The main reasons why companies undertake social and environmental reporting
The Rolls Royce utilizes both the legitimacy theory and stakeholder theory in its report. Stakeholder theory implies that companies would make environmental disclosures to stakeholders in order to gain their support and enable entity continuity (Mattei, 2011). Legitimacy theory on the other hand explicitly states that there is a correlation between a company’s influence and its public perception.Organisations seek to control environmental disclosures in order to manage public perceptions and maintain organisational legitimacy (Lindblom, 1994).
Manage public perceptions
It is widely believed that providing social and environmental disclosures grants a firm a competitive advantage against its competitors by appearing as socially responsible (Spencer & Gray, 2007).Many companies disclose their annual reports only when if these activities are perceived by management as vital in managing public impressions in relation to its operations and thus maintain public legitimacy. The Rolls Royce report is an example of such a scenario where companies used socio-environmental disclosures to obscure potential conflicts, alter public expectations and deflect attention from more fundamental issues. Rolls Royce Company engaged the community, local authorities and individuals to resolve an issue regarding odour from a gas turbine engine test bed operation in Bristol and Montreal (RR, p 30). This was an attempt to manage public perception and is consistent with the legitimacy theory.
Pressure from interest groups
In this era of societal rising expectations and emerging environmental awareness companies are experiencing pressure from interest groups, that is, environmental groups, investors, shareholders, consumer groups and local communities. When companies provide environmental reports, they demonstrate their openness to their stakeholders. It is also an indication of the ability of the company towards strategic environmental management (Guthrie & Parker, 1989). In the Rolls Royce case, the company invited interested groups to provide feedback about the style and content of the previous HS&E report and identify issues and topics that should be covered in future reports (RR, p 5). Specifically to investors RR conducted a wide range of research based environmental projects, exploring the potential for generating power from tidal streams working in partnership with the UK Energy Technologies Institute (RR, p 6). These actions were consistent with the stakeholder theory and were an attempt to gain support from the stakeholders and thus ensure business continuity (Gray, Owen & Adams, 1996).
Risk management
Risk management is done by the use of the environmental reports. By preparing these reports, the company is able to assess the risks that may be encountered when conducting business (Suchman, 1995).The Company accounts for all risks that are associated with environmental aspects and improve the reputation of the company for its dedication to manage risks. Risks are well managed and in case they happen, the company is not adversely affected. Rolls Royce adapted a risk based management system that resulted to lost time injury rate of 0.42 injuries per 200,000 exposure hours in 2009. This was an improvement of 40 per cent in 2006 compared to their target of 15 per cent (RR, p 21). The target users of the RR report are the environmental community, investors and government. In 2009, the company supported education worker position at Rosliston Forestry Centre in Derbyshire and built a protective fencing around ancient oak trees in Derby (RR, p 31). In order to please the government, RR took active roles in its trade bodies to support a wide range of themes focussed on regulation, management systems development, performance reporting, sustainability and supply chain performance (RR, p 3). To investors RR has continued to make investments over the last decade and their manufacturing facilities provide the appropriate environment to develop world-class performance levels. Such activities have raised its awareness on the sustainability front, which could influence behaviour, improve performance and minimize government intervention by practising self-regulation. This is evident, as RR has already set target improvements in key HS&E areas for 2010-2012 periods (RR, p 33).
Drawbacks of social and environmental reporting to Rolls Royce
Environmental reporting creates more costs to the company, and this reduces the profits made by the company. Small and medium size businesses find it costly to comply with the legal requirements of conducting social and environmental activities. The compliance costs are too high and this makes it possible for small companies to evade the process of environmental reporting (Deegan, Rankin & Tobin, 2002). Rolls Royce provides for these costs to ensure that it complies with the legal provisions. The profit margin of the company has been reducing over the years due to the compliance costs incurred. Rolls Royce spends an average of £900 million every year in research and development in which a third is aimed at improving environmental performance (RR, p 1).
Various companies have been reported to be hypocritical and insincere when preparing their social and environmental reports. Some companies issue false reports so that they can improve their competitive levels in the market and stifle prevailing competition in the market (Post, Frederick, Lawrence & Weber, 1996). According to thefreelibrary.com, RR is hypocritical by creating an impression of how environmentally friendly its plants are and yet it ignores the environmental impact of its products.
The basis of any financial reporting is to provide useful information to present and potential investors in their capacity as capital providers. From my analysis, the report “powering the future 2010” provides relevant financial information to its target user. The chart on CO2 emission (RR, p 11) spread over a period of 10 years has a predictive aspect as it provide vital information to any prospective user and enables him to form his own expectations about the future. The changes over the years also conform to previous evaluations.
The report is not a complete faithful representation of the company as it is not neutral and devoid of material errors. Though a reputable party such as an auditing firm (Deloitte) did verify the company’s report, the auditing was limited in nature. In its assurance statement, Deloitte admitted the risk of material errors in the report Therefore, the quality of the environmental report is questionable and any capital provider would be worried whether the Rolls Royce actual environmental and social performance is accurately represented.
Rolls Royce report falls short on verifiability as the report is produced on voluntary basis (UK) rather than mandatory. The quality of information that the report purports to represent is therefore questionable, as current management are known to use such reports as tools for strategic marketing and raising the profile of the company. This is consistent with the voluntary disclosure theory (Doane, 2002). Moreover, there are no clear guidelines on verification and majority of companies rely on internal control procedures to assess the quality of such reports. Rolls Royce has a HS&E corporate structure that includes teams like the Environmental Council and HSE committee. A quick analysis of GE aviation social and environmental report shows that it lacks uniformity to “powering a better world” and is therefore not comparable in terms of structure. Rolls Royce report is clearly presented with a breakdown of each market from aviation, marine and energy and their percentage from period to period across the company, which is not the case for GE aviation. Therefore, any potential user or capital provider with reasonable knowledge in business will be able to form a judgement regarding the future expectations of the company. However, GE aviation uses both legitimacy and stakeholder theory with its main target being the environmental community and investors, which is an attempt to improve its reputation on the sustainability front. Due to manipulation of the reports by the management, consistency across the companies is also a key issue as different accounting policies and procedures are employed in formulating the reports.
According to my analysis, the Rolls Royce report is objective and free of management’s bias. The report equally highlights positive and negative achievements by the company. This is evident from Deloitte conclusion,” based on the assurance work we performed, nothing has come to our attention that causes us to believe that the specific HS&E performance indicators or the reported progress against the 2006 HS&E targets defined above are materially misstated (RR, p 32).
Recommendations
Rolls Royce should use flexible reports to enhance compliance with any regulations that may be established. The reports have no provisions for any adjustments in case new regulations are imposed. The management should develop a flexible budget to help cater for any social and environmental needs that may develop between financial periods. The budget would help the company reduce its research and development cost from the current £900 million per year to manageable levels.
To improve on faithful representation RR should consider performing comprehensive audits of its report as opposed to limited assurance. This will provide more credibility and reliability of information contained in the report and consequently boost its reputation and awareness on the sustainability front. A good environmental performance translates to improved profitability and attracts ethical investment (Waddell, 2000).
References
Deegan, C., Rankin, M. & Tobin, J. 2002. ‘An examination of the Corporate Social and Environmental disclosures of BHP from 1983 – 1997 A test of legitimacy theory,’ Accounting, Auditing and Accountability Journal, 15 (3), pp. 312 – 343.
Doane, D. 2002. Market failure the case for mandatory social and environmental reporting. IPPR seminar the transparent company.
Gray, R., Owen, D. & Adams, C. 1996. ‘Accounting and Accountability: Changes and challenges in Corporate Social and Environmental reporting,’ Hertfordshire, Prentice Hall Europe.
Guthrie, J. & Parker, D. 1989. ‘Corporate social Reporting: A Rebuttal of legitimacy theory,’ Accounting and Business Research, 19 (76), pp. 343 – 352
Lindblom, C.K., 1994. ‘The Implications of organizational legitimacy for Corporate Social Performance and Disclosure,’ paper presented at the critical perspectives on accounting conference, New York.
Mattei, F. E., 2011. Company environmental reports: Guidelines for Preparation. Forum on Environmental Reporting.
Post, J.E., Frederick, C.W., Lawrence, A.T., Weber, J., 1996. ‘Business and Society: Corporate Strategy, Public Policy, Ethic,’ 8th Edition McGraw-Hill.
RR, 2010.’Company report of Rolls-Royce Groups PLC.’
Spence, C. & Gray, R., 2007.Social and environmental reporting and the business case. ACCA, 98.
Suchman, M.C., 1995. Managing legitimacy: Strategic and institutional approaches. Academy of Management Review 20, 571-610. Web.
Waddell, S., 2000. “New institutions for the practice of corporate citizenship: Historical Intersectoral, and Developmental Perspectives”. Business and Society Review, 105: 323–345.