July/August 2002 - VOLUME 23 - NUMBER 7&8
C o r p o r a t e R e f o r m A f t e r E n r o n
The Sunshine Standards
By Ralph Estes
The Powerful Potential of
Corporate Disclosure Requirements
Large corporate enterprises are not supported by stockholders alone. They depend on efforts, investments and contributions by all their stakeholders, including workers, consumers and neighboring communities.
Effective management and evaluation of large corporations requires measurement and communication of the total performance of the corporate enterprise, to show its effect on and return to the several stakeholders who make the enterprise work. For this, we need a new scorecard.
With the present profit and loss statement, a decision to, for example, install smokestack scrubbers appears merely as a cost. The benefits, in a cleaner environment for present and future generations, appear nowhere on this scorecard. We need a performance measurement system that reports benefits and costs to all those who are significantly affected by a corporation's actions -- the stakeholders -- instead of a system that reports only the effects on financial investors.
Such a system is presented in "The Sunshine Standards," developed by the Stakeholder Alliance. The Sunshine Standards call for corporate disclosure of information significant to stakeholders, such as environmental damage, statistics on workplace safety and health, consumer product safety and community impacts.
The Sunshine Standards are:
With a system of full and fair disclosure, management decisions and corporate behavior will change. Public reports of the injuries that result from a manager's decisions, and of the costs to employees and customers of those injuries, will influence managerial decisions. When a manager is credited for the benefits to the community from reduction of pollution, instead of only being penalized for the expenditures, that manager will be better able to weigh the effects on all stakeholders. Compilation of the stakeholder indices is also a prerequisite to moving to compensation systems that reward executives for their returns to multiple stakeholders, rather than just shareholders.
This new accounting system should provide the information required by stakeholders to make informed economic decisions. A capitalistic, free market economy rests on the assumption that all decision makers have full and fair information, yet most stakeholders today must make decisions, some involving risk of career, substantial funds, even one's life, with limited and often inaccurate information.
Moving from the present single dimension corporate scorecard to one that measures the full performance of the corporate enterprise will require action on several fronts:
Stakeholders, acting individually and through environmental, civil rights, consumer, labor and community groups, must call for provision of the information they need and to which they are legitimately entitled by virtue of their investment in the corporation. The Stakeholder Alliance, a national coalition of organizations concerned with the interests of corporate stakeholders, has been organized to promote that disclosure.
Corporations should begin to develop more comprehensive internal performance reports that hold managers accountable, by name, for the effects of their decisions on stakeholders.
Accounting firms and professional accounting organizations should cooperate to further develop and improve a scorecard that reflects the total performance of the enterprise.
National governments should review corporate information reports required by their agencies and departments, with a view toward making more information available in a convenient form to the public, and to identify possibilities for consolidation to reduce redundancy and costs imposed upon business.
National legislative bodies should consider legislation to provide for full corporate accountability to stakeholders, following the philosophy reflected in the Securities Acts enacted by the U.S. Congress in 1933 and 1934 that required accountability to stockholders. One approach would be to restructure the national securities regulatory agency (the Securities and Exchange Commission in the United States) as a Corporate Accountability Commission, with a mandate to implement an annual Corporate Report to Stakeholders.
State, provincial, county, city and other local governments should require corporate compliance with the Sunshine Standards as a condition for contracts, employee pension fund investments, tax abatements, industrial development bonds, tax increment financing, zoning exemptions and other favorable local government action.
Universities should require corporate compliance with the Sunshine Standards as a condition for campus recruiting, investment of endowment funds and contracts for vending, maintenance, food service, construction or production of school-labeled clothing and souvenirs.
A market-based economic system, to function effectively, requires that economic actors have the information they need to make rational resource allocation decisions. Our economic system has evolved into one in which only corporations and financial investors have reasonably full decision information. Employees, customers, suppliers and community leaders must often work from information that is both inadequate and difficult to obtain.
If corporations are fully accountable to stakeholders, if stakeholders are properly viewed as investors in the enterprise instead of merely resources to be consumed, and if executives are held personally responsible for the effects of their actions on stakeholders, corporate managers will behave differently. Their decisions will be directed toward nurturing and developing, instead of merely exploiting, the resources the corporation needs for long-term health. Stakeholders will give more to the corporation in return.
The Sunshine Standards will produce a healthier business sector -- one that is stronger and more competitive in the global economy, is allowed to operate with less restrictive regulation, does less harm to society and provides a fair return to all its stakeholders. It's a win-win-win strategy:
The Sunshine Standards in PracticeCustomer Information Needs
1. Product information
A. Measures of customer satisfaction appropriate to the company's products and industry, reflecting such data as customer satisfaction surveys, product returns, warranty claims and product reviews by media and consumer organizations.
B. Risks of injury from normal usage.
C. Noise, odors and other nuisances or problems associated with use.
D. Design for recycling.
E. Biodegradability of products and packaging.
F. Unusual life-cycle costs, including repairs, energy consumption and disposal, that will be borne by parties other than the producer or seller.
G. Warnings, with appropriate detail, regarding unusual contamination and adulteration exposure and risks during production, shipping, marketing and storage.
H. Emissions ratings, by specific model, for products that generate air pollution.
I. Content, additives and treatments of foods and medicines, sufficient to allow reasonably informed customers to make rational market decisions and to protect themselves and their families. Appropriate descriptions may include information regarding genetic engineering, pesticides used on fruits and vegetables, hormones and chemicals used in growing and processing meat, and substances in cosmetics and personal grooming products to which customers may be allergic.
J. Recall and additional safety-related information for automobiles, trucks, farm equipment, vans, campers and other vehicles and equipment when their use may represent a safety threat.
2. Actions brought by customers and regulatory authorities regarding products, services and market practices
A. Comprehensive record of claims, legal and regulatory actions relating to products and services, including product liability, injury and wrongful death claims, covering all jurisdictions for previous five years. Describe each claim and its disposition. Classify claims by specific product to facilitate consumer market choices.
B. Indictments and citations for regulatory violations during previous five years, giving details of each incident and resulting penalty, settlement or other disposition.
3. Social responsibility information
Customers may legitimately base purchase decisions on considerations of corporate social responsibility, such as working conditions under which products are manufactured, sustainability of production and business methods, or activities of a company's political action committee (PAC). When customers express a reasonable desire for social responsibility information, it should be provided through full and timely reporting.
Employee Information Needs
1. Employment security and stability
A. Information regarding facility closings, including:
(1) Statements of policy on helping affected employees in finding suitable employment, transferring employees to other company locations and assisting with the sale of workers'' homes.
(2) Information on positions available at other company sites.
(3) Summary of record on facility closings over past five years ‚ where, when, how many employees affected, how many successfully relocated, how much notice was given.
B. Layoff record for previous five years, showing detailed information for each layoff event.
C. Unemployment compensation rating and record.
2. Health and safety risks, classified by site
A. Employee exposure to radiation, noise, temperature and humidity extremes, chemicals, fumes, toxic substances, fibers and emissions, and to inhalation of smoke, chemicals and dust.
B. Hazards associated with use of tools and equipment, including risk of repetitive motion injury and radiation exposure from computer monitors, laser printers, televisions and microwaves.
C. Unusual threats specific to pregnant women.
D. Data on past accidents, injuries, illness and medical complaints, classified by job, department, date and nature.
3. Employment equity, security and diversity
A. Data tabulated for previous five-year period and classified by gender and race, showing:
(1) Hires and promotions during the year, and number by position classification at year-end.
(2) Average total compensation levels (including stock options and other benefits), broken out by job categories, such as top executives, other senior management, second-level management, middle management, line workers, clerical and custodial. Other classifications may also be appropriate, such as professional, research, supervisory, or entry-level.
B. Ratio of compensation, including benefits, bonuses and stock options, for top executives to that for lowest level employees.
C. Turnover statistics classified by department, job level, gender, race and age.
D. Promotions from within compared with external hires.
E. Statement of company policy regarding payment of a living wage and whether such policy excepts any geographical locations.
2. Employee grievances
A. Statistics on grievances filed by employees, classified by nature of grievance and office or agency with whom filed (e.g., human resources department, company "ombudsman," labor union, government agency). Claims that, in the company's view, are unsubstantiated should nevertheless be tabulated; explanatory notes may be provided.
B. Employment-related lawsuits (such as for discrimination or sexual harassment) filed, adjudicated or settled during the past five years. C. A statement indicating whether mandatory arbitration is required as a condition of employment or retention.
3. Pension programs
Extent to which past and current benefit liabilities are funded, contents of the portfolio and changes in market value.
4. Future plans
To the maximum extent feasible, disclose future plans and commitments that will enable stakeholders to prepare for and protect against unfavorable consequences of corporate actions. These actions may include major expansions, introduction of technology that may threaten employee job security, plant relocations or closings, product discontinuation or substantial modification and divestiture of units.
Community Information Needs
1. Company ownership information
Names, addresses and number of shares held by the 20 largest shareholders excepting any shareholder with less than one-tenth of 1 percent of outstanding shares. Provide actual beneficial shareowner names rather than "street names."
2. Environment and sustainability
A. Material usage and waste.
(1) Radioactive, toxic, hazardous and dangerous materials used, transported or stored, showing sites and routes. Provide periodic or continuous updates as necessary.
(2) Chemicals that pose a significant risk of cancer or of reproductive toxicity.
(3) Estimated annual water consumption.
(4) Annual quantities of waste and sewage expected to be generated by company operations, classified by risk to health and safety and identifying disposal methods and locations. Provide separate estimates of waste from consumption of company products.
B. Pollution emissions data.
(1) Current estimates of air and water emissions, by specific site, category and quantity, along with actual emission for the previous five years.
(2) Data on penalties, settlements and judgments related to environmental violations during the past five years.
C. Sustainability: statement of policies respecting sustainable development.
D. Recycling: material type and quantity of non-product output returned to process or market by recycling or reuse.
3. Prior performance in response to special public benefits
A. Results achieved in response to corporate commitments, such as creation of a certain number of new jobs, made to obtain special benefits requiring public funds or resources; these may include enterprise or development zone status, tax exemptions, industrial development bonds, zoning exceptions, utility discounts and modification or installation of streets or traffic controls.
B. When special public benefits are predicated on new job creation, provide specific data on new jobs actually created, classified by type of work, number of employees, average compensation and benefits and whether projected to be temporary or permanent.
4. Legal and regulatory profile
Legal and regulatory actions, civil or criminal, brought against the corporation in all jurisdictions during preceding five years. Describe the nature of claim or charge, parties involved and status or disposition. Include charges settled by pleas of nolo contendre. Show fines or other penalties rendered against the company, or its officers and agents in their fiduciary roles.
5. Financial data
Financial information equivalent to SEC Form 10-K filings covering the past five years, plus current quarterly reports.
6. Taxes paid
Taxes paid to all jurisdictions, classified by type of tax. When possible, report actual payments on a cash, rather than accrual, basis.
7. Materials sourcing
Geographic breakdown of international materials sources by dollar amount. Reasonable approximations are acceptable.
8. Facility construction data
Plant construction data important to community safety officials. Note whether asbestos, lead or other potentially hazardous materials were used, whether there are known structural defects, how ground surface was prepared and prior uses if known (for example, was the facility built on a waste dump?).
9. Vehicular activity
Estimated number of vehicles, annual mileage and annual ton-miles projected to be driven in city/communities in which the corporation has significant activity.
10. School impact data
Potential school impact of children of employees, to facilitate planning by school officials. (Disclosure will be similar to data used by the federal government in providing impacted area assistance where there are large federal facilities.)
Breakdown of financial investments by location, with sufficient detail to enable citizens and policymakers to determine the extent to which the firm is supporting local enterprises and whether it maintains investments in countries with oppressive regimes.
Corporate charitable contributions broadly classified by purpose, type and location of beneficiary, with specific identification of communities in which the company has major facilities.
13. Lobbying and political activities
Corporate contributions to political organizations at all political levels, directly or through political action committees (PACs), classified by party affiliation of the beneficiary, plus information on lobbying and other political activities.
Social and Public Policy
1. Statements regarding company adherence or nonadherence to:
A. Universal Declaration of Human Rights, particularly Article 23 concerning the right to form and join unions.
B. International Labor Organization (ILO) Convention Number 29 on forced labor.
C. ILO Convention Concerning Discrimination in Respect of Employment and Occupation.
D. ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.
E. Conventions on the elimination of all forms of racial discrimination and discrimination against women (CEDAW).
F. Convention on the Rights of the Child.
2. Amount and content of trade with countries that is officially discouraged as a matter of national policy (e.g., for abuse of human rights).
3. Foreign exchange generated and used, to permit an assessment of the extent to which the corporation is contributing, favorably or unfavorably, to the balance of trade.
4. Major government contracts, by nature and dollar amount, and amount and nature of penalties for malfeasance associated with government contracts.