Social Auditing
Taming the Corporate Beast
Making business work for all of us

by Craig Cox

For as long as there have been corporations citizens have fought to limit their power and make them more accountable to the public. Two of the most innovative strategies to emerge in recent years -- the corporate charter movement and social auditing -- are encouraging, but they also demonstrate just how tough it can be to rein in the corporate beast.

Corporate charters. This movement, led by environmentalist and labor activist Richard Grossman and his Provincetown, Massachusetts-based Program on Corporations, Law and Democracy, seeks to embolden citizens and lawmakers to toughen -- or rather enforce -- state corporate charter laws. These laws, which have been on the books for decades, give legislatures the power to limit corporations' activities and revoke their right to do business in their state.

Grossman acknowledges that, in an era of intense interstate competition for jobs and corporate tax revenues, few state governments are likely to pull the plug on any major employer. Still, he says, the question of who really governs the country -- citizens or corporations -- must be addressed. "By what authority are they participating in elections, by what authority are they lobbying politically, by what authority are they in our schools?" he asks. "We've been engaging people all over the country in these questions." And only when citizens begin looking seriously at reforming corporate charters will companies sit up and take notice.

To show how powerful these tools can be, Grossman points to the way some corporations have persuaded legislatures to write additional protections into state charter regulations to shield them from hostile takeovers. These particular charter changes-, known as constituency statutes, can now be used in 29 states to protect corporate directors from shareholder lawsuits if they make a decision -- from mergers and acquisitions to plant closings -- that may be beneficial to workers or the local community, but not necessarily to the pocketbooks of stockholders. In a 1987 Pennsylvania case, for instance, the court ruled that Commonwealth National Financial Corporation could approve a merger with Mellon Bank even though the bid was lower than that of its other suitor, Meridian Bancorp. Citing the state's constituency statute, the court ruled that the board was not shirking its fiduciary duties because its employees would have greater opportunities with Mellon than with Meridian.

This may not represent a radical transfer of power -- citizens still don't have the right to sue if their needs are ignored -- but, as Marjorie Kelly, editor and publisher of Business Ethics, has written, strengthening constituency statutes could usher in "a kind of Copernican revolution . . . [in which] stockholders are no longer the exact center of the corporate solar system."

What would such a democratic capitalism look like? Grossman says its effects would be dramatic. "The whole question of what is private and public in terms of property and decision-making would change," he explains. "Technology and product decision-making would have to be a much more public process."

Social audits. Not all corporations, of course, are slaves to the bottom line. In fact, some companies are so concerned about their impact on the world that they voluntarily undergo comprehensive evaluations of their operations by independent auditors. These audits, based primarily on social and environmental factors, were popularized three years ago by Ben & Jerry's and The Body Shop in response to criticism of their reputations as socially responsible companies. Now, a number of mainstream companies -- including every major accounting firm -- are embracing the concept as well.

The Body Shop's 1995 audit, which was performed by Kirk Hanson, longtime director of the Business Enterprise Trust at Stanford University, demonstrated both the promise and the perils of this trend. Hanson measured the Body Shop's performance using the so-called "social indicator" method pioneered by ethical investment firms. This method gives greater weight to a company's policies on popular political issues (i.e. animal testing, human rights, energy conservation) than it gives to its performance in areas directly affecting its stakeholders (such as employee relations, corporate governance, product quality). Hanson gave the company low marks in the more traditional areas of social responsibility -- wages, working conditions, product quality, management accountability -- while praising its environmental efforts and publicity campaigns about social issues. "Overall," he wrote, "The Body Shop demonstrates greater social responsibility and better social performance than most companies of its size."

In response to Hanson's report, Curtis Verschoor, an accounting professor at DePaul University and leading advocate of social auditing, argues that Hanson's audit was seriously flawed and should not be looked upon as a standard for the future. As Verschoor explained in a monograph he co-authored with journalist Jon Entine,"It appears that Hanson puts aside his own concerns about its honesty and ethics to embrace Body Shop's contentions that it should be judged by its intentions and the decibel level of its social campaigns, not its social performance."

More thorough and subjective social audit models do exist. Among the most popular are the social balance sheet, which integrates financial and social reporting by assigning a dollar value to a company's social impact, and benchmarking by objectives, which compares actual company performance with stated objectives. These methods are the primary tools of the accounting firms that are so aggressively pushing corporate social auditing into the mainstream business world. They're not perfect, Verschoor admits, and in the absence of credible, recognized standards of ethical behavior, they will inevitably be inconclusive. Still, it's a positive step. "Even if these audits are only done by a few people on a voluntary basis," he says, "it will lead the way to more socially responsible behavior on the part of corporations."

R E S O U R C E S

Program on Corporations, Law & Democracy, 211.5 Bradford St., Provincetown, MA 02657; phone/fax: 508/487-3151

Advancing Social Auditing, a monograph by Curtis Verschoor and Jon Entine is available for $8 from Dr. Verschoor at the School of Accountancy, DePaul University, 1 East Jackson, Chicago, IL 60604

Institute for Social and Ethical AccountAbility, 1st Floor, Vine Court, 112 116, Whitechapel Rd., London E! 1JE, UK; phone: 44 (0) 171/377-5866; fax: 44 (0) 171/377-5720; Web site: www.accountability.org.uk/; e-mail: Secretariat@AccountAbility.org.uk.