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A seal of approval for companies' social progress

By G. Jeffrey MacDonaldCorrespondent of The Christian Science Monitor / July 18, 2005

As someone who hunts for ethical firms, Tim Smith pores over hundreds of company social reports about labor conditions and community involvement. But how many does he trust?

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Far fewer.

"It's not credible if somebody is monitoring and reporting on themselves," says Mr. Smith, director of socially responsive investing at Walden Asset Management in Boston. "You need to do your own review, but you [also] need an independent monitor who has got integrity and is outside" the company.

Call it the "Good Housekeeping" seal of approval for ethical companies. Just as financial auditors probe whether a company's numbers can be trusted, independent social auditors aim to sniff out whether a scandal of sweatshop proportions lurks behind the many photos of happy workers in an annual report.

At this juncture, independent monitoring of social standards is far from the norm in corporate America, which is still getting used to reporting its own progress on social issues. Almost 1 in 3 of America's top 100 companies reported on their social progress this year, according to a June survey from accounting giant KPMG. That's a huge surge from the handful issuing them five years ago. But only 1 in 100 did so with verification from an independent auditor.

That puts the United States far behind Britain, where 71 percent of top companies issued social-progress reports, and more than half of those came with an independent monitor's assurance, the survey found.

Usually, investors can easily determine whether a company has allowed independent monitors to evaluate either its internal reports or its outsourced operations.

They just need to go to the company website.

Since hiring an outside auditor can cost upwards of $100,000, companies spending the money to win credibility will want the world to know, observers say. Prominently placed on its corporate social responsibility (CSR) report will be the name of the auditing organization. What's not so obvious, however, is that some audits may be more trustworthy than others.

"You've got a whole set of commercial suppliers that are out there [getting into social auditing] but it's very easy for them, frankly, to get hoodwinked by suppliers in developing countries," says Conrad MacKerron, director of corporate social responsibility for the As You Sow Foundation in San Francisco. Because it can be easy for factory managers to steer auditors away from problem areas, he says, the best audits might be those from organizations with a history of digging deep to bring trouble spots to light. "If they're not going the extra mile to talk to workers in a safe spot," Mr. MacKerron asks, "are they going to be able to find problems that were missed" by internal reviews?

Among the most sought-after names in social auditing are nongovernmental organizations (NGOs) with international reputations, according to Jeff Erikson, Washington director of SustainAbility, a consultancy in London that helps firms prepare CSR reports. Reviews done by advocacy groups like Amnesty International, Greenpeace, and others would carry far more weight, Erikson says, than those done by groups with close ties to industry, for instance.

When the auditor's name is not a household word, diligent inquisitors might send off an e-mail to the investor-relations department asking who accredited the independent monitors. If CSR reports are reviewed against the AA1000 standard from AccountAbility, for instance, then the benchmark is the same one used by more than 100 firms, including British Airways, Toyota, and Canon.