Accounting for Social and Environmental Impact

The New Entrepreneurial Leader  highlights the questions that arise when leaders begin to integrate social, environmental, and economic value creation (which we will refer to as SEERS). Here are two examples:

In the 1990s, when managers at Hewlett-Packard (HP) recognized that the soldering lead used in the company’s manufacturing process was toxic, they voluntarily initiated R&D projects to develop nontoxic, nontarnishing, and nonoxidizing alternatives. In 2006, when the European Union passed the Restriction of Hazardous Substances Directive, HP was in compliance; this earned good will from regulators that resulted in a voice in future regulation of the industry, and it opened European markets for new services from HP (see here for more).

 Here’s another real-world example: In 2004, Costco Wholesale beat Wall Street’s expectations, posting a 25 percent profit and 14 percent sales growth. The market responded with a 4 percent decline in Costco’s stock price because analysts were concerned about Costco’s strategy of paying high wages relative to its competitor, Wal-Mart. Costco paid its workers well and achieved lower employee turnover, higher sales per square foot, and lower wages per dollar of sales than Wal-Mart did, yet Wall Street didn’t appreciate Costco’s human resource strategy and failed to reward it for its socially and economically responsible approach to employee compensation (see here for more).

 Why did these companies, both of which embarked on voluntary social and environmental activities, experience different reactions to their laudable efforts? It is because the links among these three components are not always direct. Social and environmental sustainability may yield economic sustainability, but there is no straight line connecting social and environmental efforts to cost savings, higher profitability, or favorable stock market responses, as the Costco story illustrates.


With this in mind, my discussion with Bob Turner aims to offer business leaders a better sense of the practical role accounting can (and can’t) play in organizations eager to pursue a more comprehensive approach to value creation, one that includes more than simply economic profit and loss.