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8THE ETHICS OF FINANCIAL

REPORTING, THE GLOBAL

REPORTING INITIATIVE, AND THE

BALANCED CONCEPT OF THE FIRM

GEORGES ENDERLE

87

Reporting of corporate conduct is crucialfor both the companies who send outthe reports and the investors, consumers,

business partners, competitors, and publicagencies who receive and utilize these reports. Intheir reports companies represent themselvesto the public, conveying, explicitly and implic-itly, an image of their activities and philosophies,trying to enhance their reputation, and possiblyrendering accountability for their deeds andobjectives. On the other side, the receivers maycheck the quality of the reports, needing at leastsome truthful information for their own decisionmaking and holding the companies accountablefor their conduct.

While this describes the general purpose andfocus of corporate reporting, many questions

still need examination in light of globalizationand recent corporate scandals. How accurate andcomprehensive are financial reports? Do theyreveal “the substance” of corporate performancerather than hiding it behind a plethora of formal-ities? How trustworthy and reliable should thesereports be? Who is responsible for their veracity?Should companies report not only on financialand economic performances but also on socialand environmental performances? In whatrespects are the latter different from the former,and thus in need of very special approachesand measurement techniques? What features dothey have in common? Are there particular chal-lenges for corporate reporting, given the fact ofglobalization? Are there legitimate differences inreporting among cultures and continents? What

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concepts of the company are involved in varioustypes of reporting? To what extent do theseconcepts really matter for adequate reporting?

In the following, I attempt to discuss many ofthese questions.1 The first part of this chapteraddresses the ethics of financial reporting byfocusing on the fundamental requirementsof transparency and trust, and the responsibilitiesof the providers, certifiers, and users of financialreports. In the second part, after a brief presenta-tion of the Sustainability Reporting Guidelines2002, I offer several critical remarks and askwhat financial reporting and sustainability report-ing can learn from each other. In the third part,I attempt to link the issue of comprehensivecorporate reporting to the understanding of thecompany. The common underlying themethroughout this chapter is the threefold corporateresponsibility in the economic, social, and envi-ronmental respects and its implications for theconcept and the reporting of the company.

THE ETHICS OF FINANCIAL REPORTING

Before the Enron and Andersen scandals, rela-tively little public attention was paid to the truth-fulness of financial reporting. Of course, no onebelieved every company was beyond any suspi-cion of misrepresenting its activities. But, by andlarge, it was taken for granted that the reports cer-tified by publicly recognized auditors sufficientlyand accurately reflected companies’ financialperformances. Recently, however, this confidencehas been greatly shaken. Serious doubts and evencynicism about current reporting practices havespread, particularly among investors (who nowa-days make up approximately 50 percent of theU.S. population). The ethics of reporting hasbecome a vital problem of the financial sector.This is the case not only in the USA where the“earthquake” of this crisis of confidence brokeout, but also in Europe and indeed worldwide.

It would be naïve to assume that this problemcould be fixed by tough punishment of CEOs andCFOs alone or by only sharpening the regulatory

framework and strengthening its enforcement.At stake is a much more complex problem thatcalls for a more comprehensive and sophisticatedapproach. Truthfulness of and trust in the financialreporting system depend on far more than theactions and decisions of individuals or sophisti-cated “mechanisms” for the whole system. As theEnron and Andersen events have shown (seeEnderle, 2004b), far-reaching failures occurredat the individual (or micro) level of top managers,directors of corporate boards, managementaccountants, auditors, financial analysts, otheremployees, and members of supervisory boardsand public agencies, including politicians. Yet, itwould be shortsighted to blame only individuals.The crisis has also revealed serious insufficienciesat the systemic (or macro) level. The regulatoryframework did not prevent but encouraged theestablishment of several crucial conflicts of inter-est (particularly in the auditing and investmentindustry), the tempting call of which could beresisted only with extraordinary moral power.Many accounting and investment rules werevague, providing insufficient guidance in complexmatters. In many instances the enforcement ofthe existing framework was half-hearted or eventotally lacking. Moreover, to expect the financialreporting system to function well by relying solelyon the individual “players” and the “rules of thegame” would be a grave mistake. The Enron andAndersen cases clearly demonstrate the impor-tance of organizations, with their objectives, struc-tures, policies, and cultures (at the meso level), ininfluencing individuals and systems. Indeed, othercompanies in the energy, accounting, and bankingindustries and the professional associations ofthe certified public accountants and the invest-ment managers and researchers have, in varyingdegrees, affected the quality of and confidence inthe financial reporting systems.

Therefore, truthfulness of and trust in thefinancial reporting system cannot be a matter ofeither personal or institutional ethics alone.Rather, this complex problem challenges andrequires both personal and institutional ethics,the latter including organizational as well assystemic ethics. In short, a three-level approach

88 • FINANCIAL REPORTING AND ACCOUNTABILITY


is needed that pays due attention to theindispensable roles and responsibilities of persons,organizations, and systems (see Enderle, 2003).Consequently, concepts of truthfulness and trustshould take this complexity into account. If theyare modeled exclusively on the basis of interper-sonal relations (as is the case with a vast part ofthe literature on trust) or of anonymously func-tioning systems (see particularly sociologicalapproaches), they will be inadequate to capturethe core ethical issues of financial reporting.

Trust is generally a three-part relation: Atrusts B to do X (see Hardin, 2002, 9 ff.). In thecase of financial reporting, doing X concernstruthful reporting not only as a process but alsoand above all as the outcome of this process.The numbers are expected to be correct, accu-rate, comprehensive, objective, and understand-able and to adequately reflect real processes andstates of affairs of the reporting organization.A modern term for such truthfulness is trans-parency, meaning the reporting is “transparent”to the underlying financial “reality”; it does nothide substantial parts of this reality or deceivethose who receive and need the reports.

Truthfulness and trust are issues that haveshown up throughout the entire history ofhumankind and have been discussed in all ethi-cal traditions (see Bok, 1999, 2001). It thereforecomes as no surprise that they affect the modernfinancial sector too. Indeed, these core conceptsappear to have moved to center stage of atten-tion and importance due to the dynamics andcomplexity of financial markets, the wide andincreasing range of financial instruments, and thedominating role of the financial sector on thewhole economy and society at the national andinternational level. All these new developmentsoffer a myriad of possibilities for false and decep-tive financial reporting, which have not beenmatched with an increasing moral commitmentto truthfulness and trust. This discrepancybetween the seriousness of the problem and theneed to deal with it might be a major reason whythe ethics of finance has become an urgent task.

Given the scope of this chapter, only someessential features of the ethics of financial

reporting can be presented. It includes five parts,which, for the sake of introduction, are treatedseparately but, in fact, are interrelated.

Structuring the Field

For the ethics of financial reporting, it is crucialto have a comprehensive and differentiated viewof the field to which ethics should be applied.Financial reporting involves providers, certifiers,and users of financial statements and is the resultof complex structures and procedures. It dependson the rules set up and enforced by the govern-mental and regulatory bodies (at the macrolevel), the proper application and interpretationof the rules by the providers’, certifiers’, andusers’ organizations (at the meso level), and thebehavior of the individuals involved in reporting(at the micro level). The structuring of the field(as it relates to the United States) can be summa-rized in the following matrix (see Table 8.1).

Transparency and Trust

Trust in the financial reporting system is the fun-damental requirement for the proper functioningof the system and can be considered a “publicgood,” from which all participants in the systembenefit, but which is being eroded by those whodeceive. Trust is based on the truthfulness or“transparency” of financial reporting. This meansthat the numbers must be honest. They shouldreflect real processes and states of affairs ofthe company under consideration in an adequatemanner, that is, according to appropriate rulesof reporting. Moreover, they should be generatedby trustworthy people who are competent andmotivated by the knowledge that they are beingtrusted and by a moral commitment to honor thistrust (see Hausman, 2002). In short, transparencyand trust are the outcome of a combination offactors at the macro, meso, and micro level.

If financial reporting is inadequate and deceiv-ing, trust will shrink or may even collapse. As aresult, investment activities will drop and possiblycome to a halt, with far-reaching consequences for

The Ethics of Financial Reporting • 89


the economy and for individual businesses aswell. It is noteworthy that the vital importance oftransparency and trust can be argued for from boththe perspective of consequences (that withouttransparency and trust, the system would breakdown) and the perspective of principles (thathonesty should be lived up to for its own sake).

Responsibilities of the Providers

Financial reporting can be trustworthy only if itsprocesses and outcomes are reasonably transparent.Therefore, the providers have a moral and legalresponsibility to ensure transparency. First of all,the reporting rules must be conducive to fulfill thisresponsibility. For example, they have to preventconflicts of interest that are built into or tolerated bythe system, such as conflicts between auditing andnumerous nonauditing functions and conflictsbetween investment research and investment bank-ing. Moreover, they have to set clear standards fordealing with huge information asymmetries towhich companies and individuals are exposed inthe financial sector. (See Norman Bowie’s chapterthat deals with the problems of conflicts of interestand asymmetric information.) From the ethical

perspective, it is unfair and thus unacceptable solelyto blame the players for wrongdoing when the rulesof the game are deficient or misleading or evenencourage unethical behavior. (As for the impact oflaw, regulations, and Supreme Court decisions onfinancial reporting, see Lerach, 2002.)

Second, the letter and the spirit of the rulescan be followed only if the reporting organiza-tions as such embrace this commitment. Corpo-rate governance and culture have to be shaped insuch a way that the “substance” of financialperformance becomes transparent to the certi-fiers and users of financial reporting. In supportof the companies, the professional associationsof accountants and investment researchers playan indispensable role in enhancing the profes-sional ethos by multiple provisions and activitiessuch as ethical codes and ethics training.

Third, the moral responsibility of the individ-uals is equally crucial and cannot be replacedby mechanism, policies, and cultures. Instead,individuals must follow the letter and the spirit ofthe rules with competence and moral commit-ment. Here “moral commitment” is understoodin a modest sense—that is, to live up to the ethi-cal principle of honesty in providing adequate


Governmental and regulatory bodies that set up and enforce the rules (Congress, SEC, FASB,Intern. Accounting Standard Board, boards of accounting)

Certifiers

Auditing companiesPublic Company Accounting

Oversight Board (sinceJuly 2002)

Credit rating agenciesProfessional associationsof accountants and auditors

Internal auditorsExternal auditors

Providers

CompaniesFirms issuing new securitiesInvestment research divisionsProfessional associations of

accountants and investmentresearchers

Corporate managementaided by managementaccountants Board ofdirectors

Chief financial officersInvestment researchers

Macro level

Meso level

Micro level

Users

Investor firmsCreditor firms (banks, etc.)

Government agencies(collecting taxes, etc.)

Individual investorsIndividual bank employeesGovernment officersInvestment researchers

Table 8.1 Structuring the Field of Financial Reporting


financial statements while being supported bythe culture of the employer organization and theregulatory framework. This ethical requirementcontrasts with the attitude of moral carelessness(i.e., that “anything goes”) and also differs fromthe expectation of “heroic behavior.” Under specialcircumstances, it might be praiseworthy to take abold ethical stand against a prevailing misleadingorganizational culture or a deficient regulatoryframework (for example, by blowing the whistle).But, in general, the ethical quality of organizationsand systems should be such that heroic behavior ofindividuals is unnecessary.

Responsibilities of the Certifiers

The truthfulness of financial reporting in thecomplex financial sector should not rely on theproviders alone, but must be certified by inde-pendent auditors as well. The strict separation ofthe providing function and the certifying func-tion should be a hallmark of a modern societycharacterized by high degrees of division oflabor and specialization. Here again, with regardto certification, the rules must be such that theylead to the stated purpose: to strengthen ratherthan impair the independence of the auditors. Ifthere are conflicts of interest built into thesystem that seriously affect their independence,auditors and auditing firms experience too muchpressure to give up their professional responsi-bility of impartiality. It comes as no surprise thatunder the present rules in the United States (inJune 2002), the principle of independence hasbeen violated in many instances.

Standing at the interface between the providersand users of financial reporting, the certifiersare accountable to the public and thereforecan exert their task properly only if they are, andare perceived to be, independent. Conflicts ofinterest in fact and in appearance should beavoided. Having said this, many difficult ethicalissues remain open, which cannot be addressedin this chapter (see chapter by Dunfee et al., “AnEthical Framework for Auditor Independence,”in this volume). Suffice it to underscore thatindependence can be maintained only if it is an

essential feature of both the personal commitmentof the auditors (at the micro level) and the poli-cies and cultures of the auditing firms and theauditing profession as such (at the meso level).

Responsibilities of the Users

Financial reporting is also dependent on theusers’ expectations and behavior. If the users asorganizations and individuals pay only lip serviceto the fundamental importance of transparencyand tend to place the entire responsibility on theshoulders of the providers and certifiers, thefinancial reporting system cannot function prop-erly with the necessary level of trust. Therefore,the users have to engage in contributing to theestablishment and enforcement of fair and effec-tive rules of financial reporting, which enhancethe confidence in the system.

The users of financial reporting, be they orga-nizations or individuals, may focus their attentionparticularly on three sensitive areas. First, theyshould distance themselves from the unques-tioned belief in financial numbers that has spreadin financial markets in recent times and insteadseek out and scrutinize the underlying economicbasis of those numbers. Second, they should notfocus exclusively on short-term financial perfor-mance, but adopt a longer-term perspective aswell. Third, they may nurture and express morerealistic expectations regarding corporate perfor-mance and consequently discourage dishonestcorporate communications and behavior.

THE GLOBAL REPORTING

INITIATIVE (GRI) AND ITS

SUSTAINABILITY REPORTING GUIDELINES

Short Introduction

While financial reporting is over 50 yearsold and currently exposed to increasing publicattention and scrutiny, nonfinancial reporting ofcompanies is relatively young. It has taken on avariety of forms in recent years and is far from



providing a well-established and generallyaccepted framework. But, compared to the early’90s, considerable progress has been made, partic-ularly with regard to the Global Reporting Initiative(GRI), which will be briefly discussed as an out-standing example of this broader development.

The GRI was launched in 1997 as a jointinitiative of the U.S. nongovernmental organiza-tion Coalition for Environmentally ResponsibleEconomies (CERES) and the United NationsEnvironment Program. Its goal was to enhancethe quality, rigor, and utility of sustainabilityreporting. The initiative has enjoyed the activesupport and engagement of representatives frombusiness, nonprofit advocacy groups, accountingbodies, investor organizations, trade unions, andmany more. Together, these different constituen-cies have worked to build a consensus around aset of reporting guidelines with the aim of achiev-ing worldwide acceptance (SRG, 2002, p. i).

The guidelines are for voluntary use by orga-nizations for reporting on the economic, environ-mental, and social dimensions of their activities,products, and services. In its first phase, GRI hasfocused on corporations, with the expectationthat governmental and nongovernmental organi-zations will follow in due course. According toGRI, a number of key trends has fueled GRI’sswift progress: expanding globalization; thesearch for new forms of global governance;reform of corporate governance; global roleof emerging economies; rising visibility ofand expectations for organizations; measurementof progress toward sustainable development;governments’ and financial markets’ interest insustainability reporting; and the emergence ofnext-generation accounting. Already over 2,000companies worldwide are using the guidelines.This kind of reporting is seen as having numerousbenefits as a proactive critical management tool;as a key ingredient for the engagement of internaland external stakeholders of the company; asa warning of trouble spots—and unanticipatedopportunities—in supply chains; in communities,among regulators, etc.; and as a means to assessthe societal and ecological contributions of theorganization, to name a few. GRI recognizes

that many challenges lie ahead and much workremains; however, it maintains that the conflu-ence of need and opportunity will further advancethe development of generally accepted sustain-ability principles (SRG, 2002, pp. 1–5).

Compared with the GRI document of June2000, the Sustainability Reporting Guidelines of2002 have been improved considerably. Amongthe substantive changes, two should be specifi-cally mentioned in this context. The content andorganization of the reporting principles havebeen developed into a comprehensive andconsistent set of principles that provides a firmfoundation and clear profile of sustainabilityreporting (see Figure 8.1). And the indicatorsregarding economic, environmental, and socialperformance, along with integrated indicators,have become more concise and more systemati-cally organized, which substantially increasesthe grasp and utility of the reporting.

Critical Remarks

There is no doubt that the promotion of inter-national harmonization in the reporting of rele-vant and credible corporate environmental,social, and economic performance informationto enhance responsible decision making—asstated in the mission of GRI—is an urgent needand a crucial means to support global progresstowards sustainable development. GRI and itsSustainability Reporting Guidelines, therefore,deserve close attention, critical examination, andconstructive support by businesses, govern-ments, NGOs, and academia.

GRI goes beyond traditional reportingapproaches in at least three respects: It not onlyfocuses on financial information but alsoincludes economic,2 social, and environmentalinformation; it promotes a multi-stakeholderapproach as opposed to the exclusive focus onshareholders; and it complements the commonstakeholder approach by addressing the reportingcontent directly and specifying it systematically.

Despite the novelty and considerable progressadvanced by GRI, there are several serious ques-tions that need further scrutiny.



First, the concept of performance seems tobe understood mostly as “impact” rather than as“activity” of the organization (with the exceptionof some social indicators regarding policies,procedures, management systems, etc.). Thuseconomic performance is equated with the directeconomic impact on customers, suppliers, etc., interms of monetary flow. Environmental perfor-mance means the impact of the organization’s

activities on the environment—for instance, onenergy and biodiversity. Social performance isdefined as the impact on society—for instance,on indigenous rights and political contributions.However, by concentrating on the impact ofthe organization, one loses sight of its activities.While the impact of an organization concerns itseffects (or consequences or outcome), which canlie in the economic, social, or another realm, the


Inclusiveness

INFORMSINFORMS INFORMS

Accessibility ofreported information

(how, when)

Clarity

Timeliness

Quality/reliabilityof reportedinformation

Auditability

Inclusiveness

Neutrality

Comparability

Completeness

Relevance

SustainabilityContext

Decisions aboutwhat information

to report

Transparency

Figure 8.1 GRI Reporting Principles


activities chiefly regard the processes (or thecauses of the impact) which might be of primar-ily economic, social, or another nature. As themost striking example, profit generation, whichwas an aspect of economic performance in thedraft of 2000, is conspicuously absent in theguidelines of 2002. Moreover, “net employmentcreation,” “labor practices and decent work,” and“strategy and management” are not consideredactivities but are seen only in terms of theirsocial (not social and economic) impact.

Second, the distinctions among economic,environmental, and social performance (i.e.,impact) are sometimes blurred, as the previousexamples show. For instance, net employmentcreation has not only a social but also aneconomic impact. One can also question whether“competition and pricing” and “product responsi-bility” primarily concern social, rather thaneconomic, performance. In addition, the sameoutcome can have simultaneously differentimpacts. For instance, “training and education”and “health and safety” may have not only socialbut also economic consequences (say, as invest-ment in human resources). If these are valuedonly in social terms, their economic impact isignored and consequently not accounted for (seeEnderle & Tavis, 1998). With regard to social per-formance, GRI may consider two more aspects:(a) compliance with the tax law, which, perhaps,can be integrated in the category of economicperformance, similar to the way compliance indi-cators are integrated in the environmental andsocial categories; and (b) respect for social cus-toms and cultural heritage in different regions andcountries, which is an increasingly importantissue in the multicultural business environment.

Third, a further problem lies in the widely het-erogeneous informational basis of measurement.Within each category there are several aspectswith many indicators. Economic indicators are ina given currency; environmental indicators intons, kilograms, volumes, joules, etc.; social indi-cators in numbers of employees, standard injuries,lost days, average hours of training per year, poli-cies excluding child labor, etc. On what basiscan the overall performance of a company be

measured? It might be possible to compare theoverall performance within the same company attwo points in time, provided that the valuechanges of the indicators point in the same direc-tion. But if the changes point in different direc-tions (e.g., an increase in tons and a decrease injoules), the changes and the indicators (e.g., of useof materials and energy) have to be made compa-rable in order to aggregate the values. This is par-ticularly difficult with regard to environmentaland social indicators as well as the overall perfor-mance measurement.

Fourth, related to the informational questionis the evaluative question. What normative stan-dards should be used to determine the weightsand scales of different indicators? GRI seems tooffer a purely descriptive approach that onlyreports the organization’s economic, environ-mental, and social performance. It is then up tothe organization and the users of the report toevaluate the performance from the ethical per-spective. Obviously, the selection of categories,aspects, and indicators already involves somemoral judgment (since they are considered to beimportant for sustainable development). But,given this basis, no further ethical evaluation,for instance in terms of minimal ethical require-ments, is proposed. Without doubt, this reserva-tion of judgment has good reasons. It seems,however, questionable that such a value-freeposition can and should be maintained in thelong run because the reporting unavoidably willbe interpreted from an ethical perspective. If theethical perspective of the organization sharplycontrasts with the ethical perspective of, say,critical groups in society, the reporting mightmiss its objective and be counterproductive. Asa possible solution to this problem, it might beworthwhile to consider Amartya Sen’s capabil-ity perspective that is pluralistic in dealing withthe aggregation over heterogeneous componentsand advocates “partial ordering” over the alter-native states of affairs (Sen, 1999, chap. 3).What Sen has developed for the evaluation ofinstitutions and public policies in the globalcontext seems to be applicable to corporatereporting as well.



Fifth, as GRI is about the organization’seconomic, environmental, and social impact,one might clarify the meaning of impact in thiscontext. The term does not mean the randomoutcome of uncontrollable processes. It ratherdesignates the effects or consequences of corpo-rate conduct, which affect not only the economicbut also the environmental and social spheresand for which, supposedly, the company is tobe held accountable. Beyond this, it remainsopen whether the consequences are the result ofpersistently pursued policies, intended or unin-tended side effects, or a mix of both. Moreover,it does not indicate how economic, environmen-tal, and social performance might be interre-lated, for instance, in a hierarchical manner inwhich environmental and social performanceare taken as means to achieve the end of eco-nomic performance, or in a different manner.These are important questions about the concep-tion of the company to be discussed in the finalsection.

A Brief Comparison Between FinancialReporting and Sustainability Reporting

As mentioned at the beginning of this chapter,reporting of corporate conduct is crucial for thecompanies that send out the reports and forthose who receive and utilize them. This holdstrue for financial and sustainability reportingalike. However, they differ in many respects.Financial reporting has a long history while sus-tainability reporting has been developed in thelast few years. The first kind concentrates exclu-sively on financial performance, is subject to acompulsory set of rules and regulations, andvaries substantially from country to country. Thesecond kind comprehends economic, environ-mental, and social performance, works on a vol-untary basis without legal enforcement, andresolutely aims at international harmonizationof standards.

Nevertheless, both kinds of reporting maylearn from each other. They serve parallel andessential functions that enrich each other, andthey may coordinate their processes, as GRI

encourages them to do. As early as 1993, CibaGeigy began to publish separate reports (financialreviews, corporate environmental reports,reports on social responsibility, and summaryreports). Ten years later, GRI listed several hun-dred companies, which, in varying degrees, usethe sustainability reporting system (SRG, 2002).From the recent turmoil in financial reporting,sustainability reporting can draw severallessons. Reporting needs ethics and cannotproperly function without a high level of trustbased on truthfulness and transparency. It mustbe supported by appropriate rules, corporategovernance and culture, and the moral commit-ment of the individuals involved in the reportingsystem. While GRI appears to be aware of theimportance of credibility, this crucial issue prob-ably needs even more emphasis because volun-tary reporting (as with laws) is no guarantee fortruthfulness. As financial reporting builds onthree pillars (the providers, the certifiers, and theusers of the reports, depending on their respec-tive responsibilities), sustainability reportingwith its identifiable contents should equally relyon such a system of checks and balances.Consequently, the provision of independentassurance (the equivalent of financial auditing)should be enhanced and the voices of the users(similar to the investor community) strength-ened. (Numerous attempts to enhance the voicesof consumers with social and environmentalconcerns have been made in recent years; see,for instance, CEP, 2000; Cortina, 2002.) As thehistory of financial reporting indicates, there is along way to go to set up a necessary infrastruc-ture that can make sustainability reporting reallysustainable.

What can financial reporting learn fromsustainability reporting? The broader perspec-tive of GRI and its multi-stakeholder approachcan raise the awareness of the risks and oppor-tunities that are relevant to financial reportingas well. The eleven reporting principles ofGRI (see Figure 8.1) may help to betterdefine the task and profile of financial reporting.Over time, financial performance measure-ment increasingly can benefit from the


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measurement of economic, environmental, andsocial performance. And the resolutely globalapproach of GRI may bring financial reportingcloser to common international standards andprocedures in order to pursue the overarchinggoal of sustainable development.

TOWARDS A NEW

CONCEPT OF THE COMPANY

The role of companies in the ethics of financialreporting and the Global Reporting Initiativeleads one to examine the concept of the companythat underlies and shapes corporate reporting.

With the broader focus on companies’ eco-nomic, environmental, and social performance,it seems that a kind of “conceptual crossroads”has been reached where two distinct concepts ofthe company are posed: the strictly hierarchicalconcept and the balanced concept of the firm(Enderle, 2002; Enderle & Tavis, 1998).

The strictly hierarchical concept states that thecompany has one purpose, namely to maximizeits economic objectives under the constraints oflaw and basic moral norms. Social and environ-mental activities and consequences are consid-ered mere means to achieve economic goals. It goeswithout saying that this concept goes beyond themodels of profit maximization and the maximiza-tion of shareholder value by providing corporateobjectives with rich economic content: the cre-ation of wealth and employment, the provision ofmarketable products and services to consumers ata reasonable price commensurate with quality,the making of profit, etc. Social and environmen-tal performances have no value in themselves butare instrumentalized in view of the economicends. In other words, they are pursued becauseand only because a “business case” can be madefor them. This implies that they are used as longas they contribute to achieving the economicgoals of the company, and they are dropped assoon as they fail to do so.

In contrast, the balanced concept of thefirm3 conceives of the company as a multipurpose

organization including not only economic butalso some social and environmental goals that areinterrelated in a circular way. Being a multipur-pose organization does not contradict the far-reaching disentanglement of social functions inmodern society in which business, government,and the civil sector have large degrees of relativeautonomy. Rather, it reflects the fact that businessorganizations are, willy-nilly, involved in other-than-economic spheres as well, in terms of bothactivities and consequences (or impact). In addi-tion to economic responsibilities, these involve-ments also entail social and environmentalresponsibilities. According to the balanced conceptof the firm, they should be clearly stated, alongwith economic responsibilities, not only as meansbut also as ends. In such a way, they provide long-term guidance and can motivate the company, itsleaders and its employees, to proactive behavior. Itshould be noted that the recognition of those per-formances as ends does not exclude their use asmeans. (See Sen’s discussion of human rights,which can and should be considered as ends andmeans as well; Sen, 1999, chaps. 2, 10).

The term responsibility points to the evalua-tive or normative-ethical question of corporatebehavior. It is suggested to use De George’sdistinction of minimal ethical requirements,positive obligations beyond the minimum, andaspirations for ethical ideals (De George, 1993,chap. 10) and apply it to the economic, social,and environmental realms. For instance, a mini-mal ethical requirement in the economic realmwould be to respect the life and rights of yourcompetitors. A positive obligation beyond theminimum in the social realm would consist inhelping the community in the company’s neigh-borhood affected by a natural disaster. It isnoteworthy that a company can be “ethical,” orbalance its economic, social, and environmentalresponsibilities in many different ways, providedthat it respects the minimal ethical requirementsin all three realms. It is confusing to talk about an“ethical” or “unethical” corporation without dis-tinguishing these three levels of ethical demand.

In order to further specify corporate responsi-bilities, it is proposed that one apply Amartya



Sen’s “capability approach” and his ethicalframework of a “goal-rights-system” to thebalanced concept of the firm (see Table 8.2;Sen, 1999). “Capabilities” or “real freedoms thatpeople enjoy” would be the ethical standards,applicable primarily to the minimal requirementswhile having a guiding function for social oblig-ations and ethical ideals. To illustrate, a minimalrequirement in the social realm might involve theopportunity to receive basic education. Thismight require corporate policy to support localschools and to ban child labor, and the economic

facility of having access to finance may inspirea local group to establish a micro-credit bank(for further elaboration, see Enderle, 2004a).

A further question is how to balance economic,social, and environmental responsibilities in dif-ferent business situations. The answer is twofold.Economic, social, and environmental perfor-mances of companies are closely interwoven andpartially overlap. When they overlap, the samebusiness strategy can achieve two (or more) kindsof outcome (or impact in GRI terms). “Hitting twobirds with one stone” by fulfilling, say, economic


Table 8.2 Specifying Corporate Responsibilities in Terms of Capabilities of Individuals

Responsibilitiesof the Company

Economicresponsibilities

Social responsibilities

Environmentalresponsibilities

Regarding allrelationships

Real Freedoms That People Enjoy (Amartya Sen)

Basic capabilities such as freedoms to satisfy hunger, to achieve sufficientnutrition, to obtain remedies for treatable illness; opportunities to be adequatelyclothed and sheltered, to enjoy clean water and sanitary facilities.

Economic facilities: Opportunities to utilize economic resources for the purposeof consumption, production, or exchange; economic entitlements dependent onthe resources owned or available for use as well as the conditions of exchange;distribution of entitlements; availability and access to finance.

Political freedoms, broadly conceived (including civil rights): Opportunity todetermine who should govern and on what principles; freedom to scrutinize andcriticize authorities; freedom of political expression and an uncensored press;freedom to choose between different political parties; freedom to enjoy localpeace and order; etc.

Social opportunities: Opportunities to receive basic education and health care inorder to live a long and healthy life and to better participate in economic andpolitical activities.

Environmental components involved in economic facilities, political freedoms,and social opportunities.

Transparency guarantees deal with the need for openness that people can expect:the freedom to deal with one another under guarantees of disclosure and lucidity(as basic requirements for trust).

Protective security is needed to provide a social safety net for preventing theaffected population from being reduced to abject misery, or even starvation anddeath (unemployment benefits, statutory income supplements, famine relief,emergency public employment, etc.).


and environmental responsibilities, a companycan achieve positive economic and environmentalconsequences at the same time without additionalcosts. This “win-win situation” occurs more oftenthan one might believe, but it requires entrepre-neurial imagination. Thus its opportunities shouldbe taken to the fullest extent possible, which isprobably the most important challenge of puttingbusiness ethics into practice.

More difficult to handle is the second situa-tion in which different types of responsibilitydiverge. One faces a trade-off, for instance,between a considerable improvement of environ-mental performance and a substantive increaseof costs. One has reached the “apex point,” afterwhich the increase in one kind of responsibilityis only possible with the decrease in another kindof responsibility (i.e., a “win-lose situation”). Heretwo steps are recommendable. First, the apexpoint should be moved to the “right” as far aspossible. This can be achieved by measures takenby companies (e.g., new technologies, training),industries (self-regulation), or governments (reg-ulation). Second, when the apex point cannot bemoved further, but the social or environmentalneed continues to exist, the costs for addressingthis need should be clearly stated and fairlyshared with other social actors.

To conclude, I have argued for the crucialimportance of truthful and trustworthy corpo-rate reporting, which is an essential interfacebetween business and society. Recent corporatescandals have showed that the ethics of finan-cial reporting should not be taken for granted.Rather, it needs keen attention on the side ofthe providers, certifiers, and users of reporting.Moreover, companies are more than financialentities, featuring broader economic, social,and environmental performances. But if thesedimensions don’t get measured, they don’t getmanaged. Hence corporate reporting shouldbe extended to sustainability reporting. Thiswidened perspective calls for a conception ofthe firm which has a broader than financialpurpose and balances its economic, social, andenvironmental responsibilities.

NOTES

1. Given the limited scope of this chapter, I referthe reader to several other writings in which I investi-gate these issues in more detail (Enderle, 2002, 2003,2004a, 2004b; Enderle & Tavis, 1998).

2. The Sustainability Guidelines characterize theconceptual difference between the traditional financialperformance and the economic performance as follows:“Broadly speaking, economic performance encom-passes all aspects of the organisation’s economic inter-actions, including the traditional measures used infinancial accounting, as well as intangible assets that donot systematically appear in financial statements.However, economic indicators as articulated in theGuidelines have a scope and purpose that extendsbeyond that of traditional financial indicators” (SRG,2002, p. 45).

3. The view of a “balanced concept of the firm” dif-fers from the various stakeholder concepts of the firm,which are increasingly discussed in management theoryand business ethics. While the former approach primar-ily focuses on the contents of ethically responsible cor-porate conduct, the latter concentrates on the groups ofpeople (“stakeholders”) who are affected by corporateconduct, to whom the firm is supposed to be responsibleor accountable, and with whom the contents of respon-sibilities may be negotiated. Yet by listening to, andnegotiating with, the stakeholders, the question aboutthe specific contents of corporate responsibilities is notanswered yet. In contrast, the balanced concept viewemphasizes the question of what the company ought todo in economic, social, and environmental terms. Byaddressing directly these different responsibilities, thepotential conflicts and overlaps in terms of contents canbe better captured than with the stakeholder approach; ifinterpreted in an elitist fashion, however, it may fail tolisten to the voices of the stakeholders. Therefore, itseems fair to say that both approaches are complemen-tary, though not contradictory.

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