UNIVERSITYOFGRONINGEN
Full Cost Accounting in a Small to Medium
Enterprise
Is it possible to construct a Full Cost Accounting tool with a broad scope on
sustainability for a green Small to Medium Enterprise?
Master of Science Business Administration Organizational & Management Control
ABSTRACT
The purpose of this research is to find how Full Cost Accounting (FCA) with a broad scope on sustainability could help an organization evaluate (internal) and show (external) sustainability in environmentally focused SME’s. This research is conducted by the means of action research in a bio-based packaging manufacturer, Paperfoam BV. The researcher, together with the company formed an expert panel to implement the FCA system. The result of this thesis describes the development, design process, and evaluation of the system. The system provides to be an evaluation tool that visually shows a complete picture of sustainable impact, which -in a continuous process- can help the SME to evaluate sustainability and integrate a stakeholder perspective.
Keywords: Full Cost Accounting (FCA), Environmental Accounting, Life Cycle Costing (LCC),
INTRODUCTION
Sustainable Development (SD) is a topic with many challenges and opportunities. Where most companies engage in SD in a reactionary way, others thrive on SD through competitive benefits (Sharma & Vredenburg, 1998). Elon Musk’s company Tesla is a unique example of a company that thrives on SD. Elon Musk as an individual prioritizes sustainability with his vision on electric cars and green energy production. This green alternative is a niche that flourishes from the added competitiveness of sustainability and legitimacy from the green corporate image. Tesla seems, however, a quite unique example. Many companies have difficulties dealing with SD (Bansal & Roth, 2000). It is easy to learn from big corporations, but how can small companies walk the path of SD? Especially these Small to Medium Enterprises (SME’s) seem to struggle with SD (Schaper, 2002). SD is often neglected because it is not a topic that has a high priority for SME’s. SD is also poorly executed due to a lack of experience, for example, in dealing with multiple stakeholder pressures. On top of that, SD is poorly documented and evaluated in SME’s in policies, management accounting practices or standards. This lack of documentation and evaluation is not only apparent in SME’s themselves, but also in research (Schaper, 2002). Academic research into SD has mostly been focused on larger corporations. SME’s and their Sustainable Development issues have largely flown under the radar in current SD research. That, while SME’s take up 95% of the private sector firms in Western society. Making up for an estimate of 70% of worldwide pollution (Hillary, 2000). The poor state of research into SME’s and SD means that there are a lot of opportunities for research (Schaper, 2002, p. 528). SME’s that do engage in SD could show interesting findings (Isaak, 2005). These sustainability oriented companies could help understand and aid development of more sustainable business practices (Bansal & Roth, 2000; Bos-Brouwers, 2010). This research will take a deeper look into an SME that, like tesla, is ahead of the game in SD and illustrates the process of improving its evaluation and reporting of Sustainable Development.
‘’We have an unpriced externality in the negative effects […] on the environment and also in the wars that we fight and national security. Whenever you have an unpriced externality you can't quite rely on the market to do the right thing.’’ Elon Musk, (Big Think, 2011).
There is a need for a foundation helping companies to guide these efforts, effectively connecting a company’s success with social and environmental progress towards stakeholders (Porter & Kramer, 2011) Multiple recent researchers propose the integration of management control systems with SD to integrate, measure and control these stakeholder relationships (Stacey, 2010). FCA is an accounting system that financially quantifies the impact of a business externalities on external social and environmental stakeholders’ (Bebbington & Grey, 2001). These quantified externalities are input for managing stakeholder relationships (Durden, 2008) and steering organizations towards their sustainable objective (Bebbington & Grey, 2001). It accounts for environmental and social costs and benefits of economic behavior that traditional accounting overlooks (Bebbington & Grey, 2001). The system could potentially outperform all other sustainable management accounting systems, bringing society, the economy and environment together (Popoff and Buzzelli, 1993).
In the current research we show that FCA may be beneficial as a sustainability evaluation tool for SME’s. A sustainability niche could show interesting findings, which may improve sustainable behavior in SME’s (Bansal & Roth, 2000). Therefore, the research question is: How can FCA contribute in environmentally focused SME’s to help an organization to evaluate(internal) and show(external) sustainability?
What can SME’s learn from applying FCA?
LITERATUREREVIEW
The literature review starts with the definition Sustainable Development. SD then is put in the context of SME’s and tools that are in existence right now. In this section we conclude that a new hands-on tool for SME’s is needed. The literature concludes with proposed advantages of a suggested new tool based on FCA and a life cycle perspective.
SUSTAINABLE DEVELOPMENT
Sustainability is not just about the environment, stakeholders in the economy and society also need to be considered for a complete view of sustainability (Giddings et al., 2002). The economy and society act within the environment and are dependent on the environment
instead of having supremacy over the environment. This view, as depicted in picture 1, is a ‘shift in understanding of humanity’s place on the planet’, SD is about working towards a society where the society and environment are not overpowered by the economy (Giddings et al., 2002, p. 40).
In SD, the word ‘Development’ pertains the notion of improvement. This improvement is about the development towards being as fully sustainable as possible (Porter & Kramer, 2011).
THE CREATION OF SUSTAINABLE VALUE
Combining the creation of sustainable value in this section with the definition of SD broadens our definition to the development towards a world where companies create sustainable value and minimize damage with their business conduct on all -social, ecologic, economic- aspects of sustainability.
THE IMPORTANCE OF A LIFE CYCLE PERSPECTIVE IN SUSTAINABLE DEVELOPMENT
ANALYSIS OF SUSTAINABLE DEVELOPMENT FROM LIFE CYCLE PERSPECTIVE
A Life Cycle Analysis (LCA) is one of the tools that can be used to enable Sustainable Development with a broad perspective on sustainability (Gray, 2010). An LCA can be used as internal decision and evaluation support, but also as external reporting tool for both legitimacy and marketing purposes (Klöpffer, 2003). The general approach in LCA analysis is a reductionist approach, focusing on damage reduction, and impact assessment (Klöpffer, 2003). However, it can also be used in a cost-benefit analysis, including environmental, social and economic aspects of sustainability, and possibly even the inclusion of added value (Klöpfer, 2003) Generally, social, economic and environmental subjects all have their own separate Life Cycle approaches.
Environmental-LCA pertains the environmental domain and is described in detail by the European Environment Agency (Jensen,1997). In this domain, environmental principles pertain factors that revolve around the minimization of environmental damage through the use of natural resources, energy consumption and the creation of (hazardous) waste (Glavič & Lukman, 2007).
Life Cycle Costing (LCC) is often a combination of accounting and LCA, finding hidden environmental costs that generally are described as ‘overhead costs’ for a company. Combining these overheads in LCA makes it possible to find hidden costs. Full Cost Accounting can also be seen as a version of LCC, in which accounting for trade-offs in the supply chain indicates life-cycle thinking. However, current Full Cost Accounting, when considering the life cycle does so by only looking at the supply chain (Burrit & Schaltegger, 2014). This results in a shorter (economic) life cycle instead of a physical ‘cradle-to-grave’ LCA (Klöpfer, 2003).
The most comprehensive and complete LCA analysis from a social perspective is described as the Social-LCA by the UNEP. Sustainable Social principles pertain terms that include social responsibility (Glavič & Lukman, 2007). These principles include: ‘’social responsibility, safe, respectful, liberal, equitable and equal human development, contributing to humanity and the environment and health & safety’’ (Glavič & Lukman, 2007, p. 1880.). This principle comes down to participation within the community trough shared values and equal rights (Goodland, 1995). This is the least developed analysis of the three, especially if the aim is to quantify the social domain (Klöpfer, 2003).
of sustainability, and recently the call arose for a multidimensional approach to capture all dimensions in one analysis. Klöpffer, (2008) suggests future research to aim for a multidimensional approach, but no practical application has been provided so far. The current research will therefore aim to include a multidimensional approach.
SUSTAINABLE DEVELOPMENT IN SME’S
As described in the introduction, Sustainable Development is an especially difficult topic in SME’s. Schaper (2002) summarized the issues of Sustainable Development in SME’s and concluded that environmental performance of SME’s as a whole is poor compared to larger corporations. SME’s are barely engaging in voluntary environmental improvement, even though there is a common agreement between managers that the environment is an important subject (Merrit, 1998). Hillary (2000) provides insight into the barriers of self-regulation in SME’s and concludes that most SME’s are unwilling to apply significant changes in production materials, processes and management. Instead, SME’s prefer ad-hoc solutions such as ‘end of pipe treatments’, as opposed to proactive measures.
This poor performance towards SD is a result of the capabilities of SME’s compared to bigger corporations. Their path towards SD is different than the path of smaller companies. Bigger corporations tend to have larger funds available, have more formal structure and their consequences are significantly more visible (Jamali, Zandhour & Kehisian. 2009). However, larger corporations lack entrepreneurial flexibility and dynamics for changing circumstances (Bos-Brouwer, 2010). Sustainable contributions in SME’s are nonsystematic, unstructured and less formalized (Russo & Tencati, 2009). Therefore, conclusions from research into SD in bigger corporations might not always apply to these smaller companies.
Through this interplay, big corporations can become more sustainable because of SME’s that are innovators in sustainability. These SME’s have a differential effect on larger corporations. Larger corporations are less likely to pursue these sustainable opportunities at first, but idealistic large corporations could mimic—or blatantly buy—their initiatives. This transformation, starting from an innovative SME, could have a significant sustainable effect on markets through this interplay (Hockerts & Wüstenhagen, 2010). Being a sustainability niche as an SME can also result in becoming invaluable as a sustainable alternative in a network or supply chain (Moore & Manring, 2009) Of course, other SME’s can also learn from SD oriented SME’s by how these companies use their advantageous sustainable characteristics to become more competitive (Bos-Brouwer, 2010).
SME’S AND SUSTAINABILITY TOOLS
In the previous subchapter it becomes clear that SD is an important subject in SME’s. SD can make SME’s more competitive and could potentially even have a snowball effect on sustainability in the market in which the SME is operating. However, the overall sustainable performance of SME’s is poor. Therefore, improvement of decision making, evaluation and reporting for SME’s is vital. SME’s need a tool that fits the business style of SME’s that is practical and has internal and external benefits for sustainability and the company itself. There are a lot of sustainability management tools. Some of which are evaluated or tested in SME context, like Ecomapping (Koroljova and Voronova, 2007), Design for environment (Starkey, 2000) Life cycle Assessment (Masoni, Sara, Scimia & Raggi, 2004; Starkey, 2000), CSR reporting (Jamali et al., 2009; Perrini & Tencati, 2006), Environmental Accounting ( Heupel & Wendisch, 2003; Karvonen, 2000), Full Cost Accounting (Herzig et al. 2012; Clarke-Sather, Hutchins, Zhang, Gershenson, and Sutherland, 2011), Benchmarking (Altham, 2007; Tencati, Perrini & Pogutz 2004) and the Sustainable Balanced Scorecard (Hansen, Sextl & Reichwald, 2010; Perez-Sanchez, Barton & Bower2003),
However, many of these tools are designed with large corporations in mind and are too complex and resource-intensive for SME’s (Bos-Brouwer, 2010; Williams and Schaefer, 2013).
The state of research on practical SD tools for SME’s is in sharp contrast with the potential effects of SD for SME’s in the market as described in the previous chapter. A new or modified tool is needed with limitations, strengths and preferences of SME managers in mind (Johnson, 2015),
Cost Accounting makes SD comprehensible by quantifying impact with monetary values (Schaltegger & Burrit, 2010), which could be beneficial for SME’s. Although not often done, Full Cost Accounting also has the advantage that a life cycle perspective can be implemented (Burrit & Schaltegger, 2014). In our definition of sustainability, we already concluded the importance of a life cycle perspective. The possibility of combining these two systems makes Full Cost Accounting the most promising development tool for SME’s in the current research. By combining and modifying these two systems, a system specifically designed for SME’s could be designed.
In the next chapters I will explain FCA and why this system together with LCA has potential for SME’s.
FULL COST ACCOUNTING
FCA is an accounting system that corrects accounting numbers for SD (Bebbington & Grey, 2001). It accounts for environmental and social costs and benefits of economic behavior that traditional accounting overlooks. Its goal is to internalize external stakeholder consequences into the accounting system. The problems FCA tries to solve are those that arise from the economic system that, because of its focus on internal revenue, does not take environmental and social impacts into account. This internal focus leads to the economic system being inherently unsustainable (Bebbington & Grey, 2001). A company creates ‘externalities’ through their business behavior. These ‘externalities’ are external damage to the environment or society created by the company conducting business. The goal of FCA is to internalize these externalities so that companies take them in account (Bebbington, Grey & Kirk, 2001). FCA internalizes these externalities by quantifying them in monetary value. Expressing externalities in the single measure of money makes it possible to evaluate impact in the social and natural environment. Qualitative—non-numerical—data is hard to evaluate for decision making because the scope of their impact is not quantified. By monetizing externalities on different dimensions, these externalities can be compared with one another and issues of possible improvements can be identified (Schaltegger & Burrit 2010). In short, expressing impact in monetary terms has the advantage that it is expressed in a value that everyone understands.
In the introduction I included a quote from Elon Musk about the externalities of the oil business. Just to show how vast these externality costs can be; the price of one barrel of oil in 1992 was 15$. The ‘true’ environmental cost, of a barrel of oil is 60$. (Energetics, 1992).
accounting. Instead, FCA could support management with an overview of actions and their impacts, that is more transparent about rationales (Bebbington, Brown & Frame, 2007).
Full Cost Accounting is one of many terms for accounting systems that internalize these externalities. For example, Dutch consultancy firms use the term True Cost Accounting (Eosta, 2017). In accounting literature ‘total cost accounting’ and ‘sustainability accounting’ are also often used terms (Schaltegger & Burrit, 2010). These terms come down to the same principle of internalizing externalities. Therefore, I treat these terms as the same.
Figure 2: Environmental profit & loss account visualizing impact with FCA (Kering Group, 2015)
visual for SME’s. Evaluation can show ‘what if’ alternative solutions were chosen. This information can even be used for legitimizing and showing sustainable behavior to stakeholders. The need for ‘pragmatic benchmarks’ for the comparison of supply chain performance is also called for by Burrit & Schaltegger, (2014) in a literature research pertaining FCA and the supply chain. It can help show and compare good, intermediate and bad sustainable behavior for companies.
TOWARDS AN INTEGRATED FULL COST LCA FOR SME’S: PROPOSED ADVANTAGES
From the previous section we can conclude that FCA for SME’s with a broader scope on the life cycle of a product is a greenfield with little theoretical literature to draw from (Burrit & Schaltegger, 2014, p. 330). There are some exceptions. Two studies were found studies pertaining SME’s and LCA; Herzig, Viere, Schaltegger & Burrit. (2012) researched SME’s in developing countries. Clarke-Sather, Hutchins, Zhang, Gershenson, and Sutherland (2011) have researched SME and sustainable supply chain accounting and found that SD oriented SME’s experience difficulties quantifying indicators when this is done by the company itself. From the literature research we can conclude that a new or modified tool is needed for SME’s, a FCA model in which monetary impact will be combined with LCA to capture a broader scope of impact by business behavior. I propose that this integrated system could have multiple benefits, which I will now explain.
FCA could have multiple benefits for (sustainability oriented) SME’s.
The expression of impact in monetary value might have a lot of potential. Management in SME’s need hands on information that is easy to understand (Schaper, 2002). Monetary evaluation makes it possible to visually evaluate quantified environmental impacts (Bebbington et al., 2007). By monetizing SD damage and added value in monetary value, SD becomes more comprehensible and relatable for managers.
SME’s, when applying SD, mostly just focus on environmental waste reduction and ‘end of pipe’ solutions (Schaper, 2002), FCA encompasses not only the environment, but social and economic aspects as well. Therefore, it could potentially aid a ‘green’ company to evaluate all aspects of sustainability.
Striving for true sustainability, and actively showing these efforts might just be the best way to legitimize sustainability as a whole again (Porter & Kramer, 2011). However, as of now, sustainable accounting with a focus on external reporting is scarce (Burrit & Schaltegger, 2014). Therefore, this case research serves as a testing field for the development of an externally oriented FCA system.
Applying a Life Cycle Analysis in combination with FCA could have multiple benefits for (sustainability oriented) SME’s.
RESEARCHDESIGN
With little SME-specific literature to build upon, this model is experimental adaption and combination of FCA and LCA towards the preferences, qualities and weaknesses of SME’s. In essence this lack of theoretical grounding means that the research objective is highly experimental. Due to the experimental nature of this model, success is not guaranteed. However, testing the system could shed light into whether a monetized FCA system like this has potential for SME’s. The end goal is not to develop the absolute tool to be used for SME’s for Sustainable Development. Rather, it is a probe to find out whether FCA could serve as a viable and practical SD tool for SME’s, and whether it is possible to construct such a system for SME’s.
The full cost model will be achieved in four steps, as suggested by Gray, Hibbitt & Kirk (2001).
1. Define the cost objective, which can be for example a product or a production process. 2. Specify the scope or limits of analysis, e.g. what sub-set of all possible externalities are to be
identified.
3. Identify and measure the external impact.
4. Cost the external impact, monetarize the externalities that are not already captured by the current accounting for a cost objective.
A life cycle view will serve as a framework for data collection and to divide impact on different stages in the life cycle as depicted in figure 3.
Analyzing Sustainable Development in the life cycle of all -social, ecologic, economic- aspects of SD is comparable to the formula of Klöpfer (2008). The formula states that a Life Cycle Sustainability Analysis= Environmental LCA + Social LCA + Life Cycle Costing (LCSA=E-LCA+S-LCA+LCC). Although it uses the same scope, the method of costing used in the current experiment is based on Full Cost Accounting, which makes it possible to monetize and compare impact in a single unit of measurement (money). Whether such a model can be used for external reporting will be assessed by evaluating the completed system with the company after the analysis.
Figure 3: Proposed life cycle stages in the current analysis.
First, I will explain why this experiment is based on a reliance on experts. Then, I will explain the four steps described by Grey et al (2001), beginning with the cost objective: The Product. After explaining the cost objective, I will explain the overarching scope and a method to come to a subset of possible externalities; Key Performance Indicators(KPI’s). Thereafter I will go into detail what techniques will be used to find these social, environmental and economic KPI’s for sustainability and how these will be monetized.
A RELIANCE ON EXPERTS
According to Schaper (2002), researchers and experts have an important role in assisting and evaluation of what types of environmental improvement activities are most easily introduced into a small firm. Here, success of adoption in SME’s lies within awareness and the promotion of benefits of implementation, either through experts, researchers or consultants (Johnson, 2015).
The same value of experts is found in the state of FCA; Due to the conceptual nature of FCA, it is not (yet) a system that is easily implemented through a company without the reliance on experts. Especially because pragmatic managerial FCA tools and standardized monetary indicators are yet to be developed (Burrit & Schaltegger, 2014). One of the two papers found with FCA for SME’s, Clarke-Sather et al, 2012, confirms that it proves difficult for SME managers to quantify indicators on their own. Therefore, this experiment includes a reliance on experts. Instead of letting the company create their own FCA system, the researcher will serve as an expert aiding the development of the system together with the expertise of the company through action research.
This reliance on experts might be in contrast with the lack of resources found in SME’s, however this might not necessarily be an issue. Since the monetization has to be delegated to the expert, the SME saves time (a tradeoff with money). In return, the SME is rewarded with a comprehensible valuation of SD impact. Whether this assumption holds will be answered trough this experiment.
COST OBJECTIVE
until February 2017.
SCOPE OR LIMITS OF THE ANALYSIS.
A Life Cycle Analysis can be infinitely thorough, one could either define endless boundaries within the supply chain, drowning in information, or focus too narrow, missing important factors (Bebbington et al, 2001; Hunt, Boguski, Weitz & Sharma, 1998). This tension especially relevant for SME’s, since they lack resources and time.
For the FCA model it is necessary to choose the most important factors out of the respective FCA analysis to monetize and compare. In essence, the LCA is a longlist from which the most important factors, KPI’s, need to be selected for monetization.
There are multiple strategies to help attain a focus on these most important factors in LCA’s. These strategies vary in accuracy (Hunt et al., 1998). In this experiment the most fitting technique is to conduct a hotspot analysis. By using literature and (tacit) knowledge of experts, and possible weighted data from the LCA, hotspots are chosen as KPI’s in the life cycle that predictably have the greatest impact on SD, excluding those steps that have little impact on the total cost (Sarac, Absi & Dauzère-Pérès, 2010). The team conducting the hotspot analysis in this experiment has extensive knowledge about product engineering and sustainability, therefore there is an abundance of knowledge to be able to conduct a hotspot analysis. These experts can, in this experiment, follow the Pareto principle, which suggest that 80% of damage generally comes from 20% of causes. Even though it is not the most precise estimation process, it helps focus on the most important causes (Surhone, Timpledon & Marseken, 2010).
The resulting quantification—in monetary terms—of these KPI’s would then allow for benchmarking over time, and alternative production methods. In the case of this experiment two alternative production methods will be evaluated from the perspective of the company. The proposed monetization assumes sustainable value that can be damaged and increased. Therefore, all KPI’s will be created in a cost-benefit fashion.
IDENTIFICATION, MEASUREMENT AND COSTING OF ENVIRONMENTAL VALUES
The environmental LCA has already been conducted by the Copernicus Institute (Shen & Patel, 2007). Emissions will be extracted from this LCA and monetized with the most comprehensive and complete handbook—to my knowledge—on environmental monetization. The Shadow Prices Handbook by CE
Delft (De Bruyn et al., 2010). Outcomes will be benchmarked against alternative production methods
IDENTIFICATION, MEASUREMENT AND COSTING OF SOCIAL AND ECONOMIC VALUES.
Social values will be extracted through a Social Life Cycle Analysis (S-LCA). Since social interests are weighted differently by different stakeholders, interest groups and region, quantifying social measures is fairly subjective (Benoît et al., 2010). Stakeholders will be selected by the experts in a creative session to find important stakeholder categories. These found stakeholders will then be cross-checked with stakeholders from the S-LCA stakeholder list by Benoît et al, (2010) to check whether all stakeholders are included. Relative importance of these stakeholders will be weighted to quantify priority from the perspective of the company. The monetization of these stakeholders, where possible, will be done with the aid of most recent and complete handbook—to my knowledge—on monetization of social values; Social Accounting for Sustainability; Monetizing the Social Value by Retolaza, San-Jose & Ruíz-Roqueñi, (2016). The process suggested by Retolaza et al, (2016) results in added value in the social domain in three categories.
1. Economic Value with Social Impact: distributed measurable economic value to the society as a whole by producing the product. This value can be calculated with the use of a Value-Added Statement for a product level analysis. E.g. income to stakeholder personnel.
2. Socio-Economic Return: The economic returns specifically allocated to the public administration. E.g. Taxes.
3. Specific Social Value: The value in this domain can be seen as the non-economic value that is created towards specific stakeholders. Here, perceived value created is specific to the stakeholder in focus, for example; perceived value of job security is only relevant to personnel, and not to costumers. Monetization of this category is difficult, where possible, a KPI will be linked to a closely related quantifiable value, called a PROXY.
Consolidating these values into each other and subtracting double values results in the total Social Value created by the product. For example: Total Consolidated SV = SV(costumers) + SV (personnel) + SV (government) + SV (etcetera) − double numbers. In the current research I will allocate these
Figure 4: Social value categories in which sustainable social value can be created (Retolaza et al., 2016).
The resulting consolidated value is a combination of these three values and is projected against financial profit as seen in figure 4.
RESEARCHMETHODOLOGY
This research is an in-depth experiment that suits a qualitative approach (Yin, 1994). The research question is ‘tightly scoped’, taking a deeper look on how a ‘green niche’ in a smaller business could benefit from FCA. Answering the ‘how’ of this research question with a qualitative analysis will offer insight into the complex social processes that will not be touched upon in a quantitative analysis (Eisenhardt & Graebner, 2007). Single cases are chosen ‘because they are unusually revelatory, extreme exemplars, or opportunities for unusual research access’. This case is both an extreme example of ‘green’ behavior, and a unique unusual research perspective. The perspective on ‘green’ SME’s will be used to explore FCA in a ‘critical case’, where a clear set of propositions and circumstances are believed to be true that could extend knowledge on the subject (Yin, 1994).
ACTION RESEARCH
Most importantly, action research allows for the involvement of a mixed team of experts (ter Bogt & van Helden, 2011). As described earlier, the use of an expert or researcher is valuable for SME’s (Schaper, 2002). Especially in FCA research SME’s might experience problems with implementation of FCA on their own. Active engagement of a ‘mixed working team’ is also necessary for the monetization process of social values (Retolaza et al., 2016). Therefore, the writer of this thesis will actively engage in the development process as an expert and consultant.
The researcher being a graduate Industrial Design & Engineering conducting a master thesis in management makes it possible to apply knowledge from both perspectives. The skills from design perspective will help with potential implementation trough product development expertise. Making a comparison between alternative production methods possible.
DATA COLLECTION & DATA ANALYSIS
According to Eisenhardt (1989), findings in qualitative research are more valuable when multiple data sources are used due to triangulation. Data for this research consists of financial documentation, the full cost accounting data from databases on the LCA and data gathered in the shape of in depth interviews. Interviews in the case company and stakeholders and from accounting spreadsheets used by the case company.
RESULTS
The results in this experiment show the development of the FCA model for the company Paperfoam. A short introductory interview will shed some light into Paperfoam as a company and its current state of sustainability reporting and evaluation to build the planning stage of the action research. Their initial view on sustainability, full cost accounting and Life Cycle Analysis will also be assessed at the start of the experiment to make it possible to reflect on the FCA model after it is finished. After a finished model, the company, together with the researcher will reflect on the result, after which the possible next steps for the continued use of the model will be discussed.
A PRELIMINARY LOOK AT THE COMPANY AND THE DEFINITION OF THE COST OBJECTIVE
The case company, Paperfoam, is a company producing bio based packaging. The company provides work for about 150 to 250 employees in the Netherlands, Malaysia and the US, depending on sales. The company has just revised its mission and vision to include a broader view on SD and shows extensive knowledge and interest on all aspects of sustainability. Internally the company discusses the need for an economy where ‘’the price of a product truly reflects what impact the product has on the world’’. The company embraces life cycle thinking, but struggles with communication of sustainability to customers. Their experience is that anything beyond CO2 comparison is often too complicated for most external stakeholders to understand.
Instead of producing cardboard or plastic packaging, their product is made by ‘baking’ biodegradable starch, fibers and water in a mold. The mix of starch and fibers is heated and a foamy structure is formed in the mold. Essentially, the product could be seen as ‘’baked air’’. Paperfoam produces egg baskets for free-range CO2 neutral eggs. The product has less eight, is bio based and requires less emissions to produce when compared to other products. The company already conducted an LCA on a comparable product to asses’ environmental impact. However, the comparison to alternatives has not been monetized, and social and economic sustainability has not been considered.
The egg basket will be analyzed from a life cycle perspective, which thereafter undergoes monetization trough Full Cost Accounting on all—social, environmental and economic—aspects of sustainability in the life cycle. Calculations are based on annual production in the Netherlands, assuming a yearly production of 8.400.000 eggcups per year.
Figure 6: Backbone for the FCA analysis. The life cycle of a Paperfoam egg tray.
IDENTIFYING SOCIAL VALUES AND INDICATORS
The Social value analysis with the expert panel started with an expert session. The researcher, together with management created a mind map. The goal of this mind map was to generate a list of stakeholders to whom social value is created by Paperfoam. The mindmap also shows which indicators are related to these stakeholders.
Important here was to keep management in the dark about standardized lists containing stakeholders, potential social values and indicators. The Social-LCA handbook by Benoît et al, (2010) for example presents a standardized Social-LCA longlist. By keeping management in the dark about these longlists, the thinking process of management was not restricted to what a handbook perceives as social values. This helped show the perspective on value creation by management of paperfoam instead of the perspective from literature.
Figure 7: Mindmap of social value creation towards stakeholders, created by the expert panel.
The next step was to arrange these stakeholders and indicators according to their position in the life cycle of the product (Figure 8). Some indicators and stakeholders are mentioned multiple times in more places, such as personnel; Personnel is seen both in the company, but also in the supply chain. During the creation of the mindmap, management noted that they perceive SD in the social domain as sustainable value creation. Therefore, these terms are treated as the same.
Capturing perceived stakeholder weight is an important step in monetizing the social domain (Retolaza et al, 2016). To gain insight about the respective weight of importance linked to these stakeholders as perceived by management, weights were assigned to stakeholders in the life cycle (Figure 8). Participants of the session stacked chips next to the stakeholder groups in the supply chain. The more chips, the higher the importance of these stakeholders. Stacking these chips was done in multiple iterations, each time evaluating whether the balance between chips was a right representation of importance. Management had an unlimited amount of chips and the stacks were evaluated in three iterations. Interestingly, management stacked value for disposal of the packaging quite low. Social value is perceived as more prevalent during manufacturing then in end of life. Their explanation for this was; ‘’We happen to know that percentage of packaging actually ends up in the green bin, about 5%. even when we buy eggs ourselves for lunch, we sometimes buy the unsustainable packages’’.
As described in the research design, the last step in the Social-LCA analysis would be to select the most important factors from the Social-LCA as KPI’s for monetization. These KPI’s could for example be selected by applying the Pareto principle, otherwise known as the 20/80 rule. However, management was strongly against doing so. Management felt that by focusing only on the most important KPI’s, important information would be neglected, which would result in an ‘’incomplete picture’’. It was therefore decided to try and monetize the entire Social-LCA result in figure 8.
VISUALIZING AND MONETIZING SOCIAL AND ECONOMIC VALUE CREATION
In order to further explain the creation process of the FCA model in the current analysis, the end result will firstly be explained. The result will serve as a roadmap trough the FCA model.
In the current FCA model, a solution was found in a Sankey diagram. A Sankey diagram visualizes weight and flow of monetary value. The creation of this model was done using results out of Microsoft Excel and two software packages; Sankeymatic (Bogart, 2017), and Adobe Illustrator. The complete visualized result of the FCA analysis can be found in Appendix A.
A simplified depiction to explain the principle of the FCA visualization can be seen in figure 9. The diagram shows a weighted and monetized flow of sustainable social and economic values to stakeholders in the life cycle. The higher the monetary value, the more thickness a stream of value has. Value flow of each stakeholder splits into multiple indicators trough which sustainable value is created. Personnel for example splits into wages, job security, education, and so on.
In the expert session, chips were stacked by management next to stakeholders in the life cycle to evaluate importance of these stakeholders as perceived by management. The green shading in the FCA visualization represents this perceived importance. The more importance assigned by management, the darker the shade of green. These shades of green help with the interpretation of the model. Management can now easily see which streams of value are most important to them.
Society and the economy are dependent on the environment (Figure 1). This means that the environment is not part of the streams of social and economic value. Instead, the environment is shown and calculated separately and visualized as the context in which social and economic value is created.
Figure 9: Simplified depiction of FCA visualization result, showing flows of sustainable social and economic value within the context of the environment. The complete result can be found in Appendix A.
Economic value with social Impact largely consists of distributed economic value such as wages. Socio-economic return, consists of returns to the public administration such as taxes.
Part of economic value with social impact is distributed value. Distributed value includes all other economic values ending up at various stakeholders. Where exactly these economic values end up is not known. These categories are all ‘hard’ economic values that can be traced back to the cost price of a product. The sum of these three categories amounts to the total cost of a product. To illustrate this principle, an example (table 1). The annual cost price of fiber in the supply chain is € 180.749. It is assumed that 15%, of these costs end up as socio-economic return through various taxes. According to Firmfocus (n.d.), the wage to sales ratio in the fiber industry is 15%. Therefore, in this example, this 15% ends up as economic value with social impact. The remaining 70% is economic value of which stakeholders are not defined, this economic value ends up as distributed value.
Socio Economic Return: Taxes 15% € 27.112
Economic value with Social Impact: Wages 15% € 27.112
Distributed value: Undefined 70% € 126.524
Total fiber cost: Total: 100% € 180.749
Table 1: Example calculation showing that the sum of Socio Economic Return, Economic value with Social Impact and Distributed value equals component costs.
sustainable value of Paperfoam. This becomes clear when looking at figure 13, specific social value is only calculated in Paperfoam itself, not for alternative production methods.
The FCA model in figure 9 is separated into the segments supply chain, Paperfoam, Gate to Grave. These steps represent the life cycle of the product. In the next subchapters the calculations of the three segments of the Social and Economic FCA will be explained. The environment will be explained separately after the Social and Economic FCA segments.
monetized social and economic sustainable value in the supply chain
In essence, social and economic value in the supply chain is created by buying individual components and utilities required for production. This economic activity creates social value in the four categories described in the in the previous section. The detailed flow of values in the supply chain is presented in figure 10. In essence, these costs are visually dispersed as created sustainable value over stakeholders in the supply chain. Important to note is that these numbers are altered for confidential reasons.
Economic value with social impact in the supply chain is expressed in wages to employees. The Statistics Netherlands (CBS) collects data and publishes macro-statistics of Dutch companies. Firmfocus (n.d.) uses data from the CBS to present benchmark averages for specific industries. One of these averages wage to sales ratio. The specific ratios from the pulp industry, starch industry and also utilities and transport have been used to calculate how much wages, or, economic value with social impact is created by paperfoam by using annual estimated material, utility and transport costs.
Specific social value is the non-economic value that is created towards the most important specific stakeholders in the supply chain, the suppliers. Management perceived social value generated by greening the supply chain. For specific social value, a PROXY is used for valuation. The created value by Paperfoam is approximated by calculating the average cost of patenting a new technology according to the Rijksdienst voor Ondernemend Nederland, which lies between 100.000 and 50.000 (RVO, n.d.). In this case this value is set as (100.000+50.000)/2 = €75.000 .
Distributed value would normally be part of economic value with social impact. This flow of economic and social value pertains all other value towards unspecified stakeholders down the supply chain. This can for example be interest payments, down chain component costs, profit for shareholders in the company or economic value towards other stakeholders. Since we do not know where this unassigned value ends up, it is assigned separately as distributed value.
SOCIAL AND ECONOMIC FCA IN PAPERFOAM ITSELF
The detailed flow of values in paperfoam itself is presented in figure 11. Just as in the supply chain, all segments except specific social value add up to profit and loss values that are distributed over various stakeholders.
Economic value with social impact essentially comes down to annual wages of personnel, education towards personnel and the interest payment to the bank.
Socio economic return is assumed as zero. Paperfoam is still paying off debt, and therefore pays no taxes. Taxes paid by employees are not considered.
Distributed value again pertains all other distributed economic value, for example towards shareholders.
Specific social value within paperfoam is all monetized non-economic value created by Paperfoam towards specific stakeholders. The broad perspective on stakeholders by management of Paperfoam resulted in specific social value creation towards multiple stakeholders. The PROXIES and calculations used for monetization of each specific social value creation can be found in Appendix BB.
One example of specific social value is the influence of greening in the packaging industry towards the petrochemical production industry as a whole. The PROXY for the annual value of the cornstarch-based polymer technologies from Paperfoam is assumed as the cost of a patent, which lies between €100.000 and €50.000 (RVO, n.d.). Growth of environmentally friendly packaging is around 17% (Plastemart, 2017). The value of greening in the packaging industry can then be seen as a perpetual value, in which the average patent cost (100.000+50.000)/2 = €75.000 would be the Coupon rate, and the 17% growth the discount rate. Growth as discount rate because the share of Paperfoam in changing the industry will be smaller every year. Present value from greening in the industry would then be (75.000/0.17)-75.000 = €366.179.
Another calculation is the specific social value created towards social organizations. Paperfoam is used as a marketing tool by for example Wakker Dier. The PROXY used here is the average cost of one commercial in 2017, €19.500 (Film smg studios, 2017).
The PROXY to calculate job security for personnel of Paperfoam is found by looking up the industry average of fixed contracts. According to the CBS, within the industrial sector, 61% of employees have a fixed contract (Chkalova, Genabeek, Sanders & Smits, 2017). Within Paperfoam itself, 70% have a fixed contract. Here, the difference of 9% is multiplied with an average annual wage cost to represent job security.
Value towards the municipality amounts to €47.324. This value consists of job creation and greening of the municipality. The PROXY for job creation here is the percentage—3%—of jobs within Paperfoam coming from the Employee Insurance Agency (UWV) multiplied by total yearly wages cost.
The PROXY for greening of the municipality here is the fact that Paperfoam uses green energy, which is one of the goals of the municipality, total annual energy cost is used to represent this indicator (DEBBarneveld, n.d.).
MONETIZED SOCIAL AND ECONOMIC VALUES ‘GATE TO GRAVE’
‘Gate to grave’ pertains the last part of the life cycle, the part where the product leaves Paperfoam and ultimately ends up with the consumer. The egg tray gets sold to Rondeel poultry farm, the egg producer. Rondeel sells the product to Albert Heijn. Albert Heijn thereafter sells the product to the consumer. Paperfoam contributes specific social value towards these stakeholders. The detailed flow of values during ‘gate to grave’ is presented in figure 12.
In the case of the egg producer, Paperfoam packaging has specific production benefits. Each of these benefits: de-stacking, wat is dit? and film hinge technology allow faster production. The PROXY to quantify these benefits are assumed as 1% of the sales price towards the egg producer based on assumptions from management of Paperfoam.
Retail, Albert Heijn, benefits from the marketing of Wakker Dier and CO2 neutral eggs. The PROXY used here is an estimated 2% increase of sales to consumers, which results in €491.300 extra sales revenue distributed over the two marketing effects.
COMPARING SOCIAL AND ECONOMIC FCA VALUES TO ALTERNATIVE PRODUCTIONS
As previously stated, the sum of economic value with social impact, socio-economic return and distributed value is equal to sales revenue. The PROXIES from specific social value add up as ‘monetized non-economic value generated to specific stakeholders’ on top of this dispersion. By distributing social and economic value creation through the four segments, a comparison is made between different production methods.
Management from Paperfoam suggested two alternative production methods used to produce egg trays, polystyrene thermoforming and pulp manufacturing from recycled paper. The comparison is made by creating hypothetical production methods. Each company is based on a fictional supply chain and fictional company data. ‘Gate to grave’ values and specific social value are not considered in the alternative production methods. The complete calculations on these fictional production companies can be found in Appendix BB. Some of the more important building blocks to base these fictional company’s on are:
- A Sales price and annual production quantity of €0,19 and 8.400.000 respectively, these numbers are the same as Paperfoam’s.
- Mold costs are assumed as €60.000, depreciated in an annual straight-line method over 6 years. - Supplies to sales ratios are based on data from Firmfocus (n.d.).
- wage to sales ratios both for the company and its supply chain are based on data from Firmfocus (n.d.).
Figure 13: Comparison of social and economic sustainable value creation using different production methods.
The first thing that becomes clear by the results in figure 13 is that the broad perspective on stakeholders amounts to more than 50% of social value created by Paperfoam. The total sum of specific social value creation by Paperfoam amounts to € 1,93 million.
MONETIZED ENVIRONMENTAL DAMAGE
For monetizing environmental damages, the existing LCA analysis by Shen & Patel, (2007) was used as a departure point. This analysis describes the LCA of a mobile phone package. In consultation with management of Paperfoam it was decided that this LCA can be used for monetization because these products are of similar weight and describe the same material. The mobile phone package in this LCA was compared with pulp and polystyrene alternative production methods. Results from this LCA are mainly presented in Eco points or percentages, which are not monetizable. The LCA does provide important results regarding total energy usage and the amount of CO2 emissions created during the life cycle of a product, which can be monetized.
The calculation process for energy usage is done in the following way:
For a Paperfoam tray, production would cost 541 kilojoule (KJ) of energy per tray. This number is recalculated to kilowatt-hours(Kwh) per Annum with an annual production of 8.400.000 trays, resulting in a total energy usage of 1.277.361 Kwh per . This calculation is also done for the alternative production methods.
The next step is to monetize these values. As described in the methodology, the plan was to use the shadow pricing handbook from CE Delft, (De Bruyn et al., 2010). The limitation of this handbook is that it only suggests shadow prices for specific water and air emissions, such as CO2 and nitrogen oxides (NOx). Calculation of externality costs from energy usage is therefore not possible with this handbook.
The data framework of this handbook however is based on monetization of specific energy production methods from the ExternE project of the European commission (2006). The ExternE project does provide data to monetize energy usage. The ExternE project calculated external costs for specific energy production methods such as iginite, coal, solar and nuclear energy. External pricing data includes but is not limited to water and air emissions and their human health effects, effects on ecosystems and global warming and other burdens such as noise and risk of accidents. These hazards are primarily based on damage cost estimates, and where unavailable abatement cost methods (ExternE, 2006).
Since these values are from 2005, they needed to be adjusted for inflation. This was done using the Harmonized Index of Consumer Prices (HICP) from the CBS (2017).
energy.
Table 2: Calculation of externality costs of grey energy per Kwh in the Netherlands. Source of energy percentages: CBS (2016) Source of externality cost/Kwh: (ExternE, 2006).
Table 3: Calculation of externality cost of green energy per Kwh in the Netherlands. Source energy percentages: CBS (2016) Source externality cost/Kwh: (ExternE, 2006).
The second KPI is CO2 emissions during the production process, transportation and incineration. To calculate these values, one can either use damage cost or abatement cost. In this case, just as with externality cost of energy, damage cost should be used. This, because the general rule to decide between these two costs is ‘if a project leads to changes in environmental quality, damage costs should be used, while if it leads to changes in the efforts required to secure environmental targets, abatement costs are preferable.’ (De Bruyn et al., 2010, p. 9). In this project, changes in environmental quality are central because production damages the environment.
Table 4: Results from comparison of environmental externality costs of energy usage and CO2 emissions. Input data providing total energy usage and CO2 emissions from the LCA of Shen & Patel (2007). Monetized CO2 by using data from CE Delft (De Bruyn et al.,
Energy type Externality cost/KwH 2017 Grey energy Externality cost NL
Biomass € 0,00558 4,71% € 0,0003
Wind, solar, water € 0,00279 8,20% € 0,0002
Nuclear € 0,00781 6,88% € 0,0005
Coal € 0,03905 36,66% € 0,0143
Natural Gas € 0,01674 43,54% € 0,0073
Total externality cost/KwH € 0,0226
Energy type Externality cost/KwH 2017 Green energy Externality cost NL
Solar € 0,00669 4,23% € 0,0003
Wind € 0,00279 46,08% € 0,0013
Water € 0,00223 0,93% € 0,0000
Biomass € 0,00558 48,76% € 0,0027
Total externality cost/KwH € 0,0043
Life cycle stages Externalities Paperfoam Pulptray manufacturer PS thermoformer
Supply chain CO2 emissions € 261 € 2.027 € 4.778
Supply chain Energy usage € 2.752 € 5.799 € 36.022
Total Supply chain € 3.013 € 7.826 € 40.800
Production company CO2 emissions € 261 € 2.027 € 4.778
Production company Energy usage € 2.752 € 5.799 € 36.022
Total Production € 3.013 € 7.826 € 40.800
Gate to Grave CO2 emissions € 6.260 € 5.525 € 6.189
During the monetization process, several issues emerged. Firstly, waste incineration leads to energy recovery: should this recovery be subtracted from externality cost? Here it was decided not to calculate this as a gain, for incineration leads to environmental damage. The CO2 emissions from incineration are used to represent these damages.
Secondly, in the environmental LCA it is not stated whether energy usage and CO2 emissions take place in the supply chain or the company itself. Thus, it is assumed that 50% applies to the supply chain, and 50% applies to the company itself.
Thirdly, Shen & Patel (2007) did not clearly state what percentage of these CO2 emissions apply to energy usage, which might have led to double accounting of CO2 emissions. It is assumed that these CO2 emissions apply to the production process itself and not the energy required to power production. Lastly, some now qualitative externalities are not considered, such as the acidification of water resulting from potato farming. If more detailed LCA data were available, it would be possible to account for these externalities in the supply chain.
CONSOLIDATED VALUES
This subchapter describes the consolidation process of social, economic and environmental values presented at the bottom of the visualized result in appendix A. As described in the research design, the environment is kept separate from consolidated social and economic value. Social and economic sustainable values are consolidated in order to summarize these values into single numbers by adding up created stakeholder value.
During the process of accounting for all stakeholders, a different focus emerged. Instead of accounting towards a net profit adjusted for sustainability, flows of value towards different stakeholders became more relevant. This mainly resulted from the life cycle perspective, on which the FCA model in the current experiment was built. These flows of value were the biggest reason not to aim for a consolidated value based on net profit as originally planned in the research design and proposed by Retolaza et al, (2016). Instead, a total has been computed in which all undefined distributed value— which includes net profit—has been subtracted. This change of perspective is important to note, for has implications on how totals are computed in each stage of the supply chain. By subtracting distributed value, all undefined or irrelevant social & economic values are subtracted. This means that net profit also has been subtracted from calculation in this process. The part of net profit that would have been attributable to shareholders was not provided by the case company, this value would have been an economic value with social impact value stream towards these shareholders. Since accounting for social values is a continuous, evolving process (Retolaza et al., 2016), it can be added later by the company itself to avoid incomplete information. The total social and economic values minus distributed value and environmental damage are summarized in table 5.
1
Table 5: End-result of Paperfoam as compared to alternative production methods in two categories: Firstly, total sustainable social and economic consolidated values. Secondly, total environmental damage.
* N/A because ’gate to grave’ calculation was not performed for alternative production methods.
Supply chain Company gate to grave' Total
Sustainable social + economic value
Paperfoam € 288.541 € 1.430.197 € 821.261 € 2.539.999
PS Thermoformer € 301.202 € 200.583 N/A* € 501.785
Pulptray manufacturer € 303.096 € 333.659 N/A* € 636.755
Environmental damage
Paperfoam -€ 2.492 -€ 2.492 -€ 6.260 -€ 12.286
REFLECTION ON RESULTS
As per the methodology, the last step is to reflect on the results with management of Paperfoam. This reflection from the perspective of management helps to evaluate the proposed advantages of the system and answer the research question. In the literature research, four advantages are proposed that could help an organization to evaluate (internal) and show (external) sustainability. These proposed advantages—in short—are:
1. FCA could help make Sustainable Development comprehensible trough monetization. 2. FCA could help evaluate social, economic and environmental aspects of sustainability. 3. Results from the FCA could be used for external stakeholder engagement or reporting. 4. Results from the FCA with a life cycle perspective could be used for benchmarking results.
The reflection session took place after the model was presented and explained to the case company. Notes from the reflection can be found in Appendix E. From the reflection it becomes clear that the monetization and visualization helps with creating a comprehensible view on stakeholders. The system is perceived as a helpful way to make sustainability comprehensible for internal evaluation because it shows a complete view that is comprehensible at the same time. It delivered on the first two proposed advantages.
The resulting system however is, according to management, not without limitations. The last two proposed advantages are partly met. Management perceived monetized specific social value numbers as being too abstract, or ‘soft’, in the sense that they are not ‘proven, hard numbers’ to be defendable for external reporting. One example of a soft value is the greening in the supply chain, valued at € 366.175. Management feels that their influence on greening the petrochemical industry should not be valued that high. In essence however, this discussion is the goal of the monetization process. The way to improve the monetized PROXIES according to Retolaza et al, (2016) is to gather data from stakeholders’ trough for example interviews in a continuous process. Trough continuous evaluation, PROXIES are added and altered, creating continuous engagement with stakeholders, increasing an external stakeholder perspective and reinforcing stakeholder thinking in the company. The model in the current analysis is presented as a first step into this process.
CONCLUSION
This master thesis started with a look into Small to Medium Enterprises (SME’s), and the state of research on Sustainable Development (SD) in this field. Most tools to help companies with SD are not meant for SME’s, have a narrow scope on sustainability, and neglect the life cycle (Guinée, 2001; Bos-Brouwer, 2010). The current research investigates whether it is possible to develop a tool that incorporates a complete view of sustainability and its social, environmental and economic aspects with a life cycle perspective. This, while taking respective weaknesses of SME’s, a lack of time, skills and money into account. A solution was proposed; combining a life cycle perspective on all aspects of sustainability with Full Cost Accounting (FCA). The research question therefore is: How can FCA contribute in environmentally focused SME’s to help an organization to evaluate(internal) and show(external) sustainability? What can SME’s learn from applying FCA?
The proposed solution was developed in a SME that already engaged in Sustainable Development using an interventionalist approach. It became clear that the SME preferred a complete view —as opposed to focusing on a few KPI’s— of sustainable value creation, which resulted in a rich social life cycle with an abundance of monetized indicators. In order to make the result comprehensible, monetized results were visualized using a diagram of value streams. The diagram shows streams of created sustainable social and economic value in each step of the life cycle. Environmental damage is also represented in each step of the life cycle.
DISCUSSION,LIMITATIONS&FUTURERESEARCH
The management of Paperfoam showed a clear vision on how and where sustainable value is created through the actions of their company. This clear vision is represented in the FCA result as it shows an inflated value through specific social value creation. This inflated value clearly portrays the broad look on stakeholders that is central in the thinking process of the company. FCA for the social domain has an inherently different philosophy as opposed to classic accounting (Grey, 2010). As opposed to traditional accounting, external stakeholders became the perspective. The underlying philosophy here is that a company is able to create, instead of damage sustainable value (Porter & Kramer, 2010) Retolaza, San-Jose & Ruiz-Roqueñi (2015), provide a case study in which social value creation is monetized. In their result FCA to all stakeholders amounts to a value that is ten times as much as financial profit. In this regard, it is the broad look on stakeholders that separates traditional accounting from FCA. As Riezebosch, (2013) concluded; Successfully managing stakeholder relationships is about clearly understanding all stakeholders, their societal values and expectations. Merely distinguishing these groups is not enough. The FCA model is helpful in representing these societal values, in monetary value even, but it is the underlying process of integrated thinking that ultimately creates organizational commitment to sustainability. Accounting for sustainability requires to find a balance between ‘soft’ holistic, generative reasoning based on reflection and creativity, and ‘hard’ financial causal modelling. Especially when ‘soft’ generated thinking foregoes ‘hard’ integrated thinking in a dynamic fashion, a sustainability perspective becomes central (Oliver, Vesty & Brooks, 2016, p. 243). The freedom for creativity in a system such as the one described in this thesis allows the system to be dynamic. It is why the system should not be designed as an external reporting tool, which originally was one of the proposed advantages of the system in the current analysis. A tool for external reporting would have mitigated the important holistic creativity, trading ‘soft’ integrated thinking for a plain narrow focus on scorekeeping (Oliver et al., 2016).
This brings us to the discussion of the estimations used to monetize the FCA model. The (social) environment is a complex system and accounting for these externalities means including uncertainty and incomplete knowledge into exact figures (Bebbington et al., 2001). It is the continuous discussion of these values where stakeholder engagement can be created (Retolaza et al., 2016)
to include the perspective from stakeholders (Retolaza et al., 2016). A longitudinal approach would have made this step possible. The preliminary monetization of social value creation with PROXIES however presents a valuable basis for this continuous evaluation in the future. The monetization process is a great tool to identify stakeholders and the respective influence on these stakeholders. Stakeholder impact is better understood when these stakeholders are better identified (Riezebosch, 2013).
The second limitation is availability of data. Annual net profit for example was not given by the company and a lot of monetized values are created through estimation. The incompleteness of data also has an influence on the total calculated end-results. A high degree of uncertainty lowers the reliability of these numbers.
Lastly, a broad look on stakeholders from the perspective of the company incorporates a certain degree of bias. One might question whether the end-results represent an inflated value.
This research had a focus on a company that already has a broad focus on stakeholders because of their green corporate image. Future research could try to achieve a similar system in a company that has a narrow focus on stakeholders. Furthermore, field research with a longitudinal approach could allow the development of a similar system in which stakeholder engagement processes could be explicitly included. These studies could be held in either SME’s but also in bigger corporations.
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