Accounting, Organizations and Society 30 (2005) 519536 www.elsevier.

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A full cost environmental accounting experiment

Kathleen Herbohn
*
School of Business, The University of Queensland, St Lucia, Brisbane, QLD 4072, Australia

Abstract A lack of appropriate measurement techniques has constrained full cost environmental accounting (FCEA) experimentation. Yet, there has been little research on the applicability of valuation techniques recently developed by environmental economists within FCEA frameworks. This paper examines a reporting experiment using these valuation techniques that was undertaken by an Australian Government Department managing publicly owned forests. The FCEA experiment was ultimately not successful. However, the implementation experiences of the Department including the reactions of its managers and stakeholders provide an opportunity to critically reect on the experimental outcomes to extend the current empirical knowledge of corporate social responsibility reporting. Such critical reection has not been common in past FCEA experimentation. 2005 Elsevier Ltd. All rights reserved.

Introduction This paper provides an account of a full cost environmental accounting experiment. The experiment is based on a damage cost reporting system in which net prot is adjusted for positive and negative estimates of environmental externalities using valuation techniques from environmental economics. A case study was drawn from the Australian public forest sector to test the feasibility of such a reporting system. The case organisation controls publicly owned State Forest and Timber reserves under multiple use management within a
*

Tel.: +61 7 3365 6581; fax: +61 7 3365 6788. E-mail address: k.herbohn@business.uq.edu.au

politically sensitive environment. As a consequence, the organisation asked to remain anonymous, and is referred to hereafter by the ctitious name of the Department of Forest Management (DOFM). The perspective of the reporting experiment is one of economic rationalist reformation. That is, accountants have the capacity to make a positive contribution to the ecological debate, by reforming accounting and reporting systems to take account of environmental and social externalities (Bebbington & Gray, 2001; Owen, 1992). Full cost reporting systems are an attempt to reform current accounting practice, since at their simplest, they allow current accounting and economic numbers to incorporate all potential/actual costs and

0361-3682/$ - see front matter 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2005.01.001

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benets including environmental (and perhaps social) externalities (Bebbington, Gray, Hibbitt, & Kirk, 2001, p. 8). A largely unconsidered pool of measurement techniques has been developed by environmental economists to estimate non-market values of externalities. These include but are not limited to the contingent valuation method, the travel cost method, benets transfer, doseresponse models, hedonic pricing models and choice-modelling. These valuation techniques have been used in several high prole natural resource cases such as the Exxon Valdez oil spill in the USA,1 and Coronation Hill (Kakadu) in Australia.2 Despite preliminary discussion of the applicability of non-market valuation techniques by accountants, (e.g. Burritt & Cummings, 1998; Deegan, 1998; Herbohn, 2000; Herbohn, Harrison, & Herbohn, 2000; Milne, 1991; Palmer, 1998; Peace, 1997), to date little practical accounting experimentation has been attempted. Accordingly, this study investigates the feasibility of incorporating estimates of environmental externalities, derived using techniques from environmental economics, into a full cost environmental reporting system. The public sector forest management organisation, the DOFM, is the focus of investigation, and the valuation methods considered include the choice modelling and benets transfer methods. Three underlying research questions are addressed. They are: (1) issues with the implementation itself; (2) the reactions of managers to the eort; and (3) the reactions of stakeholders to reporting nonmarket values of environmental externalities.

There have been a limited number of past attempts at full cost environmental reporting. The approaches have been varied and include maintenance cost, asset valuation and damage cost reporting systems. Maintenance cost approaches focus on the maintenance of natural capital3 and have been used in the Net Value Added experiment (19901994) of BSO/Dutch Origin, and the Sustainable Cost experiments of Landcare Research New Zealand (Bebbington & Tan, 1996, 1997) and Interface Europe (Howes, 2000). Asset valuation approaches focus on valuation of environmental assets and changes therein, as was the case with the Supplementary Economic Accounts experiment (19951998) of Earth Sanctuaries. Finally, damage cost systems are concerned with estimates of external environmental costs from an organisations operations. The Full Cost Environmental Accounting project of the Canadian power utility, Ontario Hydro, adopted this approach (ICF, 1996)4 and it is also used in the DOFM case study reported in this paper. Unfortunately, the limited case study evidence from prior full cost environmental accounting experiments suggests reporting objectives often are not met due to both practical implementation problems and resistance from managers. Documented practical implementation issues include data availability, additivity of measurement units, incomplete account of impacts, reliability and suitability of estimates, and unintended uses of the environmental and social information by manageThe concept of natural capital is drawn from the work of environmental economists such as Pearce, Markandya, and Barbier (1989). In brief, the capital available to humanity is considered to fall into three categories critical natural capital, other natural capital and man-made capital. The underlying assumption is that critical natural capital must not be consumed and reductions in other natural capital must be substituted for, replaced or renewed in order for sustainability to be achieved. 4 Over a 20-year period, Ontario Hydro developed a damage function methodology for monetising external impacts and costs for its fossil and nuclear electricity generation systems such as human health and mortality. The organisation attempted to use the estimates for internal decision-making and investigated the possibility of external full cost environmental reporting. However, the reporting experiment lost signicant impetus with the departure of a key manager (Bebbington, 1998).
3

Law suits were launched by the US Federal Government and the Alaskan State Government against the Exxon Corporation for recovery of damages to the natural resources aected by spilled oil, following the grounding of the Exxon Valdez oil tanker in Prince William Sound, Alaska in 1989. Under US Superfunds legislation, trustees were permitted to sue for loss of use and non-use values, which the Department of the Interior allowed to be estimated using an environmental economic valuation technique. 2 The Australian Federal Government commissioned a cost benet analysis of the environmental costs expected from a mining venture at Coronation Hill in Kakadu. The contingent valuation method was used.

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ment (Bebbington & Gray, 2001; Bebbington & Tan, 1996, 1997; Dey, 2000; Dey, Evans, & Gray, 1995; Larringa & Bebbington, 2001). Tensions between the business as usual constraints of managers and the environmental sustainability agendas of researchers has led to the documented resistance by managers to full cost reporting systems (Bebbington & Gray, 2001). Few researchers have however, systematically reected upon their reporting experiences to identify the implementation issues and manager reactions that inuenced the outcomes of their reporting experimentation.5 This study provides a critical reection on the implementation issues experienced in the DOFM full cost environmental reporting experiment, and how they were inuenced by the reactions of managers to the eort. In addition, the DOFM case provides the unique opportunity to balance this evidence against the reporting outcomes evaluated by external stakeholders. The DOFM case study is reported in this paper as follows. Discussion of the case organisation and full cost environmental reporting framework is contained in the Section Full cost environmental accounting and the department of forest management. The study design and method is described in the Section Study design and method, the case evidence and discussion of results is contained in Sections Case evidence and Discussion of case study evidence, and some concluding comments follow.

Full cost environmental accounting and the department of forest management Case study setting The Australian public forest sector was selected as the source for this case study because it has a high environmental prole combined with politically active stakeholder groups that have an interest in the environmental consequences of forest management. Previous research demonstrates
The one exception is the insightful, critical reection of Bebbington and Gray (2001) on the Sustainable Cost experiment by Landcare Research New Zealand.
5

that the more environmentally sensitive an organisations industry, the greater the incentive to undertake environmental reporting (e.g. Cowen, Ferreri, & Parker, 1987; Deegan & Gordon, 1996; Dierkes & Preston, 1977; Patten, 1991, 1992). The environmental sensitivity of the Australian public forest sector is the result of several decades of bitter public policy debates over forest use between Federal and State Governments, conservationists and the timber industry (Herbohn & Herbohn, 1999).6 The end result is that environmental lobby groups in Australia perceive that the timber products industry is amongst the top 10 environmentally sensitive industries (Deegan & Gordon, 1996). At the same time, conservationist groups within the public forest sector enjoy signicant political inuence. Their political activities over the last decade have resulted in large tracts of native forest being withdrawn from timber production, with extensive dialogue now occurring via the Regional Forest Agreement Process7 about how forests should be managed (Frawley, 1988). Within this politically sensitive environment, the Department of Forest Management (DOFM) manages publicly owned State forests and Timber Reserves for multiple forest uses including preservation of sites of indigenous cultural signicance, eco-tourism, forest products, military training, nature conservation, outdoor recreation and research, outdoor recreation scenic qualities, and maintenance of water quality and quantity. The Department has legislated responsibilities for managing forests to accommodate evolving Native Title legislation, the RFA process, and ecologically

Two examples include struggles between Government, conservation groups and the timber industry in relation to the Franklin River Dam in Tasmania, and the World Heritage Listing of large tracts of rainforest in north Queensland. 7 The Regional Forest Agreement (RFA) process has been instigated in each Australian state as part of the National Forest Policy (1992). As part of this process, RFAs are negotiated for regions within each state to provide an adequate and representative forest reserve system for the ecologically sustainable management of forested areas, and for the longterm stability of forests and forest industries.

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sustainable forest management.8 Sustainable forest management is to be monitored via the international Montreal Agreement (1995),9 which establishes key criteria and indicators. The criteria cover biological diversity, productive capacity, ecosystem health and vitality, soil and water resources, global carbon cycles, socio-economic benets, and an eective legal, institutional and economic framework. The full cost environmental reporting experiment at the DOFM was initiated by this researcher, in conjunction with two middle managers from the Department. Initial discussions revealed the Departments interest in valuation of environmental externalities, and potential uses of this information. This interest had arisen because managers perceived that the Department was subject to increasing legislative, funding and political pressures to demonstrate and communicate the outcomes from its management of State forests for multiple uses. Ultimately, the middle managers and the researcher developed a proposal to use economic valuations of environmental externalities within a full cost environmental reporting system. Approval to proceed with the experiment was subsequently received from the Departments senior management. The development of the reporting framework is outlined below in Sections Fit within the organisational reporting framework and Damage cost reporting. Fit within the organisational reporting framework A decision analysis system, hereafter referred to as the Forest Use Planning (FUP) system,10 pro8 In this context, sustainable forest management involves integrating commercial and non-commercial values of forests so that the welfare of society (both material and non-material) is improved, while ensuring that the values of forests, both as a resource for commercial use and for conservation, are not lost or degraded for current and future generations (EGCRA, 1996). 9 A group of 12 countries including Australia that together contain more than 90% of the worlds temperate and boreal forests participated in the Montreal Process and became signatories to the Montreal Agreement (1995). 10 The actual name of the decision support system has been altered to preserve the anonymity of the case study organisation.

vided the framework for the full cost reporting experimentation. The FUP system was designed to assist with the management of competing forest uses within regions of the State while attaining the goal of sustainable forest management. It comprised eight phases, the fth of which was relevant to the full cost environmental reporting experiment.11 This phase involved preparing an inventory of the current and potential benets from regional forest resources that included economic valuations of environmental externalities. An economic valuation project was established to gather these economic values, and two managers were assigned to the project.12 At the commencement of the eld research, managers from the economic valuation project identied three potential avenues for valuation of environmental externalities. The rst was to volunteer the DOFM as a data source for choice modeling studies conducted by students from local universities.13 A second was to seek external funding for multiple choice-modeling studies of the State forest resource. To this end, sta from the DOFM, another government department and two universities were participating in a competitive

11 Phases one to four centred on dening the boundaries of a region and the forest resource, ascertaining community values and developing a strategy for consultation with key stakeholders on forest usage. The later phases, six to eight, involved preparing, ratifying and communicating a draft plan for use and management of the forest resource in question. 12 One manager was an economist with post-graduate qualications in environmental economic valuation techniques and the other had an economics background and was pursuing postgraduate studies in the valuation of environmental externalities from natural resource management. 13 In a choice modeling study, respondents are asked to choose between dierent bundles of environmental goods, which are described in terms of their attributes and the levels that these take. Varying the levels of attributes gives rise to a range of options that comprise the choice set. Respondents choices are statistically analysed to determine the impact of each attribute and a willingness-to-pay measure of value is estimated (Bennett, 1996). At the commencement of data collection, one study had already been completed which focused on the value of landscape, conservation, wood and honey uses of the State forest resource.

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national joint industry and university research grant application. A third source was the benets transfer method. Existing estimates of externalities at one site that had been estimated from choice modeling studies would be used as a surrogate for a similar change elsewhere (Kirchio, Colby, & LaFrance, 1997; Pearce & Moran, 1994). Damage cost reporting After some discussion between the two middle managers from the DOFM and the researcher, a damage cost approach was selected for the DOFM reporting experiment as being most compatible with non-market valuation techniques from environmental economics. The damage cost approach centres on deriving estimates of external environmental costs owing from an organisations operations. The externalities have been likened to non-monetary infusions of natural capital into an organisation that are provided by the environment (Boone & Rubenstein, 1997), and the damage cost estimates are deducted from net prot. The choice modelling and benets transfer valuation methods would be used to provide estimates of the DOFMs positive and negative environmental impacts to be incorporated into the conventional net prot gure. For example, the Departments forest management results in positive environmental externalities such as improvements in scenic qualities, improvements in water quality, increases in bio-diversity, and the provision of opportunities for outdoor education and research. Negative externalities include the value of alternate forest uses that are lost such as the opportunity for outdoor recreation in areas of cultural heritage signicance. The rationale of the damage cost approach is essentially pragmatic. The reection of environmental damage costs in conventional accounting performance measures motivates managers and stakeholders to factor these impacts into their decisions. This was consistent with the pragmatic aim of the DOFMs managers to use full cost environmental accounting to communicate the value of their organisations forest management in response to increasing legislative, funding and political pressures.

Study design and method Feedback data collection Data sources included documentation, direct observation and semi-structured interviews with DOFM managers and stakeholders. The noninterview data was used as part of the triangulation process to provide a background on the Department and to assist in the development of coding schema (McKinnon, 1988; Yin, 1994). The most persuasive source of data was semistructured interviews with 13 DOFM managers and 14 DOFM stakeholders. The interviews followed a cascading process, where an interviewee provided the name and contact details of other people who would be useful to interview, who might in turn provide leads on other potential contacts. All interviews were tape-recorded and transcribed verbatim. The semi-structured interviews were designed to provide background information about the interviewees. Information was also collected on the current environmental reporting framework of the DOFM including factors inuencing its current form, and its perceived usefulness to managers and stakeholders. Additionally, the interviews explored the feasibility of a damage cost environmental reporting system incorporating estimates from choice modelling and benets transfer, and in particular the need for this system, and potential barriers to its implementation.14 Managers from the Department were identied as potential interviewees if they were involved in (a) estimation of environmental externalities from the organisations management of forests, and (b) communication of management outcomes with external stakeholders. Key contacts within the Department initiated contact with the managers to assist the interview process. No refusals to be interviewed were received. The interviews were conducted during three visits to the head oce of the DOFM over an eight-month period. The rst and last visits were of one-working days duration, while the second visit was for one working week.
14 The interview protocol containing specic interview questions is available from the author upon request.

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K. Herbohn / Accounting, Organizations and Society 30 (2005) 519536 Table 1 Demographic details of stakeholder interviewees Stakeholder groupsa Conservation Timber industry Private sector (non-forestry commercial)b Government departments/agencies Other communityc Number 4 3 2 4 1 Average Average duration of interview (min)
a

The DOFM managers were drawn from senior and middle management levels, and were involved in planning, consultation, operations, cultural heritage and environmental audit. The length of the interviews ranged from 35 min to 70 min, with an average length of 56 min. The managers requested that no further demographic information be provided to maintain their anonymity. The Departments regional planners throughout the State identied pools of stakeholders from their region who satised the following selection criteria. The stakeholder must (a) currently use information produced by the DOFM to assess its management of forests, and (b) be in a position to comment on the proposed environmental reporting system (e.g. hold a management position, participate in regular consultation with the DOFM as part of its FUP system). The lists of potential stakeholder interviewees were provided to the researcher who then contacted each stakeholder directly. Only two refusals were received.15 The resulting 14 stakeholder interviews were conducted over a ve-month period. The researcher traveled to the work place of each stakeholder to conduct the interviews. Table 1 contains general demographic information on the stakeholder interviewees. Data analysis The analytical protocol recommended by Miles and Huberman (1994) was used for this study. It comprises three linked sub-processes of data reduction, data display and conclusion drawing/ verication. The steps involved in data reduction and data display that allowed conclusions to be drawn are outlined below. Data reduction was undertaken in two steps. Firstly, data summaries were used to reduce observations, eld notes, and documents collected in the eld. The summaries identied the signicance of

Range 2060

40

The stakeholder categories used were the most frequently identied groups by DOFM managers, and in many cases were how the stakeholder interviewees identied their own organisations. b Business people dependent on the ow-on eects (e.g. employment, tourism) of forestry into regional economies. c Community member with specic environmental, ecological expertise who was highly involved in consultation with the DOFM.

15 The rst refusal came from the Mayor of a local council whose involvement in a political campaign meant that she did not have the time available to be interviewed. The second refusal was from a forester who had been retired for three years and felt that he had lost touch with developments in the forest sector.

the item, provided a summary of its content and reective comments by the researcher. Once completed each data summary was added to the case study database. Secondly, data reduction was undertaken through manual coding, using descriptive and pattern coding schema. The unit of coding was a minimum of one and a maximum of three sentences. The coding of interview data (e.g. interview transcripts) and non-interview data (e.g. data summaries on observations, documentation) was done manually using an Excel spreadsheet. To minimise bias in the coding process, the descriptive coding schemes were developed prior to the commencement of analysis as part of the case study protocol, while the pattern coding scheme was developed after the rst major data collection phase (Miles & Huberman, 1994). Check-coding was used to test the consistency between the coders data reduction and another researchers coding of randomly selected sections of text, and also the main coders work against itself at regular intervals during the process. Data display was the second sub-process used to analyse the case study data (Miles & Huberman, 1994). Structured data displays were developed via a three-stage iteration. First, interim data displays were prepared for each of the 13 manager and 14 stakeholder interviewees. Four interim data displays were prepared per interviewee, based on

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descriptive codes, pattern codes, predicted stakeholder reactions (prepared only for DOFM managers), and any emerging constructs. The data included in these displays took the form of short blocks of text, quotations and phrases, and summaries in the researchers own words. Also, any relevant material from the document summaries that related to an interviewee was incorporated. Next, separate meta-matrices were constructed for managers and stakeholders respectively, that combined the data from the individual interim data displays. From these two meta-matrices, nal display matrices were derived in which key phrases were distilled into more generic descriptors.16 These nal display matrices were prepared for potential costs and benets from the reporting experiment, implementation experiences, impediments, and predicted stakeholder reactions. They took the form of role-ordered matrices, in which managers organisational levels, and stakeholders background were used to sort the data. Also, thematic conceptual displays were prepared to compare and contrast the issues emerging from the analysis of data relating to the DOFMs managers and its stakeholders. A nal research report was drawn from the role-ordered matrices and thematic conceptual matrices. Feedback on the research report was obtained from the DOFM manager interviewees to reduce bias and improve reliability (Guba, 1981; Miles & Huberman, 1994; Stake, 1994).17

ences, the DOFM managers reactions and stakeholders reactions to the full cost environmental reporting system. Implementation experiences Initial indications were positive that the implementation of a full cost environmental reporting system for the DOFM would be feasible. The reporting experiment had been approved by senior management and was supported by middle managers from the DOFM. An organisational framework in the form of the FUP system was in place to support the full cost reporting system. In addition, the DOFM had begun to use choice modelling exercises and, to a lesser extent, benets transfer to value environmental externalities from its forest management activities. Despite the early encouraging signs, little progress was made on the DOFM full cost environmental reporting experiment over the eightmonth period between the commencement of the reporting experiment and the end of data collection by the researcher. Over-optimism by the DOFM managers, coupled with sta turnover on the economic valuation project contributed to the slower than expected progress. However, the major stumbling block was that no new estimates of the Departments environmental externalities were obtained during this period. The FUP system was only applied in three areas in the State and the inventories of benets from regional forest resources produced in phase ve for each application had not included economic estimates of externalities. The failure of potential sources of nancial estimates of environmental externalities meant that it was not possible to proceed with an application of the full cost environmental reporting system as envisaged by the researcher and the DOFM managers. The limited implementation experiences do however, provide an opportunity for reection on impediments to the DOFM implementing a damage cost environmental reporting system. These impediments are discussed below. The preliminary implementation experiences can also be used to critically reect on the outcomes of the experiment using the Department managers and

Case evidence The case evidence is presented on the three research questions regarding implementation experi-

For example, the meta-matrix cell entry will have additivity problems, icon species cause problems with valuations and should not report on endangered species was distilled into the generic descriptor concerns about the appropriateness of nonmarket values. 17 While exposure of the ndings added to the reliability of the results, it also revealed managers concerns about possible identication. Accordingly, additional eort was expended to protect condentiality of data sources.

16

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stakeholders evaluations of the system. These reactions of managers and stakeholders are examined in Sections Reactions of the departments managers and Reactions of stakeholders respectively. The most compelling impediment facing the DOFM managers in the reporting experiment was the business as usual constraint rst identied by Bebbington and Gray (2001). During the course of the experiment, the DOFM was under considerable pressure from two sources. Conservationist stakeholders and other State Government agencies and departments launched sustained political attacks on the Departments forest management, and at the same time the State Government introduced budgetary funding cuts to the public forest sector. As the reporting experiment progressed, it became clear that rstly, funding economic valuation studies of environmental externalities from forest management, and secondly, developing a damage cost reporting system were decreasing in priority in direct proportion to the increasing funding and political pressures to which the DOFM was subject. As one senior manager explained: We dont want a reporting system that is going to take 90 per cent of our resources and leave 10 per cent for forest management. Interestingly, a second impediment was resistance from four DOFM managers. This resistance emerged despite the managers initial support and enthusiasm for the full cost reporting experiment. One of the main sticking points was managers belief that resource management decisions and outcomes could not be reduced to nancial components. Instead, they saw forest management outcomes as the result of political compromise amongst all aected stakeholders, with nancial estimates of externalities as only a subset of information. Following from this, the Departments managers were concerned that willingness-to-pay measures, which are estimated in choice modelling, may be ill-informed in an ecological and sustainable forest management context. To illustrate, one manager discussed the likelihood of overvaluation of the forest habitats of icon species such as Koala Bears at the expense of the habitats of more ecologically important but universally disliked spe-

cies such as the highly venomous Western Taipan snake.18 An unexpected development during the course of the eld research was the resistance of managers on the economic valuation project to the use of estimates of environmental externalities, which they described as part of simple socio-economic value, cost-benet analysis. They suggested that non-market values should only be used as a supplementary information set, to complement a more complex multi-disciplinary planning approach such as Multi-Criteria Analysis (MCA).19 However, they acknowledged that using more complex valuation methods creates what they termed a valuation dilemma. That is, the more technical and complex the valuation method used, the less likely DOFM stakeholders would be to accept the valuation outcomes because of their unwillingness to treat the valuation process as a black box process. In summary, the success of the DOFM full cost reporting experiment was eroded by a lack of additional funding to undertake economic valuation studies in the face of State Government budget cuts, and changing priorities as the organisation responded to sustained political scrutiny from its stakeholders. There was also resistance by managers to non-market valuation techniques, which had been unexpected for both DOFM managers and the researcher. Reactions of the departments managers Six of the 13 DOFM manager interviewees generally supported the proposed environmental reporting system, while seven gave qualied support. Table 2 summarises the specic benets and costs of the reporting system perceived by the

18 Although there were few estimates of environmental externalities available for the DOFM, 10 of the 13 Departmental managers had previous experience with or knowledge of nonmarket valuation techniques, and raised this concern based on their prior experiences. 19 Multi-criteria analysis is an evaluation approach that aims to rationalise planning and resource-use decisions through a systematic representation of various objectivesthat is economic, environmental and socio-culturaland their attributes (Tumaneng-Diete & Waring, 2000).

K. Herbohn / Accounting, Organizations and Society 30 (2005) 519536 Table 2 Reactions of managers from the Department of Forest Management to full cost environmental reporting using choice modeling and benets transfer valuation methods (n = 13) General reactions Positive Negative Mixed Total Benets Monitoring and reporting on sustainable forest management Rigorous resource management decisions Stronger funding negotiation position Costs Philosophical concerns Stakeholder acceptance problems No. of managers 6 7 13 7 5 5 7 6

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Departments managers in their overall assessment of the system.20 The benet most commonly identied was the use of estimates of environmental externalities in monitoring and reporting on sustainable forest management. Managers were concerned about the diculty in interpreting the sustainability of the DOFMs forest management against the Montreal criteria that were outlined in Section Case study setting. As one manager explained, what does it mean if two of the indicators for conservation go up, 29 indicators stay the same, and the remaining two on biodiversity go down? Seven of the Departments managers could foresee benets in exploring the possibility that a prot gure adjusted for positive and negative environmental externalities from the Departments forest management might assist in meeting their responsibility to the community to deliver sustainable forest management. The possibility of using full cost environmental accounting data to improve the rigour of forest resource decisions was also an important benet to managers. The ve DOFM managers noting this advantage perceived that emotion, rhetoric and political lobbying by powerful stakeholder groups
20

rather than the best quantitative data available, are currently used to inuence forest resource allocation decisions. The introduction of full cost nancial data to assist in making policies and decisions on competing forest uses could contribute to more rational, transparent and justiable outcomes. Managers also perceived the potential for full cost environmental reporting to be used in funding negotiations. Approximately six months prior to the experiment, the State Treasury Department had signalled that future funding was no longer to be allocated on the basis of the cost to provide a service. The focus was to be on the demonstrated outputs delivered, which had implications for the DOFM. The other government departments against which it competes for scare public resources tend to produce services that have a commercial value, while the DOFM delivers public goods that have no commercial value. Hence, the Departments managers argued that valuing public good components of its management of forests, such as the conservation of cultural heritage sites, and adjusting conventional prot measures using the public good values, would strengthen the case for continued and increased funding. Balanced against the perceived benets from full cost reporting, are the potential costs. As summarised in Table 2, seven departmental managers had philosophical concerns about the feasibility of measuring environmental externalities. These concerns related, in particular, to the ability of nancial values to capture landscape aesthetics, conservation and sites of cultural heritage signicance. One manager explained: You cant value social value. You cant do it with aesthetics. You cannot quantify because aesthetics is about smell. You know you go into a beautiful waterfall settingyou can smell it, you can hear it, you can see it, you can feel it. You know so all of those emotion feelings, but how can you put a number on it because one person will have a dierent feel to another. The Departments managers argued that any attempt to measure environmental externalities must be incomplete, and the information should only be a sub-set of reported information.

Discussion of the costs and benets is drawn from preliminary results reported by Herbohn and Henderson (2002, pp. 141144).

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A low level of stakeholder acceptance was a second potential cost. The DOFM managers were concerned that stakeholders, particularly powerful groups, would see the potential erosion of their power base and oppose reporting: The problem is of course that somebody ultimately makes a decision, now they either make a decision based on a set of comparable facts, or they make some sort of a subjective decision. Now I suspect that if you are powerful people, or a powerful lobby group, you are probably better having subjective decisions made. Particularly if you think that you can overly inuence those decisions. The DOFM managers suggested that a complicating factor is that stakeholders in the public forest sector currently have high levels of cynicism about the motivations of government and public servants. Consequently, nancial estimates of costs and benets of forest management would be viewed with distrust by stakeholders because the nancial numbers would be perceived as exaggerated and subject to manipulation through the underlying mathematics. A further issue in stakeholder acceptance was the hostility managers expected from specic stakeholder groupscultural heritage and conservation groups. The Departments managers found that indigenous cultural heritage groups did not want to discuss resource management at the level of forest uses. Instead, their representatives wanted to negotiate a role within the resource management framework along the lines of comanagement with the DOFM. Also, the indigenous cultural heritage stakeholders did not want their forest uses valued in the same way as other uses, considering their uses to be on a higher plane. As one DOFM manager explained: They say that their uses are special. Indigenous people are saying to us, You cant compare our religious, our cultural heritage site with the timber production in the area. Departmental managers also attempted to communicate with non-indigenous cultural heritage groups using rankings of forest values including cultural heritage uses. The extent of the adverse reaction to quantifying aspects of

cultural heritage was such that there was no attempt to introduce non-market values into the communication process. As one manager explains, They just hated it. Just thought how could you possibly put numbers on anything. . . you cant quantify a cultural heritage value, so converting that to dollars I would say is even worse. The DOFM managers attempts to use nancial estimates of environmental externalities in communication with conservation stakeholders revealed a similar attitude. A common managerial description of communication with conservation groups is: They are the sorts of ones who say, You cant put dollar values on some things. How much is my life worth because I am chained around a tree? Twenty-ve dollars? There are huge amounts of outrage and you are not going to reason with them. Reactions across managers organisational level and background The perceived benets and costs were ordered around the DOFM managers organisational levels and backgrounds, and Table 3 summarises the results. To preserve their anonymity within a highly political environment, a negotiated compromise was reached with the DOFM managers whereby only modal responses are reported separately by level and background. Senior/upper middle management appeared more concerned with strategic rather than practical day-to-day consequences of full cost environmental reporting. Their most commonly identied benet was being able to monitor and report on sustainable forest management, and to develop a stronger negotiation position with powerful stakeholders. In contrast, middle management was focused on using full cost environmental data to improve the rigour of forest management decisions. A strategic focus was also evident for potential costs since senior/upper middle management most commonly focused on the philosophical issue of whether it is appropriate to reduce resource management to wholly quantitative components. While middle management were most often concerned with the issue of stakeholder resistance to full cost reporting.

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Table 3 Most commonly identied benets and costs of full cost environmental reporting for the Department of Forest Management by managers level and background Managers levela Modal response Benet Senior and upper middle management (n = 3) Middle management (n = 10) Managers backgroundb Forestry (n = 7) Monitoring and reporting on sustainable forest management Stronger negotiation position Rigorous forest management decisions No. 3 3 4 Stakeholder acceptance problems 5 Cost Reduction of environmental management to quantitative components No. 2

Monitoring and reporting on sustainable forest management Stronger negotiation position Stronger negotiation position Monitoring and reporting on sustainable forest management

3 3 2 2

Stakeholder acceptance problems

Other (n = 4) Economics (n = 2)

Stakeholder acceptance problems Appropriateness of valuation methods Stakeholder acceptance problems

2 2 2

Based on levels of responsibility, location and size of oces, and comments made by the interviewees, there are two apparent divisions in management levels between senior/upper middle management, and middle management. b The DOFM managers backgrounds were indicated by a direct interview question and include forestry, economics and other (e.g. conservation, engineering, biological sciences).

The two most commonly identied potential benets across manager background were the use of full cost environmental reports to assist in monitoring and reporting on SFM, and attaining a stronger negotiation position with stakeholders. In terms of potential costs, managers from all backgrounds were most commonly concerned about stakeholder resistance. The economists were also focussed on the appropriateness of choice modelling and benets transfer in estimating the value of environmental externalities from the DOFMs forest management. Reactions of stakeholders The majority of stakeholders (i.e. eight out of 14) favoured a full cost environmental reporting system to account for the DOFMs forest management, while six stakeholders had mixed reactions. Table 4 contains a summary of the specic benets and costs that were perceived by stakeholders. In contrast with the Departments managers, stakeholders backgrounds are reported, because the stakeholder interviewees did not perceive a threat to their anonymity from the disclosure of this information.

Ten stakeholders across all stakeholder groups identied the benecial use of damage cost reporting in the negotiation of forest management outcomes. Economic rationalism was perceived to dominate the Australian resource management decision and policy arena. Consequently, nancial quantication of environmental externalities from forest management was perceived as the only way to ensure consideration of environmental issues. As one of the three conservationists adopting this pragmatic perspective explained: I loathe economic rationalism with a passion. However, I think my view is that we live in a world that is so totally dominated by economics that unless environmental issues can be couched with some kind of economic value on them, the policy makers arent going to be interested. So basically, we, conservationists have to start speaking the language of business and government otherwise we are going to be shut out. In particular, large positive values of environmental externalities from forest management were expected. Stakeholders acknowledged that such

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Table 4 Reactions of stakeholdersb of the Department of Forest Management to a full cost environmental reporting system using choice modeling and benets transfer valuation methods General reactions Conservationists (n = 4) Government departments and agencies (n = 4) 3 1 Timber industry (n = 3) 1 2 Local business (n = 2) 2 Communitya (n = 1) Total

Positive Negative Mixed Specic benets Negotiation tool Improvements in decision-making Means of rewarding or penalising entities for environmental performance Specic costs Appropriateness of nancially quantifying environmental externalities Loss of political eectiveness by the DOFM High levels of distrust of the DOFM Complexity of valuation methods

1 3

8 6 14 10 7 7

3 3 3

3 2 2

1 2 1

2 1

3 1 4 2

3 3

7 7 4 2

a The community stakeholder group category comprised an academic with a specialization in natural resource management who regularly consulted with the DOFM. b The stakeholder groups are based on self-description by the stakeholders and supported by the classication of the DOFM regional managers.

values would be extremely useful in negotiations to promote conservation-related forest uses by either conservationists, or by the DOFM as it manages public good components of State forests. A manager from a government agency/department described the negotiation advantage of full cost information for the DOFM. As a manager involved in negotiating funds from both State and Commonwealth governments, there is great benet in having intrinsic values attached to the protected areas. If Ive got my hand out I want a really bolstered value of the assets that I manage. I have to have some tools in my bag to justify why I have spent $5m preserving that area. The ability to use estimates of environmental externalities to assist with resource use decisions was a benet identied by seven of the Departments stakeholders from all categories except regional business and the community. Full cost data on environmental impacts could be used to

compare alternate forest uses to produce more justiable resource management decisions. It was also suggested that if non-market values were estimated when resource use plans are developed, it would ensure that any environmental impacts were considered from the start of a project, rather than as an after-thought. Seven of the DOFMs stakeholders also identied the possible use of full cost data as a basis for rewarding or penalising entities for their environmental performance. For example, non-market values could be used to determine nancial incentives for groups such as private landholders and government departments that use the forest resource to produce positive environmental impacts including increased biodiversity and preservation of wildlife habitat. Non-market values could also used in a punitive sensethat is, the user pays. Groups such as developers, government departments, and local government authorities could be held responsible for nancially quantied negative environmental impacts from their activities such as the loss of habitat for rare ora and fauna.

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Balanced against these benets are the costs of full cost reporting that were perceived by the Departments stakeholders. From Table 4, the inappropriateness of non-market values for forest resources was one of the most common concerns. Seven stakeholders from conservation, government and community backgrounds suggested that full cost reporting results in the treatment of the environment as a commoditytermed the commodication of the environment by one conservationist. Since intrinsic values such as spiritual enrichment from forest recreational opportunities and aesthetic appreciation, and the complex interrelations between ecological components of forests cannot be nancially quantied, they tend to be devalued. Consequently, inappropriate trades could be made between alternate forest uses. As one conservationist explained: So that would mean that you could start a whole system of trading, basically this place is worth $150,000, and that place is only worth $30,000, so we will trash the $30,000 one because this place is worth less in our system of accounting for resources. That $30,000 one might be a critical habitat with some endangered ora species, or fauna species. A reduction in the political eectiveness of the DOFM and the timber industry was another issue that stakeholders identied with full cost reporting. They argued that full cost data were potentially sensitive information for the Department because it could be used in an opportunistic way by conservationists, particularly if the values of conservation-related forest uses were high. A potential consequence would be the degeneration of forest resource management decisions into prolonged debates between conservationists, the timber industry and the DOFM at the expense of sound forest resource management. Four stakeholders from conservation groups were suspicious that the DOFM would exploit the potential for manipulation of full cost reporting to further its own interests. This perception reects the history of prolonged debates between conservationists, the timber industry and govern-

ment, with perceived manipulation of statistics by all parties involved. One conservationist commented: I guess that I get a bit cynical about nancial data because you can make them show anything you want . . . and we are pretty selective about the things we include too. The use of complex economic valuation models is a related cost since the DOFM stakeholders would be asked to accept the full cost information provided without understanding the underlying processes. Two conservationist stakeholders argued the potential credibility of full cost information is questionable unless a transparent valuation system was used: A whole bunch of numbers get thrown into this big black box and I cant see what is going on in the box, and Im being asked to trust that it is going to spit out a good answer. Im also being asked to trust that whatever the assumptions are that the model is built on are correct, and Im not prepared to make that leap of faith.

Discussion of case study evidence The DOFM case study is an account of an unsuccessful full cost environmental reporting experiment within the Australian state forest sector. The implementation experience serves to illustrate the dependence of accounting systems on their context. That is, the form and ultimately the success of an accounting system reects both the organisations political and historical context, and the motivations and philosophical positions of organisational managers and stakeholders. For example, changes in the Departments political environment including State Government funding cuts and sustained political scrutiny by the historically adversarial conservationist stakeholders distracted managers from developing the reporting system as they struggled to conduct business as usual. Another major sticking point was resistance from the Departments managers. This resistance was surprising to them as well as to the researcher, and is similar to the experiences documented in

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prior experimental reporting case studies by Dey (2000) and Bebbington and Gray (2001). Unlike these prior experiences, the issue for the DOFM was not a struggle for control of the organisation (Dey, 2000), or a failure to reconcile the organisations unsustainable use of resources with the objectives of the reporting system (Bebbington & Gray, 2001). Rather, the concern for the DOFM managers was that economic valuation methods are ill-informed in an ecological sense and a focus on full cost information results in unsustainable forest resource decisions. The Departments managers strongly advocated forest resource management as a process of compromise with full cost reports as one subset of available data. This viewpoint is not new. Researchers have long questioned the validity of attempting to value environmental dimensions of organisational life (e.g. Gibson, 1996; Hines, 1991, 1992; Lehman, 1995, 1996, 1998; Maunders & Burritt, 1991). In a similar vein to the DOFM managers, they have argued that such economic rationalist attempts are counterproductive and actually contribute to environmental exploitation and degradation.21 Additional reections on the reactions of managers and stakeholders It was not the original intention of the DOFM case study to oer comment on the reporting experiment in light of descriptive theories of corporate social responsibility (CSR) activities. However, the empirical evidence creates a compelling case to do so. The interactions between managers and stakeholders in negotiating the role of full cost environmental reporting in managing the State forest resource and in their relationships with each other are of particular interest. In exploring these interactions, the current paper draws a general distinction between two broad groups of theories used to inform empirical investigations of CSR

economic based theories and socially grounded theories.22 It is contention of this paper that socially grounded theories oer more insights and useful interpretations of the DOFM manager-stakeholder interactions compared to economic based theories such as Agency Theory and Positive Accounting Theory.23 There are well-rehearsed criticisms of economic theories and their role in corporate social responsibility (CSR) research.24 Apart from these broad concerns, economic theory oers, at best, a narrow interpretation of the empirical evidence of the DOFM case study. The reporting experiment could be interpreted as an exercise in minimising political costs, such as increased legislation of forest uses, by managers in light of the Departments high political visibility and its perceived poor past environmental performance by conservationists. Additionally on the basis of market event studies, the exercise would be likely to be supported by the Departments stakeholders because of the information content of CSR disclosures. The restricted focus of this type of interpretation provides few insights into the complexity of the reactions of managers and stakeholders. It ignores the tensions between managers and stakeholders over the use of quantitative full
The classication of descriptive theories of CSR is drawn from Gray, Kouhy, and Lavers (1995a) which developed three broad theory groups: (1) decision usefulness studies, (2) economic theory studies, and (3) social and political theory studies. Gray et al. (1995a, 1995b) noted that decision usefulness studies overlap with economic studies. Consequently, the current paper only draws a general distinction between two broad categorieseconomic theory and socially grounded theory. 23 Studies of CSR activities drawing from economic theory such as Agency Theory and Positive Accounting Theory have investigated the determinants of CSR disclosures such as social performance, political visibility, various nancial variables and economic performance (e.g. Belkaoui & Karpik, 1989; Mak, 1991; Ness & Mirza, 1991). The information content of CSR disclosures evidenced by stock-market reactions has also been investigated (e.g. Belkaoui, 1976; Blacconiere & Patten, 1994; Ingram, 1978; Jaggi & Freedman, 1982; Shane & Spicer, 1983). 24 A persuasive case has been made for the greater potential contribution of social theories over economic theories to the development of a conceptual underpinning for CSR (e.g. Arrington & Francis, 1991; Christenson, 1983; Gray et al., 1995b, 1995a; Puxty, 1986; Tinker & Okcabel, 1991).
22

For example, Gibson (1996) illustrates this point with reference to reporting tradeable pollution allowances within nancial statements.

21

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cost data and emotive rhetoric that was underlaid by strategic opportunism. Thus, few opportunities are oered to develop and extend the existing descriptive theoretical underpinning of CSR practice. Socially grounded theory, in contrast to economic theory, oers more insights into the DOFM case evidence. Of the socially grounded theories, the organisation-orientation of Stakeholder Theory is most closely aligned with the focus of the case study on the Department and its stakeholder relationships. This makes Stakeholder Theory particularly useful for informing the interpretation of the case evidence.25 Stakeholder theory posits that a major role of management is to assess the importance of meeting stakeholder demands in order to achieve the strategic objectives of the organisation (Roberts, 1992). Organisations have a certain degree of discretion on how to full these external demands, and accordingly prioritise managing the demands of powerful stakeholder groups. Stakeholder importance derives from their power to control critical resources required by the organisation to remain viable (Ullman, 1985). Consequently, the organisation will strategically manage relationships with important stakeholders to ensure continued survival. Publicly disclosed information, including CSR disclosure, is viewed as part of a strategic arsenal available to negotiate stakeholder relationships (Ullman, 1985). These themes from Stakeholder Theory permeate the DOFM case study evidence. The motives of Departmental managers for damage cost reporting centred on the capacity to measure and report the value of the outcomes from the DOFMs forest management as a basis for dialogue with its powerful stakeholders. Managers described quantied public good outcomes as necessary tools in their bag to bolster the Departments position in forest

use negotiations with other State Government Departments.26 They were however, particularly focussed on using the information to manage their interactions with conservationists who had access to inuential media and cultural heritage groups with legislative power via for example the Native Titles Act. Both stakeholder relationships were adversarial, and managers described full cost environmental reporting as an aggressive strategy to re-negotiate, re-dene and re-gain control of the environmental asset, the State Forest Resource.27 Reporting the nancial values of forest uses was seen as a means of replacing the dialogue of emotion and rhetoric used by these stakeholder to great eect to promote their favoured forest uses. The dynamic, two-way interaction between management and stakeholder groups documented in the DOFM case study has not been adequately captured in the CSR literature drawing on Stakeholder Theory. The general view is that social and environmental disclosures assist in securing stakeholders support and approval through, for example, developing a corporate reputation as being socially responsible (Roberts, 1992), or distracting their opposition and disapproval (Gray et al., 1996). To some extent, full cost environmental reporting by the Department did gain support from stakeholders because it met their expectations that environmental consequences were factored into mainstream performance measures of the DOFM. This was not however, the main source of stakeholder support for the experiment. Rather, the majority of stakeholders were interested in the potential for opportunistic, strategic use of any new information such as full cost
26 For example, a manager related the following experience: We were negotiating a power line through State forest with another Government Department and we put a metric on the trades to reect them occurring. The guy from the power authority was happy to acknowledge conservation values, so it made the process of management and negotiation so much easier. 27 The phenomenon of organisations redening the environment in quantitative terms to suit their own ends, has previously been identied by Gray et al. (1995b). They speculate that it is most likely attractive to organisations because it apparently reduced ambiguity, bears a hallmark of science and translates the environment into that which is known and over which power can be exercised.

25 There are two broad variants of Stakeholder Theory (Gray, Owen, & Adams, 1996). The rst variant is normative in nature and is concerned with the accountability owed by an organisation to its stakeholders (Freeman, 1984; Roberts, 1992). It has little descriptive power in a CSR context and thus is not considered further in this paper.

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information, to further the interests of their respective organisations. In short, while full cost environmental disclosures were intended by managers as part of a strategy to renegotiate the power balance in relationships with stakeholders, these very same groups viewed the information as a potential tool to be used to negotiate their relationships with the Department. Further exploration of the dynamic nature of organisation-stakeholder relationships would assist in developing a better understanding of CSR practice from a Stakeholder Theory perspective. Evidence from this study suggests that when CSR disclosures are used as stakeholder management strategies, managers and powerful stakeholders are likely to contest control of these disclosures because of their strategic importance.

Conclusion The evidence from the DOFM case study indicates that there may be a role for full cost environmental reporting systems within the noncorporate, natural resource management sector in Australia. The Departments managers and stakeholders alike perceived that full cost reporting is a necessary undertaking to secure political support and government funding, and more generally to ensure that environmental externalities are explicitly considered in decisions and policies. However, philosophical concerns about the reduction of intrinsic environmental values to nancial terms, was an unresolved source of tension for some managers and stakeholders. The potential role of environmental economic valuation techniques within accounting and reporting frameworks is not as clear. The investment of resources required to undertake valuation studies was problematic for the DOFM. There was also a valuation dilemma facing the Department in that the complexity of the natural eco-systems managed required more complex valuation methods, which were in turn viewed with distrust by stakeholders because of their complexity. At the conclusion of the case study, a stalemate had been reached with managers on the economic valuation project unclear on how to proceed with the

valuation of environmental externalities. A worthwhile area for future research would be whether economic valuation methods such as choice modelling and benets transfer are more appropriate for use by organisations operating under dierent conditions to the DOFM. Possible factors to consider in future research include the availability of resources, the political sensitivity of operations, and the history of interactions with organisational stakeholders. More generally, empirical evidence from the DOFM case study implies that the t between an accounting system and its organisational context, and its broader historical and political context is an important factor in its successful implementation. In the case of the DOFM, the history of bitter power struggles between Government, conservationists, and the timber industry acted to sensitise organisational managers and stakeholders to the political implications of any new information provided by the full cost environmental accounting system. These operating conditions also resulted in the imposition of resource constraints that ultimately hindered the reporting experiment. A fruitful area for future research includes additional eld based research into how the t of proposed environmental accounting systems within their broader organisational, historical and political contexts inuences the outcomes achieved. The case evidence also highlighted the value of socially grounded theories, such as Stakeholder Theory, compared to economic based theory in interpreting CSR reporting. From an economic theory based perspective, the DOFM reporting experiment was merely an exercise in minimising political costs. In contrast, the Stakeholder Theory perspective suggests that full cost environmental reporting was part of an aggressive strategy used by the Departments management to negotiate its relationships with powerful stakeholders. Interestingly, this study found that powerful stakeholders responded by supporting such disclosure because of its potential application in furthering the interests of their own organisations. A worthwhile area for future research is to explore the interactions between organisations and stakeholders in response to CSR disclosures intended as part of a stakeholder management strategy.

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Acknowledgments The cooperation of managers from the anonymous case organisation is most gratefully acknowledged. Also, this research has signicantly beneted from the helpful comments of the two anonymous reviewers, Scott Henderson, Lee Parker, and participants at the Emerging Scholars Colloquium at the 2001 Asia Pacic InterDisciplinary Researchers Association conference in Adelaide, Australia. Any remaining errors are my own.

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