‘Social accounting’ offers more transparency, greater investor confidence

An emerging trend is helping businesses define how they create value and the ways their actions affect customers, investors, society and the environment.

Businesses usually focus on financial capital, but other interconnected forms of capital can be analyzed to create a more holistic view of a company’s impact on its stakeholders and community, said Dr. Elizabeth Castillo, assistant professor of organizational leadership in the College of Integrative Sciences and Arts at Arizona State University.

Castillo is an expert on social accounting, a new business strategy whose effects are outlined in a financial document called an integrated report.

“[The integrated report] is a way of telling… the value creation story of a business,” Castillo said. “Their environmental impact, their social impact — like community outreach — and then also, what are their stakeholders in their ecosystem that they need to engage to be successful?”

An integrated report shows how all the pieces are connected, a model centered around “multiple capital” accounting.

“It’s relationships that open doors for you, so that’s social capital,” Castillo said. “For businesses, it’s their reputation, because that shows that they can be trusted.”

“Social accounting is a way to put all of those resources on a map so the business can understand how the pieces come together,” she said.

This strategy makes investors more confident that their money is being spent effectively, she said.

Financial transparency is a big piece of social accounting, Castillo said. For example, companies that report on how many open ethics investigations they have will be better prepared should a scandal arise.

“Transparency is a big part of it, but this also promotes what’s called integrative thinking, which is a way to see the whole — how all the pieces of the business come together and what levers can be moved,” she said.

“If you are not having high levels of employee engagement, are you measuring that and paying attention? And if so, then you’d need to maybe come up with an innovative strategy to retain your employees better.”

The idea behind social accounting is that it benefits not just a company’s reputation but its ability to attract and retain employees by increasing employee satisfaction and creating close partnerships within the community.

“Starbucks is a classic example, that they pay for the tuition of their partners,” Castillo said. “That’s an investment in human capital. It’s not just being nice, it’s actually a key strategy so that they can retain employees and save money in the long run.”

Social accounting is more than just a business strategy — it is a way of thinking, she said. Instead of looking only at the short-term bottom line, companies must pursue “win-win partnerships” in their ecosystems, which include vendors, partners, employees, investors and customers.

“It increases the trustworthiness and, I think, connection, because when you put stakeholders as a priority for the business, then the business becomes more attentive to it,” Castillo said.

Integrated thinking helps businesses anticipate future problems, and social accounting works in a similar manner, she said. Companies embracing social accounting consider not only the financial impact of decision-making but the impact on society, the environment and their reputation as well.

“[Social accounting is] on the upswing for sure,” Castillo said. “Part of it had to do with the financial crisis in 2008… part of it had to do with South Africa now mandating integrated reporting. There are formal programs like the Global Reporting [Initiative] — GRI — and the [Sustainability] Accounting Standards Board that are trying to create standards that would allow comparability across these various different reports.”

Castillo said the “time is right” that businesses start to realize that success involves more than just the companies themselves — businesses have to be sustainable in creating value for customers and maintaining good relationships.

“Social accounting helps a business kind of map and attend to that in a way that makes it actionable for their strategy,” she said.

Most social accounting is happening at larger companies right now, because they often already have the necessary network to keep up with trends, Castillo said. In the same vein, public companies have more accountability to stakeholders, so this is a good way to build trust.

“Intel just released their latest 10-K filing with the SEC, and they are taking a multiple-capitals approach,” Castillo said. “They have a page on: How do they develop human capital? How do they develop intellectual capital?”

Clorox and Etsy are two other companies utilizing social accounting, and Castillo said she hopes more Arizona companies will join the trend.

“I think it’s good for society, but also… good for business, because it helps them have a new tool in their toolkit that really will help them be better strategic thinkers and more connected to their community, which is what successful business is all about,” she said.

Part of the recent push for greater transparency came from Wall Street, because shareholder advocacy groups felt they were not getting the full report from 10-K filings that only included financial statements, Castillo said.

“They wanted more of what’s called the ESG perspective — environmental, social and governance — and that was one of the drivers,” she said.

“It was really for publicly-listed companies. But as that got taken up, then people started realizing, ‘Hey, this is actually helping us think through our business model better.’ And so, they started seeing it more as a strategic tool, not just a reporting and accountability tool, and I think that’s another reason it’s picking up traction.”

Castillo said she has been trying to get social accounting to “trickle down” to mid-sized firms and family-owned businesses, but the practice is still an emerging science. There is not yet “the degree of comparability that we want,” but Castillo does not see that as a problem because the concept is so new.

“Back 600 years ago, they were discovering that there’s a third state of matter,” she said. “We’re starting to discover this intangible resource — relationships, knowledge — that can be approached strategically as part of a business model.”

As companies deliver more integrated reports on social accounting, patterns will emerge and show the “levers” that can help produce sustainable value creation, Castillo said.

“It’s a growing science, and I think that’s another reason it will just keep getting more traction, because the more we do it, the more we’ll start to see these patterns and be able to do it better and create value better,” she said.

Graham Bosch

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