after my post regarding the importance of CSR for business, now I am trying to post whether CSR practice should be regulated or not. Again this is the part of my Social and Environment Accounting course revision :p *hope you not get bored*.
as the names suggest, mandatory reporting means that the CSR repoting practice is enforced by the law whereas in voluntary regime means that companies voluntarily disclose the CSR report albeit there is no regulation for CSR reporting.
Carrot and Sticks Report (2013) demonstrated that in the last 7 years, mandatory CSR reporting practice were remarkably increased. It implies that CSR had obtained a significant importance that it had to be regulated. in Indonesia, for instance, in 2012 BAPEPAM-LK enforced the listed companies to disclose their CSR activities either in the annual report or in the stand alone report. meanwhile in the UK, the companies act of 2006 required the listed companies to disclose about their responsibility towards the environment, employee, social community, and supply chain issue.
However, even though the trends of voluntary CSR reporting practice appear to be decreasing, the voluntary CSR reporting had initially developed long before the mandatory initiative emerged. Global Reporting Intiative (GRI) was a non-profit institution formed in 1997 by Ceres and Tellus institute with the aim to give guidelines for CSR sustainability reporting. GRI guideline is considered as the most influential guideline in the world that it is considered that it encourage the engagement with multiple shareholder. Moreover, GRI guideline for “triple-bottom-line reporting” would broaden financial reporting into a three-dimensional model for economic, social and environmental reporting. when GRI G3.1 was launched, it provided 42 strategy and profile indicators (e.g CEO statements, governance,etc), and also with 84 performance indicators (55 core indicators) in the area of environment, social, and economic. However, not all of the indicators need to be reported by companies. companies might choose which score that they want, the score is ranging from A+ to C. If companies want to get A+ they should disclose all 42 strategy and profile indicators and also 55 performance core indicators. Nevertheless, this GRI G3.1 guideline obtained a critic that even though the environmental indicators were useful, the social and economic indicators were considered less inspiring (Bebbington et al., 2014)
The critics toward GRI G 3.1 catalized the launched of G.4 guidelines whose indicators are based on the materiality principle: material aspect that influence stakeholders’ assessment and decision. companies are encouraged to engage with stakeholders to identify the material aspect for them and companies will include the material aspect in their CSR report. The assessment of report comprehensiveness would be optional, companies are free to choose either the core option given (to report with at least one indicator identified as material aspect) or comprehensive option (to report with all indicators identified as material aspect).
Despite the fact that recently mandatory reporting is mostly practiced, the necessity of CSR to be regulated is still highly contested.
Bebbington and Gray (2007) and Unerman an O’Dwyer (2007) pointed out that companies are rejecting the regulation because it makes them less flexible to report their CSR practice. Moreover, companies want to leave the impression that environment is safe in business hand. Moreover Bebbington et al’s (2013) study demonstrated that voluntary reporting practice is more effective relative to mandatory reporting practice. the study focus in Spain where CSR reporting is highly regulated and in the UK where initially there was no binding system about CSR reporting but many companies were engaged in CSR reporting practice. Arguably, the development of normativity plays a vital role in the succeed or failure of reporting practice. In the UK the norms were arise from a shared believe facilitated by ACCA. in 1991, ACCA initiated a dialogue to develop best practice in CSR reporting scheme. ACCA gave reporting award to the companies with best reporting practice. such action gave rose to peer benchmarking that encourage companies to be on the top. Beyond this tipping point, norms were internalized and further acquired as a taken for granted quality whereby all companies recognize the norms as binding. Furthermore, ACCA scheme was complemented by other initiative such as certification scheme, industry association, and business consultancies that therefore reporting CSR were highly associated with competitive advantage. Finally in 2006, the ACCA voluntary scheme was transformed into quasi-legal in which UK prime minister stipulated the scheme to the section 417 of UK Company act 2006.
However, Unerman and O’Dwyer (2007) asserted that the voluntary disclosure of CSR reporting is closely related with business case whereby companies were reporting to pursue the economic benefit that information in CSR report is disclosed in the selective manner therefore the reporting credibility could not be confirmed. Employing the reflexivity theory, Unerman and O’Dwyer (2007) argued that effective regulations could assure that the information in CSR report is verifiable and not included in a selective manner as the regulators are perceived as the expert system whereby stakeholders could place their trust. whenever outside stakeholders read the CSR report they might confirm that the report is credible without checking to detail. Moreover, the regulations might also reduce the perception of risk faced by stakeholder from business activities.
Criado-Jimenez et al (2008) also suggested that compulsory CSR Reporting standard could increase the disclosure quality because under specific disclosure requirement and enforcement mechanism (such as auditing), reporting companies would be liable for any misstatement.
Nevertheless, there are some finding suggest that even though mandatory SER exist, companies still fail to make disclosure or when they do the quality of such disclosure remains low. Bebbington et al., (2013) demonstrated that even though the regulation brought the significant increase in disclosure, only a few having attained full compliance. Spanish companies were indicated not disclosing the environmental liabilities.
Criado-Jimenez et al (2008) explain the non-compliance of business is due to the impression management strategies applied by companies. this strategy includes: Aquiescence (comply with the standard), Avoidance (concealing the non compliance), and Defiance (ignoring explicit norm). Criado-Jimenez demonstrated that the impression management practice was exist within Spanish companies. As regulation regarding CSR reporting was enforced, the number of Spanish companies disclose the CSR item in the annual report was increased significantly. Moreover, the disclosure over bad news was increased more than the disclosure of good news. However, there was a concealment practice took place that the total number of good news disclosed was twice higher than the bad news. The ritualism practice also occurred since it was indicated that companies disclose the bad news in other media than the annual report. Plausibly, companies wanted to leave the impression as conform with the law so that the stakeholders will trust them. Moreover, companies quality of disclosure was also low that it only disclose 20% out of the regulation required.
Bebbington et al (2013) also explained that the non-compliance might be occured since the standard is lack of clarity. from their study in Spanish companies it was indicated that the regulations required the companies to disclose the environment liability yet the standard did not give a guidance how to recognise and measure the environment liability. Moreover, contrast with UK norms which was arose due to the consultation progress, there was no such process in developing Spanish CSR standard. consequently, the standard was not internalized within the Spanish companies.
to sum up, current practice of CSR, both mandatory and voluntary have some benefit and limitation. Mandatory reporting standard could encourage companies to increase their disclosure and also increase the trust of the stakeholders because they perceived the report as credible. Nevertheless, some evidence suggest that there were some limitations of mandatory disclosure such as the lack of disclosure extend, the low quality of disclosure, and the ritualism practice. On the other hand, voluntary disclosure standard could be easily internalized within companies however many of the stakeholders doubted the credibility of the voluntary CSR reporting since it is closely related with companies enlighted self-interest