Mr. Linowes, a 55-year-old partner in Laventhol Krekstein Horwath & Horwath, says: "When you reach my age and you've done fairly well financially, you begin examining what the world is all about. And if you have a practical background like I do, you look for specific ways of making an impact on our seemingly overwhelming problems." That's what has caused Mr. Linowes to seek a way to measure the "socioeconomic" performance of individual businesses. If he has his way-and he is regarded by his profession as the father of socio-economic accounting every company will one day publish a socio-economic operating statement. "As I see it, it will be as common as the profit-and-loss statement and the balance sheet," he says. "It will undoubtedly be on file wih a government regulatory agency and it should be a part of every company's annual report." Mr. Linowes was asked to be more specific. The statement, he said, would reflect both action and inaction on the part of corporations. A company would get recognition for substituting lead-free paint for a poisonous compound, for voluntarily installing smoke-control equipment and for a minority hiring program. And the company would get demerits for neglecting to install a safety device on its power lathes, for refusing to properly landscape strip mining sites and for neglecting to neutralize poisonous wastes before dumping them into streams. Every company would be required to have an internal interdisciplinary committee headed by an accountant to make these determinations, Mr. Linowes said. Mr. Linowes, who plays tennis indoors when he can't play golf outdoors, was asked what too many demerits would mean to the company. "My emphasis is on the other end of the scale," he replied. "The company that took its social responsibilities seriously would get tax deductions. My plan-and I emphasize that I have no formal organization behind me-would be to convince the Government to allow deductions for expenditures in excess of 1 per cent of net worth. "Thus, a steel company that voluntarily installed unusually efficient equipment to eliminate smokestack emissions might benefit as follows: If static precipitators cost one million dollars and the company's net worth was $40-million, it would get to deduct $600,000 for the installation. This would be in addition to normal depreciation allowances and all other allowable credits." We asked him why he was pushing for something that might be regarded as visionary. He said: "It isn't visionary at all. Our society is in trouble. The most productive segment of our society is industry. If we don't get industry to apply its capabilities to this most pressing problem, it will never be solved. "Either we adopt some logical approach like this or aggressive consumer groups and government will force us to do something extreme." We asked Mr. Linowes if he is frightened by the figures often tossed around about the cost of preserving the quality of life. Some estimates range into the hundreds of billions of dollars. "I'm frightened about the general condition of our society and fear we may lose our basic free enterprise system," he declared. "The costs may be as high as the pessimists say, but we are talking about a trillion-dollar economy and we can afford it." What about foreign competitors? If they do nothing, how do we compete? "The other countries face the same problem," he replied. "Witness the face masks on the streets of Tokyo. In Greece the beautiful harbor of Piraeus is becoming polluted." What would a plan such as Mr. Linowes's mean to corporate profits? "We have to recognize that business today is no mere profit mill," he said. "It must take its share of the responsibility to society. Remember that the marginal company wouldn't be forced to spend anything. It simply wouldn't get the deduc tion, but it would have to pay the price of visibility." (c) Speech by David F. Linowes, "Measuring Social Programs in Business-A Social Audit Proposal for Immediate Implementation," Apr. 28, 1972 (c) Speech by David F. Linowes, "Measuring Social Programs in MEASURING SOCIAL PROGRAMS IN BUSINESS A Social Audit Proposal for Immediate Implementation International Partner Laventhol Krekstein Horwath & Horwath New York, New York Adjunct Professor of Management New York University For Delivery To American Accounting Association 24th Annual Meeting Southeast Region Louisiana State University Baton Rouge, Louisiana April 28, 1972 MEASURING SOCIAL PROGRAMS IN BUSINESS A Social Audit Proposal for Immediate Implementation by David F. Linowes So The worst present-day corporate abusers of the environment and of humanity look best on their current profit and loss statements. phisticated analysts have always been aware that those managements which neglect their machinery and equipment and do not make expenditures to train junior executives, often show a higher earnings picture during the short term than is justified. In time, of course, this neglect of equipment and executive personnel training takes its toll in the operating effectiveness of the company. In the same way, business management can show good operating profit results by ignoring the harm it is doing by dumping poisonous production waste into streams or polluting the atmosphere. - In our present system or include in any statement of business reporting, we do not measure of its stewardship prepared by management the damage done to a stream when the poisonous pollutants are dumped into it, or to the landscape when the land is scarred and mutilated by machine-efficient strip mining techniques. Nor do we give proper reporting credit for the "good" that management does. Society will no longer condone avoiding accountability for these pro and con social actions. Challenges to the role of business have become so widespread that the business executive can no longer look to dollar profit measurement alone as an adequate reflection of his effectiveness. Because of the expanding exposure of business to the various facets of society, the traditional measurement of profitability and growth reflected both in the profit loss statement and balance sheet are no longer adequate. Business management today is functioning in a new environment and is being forced to assume its share of society's problems. 2 Those relatively few companies which undertake actions benefiting society are necessarily incurring costs for such activity, and are now beginning to recognize that it is unfair for them to be "penalized" on their profit and loss statements for such wholesome activity. Costs of hiring and training hard core unemployables, making executives available to assist ghetto entrepreneurs, and incurring extra costs in neutralizing poisonous waste before being dumped into streams presently serve to reflect negatively on progressive management because they are charged as expenses against its operations. On the other hand, for a management that refuses to assume any responsibility for the problems of society and carelessly continues to pollute the environment, its operations look better under today's system of reporting because it is not being charged with these extra costs. This state of affairs cannot continue. A means must be found for properly reflecting all facets of a management's efforts. Measurement of social programs is being demanded. Some academicians may argue that before we seek to implement social program reporting, we first should define what we mean by social action or non-action. Sometimes social programs are difficult to define. That does not mean we should not deal with them. For as Justice Potter Steward said of obscenity, "I can't define obscenity but I know it when I see it." In the same way, we need not necessarily wait until we clearly define a social action or non-action, for I believe we know it when we see it. The accountant (who is the measurement expert), the business executive, and the social scientist together should immediately initiate action to develop and adopt a usable measuring and reporting device for social programs in business, which is, after all the most productive segment of our society. Meanwhile, even now many socially helpful pro 3 grams can be made quantifiable for measurement and for visibility. Much is being said of the need for the measurement of social programs, but the observations run all over the horizon. The biggest mistake we can make at this juncture is to try to design techniques which will fully satisfy all dimensions. It may be years before we can invent and use social measurement with the confidence and relative precisions with which we use economic and fiscal measurements in business and government. But we do have enough standards available in social areas so that we can begin now. I should add, however, that considering the softness of much of the economic and fiscal data used today, as well as how this data is often misused, I venture to say that the results of social measurements with all their present limitations can be just as effective as economic measurements. What we can do at once is to borrow from economics and apply the "system" of economic and fiscal measurement to social areas. This I call Socio-Economic Measurement. Dollars involving social costs incurred by business are clearly determinable. The fact that a statement prepared of these costs may not be complete is not sufficient reason for us to delay further the preparation and use of such exhibits. Traditional financial statements never have been able to fully reflect significant facets of business affairs e.g., value of trained manpower, extent of provision for executive succession, potential profitability of new inventions and product development, contingent liabilities which include potential adverse legal actions for faulty products, etc. Here I present a suggested beginning. It is in the form of what I call a Socio-Economic Operating Statement (SEOS). |