Paper Outline
The main reasons why companies undertake social and environmental reporting
Drawbacks of social and environmental reporting to Rolls Royce
Recommendations
The main reasons why companies undertake social and environmental reporting
Companies undertake social and environmental reporting to inform their stakeholders about relevant issues about environment. The strategy of environmental reporting improves the relationship between the company and their stakeholders. Companies experience pressure from interest groups such as environmental groups, financial institutions, shareholders, consumer groups, local communities and other stakeholders. When companies provide environmental reports, they demonstrate their openness to their stakeholders. It is also an indication of the ability of the company towards strategic environmental management. Environmental reports address a large number of target groups. There are many stakeholders who use the environmental reports, and this helps communicate the agenda of protecting the environment by the use of the reports (Deegan, Rankin & Tobin, 2002).
Awareness about the need to have clean environments has increased and companies have been required to adhere to the provisions of improving the environment. The number of environmental interest groups has increased and this is crating more pressure to companies to maintain clean environments. This has created the need to provide environmental reports which indicate the companies’ effort to promote clean environments. Environmental reports show the extent to which companies have the responsibility of their activities to the environment (Gray, Owen & Adams, 1996).
Companies can use the social and environmental reports to obtain licenses to operate business. Since the reports show the attitude of the company towards protecting the environment, the government is convinced that the companies have a corporate social responsibility of improving the status of the communities. Governments put regulations to ensure that companies adhere to certain provisions. There are subsidies offered to companies which comply with the provisions. For example, governments regulate companies by requiring them to adhere to diversity, health and safety standards, and other environmental standards (Mattei, 2011).
It is a competition strategy that companies are using to capture the demand of customers for their products. In a competitive market place, companies seek to get strategic positions. This can only be achieved by establishing distinct values and ethical standards. Conducting CSR activities allows a company to improve consumer loyalty because the reports indicate the allocated funds for financing such activities. Ethical values of a company are illustrated in the reports provided to the general public. Therefore, the social and environmental reports provide brand identification of companies in the market, and this helps improve the competitiveness of a company in the market (Doane, 2002).
Risk management is done by the use of the environmental reports. By preparing these reports, the company is able to assess the risks that may be encountered when conducting business. The company accounts for all risks that are associated with environmental aspects. The social and environmental reports improve the reputation of the company for its dedication to manage risks. For example, companies which prepare their reports showing their efforts to managing corruption and other unethical practices, get a higher reputation rating in the market. Risks are well managed and in case they happen, the company is not adversely affected. This builds a culture of doing the rights things (Lindblom, 1994).
Social and environmental reporting improves human resources management strategies of an organization. The reputation of a company improves when it provides reports which indicate the responsibility of the company in improving the status of its employees. The reports also show how the company is dedicated to manage its human resources ion the future (Wood, 1991). This helps improve employee recruitment and retaining. There is an increase in competition among companies for skilled and professional workers in the labour market. Companies which provide reports indicating provisions for improving their employees attract more skilled and professional employees (Waddell, 2000). Potential employees inquire about the corporate social responsibility of a company so that they can determine the attached benefits of working with the company. The CSR also improves the performance of employees. A company which taps knowledge from skilled and professional employees is able to improve its innovative strategies. This will help improve the profits made by a company, as well as improving its competitiveness in the market (Guthrie & Parker, 1989).
It is evident from the reports of Rolls Royce Company that the profits have been improving upon improvement of employee remuneration. Using remuneration as a measure of social responsibility, the company has been able to improve on its returns after improving the welfare of its employees. For example, average remuneration per employee was $72,869 in 2006, $91,632 in 2007, 64,667 in 2008, $98,234 in 2009 and $102,185 in 2010. The corresponding turnover per employee was $191,850 in 2006, $192,617 in 2007, $232,872 in 2008, $270,494 in 2009 and $284,961 in 2010 (Rolls-Royce Group PLC, 2011). This shows an increasing trend of company turnover as the employee remuneration increases. The profits, shareholders funds and total assets of the company also increase accordingly. This indicates that when the welfare of the employees increases, the company gains increase (Spence & Gray, 2007).
Drawbacks of social and environmental reporting to Rolls Royce
Environmental reporting creates more costs to the company, and this reduces the profits made by the company. Small and medium size businesses find it costly to comply with the legal requirements of conducting social and environmental activities. The compliance costs are too high and this makes it possible for small companies to evade the process of environmental reporting (Deegan, Rankin & Tobin, 2002). Rolls Royce provides for these costs to ensure that it complies with the legal provisions. The profit margin of the company has been reducing over the years due to the compliance costs incurred. The profit margin was $19.44 in 2006, $9.86 in 2007, -$20.83 in 2008, $28.39 in 2009 and 6.33 in 2010. This shows a declining trend on the profits made by the company at the expense of creative social and environmental sustainability. On the other hand, the remuneration ratio has been increasing for the same period of time. Average remuneration per employee was $72,869 in 2006, $91,632 in 2007, 64,667 in 2008, $98,234 in 2009 and $102,185 in 2010. The corresponding turnover per employee was $191,850 in 2006, $192,617 in 2007, $232,872 in 2008, $270,494 in 2009 and $284,961 in 2010 (Rolls-Royce Group PLC, 2011). This shows an increasing trend of company turnover as the employee remuneration increases, while the profit margins decrease over the same period of time.
Social and environmental reporting process creates the “compliance mentality” to the companies involved. As such, companies prepare the environmental reports so that they can comply with the provisions imposed upon them, but not to conclude the reports based on the interest of the company. Companies apply survival tactics to overcome any policy that may drive them out of business (Suchman, 1995).
Various companies have been reported to be hypocritical and insincere when preparing their social and environmental reports. The strict measures that have been put in place are hard for most companies to adhere to, and it becomes impossible for some companies to comply with such standards without bending the laws. Some companies issue false reports so that they can improve their competitive levels in the market. It is a survival tactic that companies use when stiff competition prevails in the market (Post, Frederick, Lawrence & Weber, 1996).
Recommendations
Rolls Royce should use flexible reports to enhance compliance with any regulations that may be established. The reports have no provisions for any adjustments in case new regulations are imposed. The solvency ratio of 24.74 should be increased to ensure that the company enough assets to cover all the liabilities that may associated with maintaining CSR. The management should develop a flexible budget to help cater for any CSR needs that may develop between financial periods. Obtaining a higher solvency ratio is better because it will help cover all liabilities that may crop up in between the financial periods. The current solvency ratio is 24.74. On the other hand, the company should maintain the current shareholders ratio of 17.66. Increasing the ratio would reduce the profits generated by the company. Alternatively, decreasing the ratio would affect shareholders negatively.
The management should maintain the current employee average remuneration per employee ($59,897). Increasing the ratio will affect the profits made by the company. As the company aims at getting a higher employee satisfaction, it should maintain costs which are sustainable. Setting a higher remuneration for employees will create excess costs for the company, and this may affect the long term survival of the company in the market. The management should use other non-monetary motivational strategies to attract and recruit professional and skilled personnel. This will help improve the image of the company while maintaining the profitability and competitiveness of the company.
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