1. Issues in Social and Environmental AccountingVol. 1, No. 2 December 2007Pp 311-333 On The Effectiveness of Social andEnvironmental AccountingMarc OrlitzkyGlen WhelanNottingham University Business SchoolUKAbstractThis paper presents the broad outline of an instrumental theory of social and environmentalaccounting (SEA) at two levels of analysis: organizational and societal. We argue that, giventhe impact of signaling and transaction costs as well as various other costs and benefits of SEA,the level of SEA should be set so that marginal costs of SEA equal marginal benefits (at thefirm level) or marginal costs of SEA to society equal marginal benefits to society (in line withthe tenets of social efficiency). In this context, we summarize the overall empirical evidenceregarding the financial benefits of social and environmental disclosures for the reporting or-ganization. Moreover, because all organizational decision making is embedded in politicalgovernance systems, we also highlight the importance of these systems for SEA and concludewith three suggestions for future research.Keywords: Corporate social performance; corporate social responsibility; environmental ac-counting; moral frameworks; political governance systems; social accounting; social effi-ciency; utilitarianism.THE EFFECTIVENESS OF SO-35% of the Fortune Global 250 pub-CIAL AND ENVIRONMENTAL AC-lished social and environmental reports.COUNTINGThis proportion has increased to 45%three years later and 64% in 2006 (Kolk,The proportion of large multinational 2003; 2008; KPMG, 2002). Europeancompanies reporting on the social and companies are more likely to discloseenvironmental consequences of their social and environmental data than U.S.business activities has dramatically in-companies and are generally seen ascreased during the last decade. In 1998,best practice trendsetters in social andMarc Orlitzky is research fellow at International Centre for Corporate Social Responsibility, Nottingham UniversityBusiness School, UK, email: marcorli2007@yahoo.com. Glen Whelan is Lecturer in Business Ethics at the ICCSR,Nottingham University Business School, UK, email: Glen.Whelan@nottingham.ac.uk

2. 312 M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333environmental accounting (SEA) (Owen the level of SEA that maximizes the firm& ODwyer, 2008; Standard & Poors,-specific utility of SEA (again consider-SustainAbility & UNEP, 2004). None-ing both costs and benefits of SEA, buttheless, some scholars have raised con-only costs and benefits for the reportingcerns about greenwashing, the lack oforganization). Keeping levels of analy-verification or verifiability, and thus thesis distinct is important because the twolack of genuine accountability (Owen & different objectives of effectiveness mayODwyer, 2008). As SEA touches onnot necessarily converge with respect tomost dimensions of organizational per- conclusions about the right level orformance and social efficiency as de-type of SEA as they consider differentfined below, this commentary contextu- costs and benefits at different levels ofalizes SEA by focusing on the integral analysis for different actors (as we willelements of effective SEA and its politi-show in this paper). The overall conclu-cal governance contingencies.sion of our argument is that, given lim- ited resources, both organizations andFor the purpose of this paper, we define society as a whole shouldin the inter-SEA as the provision of informationests of outcome effectivenessonly pur-about business impact and performancesue those actions that maximize out-with regard to social and environmentalcomes at minimal cost. Connectingissues. Like standard financial account- SEA to organizational and societal neting, SEA measures, monitors, and con-benefits, we introduce ideas that are pri-trols business activities and thus is help-marily prescriptive in nature. Accordingful to both internal (e.g., managers) andto Donaldson and Preston (1995) andexternal (e.g., investors) stakeholders. InBazerman (2005), prescriptive theoriesline with this functional definition, effec- connect actions A to outcomes B, i.e.,tiveness of SEA is defined as the extent evaluate the extent to which any actionto which SEA meets two equally impor-A is instrumental to achieve any out-tant objectives, namely: the non-come B. Although we do not provide afinancial information requirements ofnormative foundation for our chosenorganizational stakeholders in verifiableoutcomes at organizational and societalform and the contribution of SEA tolevel (there may be others), the sectionsbusiness as a performance-enhancingon political governance systems, con-tool (Epstein, 2008). Thus, to analyze ceived as important contextual forces, dothe effectiveness of SEA requires anevertheless allude to some of the nor-deeper understanding of outcomes at themative underpinnings of our chosen out-societal and organizational levels ofcomes.1analysis. Our contribution to this issue of IssuesAt the societal level, that level of SEA isin Social and Environmental Accountingmost effective that achieves greatest so-cial efficiency, that is, maximum aggre- 1Prescriptive, or instrumental, theorizing differs fromgate societal well-being (with both bene-normative theory in that the latter identifies moral orfits and costs of SEA to all constituentsphilosophical guidelines for the operation and manage-being included in this utilitarian calcu-ment of business firms, while the former describes connections, or the lack thereof, between any actionlus) (Baron, 2006). At the organiza- (e.g., SEA) and company objectives (e.g., profitability)tional level, effectiveness is captured by or sociopolitical objectives (e.g., democracy) (Donaldson & Preston, 1995). 3. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333313is structured as follows. First, we sum- Benefits and costs of SEA based onmarize potential benefits and costs of economic theorySEA to reporting organizations and theorganizations stakeholders. Second, inTwo seminal economic theoriesbuilding off these general considera-(signaling theory and transaction costtions, we derive some suggestions foreconomics) can be used to analyze thebest practice in SEA. Third, we presentcosts and benefits of SEA. From athe current empirical evidence regarding managerial perspective, economic theo-the financial benefits of social and envi- ries are useful because they make ex-ronmental disclosures for the reportingplicit what other theories applied toorganization. Fourth, we point out how SEA, such as legitimacy theorybroader social and political governance(Deegan, 2002), leave implicit. In othersystems may influence, constrain, or words, they make costs and benefits thesupport SEA. Finally, we conclude with central foci of the analysis of SEA. Assome suggestions for fruitful future re- shown in Figure 1, it is argued that thesesearch agendas in SEA. benefits and costs accrue to the reporting organization and society at large.Figure 1 Taking Account of Social and Environmental AccountingBenefits CostsTo Reporting LegitimacySignaling costsOrganization (e.g., monitoring,Shift in emphasis Competitive advan- data collection)from laissez-fairetage (through sig-naling/reputation) toliberal democraticTo Other Decreasing transac- Opportunity costs stateStakeholderstion costsInformation over- load/ambiguity (DiMaggio & Powell, 1983). To theBenefits and costs to the reportingextent that stakeholders claim a right toorganization know details about organizations social and environmental initiatives, organiza-The conventional explanation for SEA,tions will try to live up to these expecta-legitimacy theory (Deegan, 2002), relies tions and, thus, close the legitimacy gapon an institutional logic of conformity. between stakeholder perceptions andAccording to legitimacy theory, organi-organizational reality (Campbell, 2000).zations conform to stakeholder expecta-Seen in this light, SEA can be regardedtions of good behavior and to aas an explanation and justification ofbroader social contract (Mathews,current organizational activities (Maurer,1993). The idea that organizations con-1971) or an effort to garner social sup-tinually strive to gain or maintain legiti-port (Suchman, 1995). In short, legiti-macy is consistent with the notion ofmacy theory can be considered an amal-isomorphism in institutional theorygam of institutional explanations and 4. 314M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333stakeholder theory (Campbell, 2000).example, good corporate citizens mayWhilst legitimacy theory is of key im-attract more talented employeesportance, research has suggested that (Greening & Turban, 2000; Turban &other theories can help provide further Cable, 2003; Turban & Greening, 1996)and arguably more nuanced explanationsand address environmental challengesfor the prevalence of SEA activities. For and opportunities more proactivelyexample, Campbell (2000) showed that(Berry & Rondinelli, 1998; Hart, 1995;chairman succession affected the level2007). Insofar as SEA is not imposedof the voluntary disclosures of Marks on all businesses and instead is voluntar-and Spencer, a British retailer. Camp-ily chosen, its adoption may lead tobell argued that because different corpo- greater interorganizational trust and, inrate leaders may perceive organizationalturn, higher economic performance andenvironments differently, we cannot un- growth (Hosmer, 1995; Knack &derstand organizations investment in Keefer, 1997). The overarching as-SEA technology without analyzing thesumption in signaling theory is that man-cognitive filtering mechanisms inside agers will be incentivized to maximizemanagers heads. Similarly, it is diffi-these reputational returns of SEA net ofcult for legitimacy theory to argue thatits associated signaling costs. Thesebusiness executives make resource allo- signaling costs include financial and noncations without reference to some type-financial (e.g., time) expenditures asso-of cost-benefit analysis. This omission ciated with the collection and dissemina-is redressed in this paper given its focustion of SEA information.on economics and political governance,and its concern to offer practical solu-However, not all organizations can ex-tions to managerial questions about the pect to derive the same benefits fromright level of voluntary SEA. SEA signaling. The effectiveness of sig-naling depends on the extent to whichFrom an economic perspective, signal- stakeholders interpret SEA correctly as aing theory adds explanatory power.signal of business responsibility andMarket signaling captures an economic commercial reliability. This implies thatview of organizational reputation be- an activity or characteristic that is rela-cause a signal is used to communicate tively more costly for the lower-qualityinformation to, or change the beliefs of, types in the market (i.e., irresponsibleother actors in the market (Spence, organizations) tends to be more effective1974; 2002). Thus, a signaling device as a signal because this makes it moresuch as SEA represents a differentiatingexpensive for irresponsible organiza-(rather than mimetic or homogenizing) tions to attain it and, thus, it is morecharacteristic through which the report-likely to be used as a (valid) signal bying company may gain competitive ad-responsible market actors. Conversely,vantage. In the same way as a degree of insofar as managers know what types ofhigher education may signal job appli-signals are used by stakeholders undercants intelligence, work motivation, orconditions of information uncertainty,productivity, SEA can signal an organi- they may be tempted to fake signals,zations commitment to corporate citi-so that the signals do not validly sepa-zenship. In turn, this can affect the or- rate responsible and irresponsible or-ganizations financial bottom line. For ganizations (Spence, 1974). For exam- 5. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333 315ple, many outsiders mistook EnronsInsofar as the signal can be invalid, thefaking of social responsibility for genu-reduction of transaction costs is, ofine corporate responsibility. Likewise,course, not an automatic outcome ofmany consumers seem to be misled bySEA.the marketing of ethical food, whichmay have a number of ecologicallyStakeholder costs as a consequence ofharmful side-effects (Economist, 2006).SEA are more difficult to specify thanWhen this kind of dishonesty or over-the more obvious and tangible costs tostatement happens SEAs value as a sig-the reporting organization. Stakeholdersnaling device will be weakened.primarily incur opportunity costs. These opportunity costs arise from the fact that the reporting organization sacrificesBenefits and costs of SEA to stake-some investments in stakeholder man-holdersagement activities that are not SEA. For example, instead of spending managerialAny economic transaction incurs trans- time and organizational resources (suchaction costs, and all organizational ac- as paper) on the collection and compila-tors are motivated to minimize these tion of data in glossy reports, organiza-transaction costs (Coase, 1937; William- tions could devote more time to interac-son, 1975; 1985). Because of bounded tive stakeholder dialogues or addressrationality (Simon, 1997) and opportun-environmental risks. However, becauseism (Williamson, 1975), transactionSEA typically serves as a control devicecosts are uncertain and often difficult to for past mistakes or failures in stake-predict (Williamson, 1993). As men-holder management (Epstein, 2008),tioned above, SEA may signal that thethese opportunity costs are likely to bereporting organization is behaving in aquite low. In addition to opportunitycaring and responsible manner and, thus, costs, accelerating provision of socialprovide evidence (hard data) summariz- and environmental reports may also leading, or at least illustrating, the organiza- to information overload and, therefore,tions social and environmental activi-more (rather than less) stakeholder un-ties. This will reduce transaction costs certainty about the meaning of all this(borne by stakeholders): e.g. expenses informationparticularly when SEAassociated with the monitoring and tends to be based on non-standardizedsearching for signifiers of corporate re-measures, which might be incommensu-sponsibility and promise keeping.rate in cross-firm and cross-industryStakeholders that claim a right to knowcomparisons.about organizations social and environ-mental activities would have to spendmuch more time searching for this infor- Best practice in SEAmation if SEA data were unavailable.For example, stakeholders would have toThese instrumental theories of SEA caninterview competitors and suppliers or add important insights to previous SEAspend money on undercover data collec- best practice lists, which included, fortion. In other words, because SEA canexample, Zadek et al.s (1997) criteria ofserve as a market signal, it may alsoinclusivity, comparability, completeness,lower transaction costs for stakeholders.external verification, and continuous 6. 316M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333improvement. This and other best prac- Second, and from the broader societaltice lists focus mainly on duty-basedperspective, the preceding theories sug-precepts. Deontological principles can gest that social efficiencyi.e., the dif-obviously be praised from a moral per- ference between all societal benefitsspective. Nevertheless, they can some- emerging from SEA and all societaltimes be accused of providing limitedcosts emerging from SEAshould belevels of managerial or political guid-maximized (see Baron, 2006 on socialance regarding the practical limits im-efficiency in general). This implies theposed on SEA by resource scarcity and, following change in the utilitarian calcu-thus, the right level of SEA. For ex-lus: MBSEA(all) = MCSEA(all).ample, the imperfect Kantian duty totreat others beneficiently which is aUndoubtedly, this cost-benefit analysis,duty that can be related to the duty thatwhether at the organizational or societalcorporate managers might be considered level, is no easy task. The specificationas having in regard to accurate reportingof all benefits and costs associated with provides limited guidance as to howSEA is difficult. However, our theoriz-one should help others, how many one ing offers the following suggestions.should try to help, how much time oneFirst, SEA should be stakeholder-should devote to helping others, and sooriented rather than focused on societyon (e.g., Korsgaard, 1996: 20-21; White, at large (Clarkson, 1995; Orlitzky, 2007;2004: 92-94).Orlitzky & Swanson, in press): for the simple reason that costs and benefits canIn contrast to many duty-based precepts, only ever be related to specific constitu-which are often limited in their capacityents. What this means is that, stake-to provide practical advice regarding theholder-centered reasoning requires thatallocation of resources, the aforemen- those who will reap the benefits relatedtioned theories can be used to derive theto SEA, and those who will bear thefollowing prescriptive advice for best costs, be concretely specified. In con-practice in SEA (see Endnote 1 on thetrast, reasoning based on some amor-distinction between prescriptive and nor-phous common good can be under-mative dimensions of an issue).stood to present an obstacle to estimat- ing the concrete costs and benefits asso-First, at the organizational level ofciated with SEA.analysis, the preceding theories suggestthat managers ought to initiate SEA so At the same time, a stakeholder focus inthat the difference between total benefits SEA reiterates the importance of con-of SEA for their firm and total SEAtinuous improvement with (ever-costs of their firm is maximized. Ex-changing) stakeholder needs in mind andpressed differently, SEA should expand as long as marginal benefits exceed mar-up to the point where firm-specific mar- ginal costs. An issue focus, on the otherginal benefits from SEA equal marginal hand, might reify issues as stable enti-costs. Only the firm-specific benefits ties to be addressed when reality wouldand costs of SEA are included in the recommend a mindset that acknowl-formal calculus of MBSEA(firm) = MCSEA edges stakeholder groups (or individu-(firm).als) evolving constructions of organiza- tional reality. For example, what at one 7. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333 317point in time was perceived as business greater verifiability and accountability,as usual (e.g., disposal of oil rigs in the and as shown by Akerlof and otherNorth Sea) might shift almost over- economists, well-functioning marketsnightto a deeply moral issue that oil tend not to reward the lack of transpar-companies must address. More broadly,ency.flexibility allows for the innovations andstrategic planning necessary to devisesolutions in stakeholder and environ-Empirical evidence on the effective-mental management that are cost- ness of SEAeffective and optimal for overall societalwell-being (Husted & Salazar, 2006). As is obvious by now, we do not assumeThus, reporting flexibility emerges as a that more and more SEA is necessarilykey principle of effective SEA, a pointthe optimal outcome for an organizationto which we will return in the section on(or society at large); nor do we assumepolitical governance systems.that any particular type of SEA is neces- sarily optimal for either organizations orIn effective SEA, there is not only cross- societies. Instead, we make the moretemporal but also geographic flexibility.realistic assumption that SEA, thoughStakeholders in different cultures may often resulting in many benefits, is neverespouse different values (Donaldson, a cost-free exercise and reaches an opti-1989; Donaldson & Dunfee, 1999), and mum level, beyond which net benefitsSEA should reflect different cultures (especially for business) will start to falldiffering preferences, norms, and priori-(see previous section on opportunity,ties. This best practice of internationalsignaling, transaction, and other costs).flexibility even applies to objective To understand the net effectiveness offacts such as pollution abatement orSEA more fully, we can draw on empiri-animal rights because different cultures cal research to test this assumptionatespouse different views on the impor-least partially. Specifically, we cantance and substance of such practices. draw on past empirical studies that haveOur instrumental theory of SEA effec-examined the question to what extenttiveness also explains why verifiability SEA is linearly correlated with corporateand verification of organizations socialfinancial performance across industriesand environmental disclosures are so and study contexts. A large positiveimportant. Without verifiability and, in correlation would cast doubt on our the-fact, actual credible verification, espe-ory of optimalrather than maximalcially external stakeholders would ex- SEA because such a correlation wouldperience no cost advantages when deal- imply a business case2 for ever-ingwithresponsible versusincreasing levels of SEA (for a similarirresponsible organizations becausediscussion of corporate social responsi-those SEA signals could not be trusted.bility more generally, see McWilliams &Sooner or later, markets will collapse Siegel, 2001).when there is information asymmetry (asin the case of SEA) and low trust be-Most research reviews in SEA still con-tween buyers and sellers of products clude that, because of variable findings,and/or information (Akerlof, 1970). In the correlation between social disclo-this sense, market pressures exist for sures and financial performance cannot 8. 318M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333be established empirically (Deegan,counting measures can be conceptual-2002; Ullmann, 1985). However, two ized as measures of organization-levelaward-winning meta-analyses concludedefficiency in the use of company re-there is a small positive yet negligible sources, this finding reaffirms the afore-correlation (Orlitzky & Benjamin, 2001;mentioned idea that increasing levels ofOrlitzky, Schmidt & Rynes, 2003).2 The SEA are not necessarily efficient frommeta-analytic results shown in Table 1 an organizational perspective. Alterna-suggest that we can, in fact, reach gen- tively, the negative correlation betweeneral conclusions about the business case accounting CFP and SEA might lead tofor SEA. In general, the true score cor- the conclusion that poor financial per-relation between social disclosures andformers are more likely to disclose so-all different measures of corporate finan- cial and environmental data (possibly tocial performance (CFP) is .09, with over distract the readers of their annual re-98% of the cross-study variance by suchports, such as shareholders, from theirartifacts as sampling error and measure- poor financial performance as measuredment error. Whenever the cross-study by return on assets or equity). This al-variance explained reaches 75% in aternative interpretation, though, callsmeta-analysis (see sixth column in Table into question the interpretability of SEA1), we can conclude that there are noas a valid signal of organizational socialmoderators and we have correctly identi- and financial sustainability (see also pre-fied the population parameter, or mean vious section on faking).true score correlation (Hunter &Schmidt, 2004). With market measures The only area in which empirical resultsof CFP (such as share price apprecia-are inconclusive is the correlation be-tion), the true-score correlation wastween SEA and firm risk (Orlitzky &slightly larger ( = .11; 2 = .01).Benjamin, 2001). The true score correla-Thus, the meta-analytic data suggest thattion of -.10 might suggest that SEAfinancial markets reward social disclo-minimizes firm risk. However, this con-sures only to a minor extent. However, clusion would be premature becausethe meta-analytic data also show thatstudy artifacts explained only 26% of thesocial disclosures are not correlated, and cross-study variance, and thus the truemay even be inversely correlated, with score standard deviation SD was a size-any internal, accounting measures of able .23 (the square root of the true scoreCFP ( = -.02; 2 = .00; i.e., all of the variance estimate reported in Table 1,cross-study variance is explained by 2study artifacts). i.e., ). Furthermore, the file drawer analysis, which calculates theHence, far from being inconclusive, thenumber of studies needed to change ouroverall results show that voluntary dis- conclusions substantially (i.e., a failsafeclosures have only small positive bene-N), indicates that only one additionalfits for the valuation of firms in financial study would be needed to change con-markets and may even be counter- clusions in the case of SEA and firmproductive in terms of internal account- risk. Therefore, more studies will haveing measures of CFP. Since these ac- to be conducted on SEA and firm risk2By business case of SEA, we mean SEA results inbefore we can reach any general conclu-short- or long-term financial benefits for business. 9. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333319Table 1Meta-analytic Conclusions Regarding SEA Relationship of kaTotal Sample-size Ob- % Vari- Mean Vari- FileSocial Disclosuressampleweightedservedance true- ance ofDrawersizemean ob- variance Explainedbscore r r Analysisc with served(mean )[=2()] r (robs)All measures of CFP975,360 .0438.018998.47%.0871.0011 NA2.a.1. Market-based CFP794,426 .0548.020689.75%.1090.008182.a.2. Accounting CFP18 934 -.0085.0077100.00% -.0168 .0000 NABusiness risk2213 -.0741.038125.85%-.1041 .0543 1Social audits and CFP355,016 .1143.0081100.00% .2272.0000 45Note: CFP = corporate financial performance.ak: number of correlation coefficients meta-analyzed;brefers to percentage of observed variance explained by sampling error and measurement errorin CSP;cHunter & Schmidts (1990) effect size file drawer analysis: Number of missing studies neededto bring robs up to -.05.Source: Orlitzky & Benjamin (2001); Orlitzky, Schmidt, & Rynes (2003).sions in this area.forecasting, and management. For ex-Furthermore,these meta-analysesample, when SEA is verified in the formshowed that, of all the different proxiesof social audits, we observe a muchof corporate social responsibility (CSR),greater and generalizable true score cor-SEA was correlated with CFP to the relation of .22 with CFP (see last row ofsmallest extent (Orlitzky & Swanson, inTable 1). This suggests that stake-press)3. These other CSR measures in-holders do not trust SEA as a signal ofcluded CSR reputation, executive val-good corporate citizenship unless socialues, and such organizational processes disclosures are implemented in a com-as social audits, philanthropic donations, prehensive organizational audit systemissues management, stakeholder man-and objectively verified by independentagement, and environmental assessment, auditors. Overall, our previous, theory- based intuition about the necessity of3 Orlitzky and Benjamin (2001) won the 2001 Bestverification and auditing is supported byArticle Award given by the International Associationfor Business and Society (IABS) in association withthese meta-analytic findings.California Management Review. Orlitzky, Schmidt, andRynes (2003) won the 2004 Moskowitz award for out-standing quantitative research relevant to the socialinvestment field. The Moskowitz Prize is awarded SEA and political governance systemsannually to the research paper that best meets the fol-lowing criteria: 1) practical significance to practitionersof socially responsible investing; 2) appropriateness and Organizations social, political, and eco-rigor of quantitative methods; and 3) novelty of re- nomic environments may also affect thesults. This entire research program will be summarized effectiveness of SEA. Hitherto, this fact(and updated with new findings) in a forthcoming book(Orlitzky & Swanson, 2008).of organizational embeddedness has 10. 320M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333been understated within the SEA litera-cially negative liberty, is emphasized. Inture. This is unfortunate, for without effect, the idea of negative liberty referswork explicitly concerned to connect to those liberties associated with respect-SEA with the broader domain of politi- ing private property, not being infringedcal governance systems, SEA scholar- upon, not being lied to, not being ag-ship remains incomplete (Deegan, 2002; gressed against, and/or, not being forci-Mathews, 1997), especially given our bly constrained (e.g., Berlin, 1969; Sen,focus on SEA effectiveness. Amongst1988). For negative liberty to be re-other things then, and as will be furtherspected then, it is generally required thatemphasized in the concluding discus- other people refrain from actively harm-sion, the present paper is concerned toing others or from forcibly imposingsuggest that scholars of SEA need to their will on others in any way. Never-increasingly engage with, or at leasttheless, and as Shue (1996: Chapter 2)more fully acknowledge, the ways inhas argued, if the negative liberties of awhich the interrelated concerns of moral certain person (e.g., Person A) are to beand political philosophy shape the politi- respected, other people or institutionscal governance systems that impact (e.g., Police Force Z) will commonly beupon, or contribute to the definition of,required to act so as to forcefully pre-the effectiveness of SEA. More specifi-vent another person (e.g., Person B)cally, the present section of the paperfrom infringing as such. Given this gen-refers to a number of perspectives thateral concern and whilst acknowledgingcombine to inform, and often compete tothat some thinkers aligned with the lais-inform, the (re)design and (re)sez-faire, classically liberal, or libertar-construction of political governance sys-ian perspective argue that not even atems within contemporary societies.minimal state can be justified given thatWith reference to the discussions al-taxation is money paid under threat ofready completed, what the present sec- institutionalized violence, and hence,tion of the paper suggests is that, ulti-disrespectful of negative liberty (e.g.,mately, it is very difficult to conceive Hoppe, 1999; Rothbard, 1978) mostthe effectiveness of SEA at the manage-of those aligned with this broad line ofrial and/or stakeholder level minus thethought side with Nozick (1974: ix) insort of birds eye view that the interre-thinking that something tending towardslated domains of moral and political phi-a night-watchman state limited to thelosophy enable one to take. It is for this narrow functions of protection againstreason that the following two systems of force, theft, fraud, enforcement of con-political governance are discussed next. tracts and so on is justified. The second thing that the laissez-faire,The laissez-faire, classically liberal,classically liberal, or libertarian perspec-and/or libertarian perspective tive tends to suggest is that the sum of individual goods within a given societyThe first political governance systemis likely to be maximized so long ascan be termed the laissez-faire, classi- negative liberty is respected. This utili-cally liberal, and/or libertarian perspec- tarian argument, whilst not always puttive. In this system, the importance offorward by those associated with a lais-individual autonomy and freedom, espe- sez-faire, classically liberal, or libertar- 11. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333 321ian perspective, is nevertheless com- century Britain, which is commonly con-monly advanced. Mises (2002: 22-23),sidered the archetype of a classicallyfor example, makes the basic point well liberal society, limited the role of thewhen he writes: nation-state to that of the night- a system based on freedom watchman (Taylor, 1972). Neverthe- for all workers warrants the less, this general perspective has had a greatest productivity of human massive influence on the collective psy- labor and is therefore in the in-che of Western society and has thus in- terest of all the inhabitants of the fluenced the design and construction of earth free labor is able toits political governance systems. Ac- create more wealth for every-cordingly, it is here argued that a sophis- one.ticated understanding of the laissez-Given these two beliefs i.e., the belieffaire, classically liberal, or libertarianin the importance of negative liberty and perspective is of vital importance to anythe belief that respect for negative lib- discussion of the effectiveness of SEA.erty maximizes social welfare those Three specific reasons will now be putwho can be associated with a laissez- forward for arguing thus.faire perspective (e.g., Friedman, 1962;1970; Mises, 1963; Mises, 1990; First, an understanding of laissez-faireNozick, 1974; Smith, 1776/1976) tend to thinking is vital if one wishes to contex-(1) want the role of the nation-state to be tualize the fact that the managers of lim-limited to something approaching theited-liability and publicly traded corpo-night-watchman role4 and (2) tend torations are legally obliged, and remu-champion the benefits that a society de-neratively encouraged, to try to maxi-rives from the actions that business peo- mize shareholder wealth (e.g., Beer-ple (who are largely understood as beingworth, 2004/2005; Bostock, 2004/2005;motivated by the desire to maximize Collison, 2003; Cragg, 2002; Owen,their own financial profits) engage in to 2005a). This fact, which means thattry to satisfy consumers. managers are strongly encouraged tomeasure the effectiveness of SEA inBefore proceeding to expand on the sec- terms of maximum net company bene-ond of these two points, which is closely fits, is often presented in a negative lightrelated to Smiths idea of the invisiblewithin the SEA scholarly literature givenhand (see below), it should be high-that it tends to limit the extent and qual-lighted that the laissez-faire, classically ity of SEA activities (Owen, 2005b). Inliberal, or libertarian ideal of society hasshort, those who present the profit mo-never been actualized on any large scaletive in a negative light, do so for ethicalin recent history (it may, however, havereasons. Accordingly, and as the preced-been actualized on a large scale histori- ing discussion suggests, it is importantcally or on a smaller scale more re-that scholars of SEA recognize that thiscently). Indeed, not even nineteenth- concern with profit maximization can beargued for on both deontological (and/or4Neither Friedman nor Smith, for instance, champi- rights-based) and utilitarian groundsoned the sort of pure laissez-faire perspective beinghere discussed. Nevertheless, both thinkers have defi-(McCloskey, 2006; Mises, 1963; Smith,nitely championed the benefits of limiting government 1776/1976).involvement in various social and economic issues.Hence the emphasis placed on the word approaching. 12. 322M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333The deontological (and/or rights-based) lence is originally derived, isargument in favor of profit maximiza- frequently powerful enough totion states that as long as profits are gen-maintain the natural progress oferated in a manner that does not infringe things towards improvement, inon the negative liberty of other people spite both of the extravagance ofe.g., so long as there is no coercion orgovernment, and of the greatestdeception involved then they are justi- errors of administration. Likefied. This argument is directly related tothe unknown principle of animalthe idea that a truly commercial interac- life, it frequently restores healthtion is mutually beneficial, and hence, and vigour to the constitution, innon-coercive. Furthermore, this idea is spite, not only of the disease, butrelated to the belief that, so long as oneof the absurd prescriptions ofis entitled to, or rightly owns, the re-the doctor. (Smith, 1776/1976:sources utilized in the production of 443)goods and services, then they are alsoentitled to, or deserving of, any profitsBoth the deontological and utilitarianthat the sale of these goods and servicesarguments made above help justify insti-generate (Kirzner, 1989; Nozick, 1974).tutional frameworks that strongly en-In contrast to the deontological (and/or courage managers to judge the effective-rights-based) argument, the utilitarianness of SEA initiatives in terms of firm-argument justifies the right of individu-specific net returns from SEA. Accord-als to earn private profits on the basis ingly, it can be argued that those whothat this right has positive consequenceswish managers to primarily judge thefor social welfare. Mises neatly encapsu-effectiveness of SEA initiatives in otherlated one element of the utilitarian de- ways such as in terms of accountabil-fense of private profits by stating that:ity to stakeholders (Owen, 2005b) The behavior of the consumers need to directly engage these normative makes profits and losses appear arguments if they are to alter systems of and thereby shifts ownership of political, economic, and corporate gov- the means of production fromernance that encourage managers to be the hands of the less efficient primarily concerned with profit maximi- into those of the more efficientzation. [] In the absence of profit and loss the entrepreneurs would notThe second point to be made, in relation know what the most urgent to SEA and the laissez-faire, classically needs of the consumers are. liberal, and/or libertarian perspective, is (Mises, 1963: 299)that the deontological argument aligned with this worldview can be used to argueAnd, more famously, Adam Smith has for the necessity of honest and compre-provided a utilitarian argument defend-hensive disclosure when it comes toing private profits when he wrote: SEA. Indeed, given the laissez-faire con-The uniform, constant, and unin- cern with truly commercial interactionsterrupted effort of every man to and, given the presupposition that manybetter his condition, the princi-consumers are concerned with the socialple from which public and na-and environmental impact that compa-tional, as well as private opu-nies can have, it can be argued that com- 13. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333 323panies are morally obliged on laissez- with the Austrian school of economicsfaire, classically liberal, or libertarian (Kirzner, 1985; 1989; Mises, 1963;grounds to honestly and comprehen- 1990), suggests, amongst other things,sively disclose the impact that the pro- that if governments set and enforce base-duction and sale of company goods andline standards that must be met with re-services have in regard to social and en-gard to SEA reporting, then companiesvironmental matters. The reason whywill be likely to do no more than try tothis can be argued is that the mutualachieve this baseline standard. One rea-benefit upon which any commercialson why this might occur is that, when-transaction is based implies the need to ever governments set a baseline stan-disclose information that could poten- dard, they can, whether intentionally ortially prevent a sale. For example, at not, give off the impression that any ef-least some people would, all other thingsfort to improve upon this level wouldbeing equal, prefer to purchase products result in resources being misallocated.from companies determined to reduceFurthermore, whenever governmentstheir carbon footprint than those not so provide hard and fast rules for the com-concerned. Thus, if a company decidedpletion of a task, managers and businessto give the false impression that theirpeople will obviously decide not to trycarbon footprint was less than that of to create a better way to accomplish thetheir competitors via their SEA, thensame task on the grounds that govern-they could be ethically criticized on lais-ment regulations will not allow such ansez-faire, classically liberal, or libertar- improvement to be implemented. Inian grounds: for lying (whether actively short, it can be said that governmentor by omission) is to disrespect the nega- regulation, in these and other matters,tive liberty and personal autonomy ofdiscourages innovation and results in aothers. Furthermore, the failure of or-suboptimal compliance rather than aganizations to provide honest accounts more desirable integrity mindset on theof such issues will likely increase trans- part of business executives (Paine,action costs incurred by customers and 1994). Furthermore, whenever suchother stakeholders in the future because baseline standards are implemented,deception lowers trust, which in turnfirms will be in a position to deflectnecessitates more future monitoring. criticism that they might receive fromObviously, such an outcome will also various stakeholders for not doing morelead to undesirable outcomes at the levelby responding: Company X hasof aggregate social welfare. achieved the governments standards and hence Company X has met societysThe third reason that an understanding expectations. Such a managerial com-of the laissez-faire perspective is vital to pliance mindset can translate into aunderstanding the current state of, andstance of as bad as the law allows (tocurrent debates surrounding, SEA, is due borrow the words of Interface CEO Rayto the utilitarian argument associated Anderson).with the classically liberal perspectivesuggesting that it would be a mistake forIn building off this same argument, itgovernments to over-regulate this area.can also be suggested that, wheneverThis general argument, most closely as-governments regulate and monopolizesociated with various thinkers aligned reporting and accounting processes, they 14. 324M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 309-331decrease the sphere available to socialinclude things such as basic levels ofand environmental entrepreneurship and education and welfare, can be consid-innovation. What this suggests, in spe-ered examples of positive liberty (Sen,cific regard to the contemporary lack of 1988) in that such goods positively en-governmentally enforced SEA activities,able people to achieve certain ends thatis that such a lack is far from being a badmere negative liberty cannot ensure (e.g.thing. To briefly elaborate, this lack ofwithout a basic level of education, indi-governmental presence leaves a vacuumviduals are unlikely to be capable ofthat market-driven innovations from sev- holding down a decent job, even thougheral competitors can fill. Thus, we have their negative liberty is respected andorganizations, such as AccountAbility in protected).the UK, the Global Reporting Initiative(GRI), KPI in Europe, and other simi-In addition to such positive liberties,larly oriented organizations, all develop- which are commonly argued for on de-ing systems and institutions that encour-ontological grounds and/or on the basisage SEA innovations. Such diversity andof human rights (e.g., Donnelly, 2003:competition, according to the laissez- Chapters 1-3), supporters of the liberalfaire perspective, is beneficial. And, democratic perspective consider equalwhen it comes to a young and develop-political participation essential to livinging field like SEA, it might be suggesteda good and full human life. Indeed, andthat this lack of hard regulation is a veryonce again, those of a liberal democraticgood thing indeed. bent regard participation in the democ- ratic election of politicians as a human right (e.g., Gewirth, 1996: Chapter 8).The liberal democratic perspective On this particular point, it must be men- tioned that advocates of a laissez-faire,The second political governance system classically liberal, or libertarian politicalcan be termed the liberal democratic governance system also commonlyperspective. It is arguably more impor-champion the importance of politicaltant than the laissez-faire, the classically participation. The difference betweenliberal, or libertarian perspective in thatthe two perspectives in this specific re-it is actualized to a greater extent withingard is that, whilst advocates of laissez-the world today. The reason then for the faire political governance systems try tolaissez-faire perspective having beenconvince the voting public that it is im-discussed first is that, in a number ofportant to keep the role of governmentsimportant regards, the liberal democraticto a minimum, advocates of liberal de-perspective can be considered a moder- mocracy argue that democratic govern-ated version of it. With this stated, thements need to play a much more activefirst thing to note is that, whilst being farrole.from disrespectful of negative liberty,the liberal democratic perspective never-Those aligned with the liberal democ-theless suggests that people have a rightratic perspective will argue as such be-to other goods as well; and, that liberalcause they believe it important that alldemocratic nation-states have a duty tothe people within a given society haveprovide these goods to its citizens. These their positive and participative rightsgoods, which are commonly thought to respected and, in contrast to advocates 15. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 309-331 325of laissez-faire, that governments needprofits in a regulatory environment thatto play a more than minimal role to en-is simply and solely concerned to protectsure that the social good is maxi- negative liberty. Thus, and whilst themized. In regard to the social good, liberal democratic perspective is farwhich is here conceived in utilitarian from disparaging of the utilitarian argu-terms, those aligned with the liberal de-ments that those aligned with the laissez-mocratic perspective commonly put for- faire perspective make, it neverthelessward two reasons as to why simply re-suggests that governments need to estab-specting negative liberty will not ensurelish various rules, regulations, incen-an increase in social welfare (see Bau-tives, and so on to ensure that the ener-mol, 1965, for example). First, they gies of profit-motivated actors contributecommonly reason that, without govern-to, and do not undermine, the socialment direction and/or control of re- good.sources, certain public goods will oftengo unproduced on the grounds that pri- One of the key decisions facing publicvate providers are unable to capture any policy makers then, according to the lib-income from their production. Second,eral democratic perspective, is whetherthey commonly reason that, minus gov-or not they should devise mechanisms,ernment regulation of commerce and or allow mechanisms to evolve, thatindustry, negative externalities will pro- channel the pursuit of profits in a so-liferate given the costs associated with cially productive direction (McMillan,self-regulation. Whenever either of these2002: 228). In specific regard to SEA,things occurs i.e., whenever markets what this means is that public policydo not produce certain public goods or must decide whether governmentswhenever they produce negative exter-should, or should not, impose hard regu-nalities the market can be said to havelation on business and corporate activi-failed.ties. As the preceding sub-section has indicated, there are potential costs asso-As the preceding discussions state, thoseciated with hard regulation, i.e., dimin-aligned with the liberal democratic per- ished innovation and the potential for aspective believe in contrast to thosereduction in activities towards the lowestaligned with the laissez-faire, classicallycommon denominator. However, and asliberal, or libertarian perspective that a the discussion of this sub-section hasmore than minimal government directing indicated, there are similarly potentialsociety in the name of the people, and negatives associated with leaving suchindeed, for the people, is justified. More institutional creation to the invisiblespecifically, those aligned with the lib-hand.eral democratic perspective commonlywant governments to impose hard regu-One potential negative is that, withoutlations that require business people and government coercion, various othermanagers to act one way or the other. To stakeholders will be unable to enforcereiterate, the basic reason why is thathonest and comprehensive reporting andthose aligned with the liberal democraticsocial disclosures. Thus, if a society con-perspective do not believe that social siders it important that people have ac-welfare will be maximized if businesscess to information established via SEApeople and managers are left to pursue activities, it can be argued that govern- 16. 326 M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 309-331ments need to ensure, via ultimately co- by governments is so that they can useercive means, that businesses and corpo- this information to suggest the need forrations disclose such information. Im- other policy initiatives. For example, ifportantly, this specific concern is relatedenvironmental NGOs have increasedto the more general notion that, aaccess to information regarding defores-workable market design keeps in checktation, desalination, groundwater usage,transaction costs These costs include hazardous chemical usage, and so on,the time, effort, and money spent in the then they can use this information to tryprocess of doing business both those to encourage governments to engage inincurred by the buyer in addition to the new policy initiatives whose aim is toactual price paidTransaction costs canensure that corporate practices improvearisebefore any businessis in such regards. Clearly, if one acceptsdone (McMillan, 2002: 9). that corporations can both positively and negatively impact upon social and envi-This idea of transaction costs is centralronmental concerns, and if one similarlyto understanding the fact that various accepts as do those aligned with thenon-governmental organizations (NGOs)liberal democratic perspective that such as the CORE coalition, for exam-government action is commonly re-ple (Zerk, 2007) continue to lobby quired to ensure that corporations posi-liberal democratic governments for in- tively impact upon social and environ-creasingly stringent and comprehensive mental concerns, then it is clear as toSEA practices. One of the reasons they why governmentally enforced SEA stan-desire such regulation is so that they can dards may be required. Indeed, it can bethen use this information to suggest toargued that governments themselves willtheir own members, and to the public be unable to establish the relative suc-more generally, that if they hold certaincess or failure of various policy initia-values regarding any number of socialtives unless they have access to informa-and/or environmental concerns, thention garnered from SEA practices. Inthey should choose Company A overshort, the liberal democratic perspectiveCompany B, C, and D. In short, theysuggests that governments will com-wish the government to impose increas- monly be required to regulate variousingly comprehensive regulations so thatelements of SEA if the activities ofthey can reduce the transaction cost for profit-motivated actors are to contributethose who wish to make purchasing de-to, and not undermine, social welfare.cisions on more than narrowly instru-mental grounds.5 In liberal democratic governance sys- tems, then, the emphasis shifts from firmA second reason why various NGOs -level effectiveness of SEA (MBSEA(firm)wish to see increasingly stringent and = MCSEA(firm)) to social efficiencycomprehensive SEA practices enforced (MBSEA(all) = MCSEA(all)). This shift in5 emphasis is shown as an arrow in FigureOf course, costs are not reduced at the aggregate levelbecause more regulation means a larger governmental 1. As argued before, the arrow does notbureaucracy is needed to enforce these regulations,imply that laissez-faire capitalism cannotwhich in turn needs to be funded with greater taxation.maximize social efficiency. Rather, inStrictly speaking, we are not dealing with a society-level reduction in (transaction) costs but with a transfer the absence of government interventionof costs from one set of stakeholders to another.(in laissez-faire systems), managers have 17. M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 309-331 327cognitive leeway to focus on employerarticulated, if one is to fully understandinterest in their cost-benefit analyses of the current state of SEA within theseany given corporate action. Argumentsdifferent countries. Whelans (2007)can be provided that these ultimately self work in particular, which engages with-interested actions result in the greatest Confucian thought to make further sensepublic benefit, or maximum social effi-of the Asian financial crisis and justciency (Bragues, 2006; Mises, 1963;what corporate social responsibilitySmith, 1776/1976). So, shift in empha-might mean in this part of the world,sis refers to a shift in managerial think-provides an example of how moral anding, which is forced (either directly or political philosophies can be used toindirectly) through government interven- shine a light on matters of institutionaltion in liberal democratic societies, to concern.transcend, in all managerial decisionmaking, the organization-level calculusAnother area that requires further re-of MBSEA(firm) = MCSEA(firm) and considersearch is empirical work relating to thethe broader stakeholder benefits of or-moral frameworks through which man-ganizational practices and policies. agers view the world. Tetlock (2000), for example, has highlighted that the way in which managers view a particularSuggestions for future researchsituation will be informed by the ethical and political theories they align them-This paper, like a great deal of the exist-selves with. To briefly extrapolate, suching scholarly literature on SEA, concen- work suggests along with Whelanstrates on Western countries and Western(2002) work on Pierre Bourdieus failureinstitutional forms. Accordingly, we to change the institutionalized patternssuggest that future research on SEAof the French media that if managersneeds to broaden its horizons, and in- are to be convinced of the merits ofcreasingly engage with hitherto under- adopting various SEA activities, then itrepresented geographic regions, and thewould be sensible for those trying tovarying institutional frameworks thatconvince managers to present their argu-prevail within them. For example,ments in a manner that is not inconsis-Aguilera & Jackson (2003: 453), Stern- tent with the ethical and political beliefsberg (1998), and Yafeh (2000) have all that managers have. Thus, if one presup-highlighted that corporate governanceposes that the managers of business cor-systems within East-Asia are commonlyporations are largely in favor of com-characterized by a system of cross-mercial enterprise, arguments aimed atshareholdings. Furthermore, Hansmann convincing managers to adopt various& Kraakman (2004: 40), Robins (2002),SEA practices should not, in addition toand Whelan (2007) have all emphasizedother things, rankly criticize commerce.that the political governance systems of Or, if one presupposes that managersEast-Asia have historically tended toand students of business tend to be utili-emphasize a stronger role for govern-tarian in ethical orientation, as has beenments in the direction of industrial pol-suggested in at least some of the litera-icy. Arguably, the moral and political ture (Orlitzky, 1997), then those wishingphilosophies that support such different to convince managers of the merits ofpolitical governance systems need to beSEA, should do so in utilitarian terms. 18. 328 M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 309-331Rather obviously, just what the ethical cluded that, given the impact of signal-and political beliefs of managers are,ing and transaction costs and variousand the way in which these beliefs im-benefits of SEA, the level of SEA shouldpact on managerial perceptions of SEA,be set so that marginal costs of SEAis a question that requires further empiri- equal marginal benefits (at the firmcal research. level) or marginal costs of SEA to soci-ety equal marginal benefits to society (inThe field of SEA, like most of the aca- line with the tenets of social effi-demic business literature (Pfeffer, 1993; ciency). However, because all organ-Van Maanen, 1995b), is characterizedizational decision making is embeddedby high paradigmaticdiversity in moral and political governance sys-(Mathews, 1997; Owen & ODwyer, tems, we also highlighted the importance2008). Paradigmatic diversity implies of these systems for SEA. In doing so,that different perspectives and findingsand amongst other points made, we dreware incommensurate (Burrell & Morgan, on laissez-faire or classically liberal1979). To clarify the current state ofthinking to argue that honest and com-affairs, researchers could, at a minimum, prehensive disclosure is needed if theinvestigate why paradigmatic diversity is relationship between consumers and cor-so prevalent in the SEA research arenaporations is to be a truly commercial(see also McKinley, Mone & Moon,one, and, in drawing on liberal democ-1999). Pfeffer (1993) and others (e.g., ratic ideas, we suggested that govern-Wilson, 1998) argued that science would ments will commonly try to impose stan-progress most rapidly when researchersdards for disclosure on corporationsagree on a common set of ontologicalwhenever suitable levels of disclosureand epistemological assumptions. On do not voluntarily arise. In doing so,these grounds, it might be worthwhile tothese macro discussions provide anstrive towards greater theoretical agree- overview of certain normative beliefsment. From the vantage point of scien-which can be understood to justify thetific progress and influence, the bestroles governments currently do (or dotype of SEA theory would not only benot) play in setting standards for SEA;unified but also prescriptive (Bazerman,and, a further understanding of why An-2005). 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