Encouraging ethical corporate behaviour
Corporate Social Responsibility (CSR) reporting loopholes allow executives to polish their image for personal financial gain even when their actual performance falls short.
Firms fudge figures to achieve cash bonus
Chief executives can receive an extra $200,000 in income on average by exploiting weak regulations around measurement of their corporate social responsibility performance. Changing the rules of the game retrospectively allows them to be seen as still meeting targets.
The research, CSR Restatements: Mischief or Mistake?, by Dr Rebecca Bachmann from the Department of Accounting and Corporate Governance and Associate Professor Helen Spiropoulos from UTS shows companies often use restatements to present a more favourable image to justify substantial bonuses for CEOs, even when actual performance does not merit such rewards.
“The easiest way for a CEO to achieve their ESG-related performance targets is to change the way in which it is measured,” Dr Bachmann says.
A substantial portion, about one fifth, of a CEO's cash bonus can be linked to ESG-related performance metrics.
After examining 674 CSR reports and other data related to compensation for a range of 500 ASX listed companies, they showed many restatements are not a reframing of innocent mistakes but a strategic effort to manipulate public perception and protect corporate reputations through calculated deceptions.
This important finding underscores the need for stakeholders, including investors, regulators, and consumers to exercise caution when relying on CSR reports for decision-making and insight into genuine commitment on environmental, social and governance (ESG) issues. CSR reporting has been largely unregulated and annual performance data is typically disclosed voluntarily, with considerable variability in how it’s reported.
“One change that has been noticed is that there is now much more focus on remuneration by shareholders, and a high level of ‘no’ votes in some companies last year. This shows people are starting to pay attention and pushing for more transparency,” Dr Bachmann says.
The research questions whether incorporating CSR/ESG-related performance targets in the CEO's compensation contract results in real change, or instead encourages manipulation if a potential outcome allows for unreliable and inconsistent information to be included, primarily to paint executives in a more favourable light.
Retrospectively changing the way performance is measured raises questions about the need for re-evaluation of compensation structures to ensure they reflect true corporate performance. Although Australia is in the process of adopting sustainability reporting standards recently issued by the International Sustainability Standards Board (ISSB) there are still gaps.
“The new standards are a starting point; time will tell if it’s enough but it’s a step in the right direction,” Dr Bachmann said.
About 55 per cent of firms incorporate ESG-related performance targets, but a lack of clarity in reporting frameworks until now has allowed firms to make ad-hoc changes to the way in which sustainability performance (such as injury rates or water usage) are measured because of ambiguity in those standards.
By providing evidence of how this loophole has been exploited, the research findings underscore the urgent need for a more robust and transparent reporting framework to hold firms accountable and ensure ESG targets drive real, positive change.
“We want a planet to live on,” Dr Bachmann says.
Without change, the potential for achieving the UN's Sustainable Development Goals (SDGs) – where international corporations play a crucial role – remains bleak. Among the relevant SDGs is the need for robust frameworks that prevent manipulation and drive real progress in sustainability efforts.
A key impact of this research is to push for the necessary reforms in sustainability reporting, ultimately fostering a more ethical and accountable corporate environment through more transparent and rigorous standards.
It also ensures investors will benefit from more accurate and reliable ESG performance data, enabling better-informed investment decisions that align with ethical and sustainable practices.
“Historically, a key target has been profit. While that’s still the case, society is also holding companies accountable,” Dr Bachmann says.
This new focus is one element for encouraging ethical corporate behaviour and informed policymaking, contributing to enhanced environmental and social well-being.
The study was published in the Journal of Management Accounting Research.