secondary rather than essential.

    The leaders of the new economy will be the ones who will successfully integrate both the new communication technology and the new relationship with stakeholders into their business practices. Fear of the unknown is the greatest obstacle, as businesses face a new situation with contradictory information and sometimes serious misconceptions. This article will explain the new relationship with stakeholders, clarifying its importance and its different approaches.

I - Definitions.

    Social Audit, AKA Ethical Audit, AKA Monitoring, analyses the relationship between a company and its stakeholders. However, the term Social Audit covers three different situations:
1. An analysis performed by an independent Auditor.
2. An analysis performed by corporate insiders.
3. An inspection performed by independent Auditors.

    Generally, these three situations follow each other over time, as the company builds its Social Policy. First, an Independent Auditor analyses the situation and makes recommendations. Then, the company creates a structure to organize and monitor its Social Policy. Finally, when the policy is running smoothly, the company orders an Independent Inspection whose findings are usually publicized with the yearly financial statements.

    There are many types of audit, following competing schools of thought and national bias. For instance, while French and Italian Social Audits focus on labor issues, Danish "Ethical Accounting" audits have a much broader scope. However, there are two main distinctions to be made, between Qualitative and Quantitative audits, and between Defensive and Productive audits.

    The first distinction is between Qualitative and Quantitative Audits. Qualitative Audits may use numbers (for instance the emission of carbon dioxide, or the percentage of women and minorities in the top paying jobs), but numbers are never the final product. The Qualitative approach uses numbers as data, then makes a qualitative assessment. The Quantitative approach, on the contrary, attempts to convert qualitative phenomenon into calculations in order to obtain numbers as the final product. Paradoxically, while the Qualitative approach gives 
the best result, many Auditors and Corporations are attracted to the Quantitative approach and its deceiving "scientific" look. They erroneously feel that numbers cannot be contested, and do not realize that their arbitrary composition and interpretation usually lead to endless disputes.

    The second distinction is between Defensive and Productive Audit. A Defensive Audit is aimed at preventing lawsuits and boycotts, while a Productive Audit is designed to increase productivity, market shares and long term investment.

    There are two more concepts to define. The company's Stakeholders are any person or group that has some interest in what the company does (its employees, suppliers, investors, customers, community and society). The first work of a Social Auditor is to identify the stakeholders. Finally, Social Reporting is the way the Social Audit is publicized.

II - Scope of a Social Audit.

    The identification of the stakeholders is generally the first task of an audit. However, a Social Auditor does not study each group of stakeholders separately. Stakeholders have to be considered as a whole, because their concerns are not limited to the defense of their immediate interest. As a result, the Social Auditor will work on the components of a company's Social Policy (Ethics, Labor, Environmental, Community, Human Rights, etc.), and for each subject, the Social Auditor will analyze the expectations of all stakeholders.

The scope of the audit generally includes the following policies:

* ETHICS: values the company vows to respect. Policies include the pledge not to participate in (nor engage in business with people involved in) a series of activities that are deemed offensive. This list of unacceptable activities often includes exploitation of children, unethical treatment of animals, damage to the environment, and dealings with undemocratic regimes or with "bad guy" industries (fur, tobacco, guns, etc.).

* LABOR: creation of a working environment allowing all employees to develop their potential. Policies include training, career planning, remunerations and advantages, rewards linked to merit, balance between work and family life, as well as mechanisms that ensure non-discrimination and non-harassment.

* ENVIRONMENT: monitoring and reduction of the damage caused to the environment. For instance, policies of reduction of emissions and waste.

* HUMAN RIGHTS: making sure the company does not violate human rights nor appears as supporting human rights violators.

* COMMUNITY: investment in its local community. Policies include partnerships with voluntary local organizations, with financial donations, donations in kind (computers for education, food and clothes for the poor), and employees involvement. The company may initiate or participate to a major project such as the regeneration of a poor neighborhood plagued with unemployment, poverty, low education and racial tensions.

* SOCIETY: investment or partnership beyond the community. For instance, Cause Related Marketing (partnership with a charity to market a product while giving a small percentage of the sales to the charity).

* COMPLIANCE: Identification of all legal obligations and of the means to comply. Policies must deal with changing rules related to its work force (Labor), its products (Health, Environment, Intellectual property, specific regulations), its administration (Business, Tax), its dealings (supplier and customer liability, Criminal actions).

III - Importance of the Social Policy.

    The phenomenal growth of Socially Responsible Funds (now 20% of funds invested in the US), the growing difficulty to attract qualified employees, and the rise of non-governmental organizations able to sue or boycott unethical businesses, demonstrate the vital importance for any business of a well designed Social Policy.

The Ethics Policies will attract long-term investors, increase market shares for the ethical product, strengthen partnerships, and make the employees proud.

The Labor Policies will attract and keep a qualified workforce, and increase productivity, while opening new markets (ethnic minority customers are sensitive to the anti-discrimination policies in the work place).

The Environmental Policies will attract customers interested in the protection of the environment, and investors who fear the risks linked to bad environmental practices, while sometimes reducing the costs with cost-effective modifications of production processes. As for most other components of the Social Policy, serious Environmental Policies will attract Socially Responsible Funds and a qualified workforce (nobody likes polluters!).

The Human Rights Policies, also, will attract Socially Responsible Funds and a qualified workforce. Its most important role, however, is defensive: to prevent boycotts or campaigns of protest that could seriously tarnish the reputation of the company accused of practicing (or being an accomplice of) human rights abuses, and the resulting falling stock prices, loss of market shares, and low-moral work force.

The Community Policies will not only create roots in a local base for the company, it will also increase the productivity of the work force involved in the projects (by developing their leadership and customer service skills, building pride and loyalty with the feeling of being useful).

The Society (or Extra-Community) Policies boost not only the products linked with the policy but also the image of the company. Cause Related Marketing is extremely appreciated by customers because it makes them feel good (allowing them to support charities without spending their time or money), as long as the charities are well chosen and the percentage is not too small (or the ceiling too low).

The Compliance Policies are part of the Social Policy for two reasons. First, by complying with the law, the company demonstrates it is socially responsible. More importantly, Compliances Policies often go beyond the legal requirements, in order to show concerns for social matters (health, labor, environment, etc.). In many cases, companies build their social image by doing only slightly more than what is required by the law.

IV - Creation of a Social Policy.

    Most companies (if not all) already have elements of Social Policy. Often, these are independent pieces of regulation and practices. Most of the time, they are not part of a unique strategy, they are not managed by powerful senior executives, they are not reviewed before any business decisions are made, and they are not used in ways that would produce their full benefits.

    The first step is to have an Independent Social Audit, either Defensive (to prevent lawsuits and boycotts), or Productive (to increase productivity, market shares and long term investment). The audit will identify the stakeholders, clarify the components of a Social Policy that would address the concerns of these stakeholders at either the Defensive or Productive level, and make recommendations on the necessary measures to build the Social Policy.

    The company must be totally involved in the Audit. The Independent Social Audit is neither an inspection (for which the company would dissimulate important pieces) nor is it a situation where the Auditor brings his "one size fits all" solutions. The Auditor is only the coach of a team, composed of senior executives of the company who are working at gathering the information and finding solutions. The Auditor provides the directions, merges the information to create a whole picture of the social situation, and gives advice on the method used by the company to build its Social Policy and on its different aspects. Ultimately, it is the leadership of a company who builds its Social Policy, and then decides on the best way to run the policy (for instance, nomination of a person or creation of a department dedicated to Social Policy issues).

V - Rules.

    Building a Social Policy is not an easy task. While some rules are clear and must always be followed, others depend on the specific situation of the company, and finally, in a few cases, there are no solutions! A few examples will illustrate this point.

    An example of a clear rule that must always be followed is the integration of the Social Policy into all stages of business planning, and its management by powerful senior executives. If the Social Policy is not taken into account in the making of all business decisions, it will not produce the positive effects (defensive or productive), and is even likely to backfire, as expectations from stakeholders have been raised.

    Other basic rules include the need to be committed to its own Social Policy (there is no turning back), and the need to be coherent in the respect for the elected values. Several big corporations, such as Nike or Coca-Cola, are now in trouble for ignoring these rules.

    The Nike case: Nike's overseas factories are often described as a Human Rights and Labor nightmare, and the company recognized in the mid-90s that Nike had become "synonymous of slavery". After unsuccessfully trying to improve the situation with an ambitious Social Policy that was not integrated into the decision making process [1st mistake], the company turned against its stakeholders [2nd mistake], canceling financial aid to several universities (U. of Oregon, Michigan, Brown) who had joined the Worker Rights Consortium (WRC), an organization that denounced the physical abuse, low salaries and long hours (more than 72 hours a week) in Nike's factories in Asia, and asked for independent inspections.

    The Coca Cola case: With a Social Policy based on values such as diversity and non-discrimination (the company fought for the civil rights movement in the segregated South in the 1960s), Coca Cola captured the ethnic market: more than 50% of its American customers belong to an ethnic minority. The company, however, became victim of its lack of coherence when it appeared that the value of non-discrimination, that its Social Policy promoted, had not been taken into account in its Labor policies: its African American employees were underpaid and never promoted. As a result, Coca-Cola is now facing a boycott organized by some of its old allies such as the Civil Right Movement.

    A rule that clearly depends on the specific situation of the company is the Communication rule. Many Social Audits present communication as a necessary first step. According to this view, the company should advertise the work in progress and ask each stakeholder to bring its input in the building of the Social Policy. One of the success stories often mentioned is The Body Shop case. Having chosen communication and transparency since the beginning, The Body Shop enjoys the full benefits of its well-prepared Social Policy. While communication of 
the Social Policy is an essential element of its success, communication during the early stages of its creation is a decision that must be carefully weighted, as the company must decide if it is ready to face the increased expectations and scrutiny from stakeholders.

    Finally, an example of a situation with no satisfying rule is the case of conflict between Western values. In the case of conflict between Western and non-Western values, the rule is clear. Western values (which are based on the protection of individual rights) must always be chosen, for many reasons: they are the values of the most important stakeholders for the company, they are safer (usually won't lead to boycotts or trials), they are the basis for all international conventions, and they could be presented as a contribution to the enlightenment of other cultures (for instance, improving the life and status of women in Islamic or tribal cultures). In the case of conflict of values between members of the Western world, there is no rule. A case-by-case damage control approach is the only solution, as Imerys recently learned.

    The Imerys case: after Imerys (a French group, world leader in transformation of minerals) acquired a factory in Alabama, an American Union, ICEM, complained of what it analyzed as anti-union activities (Imerys refused to recognize the "Authorization Card" system). An Ethical Pension Fund, Walden Asset Management, demanded an explanation of Imerys, only to hear that the company acted in the name of Labor and Human Rights, following its Social Policy. The Authorization Card system (which allows a union to be deemed the only representative of the employees and avoid elections if it can produce an authorization card signed by enough employees) is considered by some American unions as a labor right, while Europeans see it as a violation of the fundamental labor right to freely elect its representatives (and exposing the employees to physical pressures from unionists coming to their houses at night to make them sign the card). Both Imerys and the Pension Fund realized the relativity of values, and Imerys is in the process of negotiating with ICEM a solution acceptable under both sets of values.

Dr. J.R. Breton (Do not write NOSPAM in the address!)

2000 J.R. Breton