We have something called Right to Information Act (RTI Act). This law fosters transparency and accountability in public institutions and institutions receiving sufficient government funding. RTI has proved to be a game changer ever since it has come into being. 2G scam was unveiled by RTI and so have many other scams. The attack on various RTI activists across India has proved that it has been a menace for the corrupt. However this law doesn't cover private bodies or large companies that affect resources of the nation, society, economy and environment. Eg: A mining company in a tribal area has to take into account how the operations affect the tribals and the biodiversity. Even the small shareholders do not have access to most of the information in a private company which they should be entitled to – as they hold a ownership right. Putting it precisely – any stakeholder should have access to relevant information whether it be a private organization or a public organization.
Non-financial accounting or social accounting is one such tool. Social accounting is the process of communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at large. A company does report its performance annually in the annual report but it does not cover the environmental and social costs. Even if it does in some cases it is just a lip service. Why does it need to account for social and environment costs? A mining company’s unfair practices vis-a vis the locals contributes to Naxalism. A manufacturing industry’s release of harmful gases and toxic material leads to climate change and subsequent implications like – temperature rise, rise of sea level, biodiversity loss etc. USA bailed out big banks during the sub-prime crises, a pit that the bankers dig for themselves. Why did the government bail out the banks if it was their fault? Because the failure of banks could have lead to numerous job losses – huge social impact. After the government bailed out the banks and they came back to their ways, they paid hefty bonuses to the CEOs. No learnings still !
From a shareholders point of view, what matters is only profit. Why should they worry about the non financial reporting? Because the information in non-financial reports contributes to building up a company's risk profile. And although it has still not been convincingly demonstrated that good environmental and social practices create value for shareholders, it is clear that bad ones can destroy it (-George Dallas, Standard & Poor’s). Exxon's attitude to the oil spillage from the Exxon Valdez drove customers away from its pumps. Satyam's image took a beating across the board.
Further from a shareholder’s point of view, especially the small shareholders and retail investors there needs to be a framework similar to RTI. Why? Because they hold ownership rights in the company (A share is a ownership right). The major decisions are taken by the board members which consists of majority shareholders. Suppose there are 10 gentlemen who form the board holding 75% shares, rest are retail investors. There may be a nexus among these 10 gentlemen and they may agree to unfair accounting practice whereby they inflate the cost to report lesser profit and in turn lesser taxes to the government and lesser dividends to the retail investors while filling up their pockets. Another implication would be the black money generated because of the cost inflation. A good example is the recent report of CAG on Reliance petroleum operations in the KG basin where it highlighted gold plating of costs.
There are certain safeguards like environmental impact assessment (EIA) and Companies Act but they have proved futile (numerous examples mentioned above). There needs to be a comprehensive mechanism through which the above mentioned issues are addressed. Enough of privacy!
