Management accounting

Question 2 - Accounting for Sustainability

WealthWise Insurance has recently set up an internal information system to improve social and environmental practices within the company. The company has its head office in Brisbane and offices in all capital cities and every regional city with a population of more than 50 000 people. One of the underlying principles of the company is to be socially and environmentally responsible. This principle has been in place for many years, dating back to the firm's founder, Jeannette Dai, who felt that she would like to contribute to society rather than simply maximising profits.

The company is a major contributor to charities, particularly those that focus on the homeless and the poor. It actively promotes environmental management in all of the company operations. It sponsors a program that provides scholarships to disadvantaged students to allow them to attend university, and it is proud to offer employment in the company to long-term unemployed and the poor. Each year it publishes a sustainability report that summarises its achievements across each area of performance.

Over time these activities have become a marketing strength of WealthWise. The social and environmental stance taken by the company has attracted many customers to the company. Listed on the Australian Securities Exchange in 2001, the company has also become a preferred investment of ethical and green investment funds.

The mission statement of WealthWise states that it will aim to:

Support employees in achieving their personal and career goals.

Act in a socially responsible way when dealing with insurance clients and the general community.

Promote a better social and physical environment for the world.

However, the current chief executive officer, Sylvia Trott, thinks that the firm has become complacent and is resting on its past achievements. She is concerned that the firm has built up a reputation for good social and environmental practices but is not 'walking the talk'. There is some level of discontent among employees about the way that management treats staff, and this is impacting on employee satisfaction. There have also been negative reports in the media of its treatment of businesses in Phuket and Langkawi that were damaged in the December 2004 tsunami. The reports claim that the company has tried to minimise the amounts paid to these businesses by strictly applying clauses in the insurance contracts that cover earthquake damage but not flood damage.

In 2004, the company's profit rose by 15 per cent to $173 million on an asset base of $1235 million. This is the third consecutive year of increased profits. Earnings per share were 62 cents, and the market value was $5.40 per share. The board is concerned that WealthWise makes a loss on its insurance business, while its investments yield a strong return and are the main reason for the increase in profitability. Its investment portfolio includes shares in BHP Billiton, Qantas, Telstra and James Hardie Industries.

The board adopts a sustainability approach to viewing its performance and uses the following key performance indicators to assess company performance:

Financial:

Profit.

Gross insurance premiums.

Return on investment.

Economic indicators:

Policy, practices and spending on local suppliers.

Procedures for hiring local staff.

Development projects primarily for public benefit.

Social indicators:

Employee satisfaction ratings.

Percentage of women in the top three tiers of management.

Number of indigenous employees.

Customers' ethical ranking of sales staff.

Number of staff hired who were previously unemployed teenagers.

Environmental indicators:

Tonnes of paper recycled per annum.

Percentage reduction in electricity usage.

Litres of fuel per dollar of sales.

Required:

1. Explain what is meant by sustainability reporting and why a publicly listed insurance company like WealthWise may adopt this approach.

2. Consider the list of key performance indicators used by WealthWise. Explain how these measures could be used to help achieve the mission.

3. Suggest alternative performance measures that could be included in the performance measurement system to assist WealthWise to achieve its mission.

4. Write a report to the chief executive officer explaining what steps she can take to encourage staff to behave in a way that supports sustainability. Specifically, explain to her how the performance measurement system could be used in a balanced way to support the achievement of the company's goals.