Compiling an account of the social, economic and ethical effects of business activity of an organization each year. The objective is to provide a reasonable basis for understanding key aspects of the social impact and ethical behaviour of the organization in relation to its aims and those of its stakeholders (i.e., staff, communities and suppliers).
The stakeholder approach to social auditing developed in the last few years has the following key facets: (a) comparative – it offers a means whereby the performance of the organization can be compared to that of other related organization; (b) comprehensive – it sets out to provide a more comprehensive assessment of an organization's social impact and ethical behaviour; (c) polyvocal – it is based on the views and accounts of stakeholders themselves, as well as those of the enterprise members, producing a "social document" reflecting the views of many groups, and based on a three-tier categorization of values (core aims of the organization, specific stakeholder aims, and societal aims) and multi-directional accounting; (d) regular – it is intended to take place on a regular basis; (e) externally validated – the results are validated by one or more people who do not have a vested interest in the results; (f) disclosure – the results are disclosed to stakeholders.
The strategy is new and developing through practice. The methodology follows the general cycle of identifying stakeholders, identifying indicators, measuring quality and quantity, producing draft social accounts, auditing accounts, publishing accounts, and developing responsive strategies and plans. It is generally undertaken by an external independent auditor who compiles and publishes a report which identifies areas of good and poor practice. Social and ethical measuring and reporting may also be done internally by companies. These may include environmental reports, which only look at the environmental impact of companies, and community surveys which measure satisfaction levels amongst the groups with which the company works.
Quantitative indicators for social audit depend on the capacity of the organization's management systems to capture and analyse the appropriate measures. Relevant statutory requirements are few and far between, but may include such areas as general satisfaction of staff and shareholders with the company; material rewards e.g. wages; affirmative action e.g. equal employment opportunities, corporate gift-giving and community investment by the company; environment e.g. energy consumption and recycling; customer service and perspectives e.g. fair trade policies. Apart from the growing practice of environmental auditing (with its pillars of "best practice" and "benchmarking") there is no established or published method to follow. It is necessary, therefore, that each company needs to develop its own working solutions and internalized systems of social book-keeping.
The concept of the social audit to measure the ethical performance of a business was originally conceived by the writer George Goyder in the 1960s. It is only recently beginning to catch on. While there are a plethora or techniques for evaluation and strategic planning which encompass non-financing factors, none stand up to the test of providing a comprehensive approach to understanding the social performance of a company. As a result, sometimes socially responsible businesses are idealized or sometimes dismissed as being "merely inefficient". Other businesses can get away with giving an impression of social responsibility through public relations hype.
Traidcraft is a UK-based company (annual turnover over £6 million) whose primary business objective is to increase the volume, value and quality of fair trade with primary producers in the third world, bringing love and justice to the international trading system and transferring wealth from the first world to economically disadvantaged people in the Third World. It has been pioneering the methods of social auditing with the advice and support of its Audit Advisory Group, including members of the European Fair Trade Association, Fair Trade Organisation, New Economics Foundation, and Intermediate Technology Development Group. The main method used is consultation with the stakeholders of the organization, the groups of people who are involved in or affected by the organization's objectives. This group of people the company also calls its "community of purpose". In the case of Traidcraft they include its suppliers (producers in the third world comprising around 100 organizations in 26 countries), customers (consumers of its products and the wider public), shareholders, staff, representatives and retailers.
Where it is appropriate and possible to do so, the company's performance has also been measured and compared to external benchmarks or its own corporate plan targets. The process has enabled a limited number of performance indicators to be defined, such as, in the case of producers: "direct income to Third World", "payments made in advance", and "contact time with producers"; and in the case of staff: measures of "fair wages", "equality of opportunity" and "staff development". Environmental issues have also been reviewed by an independent consultant, and include consideration of matters such as the as weight and type or packaging materials, mode and quantity of import transport, and the annual weight of carbon dioxide (CO2) emissions through gas and electricity consumption over a four-year period.
The "Ethical Accounting Statement" has been developed in Denmark and Norway by the Copenhagen Business School and was first used by a Danish regional bank, SBN Bank, which has since since produced annual statement. A further 15-20 organizations, ranging from small companies to hospitals, have now adopted this approach. Like the social audit, the Ethical Accounting Statement involves a consultation process with all the stakeholders. Beyond this it encourages stakeholders to propose practical changes to the organization's approach. Unlike the social audit, however, it does not have any external validation, but relies on the staff to ensure accuracy of the accounts and to track the company's performance without external benchmarks.
In 1994 there was an international meeting of organizations involved in social auditing in Dessau, Germany.
Ben and Jerry's, an ice-cream manufacturer in the USA, produces a "social account" based on stakeholder consultation and external validation. Its approach differs, however, in that the company invites a well-known and respected person from outside the company to spend some time each year exploring any aspect of the company's activities and report on them in a manner that he or she may wish. The outcome can therefore be more intensive, but less systematic and comprehensive that the social audit, and does not have external benchmarking or verification. The Body Shop is another company to have adopted the strategy.
NEF is preparing a volume of case studies of social audits in association with the Centre for Social and Environmental Accounting at Dundee. Together with the Institute of Social and Ethical AccountAbility and SustainAbility Ltd, it also hosted the Windsor Roundtable on Social and Ethical Accounting and Auditing in December 1996, which sought to stabilize social and ethical accounting practices, establish agreed terminology, frameworks, training and accreditation for auditors.
British Telecom announced in 1996 that it intended to conduct an ethical audit.
The reasons why companies would undergo a social audit go far beyond doing the right thing. It addresses the effectiveness of company activity, by articulating different stakeholder values and perspectives, strengthens strategic management procedures and offers a means for transparency and accountability.
Companies have long embraced 'soft' quality assurance systems covering the environment, staff relations, suppliers and community involvement. They have also increased their level of social reporting. But both systems and reporting have evolved in fragmented ways. Social auditing and reporting offers a framework for integrating these quality assurance and reporting systems. It also offers a method of mediating between companies and stakeholders based on shared values and interests. It can provide a good basis to mold policies, make decisions and take actions.
Standard need to be agreed upon by companies and non-profit organizations. Without such agreement, the practice will degenerate into just another fashionable public relations and management tool. If this happens, companies will quickly find these techniques useless for building business reputation.