Vanderbilt Law Review Volume 29 Issue 3 Issue 3 - Symposium: Financial Institutions, Municipal Finance, and Community Article 1 Development 4-1976 Progress in the Art of Social Accounting and Other Arguments for Disclosure on Corporate Social Responsibility Douglas M. Branson Follow this and additional works at: https://scholarship.law.vanderbilt.edu/vlr Part of the Law Commons Recommended Citation Douglas M. Branson, Progress in the Art of Social Accounting and Other Arguments for Disclosure on Corporate Social Responsibility, 29 Vanderbilt Law Review 539 (1976) Available at: https://scholarship.law.vanderbilt.edu/vlr/vol29/iss3/1 This Article is brought to you for free and open access by Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law Review by an authorized editor of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. VANDERBILT LAW REVIEW VOLUME 29 APRIL 1976 NUMBER 3 Progress in the Art of Social Accounting and Other Arguments for Disclosure on Corporate Social Responsibility* Douglas M. Branson** TABLE OF CONTENTS Page I. AN INTRODUCTION TO SOCIAL ACCOUNTING ............ 546 II. AN INVENTORY OF TYPES OF SOCIAL AUDITS ........... 551 A. The Process Audit ............................ 551 B. The Complete Audit .......................... 560 C. The Complete Audit - Another Approach ...... 562 D. The Super Social Audit ........................ 566 III. PRESENT PROSPECTS AND RECOMMENDATIONS FOR FUR- THER PROGRESS IN SOCIAL ACCOUNTING ............... 574 IV. PROGRESS IN THE ART OF SOCIAL ACCOUNTING - A FIRST ARGUMENT FOR DISCLOSURE ......................... 580 V. INCONGRUITIES IN THE PRESENT DISCLOSURE SYSTEM - ANOTHER ARGUMENT FOR DISCLOSURE ................ 582 A. The Purposes of Disclosure - In General ........ 582 B. Utility in the Investment Process - An Argument for Disclosure on Social Responsibility .......... 585 (1) Introduction ............................... 585 (2) Evidence of Investor Interest in Social Responsi- bility Disclosure ........................... 587 (3) Individual Investor Attitudes ............... 592 C. Parity as a Goal of Disclosure - Presentationof a Well-Rounded Picture of the Firm .............. 604 * The author wishes to thank Professor Ernest L. Folk, III,of the University of Virginia School of Law for reading and commenting on an earlier draft of this article. ** Assistant Professor of Law, University of Puget Sound. B.A., University of Notre Dame, 1965; J.D., Northwestern University, 1970; LL.M., University of Virginia, 1974. VANDERBILT LAW REVIEW [Vol. 29:539 (1) Expanding Financial Accounting Requirements ............ ......... ....... .............. 604 (2) Expanding Financial Disclosure Requirements 606 (3) Expanded Accessibility to and Dissemination of Financial Information ...................... 609 D. Another ParityAs a Goal of Disclosure - Equality of Access to Information for Investors or Categories of Investors ..................... ............. 617 E. A Third Parity as a Goal of Disclosure- Equivalent Amounts of Information Available About Different Corporations and Classes of Corporations ........ 621 F. A TraditionalPurpose of Disclosure- Preventionof Fraud and Forced Revelation of Risk ............ 624 VI. THE PRESENT POSITION AND ATITUDE OF THE SECURITIES AND EXCHANGE COMMISSION ........................ 627 A . Introduction .................................. 627 B. Formal Action by the SEC ..................... 629 C. The Revolution on the Theory of the Corporation 639 VII. A COST-BENEFIT ANALYSIS FROM NONINVESTOR POINTS OF V IEW ............................................ 648 A. Introduction .................................. 648 B. Benefits Social Accounting and Disclosure Might Bestow .................................. 649 (1) Uniformity, Comparability, and Resulting Ben- efits ...................................... 649 (2) More Efficient Allocation of Corporate Re- sources Devoted to Social Responsibility ..... 651 (3) Relief of Corporate Social Performances from M isguided Attacks ......................... 653 (4) Relief from Some Shareholder Proxy Proposals and the Waste of Corporate and Governmental Resources They Entail ..................... 655 (5) Relief from Public Relations Drivel Now Substi- tuting for Controlled Disclosures ............ 657 (6) Social Accounting and Disclosure as the Most Efficient Use of Governmental Resources ..... 658 (a) Federal Chartering ..................... 659 (b) Federal Corporate Uniformity Statutes ... 662 (c) Installation of Public Interest Directors ... 664 (d) Liberalized Shareholder Proxy Proposal R ule .................................. 666 19761 SOCIAL ACCOUNTING (e) One-Person-One-Vote Restructuring ...... 667 (f) Nationalization ......................... 668 (7) Accounting and Disclosure as the Most Politi- cally Feasible of Reforms ................... 668 (8) Disclosure as a Means of Forcing Social Ac- counting's Development .................... 669 (9) Disclosure Will Make Further Reform Less Ab- rupt and Better Considered ................. 670 C. Costs Social Accounting and Disclosure Might Im pose ....................................... 670 (1) The Information Social Accounting Could Pro- vide Would Be of a Soft, Speculative Variety . 670 (2) Social Responsibility Is a Moving Target, and Costs Will Be Incurred in Hitting a New Target Each Year ................................ 672 (3) Compiling Data on Corporate Social Perform- ance W ill Be Costly ........................ 673 (4) Image Costs to Corporations Will Arise When Disclosure Forces Revelation of Negative Items or Lack of Progress on Certain Social Fronts .. 674 (5) An Excursion into the Socioeconomic Arena Will Cause Loss of the SEC's Non-Controversial Status, and, Therefore, Its Effectiveness ..... 676 VIII. A MODEST PROPOSAL - REQUIRED DISCLOSURE OF PRO- CESS AUDIT RESULTS .. .............................. 678 IX. CONCLUSION ........................................ 682 Would you tell me please which way I ought to go from here? That depends a good deal on where you want to go. -The Cheshire Cat to Alice in Wonderland. In the area of corporate social responsibility, where to go and how to get there are major questions facing corpora- tions, their lawyers, investors, and governmental agencies alike.' Questions of "where to go" facing corporate execu- 1. See, e.g., R. BAUER & D. FENN, THE CORPORATE SOCIAL AUDrr 3 (1972), reviewing "rhetoric from businessmen and public officials alike" calling on "corporate management to solve the problems of Urban America once and for all" and the confusion that has resulted: Ralph Nader, consumerism, ecology, Africa, misleading advertising, Campaign GM, student and church criticism all tumbled over one another seeking attention to the point VANDERBILT LAW REVIEW [Vol. 29:539 tives and others include how much corporate social respon- sibility is enough 2 and what forms social responsibility should take. Other questions concern which of the socially responsible measures corporations could take portend the greatest good for the greatest number, or on the more prag- matic scale, which measures will win the greatest amount of public or governmental acceptance. What roles govern- ment, citizen groups, or investors should play in inducing or in monitoring corporate social responsibility are questions of "how to get there."' 3 Much debated and often where the businessman of the seventies is caught up in a confusing turbulence of de- mands and charges and concerns, all marching under the umbrella of "social responsibil- ity." On the quandary facing institutional investors over how to inject corporate responsibility into the investment selection process see B. LONGSTRErH & H. ROSENBLOOM, CORPORATE SOCIAL RESPONSIBILITY AND THE INSTITUTIONAL INVESTOR 41-70 (1973). For a description of similar problems facing not-for-profit institutional investors, J. SIMON, C. POWERS & J. GUNNEMAN, THE ETHICAL INVESTOR (1972) [hereinafter cited as THE ETICAL INVESTOR]. See also auth- orities cited note 4 infra. 2. This article presumes that corporations do have responsibilities over and above pro- viding goods and services to meet demand and beyond maximizing profits for the benefit of stockholders. Most scholars who have addressed the question now agree that corporations do have such a responsibility. See, e.g., notes 176-88 infra and accompanying text. There are, however, a few who believe that any corporation attempting to fulfill social responsibilities is, indeed, an Alice in Wonderland. The most notable of these is Professor Milton Friedman, who states: Most of the talk has been utter hogwash . .[Tihe question is, do corporate execu- tives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no, they do not. McClaughry, Milton FriedmanResponds, Bus. & Soc'y REv. 5, 6 (Spring 1972). See also M. FRIEDMAN, AN ECONOMIST'S PROTEST 147 (1972) (remarking that corporate social responsibility is "pure and unadulterated socialism"); Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. Times, Sept. 13, 1970, § 6, at 32 (corporate responsibility "could thoroughly undermine the very foundations of our free society" and "is a fundamentally subversive doctrine"). The other notable devotee of profit maximization as the corporation's sole goal is Professor Henry G. Manne. See, e.g., Manne, FinancialIntermediaries and Corpo- rate