What influences managers ability to record and report on non-financial capitals? The case of Social Return on Investment

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1 What influences managers ability to record and report on non-financial capitals? The case of Social Return on Investment Matthew Hall, Yuval Millo and Emily Barman BUSINESS WITH CONFIDENCE icaew.com

2 Introduction Traditional accounting reports focused only on the financial capital of the organisation often exclude non-financial capitals that are important but have little recordable financial footprint. Alternative reporting practices, such as social accounting, seek to expand the range of capitals taken into consideration when measuring performance, often including economic, social and environmental factors. But the development of accounting and reporting systems to incorporate measures of non-financial capital is not straightforward. Prior efforts have been met with mixed success, particularly where there are divergent views on how to compute the social and ethical impacts of business activities. Why is expanding the range of capitals included in the accounting process so problematic? And what factors influence managers ability to record and report on non-financial capitals? To answer these questions we examined a case where managers attempted to develop a new accounting system to record and report on non-financial capitals. In particular, we focus on the Social Return on Investment (SROI) accounting methodology developed by practitioners in two different settings; the US and UK (Hall, Millo and Barman, 2015). Managers in both the US and the UK settings developed SROI in order to record and report on a greater range of non-financial capitals being generated by the social purpose organisations that they were working with. A prime focus in SROI is the calculation of a measure of social impact based on a ratio of the organization s costs to the monetised benefits gained by different stakeholders from the organization s activities (REDF, 2000; Cabinet Office, 2009). Interestingly, the way the SROI method developed in the US and UK settings was not the same. There were important differences in the range of non-financial capitals included in the SROI calculation and how those capitals were measured and valued. For example, in the US setting, managers only included in SROI those non-financial capitals (client impacts) that could be valued by reference to governmental cost savings. In contrast, in the UK setting, the SROI method included a wider variety of non-financial capitals by including value being created for a range of stakeholders (not only clients) and by using a diverse mix of monetary proxies to calculate the value of non-financial capitals (rather than only using governmental costs savings) (see Table 1). Managers epistemic beliefs and the organisation s material conditions shape reporting on non-financial capitals What factors influenced managers ability to record and report on non-financial capitals in the SROI method in the US compared to the UK setting? We found two factors that were important: (1) managers epistemic beliefs, and (2) the material conditions facing managers in their organisation (see Table 2). Epistemic beliefs refer to managers opinions about what counts as valid and appropriate data. In the US setting, managers held the view that data is valid when it is standardised, collected consistently over time, and is comparable across organisations. As such, the US managers only used governmental cost savings data to measure client impacts, because that was the only data they viewed as standardised, consistently collected, and comparable. In contrast, in the UK setting, managers held the view that data is valid when it reflects and directly incorporates the (potentially) different experiences of a range of stakeholders, such as staff, volunteers, and clients. As such, the UK managers did not restrict themselves to governmental costs savings, but used a wider variety of data to value non-financial capitals. This included the website, Wikivoice which revealed the preferences of stakeholders and direct client consultation. In this way, the different epistemic beliefs lead the mangers to use different types of data and different measures in order to record and report on non-financial capitals. The material conditions facing the manager refer to the nature of existing data collection and reporting systems, access to financial resources, and access to necessary labour and expertise. In the US setting, managers developed comprehensive and sophisticated data collection and reporting systems, drawing on their extensive financial resources, interns and consultants, and their own expertise and experience in data analysis. In the UK setting, managers lacked the same level of financial resources, labour and expertise, which placed some limits on the extent to which stakeholders could be consulted and involved, and led to the use of relatively inexpensive methods of data collection, such as the Wikivoice. 2

3 Implications for accounting practitioners Our focus on managers epistemic beliefs and the organisation s material conditions is important because these factors affected which non-financial capitals were included in the accounting and reporting system, and the form and type of data used to represent and report on them (Table 1). This indicates that although an accounting standard or methodology may look similar in theory, it may work very differently in practice, depending on the epistemic beliefs of managers and the organisational and material context within which those new standards and methods are implemented. For new accounting methods like SROI, there may need to be more guidance and transparency regarding what non-financial capitals to include and what sources of data and information could be used to measure and value them. Overall, our findings indicate that efforts to develop accounting systems to record and report on non-financial capitals should pay more attention to the epistemic beliefs of managers and the organisational context within which such systems are designed and in which they will be implemented in practice. Without such attention, the mixed success of past attempts to expand the range of capitals included in the accounting and reporting process is likely to continue. Table 1 Managers develop data collection and a reporting system to record and report on non-financial capitals Managers value non-financial capitals using monetary proxies US setting Incorporation of non-financial capitals in SROI UK setting US managers develop a sophisticated system to measure impact on clients using a standardised set of 40 metrics to track client progress. Any impacts outside the scope of the standardized metrics are excluded from SROI. Managers consult clients only on order to provide information to indicate the level of impact on each metric. Managers assign a monetary value for client impacts by referring to the relevant governmental cost savings that arise from client progress. Managers only include client impacts that have governmental cost data available. If there is no governmental cost data available, managers exclude those impacts from the calculation of SROI. All client impacts are valued from the perspective of governmental cost savings. UK managers consult a wide variety of stakeholders about the intended and unintended impacts of social enterprises and their inputs are used to develop the appropriate metrics. Managers consult clients and other stakeholders in order to provide information to indicate the level of impact on each metric. Managers assign a monetary value for a wide variety of stakeholder impacts using a variety of proxies and methods, such as revealed preferences, a Wikivoice, direct consultation with stakeholders, as well as governmental cost savings. Managers include a wide range of impacts in the calculation of SROI, and impacts are valued from a variety of perspectives. 3

4 Table 2 Factors explaining managers ability to record and report on non-financial capitals: epistemic beliefs and material conditions Factor US setting UK setting Managers epistemic beliefs about what counts as valid and appropriate data The material conditions available to the manager in his/her organisation, such as the nature of existing data collection and reporting systems, access to financial resources, and access to necessary labour and expertise. US managers held the view that data is valid when it is standardised, collected consistently over time and is comparable across organisations US managers had extensive financial resources to use in developing SROI. They hired interns and consultants with expertise in data collection and analysis. US managers also had expertise in data collection and analysis from prior business and educational experiences. UK managers held the view that data is valid when it reflects and directly incorporates the (potentially) different experiences of stakeholders UK managers had extremely limited financial resources to use in developing SROI. They could not hire interns or consultants. UK managers had very little expertise and experience in data collection and analysis. 4

5 References Cabinet Office, Office of the Third Sector. (2009). A guide to social return in investment. London, United Kingdom. Hall, M., Millo, Y., & Barman, E. (2015). Who and what really counts? Stakeholder prioritisation and accounting for social value. Journal of Management Studies, 52, REDF. (2000). SROI Methodology: Analyzing the Value of Social Purpose Enterprise Within a Social Return on Investment Framework. San Francisco: REDF. ICAEW TECPLN /16 5