by David Boyle
‘With respect, sir,’ said the questioner, the shareholder’s representative from Abbey Life, ‘this is not my AGM, it’s yours.’ Not surprising, perhaps, that some Japanese corporations have responded by hiring Yakuza gangsters to stop people asking difficult questions at shareholder meetings. It doesn’t work because, slowly but surely, the secrets that traditional balance sheets ignore are coming out in the open.
There was the Chentex factory in Nicaragua from where, in 1997, Wal-mart, K-Mart and J.C. Penney were sourcing their jeans, where workers made 11 cents for making each $14.99 pair. There was also the Mexican factory subcontracted by Walt Disney where there was no drinking water – workers had to bring their own. The companies involved wouldn’t have known, but it still all suddenly becomes public under the close attention of the new auditors. So does the truth about where our money is invested. Suddenly the Church of England found it was investing in the Playboy Channel, the Labour Party in the big GM food and arms companies, Shell in BP and BP in Shell. It’s a strange shadowy world, where anti-smoking campaigners suddenly find their pension money is invested in Imperial Tobacco.
Hot on the heels of the ethical revolution is a demand for honesty, openness and standard definitions. No longer are coloured photos of smiling children in the annual report enough to demonstrate a commitment to charity or community investment. Ethical investors want to know how much, whether it works, what local people think, whether it’s gender specific, and the answers all go into the league tables. It’s an exhausting process to measure it, and even then there are some knotty problems.
Here’s one. If a small company gives a large proportion of their profits to charity, and a large company gives much more – though it happens to be a smaller proportion of their profits – which of them is the most ethical? Ethical investors don’t know the answer, though whole conferences and reports are devoted to finding out. Those of us familiar with the gospels might recognize it as the Parable of the Widow’s Mite.
III
You don’t manage a football team by looking at the score, says one management consultant. In the same way, it’s not a very good way of managing a company if all you’re doing is looking at one simple measure of success – the profit line. The world is now much more complicated.
Many companies still believe the only purpose for their existence is the one they measure and nothing else – shareholder value. Critics say that profit became the main corporate goal for companies only as recently as the middle of the last century, that the original purpose behind the charters for the East India Company or the Hudson’s Bay Company was public benefit. Even a century ago, a robber baron like Cornelius Vanderbilt kept his profits secret. He kept all his figures in his head because he didn’t trust anybody.
Since then, business writers would quote the old economic warhorse Milton Friedman with approval: ‘A corporation’s social responsibility is to make a profit.’ Not any more. Even Henry Ford realized there was more to it than that. ‘Business must be run at a profit, else it will die,’ he said. ‘But when anyone tries to run a business solely for profit … then also the business must die, for it no longer has a reason for existence.’
If you have well over half of your customers measuring your products by how ethical you are, then you are already living more in Ford’s world than Friedman’s. The old measures don’t work: how can they when between 25 and 40 per cent of shoppers admit to boycotting unethical companies, and when 71 per cent of all French consumers would choose a child labour-free product even if it’s more expensive? And if measuring everything by the bottom line worked – and corporations were the great hope for the world – then how come the world is in such a mess?
That still leaves us with the question of how we can measure these various ethereal qualities which seem to lie at the heart of business success. Either you try to put a price on them, like intellectual capital. Or you measure them all in a completely different way, like ethics. Both are impossible to do with any accuracy, which is why companies are trying to knit the whole equation together. What they need, say the Harvard business gurus, is a new kind of scoring system. They call it the Balanced Scorecard.
For some reason, most companies prefer to divide this scorecard into three different measures. At Skandia it is human capital, structural capital and customer capital. Ben & Jerry’s ice-cream has a three-part mission statement: economic mission, product mission and social mission. DuPont goes for shareholders, environment and society, and their rivals Dow Chemicals slips another one in unexpectedly, measuring four kinds of success: economic, environmental, social and health. For John Elkington of the influential London-based consultancy SustainAbility, it is what he calls a ‘triple bottom line’ – financial, environmental and social.
Elkington cut his environmental teeth by rescuing Egypt’s largest delta lake from a series of massive development projects and spent the next decade or so writing some of the first corporate environment ‘statements’. But it was his runaway bestseller The Green Consumer Guide in 1988 which made his name and reputation, and unexpectedly brought the big companies rushing to employ him – even though Monsanto and three separate sections of ICI were also trying to sue him at the same time. His follow-up Supermarket Guide was based on the answers to a 99-page questionnaire: the process of measuring the greenness of companies was beginning. Then in 1990, they produced a report on environmental ‘auditing’.
‘Within days, forty-five or fifty companies had called up saying “We’d like an environmental audit – by the way, what is an environmental audit?”’ he said later.
That was the second bottom line, but what about the third one – the social dimension? Companies were already starting to measure some parts of their effect on society. Some were trying to measure their reputation. Some, like Marks & Spencer, were measuring their suppliers’ creativity. Most were trying to measure customer satisfaction, though often the wrong bits – the booking staff were polite, but the train was still late. A social audit went even further, trying to measure the impact companies have on what are now generally described as their ‘stakeholders’ – which can include anything from neighbours to employees’ families.
The audits were developed by a range of organizations and pioneers like Richard Evans of the ethical trading company Traidcraft and Simon Zadek of the London-based New Economics Foundation, known to its friends as ‘NEF’. The result tended to be an extremely complex audit report, packed with numbers and measures, but no bottom line.
Shell was one of the key companies in the trend. They realized that, if their public antenna had been a little more sensitive, they could have predicted the outraged reaction to dumping the Brent Spar oil rig – including having bullets sprayed across their petrol stations in Germany. If they had worried a little more about what the world thought of them, maybe they could have prepared better against the execution of Ken Saro-Wiwa in Ogoniland. Nike was another: their ‘Just do it!’ slogan led to accusations about the conditions in their Asian factories. Nike responded by inviting in independent inspectors and social auditors, just as Shell did, and both began the painful process of peering in the mirror at themselves long and hard.
When the Shell Values Report was published, it carried this piece of unexpected corporate honesty in the front: ‘We had looked in the mirror and we neither recognized nor liked what we saw. We have set about putting it right …’
Measuring your corporate success in terms of a social bottom line can be a laborious process. It sets yardsticks by which you can measure your progress, and then measures it – and that can mean judging your success by some unusual ideas. Like the ethnic diversity of your employees (Co-op), your wage differentials (Happy Computers), your spending on internal training (Body Shop), customer complaints (Ben & Jerry’s), trust in the company (BP), number of employees dismissed for taking bribes (Shell). None of those will give a complete picture – in fact you might get more complaints if your reputation is high – but they are no longer
the rigid business of looking at the profits and nothing else.
IV
I first came across Simon Zadek when he was at the NEF, developing the idea of social auditing to the point where it was suddenly embraced by the big accountancy firms. He wore, as always, a strange brown hat with a wide brim and talked with animation in frighteningly complicated sentences – like a cross between Indiana Jones and Professor Branestawm. By the end of the 1990s he had established the idea enough for his Institute of Social and Ethical Accountability to attract some of the biggest names in business to their annual conference. Over the same period, he spread inspiration and irritation in almost equal measure – he was even threatened with legal action at one stage for using the phrase ‘social auditing’ at all.
Trained as an economist, Zadek cut his auditing teeth with Coopers & Lybrand, working in developing countries with the World Bank. But he had also done a Ph.D. in the economics of Utopia. ‘Science fiction writers know more about development than economists,’ he told me. ‘They take a systems approach without even thinking about it. In economics, all the emphasis is on simplication, but in fiction the whole emphasis is on nuance.’
Zadek’s heroes were writers like Ursula LeGuin and Marge Piercy – and Jurgen Habermas, the unintelligible Frankfurt philosopher of ethics. He was also a Buddhist; he wasn’t your average auditor. Still, there he was writing reports for the government of St Lucia, working with VSO and other development organizations. By 1992 he was at the NEF, working with the ethical trade organization Traidcraft Exchange and developing a method for audits without a bottom line, spelled out in their joint pamphlet Auditing the Market. ‘In practice that was what we now understand a social audit to be,’ he told me later. ‘It means understanding how an organization thinks and breathes and acts, from the procedures it has and its inner thinking. It means looking at it not from one perspective but from many perspectives.’
You might say that social auditing relates to financial auditing rather as Picasso’s modernistic paintings relate to classical ones. You have all the perspectives at once crowded onto the one canvas. This is ‘cubist’ auditing.
Simon Zadek wasn’t the first ethical auditor by any means. There were methods called ‘constituency accounting’, developed by the radical accountant Rob Gray in 1973. There were ethical accounting statements developed in the late 1980s in Copenhagen. Even the phrase was coined by Charles Medawar when he launched Social Audit Ltd in 1971, a joint venture with the founder of the Consumers Association, Michael Young. There was also a collection of Marxist journalists called Counter Information Services who carried out a series of ‘audits’ in the 1970s. They didn’t pretend to be unbiased. The CIS ‘audit’ of GEC had a photo of bomb damage on Vietnam on the front. Their report on Ford carried a big picture of the Spanish dictator General Franco.
Social audits have to be as objective as financial audits, of course. It’s just not clear how. When Medawar carried one out on the Alkali Inspectorate, which was supposed to be checking things on behalf of the public, it proved to be such a secretive organization that auditing of any kind was impossible. But when they carried out a more co-operative audit on the Avon Rubber Company, the company withdrew their support. ‘A detailed correction of the report would in our opinion result in a document as voluminous as the draft report itself,’ they said.
How could social auditors be objective? You can’t do it without the co-operation of the company, but if you co-operate can you be objective? But as so often, practical demands over-rode the logical problem. ‘I would love it if every shareholder of every company wrote a letter every time they received a company’s annual report and accounts,’ wrote Anita Roddick of The Body Shop in 1990. ‘I would like them to say something like “Okay that’s fine, very good. But where are the details of your environmental audit? Where are the details of your accounting to the community? Where is your social audit?”’
Where indeed? But by 1995, she had one of her own, conducted with Zadek’s team at the NEF, and then a full-blown Values Report commissioned partly as a response to the transatlantic campaign against them started by the American journalist Jon Entine which accused them – bizarrely – of being ‘the most evil company in the world’. The Body Shop’s first social report Measuring Up meant interviewing nearly 5,000 people. It even involved Zadek flying out to New Mexico to ask the views of the Santa Ana Pueblo Indians who supply the blue corn for Body Shop’s face washes. Then there was Ben & Jerry’s, the hip ice-cream manufacturers from Vermont. By 1995, when they commissioned a social audit from NEF, they were turning over more than the entire Russian economy and giving away as much as 7.5 per cent of their profits to charity. They were hardly an average company. The results of both were impressive.
One of the great advantages of getting socially audited is that it can stop companies deluding themselves with their own public relations. But the other side of the coin is that it can be embarrassing to make the results public. When Ben & Jerry’s received their report in 1995, it showed that employee morale (admittedly very high) had dropped during the year. It also showed staff complaining that the company’s commitment to the Children’s Defense Fund conflicted with their own struggles to juggle family and job.
The idea of social audits arrived just as companies had finished their massive clear-outs of staff – known as downsizing. They had flattened their hierarchies and outsourced their services, and found that their success now depended on building relationships of what Zadek calls ‘intimacy, understanding and trust’. The old hierarchies didn’t work any more, just like the old measurements. There was no hierarchy to order around, just relationships with outsiders or valuable staff. Social auditing seemed to be a way of measuring them.
Zadek’s model was based on the idea that stakeholders have the right to be heard, which gives social audits a kind of objectivity which simple market research doesn’t have. They deserve a voice in big organizations which affect them. So the auditors just go out and listen. They don’t necessarily dig – just as conventional auditors were found to have overlooked the peculiar finances of BCCI or Robert Maxwell’s pension funds.
Yet social auditing is still measurement. ‘Five years ago, those organizations were completely blind,’ says Zadek now. ‘Certainly the more progressive companies now have a far better knowledge, far more sophisticated understanding, and therefore a far more sophisticated ability to explore into civil society before it becomes part of the problem – for them. What made us a Trojan horse for the business community was our argument that this is not an evaluation. It’s helping you count what counts, we said. The sales pitch was – you’ve obviously got an asset because you want to manage it, and that’s all we’re doing.’
Of course that wasn’t all the social auditors were doing at all, which may be why there is a continuing grumbling from the old guard, clinging to the bottom line. Suppliers also reported being fed up with being audited by their customer companies over and over again. One magazine editor even dismissed the intellectual capital gurus like Thomas Stewart as ‘business Bolsheviks’ for their ‘justification of irrationally overvalued companies’.
‘Why we bolshies want the market to be high, I don’t know,’ replied Stewart.
But does social auditing work? As Chairman Mao said about the effects of the French Revolution, it’s too early to tell. But the early indications are that measuring how effective it is could be yet another nonrational, uncountable business. It works if companies approach it with honesty and enthusiasm. If they don’t, it doesn’t. And like any other counting system, it may not be that accurate.
Simon Zadek tells the story of the successful completion of a social audit for a leading South African company. At the end of the board meeting, the chief executive took him out onto the balcony to congratulate him for a job well done. But social audits can’t see the whole picture, he said. ‘Every company has a killer story that they’re not disclosing,’ said the chief executive, looking out across the other
corporate headquarters below. ‘And just to prove it, I’m going to tell you what ours is …’
By 1999, social auditing was all the rage. Pricewaterhouse-Coopers was offering the service. KPMG had bought up The Body Shop’s social audit department lock, stock and barrel – a prime example of buying intellectual capital – announcing that the social audit ‘market’ would soon be worth £20 million a year. One New York consultancy was reporting fifty inquiries a day from companies wanting social audits. Suddenly ethics were big business. ‘In a pinch? Thinking about re-tooling your company’s ethics training?’ said a full-page advertisement in 1999 from the Ethics Resource Center in Washington DC. Or, as the PricewaterhouseCoopers advert put it: ‘We’d like to be ethical, aware and responsible. But what’s in it for us?’
What’s in it for us sounds like a contradiction when we’re talking about measuring ethics. The answer is that social auditing is about measuring your reputation – not according to what it’s worth to put it on the balance sheet – but to show where it’s wanting. It’s not so much a matter of measuring how organizations perform, it’s about listening and distilling what people say about you. It is as close to a way of measuring without using numbers as it’s possible to get. Charles Booth would have loved it.
V
Business has faced the counting crisis by changing what they count, and counting even more. They are taking their attention away from the bottom line just a little, but enough to look at what they call the company’s ‘balanced scorecard’. In doing so, they have shifted from narrow financial reporting to something more broadly economic.
As long ago as the Companies Act 1985, companies were told to calculate the value of their ‘cumulative goodwill’. Most ignore this on the quite reasonable grounds that it is impossible to work out. But there is now a multiplicity of counting systems to choose from. There is an ‘emotional bonding’ measure to measure customer loyalty. There is ‘lifetime value modelling’ to work out what customers might be worth throughout their buying lives. There is Customer Value Management, lead indicators, lag indicators, Total Asset Utilization, People Value-Added. Even Calculated Intangible Value. There is a new generation of horrendous acronyms, GIPS, TOMAS, EFQM or BREEAM (Building Research Establishment Environmental Assessment Method). There are even the new social auditing standards SA8000, GRI and AA1000. It’s a number-cruncher’s paradise. There is even a measure of culture, devised by North West Water and Manchester School of Management, with eleven ‘metrics’ including a measure of ‘internalization’ – or how much your staff believes all the rhetoric about values.