CH-13-15 International Business and Management: Glocally Responsible Business – Principles of Responsible Management: Global Sustainability, Responsibility, and Ethics : Book Guide

This Document Contains Chapters 13 to 15 CHAPTER 13 INTERNATIONAL BUSINESS AND MANAGEMENT: GLOCALLY RESPONSIBLE BUSINESS GET IN TOUCH! This instructor’s manual can only cover a small initial selection of relevant advice. Please visit the website of the Center for Responsible Management Education www.responsiblemanagement.net or write to Oliver Laasch through [email protected] to share your ideas for new contents, experiences in teaching with the book, constructive criticism, and, of course, questions. The textbook is a snapshot of a quickly developing field that aims to educate responsible managers, and to create responsible businesses, which requires constant updating. We invite you to become part of a growing community of academics and practitioners taking on this task. THE INSTRUCTOR’S MANUAL This Instructor’s Manual contains a brief chapter introduction, a listing of chapter objectives, an expanded outline, chapter summary, teaching points, answers to end of chapter questions and exercises, and test questions. INTRODUCTION Different words today describe international business activities: multinational enterprises, multicultural organizations, global businesses, and international, foreign, or nondomestic businesses. We emphasize in this chapter, however, that a company does not have to be a global business to be globally responsible. Even simple sourcing activities are globally responsible to some degree. We use the word “glocal” as a mixture of the words global and local, and the term describes global activities with a strong adaptation to local circumstances. The goal of this chapter directs students toward creating value for stakeholders around the world while adapting business activities to local circumstances. Students will be able to manage or develop a business that actively addresses both global and local sustainability issues. Furthermore, they will be able to sustain a business that manages global moral issues and intercultural ethics successfully. This chapter begins by emphasizing that glocalization means businesses consider trends and drivers of both globalization and locally responsible business. Next, we focus on how a company can assess its global position and understand how well a glocally responsible business is doing. Next, we analyze how to “map” global business activity and analyze the different global activities of the business to understand ethical, stakeholder, and triple bottom line implications. We close with a focus on managing glocally, which means equipping single managers with the tools to manage responsibly in a global workplace. CHAPTER OBJECTIVES After reading this chapter, students should be able to…  …analyze the glocal (global and local) environments for responsible business.  …map a company’s nondomestic activities and understand their implications for responsible management.  …manage responsibly in an intercultural context. CHAPTER OUTLINE Opening Case – Managing Global Social Expectations: GlaxoSmithKline, with the development of a globally geared and flexible pricing structure, managed to fulfill its social obligations without sacrificing medicine research and development and. The company simultaneously improved health outcomes in the developing world while becoming an active participant in the process. GSK shows how companies can implement a “glocally” responsible business strategy, which combines a globally responsible business strategy with locally relevant actions. I. Responsible Management and International Business: The global environment is important even for companies that would not consider themselves global. Simple sourcing activities offer globally responsible options. For any business with some type of international involvement, four main questions arise: • How do we responsibly address globalization and the challenges posed by it? • How is responsible business infrastructure different in one country from another? • How do we manage global business activities responsibly? • How do we responsibly manage issues arising in managers´ international activities? II. The Goal: Glocally Responsible Business: Glocalization is a mixture of the words “global” and “local” and describes global activities with a strong adaptation to local circumstances. A glocally responsible business (GRB) is a business that is both globally and locally responsible. A GRB creates value for stakeholders around the world, in every location it operates, actively addresses both global and local sustainability issues, and manages global moral issues and intercultural ethics successfully. III. Phase I: Understanding the Glocal Business Context A. Globalization: Globalization refers to "the widening set of interdependent relationships among people from different parts of a world….” Conventional wisdom in business tells us we are now operating in a globalized world with global sustainability, stakeholder and ethical interests. Yet the actual context and consequences of global sustainability are still very much contested. Globalization has changed the very nature of business in this century. 1. Effects of Globalization are manifest in the growth of global media, global communication technology and access to Internet, global transportation, emergence of global standards, the rise of BRICS economies, anti-globalization movements and global NGOs, and global challenges and opportunities. 2. Effects of Globalization on Responsible Business. A decline in political power of countries with multinationals gives rise to numerous ethical issues. Global companies often develop global personal identities and affiliations, assume country-level responsibilities, emerge as global stakeholder organizations, and promote the growth of independent self-regulatory organizations. B. Localizing Responsible Business: Business strategies for responsible business are crafted from the perspective of a global business interacting with many countries at the same time. Nevertheless, the operations of such global business are locally “on the ground” in different locations throughout different regions, countries, and locations. A glocally responsible business adapts responsible business and management to local conditions, including culture, systems, standards and resulting local issues, challenges and opportunities. IV. Phase 2: Assessing the Responsible International Business: International business can be defined as “all commercial transactions, including sales, investments, and transportation, that take place between two or more countries.” That is, all businesses involved in such transactions can be called international businesses. An important consideration in understanding the tremendous power of international business is to observe how the combination of technology and communication has intersected with the growth of sustainability activities. These activities break down political barriers and involve the creation of global responsible business networks, such as the UN Global Compact to accomplish those activities. A. A Transnational Perspective of Responsible Management: Assessing a global business position means an organization develops a comprehensive international strategy to create value with its products or services. The organization first assesses where it stands in international markets. This assessment allows responsible management to create value in the triple bottom line economically, socially, and environmentally during the process of developing its strategy. The business will “develop a compelling value proposition (why a customer should buy its goods or use its services) that specifies its targeted markets (those customers for whom it creates goods or services).” B. Assess the Type of International Firm the Company Is: International firms tend to form distinct patterns with regard to motivations in strategy, structure, and managerial processes, each of which directly impacts responsible management practices within the company: 1. Globally Sourcing Companies (GSGs) base their domestic activities on supply chains in foreign markets. They usually have operations and markets confined to one country, but have far-reaching global supply chains that create the urgent need for ensuring responsible business practices among suppliers abroad. 2. An Export Business (EB) produces local domestic products for a foreign market. 3. Businesses with an international mentality “tend to think of the company’s overseas operations as distant outposts whose main role is to support the domestic parent company in different ways, such as contributing incremental sales to the domestic manufacturing operations.” 4. Multinational firms begin to emphasize localization and responsiveness to national cultural differences. 5. Global companies view the world as the strategic market rather than one with national or local markets. 6. Transnational firms typically have strong global sustainability, responsibility, and ethics standards, and are able to effectively customize those standards to local actions, perfectly aligned with issues, needs, and culture in each region. C. Assessing the Company's Degree of Global Sustainability, Responsibility, and Ethics: We use two ways to analyze the degree of global responsibility of an organization. The first one is an adaption of Carroll’s responsibility pyramid to the global sphere. This assessment is a qualitative, model-based assessment. The second is to use globally responsible business norms that are discussed in the chapter. V. Phase 3: Mapping International Business Activity: Global sourcing, global trade, foreign markets, foreign direct investment such as subsidiaries, and global alliances or partnerships are typical international transactions and are called “international business transactions.”. Each of those activities bears different challenges related to the triple bottom line, stakeholder relations, and specific ethical dilemmas. Each activity also has specific areas of opportunity to do good. A. Global Sourcing: Global sourcing is the process of procuring inputs used throughout the international supply chain. Responsible global sourcing relies not only on external verification but also on a continuing self-assessment within the company. The company’s own standards, applied internally, are transferred through responsible sourcing and supply chain management to sourcing partners in the supply chain. B. Global Trade: Global trade has been widely criticized for many of the ailments of the global economic system. On the other hand, trade also the potential to reduce economic inequalities and to create a truly inclusive global economic system. Responsible trade has to consider both facts, which is why responsible trade refers to practices that mitigate the potential negative impacts of trade and harness the potential of trade to do good. Four types of trade are: (1) responsible trade, (2) sustainable trade, (3) fair trade, and (4) ethical trade. C. Foreign Markets: Seeking foreign markets refers to efforts to expand beyond the domestic home market. These are three popular forms of market entry that at the same time provide an excellent initial strategic position: (1) sustainable market innovation, (2) sustainable infrastructure, and (3) base of the Pyramid (BoP). D. International Subsidiaries: International subsidiaries are business units located in foreign countries. 1. Foreign Direct Investment (FDI) is a measure of foreign ownership consisting of financial investments and tangible or intangible assets transferred abroad. 2. Mergers refer to two companies voluntarily becoming one and exchanging financial investments on a mutual basis. 3. Acquisitions refer to the voluntary or forced majority purchase of another firm’s assets and are sometimes referred to as takeovers. E. Global Strategic Alliances: Strategic alliances abroad are “the cooperative relationship between two or more organizations that range from shared information and research to joint ventures where minority partners are subcontracted to provide local market access and distribution channels.” Types discussed in the chapter are scale alliances, link alliances, and vertical and horizontal alliances. VI. Phase 4: Responsibly Managing in a Globalized Business A. Cross-National Diversity Management: Cross-national diversity management refers to "managing a workforce composed of citizens and immigrants in different countries.” The ideal goal of diversity management is to create a “multicultural organization,” an organization that estimates and actively fosters cultural differences and provides equal opportunities. B. Intercultural Management: Globally operating businesses must also consider universal global standards if they respect local cultural differences. A difficult balance should be achieved between global corporate culture and practices rooted in a local culture. Managers can consider these cultural dimensions: 1. Individualism / Collectivism 2. Power distance 3. Uncertainty avoidance 4. Masculinity / Femininity 5. Long-term orientation / Short-term orientation 6. Indulgence / Constraint C. Cross-Cultural Ethics: Cross-cultural ethics is ethical decision making while considering different local cultural values. Because cross-cultural ethics is a well-established field, our discussion is pragmatic with a focus on management applications in ethical practices. We do not address ethics at the philosophical level, but aim to find processes and common ground among different cultural ethics in order to efficiently deal with cross cultural ethical dilemmas. Principles of Responsible International Management and Business (SUMMARY) I. A glocally responsible business (GRB) is a business that is globally and locally responsible, able to create value for stakeholders around the world and in every location, actively addresses both global and local sustainability issues, and manages global moral issues and intercultural ethics successfully. II. Responsible management in international business consists of four phases: understanding glocalization, assessing the global position, mapping global business, and managing globally. III. Glocalization is a mixture of the words global and local and describes global activities with a strong adaptation to local circumstances. Understanding glocalization means understanding drivers of globalization and local differences. IV. There are different types of international businesses. The domestic business is different from the globally sourcing, export, international, multinational, global, and transnational perspectives. V. Assessments of glocally responsible business conduct can be either model-based or based on international responsible business standards, such as the OECD Guidelines for Multinational Enterprises, and the UN Global Compact. VI. Important considerations for glocally responsible business conduct are global stakeholders, global externalities, fairness of distribution, and international development. VII. Components of a global activity “map” are global sourcing, global trade, foreign markets, foreign subsidiaries, and strategic alliances. VIII. Managing in a globalized business entails global diversity management, intercultural management, and cross-cultural ethics. TEACHING POINTS 1. Bottom line message: Globally responsible businesses can achieve both global and local objectives; achieve and exceed international sustainability, responsibility, and ethical standards; and adapt business conduct to the various locations in which it operates. 2. The central role of this chapter to the book and its broader theme of “glocalism”: As indicated by the book´s subtitle, a global and local perspective toward responsible management is important to this book as a whole. This is also why the sidebar boxes aim to offer a balanced sample of contents from all regions of the world. The practitioner interviews at the end of each chapter, the chapter introduction cases and many other minor structural elements also aim to offer a balance sample. 3. Moving toward glocalization: A glocally responsible business (GRB) is a business that (1) is globally and locally responsible, meaning that it creates value for stakeholders around the world in every location it operates; (2) actively addresses both global and local sustainability issues; and (3) manages global moral issues and intercultural ethics successfully. 4. Influencing responsible business through globalization: Today, multinationals have unprecedented power and influence worldwide because of the diminishing political power of countries, growth of a multinational’s personal identity, emergence of country-wide responsibilities of multinationals, emergence of global stakeholder organizations, and growth of global independent self-regulatory organizations. These changes have shifted greater responsibility to organizations to be responsible at the local level and to care for the welfare of local communities. 5. A long way to go, much to learn from each other: As the authors of this chapter are based in the Northern-American and the Western European regions, this chapter is culturally biased from the outset. It is up to classroom discussion to make sense of the contents thorough discussions of the relevance from different local perspectives. 6. Complementary relationship to the supply chain management chapter: Supply chains are mostly international. It is for this simple fact that we recommend the use of this chapter together with the supply chain management chapter. While this chapter on international management and business is centered on social and ethical impacts, the supply chain chapter highlights the environmental issues of global supply chains. One could argue rightfully that the supply chain chapter is mainly about sustainability, and the international business and management chapter about responsibility, and ethics. 7. Managing responsibly in a globalized business. How does a manager work responsibly in an international setting? Transnational managers today, who responsibly function in a globally diverse workforce, must cope with cultural differences while achieving both mainstream and responsible management objectives, lead with ethical and moral initiatives in the company, and resolve conflicts between differing moralities. Understanding and being trained in cross-cultural skills for responsible business conduct moves these managers a long way toward effective management. There is much information online about culturally different business practices. ANSWERS TO END-OF-CHAPTER QUESTIONS AND EXERCISES A. Remember and Understand A.1. Define a glocally responsible business. A glocally responsible business (GRB) is a business that is globally and locally responsible, which means that it (1) creates value for stakeholders around the world and in every location, (2) actively addresses both global and local sustainability issues, and (3) manages global moral issues and intercultural ethics successfully. A.2. Define the three types of responsible trade and explain differences and commonalities. Responsible trade refers to practices that mitigate the potential negative impacts of trade and harness the potential of trade to do good. Sustainable trade refers to trade as a tool to further sustainable development, socially, environmentally, and economically. Fair trade is a “trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade.” While responsible trade helps optimize the impact of trade, sustainable trade focuses more narrowly on the goal of sustainable development, and fair trades highlights partnerships, openness, and transparence among trading partners. All three have immense overlaps, but differ in their respective focus concerns. A.3. The global map summarized CSR challenges and opportunities by continent and region for responsible business. Pick three continents or regions most important to you and explain context, priority issues, and trends. Students could begin with the African continent and describe its responsibility as infancy. They could choose or be assigned one of the African cases (Coca-Cola, De Beers Group, Satemwa, Shell, Unilever) and research it online. Their focus could be on how Africa could move forward in its CSR. Students might then describe a medium-development continent and contrast it to Africa. The third continent could contrast highly developed CSR (in education and codes) with the infancy development of Africa. A.4. What is BoP? Describe how it is important to companies in the types of international activity areas. The “base of the economic income pyramid” (BoP) refers to sourcing activities involving small and medium enterprises among exceptionally low income people. Prahalad’s 2006 book estimated that 4 billion people globally live in the BoP, which is almost 60 percent of the world’s population. Students could be asked to update Prahalad’s statistics by researching information from the UN web page. This question also could be tied with A.3 to emphasize how important to companies, especially banking, is investment and development of SMEs in Africa. For example, the Carlyle Group is part of a small group of investors that has invested $210 million into the Export Trading Group, a Tanzania-based agricultural company. Students should then look at the activity areas illustrated in Phase 3 and to think about how each of these activities connects to considerations related to the BoP. Global sourcing, for instance, might involve sourcing partnerships from BoP parts of societies. For instance, Walmart in Central America has developed a local sourcing program in which the company buys exclusively from marginalize, poor communities. A.5 Describe the five activity areas of international businesses to be taken into consideration when a company “maps” its global business. Global sourcing is the process of procuring inputs used throughout the supply chain internationally. Responsible global sourcing relies on not only external verification but also an ongoing self-assessment within the company. Global trade includes responsible trade (practices that mitigate the potential negative impacts of trade and harness the potential of trade to do good, sustainable trade (the tools that further sustainable development, socially, environmentally, and economically), and fair trade (trading partnerships based on dialogue, transparency, and respect that seeks greater equity in international trade. Foreign markets are efforts to expand beyond the domestic home market. Three popular forms of market entry provide an excellent initial strategic position: (1) sustainable market innovation, (2) sustainable infrastructure, and (3) base of the Pyramid (BoP). International subsidiaries are business units located in foreign countries. The three aspects are foreign direct investment (FDI), international (M&A), and transfer pricing and international taxation. Global strategic alliances are cooperative relationships between two or more organizations that range from shared information and research to joint ventures. B. Apply and Experience B.6. Look up information on one company with international activity. What type of international business would best describe this company: globally sourcing, export business, international mentality, multinational, global, or transnational? How do you think the company could better manage its glocally responsible business activities? To begin, students could select a company from the chapter or externally, to look up information on international business activity. Typically, company websites do not identify their “type,” so they should be encouraged to draw their own conclusions about types and base their conclusion on knowledge from the chapter and evidence from the site. The opening case GlaxoSmithKline can illustrate a transnational mentality because the global company adapts locally its business strategy and business model. On the main GSK site, the link “Explore GSK2”will lead to information about the Developing Countries and Market Access operating unit. The site explains “The unit has a 50/50 split in its goals - to improve access to healthcare and to grow a sustainable business for the long term.” Thus, GSK seeks to improve local healthcare AND to promote local sustainable businesses over the long term, evidence of a transnational mentality. B.7. Give two examples of ethical conflicts when values of two cultures lead to opposite conclusions, two examples when rules or standards are morally important to one culture but not important or neutral to the other, and two examples when both cultures agree on the same ethical value but circumstances create different interpretations of what is acceptable. Create a list of ethical issues that address these examples. Students may identify most with actual examples of ethical conflicts with well-known companies like Nike and Apple. They may be familiar with how Nike’s US-based ethical values differed significantly from ethical values in Indonesia where child labor, low wage per hour issues, and factory working conditions were accepted in manufacturing plants. It has been reported that women in Indonesian plants, for example, who work long hours and earn low wages, do not feel their ethical values are violated, but claim their jobs help them and their families. Indonesian laws are not broken. Similarly, Apple has struggled with differing cultural values in its Chinese supply chain. Other ethical issues can be introduced to students concerning a country’s position on childhood obesity or health effects of cigarette smoking. Different countries may agree that smoking is harmful, but circumstances in a country create different interpretations of what is acceptable. C. Analyze and Evaluate C.8. Look up more information on Unilever as an international leader in global sourcing. Examine how the company’s documents, Responsible and Sustainable sourcing guide for suppliers, the Sustainable Agricultural Code, and Scheme Rules set benchmark standards for sustainable performance. What are the goals of these documents? A good site to begin with is to examine Unilever’s sustainability reports http://www.unilever.com/sustainable-living/?WT.LHNAV=Reporting and read about Unilever on http://www.unilever.com/aboutus/supplier/sustainablesourcing/ These links show the Unilever Responsible and Sustainable sourcing guide for suppliers and Scheme Rules. The sourcing guide, for example, illustrates how Responsible Sourcing, Supplier Quality Assurance, and Sustainable Agriculture all are involved in sustainable sourcing. Students can read about each of these and comment. Furthermore, the Scheme Rules include certified practices and self-verified practices of farmers engaged in sustainability improvement programs. Students will discover how the Unilever Sustainable Agriculture program started in 1998 and resulted in the publication of the Unilever Sustainable Agriculture Code. This code became the basis for the Unilever Sustainable Sourcing developed in 2010. The goal of these documents: By 2010 Unilever intended to buy all its agricultural raw materials from farms applying sustainable agricultural practices, which include how farmers and farm workers can obtain a liveable income and improve living conditions, maintain and improve soil fertility of agricultural land, protect water availability and quality, and protect nature, biodiversity and climate. C.9. Look up more information on Kraft Foods and its international leadership in global sourcing. How has Kraft improved its sustainable position with agricultural commodities, with the environment, and with energy reduction? Besides the primary http://www.kraftfoodsgroup.com web site, students can find information about third-party alliances of Kraft Foods and keys to the company’s sustainability strategy, including global sourcing at http://www.greenbiz.com/blog/2012/09/18/kraft-alliances-key-sustainability?page=full. For example, Chris McGrath of Kraft Foods defines “sustainably-sourced” as third-party certification or verification. Kraft has sourced from Rainforest Alliance Certified farms, the world’s largest buyer of Fairtrade Certified cocoa, and Fairtrade organic cocoa. Kraft has also worked with TerraCycle, an “international upcycling and recycling company that collects difficult-to-recycle packaging and products and repurposes the material into affordable, innovative products.” The Kraft Foods main site describes how the company makes significant impacts in the Agricultural Supply Chain, reduces environmental impacts through its policies and performance, and reduces impact on climate change through its Carbon Disclosure Project (CDP). D. Change and Create D.10. Consider how can you improve your own intercultural management competences and improve your knowledge, skills, and personal attributes in cultural competence. If not done so already, professors can request students examine country cultural values on Geert Hofstede’s site at http://geert-hofstede.com/ to set the context for this question. They can compare values of their home country with those of another country or with countries of other classmates. This value analysis will in turn lead to a discussion of what managerial competencies are required for different cultures. An in-class debate or discussion could result, involving students as managers in an international manufacturing plant. Question B.7 could be used as a basis for this discussion. For example, students may assume they are human resource managers in an international manufacturing plant charged with reinforcing ethical values of employee rights. Assume the host country’s values differ from country ethical values where the plant is located. They can be challenged with how the host country’s values should be adopted or reinforced. D.11. Analyze the sustainability report of an internationally operating company and use the concepts covered in this chapter to develop one recommendation for improvement. Write an e-mail to the company using the contact information provided in the report, and follow up on answers. Ethical issues could be the focus of this question. Infosys, an IT services company based in India, was highlighted in the Think Ethics box on page 406. Infosys has taken a top-down decision to operate by a strict code of ethics heavily focused on anti-bribery. Students will notice on the company’s web site a lack of information about ethics or other responsibility information. Furthermore, more recently the U.S. government alleged Infosys violated immigration laws, according to an article in The Wall Street Journal on October 29, 2013. The federal government claimed Infosys Ltd. was outsourcing illegally placed workers on visitor, rather than work, visas at big corporate clients across the U.S. The fine was set to be the largest immigration fine ever at $35 million. Require students to follow up on these issues and search the web site for ethical codes. They could write Infosys and ask for ethical information. Encourage them to do so with the appropriate tone and voice and give them direction on the actual email message. TEST QUESTIONS 1. The opening case about GlaxoSmithKline highlighted which responsible management action that treated rotavirus, a chronic diarrheal infection in children? a. research & development in pharmaceuticals b. technology driven medicine c. organization-wide restructuring d. three-tiered pricing structure Answer: d 2. The word “glocal” best describes a. global market growth and limited local reach. b. global activities with a strong adaptation to local circumstances. c. global marketing strategies with local green marketing. d. global management and strong local units. Answer: b 3. A main goal of a glocally responsible business (GRB) is to create a. value for stakeholders in each location in which operates. b. a multicultural organization. c. strong infrastructure for responsible business. d. a map of Porter’s diamond model at the local level of business. Answer: a 4. Globalization is best defined as a. all commercial transactions that take place between two or more countries. b. the process of procuring inputs used throughout the supply chain internationally. c. the widening set of interdependent relationships among people from different parts of a world that happens to be divided into nations. d. the efforts to expand beyond the domestic home market. Answer: c 5. Which driver of globalization does NOT belong in the following list? a. Global media b. Global communication technology and access to Internet c. Global rise of the BRICS d. Global decline of anti-globalization movements Answer: d 6. Which statement best reflects a current trend in globalization? a. Employers and employees are retaining greater personal identity with their own culture or community. b. There is a decline in political power of countries with multinationals. c. The growth of global self-regulatory organizations has been declining. d. Multinationals are becoming less involved in their roles and responsibilities in societies. Answer: b 7. CSR business practices on the continent of Africa can be best described as a. CSR in its infancy. b. CSR codes existing throughout the continent, but not available to citizens. c. CSR programs exist in numerous universities throughout the continent. d. CSR is a continent-wide priority for building internal understanding and support within businesses. Answer: a 8. The “CSR Navigator,” developed by the German development agency GIZ, provides a methodology by which to assess national responsible business policies. The primary purpose of the navigator is a. to conduct a risk assessment of a country’s businesses. b. to develop recommendations for responsible businesses and managers in different countries regarding the local public policies related to responsible business. c. to guide top CSR business personnel in developing mission and vision statements. d. to advise governmental officials of responsible actions for the citizens of their country. Answer: b 9. Explicit CSR practices versus implicit practices in a country differ because a. explicit practices consist of business policies that assume and articulate responsibility for some societal interests and are voluntary activities by individual corporations. b. explicit practices are based on values, norms, and rules collective in the organization. c. explicit practices typically are collective corporate activities rather than individual. d. explicit practices tend to define proper obligations of corporate actors in collective rather than individual terms Answer: a 10. Michael Porter’s “diamond model” of national competitive advantage considers a. global shareholder demand conditions. b. global supply chains for competitive advantage. c. global marketing techniques for responsible business. d. global attributes of nations that consistently help domestic competitive national advantage. Answer: d 11. Michael Porter’s “diamond model” of national competitive advantage, when applied to responsible business, a. considers competitive factor conditions. b. may be used to better understand the local infrastructure and environment for responsible business conduct. c. applies Porter’s marketing concepts to responsibility management. d. assesses global demand conditions driving responsible customer needs. Answer: b 12. A global business with an international mentality a. views the world as the strategic market rather than national or local markets. b. thinks in terms of creating products for a world market and manufacturing them on a global scale in a few highly efficient plants near the corporate center. c. has strong global sustainability, responsibility, and ethics standards and effectively customizes those standards to local actions. d. tends to think of the company’s overseas operations as distant outposts whose main role is to support the domestic parent company. Answer: d 13. A global business with a transnational mentality a. views the world as the strategic market rather than one with national or local markets. b. thinks in terms of creating products for a world market and manufacturing them on a global scale in a few highly efficient plants near the corporate center. c. has strong global sustainability, responsibility, and ethics standards and effectively customizes those standards to local actions. d. tends to think of the company’s overseas operations as distant outposts whose main role is to support the domestic parent company. Answer: c 14. Economic responsibility in Carroll’s Pyramid framework for business’s social and ethical responsibilities a. remains the bedrock for MNCs doing business internationally and is essential to survival and growth. b. is secondary to legal responsibilities, both domestically and with foreign subsidiaries. c. falls below the importance of philanthropy responsibilities, which include discretionary social responsibilities of the business in the foreign country d. builds upon the foundation of ethical responsibility, which is positioned at the bottom of the pyramid. Answer: a 15. Cultural competence a. is ethical decision making under influence of different cultures’ values. b. describes the process of checking economic, social, environmental, and ethical implications of a merger or acquisition. c. are all transactions that take place between at least two countries. d. refers to the ability to cope with cultural differences. Answer: d 16. Fair trade is a a. trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. b. trading process of procuring inputs used throughout the supply chain internationally. c. trading model where a company chooses a third-party company to provide a needed service or process. d. trading measure of foreign ownership consisting of financial investments and tangible or intangible assets transferred abroad. Answer: a 17. Offshoring a. is the preferential sourcing of activities for small and medium enterprises at the base of the pyramid. b. means that activities that were done domestically are now carried out abroad. c. is the process of procuring inputs used throughout the supply chain internationally. d. refers to a model where a company chooses a third-party company to provide a needed service or process. Answer: b 18. Transfer pricing refers to the a. pricing rates involved in a voluntary or forced majority purchase of another firm’s assets. b. pricing rates involved when two companies voluntarily become one and exchange financial investments on a mutual basis. c. rates paid internally inside the company when products or services are transferred from one subsidiary in one country to another subsidiary in another country. d. rates charged in the process of checking economic, social, environmental, and ethical implications of a merger or acquisition. Answer: c 19. The “In Practice” box describing activities of the multinational Tanzania-based agricultural Export Trading Group (ETG) illustrates a principles that concerns a. large private-equity investments to support sustainable activities in Sub-Saharan Africa. b. a greenfield investment for construction of new operational facilities. c. an international subsidiary being located in Tanzania. d. a sustainable market innovation strategy to enter a new foreign market. Answer: a 20. Which statement best characterizes the main idea of this chapter? a. Companies today are engaging in strategy-based decision-making processes that create sustainable value throughout the entire supply chain. b. Many countries and consumers do not have the infrastructure to develop sustainably. c. Globally responsible businesses can comply with international sustainability, responsibility, and ethics standards, and adapt business conduct to various locations. d. Multinationals have unprecedented power and influence worldwide because of the diminishing political power of countries. Answer: c CHAPTER 14 ACCOUNTING AND CONTROLLING: STAKEHOLDER ACCOUNTABILITY GET IN TOUCH! This instructor’s manual can only cover a small initial selection of relevant advice. Please visit the website of the Center for Responsible Management Education www.responsiblemanagement.net or write to Oliver Laasch through [email protected] to share your ideas for new contents, experiences in teaching with the book, constructive criticism, and, of course, questions. The textbook is a snapshot of a quickly developing field that aims to educate responsible managers, and to create responsible businesses, which requires constant updating. We invite you to become part of a growing community of academics and practitioners taking on this task. THE INSTRUCTOR’S MANUAL This Instructor’s Manual contains a brief chapter introduction, a listing of chapter objectives, an expanded outline, chapter summary, teaching points, answers to end of chapter questions and exercises, and test questions. INTRODUCTION This chapter illustrates the use of accounting and controlling in the sustainability management framework in order to satisfying stakeholder accountability. In the first section a summery of the basics of accounting is provided in order to identify the main characteristics that sustainability accounting can figure out in a responsible management process. The later sections introduce the four phases and basic concepts of sustainability accounting, including the reporting and controlling methods and instruments. CHAPTER OBJECTIVES After reading this chapter, students should be able to…  …integrate sustainability, responsibility, and ethics into an accounting and controlling system with the goal to achieve stakeholder accountability.  …develop and use indicators for social, environmental, and ethical activity and performance as a basis for responsible management activity.  …report internally and externally about responsible business activity and performance. CHAPTER OUTLINE I. Accounting and Responsible Management: Responsible management is impossible without an accounting practice that delivers information regarding the triple bottom line, stakeholders, and ethical issues. The management proverb “What cannot be measured, cannot be managed,” is as true for responsible management as it is for any other management activity. II. The Goal: Stakeholder Accountability: Stakeholder accountability is the process of providing relevant information to stakeholders that allows them to hold the organization accountable for its activity and outcomes. III. Phase 0: Understanding the Basics of Accounting: Accounting for the financial information concerning a business’s actions is indeed the very “language of business,” which ultimately will communicate to stakeholders whether they are external, internal, or governmental and regulatory bodies―how the business is performing. While many companies and accounting systems have used different criteria and information, the importance and credibility of accountancy rests upon the selection of the data for its relevancy, reliability, and comparability. The information provided should be verifiable and a true representation of the data. Companies, while often using slightly different systems and often different temporal criteria, should be able to build enough comparability and consistency into their accounts that managers and stakeholders can realistically measure, analyze, and compare across companies, sectors, regions, and times. A. The Rise of Sustainability Accounting and its Role in Responsible Accounting: Sustainability accounting is the most commonly used term in theory and practice. Nevertheless, it is important to highlight that the integration of all three domains of responsible management—sustainability, responsibility, and ethics—into traditional accounting, is a necessary condition for responsible business. Sustainability accounting and reporting can be defined as a subset of accounting and reporting that deals with activities, methods, and systems to record, analyze, and report: • environmentally and socially induced economic impacts; • ecological and social impacts of a company, production site, and so on; • measurement of the interactions and links between social, environmental, and economic issues constituting the three dimensions of sustainability. Even though the process of sustainability accounting is similar to that of traditional financial accounting, it contains some distinctive key factors: • The focus is on ethical, social, and environmental data. • The accountees include not only shareholders but also a wide range of stakeholders. • Sustainability accounting is voluntary and not yet regulated by law. This process must take place considering the ethics of accounting that are the practitioners’ obligations to the public, the profession, and the organization to maintain the highest standards of ethical conduct by considering the interrelations of rules, values, and virtues. IV. Phase 1: Identify the Account and Gather Data: In the first phase, the organization must first identify all the broad groups of sustainability information required using the stakeholder accountability approach. The different stakeholder issues should then be prioritized. This process depends on how organizations define their level of sustainability disclosure—also referred to as ESG (environment, social, and governance) disclosure—which is the act of communicating organizational performance on material matters. An important part of responsible accounting is explaining how this stakeholder issue prioritization has been achieved. Considering the complexity of this process, a three-step test can be useful in order to target every single responsible business issue to the account that the organization aims to represent in data: 1. Delineate the parts of the organization for which accounting will be developed by defining the accounting entities; 2. Identify the stakeholders who are the potential recipients of the data, which answers the question: Who will receive the information on the responsible business performance of the organization? 3. Provide the form the data must have, examining how the information can be modeled and generated. This final stage considers quantification of the flows associated with aspects of the responsible business interest. A. Materiality: An important principle for defining the content of responsible accounting data is materiality. Methods define materiality as part of the field of business responsibility because they help to elucidate how important certain issues are to the stakeholder of a company. Many international regulators and standards setters, public and private sector organizations, have issued guidelines that have attempted to define materiality for nonfinancial information. In order to determine their materiality within an industry, the SASB (Sustainability Accounting Standards board was incorporated in July 2011) evaluates: • Evidence of interest; • Evidence of economic impact; • A forward-looking adjustment. Each sustainability issue is graded in the context of these three lenses and, through a proprietary algorithm, the SASB transforms these grades into a “Materiality Score” (MS) that ranges from 0.5 to 5. All issues above 2.25 are then considered as material for the industry in question. An example of the SASB materiality map constructed for the health care sector is represented in Slide 12. V. Phase 2: Evaluation and Elaboration of the Data: In this second phase of evaluation and elaboration of the data, organizations measure a broad set of social and environmental benefits and costs and consider impacts on both the company and society. A. Costing Models: Although it is difficult to precisely measure sustainability performance, both academics and practitioners have developed economic and financial analysis techniques that provide reasonable estimates for social environmental performance: • Full-cost accounting: allocates all direct and indirect costs to a product or product line for inventory valuation, profitability analysis, and pricing decisions. • Activity-based costing (ABC): assumes that activities related to products, services, and customers cause the costs. • Life-cycle assessment: a design discipline used to minimize the environmental impacts of products, technologies, materials, processes, industrial systems, activities, and services. • Natural capital inventory accounting: involves the recording of stocks of natural capital over time, with changes in stock levels used as an indicator of the (declining) quality of the natural environment. B. Responsible business Performance Metrics: After evaluating the inputs and their effects on responsible business and traditional financial performance, organizations’ managers can develop the appropriate processes to measure responsible business results. One of the most important is the Epstein’s sustainability model in which the managerial actions taken lead to sustainability performance and stakeholder reactions (outputs) that at a final stage affect long-term corporate financial performance (outcomes). Several tools and techniques are used to measure the different aspects of responsible business performance. It is possible to distinguish between two categories of sustainability assessments: • Stronger - tends to be all-encompassing, setting broader physical boundaries to the sustainability model, referring to longer time frames for measuring stability and success, and minimizing trade-offs among the sustainability interest of competing components in the system. • Weaker – tends to be limited. The broader the range of the activities involved and the longer the duration, the more likely the outcome will be affected by other factors, and the more complex the measurement becomes. C. Indicators: Accounting also means deriving indicators that enable organizations to define clear performance targets and delineate their current status through ongoing measurement. Central to the responsible accounting framework is the use of a sustainability performance indicator to measure the environmental, social, and economic dimensions of sustainability. The GRI Sustainability Reporting Guidelines utilize a wide array of indicators to measure performance toward the goal of sustainability. Each of the categories includes a set of core and additional performance indicators. • The economic dimension of sustainability addresses the organization’s impacts on the economic status of its stakeholders and on economic systems at local, national, and international levels. • The social performance indicators are divided into four different categories: labor practices, human rights, society, and product responsibility. • The environment category is composed of the environmental indicators that cover performance related to inputs and outputs. The indicators also cover the performance related to biodiversity, environmental compliance, and other relevant information such as environmental expenditure and the impacts of an organization’s products and services. D. The value-Added Model: The value added can be defined as the value created by the organization in carrying out its activities and managing the contribution of its employees, as, for example, in the case of a manufacturing company calculating the difference of the sales less the cost of goods and services used in the production processes. The value added describes the economic value created by the organization, and how it is distributed among stakeholders. E. Social Return on Investment: Social return on investment (SROI) is a framework for measuring and accounting a much broader concept of value; it seeks to reduce inequality and environmental degradation and improve well-being by incorporating social, environmental, and economic costs and benefits. SROI measures change in ways that are relevant to the people or organizations that experience or contribute to it. It captures the ex-post situation compared with the ex-ante one by measuring social, environmental, and economic outcomes using monetary values to represent them. As a result, a ratio of benefits to costs is calculated. This ratio shows the value of the social and environmental impact that has been created in financial terms. VI. Phase 3 Reporting: Once the information is elaborated, the third component of the sustainability accounting process concerns the dissemination of information to internal and external users, that is, reporting. This process must be based on three key questions: 1. Which are the qualitative criteria that responsible accounting information should represent? 2. What is the appropriate format of responsible accounting reports? 3. Which are the tools and mechanisms that responsible accounting information should use for the internal and external disseminations? A. Global Reporting Initiative: Among the international standards, the Global Reporting Initiative (GRI) guidelines, which are process-oriented standards with a particular focus on the how to create the reporting document, are the world’s most widely used responsible business reporting framework. Sustainability Reporting Guidelines (G3.1 Guidelines) are composed of Reporting Guidance and Principles (Defining Report Content, Quality, and Boundary) and Standard Disclosures that are considered to have equal weight and importance in the reporting process. The GRI guidelines are divided into three main areas: The first area is composed of principles in two subsections, one that deals with content, that is, with the question of what to report, already analyzed in the first phase of the accounting process (stakeholder inclusiveness, materiality, completeness, and sustainability context).The second subsection containing principles that guide choices on ensuring the quality of reported information includes decisions related to the process of preparing information for the report. • The second area of the GRI guidelines called standard disclosures, is dedicated to the identification of information that is relevant to most organizations and interests most stakeholders. GRI provides also other documents for reporting: • Sector supplements: providing guidance that captures sustainability issues faced by specific industry sectors (e.g., telecommunications, auto manufacturing, mining, etc.) • Technical protocols: providing detailed definitions, measurement methods, and procedures for reporting on indicators contained in the core guidelines (e.g. energy indicators) • National annexes: providing national country perspectives and particular influences, issues, and contexts related to sustainability • Issue guidance documents: on topics such as, among others, diversity and productivity B. Integrated Reporting: Integrated reporting integrates social, environmental, and ethics data with traditional financial reporting data. In other words, the responsible business dimensions are not supplemental to the financial accounting, but rather are integrated with it as one topic with four aspects. Integrated reporting gives a broader explanation of an organization’s performance than traditional financial reporting. It makes visible an organization’s use of and dependence on different resources and relationships, or “capitals”; its interaction with external factors, relationships, and resources; and its access to and impact on them. For this analysis, IIRC designates six capitals that the business may rely on, putting together the financial and nonfinancial resources: • Financial capital: The wide-ranging funds available to the organization • Manufactured capital: Manufactured physical objects, as distinct from natural physical objects • Human capital: People’s skills and experience, and their motivations to innovate • Intellectual capital: Intangibles that provide competitive advantage • Natural capital: Includes water, land, minerals, and forests; and biodiversity and ecosystem health • Social capital: The institutions and relationships established within and between each community, stakeholders, and other networks to enhance individual and collective well-being. It includes an organization’s social license to operate. C. Auditing and Assurance: Auditing and assurance have become a critical part of the responsible accounting process. The growth of the adoption of voluntary sustainability reporting suggests that both corporations and their stakeholders find value in the publication of this data. The audit can be seen as a tool that has been developed for both internal and external use for the verification of the quality of stakeholder accountability. The purpose of an audit has been defined as the investigation and review of actions, decisions, achievements, statements, or reports of specified persons with defined responsibilities, to compare these actions with norms, and to form and express an opinion on the result of that investigation, review, and comparison. A match between corporate sustainability external auditing and internal social auditing aims at improving the social, environmental, and economic performance of organizations. The implementation of external assurance can be directed to professional providers, stakeholder panels, and other external groups or individuals. The Institute of Social and Ethical Accountability framework - AA1000 emphasizes three principles: • Completeness: demands that the assurance provider evaluate the extent to which the reporting organization has included in its report. • Materiality: requires that the assurance provider evaluate whether the reporting organization has included adequate and timely information for the stakeholders. • Responsiveness: evaluate whether the reporting organization has identified and answered stakeholder concerns and explained the basis of any strategy of reaction. D. Ethics of Accounting: One of the main tasks of the accounting profession is to present or to assist organizations in presenting the most truthful and accurate reports possible. The ethical behavior of the accountants is also part of the auditing process, where auditors have the responsibility to evaluate the accounting results carried out by other accountants in terms of truthfulness and accuracy. VII. Phase 4: Management Control: Accounting reporting is used by organizations in internal governance and external governance processes. In particular, internal uses of accounting information arise from the need to measure and control activities and to use data to assist the decision-making processes. Once the data are reported, during the management control process the responsible business performance can be evaluated by comparing the results achieved with the objectives indicated during the programming phase. This is an important assessment practice, as it can identify significant improvements to add to responsible management activities, and revisits the targets in setting out new objectives. In this last phase, the role of accounting and accountants is seen to: • Support the process of engaging management in the development and improvement of responsible business; • Review results, processes, and inputs as well as relate these areas to each other • Support and challenge management in their choice of responsible management measures; • Facilitate communication and review of reports. A. Responsible Management Dashboard: Responsible accounting utilized for management control purposes is designed to support and facilitate the achievement of the organization’s objectives through the utilization of appropriate management information tools. In particular, an instrument that can give overall, concise, and real-time information internally and externally is the responsible management dashboard. Responsible business metrics can be sent to a dashboard, which dynamically elaborates real-time information. PRINCIPLES OF MANAGEMENT: BASICS AND PROCESSES (SUMMARY) I. The goal of responsible accounting is the verification of a high level of organizational stakeholder accountability, providing quantitative and qualitative information oriented to the long-term achievement of organizational ethical, social, and environmental, and economic performance. II. The responsible accounting process consists of four phases: (1) gathering data, (2) elaboration and evaluation of the data, (3) reporting both internally and externally, and (4) implementing and evaluating strategies. III. The disclosure of the information is one of the main criteria of the responsible accounting activity and therefore should integrate social, environmental, and ethical with economic accounting data. IV. Materiality is an important principle for defining the content of sustainability accounting data. Materiality should depict the importance of all responsible business issues that are of importance to the company and its stakeholders. V. Responsible accounting measures a broad set of social, environmental, and ethical benefits and costs and considers impacts on the company, economy, society, and the environment. Although some forms of responsible accounting rely on monetary units to measure environmental, social, and ethical impacts, the use of multiple units of measurement is preferable. VI. The dissemination of accounting information to internal and external users is made through appropriate reports on sustainability, responsibility, and ethics. The Global Reporting Initiative (GRI) guidelines— process-oriented standards with a particular focus on the document—are the world’s most widely used responsible business reporting framework. VII. The integrated approach for the accounting process can be an important framework for reporting the social, environmental, ethics, and economic indicators contributing to stakeholder accountability. VIII. The responsible management control process evaluates the responsible accounting data, comparing the results achieved with the values and objectives identified during the programming phase. TEACHING POINTS 1. Take home message(s): The accounting and controlling processes are important for responsible management not only for supporting decision making but also for providing relevant information to stakeholders that allows them to hold the organization accountable for its activity and outcomes. 2. Underlying chapter structure: This chapter tries to individuate important tools such as those offered by the accounting data and instruments that can support the processes of responsible management and business, sustainability, responsibility and ethics. The utility of these tools is individualized for each phase that the accounting and controlling processes can apply to the responsible management. 3. Connecting accounting, controlling and financial management: The contents of this accounting and controlling chapter are closely connected to the contents covered in the following chapter on financial management. For instance, the topic of social return on investment, which is mentioned briefly in this chapter, is illustrated in detail in the financial management chapter. It is recommended to use both chapters together. ANSWERS TO END-OF-CHAPTER QUESTIONS AND EXERCISES A. Remember and Understand A.1. Mention the main drivers of sustainability accounting and describe how they may influence the accounting process. Sustainability accounting and reporting can be defined as a subset of accounting and reporting that deals with activities, methods, and systems to record, analyze, and report, firstly, environmentally and socially induced economic impacts; secondly, ecological and social impacts of a company, production site, and so on; and thirdly, and perhaps most importantly, measurement of the interactions and links between social, environmental, and economic issues constituting the three dimensions of sustainability. In many ways, the drivers behind and the emergence of social and environmental accounting reflect the same pressures that have raised the profile and importance of responsible business and management in other management disciplines and operations. These are, namely, the increased importance of stakeholders and the realization that companies have responsibilities that cannot always be expressed only in traditional financial terms. In particular the main drivers and issues behind this rise are: • Related to Business: Increased demand for more complex and accurate management information; measurability and transparency of economic, social, and environmental factors. • Related to Government: Preemptive and preparatory policies for regulatory regimes and changes; increased business legal responsibility; global/national economy externalities valuation. • Related to Society: Increased power of society and lobbying groups; enhanced awareness of interconnectedness, impact, “trade-offs,” and moral responsibilities of business/society. A.2. Describe the four phases of accounting and give an example of a typical activity for each phase. In phase 1, data gathering, we identify the groups of data—environmental, social, ethics, and stakeholder information—to be gathered, and prioritize them. In phase 2, data evaluation, we illustrate how to measure social and environmental benefits and costs and consider impacts on both the company and society, both current and future. Phase 3, reporting, shows avenues by which to disseminate the information found to stakeholders of the company, both internally and externally. Finally, phase 4, controlling, elaborates on how to use data internally in order to manage what was measured, which closes the cycle. A.3. Define each of the following terms and describe the differences between them: • Global Reporting Initiative • Integrated reporting approach • AA1000 standards. • The GRI is a nonprofit, network-based organization that works toward a sustainable global economy by providing sustainability reporting guidance that is broadly used around the world. • According to the IIRC framework, integrated reporting brings together the material information about an organization’s strategy, governance, performance, and prospects in a way that reflects the commercial, social, and environmental context within which it operates. • The AA1000 standards are the main international standards for conducting external verification services on sustainability reports. They are comprised of: AA1000APS (2008) Accountability Principles, AA1000AS (2008) Assurance Standard, AA1000SES (2011) Stakeholder Engagement. The differences among these standards are related to their objectives, even though they belong to the same phases of accounting. In particular, GRI and integrated reporting belong to the reporting phase and differ one from the other in the goal they have. In particular, while GRI focuses on ESG reporting inside sustainability reports, the Integrated report combines the most material elements of information currently reported in separate reporting strands (financial, management commentary, governance and remuneration, and sustainability) into a coherent whole. The AA1000 Standard enhances the reporting phase as social auditing provides a mechanism for decision-makers to evaluate environmental, ethical, and social planning and facilitate stakeholder engagement in the social, environmental, and ethical decision-making process of an organization. B. Apply and Experience B.4. Look up the table of contents for the responsible business reports of a company of your choice and rewrite it by integrating new social, environmental, and ethics considerations. Then describe the appropriate accounting data for the new contents. The intention of this exercise is for students to critically examine GRI reports guided by the question “what is missing?” and to exemplarily create content for such a report. This does not literally mean to “rewrite” the whole report as it is framed in the question, but to add and integrate a short text related to an additional relevant consideration and to understand how this changes the overall report structure. One piece of information missing in many sustainability reports is the value added statement and its distributions among stakeholders described in this chapter. These data can be important considering that the calculation and distribution of the value added produced by the company gives a complete vision of the contribution the company gives through its activities, especially to the territories it operates. If we suppose that these activities stop or are moved in another geographical area, the level of the employment will fall and the public institutions will not receive the taxes this company pays. In general, the value added statement can be useful for measuring and analyzing the contribution that the companies can give to the wellbeing of communities in which they operate. B.5. Design a management control framework for a company of your choice, based on social, environmental, and ethics indicators for the product or service offered. You can use Figure 14.17, The Process of Management Control, as a template. One of the focal points of the management control processes is to individuate social and environmental concerns, as well as stakeholders’ expectations that must be integrated with traditional financial and economic goals, developing a multidimensional and balanced performance measurement system. This integration can help sustainability performance to be evaluated in a holistic and balanced approach, assisting managers to guide decision making and corporate behavior. In doing this, the sector in which the company operates is an important variable, as it gives important benchmarks through which companies can individuate their own objectives. Using the data reported, during the management control process, the responsible business performance can be evaluated by comparing the results achieved with the objectives indicated first. After that, an assessment processes can identify significant improvements to add to responsible management activities, and revisits the targets in setting out further objectives. This framework can be determined for each dimension of the triple bottom line. C. Analyze and Evaluate C.6. Look up the list of performance indicators proposed by the Global Reporting Initiative (www.globalreporting.org). Which indicators do you think are the easiest ones to gather quantifiable data for? Which are the most difficult and why? Here students should show that they are able to classify the different GRI indicators through their similarity with the main characteristics of the accounting data. In general, those of the economic category are the easiest to gather as they are created with the traditional data measured by companies. Another criteria that can be adopted to verify the quantification of the indicators offered by GRI, is the level of regulation that exists for the specific topic to which the indicator refers. If there is a framework defined by norms, it can be easier to follow and report according to guidelines. An example is the indicators for health and safety topics, which companies are already accustomed to reporting. Finally, putting the data into a structured process such as management control can facilitate the calculation and reporting of indicators. Furthermore, it also helps with the monitoring of indicators over time. C.7. Look up the most recent GRI report of a company from your country and answer the following questions: (1) Who are the primary stakeholders of the company? (2) Which are the most material lines of action? (3) How good is the company’s triple bottom line performance? (4) How does the company report on ethics topics? Based on these steps of analysis, would you classify the company as a responsible business? This is an integrative exercise that aims at piecing together several concepts introduced in the chapter to a sensible whole. The main quality criterion for a good answer to this question could be the degree to which the student is able to connect the concepts (such as materiality and ethical indicators) to concrete contents found in the report. D. Change and Create D.8. Design the accounting approach of the future. What should accounting in fifteen years look like, to make a maximum contribution to sustainable development, stakeholder value, and moral excellence? (Use the main standards discussed in the “Phase 3: Reporting” section of this chapter.) The main tendency that can be retrieved through the different standards analyzed in this chapter, is to determine the importance of social and environmental topics together with the economic one. Even though sustainability reporting is a voluntary based reporting, some of the issues it embraces are becoming part of the mandatory ones. In accordance with this process, the new approach represented by the Integrated report tries to put together the traditional financial information of economic reports with the responsible business dimensions not as supplemental to the financial accounting, but rather integrated with it as one topic with four aspects. Considering that the nature and the issues of responsible management are created by the ethical and sustainability sphere that goes beyond the normative, making sustainability reporting mandatory may be in contrast with the concepts it represents. Such added reporting can complicate the accounting systems of companies if it operates in parallel with preexisting reports. If we consider also that one of the main objectives of the accounting process is to support decision making, the next generation of sustainability accounting should interact with economic data through the management control systems and in the reporting processes. TEST QUESTIONS 1. Which of the following topics is not a standard element of sustainability accounting and reporting? a. Environmental Impact. b. Social Impact. c. Economic Impact. d. Relational Impact. Answer: d 2. Which of the following is not a distinctive key factor for sustainability accounting? a. The focus is on ethical, social, and environmental data. b. To provide companies with clear information on its economic activities. c. The ac The accountees include not only shareholders but also a wide range of stakeholders. d. Sustainability accounting is voluntary and not yet regulated by law. Answer: b 3. The external verification and endorsement of accounting process and outcomes is called: a. Controlling. b. Auditing. c. Assurance. d. Disclosure. Answer: c 4. Which of the following is not an accounting entity for a company? a. Human resources management. b. Organizations’ mission. c. The state d. Corporate Governance Answer: c 5. The definition of materiality of sustainability information does not refer to it as: a. Relevant to decision making. b. Assessing its qualitative importance. c. Assessing its quantitative importance. d. The allocation process of direct and indirect cost. Answer: d 6. Which of the following is a framework for business reporting on sustainability? a. GRI. b. AA1000. c. SASB d. SROI. Answer: a 7. Imagine you are working as part of the team that is to establish the sustainability report of a medium-sized company. Which of the following indicator groups would be the best to use if you wanted to report the material impact to your local community? a. Sourcing practices, supply chain impacts. b. Materials and waste, resource efficiency, product environmental impact. c. Corporate citizenship activities, local initiatives, political contributions. d. Product safety, customer privacy. Answer: c 8. Which of the following categories is not part of the sustainability accounting data elaboration and evaluation phase: a. Auditing. b. Costing models. c. Sustainability performance metrics. d. The value-added model. Answer: a 9. One of the following methodologies is not used by social and environmental cost accounting. Which one is it? a. Life-cycle assessment. b. Natural capital inventory accounting. c. Activity-based costing d. Social Return on Investments. Answer: d 10. Life-cycle assessment: a. Is a design discipline used to minimize the environmental impacts of products, technologies, materials, processes, industrial systems, activities, and services. b. Involves the recording of stocks of natural capital over time, with changes in stock levels used as an indicator of the quality of the natural environment. c. Assumes that activities related to products, services, and customers cause the costs. d. Allocates all direct and indirect costs to a product or product line for inventory valuation, profitability analysis, and pricing decisions. Answer: a 11. ESG in responsible accounting stands for: a. Ethical, Societal, Good. b. The indicator groups: Environmental, social, governance. c. All financial indicators. d. The reporting quality attributes of earnest, sincere, and goodwill. Answer: b 12. The principles that guide choices on ensuring the quality of GRI reported information does not include: a. Accuracy. b. Clarity. c. Inclusiveness. d. Reliability. Answer: c 13. The principles that deal with content of GRI reported information does not include: a. Comparability. b. Sustainability context. c. Materiality d. Completeness. Answer: a 14. IIRC explicitly designates six capitals that the business may rely on in putting together the financial and nonfinancial resources. Which of the following is not one of them: a. Financial capital. b. Intangible capital. c. Human capital. d. Natural capital. Answer: b 15. Integrated reporting information is only a little critical for: a. Meeting the information needs of investors. b. Effective allocation of scarce resources. c. Paying taxes. d. Meeting the information needs of stakeholders. Answer: c 16. A friend of yours tells you very excitedly that the company she is working in “really cares about people.” The reason for her excitement is that the company had conducted a large-scale stakeholder survey, asking different groups how important several topics related to the company were for them. How would we call this process in responsible accounting jargon? a. Integrated Report. b. Materiality Assessment. c. Assurance. d. GRI. Answer: b 17. The AA1000 framework emphasizes three principles. Which of the following is not among them: a. Completeness. b. Materiality. c. Responsiveness. d. Comparability. Answer: d 18. During the management control process, the role of accounting is not to: a. Support the process of engaging management in the development and improvement of responsible business. b. Review results, processes, and inputs as well as relate these areas to each other. c. Define the content and the review process of reports. d. Support and challenge management in their choice of responsible management measures. Answer: c 19. To be a perfectly faithful representation, a depiction would have three characteristics. Which of the following is not one of them? a. Complete information. b. Comparative information. c. Neutral informarion. d. Free from error. Answer: b 20. Which of the following statements related to the practice examples from the chapter is summarized correctly? a. The Australian Fair Trade Business TradeAid has stopped producing a financial report, as the social data are the only ones material for their stakeholders. b. The Save80 stove is an expensive, high-tech kitchen appliance that saves energy, water, and reduces waste. The target customers are people in high-income households. c. The household paper products company Marcal was able to save itself from bankrupcy partly because of accounting and communicating their recycling efforts. d. The economic problems of the energy company CPL are related to their sloppy reporting practices. Answer: d CHAPTER 15 FINANCE: RESPONSIBLE RETURN ON INVESTMENT GET IN TOUCH! This instructor’s manual can only cover a small initial selection of relevant advice. Please visit the website of the Center for Responsible Management Education www.responsiblemanagement.net or write to Oliver Laasch through [email protected] to share your ideas for new contents, experiences in teaching with the book, constructive criticism, and, of course, questions. The textbook is a snapshot of a quickly developing field that aims to educate responsible managers, and to create responsible businesses, which requires constant updating. We invite you to become part of a growing community of academics and practitioners taking on this task. INTRODUCTION Several reasons exist why financial management and sustainability, responsibility, and ethics topics go inherently together. First, financial management and finances are central to any business and its processes. This holds true also for any form of responsible management activity. Only if financial management provides the necessary resources to implement responsible management activities will a company be able to become responsible. Second, the finance department is an important driver for responsible business, and traditional financial management has increasingly become dependent on companies’ social, environmental, and ethics performance. Sustainability, responsibility, and ethics are on the chief financial officer’s (CFO’s) to-do list. External reporting, financial controlling, and risk management are largely affected by considerations related to responsible business, especially in investor relations. According to a study conducted by Ernst & Young in 2012, Sixty-five percent of companies’ CFOs are involved in sustainability initiatives. The third reason why financial management and responsible management topics go inherently together is that financial management has been blamed for many of the flaws of the economic systems, such as companies’ unhealthy, short-run profit and profit-driven behavior. Financial management and accounting have been the culprits of company collapses like those at Enron and Worldcom. The financial sector itself has been blamed extensively for being at the heart of an unfair capitalist system, as shown impressively during the height of the Occupy Wall Street movement when millions of people all over the globe were protesting. This is why there have been extensive efforts to rethink many of the most basic assumptions of financial management, in order to create truly sustainable, responsible, and ethical corporate finance. CHAPTER OBJECTIVES After reading this chapter, students should be able to… …access financing for responsible business activities. …make capital budgeting decisions based on sustainability, responsibility, and ethics. …govern your company to the best interest of its stakeholders. …generate a responsible return on investment (RROI). CHAPTER OUTLINE I. Responsible Financial Management (Slide 3): As illustrated in the introduction to this supplement, bringing sustainability, responsibility, and ethics to the core of the financial management process is a key success factor for a responsible business. II. The Goal: Responsible Return on Investment (RROI) (Slide 4-5): Responsible return on investment (RROI or ROIRes) is a measure of company success concerned with optimization of short, medium and long-run returns in the form of maximum triple bottom line, maximum stakeholder value creation, and minimum ethical misconduct. The RROI is a mixture of the following alternative returns: • The triple bottom line return on investment (ROITBL) measures the amount of economic, social, and environmental value created, per dollar spent. • The stakeholder value return on investment (ROISHV), or short stakeholder return, measures the amount of value created for stakeholders per dollar spent. • The ethical return on investment (ROIETH) measures the number of ethical misbehaviors per dollar spent. III. Phase 0: Understanding Financial Management (Slide 6): Financial management is the planning, organizing, budgeting, directing, controlling, and governance of the financial activities of an organization. A. Mechanisms and Structures of Mainstream Financial Management (Slide 6-8): Functions of financial management are to externally procure funds, to internally fund business assets and activities, and to distribute the financial results of the business activity. B. Questioning Paradigms of Financial Management (Slide 9): In order to create responsible financial management practices, six main paradigms of finance have to be questioned: profit maximization, constant growth, short-run thinking, money as a decision-making indicator, the dominance of shareholders, and the internality thinking that leads to incomplete decisions. IV. Phase 1: Financing Responsible Business (Slide 10-13): Financing refers to the activities necessary to procure the capital necessary for the conduct of the organization. The first phase and function of the responsible financial management process is the financing of responsible business. A responsible organization, whether an NGO, a social enterprise, or a corporation, requires capital to be founded, to run, and to grow. Financing for responsible business conduct might also apply to single responsible management activities for which additional, usually external, financing is necessary. A. Socially Responsible Investing (Slide 14): Socially responsible investment (SRI) is a practice that involves the evaluation of social, environmental, and/or ethical issues in the selection of financial products. SRI, among others, employs the following techniques: • Negative screening is a process by which funds are not committed to investments in organizations deemed unworthy on social, environmental, or ethical criteria. • Divestment is the opposite of investment, and describes the process by which investments are removed from a portfolio. • Positive screening is a process to identify exemplary companies in the field of responsible business for investment purposes. B. SRI Indices (Slides 15-16): An SRI index is a ranking of companies based on their responsible business performance. The two most salient indices are the Dow Jones Sustainability Index and FTSE4Good: • The Dow Jones Sustainability Index (DJSI) applies criteria from the economic, environmental, and social dimensions to calculate a maximum score of 100. • For inclusion in the FTSE4Good index, companies need to satisfy standards in three types of criteria: environmental, social, and stakeholder and human rights. C. Activist Shareholding (Slides 17): An activist shareholder is an investor who buys company shares in order to target and influence company behavior by being granted access to shareholder participation mechanisms. D. Directed Financing: Private Equity and Impact Investing (Slide 17): Direct financing describes the raising of capital without an intermediary. Increasingly investors have found ways to directly rewarding particularly good social, environmental, and ethical ideas, and the directed solution of particular issues. The two foremost practices of such direct financing are private equity financing of social enterprises and impact investing. • Private equity financing of social enterprises is often achieved through venture capitalists and angel investors. A venture capitalist provides capital to start-up companies. An angel investor is an affluent individual who provides his personal capital to start-ups. • Impact investing is a profit-seeking investment activity that intentionally generates measurable benefits for society. E. Alternative Ownership Models (Slide 18-19): Alternative ownership models that provide mechanisms for individuals to pool small individual amounts to large sums have increasingly become an attractive source of funding for organizations’ activities. • Crowdfunding raises external finance from a large audience (the “crowd”), with each individual providing a very small amount. • Cooperatives are businesses owned and run by and for their members. F. Cross-Financing and Goodwill Financing (Slide 20): Financing does not necessarily have to stem from external sources or from investors who expect returns. Many responsible business activities and projects can be financed through funds that are internally available, so-called pay-as-you-go financing. Another financing option is through donations or subsidies resulting from stakeholders’ goodwill created through responsible business practices. • Cross-financing is a method that uses the income of some activities of an organization to subsidize activities that do not create income. • Goodwill financing uses stakeholders’ positive attitude toward the business’s social cause to generate funds. G. Debt Financing: Financing responsible management activities through debt is not a focus of this chapter. Nevertheless, we would like to highlight two debt-related topics, special credits for responsible businesses, and microfinance, both of which should not be missed in a chapter on finance and responsible management. V. Phase 2: Capital Budgeting and Programing Internal Activities (Slide 21-22): While phase 1 dealt in depth with financing, the “external investment” realized into the company, this phase 2 illustrates capital budgeting, the process of analyzing alternate projects and activities to decide which ones to accept and for which ones to free a budget for implementation.42 We could say that capital budgeting is an internal financing or investment process through which companies decide which alternative activities should be undertaken. Fundamental techniques in capital budgeting in responsible business include the following: • Through the qualitative method stakeholder value, triple bottom line, and ethical considerations are viewed as one additional intangible decision factor that complements the main financial decision instruments. • The quantified method aims to measure the social, environmental, and ethical value and to translate it into a social, environmental, or ethical return on investment. Those alternative returns on investment can then be compared to the traditional financial return on investment on a quantitative basis • The monetized method attributes financial value to traditionally intangible factors, and this way makes a comparison on a financial basis possible. A. Calculating the Social Return on Investment (Slides 23-28): Social return on investment (SROI) is a method that quantifies and monetizes all stakeholder costs and benefits—the social, environmental, and economic ones—of an activity in one single ratio. The SROI calculation is divided into the following six steps: 1. Scope and stakeholders: An initial step must be to define the scope. 2. Mapping outcomes: During the second step, the main goal is to acquire a clear understanding of the “mechanics” of the activity. 3. Indicators and monetization: It is now time to develop measurable input, output, and outcome indicators for activities. 4. Establishing impact: The fourth step deals with isolating the impact that has been achieved by the organization’s activity from the part of the outcome created by other factors. 5. Calculating the SROI: In step 5 we have reached the core piece of the SROI calculation. The goal at this stage is to come up with a concrete number for the SROI. 6. Dissecting the SROI: The last stage of the process of establishing an SROI is to dissect it into its components, with the purpose of enriching the practice value and analysis possibilities. B. Subjects of Capital Budgeting: We have mostly talked about responsible management activities or projects as objects of the SROI calculation. In practice, however, the SROI evaluation can be used to assess virtually any business element, such as products, processes, departments and employee performance. VI. Phase 3: Results and Governance (Slide 29): The outcome of the financial management process must be aligned with the interest of main stakeholders, among them the shareholders or owners of the organization. A. From Shareholder-Value- to Stakeholder-Value-Based Management (Slide 30-31): The ultimate objective of companies in mainstream financial management is the maximization of shareholder value. Responsible management may be harnessed to drive economic value, but should also integrate the stakeholder value as an additional ultimate objective. B. Corporate Governance and Fiduciary Responsibilities (Slide 32-35): The topics of corporate governance and financial management are intimately connected, as both traditionally have been centered on the relationships between a company and its owners. • Corporate governance describes a set of mechanisms and structures aimed at ensuring that managers lead an organization in the best interests of main stakeholders. The principal–agent problem describes the problems arising under conditions of incomplete, uncertain, and asymmetric information when a principal (such as an owner) employs an agent (such as managers) to represent the principal’s interest. Incentives have to be calibrated to minimize problems of moral hazard and conflict of interest. • The topic of fiduciary responsibilities builds on an important, potential impact of financial managers’ decisions when they are entrusted with handling large amounts of money. Principles of Finance: Responsible Return on Investment (SUMMARY) I. The goal of responsible financial management is the responsible return on investment (RROI) which is a measure of company success that aims at the optimization of long-run returns in form of a maximum triple bottom line, maximum stakeholder value creation, and minimum ethical misconduct. II. In order to create responsible financial management practices, six main paradigms of finance have to be questioned: profit maximization, constant growth, short-run thinking, money as a decision-making indicator, the dominance of shareholders, and the internality thinking that leads to incomplete decisions. III. Financing describes the process of procuring funds for business activities. Financing in responsible business has a set of attractive additional financing tools, due to its special characteristics. IV. Capital budgeting is the process of internally allocating financial resources to company activities and projects. Capital budgeting is crucial to provide responsible management with the financial resources required. V. The social return on investment (SROI) is a method that quantifies and monetizes all stakeholder costs and benefits—the social, environmental, and economic ones—of an activity in one single ratio. VI. Corporate governance describes a set of mechanisms and structures aimed at ensuring that managers lead an organization to comply with its responsibility to owners and other main stakeholders. VII. Fiduciary duties are special responsibilities that arise when people control and work with significant sums of money. TEACHING POINTS 1. Objective and rationale: The objective of this chapter is to show how financial management tools, such as the payback periods, and returns on investment can be used to manage non-financial factors. The question if we can still legitimately call this financial management or if we should think of a new way of framing this important function of the business is an important 2. The role of financial management in the managerial control task: It is important to connect this chapter to the preceding chapter on accounting and controlling. Often both topics are intimately intertwined in practice. For instance, the social return on investment as a capital budgeting tools might also have been presented in the preceding chapter as a controlling indicator. 3. Paradigms of financial management: Questioning the paradigms of financial management means questioning the very nature of financial management. Students (and lecturers) alike often have to make a major creative effort, to visualize a new form of financial management questioning paradigms as essential to financial management as profit maximization, the shareholder value focus and the focus on money as dominant currency of value creation. In our courses we spent much time with students to openly discuss the possibility, and consequences of questioning and breaking these paradigms. 4. SROI and RROI: Sometimes students find it difficult to distinguish between the Responsible Return on investment (RROI) illustrated in the chapter introduction and the Social Return on Investment (SROI) extensively presented in the capital budgeting section. The RROI is an ideal type, rather theoretical, overall company return, including all three, domains, sustainability, responsibility and ethics, but which in reality is very complex to calculate and quantify for the complete company. The SROI instead is a less complex, tried and practiced method that captures much of the spirit of the RRO integrating responsibility (including costs and benefit per stakeholder), and sustainability thinking (including social, environmental and economic costs and benefits). 5. Critically examine monetization and quantification: The topics of monetization and quantification can be examined very critically. One typical area of criticism relates to the assumption that rational decision making based on quantitative, monetary factors yields best results. Also, the complexity and necessary effort to quantify and/or monetize qualitative factors might lead to questioning the methods proposed in this chapter. We usually try to proactively engage with these valid arguments in order to help students to develop a feeling for when financial management tools truly add value and when they rather distract from what matters. ANSWERS TO END-OF-CHAPTER QUESTIONS AND EXERCISES A. Remember and Understand A.1. Describe the differences between mainstream and responsible financial management. Responsible financial management aims to create a responsible return on investment (aiming to optimize triple bottom line, stakeholder value, and ethical return per dollar spent), while mainstream financial management, more narrowly, aims at the financial returns on investment incurred by the company. A transformation from mainstream to responsible financial management requires to question fundamental paradigms of financial management such as profit maximization, constant growth, short-run thinking, and even money as the dominant decision-making indicator A.2. Paraphrase the three decision areas of financial management. Students should describe the basic characteristics of the following three areas in their own words: 1. Procurement of funds, also called the finance decision (Phase 1: Financing): Finance decisions in this area are concerned with how to raise funds from various sources for the organization’s activities, how to choose the right capital structure and define the period of financing, and the costs of funding. 2. Internal investment decision (Phase 2: Budgeting): Decisions in this area revolve around capital budgeting of procured capital. Internal investment decisions channel financial resources to activities and assets of the organization and are concerned with how to distribute capital between fixed assets and current assets, to manage working capital (current assets minus current liabilities), to control financial performance, and to define budgets for different areas of the business. 3. Financial results, also called the payout or dividend decision (Phase 3: Results): Decision making in this area deals with how the financial results of business activity are distributed, including the distribution of net profits through either shareholders’ or owners’ payout or retained profits to be further reinvested in the company. This reinvestment occurs with the payment of taxes and documentation of the results in annual reports and balance sheets. A.3. Define and interrelate the following terms: RROI, ethical ROI, TBL ROI, and stakeholder ROI. Interrelatedness: The responsible return on investment (RROI) is an umbrella term integrating the three other types of ROIs. Definitions: Responsible return on investment (RROI or ROIRes) is a measure of company success concerned with optimization of short, medium and long-run returns in the form of maximum triple bottom line, maximum stakeholder value creation, and minimum ethical misconduct. • The triple bottom line return on investment (ROITBL) measures the amount of economic, social, and environmental value created, per dollar spent. • The stakeholder value return on investment (ROISHV) , or short stakeholder return, measures the amount of value created for stakeholders per dollar spent. • The ethical return on investment (ROIETH) measures the number of ethical misbehaviors per dollar spent. A.4. Define and interrelate the following terms: SROI, monetization, and indicators. Interrelatedness: The social return on investment monetizes several indicators for the description of social, environmental and economic stakeholder value in order to calculate one number reflecting the “social” (overall) profitability of an activity. Definitions: Social return on investment (SROI) is a method that quantifies and monetizes all stakeholder costs and benefits—the social, environmental, and economic ones—of an activity in one single ratio. Monetization attributes financial value to traditionally intangible factors, and this way makes a comparison on a financial basis possible. Indicators are measurement items can be divided into hard indicators that can be measured quantitatively without bigger effort, as opposed to soft indicators which are rather qualitative and difficult to quantify. B. Apply and Experience B.5. Look up the structure of the board of directors for three different companies. Which company has the best board? Why? The goal of this exercise is for students to firstly practice to obtain information about companies´ governance structures, and secondly to judge these structures by their composition. Some considerations that might be included into the evaluation process might be the cultural and gender diversity of the board, its representation of major stakeholders (e.g. employee or NGO representatives), power distribution (e.g. is the chairman of the board also the CEO of the company), and the degree to which responsible business topics are represented in board positions and committees. B.6. Look up the criteria of socially responsible investing (SRI) institutions online. In what ways do they differ? What are the different criteria they use or sectors they encourage or screen against? Which do you think are the most advantageous systems and why? The goal of this exercise is to create a feeling for the qualitative differences in SRI criteria and to reconnect to the topics of positive and negative screening illustrated in the chapter. Students could look at a variety of SRI-related institutions, such as the DJSI, and FTS4Good indices mentioned in this chapter, the UN Principles for Responsible Investment, or also socially-responsible investment funds. In the analysis of “the most advantageous system” students are expected to freely discuss the advantages and disadvantages of different SRI criteria catalogues. B.7. Ask one person currently employed in a company the following question: “Should companies be managed for shareholders or stakeholders?” Do you agree with the person’s answer? In this exercise we aim to hone students´ critical skills and want to aid them in forming their own opinion on the paradigms of financial management and about their effects. On purpose, this questions attaches to a controversial topic that might lead a very diverse set of different answers from different individuals. C. Analyze and Evaluate C.8. Look up one of the exemplary SROI reports available at www.thesroinetwork.org/. Analyze the methodology used. What would you have done better? The goal of this exercise is for students to get familiarized with various applications of the SROI method. The following screenshot is the summary of the “Food Connect Sydney Forecast SROI Report” available for download from the SROI Network homepage under “Case Studies Not Assured”. Students are expected to delve deeper into the calculation of such returns and to propose improvements and criticize parts of the SROI calculation. Toe-hold for criticism in this specific case might be the lump-sum calculation of value created from 2010-2014, the neglect of environmental costs and benefits, and further details in the monetization of, for instance, “self-esteem, optimism and sense of community” among the farmers. C.9. Review the triple bottom line concept. How do you think each part is weighted by most companies? What would be the consequences for financial management systems if each of the three sections were equally weighted? Here students are expected to think thoroughly about the consequences of a triple bottom line financial management system. Consequences to be addressed might be, for instance: • The rivalry between social, environmental and economic factors as decision making indicators- which dimension will be the dominant decision making factor? • Reports would need to cover all three dimensions. • Incentive systems and performance measurement would need to consider social, environmental, and economic factors. • Employees “listening to the money logic” would need to be trained to apply a broader triple bottom line logic in their day-to-day decision making. C.10. Think about the employee and about the community as stakeholders. For each, come up with four main value drivers, similar to the drivers for shareholder value displayed in Figure 15.11. Exemplary value drivers might be: 1) Employees: Work-life balance, wage level, non-wage benefits, work-climate 2) Local community: Community-volunteering hours spent, number of jobs created in the community, minimization of negative environmental impacts and resource usage, local infrastructure created through the company D. Change and Create D.11. Describe a fictional or real responsible business activity and develop its SROI. Then think about ways to increase the SROI, based on the calculation and its results. It is recommendable for this task to choose an activity with a very low complexity level, similar to the GreenO example covered in the chapter. The calculation of the SROI may be very time intensive and will challenge students´ imagination when monetizing social value. The GreenO example provides a template for the analysis required in this task. It is important that students start to think about ways to improve the SROI once they have finished their calculation, in order to highlight the practice value of the SROI as an indicator and the process of calculating it as a learning process to better understand how value is created. TEST QUESTIONS 1. Which of the following statements about responsible return on investment is not true? Responsible return on investment a. is a tool for the main goal of calculating how much money a company makes from responsible business activities. b. includes components related to sustainability, responsibility, and ethics into its calculation. c. may be split up into the triple bottom line return on investment, stakeholder value return on investment, and the ethical return on investment. d. includes the financial performance of the company. Answer: a 2. Which of the following exemplary activities is part of the capital budgeting phase of responsible financial management? a. Identifying an angel investor with a social venture background. b. Calculating the social return on investment of a planned responsible management activity. c. Establishing a cooperative model of company ownership. d. Choosing representatives of main stakeholder groups as directors for the company board. Answer: b 3. Which of the following exemplary activities is part of the financing phase of responsible financial management? a. Deciding which community project to implement, based on the social impact of each project. b. Using the social return on investment to understand how much value your different responsible management activities create. c. Creating revenues through a social marketing campaign which are then used to fund the position of the chief responsibility officer. d. Establishing a governance system. Answer: c 4. Which of the following exemplary activities is not part of the results and governance phase of responsible financial management? a. Assuring that all managers involved into making major financial decisions realize their fiduciary responsibilities. b. Implementing structures aimed at dealing with principle-agent conflicts. c. Managing reporting and auditing activities. d. Calculating the projected social return on investment for three alternative new product ideas. Answer: d 5. A protester at an “Occupy” manifestation holds up a sign saying “We are the 95%”, referring to the majority of society which, according to this social movement, is not represented well by the way banks do business. Which of the following paradigms of conventional financial management is this particular statement questioning? a. Shareholder paradigm. b. Growth paradigm. c. Short-run paradigm. d. Internality paradigm. Answer: a 6. A CEO of a major business announces that in the future, any major financial decision made in her business will have to have at least neutral or even positive effects on society and the environment. She states further that companies´ own costs and revenues should not be the main criteria for decision making, which is why broader criteria need to be included into the process. Which of the following paradigms of conventional financial management is she questioning? a. Internality paradigm. b. Shareholder paradigm. c. Short-run paradigm. d. Growth paradigm. Answer: a 7. “A method that quantifies and monetizes all stakeholder costs and benefits—the social, environmental, and economic ones—of an activity in one single ratio.” a. Ethical ROI. b. Corporate social performance. c. Social return on investment. d. Blended value. Answer: c 8. “An estimate of the financial value represented by a social or environmental factor.” a. Hard indicator. b. Soft indicator. c. Blended value. d. Financial proxy. Answer: d 9. “Long-run changes achieved through an activity.” is the definition for which of the following terms in a social return on investment context. a. Outcome. b. Input. c. Output. d. Impact Answer: a 10. In an industry journal you see a funding opportunity where an investment company searches for companies with exceptionally high environmental management standards. How is this practice called in SRI jargon? a. Divestment. b. Positive screening. c. Activist shareholding. d. Negative screening. Answer: b 11. A friend of yours has recently read an article about the Dow Jones Sustainability Index (DJSI) and is very critical. He says that this is just another one of these greenwashing instruments where the highest-bidding companies buy themselves a good image without checking what the company is really doing. Which of the following answers could you truthfully give, based on your studies of this chapter? a. “You are absolutely right. Nobody assesses the DJSI companies´ performance.” “ b. “You might want to read up a bit more on the DJSI, before you make such a statement: Inclusion into the DJSI is based on a questionnaire that assesses the companies´ social, environmental and economic performance.” c. “You are wrong in a sense that all DJSI-indexed companies are checked through the FTSE4Good method.” d. “You are right. All companies that apply are included into the DJSI.” Answer: b 12. “An investor who buys company shares in order to target and influence company behavior by being granted access to shareholder participation mechanisms.” a. Impact investor. b. Activist shareholder c. Angel investor. d. Venture capitalist. Answer: b 13. Which of the methods, monetization, qualitative, and quantitative methods, and negative screening, are part of the calculation of the social return on investment? a. Only monetization. b. Only negative screening and monetization. c. Only quantitative. d. Qualitative, quantitative, and negative screening. Answer: d 14. Which of the following statements about corporate governance is wrong? Corporate governance a. is a management instrument in the mere interest of shareholders. b. is based on the so-called principle-agent relationship. c. includes management areas, such as payment and reward systems, reporting, and legal compliance. d. aims at ensuring that managers lead an organization in the best interests of main stakeholders. Answer: a 15. Which of the following statements referring to various sections of the chapter is incorrect? a. The term fiduciary responsibility refers to the obligations of people who manage great amounts of money. b. The principal-agent problem in corporate governance refers to the situation where a principal (the manager) and an agent (an employee working for him) have different interests. c. Capital budgeting may be applied to a variety of subjects, such as products, processes, and projects. d. The internality paradigm in conventional financial management puts too much emphasis on so-called internalities and neglects external effects. Answer: b 16. Which of the following statements on the social return on investment (SROI) is untrue? The SROI a. includes both positive and negative factors in its calculation. b. may integrate social, environmental and economic factors in its calculation. c. Considers social cash flows, defined as all costs and benefits incurred by the actor of a specific activity. d. integrates elements of stakeholder thinking in its calculation. Answer: c 17. Which of the following statements about microfinance is incorrect? Microfinance a. typically provides banking services to people with low-incomes, often small entrepreneurs, who would usually not have access to such services. b. services usually are offered at a minimum threshold of 100 US Dollars. Lower amounts are not efficient. c. has often shown positive results in terms of profit margins, low default rates, and an in encouraging local entrepreneurs and empowering marginalized people in society. d. is an example for a so-called bottom of the (income) pyramid business model. Answer: b 18. Which of the following features is not a typical distinguishing component of the cooperative ownership model? a. Ownership through cooperative members, such as employees or customers. b. Hierarchical structures. c. Democratic decision making processes. d. Member-nominated and elected board. Answer: b 19. In practice: Which of the following short case descriptions is summarized incorrectly? a. The Israel-based call center Call Yachol is able to create a diverse workplace for people with disabilities and to reduce the cost of employee turnover at the same time. b. The fictional GreenO example helps to understand the different avenues for a company to access external financing for responsible business activities. c. The London-based business ClearlySo helps social entrepreneurs raise capital. Among others, through a speed-dating between high-net worth individuals and the entrepreneurs. d. In Indonesia companies that are directly related to natural resources have an obligation to budget their spending for the implementation of CSR activities and to ensure their implementation. Answer: b 20. In practice: Which of the following short case descriptions is summarized correctly? a. The company Vodacom used M-Pesa to make financial donations to educational activities. b. The food retailer Alishan Organic Center and the NGO “Second Harvest” have teamed up in Japan to sell organic food to the government at an exceptional profit. c. Prometheus Finance in New Zealand provides loans to all companies that are listed in the Dow Jones Sustainability Index. d. The online platform Elevyn increases the profit margin of artisans and Malaysias, Cambodia and the Philippines to commercialize their products and to increase their margins, while also creating a wider stakeholder return on investment in local communities. Answer: d Solution Manual for Principles of Responsible Management: Global Sustainability, Responsibility, and Ethics Roger N. Conaway, Oliver Laasch 9781285080260, 9789387994904