11.pp.0311www.iiste.org call for paper-333

Issues in Social and Environmental Accounting
Vol. 1, No. 2 December 2007
Pp 311-333

On The Effectiveness of Social and
Environmental Accounting

Marc Orlitzky
Glen Whelan
Nottingham University Business School
UK

Abstract

This paper presents the broad outline of an instrumental theory of social and environmental
accounting (SEA) at two levels of analysis: organizational and societal. We argue that, given
the impact of signaling and transaction costs as well as various other costs and benefits of SEA,
the level of SEA should be set so that marginal costs of SEA equal marginal benefits (at the
firm level) or marginal costs of SEA to society equal marginal benefits to society (in line with
the tenets of social efficiency). In this context, we summarize the overall empirical evidence
regarding the financial benefits of social and environmental disclosures for the reporting or-
ganization. Moreover, because all organizational decision making is embedded in political
governance systems, we also highlight the importance of these systems for SEA and conclude
with three suggestions for future research.

Keywords: Corporate social performance; corporate social responsibility; environmental ac-
counting; moral frameworks; political governance systems; social accounting; social effi-
ciency; utilitarianism.

THE EFFECTIVENESS OF SO- 35% of the Fortune Global 250 pub-
CIAL AND ENVIRONMENTAL AC- lished social and environmental reports.
COUNTING This proportion has increased to 45%
three years later and 64% in 2006 (Kolk,
The proportion of large multinational 2003; 2008; KPMG, 2002). European
companies reporting on the social and companies are more likely to disclose
environmental consequences of their social and environmental data than U.S.
business activities has dramatically in- companies and are generally seen as
creased during the last decade. In 1998, “best practice” trendsetters in social and

Marc Orlitzky is research fellow at International Centre for Corporate Social Responsibility, Nottingham University
Business School, UK, email: marcorli2007@yahoo.com. Glen Whelan is Lecturer in Business Ethics at the ICCSR,
Nottingham University Business School, UK, email: Glen.Whelan@nottingham.ac.uk

312 M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333

environmental accounting (SEA) (Owen the level of SEA that maximizes the firm
& O'Dwyer, 2008; Standard & Poor's, -specific utility of SEA (again consider-
SustainAbility & UNEP, 2004). None- ing both costs and benefits of SEA, but
theless, some scholars have raised con- only costs and benefits for the reporting
cerns about “greenwashing,” the lack of organization). Keeping levels of analy-
verification or verifiability, and thus the sis distinct is important because the two
lack of genuine accountability (Owen & different objectives of effectiveness may
O'Dwyer, 2008). As SEA touches on not necessarily converge with respect to
most dimensions of organizational per- conclusions about the “right” level or
formance and social efficiency as de- type of SEA as they consider different
fined below, this commentary contextu- costs and benefits at different levels of
alizes SEA by focusing on the integral analysis for different actors (as we will
elements of effective SEA and its politi- show in this paper). The overall conclu-
cal governance contingencies. sion of our argument is that, given lim-
ited resources, both organizations and
For the purpose of this paper, we define society as a whole should—in the inter-
SEA as the provision of information ests of outcome effectiveness—only pur-
about business impact and performance sue those actions that maximize out-
with regard to social and environmental comes at minimal cost. Connecting
issues. Like standard financial account- SEA to organizational and societal net
ing, SEA measures, monitors, and con- benefits, we introduce ideas that are pri-
trols business activities and thus is help- marily prescriptive in nature. According
ful to both internal (e.g., managers) and to Donaldson and Preston (1995) and
external (e.g., investors) stakeholders. In Bazerman (2005), prescriptive theories
line with this functional definition, effec- connect actions A to outcomes B, i.e.,
tiveness of SEA is defined as the extent evaluate the extent to which any action
to which SEA meets two equally impor- A is instrumental to achieve any out-
tant objectives, namely: the non- come B. Although we do not provide a
financial information requirements of normative foundation for our chosen
organizational stakeholders in verifiable outcomes at organizational and societal
form and the contribution of SEA to level (there may be others), the sections
business as a performance-enhancing on political governance systems, con-
tool (Epstein, 2008). Thus, to analyze ceived as important contextual forces, do
the effectiveness of SEA requires a nevertheless allude to some of the nor-
deeper understanding of outcomes at the mative underpinnings of our chosen out-
societal and organizational levels of comes.1
analysis.
Our contribution to this issue of Issues
At the societal level, that level of SEA is in Social and Environmental Accounting
most effective that achieves greatest so-
cial efficiency, that is, maximum aggre- 1
Prescriptive, or instrumental, theorizing differs from
gate societal well-being (with both bene- normative theory in that the latter identifies moral or
fits and costs of SEA to all constituents philosophical guidelines for the operation and manage-
being included in this utilitarian calcu- ment of business firms, while the former describes
connections, or the lack thereof, between any action
lus) (Baron, 2006). At the organiza- (e.g., SEA) and company objectives (e.g., profitability)
tional level, effectiveness is captured by or sociopolitical objectives (e.g., democracy)
(Donaldson & Preston, 1995).

M. Orlitzky, G. Whelan / Issues in Social and Environmental Accounting 2 (2007) 311-333 313

is structured as follows. First, we sum- Benefits and costs of SEA based on
marize potential benefits and costs of economic theory
SEA to reporting organizations and the
organizations’ stakeholders. Second, in Two seminal economic theories
building off these general considera- (signaling theory and transaction cost
tions, we derive some suggestions for economics) can be used to analyze the
best practice in SEA. Third, we present costs and benefits of SEA. From a
the current empirical evidence regarding managerial perspective, economic theo-
the financial benefits of social and envi- ries are useful because they make ex-
ronmental disclosures for the reporting plicit what other theories applied to
organization. Fourth, we point out how SEA, such as legitimacy theory
broader social and political governance (Deegan, 2002), leave implicit. In other
systems may influence, constrain, or words, they make costs and benefits the
support SEA. Finally, we conclude with central foci of the analysis of SEA. As
some suggestions for fruitful future re- shown in Figure 1, it is argued that these
search agendas in SEA. benefits and costs accrue to the reporting
organization and society at large.

Figure 1
Taking Account of Social and Environmental Accounting
Benefits Costs
To Reporting • Legitimacy • Signaling costs
Organization (e.g., monitoring, Shift in emphasis
• Competitive advan-
data collection) from laissez-faire
tage (through sig-
naling/reputation)
to
liberal democratic
To Other • Decreasing transac- • Opportunity costs state
Stakeholders tion costs • Information over-
load/ambiguity

(DiMaggio & Powell, 1983). To the
Benefits and costs to the reporting extent that stakeholders claim a right to
organization know details about organizations’ social
and environmental initiatives, organiza-
The conventional explanation for SEA, tions will try to live up to these expecta-
legitimacy theory (Deegan, 2002), relies tions and, thus, close the legitimacy gap
on an institutional logic of conformity. between stakeholder perceptions and
According to legitimacy theory, organi- organizational reality (Campbell, 2000).
zations conform to stakeholder expecta- Seen in this light, SEA can be regarded
tions of “good” behavior and to a as an explanation and justification of
broader “social contract” (Mathews, current organizational activities (Maurer,
1993). The idea that organizations con- 1971) or an effort to garner social sup-
tinually strive to gain or maintain legiti- port (Suchman, 1995). In short, legiti-
macy is consistent with the notion of macy theory can be considered an amal-
isomorphism in institutional theory gam of institutional explanations and


stakeholder theory (Campbell, 2000). example, “good” corporate citizens may
Whilst legitimacy theory is of key im- attract more talented employees
portance, research has suggested that (Greening & Turban, 2000; Turban &
other theories can help provide further Cable, 2003; Turban & Greening, 1996)
and arguably more nuanced explanations and address environmental challenges
for the prevalence of SEA activities. For and opportunities more proactively
example, Campbell (2000) showed that (Berry & Rondinelli, 1998; Hart, 1995;
chairman succession affected the level 2007). Insofar as SEA is not imposed
of the voluntary disclosures of Marks on all businesses and instead is voluntar-
and Spencer, a British retailer. Camp- ily chosen, its adoption may lead to
bell argued that because different corpo- greater interorganizational trust and, in
rate leaders may perceive organizational turn, higher economic performance and
environments differently, we cannot un- growth (Hosmer, 1995; Knack &
derstand organizations’ investment in Keefer, 1997). The overarching as-
SEA technology without analyzing the sumption in signaling theory is that man-
cognitive filtering mechanisms inside agers will be incentivized to maximize
managers’ heads. Similarly, it is diffi- these reputational returns of SEA net of
cult for legitimacy theory to argue that its associated signaling costs. These
business executives make resource allo- signaling costs include financial and non
cations without reference to some type -financial (e.g., time) expenditures asso-
of cost-benefit analysis. This omission ciated with the collection and dissemina-
is redressed in this paper given its focus tion of SEA information.
on economics and political governance,
and its concern to offer practical solu- However, not all organizations can ex-
tions to managerial questions about the pect to derive the same benefits from
“right” level of voluntary SEA. SEA signaling. The effectiveness of sig-
naling depends on the extent to which
From an economic perspective, signal- stakeholders interpret SEA correctly as a
ing theory adds explanatory power. signal of business responsibility and
Market signaling captures an economic commercial reliability. This implies that
view of organizational reputation be- an activity or characteristic that is rela-
cause a signal is used to communicate tively more costly for the lower-quality
information to, or change the beliefs of, types in the market (i.e., irresponsible
other actors in the market (Spence, organizations) tends to be more effective
1974; 2002). Thus, a signaling device as a signal because this makes it more
such as SEA represents a differentiating expensive for irresponsible organiza-
(rather than mimetic or homogenizing) tions to attain it and, thus, it is more
characteristic through which the report- likely to be used as a (valid) signal by
ing company may gain competitive ad- responsible market actors. Conversely,
vantage. In the same way as a degree of insofar as managers know what types of
higher education may signal job appli- signals are used by stakeholders under
cants’ intelligence, work motivation, or conditions of information uncertainty,
productivity, SEA can signal an organi- they may be tempted to “fake” signals,
zation’s commitment to corporate citi- so that the signals do not validly sepa-
zenship. In turn, this can affect the or- rate responsible and irresponsible or-
ganization’s financial bottom line. For ganizations (Spence, 1974). For exam-


ple, many outsiders mistook Enron’s Insofar as the signal can be invalid, the
faking of social responsibility for genu- reduction of transaction costs is, of
ine corporate responsibility. Likewise, course, not an automatic outcome of
many consumers seem to be misled by SEA.
the marketing of “ethical food,” which
may have a number of ecologically Stakeholder costs as a consequence of
harmful side-effects (Economist, 2006). SEA are more difficult to specify than
When this kind of dishonesty or over- the more obvious and tangible costs to
statement happens SEA’s value as a sig- the reporting organization. Stakeholders
naling device will be weakened. primarily incur opportunity costs. These
opportunity costs arise from the fact that
the reporting organization sacrifices
Benefits and costs of SEA to stake- some investments in stakeholder man-
holders agement activities that are not SEA. For
example, instead of spending managerial
Any economic transaction incurs trans- time and organizational resources (such
action costs, and all organizational ac- as paper) on the collection and compila-
tors are motivated to minimize these tion of data in glossy reports, organiza-
transaction costs (Coase, 1937; William- tions could devote more time to interac-
son, 1975; 1985). Because of bounded tive stakeholder dialogues or address
rationality (Simon, 1997) and opportun- environmental risks. However, because
ism (Williamson, 1975), transaction SEA typically serves as a control device
costs are uncertain and often difficult to for past mistakes or failures in stake-
predict (Williamson, 1993). As men- holder management (Epstein, 2008),
tioned above, SEA may signal that the these opportunity costs are likely to be
reporting organization is behaving in a quite low. In addition to opportunity
caring and responsible manner and, thus, costs, accelerating provision of social
provide evidence (hard data) summariz- and environmental reports may also lead
ing, or at least illustrating, the organiza- to information overload and, therefore,
tion’s social and environmental activi- more (rather than less) stakeholder un-
ties. This will reduce transaction costs certainty about the meaning of all this
(borne by stakeholders): e.g. expenses information—particularly when SEA
associated with the monitoring and tends to be based on non-standardized
searching for signifiers of corporate re- measures, which might be incommensu-
sponsibility and promise keeping. rate in cross-firm and cross-industry
Stakeholders that claim a right to know comparisons.
about organizations’ social and environ-
mental activities would have to spend
much more time searching for this infor- Best practice in SEA
mation if SEA data were unavailable.
For example, stakeholders would have to These instrumental theories of SEA can
interview competitors and suppliers or add important insights to previous “SEA
spend money on undercover data collec- best practice” lists, which included, for
tion. In other words, because SEA can example, Zadek et al.’s (1997) criteria of
serve as a market signal, it may also inclusivity, comparability, completeness,
lower transaction costs for stakeholders. external verification, and continuous


improvement. This and other best prac- Second, and from the broader societal
tice lists focus mainly on duty-based perspective, the preceding theories sug-
precepts. Deontological principles can gest that social efficiency—i.e., the dif-
obviously be praised from a moral per- ference between all societal benefits
spective. Nevertheless, they can some- emerging from SEA and all societal
times be accused of providing limited costs emerging from SEA—should be
levels of managerial or political guid- maximized (see Baron, 2006 on social
ance regarding the practical limits im- efficiency in general). This implies the
posed on SEA by resource scarcity and, following change in the utilitarian calcu-
thus, the “right” level of SEA. For ex- lus: MBSEA(all) = MCSEA(all).
ample, the imperfect Kantian duty to
treat others beneficiently – which is a Undoubtedly, this cost-benefit analysis,
duty that can be related to the duty that whether at the organizational or societal
corporate managers might be considered level, is no easy task. The specification
as having in regard to accurate reporting of all benefits and costs associated with
– provides limited guidance as to how SEA is difficult. However, our theoriz-
one should help others, how many one ing offers the following suggestions.
should try to help, how much time one First, SEA should be stakeholder-
should devote to helping others, and so oriented rather than focused on society
on (e.g., Korsgaard, 1996: 20-21; White, at large (Clarkson, 1995; Orlitzky, 2007;
2004: 92-94). Orlitzky & Swanson, in press): for the
simple reason that costs and benefits can
In contrast to many duty-based precepts, only ever be related to specific constitu-
which are often limited in their capacity ents. What this means is that, stake-
to provide practical advice regarding the holder-centered reasoning requires that
allocation of resources, the aforemen- those who will reap the benefits related
tioned theories can be used to derive the to SEA, and those who will bear the
following prescriptive advice for best costs, be concretely specified. In con-
practice in SEA (see Endnote 1 on the trast, reasoning based on some amor-
distinction between prescriptive and nor- phous “common good” can be under-
mative dimensions of an issue). stood to present an obstacle to estimat-
ing the concrete costs and benefits asso-
First, at the organizational level of ciated with SEA.
analysis, the preceding theories suggest
that managers ought to initiate SEA so At the same time, a stakeholder focus in
that the difference between total benefits SEA reiterates the importance of con-
of SEA for their firm and total SEA tinuous improvement with (ever-
costs of their firm is maximized. Ex- changing) stakeholder needs in mind and
pressed differently, SEA should expand as long as marginal benefits exceed mar-
up to the point where firm-specific marginal costs. An issue focus, on the other
ginal benefits from SEA equal marginal hand, might reify “issues” as stable enti-
costs. Only the firm-specific benefits ties to be addressed when reality would
and costs of SEA are included in the recommend a mindset that acknowl-
formal calculus of MBSEA(firm) = MCSEA edges stakeholder groups’ (or individu-
(firm). als’) evolving constructions of organiza-
tional reality. For example, what at one


point in time was perceived as “business greater verifiability and accountability,
as usual” (e.g., disposal of oil rigs in the and as shown by Akerlof and other
North Sea) might shift –almost over- economists, well-functioning markets
night—to a deeply moral issue that oil tend not to reward the lack of transpar-
companies must address. More broadly, ency.
flexibility allows for the innovations and
strategic planning necessary to devise
solutions in stakeholder and environ- Empirical evidence on the effective-
mental management that are cost- ness of SEA
effective and optimal for overall societal
well-being (Husted & Salazar, 2006). As is obvious by now, we do not assume
Thus, reporting flexibility emerges as a that more and more SEA is necessarily
key principle of effective SEA, a point the optimal outcome for an organization
to which we will return in the section on (or society at large); nor do we assume
political governance systems. that any particular type of SEA is neces-
sarily optimal for either organizations or
In effective SEA, there is not only cross- societies. Instead, we make the more
temporal but also geographic flexibility. realistic assumption that SEA, though
Stakeholders in different cultures may often resulting in many benefits, is never
espouse different values (Donaldson, a cost-free exercise and reaches an opti-
1989; Donaldson & Dunfee, 1999), and mum level, beyond which net benefits
SEA should reflect different cultures’ (especially for business) will start to fall
differing preferences, norms, and priori- (see previous section on opportunity,
ties. This best practice of international signaling, transaction, and other costs).
flexibility even applies to “objective To understand the net effectiveness of
facts” such as pollution abatement or SEA more fully, we can draw on empiri-
animal rights because different cultures cal research to test this assumption—at
espouse different views on the impor- least partially. Specifically, we can
tance and substance of such practices. draw on past empirical studies that have
Our instrumental theory of SEA effec- examined the question to what extent
tiveness also explains why verifiability SEA is linearly correlated with corporate
and verification of organizations’ social financial performance across industries
and environmental disclosures are so and study contexts. A large positive
important. Without verifiability and, in correlation would cast doubt on our the-
fact, actual credible verification, espe- ory of optimal—rather than maximal—
cially external stakeholders would ex- SEA because such a correlation would
perience no cost advantages when deal- imply a business case2 for ever-
ing with “responsible” versus increasing levels of SEA (for a similar
“irresponsible” organizations because discussion of corporate social responsi-
those SEA signals could not be trusted. bility more generally, see McWilliams &
Sooner or later, markets will collapse Siegel, 2001).
when there is information asymmetry (as
in the case of SEA) and low trust be- Most research reviews in SEA still con-
tween buyers and sellers of products clude that, because of variable findings,
and/or information (Akerlof, 1970). In the correlation between social disclo-
this sense, market pressures exist for sures and financial performance cannot


be established empirically (Deegan, counting measures can be conceptual-
2002; Ullmann, 1985). However, two ized as measures of organization-level
award-winning meta-analyses concluded efficiency in the use of company re-
there is a small positive yet negligible sources, this finding reaffirms the afore-
correlation (Orlitzky & Benjamin, 2001; mentioned idea that increasing levels of
Orlitzky, Schmidt & Rynes, 2003).2 The SEA are not necessarily efficient from
meta-analytic results shown in Table 1 an organizational perspective. Alterna-
suggest that we can, in fact, reach gen- tively, the negative correlation between
eral conclusions about the business case accounting CFP and SEA might lead to
for SEA. In general, the true score cor- the conclusion that poor financial per-
relation ρ between social disclosures and formers are more likely to disclose so-
all different measures of corporate financial and environmental data (possibly to
cial performance (CFP) is .09, with over distract the readers of their annual re-
98% of the cross-study variance by such ports, such as shareholders, from their
artifacts as sampling error and measure- poor financial performance as measured
ment error. Whenever the cross-study by return on assets or equity). This al-
variance explained reaches 75% in a ternative interpretation, though, calls
meta-analysis (see sixth column in Table into question the interpretability of SEA
1), we can conclude that there are no as a valid signal of organizational social
moderators and we have correctly identi- and financial sustainability (see also pre-
fied the population parameter, or mean vious section on “faking”).
true score correlation ρ (Hunter &
Schmidt, 2004). With market measures The only area in which empirical results
of CFP (such as share price apprecia- are inconclusive is the correlation be-
tion), the true-score correlation was tween SEA and firm risk (Orlitzky &
slightly larger (ρ = .11; σ2ρ = .01). Benjamin, 2001). The true score correla-
Thus, the meta-analytic data suggest that tion ρ of -.10 might suggest that SEA
financial markets reward social disclo- minimizes firm risk. However, this con-
sures only to a minor extent. However, clusion would be premature because
the meta-analytic data also show that study artifacts explained only 26% of the
social disclosures are not correlated, and cross-study variance, and thus the true
may even be inversely correlated, with score standard deviation SDρ was a size-
any internal, accounting measures of able .23 (the square root of the true score
CFP (ρ = -.02; σ2ρ = .00; i.e., all of the variance estimate reported in Table 1,
cross-study variance is explained by 2
study artifacts).
σρ
i.e., ). Furthermore, the file
drawer analysis, which calculates the
Hence, far from being inconclusive, the number of studies needed to change our
overall results show that voluntary dis- conclusions substantially (i.e., a failsafe
closures have only small positive bene- N), indicates that only one additional
fits for the valuation of firms in financial study would be needed to change con-
markets and may even be counter- clusions in the case of SEA and firm
productive in terms of internal account- risk. Therefore, more studies will have
ing measures of CFP. Since these ac- to be conducted on SEA and firm risk
2
By “business case of SEA,” we mean SEA results in before we can reach any general conclu-
short- or long-term financial benefits for business.


Table 1
Meta-analytic Conclusions Regarding SEA
Relationship of ka Total Sample-size Ob- % Vari- Mean Vari- File
Social Disclosures sample weighted served ance true- ance of Drawer
size mean ob- variance Explainedb score r r Analysisc
with… served (meanρ ) [=σ2(ρ)]
r (robs)

All measures of CFP 97 5,360 .0438 .0189 98.47% .0871 .0011 NA

2.a.1. Market-based CFP 79 4,426 .0548 .0206 89.75% .1090 .0081 8

2.a.2. Accounting CFP 18 934 -.0085 .0077 100.00% -.0168 .0000 NA

Business risk 2 213 -.0741 .0381 25.85% -.1041 .0543 1

Social audits and CFP 35 5,016 .1143 .0081 100.00% .2272 .0000 45

Note: CFP = corporate financial performance.
a
k: number of correlation coefficients meta-analyzed;
b
refers to percentage of observed variance explained by sampling error and measurement error
in CSP;
c
Hunter & Schmidt’s (1990) effect size file drawer analysis: Number of missing studies needed
to bring robs up to -.05.

Source: Orlitzky & Benjamin (2001); Orlitzky, Schmidt, & Rynes (2003).

sions in this area. forecasting, and management. For ex-
Furthermore, these meta-analyses ample, when SEA is verified in the form
showed that, of all the different proxies of social audits, we observe a much
of corporate social responsibility (CSR), greater and generalizable true score cor-
SEA was correlated with CFP to the relation of .22 with CFP (see last row of
smallest extent (Orlitzky & Swanson, in Table 1). This suggests that stake-
press)3. These other CSR measures in- holders do not trust SEA as a signal of
cluded CSR reputation, executive val- good corporate citizenship unless social
ues, and such organizational processes disclosures are implemented in a com-
as social audits, philanthropic donations, prehensive organizational audit system
issues management, stakeholder man- and objectively verified by independent
agement, and environmental assessment, auditors. Overall, our previous, theory-
based intuition about the necessity of
3
Orlitzky and Benjamin (2001) won the 2001 Best verification and auditing is supported by
Article Award given by the International Association
for Business and Society (IABS) in association with these meta-analytic findings.
California Management Review. Orlitzky, Schmidt, and
Rynes (2003) won the 2004 Moskowitz award for out-
standing quantitative research relevant to the social
investment field. The Moskowitz Prize is awarded SEA and political governance systems
annually to the research paper that best meets the fol-
lowing criteria: 1) practical significance to practitioners
of socially responsible investing; 2) appropriateness and
Organizations’ social, political, and eco-
rigor of quantitative methods; and 3) novelty of re- nomic environments may also affect the
sults. This entire research program will be summarized effectiveness of SEA. Hitherto, this fact
(and updated with new findings) in a forthcoming book
(Orlitzky & Swanson, 2008). of organizational embeddedness has


been understated within the SEA litera- cially negative liberty, is emphasized. In
ture. This is unfortunate, for without effect, the idea of negative liberty refers
work explicitly concerned to connect to those liberties associated with respect-
SEA with the broader domain of politi- ing private property, not being infringed
cal governance systems, SEA scholar- upon, not being lied to, not being ag-
ship remains incomplete (Deegan, 2002; gressed against, and/or, not being forci-
Mathews, 1997), especially given our bly constrained (e.g., Berlin, 1969; Sen,
focus on SEA effectiveness. Amongst 1988). For negative liberty to be re-
other things then, and as will be further spected then, it is generally required that
emphasized in the concluding discus- other people refrain from actively harm-
sion, the present paper is concerned to ing others or from forcibly imposing
suggest that scholars of SEA need to their will on others in any way. Never-
increasingly engage with, or at least theless, and as Shue (1996: Chapter 2)
more fully acknowledge, the ways in has argued, if the negative liberties of a
which the interrelated concerns of moral certain person (e.g., Person A) are to be
and political philosophy shape the politi- respected, other people or institutions
cal governance systems that impact (e.g., Police Force Z) will commonly be
upon, or contribute to the definition of, required to act so as to forcefully pre-
the effectiveness of SEA. More specifi- vent another person (e.g., Person B)
cally, the present section of the paper from infringing as such. Given this gen-
refers to a number of perspectives that eral concern – and whilst acknowledging
combine to inform, and often compete to that some thinkers aligned with the lais-
inform, the (re)design and (re) sez-faire, classically liberal, or libertar-
construction of political governance sys- ian perspective argue that not even a
tems within contemporary societies. minimal state can be justified given that
With reference to the discussions al- taxation is money paid under threat of
ready completed, what the present sec- institutionalized violence, and hence,
tion of the paper suggests is that, ulti- disrespectful of negative liberty (e.g.,
mately, it is very difficult to conceive Hoppe, 1999; Rothbard, 1978) – most
the effectiveness of SEA at the manage- of those aligned with this broad line of
rial and/or stakeholder level minus the thought side with Nozick (1974: ix) in
sort of bird’s eye view that the interre- thinking that something tending towards
lated domains of moral and political phi- a “night-watchman” state limited “to the
losophy enable one to take. It is for this narrow functions of protection against
reason that the following two systems of force, theft, fraud, enforcement of con-
political governance are discussed next. tracts and so on” is justified.

The second thing that the laissez-faire,
The laissez-faire, classically liberal, classically liberal, or libertarian perspec-
and/or libertarian perspective tive tends to suggest is that the sum of
individual goods within a given society
The first political governance system is likely to be maximized so long as
can be termed the laissez-faire, classi- negative liberty is respected. This utili-
cally liberal, and/or libertarian perspec- tarian argument, whilst not always put
tive. In this system, the importance of forward by those associated with a lais-
individual autonomy and freedom, espe- sez-faire, classically liberal, or libertar-


ian perspective, is nevertheless com- century Britain, which is commonly con-
monly advanced. Mises (2002: 22-23), sidered the archetype of a classically
for example, makes the basic point well liberal society, limited the role of the
when he writes: nation-state to that of the “night-
…a system based on freedom watchman” (Taylor, 1972). Neverthe-
for all workers warrants the less, this general perspective has had a
greatest productivity of human massive influence on the collective psy-
labor and is therefore in the in- che of Western society and has thus in-
terest of all the inhabitants of the fluenced the design and construction of
earth… free labor… is able to its political governance systems. Ac-
create more wealth for every- cordingly, it is here argued that a sophis-
one…. ticated understanding of the laissez-
Given these two beliefs – i.e., the belief faire, classically liberal, or libertarian
in the importance of negative liberty and perspective is of vital importance to any
the belief that respect for negative lib- discussion of the effectiveness of SEA.
erty maximizes social welfare – those Three specific reasons will now be put
who can be associated with a laissez- forward for arguing thus.
faire perspective (e.g., Friedman, 1962;
1970; Mises, 1963; Mises, 1990; First, an understanding of laissez-faire
Nozick, 1974; Smith, 1776/1976) tend to thinking is vital if one wishes to contex-
(1) want the role of the nation-state to be tualize the fact that the managers of lim-
limited to something approaching the ited-liability and publicly traded corpo-
“night-watchman” role4 and (2) tend to rations are legally obliged, and remu-
champion the benefits that a society de- neratively encouraged, to try to maxi-
rives from the actions that business peo- mize shareholder wealth (e.g., Beer-
ple (who are largely understood as being worth, 2004/2005; Bostock, 2004/2005;
motivated by the desire to maximize Collison, 2003; Cragg, 2002; Owen,
their own financial profits) engage in to 2005a). This fact, which means that
try to satisfy consumers. managers are strongly encouraged to
measure the effectiveness of SEA in
Before proceeding to expand on the sec- terms of maximum net company bene-
ond of these two points, which is closely fits, is often presented in a negative light
related to Smith’s idea of the invisible within the SEA scholarly literature given
hand (see below), it should be high- that it tends to limit the extent and qual-
lighted that the laissez-faire, classically ity of SEA activities (Owen, 2005b). In
liberal, or libertarian ideal of society has short, those who present the “profit mo-
never been actualized on any large scale tive” in a negative light, do so for ethical
in recent history (it may, however, have reasons. Accordingly, and as the preced-
been actualized on a large scale histori- ing discussion suggests, it is important
cally or on a smaller scale more re- that scholars of SEA recognize that this
cently). Indeed, not even nineteenth- concern with profit maximization can be
argued for on both deontological (and/or
4
Neither Friedman nor Smith, for instance, champi- rights-based) and utilitarian grounds
oned the sort of “pure” laissez-faire perspective being
here discussed. Nevertheless, both thinkers have defi- (McCloskey, 2006; Mises, 1963; Smith,
nitely championed the benefits of limiting government 1776/1976).
involvement in various social and economic issues.
Hence the emphasis placed on the word approaching.


The deontological (and/or rights-based) lence is originally derived, is
argument in favor of profit maximiza- frequently powerful enough to
tion states that as long as profits are gen- maintain the natural progress of
erated in a manner that does not infringe things towards improvement, in
on the negative liberty of other people – spite both of the extravagance of
e.g., so long as there is no coercion or government, and of the greatest
deception involved – then they are justi- errors of administration. Like
fied. This argument is directly related to the unknown principle of animal
the idea that a truly commercial interac- life, it frequently restores health
tion is mutually beneficial, and hence, and vigour to the constitution, in
non-coercive. Furthermore, this idea is spite, not only of the disease, but
related to the belief that, so long as one of the absurd prescriptions of
is entitled to, or rightly owns, the re- the doctor. (Smith, 1776/1976:
sources utilized in the production of 443)
goods and services, then they are also
entitled to, or deserving of, any profits Both the deontological and utilitarian
that the sale of these goods and services arguments made above help justify insti-
generate (Kirzner, 1989; Nozick, 1974). tutional frameworks that strongly en-
In contrast to the deontological (and/or courage managers to judge the effective-
rights-based) argument, the utilitarian ness of SEA initiatives in terms of firm-
argument justifies the right of individu- specific net returns from SEA. Accord-
als to earn private profits on the basis ingly, it can be argued that those who
that this right has positive consequences wish managers to primarily judge the
for social welfare. Mises neatly encapsu- effectiveness of SEA initiatives in other
lated one element of the utilitarian de- ways – such as in terms of accountabil-
fense of private profits by stating that: ity to stakeholders (Owen, 2005b) –
The behavior of the consumers need to directly engage these normative
makes profits and losses appear arguments if they are to alter systems of
and thereby shifts ownership of political, economic, and corporate gov-
the means of production from ernance that encourage managers to be
the hands of the less efficient primarily concerned with profit maximi-
into those of the more efficient zation.
[…] In the absence of profit and
loss the entrepreneurs would not The second point to be made, in relation
know what the most urgent to SEA and the laissez-faire, classically
needs of the consumers are. liberal, and/or libertarian perspective, is
(Mises, 1963: 299) that the deontological argument aligned
with this worldview can be used to argue
And, more famously, Adam Smith has for the necessity of honest and compre-
provided a utilitarian argument defend- hensive disclosure when it comes to
ing private profits when he wrote: SEA. Indeed, given the laissez-faire con-
The uniform, constant, and unin- cern with truly commercial interactions
terrupted effort of every man to and, given the presupposition that many
better his condition, the princi- consumers are concerned with the social
ple from which public and na- and environmental impact that compa-
tional, as well as private opu- nies can have, it can be argued that com-


panies are morally obliged – on laissez- with the Austrian school of economics
faire, classically liberal, or libertarian (Kirzner, 1985; 1989; Mises, 1963;
grounds – to honestly and comprehen- 1990), suggests, amongst other things,
sively disclose the impact that the pro- that if governments set and enforce base-
duction and sale of company goods and line standards that must be met with re-
services have in regard to social and en- gard to SEA reporting, then companies
vironmental matters. The reason why will be likely to do no more than try to
this can be argued is that the mutual achieve this baseline standard. One rea-
benefit upon which any commercial son why this might occur is that, when-
transaction is based implies the need to ever governments set a baseline stan-
disclose information that could poten- dard, they can, whether intentionally or
tially prevent a sale. For example, at not, give off the impression that any ef-
least some people would, all other things fort to improve upon this level would
being equal, prefer to purchase products result in resources being misallocated.
from companies determined to reduce Furthermore, whenever governments
their carbon footprint than those not so provide hard and fast rules for the com-
concerned. Thus, if a company decided pletion of a task, managers and business
to give the false impression that their people will obviously decide not to try
carbon footprint was less than that of to create a better way to accomplish the
their competitors via their SEA, then same task on the grounds that govern-
they could be ethically criticized on lais- ment regulations will not allow such an
sez-faire, classically liberal, or libertar- improvement to be implemented. In
ian grounds: for lying (whether actively short, it can be said that government
or by omission) is to disrespect the nega- regulation, in these and other matters,
tive liberty and personal autonomy of discourages innovation and results in a
others. Furthermore, the failure of or- suboptimal compliance rather than a
ganizations to provide honest accounts more desirable integrity mindset on the
of such issues will likely increase trans- part of business executives (Paine,
action costs incurred by customers and 1994). Furthermore, whenever such
other stakeholders in the future because baseline standards are implemented,
deception lowers trust, which in turn firms will be in a position to deflect
necessitates more future monitoring. criticism that they might receive from
Obviously, such an outcome will also various stakeholders for not doing more
lead to undesirable outcomes at the level by responding: “Company X has
of aggregate social welfare. achieved the government’s standards
and hence Company X has met society’s
The third reason that an understanding expectations.” Such a managerial com-
of the laissez-faire perspective is vital to pliance mindset can translate into a
understanding the current state of, and stance of “as bad as the law allows” (to
current debates surrounding, SEA, is due borrow the words of Interface CEO Ray
to the utilitarian argument associated Anderson).
with the classically liberal perspective
suggesting that it would be a mistake for In building off this same argument, it
governments to over-regulate this area. can also be suggested that, whenever
This general argument, most closely as- governments regulate and monopolize
sociated with various thinkers aligned reporting and accounting processes, they


decrease the sphere available to social include things such as basic levels of
and environmental entrepreneurship and education and welfare, can be consid-
innovation. What this suggests, in spe- ered examples of positive liberty (Sen,
cific regard to the contemporary lack of 1988) in that such goods positively en-
governmentally enforced SEA activities, able people to achieve certain ends that
is that such a lack is far from being a bad mere negative liberty cannot ensure (e.g.
thing. To briefly elaborate, this lack of without a basic level of education, indi-
governmental presence leaves a vacuum viduals are unlikely to be capable of
that market-driven innovations from sev- holding down a decent job, even though
eral competitors can fill. Thus, we have their negative liberty is respected and
organizations, such as AccountAbility in protected).
the UK, the Global Reporting Initiative
(GRI), KPI in Europe, and other simi- In addition to such positive liberties,
larly oriented organizations, all develop- which are commonly argued for on de-
ing systems and institutions that encour- ontological grounds and/or on the basis
age SEA innovations. Such diversity and of human rights (e.g., Donnelly, 2003:
competition, according to the laissez- Chapters 1-3), supporters of the liberal
faire perspective, is beneficial. And, democratic perspective consider equal
when it comes to a young and develop- political participation essential to living
ing field like SEA, it might be suggested a good and full human life. Indeed, and
that this lack of hard regulation is a very once again, those of a liberal democratic
good thing indeed. bent regard participation in the democ-
ratic election of politicians as a human
right (e.g., Gewirth, 1996: Chapter 8).
The liberal democratic perspective On this particular point, it must be men-
tioned that advocates of a laissez-faire,
The second political governance system classically liberal, or libertarian political
can be termed the liberal democratic governance system also commonly
perspective. It is arguably more impor- champion the importance of political
tant than the laissez-faire, the classically participation. The difference between
liberal, or libertarian perspective in that the two perspectives in this specific re-
it is actualized to a greater extent within gard is that, whilst advocates of laissez-
the world today. The reason then for the faire political governance systems try to
laissez-faire perspective having been convince the voting public that it is im-
discussed first is that, in a number of portant to keep the role of governments
important regards, the liberal democratic to a minimum, advocates of liberal de-
perspective can be considered a moder- mocracy argue that democratic govern-
ated version of it. With this stated, the ments need to play a much more active
first thing to note is that, whilst being far role.
from disrespectful of negative liberty,
the liberal democratic perspective never- Those aligned with the liberal democ-
theless suggests that people have a right ratic perspective will argue as such be-
to other goods as well; and, that liberal cause they believe it important that all
democratic nation-states have a duty to the people within a given society have
provide these goods to its citizens. These their positive and participative rights
goods, which are commonly thought to respected and, in contrast to advocates


of laissez-faire, that governments need profits in a regulatory environment that
to play a more than minimal role to en- is simply and solely concerned to protect
sure that the “social good” is maxi- negative liberty. Thus, and whilst the
mized. In regard to the “social good”, liberal democratic perspective is far
which is here conceived in utilitarian from disparaging of the utilitarian argu-
terms, those aligned with the liberal de- ments that those aligned with the laissez-
mocratic perspective commonly put for- faire perspective make, it nevertheless
ward two reasons as to why simply re- suggests that governments need to estab-
specting negative liberty will not ensure lish various rules, regulations, incen-
an increase in social welfare (see Bau- tives, and so on to ensure that the ener-
mol, 1965, for example). First, they gies of profit-motivated actors contribute
commonly reason that, without govern- to, and do not undermine, the “social
ment direction and/or control of re- good.”
sources, certain public goods will often
go unproduced on the grounds that pri- One of the key decisions facing public
vate providers are unable to capture any policy makers then, according to the lib-
income from their production. Second, eral democratic perspective, is whether
they commonly reason that, minus gov- or not they should “devise mechanisms,”
ernment regulation of commerce and or “allow mechanisms to evolve, that
industry, negative externalities will pro- channel the pursuit of profits in a so-
liferate given the costs associated with cially productive direction” (McMillan,
self-regulation. Whenever either of these 2002: 228). In specific regard to SEA,
things occurs – i.e., whenever markets what this means is that public policy
do not produce certain public goods or must decide whether governments
whenever they produce negative exter- should, or should not, impose hard regu-
nalities – the market can be said to have lation on business and corporate activi-
failed. ties. As the preceding sub-section has
indicated, there are potential costs asso-
As the preceding discussions state, those ciated with hard regulation, i.e., dimin-
aligned with the liberal democratic per- ished innovation and the potential for a
spective believe – in contrast to those reduction in activities towards the lowest
aligned with the laissez-faire, classically common denominator. However, and as
liberal, or libertarian perspective – that a the discussion of this sub-section has
more than minimal government directing indicated, there are similarly potential
society in the name of the people, and negatives associated with leaving such
indeed, for the people, is justified. More institutional creation to the invisible
specifically, those aligned with the lib- hand.
eral democratic perspective commonly
want governments to impose hard regu- One potential negative is that, without
lations that require business people and government coercion, various other
managers to act one way or the other. To stakeholders will be unable to enforce
reiterate, the basic reason why is that honest and comprehensive reporting and
those aligned with the liberal democratic social disclosures. Thus, if a society con-
perspective do not believe that social siders it important that people have ac-
welfare will be maximized if business cess to information established via SEA
people and managers are left to pursue activities, it can be argued that govern-


ments need to ensure, via ultimately co- by governments is so that they can use
ercive means, that businesses and corpo- this information to suggest the need for
rations disclose such information. Im- other policy initiatives. For example, if
portantly, this specific concern is related environmental NGOs have increased
to the more general notion that, “a access to information regarding defores-
workable market design keeps in check tation, desalination, groundwater usage,
transaction costs… These costs include hazardous chemical usage, and so on,
the time, effort, and money spent in the then they can use this information to try
process of doing business – both those to encourage governments to engage in
incurred by the buyer in addition to the new policy initiatives whose aim is to
actual price paid…Transaction costs can ensure that corporate practices improve
arise before any business is in such regards. Clearly, if one accepts
done” (McMillan, 2002: 9). that corporations can both positively and
negatively impact upon social and envi-
This idea of transaction costs is central ronmental concerns, and if one similarly
to understanding the fact that various accepts – as do those aligned with the
non-governmental organizations (NGOs) liberal democratic perspective – that
– such as the CORE coalition, for exam- government action is commonly re-
ple (Zerk, 2007) – continue to lobby quired to ensure that corporations posi-
liberal democratic governments for in- tively impact upon social and environ-
creasingly stringent and comprehensive mental concerns, then it is clear as to
SEA practices. One of the reasons they why governmentally enforced SEA stan-
desire such regulation is so that they can dards may be required. Indeed, it can be
then use this information to suggest to argued that governments themselves will
their own members, and to the public be unable to establish the relative suc-
more generally, that if they hold certain cess or failure of various policy initia-
values regarding any number of social tives unless they have access to informa-
and/or environmental concerns, then tion garnered from SEA practices. In
they should choose Company A over short, the liberal democratic perspective
Company B, C, and D. In short, they suggests that governments will com-
wish the government to impose increas- monly be required to regulate various
ingly comprehensive regulations so that elements of SEA if the activities of
they can reduce the transaction cost for profit-motivated actors are to contribute
those who wish to make purchasing de- to, and not undermine, social welfare.
cisions on more than narrowly instru-
mental grounds.5 In liberal democratic governance sys-
tems, then, the emphasis shifts from firm
A second reason why various NGOs -level effectiveness of SEA (MBSEA(firm)
wish to see increasingly stringent and = MCSEA(firm)) to social efficiency
comprehensive SEA practices enforced (MBSEA(all) = MCSEA(all)). This shift in
5
emphasis is shown as an arrow in Figure
Of course, costs are not reduced at the aggregate level
because more regulation means a larger governmental
1. As argued before, the arrow does not
bureaucracy is needed to enforce these regulations, imply that laissez-faire capitalism cannot
which in turn needs to be funded with greater taxation. maximize social efficiency. Rather, in
Strictly speaking, we are not dealing with a society-
level reduction in (transaction) costs but with a transfer the absence of government intervention
of costs from one set of stakeholders to another. (in laissez-faire systems), managers have


cognitive leeway to focus on employer articulated, if one is to fully understand
interest in their cost-benefit analyses of the current state of SEA within these
any given corporate action. Arguments different countries. Whelan’s (2007)
can be provided that these ultimately self work in particular, which engages with
-interested actions result in the greatest Confucian thought to make further sense
public benefit, or maximum social effi- of the Asian financial crisis and just
ciency (Bragues, 2006; Mises, 1963; what corporate social responsibility
Smith, 1776/1976). So, “shift in empha- might mean in this part of the world,
sis” refers to a shift in managerial think- provides an example of how moral and
ing, which is forced (either directly or political philosophies can be used to
indirectly) through government interven- shine a light on matters of institutional
tion in liberal democratic societies, to concern.
transcend, in all managerial decision
making, the organization-level calculus Another area that requires further re-
of MBSEA(firm) = MCSEA(firm) and consider search is empirical work relating to the
the broader stakeholder benefits of or- moral frameworks through which man-
ganizational practices and policies. agers view the world. Tetlock (2000),
for example, has highlighted that the
way in which managers view a particular
Suggestions for future research situation will be informed by the ethical
and political theories they align them-
This paper, like a great deal of the exist- selves with. To briefly extrapolate, such
ing scholarly literature on SEA, concen- work suggests – along with Whelan’s
trates on Western countries and Western (2002) work on Pierre Bourdieu’s failure
institutional forms. Accordingly, we to change the institutionalized patterns
suggest that future research on SEA of the French media – that if managers
needs to broaden its horizons, and in- are to be convinced of the merits of
creasingly engage with hitherto under- adopting various SEA activities, then it
represented geographic regions, and the would be sensible for those trying to
varying institutional frameworks that convince managers to present their argu-
prevail within them. For example, ments in a manner that is not inconsis-
Aguilera & Jackson (2003: 453), Stern- tent with the ethical and political beliefs
berg (1998), and Yafeh (2000) have all that managers have. Thus, if one presup-
highlighted that corporate governance poses that the managers of business cor-
systems within East-Asia are commonly porations are largely in favor of com-
characterized by a system of cross- mercial enterprise, arguments aimed at
shareholdings. Furthermore, Hansmann convincing managers to adopt various
& Kraakman (2004: 40), Robins (2002), SEA practices should not, in addition to
and Whelan (2007) have all emphasized other things, rankly criticize commerce.
that the political governance systems of Or, if one presupposes that managers
East-Asia have historically tended to and students of business tend to be utili-
emphasize a stronger role for govern- tarian in ethical orientation, as has been
ments in the direction of industrial pol- suggested in at least some of the litera-
icy. Arguably, the moral and political ture (Orlitzky, 1997), then those wishing
philosophies that support such different to convince managers of the merits of
political governance systems need to be SEA, should do so in utilitarian terms.


Rather obviously, just what the ethical cluded that, given the impact of signal-
and political beliefs of managers are, ing and transaction costs and various
and the way in which these beliefs im- benefits of SEA, the level of SEA should
pact on managerial perceptions of SEA, be set so that marginal costs of SEA
is a question that requires further empiri- equal marginal benefits (at the firm
cal research. level) or marginal costs of SEA to soci-
ety equal marginal benefits to society (in
The field of SEA, like most of the aca- line with the tenets of social effi-
demic business literature (Pfeffer, 1993; ciency). However, because all organ-
Van Maanen, 1995b), is characterized izational decision making is embedded
by high paradigmatic diversity in moral and political governance sys-
(Mathews, 1997; Owen & O'Dwyer, tems, we also highlighted the importance
2008). Paradigmatic diversity implies of these systems for SEA. In doing so,
that different perspectives and findings and amongst other points made, we drew
are incommensurate (Burrell & Morgan, on laissez-faire or classically liberal
1979). To clarify the current state of thinking to argue that honest and com-
affairs, researchers could, at a minimum, prehensive disclosure is needed if the
investigate why paradigmatic diversity is relationship between consumers and cor-
so prevalent in the SEA research arena porations is to be a truly commercial
(see also McKinley, Mone & Moon, one, and, in drawing on liberal democ-
1999). Pfeffer (1993) and others (e.g., ratic ideas, we suggested that govern-
Wilson, 1998) argued that science would ments will commonly try to impose stan-
progress most rapidly when researchers dards for disclosure on corporations
agree on a common set of ontological whenever suitable levels of disclosure
and epistemological assumptions. On do not voluntarily arise. In doing so,
these grounds, it might be worthwhile to these “macro” discussions provide an
strive towards greater theoretical agree- overview of certain normative beliefs
ment. From the vantage point of scien- which can be understood to justify the
tific progress and influence, the best roles governments currently do (or do
type of SEA theory would not only be not) play in setting standards for SEA;
unified but also prescriptive (Bazerman, and, a further understanding of why An-
2005). On the other hand, it must be glo-American corporations are posi-
acknowledged that, given the relative tively encouraged to try to maximize
youth of the field, a diversity of ap- profits. The paper concluded with three
proaches would arguably allow for suggestions for future research.
maximum innovation (Van Maanen,
1995a; b).
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