Ralph Estes is a professor of accounting at American University. He is one of a handful of accounting industry renegades who have made the case for corporate social accounting to prevent corporate crime. He is the author of Corporate Social Accounting and Accounting and Society, and is currently working on a new book, tentatively entitled Tyranny of the Bottom Line.
Multinational Monitor: What is your critique of accounting as it is practiced today?
Ralph Estes: In brief, the problem with accounting is that it is a biased scorekeeper. It does not account for the multiple objectives of a corporation. It accounts for only one of those objectives. It leaves out all the rest, and this pushes corporate mangers to perform against one major goal, when in fact the typical corporation exists to achieve several goals.
MM: It accounts for return to shareholders. What are the objectives it doesn't account for?
Estes: Each corporation will have an identified set of objectives. For some, it will be a small set, for others it will be fairly large. General Electric, for example, identifies about ten - one of which will be profitability to shareholders. The other ones might include: being a good employer, providing good products and services at a fair price, being a good citizen. [Yet] there is no accounting for any of these.
And there is no accounting above all for the major purpose for which the corporation exists. A corporation is not chartered by society to provide a return to stockholders. We allow that. But the reason we give corporations valuable charters is because we expect corporations to serve the public purpose, to do something good for society.
We have been diverted from our original understanding of the purpose of the corporation - I call it the perversion of the corporate purpose.
MM: How did the emphasis come to be on return to shareholders, when corporations have these other constituencies?
Estes: Like other major changes which occur over a long period of time in society, this perversion of corporate purpose occurred gradually, subtly and in a not very exciting fashion. When corporations were first chartered by Queen Elizabeth and her successors and then subsequently by the American colonies that became states, a public purpose was always stated in the charter and understood as the reason the corporation was granted special benefits. Along the way, investors invested, and they wanted an accounting for the investment.
As years went by, accountants kept on providing performance reports to the investors, but the state was not asking for a report on how well the corporation was producing for its public purpose. The employees were not asking for a report on how the corporation was performing with respect to employees. Consumers were not demanding an accounting from the corporation on how well it was performing for them. So we had a vacuum and the only thing filling that vacuum was the accounting report to stockholders - not to the other stakeholders.
Over the course of almost 300 years, we gradually turned from an understanding that the corporation is chartered to serve the public interest and the public purpose toward a belief that it exists to serve stockholders or the bottom line.
MM: Was it the failure of these other constituencies to demand a fair accounting, or was it instead the domination of shareholders in the process and their demand for an exclusive accounting?
Estes: I see no evidence in my research to indicate that shareholders had such a clear-cut goal. They just wanted an accounting for what they were putting into the company - a perfectly reasonable desire, since the shareholders, more than the other stakeholders, were often far removed from the geographical area of the operations on the corporation. By and large, the other stakeholders could observe what the corporation was doing.
MM: How would the new accounting system work?
Estes: A new accounting would be fairly simple in conception but not overly simple in initial execution. But then the accounting we have now is incredibly complex and very unsatisfactory, even in terms of its biased mission.
It would look pretty much like the accounting income statement we have now, with one column that shows the revenues - that's the good; the costs or expenses - that's the bad; and the net - the bottom line. It would include about four or five more columns, for employees, consumers, local communities and society at large. Each of these columns would show the goods that occur for these stakeholders, the bads and their bottom lines.
What will happen is that corporate managers, who now make the decisions in contemplation of how they will look on that one-dimensional bottom line, will have to think how these decisions will play out in the several columns. Being held accountable for the cost to the other stakeholders will affect their decisions.
Take the coal companies. Some 500 coal companies were cited by the Labor Department in early 1991 for doctoring their dust samples. They were condemning their workers to black lung disease, to painful illness and ultimately death, in order to save a few dollars on plant safety and dust filtering devices.
If the managers who made the decisions to falsify these dust samples had known that their annual report was not going to show simply revenues and expenses to stockholders, but was also going to show the benefits to workers in salaries and wages, experience and pensions and the costs to workers, including projected future costs of black lung disease resulting from their actions in tampering with these dust samples, then it is almost certain that their decisions would have been different.
MM: Isn't social accounting of that nature more complex than the current accounting system which involves just dollars and cents? How do you put a price on black lung disease, for example?
Estes: I've done it in court testimony dozens of times. It happens every day in the courts of every community of this country, as expert witnesses come in to assess the loss to workers and to the deceased in wrongful death and personal injury cases. So it's not nearly as difficult for people who are qualified and who have studied the area as it might appear to those who haven't.
But we do not need to go to dollars at the outset. Dollars will come. What we need is simply information. What we need is a reporting of the layoff record of a company in all jurisdictions over several years so that workers can make informed employment decisions. What we need is detailed reporting of statistics on hiring, placement and promotion of women and minorities, so that women and minorities contemplating moving from one firm to another can see what their chances are. What we need is a reporting of the pollution emissions, the toxic substances stored, the hazardous waste created in the community.
All of this information is more or less required to be collected by the corporation and much of it is required to be reported to various federal agencies, but it is often not accessible to the people who need to know it. And when it is, it is accessible at great effort and cost, often only through Freedom of Information inquiries.
MM: So this is a step-by-step process - first disclosure, and then later requirements to factor the other costs into corporate decisions?
Estes: You won't have to require them to factor them in. If it is in a publicly available annual report, where the public can hold the corporation accountable for what it has done, then the marketplace will do the regulating and the decisions will be different.
It is not hard to get from here to there. The first step is a very easy one. A corporation that wants to be accountable to its stakeholders, that wants to fairly account to its other stakeholders in addition to its stockholders, need start only by taking the information it presently must collect and must file with various federal agencies and put that out in a form that is accessible to all. Right now, workers are not allowed access to corporations' EEOC [Equal Employment Opportunity Commission] filings, for example, so that the people who are most affected by whether a corporation is discriminating cannot judge for themselves whether they are going into an environment that is discriminatory.
MM: It is not a secret that Du Pont produces chemicals that destroy the ozone layer. It's been reported in all the major media outlets. So what effect does it have if Du Pont reports what everyone knows?
Estes: It's kind of a phenomena of "What's today's news?" The coal companies, for example, were very much in the news in early 1991 and again in late 1991, when new indictments were released. [But] we may never hear any more about the coal companies.
What I'm talking about is every year, at corporate report time, the information comes out and anytime an individual, a worker, a city council member or a member of Congress wants to find out what the corporation is doing in these important areas, he or she can simply go to the corporate report. Right now, when a worker wants to find out what the employment environment with respect to discrimination is at Du Pont, they don't know where to go and they sure don't have the means to go back and research newspapers for the last several years to see if there has been any story reported on it.
Imagine this: the corporate reports for all the corporations in Philadelphia, for example, are released by March 31. These are filed with the Corporate Accountability Commission in Washington, but they are also filed with the clerk's office in cities in which the corporation does business, and with labor district offices and in the corporation's headquarters. The news media jumps on this just like they do the stockholders' report today. And on the nightly business report, we have a detailed comparison of the pollution of all of the large corporations located in Philadelphia, a comparison of what they are doing now and how they have changed over the last year. The media seeks interviews with the CEOs and the environmental protection officers of these corporations to explain [their performance].
Do you think that these people will be ignoring pollution in the next year? They would be making different decisions. The same would be true for safety issues and product liability issues - it would be a different and a more responsible corporate America. And in fact, it would be one that corporate managers would much rather work in, because it would free them to be as good as they want to be, instead of being bound now to the tyranny of the bottom line.
MM: If a member of Congress approached you and asked you to draft legislation to put into effect this new accounting, what would you propose?
Estes: We would rename the Securities and Exchange Commission the Corporate Accountability Commission. And we would require all companies meeting certain size requirements to file an annual corporate report. Initially this corporate report would contain the information presently included in the 10-K and the information presently being filed with other regulatory agencies - information that the corporation now gathers and information the corporation now reports. So, there would be no additional cost to the corporation.
Then, the Corporate Accountability Commission would hold hearings and conduct research to determine the information needs of the several stakeholder groups, including stockholders, who are not well served by the present system. It would undertake to identify the major information needs of workers - [information relating to] safety issues, toxic substance issues, layoff issues. It would undertake to identify the major information needs of consumers, of communities. And from all this, and over time, the Corporate Accountability Commission would establish more relevant reporting requirements.
Several years down the road, we would have a fairly comprehensive corporate report available to all stakeholders.
MM: You argue that in corporate America, we are not dealing with evil people but with a system that leads to evil results. But corporate executives realize this. They could act to move in a different direction, but they don't.
Estes: Some try to. And there are examples of companies trying to swim upstream against the tide, but that inexorable pressure of the bottom line keeps drawing them back, and as soon as the one CEO leaves, or as soon as times get a little bit hard, back they come to the same kind of behavior they were engaging in in the past. Yes, there are some very commendable efforts of corporations to serve the needs and the interests of the whole set of stakeholders, but they are fighting a pressure that almost nobody can stand up against for any long period of time.
The standards of that system say this: If you are faced with a question of closing a plant in Dodge City, Kansas that will put 5,000 people out of work and devastate a community, devastate a school system, devastate a police department, devastate the social fabric of that community, in order to move that plant to Juarez, Mexico to earn a .5 percent higher return on investment for the stockholders and a few pennies more in earnings per share, the system now says, "Hey, you've got to do it." You can feel sorry for Dodge City, but you've got to do it. And managers don't like to do that, but they do it.