CORPORATE STAKEHOLDER DEMOCRACY
POLITICIZING CORPORATE SOCIAL RESPONSIBILITY
Robert Braun
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[...] the heartland issue is process, in old 70s terms, the heartland view is democracy, that
slightly funny old word if you remember it. That we were all in the business of reinventing
democracy in a transnational globalized world ,[...] about the rights of people impacted to
have a say over how institutions made decisions. [...T]here is a golden thread of
accountability running through sane societies, sane and civilized societies. [... It] is
profoundly about civilizing power. Not getting rid of it but civilizing. I am more interested in
how processess of change can drive efficiently new models of people’s participation in
emerging political institutions, and my focus on the business community is because I think it
is the most important political institution to emerge in the last century, and therefore the
[business community] needs to be politicized. [Businesses] need to be made accountable
through the political processes and not only through regulatory processes – to direct
participation, a direct model of democracy.
Simon Zadek*
*
Waddock, S, (2008): The Difference makers: How Social and Institutional Entrepreneurs
Created the Corporate Responsibility Movement. Greenleaf.
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TABLE OF CONTENTS
INTRODUCTION...................................................................................................................... 4
PART I : THE THEORY OF RESPONSIBILITY .............................................................. 13
1. RESPONSIBILITY .......................................................................................................... 14
2. STAKEHOLDERS ........................................................................................................... 48
3. CORPORATE POLITICS – STAKEHOLDER DEMOCRACY................................................. 76
PART II: APPLYING RESPONSIBILITY...................................................................... 107
4. RESPONSIBLE CORPORATE MANAGEMENT ................................................................ 108
5. RESPONSIBLE OPERATION.......................................................................................... 131
6. RESPONSIBLE MARKETING......................................................................................... 170
7. RESPONSIBLE FINANCES ............................................................................................ 194
8. RESPONSIBLE RESEARCH AND INNOVATION............................................................. 213
PART III : THE OPERATION OF CSR........................................................................... 234
8. STANDARDS AND GUIDELINES................................................................................... 235
9. STAKEHOLDER INCLUSIVENESS AND DEMOCRACY ................................................... 258
REFERENCES...................................................................................................................... 275
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INTRODUCTION
This book is for and about the future. About a future where the differentiation which
views corporations as institutional actors interested purely in maximizing economic
value while on the other hand considers it to be the task of the state and other political
institutions to regulate the coexistence between people, their institutions, as well as to
resolve the conflicts of a multi-faceted society will no longer be sustainable.
The book deals with the interpretation of democracy, focusing on the new role
corporations play in it. I believe that corporations are the people who are impacted by
the corporation and who in turn have an impact on the corporation: they are the
stakeholders of corporate operation. Corporate value creation does not purely mean
economic, but also environmental and societal value creation and its sustainment. So I
take corporate social responsibility as values and interests of the stakeholders
incorporated into business operation. This means running corporations in a way that
takes the values and interests of stakeholders into account, potential conflicts between
stakeholders are assessed and provided with institutional systems of conflict
resolution; all this achieved through the involvement and engagement of stakeholders,
as well as through bringing about a value creating cooperation with and between
them, based on dialogue and equality. This is what corporate politics is about. To put
it differently: political CSR, the approach of this book, diverges from traditional
instrumental approaches to CSR as well as positivistic research on political corporate
activity (CPA). It focuses on the role of business firms in providing public goods as
well as defining and enforcing public rules (Scherer, 2017).
This is a departure from earlier approaches: a radical turn in viewing corporate
operation and value creation. This turn applies equally to corporate theory, business
operation and processes in practice, and the form and mode of cooperation with the
stakeholders, as well as to the new interpretation of the context in which corporations
find themselves. Primarily, therefore, it applies to the approach which sees value
creation as the equilibrium between economic, social and environmental value
creation based on the philosophy of sustainable development. Most of these
approaches are not radically new: the shift has been in the making for almost thirty
years. To radically change economic, social, and theoretical approaches is a long,
painstaking and, above all, slow process. For it to become successful, the diverse
5
cooperation of many is needed. Luckily, such cooperation does exist – academics,
NGOs, representatives of stakeholders, corporations and their decision makers and
politicians have made alliances to prepare the way for and bring about this paradigm
shift. This volume may be a minute contribution to the ongoing discourse.
Political CSR is contested territory; definitions, research agenda descriptions
as well as theoretical approaches vary (Frynas & Stephens, 2015; Scherer & Palazzo,
2007, 2011; Scherer, 2017). The broadest definition would claim that political CSR is
described as “activities where CSR has an intended or unintended political impact, or
where intended or unintended political impacts on CSR exist (i.e. impacts related to
the functioning of the state as a sphere of activity that is distinctive from business
activity)” (Frynas & Stephens, 2015. p. 485.). A normative-critical theory advances a
notion of corporate politics as a facet of the public realm in which deliberations take
place and collective decisions are made to further the public interest. Corporations in
this view are seen as based on corporate citizenship; research analyses conditions,
identifies the unjustified use of power, and aims to reform social practices and
institutions, corporations included, so that human beings are freed from dependency,
suppression and subordination (Marti & Scherer, 2016; Scherer, 2017). Political CSR
differs from CPA which is based on the premise that business firms engage in
political activities to create or maintain corporate profits and seek to bring about
public policy changes to promote their private interests (Lawton et al., 2013).
Political CSR applies a variety of theories to deal with corporate operations
from a political point of view. The analysis focusing on corporation-society
relationships utilizes stakeholder theory, institutional theory and resource dependence
theory – all of which will be applied in this book as well. Focusing on the firm itself,
instrumental economic and managerial perspectives include agency theory,
transaction cost economics as well as behavioral economic theories. Writing about
power and political interactions, theorists apply Habermasian theories of discourse
ethics, Rawlsian theories of justice as well as Foucauldian theories of power
discourses. The approach of this book, while applying a variety of the above
mentioned theories, is that it mostly focuses on the individual level analysis, and uses
macro- and meso-level analysis only inasmuch as to lay the groundwork of political
CSR to be applied on the individual level. This diverges from the approach mostly
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taken by scholars of political CSR, as the majority of papers published in this area are
focusing on the macro- and the meso level (Frynas & Stephens, 2015).
In the last decade, as researchers in the field note, approach to CSR has taken a
‘political turn’. The focus of CSR has shifted towards how firms shape their
institutional environment driven by a concern for the public good that goes beyond
the purely economic calculations of corporate actors. This political turn is “interpreted
as a corporate attempt to close governance gaps on the local, regional, and global
level” as well as it is “associated with the changing role of state agencies and the
redistribution of governance tasks between private and public actors” (Scherer et al,
2016, p. 273.). This ‘political turn’ means that firms become political actors by (a)
engaging in public discourse; (b) maintain their legitimacy by providing solutions to
public issues and complying with changing societal expectations; and (c) submit their
corporate governance to democratic control (Palazzo and Scherer, 2006; Scherer et al,
2016).
Also, in many ways, we have been witnessing a ‘participatory turn’ in
governance on both the national and corporate level. This entails public identity work
that is seamlessly woven into the public and private spheres; a necessity of ‘civil
society’ participation and improving public access in decision-making processes, as
well as higher levels of public accountability. As Sheila Jasanoff (2003) put it “[w]hat
has to change is the culture of governance, within nations as well as internationally;
and for this we need to address not only the mechanics, but also the substance of
participatory politics” (p. 238). Political CSR addresses exactly this: how to
substantiate and promote more democratic and participatory interaction between the
different stakeholders of the corporation; how to involve and engage corporate
citizens into the decision making processes of the corporation.
The subject matter of political CSR: responsible operation or corporate
democracy is a new understanding of the corporation, one which incorporates the
interests and values of stakeholders into the operation of the business, thereby
creating a new value chain. This new value chain takes into account the aspects of
economic value creation but at the same time considers the ecological and social
effects as well and functions along those considerations. Corporations have the
greatest influence on our social wellbeing; they possess vast resources, their thinking
is strategic and they have the ability to act. They cover all areas of social existence:
7
they create and form culture, damage or protect the environment and may create or
diminish economic prosperity. We are the ones who are affected by the corporations –
thinking, feeling, acting human beings, who want their fair share in the decisionmaking.
Let’s translate the thoughts of the Gettysburg Address into the language of
corporations.
“Four score and seven years ago our fathers brought forth on this continent, a
new nation, conceived in Liberty, and dedicated to the proposition that all men are
created equal. […] It is rather for us to be here dedicated to the great task remaining
before us – that from these honored dead we take increased devotion to that cause for
which they gave the last full measure of devotion – that we here highly resolve that
these dead shall not have died in vain – that this nation, under God, shall have a new
birth of freedom – and that government of the people, by the people, for the people,
shall not perish from the earth” (Lincoln, 1863).
Responsible operation means corporate governance of the stakeholders, by the
stakeholders and for the stakeholders. It means that all stakeholders are created equal,
therefore the weak and voiceless shouldn’t carry the consequences of negative
externalities and moral hazards. The management of the corporation is not only
responsible towards its stockholders but also towards every stakeholder.
For this is what is right.
Responsible operation, value-centric democratic corporate policy, and value
maximization for the stakeholders is a process. Depending on the value structure,
interest relationships, contexts of internal regulators and the political environment of a
given society, corporations get formed, adapt themselves to the circumstances and
create the space, institutions, mode and form for the democratic politicizing of
stakeholders. There is no such thing as a good or a bad corporation. Every corporation
politicizes, some consciously, some less so. The corporation that politicizes
consciously may function democratically, creates and operates the democratic
institutions for the stakeholders. This is the result of a step-by-step, strategic process.
Briefly, four steps may be differentiated in order for us to see how far a given
corporation has progressed towards stakeholder democracy.
The first step is the traditional anti-democratic (feudal) corporation which
applies certain elements of responsible operation by stakeholders on an ad hoc,
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sporadic basis, giving in to the pressure of some stakeholders. However, these
elements do not become part of the corporation’s operation, and do not become part
of corporate strategic decision-making. Their aim is to reduce stakeholders’ risks in
the interest of economic value maximization, or the realization of some economic
advantage through the stakeholders.
The second step is the organizational-regulatory democracy level, where the
corporations try to comply with the stakeholders’ regulations-based expectations –
transparency, reporting, consumer protection and environmental rules. However, they
do not do this in a systematic and strategic manner; they take the stakeholders’ values
and interests only to a limited degree, and mainly because of legal pressure, into
account. Corporate policy is not democratic: the values and interests of stakeholders
do not appear on the level of strategic decision-making, value-maximization focuses
on economic values, environmental and social issues are only interesting for the
corporation in as much as they promote the corporation’s economic value creation.
The third level is inter-corporation stakeholder democracy. Corporations
create rules and soft-laws, make recommendations, determine norms and interrelationship
rules jointly, generally within the frame of multi-stakeholder
organizations (whether national or international), involving the representatives of the
stakeholders as equal participants or as cooperating partners. On this level the buds of
the institutions of democratic stakeholder politicizing are already emerging, or could
emerge, as some form of the stakeholder approach appears in corporations
participating in such a cooperation, even in their strategic decision-making process.
The fourth level is corporate stakeholder democracy, where the stakeholders
become citizens of the corporation, the institutions of deliberative stakeholder
democracy are set up and corporate strategic decisions are made according to the
principles and operation of the liberal democracies.
This book introduces the process of how and why corporations set out on this
journey; it presents the various forms of operation of corporate policy, as well as
those institutions, their legitimation and background, which are the institutional
foundation of deliberative corporate democracy. The policy of corporate operation
satisfies Carman’s classic definition of the exchange-based process of marketing in
the course of which participants have the right to decide whether they want to
9
participate in the exchange and whether they have any values or assets which could be
part of the exchange process, and there is a minimal level of trust between the parties
so that the exchange would actually be realized (Carman, 1980). Corporate policy
further expands the definition of Carman regarding the paradigm of marketing. In
terms of macroeconomics, responsible operation is an exchange process based on
equality and mutual participation, the aim of which is the establishment of the
institutional background and modes of operation for the allocation of resources in the
interest of common value creation for the stakeholders, taking negative externalities,
moral hazards and information inequality into account.
The journey of corporate democracy is also a journey in building and
sustaining inclusive political and economic institutions within and among
corporations. It is not only nations that fail if their institutions are extractive but
corporations as well (Acemoglu-Robinson, 2012). Current mode of corporate
operation is highly extractive: stockholders and a limited number of key stakeholders
exploit the majority of other stakeholders, the future generations included. They
extract economic and well as societal and environmental value for their own financial
benefit. This is what economists call negative externalities: costs paid by third parties
not included and voiceless in the contractual relationships corporations represent.
Current corporate successes and the economic or financial growth they generate as
extractive institutional systems are not surprising: as Acemoglu and Robinson have
shown extractive political and economic systems may generate growth, as they did
from the Bushong in the Kuba Kingdom in today’s Congo to the Maya cities as well
as in the Soviet Union between 1928 and 1970. However, such political and
economic systems are unstable and non-sustainable. Corporate democracy or
stakeholder inclusive corporate political systems may offer more stability and
sustainable growth than the current generally undemocratic, extractive corporate
setup. Analyzing the structure and mode of corporate politics, I hope, will offer
answers as to why.
And now for the structure of the book. The first part is devoted to the
theoretical background, context and process of corporate social responsibility. It
shows the different social and economic processes and theories – with special
emphasis on the stakeholder theory of Edward R. Freeman – which were the
foundation on which change evolved. It discusses the social context, the various
10
stakeholder approaches and it also endeavors – with the help of an historic parallel –
to define the corporate polity.
The second part analyses the new kind of operational logic from the viewpoint
of the different areas of corporate operation; it gives an overview of the consequences
for the individual areas of operation and indicates how corporate policy can be
realized in the given field of operation. First, it discusses the theoretical approach to
responsible operation relevant to the given area, then it analyses the current practice,
followed by an indication of why an approach aiming at a ‘political turn’ is more
advantageous both for the corporation and the outside world.
The third part of the book introduces the institutions necessary for the creation
of the corporate polity, as well as the mode and forms of operation, i.e. the process of
paradigm shift modes of stakeholder operation and the bases of stakeholder
involvement, its structure and consequences. It also sets the direction for new
research, which may offer exciting and novel, as yet unexplored, insights for further
shaping of the future.
I trust that this volume will contribute towards the ongoing discourse on social
responsibility. My hope is that students, involved and interested professionals,
businessmen and managers will benefit from its contents. It may possibly help to get
the above-mentioned changes in value-structure and mentality on the way and that the
societal conditions for these changes may come about.
****
Research and writing are lonely work, yet not one without companions on the way. I
stood on the shoulders of giants. This is true for researchers who have gone before
me, but for me personally the communities I had the opportunity to work in in the past
years are at least as important.
I met a great number of committed and brave people in the course of my
research and the consultations. I owe them thanks for the discussions, support,
cooperation and arguments – I tried to learn from all of them. A word of thanks is due
to Professor András Bauer, a colleague as well as a friend, who has helped my work
with advice and many discussions; to my other colleagues at the university, to my
teaching assistants, Katalin Ásványi, with whom I have been teaching this semester
11
and Rita Lukács, who was my teaching assistant in the previous years. I would also
like to express my thanks to students in Budapest and in Vienna, who have guided
and formed me over the years with their questions and enthusiasm.
I owe gratitude to my colleagues with whom I have worked at B&P
Consulting Group in Budapest, Bucharest, Sofia, and Warsaw for years. Reading this
book will perhaps let them see a little more clearly the path along which I have
progressed – with their conscious or less conscious support and help.
Endre Hann of the market research group Median supported me with early
research and friendly words, Ákos Kozák, CEO of the Hungarian outfit of the global
research company GfK has helped my work in countless ways over the years. My
colleagues at Corvinus University in Budapest offered support for my teaching and
research; Erich Griessler and my colleagues at the Institute for Advanced Studies in
Vienna provide me with the right balance of peace of mind and intellectual stimulus
to keep me going. I learn a lot from all of them every day.
Of my colleagues in Budapest, my PhD student Rita Lukács assisted me most.
I have learnt a lot from her: she was the wind under my wings. Without her this book
would certainly never have come to be. had arguments about CSR with and have
learnt from politicians, academics, editors, my one time boss, the Governor of the
Hungarian National Bank, Chief Executive Officers I advised, editors-in-chiefs I
submitted papers and comments to, as well as various other actors of the economy –
all this has given me strength to carry on and nothing had killed me in the process.
This in itself can be considered a success. According to a saying that one of my
dearest assistants, Rita Csenki shared with me some time back, “in the end everything
will be okay; if it’s not okay, it’s not the end”. I have kept to this.
While working on the book, Áron Horváth of CSR Europe helped me with
feedback, advice and sources. Thank you for the cooperation, help and support – it
was great to work together.
Of course, for any possible mistakes in the book I am solely responsible.
Mark Line, Simon Zadek, Charles Seaford, Cosmin Alexandru, the staff of the
csr network, AccountAbility and the New Economics Foundation shared with me
innumerable studies, experiences, half-baked thoughts and ideas in the course of our
12
cooperation. I hope I could give them something back in return. I had the good
fortune of working with a number of other smart people during the past years. It was a
pleasure to be with them and to learn from them.
My thanks go also to the staff of the Alessio Restaurant and Café in Budapest
for their support, service and for taking care of me – the overwhelming part of the
book was written there under their caring eyes. American writer Jonathan Franzen
said once in an interview that “if we drank more good espresso the world would also
be a better place” (Dési, 2015). I did my best in Alessio to make the world a better
place.
Last but not least, I thank my partner, friend and the love of my life, Krisztina
Rozgonyi. She is somebody with whom and for whom it is worth living, to whom it is
a pleasure to belong, with whom it is wonderful to have a dialogue, who is great to
look up to and from whom one can and must learn wisdom, commitment, taste and
caring. I hope that some of this comes through in this book. I wish for my daughters,
Nora and Sara that they would find a companion on their journey as I have. It is their
special fortune that Krisztina is their mother and mine that they together are my
family.
Vienna-Budapest, 2015/2017
13
PART I : THE THEORY OF RESPONSIBILITY
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1. RESPONSIBILITY
The Body Shop
September 10, 2007 was a sad day for the international business community. Anita
Roddick, founder of one of the best-known social brands, The Body Shop, passed
away. She was a child of the twentieth century, yet she was searching for the answer
to the most important question of the twenty-first: how can social values be integrated
into the operation of businesses? Anita Roddick not only integrated these values into
her business but made the principle of reconciling the profits necessary for business
success with responsibility towards the environment and the future the essence of the
operation of her enterprise.
The Body Shop was founded by Dame Anita Roddick, with its head-office in
Littlehampton, Southern England. The company has been part of the L’Oreal group
since 2006. Anita Roddick was born of Italian immigrant parents in Littlehampton in
1942 as Anita Perilli. She became a teacher and worked in Israel as well as in Geneva
for the UN. She traveled across the world from South Africa to Australia. In order to
be able to bring up her two children as a single parent, in 1976 she opened a little
shop in the town of her birth, where she sold cosmetics made of natural ingredients.
She relied on the expertise of herbalists to find the right mixture of ingredients for the
cosmetics, which she sold in returnable containers. The shop soon became a big
success due not only to the attractive prices and to the use of natural ingredients but
also to the competitive advantage over multinational corporations which were under
constant scrutiny of the authorities. The shares of The Body Shop were introduced
onto the London Stock Exchange in 1984, followed by the acquisition of The Body
Shop by L’Oreal in 2006 for a price of 652.3 million pounds sterling. The five main
values that the company still stands by are: supporting community fair trade,
defending human rights, oppose animal testing, activating self-esteem and protecting
the planet Earth. Anita Roddick understood the call of the times when she, besides her
rejection of animal experiments and promotion of the use of natural ingredients, used
returnable containers made of recycled glass and recycled paper as packaging material
and when she, whether in her personal capacity or as representative of her company,
15
campaigned for such causes as the fight against the spread of AIDS or helping the
homeless. She was a political person and she did politize her company. Her death was
mourned by both the Prime Minister of Great Britain and the Editor-in-chief of Big
Issue, the newspaper of the homeless in London. Anita Roddick was at the same time
holder of the Order of the British Empire (DBE), Dame Roddick of corporate board
rooms and the ‘Princess of Activistse’ on the streets. She not only heard the call of the
times, she dictated them: by her achievements as a committed and charismatic leader,
by her thoughts, by standing up for her values and upholding her identity as leader of
her enterprise. She has shown the world that change can be directed and not simply
endured.
The Body Shop, founded by Anita Roddick in 1971, was an excellent
investment: her starting capital was a loan of 4000 pounds sterling. After the company
had gone public, she subsequently sold her own share for 118 million pounds.
Furthermore, she operated the company with a considerable profit all along. In all
those years she proved that good products can be produced using natural ingredients
and environment-friendly packaging, without causing suffering – not even to animals.
The Body Shop has shown that the cosmetics industry does not have to torment its
buyers by making them want to achieve unattainable beauty ideals. It offers products
for natural body care, indulging the body and creating harmony between body and
spirit, and expresses a set of values striving towards internal and external harmony
instead of skinny, heroin-addicted artificial beauties. Now a member of the L’Oreal
group, The Body Shop has in spite of initial scepticism, formed the group’s culture,
as opposed to being assimilated to more traditional approaches to corporate
operations.
What is CSR?
At the time when The Body Shop was born in the garage of a small English town
towards the end of the seventies of the last century, business and societal values were
divided by a Chinese wall. In the world of business, thought leaders of the day were
followers of Milton Friedman’s ideas on the responsibility of movers and shakers in
business. According to Friedman, the only responsibility of businessmen is increasing
16
profits and fulfilling the financial expectations of stockholders – the business of
business is business. If they are successful, they may in turn voluntarily give some of
that profit back to those who have the expertise and desire to improve the world
(Friedman, 1970). The world has changed a lot since the late seventies. The role and
significance of business in the modern world has changed, too, as have society’s
expectations of the firm, mainly due to the socio-formative power of global
capitalism. Today, corporations are no longer viewed as transmission belts of
exchange between owners and consumers, with the purpose of providing consumers
with goods and services, and owners with profit. The modern corporation is an
influential player in a complex web of social interactions which, through its sheer
operation, exerts a large influence on the lives of individuals and groups, even those
not yet born. This process actually works both ways. These same individuals and
groups have a great influence on the operation of the corporation: they are the ones
creating economic value – as employees, as consumers, as subcontractors, and as
owners – in exchange for the ’licence to operate’. This is literally the case when we
talk about authorities, but NGOs, associations and other membership organizations,
representing important issues or ideals, offer this ‘licence’ in an indirect, nevertheless
determining way. As such, corporations are intertwined in an intricate web of
individuals and groups with a stake in the operation of the corporation. In this web
communication is not one-way but multi-threaded and everybody has an impact as
well as influence on everybody else. It is while working for some shared value created
together that they licence the corporation to operate.
While as a result of the commitment of a few corporate responsibility has
become part of the mainstream of business operation, more and more new and deeplyrooted
problems have been exposed. There are few who even dare to mention the
contradictions. Public writers and the average citizen are often indignant about the
fact that globally known branded goods purchased and consumed in the western
world are being produced in the cellars of China, Bangladesh or India by human
beings kept under conditions of near-slavery reminiscent of Dickens’ world of the
industrial revolution. However, the mere suggestion that all this is happening in order
to raise our so-called western standard of living, and as such it is the common
responsibility of western society, causes just as much indignation. The idea that
giving workers decent pay, providing appropriate working conditions and letting up
17
with the exploitation of the environment costs money which must be paid by
stockholders as well as consumers appears only in the writings of radical critics of
capitalism. The fact that corporations and their decision makers play a political role,
by taking part in, moulding and influencing conflicts between individuals and their
groups arising from their differences in goals, values and strategies, is not yet a
mainstreamed concept today. Even with all the public discussion on and about CSR
corporations and their decision makers often see themselves and their organizations as
apolitical, value neutral actors of the global economy, whose task it is to refrain from
getting near any such conflicts.
In today’s globalised business world, one of the biggest challenges is
managing the public responsibility of the corporation. What Anita Roddick did
personally and intuitively has by now become part of corporate management: an
activity requiring planned strategic processes, similar to marketing, HR management
and the supply chain. Even in a global economy, challenges of culture, business and
consumer environments, and stakeholder webs are local, therefore questions need to
be posed and answers need to be found, business operations need to be redefined
locally. The management buzz-word of the last third of the twentieth century was ‘the
marketing-driven corporation’. It is not difficult to predict that successful corporations
of the twenty-first century will copy the corporate responsibility-driven model of
operation.
Definition of Corporate Social Responsibility
Corporate social responsibility is known by many names and has many faces. There is
no agreement on where the boundaries of CSR lie (Blowfield & Murray, 2008). CSR
is used in exchange for corporate citizenship, accountability, sustainable
development, environmental responsibility, corporate philanthropy and strategy. CSR
has national and industry contexts; it is an umbrella term for a variety of concepts and
practices, all of which recognize “that companies have a responsibility for their
impact on society and the natural environment, often beyond legal compliance and the
liability of individuals” (Frynas & Stephens, 2015, p. 485.). It is being used for the
philanthropic activities of a corporation but also for the strategic tool used to enhance
18
its competitiveness through stakeholder management. There are a number of
definitions to describe corporate social responsibility. According to the ISO, the
International Standards Organization, it is the “social responsibility of an organization
for the impacts of its decisions and activities on society and the environment, through
transparent and ethical behaviour that contributes to sustainable development,
including health and the welfare of society; [it] takes into account the expectations of
stakeholders; is in compliance with applicable law and consistent with international
norms of behaviour; and is integrated throughout the organization and practiced in its
relationships” (ISO, 2010). At the same time, corporate social responsibility as an
academic endeavour is in its early phase of disciplinarization. This means that no
unanimous and generally accepted theoretical bases have been developed on which a
uniform definition could be built, and scientific demarcation from other disciplines,
like strategic management, sustainability, strategic communication and organization
theory, is blurred. This does not mean that the theoretical bases of this area are not
well-founded and detailed in academic literature; nor does the scientific community
doubt the independence and academic relevance of the area. Rather it is that
becoming an independent discipline of academic studies is a slow and painful process.
In addition, a further difficulty has to be faced: if the challenge is a paradigm shift, as
I believe is happening in the case of CSR and related areas, the cumulative
expectations of ‘normal science’ and the revolutionary challenges of a paradigm shift
must equally be lived up to (Kuhn, 1962).1
Of the definitions to be found in the literature this book uses the probably
simplest one: corporate social responsibility (CSR) means the integration of the
stakeholders’ values and interests into the corporation’s business operation. This
definition shifts the focus from the meta (economy/society as a whole) or meso (intercorporation,
governance) level to the individual level. In other words, it is the
stakeholders of corporate operation who are at the centre of this understanding of
corporate social responsibility: they are the ones who are impacted by the
corporation’s operation and who do or can affect the operation. Stakeholders can be
individuals or groups, yet to perceive their stakeholder position, conscious action is
1
Academics, due to the principle of ‘publish or perish’ and the quest for impact factor and citations
work in intellectual silos as well as limited spaces for intellectual innovation: high impact factor
journals are leading publications of established fields that are not necessary open to ‘paradigm shifts’.
19
needed on their part. Stakeholders need to realize that the corporation’s operation has
an effect on them and in return they can have an effect on the corporation’s operation.
This process is not without conflicts: differences in values, interests, backgrounds and
visions cause stakeholders to fight for the right of way. The politicization of the
corporation needs stakeholders as zoon politikon in the Aristotelian sense to be part of
the polis: people who understand that they have values and interests and are ready to
stand by them in the belief that by cooperation, dialogue and engagement negative
externalities of corporate operation can be minimized and positive externalities
maximized. On the other hand, there are or can be ’silent’ stakeholders, just as there
can be ’ignorant’ stakeholders, namely those, whose life is being significantly
influenced by the corporation without them being aware of it, in the same way that
they are not aware of the fact that these are not ’natural’ processes, but rather the
result of human interference. Of course, the generation yet to be born constitutes a
separate group, which is both ‘silent’ and ’ignorant’ at the same time. The identity of
the stakeholders plays an important role in their relationships as stakeholders, that is,
they stand for certain values and represent certain interests, and organize themselves
into groups and organizations along those values and interests. These values and
interests will be the most important determinants in their relationship with the
corporation. Every stakeholder stands or can stand for a number of interests and
values, that is, their specific commitments will determine their identity as
stakeholders.
According to the definition above, CSR is a business activity: the aim and
essence of a business activity is the support and promotion of creating value through
business operation. However, this should go beyond the instrumental view of CSR
focusing on the business case of CSR (Caroll & Shabana, 2010). The incorporation of
stakeholder values into corporate operation is less content than form: the efficient
management of stakeholders should be made part of the effective operational
processes of the corporation, similar to other areas of business, such as marketing,
supply chain, production, R&D and HR management. The shift here is that CSR takes
corporations to go beyond their mere corporate profit interests and are more directly
concerned with public welfare as represented by their stakeholders. Corporations
assume responsibility by creating positive and avoiding negative impacts for societal
actors. In other words they commit to “actions that appear to further some social
20
good, beyond the interest of the firm and that which is required by law” (McWilliams
& Siegel, 2001, p. 117). While CSR literature is inconclusive as to what actually
motives firms to “further some social good” it is understood that involving and
engaging stakeholders in corporate operations is beneficial to the corporation
(Freeman et al, 2007). Parallel to definitions widely accepted in business life, CSR is,
actually, stakeholder management. From a strategic management point of view of the
corporation, it is the efficient management of corporate stakeholders in the interest of
eliminating or at least reducing conflicts and potential risks posed by certain groups of
stakeholders, minimizing negative impact on stakeholders, exploiting business
potential with given groups of stakeholders, and promoting the successful and
sustainable development of the corporation based on cooperation. The aim of
stakeholder management is the common creation of mutually accepted and treasured
value, maximization of stakeholder value based on cooperation, moderated by
discursive institutional processes.
The operation of CSR, the management of stakeholders, is an activity directed
and supervised by the corporation. This activity entails the setting of the corporation’s
aims and goals, determining the reference values and timing of monitoring, the setting
up of the organizational structure and its integration, directing the process,
determining points of assessment and carrying out such assessments, as well as
arranging for feedback channels, i.e. setting up the institutional background for an
equality-based cooperation. All this is the task and responsibility of the corporation,
with the stakeholders as participants of the process.
For stakeholder values and interests to become integrated into corporate
business operation, it is necessary to understand that the boundaries of the corporation
do not end at the fence around its property. The corporation impacts the lives of many
individuals and groups, each with their own identity, in the same way that these
groups also have an effect on the operation of the corporation in a number of ways.
Many authors use the model of the corporation being the entirety of its stakeholders,
with its most detailed and best known exposition to be found in Edward R. Freeman's
stakeholder approach strategic management model (Freeman, 1984). We will discuss
this theory and the ensuing management practice in detail in chapters to follow. These
theories view and make the corporation appear as more than just a stockholder-owned
and run transmission belt which creates economic value for the stockholder by selling
21
products or services produced by employees or suppliers. Other stakeholders of
corporate operation are understood to be important and politically equal participants
of the corporate value chain, since the corporation and the stakeholders mutually
impact each other, they each have resources to be offered and claims to be made, and
they each may play an important role in the value creation process, i.e. in the
organizational culture of the corporation (Ferrell et al., 2010).
The triple bottom line (TBL) theory of value creation claims that corporate
value creation should go beyond financial and economic effectiveness, and that
corporate societal and environmental impact should also be measured and managed
(Elkington, 1998). This is also reflected in the more popular 3P (people, planet, profit)
principle, which has by now become the fundamental approach to sustainability.
Similar to TBL, its core message is that on top of operating financial capital
successfully, similar success is to be expected from the utilization of human and
environmental resources as well. Corporate social responsibility thus means the
effective management of stakeholders in order to meet the requirements of the 3P
principle as best as possible by involving and engaging stakeholders and cooperating
with them in order to integrate their values and interests into the operation of the
corporation.
Yet, corporations, just like other institutional stakeholders, are still struggling
to make social corporate responsibility part of their core business, consequently
missing out on a number of potential opportunities offered by the social responsibility
approach (Porter-Kramer, 2006). Many believe CSR is an excellent corporate
management/reputation opportunity in the 21st
century, however leaders have a hard
time coping with the challenges posed by the shift behind the new, political approach
to corporate operation.
CSR is more (political) form than societal content. It is a political process of
checks and balances, distribution of power and discursive institutionalized conflict
resolution strategy among stakeholders. Stakeholder claims and expectations surface
in the institutional body politics of the corporation for the common good of sustained
impact management. To put it differently: responsibility is an institutional-political
process and not a well-defined catalogue of values. While the concept of political
CSR is a normative model as it integrates values and also offers critical reflection on
22
them, focusing on processes that may change social reality through reforming social
practices and institutions. However, instead of prescribing the integration of some
socially important principles on top of the public agenda (climate change, inequality
and poverty) into corporate operation, in other words the content, this view of CSR is
about new ways of involving and engaging stakeholders around commonly
determined value-creating goals, substantiated by a new form of (political)
legitimation for this process, as well by as the institutionalization of new ways of willformation
of stakeholders, that is, the form of corporate operation.
Thus, to rephrase Milton Friedman’s statement: the business of business is the
politics of business since the social context of the conditions for achieving corporate
goals, the interpretation of economic and societal benefit and the meaning of
compliance with social norms have all changed. In order for businessmen to focus on
the fiduciary responsibility of increasing shareholder value, they actually have to
increase stakeholder value based on the TBL or the 3P principle. Corporate strategy
and processes without the effective risk and conflict management of stakeholder
politics make successful and sustainable corporate operation impossible.
23
The history of the development of CSR
Who is responsible and for what?
My interest in the history of CSR is not how and why business should promote
societal values or “further some social good” (van Aaken et al, 2013; Scherer, 2017).
The point of departure is rather the question – also raised by the first authors dealing
with CSR in the twentieth century – of whether corporate decision-makers have any
responsibility beyond the financially successful operation of the corporation. The
history of modern corporate social responsibility started with issues of ethics in
business: does the corporation as an organization have any moral responsibility
towards the society in which it operates, and does such a responsibility extend beyond
the individual responsibility of the decision-makers of the corporation? This is the age
old question of moral agency of corporations. The literature on business ethics leaves
the question open: there is a business ethics tradition that views the corporation as
‘moral agent’ (French, 1979), while the Anglo-Saxon ethics culture does not
(Velasquez, 1983). Considering that corporations are the most significant players in
the economic web of social interactions, the ethical question remains: what kind of
moral responsibility do corporations and their decision-makers have towards society?
Can the corporation be made accountable for any societal consequences resulting
from its operation? If so, in what way? And what should be done to incorporate this
responsibility into the business operation? Even if the question of being a ‘moral
agent’ is hidden behind a veil of ignorance, the basic normative question still remains:
how and in whose interest must a corporation be managed?
Although similar questions were already raised in the thirties and forties of the
last century by activists representing the general interests of the minority
shareholders, the history of responsibility starts with the book by Howard R. Bowen,
published in 1953. Bowen posed the question: What kind of responsibility towards
society is to be expected of ‘the businessman’? (Bowen, 1953) He gave an answer to
this question which may be considered to be the first definition of CSR. In his
opinion, the social responsibility of businessmen (rather: corporate decision-makers)
means that they apply such practices, make such decisions and perform such activities
24
which are congruent with the general aims and values of society (Bowen, 1953). In
other words, Bowen contended that corporate decision makers had to be aware of the
fact that the consequences of their decisions reached beyond their responsibility for
the corporation’s balance sheet, and that they also had to live up to certain societal
expectations, goals and conditions.
It was Bowen’s definition that analyses of social corporate responsibility were
measured against in the sixties and seventies. Keith Davis developed this thought
further and advanced the view that “businessmen’s decisions and actions taken for
reasons at least partially beyond the firm’s direct economic or technical interests”
(Davis, 1960, p. 70). He maintained that the responsibility of the corporation must be
proportionate to the corporation’s socio-economic power and strength, thereby
placing social responsibility in a political-power context. According to his “iron rule”,
the responsibility of businessmen must be comparable with their social strength
(Davis, 1960). This is the first clear definition of corporations as political institutions.
The point of departure for corporate responsibility literature at the time was
that the corporation – whether we transfer a ’personal’ moral responsibility to it or not
– is a determining factor of the socio-cultural-economic environment and therefore
the people who determine the operation of the corporation have/should have a special
responsibility for the corporation’s participation in the operation of society. However,
in the early days, corporate responsibility meant individual responsibility limited to
those who determined corporate operation. CSR was viewed and presented as an
individual moral question and was not perceived as the organizational or political
responsibility of the corporation as a public institution. All this followed naturally
from the corporate management and organizational development models of those
days, which measured the success of the corporation by the personal abilities,
achievements and management techniques of the strategic leader (Drucker, 1954).
The Friedman doctrine
Authors writing about responsibility in the sixties agreed that the responsibility of
corporate decision-makers somehow reached beyond economic interests and profit,
25
even beyond legal or regulatory responsibility, and included some kind of socialpolitical
responsibility as well. It was amidst this consensus that the controversial
piece by the future Nobel Prize laureate Milton Friedman appeared. The fundamental
statement of his (in)famous article, published in the New York Times Magazine, was
that decision-makers in business do not have and must not have any other
responsibilities than to make profits. In one of his earlier books (Friedman, 1962)
Friedman had already formulated his statement that later, in its more specific
expression, became known as the “Friedman doctrine”: "there is one and only one
social responsibility of business – to use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game, which
is to say, engages in open and free competition without deception or fraud."
(Friedman, 1970, p. 122). The essence of the ‘Friedman doctrine’ is that business
decision-makers only have specific fiduciary responsibility: they must exclusively act
for and in the interest of stockholders. The interpretation of the doctrine triggered the
first serious debate about potential conflicts between shareholders and stakeholders in
the context of interpreting the business responsibility of the corporation. Followers of
Friedman, who reject the idea of corporate social responsibility, maintain that
business decision-makers only have a responsibility towards stockholders of the
corporation, whereas critics of Friedman argue that corporate responsibility extends to
a number of other stakeholder groups, moreover, that the corporation can only be
directed successfully if the interests of the stakeholders are continuously taken into
account (Freeman, 1984). (Stakeholders and stakeholder theories will be discussed in
the second and third chapters in detail. The political interpretation of Friedman’s
doctrine, i.e. who personally and with what kind of mandate should and must deal
with social issues, and where and how the system of checks and balances must be
applied, will come under detailed scrutiny in the third chapter of this book.)
At the same time, Friedman’s standpoint is a clear dividing line in the
literature dealing with corporate social responsibility. His article was not specifically
targeted against social responsibility, rather it was written in defense of the free
market. The aim of limiting corporate responsibility to fiduciary responsibility is to
maintain a free and distortion-free market, which – as postulated by Adam Smith –
through its self-regulating mechanism makes it possible for those economic and
market conditions to evolve which will move social progress forward. Many, from the
26
Nobel-Prize winner Joseph Stiglitz to the anti-corporation activist Naomi Klein, have
criticized this standpoint as being unviable from the perspective of the real-life
operation of the economy. According to Stiglitz and other economists, the selfregulation
of the market is not effective, partly because the inequality of access to
information by different players in the market cannot be reduced to a degree which
would result in optimal conditions (Smith, 1982), and partly because the players in the
market are not rational actors, therefore, their decisions are inevitably influenced by
biases and heuristics (Kahneman, 2011). Stiglitz put it in the simplest possible way:
“the invisible hand of the market is invisible because it is not there” (Stiglitz, 2002).
Klein goes much further than this: in her opinion it was the Friedman doctrine and the
economic philosophy of the Chicago School that was the cause of the financial and
economic crisis in the first decade of the twenty-first century, and which also ruined
many an economy and society in the second half of the twentieth century (Klein,
2013).
On the other hand, the interpretation of the Friedman doctrine may bring us
closer to understanding the turn, resulting from the social processes of the sixties,
which significantly changed standpoints regarding the necessity for corporate
responsibility. Beside the exclusively fiduciary responsibility of managers, Friedman
makes two other strong statements: the activity must be in the interest of making
profit, and this must be achieved by “staying within the rules of the game”. As already
indicated in the introduction, both strong statements are in line with the definition of
corporate social responsibility put forward in this book. Friedman is right regarding
decision-makers’ responsibility beyond their fiduciary responsibility understood as
‘staying within the rules of the game’ if we apprehend this as being set by other
players than those carrying fiduciary responsibility only. In other words, decisionmakers
must keep to the written and unwritten social norms and values. He is also
right that corporations must serve the interests of ‘profit’, understood as sustainable
business success. Integrating stakeholder values and interests into the operation of the
business means that this should be done in the same way as any other of its processes
and good practices in the course of its operation in the interest of the common goal to
be achieved through its operation: that is, ‘business’ success. As Scherer (2017)
points out, “furthering some social good” can be explained by economic calculations
and instrumental reasoning based on institutional pressures or NGO/CSO activities.
27
Friedman is also right in stating that the corporation must achieve its success by
considering social norms and values, therefore its operation must at all times comply
with the values of the given society and the hard and soft regulating systems
stemming from these.
The reason why Friedman is nevertheless mistaken when he actually flatly
rejects corporate social responsibility, is that the meaning and interpretation of
‘business success’, ‘profit’, and also the ‘rules of the game’, has changed. Lacking the
invisible hand, other principles need to regulate the process of corporate cooperation
and competition. As far as the macro-economic processes are concerned, this is the
task of governments or larger supra-national corporations, as is postulated – among
others – by Stiglitz, or Piketty in his analysis of the operation of capital in the twentyfirst
century (Stiglitz, 2012; Piketty, 2014). On the level of corporations,
(self)regulation may be achieved through equality-based cooperation with
stakeholders on a corporate or supra-corporate, multi-stakeholder level (SchererPalazzo,
2011). This is what Scherer et al. (2016) mean when they refer to as “firms
turn into providers of public goods because local institutions do not work sufficiently,
local governments fail to enforce relevant regulations, or because public authorities
deliberately shift governance tasks to private actors” (Scherer et al, 2016, p. 278).
Change has also come about in the questions of who determines the social norms for
’business success’, and who, and with the help of which apparatus, can enforce these
norms. We will further investigate the role of corporations in the provision of public
goods in the third chapter of this book.
Triple Bottom Line
Although the aspects for measuring corporate performance beyond financial success
were known earlier, it was in the middle of the nineties that expectations beyond
financial performance of the corporation were clearly defined. The term triple bottom
line (TBL) was coined by John Elkington, who gave a detailed explanation of it in his
book Cannibals With Forks: The Triple Bottom Line of 21st Century Business
(Elkington, 1998). According to Elkington’s consulting firm, SustainAbility, the triple
bottom line motivates corporations to pay attention not only to economic, but also to
28
ecological and societal value creation (or demolition, for that matter). In a narrow
sense, the TBL is a measurement and reporting framework which assesses corporate
performance according to economic, ecological and social parameters. In a wider
sense, it is a value system including goals and processes that helps corporations
reduce damages caused as a result of their operation, in the interest of creating
economic, social and ecological value (Elkington, 1998). Although the term has
become widely known through Elkington’s book, the framework he presented had
been formulated earlier, in the Brundtland Report or in the Rio Declaration in 1992.
Referring to Friedman, what has changed is our understanding of ‘profit’, i.e. the
increase in the corporation’s value. Friedman’s formulation is fairly vague: ‘profit’ as
economic value is ambiguous as the “consistent treatment of the nature and source of
profits is notable by its absence” (Fine, 1970, p. 105). In reality, what he meant was
increasing value for the stockholders, which could be short-, or long-term
(sustainable) profit, just as it could be an increase in shareholder value, or a
combination of these (Fox-Lorch, 2012). With the appearance of TBL the meaning of
corporate value increase has changed. For a corporation to operate successfully in the
long-term, i.e. for it to continuously increase shareholder value, as well as to reduce
risks stemming from short-term financial gain maximization, it is no longer enough to
meet only economic expectations but the corporation must also take social and
ecological aspects into consideration and give account of the results of these
activities.
It is even more significant that since the publication of Friedman’s article the
‘rules’, namely the framework for the interpretation of written and unwritten societal
norms, have also changed. One of the most fundamental changes that has taken place
in present-day Global North societies is that the wall separating the public sphere and
the private sphere has fallen (Arendt, 1958). As a result of the sexual revolution, the
emergence of gender, consumerism and new complex trends of fashion, as well as the
internet and social media – just to mention a few of the trends that have formed the
cultural-anthropological environment of late modernity – a separation of the private
sphere of values and beliefs from the public sphere of shared imaginaries of the
political, in which value-neutral processes secure the political cohesion of the
community, has lost its significance (Beck et al, 1994; Beck, 1992; Giddens, 1991).
With the borders between private and public having become blurred, the values and
29
commitments earlier part of the private sphere have appeared on different public
platforms, including societal value preferences, commitment towards the environment
and expectations regarding collective cooperation. The fact that protection of the
environment, keeping animals under appropriate conditions, respecting the various
forms of human dignity and human rights, as well as gender equality are important
issues is now part of the public domain and have become the fundament of individual
and organizational cooperation. The public sphere has been flooded by personal and
organizational identities based upon value preferences, expecting respect from other
members of society as well as formulating such strategies in the course of the
cooperation with them which respect the values underlying these identities. These
expected strategies have also changed the communication between individuals and
organizations and their relation to each other, whether in the form of written or
unwritten norms. This means that they have transformed Friedman’s ‘rules’.
Therefore, we may conclude that the Friedman doctrine is valid (“increase its profits
so long as it stays within the rules of the game”), yet it should be interpreted in a
different way than it was in the sixties-seventies of the last century. ‘Profit’ does not
merely mean the achievement of short-, or longer-term financial results, but also the
compliance with the requirements of the three-fold success criteria of the TBL.
‘Staying within the rules of the game’ no longer simply means compliance with the
law or regulation or adjusting to the value-neutral processes of the earlier public
sphere, but also acquiescence with the value-laden and value-committed cooperative
strategies of the public and private spheres. Active participation in corporate value
creation of stakeholders has opened up ‘fiduciary’ responsibility towards other
stakeholders beyond stockholders only. Although Milton Friedman was, and is still
today seen – not without reason – to be the most significant opponent of a more
traditional understanding of corporate social responsibility, a twenty-first century
interpretation of his doctrine can provide arguments for substantiating the importance
and necessity of a politicized corporate responsibility.
It was the Committee for Economic Development (CED), numbering leaders
of the most significant US corporations and researchers from universities among their
members, founded in 1942, that contributed best to understanding CSR and to
increasing acceptance of corporate responsibility in the beginning of the seventies. In
their study, Social Responsibilities of Business Corporations, published in 1971, they
30
declared that “[b]usiness functions by public consent, and its basic purpose is to serve
constructively the needs of society – to the satisfaction of society” (CED, 1971). The
study uses three concentric circles to define corporate responsibility. The inner circle
contains the responsibilities necessary for an effective business operation, such as
products, employment and the responsibility for economic growth. The middle circle
contains those responsibilities which require sensitive attention to the context in
which the business operates and changing social values and priorities, such as
conservationism, hiring of employees and cooperation with them, compliance with
the expectations of consumers and providing them with correct information, due
diligence, and the prevention of injuries at the workplace. The components of the
outer circle are those, as yet not fully developed and ambiguous, responsibilities
through which corporations can actively shape their social environment, for example
in the interest of reducing poverty or the decay of towns and cities. Here again we see
the emergence of an active participation in the provision of some form of social good
or the restriction of public bad by the corporation (Scherer et al, 2016).
Ecological tragedies and corporate scandals
Two important and in many respects interlinked phenomena became the driving force
behind corporate responsibility in the eighties: the lid was blown off the scandalous
ecological and social damage caused by large corporations, and the growing demand
for corporations to account for not only their financial results but also for other
externalities, risks and impacts in a structured and transparent way.
The first corporate scandal/tragedy, which – with the help of the international
media – drew attention to the risks of corporate operation, was the Union Carbide
case in Bhopal, India. In the early morning hours of 3rd
December, 1984, a white
cloud rose from the insecticide manufacturing plant of the chemical giant Union
Carbide near Bhopal. The cloud was methyl-isocyanide (MIC). About five-hundredthousand
people were exposed to the heavily toxic gas. The human consequences of
the tragedy were truly dramatic. To date this is considered one of history’s worst
industrial catastrophes. As a result of having come into contact with the gas, 2259
people died immediately. According to the official investigation by the Indian
31
authorities, the death toll directly attributable to the gas rose to 3797 people. Other
estimates speak of eight thousand death cases in the two weeks following the
catastrophe, with further eight thousand deaths that could directly be linked to the
accident. The investigation by the Indian government, completed in 2006, registered
558,125 injuries, health deterioration and deaths which were direct results of the gas
pollution. The real causes of the tragedy have remained unknown. According to
activists and the government investigations, weak management and control, as well as
the lack of regular maintenance led to water being able to get into the MIC tank.
Union Carbide kept to their earlier standpoint, maintaining that the water got into the
tank through sabotage. As a result of the legal proceedings ending in 2010, seven
former employees of Union Carbide, including the plant’s director, were sentenced to
two years imprisonment and a fine – the most severe punishment that could be
imposed according to Indian law in such a case. Bhopal has become the textbook case
for irresponsible environmental operation: the company was operating at a loss and
therefore all investments were put on hold. This was not the first such incident at
Union Carbide. They had encountered problems with the MIC tank as early as in 1982
and although no catastrophe happened then, none of the protective measures,
suggested by the investigation report at the time, were implemented. Beyond the
deaths and health problems, the catastrophe caused substantial social and ecological
damage, which has had lasting effect on the lives of the inhabitants of the region
(Bogart, 1989).
The other most significant ecological catastrophe of the eighties was the
accident of the Valdez, the Exxon owned oil tanker. The ship ran aground near the
shores of Alaska on 24th
March, 1989, spilling some fifty million litres of oil into the
sea as a result of the accident. Reports by some NGO’s showed that the true extent
and quantity of the spillage was underestimated. In the days following the oil spill
almost 200,000 birds, 2800 sea otters, hundreds of sea dogs, close to three hundred
eagles and countless other animals perished. The accident devastated the habitat of the
animals, the breeding places of birds and the micro-organisms of the water thereby
disturbing the food-chain of the local fauna and flora. Local inhabitants are still
suffering from the remains of the oil and the damage caused to their environment. The
tragedy was caused by a number of coinciding factors. Crew members of the ship
were overextended and exhausted because Exxon did not allow them sufficient time
32
off. The third officer, who was in command of the ship at the time of the accident,
was tired due to days of continuous work without enough rest. The so-called
Raytheon Collision Avoidance System (RAYCAS) of the ship, with the help of which
running aground could have been avoided, had for more than a year been nonfunctional
– according to reports Exxon’s management had not approved the funding
for its repair as they thought the costs to be too high (Palast, 1999).
In the ensuing court case, the Court of the State of Alaska compelled Exxon to
pay five billion dollars in damages, which was finally substantially reduced to half a
billion dollars following a number of appeals. A further relevant outcome, and
footnote to the emergence of the global financial crisis in 2008, of the case was the
introduction of CDS (Credit Default Swap) as a financial instrument by J.P. Morgan,
Exxon’s bank to provide collateral for the five billion dollar damages payment of
Exxon. A CDS is also called a credit derivative contract and in essence it is
considered to be an insurance against non-payment or bankruptcy of the seller of the
policy. CDS has been extensively criticized since, due to its non-transparent nature
and because its purpose is really to avoid having to create bank reserves for loans or
other debt instruments according to the Basel rule – as was the case with the
Exxon/J.P. Morgan transaction. Many believe that, due to its systemic risks, the CDS
was one of the financial tools that caused the 2008 financial crisis.
A third important case that can be mentioned in connection with CSR was the
sweat-shop scandal involving Nike, the sportswear manufacturing company, at the
end of the eighties. Nike, similarly to other clothing and sportswear manufacturers,
had their products made in the Global South by contract manufacturers or OEMs. In
order to be able to make these products at very low costs, workers in these plants were
paid extremely low wages, typically between USD 1.25 and 2 per day, combined with
working conditions unworthy of human beings, not seldom employing children to do
hard physical work. This scandal was especially important from the point view that
the abuses were uncovered by NGOs, student organizations and consumer protection
movements, who then started a campaign against Nike in their home countries (that is
in the Global North – where key stakeholders: stockholders, consumers resided).
Similar scandals involving other companies were uncovered later, like the GAP
clothing company’s scandal in 2007, or the scandals of H&M, Zara and Marks &
Spencer in the years to follow. As a result, these companies were forced to introduce
33
control systems that exclude the use of child labour as well as prescribe
subcontractors the payment of minimal wages. Despite these efforts NGOs still
uncover similar cases from time-to-time, where workers are kept under conditions as
described above. The latest such case was when NGOs called for boycott against
FoxConn, one of Apple’s most significant OEMs, because of inhumane working
conditions.
These cases in the eighties directed attention to the fact that social and
ecological impacts – the negative externalities of their operation – that corporations
have on their environment may have tragic consequences and can cause long-term
damage. The need for handling risks associated with these impacts and reforming the
operation of corporations in a way that takes the negative externalities into
consideration when evaluating the performance of the corporation (or ‘internalizing
externalities’ in econ-speak), and trying to alleviate the effects of these, has become
the driving force behind corporate social responsibility during the eighties and
nineties of the last century.
Social reports
Since as early as in the beginning of the eighties ‘social reports’ – beside corporate
financial reports – have been published, giving account of a part of the negative
externalities for the investors. The theoretical foundations for these reports were laid
down by Theodore J. Kreps, professor at Stanford (Caroll-Beiler, 1975). Kreps’ aim
was to set up a measuring system that would assist corporate decision makers in their
efforts to promote social goals by making public information going beyond data
contained in financial reports. Howard R. Bowen (1953, quoted above) on the other
hand suggested a system in which external auditors evaluate the ‘social effects’
(remuneration, human resources, social contacts and communication). He, however,
proposed it to be used exclusively by corporate decision-makers and not for the
general public. These two theoretical approaches clearly reflect the possible dual aim
of ‘social reports’. The proposition of Kreps puts corporate performance in the
foreground and presents it as part of striving towards reaching social goals, whereas
34
Bowen’s method offers corporate leaders a new tool for being able to lead the
corporation under their management, with minding public goods, better.
A few corporations in the United States experimented with ‘social reports’ and
even their publication in the early seventies. Research conducted in 1974 showed that
74% of large corporations did prepare some kind of ‘social audit’, but – partly due to
the Friedman doctrine – this did not become a widely accepted practice. Management
thought spending money on such reports to be a waste of money, while companies
restrained from any publicity regarding their social performance – or the lack of it –
for fear of any assumed risks they may run with regard to their reputation (Hess,
2008). Preparing social reports came to a near to complete halt in the eighties, due to
the recession and lack of interest. Social report preparation was resumed early in the
nineties, partly because of the environmental awareness enflamed by natural
catastrophes and as the ensuing refinement of published ecological reports, partly
because of the social report initiatives of pioneering companies, such as Ben & Jerry
and the Body Shop. In 1977 the Global Reporting Initiative, conceived by the CERES
non-profit organization got under way with the aim of preparing a generally accepted
and widely applied standardized system of reporting on social and sustainability
issues, in collaboration with actors of science and governments. CERES was the
driving force behind GRI, and as a result of this cooperation the first GRI reporting
standard was published. GRI became an independent organization in 2002, and since
then the fourth, revised edition of the reporting standard has already been published.
Following the publication of the first standard in 2000 a mere fifty corporations
prepared GRI-based reports, whereas this number was estimated to be thousands by
the end of the first decade of the twenty-first century. (The GRI, the reporting system
and its methodology will be discussed in further detail below.)
Institutional legitimation and responsibility
The appearance of GRI and the general acceptance of social/sustainability
reports in corporation circles made theoretical discourse about the legitimation of
corporations even more pointed and important. These discourses served later as the
theoretical basis for sustainability and social reports. The term legitimation was
35
introduced into the literature on organizational sociology by Max Weber (Weber,
1978). The authority types identified by him later frequently became the point of
departure for organizational theories. Weber’s theory was developed further by
Parsons, who viewed legitimation as the organization doing justice to norms, laws and
values accepted by society (Parsons, 1971). Authors of organizational theory took this
approach as point of departure, yet at the same time the exact content of the
legitimation of organizations was disputed, to a large degree due to the ecological
catastrophes and social injustices mentioned above as well as others. There was no
uniform definition as to the exact meaning of the legitimation of organizations in the
seventies-eighties, just as there was no differentiation between the different types of
legitimations. Mark Suchman states that “[l]egitimacy is a generalized perception or
assumption that the actions of an entity are desirable, proper, or appropriate within
some socially constructed system of norms, values, beliefs, and definitions”
(Suchman, 1995, p. 574). Suchman viewed legitimation, on the one hand, as a
question of organization, i.e. how do the norms of a given society become integrated
into the operation of an organization?; and on the other, as a strategic tool, the
adequate use of which helps corporations achieve success by applying these values
and norms in their operation. From all this the definition of a number of sub-areas of
legitimation follows. We can differentiate between pragmatic, moral and cognitive
legitimation. The origin of pragmatic legitimation is the self-interest of the
organization. Its aim is to get reciprocation for achieving legitimation. Moral
legitimation stems from the judgement of the environment, and its goal is to get a
‘licence to operate’. The basis for cognitive legitimation is ‘taken-for-grantedness’ or
mutual and conscious acceptance. It follows that there can be post-conscious and preconscious
institutionalization. The former can come to be as a result of an evaluation
process based on mutual cooperation, whereas the latter is based upon conscious
acceptance or agreement (Suchman, 1995). However, legitimacy problems may arise
when companies are deciding on priorities and contributions to public goods without
proper inclusion and deliberation with the addressees of their engagement and
companies miss the actual expectations of the members of society (Matten & Cane,
2005; Scherer et al, 2013; Scherer, 2016).
There are a number of tools available to corporations to help manage their
legitimation: from reputation management using PR through brand building to
36
marketing communication and the tools of internal-external communication. At the
same time, there is obviously an information inequality between the corporation and
its environment. This inequality must be balanced out as a pre-requisite for the
company to obtain, maintain and improve its legitimation. Consequently, the
social/sustainability reports in the nineties became tools for alleviating information
inequality and managing strategic organizational legitimation, to a large degree due to
the question of strategic organizational legitimation having become the focal point
and avoiding the problems stemming from the public withdrawal of the ‘licence to
operate’. This had a beneficial effect on reporting and on the development of
organizational reporting culture, both within the corporations and in organizations
supporting the corporations.
Thus, the spread and application of corporate social responsibility was helped
by two related circumstances in the eighties and nineties. One of these was the
recognition induced by – mainly ecological – catastrophes that corporations and their
environments must manage the negative externalities and risks arising from their
activities. The other one was that the pre-requisite for managing these negative
externalities and reducing risks was the alleviation of information inequalities and
preparing for proper inclusion and deliberation with the addressees of provision of
public goods or avoidance of public bads, and the tool for doing this was the strategic
management of institutional legitimation.
Institutionalization of responsibility
The practice of some form of corporate social responsibility therefore gradually
became an important, necessary and finally compulsory area of corporate operation in
Western Europe. As more and more corporations published sustainability/social
reports, an increasing number of corporations felt that the key performance indicators
(KPIs) contained in these reports had to be managed in order for institutional
legitimation to be obtainable and sustainable. Also, KPIs where questioned and
challenged for accuracy, manageability and usefulness by stakeholder groups entering
into cooperation of any form with the corporation. The first decade of the twenty-first
century saw the institutionalization of corporate responsibility and its integration into
37
corporate operation. Institutionalization did not only take place in the corporate
sphere. NGOs and consulting firms were founded to take on the task of popularizing
CSR, thereby helping the process of institutionalization. Independent chairs were
established at universities and the issue of responsibility found a place on the agendas
of international organizations. Global Compact, a specialized institution of the UN,
was set up. The European Union issued communiqués, first about the compulsory
nature of reports, later about the strategy -- “Europe as the Centre of Excellence for
Responsibility”. According to the Union’s CSR strategy of 2011: “Through CSR,
enterprises can significantly contribute to the European Union’s treaty objectives of
sustainable development and a highly competitive social market economy. CSR
underpins the objectives of the Europe 2020 strategy for smart, sustainable and
inclusive growth, including the 75% employment target. Responsible business
conduct is especially important when private sector operators provide public services.
Helping to mitigate the social effects of the current economic crisis, including job
losses, is part of the social responsibility of enterprises. CSR offers a set of values on
which to build a more cohesive society and on which to base the transition to a
sustainable economic system” (European Commission, 2011). All this is supported by
the indices and indicators underlying EU strategy. The strategy states that “The
number of EU enterprises that have signed up to the ten CSR principles of the United
Nations Global Compact has risen from 600 in 2006 to over 1900 in 2011. The
number of organizations with sites registered under the Environmental Management
and Audit Scheme (EMAS) has risen from 3,300 in 2006 to over 4,600 in 2011. The
number of EU companies signing transnational company agreements with global or
European workers’ organizations, covering issues such as labour standards, rose from
79 in 2006 to over 140 in 2011. The Business Social Compliance Initiative, a
European, business-driven initiative for companies to improve working conditions in
their supply-chains, has increased its membership from 69 in 2007 to over 700 in
2011. The number of European enterprises publishing sustainability reports according
to the guidelines of the Global Reporting Initiative rose from 270 in 2006 to over 850
in 2011” (European Commission, 2011). The European Parliament, like many other
European organizations, has also formulated what they would expect from the
Commission to make CSR general practice, not only for corporations but also in the
economy as a whole. Among others, the Parliament’s initiative “[s]tresses that
corporate responsibility must not be reduced to a marketing tool, and that the only
38
way to develop CSR to the full is to embed it in a company’s overall business strategy
and to implement it and translate it into reality in its day-to-day operations and
financial strategy; would welcome a link between good corporate responsibility and
good corporate governance; believes the Commission should encourage companies to
decide on a CSR strategy at board level; calls on the Commission and the Member
States to introduce corporate stewardship codes that reflect the importance of
responsibility for all in the company and establish a strong link between its
environmental, social and human rights performance and its financial results”
(European Parliament, 2013). By the end of the first decade of the twenty-first century
the issue of responsibility had become accepted and integrated business practice in the
developed Western countries.
Social and economic paradigm shift
The ecological catastrophes and their consequences lead to another important social
recognition at the turn of the eighties and nineties. Warnings increased that the
exploitation and demolition of scarce environmental resources and the natural
environment will lead to dramatic consequences even in the midterm. More and more
people have come to recognize that the traditional growth of
economic/production/consumption ‘value’ causes damage far in excess of the value
created. In other words: the economic value created is lower than the sum total of the
consequent social costs. These are comprised partly by the consequences of, offset or
hidden, ecological damage already present in mainstream public discourse at the
beginning of the second millennium, as well as less present social costs offset by
government social transfers, or hidden behind achievements not produced. But the
situation is even worse. By ignoring the social costs incurred, GDP/GNP, nowadays
the most widely accepted indicators for economic performance summarizing the
system of national accounts, do not measure value creation correctly. What is more,
economic headline indicators show social costs as value increase despite the fact that
these are costs. As Robert Kennedy put it in his seminal speech on GNP at Kansas
University in March, 1968: “Too much and for too long, we seemed to have
surrendered personal excellence and community values in the mere accumulation of
39
material things. Our Gross National Product [...] counts air pollution and cigarette
advertising, and ambulances to clear our highways of carnage. It counts special locks
for our doors and the jails for the people who break them. [...] It counts napalm and
counts nuclear warheads and armoured cars for the police to fight the riots in our
cities. [...] Yet the gross national product does not allow for the health of our children,
the quality of their education or the joy of their play. It does not include the beauty of
our poetry or the strength of our marriages, the intelligence of our public debate or the
integrity of our public officials. [...] it measures everything in short, except that
which makes life worthwhile” (Kennedy, 1968). GDP does not measure and does not
evaluate environmental damage caused by traditional production growth, just like it
does not measure those social damages that are caused by traditional consumption
growth. As a result of traditional economic growth the gap between those few who
share the accumulated wealth and the majority who are unable to accumulate wealth,
since all they are able to do is to earn basic subsistence, is getting wider (Stiglitz,
2013). An increase can be seen in a large part of the Global North of the number of
those who have lived in deep poverty, often for generations, struggling to survive
without the hope of ever earning a living and therefore not having the remotest chance
of accumulating financial security. They are the number one recipients of social
transfers, but according to many the system is unsustainable, since less and less
income-producing people have to support an ever-increasing number of inactive
citizens. As a consequence of global crises and in periods of recession more and more
people become inactive. In the process they lose their accumulated wealth and start
sliding down towards poverty. The three future shaping key megatrends:
environmental, consumer and local consciousness have elevated ecological
sustainability (thrifty and conscious husbandry with limited resources) and social
sustainability (democracy, based on involvement and cooperation) into the
mainstream of thinking and acting.
In 2008, French President Sarkozy commissioned Joseph Stiglitz, professor at
Columbia University in New York, who at the time was already known to be a critic
of traditional fiscal practice, to investigate whether GDP is a suitable tool for
measuring development under modern social and economic conditions. It was hardly
surprising that Stiglitz and his colleagues came to the conclusion that the GDP does
not sufficiently take into account aspects of quality of life, just as it does not concern
40
itself with the dangers of depleting natural resources and costs of restoration. In short,
new indicators and a new economic paradigm were needed. The second, so-called
‘higher level committee’ started work in 2014. Its task will be to set up the indicators,
the economic model and regulating system in line with the principles of the ‘new
economics’ (Stiglitz et al, 2008; 2010).
In the first half of the nineties of the last century, psychologist Daniel
Kahneman, who in 2002 was awarded the Nobel Prize in Economics for work done in
the field of behavioural economics and decisions under risk, started research into the
psychology of subjective well-being and its economic consequences. Kahneman and
his fellow researchers were curious to find out which factors and circumstances
formed people’s subjective feeling of being well or thriving, in everyday language
their happiness and well-being. Kahneman’s findings, namely that the feeling of wellbeing
is the sum total of a number of ‘subjective factors’, such as biases, heuristics,
and distortions of the remembering self, have influenced the work of numerous
researchers. They posed the question: what factors are necessary for people to feel
that they are happy with their lives? These researches served as the basis for the
economics of well-being, which placed psychological well-being – rather than being
materially well-off –at the centre of the operation of economic systems. Many a study
was conducted to find out which qualities, forms of behaviour and opportunities
mould well-being, i.e. the phenomena that make a significant proportion of people
answer the simple question of how happy they generally felt last week positively
(Kahneman, 2000; 2011).
All this research has also shaped the public policy discourse on
macroeconomics. In the same way that in the early years of our century institutions
for supporting, developing and teaching corporate level responsibility were set up,
new institutions came into being parallel to the former for the purpose of propagating
and advancing the new paradigm of economics. The economics of wellbeing aims at
providing individual and communal wellbeing for as many as possible. It considers
financial or economic development, social processes and the so-called ‘human
systems’, such as education, health-care, care for the aged, etc., as tools while
considering the thrifty treatment of limited natural resources and the search for
alternatives to them to be a pre-requisite for achieving its goals. This train of thought
has recently become part of economic and policy thinking in Western Europe. British
41
ex-Prime Minister, David Cameron commissioned the British Bureau for Statistics,
involving the British think tank, the new economics foundation, in the work, to
develop indicators for measuring well-being and to start measuring performance. He
announced that he is planning to link the effectiveness of his government to the
development measured by these indicators (New Economics Foundation, 2015).
Thus the principles and practice of responsibility and their integration into
corporate operation presumes that the scientific foundations and paradigms also have
to change. Should the integration of stakeholder values and interests into corporate
operation become the basis for corporate value creation, and should the performance
of corporations not only be evaluated on the basis of their financial success but also
according to the principles of the triple bottom line, conceptions about development
and progress cannot remain unchanged either. Therefore, ideas about economic
progress and growth and the necessity and extent of these must likewise change in
order to achieve success of responsibility on a corporate level. Propagators of
ecological and social sustainability appeared parallel to the development of CSR.
Similarly to the institutionalization of CSR and the new economics, the
representatives of the idea of sustainable development established their own
institutions. The Bruntland Commission, set up by the UN in 1987, defined
sustainable development in its report as “development which meets the needs of
current generations without compromising the ability of future generations to meet
their own needs”, which is the central idea that the term sustainable development
stands for. According to the representatives of this initiative, development must have
regard to limited ecological resources, the Earth’s ability to support its population and
the depletion of the natural environment. Representatives of sustainable development
are critical of over-consumption, growth seen exclusively as an achievement in a
material sense, and wastefulness, which can be observed side-by-side with poverty
and starvation and serious multiple deprivation. The definition of sustainable
development evolved parallel with the thought and practice of corporate responsibility
and later became widely known through Lester R. Brown’s work, Building a
Sustainable Society, published in 1981. The setting up of the UN Millennium Project
was an important step in the process of institutionalization, which created a
framework for identifying the most important global challenges. The Millennium
Project viewed the answers to these challenges the most important success criteria in
42
the interests of the future of humankind. As José Antonio Ocampo, Deputy Secretary
General responsible for sustainability at the UN stated in the introduction to the
Millennium Project: “Six years ago, leaders from every country agreed on a vision for
the future – a world with less poverty, hunger and disease, greater survival prospects
for mothers and their infants, better educated children, equal opportunities for women,
and a healthier environment; a world in which developed and developing countries
worked in partnership for the betterment of all. This vision took the shape of eight
Millennium Development Goals, which are providing countries around the world a
framework for development, and time-bound targets by which progress can be
measured” (The Millennium Development Goals Report, 2006, p. 3). The timeframe
for the Millennium Project has been set for 2000-2015 with the following eight goals:
eradicate extreme poverty and hunger, achieve universal primary education, promote
gender equality and empower women, reduce child mortality, improve maternal
health, combat AIDS/HIV, malaria and other diseases, ensure environmental
sustainability and develop a global partnership for development (The Millennium
Development Goals Report, 2006).
All in all, the pillars of the new social-economic paradigm have become clear
by the early twenty-first century: the triple bottom line and corporate responsibility
integrating stakeholders’ values and interests into the operation of the corporation
(TBL); initiatives for supra-corporative, multi-stakeholder initiated soft rules,
recommendations and standardization on the micro and mezzo level of the economy
based on the involvement of stakeholders (pCSR); developing and using indicators
other than GDP for measuring economic progress; taking into consideration not only
monetized social transactions but also the limited environmental resources; giving
primacy to the development of human capital (beyond GDP); the ‘new economics’
(NE) and public policy practice, considering the ecosystem of economy-societyenvironment
to be important, and the vision of sustainable development determining
the direction of socio-economic development and its possible strategies globally (NE).
Therefore, (p)CSR is not an independent and separate territory, but part of a system
that fits in organically with the new socio-economic paradigm through the
transformation of the politics of corporate level business operations.
43
Responsible brands, responsible communication
Corporate social responsibility is not the only area in the lives of corporations where
this kind of shift has occurred. The attitude towards corporate brands has gone
through a similar transformation in the past decades. Brands are no longer simply
signs of ownership and tools for image building, they have become communities built
upon common beliefs regarding a mutually beneficial social exchange based on solid
cultural roots and complex organizational contacts. Therefore instead of a purely
management task, brand ownership is a mutual process based on negotiation to give
meaning and attach positive associations (Fagerholm, 2007). Corporate leaders lose
direct control over the identity of their brands, therefore brands also become
communities, which assist educated and informed brand selection, that in turn will
reinforce the development of individual identity positions (Ind, 2003). Leading
brands, like Nike, Coke or Starbucks, have realized that the success of a brand is not
primarily decided by the board of directors or the marketing department. The concept
of brand ‘co-creation’ and ‘living the brand’ offers brand community models, which
can create more value for the stakeholders than brands owned by the shareholders
focusing merely on shareholder value. Brand communities are – just like nations –
virtual, imagined communities, which are no longer the property of the corporation or
its representative, the marketing expert, but of the community and its members
(Anderson, 1983). This, of course, does not eliminate the need for marketing
professionals, rather it gives them different, political, tools to work with, since
mobilizing the community – thus sustaining and increasing the power of the brand –
depends on raising a sense of identification and belonging, the introduction and
operation of rites and symbols and sustaining the responsibility towards the
community (Muniz & O’Guinn, 2001).
Corporate social responsibility, as the new model of corporate operation,
extends the brand community over the corporate community as well. Effective and
methodological CSR includes voluntary activities, just as it includes compulsory legal
and operative practices. It politicizes the corporation as it focuses on the inevitable
socio-cultural differences among different stakeholders and the modes that these
differences may be reconciled to cooperate in will formation and value creation as
44
well as manage the power setup or the “complex strategic situation in a particular
society” (Foucault, 1990b, p. 93). To achieve this it is not enough to understand the
new business-social context. The actors have also to become acquainted with the tools
of the new context, primarily in communication. For an equal and, to some extent,
oppression-free exchange with stakeholders, it is necessary to use multi-directional
and multi-sided communication by applying the principles of web 2.0 (many-tomany)
connecting the points of a matrix. Communication in this process is not meant
to be ‘speaking about something’, nor a mere tool for setting the basis for the action
and directing it, but rather – in line with Austin’s speech act theory - it must itself be
the action (Austin, 1962). Therefore, communication with stakeholders and the
politicization of exchange may serve as the basis for the process of developing the
corporate constitution, in the course of which the implementation of various
principles of communication may lead to the emergence of ‘stakeholder constitutional
democracy’. Liberal and democratic corporate communities need to be managed
appropriately, cooperative management and discursive legitimacy are to be applied
and it is important to involve and engage stakeholders to ensure their commitment. It
would be desirable to initiate a constitutional process in corporations, instead of
stricter regulatory practices and direct state involvement to arrive at favourable
societal outcomes. Supra-national organizations may involve organizational
stakeholders in the process of drafting the constitution having regard to the principles
of cooperative management. This process can lay down the forms and structures of
corporate constitutions, it can provide examples and good practices for the elaboration
of such constitutions and it can accept binding legal steps to be incorporated into
national legal systems. One of the first steps in this direction was when the EU
accepted a directive formulating expectations towards corporations to include in their
annual operational report – beyond the financial aspects – ‘strengthened control’, in
effect requiring them to include a CSR report as well. Corporations can undergo a
process of transformation due to stakeholder pressure, or they can manage such
transformations already under way. However, a shift and redistribution of power
based on the new concept of marketing-guided communal sovereignty has still only
just begun in very few corporate communities (Ind, 2004).
Criticism of CSR
45
While by the end of the first decade of the twenty-first century the issue of corporate
social responsibility has become an accepted and general business practice in the
developed Western European countries, many critics of this practice have come
forward (Broomhill, 2007; Caroll & Shabana, 2010; Fooks et al., 2013; Fougére &
Solitander, 2009; Henderson, 2009). Their criticisms can basically be divided into
four groups.
According to the first group of critics, CSR is nothing more than a PR activity,
simply serving communication goals for improving the corporation’s image. This
criticism may be well-founded, although numerous authors – primarily interpreting
the question from an organizational legitimation standpoint as discussed above –
allow that the acquisition and maintenance of the corporation’s image is an important
part of corporate operation; therefore, it is part of the management of legitimation.
This would be the position of those who share the ‘CPA ontology’ referred to by
Scherer (2016); this is characterized by the premise that corporations engage with the
political system, stakeholders included, only to gain economic benefits and further
their competitive positions. However, if the corporation presents a positive picture by
integrating stakeholder values and interests to some extent, thereby acquiring and
maintaining its institutional legitimation, in reality it is managing responsibility.
Critics also argue that the corporation can achieve substantial image improvement by
showing only modest responsibility supported by effective communication. This
criticism may be well-founded, but in this case stakeholder responsibility may have to
be scrutinized. Should the stakeholders feel that their values and interests have not
been integrated into the operation of the corporation to a sufficient degree, they have
the possibility of withdrawing the legitimation from the corporation and, as a final
resort, even forcing the withdrawal of the social ‘licence to operate’. Managing
stakeholders or stakeholder politics is not a one-way-street. It presumes two-way
communication, since proper mutual communicative cooperation with the
stakeholders is part of a PR that has due regard for responsibility. As mentioned in the
introduction, these corporations are on the first level, i.e. they operate according to the
anti-democratic operational model showing only sporadic and opportunistic
responsibility. Stakeholders have the possibility to force these corporations to change,
or to at least to make them move towards an organizational-regulatory democracy,
46
through putting legitimation in jeopardy, by stakeholder actions, such as boycotts,
walk-outs and negative reports, by involving direct legislative interference, and,
ultimately through the withdrawal of the ‘licence to operate’.
The second group of critics argue that while the issue of responsibility in the
whole of the economy may seem to be accepted and have become general business
practice, for the time being this only applies to large corporations – smaller
companies do not bother themselves much with it. This criticism is well-founded. It is
exactly for this reason that the most significant challenge for institutions and
organizations in the process of institutionalization of CSR has been to demonstrate the
CSR cause, its usefulness and necessity, to all the smaller players of the economy.
There are a number of initiatives in the European Union that aim at popularizing and
advancing the principles and practice of corporate social responsibility among mainly
small-, and medium-sized enterprises. Beyond this, large corporations – as part of
their responsibility, yet mainly motivated by the recognition that in the interest of the
healthy functioning of the economic ecosystem all members of the supply-chain must
operate according to the same practice – can themselves take steps in the interest of
making smaller enterprises linked to them part of the system of responsibility. We
will return to supply-chain responsibility in Chapter 5.
According to the third group of criticisms, large corporations often seem to
operate responsibly, yet in reality, they ‘sub-contract’ irresponsible practices to their
partners and contractors. It is true that this does occur regularly, yet here regulation
and multi-stakeholder corporate initiatives should play a role in order to prohibit the
sub-contraction of irresponsible operation to various points of the value chain. This is
what responsible supply chain management, multi-stakeholder self-regulation and full
supply chain state regulation are aimed at. These prescribe uniform responsibility
systems for the entirety of the supply chain and to corporate partners controlled by
third parties.
The fourth group of critics hold that the responsible operation of the
corporations in reality exerts excessive influence on the operation of society. This
influence can then be used/exploited for unethical or irresponsible practices. As stated
earlier, corporations have by the end of the twentieth century become one of the most
influential actors in shaping social processes. Therefore, whether we want it or not, it
47
is they who are the key determining factors in shaping our lives. It is corporations that
have the financial and human resources, operating knowledge and organizational
culture that can be the most important driving forces behind social innovation. This is
exactly why involving corporations in the process of societal transformation, the
politicization of corporations, is not harmful. This is, I think, what Zadek means when
he talks about “civilizing power” (Waddock, 2008). Corporations must participate in
designing and setting up spaces for democratic stakeholder politicizing, and
establishing its institutions, depending on the social value system, interest
relationships, legislative context and political environment. Every corporation
politicises in the interest of shaping social conditions according to its goals. The
introvert corporation that only represents the interests of its stockholders does not take
cognisance of its operation’s impact on other stakeholders, there is no offset, limit or
mitigation to such negative externalities. The lack of involvement of stakeholders
lessens its value-creating ability, since for the twenty-first century cooperation the
sharing of knowledge and mutual support maximizes value creation. And this is what
produces ‘profit’ for everyone. The corporation that politicizes consciously is
democratic, and creates the institutions for stakeholder involvement, making
engagement more successful and valuable for both the stakeholders and society as a
whole.
48
2. STAKEHOLDERS
The GE dialogue
The top management of General Electric met in Brussels in the autumn of 2007. The
agenda this time was not the question of a major investment, nor the selling off of a
subsidiary. The meeting was convened by Ferdinando Becalli-Falco, Vice President
and European Director General of GE and all major areas of the corporation were
represented. The HR Deputy CEO, as well as the manager responsible for marketing
and suppliers were also present. However, this time GE wanted something more,
something different from a meeting of the directors where management deliberates
global strategic questions facing the corporation. This meeting fitted into a series of
previous ones where GE’s declarations “Citizen Report” and “Principles of Human
Rights”, both published a year earlier, were discussed. In the twelve months since
their publication, similar meetings had been held in New York, London, Warsaw and
Hong Kong. In these places, GE’s top management met with leaders and
representatives of groups of the corporation’s most important stakeholders,
international experts and thought leaders on responsibility, rather than with politicians
and statesmen. This series of meetings was organized by the international NGO
AccountAbility, in line with the standard for stakeholder dialogue published by them
earlier. The meeting in Brussels was chaired by Simon Zadek, Chief Executive of the
organization. In his welcome address, one of the directors of GE apologized for not
switching off his cell phone during the day. The reason for this – as he explained –
was that it was conceivable that he would be called from the Far East, where one of
GE’s employees had been arrested for refusing to divulge information about the
corporation’s electronic mailing system to the authorities, and also because another
employee in an unnamed North-African country might be asking for help as the
authorities there had been putting him under pressure to tell them the names of his
colleagues who took part in the work of anti-government NGOs using the
corporation’s email system.
This welcome address was a good illustration that involving stakeholders and
the integration of stakeholder values and interests was not merely a theoretical
49
challenge, but part of daily decision-making by corporate leaders. At it happens, the
phone did not ring but the participants discussed in detail the question of what
decision alternatives are open to corporate leaders in such situations. How can a
global corporation cooperate with the local authorities of a huge country – this being
the regulating pre-requisite for business operation – which does not profess to the
principles of freedom of speech as practiced in western democracies, while adhering
to its own corporate culture based on western democratic traditions and protecting its
most important stakeholders. The participants also considered whether an employee
should be allowed to use the corporation's email system for their personal political
ambitions, and whether after such an incident the corporation has the right and
possibility to continuously monitor employees’ emails in order for the corporation not
to become involved in political fighting.
The meeting was held according to the so-called Chatham House Rule, i.e.
“[...] participants are free to use the information received, but neither the identity nor
the affiliation of the speaker(s), nor that of any other participant, may be revealed.”
Following heated debates at the Royal Institute for International Affairs, the rule was
devised in 1927 and refined in 1992 and 2002. It made it possible for both GE top
managers and the participating stakeholder representatives to speak their minds
openly and clearly without running the risk of anybody, including the participants,
later making all or any part of the arguments public. Non-corporate participants had
the opportunity to learn about the influence of a global corporation, the depth of
issues to be dealt with by decision-makers and the multi-faceted and often dramatic
significance of these issues. A number of arguments, conflicts and differences in
interests and value judgments also surfaced during this two-day meeting. Conclusions
of the meeting were built into the decision-making process at GE.
Leaders of international organizations, CSR experts, academics and experts on
responsibility and human rights are fully aware of just how significantly GE, one of
the world’s largest corporations, influences the situation of human rights in the world.
What is more, it is not only the situation of human rights that GE influences, but also
the way people live, how they work, what they eat, what means of transportation they
use, people’s banking habits, their healing from an illness and whether they have
electricity and hot water in their homes. In the course of its operation, the corporation
comes into contact with millions of people, it provides information, cooperates or
50
suspends cooperation, buys and sells, hires or fires, provides training or gives support
to others who train, pollutes the environment or it cleans it up, develops or destructs,
shows direction, argues and conducts dialogue, criticizes, requests and conquers. GE
has employees in excess of three-hundred-thousand people world-wide and an annual
turnover of more than one-hundred-and-fifty billion US dollars. This is more than the
GDP of Norway, Peru or Portugal. Its effect on the world is greater than that of the
total number of its employees. Decisions taken by its leaders and the operation of the
corporation influence the lives of millions. Its employees provide a living for
hundreds of thousands of families, its scientists determine the technology of the
future, its financial decision-makers set the financial instruments of today and
tomorrow, its engineers and chemists develop medicines and medical instruments for
the present day; power plants operated by GE warm households and influence the
quality of life of many and through its subcontractors the fate of further millions are
influenced. GE’s aeroplane engines transport millions of people yearly, its media
companies provide decision-makers and the man-in-the-street with information, its
investment decisions can make or break countries around the globe, its innovations
control the life of generations, in the course of its daily operation it gets in touch with
hundreds of millions, it shows the way, cooperates, participates, gets and gives. As
one of the world’s largest corporations, GE basically influences the life of all
mankind. Furthermore, it not only affects future generations but also guards and helps
preserve the memory and values of past generations.
The participants were in agreement that the intentions of the corporate leaders
were honest, their goals clear: ask for advice and offer cooperation in cases where
they are less experienced yet their decisions may affect the lives of hundreds of
thousands, just as they can contribute to the success of the corporation or also ruin it.
Thus, the keynote of the meeting guided the participants towards the very practical
questions of the relationship between human rights and the corporation. During the
two days the issue of GE’s responsibility was also raised regarding questions of its
employees’ cooperation with authorities in a country that does not support human
rights, and of how it should reconcile its business interests with principles that
western society stands for, and also of how it should meet the expectations put
forward by international human rights organizations.
51
The results of that 2007 meeting have since become part of GE’s decision-making
process, and were included in GE’s “Global Citizenship Report” of 2007E. Following
the meetings, a commissioned panel of experts formulated recommendations for GE
regarding principles of human rights, transparency and stakeholder interests and
values to be built into its business operation (GE, 2007).
Who are stakeholders?
The most important insight of corporate social responsibility is that the boundaries of
the corporation are not to be drawn along the fences of the company. The operation of
every corporation affects the life of numerous people and not only of those who are in
direct contact with it. The corporation, especially multinational corporations (MNCs)
is a determining player in a complex socio-economic web of interactions. Everybody
who is impacted by the corporation and who has an impact on the corporation is part
of this matrix. In addition, the players in this matrix are not simply individuals but
groups of people, organizations, other corporations, groups of corporations and
organizations and sometimes whole countries. Corporations do not only affect others
through their business operations but also through other aspects of their operation.
Corporations are much more efficient organizations than governments or other
societal players, including NGOs. As Jeffrey Swartz, former CEO of Timberland put
it, “Business has such strengths to share – innovation and resources and expertise –
that are useful and applicable far beyond creating a great service or product. We live
in this world and whether we want to or not, we have an impact on it … why not try to
make that impact as positive as we can, since we can?” (AccountAbility, 2011). As
such, the integration of stakeholder values and interests into business operation or into
the DNA of the corporation is one of the greatest challenges of the twenty-first
century. By the effective management of the company the operation, the business
success of the corporation as well as the operation based on the triple bottom line
principle can be influenced, and at the same time the world can be made a more
livable, better and safer place for everyone.
52
The history of stakeholder theory
The stakeholder theory of corporations evolved in the eighties. Research into
corporate impact or corporate politics was present earlier, stating that “[c]orporations
have ceased to be merely legal devices through which the private business
transactions of individuals may be carried on”, since “grown to tremendous
proportions” in reality it “has attracted to itself a combination of attributes and
powers, and has attained a degree of prominence entitling it to be dealt with as a
major social institution” (Berle & Means, 1932, p. 3). Yet, it was only in the eighties
that the question of the responsibility of business decision-makers in issues regarding
the impact the corporation makes on the environment and society was raised. The
corporate strategy theories of those days did not help decision-makers to meet the
challenges of the era, or at least to provide a foundation for management practices for
combating obvious corporate environmental and social risks. As we saw in the
previous chapter, corporate leaders of that time had to face numerous, earlier
unknown environmental and social challenges. The handling of ecological
catastrophes, accidents, labour abuses and other social conflicts; the proper evaluation
of the operating environment and the working out of the appropriate strategies, all
required a new leadership understanding and tools. As Edward. R. Freeman (1984),
godfather of the stakeholder theory, wrote in his seminal Strategic Management: a
Stakeholder Approach: “Our current theories are inconsistent with both the quantity
and kinds of change that are occurring in the business environment of the 1980s […]
A new conceptual framework is needed” (Freeman, 1984, p. 5).
The stakeholder theory of corporations was to become this new conceptual
framework. The point of departure of this approach is that the corporation does not
end where its property ends: corporate decision-makers have to do more than simply
manage the employees and its immediate business environment. They face a complex
interest, identity, vision and value matrix, in which everybody participates who has an
impact on the realization of the strategic goals of the corporate community, or on
whom the corporation has an impact in the course of realizing these strategic
objectives. Stakeholders of the corporation are all individuals and their groups in
contact with the corporation who may have a claim or interests regarding corporate
53
operation without limits in time or space. They are individuals or groups who are
affected by the operation of the corporation or who can have an impact on it, whether
they are aware of it or not.
The term ‘stakeholder’ is a play on words, echoing ‘stockholder’ and referring
to one of the important theoretical points of departure of the theory: the fiduciary
responsibility of corporate leaders and its extension to stakeholders. One of the
possible ethical conclusions of the stakeholder theory may be that the fiduciary
responsibility of a corporate leader does not only extend towards the stockholdersowners
but also to every stakeholder, even if not to the same degree. There are a
number of authors who are of the opinion that the triad of fiduciary responsibility –
loyalty; goodwill and diligence; complete transparency and openness – is applicable
to every stakeholder relationship and not only to the stockholders of the corporation
(Atherton et al., 2011). The conclusion is therefore that substantiating the stakeholder
approach can be done not only on strategic but also on ethical grounds. According to
Freeman we may “revitalize the concept of managerial capitalism by replacing the
notion that managers have a duty to stockholders with the concept that managers bear
a fiduciary relationship to stakeholders. Stakeholders are those groups who have a
stake in or a claim on the firm. Specifically I include suppliers, customers, employees,
stockholders, and the local community as well as the management in its role as agent
for these groups. I argue that the legal, economic, political, and the moral challenges
to the currently received theory of the firm, as a nexus of contracts among the owners
of the factors of production and costumers, require us to revise this concept. That is,
each of these stakeholder groups has a right not to be treated as a means to some end,
and therefore must participate in determining the future direction of the firm in which
they have a stake” (Freeman, 2001, p. 39).
Other authors see a difference between the fiduciary responsibility of
stockholders and that of other stakeholders. These authors contrast the so-called
‘multi-fiduciary interpretation’ of stakeholder relationships (in which the corporate
leader also has a moral responsibility for protecting and increasing those values which
are ‘owned’ by the stakeholders) with the corporation’s strategic interpretation, in
which stakeholders – though aware of their strategic significance – do not generate a
moral responsibility for the leader of the corporation and are simply tools to be
managed for achieving corporate strategic objectives: they do not ‘possess’ anything
54
of the corporation (Goodpaster, 1991). At the same time, one of the points of
significance of the stakeholder theory – as formulated by Freeman – is that it offers
theoretical bases to the search for practical answers: how are corporate decisionmakers
to lead their corporations under changed social, cultural, and environmental
conditions?
The fact that the corporation operates in a complex business environment in
which many different aspects have to be taken into consideration, is nothing new. As
early as in the sixties researchers came to understand that a business context reaching
beyond the traditional borders of the corporation may be of importance in the course
of strategic planning, as players of the business environment might be obstacles in the
way of realizing the achievable goals. Corporations were seen by researchers more
and more as ‘open systems’, therefore they recommended building a system which
takes the environment into account and defines itself according to this environment
(Katz-Kahn, 1966; Thompson, 1967; Ackoff, 1970; Pfeffer & Salancik, 1978). These
approaches, however, concerned themselves with the organization itself, rather than
with the corporate decision-makers and the responsibility they carry for their
decisions. They viewed the corporate environment as a hindrance, rather than a help
or a partner to be involved in solving the problem.
The term ‘stakeholder’ appeared first in the studies of researchers at the
Stanford Research Institute (SRI) early in the sixties. An internal memorandum of the
project’s participants is the first to mention a group “without the support of which
organization as such will disappear” (quoted in Freeman et al, 2010). The notion goes
back as far as the discussion in 1962, where thoughts were exchanged in SRI about
strategic planning. The key question was: Who should have a say in formulating the
corporation’s mission? This question was at the time thought to be one of the most
important elements of strategic design. The discussion revolved around those
individuals and groups who could contribute to the success of the corporation, and
whose interests and needs the management had to consider, at least to some degree.
And then Marion Doscher, who had at the time been with the organization for just a
few years, exclaimed: “you mean the stakeholders, since all of them have a stake in
the corporation”. She explained that the origin of her exclamation was an old Scottish
saying, which referred to people who had a legitimate claim for some of their
valuables (quoted in Freeman et al., 2010). The thought and its definition were readily
55
accepted by those present at the discussion. Consequently, it was included in the
working material of the working group entitled ‘The Theory and Practice of
Planning’, and following this, the basic methodology for stakeholder need
assessment, accompanied by a simple diagram, was presented in the SRI study
Strategic Planning.
At the same time, similar thoughts were in the process of being formulated in
other research centres as well, such as the Tavistock Institute in London and the
National Training Laboratory in Maine, US. Here the focus of research was on human
resources and the problem was approached from a socio-psychological and
psychoanalytical point of view, looking at various facets of group cooperation.
Business and ethical aspects were not the primary interests in this research, i.e. the
goal was less to determine the necessary conditions for the survival of the
corporation, but rather the question of how the corporation should adapt to its
environment, and how and to what extent it must take into consideration the opinion
and needs of individuals and groups making up that environment. The original
formulation of the stakeholder theory used here was, “Determination of corporate
purpose requires comprehensive information about the expectations of the firm’s
‘stakeholders’. (These are all groups – such as owners, employees, and suppliers –
who have something directly at stake in the company’s progress.)” (quoted in
Freeman et al., 2010)
It was not merely the introduction of the new term that lead to a turnabout in
thinking, but also the fact that the environment – the stakeholders – of the corporation
were no longer seen as a hindrance, but rather as a necessary prerequisite for
achieving business success through their involvement and support. Stakeholders as
the corporation’s environment could formulate ‘expectations’, they had an interest in
the operation of the corporation and they could come forward with ‘legitimate
claims’. Thus, according to this approach, the success of the corporation depended on
how much the strategic decision-makers considered these expectations and to what
extent they were able to cooperate with the stakeholders in the interest of common
success. This theoretical point of departure was developed further in the eighties by
the participants of a series of seminars on the theoretical questions of corporate
management at the Wharton School in Pennsylvania, partly involving in these
seminars the researchers of SRI and the Tavistock Institute who designed the
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stakeholder theory originally. Freeman’s theory grew out of these seminars, the
primary goal of which was to find a statistically provable connection between
stakeholders and business success, as well as to show that management practices that
have regard to the interests of stakeholders create economic value.
The historic background outlined by Preston in his work published six years
later is slightly different from that of Freeman (Preston & Sapienza, 1990). He claims
that the origins of the stakeholder theory can be traced as far back as the thirties,
though it was not called that at the time. During the Great Depression, the internal
documents of the General Electric Company identified four important groups that
were necessary for business success and for overcoming the world-wide financial
crisis. These groups were the owners, the employees, the consumers and public
opinion. John Wood Johnson took these four groups as the basis for formulating the
basic corporate philosophy of Johnson & Johnson, in which the most important
‘strictly business’ groups – consumers, colleagues, managers and owners – were
listed. In the fifties General Robert Wood, CEO of Sears mail-order company, named
four groups essential for every business: consumers, employees, community and
shareholders. The novelty of Wood’s approach was that here the origins of the
philosophy of modern corporate responsibility can already be detected. According to
Wood, profit was only a by-product of satisfying the legitimate needs and interests of
groups which are in contact with the corporation. He claimed that building the
interests of the first three groups into the business operation properly will benefit the
fourth group, the shareholders (Preston & Sapienza, 1990).
The stakeholder theory was important for more than the theory and practice of
social responsibility. Taking the interests of stakeholders into account and, as shown
earlier, predicting the movements and actions of stakeholders have become important
factors in the process of corporate strategic planning. The purpose of strategic
planning is to optimally design and utilize the external and internal resources at the
corporation’s disposal. In the course of this process the planners evaluate and analyze
organizational resources, skills, risks and opportunities that may come about in the
internal and external environments. The significance of the stakeholder theory for
strategic planning was that information provided by the environment of the
corporation, changes and processes in that environment, strategically important
issues, recognition of problems and challenges, and the assessment, evaluation and
57
integration of these into the planning process is an indispensable part of strategic
planning. Stakeholder theory became similarly important for organizational
development. Those who concerned themselves with organization theory saw and
presented the corporation as a ‘system’ in which the cooperation and
interrelationships between the various actors was of utmost significance. Problems
arising in the ‘system’ could only be solved through the cooperation and involvement
of all stakeholders that is every participant in the system. Furthermore, in this
framework organizational development cannot only pertain to one single
organization, since the economy as a whole is systemic, therefore a system design
must take the operation of the system – the entire stakeholder network – into
consideration.
Definition of stakeholders
In Freeman’s original definition stakeholders were the suppliers, consumers,
employees, the owners, the local community and the management. These were the
groups that could contribute to the success of the corporation and that could
legitimately enforce their interests and claims against the corporation. Later other
authors expanded the number of groups by adding governmental bodies, various
political and social organizations and institutions, competitors, trade unions,
representatives of the media, and past and future generations. Whereas the original
stakeholder theory of Freeman considered only individuals and their groups to be
stakeholders, by now numerous authors interpret the built and natural environment as
an independent stakeholder as well.
I agree with Freeman that stakeholders are always people or their groups, even
in institutional form. According to the concept forwarded in this book, therefore the
environment or nature cannot be considered stakeholder. The essence of stakeholder
theory is that interests and values of people or their groups be integrated into the
business operation (adhering to principles of the triple bottom line – though this is, of
course, not used by Freeman at the time). Stakeholders are moral agents having values
and interests which they are capable of formulating and representing, by which they
may stand unflinchingly, and for which they are prepared to enter into conflicts and
58
subsequently participate in their resolution. Stakeholders are able to evaluate and
operate institutions, and take part in hierarchies which they understand and which
they can influence. Stakeholders are capable of forming alliances, establishing
cooperative relationships and being part of power contexts through the representation
of their interests and values. Protecting ecological values is part of responsibility
towards future generations. Conserving the environment protects the interests and
values of generations not yet born, which must be part of corporate operation.
Stakeholders and their relationships with the corporation are clearly not limited in
space or time. Under today’s globalized socio-economic conditions, stakeholders do
not have to be in physical contact with the corporation – stakeholders may be in a
different country or on a different continent. Time limitations do not apply either,
since the not-yet-born may also make claims to the corporation via their
representatives, while upholding the memory of past generations and representing
their interests and values today may also be part of corporate operation.
The point of departure of stakeholder theory is common value creation, which
presumes that value creation must happen in such a way that it serves the interests of
all stakeholders or it does not cause any of the stakeholders irreparable harm. Thus,
from an ethical point of view, common value creation presumes a ‘contractual’
relationship between members of the stakeholder network, which takes into account
the normative expectations of autonomy, decency and solidarity as formulated by
Rawls, Rorty and other liberal philosophers (cf. Rawls, 1971; Rorty, 1989). In other
words, stakeholders are all those who participate in common value creation, and who
can expect that their relationship with the company be shaped by taking these aspects
and the normative content of the ‘contractual obligation’ into consideration. The
normative content, the basic rules for the ‘contractual relationship’, stakeholder
relations and stakeholder policy will be discussed in the third chapter.
The question of who exactly the stakeholders are is answered in the literature
in different ways. It was Freeman, once again, who posed the basic question to be
answered in the form of assessing “who and what really count?” (Freeman, 1984).
Answering Freeman’ question may be approached from several aspects: there are
primary and secondary stakeholders, owner and non-owner stakeholders, those who
act and those who are affected by others’ actions, stakeholders whose relationship
with the corporation is voluntary and those whose relationship is not, possessors of
59
rights, stakeholders claiming legal or moral rights, ones who have their own resources
and those who depend on the corporation, risk-bearers, and influencers and
stakeholders who are influenced. There are many different descriptions which – in a
broader sense – endeavour to define all stakeholder groups and assist corporations by
offering pointers as to who are or could be their stakeholders.
The most important difference in defining stakeholders is whether a narrow or
a broad approach is applied. The purpose of a narrow definition is to give corporate
leaders a tool for meeting external challenges taking the corporation’s limited
resources and the limited time and attention span of managers and employees into
account. A narrow definition of stakeholders attempts to specify the stakeholder
groups according to the immediate significance they have in achieving the
corporation’s primary business goals. The narrow definition rests on ethics. Its goal is
to determine a normative basis which can serve as a directive for corporate leaders in
deciding which stakeholders’ claims are legitimate and which ones are not. In this
sense, the purpose of involving stakeholders is the maximization of direct corporate
goals, and in order to achieve this, the efficiency of the integration of stakeholder
interests and values must be maximized. Clarkson’s stakeholder definition, based on
voluntary and non-voluntary risk-bearing, is an example of this approach, “Voluntary
stakeholders bear some form of risk as a result of having invested some form of
capital, human or financial, something of value, in a firm. Involuntary stakeholders
are placed at risk as a result of a firm's activities. But without the element of risk there
is no stake” (Clarkson, 1994:5).
The purpose of a broad definition is to account for each and every person or
group that could be the corporation’s stakeholder. According to Freeman’s by now
classic definition, “[a] stakeholder in an organization is (by definition) any group or
individual who can affect or is affected by the achievement of the organization's
objectives” (Freeman, 1984:46). Stakes can be mutual or one-way and this definition
of ‘stake’ as mutual affect is so broad that virtually anybody who gets or can get in
contact with the corporation is considered a stakeholder. In this case the principle
focus is not on providing corporate leaders practical help but rather on the structure of
common corporate value creation. The broad interpretation tries to take into account
what kinds of stakeholder relationships exist, which individuals and groups may
formulate legitimate claims and stakes towards the corporation and who can
60
legitimately state that the operation of the corporation has an impact on them. In this
interpretation the point of common value creation is to take all stakeholder interests
and values into consideration because in this way it can be assured that possible risks
are avoided and opportunities are exploited. This can make dealing with possible
stakeholder conflicts on the basis of equality possible through guiding them into the
institutional hierarchy. Value maximization is to be achieved according to strategic
interests and by acquiring and sustaining the necessary legitimation.
There is no such thing as ‘right amount of’ or ‘complete’ responsibility.
Analyzing and managing stakeholder relationships is an ongoing learning process, in
which the continuously expanding and dynamically developing relationship between
the stakeholders and the corporation is the key to business success and growth
according to the triple bottom line criteria. The basis of the broad interpretation is
political: its goal is to create a system in which everybody can become a stakeholder
if they get into an interest- or value based relationship with the corporation in order
for potential conflicts to become manageable and institutionalized. The broad
definition assumes that a stakeholder matrix, widely framed, is political in its nature:
stakeholders hold different values and interests that may get into conflict with one
another; thus managing stakeholders requires an institutional setup in which diverging
and conflicting stakeholder claims may be discursively aligned.
One further, debated, question related to ‘stake’ is whether a group or an
individual can be a stakeholder without actually having contact with the corporation.
We can differentiate between real and potential stakeholders. Some authors argue that
there cannot be a stakeholder relationship without actual contact, whereas others
suggest that the potential or latent stakeholders – in the interest of increasing
management efficiency and problem-solving ability – should also be considered. I
argue that for the efficient management of stakeholders a broad interpretation of
stakeholders should be applied. If we accept that the purpose of social responsibility
is to ‘integrate the interests and values of stakeholders into the business operation’,
then questions of legitimation are secondary to political interests. Meeting the criteria
of the triple bottom line efficiently is a political question: taking interests and values
of all possible stakeholders into account, managing potential conflicts, creating and
operating institutional hierarchies is necessary for the corporation to avoid or
minimize risks and to exploit or maximize its opportunities. The goal of the
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corporation, in stakeholder theory, is the maximization of societal value through
attending to both private and public interests. This can only be achieved if the
interests and values of all stakeholders are – at least potentially – integrated into the
operation. Institutions of stakeholder cooperation and engagement, and discursive and
deliberative practices offer methods and processes for this. At the same time, the
narrow interpretation is also relevant, as this makes the prioritization of the claims of
stakeholder groups and individuals and the successful allocation of resources – as the
indispensable prerequisite for efficient stakeholder management – possible.
Thus, our point of departure is the broad interpretation of who is a stakeholder.
All stakeholders are equal but not in the same way: anybody can become a
stakeholder and therefore important to the corporation, yet their claims on the
corporation do not all carry the same weight and it is the responsibility of the
corporate decision-makers to assess to what extent and how they should consider
these claims while making decisions. Further, it is important that latent stakeholders,
those stakeholders who have yet to come to terms with or define their stake, are also
stakeholders, but they can only come forward with their claims once they have
‘established’ themselves as stakeholders and put their claims in. This can happen
proactively out of own initiative or passively as a result of the corporation’s action.
This has a bearing on stakeholder management, since the interests and values of
stakeholders must be taken into account even if the stakeholders did not put in their
claim for them, in the same way that stakeholders cannot lose the right to their claims
only because they did not put in their claims.
The different forms of stakeholder relationship: three strategic communication
approaches
Since the appearance of stakeholder theory it has become one of the most important
fundaments of strategic management. Strategic management recognizes that the
corporation is not a transmission belt between the stockholders, employees and
consumers, but rather the key player in a complex network of different stakeholders.
Business success builds on how successfully the corporation manages its
stakeholders, to what extent it uncovers risks borne by and opportunities represented
62
by stakeholders, as well as assesses values, stakes, claims and goals that can be
integrated into the common value creation process. All this is not only relevant in
terms of corporate social responsibility. The stakeholder approach is being used in a
number of areas of strategic management: here I focus on three key strategic
communication areas that are of special importance for the communication between
the corporation and the stakeholders. These are the management of the
communication of the responsibility, of the reputation and of the brand of the
corporation. We will be looking at similarities and differences between these three
strategic communication areas to see which communication area’s toolkit should be
used and when in the process of designing the efficient management of stakeholders.
Corporate social responsibility, as discussed, is about integrating stakeholders’
values and interests into business operation through the efficient management of
stakeholders. In terms of the broad interpretation of stakeholders used in this book,
the target group of corporate social responsibility are all stakeholders; its means are
the management of stakeholders by reducing information inequality through
prioritization of stakeholder values, interests, goals and challenges as well as utilizing
an equal and two-way network of communications and, in an organizational sense, the
establishment of a widely shared discursive legitimacy through stakeholder
democracy.
To understand the significance of stakeholders in strategic communication, it
is worth looking at the relationship between other important areas of strategic
communication: reputation management shaping corporate image and goodwill, and
brand management developing corporate identity and corporate community. The
clarification of these terms is aimed at pinpointing the stakeholder based structural
similarity of the three areas, and at the same time demonstrating theoretical and
managerial differences between them, as well as showing what role these different yet
interlinked areas play in corporate politics.
Reputation, or goodwill, management focuses on shaping corporate image. Its
aim is to create a picture of the corporation in the heads of stakeholders, which will
help the corporation in maximizing common value creation. The target group of
image management are all stakeholders, yet in the course of prioritization and
segmentation of the target group special attention must be paid to the key opinion
63
leaders (KOLs). Reputation, according to Fombrun & Van Riel “is a collective
representation of a firm's past actions and results that describes the firm's ability to
deliver valued outcomes to multiple stakeholders. It gauges a firm's relative standing
both internally with employees and externally with its stakeholders, in both its
competitive and institutional environments” (Fombrun & Van Riel, 1997). According
to the definition, stakeholders play a key role here as well, however, it is the
representation of “a firm’s past actions and results”, which becomes a value creating
power for the corporation through the goodwill perceived by the stakeholders.
The definition used here does not differentiate between the identity, image and
goodwill of the corporation. However, we may still attempt to make some distinction
between the terms image, goodwill and reputation in order to see how the areas of
strategic communication – CSR, reputation and brand – are related to each other.
Corporate identity serves as the base for strategic communication. It is ‘inside’ the
corporation as the central element of corporate operation, differentiating the
corporation from other players, being permanent and enduring and therefore linking
the corporation’s past with its present and future. This is, in its classic form, what
Balmer and Soenen (1999) call ‘ideal and desired identity’. Identity is a cultural
phenomenon, which is the sum total of symbols, convictions, values and basic
assumptions. On the other hand, the image of the corporation is the entirety of
impressions of the stakeholders about the organization, or to put it in everyday
language, the emotions and opinions that are invoked in the stakeholders by a logo or
a name. Image is the picture of the organization in the minds and souls of people.
While it is based on its identity, it is not totally under the control of the corporation,
since it is shaped by numerous stakeholders, primarily by key opinion leaders.
According to Balmer & Soenen, this is conceived identity. Reputation is an opinion or
judgment that stakeholders form or make when they come into contact with the
corporation. Making a judgment is mostly forced by some event or situation.
Mutual corporate value creation is supported by ‘corporate reputation capital’,
the immaterial value stemming from reputation. Whereas corporate identity (ideal and
desired identity) is stable and static, the image and reputation (conceived identity),
and with it ‘reputational capital’, constantly change. The aim of reputation
management is to shape the image through KOLs bending reputational judgment – the
goodwill – in a positive direction to increase reputation capital. Reputation
64
management takes stakeholder values and interests into consideration only to the
extent it is necessary for increasing the reputation capital of the corporation.
Reputation management is about convincing others and it does not strive for
communication equality. Its behaviour is value-neutral in stakeholder conflicts and it
enforces corporate interests through power structures. As in CPA, a traditional
approach to reputation management is based on a narrow view of corporate politics;
its main goal is to bring about changes in perception to promote private interests or
corporate goals. One may be of the opinion that the goal of reputation management is
to create a ‘perception capture’ in which democratic stakeholder processes are
undermined by the power discourse of KOLs increasing ‘reputation capital’ even at
the risk of directing away stakeholder perception from public interest or public goods.
The primary target group of ‘brand management’ is consumers but target
group segmentation must take into account that all stakeholders may influence
consumer behavior. Therefore, it is an important aspect of brand management to
uncover stakeholder values and interests, so that it can facilitate and influence
consumer decisions through these stakeholder values and interests when activating the
brand. The objective of brand management is to establish a multi-level relationship
between the brand and the consumers to anchor consumer decisions. Anchoring
consumer decisions – turning potential into a loyal consumer – helps the corporation
maximize common value creation through value-based activation of the brand. The
basis for brand management is corporate identity, the sum total of symbols and
cultural values as represented by and at touchpoints consumers may interact with the
brand. Its tool is the shaping of the image of the brand, in other words, of the picture
and impression perceived by the consumer about the identity, actual and
communicated, and the activation and bringing to life of this image to assist
consumers arrive at desired decisions.
Establishing a common identity is an especially important tool of modern
marketing. In order to maximize the value of the brand, the corporation must form
consumers related to the brand into an ‘imagined community’ avowing the same
identity. Similarly to nations, there is a tight bond between members of this
community: they are aware that their community is limited (they do not know every
other member) and restricted (they know that there are other similar communities),
yet sovereign (it derives its cohesion and self-awareness from inside the community
65
and not from any external power) and its members are joined together by a strong
comradeship into an alliance, for which they are prepared to bring various sacrifices
(Anderson, 1983). The cohesive power that is similar to national sentiments was
applied to brand communities by Muniz and O’Guinn (2001). In their interpretation,
members of a brand community – as actual or potential consumers – are joined
together by a multi-level and multi-threaded network in which the community is held
together and built further by different levels and forms of brand bonds, operating
common symbols and rites and a sense of moral responsibility felt for and managed
by the community (Muniz & O’Guinn, 2001). The common identity that joins the
brand community together is the identity of the consumers, in which corporate
identity, consumers’ stakeholder identity and the commonly professed and
represented brand-community identity are all mixed together. Members of the identity
community fulfil different roles, like teacher, hero or idol, which have an impact on
their stakeholder relationships. Furthermore, brand communities are not the sole
players on the ‘markets’ of identities. Oppositional loyalty increases the power of
belonging to the community and it sets members of the community against other
communities, who will in this way be prepared to take on political roles in the interest
of protecting their own community.
The common basis for responsibility-, reputation- and brand management is
corporate identity – symbols, convictions, values and basic assumptions – which the
three areas put into the service of common value creation in different ways. We have
seen that all three areas use a stakeholder approach. Their point of departure is
identity and the management of value and interest relationships between the various
stakeholder groups in the interest of common value maximization. On the other hand,
target groups and means are different, just as the quality, depth and content of
relationships are also different. The communication of responsibility utilizes the
integration of values and interests into the business operation. It helps uncover
stakeholder values and their prioritization, so that the chosen and mutually agreed
values and interests may get integrated into the common identity or get closer to the
corporation’s identity. Reputation management aims at influencing stakeholder
judgment. The judgment will be positive and transformable into reputation capital, if
the values of the corporation and that of stakeholders coincide or are similar, and if,
through the credibility of KOLs, the corporation can convince stakeholders that it
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manages its activities in accordance with those values. However, in the case of
reputation management stakeholder values may be captured and attention may be
directed away from public interest. In the course of brand management, the values and
convictions underlying corporate identity become mingled with the values and
convictions of communities which identify themselves as consumers: the brand loses
its direct influence over the set of values of the community, but it can support, help
and from time-to-time influence the identity of the community. In addition, members
of the community are prepared and inclined to take on political roles (to experience
stakeholder conflicts and act on them, whether in support of or against the brand that
is the basis for their identity community, or against members of another community).
A brand community is special in that it can happen that the corporate ‘owner’ of the
brand totally loses influence over the brand community, and the identity of the brand
– possibly even after the corporation/brand ceases to exist – lives on in the identity of
the community (Muniz & Schau, 2005).
All three strategic communications areas play an important role in corporate
politics. Leaning on each other and helping each other, using the different means for
achieving a common strategic goal, they can further the integration of stakeholder
values into the business operation thereby increasing the corporation’s goodwill,
strengthening the brand community and creating the methods for handling stakeholder
conflicts and for acquiring and upholding corporate institutional processes and
stakeholder legitimation. One of the possible methods for defining relevant
stakeholders is asking the question: what role does a given stakeholder group play in a
strategic communication process? For this, however, we have to move on to
presenting and analyzing different strategic stakeholder approaches.
Static and dynamic stakeholder approaches
Freeman (1984), in his classic work, differentiates between three levels of stakeholder
management. These are the rational, the processes and the transactions levels. On the
rational level, answers are sought to the questions: who are the stakeholders of the
organization and what stake do they have? Once the stakeholders have been
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identified, a map of the corporation’s stakeholders can be drawn up showing the
stakeholder groups of the corporation.
[Insert here: Freeman’ basic stakeholder map]
The second level is connected with the strategic management of the corporation–
stakeholder relationship: it studies the processes through which the corporation
manages its relationship with the stakeholders. Here the strategic management toolkit
of the corporation must be restructured to fit in with the challenges posed by the
stakeholders and to make it capable of managing stakeholder relationships. In
Freeman’s approach the third level, the level of transactions, is when stakeholder
values and interests become integrated into the business operation. On this level
corporate processes and corporate operational practices already take into account
stakeholders’ interests, notions, intentions, needs and claims and make these part of
the operation during corporation-stakeholder transactions.
Donaldson and Preston (1995), analysing different stakeholder strategies,
argued that since the publication of Freeman’s work the fact that corporations have
stakeholders has become a commonplace. Dozens of books and hundreds of studies
deal with the relationship between the corporation and its stakeholders. The authors
divide stakeholder theories into four categories. They differentiate between
descriptive, instrumental, normative and managerial approaches.
Descriptive stakeholder theories show what the corporation is. These theories
describe the corporation as a self-contained net of cooperative and competitive
interests, demonstrate the development of corporation–stakeholder relationships in the
past and in the present, as well as set up prognoses as to the possible development of
these relationships. Other approaches are instrumental: these theories examine the
correlations between stakeholder management and corporate goals. Their assumption
is that if corporations manage their stakeholder relationships effectively then they will
be more successful than other corporations measured by traditional performance
indicators, i.e. profit, stability and growth. These theories show what corporation–
stakeholder relationships are. Yet, it is the normative approaches that are the true
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basis for stakeholder theory: they identify stakeholders according to their interests and
study whether the corporation has any functional interest in dealing with these
stakeholders. These theories show who a stakeholder is. The fourth group of
stakeholder theories are the decision-maker or managerial approaches. These theories
not only describe existing or potential relationships but they also propose views,
structures and various actions. Here the emphasis is on how corporations incorporate
the legitimate needs, claims and interests of all stakeholder groups into the business
operation, and what kind of organizational structures, operational principles are
introduced to this end, and – from time-to-time – which individual managerial
decisions are made. These theories show what the management of corporation–
stakeholder relationships is.
In other words, descriptive theories show that corporations have stakeholders;
instrumental theories show that corporations which consider their stakeholders may
develop successful operating strategies; normative theories pinpoint why corporations
have to concern themselves with their stakeholders at all, while managerial
approaches show how corporations should cooperate with stakeholders (Freeman,
2004).
To be able to answer Freeman’s, previously quoted, classic question:“Who
and what really count?” the typology of stakeholder groups has to be established.
Clarkson, in his work introducing the definition of corporate social performance,
speaks of primary and secondary stakeholder groups. His point of departure is his
own stakeholder definition: “[s]takeholders are persons or groups that have, or claim,
ownership, rights, or interests in a corporation and its activities, past, present, or
future. Such claimed rights or interests are the result of transactions with, or actions
taken by, the corporation, and may be legal or moral, individual or collective.
Stakeholders with similar interests, claims, or rights can be classified as belonging to
the same group: employees, shareholders, customers, and so on” (Clarkson,
1995:106). This means that people with similar interests, claims or rights may be
considered as part of the same stakeholder group.
He considers primary stakeholders to be those without whose continuing
participation the corporation cannot survive as a going concern. Typically, these
stakeholder groups are the shareholders and investors, employees, consumers and
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suppliers, but governments and communities also belong to these groups. The latter,
as regulators and operators of the infrastructure, whose rules must be adhered to and
to whom taxes and levies must be paid, provide the conditions for business operation.
The corporation is dependent on the primary stakeholders: if one of these groups
becomes dissatisfied with the operation of the corporation and withdraws its support
from it, the whole or part of the operation of the corporation suffers severe damage
and may make its survival as a going concern impossible. As Clarkson puts it, “the
corporation itself can be defined as a system of primary stakeholder groups, a
complex set of relationships between and among interest groups with different rights,
objectives, expectations, and responsibilities. The corporation's survival and
continuing success depend upon the ability of its managers to create sufficient wealth,
value, or satisfaction for those who belong to each stakeholder group, so that each
group continues as a part of the corporation's stake-holder system” (Clarkson, 1995:
106).
Secondary stakeholders are those who influence or affect the corporation, or
are affected by it but they are not themselves engaged in transactions – as in Freeman
– with the corporation and are not essential for its survival. Clarkson considers special
interest and lobby groups to be part of this group, having significant power to
mobilize public opinion for or against the corporation, as, for example, in the cases of
corporate scandals mentioned in the first chapter. “The corporation is not dependent
for its survival on secondary stake-holder groups. Such groups, however, can cause
significant damage to a corporation. […] Secondary stakeholders may be opposed to
the policies or programs that a corporation has adopted to fulfill its responsibilities to,
or to satisfy the needs and expectations of, its primary stakeholder groups” (Clarkson,
1995:107).
The most cited example of instrumental stakeholder theories is the powerlegitimacy-urgency
based approach proposed by Mitchell and his fellow researchers
(Mitchell et al., 1997). The authors, similarly to Donaldson and Preston, propose that
the various stakeholder approaches should be organized into a theoretical structure in
order to be able to get through the “stakeholder minefields” (ibid, p. 862). They
maintain that analysts propagating the narrow view of stakeholders stress the
legitimacy of stakeholders’ claims causing disadvantages or advantages to the
corporation stemming from some contractual relationship, transaction, other
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relationships, legal or moral obligation or moral interests. On the other hand, those
professing to the broad view of stakeholders stress the power stakeholders have to
influence corporate operation. They assert that for defining the necessary actions
regarding stakeholders, the two views have to be reconciled, since if only power is
taken into consideration the incorporation of legitimate claims into business operation
can be ignored and that can mean the end of the corporation. On the other hand, not
every stakeholder claim has the same weight, thus determining the legitimation of the
individual claims may be important for the corporations. Consequently the authors
suggest, as a bridge solution, the introduction of urgency, which is capable of
resolving the opposition between the narrow and broad views, making the theory
more useful, clearer and more dynamic.
The point of departure for the authors was Max Weber’s definition of power
as “the probability that one actor within a social relationship would be in a position to
carry out his own will despite resistance” (Weber, 1978, quoted by Mitchell et al.,
1997, p. 865) To paraphrase it, in stakeholder relationships power is when some
stakeholders have or acquire such forceful, utilitarian or normative means which
make it possible for them to force their will onto the other party. However, the
possession of such means is varying and not permanent. This is the reason why power
is temporary: in the same way it can be acquired, it can also be lost. While numerous
authors link the terms legitimacy and power, Mitchell and his colleagues stress that a
differentiation is important: although a stakeholder may have legitimate needs and
claims on the corporation, if they do not have the power to enforce them, or at least to
create the appearance of doing so, the corporation can ignore the legitimate interests
and claims. A claim, need or stakeholder can be considered legitimate, if it is
acceptable, just and proper according to some social norm, value, conviction or
definition. While the terms ‘power’ and ‘legitimacy’ bring the corporation closer to
being able to manage stakeholder relationships, they do not describe precisely enough
the needed actions to be taken in a given relationship. For this, the introduction of the
term urgency is necessary, i.e. to what extent does a stakeholder claim require
immediate action on part of the decision-maker? This has two aspects to it. On the
one hand time pressure: to what degree will a delay in making a decision regarding
the management of a claim or relationship make it unacceptable to the stakeholder?
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On the other hand, the critical nature of the claim or relationship: how important is
the claim or relationship to the stakeholder?
[Insert here: Mitchell’s diagram (page 874.)]
Based on the aforementioned, Mitchell et al. differentiate three main categories of
stakeholders and within them three, three and one sub-categories respectively. Latent
stakeholders are groups where only one of the above described attributes – power,
legitimacy and urgency – is present. Decision-makers do not concern themselves with
these groups, they ignore their existence. The category of latent stakeholders includes
three sub-categories. Dormant stakeholders have power but they have no legitimate
contact or urgent claims. Dormant stakeholders do not have any contact with the
corporation, yet they are capable of acquiring a further attribute at any time, thus
becoming an entity to reckon with. Discretionary stakeholders, although they have
legitimacy, have neither urgent claims nor the power to assert any possible claims.
The most important characteristic of these stakeholders is that there is no corporate
interest whatsoever in getting into contact with them but decision-makers may decide
to do so. The no-obligation beneficiaries of corporate charity are typical examples of
this (Caroll, 1991). Demanding stakeholders formulate some urgent claim, though
they have neither power nor legitimacy. They can make a lot of noise but unless they
acquire another attribute, no further attention is paid to them: they are irritating but
irrelevant.
The other large category is made up of the expectant stakeholders. They have
two of the three important attributes and as such, they can expect the attention of
corporate decision makers and, under given circumstances, demand action on their
part, since the third attribute is easily attainable by them. But it can also happen that
the corporation will pre-empt this process and take up formal contact with these
stakeholders. There are three sub-categories: the dominant, dependent and dangerous
stakeholders. Dominant stakeholders have power and legitimacy, therefore they can
expect special attention on the part of the decision makers. The corporation maintains
formal and continuing contact with these stakeholders, and they are integrated into the
business operation in an organizational sense as well (employees and shareholders get
72
representation on the board of directors, the corporation has its own HR department
and there is a dedicated person dealing with government and regulatory bodies).
Dependent stakeholders have urgent claims but they have no power to enforce them.
These stakeholders often depend on other stakeholders to have their claims
recognized and integrated into the business operation. In the event of ecological
catastrophes such stakeholders can be the local inhabitants who, for lack of power,
have to rely on strong international organizations or local authorities to enforce their
interests. Dangerous stakeholders are those who have urgent claims and also the
power to enforce them, yet no legitimacy. They are, in the strictest sense of the word,
dangerous since they often attempt to enforce their claims with threats of terrorist
activities or religious motivations.
The third category is constituted by those stakeholders who have all three
attributes: they have urgent and legitimate claims and the power to enforce them.
Definitive stakeholders are those with whom decision-makers must concern
themselves without delay and with full mandate. These groups are made up of
dependent or dangerous stakeholders, who turned into definitive stakeholders by
getting representatives with power on their side or acquiring legitimacy through some
social or political process (Mitchell et al., 1997).
[Insert here: Donaldson & Preston exhibit, page 74.]
We may see politics as a process involving the exercise of control, constraint and
coercion in society. Stakeholder segmentation, as presented by the power-legitimacyurgency
matrix, follows the structure of political logic in many aspects. It approaches
stakeholders from a power point of view: the primary aim of segmentation is to keep
control, maintain constraint and manage coercion, to avoid or reduce risks, as well as
to maximize potential benefits. The political approach corresponds to the
organizational-regulatory level of the politics of corporations. Here corporations
attempt to live up to stakeholder expectations enforced by regulators and multistakeholder
organizations. They prioritize stakeholders according to the power and
legitimacy of political pressure and its urgency, but at the same time strategic
decisions based on such prioritization are individual and not institutionalized.
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Organizational steps are only taken if these are required for a more efficient
utilization of resources. Corporate operation is not democratic: the interest and values
of stakeholders do not appear on the strategic decision-making level, the focus of
value maximization is of an economic nature and the ecological and social values
underlying stakeholder legitimacy are only interesting for the corporation inasmuch as
the minimization of risks and the exploitation of opportunities stemming from them
promote value creation.
For the discussion of the normative theories we return to Freeman. He
suggests that if value creating activities are viewed as contractual relationships
between the parties, then it should be possible to define the normative principles
underlying these relationships. He posed the following question: if both the
corporation and the stakeholders accepted the ‘Doctrine of Fair Contracts’ based on
liberal principles (autonomy, solidarity and fairness), then what common ground-rules
would they set up on which a contractual corporation–stakeholder relationship could
be built? Freeman formulated six ground-rules that serve as the basis for a normative
stakeholder-corporation relationship. These are the principle of entry and exit, the
principle of governance, the principle of externalities, the principle of contracting
costs, the agency principle, and the principle of limited immortality.
The principle of entry and exit means that it is clearly defined how a
stakeholder can enter, exit or renegotiate a contract. The aim of the principle is
straightforward: each stakeholder must be able to determine when a contract exists
and what the conditions for its fulfillment are. The principle of governance says that
the procedure for changing the ‘rules of the game’ must be agreed upon by unanimous
consent. The principle of externalities says that if a contract between a stakeholder
and the corporation imposes a cost on a third party, then the third party has the option
to become party to the contract, and the terms can be renegotiated thereby reducing
costs (externalities). The principle of contracting costs says that all parties to the
contract must share in the cost of contracting, none of the parties gets a ‘free ride’.
The agency principle declares that any agent acting in the common interest of the
parties must serve the interests of all parties involved. The principle of limited
immortality states that the corporation is to be managed as if it could continue to serve
the interests of stakeholders through time. Stakeholders are uncertain about the future
but, subject to exit conditions, they realize that the continued existence of the
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corporation is in their interest. Therefore, it would be rational to hire managers who
are fiduciaries to their interest and the interest of the collective. If it turns out that
’collective interest’ is an empty set, then this principle simply collapses into the
agency principle (Freeman, 1994).
Of course, other sources can also be taken as a basis for defining the
normative bases of stakeholder theory. Other authors argue that the normative aspects
of ownership rights are similar to those of stakeholder theory. While it may sound
surprising that stakeholder theory finds its normative bases in the ownership theories
it was meant to oppose, the right to ownership has a much wider meaning than just
protecting the rights of owners. It defines the rights and duties of owners, and it
demarcates the boundaries of a complicated web of rights and duties that protects the
owners’ rights and prescribes their duties at the same time. However, it also protects
the human rights and dignity of all those who could be impacted by the ‘operation’ of
property. If we accept this pluralistic view of ownership rights, the relationship
between the normative bases of right to ownership and stakeholder theory becomes
more obvious (Donaldson & Preston, 1995).
Yet other authors base their stakeholder theory on feminist ethics. They argue
that the standpoint of feminist ethics, especially the ‘ethics of caring’, may provide
the right point of departure for re-interpretation of the stakeholder theory by
eliminating limitations and shortcomings caused by present-day use of masculine
phrases and metaphors. Here the basis for a stakeholder-corporation relationship may
be trust, cooperation, reciprocity and equality (Wicks et al., 1994).
Stakeholder theory lays the foundation for corporate politics showing that
stakeholders have rights and claims against the corporation. They are able, or can
become able, to assert their political influence in the interest of common value
creation. They have ethical grounds for enforcing stakeholder equality, to voice their
opinion and to assert their claim for having a say in strategic decision-making
(Freeman, 2014). The normative contract, as proposed by Freeman, has stakeholders
as equal contractual parties with a wide range of differing values and interests.
Stakeholders representing such values may get into conflict with one another as well
as with the corporation with its own set of values and range of interests set
dominantly by one stakeholder group: its stockholders. Normative theory, however,
75
does not stipulate that contractual parties have trust-based institutions, which are
capable of resolving conflicts stemming from value-differences and stakeholder
segmentation (Freeman et al., 2010). The contractual normative foundations of
stakeholder theories, therefore, provide the basis for corporate politics, while offering
no guidance with regards to the organizational hierarchies and legitimate modes of
resolution in potential conflicts (Scherer & Palazzo, 2007). To resolve this ambiguity,
we turn, in the next chapter, to the political ethics of Jürgen Habermas.
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3. CORPORATE POLITICS – STAKEHOLDER DEMOCRACY
The difficulty of making predictions
While we are all aware that the world is changing and therefore prognoses have to be
made, making predictions is not easy. For example, towards the end of the nineteenth
century in London and in New York traffic was considered the biggest problem.
These fast developing cities were the centre of world trade, where millions lived in a
relatively small space. Traffic in those days meant, of course, horse-drawn vehicles,
with which numerous problems were associated. Thousands of horses – slow and in
unexpected situations not seldom dangerous – worked in London. They had limited
capacity and ‘working hours’. However, this was not the biggest problem. The horses
needed a lot of hay for feeding, which had to be transported to the city, and what went
in also had to come out. Horse manure started to cover the streets threatening to
become a crisis situation, they hindered traffic, spread diseases and, when it rained,
the sewage system suffered. A town-planning meeting called to address the issue had
to be terminated ahead of time because it soon became obvious that no solution to the
problem would be found and therefore it made no sense to carry on the discussion.
The Times made an important and exact prognosis for the city of London in 1894: by
1950 London’s streets would be covered in horse manure three meters high. A similar
prognosis for New York predicted that by 1930 horse manure would be three storeys
high in the streets of Manhattan. This was not how it happened, although at the time
these prognoses seemed to be reliable.
The case of horse manure was, however, not the only one where such
prognosis failed. Predicting changes in writing and written communication proved to
be just as difficult as predicting the future of urban commuting. Pupils mostly used
pencils for writing, though ink and pen had already been widely in use at the end of
the nineteenth century. Both were not without problems: using ink was a challenge as
far as keeping the notebooks neat and clean, whereas in the case of using pencils, their
sharpening caused problems. The US National Association of Teachers in the US
declared in 1907 that one of the biggest problems in teaching pupils was that
“students today depend too much upon ink. They don’t know how to use a pen knife
77
to sharpen a pencil. Pen and ink will never replace the pencil.” (Vielmetter & Sell,
2014, p. 9).
One might think that neither the experts concerning themselves with the
problem of horse manure, nor the teachers could have anticipated the innovations that
would determine the future. For them the horizon reached as far as trying to solve the
problems of horse-drawn carts and hand-sharpened pencils or dip pens. Therefore –
one might assume – it was inevitable that they were blind regarding the future. But
this is not true. The internal combustion engine, the all-determining basis for the
modern automotive industry, was invented thirty years prior to 1894. Siegfried
Marcus, a Viennese innovator, had already experimented with his four-cycle engine
and was the first to use gasoline as a fuel in the 1870’s, while Carl Benz patented the
automobile as early as in 1886. Furthermore, in 1894, when the above-mentioned
Times article appeared, the serial production of automobiles had already started.
Similarly, John J. Loud patented the first ballpoint pen on October 30, 1888,
developed by him to be able to write on leather, for which traditional ink and pen
were unsuitable. At the time of the teachers’ declaration in the US, the technology for
solving the problems had already been available for close to a quarter of a century.
All this confirms what the Danish physicist, Niels Bohr – quoting a Danish
showman – once said, “Prediction is always difficult, especially if it is about the
future”. (Just by the way, this apparently also holds true for the past, since –
according to other sources – the above-cited quotation is also attributed to K.K.
Steincke, published in his Farvel og Tak book in 1948, and also to Mark Twain,
Samuel Goldwyn and Robert Storm Petersen).
Megatrends
The theory and practice of corporate social responsibility means a major shift in
corporate operation and the politics of the corporation. In order to understand the
depth and quality, as well as the future direction of this shift, we need to look at the
future. In this chapter we will look at megatrends that shape our future, and their
78
macro- and microeconomic impacts. We will see how these megatrends influence
economic and corporate processes and how they transform corporate operation.
Megatrends reflect the main processes in society and the economy, whereas
corporate endeavours are social constructs, therefore corporate politics is a reflection
of what kinds of consequences megatrends and their impacts have for the operation
and management of corporations. The term ‘megatrend’ was introduced into public
discourse by John Naisbitt’s book of the same title. He argues that megatrends are
long-term, transformational processes with global reach, broad scope, and a
fundamental and dramatic impact (Naisbitt, 1982). Megatrends lead to
transformations that require institutional answers. The majority of Naisbitt’s
recognitions concerning megatrends became a determinant part of the processes
ensuing around the turn of this century, i.e. the transition from an industrialized
society to a knowledge-based society, general acceptance of globalization, the need
for long-term strategies, the strengthening of participatory democracies and a world
that has progressed from one offering few opportunities to one offering a wide
variety, all these factors have led to changes that determine our everyday social
processes. Yet the changes that occurred in the last two decades of the past century
were only the beginning of the megatrends of the shift. Following Naisbitt’s lead, a
number of scholars started to map out the phenomena, changes and hidden sources of
information that could be signaling megatrends. Making predictions about long-term
societal processes has become an independent area of research and business studies,
for which the beginning of the new century also meant a natural dividing line. Since
the millennium, many a book, research paper and consultancy document has been
published trying to analyze and evaluate the megatrends of the twenty-first century.
Going into their details would go beyond the limits of a book on corporate social
responsibility. However, it may be useful to see the common elements in these
megatrends that will most probably determine the next one-hundred years. According
to megatrend researchers the following process will determine our future:
- globalization, demographic changes, health-care revolution;
- ecological and climate change, the scarcity of natural resources;
- urbanization, new individualism and value-pluralism;
- digitization, connectedness and technological convergence;
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- community, gender equality and consumer and life-style consciousness
(Naisbitt & Aburdene, 1991; Vielmetter & Sell, 2014).
Globalization, demographic changes and health-care revolution
According to forecasts, the Earth’s population will exceed nine billion people by
2050. Life expectancy, which in the Global North increased by nearly twenty-five
years by the end of the twentieth century (1960-1990), will keep on increasing. The
fast development of medical science also means better health and therefore longer
active years. This will be supplemented by advances in genome editing technology
(CRISPR cas9), as well as technology entering end of life care and being utilized for
possibly further extending biological life. All this makes present-day old-age care
unsustainable and will need to be reformed. Pension systems, health care services are
unsustainable by current regimes of financing; as are systems to manage short or
longer-term temporary or structural unemployment. To accommodate the longer
active years, totally new life-cycle planning strategies, career paths and work-life
equilibrium are needed. These processes will increase the need for an extended and
more generally available social welfare system, including, potentially, some form of
unconditional basic income or living wage to cope with basic needs and offer basic
social security for all.
Ecological- and climate change and the scarcity of natural resources
Ecological changes, global warming, transformation of ecosystems and the extinction
of species of flora and fauna have initiated long-term and fundamental changes in the
natural and built environment. Climate change is no longer a threat, but an everyday
reality. Its effects – natural processes, changes in ocean stream patterns and
temperature and precipitation cycles – cannot yet be foreseen exactly. These
processes have an impact on the Earth’s capacity to sustain its population and on the
quality of life of human beings. The scarcity of fossil energy resources is likewise no
longer a threat, but reality. Therefore, it is of paramount importance that renewable
energy be used as widely as possible, energy efficiency be increased and zero
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emission be targeted. From all this, it is clear that the present-day use of energy,
production methods and environment-polluting emission processes are unsustainable
and have to be re-thought, together with our relationship to the natural- and built
environment and planning- and life structures.
Urbanization, the new individualism and value pluralism
In 2008 half of humankind lived in an urbanized environment. Forecasts predict that
by 2050 64% of the world population and 86% of the population of the first world
will be living in urbanized areas. Consequently, the proportion of large urban sprawls
will increase, new mega-cities and urban regions will be created. All this will
radically change urban traffic, its infrastructure and modes. The huge, concentrated
urban population will change the pattern of population density and the metabolism of
the city (the structure of in- and outflux, its products and processes) will be
transformed. This will make the present-day individualistic and automobilitydominated
lifestyle of urban citizens unsustainable: various forms of public and
shared mobility services will get preference, attempts will be made to slow down
traffic and to reconcile individual and public modes of transport into a seamless
mobility-as-a-service (MaaS) offering; socialities of work, home and education will
emerge and transform in spatially versatile new forms, and the structure of time
utilization and planning will change. Mobilities and other socialities will be shared in
co-working, co-creating environments; smart and intelligent transportation systems
with autonomous, connected vehicles will dominate urban mobility; shared public
urban spaces will be occupied by diverse ‘mobility things’ operating autonomously
enabling urban flows of people, goods and information providing safer, more
effective, cheaper and more accessible modes of transportation for all.
Digitization, connectedness and technological convergence
Current and yet-to-come technological innovations, 3D printing, genome editing,
artificial intelligence, development of robotics, autonomous vehicles, multi
dimensional connectedness, digitization and convergence all increase the possibilities
of ubiquitas (being present everywhere and at all times) and radically improve
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process efficiency. Technological advances in robotics will create job losses making a
considerable number of people, especially in the short run, redundant from work; will
further decrease job security, while also creating new types of occupations and ways
of life. Additive manufacturing and other forms of small-scale local production will
reverse offshoring processes and onshore/bring back the making of artifacts to Global
North environments. The speed and quantity of data processing create new knowledge
with new challenges and solutions. Mediascapes will continue to transform, social
media and other algorithm manipulated platforms will create and maintain filter
bubbles and echo-chambers influencing perceptions of the public and the private
realm of values, cultures and identities. Multidimensional connectedness will further
advance the creation of human-non-human hybrids, conflate the public and private
realms into different form of ‘priblics’. Scientific breakthroughs, especially a deeper
understanding of quantum theory and mechanics will bring about new paradigm
changes in our concept of timespace and our basic philosophical constructs such as
causality. This will change attitude towards traditional socialities of work, knowledge,
learning, and transform value-creating processes, as well as assist the transition from
a knowledge-based society into what Stiglitz and Greenward (2014) call a “learning
society”.
Gender equality, community and consciousness
By 2020 a significant number of top managers of the five hundred largest global
corporations will be women, who will play a determining role in both corporate
management and in social-political and economic decision-making. Also by 2020,
one third of the world’s population will be made up of those born after 1980, the socalled
Generation Y. As digital natives they have fundamentally different habits, lifestyles
and convictions from the generations before them. Their influence on
consumption, on the structure of acquiring and providing information and on learning
processes will be significant, as Generation Z, born around the Millennium with
radically new ways of thinking and ability structures, will reach adulthood. All this
will fundamentally change the conditions for decision-making, trust and cooperation:
new community-based processes (clouds and crowds) will be introduced and/or made
to reign. As natives of a world of cyberized interconnectedness, climate change and
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genome editing, their decision-making as well as social skills will be different from
that of previous generations. It is yet to be seen how the generational transitions will
inform and change interactions in- and between communities, approaches to
consumption and consumerism, glocalities as well as online and offline
interconnectedness.
As pointed out in the introduction, it is not easy to predict the future.
Consequently, it is not certain that these will be the determining processes, yet it is
probable that the direction and character of changes will be along these lines.
Moreoever, the consequences of these megatrends are not linear, but complex: multidirectional,
open-ended, interlinked and mutually reflective. The megatrends will
have significant and mutually enhancing impacts on each other, thus these processes
will take place relatively quickly in the next few decades. Megatrends will change our
knowledge of the worlds around us, both on a planetary and interplanetary scale; our
socialities and social interactions as well as our imaginaries. Most of these processes
involve technology and some form of hybridization: the cooperation and co-existence
of human-non-human entities. Science and innovation will continue to be driving
forces of our techno-social futures while they are also changing; new societal
challenges will bring about new methods, approaches and attitudes to societal
engagement, inclusion and multi-faceted openness.
These fuzzy, vague yet impactful processes create the macro-level paradigmshifting
context of corporate social responsibility. All these megatrends and their
varieties will determine our societal relationships, likewise our values and
organizational environment. As a result of the changes, our organizations will shift
from mechanical, organism-like, centrally-directed structures to team-centered,
participatory organizations, in which the individual will play the determining role
(Ackoff, 1994). On all levels of the organization, the centrally-directed structures
need to be replaced by decentralized management, organizational and cooperation
models, which are more capable of organizational adaptation and learning (Evans &
Wurster, 1997). There will be less need for representation and indirectness on the
level of both global and local management, and more participation, more efficient
organization and regulation (but not control) of information- and knowledge flow and
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of the communication channels, a better understanding and management of the evergrowing
complexity, and a wider range of problem-solving tools will be called for.
New thoughts, knowledge, abilities, enhanced innovation, the coming to the fore of
glocal (global and local) capabilities, adaptation to the continually changing processes
and the acceptance and endurance of a state of uncertainty will be needed (Beck,
2006; Standing, 2011). As a result of these processes, the political role of national
states will diminish, since the international integration of the capital- and labour
markets will require regulatory, managerial and organizational models and
organizations which can generate global or regional social and economic orders and
processes reaching across borders (Ohmae, 1995). Not only technologies, but also
social traditions, convictions, modes of cooperation and global norms will be
transformed and adapt themselves to each other (Spies, 1998).
3.3. The politics of corporate social responsibility
Political CSR
Megatrends determining the social and political processes of the twenty-first century
have not left corporate operation untouched either. Globalization has weakened the
earlier accepted Westphalian order of national states, which was the basis for the
cooperation with and regulation of the business sphere, that is of corporations,
stakeholders and markets. Demographic changes require new generational
cooperation structures as well as new, less age-dependent identity strategies, while
prolonged life expectancy, due to the health-care revolution, calls for new strategies
for career paths. Environmental and climate change is creating a context in which
eco-political questions carry increasing weight and every actor of the eco-system of
the Earth is turning into an active and responsible participant of the ecological
processes. Urbanization is creating a new more interactive culture and new,
multifaceted identities with ensuing new value-systems, whereas urban life brings
about new stakeholder relationships, and new types of equality-based eco-systems and
cooperation models. Digitization, the new interconnectedness and technological
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convergence create new communication channels and forms among stakeholders,
thereby supporting and strengthening the equality-based bi- or multi-directional
communication models and practices. Ubiquitous technology (mobile handsets and
the Internet of Things [IoT]) offers new possibilities for political participation and
may create new structures and modes of expressing opinions and wills. Communality
creates new, politically defined relationships, new forms of identity; patterns of
consumption, choices of workplace, and creating work-life balance will become more
conscious and value-driven. As a result of all this, the relationships between
corporations and their stakeholders become radically transformed, new channels of
communication, new spaces for (inter)action and thus-far unknown challenges are
born, which require new models of corporate operation and a new theoretical
foundation underlying these models.
Following the normative foundation of CSR, as described in the first two
chapters, a new stakeholder driven theory of corporate responsibility is needed: one
that takes into account social processes of the twenty-first century as well as enables
corporations to integrate consequences of current megatrends into their operation.
Many an author has argued that a ‘positivist theory’ of CSR is unsuitable for
furthering the establishment of the new corporate operation. Based on the natural
sciences, traditional theories of CSR have approached corporate responsibility and the
role of corporations in society by wanting to draw up ‘general rules and regularities’
for the normative foundation of the operation expected from corporations. A new
theory of corporate operation accepts that in the age of globalization multinational
corporations (MNCs) – as societal actors disposing over the most significant
resources and management capabilities – must establish a new type of relationship
with politics. It is not only necessary to transcend the Friedman doctrine – which took
the fiduciary responsibility of corporate leaders as its point of departure and limited
corporate decision-makers’ obligation for social responsibility – but also to develop a
new kind of stakeholder-based social and political involvement that goes beyond
passive compliance with laws, norms and regulatory practices or philanthropic
support of social issues. In the globalized world ‘business’ is no longer – only – part
of the private world, just as politics does not happen exclusively in the public sphere.
On the one hand, as a result of globalization, nation states are less and less capable of
meeting the challenges posed by global regulations; on the other hand, parallel to this,
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the privatization of numerous areas which had previously been considered the
exclusive privilege of nation states (health-care, education, law-enforcement) is under
way. As a result of globalization, the world order of nation states as it evolved
following the Peace of Westphalia, which framed their traditional roles, was
undermined.
The Peace of Westphalia laid down a number of principles which determined
the role of nation states in establishing the world order and its political structure from
the seventeenth century right through to the end of the twentieth century. The Peace
spelt out the principles of the sovereignty of states and their right to political selfdetermination,
the equality of states, and the principle that no state has the right to
intervene in the internal affairs of another state. Based on these principles, the
international order of the Age of Modernity was called the Westphalian world order.
Globalization, reinterpretation of the role of nation states and the strengthening of
supra-national participation in international organizations questioned the validity of
the Westphalian world order towards the end of the twentieth century. This is
exemplified in a 1999 speech by the then British Prime Minister, Tony Blair, in which
he spoke of the need for “a new, post-Westphalian world order”.
These two processes – the reinterpretation of the role of nation states and the
social participation of global corporations – have led to the need for a new, political
approach to the role that corporations play in society in the age of the new postWestphalian
world order (Scherer & Palazzo, 2010). The central thesis of political
CSR is that the classic liberal political standpoint, i.e. the radical separation of the
economic and political spheres, is not sustainable. Parallel to the decrease of the
global regulating ability and role of nation states, the mode and means of regulation
have also changed: hard rules are ever-increasingly being supplemented by soft
regulation tools, and the means and institutions for mutual- and self-regulation are
evolving. In these, corporate legitimacy is no longer derived from living up to the
expectations set by ‘social rules and norms’. ‘Living up to’ is being more and more
replaced by adaptation to the principles of multi-level social connectedness: in a
pluralistic, heterogeneous and unregulated political environment, legitimacy is no
longer to be had by operating by the letter of the law, nor by adapting to social norms.
Rather, corporations – just like any other social actor – have to ‘create’ legitimacy in
a continuously changing and recreated discursive and political space influenced by the
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social actors (Edward-Wilmott, 2011). In other words, corporations and their
decision-makers must take on active political roles in which the minimum of
corporate responsibility is laid down by laws, yet “as the system of law and the
enforcement apparatus of the state are incomplete there is a likely possibility of
regulation gaps and implementation deficits which have to be filled and balanced by
diligent managers with pro-social behaviour and an aspiration to the common good”
(Scherer & Palazzo, 2008). As such, it is no longer satisfactory for corporations to
look upon rules or stakeholder demands reactively or even with strategic foresight,
but they themselves must become proactive, influential and shaping participants of
social processes in order for them to become part of solving ecological and social
challenges still ahead of us.
Political corporate social responsibility is thus defined as corporations
“engaging in public deliberations, collective decisions, and the provision of public
goods or the restriction of public bads in cases where public authorities are unable or
unwilling to fulfill this role. […] These corporate engagements are responsible
because they are directed to the effective resolution of public issues in a legitimate
manner, often with the (explicit) aim of contributing to society or enhancing social
welfare, and thus not limited to economic motivations (Scherer et al, 2016, p. 275).
Other definitions draw the scope of political CSR more boadly, as “activities where
CSR has an intended or unintended political impact, or where intended or unintended
political impacts on CSR exist (i.e. impacts related to the functioning of the state as a
sphere of activity that is distinctive from business activity)” (Frynas & Stephens,
2015, p. 485). However, such a broad definition leaves important aspects of CSR
undefined. In Freynas & Stephens (2015) it seems that there is a vaguely defined
‘basic CSR’ domain understood in terms of corporate citizenship, accountability,
sustainable development under the umbrella of “companies hav[ing] a responsibility
for their impact on society and the natural environment, often beyond legal
compliance and the liability of individuals” (Frynas & Stephens, 2015, p. 485) and a
sub-set termed political CSR with “intended and unintended political impacts”. As
Scherer (2017) points out, the broad understanding of pCSR does not clarify the
notion of ‘political’, or leave concepts such as the ‘state’ and ‘the functioning of the
state’ also undefined. It is also not clear how political impact differs from impacts on
society and the natural environment. The definition used by Scherer et al. (2016) and
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the definition used in this book may be aligned as, in conceptualizing pCSR,
corporations engage in public deliberations, collective decisions and joint activities
with stakeholders in order to (1) anticipate, respect and be responsive to values and
interests of stakeholders; (2) integrate their stakes into corporate operations and
processes; and (3) take on the provision of public goods or the restriction of public
bads in cases where public authorities or other societal actors are unable or unwilling
to fulfill this role.
For justification of corporations’ political involvement, the theory of political
CSR reaches back to the deliberative democracy concept of the German social
philosopher, Jürgen Habermas. For Habermas, the basis for legitimacy of societal
decision-making is the open, public deliberation of free and equal citizens, in the
course of which the institutionalization of the processes of opinion- and will-forming
and their general applicability creates legitimacy for the decisions (Habermas, 1996).
Thus, the basis for the political legitimacy of business operations is not the disclosed
interest or verbalized opinion of the individual or institutional stakeholder but –
similarly to all other participants in the political space – the institutionalization of
different forms of public dialogue and the modes of the processes of social willforming.
The task of corporations, therefore, is to contribute to creating spaces for
deliberation and institutions for common will-forming, to participate pro-actively in
such processes, and to accept common decisions arrived at in open deliberation. As
Scherer and Palazzo put it: “The legitimacy-ascribing environment of globally active
corporations consists of a multiplicity of – often contradictory – legal and moral
demands from a wide range of institutional and cultural environments in the different
host countries. Accordingly, questions of corporate responsibility are of a much
higher level of complexity than in more homogeneous national contexts. For a
corporation to deal with changing societal demands in a reasonable way, it must
replace implicit compliance with assumed societal norms and expectations with an
explicit participation in public processes of political will-formation. We consider this
shift as the politicization of the corporation” (Scherer & Palazzo, 2007, p. 1108).
Stakeholder democracy
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A theory of the politicization of the corporation requires the analysis of corporate
social impact as well as corporate political structures. As regards social impact, the
question is: What kind of procedural responsibility do corporations have to mitigate
social consequences of their operation, and what rights and duties do the stakeholders
have to influence such consequences? Regarding the political structure of operation,
the question is: Whether the institutional decision-making processes of corporate
operation are suitable for stakeholders to influence social consequences efficiently
and to mitigate conflicts of stakeholder values and interests, and what kind of
procedural and institutional changes are necessary so that stakeholders can mutually
maximize values created?
As the corporation is viewed as an equal participant in shaping global social
processes, the corporate community, as the sum total of stakeholders, must be looked
upon from a different perspective. If corporations are seen as political institutions, the
relationship between the corporation and its stakeholders must also be politicized.
Stakeholders do not only have interests towards and stakes in the corporation but –
similarly to the members of the political community – they have also various rights
and duties, and the opportunity and/or duty to participate in the process of political
opinion-formation and decision-making (Marshall, 1964). Thus, members of the
corporate polity, corporate citizens, have basic rights, societal, political and social
rights and duties, as well as opportunities to take part in the corporate democratic
processes. A political stakeholder theory would assume that stakeholders as corporate
citizens may participate in deliberative democratic processes, may create democratic
intra- and inter-corporate political institutions and form a democratic stakeholder
community. Citizens have not only rights and duties, but represent different identities
and their struggle for recognition. Based on these identities citizens formulate
demands which can serve as a basis for social recognition and inform processes of
economic re-distribution.
An identity-based corporate citizenship, the foundation of stakeholder
democracy, may be approached from three different viewpoints: cosmopolitan,
ecological and cultural (Crane et al. 2008). Cosmopolitan citizenship, beyond
citizenship in traditional nation states, may entail new types of transnational rights,
duties, opportunities for participation, and communication platforms. Ecological
citizenship refers to rights, duties and opportunities of participation stemming from
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commitment to the environment. Similarly to the term cosmopolitan citizen, this
approach covers a broad area of interpretation, from the commitment to a given
region or lifestyle to the interpretation of rights and duties reaching far beyond the
current frameworks for interpretation of one’s environment, without limitations in
time or space. Cultural citizenship resolves the contradiction between certain groups
of society feeling both part of the political community, as well as outside of it. These
identity positions lead, or may lead, to special limitations of rights and/or to a
broadening of rights and duties. Typical examples for this are ethnic or sexual
communities, who, although they are members of a given political community, still
have to face significant limitations if they want to live a full life according to their
interests, lifestyles and desires.
These forms of citizenship can also be interpreted in the context of
corporations. The idea of the cosmopolitan corporate citizen makes it possible for
corporate stakeholders to become part of the processes of global transnational
decision-making, while also highlighting the limits corporations face in their global
social-political participation. Ecological corporate citizenship may lay the
foundations for fighting for corporate responsibility to make air-pollution, the
climate-change caused global risks and the responsibility towards the not-yet-born
future generations part of corporate operation. Cultural corporate citizenship allows
corporations to reflect on differences between identities, such as the so-called ‘pink
economy’, which produces goods for consumers with a homosexual identity. Through
cultural citizenship, corporations are able to contribute to the existence of certain
identities, for example, by offering goods and services which provide the various
groups with identity challenges (those challenged in their mobility, ethnic or sexual
minorities) with the opportunity of political participation (Crane et al., 2008).
Stakeholders are members of the political corporate polity and their positions,
interests and action do not only stem from their stakes in the corporation but their
identity positions. Conflicts arise between stakeholder groups in a corporate
environment because of the struggle for recognition of these identities. Survival,
growth and success of the corporation depend on the institutionalized management of
such conflicts and the democratic resolution thereof to maintain the corporate polity
as a whole. Therefore we suggest that impacts of corporate operation, its negative
economic, ecological and cultural externalities, are to be mitigated by processes
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entrenched in a political system of ‘stakeholder democracy’, a corporate system of
political checks and balances with institutionalized democratic public political spaces
for deliberation, collective decisions and joint activities; such mitigation geared
towards the provision of public goods or restriction of public bads, designed and
operated for and by free and equal corporate citizens. We can now turn to the political
structure of operation.
Time-travel – absolutistic corporations and late-modern stakeholders
To have a broader take on corporate responsibility, I believe that one of the great
contradictions of the day is that there is a huge gap between the politics and
communication of present-day enterprises and the world surrounding them. To put it
more simply: while we live in the social, political and communications environment
of the 21st
century, modern enterprises are the products of the age, the 17th
century, in
which they evolved. The Peace of Westphalia in the seventeenth century created the
new order of nation states just as the birth of the modern enterprise was the Industrial
Revolution, also in the seventeenth century. CSR may be seen as an attempt to bridge
the socio-corporate gap between the age of the birth of modernity in the 17th
century
and the post-industrial late modernity of the 21st
century.
Societies in late modernity have been flooded by organizational and personal
identities confessing to definite value preferences expecting respect from other
members of society, and that, in the course of cooperation with them, strategies be
developed which respect the values underlying such identities. As seen earlier, these
different identities are different stakeholder positions which also justify different
rights and duties relationships between corporations and stakeholders. The public
sphere is flooded with identities holding definitive value positions looking for mutual
respect; strategies of cooperation between such institutional or personal identities
need to respect the values supporting such value driven stakeholder positions. These
positions also underpin specific rights and duties in relation to stakeholder contacts
with corporations.
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While a homogeneous world market does not exist, a global culture does, and
is manifested through numerous communication channels. The tastes and value
systems of global consumers differ, yet the same global icons, global brands and
corporations, embodied by the same global symbols, are present in their lives. These
corporations are no longer ‘conveyor belts’ transporting goods and services to
consumers and in return profits to the shareholders. They are much rather important
actors shaping the present-day social structure in a web of interactions; values are
determined by stakeholders, who are directly part of the given social structure and in
much more complex ways than earlier. They have to manage involved relationships in
order to gain respect for their identity and acknowledgement by all stakeholder
groups. “Many consumers are awed by the political power of companies that have
revenues greater than the GDPs of smaller nations and that have a powerful impact on
people’s lives as well as the welfare of communities, nations, and the planet itself.”
(Holt et al., 2004, p. 69). Authors of the Global Brands Study, published in 2002,
stated that stakeholders choose and pay by weighing up three main characteristics of
global brands on offer: quality label, global myth and social responsibility. Through
their global power, they are all sufficiently well-informed to influence the world
around us. Stakeholders form opinions, they dispose over the means for effectively
expressing their ideas and ideals and, furthermore, they have the power to form
alliances and to increase their opportunities beyond their individual limits. Today it is
just as important as ever for corporations to understand these changes, since they are
the most powerful players in the net of interactions through the enormous resources at
their disposal, their successful operating practice and influential communication
channels. Corporations, utilizing their wide-spread technological, innovative and
marketing capabilities, may be able to manage problems with which governments and
NGOs have been struggling for decades. This is exactly what Scherer et al. (2016)
mean when they write about turning corporations into political actors by “the
provision of public goods or the restriction of public bads in cases where public
authorities are unable or unwilling to fulfil this role” (p. 275).
The most important characteristics of modernity, the socio-cultural context of
modern capitalism, is the emergence of public spaces. Habermas argues that the
“bourgeois public sphere”, striving for equality and being accommodating and
critical, had established a communication environment in which new arenas for
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discourse, urban public spaces and more open forms of social life had appeared,
publishing had evolved at an enormous speed, thereby creating a new forum which
furthered the development of political-social-economic knowledge and dialogue
(Melton, 2001). The concept of the public sphere rests on Kant’s ideal that rationality,
the mind and wisdom, liberates human beings from their self-imposed imperfection;
thinking leads to rational dialogues, which in the end result in contractual social,
political and business cooperation. The belief in the superiority of reason and the
search for intellectual instead of transcendental truth furthered the appearance of a
new form of trust, which transformed the context of the public sphere striving for
intellectual equality. This concept of trust is rooted in the universal nature and
localizability/traceability of truth on the ground of which all conflicts may find proper
ordering. The public sphere continuously needs reliable and trustworthy information
in its search for the truth in the course of resolving all manner of conflicts and
arguments. Truth is based on the ever-increasing volume of information to be had at
any time, through all the channels and from numerous trustworthy sources. Taking
social-political development as our point of departure, three essential viewpoints have
appeared in 21st
century late-modernity in the Global North which are the basis of
present-day western social establishment, determining the rules of engagement in
relationships between identities.2
Liberal democracy. The political structure of late-modern western societies is
liberal democracy, where checks and balances guarantee that every member of the
community can participate in decision-making processes related to their being
governed. In liberal democracies there is universal suffrage and decisions are made by
the grown-up members of the community. The constitution of liberal democracies
guarantees that the leaders of the community cannot misuse their mandate, separation
of powers is secured, the judiciary, accepted and legitimized by the community, is
independent and the checks and balances function in order to secure the independent
2
It is important to note that Global South contexts provide other possible points of
views. The emergence of illiberal democracies or authoritarian forms of capitalism in
India, China or Singapore that have, however, provided social development and
middle-classification unparalleled in the histories of these countries deserve a closer
look. The success of these countries in raising living standards and providing middle
class status to a huge number of people merit an in-depth analysis of the socioeconomic
as well as political impacts that are not easily refutable on politico-moral
grounds.
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nature of the three branches of power. Value-based rights and freedoms are limited by
bureaucratic processes, which create a modus vivendi between social actors with
mutually exclusive values, and – should the community wish so – change such a
modus vivendi.
Pluralistic set of values. The values of western societies in the 21st
century are
pluralistic, i.e. in these societies there is no single, universally accepted and externally
legitimated set of values which are enforced by virtue of the power controlled by a
few members of society. Values which mutually exclude each other are placed behind
the “veil of ignorance” (Rawls, 1971) – for example, the right to self-determination of
women over their own bodies, and the foetus’ rights from the moment of conception –
and moral decisions are based on the consensus of equal actors committed to powerfree,
rational discourse (Habermas, 1984). Moral decisions are context-dependent and
pragmatic: the values professed by one are just as valuable as the values professed by
others – and anyone can continue to stand by them unflinchingly even if we know that
they are relative (Berlin, 1968).
Interactive media culture. With the appearance of web 2.0 solutions in mass
communication, the media are no longer a ‘one-to-many’ type of communication tool.
Web 2.0 can be described as a web-based system that furthers communication,
information sharing, joint work, common creation and the ability to cooperate. The
old methods of sending messages and the external monitoring of information flow and
dialogues led to new forms of information exchange making it possible for
participants to choose the sources, channels and depth of trust preferred by them
much more freely. Social media transformed media consumption patterns; media
representation and contexts creating filter bubbles and echo-chambers, thus shifting
trust relations in information acquisition.
These three essential structural elements underlie the political-social context
of deliberative democracy as put forward by Habermas. It is in this context that the
public dialogue of free and equal citizens emerges, in the course of which processes
of opinion and will-forming become institutionalized through legitimation within the
socio-political space (Habermas, 1996). In this space, corporations and their
stakeholders make up an involved matrix with numerous inter-linkages. Corporations,
as the ones with the most significant resources, have to act in a way that both makes
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them capable of managing and directing stakeholders within the matrix to achieve
corporate goals as well as adhere to TBL principles of value-maximization and the
need for provision of public goods while paying due regard to the fact, as part of the
equality matrix, that they have no special legitimation but attain it only through
democratic processes within the deliberative space.
An intellectual shift, typically, also brings change to the origins of trust which
are the basis for interactions and identity relationships in the, by now global,
deliberative space. The Information Age opened the way for the Age of Communities,
in which arguments and dialogues may result in agreements, contractual relationships
and – by their nature – conditional values, rooted in the communal characteristics of
trust. The trust needed for power-free dialogue aiming for contractual relationships
does not stem from intellectually trustworthy and rational sources of information.
This trust originates in the community of stakeholder relationships, in which
interactions are based on mutual, yet not exclusive engagement in open and nontraditional
forms of dialogue with other stakeholders. The level of stakeholder
relationships, proximity and importance is dependent on the influence and effect
stakeholders exert on each other. Trust is community based, entirely entrusted to the
judgment of the community of stakeholders. The emergence of the concept of “fake
news” and the mechanics of ‘echo-chambers’ and ‘filter bubbles’ is an, albeit
negative, case in point.
It is not surprising that corporations do not operate according to 21st
century
principles. Corporations still live in a dual world; while they operate in late
modernity, they are the last bastions of enlightened absolutism, the political system of
their conception in early modernity. Stakeholder relationships within the corporation
are not guided by liberal democracy, value pluralism or interactive media culture.
Rather, just the opposite. Political decisions are being made by a few chosen ones,
there is no universal suffrage or any participatory practice in corporate decisionmaking,
the ‘government’ is not selected with the participation of – even if only in
limited numbers – stakeholders, and there are no checks and balances guaranteeing
the impartiality of the various branches of power within the corporation. Value-based
rights and freedoms are not limited by democratic and bureaucratic processes which
secure the modus vivendi between stakeholders confessing to mutually exclusive
values. Further, there are no processes for changing the modus vivendi, should the
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community choose an alternative strategy. Pluralism of values does not exist within
the current system of relationships between stakeholders: they are being ruled by
centrally determined values of stockholders, and actualized by a limited number of
stockholder approved and selected stakeholders: the management. Moral decisions are
made based on the value judgment of those in power, without any equal and rational
dialogue involving affected or other stakeholders. There is no impartial remedy
process for breaches of stakeholder values; nor are there processes to mitigate
between conflicts of value. Moral decisions are independent of the context and they
serve one single purpose: the well-being of the aristocracy of corporate absolutism,
i.e. that of management and shareholders themselves. There is no interactive media:
messages are sent through channels of ‘one-to-many’. Information flow is strictly
controlled and centralized. The web is typically used more as a platform than as a
concept and its main role is to convey the messages of stakeholders in power to
employees without access to other sources of information.
Inevitably, stakeholders live in a dual world: on the one hand, in the latemodern
age liberal democracy of the 21st
century and, on the other hand, in respect of
numerous corporate stakeholder relationships, they are stuck in the enlightened
absolutism of the 17th
century. Similarly to the employees, to use the language of
history, they are also subjects of the enlightened absolutistic ruler, i.e. the CEO or the
Chairman of the Board and the aristocracy and nobility surrounding them. It is ironic
that even the aristocracy may live in a dual world: in the corporate world they have
power, yet at home or in other socio-cultural contexts they are just one of the many
stakeholders participating in dialogue.
Without wanting to expand too much on historic analogies, we all know what
happened to the aristocracy during the revolutions of the 19th
century. The
bourgeoisie, deprived of political power yet disposing over substantial economic
resources, took over power. These revolutions also extended the world of enlightened
rational dialogue to areas which had earlier been exclusively controlled by the
absolutist power of the Church. The price was high: massive bloodshed and social
turmoil. In the world of corporations, CSR offers the opportunity of a way out,
without ‘bloodshed’, based on changes not threatening anybody’s social status or
existence.
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CSR – the bloodless revolution
Well-described and well-executed CSR strategies may help corporations utilize their
development energies instead of revolutionary dynamics; to engage with stakeholders
around the negotiating table and to start to reorganize the political and social
environment of corporate politics. They may begin to engage in public deliberations,
collective decision making, and the provision of public goods (Scherer et al., 2016).
The transformation of this environment means more than innovative leadership and
application of the skills and means of an already existing CSR management. Paradigm
shifters now – as always – face an almost insurmountable hurdle. They have to
change the language and the rules of the game while carrying on playing the old
game, according to the old rules, using the old language.
Rather than redefining their strategies relating to their identity, corporations
need a new identity. They must come to accept that corporations are political
communities and not royal courts. The boundaries of the corporation are not where
the walls of the ‘corporate castle’ end: the world out there, beyond the fortifications of
the corporation’s headquarters, is not a world of desperate corporate subjects just
waiting to be subjugated by the marketing-broadsword, the gun of precarious labour
or the weapons of sales. The corporation is the sum total of all stakeholders. These
stakeholders affirm values and they have interests and emotions; they are ready to join
the political community of the corporation provided it does not necessarily mean
giving up their identity.
The literature on political CSR is divided regarding the question of the
equality of stakeholders (Crane, Matten & Moon, 2008). While stakeholders are not
equal as far as their influence, effect and their position in corporate politics is
concerned, with regard to their basic rights corporate citizens – just as any other
citizens – must be equal. They must be treated as such in their role as stakeholders
and in view of their identity: freedom of expression and stakeholder dignity must be
upheld. Their stakeholder rights and freedoms as well as the means of practicing these
rights and freedoms deserve due protection otherwise the deliberative democratic
space does not exist and stakeholder democracy would not happen. The burden of
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absolutism can be shed by allowing stakeholders to enjoy their value pluralism, which
had previously been extended to the public sphere. As regards the management of
corporate communities, it is important to introduce a system of checks and balances
via public deliberation and collective decision making. While the corporation is
exclusively owned by the shareholders, corporate communities are not, although their
political management is the task of leaders. Corporate leadership must use
cooperative forms of management. More open formats, involving as many
stakeholders in decision-making as possible, must be developed.
Stakeholder democracy also presupposes the responsibility of stakeholders.
Creation of new corporate ‘social contracts’ are needed, one formulated by each and
every corporate community through stakeholder involvement, dialogue and
engagement. Organizational and individual stakeholders must understand that the
corporate purpose for acquiring a licence to operate is to strive for sustainable
economic success. Stakeholders must also realise that when they vote with their
chequebooks, common values come with a price. Responsibility must also be shared –
locally produced goods may be more expensive than goods flown in from faraway
countries with low cost of labour and weak standards of operation; natural ingredients
and the output of ecological production is healthier, yet pricier; better, safer and more
flexible working conditions reduce bottom lines, which must be compensated by
different pricing and profitability strategies. It is important for stakeholders to realize
that they are also consumers. In their different roles and stakeholder relationships they
must not give up the values they represent.
Cooperative governance is becoming more and more a form of managing
cooperation between organizational stakeholders, i.e. the corporation, government and
NGOs (Zadek, 2006). In post-industrial societies each corporation represents such
organizational power that it prevents them from concluding balanced and transparent
agreements with other players of the public sphere. They are ‘too big to fail’, they
control too many communication channels, and they are capable of mobilizing
enormous financial and other resources in the interest of achieving their goals. When
they enter the social arena of deliberation and provision of public goods, as they have
to in the 21st
century, the stage is transformed.
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Corporations must therefore go through an internal change by transforming
themselves from absolutistic royal courts into democratically managed corporate
communities. The different bodies of corporate communities must work out strategies
which will make it possible for stakeholder representatives to sit at the ‘licence to
operate’ negotiating table and take part in the decision-making process. Boards of
directors of corporations have already well-tried methods for involving people not
part of management; there are working examples of employee and non-executive
stakeholder participation in decision-making bodies. Leadership also must be made
more politically accountable and therefore better balanced between the various
branches of power, i.e. the ‘judiciary’, ‘executive’ and ‘legislative’. This has already
started at multinational corporations through the establishment of ethics committees,
the introduction of procedures for handling complaints of public interest, and the
employment of compliance officers. On the other hand, because no independent,
representative bodies of stakeholders exist to report to, experimenting with initiatives
for making the corporate ‘judiciary’ more open, as corporate scandals prove, have
proved to be in vain. In liberal democracies, top leaders are responsible to elected,
representative bodies of the political community. Making stakeholder interest part of
business decision-making and operation presumes strong stakeholder representation
and the political accountability of corporate leaders.
Corporate management is not the only area where this kind of shift is
happening. The concept of the corporate brand has gone through a transformation in
the last decade. Brands are no longer simply a means for marking ownership, image
building and anchoring consumer choice. They have become communities with solid
cultural roots and complex organizational relationships, building on common valuecreation
and the conventional belief in mutually beneficial social exchange. Therefore
brand ownership, instead of being a corporate management job, is more a mutual
activity based on deliberative processes to endow brands with meaning and help
brands stir positive emotions (Fagerholm, 2007). Corporations gradually lose direct
control over their brands. Brands become political communities which make free and
informed brand choices possible, thus assisting in developing their own identity (Ind,
2003). The leaders of the world of branding, such as Nike, Coke or Starbucks, have
realized that the success of their brands is not always decided in board meetings or in
marketing departments. The concept of co-creation and idea of ‘living the brand’ offer
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brand-community models, which can create more value for the stakeholders than
corporate brands owned by shareholders focusing only on return on investment.
Brand communities – just like nations – are virtual, imagined communities
(Anderson, 1983), which are not owned by the corporation and its representative, the
marketing expert, anymore, but by the corporate community as a whole. This does not
make marketing experts redundant – they are merely offered different tools.
Mobilization of the community – which keeps up and increases the strength of the
brand – depends on invoking functioning identities, introduction and operation of rites
and symbols, and on sustaining a sense of responsibility towards the community
(Muni & O’Guinn, 2001). Corporate social responsibility, as the new model of
corporate operation, extends the concept of brand community to the corporate
community. Efficient CSR includes voluntary activities, as well as legally and
operatively compulsory practices. Stakeholders as corporate citizens are equal and
provided with the right to participate in corporate politics. Participation and
engagement is an option for every member of the corporate community.
The Founding Fathers of the United States, through the opening sentence of
the Constitution: “We, the people of the United States”, created a people from scratch
simply as a result of the constitutive power of the written and uttered word. The
Constitution, by its sheer declaration, created a web of relationships which led to
promises, duties, abilities and interactions earlier not seen and which could hardly be
foreseen at the time of foundation (McGowan, 1998). It created the brand “America”
as an imagined community. The American Constitution declared the exclusive
political sovereignty of the people. Modern constitutions determine types of
governments, basic rights, responsibilities as well as duties of constituents they
regulate the relationship between individual and organizational stakeholders, as well
as between the executive, the judiciary and the legislative. Constitutionalism and
democratic representation of stakeholders need to enter the corporate world. This is
the only non-violent alternative to one-sided usurpation of power by a group of
stakeholders within corporate administration. Corporations need a constitution based
on the principles of political democracy and value pluralism of the 21st
century,
instead of a tradition of political operation according to the principles of the
enlightened absolutism of the 17th
century.
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Corporate constitutionalism must be based on stakeholder sovereignty,
cooperative management and stakeholder engagement or, in legalese, accountability,
contestability and deliberation (Bottomley, 2007). For corporate constitutionalism,
effective multi-directional communication is necessary. Stakeholders do what they
have to do – they represent, they demand, give feedback, and they participate.
However, CSR is about the institutional responsibility of corporations in the provision
of private as well as public goods. It is about what corporations can do in the interest
of the shift happening gradually and continuously, without ‘bloodshed’. For equality
based, authority-free communication, application of multi-directional and multi-sided
communication is needed, using the principles of web 2.0 (many-to-many), which
connects points of the web of social interactions (Barabási, 2003). But this is not
sufficient. Constitutive communication, much as in the case of the founding of
America, would lead to corporate constitutionalism and to the emergence of
corporations becoming ‘stakeholder constitutional democracies’. This would create an
operational environment that reduces the effects of negative externalities as well as
mitigates their harmful economic, ecological and cultural consequences. A new
political corporate operational structure is needed, one which ensures that the power
sphere needed for deliberative democracy to prevail rests on equality, in which the
corporation does not participate with a sovereignty independent of stakeholders
claiming legitimacy outside the deliberative space; and where the equality before ‘the
law’ of stakeholders is secured. In other words, the political structure of the
corporation must fulfil the requirements of the principles of stakeholder democracy.
The role of the generations in the CSR process
Responsible operation and the emergence of ‘stakeholder democracy’ presupposes a
new vision of the corporation and the world surrounding it. CSR is a shift in the
philosophy of corporate management and business strategy. This is not an automatic
process. Corporate decision-makers are not yet ready for a major shift; neither are
their shareholders. Obviously there are a number of reasons for this, one of them
being that their business philosophy and cultural background rest on totally different
traditions. Most top managers are baby-boomers, born in the decades after the Second
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World War, who did their business studies in the seventies, acquired their businessand
MBA experience in the 90s and gained leadership experience around the turn of
the century. Although most of them recognize the problems facing societies and
corporations of today, their experience, knowledge and skills are deeply rooted in the
traditional way of thinking about business and society. The successes that elevated
them into their present positions stem from a totally different kind of social and
business environment.
Post-war generations are generally divided into three categories. There are the
‘baby boomers’, the generation that was born in the period from after the Second
World War to around the middle of the sixties, with the rise in the quality of life. A
new culturally and economically self-determining generation evolved. Culturally,
baby boomers rebelled against their parents, but were also a generation of talent-based
independence and progress. A substantial part of today’s leaders are members of this
generation. Their rebellion has by now turned into conformity and the desire to
safeguard their success and the status quo. Their road to becoming leaders may have
been instructive and full of experiences, yet their advancement was less conscious and
planned. While the audacity and courage of this generation caused a number of limits,
walls and taboos to disappear in the sixties, through their determining years and life
experiences – both in view of their rebellion and the ensuing consolidation – they are
strongly attached to a world of cultural and technological challenges much different to
those of today.
The baby boomers were followed by Generation X, today’s 30–40 year olds.
They had little room for rebellion, since it was exactly the generation of rebellion that
had created a livable world for them. Consequently, for them rebellion meant the
return to the conservatism of the grandparents, the pre-war generation, as well as to
respect tradition and order. Internationally this generation saw less opportunities
ahead of them and experienced the world not as continuous progress, a series of steps
towards a better life, but as slow development interrupted by crises not seldom
resulting in longer periods of regression. While, technologically speaking, the world
had opened up, when as young adults they witnessed the spreading of computers and
the internet and the new technological revolution of the late eighties and early
nineties, few of them could take advantage of the opportunities offered by this brave
new world. Some of our current leaders and the next generation behind the baby-
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boomers – after lots of enthusiasm and major failures – usually prefer to follow the
well-tried path of considered progress and experimentation. This generation, having
lived through the era of eastern European wild capitalism and the dotcom crisis, today
tends to hold back and hinder progress, biding their time and hoping.
Generation Y – instead of rebelling – simply had to occupy the ‘ready-made
space’. After the technical and social uncertainties of the generations before them,
members of this generation are natives of the new world: technical novelties do not
pose challenges and opportunities for them, but are simply part of the natural
environment and everyday skills. Email, interactive social media, mass and consumer
culture, and the unclear borders between freedom and licentiousness have made this
generation both introverted and extroverted. While they turned away from areas of
traditional economics and public politics, another social space, the spaces of social
media, opened up for them or they created these for themselves. They do not chat
with each other upwards and ahead, but rather sideways and in the present. They have
limited goals but a lot of sensitivity, knowledge and skills – one of the challenges for
Generation X and the baby-boomers is how to put all this in the service of serving
public goods. While baby boomer and Generation X leaders inherited the old way of
knowing, more and more of their employees, consumers, and stakeholders have
completely changed in their way of thinking, consumption habits and identity. The
baby-boomers see value creation as continuous growth, and success in monetary
terms and financial security. They maintain that success is to be achieved through
expertise in production and technologically-directed expansion. They view
communication as a necessary evil and, although they know the potential of modern
technology and communication, they do not enjoy it; they apply it but they do not use
it. For them the world of work is a given, business is a means of proving themselves.
In this world work comes first and well-being comes second. This generation lives to
work, while generation Y works to live. The Y generation prospers through open
communication, understands the media and information, is prepared to cooperate, is
ready to network, and accepts mutual dependence in the interests of attaining its
goals; one of its major strengths is striving for the creation of a work-life balance
(WLB) (Jorgensen, 2003).
The question arises: what will follow? The fourteen and eighteen year olds of
today, born around the turn of the century, may become just as radical a generation as
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the baby-boomers used to be at the time. They are the ones, who – despite crises – are
growing up in prosperity and security – at least in the Global North –, yet they see the
internal and external challenges posed by this fast-moving world. They use the
products of technological achievement with natural tranquility and no longer with the
joy of recognition, they see both the advantages and disadvantages of the effects of
the second half of the 20th
century and they dare to and do ask questions, some of
which have no easy and satisfactory answers. According to them, work has to serve
life, the past has to serve the future – they are looking for everyday happiness rather
than for self-justifying experience. Their identity, being different and showing it off to
the world, is important to them: everybody is equal, which is why everybody can be
different. Consumption is not acquisition but the opportunity of belonging to a
community, cultural icons such as ‘Hello Kitty’ and ‘Bakugan’ have no message to
convey and that is the way it should be, because in this way they can fill it with any
content they wish, with what we are or could be. And most importantly: nobody will
solve the world’s problems if they do not do it. Solutions should not be expected from
the state or from politicians: they can and must find them and force them into being.
The power of their communities lie, or could lie, in exactly this: they are capable of
joining forces to achieve their goals as consumers, future employees and activists.
Their culture is not that of confrontation and competition, but of cooperation. They
are responsible for themselves, for their freely-chosen communities and for their
present and future – for which they are prepared to act. They could be Generation R,
the responsible generation, although according to the alphabet (BB, X, Y), the next
generation would have to be Generation Z. Generation R/Z could ensure that – instead
of the Post-Westphalian state – modern corporations (in cooperation with the
communities and in line with their values), as agents with the greatest societal impact,
meet the social challenges of the economic success achieved during the past four
hundred years. When it comes to brands, they are the ones who can no longer be
satisfied by relationships based on economic interest only (price, services, quality), as
the baby boomers were. In the same way, they are not too interested in the pseudoemotional
bonding (dogs, children, love) created by brands either. They desire value
relationships and brand communities where the product or service is born with their
involvement; where the brands bravely declare their values and become loveable
thereby; where belonging to a brand is a value declaration; where the brand is a means
of demonstrating value-based identity and not the symbol of falling prey to
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consumerism. Generation R/Z could deliver the consumer from the compulsion of
consuming. This does not mean a battle against consumption but rather a choice of
values in the interest of valuable consumption – the embodiment of sustainability,
ecological awareness and freedom from oppression in consumerism (Tulgan, 2013;
Klaffke, 2014; Ingold, 2016).
Equality and communication in the stakeholder network
‘Stakeholder democracy’, based on the principles of deliberative democracy, requires
new forms of stakeholder-corporate cooperation. It is not only that the impact and
political structure of operation are not sustainable anymore, but the application of new
principles in communication between stakeholders is required. The new principles of
communication have to be congruent with the principles of stakeholder democracy.
They have to contribute to the free, equal and public dialogue of corporate citizens, to
the institutionalization of the democratic processes of opinion- and will-forming.
Furthermore, corporations have to accept the validity of agreements concluded within
the corporate community in the interest of gaining the necessary legitimacy.
The principles of the new communication practice could be the following:
Sharing. There is considerable information asymmetry in communication between
corporate leaders and stakeholders. Therefore, in order for an equal and dominationfree
communication to prevail, this asymmetry must be reduced. To this end,
structured and comparable information is needed, which is interpretable for
stakeholders both quantitatively and qualitatively, as well as analyses and rankings
which make expert interpretation possible – wherever this may be necessary.
Sustainability reports based on international standards serve just this purpose at
present, in the same way as rankings and analyses based on these reports do. They are
but the minimal pre-condition for the evolution of deliberative spaces: communication
is influenced by numerous other factors, such as institutional processes of legitimation
and decision-making heuristics and biases (Kahneman, 2011).
Commitment. Easing communicational asymmetry leads to dynamic relationships
between corporations and stakeholders. Mutual articulation and representation of
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values and stakes can become the basis for stakeholder relationships in which the
coordination of values and stakes becomes the goal of communicative actions.
Deliberative corporate spaces are to be created. Stakeholder dialogues based on
various process descriptions serve this purpose at present. In the course of these,
stakeholders – through the participation of a mediating third party – get the
opportunity to express their values and interests. Corporate managers define their
expectations towards stakeholders and the business goals they want to achieve with
the help of engaged stakeholders, and then allow these to confront each other and
endeavour to come to a consensus regarding the possibilities of joint action.
Engagement. Stakeholder dialogue and other communication practices aimed at
invoking commitment may lead to stakeholders’ formalized involvement in corporate
operation and decision-making, to the evolution of institutions of stakeholder
democracy, and to the systematic application of the models of co-creation and
competition (competitive cooperation).
New corporate communities in modern liberal democracies need more
cooperative forms of management and it is vital to involve and engage the
stakeholders. A series of crises – the financial crisis in 2008, Brexit, the refugee crisis
in Europe, the rise of populism and the far right, the alt-right movements entering
mainstream politics – offer an opportunity for corporate and political leaders to act in
support of CSR instead of falling to prey to stakeholder ‘revolts’. Their remit is to
politicize their corporations: to turn their business’ into political actors by entering in
public deliberations and collective decision-making with their stakeholders about and
for the provision of public goods including, but not limited to, contributions to
governance, public health, education and infrastructure, enforcing social and
environmental standards, fighting against global warming, corruption, discrimination
and inequality (Scherer et al., 2016). We have already seen what power stakeholders
have and what results the revolts of corporate communities can achieve against
corporations such as Gap, Nike, Shell, Exxon or Arthur Andersen. Brands such as
Timberland, Interface, Seventh Generation, The Body Shop and Ben & Jerry’s, which
started building corporate communities, prove that there is no inherent conflict
between increasing competitiveness, mitigating the impacts of negative externalities,
and the transformation of the political structure of operation, provided the given brand
commits itself to a new type of value-creation. The following chapters will show in
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what areas and with what means the principles of political corporate social
responsibility may be put to use.
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PART II: APPLYING RESPONSIBILITY
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4. RESPONSIBLE CORPORATE MANAGEMENT
The Enron story
At around 2 a.m. on January 25, 2002 J. Clifford Baxter, once the strategic
director of the Enron oil company, woke up in his Texas home, arranged his bed as if
he was still fast asleep under the blankets so that his wife would not notice that he had
got up. He put on a T-shirt and a tracksuit, quietly went down to the garage so as not
to wake up their two children. He got into his Mercedes 500 S and drove off into the
night. Twenty minutes later he stopped the car on Palm Royale Avenue, put his wallet
on the car seat and shot himself in the head with his Magnum. Next to his wallet he
also left a letter addressed to his wife: “I am so sorry for this. I feel I just can't go on.
I've always tried to do the right thing, but where there was once great pride now it's
gone. I love you and the children so much. I just can't be any good to you or myself.
The pain is overwhelming. Please try to forgive me. Cliff” (McLean & Elkind, 2004:
xi). Although this suicide did not put an end to the Enron story, the pistol shot in
Texas has become a tragic milestone in the rise and fall of Enron – and of modern
business operations paved by ethical offences.
J. Clifford Baxter, son of a New York police family, achieved a great deal in
his life. Eight months earlier he had been the strategic director of Enron, the most
trusted man of CEO Jeff Skilling and the man thought to be the brains behind Enron.
Thanks to the share options he had received from Enron, he was a multi-millionaire.
Between 1980 and 1985 he served in the US Airforce and he took his discharge as
captain. Following his army years, he graduated from Columbia University in New
York with an MBA degree. After a short period of working as an investment banker,
he joined Enron in 1991 and gradually progressed to the position of strategic director.
Enron used to be one of the largest and most valuable US corporations.
Fortune magazine awarded it the title of the “most innovative company” for six
consecutive years. Distinguished people like Henry Kissinger or James Baker, the
Chief of Staff of the Reagan and Bush Administration, lobbied for them. Nelson
Mandela, Colin Power, US Secretary of State, Mikhail Gorbachev and Alan
Greenspan, former FED Chairman, all highly valued the Enron Prize awarded to them
for their social participation. Although Greenspan, as Chairman of the FED, could
accept neither the US$10,000 Prize nor the statuette worth US$15,000 USD, in his
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speech he stressed how honoured he felt to be among the awardees. Enron declared
bankruptcy only nineteen days after that award ceremony. At the height of its success
Enron employed twenty thousand people and it was one of the largest companies in
world in the electricity and gas production and distribution sector with some interests
in the paper industry as well. Its annual turnover reached USD 111 billion in 2000,
according to the financial statements of Enron. As one of the world’s most valuable
companies, Enron was included in Fortune magazine’s “Top 100 workplaces” in the
year 2000.
The original company, Northern Natural Gas Company, was founded in 1932
in Omaha, Nebraska. In 1979 the company went through a re-shuffle and, after the
merger of a number of companies with the same industry profile, Enron came into
being, headed by Kenneth Lay, CEO. Later, beside Lay, Jeff Skilling took over the
operative management, and he, together with Andrew Fastow, Vice-President for
finances and Clifford Baxter, made the company grow into one of the world’s largest
corporations in the energy industry – partly by taking advantage of the liberalization
of the energy sector, partly by making use of the latest financial tools. At the zenith of
its success Enron operated close to forty power stations, many tens of thousands of
kilometers of gas- and oil pipelines and a broadband data provider world-wide from
India to South America. The corporation disposed over huge marketing resources and
the price of its shares kept rising.
Enron declared bankruptcy in 2001 after it came to light that the corporation
had manipulated its turnover figures and had enormous debts. Within days, the price
of its shares plummeted to a few cents per share from the earlier 90 dollars. This was
history’s biggest stock exchange bankruptcy, only to be surpassed by WorldCom and
Lehmann Brothers in later years. The collapse of Enron also meant the end of its
auditors, Arthur Andersen, one of the four largest auditing and management
consulting firms in the world. Prior to declaring Enron’s bankruptcy Kenneth Lay,
Clifford Baxter and other top managers of the corporation sold many ten millions of
dollars’ worth shares in an attempt to save their private fortunes.
The most valuable part of the corporation, Northern Natural Gas Company,
was sold to investors from Omaha, who relocated its headquarters to Nebraska. Today
it is a profitably operating member of the Berkshire Hathaway group headed by
Warren Buffet. The leaders of Enron were tried in court. Jeff Skilling is currently
serving his 14-year jail sentence in Alabama, USA. Andrew Fastow was sentenced to
110
six years imprisonment and left jail in 2011. Kenneth Lay was found guilty of fraud
on May 25, 2006. He could have expected a jail sentence of 10-30 years, however he
died of a heart attack on July 5, 2006, before the court could announce its sentence.
The story of Enron is one of the most important sources on business ethics for
textbooks and case-studies. As a consequence of it, a number of important legislative
steps were taken: rules, laws and limitations for corporate management were
introduced. The most important of these was the Sarbanes-Oxley Act of 2002 (“To
protect investors by improving the accuracy and reliability of corporate disclosures
made pursuant to the securities laws, and for other purposes”) which radically
changed the rules of corporate management, controlling and accounting procedures in
the United States. The story of Enron, beyond being a case study in business ethics
and corporate management, is exciting because it is all about the essence of the
modern business. It is about how smart and successful business people become prey
to their own human weaknesses and their financial ambitions; how they are deceived
by irresponsibility, the unconditional pursuance of growth and expansion, their belief
in the opportunities offered by liberalized markets, the legitimacy of success and by
the ruthless and finite risk of the Ponzi schemes played on the stock-exchange. Enron
was a successful company, its leaders were everyday, smart, talented and respected
businessmen. The operation of the corporation affected the lives of millions, often
permanently. The story of the rise and fall of Enron is the story of ruined people:
investors, analysts, accountants, employees and managers. “People didn’t just go to
work for Enron” Skilling said. “It became a part of your life, just as important as your
family. More important than your family. But at least I knew we had this company”
(McLean & Elkind, 2004: xxi). Skilling, when still top manager of the company, left
his wife and children. He went to psychologists and lived on anti-depressants. Baxter
took a long sailing cruise before his suicide. He wanted to relax, contemplate and
forget. On his return to Florida he called his psychologist, telling him that he needed
help. The psychologist could only give him an appointment for February but Baxter
could not wait that long. He should have given his testimony in court in February but
he chose suicide instead.
The Enron story brought to the surface the archetypical symptoms and
problems of business legitimacy: the conflict between stockholders, managers and
other stakeholders, the remuneration of management, as well as questions of corporate
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governance, modern business and responsible operation. These issues will be dealt
with in the rest of this chapter.
The ethical aspects of the Enron story, however, had a continuation after the
bankruptcy. Lynn Brewer, an employee of Enron, published a book in 2004 with the
title: Confessions of an Enron Executive: a Whistleblower’s Story. Following the
publication of her book, Brewer became a celebrated lecturer and hero of ethical
corporate operation. The fee she received for a lecture often exceeded ten thousand
dollars. Her company, the Integrity Institute, acts in the interest of stakeholders by
validating corporate management models and ethical systems as independent experts.
She was awarded numerous international distinctions and the official recognition of
the Nobel Peace Prize Committee. The only problem is that – as was uncovered by an
article in USA Today in October 2007 – Brewer never belonged to the management of
Enron, a large part of the Enron story as described by her is not proven, all or parts of
it are said to be clearly fabricated. Her boss at the time does not recall her ever having
reported him about misuse of power or having made other constructive proposals. She
left Enron because she was dismissed due to an ethical offence – while in London on
company business, she and her friend rented a car at Enron’s expense and travelled
across England for a week, but at the same time the task she was sent to do remained
undone (Farrell, 2007). The Enron story and the story of Brewer proves that in the
business world nothing is what it seems to be, the stakes and values of stakeholders
differ, the legitimacy of the various participants is different and trust, the basis for
cooperation, is fragile as well as person and situation dependent.
The theory of corporate governance
According to modern theory of corporations they are “jointly managed transactions”,
meant to supplement the imperfections of eventual contracts regulating transactions
between parties disposing over different kinds of resources (capital, labour, raw
material, consumer decision, etc.). The premise is that the joint, contract-based
exploitation of these resources – this is the corporation – creates added value
compared to each owner of the different resources utilizing their resources
individually. On the other hand, it is obvious that earlier deals, contracts, agreements
regulating transactions in the course of joint utilization of resources are inevitably
imperfect, since not all possible events that may occur while transacting can be
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foreseen during prior negotiations. In addition, in order to utilize resources in an
optimal way, further investments may often be necessary, notwithstanding the fact
that the conditions of the contract can – to optimize it in view of events occurred – be
renegotiated after investments had already been made or having given resources in
joint use. It may so happen that parties begin to act in a self-interest directed,
opportunistic way and the participants in the stronger position become egoists at the
moment of renegotiation when it comes to distribution of the added benefit created,
channeling the value surplus towards themselves. Should the owners of resources
participating in the joint transaction expect this to happen, they will keep the
availability of their resources and their investments below the optimal level – in order
to minimize risk – thereby endangering effectiveness, value-maximization and
competitiveness.
The corporation can counteract this problem by establishing appropriate
authority position(s): the owners of the resources – generally investors – give
someone a mandate to eliminate the imperfections of prior agreements through their
decisions without renegotiating prior contractual agreements thereby allowing the
control of transactions requiring continuous decision-making, as well as providing the
optimal supply of resources. In this way the company becomes a system based on
special contractual relationships: when events occur which prior agreements are not
capable of handling, the original contract is fulfilled by applying a “residual right of
control”. This gives the owner of such a right the mandate to make decisions in issues
that formerly could not be foreseen and therefore were not regulated in earlier
contracts. Issues are further complicated by the fact that those providing the – mainly
financial – resources, especially in the case of MNCs, are numerous, with individually
small contributions, therefore for them it does not make sense to take part in
supervising the “residual right of control”. Thus, the owners of the resources give the
mandate for exercising the residual right of control to dedicated people involved in
corporate management: they will be the operative leaders of the corporation.
Therefore, due to the large number of those providing the financial resources,
the costs of attention and aspects of effectiveness the title of ownership and
management are divorced from each other in a significant number of corporations.
When the title of ownership and management are divorced from each other, the
‘principal-agent problem’ appears. Within the corporation, the principal-agent
relationship is one where the owner of the resources/shareholder (principal) consigns
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certain people (agents) to provide certain services in their interest, for which they get
the necessary mandate from the principal. On the other hand, if both parties strive for
benefit maximization, there is good reason to assume that the agent will not in every
instance act in the exclusive interest of the principal. The principal can reduce the
risks associated with this attitude by bearing the costs of control. Likewise, they can
motivate the agent by providing additional resources, and they can offset residual loss
stemming from the consequences of the difference between the ideal decisions
expected by the principal and the actual decisions. In other words, it seems reasonable
to assume that the interests of the principal suffer harm, and also that – in order to
minimize such harm – they have to bear significant costs. Should these losses exceed
a certain level, or if they are disproportionately distributed among the various owners
of resources with different stakes and stake-optimizing strategies, the effectiveness
and competitiveness of the corporation may suffer damage (Jensen & Meckling,
1976).
Modern corporations do not only have to deal with the limitations of
contractual relationships. The legitimacy of corporate operation (i.e. individuals enter
into contractual relationships in the interest of accumulating personal wealth, they
hire agents to represent their interests and in connection with this they set up
motivational tools, they deal with risks, and they submit their resources to a common
management in the interest of creating surplus value to secure personal benefits for
themselves) does in itself not have any social acceptance and support. Corporations
can expect social acceptance and support if they operate according to prevailing
societal norms and expectations, and their goals are reconcilable with social goals and
visions in a broader sense. In other words, the legitimacy of corporations is dynamic
and temporary: to uphold the ‘social licence to operate’ corporations must make an
autonomous effort in the interest of complying with societal norms and expectations.
It is because of these theoretical premises that the issues of corporate governance
reach beyond a simple principal-agent relationship, requiring structures which ensure
that the interests of the agents do not significantly differ from those of the principal(s)
and that the operation of the corporation is in line with the norms of society in the
interest of attaining legitimacy and obtaining their licence to operate.
Corporate governance is the sum total of processes, customs, incentives,
culture, institutions and practices that influence and determine how the corporation is
directed, managed and controlled in the interest of producing goods and services
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effectively (Turnbull, 1997). According to another definition, taking the principalagent
problem as point of departure, corporate management is “a complex set of
constraints that shape the ex-post bargaining over the quasi-rents generated in the
course of a relationship” (Zingales, 1997). The definition of the OECD is the
following: “Corporate governance is one key element in improving economic
efficiency and growth as well as enhancing investor confidence. Corporate
governance involves a set of relationships between a company’s management, its
board, its shareholders and other stakeholders. Corporate governance also provides
the structure through which the objectives of the company are set, and the means of
attaining those objectives and monitoring performance are determined. Good
corporate governance should provide proper incentives for the board and management
to pursue objectives that are in the interests of the company and its shareholders and
should facilitate effective monitoring“ (OECD, 2004). As we have seen, the basic
issue of corporate management is how corporate operation can be optimized in the
web of imperfect contracts and “residual rights”, minimizing necessary agents’ costs
while attaining and sustaining social legitimacy and cooperation with stakeholders.
Models of corporate governance
Authors investigating issues of corporate governance take two different points of
departure. The narrow approach takes the interests of the stockholders of the
corporation as a starting point and tries to find an answer to the question: what
customs, institutions and rules must be introduced in the interest of benefit
maximization and competitiveness in order to be able to fully enforce the fiduciary
liability of manager-agents while minimizing agent costs paid by the stockholderprincipal?
This train of thought sees the corporation as machinery, where the task of
management is – through utilization of the resources provided by the stockholderinvestor
– the efficient production of goods and services and the organization of other
stakeholders participating in the process, while effectively limiting the assertion of
self-interest by the agents. The point of departure of this approach is the stake of the
stockholders and it sees as goal the sustainable maximization of the ‘quasi-rent’ due
to the stockholders from the value surplus generated for them, while at the same time
complying with the norms of society in the interest of attaining and retaining macro-
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level social legitimacy. This is called the stockholder or fiduciary view of corporate
governance.
The broad approach of corporate governance takes the social norms, values
and interests represented by the stakeholders as point of departure and proposes that
all stakeholders put their resource-investment at risk, therefore – in proportion to the
risk assumed and resource investment made – they also have a legitimate claim on the
value surplus created. As a consequence, this approach moves away from the
principal-agent model toward the team-cooperation problem: the task of corporate
governance will be the development of effective cooperation, negotiation,
coordination and conflict management models which will ensure the maximization of
common profit and the proportionate distribution of it among the providers of the
resources. Sir Adrian Cadbury, in a speech delivered at the Global Corporate
Management Forum, said that: “Corporate governance is concerned with holding the
balance between economic and social goals and between individual and communal
goals. The governance framework is there to encourage the efficient use of resources
and equally to require accountability for the stewardship of those resources. The aim
is to align as nearly as possible the interests of individuals, corporations, and society”
(Cadbury, 2000, p. vi.). According to this model, the long-term success of the
corporation does not mean the maximization of stockholder profits over a long period
of time but rather the fullest possible realization of the part-interests of stakeholders
and the distribution of the value surplus in a proportion that ensures the sustained
commitment of stakeholders necessary for maintaining their cooperation (Ayuso &
Argandoňa, 2007). This may be called the stakeholder approach to corporate
governance.
Departing from these two basic concepts, a background paper for the OECD
recommendations on corporate control differentiates between four models of
corporate management: the simple finance model, the stewardship model, the
stakeholder model and the political model (Hawley & Williams, 1996). The simple
finance model is the basic case of the principal-agent problem. Here the task of
corporate management is – as shown earlier – to adjust the optimum agent costs and
the costs of the risks associated with authority transfer: the determination of the costs
of supervision/control of the agents, of binding them to the principal, and of residual
losses proportionate to the expected profits. This model is the rudimentary form of
corporate governance. The managers of the corporation always retain sufficient
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authority to have the possibility – acting out self-interest – not to want or be able to
further optimize the competiveness and value-creating ability of the corporation: a
significant part of stakeholders is not involved in any strategic value-creating process,
they participate in the process only by making their resources available. According to
this model, the task of corporate management is both control and supervision, the
prevention of assertion of self-interests and minimizing the principal-agent conflict.
Corporate governance must become independent of daily management: the operative
responsibility of the managers is ensured by controlling organizations independent
from them. The best example for the simple finance model of corporate management
is the operation of the peripheral local subsidiaries of global corporations. Taking
advantage of the low income level of the economy as a whole, these corporations
determine the costs of binding those participating in the management of the
corporation to the principal (management remuneration and benefits)
disproportionately (compared to local pay) high and accept the similarly high residual
losses (corruption, inefficiency and ‘constitutional costs’). Local top managers
receiving much higher salaries than their market value – compared to similar
positions in local companies, government servants and entrepreneurs – would fully
exert their fiduciary responsibility, to a large degree at the cost of other stakeholders
(employees, suppliers and consumers), in order to comply with the profit maximizing
expectations of their stockholders. Thus, in reality, the agent becomes an ‘exploiting
supervisor’ of the stakeholders. The frail social norms, weak interest-protecting
organizations and the inability of stakeholder representation in these countries do not
make it possible for stakeholder interests to be built into the business operation and
for stakeholders to participate in the value-creating process in a strategic way. This
corporate management model follows the model of the ‘antidemocratic corporation’
as described in the introduction of this book. One of the more extreme examples to
this mode of operation is where discretionary stakeholders, having social legitimacy
but neither urgency nor the power to assert any possible claims (Carroll, 1991), get
involved through ad hoc, sporadic charity and environmental protection programmes
and cooperation, in the interest of assisting the company upholding the appearance of
social legitimacy, this maintaining its licence to operate.
Unlike the simple finance model that starts out from limiting the egoistic selfinterest
of agents, the stewardship model of corporate governance presumes that the
agent/manager is not simply motivated by material self-interest but by the full
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exploitation of the values inherent in cooperation and common success. The steward –
although he is also a rational decision-maker – is not interested in individual profit but
rather in the results of community cooperation: thus the stake of the
caretaker/manager coincides with maximizing the wealth of the principal. The main
representatives of the theory, Donaldson and Davis, put it as follows: “the executive
manager, under this theory, far from being an opportunistic shirker, essentially wants
to do a good job, to be a good steward of the corporate assets. Thus, stewardship
theory holds that there is no inherent, general problem of executive motivation. Given
the absence of an inner motivational problem among executives, there is the question
of how far executives can achieve the good corporate performance to which they
aspire. Thus, stewardship theory holds that performance variations arise from whether
the structural situation in which the executive is located facilitates effective action by
the executive. The issue becomes whether or not the organization structure helps the
executive to formulate and implement plans for high corporate performance”
(Donaldson & Davis, 1991, p. 51). The agent model presumes an inherent conflict
between the interests of the principal and the agent, therefore the task of corporate
management is to reduce such conflicts and to minimize the costs associated with it.
The steward model presumes that the interests of the principal and the steward
coincide, therefore the task of corporate governance is to facilitate a best possible
cooperation: the coordination of achieving the common goals should be as effective
as possible and the boosting of the steward’s motivation as successful as possible. The
steward model also presumes that the manager values internal motivations, mutuality,
goal-orientation, growth, duty and success higher than external, material motivations
(Donaldson & Davis, 1991; 1993). As a result, the costs of controlling and binding the
manager to the principal can be reduced significantly and the aim of investments
relating to control is mainly to increase the effectiveness of cooperation and the
organizational motivational structures in the hope of common profits. Here the aim is
not so much the setting up of controlling bodies independent from the managers, but
much rather that the managers become participants in the long-term success of the
corporation, seeing it as their own success, going beyond being part of the daily
management of the corporation. Therefore, this model does not support the
establishment of independent strategic controlling bodies but rather that the
responsibility of management should manifest itself in a not only short-term but also
long-term institutional framework. This model backs the heterogeneous personal
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composition of the board and management and the participation of management in
controlling and strategic bodies. While the point of departure of the model is still the
fiduciary responsibility of the managers towards the stockholders, it strengthens
cooperation with stakeholders and joint success in the whole organization. This model
fits in with the level of the ‘organizational-regulatory democracy’ level described in
the introduction: leaders carrying fiduciary responsibility, who are success-oriented
and looking for legitimacy, try to comply with stakeholder expectations enforced by
regulators and legitimate political institutions – adequacy, reporting, consumer
protection and environmental rules – yet they do not do this in a systematic and
strategic fashion. The stakes and values of only those stakeholders who are necessary
for economic value maximization appear on the level of strategic decision-making,
however managers would not shy away from business activities that turn
corporations, to a limited extent, into political actors. Corporations in this model may
engage in public deliberation and the potential provision of some social goods, but
ecological and societal values are only relevant in as much as they support economic
value creation and consequently the economic success of the managers of the
corporation. Thus, the corporation does not display any (explicit) aim of contributing
to social welfare beyond economic interests (Scherer et al., 2016).
The stakeholder model moves away from fiduciary responsibility towards
stakeholder responsibility and presumes that the goal of the corporation as ‘jointly
managed transactions’ is the realization of the interests of all stakeholders and the
maximization of the various benefits for them stemming from making their resources
available. Margaret Blair (1995b) defines corporate governance in this broader
context and she argues that corporate governance should be considered as the set of
institutional solutions for governing the relationships among all stakeholders that
contribute firm specific assets. This model requires corporate management structures
and solutions in which representatives of different stakeholders play a role and which
even make it possible for the relevant stakeholders to get stockholder rights or real
ownership in the interest of collective corporate success. This model supports joint
management structures as well as cooperative and associative as opposed to market
and hierarchy based organizational management models (Turnbull, 2000). This is the
operative model underlying inter-corporation stakeholder democracy. Here the leaders
are inclined to participate in and accept the institutions and modes of operation for
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soft legislation, recommendations, norm determination and joint regulation which
were set up together with the stakeholders and where they, even as directors, are
active participants in multi-stakeholder organizations, be it international or national.
In this governance model the buds of the institutions of democratic stakeholder
politicizing appear or could appear in the same way as some form of the stakeholder
approach is realized at corporations participating in such cooperation and in strategic
decision-making. In this model corporate engagements are directed to effectively and
legitimately resolve public issues, provide public goods ad contribute to society with
the explicit aim of enhancing social welfare beyond economic motivations (Scherer et
al, 2016).
The political model of corporate governance recognizes “that the allocation of
corporate power, privileges and profits between owners, managers and other
stakeholders is determined by how governments favour their various constituencies”
(Turnbull, 1997 p. 191) as well as that organizational management and influence
allocation is not of a market-economic but of political nature within the corporation.
The basis of the theory is that the corporation is part of the national and global socialeconomic
ecosystem, therefore the coordination of the various stakeholder interests
must reach beyond the operating systems within the corporation. In this theory, the
corporations are a determining part of a complex socio-political matrix in which it is
the task of the various forms of soft and hard legislation reaching beyond the
boundaries of the corporation to ensure the optimal distribution of the complex
network of stakes, values and influences. Joseph Roe (2003) calls this the
precondition for the peace necessary for economic success. It is the duty of the
representatives of interest and value relationships reaching beyond the corporation
and of their institutions to determine what this distribution should optimally look like.
In this model, the goal and task of corporate management is no longer only to
maximize corporate value surplus, it is not satisfied by corporations complying with
social norms and expectations, but it expects corporations to operate as efficient
resource-utilizing partnerships in the interest of the whole society, involving every
active and passive stakeholder and cooperating with them.
This model comes close the definition of political CSR used by Frynas &
Stephens (2015) as corporations having “intended or unintended political impacts or
where intended or unintended political impacts” (p. 485) on the corporation exist.
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This definition utilizes the CPA approach of Lawton et al. (2013). Freynas &
Stephens approach to political CSR, however, is criticized by Scherer (2017) claiming
that the concept of ‘political’ is unclear as is the substantiating claim of this being a
‘sphere of activity that is distinctive from business activity’. In this definition, as
Scherer (2017) emphasizes, concern for public interest is largely excluded, the
negative implications that CPA practice may hold for society are not considered and
only political strategies that enhance corporate profits are explored. The criticism also
claims, rightly in my view, that while defining political CSR in CPA terms aims at
dismissing the normative standpoint to political CSR, they actually follow a hidden
normative agenda of profit maximization, potentially at the expense of being
detrimental to society (Scherer, 2017). A political model of corporate governance,
following political CSR principles, may work effectively if the power allocation
within the corporation is adjusted to the stakeholder model, thus applying modes of
operation based on equality, power division and cooperation instead of on hierarchical
models of governance.
Political institutions may influence corporate governance in a number of ways.
Regulation may stipulate the form and extent of ownership, the form, size and modes
of remuneration; it can regulate relationships within the corporation, just as it can
determine compulsory management structures and internal regulations. If the political
model is evaluated according to the aspects of the principal-agent model, political
entities – international and national governmental and non-governmental political
institutions – are able to reduce or increase agent-related principal costs (through
taxes, salary limits, preferred forms of payment, limiting rentierism and corruption) in
the interests of upholding certain social values and goals, or they can regulate
principal-agent relationships in other ways (voting limitations and securing special
ownership rights). Furthermore, through political deliberative and collective decision
processes, co-created soft or hard regulatory practices can influence or prescribe the
participation of certain stakeholder groups in management (collective rights, works
committees, employee supervision and controlling rights). In addition, the political
model can also help the various stakeholders not only in being able to put in their
claims regarding resource allocation, but also in their making use of other political
means of pressure within the corporation in the interests of realizing their stakeholder
interests. This model means or may mean the evolution of more complex management
structures, which may eventually lead to the liberalization, the coming into being of
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‘stakeholder democracy’ and the enforcement of ‘stakeholder sovereignty’ in the
operation and management of the corporation. This is the level of ‘corporate
stakeholder democracy’ when stakeholders become full corporate citizens, basic
institutions of deliberative stakeholder democracy come into being and corporate
strategic decision-making happens along the lines of the principles and operation of
democracies. This also brings with it changes in legitimacy in the structures of
corporate management, since ownership of resources will no longer be the only
legitimate source of participation in management but numerous other factors of
legitimacy (development of human capital, support of learning society) and
stakeholder goals (wellbeing, creating shared value) also become possible (Porter &
Kramer, 2011; Stiglitz, 2014).
Institutional ethical issues
As we have seen, the separation of the right to ownership and to management brings
numerous theoretical problems to the surface, which manifest themselves in different
management models. As corporate management is of a practical nature, the problems
also appear in specific forms of organization and models of operation. When different
approaches to the principal-agent model are discussed, there are basically three areas
around which the practical questions of separating ownership and management
revolve. These are agent control/supervision, agent bonding and residual costs.
Numerous organizational problems can be traced in all three areas.
Independent governing bodies
The issue of control/supervision manifests itself in the introduction of independent
boards of directors. In the interests of limiting the room for maneuvering by selfinterest
driven managers, and of optimizing the provision of resources, stockholders
set up controlling and directing bodies that are not involved in daily management.
However, independence has become a goal that has often proved to be difficult to put
into practice. While appointing outside members – who are as such, independent of
the management of the corporation – to the board of directors seems easy to realize,
attaining independence is by far not that simple. Theoretical independence often does
not go hand in hand with operative independence: the meeting schedule of the board
and the structure of disseminating information is determined by the operative
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managers of the corporation: they are the ones who in most cases have control over
the salaries and other forms and modes of remuneration of the members of the board
and they have the final say in who can participate and in which committee of the
board. This being the case, it is possible to influence the seemingly independent board
members and reduce the effectiveness of their controlling function. In the principalagent
relationship, managing the ‘independent board of directors’, especially in the
case of large corporations, has become a task on its own, through which the costs of
participation of the stockholders again increases the marginal costs of control, or the
participation of small stockholders in managing the board is made impossible.
Similarly, the theoretically independent members of the board – those who have real
business experience and are therefore able to exert effective control – are in contact
with the managers in charge of the corporation in numerous ways due to the nature of
the market(s), and they are dependent on them. The smaller the market, the more
often the actors of the market are interconnected through numerous visible and
invisible threads. Mapping these threads and cutting them once again results in
increased costs to the stockholders. In order to achieve true change in this connection,
a transformation must take place in the institutional order and hierarchy of
management, as well as in the mode of legitimacy of the independent management
bodies. Strategic stakeholder engagement in governance can come about if the
independent governing bodies rest on true, widely spread and democratic stakeholder
legitimacy and involvement.
Management remuneration
Agent bonding problems manifest themselves in management remuneration. In the
case of large corporations, the remuneration of top management has for long been a
fundamental question of business ethics. In 2006, the year before the crisis, the ratio
of management remuneration to average market regulated income was 411:1 in the
United States. And this did not change significantly in the first year of the crisis: it
dropped to 344-fold. The most dramatic ratios were to be observed in the
remuneration of financial investment managers: in 2008, the top fifty best paid
financial investment bankers earned $588 million per annum each, 19,000 times as
much as the typical US worker (Executive Excess Research, 2005, 2008). According
to an international survey conducted by Kelly Services, an international human
resources company, 57% of the employees were of the opinion that managers earn too
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much and their income is not commensurate with their performance. The
extraordinary management earnings in themselves pinpoint the failure of corporate
governance regulation.
The sheer volume of managerial salaries and other benefits is dramatic enough
but especially so in the light of how it compares to the performance of managers.
Management income grows at a faster rate than corporate profits and that they do not
drop even if the corporation or an industry in a given period performs below
expectations. Research by psychologists studying business decisions confirms that it
is most seldom that there is any correlation between measurable corporate
performance and the performance of management. Management performance – just
like success in general – is influenced by a number of illusions, heuristics and biases
which radically distort the correlation between performance and how well-founded
action is. Optimism bias, as when wanting to achieve something the real chance of
failure is systematically underestimated; the illusion of validity as when interrelated or
preconception-based information is taken as independent or proven; or the return to
average – the phenomenon where performance over a longer period of time
converges to the average are all such cognitive biases. As most assumptions and
prognoses on which decisions are based cannot be proved, and as decision-makers
tend to make their decisions based on superficial or limited information, biases or
simple errors, it seems to be obvious that management performance is mainly
influenced by luck (Dorff, 2009). Overall, research shows that while performance is
overwhelmingly influenced by sheer luck, decision-makers often see their predictions
of the future or the information and assumptions underlying their decisions as verified
(Kahneman, 2011). While from the principal-agent relationship it would follow that
the limitation of the self-interest driven managerial behaviour and the determination
of the optimum ‘bonding cost’ could best be done by linking management
remuneration to performance, based on the above income paid to management is,
simply, pay for luck.
This does not only happen because it is questionable how well-founded
management decisions are, but also because the tools for measuring performance are
not available. Due to the nature and complexity of the market and the limited
possibilities of influencing it, the observable elements of corporate performance do
not change, increase or decrease because of management either but rather because of
factors independent of the corporation. As such the salaries of managers linked to
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corporate performance are in reality: ‘payment for luck’. On the other hand, the extent
of ‘payment for luck’ can be reduced by appropriate corporate governance tools,
primarily by appointing independent board members not attached to the managers. In
better managed corporations the salaries of the managers are lower and they are less
dependent on luck (Bertrand & Mullainathan, 2001).
Transparency
Residual costs are influenced by numerous factors. As was shown earlier, the
substantiation of management decisions and their prognoses for the future are
dubious; managerial performance is luck-based. Accordingly, managers often make
wrong decisions: errors are enhanced by optimism bias or over-confidence caused by
the illusion of validity – experts/managers often overestimate their own expertise
while it is exactly for their firm determination that the market rewards them, by
selecting and holding them in great esteem. Thus it is very probable that there would
be a significant difference of opinion between the non-entrepreneur and non-expert
investor and the manager continuously falling prey to optimism bias and the illusion
of validity. This is the basis of the residual costs to be carried by the principal. On the
corporate level, it can be counterbalanced if strategic decisions are made by the board
of directors consisting of independent stakeholder members, or if the validation is
done by those who have an overview of the operation of the corporation, even from a
societal perspective. At the same time, exactly because the salaries of managers are
linked to corporate performance, corporate managers will be interested in increasing
corporate performance by using non-market-conform tools and by keeping such tools
underlying corporate performance hidden from members of the independent corporate
institutions. Such non-market-conform tools could be corruption and the extortion of
certain stakeholders. Corruption may not only refer to state rent seekers. It is also
corruption when business success is achieved by catering to the personal needs of the
buyer’s decision-maker in a way separate from corporate interests, for example, or by
any form of bribery (involving but not limited to backdoor payments based on nontransparent
systems of incentives), rather than by competitiveness, competition and
excellence. Extortion of stakeholders can also take a number of forms. One of these is
when the buyer, through the abuse of market power, pushes down the price in the
extreme. This forces the supplier to reduce the actual costs by cutting the offered price
by certain cost elements, such as taxes and other dues, thus channeling negative
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externalities in the direction of certain groups of stakeholders. Examples for this are
outsourcing, or employees paid as quasi-entrepreneurs against invoices submitted by
them, a practice common in post-transition Eastern European countries. Increasing
transparency, and making the income of management and the stakes of the
corporation in the supply chain fully public could help reduce ‘residual costs’.
Conscious illegal pay-outs and the extortion of stakeholders could be stopped by full
dissemination of financial and non-financial information, in the case of large
corporations in a compulsory manner, in a standard structure and in a form that is
transparent and comprehensible for stakeholders. The reduction of information
deficiency and the increase of transparency through compulsory reporting will be
discussed below in connection with the tools for stakeholder management, under
Sustainability reports.
Tools of corporate governance
The toolkit of corporate governance looks for more than just an answer to problems
stemming from the principal-agent relationship. Often the interests of stakeholders
must be upheld against specific, disadvantageous market processes.
Independent members of the board and committees have already been touched
upon. The two most important committees of the board are the audit and the
remuneration committees. The audit committee is the board of independent, nonexecutive
directors who select (propose to the Board for selection by the
shareholders) an independent auditor to review a financial progress report. This
committee also reviews, audits and evaluates the corporation's and its officers'
financial and related activities and risks. In two-tier Board systems the Audit
Committee is a committee of the Supervisory Board. However, in jurisdictions where
the Supervisory Board powers are limited, a subcommittee of the Board of Directors
(that includes non-executive members) also assumes and takes responsibility for
similar financial and risk management responsibilities as the Supervisory Board’s
Audit Committee (AmCham, 2011). The remuneration committee’s purpose and
responsibility is to review and approve Chief Executive Officer and other key
executives’ compensation, evaluate their performance as well as to determine and
approve their remuneration levels. This committee makes recommendations on
incentives such as equity-based plans (subject to Board approval) (AmCham, 2011).
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These committees support and help the management of the board of directors in order
that the managers disposing over corporate resources do not significantly influence
the independent board. The internal audit serves to supervise management and the
‘reduction of residual costs’. The task of the internal audit is the ongoing appraisal of
the governance, risk management and internal control processes of a company's
operations. Internal audit can be executed by disciplined and specialized employees of
a firm, independent from management processes, or by external service providers
(outsourcing). Internal audit provides the management and the board both assurance
of compliance and consulting regarding critical business decisions (AmCham, 2011).
The rules limiting the self-interest driven actions of managers and those
establishing liabilities of managers beyond legislative regulations fit in with the order
of corporate governance. Such rules are the ones limiting ‘insider trading’ and those
breaking down the limited liability of managers. Insider trading is understood in terms
of direct or indirect dealing in financial instruments by any person (insider) who
possesses material, non-public (insider) information in relation to shares, securities
and other financial instruments, and the encouragement of others to carry out such
deals, as well as the disclosure of insider information to any other person, before its
publication. In a broader sense it refers to unethically acting on non-public
information for personal gain (AmCham, 2011). The purpose of breaking down
limited liability is to abolish protection ensuing from the limited liability if the
damage or loss occurred because of an ethical offence. Accordingly, the CEO or
stockholder of the corporation can be made responsible for liabilities of the
corporation even if the law secures them limited liability.
The limitations stemming from adhering to market processes also fit in with
the system of corporate governance. These are the application of the ‘poison pill’, the
‘white knight’ or the ‘golden parachute’. These limitations serve the purpose that
managers should not want to support or oppose corporate mergers and buy-outs which
are not in the interests of stockholders or stakeholders. The ‘poison pill’ makes it
possible to prevent someone from taking over control of the corporation by buying up
a certain number of shares contrary to the interests of the stakeholders. Existing
shareholders – under preferential conditions – get the chance to purchase further
shares, thereby reducing the percentage stake of the new buyer and preventing the
taking over of control or making it disproportionately expensive. Thus, the ‘poison
pill’ makes it impossible or at least very dangerous to ‘swallow’. The ‘white knight’
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refers to a corporation that steps in and buys up the target company in a ‘friendly
way’ in the event of a third party wanting to acquire it in a hostile manner. The
‘golden parachute’ is a tool that provides managers with the guarantee of a substantial
severance pay in the event that a change in the control of the corporation should take
place, in order for them not to hinder a merger when it serves the interest of the
stakeholders. These limitations create political institutional hierarchies which provide
institutionalized systems for managing inevitable stakeholder conflicts, but are
typically not democratic and represent the interests of specific stakeholders, and do
not create modes of deliberative and democratic will-forming applicable for
mitigating the interests of all stakeholders.
Regulating corporate governance
One of the most important regulating steps taken concerning corporations listed on
United States stock exchanges and operating globally is the Sarbanes-Oxley Act of
2002, also known as "Public Company Accounting Reform and Investor Protection
Act" passed by the 107th
US Congress. The purpose of the Act is to increase the
financial transparency and reliability of the reports of corporations listed on US stock
exchanges and to make their operation more controllable. The Act was submitted for
adoption by Senator Paul Sarbanes and Congressman Michael Oxley. It has an
influence on a number of areas of corporate governance and accounting procedures.
Among other things, the Act provides for stricter control of and limitations to the
rights of managers, it increases the accountability of corporate leaders (e.g. it
prescribes the re-payment of premiums and sets much more detailed rules for
conflicts of interest), strengthens the independence of the members of supervisory
boards and audit committees, and regulates procedures of public accounting practices
more strictly. The Act also prescribes a much more detailed and circumspect reporting
obligation for corporations, it makes the rules applicable to auditing firms
significantly stricter, it increases the publicity and transparency of corporations,
introduces stricter criminal liability sanctions for ethical offences, strengthens the
rules and institutions of internal control, creates official institutions for whistleblowing.
In addition, the CEO and CFO are responsible for keeping to the rules of the
controlling system and for taking the necessary precautionary steps, and their
declarations to this effect must be attached to the balance sheet. The purpose of the
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institutions for whistle-blowing is to guarantee the safety and stability of the
international financial markets and to fight corruption, banking and financial crimes
and insider trading. A further aspect of the regulation is the modified rules relating to
the composition of the boards of directors.
Legislation and recommendations support an increase in the proportion of the
different ethnic, sexual and cultural groups on the boards. Similarly, it is necessary to
strengthen the participation of the different stakeholder groups on corporate boards
and in their committees. Corporate boards today consist of white men mainly: in the
countries of the European Union over ninety percent of the members of the boards of
directors of large corporations are men. Therefore the European Committee issued a
directive in 2012 according to which the proportion of women on the boards of large
corporations (companies employing more than 250 people and/or with an annual
turnover exceeding 50 million Euros) must be increased to forty percent by 2020.
These corporate governance structures, modes and rules increase the
participation and diversity of stakeholders in the strategic governance of the
corporation but they do not improve the circumstances of stakeholder democracy.
Certain stakeholder groups are put in a better position than they were in earlier and
the general vulnerability of stakeholders is reduced by them, but overall they do not
create deliberative institutions based on equality which could make obtaining and
maintaining social legitimacy possible through democratic stakeholder structures, just
as they do not facilitate the involvement of stakeholders in the process of value
creation.
Institutions of stakeholder democracy
As discussed in the previous chapter, corporate politics complying with the challenges
and social structures of the twenty-first century have shifted corporate operations in
the direction of stakeholder democracy. It is the standpoint of this book that processes
institutionalized for free and equal corporate citizens of the deliberative corporate
public political space and entrenched in a system checks and balances may be able to
ease the negative impacts and harmful economic, ecological and cultural
consequences of corporate operation. For this, a political operational structure is
required which ensures that the power sphere necessary for enforcing discursive
democracy is based on equality; in which the corporation does not participate
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claiming independent sovereignty and legitimacy from outside the deliberative space;
and where the equality of stakeholders is guaranteed in terms of basic rights. Guiding
principles of institutions of stakeholder democracy are similar to those of a general
democracy; they ensure the separation of power inside the corporation, guaranteeing
basic rights, the democratic participation and representation of stakeholders, and the
principle of one stakeholder one vote. In the past few years, numerous steps have
been taken in the area of corporate governance towards increasing the transparency of
decision making for the stakeholders, the independence and accountability of decision
makers, and stakeholder engagement in the process of decision-making. Regulations
of the past years – especially the rules relating to female members of the boards –
significantly increase the diversity of the governing bodies. However, this is not
enough. A new model of corporate operation is needed, allowing more room for
stakeholder participation and representation in corporate decision-making processes,
i.e. the creation of governing structures and institutions must be targeted, allowing for
the engagement of different internal and external, active and passive stakeholder
groups and their political representation. It is also necessary that the selection
processes of the governing bodies become democratic, different individual and
organizational stakeholders be able to participate in the selection process, and that it
be possible for them under given circumstances to support members of the governing
bodies in the selection and decision-making process with their votes. As opposed to
the financial model based on the principal-agent relationship, it is necessary to
strengthen the stewardship role of corporate decision makers. To this end,
organizations may adopt processes to support governance based on cooperation,
equality and mutuality. Supra-national organizations as well as global multistakeholder
initiatives may play a significant role in the development of the corporate
institutions of stakeholder democracy.
As a result of the research of Piketty (2014) and others, which pinpoint the
structural disproportionality between the return on capital and the growth of labour
based income, and in the interest of lessening the detrimental effects on society and
quality of life stemming from the inequality caused by this, the operation of the
market must be regulated in a number of ways (Piketty, 2014, Stiglitz, 2012). The
global tax proposed by Piketty is only one of the possibilities. It is important to put
limits on management income, and transparency must be increased. The present
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conceptualization of corporations no longer complies with the findings of the analyses
of the role played by the various forms of capital (financial, human and ecological) in
the twenty-first century. Therefore a radical re-think of the operation of organizations
using such capital has become necessary. In the words of Scherer and Palazzo (2011),
the traditional concept of the corporation is “within and between those stable and
democratic Western capitalist countries where governments are in principle willing
and able to deal with externalities and to tame and frame homo oeconomicus through
strong legal frameworks. […] The primacy of property rights, the belief in selfregulative
markets, and the assumption that the pursuit of private interests
automatically promotes the common good are premises that need to be reconsidered
under the post-national constellation. The theory of the firm needs to be developed
further for managerial decision-making in extremely difficult regulatory contexts” (p.
40).
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5. RESPONSIBLE OPERATION
The Wal-Mart case
On January 12, 2006 the phone rang in the office of Jeff Immelt, CEO of GE. It was
Lee Scott, CEO of Wal-Mart at the other end of the line. It seldom happens that the
CEO of a global corporation that is the buyer consults with the CEO of the supplier.
This is what happened this time. As a result of this discussion, a deal was concluded
that fundamentally changed home energy consumption in the United States. But the
story did not start with this telephone call.
In August 2005 Katrina, one of the most devastating hurricanes in the history
of the United States, swept through the country’s southern states causing the death of
1833 people. No other hurricane had claimed this many lives since the 1928
Okeechobee hurricane; in addition Katrina caused 100 billion dollars’ worth of
damage in property and buildings. In a strategic meeting in the autumn of 2005, the
CEO of Wal-Mart proposed that Wal-Mart should help the victims. “Not in the form
of charity but by giving them more for their money” - he said. Following this meeting
Chuck Kerby, Vice-President for procurement (hardware and paints), convened a
meeting with his senior procurement staff, posing the question of what they should
do. There had been earlier discussions about how energy costs could be reduced. At
the time they were only thinking in terms of their stores. Someone put forward the
suggestion that the light bulbs in the ceiling-ventilators in the shops could be changed.
There are four bulbs in each ventilator and there are ten different ventilators exhibited
in each store on average. This means forty bulbs in each of the 3230 stores. A quick
calculation showed that this step could save Wal-Mart 6 million dollars per annum on
energy costs. They could not believe it. The figures were recalculated, over and over
again. Every time the same result came up. After the CEO meeting, Kerby did what
he always did when they were contemplating offering additional benefits to their
customers: he went shopping in a Wal-Mart store.
The vice-president had started his career at Wal-Mart as a shopping cart
collector in Missouri twenty-three years earlier. He knew everything about the
company. On this occasion he only bought products used when refurbishing an
apartment, were necessary for quickly fixing something, or making the
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apartment/house more livable. Back at the office he and his staff went through each
item one by one and tried to think of ways of reducing costs to their customers.
Among the products there was a small package: three GE energy saving light bulbs at
a price of $9.58. For the price of this single energy saving bulb, twelve old-fashioned
60 Watt bulbs could be bought. When Kerby picked up the box everybody
remembered the 6 million dollar meeting. Diana Lindsay, responsible for buying light
bulbs, immediately started negotiations and after two weeks she managed to convince
GE to give a 21% discount in order for the two companies to jointly help the victims
of Katrina. Although this was still the price of 10 traditional bulbs, the price drop
could be felt by the customers, too.
Energy saving bulbs were first put on the market on March 28, 1980. The
product has gone through many changes since then: today their usage value is the
same as that of traditional bulbs. The changes extend to almost every aspect: its
appearance, light intensity, the colour of the light and the mode of operation. Yet two
things have not changed: to achieve the same light intensity as with traditional bulbs,
75-80 % less energy is needed, and it has a life span eight to ten times that of
traditional bulbs. If only one bulb would be changed in each of the 100 million
households in the US it would mean an energy saving equal to the annual energy
consumption of 1,5 million people. On a side note, there are between fifty and a
hundred light bulbs in each US household. The conclusion was clear for Wal-Mart:
this was a change that could only bring benefits. Wal-Mart drew up a plan and made it
its goal to sell one hundred million energy saving light bulbs annually. For this,
however, Wal-Mart alone was not enough. Sixty percent of the light bulb market was
in the hands of GE and for Wal-Mart to start their energy saving bulb revolution the
cooperation of the supplier was also needed. Factories had to be redesigned,
production structures changed, innovation and – taking the new quantities into
account – a new pricing structure were needed.
GE had launched their Ecomagination program years earlier. The purpose of
this program was to produce more useful and ecologically less harmful products
through product development and innovation. The plan of Wal-Mart fitted in exactly
with the Ecomagination program. Even if, as a consequence, factories had to be
closed down and the manufacturing of traditional bulbs had to be stopped. Andrew
Ruben, Vice-President for sustainability said after the launch of the program: “We
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realize that we can influence big things. Energy usage. Efficiency. Dependence on
foreign oil. And we realized that if we’re really going to move things, it’s not about
our direct footprint—our stores, our offices—it's about our supply chain and our
customers. So this is about selling lightbulbs, but it’s far bigger. This has huge
implications for the world” (Fishman, 2006). Today a traditional bulb costs little more
than one dollar in Wal-Mart (Osram, 4-pack, $4.95), while the energy saving bulbs
cost not quite double this, $2.44 (GE, 4-pack, $8.88). This is a dramatic offer: double
the price, eighty percent energy saving and a tenfold life span.
This is why the phone rang in the office of Jeff Immelt.
Ecological responsibility
Although the literature on ecological responsibility, as part of corporate social
responsibility, is most extensive and corporate attention to the environment is the
most accepted and most widely used tool in relation to business and ethical behaviour
– both in terms of regulation and of everyday voluntary practice – the literature on the
theory of ecological responsibility is surprisingly uncertain. As discussed earlier, from
the 1960s, mainly under the influence of the ecological catastrophes caused by
corporations, the conviction started to spread that corporations must bear special
responsibility towards the environment.
The origin of the ecological movement in the United States is taken to be the
book, Silent Spring, by Rachel Carson (1962), in which she showed, supported by
proof and professional arguments, that the widely used industrial pesticide DDT
(dichlorodiphenyltrichloroethane) drastically reduces the reproduction capability of
animals that were not targeted by the insecticide. This endangers the functioning of
the ecosystem and, what is more, it accumulates even in human beings and can have a
negative effect on child conception (Carson, 1962). Shortly afterwards, the use of
DDT was prohibited almost everywhere. As a result of the book and the ensuing
environmental movements, legislation initiatives, hearings and media campaigns, the
demand for ecological responsibility on the part of the corporations commenced
(Newton, 2010). Beyond the damage caused by corporations, the foundations of
ecological responsibility are rooted in normative declarations: “deep world-wide
poverty, increasing population growth, and limited resources within an already
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threatened ecosphere […] raise a serious economic and moral dilemma. Significant
economic activity will be necessary to meet the basic needs of an increasing human
population, yet economic growth itself is responsible for much of the environmental
degradation which already jeopardizes the possibility of meeting even present needs”
(DesJardins, 1998, p. 826). In other words, “Business leaders can no longer afford the
ethical missteps that led to the epidemic of scandals in the last decade. To leave a
livable world for future generations, leaders also must pay attention to environmental
matters.” (Freeman et al., 2008, p. 3).
The environment-related responsibility of corporations and businesses has
become one of the most important issues of late modernity. From the proponents of
post-Marxist and anti-growth de-modernizing social-economic theories to believers in
the preservation of beautiful and untouched nature, from supporters of conscious
consumption and green capitalism to followers of the theories of sustainable
development, the need for the protection of the environment is an everyday general
conviction at the beginning of the twenty-first century. This list also shows that while
the practice of ecological thinking is fully acceptable today, this practice rests mainly
on political-aesthetic convictions and thought experiments (Sober, 1998; Sagoff,
1982). This in itself is not a criticism of ecological thinking, much rather it is an
indication that the practice of commitment to the environment – mainly due to the
dangers and challenges felt by everybody – is further developed than its theoretical
foundation. This is significant because, for the social-economic shift in progress, a
theoretical foundation that fits in with the practice of ecological responsibility is also
needed.
The theory of environment protection
The ethical approach to ecological responsibility emerged in the middle and second
half of the previous century. Earlier, environment-related views were not of an ethical
nature: philosophers of the Enlightenment searched for order and causal relationships
in the functioning of nature. The nature-related approach was anthropocentric: it was
the human being that mattered in nature and ethics studied the conscious and rational
decisions of people (Baker-Richardson, 1999). Representatives of environmental
ethics in the last century took as their point of departure that nature is an independent
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organism, a closed system which is not merely beautiful, but ethical interests are also
attached to its undisturbed and interference-free functioning. Some authors
differentiate between human ethics – which rests on mutually felt responsibility
towards each other – and bio-ethics, the basis of which is the order of undisturbed
nature with its never-ending cycles (Rolston, 1991; Leopold, 1949). They maintain
that nature is original, ancient and undisturbed, as opposed to the built environment,
which is artificial and man-made, serving human interests and profit. In these ethical
approaches, originality is confronted with artificiality, which being a ‘reproduction’
and ‘forgery’ cannot be perfect and it is even horrifying and dangerous in its
artificiality as opposed to the harmony and peace of nature (Krieger, 1973).
Beyond the protection of the natural order of limited resources and of plants, a
priority area of environment protection is the protection of the rights of animals.
Animal rights protection, in the context of the ethical approach to the environment,
pinpoints an area that is broader than protecting the interests of animals: does human
dignity, the nature and distinctiveness of human existence and its uniqueness, in itself
justify the differentiation between human and animal (natural) rights? Animal rights
protectors claim that that the human species character of man does not justify the
ethical uniqueness of human existence. According to them, an ethical foundation is
needed of which – as was proposed by the famous utilitarian philosopher Bentham –
the animal world capable of suffering is also part and the term equality must also be
extended to the animal world (Singer, 1989). Bio-ethical theories go even further:
according to them the basis for an ethical existence is not suffering but life.
Everything that lives – whether it has a life program or not and therefore only exists
as a result of natural processes – must be respected. In spite of some living beings not
‘thinking’ or ‘suffering’, their life is part of the natural order of the world and
interfering with it is an ethical offence. Yet other theories postulate that in the course
of ‘using’ nature there is a conflict between rationally acting individuals driven by
self-interest and the community as a whole because individuals driven by self-interest
take a larger share of the common resources and this leads to inequality, on the one
hand, and the depletion of the limited resources (energy, water and food) which could
otherwise support the whole community, on the other hand (Hardin, 1968). This,
according to so-called land ethics, could create hardly resolvable dilemmas, starting
from the issue of the necessity for helping those starving right through to the question
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of limiting human reproduction (Hardin, 1974). Representatives of deep ecology
consider human existence and identity not simply something that fits in with the order
of human culture but something that exists in deep symbiosis with the natural
environment. They maintain that the ‘natural health’ of man is at least as important as
her ‘physical health’ (Baker-Richardson, 1999). The various post-modern approaches
to natural ethics politicize the relationship of human beings to nature: feminist
environment ethics considers sensitivity towards nature – which can be described with
metaphors of caring, nursing and protection – to be a traditionally female attribute, as
opposed to the manly dominance- and oppression-based approaches. According to
them, nature-related ethical offences stem from the female values being forced into
the background, whereby masculine attributes get the upper hand. Building on this
train of thought, the post-modern environmental ethics’ discourse on power,
oppression, equality and pluralism views the western way of thinking about nature
that is based on sustainable development and the oppression-free relationship of
aboriginal tribes to nature as having the same value.
The economic approach to the theoretical foundations of environment-related
responsibility, which has by now become part of the mainstream, takes market
failures, negative externalities and the limitations on the use of public goods as its
point of departure. Markets – if they function ideally – are self-regulating mechanisms
that aim at the Pareto optimum: in a free market goods and services are distributed in
such a way that it is impossible to improve anybody’s position – in other words the
utility of the goods owned by them – without at the same time causing damage to
others. Ideally, the market corrects a possible drop in efficiency through informationbased
price differentiation or through meeting changing demand. The market fails
when either due to an extreme information asymmetry or because of an unusual
market situation (monopoly or oligopoly) such correction does not occur. Lack of
environment-related information and deviations in the allocation of the limited
resources may also lead to market failures. As a result markets lose the ability to
reach the Pareto optimum, since the reallocation of resources in such a way that
through it the utility for some can be increased without putting others in a
disadvantageous position is imaginable – even necessary. The Pareto optimum refers
to market efficiency only and does not mean the realization of justice, social equality
or other freedom-related principles (Sen, 1970).
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A further failure of the operation of the market is when negative externalities
are ignored. An externality emerges when the market price does not take into account
the cost arising to third parties when goods and services are acquired. Externalities
can be positive or negative. Environment-related theories study negative externalities,
since environmental damages are typically such: costs of restoration and the value
loss caused by pollution are not built into the price of goods and services. One
possible way for managing negative externalities – suggested by Pigou in the 1920s
(Pigou, 2013) – is cost-internalization: e.g. enforcing the principle of ‘the polluter
pays’ or any other taxes and dues levied that can counteract negative externalities.
This does not primarily mean the costs of restoration of the damage caused but paying
for the external costs which are embodied in taxes payable and in opportunity costs
due to lost subsidies. In this way producers and service providers can be motivated to
reduce their costs and to operate in an environmentally conscious way. (At the same
time, there are difficulties with the internalization of negative externalities through the
polluter pays principle and taxes: the non-optimal functioning of the market and the
uncertainty in estimating the costs of negative externality.) Another theoretical mode
of managing negative externalities is the application of the Coase theorem: if the
transaction costs are negligible, negative externalities can be managed by negotiation,
obviating the need for (e.g. state or regulatory) intervention. Because marginal costs
and marginal profit are in balance, the parties – independent of ownership or liability
to carry the costs – are themselves capable of distributing the costs of negative
externalities (Coase, 1960). While both the taxes proposed by Pigou and the
negotiation principle of Coase are theoretical constructs, they had a significant impact
on the rules, principles and recommendations which appeared in the politics regarding
environmental externalities in the second half of the 1970s. Besides the negative
externalities, the irresponsible handling of public goods also led to the conflict of
ecological responsibility where neither rivalrous nor excludable utilisation by
consumption (the optimal utility or correction achievable by competition) is typical –
this is the “tragedy of the commons” (Hardin, 1968). One only needs to think of the
unrestricted fishing which has led to a radical drop in the number of certain types of
fish and to the collapse of local ecosystems. The challenge to ecological responsibility
is the same here: regulatory restriction of utilisation which does not make the utility
of public goods – embedded in non-rivalrous and non-excludable consumption –
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impossible. Examples for the above could be the introduction of fair-trade rules or the
rules for community utilisation.
As shown earlier, one of the biggest difficulties concerning regulatory or
governmental intervention in the context of negative externalities is the precise
estimation of the costs of the given externality. This makes the application of the costbenefit-analysis
(CBA) of traditional economics difficult to use in regulating
ecological issues. The most important environmental question is the valuation of
environmental worth: what tools are available for estimating the price of
environmental values? In addition to traditional methodologies (utility and
opportunity), economists use valuation methodologies underlying customer decisionmaking
(willingness to pay [WTP] and willingness to accept [WTA]) for the
estimation of ecological values – thereby determining governmental and regulatory
intervention in terms of cost/benefit.
However, in the past decades approaches applying traditional economic
principles to ecological responsibility have come under criticism. The challenges of
responsible behaviour pinpoint more strongly than ever the problems of traditional
economics and its rationally acting subjects: besides liberal criticism of optimal
distribution, approaches adapting the insights of behavioural economics have also
appeared which – paradoxically – have attacked the mathematical models and their
predictably behaving market players from the angle of calculability and the
applicability of algorithms (Kőszegi-Rabin, 2006). Critics of the traditional
approaches keep ever more intensively attacking economic thinking because of socalled
value-monism, calling for traditional economic thinking to accept the pluralism
of values and valuations, and practical applicability, as well as to take into account the
cultural-social-environmental context (Gowdy-Erickson, 2005; Krugman, 2012).
Similarly, it is the insights of behavioural economics that point out that including
consumer decisions in valuation methodologies will not improve the precision of
valuations by determining the cost-benefit ratio, but will rather increase its
uncertainty (Kahneman, 2011).
Ecological strategies
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Neither the environmental ethics approach, nor the environmental economics
approach could condense environmental responsibility into one single general theory.
There is no consensus regarding the values underlying commitment to the
environment in ethical approaches based on these values, nor in the social science –
especially the economic – approaches to the environment. This also means that
mindset and theoretical barriers have been constructed before possible agreements
and behaviours. Freeman (2008) discusses five such barriers. One of the barriers to
free arguments and agreement is the “regulatory mindset”: the guarantee for
sustainability is regulatory intervention. This means that environment- and
sustainability-related market operations must be corrected through legislation and
control. According to Freeman, however, regulatory intervention impedes innovation
and hinders the culture of voluntary initiative and participation, which can have
unexpected and often incalculable consequences. Another barrier is the “cost-benefit
mindset”. This is not only dangerous because of the challenges posed by the
traditional economic view but also because it does not take into account a number of
factors which increase the value of human capital or reduce associated costs.
Similarly, it does not integrate into the operation the full product life-cycle concept,
according to which the cost-benefit analysis must be kept in mind during the whole
life-cycle of the product or service. Furthermore integrating the findings of
behavioural economics into the operation makes it possible to approach costs and
benefits from angles other than the purely monetary: just as there are more complex
tools for measuring social development than GDP (Stiglitz, 2008; Kahneman, 2011)
the traditional economic approach is no longer suitable for measuring the triple
bottom line (TBL), or the well-being economics based value increase and
performance. Freeman calls this the “constraint mindset”. Going further, the
“sustainable development mindset” also poses numerous problems. Leaving aside the
question of whether a report twenty years ago can still be the basis for meeting the
challenges of today and tomorrow, the criticism of the initiative focusing on
sustainability based on the Brundtland Report rests on the fact that sustainability is
approached from the viewpoint of counteracting negative consequences and
sustaining the still-existing values of the present. Freeman asks the question whether
it is the values of today that are to be bequeathed to the next generation? Do we know
today what will be adequate in twenty, fifty or a hundred years’ time? Freeman claims
that ‘sustainability’ is not a vision, but a barrier. By trying to slow down growth, it
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hinders innovation and the spreading of disruptive thinking and therefore contradicts
the logic of commerce and competition, while at the same time – by giving the
illusion of acting correctly – it is more of a problem than a solution. The last barrier is
the “greenwashing mindset” which focuses on the environment and calls upon the
actors of business and society to think in “big schemes”: to initiate huge actions
which are too big and too general – and too spectacular – to achieve true results
(Freeman et al., 2008).
Taking the stakeholder approach as his point of departure, Freeman’s
conclusion is that there are four directions that environmentally conscious corporate
behaviour can take. These are not necessarily phases of development but rather
chosen attitudes and practices which are valid on their own and avoid some of the
above barriers. The aim of the strategies is to meet the challenges of competition in
the economy and in business while at the same time offering the opportunity of
integrating environment consciousness into business operations. The “light green
strategy” aims at complying with environmental rules, regulations and treaties and
focuses on the regulator(s) as stakeholder(s). While this seems to be the least
effective, according to Freeman this is not necessarily so. Keeping the rules provides
opportunities for innovation – in both technology and operation – and thereby for
creating and utilizing competitive advantages. Furthermore, this principle makes
political participation possible: leaders with environmental efficiency and innovation
in mind may utilize corporate political action and trade agreements as well as multistakeholder
initiatives for development advantage, thereby forcing competitors to
make developments, and thus creating a competitive advantage for themselves. The
“market green principle” puts the environmentally conscious customer at the centre of
corporate behaviour. Innovation and development primarily focus on the customer as
well: the integration of commitment to the environment into the business operation is
realized through getting to know, motivating and ‘developing’ the customer. This
principle also motivates development and innovation, and provides the opportunity to
create a competitive advantage. On the other hand, green preferences also offer
reputational advantages which address other stakeholders, thereby becoming capable
of turning the direct product/service advantage into reputational advantage and values
that manifest themselves in goodwill. The “stakeholder green principle” extends
environmentally conscious operation to all the stakeholders: besides the customers
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and regulators, the supply chain is also ‘made green’. Likewise, it gives due
consideration to the commitment of other stakeholders to the environment. This
principle requires complex solutions, forms of cooperation and democratic discursive
practice, since differences in ethical considerations, theoretical foundations and
approaches – often even contradictory – make environmental preferences acceptable
to many stakeholders difficult to establish and sustain. This is where political
institutions and equality-based democratic processes appear in an attempt to resolve
stakeholder conflicts. The “dark green principle” puts environmentally conscious
operation in the focal point. This is based on the ‘cradle to grave’ approach, taking the
whole life-cycle into account and complying with the necessity of maximum
recyclability. Both past and future generations are included; environmentally
conscious operation is not looking for innovative modes and possibilities of gaining
competitive advantage but is itself the basis of competitive advantage. In this strategy,
environmentally conscious operation is what determines the identity of the
corporation – in the language of marketing, it is the basis underlying the brand and the
cohesive power of the brand community (Freeman et al., 2008).
Environmental stakeholder democracy
Many authors claim that in order for environmental values and an environmentally
conscious way of thinking to become part of business-society relationships, a re-think
of the definition of democracy is also needed. The basis for such a re-consideration
must be the recognition that the social conditions of late modernity can best be
described as a “risk society” (Beck, 1986). The risk-society rests on “non-knowledge”
and on the irony stemming from it: the late modern human condition building on
rationality, i.e. on the bad experiences of the past, facilitates the wrong kind of risk –
the kind that believes that danger is calculable and controllable – while the reason for
risk is exactly the incalculability of “non-knowledge”. The cruel manifestations of
this irony are endless: when states terrified of terrorism and cultural conflicts limit
people’s freedom rights in order to protect them, as a result of which the free society
itself is eliminated while neither the threat of terrorism nor cultural conflicts diminish.
Numerous environmental phenomena are similar: regulation helps to enforce the
efficient use of energy resources – e.g. nuclear energy – without having exact
knowledge of the risks and consequences. Beck claims that the resolution of the irony
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could be a “new beginning”: something else has to be done and in another way than
until now.
The existential fear of risk and danger, i.e. the new beginning – according to
Hannah Arendt – prompts action, which is of necessity free and pluralistic. “It is in
the nature of beginning that something new is started which cannot be expected from
whatever may have happened before. This character of startling unexpectedness is
inherent in all beginnings and in all origins. […] The fact that man is capable of
action means that the unexpected can be expected from him, that he is able to perform
what is infinitely improbable.” (Arendt, 1958., p. 177-178). Arendt sees action as
political action: the creation of something new with the goal of a new cooperation and
laying the foundations for “common action”. The constitutive foundation of the
United States – as referred to earlier – is a good example for this (Arendt, 1963).
Beck mentions three reasons for risks triggering a new beginning:
delocalization – the risks and their consequences are not limited to one single location
but they affect everybody; incalculability – stemming from mathematically
inexpressible non-knowledge; and non-compensability – the consequences of dangers
and accidents cannot be compensated (Beck, 2006). ‘Incalculable delocalized
interdependence’ manifests itself on three levels: in space (since it has no
consideration for borders in space therefore it can have any effect anywhere); in time
(since it stretches far beyond the known life-spans, e.g. the decomposition time of
nuclear heating elements); and on the social (due to the complexity of the
relationships, possible consequences cannot be predicted). Its political consequence is
that the focus of political action must be shifted from the decision to its consequences:
political actors must agree on the possible consequences of political action rather than
on the decision itself (Dewey, 1927).
This offers a new approach to democracy. Environmental democracy puts
forward a notion of deliberative participatory democracy which – going beyond direct
and representative engagement – views as its goal the acceptance of the consequences
of deliberative consensus through institutionalizing spaces of deliberation and
discourse as well as the processes of societal will-forming, rather than the decisions
based on deliberative rationality. Environmental democracy, much as political CSR
offers a post-national institutional setup beyond the Westphalian order (Scherer &
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Palazzo, 2007), surpasses the framework of nation states, creating a new kind of
“enlightened cosmopolitanism” (Beck, 2006). It transgresses the paradigm of the
division of spheres of economy, society and environment: the complexity of the
processes and their consequences does not make it possible for dialogues, arguments
and consensus to come about in only one segment of the political space. It assumes
complex cooperative and communicative processes and their institutionalized
guarantees to arrive at temporary consensus between the often contradictory opinions
in the interests of common action. In stakeholder democracy, stemming from
environmental democracy, it is the understanding of the consequences (within the
limits of “non-knowledge”), their acceptance and the possibility of the continuous reevaluation
of the consensus that becomes important, rather than rationally verifying
political decisions.
All this requires a new corporate attitude. It requires the politicization of
corporate operations in the provision of environmental public goods, respecting
environmental values and making the equality-based engagement of stakeholders
possible. The politicized corporation must accept that the corporation is one actor of
the spaces of deliberation, providing resources and management processes so that
these spaces can function. There is a reciprocal relationship here: corporations
become participants and shapers of the institutions and processes of stakeholder
democracy at the same time. The new context also presents new challenges for
corporations to retain their legitimacy; there is a need for the creation of a new
legitimacy. This legitimacy cannot rest on the earlier political practices only: political
manipulation (power-based communication and influence moving significant
resources and direct governance), political adaptation (coming to a consensus with
significant actors and common governance) or ethical argument (adhering to norms
represented and accepted by stakeholders, which are therefore legitimate, and
surrendering governance) are in themselves no longer sufficient to retain legitimacy in
the complex political institutional space. Therefore, a ‘paradox approach’ is needed
which applies the three political practices parallel. This approach defines the strategy
in relation to the different stakeholder positions, issues, processes and challenges –
such as, for example, the issue of environment/sustainability – and uses all tools of
political governance at the same time, from direct control to deliberative rationality.
All this requires a new political management practice: corporations are traditionally
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not prepared for using various parallel strategies and for coordinating the complex
processes, demands and interests which often contradict each other. Here the parallel
application of three different organizational processes is required: structural solutions
– different problems are dealt with by different organizational units therefore there is
no or only limited centralized (political) direction; contextual solutions – where
management delegates a responsible person to give answers to the different
challenges if such answers bring the desired results for the corporation thereby
reducing centralized political responsibility; and capacity building based on internal
feedback and development – which builds on the common effort and mutually
supportive cooperation between the different organizational units and decisionmaking
levels thus increasing the necessity for political cooperation and internal
consultation, for breaking with traditional hierarchies and creating new
organizational-political dynamics. None of these strategies on its own is suitable for
dealing with the complexity of ecological and social issues, therefore here too the
parallel application of different strategies is needed, however ambiguous their
outcomes may be. (Scherer et al., 2013).
Ecological problems and the management of social risks necessitate a new
political attitude, new organizational strategies and new management decision-making
of the corporation. The new politicized approach, besides forcing corporations to
participate with stakeholders in non-violent deliberative processes based on equality,
are closer to the institutional and organizational order of public policy decisionmaking
processes than to traditional, top-down corporate decision-making and
operation (Scherer-Palazzo, 2007). The need for and challenges of managing
ecological issues and social risks – negative externalities, the over-utilization of the
commons, the participation and involvement of stakeholders and the environmental
and social risks of non-knowledge – indicate that corporations of the twenty-first
century also have to become institutions of pluralistic liberty which accept the
standpoint of Isaiah Berlin (1958) that “’[t]o realize the relative validity of one's
convictions’, said an admirable writer of our time, ‘and yet stand for them
unflinchingly is what distinguishes a civilized man from a barbarian.’ To demand
more than this is perhaps a deep and incurable metaphysical need; but to allow it to
determine one’s practice is a symptom of an equally deep, and more dangerous, moral
and political immaturity” (p. 172). The politics of uncertainty, and the possibility of
living with its fears and hopes, is reflected in philosophy as Russell (2004) remarked
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in his introduction to The History of Western Philosophy: “Uncertainty, in the
presence of vivid hopes and fears, is painful, but must be endured if we wish to live
without the comforting fairy tales. It is not good either to forget the questions
philosophy asks, or to persuade ourselves that we have found indubitable answers to
them. To teach how to live without certainty, and yet without being paralysed by
hesitation, is perhaps the chief thing that philosophy, in our age, can still do for those
who study it” (p. 2).
Responsible supply chain management
The theory of the supply chain
In the past few decades one of the most important tools of operational efficiency has
been the successful organization of the supply chain. As discussed above,
corporations are becoming ever more complex systems, in which products, services,
financial tools, knowledge and information – both upstream and downstream –
continually flow between the source and the consumer (Cooper et al., 1997). All
corporations take part in supply chains which, because of the competition enforced
need for excellence in performance and value creation, are becoming ever more
complex systems and governance processes. According to its definition, supply chain
management (SCM) is “the integration of key business processes from end user
through original suppliers that provides products, services, and information that add
value for customers and other stakeholders” (Lambert, 2001, p. 2). When describing
corporate operation the management of the supply chain means both the planning of
internal and external material and information flow, and the setting up of forms of
cooperation beyond vertical integration in the various areas of operation. It means the
form, mode and management of the relationship with the suppliers just as it does the
procurement process, logistics and delivery chain, the management of the information
systems and the corporate marketing processes. Supply chain management is
increasingly becoming the most important tool of corporate strategic management
(Chen & Paulraj, 2004). On the other hand, while SCM is one of the most important
tools of corporate efficiency and performance, supply chain management is an intercorporation
integrative activity – which turns the competition between various
corporations into a competition between integrated supply chains through the
effective use of internal and external resources. In other words, from the point of view
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of the supply chains it is no longer the economic performance of one corporation that
determines competitive performance but the performance of the whole supply chain –
both that of the buyers and of the sellers since these roles keep changing in the supply
chain as a whole.
The management of the supply chain affects the whole economy and in a
globalized economy the integration of the supply chains is embodied in cooperative
processes reaching beyond the borders of nation states. This is a management theory
shift that recognizes that in the twenty-first century the different business entities no
longer simply compete with each other but are interconnected, as actors of the supply
chains, through complex relationships, interests and abilities (Lambert & Cooper,
2008). Thus, institutions participating in the operation of the economy are economic
actors interlinked by many threads, who are mutually each other’s partners,
competitors, suppliers and buyers in addition to the fact that from time-to-time these
roles change inside and outside the corporation since it can happen that a supplier is
both the partner and the competitor of another corporation.
Management of the supply chain theories usually attempt to define SCM from
three different viewpoints. (For a long time, the literature on supply management used
to consider management concepts more important than theoretical foundations to base
supply chain management on. The theory of supply chain management is a relatively
new field. Besides the three most important theories discussed below, a number of
authors argue for the application of other theories to the field. Some authors apply the
resource- or knowledge-based approach to organization theory, while others use the
strategic decision theory or systems theory (Giannakis & Croom, 2004; Halldorsson
et al., 2007; Chicksand, 2012)). As shown earlier, the basic focus area of business
ethics is the principal-agent relationship and this offers one possible approach to
supply chain management. The other theory takes transaction cost economy as its
point of departure, while the stakeholder approach also gets a role to play in the
theoretical foundation of SCM. The application of the principal-agent theory to
supply management starts out from the assumption that the relationship between
buyers and sellers participating in the chain is contract-based and that in this
contractual relationship the basis for cooperation is the delegation of authority in the
interests of performing a given task. As shown earlier, in this relationship, the
principal endeavours to reduce the controlling, remuneration and other costs of the
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agent, while the agent seeks income maximization and reduction of the principal’s
influence. The conflict of effective governance stems from the differences in
acquiring information, conflict of interests, moral hazards and adverse selection
(Fleischer, 1991). In supply chains these problems may be due to the false
demonstration of abilities (adverse selection) and the shortcomings of task
performance (moral hazard). Regarding supply chain management, it is therefore
necessary that the principal define precisely in advance the nature of the task to be
performed and the abilities necessary for its performance. The mode of managing
moral hazard is to include feedback expectations, and feedback and training practices
in the relationship, thereby making it possible to effectively prevent the discovery of
faulty or negligent task performance only at the end of the process (Fayezi et al.,
2012). Research shows that applying risk minimizing and conflict management
strategies represented by the agent theory – supplier development, certification and
joint determination of the target price – have made supply chain management more
effective than other traditional tools, like buffers, over-ordering or supplier pools.
Similarly, research has shown that applying the tools of principal-agent theory to
managing risks and establishing trust proved more effective: it brought trust (creating
proportionality between agent costs and agent remuneration) and joint goal
determination. Likewise, that assertion of self-interest by both the principal and the
agent was more limited when the common financial and social goals were precisely
determined and optimized (Clemens-O’Loughlin, 2007).
The other approach to supply chain management is transaction cost economics
(TCE). It is based on research by Nobel laureate Oliver Williamson. According to
this, in non-traditional transactions – requiring regular, sporadic investments with
inherent uncertainty regarding their execution, such as complex, non-vertical business
cooperation within an organization that has an effect on the supply chain – it is the
bilateral adaptive management structure that is most efficiently able to reduce costs
associated with business transactions. Transactional costs are considered to be costs
required for establishing, utilizing, changing and managing the organization necessary
for bringing about the operation of the business. Such costs are, for example, legal
costs, organizational, information or political costs (e.g. legal and management costs
incurred in concluding a contract), expenditure on controlling and measuring
performance, and costs associated with gathering and organizing information. The
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efficiency of business processes does not aim at eliminating or necessarily reducing
these costs but making them proportionate to the risks and expected results. As
Williamson (1979) puts it: “ [I]f transaction costs are negligible, the organization of
economic activity is irrelevant, since any advantages one mode of organization
appears to hold over another will simply be eliminated by costless contracting” (p.
233). The extent of transaction costs is primarily determined by the pricing conflict of
transaction specific in kind investments and by the behaviour guided by opportunism
and self-interest and the reduction of risk arising from it. According to Williamson
(1985), these costs can be reduced by setting up management structures which rest on
the cooperation of the parties rather than on the governance of one party. Applying
specific, adaptive management techniques makes it possible, for example, to settle
price modifying suggestions through quantity increasing agreements offering mutual
benefit, instead of excluding the possibility of unilateral price modification by
increasing transaction costs.
As regards supply chain management, the frequency of transactions, the
social, political and economic risks, and the exchangeability of transaction specific
tools are the barriers to reducing costs, while the opportunistic and self-interest-driven
attitude (fraud, lies or the circumvention of contracts by more refined, self-interest
driven means), the lack of, or limited alternative sources of procurement and the
asymmetric access to information or the lack of it may be cost-increasing factors
(Williamson, 1985). In supply chain management, the reduction of transaction cost is
an important aspect since it helps corporate management to choose the most
appropriate form of management – vertical integration, uniform supply chain and oneoff
transactions – in the course of organizing the business process, taking into account
transaction costs and related phenomena (recurrence, uncertainty and investment
specificity). The more transaction specific an investment, the more interested is the
partner in a cooperative adaptation during the modification of the agreements, rather
than terminating the relationship. Similarly, uncertainty in supply and demand makes
it desirable for the buyer to establish a tighter cooperation in the interest of not having
to develop its own products or invest in strict quality control (Garfamy, 2012).
The third theoretical approach to be found in the literature is based on the
application of the stakeholder theory to supply chain management. The supply chain
is an organizational form in which value creation rests on vertical and horizontal
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expansion and management of stakeholder relationships, thus offering the
management of the supply chain a ‘natural’ framework for interpretation. According
to stakeholder theory: “[T]he corporation itself can be defined as a system of primary
stakeholder groups, a complex set of relationships between and among interest groups
with different rights, objectives, expectations, and responsibilities. The corporation's
survival and continuing success depend upon the ability of its managers to create
sufficient wealth, value, or satisfaction for those who belong to each stakeholder
group, so that each group continues as a part of the corporation's stakeholder system”
(Clarkson, 1995, p. 1995). Accordingly, in the course of the identification of
stakeholders and common value creation, the application of the principle of value and
interest proportionality becomes a critical factor in the success of the supply chain.
Stakeholder theory differs from previous theories in as much as it takes as its point of
departure that contractual relationships do not only come about between, and have
impact on, individual sellers and buyers but on the whole of the supply chain, since
competition no longer takes place between individual companies but between
complex web supply chains (Drucker, 1998). Applying the stakeholder theory to
supply chain management, one can differentiate between upstream and downstream
stakeholders in the course of identifying potential stakeholders. Upstream
stakeholders are those groups of stakeholders who are buyers of the products or
services, whereas downstream stakeholders are the suppliers and subcontractors. On
the other hand, according to this definition, other stakeholder groups affected by the
supply chain may also belong to the supply chain, just like other ‘invisible’
stakeholders who are inevitably required for the successful management of the
process (Walker et al., 2008). In order for supply chain management to be successful,
it is not sufficient to manage risks stemming from individual contractual relationships
but it is also necessary to survey and take into account the interests of stakeholders
participating in the whole of the supply chain and to build trust such that possible
business risks created by stakeholders can be managed. Therefore, the key to
stakeholder approach guided supply chain management is the creation, maintenance
and management of trust between stakeholders (Walker et al., 2008). As such, supply
chain management follows the traditional, complex strategic approach to stakeholder
processes as described above.
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All the theories described here start out from the premise that for the success
of the modern corporation, cooperation beyond vertical organizations is required.
These actors/stakeholders pose various risks and the management of such risks and
the efficient management of the complex supply chains is a critical success factor in
corporate operations. While principal-agent theory and transaction cost economics
view the issue of ‘make-or-buy’ their focal point, the stakeholder approach focuses on
the stakeholder impact of corporate operation. Here supply chain management does
not narrow in on just the issue and consequences of ‘make-or-buy’ decisions but
actually arranges the complex politics of the supply chain in a uniform framework.
Sustainable supply chain management
As discussed in the introduction, one of the reasons for the emergence of corporate
social responsibility was the corporate scandals, the tragedies and ecological damage
caused by corporations in the seventies and eighties. By the end of the nineties, more
and more people realized the key importance of the sustainable operation of the
supply chain in the course of managing the risks of corporate operation. The literature
on sustainable supply chain management (SSCM) mainly focuses on areas where
issues of responsibility and supply chain management could be interlinked. SSCM is
defined as “the management of material, information and capital flows as well as
cooperation among companies along the supply chain while taking goals from all
three dimensions of sustainable development, i.e., economic, environmental and
social, into account which are derived from customer and stakeholder requirements.
In sustainable supply chains, environmental and social criteria need to be fulfilled by
the members to remain within the supply chain, while it is expected that
competitiveness would be maintained through meeting customer needs and related
economic criteria” (Seuring & Müller, 2008, p. 1700). Thus the management of the
sustainable supply chain takes as its point of departure the application of the triple
bottom line (TBL) principle, while at the same time taking into account that the basic
purpose of supply chain management is to maintain competitiveness and to meet the
challenges posed by competition between different supply chains.
As a result of managing the risks that arose following the corporate scandals,
sustainable supply chain management and theoretical works discussing good practices
focused primarily on working conditions, violation of human rights at suppliers, the
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use of child labour, low wages, and on general environmental issues. As the authors
of one of the most cited studies put it, “there has been, respectively, little theorybuilding
research appearing within the broad field of supply chain management to
date” (Carter & Rogers, 2008, p. 362). Consequently, the research into sustainable
supply chain management also suffers from theoretical hiatuses. On the other hand,
all previously discussed theories offer points of departure for the basis of sustainable
supply chain management in the light of the above definition. First I will show how
the theories of sustainable supply chain management discussed above can be applied
to sustainable supply chain management. This will be followed by an overview of the
various areas in an attempt to show how all this works in the practice.
As shown earlier, the principal-agent approach reduces the moral hazards of
agent self-interest through better task definition and feedback, process-flow
prescription, and training practices in the operation. The agents, wanting to exert their
own self-interest, are not interested in reducing negative externalities just as they will
also not benefit from the long-term effects of positive externalities. In sustainable
supply chain management it is therefore necessary for the principal to introduce
practices that limit the moral hazards of unsustainable operation as well as reduce the
effects of negative externalities. Such practices include certification, clearly defined
processes for sustainable procurement and cooperation set up by third parties, the
prior establishment of the costs of managing negative externalities (minimizing
ecological and social damage), and have built-in incentives and motivations,
enforcement of information dissemination and transparency (disclosure and
sustainability reports), as well as effective control structures involving stakeholders.
The transaction cost economy-based interpretation of supply chain management
approaches the issue via adaptive management techniques used for reducing
transaction costs. In this case, supply chain competitiveness is determined by the
frequency of the transactions, reduction of social, political and economic risks, and of
risks stemming from transaction-specific investments. The sustainable supply chain –
which creates long-term relationships between the players in the supply chain using
management structures that clearly define the stakes of every participant and
integrates mechanisms of continuous consultation between the participants (dialogue
flows), establishes modes of equal and mutual information flow (disclosures, reports
and standards), regulates the structure of procurement sources, and eliminates
multiple supply intermediaries (fair trade) – may be capable of increasing the
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competitiveness of the whole supply chain by reducing transaction costs while taking
the principles of TBL into account during the process as well. The stakeholder theory
represents the viewpoints of sustainability in the supply chain the most
unambiguously. Besides upstream and downstream stakeholders, stakeholder groups
which do not directly participate in the supply chain but have an effect on it, as well
as invisible stakeholders influencing the competitiveness of the supply chain, are also
considered to be part of the supply chain. The most important aspect of sustainable
supply chain management is to create trust between the participants of the supply
chain. This makes them interested in staying in the supply chain, thereby jointly
protecting the competitiveness of the chain. In order for the participants – based on
their prior agreement – to be able to continuously comply with the standards,
regulations and recommendations that secure the sustainability of the supply chain
(ISO 26000, SA 8000 and OECD recommendations), continuous coordination and a
mutually supportive learning environment is required in the whole supply chain. In
the same way, after having complied with standards, opportunities which could be
suitable for creating sustainable competitiveness beyond regulations must be jointly
sought. (Walker et al., 2008).
The practice of sustainable supply chain management
Management of the sustainable supply chain can be derived from all supply chain
theories. The background to SSCM are those societal challenges which emerged in
the eighties and which forced large international corporations to pay more attention to
the corporation as the sum total of the stakeholders. The supply chain complying with
the requirements of sustainability must at the same time be competitive and
sustainable, in accordance with the interests of all the stakeholders. This, however,
demands new forms of cooperation. As discussed in the third chapter, for corporations
to be able to meet the social, economic and environmental challenges of the twentyfirst
century, the corporation must adopt a new, political approach. This approach
accepts that in the post-Westphalian era, the global regulating and influencing power
of nation states has become weaker while at the same time new challenges have
emerged which – beside legislated hard rules – call for cooperation based on soft
rules, and consultative processes and modes of exercising power (Scherer & Palazzo,
2007; Scherer, 2016; Scherer et al. 2017). Compliance with ‘social rules and norms’
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as the basis for the legitimacy of corporate operation must be replaced by the active
participation of the corporations in public deliberations and collective decisions.
Corporate politics as the new form of responsibility requires the active participation
of the corporation in institutionalized spaces of dialogue, re-creating ‘rules and
norms’ according to different stakeholder interests and social contexts. The
corporation itself is a participant in the processes of social will-forming or, to use the
language of responsibility, in stakeholder interest- and value declarations. The
premise of supply chain management is that for maintaining business competitiveness
it is not sufficient to organize cooperation within one single, vertically structured,
corporation to reduce the risks associated with external and internal stakeholders and
to take advantage of the opportunities stemming from the cooperation of stakeholders,
but all this has to be extended to the whole of the supply chain. Thus, in reality,
competition does not take place between corporations but between supply chains
interconnecting corporations. Sustainable supply chain management recognizes that
for competitive advantage to be attained, the inclusion of the interests and values of
some or all of the stakeholders in the whole process of the supply chain is necessary.
The inclusion of interests and values of the stakeholders in the processes should lead
to the politicizing of the whole supply chain. That is, actors in the supply chain should
jointly and in a coordinated manner comply with the hard rules (laws, international
regulations and standards), they should jointly take part in the creation and
publicizing of soft rules (industry agreements, recommendations of associations,
chambers of commerce, supra-national organizations, and NGOs), continuously
learning from and training each other, and they should shape the social context they
have to fit into by involving the stakeholders. As such, sustainable supply chain
management has to have due regard for the effective organization of the whole of the
supply chain, maintaining and increasing competitiveness and adhering to rules and
regulations; to the democratic structure of corporate operation: maintaining and
increasing trust within the supply chain, continuously meeting the challenges posed
by the requirements of sustainability; and to politicization of corporate operation:
participation in the shaping of ‘rules and norms’, public deliberations and collective
decisions and the provision of public goods, inhabiting institutionalized discursive
spaces and to equal participation in will-forming together with the stakeholders..
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These processes can hardly be directed from one single centre. Therefore, new
forms of sustainable supply chain management are needed in the interests of gaining
and maintaining trust; forms which are capable of handling the complex social matrix
as well as new skills, since neither the earlier modes of legitimacy nor the earlier
forms of exercising power are suitable for creating and maintaining long-term trust
(Scherer & Palazzo, 2007; Walker et al., 2008). The substantial challenges that the
present and future recommendations, standards and guidelines formulate are the first
steps towards the politicization of the supply chain. The expectation that the manager
should comply with the requirements of human rights, labour law, fair employment,
environmental, social and product liability is the foundation of sustainable supply
chain management. These requirements are manifested in and prescribed by
international recommendations, standards, industry agreements and supra-national
organizations. The role these recommendations, standards and processes play in the
process of politicization will be discussed below.
In order that corporations and supply chains be able to satisfy the requirements
of sustainability they have to manage their performance in six basic areas. These are
the assessment of the participants in the supply chain; definition and communication
of expectations; measurement of base-line performance; joint learning and capacity
building; creation of forums of cooperation, common development, determination of
performance indicators and measurement of progress; and industry and institutional
participation in international cooperation. As a first step, the supply chain,
stakeholders making up the supply chain, and those values and interests with which
the supply chain as a whole must comply must be mapped and assessed. The
assessment must extend to getting to know and to summarizing the social,
environmental and economic challenges of those making up the supply chain, and to
the prioritization of such challenges. The prioritization must consider
competitiveness, principles of TBL and ‘invisible’ and external stakeholder
expectations. As the next step the expectations must be clearly defined for the whole
of the supply chain and communicated to all participants in the supply chain. Such
expectations may be compliance with external requirements (standards, industry
agreements and recommendations) but also the laying down of specific rules in the
interests of increasing the competitiveness and sustainability of the supply chain, and
which are binding on the whole supply chain. As the third step, the base-line
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performance of the actors in the supply chain must be monitored using different
screening tools: with the help of positive or negative screening tools it must be
determined whether they are suitable for participation in the supply chain as far as
their sustainable performance is concerned. For this it is necessary that their
sustainable performance related data and information be made publicly, and
comparably, accessible. These allow for more efficient sustainability related processes
of supply chain management. The next steps serve the politicization of supply chain
management. For the establishment and utilization of discursive spaces for public
deliberation, the development of such spaces and institutions of common
understanding is needed: fora for common learning, capacity building and cooperation
must be created together with the common institutions and tools necessary for
reaching the clearly-defined goals, the forms and processes of complaints and legal
remedies, and the modes of mediation and resolution together with the stakeholders.
To achieve this, ‘checks and balances’, stakeholder rights and equality, the protection
of minority opinions, and independent and transparent conflict management processes
and institutions are necessary. The fifth step is common development, determination
of performance indicators, measurement and disclosure of impact-related data,
measurement of performance, inclusion of stakeholder expectations, third party
certification of performance indicators, and publication of progress achieved, as well
as solicitation of feedback from stakeholders and inclusion of it in the common
process of development. The above-listed are the new modes of gaining and
maintaining stakeholder trust and creating the institutional system of legitimacy.
Finally, participation in industry and institutional cooperation, in the development of
standards, norms and of common knowledge and in the common shaping of the
application of processes through the engagement of stakeholders outside the supply
chain creates forms of multi-stakeholder cooperation and institutions which bring
about the new institutional context of corporate politicization and the provision of
public goods by corporations (Scherer & Palazzo, 2011; Scherer et al, 2016).
Sustainable human resources management
Strategic human resources management
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In the same way as other areas of strategic management discussed in this book, human
resources management also went through significant transformation in the second half
of the last century. Up until the 1970s economists and corporate leaders viewed the
labour force as a cost of operation, the reduction of which was seen as the prime task
of strategic management. The task of those dealing with human resources was to keep
records of the labour force and to secure the necessary legal/accounting background.
The strategic approach was only traceable in so-called ‘productivity bargaining’ – in
the form of wage bargains as part of the rights and duties as these were laid down in
the collective agreement (Salaman et al., 2005). Since the seventies, however,
corporations have increasingly come to realize that appropriately managed employee
relationships are extremely important for maintaining competitiveness. Traditionally,
human resources management (HRM) deals with basically four areas: selection,
appraisal and performance management, rewards and development (Armstrong,
2006). Its goal is to increase organizational efficiency, to develop human capital, to
manage organizational and individual learning and to fulfill the changing needs
arising from competition. In the last decades of the past century a dual process could
be observed in the area of strategic management of human resources: on the one hand,
collective bargaining relationships were loosened so that non-strategic human
resources were tied to the corporation as loosely as possible (outsourcing and supply
chain management), on the other hand, strategic human resources increasingly
appeared as a competitive advantage in corporate strategy and required a complex
strategic approach. As a result, human resources management became more and more
a strategic area, “[a] distinctive approach to employment management which seeks to
achieve competitive advantage through the strategic deployment of a highly
committed and capable workforce using an array of cultural, structural and personnel
techniques” (Storey, 2001, p. 6.). This, however, only had an effect on the internal
relationships of the corporation, reflecting the approach in which strategic human
resources management (SHRM) was primarily an organizational and efficiency issue.
Extending this way of thinking beyond the employees of the corporation, strategic
human resources management started increasingly to be seen as a set of significant
ideas of institutional change: “[t]hey affect how organizations are changed, and how
they perform; they affect how employees are treated, they affect security of
employment and they affect the nature of employment. They also affect us as
individuals, influencing how we see ourselves and our relationships. SHRM
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prescriptions, theories and practices mediate between the public and the private,
defining the relationship between biography and history. Although SHRM initiatives
are frequently presented by their proponents as simply technical matters – means of
improving organizational performance – they frequently owe their appeal and
influence to their affinities with larger political ideological forces” (Salaman et al.,
2005, p. 5). Strategic human resources management offers the organization ‘as a
system of primary stakeholder groups’ a toolkit for measuring up to the requirements
of continuous change due to competition. While traditional human resources
management concerned itself with retaining the performance and competitiveness of
the organization, strategic human resources management deals with planning,
organizational change and design, as well as laying of the foundations for, and
sustaining, competitiveness. SHRM focuses primarily on areas that involve critical
success criteria and strategic decisions in connection with managers and employees,
and which could have a long-term effect on corporate behaviour and business success
(Armstrong, 2006).
Looking at it from another angle, human resources management has two main
areas or approaches: ‘hard’ and ‘soft’ HRM. In hard HRM management views
employees as assets and resources that can be used, where the only goal of HRM is to
create and improve the conditions for efficiency and profitability and where the barter
relationship is to be terminated when the usefulness of the ‘asset’ can no longer be
sustained. Contrary to this approach, soft HRM sees the employee as a tool rather
than an object and its goal is employee commitment and the improvement of
organizational efficiency by winning the employees’ ‘hearts and minds’ (Storey,
1989). Naturally, these are theoretical constructs and in real life corporate human
resources management is some mixture of the hard and soft approaches (Greenwood,
2004). According to strategic human resources management experts, soft HRM,
which takes the interests and opinion of employees into account and endeavours to
realize organizational goals by increasing their commitment, is more effective than
hard HRM (Legge, 1995). Others, however, claim that the soft approach only serves
to veil the use of hard tools. Lately, strategic human resources management has been
using a mixture of individual soft tools and system-entrenched hard tools to an everincreasing
degree (Greenwood, 2004).
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The theory of sustainable human resources management
Towards the end of the last century, corporate scandals, bankruptcies and ecological
catastrophes directed special attention to ethical issues in relation to human resources
management. In response to issues like child labour, violation of employee rights,
corruption, environmental damage and other corporate scandals, ever-stronger calls
emerged for human resources management to concern itself with ethical questions
with much greater determination.
Ethical issues used to be part of the practice of soft HRM, since human
resources management deals with the relations of human working conditions and as
such, ultimately, with the lives of people. It is often the ethical dimensions of work
having turned into a commodity that stood in the focal point. As this is all about the
shaping of human relationships, the factors hindering quality of life and
organizational operation surfacing in these relationships and their social impact,
sustainable human resources management must primarily be studied from the point of
view of ethics. It is not only the radical ethical challenges mentioned above that pose
potential dangers for human rights and personal freedom, but also everyday work
situations. Workers are often defenseless in their contractual relationships or their
rights are limited by extra-contractual stipulations which the majority have no choice
but to accept. Not only ‘average’ employees but managers can come under moral
pressure because of their assumed or real contractual or extra-contractual fiduciary or
utilitarian responsibility, or because their moral autonomy is oppressed by the
processes and flows of the system due to its operation (Jack et al., 2012). While
researchers of the topic have drawn attention to the fact that the theory of ethical
human resources management and its scholars on the one hand, and its practice and
challenges on the other hand, are significantly distant from each other, the question of
ethics in sustainable human resources management has in the past years become its
central issue. Corporations have, one after the other, prepared and introduced ethical
codices regulating behaviour, cooperation and adaptation within the organization,
developing on all levels of the organization mechanisms, groups and functions of
internal control and ethical compliance, and they have participated in industry
cooperation which aims at clarifying ethical questions and the realization of ethical
operation.
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We may differentiate between four approaches to the issues of ethical human
resources management. The ethical-declarative approach – which in today’s corporate
practice is the most widely accepted one – starts from the systems, policies, guidelines
and processes applied. Its concern with questions of ethics stems from the perspective
of HR managers, corporate leaders and co-workers and looks to answer questions
about which behaviour and mode of operation is ethical and which one is not. Using
an ethical vantage point what is considered proper, acceptable and good behaviour is
then prescribed for the employees and/or the managers of the corporation. Often
Kohlberg’s moral development theory is the background for these approaches.
Kohlberg (1971) claims that organizations, just like people, go through hierarchically
organized steps of development in their attitude towards ethics. Moral argumentation
becomes ever more complex in the course of development from childhood to
adulthood, therefore both human beings and organizations get ‘ever better’ at being
able to apply ethical, legal and philosophical theories to challenges arising. On the
lower, pre-conventional level, the moral decision is motivated by wanting to avoid
punishment, followed by trying to live up to one’s own perception of fair process in
relationships based on mutuality. On the middle, conventional levels, the individual
first tries to comply with the expectations of important others, while later this
compliance is determined by societal rules and laws. On the highest, postconventional
or autonomous level, the moral decisions are determined by individual
principles of justice and lawfulness. Yet only twenty percent of people reach the
highest level of development. The majority has conventional moral sensitivity, i.e.
they are guided by close relationships and expectations verbalized by society as a
whole (Kohlberg, 1971). Thus proper ethical behavior prescribed offers primary
stakeholders guidance to moral decisions in corporate operations on the individual
and group levels.
Rather than being a statement, the ethical-conditional approach reflects
uncertainty, questions and a critical attitude: a shift from the classical – Kantian and
utilitarian – moral-philosophical justification in the direction of post-colonialist, poststructuralist
and feminist ethics, and the questioning of declarative modes of the
mainstream of business ethics, as well as the search for alternative ways and ethical
explanations. The ethical-ethnographic approach is of a descriptive nature with a
detailed demonstration of the moral challenges facing people operating in
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organizations and the possible – practice oriented – ethical solutions. The ethicalsystem
thinking approach studies moral questions in a broader cultural, political and
social context, focusing on the cooperation between organizations, the integration of
organizations into society and their compliance with expectations, social processes,
effects and challenges rather than on the individual and individual organizations
(Jack, 2012).
While researchers have noted that there is a substantial gap between
theoretical-academic research and the practical questions of corporate ethics, the
practical application of ethical issues is surrounded by a number of simplifying myths
(Trevino & Brown, 2004). One of these myths is that ethical questions are simple
since it is enough to ‘know’ which behaviour is right and which one is wrong.
However, ethical questions are often complicated, right or wrong behaviour is not
trivial and, on top of it, the right organizational interest and the individual sense of
justice often get into conflict. Frequently, ethical questions do not present themselves
as moral dilemma but rather as a task to be solved or as an everyday practice.
Downloading contents from the internet is not considered a violation of intellectual
property rights, approving a credit application of a person with low income is not
considered as putting someone at risk and authorizing as witness an official document
is not considered to be a personal action devoid of responsibility. In addition, the
effects of the working environment often suppress ethical considerations. Referring
back to the development theory of Kohlberg, on the conventional level, the majority
of people would comply with the expectations of their peers and of the working
environment rather than wanting to meet moral challenges according to their own
moral awareness. What is worse, those who approach their working environment
along ethical considerations draw the attention of their co-workers and the
management and are often accused of behaving ‘too ethically’ instead of solving the
problem at hand. The ethical arguments against this myth are intricate, often requiring
complex and long-term personal approaches and a supportive environment. Based on
the contradictory approaches, moral challenges posed by the organizationalworkplace
can be resolved in various ways. The ‘level of development’ of moral
awareness and behaviour does not depend on the moral position but on its application
– avoidance of retaliation, compliance and inner conviction.
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The other myth is that unethical organizational behaviour is caused by ‘a few
bad apples’. In other words, the organization as whole would behave ethically if there
were not some unethical people in the organization who corrupt the entire institution.
This may occasionally be the case, but generally it is not so. Milgram’s experiments
on human behaviour proved that people easily adapt to the assumed ethical position
created by the situation. The jailers easily ‘believed’ that their prisoner mates were
‘guilty’ and that they deserved their punishment (Milgram, 1974). This is frequently
true in simpler situations also: the boss-subordinate relationship often does not make
it possible to see the solution to the problem as a question of ethics, just as pressure
exerted by the boss is often justified by the expectations of the stockholders which
cannot be met by normal operation. In these cases it is hardly possible to identify the
‘bad apples’, and removing those who are thought to be guilty from the organization
will not result in more ethical operation.
The third myth is that the solution to ethical problems are formalized rules,
recommendations and processes. While research proves that in corporations where
formalized ethical processes (recommendations and codices, training, advice and
reporting) exist reporting of behaviours felt to be unethical by far exceeds (by 78%)
the reported cases where there are no such processes, the processes on their own are
not sufficient for ethical corporate behaviour to come about (Ethics Research Center,
2003 quoted by Trevino & Brown, 2004). Each of the corporations that caused the
most significant ethical scandals of the last decade (Enron, Arthur Andersen,
WorldCom, Exxon, Volkswagen) had a detailed and well worked out ethical codex
and internal control mechanism. The reasons for unethical behaviour are complex, as
we have seen. In order for a corporation to be concerned about ethical issues, ethical
values must be entrenched in the corporate culture. What is needed is the easing of
hierarchical relationships, a culture of autonomy supporting autonomous decisionmaking,
an evaluation system for rewarding ethical behaviour, corporate operation
where positive examples are demonstrated and discussed, and internal relationships
based on equality and dialogue. All in all, what is needed is a corporate culture based
on equality and openness.
The fourth myth is that ethical corporate behaviour depends solely on the
managers. There is an element of truth in this: managers are important players in
shaping and representing corporate culture. However organizational culture is a
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complex system in which individual behaviour – whether in a positive or a negative
sense – has limited effect. Furthermore, one must distinguish between the moral
human being and the ethical manager. It often happens that an otherwise moral person
is motivated by a conventional desire to comply within the organization. Conversely,
it also happens that a person with a less developed moral awareness is forced into a
strict behavioural framework by corporate culture and the system of social norms. In
other words, the question of managerial ethics can be represented as a matrix where
the two axes are strong/weak personal conviction and strong/weak managerial ethical
approach. The manager with a weak personal conviction but strong ethical
management approach is the ‘hypocritical leader’; the manager with a strong personal
and weak management ethical approach is an ‘ethically mute leader’; the boss who is
weak in both senses is the ‘unethical leader’; while the leader strong in both senses is
an ‘ethical manager’.
[Trevino-Brown diagram]
The fifth myth is that the ethical behaviour of both individuals and organizations
keeps deteriorating. To refute this myth be it sufficient to refer to a classic text: more
than one hundred of the 613 rules regulating life and ethical behaviour in the Talmud
are about ethics in economic-business activities (Kahaner, 2003). As Alan Greenspan,
former Chairman of the FED put it: “It is not that humans have become any more
greedy than in generations past. It is the avenues to express greed [have] grown so
enormously” (Greenspan, 2002, p. 4). In other words, it is not people who have
become less ethical during the years but the complexity of challenges has increased
significantly, as have the opportunities to conduct self-interest centered behaviour.
(Trevino & Brown, 2004).
All things considered, the ethical foundation of responsible corporate
management requires complex modes of management and operation which cut
through traditional corporate hierarchies of power, processes and institutions. The
answer to ethical challenges (also) presumes relationships based on equality and
dialogue, and the creation and operation of a corporate culture – setting up the
institutions for managing stakeholder conflicts on an ethical basis – building on
openness and equality.
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The most significant challenge to the traditional approach to HRM was
formulated by the application of the social criticism of Michel Foucault, the French
social philosopher, to human resources management. Power, or rather the relationship
of power and knowledge, as well as institutions, the control mechanisms and
supervision created by them, and their effects are at the centre of Foucault’s research
(Foucault, 1988; 1990a; 1990b; 2011). He derives his criticism of the traditional
approaches, and especially practices, of human resources management from an
analysis of the connection between power and knowledge in labour and the
relationship of employees and the workplace. Applying Foucauldian criticism to
HRM (taking Williamson’s transaction cost theory as point of departure), Townley
(1993) claims that the aim of HRM is to fill in the unknowns – which are typically
due to the modes of work and the individuality of the worker – in imperfect
contractual relations. In other words, HRM aims to create knowledge, thereby
reducing contractual uncertainty, and through this knowledge it creates power
relationships which uniformalize employees through oppression and deprivation of
civil liberties. Put another way, it creates order and discourse which organizes the
physical and discursive space in a way that, due to the calculability of this space, the
uncertainty between promises and performance can be reduced: so that individuals
become transparent and manageable. The tools for this – in Foucauldian language –
are enclosure (discursive designation of the workplace and demarcation of it from
other workplaces), partitioning (fixing the workplace of individual workers) and
ranking (organizing the workers into a hierarchical order). By structuring work spaces
and by creating demarcations and separations between the work processes and their
executors, and by creating a hierarchy between them, HRM establishes the discursive
institutions of control and supervision, and of compliance and ‘normalization’; by
determining working hours, by dividing up the work area, by surveillance and by the
exact prescription of work processes it puts the individual and their bodies under
control (it regulates their operation through the use of specific language); through the
system of evaluation and self-development and through ‘admission’ of weaknesses
and mistakes, it forces employees into a humiliating and deprived situation (in other
words, it deprives them of freedom and independence with the help of the discourse
setup). The individual becomes predictable, calculable and manageable through the
creation of the specific language, the institutions and processes of HRM (Townley,
1993). Therefore, in this approach human resources management is not a tool for
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developing organizational efficiency, competitiveness and human capital but an area
for political power and victimization for employers. From an ethical point of view, in
this approach the aim of HRM is to deprive employees of their independence, and
from a political viewpoint, its aim is to force the employer’s moral leadership onto
employees, creating their oppression and subordination.
The other criticism of traditional HRM is based on the stakeholder approach.
This claims that deficiencies and inadequacies of traditional HRM indicate that soft
HRM is in reality not an ethical approach; since cooperation with employees does not
necessarily mean that their interests and values get built into the business operation. It
is conceivable that the engagement of employees means representation and execution
of organizational interests and/or economic goals without a responsible and ethical
approach towards the employees. While ‘employees’ may be the most important
stakeholder group, their involvement in decision-making does not in itself mean the
implementation of ethical and responsible aspects. Stakeholder involvement is based
on an analysis of stakeholder interests and values, the aim of which is not one of
ethics since it basically serves organizational-strategic purposes. The stakeholder
approach is ethically neutral because getting to know and assessing the interests and
values of stakeholders is done in the interests of organizational goals and they
basically serve to manage stakeholder risks (Greenwood, 2004).
In view of the above, therefore, for the interpretation of sustainable human
resources management an approach is need which is based on the stakeholder theory,
yet which also takes ethical aspects into account and which organizes the possible
management practices into a matrix according to whether the extent of employee
involvement is strong or weak and whether the implementation of ethical aspects
regarding employees is strong or weak. If responsible or ethical aspects related to
employees are not taken into account and there is no involvement, one speaks of
‘hard’ human resources management, where the discourse is completely ruled by
efficiency, cost reduction and goal-oriented employer attitude. If employees’ interests
are considered but there is no involvement (i.e. there is an acceptance of and support
for employees’ interests by the employer yet these do not get built into the operation)
a ‘paternalistic’ approach is applied. A low grade responsibility or ethical view which,
however, allows for consultations with employees in line with the strategic interests
of the company indicates ‘soft’ HRM. The involvement of employees coupled with a
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high degree of ethical commitment and consideration for the interests of employees
indicates ‘ethical’ human management practice. The theory of stakeholder approach
HRM shows that the practice of human research management building on employee
stakeholder involvement and the ethical approach from the employees’ viewpoint
must be applied simultaneously: this can lead to sustainable human resources
management (Simmons, 2008).
[Simmons diagram]
For the implementation of the responsible stakeholder approach therefore, the
inclusion of ethical aspects into the processes of HRM is needed. For the ethical
aspects to exert their effect horizontal (management, middle management, employee
representatives, stockholders and regulators) and vertical (management, functional
units and teams) cooperation and involvement is also necessary. In this approach, too,
institutionalized – political – discursive processes and channels are required for the
ethical aspects, i.e. for aspects of justice regarding employees to prevail. Managing
conflicts, dialogue and concluding agreements between various stakeholders in the
process of stakeholder involvement brings about conditions of ‘system procedural
justice’ within HRM whereas acting according to the ethical approach (feedback and
equality), i.e. the perception of employers’ fairness by the employees creates ‘system
distributive justice’ (Simmons, 2008).
Political human resources management
The theory and practice of human resources management in itself is no guarantee for
the emergence of responsible operation. As is apparent from a Foucauldian criticism
of HRM traditional institutional discourse on HRM creates a power-based and
oppressive framework. Realizing stakeholder viewpoints and their ethical approach
provides the opportunity for both the aspects of distributive and procedural justice to
become effective through stakeholder involvement. However, for a shift through
responsibility to take place it is necessary to enforce stakeholder justice. Here again
Foucault’s approach is called to assistance.
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The basis of Foucault’s (1990b) late ethics – partly as criticism of the
institutional discursive ethics of Habermas – was action-ethics, based on “caring,
development and fulfillment”. In his definition, “[A] moral action tends toward its
own accomplishment; but it also aims beyond the latter, to the establishing of a moral
conduct that commits an individual, not only to other actions always in conformity
with values and rules, but to a certain mode of being, a mode of being characteristic
of the ethical subject […] for an action to be ‘moral,’ it must not be reducible to an
act or a series of acts conforming to a rule, a law, or a value. Of course all moral
action involves a relationship with the reality in which it is carried out, and a
relationship with the self. The latter is not simply ‘self-awareness’ but self-formation
as an ‘ethical subject,’ a process in which the individual delimits that part of himself
that will form the object of his moral practice, defines his position relative to the
precept he will follow, and decides on a certain mode of being that will serve as his
moral goal. And this requires him to act upon himself, to monitor, test, improve, and
transform himself. There is no specific moral action that does not refer to a unified
moral conduct; no moral conduct that does not call for the forming of oneself as an
ethical subject; and no forming of the ethical subject without ‘modes of
subjectivation’ and an ‘ascetics’ or ‘practices of the self’ that support them. Moral
action is indissociable from these forms of self-activity, and they do not differ any
less from one morality to another than do the systems of values, rules, and
interdictions” (Foucault, 1990b, p. 28). In other words, Foucault found the basis for
moral conduct in the “practices of the self” occupying itself with identity and
development: in conscious and voluntary actions where the individual does not only
comply with the laws and adapts to rules but becomes an independent individual
creation through self-transformation. As such Foucault recommends that by focusing
on oneself instead of complying with rules and institutionalized processes enforcing
right action, observing the practices of power also embodied by HRM, understanding
it and viewing it critically, one should shape one’s ethical actions through opposition
to the logic of power. Thus, he looks upon institutionalized discursive spaces and
processes, as proposed by Habermas, with suspicion, yet he is confident that
individuals and their communities will realize that by viewing the oppressive
apparatus of power critically and by becoming independent of the actions expected by
it from them, individuals will be able to act according to their own moral desires
(Crane et al., 2008).
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In applying “practices of the self” to the stakeholder approach, the individuals
acting as stakeholders must first “create themselves” as stakeholders. They must
establish an identity-, value- and interest position in consultation with themselves and
with others in the same stakeholder position. In Foucauldian language a stakeholder
must ‘define his position relative to the precept he will follow’, he must define his
interest and value positions, a certain mode of being, stemming from being a
stakeholder, and based on this he must draw up the agenda that ‘will serve as his
moral goal’. It follows that the corporation as stakeholder community delegates tasks
to stakeholders as well: it is not enough to expect the mapping and involvement of
stakeholders but active steps must be taken towards creating stakeholder positions.
This is not obvious since every individual can be member of numerous stakeholder
communities and can hold numerous stakeholder positions. This means that the
‘stakeholder practice of the self’ requires active responsibility on the part of the
stakeholders in the course of which – to achieve an ethical decision-maker/employer
attitude – first the stakeholder-self has to be defined and made public observing and
unveiling the power-based discourse of HRM, followed by enforcing engagement
through continuous shaping and development of the stakeholder self. The
‘stakeholder-self’ thus established must be represented in dialogue with other
stakeholders parallel to continuous consultation about the own stakeholder interests
and values within the own community as a result of the process of dialogue.
Sustainable human resources management is a complex and multi-polar practice, in
which the vertical and horizontal processes must be supported by definite ethical
aspects, besides the stakeholders themselves having to continuously reflect on their
own positions and develop ‘stakeholder-self practices’ in order for the stakeholder
community as whole – the corporation – to be able to benefit from it. From a
Foucauldian perspective “a redirection in management of business ethics away from
compliance towards integrity puts greater emphasis on the moral capacities of the
individual. However, Foucault’s ethics suggest a somewhat different path to achieve
self-governance. Instead of encouraging employees to live up to a set of core values
by training them in what the organization stands for, or even facilitating constructive
criticism of these values in order to generate a more adaptive set of values, the focus
would be on providing an enabling environment that facilitated active, creative and
innovative processes of subjective self-formation. This shifts the focus from the
company and its values to the individual. Thus, ethics would become an emotional,
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embodied, lived experience rather than an instrumental response to externally
constructed values or rules” (Crane et al., 2008, p. 25).
Having analysed responsible corporate management, responsible attitude to
the environment, sustainable supply chain and responsible human resources
management, we claim that responsible corporate behaviour is essentially political
corporate responsibility: incorporating stakeholder values and interests into business
operation, reducing the impacts of corporate operation and of their harmful economic,
ecological and cultural consequences, engaging in public deliberation, collective
decisions, the provision of public goods, and the realization of stakeholder well-being
and corporate profitability according to the principles of TBL can only be achieved
through political processes of stakeholder democracy; a deliberative democratic
corporate polity entrenched in a system of free and equal (corporate) citizens
defended by a system of corporate checks and balances offering opportunities for
developing the stakeholder self as well as for unveiling corporate power-discourse.
The discourse ethics of Habermas and the political corporate responsibility based on it
sees the political model of stakeholder democracy and responsibility in
institutionalized and equality based discursive processes: the institutionalization of
public dialogue and the modes of processes of social will-forming with corporate
participation. According to Beck’s risk-society model, political social responsibility
similarly presumes the emergence of institutionalized discursive processes. Its basis
is, however, not the rational justification of decisions but the acceptance of the
consequences and the possibility of continuous re-evaluation of the consensus.
Therefore, the guarantee for the emergence of stakeholder democracy, equality and
participation is provided by the creation of institutions of – as Berlin (1958) called it –
‘plural liberties’ supported by corporations and achieved with corporate participation.
These institutions approach decisions from their consequences and aim at the creation
of a stakeholder consensus that is temporary and can be modified by mutual intent,
rather than at universally valid ethical agreements. Responsibility practices building
on Foucault’s model view discursive institutions with suspicion as these are
considered to be reflections of the violence of stakeholders in positions of power and
therefore they put the emphasis on the individual stakeholder. Stakeholders first have
to create themselves as stakeholders, i.e. they must assume a stakeholder identity
based on which then they must make their stakeholder-self public; and they must
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force stakeholder engagement and dialogue based on equality and they must bring
about temporary consensus between the stakeholders and within the stakeholder
identity community by observing corporate power discourse, by unveiling it, and
through the continuous shaping and developing of their stakeholder self. Both the
unveiled power discourse and the temporary consensus serve the interests of the
whole corporate stakeholder community – i.e. the corporation – since it may secure
the engagement and involvement of all the stakeholders and an increase in efficiency
and competiveness of both the processes and results through a reduction of
transaction costs. We now turn our attention to the appearance of responsible
corporate operation in the market, i.e. to responsible marketing.
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6. RESPONSIBLE MARKETING
Why is the Doughboy afraid?
On 29th
March 1984, Ben Cohen and Jerry Greenfield were working on putting
together the documentation that was necessary for launching their company on the
Vermont stock exchange. The phone rang in the office and Paul Tosi, one of the
biggest local distributors of Ben & Jerry’s ice cream manufacturing company was at
the other end of the line. Ben picked up the phone. “There is something very
important I want to talk to you about, but it is nothing for the phone. Let’s meet
tomorrow, as soon as you are available.” The next day the three of them met and this
discussion changed ice cream history.
Ben & Jerry’s was founded in 1978 by two chubby college friends who simply
loved to eat. Neither of them finished university. They attended a five-dollar course
on ice cream making and then – with an investment of 12,000 dollars of which two
thirds was borrowed – they refurbished a dilapidated petrol station where they opened
their first ice cream parlor in Burlington, Vermont. The ice cream parlor did well,
therefore they built an ice cream manufacturing plant and started selling pre-packaged
ice cream. Ben was suffering from anosmia – the impairment of sense of smelling –
therefore large pieces of biscuits and other sweets were mixed into Ben & Jerry’s ice
cream. This later became the specialty of the brand. By the early eighties the ice
cream with peculiar, fantasy names was sold in numerous supermarkets in the state of
Vermont.
At the personal meeting Paul Tosi informed the owners that Häagen-Dazs, a
much larger ice cream manufacturer than Ben & Jerry’s, had threatened the
distributors that if they carried Ben and Jerry’s they would lose their Häagen-Dazs
distributorship. The Danish sounding yet American brand was one of the most
popular and well-known premium ice cream brands available in every shop. The
company was founded in 1961, and acquired by Pillsbury, a multinational food
company, in 1983. What Paul Tosi said in the meeting meant grave danger for Ben &
Jerry’s but it also offered a huge opportunity.
In the next few days Ben spoke with a number of their distributors who told
him a similar story. Jim Richards, the sales manager of Häagen-Dazs had phoned
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numerous distributors and told them that Häagen-Dazs would terminate their
cooperation with them if they carried on distributing Ben & Jerry’s products. Cohen
and Greenfield initiated legal procedures at once but were only too aware that they
would not be able to finance the long legal procedure and that the large corporation
owning Häagen-Dazs would probably win in court. Therefore they decided to call on
the consumers and other stakeholders supporting Ben & Jerry’s to help.
The most important decision was to attack Pillsbury instead of Häagen-Dazs.
An argument between Ben & Jerry’s and Häagen-Dazs would have been nothing
more than a fight between two ice cream manufacturers, whereas an action against
Pillsbury made the story look like a struggle between David and Goliath. The
advertising icon and brand mascot of Pillsbury was Poppin’ Fresh, the Doughboy, a
caricature of a baker’ apprentice because the leading products of the company were
frozen bakery products. The doughboy – resembling a popular mass-produced
sculpture and memento sold America-wide in the twenties and thirties –
emblematized the World War I. America soldier in US mass-culture. The muscular
apprentice with his huge hands symbolized the school-dropout who signed up in the
army in the Great War. The slogan of Ben & Jerry’s campaign was “What is the
doughboy afraid of?” referring simultaneously to Pillsbury’s nationally recognized
brand mascot and to the American hero who is not afraid of anyone. Ben sensed the
opportunity that this could make him and his company heroes if he forced the
‘heartless’ corporation to withdraw. He asked Jerry to fly to Arizona to start a
personal demonstration in front of Pillsbury’s head office. Jerry stood in front of the
entrance with a picket sign with the slogan on it. He distributed flyers with the whole
story and a call to join the campaign. The flyer – with the title: ‘American dream’ –
described the difficult early years of Ben & Jerry’s, contrasting it with the story of
Pillsbury that had a turnover of four billion dollars. The question was posed: “Now
that you know the whole story, what do you think? Do you think the Doughboy is
afraid of two guys working with 23 people in 4,000 square feet of rented space?” one
of their flyers read. “Do you think the Doughboy is afraid he’s only going to make
$185.3 million in profits this year instead of $185.4 million? Do you think the
Doughboy is afraid of the American Dream?” (Lager, 1995, p. 115). The other side of
the flyer was an order for the Doughboy Box containing a pre-printed letter of protest
and a T-shirt which made its wearer part of the campaign. At the bottom of the flyer
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there was a toll-free number which could be called to register, to protest and to ask
questions. Ben & Jerry’s did everything so that local and national newspapers would
pick up the story. Within days the phone did not stop ringing, hundreds registered and
ordered protest letters and T-shirts. Articles appeared in the New York Times and in
the Washington Post: the photo of Jerry’s flyer distributing campaign became the
cover story. However, Ben & Jerry’s did not stop here, just as Häagen-Dazs also
increased the pressure on their distributors. Jim Richardson announced that
distributors selling Ben & Jerry’s after July 9 would not be supplied with HäagenDazs.
As a reply, Cohen and Greenwood likewise intensified their national presence:
they bought an advertisement in the Rolling Stone magazine for 250 dollars. “What is
the Doughboy afraid of? Help two hippies from Vermont in their fight against the
huge Pillsbury corporation. Send one dollar and we will send you the full story
together with a bumper sticker!” In August they bought a billboard next to the busy
Route 128 leading into Boston with the text: “Don’t let Pillsbury squash Ben &
Jerry’s!” Posters with the same text could be found on many buses in Boston. At the
peak of the campaign an aeroplane pulled a banner with this text as it flew over the
packed football stadium of Foxboro. By now four hundred protest boxes were being
sent out weekly, volunteers organized local supporters and Charles Pillsbury, great
grandson of the founder, a renowned human rights lawyer, wrote a letter to the CEO
of Pillsbury criticizing the behaviour of the corporation. The reputation of Pillsbury
lay in ruins and the company was on the losing end in the eyes of the public. The
agreement prohibiting Häagen-Dazs from forcing distributors to choose between two
competing products was signed on the 6th
of March, 1985. The ‘two hippies’ who
turned to the stakeholders for help came out winners (Lager, 1995).
By the end of the nineties Ben & Jerry’s was the best known US social brand.
Sustainability, social commitment and responsibility became part of their business
operations and they spend a portion of their profits on societal goals. But the story
does not end here. In 1993 traders accused the company of illegally limiting the
distribution of competing ice cream manufacturer – just like Pillsbury had done
earlier. It was also said that some of the products of the company supposedly so proud
of the local values of Vermont were not manufactured in Vermont, and that the fat
content in some of the products was higher than permitted. As human beings they are
very kind and responsible – said a trader, Chuck Schiffer – but “[c]orporately, they're
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absolutely vicious” (Newsweek, 1993). Business life is complex. In 2000 the founders
sold the company to the global corporation Unilever, which consented to keeping the
model of responsible operation –, as did L’Oréal when it bought Body Shop –
similarly to L’Oreal who bought Body Shop.
The theory of responsible marketing
Ben & Jerry’s “Doughboy” campaign pinpoints important issues of responsible
marketing. Almost every element of it can be studied from the viewpoint of ethics as
well as of responsibility. The market limiting behaviour of Häagen-Dazs/Pillsbury
underlying the Ben & Jerry’s campaign can be approached from an ethical viewpoint.
So too can the campaign activity of Ben & Jerry’s using political tools and making
social phenomena outside of what is strictly business (such as myths and values –
‘hippy’, ‘American dream’ and the fight of ‘David and Goliath’ ) part of marketing
communication. The campaign shows that marketing – sales, addressing consumers
and the interpretation by potential consumers – cannot be void of scrutinizing social
values and impacts.
Marketing is more than the public communication of the brand in the interest
of influencing product-related consumer decisions. In the widest sense, marketing is
“a social and managerial process by which individuals and groups obtain what they
need and want through creating, offering, and exchanging products of value with
others” (Kotler & Armstrong, 1997, p.7). This means that marketing is a social
activity based on continuous exchange, in which the primary stakeholders are the
participating parties in the transaction, while at the same time the process of the
transactions impacts other stakeholders and society as a whole. The transaction is
often a product or service but it can also be knowledge, connections or other valuecarrying
goods which can have social effects outside the transaction (Bauer et al.,
2014). As participants in the transaction always have an effect on other stakeholders
and on the whole of society, ethical questions always arise in connection with
marketing activities (Reidenbach & Robin, 1990; Smith & Quelch, 1993). Exchange,
as the central element of marketing, always involves responsible behaviour, since
“trust, equity, responsibility and commitment are important for the development of
relational marketing exchanges” (Gundlach & Murphy, 1993, p. 42).
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Consequently, ethical issues were discussed in marketing literature early on;
just as the field of marketing management was an important area of research into
business ethics (Smith & Murphy, 2012). It is only natural that the opposite view also
appeared, stating that marketing was per se unethical, and going so far as to state that
the lack of ethics was a necessary element of marketing. As Farmer (1967) put it in
his, by now classic, marketing critical study: “For the past 6,000 years the field of
marketing has been thought of as made up of fast-buck artists, con-men, wheelerdealers,
and shoddy-goods distributors. Too many of us have been ‘taken’ by the tout
or con-man; and all of us at times have been prodded into buying all sorts of ‘things’
we really did not need, and which we found later on we did not even want ” (Farmer,
1967, p. 1).
On the other hand, when studying marketing it is not enough to look at
whether decisions made in the course of exchange aimed at satisfying the different
desires, expectations and needs are morally right or wrong, but the intended impact of
the processes on different stakeholders must also be considered. Thus, responsible
marketing can be approached from two different angles: marketing ethics and societal
marketing. Every marketing activity has a social impact. The difference is that the
ethical dimension of societal impacts studies the non-intended consequences and/or
how decision-makers are aligned to normative principles, while societal marketing
looks at the intentional, benefit-oriented social impact of the exchange process.
Marketing ethics
The ethical dimension of marketing has for long occupied the minds of theorists
therefore there is a rich literature on the theoretical and also the management-focused
approaches to marketing ethics (Tsalikis & Frietzsche, 1989; Smith & Murphy, 2012).
Ethical approaches study the ethical dimension of the marketing processes: what the
key aspects for ethical consideration are and how the process of ethical decisionmaking
works. This approach focuses primarily on the ethical problems facing
marketing decision makers and marketing managers, as well as on ethical decisionmaking
itself, its frameworks and application of traditional moral philosophy
principles. This is the positive approach to marketing ethics. On the other hand, the
normative approach to marketing ethics studies how marketing decision-makers
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should decide, what the right and the wrong decisions are, and what is or could form
the basis for ethical decisions.
Even early on, the extensive literature on marketing ethics used empirical
means to study how marketing experts make their decisions and which aspects they
consider when evaluating the ethics of their decisions. Some researchers, having
conducted in-depth interviews with marketing experts, found that while some of them
used ‘moral imagination’ when making their decisions thought to be right, the
majority suffered from ‘moral myopia’, i.e. they thought that what complied with the
letter of the law was also ethical. Others again demonstrated ‘moral muteness’
professing to the “[t]he client-is-always-right syndrome [not wanting] to tell clients
‘no’ regarding ethics” (Drumwright & Murphy, 2004, p. 14). Yet other authors
studied the use of ‘Machiavellian marketing”, i.e. how widely spread forceful,
manipulative and influence asserting behaviour in marketing was. As they see it,
while in certain areas of marketing and in certain age groups the Machiavellian
tendencies are stronger and here more people can be found with ‘high Mach’ (i.e.
highly manipulative and forceful) attitudes as measured on a predetermined scale, it
cannot be stated that the majority of people working in marketing would have
Machiavellian character traits. According to them – having done research on one
thousand members of the US Marketing Association – there are no more
Machiavellian people working in marketing than in society generally (Hunt &
Chonko, 1984).
One of the best known and most cited studies on positive marketing ethics is
the ethical decision making model of Hunt and Vitell (H–V model), published in
1986. The model scrutinizes the question of how marketing people make decisions
when they realize that these decisions have an ethical dimension as well. Their point
of departure is that when marketing experts realize that there is an ethical dimension
to a decision, they look at possible alternatives. The choice between alternatives will
in the first instance be one of deontology: checking for the right or wrong position
relative to a pre-determined norm. According to the authors, the starting point for this
could be some general ethical conviction regarding fair behaviour, fraud and stealing,
or a situation-specific opinion, such as misleading advertisement, product safety, rechanneling
of monies or data safety. According to the H–V model, the form of
applying the norm will either be ‘it is always right that…’ or ‘it is generally right
that…’. In other cases, marketing people use a teleological approach, which means
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that they will look for the possible consequences of the decision. The H–V model
studies four theoretical points of departure: the impact of perceived consequences on
different stakeholder groups; the probability of the consequences actually ensuing in
different stakeholder groups; the desirability of each consequence, and the importance
of each stakeholder group. Thus, the model does not study which ethical decisions are
desirable, nor the ‘right’ or general ratio between the deontological/normative and
teleological/consequential approaches. The purpose of the model is to analyze which
ethical positions, institutions and processes inform deontological and teleological
approaches, and what kind of influencing factors there are or could be — group
effects, personal opportunities supported by the alternatives, personal convictions and
character traits — which could bring further ethical variations into the decision
making process (Hunt & Vitell, 1986; Hunt & Vitell, 1993; Hunt & Vitell, 2006). The
model, the variations in the decision making process and the different ethical
approaches were tested in numerous empirical experiments and were verified partially
or to the full (Mayo & Marks, 1990).
Beside Hunt and Vitell a number of other authors have dealt with corporate
marketing ethical decision-making processes. They studied to what extent various
corporate institutions (processes, regulations and codices) strengthen ethical
decisions; research showed that bureaucratic ethical processes enhanced the perceived
significance of ethical questions in the same way as they did the probability of ethical
decision making (Ferrel & Skinner, 1988; Singapakdi & Vitell, 2007).
[Laczniak-Murhy diagram here]
The normative approach to marketing ethics – based on the classic work of
Clarence Walton – searches for an answer to the question: ‘what is the right or wrong
decision on the market?’ (Eells & Walton, 1961). Taking this question as point of
departure, many an author has tried to find the theoretical basis of marketing
decisions, primarily along traditional normative ethical considerations. The best
known work of this school of thought is the one by Laczniak and Murphy (2006)
which presents an ethical marketing decision making system based on seven ethical
principles “anchored in moral philosophy, business ethics research, corporate social
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responsibility frameworks, public policy thinking, religious values, legal guidelines,
and a modicum of utopian idealism about how marketing practices might be ethically
improved from both an organizational and societal standpoint” (Laczniak & Murphy,
2006, p. 157). In this system the ethical foundation rests on the following essential
basic perspectives (BPs):
- Ethical marketing puts people first;
- Ethical marketers must achieve a behavioural standard in excess of
the law
- Marketers are responsible for whatever they intend as a means or
ends with a marketing action
- Marketing organizations should cultivate better (i.e., higher) moral
imagination in their managers and employees
- Marketers should articulate and embrace a core set of ethical
principles
- Adoption of a stakeholder orientation is essential to ethical
marketing decisions
- Marketing organizations ought to delineate an ethical decision
making protocol
According to Laczniak & Murphy (2006) these principles make up a decision-making
system which, if adhered to, sufficiently assists marketers to make right decisions.
Other theoreticians turn to traditional authors of moral philosophy for defining a
normative marketing ethics. Aristotle’s virtue ethics, the discursive ethics of
Habermas, the moral development theory of Kohlberg, as well as Rawls’ social
justice theory, have all served as the basis for the ethical approaches of authors
concerning themselves with marketing ethics (Ferrel et al., 1989; Nill, 2003; Laczniak
& Murphy, 2008). On the other hand, there are authors who view the ‘great ethical
narratives’ with scepticism and suggest that the normative approach should be
replaced by marketing ethics’ own situational ethics, following three basic principles:
it accepts certain forms of moral relativism; it has restricted validity in time and
space, and it is primarily of a descriptive nature (Reidenbach & Robin, 1993). Others
have formulated their criticism of the whole marketing ethics ‘project’ claiming the
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“total redundancy and superfluity of marketing ethics”, asserting ”[w]hat are almost
universally positioned as ethical issues in marketing are, in reality, nothing more than
legal or economic issues” and should “concede that it has nothing to say beyond
‘obey the law’ and ‘act in your own commercial interest’” as well as “the subject of
marketing ethics appears to be completely undistinguished, feckless, jejune, and
vacant operationally, offering not an iota of content distinct from other established
normative concepts” (Gaski, 1999, pp. 328-330).
Issues of marketing ethics are not only present in “great narratives” or ethical
decision-making processes in general, but also in numerous sub-areas. Marketers and
decision makers in business continually have to face challenges of self-interest driven
behaviour and ethically proper decisions. One of the challenges in the sub-areas of
marketing is to achieve the ‘result’ that best serves the interests of the principal –
which may often come into conflict with the representation of the interests of other
stakeholders. Similar ethical conflicts are, among others, questions of information
inequality, data safety and the interest collision between different entities’ rights to
the protection of their personal data and the enforcement of business interests. The
issue of marketing ethics clearly demonstrates conflicts stemming from the diverging
interests of different corporate stakeholder groups. These conflicts may be resolved
by political institutional means based on moral foundations.
Market research
Ethical dilemmas surface when the individual realizes that – in executing a task –
there is a conflict between the obligation or expectation towards one group of
stakeholders and a similar obligation or expectation towards another group (including
the individual’s own point of view). The most important ethical dilemmas in market
research arise in connection with the obligations and expectations between principal
and researcher, and between researcher and respondent (Malhotra & Simon, 2009).
They relate to the security of the research subjects’ information (open access of data,
informed consent and sampling methods) and to the relevance of the decisions of
participants in the research (students, ‘experts’). Ethical case studies in business
schools often discuss the question of data manipulation when research results do not
fully serve the interests of the client, the criteria of the initial hypothesis or the
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marketing sub-contractor. The most important ethical objective is to safeguard
research integrity (complying with professional, efficiency and sampling principles).
The recurring ethical dilemmas of research are financial in nature: they stem from the
conflict between the self-interest of the individual/sub-contractor (the dilemma of the
effectiveness of the fees payable for regular or ad-hoc research), and the interests of
the client; and between the assumed or really expected results and the professional
aspects of the research (Hunt et al., 1984).
Ethical advertising
The most significant ethical dilemma in advertising stems from the presumed
stakeholder conflict of interest between the principal and the target groups of the
advertisement. Research has pointed out the various possible ethical aspects of
distortion, misleading, unfair influence and communicative assault in advertising
(Becker, 1970). Others have questioned the applicability of the term ‘truth’ to
advertising: the goal of advertising is to convince and to make the product or service
attractive, therefore – they claim – being ‘truthful’ can hardly be viewed as an ethical
criterion for advertising. As such, various authors examined the ethical aspects from
the viewpoint of advertising professionals, focusing on aspects which determine, or
may determine, the basic attitude of those working in the advertising industry. As a
result, the emphasis of the questions posed regarding ethics shifted from the content
of advertisements to the ethical judgment of the makers of advertisements and the
decision-making processes. As discussed above makers of advertisements often suffer
from moral myopia, i.e. they do not realize the moral aspects of their activity on the
one hand, while on the other hand, they use distorted moral foundations in the
interests of being able to rationalize potential dilemmas according to aspects of
effectiveness and compliance. Ad makers often refer to the misguided ethical
principle of ‘what is legal is also ethical’, just as they protest against taking ethical
aspects into account, saying that it would mean the ethical censorship of
advertisements. They claim that addressees of advertisements are, as they see it,
clever and broad-minded enough to be able to defend themselves against possible
harmful effects. Others again suffer from ‘moral muteness’: while they realize the
moral challenges, they separate their own moral convictions from the interests of the
corporation and keep quiet about practices considered unethical by them. Their
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excuses stretch from ‘the interests of the corporation must be kept in mind’ to ‘the
client is always right’ principle. Naturally, as researchers have pointed out, these
modes of moral operation do not only appear in the world of advertising (Drumwright
& Murphy, 2004).
Some authors go beyond the possible advertiser-addressee-principal
stakeholder conflicts of interest and study the cultural impact of advertising
(Törőcsik, 2009). Many critics of advertising speak of advertising’s ‘false’ power of
conviction, or in a broader sense, the negative cultural effects of commercialism: the
declaration of the primacy of material values, the destruction of the traditional family
and religious communities, the ‘distortion’ of reality, idealized ‘happiness’ and the
heralding a ‘good life’ by transmitting imperfect and partial information. Following
the publication of Pollay’s “The Distorted Mirror: Reflections on the Unintended
Consequences of Advertising” – in which he studies the cultural effects of advertising
based on analyses of anthropologists, sociologists and philosophers – a major debate
emerged about the undesired effects of advertising and about the necessity of wellfounded
research into this issue (Holbrook, 1987; Pollay & Mittal, 1993).
With the emergence of digitization and the internet new marketing ethical
problems surfaced. Besides the appearance of traditional questions of copyright and
intellectual property in the world of the internet – what protection is assigned to an
original intellectual work, what rights does the author of the intellectual work possess
regarding the use of their name, the content and modification of their content –
numerous ethical issues have emerged with regard to personality, safety of personal
data and generally the safety of information. Recent debates concerning ‘filter
bubbles’, ‘echo chambers’ and other adverse effects of social media as well as recent
cases of ‘fake news’ and the negative and untrue information spread through channels
of advertising on social media platforms are all cases in point (Gil de Zúñiga, 2017).
Questions of marketing ethics will remain in the focus of debates: consequences of
information asymmetry and power inequality between producer/seller and consumer,
the increasing emphasis on human well-being, the spreading of a stakeholder
approach in corporate operation, ethical consumption, increasing ecological
responsibility all need increasing ethical sensitivity in marketing processes.
Societal marketing
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From the 1970s on it has become increasingly accepted that the responsibility of
marketing reaches beyond the practice of value-based exchange building purely on
desires and needs manifested in products and services. Kotler (1972) described the
social responsibility of marketing as it “should deliver value to customers in a way
that maintains or improves both the consumer’s and society’s well-being. It calls for
sustainable marketing, socially and environmentally responsible marketing that meets
the present needs of consumers and businesses while also preserving or enhancing the
ability of future generations to meet their needs” (Kotler & Armstrong, 2012, p. 9).
To put it another way, societal marketing means that the corporation, with the help of
marketing resources and personnel, sets significant and socially important goals and
facilitates the engagement of as many people as possible in socially beneficial
activities (Bloom et al., 1995). The spread of societal marketing gave rise to
significant debates: some see it as the greatest society-shaping power of marketing
(Smith, 1994), while others claim that advertising freed of its limitations does social
damage (Garfield, 1991).
Societal marketing formulates both economic and non-economic goals and
provides the corporation with the necessary resources for achieving them. As an
activity it in many cases reaches beyond the responsibility of the marketing
practitioners and involves a number of other business units in reaching societal goals.
Sometimes the ratio of economic and non-economic objectives tips the scale towards
the non-economic objectives as it also happens that the goal is not to involve as many
people as possible in socially important activities (donation, voluntary work, selective
waste collection, etc.) but to raise awareness regarding socially useful and important
values (women’s equality, domestic violence, the importance of reading, etc.). From
an ethical/responsibility point of view, three types of activities can be differentiated:
societal marketing actions serving economic, non-economic and mixed goals. In the
case of campaigns with an economic purpose, the social consequence can be regarded
as a spillover effect, since the campaign is aimed at selling goods or services. Such
marketing actions could be an advertising campaign targeting specific social groups
(ethnic and sexual groups, or the physically challenged) where sometimes these
groups themselves are active participants in the campaign. Through campaigns with
non-economic goals, traditional marketing aims can be achieved indirectly,
accumulating ‘ethical capital’ which can later, in the event of damaged consumer
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identity, loyalty or reputation, be turned into marketing capital (Wagner-Tsumamoto,
2007).
In the case of campaigns with non-economic objectives, many have questioned
the success of these campaigns where the aspects of measuring success – precisely
because of the formulation of the social goal – are ambiguous. On the other hand, in
the case of non-economic purpose campaigns, the results for the organization, like
employee and consumer identification with the organization and inter-organizational
identification and cooperation between companies participating in the marketing
activity (e.g. client-agency), improve. It has been suggested that primarily in the case
of mixed purpose campaigns, advertisements with social dimensions are causeexploitative
rather than cause-related campaigns, i.e. the aim is not to support a social
goal/issue but to exploit the given issue in the interest of hiding or promoting
economic interests. However, consumer acceptance of advertisements with a social
dimension, their increasing numbers and the clear impact they have indicate that
primary stakeholders, i.e. the consumers, do not see these actions as causeexploitative
(Drumwright, 1996).
Societal marketing comes in many forms and shapes. In analyzing different
societal marketing activities the focus will be on whether they formulate an economic,
non-economic or mixed goal, what corporate resources they require, whether the
responsibility impact is planned or unplanned, from what source they are funded and
whether strategic corporate impacts are realized. Traditional donation is the simplest
and most widely used societal marketing activity. Donations can have non-economic
or mixed purposes, depending on whether the donation appears in the public
marketing activity of the corporation or not. Since this activity is often ad hoc,
requiring only communication resources, it is frequently dependent on the personal
preferences and commitment of the managers, the social impact is not planned by the
corporation, any stakeholder can be the beneficiary (typically they are ‘discretionary
stakeholders’ with no real power or urgency, but big social legitimacy), there is
typically low employee or other key-stakeholder participation or involvement and it is
funded from the corporation’s own resources, such as operating cost. Consequently,
strategic corporate results cannot be expected from traditional donations. Strategic
donation strengthens economic goals yet this is still not the primary purpose. It tries to
reduce the ad hoc factors in the process of donation, therefore there is a stronger tie
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between the donation activity and the strategic objectives of the corporation so that
social impact can become planned and linked to corporate goals. It often moves
resources beyond those of the marketing department and has a more definite
connection with stakeholders having legitimacy and expectations and who are
important from the perspective of the corporation. At the same time, in the majority of
cases there is a low level of employee involvement, and funding is still from the
budget allocated to donations. Corporate results can be achieved by strategic donation
primarily through strengthening the brand and stakeholder management if objectives
of stakeholders – in particular the values and objectives of consumers as stakeholders
– fit the strategic goals of the corporation well. (Porter & Kramer, 2011). Sponsorship
is a form of strategic donation where the value equivalent of the donation appears in
public in the form of communication. Here the prime goal is economic, the utilization
of corporate resources is limited to marketing and social impact is not planned. Its
purpose is basically marketing-driven: to represent the sponsored activity as a
psychographic segmenting viewpoint, to address the customer segment that holds the
sponsored goal in high esteem and to gain reputational advantage through the wide
recognition of the sponsored activity. In the case of sponsorship, the involvement of
different stakeholders, including that of employees, is low (Crimmins & Horn, 1996).
Societal advertising formulates mainly economic goals, it is limited to the
utilization of marketing resources but the social impact is often planned and strong,
like the Benetton anti-Aids campaign, the Special Olympic Games advertisements of
Coca-Cola or the advertisements of Guinness beer introducing physically challenged
sportspeople in wheel-chairs. There is a low level of stakeholder involvement and
funding comes exclusively from the marketing budget. The corporate strategic results
are improved corporate image and reputation; brand loyalty and the brand community
may generally be strengthened.
Cause-related marketing (CRM) is the best known form of societal marketing.
If it is executed well, it requires the use of the most complex and most effective
marketing tools, therefore its effectiveness is significant. CRM is a marketing activity
where the corporation formulates some socially-relevant sponsorship promise and
motivates consumers to a higher revenue-generating activity. A part of the additional
income is then spent on sponsoring a pre-determined purpose. The first, by now
‘classic’, CRM campaign was sponsorship by American Express (Amex), the credit
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card company, for the renovation of the Statue of Liberty in New York in 1983. Amex
donated one cent for every card transaction, and 1 dollar for each new card issued in
the three months of the special offer supporting the restoration of the statue. This
activity did more than result in support, it also meant advertisements advising
consumers of the sponsorship and motivating them, as well as other communication
activities. The result of the campaign was that card usage increased by 28% compared
to the previous year and 1.7 million dollars were collected for the renovation of the
Statue of Liberty (Varadarajan & Menon, 1988). Cause-related marketing formulates
mixed goals; in the strategic execution neither goal (economic/non-economic)
dominates. It moves a number of stakeholder groups but the engaged stakeholders do
not get involved based on legitimacy/power – i.e. corporate strategic – considerations
but on their issue-related interests and values. If executed well, resources other than
those of marketing are involved in the activity and the source for the sponsorship is
partly the increased corporate revenues and partly the increased frequency of
purchases by consumers or the engagement of new consumer segments. The strategic
result is increased revenue and the strengthening of brand image and reputation. CRM
is often not limited to one corporation. It happens ever more often that a number of
different brands take part in a common CRM action, like the RED campaign
involving famous international brands. In the case of multi-brand CRM campaigns,
the involvement of stakeholders is lower, on the other hand economic benefits can be
more significant – primarily because of mutual reputation enhancement by
participants.
In a special form of CRM the cooperation involves the use of an NGO logo or
name: it is the ‘support’ of a non-profit organization that creates credibility for
communicating a product/service. Here the cooperation is virtual, the communication
of the product/service carries the ‘recommendation’ of the non-profit organization.
The principal objective of these campaigns is economic and the social consequences
stem primarily from a spillover effect: communication resources serving an economic
goal may increase recognition for a non-profit organization or the cause that it stands
for. These actions utilize almost exclusively marketing resources, and stakeholder
involvement is negligible. The strategic result is an improved reputation and the
strengthening of the legitimacy of the message. Its strategic form is ‘NGOcorporation’
strategic cooperation which builds on mutual benefits and involvement
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affecting both the corporation and the NGO. This presumes long-term common
communication, organizational connections and multi-level cooperation, including the
harmonization of visions and missions. Beyond sharing resources, multi-level
cooperation also means the mutual sharing of knowledge, experience and abilities, as
well as significant organizational interaction. Other terms for this strategic
cooperation are mission marketing, issue-centric branding or passion branding. Such
strategic cooperation presumes planned social impact in the course of which the
values represented by the NGO become part of the corporate image and of the
corporate brand. As regards the corporation, this can cause a positive social effect in a
number of important stakeholder groups: it increases consumers’ brand identity and
loyalty, it strengthens employee commitment and in potential employees the ‘desire to
join’, it enhances inter-organizational identity in supply chains, and it reduces the
potential discrepancy between personal and corporate identity in the perception of
employees. Effective and strategic cooperation moves many different stakeholder
groups and involves them in corporate and civic operation, it brings the stakeholders
of the corporation and of the NGO closer to each other, thereby creating a
‘community of responsibility’ (Berger et al., 2006).
The involvement of employees in attaining social goals can take place within
the framework of traditional volunteering. In this case the staff of the corporation
contribute their voluntary work towards some social goal. Resources are partly
provided by the corporation and partly by the employees as stakeholders. In addition
to organizational and management resources, the corporation may offer volunteers
working hour allowances. Volunteering can be ad hoc when the voluntary activity is
not regular and the social goal it attains is not closely linked to the goals of the
corporation (building a playground, nursery school refurbishing, food distribution,
etc.). The strategic form of volunteering aligns with the economic goals of the
corporation and brings about a coordinated social impact with the help of the
voluntary work of the employees. Strategic volunteering is a form of civil-corporate
cooperation where the corporation specifically draws on the professional-business
capacity and resources of employees in the cooperation (financial, marketing and
logistic), while also supporting the volunteering by providing communication and
management resources. The social impact is planned, though it is primarily aimed at
achieving economic goals. It utilizes mostly corporate resources and the strategic
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result is the engagement of employee stakeholders in the largest possible numbers,
thereby spreading corporate identity, employee branding and the culture of
cooperation.
The results of societal marketing as regards stakeholder commitment, and
therefore the strategic goals of the corporation, are not clear-cut. Consumers have a
positive attitude towards societal marketing and even show increasing consumer need,
and an ever-increasing number of consumers are open to corporate social impact
(Cone Communications, 2013). At the time when the first societal marketing actions
appeared, many predicted – because of the positive attitude of consumers – that
beside the traditional triad of consumer decisions (price, perceived quality and
serviceability) social impact would become a central aspect of consumer decisions.
Today it seems rather that there are socially aware consumer groups where societal
marketing activities positively influence perceptions of the product/service (Webb &
Mohr, 1998), while there are also consumer segments which react negatively to
similar actions, claiming that they lessen the capability of the corporation to produce
good quality products/services or increase prices disproportionally (Sen-Bhattacharya,
2001). Judgment on societal marketing actions is similarly mixed in the case of a
defensive corporate situation, where the purpose of societal marketing is to counteract
some negative perception with regard to the corporation or a product. While in many
cases such actions have proved successful there are studies showing that such actions
increased ‘consumer skepticism’ towards the corporation (Webb & Mohr, 1998).
The success of societal marketing can clearly be demonstrated in stakeholder
effects inside the corporation. Societal marketing actions increase employee
engagement, organizational identity and in many instances help inter-corporation
cooperation and the development and strengthening of strategic unity within the
supply chain (Drumwright, 1996; Sen & Bhattachyara, 2001; Lichtenstein et al.,
2004). Using societal marketing can offer corporation benefits in basically four areas:
it strengthens differentiation and consumer loyalty, increasing brand value in some
consumer segments; it counteracts negative perceptions of the corporation; it
enhances employees’ organizational identity and engagement thereby having an effect
on their efficiency and productivity; and it increases organizational identity in some
key-stakeholder groups, primarily in suppliers, cooperative partners and consumers
(Drumwright & Murphy, 2001). Among the negative effects some – successful –
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societal marketing actions excessively determine the brand perception of the
corporation thereby forcing all other activities and the brand message into the
background. Similarly, corporations which put societal marketing in the centre of
their brand identity have created unrealizable consumer expectations which the
corporation could later not fulfill, leading to the loss of a significant number of
customers in certain very loyal segments. Also, certain steps exposed the brand and
the corporation to serious attack – typically when small, expanding independent
companies like the Body Shop or Ben & Jerry’s became members of a larger
international group.
It is clear from the above that societal marketing can count on results and
enhance the achievement of corporate strategic goals, when the ratio between
economic and non-economic goals is appropriate, the social impact supported by the
stakeholders is planned and meets the strategic goals of the corporation, stakeholder
involvement is part of the action, the stakeholder groups contribute to the social
impact with their own resources, and the strategic result is measurable for both the
corporation and the stakeholders (Drumwright & Murphy, 2001).
Brand communities and stakeholders
Earlier research has shown that the establishment of strategic relationships,
cooperation and long-term alliance between NGOs and corporations has the strongest
effect on stakeholders participating in these relationships. This is where the most
value creation occurs (Horváth & Bauer, 2013). One of the most important reasons for
this effect, as discussed above, is the double identity expectation from stakeholders in
the course of traditional corporate operation. During regular, non-strategic, non-value
based relationships they have to meet both the requirements of the structures of
twenty-first century social-cultural reality and the seventeenth-eighteenth century
political-organizational expectations of traditional corporate operation. Stakeholders
verbalize this as “I am one person at home and another at the office” or that “I must
park my morals with my car” (Berger et al., 2006, p. 132). Due to the common
strategic activity, social alliances enable various forms of intra- and interorganizations
to get stronger and be filled with stakeholder values. This not only
shapes the common vision but cuts through organizational frameworks and
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hierarchies which stand for the oppressive ‘feudal’ political apparatus of double
identity. With the help offered by cooperation, identification, engagament and
dialogue, members of the organization become capable of resolving their stakeholder
conflicts and perceiving their workplace organization to be more complete with a
stronger social legitimacy. Members of the organization ‘assume’ various mediating,
protective and conflicting roles, and the values and common interests created by the
cooperation became part of their identity. The cooperation of the stakeholders results
in the creation of a ‘community of responsibility’. Stakeholders participating in the
cooperation, materially shaping its operation in a structure different from the usual
corporate hierarchy and organizational framework, and determining and assimilating
its values have brought about a new type of corporate stakeholder community,
resembling the recognitions of research on brand and consumer communities
uncovering the new communal conditions of post-modern consumerism (Berger et al.,
2006; Lichtenstein et al., 2004; Sen & Bhattacharya, 2001).
The term ‘brand community’ was introduced into brand-related studies by
research conducted by Muniz and O’Guinn (2001) at the beginning of this century.
The brand community, taking as its point of departure Benedict Anderson’s concept
of identity, is an imaginary community which is bound together by communal
sovereignty, its perceived limits – i.e. that they are clear about the existence of other
similar communities – and a deep comradeship of its members, as opposed to kin
relationships (Anderson, 1983). Traditional characteristics of identity community can
be detected in these ‘brand communities’ as well: members are bound together by a
consciousness of kind, symbols and rituals which maintain communal bonding, and
the moral responsibility of members of the community to mutually help and protect
each other (Muniz & O’Guinn, 2001). Others have noted that post-modern consumer
communities exhibit similar traits: gestures of consumption are complemented by
rituals, artificially created traditions and multi-threaded relationships between
members of the community that has thus emerged (McGrath et al., 1993). In other
instances, consumers of sub-cultural brands – Harley Davidson, Jeep, Macintosh –
create a particular community of users giving rise to events, meetings and symbols of
belonging together which reach beyond the brand identity, protecting and supporting
each other and becoming capable of common action (McAlexander & Schouten,
1998; Cova & Cova, 2002). Yet others write about ‘brand tribes’ or ‘tribal
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consumption’, about communities which are tied together by tribal relationships based
on consumption and brand commitment (Kosinets, 2007).
All research indicates that the culture of consumption creates complex
communities, the members of which are tied together by a strong sense of identity,
where rituals, traditions and jointly organized events strengthen its cohesion, and
where members of the community assume different roles and create the power of
common action in the interest of the community (Muniz & O’Guinn, 2001). These
‘tribal brands’ or ‘brand communities’ – other than in post-modern consumption
communities – are organized around one single brand. In certain cases they uphold
the values of the brand and of the community even against the owner of the brand
(Shau et al., 2009) or carry on operating the community after the owner of the brand
decided to take the (sub)brand off the market, as in the case of the early tablet Apple
Newton (Muniz & Schau, 2005). Members of the brand community do not only
cultivate rituals and traditions keeping the community together, but they also
contribute their own values to the community. The legitimacy for the sense of identity
is not simply the fidelity towards the brand, but ‘using the brand for the right reason’:
Muniz studied a Saab community and found that the members of the community did
not accept those as members who drove a Saab simply as a status symbol and not
because the car offered a great driving experience and kept its value for a long time.
Similarly, ‘opposing brand loyalty’ expresses that the members of the brand
community are aware of the values of their community and this is how they
differentiate themselves from other brand communities. The brand community
became capable of defining its own values through the rejection of the values of the
opposing brand, like e.g. the rejection of traditional PCs by users of early Macintosh
computers (Muniz & O’Guinn, 2001).
Corporate stakeholder communities emerging as a result of stakeholdervalues-based
societal marketing – especially the civil-corporate alliances and
cooperation – and the ‘brand communities’ or ‘brand tribes’ based on the sense of
identity, common traditions and rituals, show the same social pattern. Stakeholders
form a community through their relationship with the corporation/brand. This
stakeholder community rests on the strong value identification of its members, on
mechanisms allocating sovereign decision-making, protective and operating roles, and
on the ability to mutually act together. Both communities cut through the framework
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of traditional hierarchy and management: communities of responsibility transgress the
hierarchy of corporate decision making through identification and value-centric
common action, while members of the brand community escape from the captivity of
the uni-directional and hierarchical communication of the brand owner. Society
centred marketing and the emergence and operation of imaginary communities
demonstrates the political possibilities of responsibility and value centered identity.
Political social marketing
Communities are political constructs and in this the imaginary communities –
consumer groups, brand communities or brand tribes – are no exceptions. The
purpose of a community is to take and exploit opportunities greater than those of
individuals, partly because the individual feels that something that was there got lost
and with the help of the community a ‘return’ to some earlier had, or as such
perceived, authenticity and security is made possible, or the community offers a
chance with which the member of the community can transgress their own personal
limitations thereby becoming less vulnerable and more capable of taking
opportunities. The emergence and maintenance of the community requires substantial
resources: the various members of the community take on different roles for the
benefit of the whole; with the help of rituals they strengthen and maintain its cohesion
and mobilizing ability; myths and stories legitimize and support the community;
emotional identity manifests itself and is enhanced by symbols; gatekeepers protect
the integrity of the community and demarcate its boundaries; and teachers and
supporters help the newly joined in order that they become strong and equal members,
thereby further strengthening the community as a whole (Anderson, 1983). Thus the
community is a power-political phenomenon: internally it offers members the
supersession of personal limitations and the reduction of personal insecurity and
vulnerability, whereas externally it offers the power and support of the whole
community if, in the interest of protecting the values of the community or validating
the supremacy of values, other powers have to be gone against. Early sociotheoreticians
of modernity saw the loss of traditional communities, the atomization
and individualization of human existence in the strengthening of rationality and
individuality, which – as opposed to the above – increased the vulnerability,
insecurity and hopelessness of the individual (Tönnies, 2002). Modern
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communication tools and the ubiquity of values, people and meanings made the
emergence of new forms of communities possible: this process was supported and
reinforced with special vigor by consumerism. While retaining continuity with earlier
goals, these post-modern, imaginary communities aimed at transformed goals with
renewed political power: internally they offered their members the opportunity for
emancipation, while externally the possibility of going against the greater power and
might. In consumer communities, emancipation offered the opportunity of liberation
from mass culture, mass production and consumerism and the return to some
imagined authenticity, while in some brand communities it made possible an escape
from the terror of the brand owner, who influenced brand life-cycle in a direction that
did not meet with the desire of the community, and freed the brand and the
community (Cova & Dalli, 2008; Muniz & Schau, 2005).
Stakeholder corporate communities creating ‘communities of responsibility’,
‘modeled’ on brand communities, by cutting through internal corporate hierarchies of
power, may create the internal channels of will-forming of corporate deliberative
democracy and the processes and channels of validating such will-forming through
equality based, value oriented relationships, influenced yet not determined by
corporate hierarchy. In order for corporations to be able to exchange “implicit
compliance with consensual social norms and expectations for explicit participation in
public dialogue and justification”, i.e. for the conditions of corporate politicization, as
suggested by Scherer and Palazzo, to come about, first corporate communities have to
become democratic (Scherer & Palazzo, 2010). This is the context in which the public
dialogue of free and equal corporate citizens may emerge, in the course of which the
processes of opinion- and will-forming within corporate communities become
institutionalized with the legitimacy of inter-corporate (MSIs) or single company
social-political spaces within stakeholder matrices linked to individual corporations
(Habermas, 1996). Here the task of the corporate marketer is prominent, since it is no
longer sufficient to manage the brand or consumer community of stakeholders, but the
corporate stakeholder community as a whole. During the shift, the task of marketing
becomes a political one. Marketing activities have to create and operate the
institutions and channels of trust in such a way that the ‘community of responsibility’
would co-create and support strategic corporate goals and that they together would
become able to create a competitive advantage according to the principles of TBL
through the widest possible involvement and cooperation of the stakeholders. For
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responsible marketing deliberative democracy means that the tools to be used,
compared to traditional marketing, will change significantly. Instead of one-way
communication, networked communication based on equality and involvement have
to be used, which often carry the risk that the corporate community – becoming
emancipated and opposing corporate strategic decisions – will suggest and accept
directions different from those of the management or other key stakeholders or
stockholders of the corporation. At the same time, corporate marketing is/can be best
prepared to operate processes of marketing as a political, strategic and communication
activity, since the operation of modern politics also follows the principles and rules of
marketing. Political marketing itself is a conglomerate of pragmatic, symbolic and
institutional processes. The goal of political processes is to transform oppositions and
conflicts stemming from social and stakeholder configurations into resolvable and
accepted differences, and to transform hierarchies through mobilization to uphold the
unity of, and support for, the community in the interests of common goals. Thus the
process of corporate value creation itself also becomes transformed: the management
of the corporate stakeholder community – i.e. the integration of the values and
interests of stakeholders into corporate operation – means the transformation of
stakeholder conflicts and oppositions into manageable hierarchies, the purpose of
which is not to promote stockholder interests but the maximization of stakeholder
well-being according to TBL principles. Part of this is the realisation of stockholder
financial interests, while these interests must have due regard to the interests of other
stakeholders, and the retention of the possibility of mobilizing the stakeholder
community in the interests of its unity, long-term well-being and common goals.
Societal marketing also points to the limits of the definition of the use of the
‘political’ by Scherer (2017) in defining political CSR as “(1) deliberations about
collective issues, decisions and rules; (2) the production of public goods (and the
avoidance of public bads); and (3) the contribution to and impact on social welfare.”
Without the inclusion of stakeholders and focusing on their involvement and
engagement in the democratic process, this definition limits the understanding of
political CSR to corporate actions that may be associated with societal marketing.
Most of the forms of societal marketing discussed above satisfy the definition of
Scherer (2017) and Scherer et al. (2016). As noted in the introduction CSR has taken
a ‘political turn’ meaning that firms become political actors by (a) engaging in public
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discourse; (b) maintaining their legitimacy by providing solutions to public issues and
complying with changing societal expectations; and (c) submitting their corporate
governance to democratic control (Palazzo and Scherer, 2006; Scherer et al, 2016). It
is suggested therefore that a definition that makes explicit reference to the inclusion of
stakeholders in democratic processes through corporate operations across all
departments may better serve the purpose. Thus this book defines political CSR as
corporations, realizing the democratic role they must play reinventing democracy in a
transnational globalized world, engage in public deliberations, collective decisions
and joint activities with stakeholders in order to (1) anticipate, respect and be
responsive to values and interests of stakeholders; (2) integrate their stakes and claims
into corporate operations and processes; and (3) take on the provision of public goods
or the restriction of public bads in cases where public authorities or other societal
actors are unable or unwilling to fulfill this role.
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7. RESPONSIBLE FINANCES
Sinful pleasures
An exciting book was published in America in 2004 with the title of Investing in Vice:
The Recession-proof Portfolio of Booze, Bets, Bombs, and Butts (Ahrens, 2004). The
author, Dan Ahrens, had earlier rather successfully managed a fund attracting
significant attention. Following the publication of the book, he started a media
campaign promoting investments in sinful pleasure — he advocated the idea that ‘sin
pays’ in numerous TV shows, articles and interviews. He claimed that the financial
results of companies active in the sinful pleasure industry by far exceeded those of the
largest US corporations active in the traditional industries measured by the Standard
& Poor’s index. The following year Ahrens quit his position as CEO of the Vice Fund
in order to start his own business with the aim of monetizing sinful pleasures.
The story of Vice Fund started on 30th
August, 2002 when the new, innovative
fund was registered by the US stock exchange authority. This fund differed from the
many thousands of other small funds: it wanted to forge capital from human sinful
pleasure – in the strictest sense of the word. “No matter what the economy's state or
how interest rates move, people keep drinking, smoking and gambling,” said Ahrens
in 2003 (Ahrens, 2004). The Dallas-based small fund, Mutuals.com agreed in the
second half of 2001 to set up a new, unique fund. The premise was that the financial
performance of industries based on sinful pleasure – alcohol, cigarettes, gambling and
sex – exceeded the results of traditional industries, therefore investing exclusively in
these industries carried the promise of significant success in the market. The rule for
choosing the investment portfolio was that 80% of the financial resources of the fund
had to be kept in the shares of large corporations operating in the four ‘sinful’
industries – alcoholic drinks, cigarettes and tobacco; gambling; and
defense/armaments – and that 25% of the turnover of the targeted corporations had to
come from these products/services. The fund was launched with a capital of 44.5
million dollars, its CEO was Dan Ahrens and the background was provided by
Mutuals.
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The sinful fund immediately raised media interest, especially in view of the
fact that since the early years of the century financial funds and institutions that
directed investors towards responsible investments had received significant attention.
By 2002 the value of investments in responsible investment funds reached 2.15
trillion dollars, which meant a 7% increase compared to the previous year, while
traditional portfolios managed by professional organizations yielded a 4% drop in
value. In 2002 1.5 billion dollars streamed into responsible investments, on the other
hand general funds lost 10.5 billion dollars in the same period. Thus the sinful fund
provided an interesting – though tiny – basis for comparison in relation to traditional
and responsible funds. In the first year of its operation Vice Fund performed better
than the S&P 500 index by 3.4%, but due to the 2% management fee it could not offer
a substantial profit for its investors. The share portfolio (Boeing, Altria/Phillip Morris,
Reynolds, MGM Resorts, Galaxy Entertainment and Diageo) consisted of long-term,
non-volatile and relatively low risk shares of large corporations. The detailed analysis
of the fund proved that, compared to similar funds and the S&P indicative for the
general performance of large corporations, it still showed a better performance at a
lower risk. Research proved that sin – in certain cases – really paid well (Bernardin &
Dumoussaud, 2013).
At the same time, the story of Vice Fund is not void of dramatic turns. In 2004
the US Securities and Exchange Control (SEC) started an investigation against the
management of the company: CEO Richard Sapio, President Eric McDonald and the
compliance officer Michelle Leftwich. The investigation proved that the management
carried on insider trading, they did not keep to time limits in handling assignments
which they often registered after information about targeted investments had already
become publicly known, thus – by backdating assignments – realizing benefits for
themselves and their clients. Their guilt was proven and they were fined hundreds of
thousands of dollars besides being suspended from working and participating in any
professional financial services. As a result, the founders of Mutuals left the company.
Although the transactions investigated did not take place in Vice Fund, in 2004
Ahrens left the fund in order to independently carry on exploiting the benefits of sin,
primarily in the casino industry. So: sin sometimes does pay, at other times –
especially when it is coupled with offences – it does not. In an interview, Ahrens said
that he did not simply intend to invest in companies operating casinos, but especially
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in those corporations which aim at preventing the even greater human sins: companies
that develop and sell theft-preventing security equipment to casinos (Lubove, 2006).
Vice Fund was renamed Barrier Fund in July, 2014 because the standpoint of Gerry
Sullivan, who followed Ahrens as fund manager in 2011, was that their aim was to
“raise assets and not raise eyebrows” (Damato, 2014).
The history of responsible investment
Ethical questions in connection with financial investments have for long occupied the
minds of those working with money. Basic religious documents (the Old Testament,
the New Testament and the Koran) contain rules for the ethical handling of money
which were most probably rooted in the customs of the time. In the seventeenth
century, the Quakers rejected making profits from the arms- and slave trade. At the
Quaker meeting in Philadelphia in 1758, a resolution was passed in terms of which
Quakers would not be allowed to take part in buying and selling slaves. The founder
of the Methodist Church, John Wesley (1703-1791) said in his sermon titled ‘About
the use of money’ that no damage must be caused to fellow human beings through
business activities and no investments must be made in industries which harm health
(Wesley, 1983).
The first fund in the modern sense which did not use a merely financial
control mechanism was the Pioneer Fund established by Philip Carret in 1928. Here,
for the first time, ethical filters were applied when evaluating a given investment.
Carret, friend of the legendary investor from Omaha Warren Buffett (and one of the
investors in Buffet’s company, Berkshire Hathaway), met Buffett’s father back in the
forties of the previous century in connection with an investment in Omaha. He was
often referred to by Buffett as “one of my heroes” from whom he learnt a lot (Whyatt,
1998). Carret – who remained an investor until his death at the age of 101 – set up the
fund for Lutherans with the condition that no investments were allowed to be made in
companies dealing with alcohol and tobacco products.
In the fifties and sixties, the pension funds of US trade unions used investment
strategies which also took social aspects into consideration during their investments,
i.e. some funds invested primarily in the health and home building industries. The
truly first ethical fund was set up in the early seventies – also with a religious
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background, namely the participation of the Methodist Church – as a consequence of
the protests against the Vietnam War. The Pax World Fund, established in 1971, used
ethical filters in order to prevent any investments being made in companies that had
any connection with the war or with the arms trade. It followed that in the second half
of the seventies, as a result of international protest against the apartheid regime of
South Africa, large international funds prohibited investments in South Africa or in
companies in that country.
As a consequence of ecological tragedies and corporate ethical scandals
discussed earlier, more and more funds were set up which clearly defined, whether in
a negative or positive sense, exactly what type of corporations the money of investors
could be invested in. By the early years of this century, the number and size of the
portfolios of Socially Responsible Investment (SRI) funds grew exponentially. In
2014 in the US the amount managed by SRI funds exceeded 6.5 trillion dollars, which
was 18% of the total professionally managed investment portfolio. Between 1995 and
2014 the managed amount grew tenfold, with a money volume increase of 13.1% p.a.
in SRI funds. While in the most developed financial market, the US, nearly 20% of
investment money is managed by SRI funds, this ratio is around 15% in Europe. This
growth was significantly facilitated by the changing regulatory environment. The first
government level regulation compelling pension and public purpose funds to disclose
both their investment policies and the extent to which they take social, environmental
and ethical goals into consideration when making investment decisions was passed in
the United Kingdom. In 2000 the British Parliament sanctioned the modification of
the Pension Act, which explicitly prescribed that the pension funds in their
Declaration of Investment Principles had to disclose “the extent (if at all) to which
social, environmental and ethical considerations are taken into account in the
selection, retention and realization of investments.” (Renneboog et al., 2008, p. 1727).
Similar regulatory processes took place in other European countries. In 2002
Germany passed an Act in terms of which the pension funds “must inform the
members in writing, whether and in what form ethical, social, or ecological aspects
are taken into consideration when investing the paid-in contributions” (Renneboog et
al., 2008, p. 1728). Responsible investment rules were implemented in Sweden, Italy,
Belgium and Holland as well. Legislative changes and the ensuing positive
expectations largely contributed to the spread of responsible investment funds in
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Europe and the exponential increase of the amounts managed. Both the European and
the American responsible investment forum named the growing demand on the part of
institutional investors as the reason for this growth, noting that positive regulatory
expectations and steps also helped the growth of responsible investment funds.
Responsible funds
Responsible funds are institutions of the financial intermediary system which
endeavour to reduce the negative externalities of business operations by screening,
controlling and supervising the known economic processes. Their aim is to prevent or
to screen investments through which negative externalities become significant or
remain unmanaged. Negative externalities can be based on principle: in certain
industries negative externalities – often in excess of economic value creation – come
about ‘naturally’ and as such these industries – the ‘sinful’ or ‘guilty’ industries – are
by definition excluded from the circle of investments. In other industries negative
externalities are measurable and manageable: the prime aim of responsible funds is to
invest in industries and economic actors where negative externalities have been
measured and efforts have been made to reduce them. Negative screening tries to
exclude players which do not measure or do not do so properly; those who apply
positive screening and other active tools support the reduction of negative
externalities through tactical or strategic means. The point of departure of responsible
funds is to create a – desirable, satisfactory or possible – balance between financial
results and ecological, social effects. The goal of responsible funds is to achieve
financial profitability while taking the value-creating potential hiding in the
minimization of social impact into account or recognizing market opportunities
stemming from responsible operation.
The most frequently raised issue regarding responsible funds concerns their
financial performance compared to that of traditional funds. Since the emergence of
responsible funds, many studies have dealt with such comparison. Analyses regarding
the growth of responsible investment portfolios indicate that the prime mover of
growth is not the difference in performance but the demand on the part of institutional
and individual investors as well as the personal commitment of the staff of enterprises
managing such portfolios. The principal reason for the growth of responsible
investment portfolios is ‘grassroots market pressure’, meaning that both individual
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and institutional investors expect to an ever-increasing degree that their investments
should comply with their personal values and – in the case of institutional investors –
that these should contribute to the increase in their goodwill and reputation and fit in
with assumed or real stakeholder expectations.
However, investors are only one part of the market. The other part is made up
of targeted corporations, which increasingly recognize that – in the early stages – a
turn towards SRI funds and compliance with their principles may offer investor
benefits. Later – with the growing number of responsible investment funds and
increased monetary resources managed by them – adhering to SRI principles and
expectations means falling in line with the mainstream of the market. As a
consequence, a mutually supportive process of growth commences in which the
personal commitment of the players in the investment market, the number of funds
and the growth of investments managed create the desire for compliance which,
together with the change in the regulatory environment, leads to the promotion and
strengthening of the SRI market (Wallis & Klein, 2014).
The performance of the responsible funds
In the past decade a great number of studies dealt with the comparison of the
performance of traditional and responsible funds. As Wallis & Klein (2014) show in
their extensive and structured literature review, numerous meta-analyses were utilized
and various tools were used, yet research – in the course of comparing performance
measuring results – has not proved that the performance of responsible funds would
be better than that of traditional funds, nor is there any overriding and convincing
evidence to the contrary. This confirms Milton Friedman’s bon mot, according to
which “[i]f people want to invest that way, that is their business. In most cases
such investing is neither harmful, nor helpful” (Laufer, 2003, p. 165). It seems that
responsible funds perform slightly worse in the short-term, while in the long-term and
overall they perform somewhat better than traditional portfolios.
There are three different assumptions with three different explanations.
According to the first assumption, the performance of responsible funds equals that of
traditional funds. This is explained by the fact that investors, should they want to sell
their investment, will always find sufficient traditional buyers and as such the market
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does not pay a premium for their investment, while research has not proved that the
financial performance of responsibly operating companies would be any better than
the performance of companies not operating responsibly. It is true that some studies
show a positive corporate level comparison between the slightly better performance of
responsible indices (Dow Jones Sustainability Index, FTSE4Good) and the traditional
stock exchange indices (S&P 500, NYSE), however the correlation between cause
and effect is still unclear. Corporations managing their stakeholders consciously and
doing justice to their social, ecological and ethical duties are generally well-managed
corporations, therefore it is not clear whether their better performance is due to their
more conscious, strategic and planned management or to responsible operation.
According to the second assumption performance of the responsible funds is lower
than that of the traditional ones, which is attributed to higher operating costs (such as
screening, more thorough selection and control), and the narrower allocation
possibilities and smaller market, which negatively influence the value of the portfolio.
Not to mention that stockholders of traditional portfolios can put together exactly the
same portfolios as those of the SRI funds, while this is not possible vice versa. This
means a market advantage for traditional funds. According to the third assumption
SRI funds surpass traditional funds. This may be explained by the fact that news
related to environmental damage caused, violation of social norms and ethical
scandals may from time-to-time unduly reduce the value of traditional portfolios,
thereby giving SRI portfolios a competitive edge. Similarly, the targeted investments
underlie a stricter scrutiny which may also involve a deeper investigation of the
financial performance and prospects of the corporation – this can also contribute to
value expansion exceeding that of traditional funds predicted by certain studies of SRI
funds (Wallis & Klein, 2014).
The process of responsible selection
Responsible funds use different methods to select their investment targets. Many of
them do not use one single method but a mix of various methods, screens and
processes. The most basic selection criteria that funds use are the screens. Screens are
specific criteria that help select non eligible candidates from a possible universe of
investment targets. (Kinder & Domini, 1997). Negative filters involve an
investigation which excludes from the investment portfolio companies operating in
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certain industries, regions or countries or certain kinds of operations. Traditional
negative filters relate to the ‘sinful’ industries – alcohol, tobacco, arms, sex and
gambling – but negative filters can also relate to different negative scripts of
sustainable or stakeholder performance, from the high number of workplace accidents
to the practice of non-ethical cooperation with suppliers or the non-effective
management of consumer complaints. If the examination is based on industry
affiliation, by using negative screens it can be determined what proportion of the
turnover has to come from negatively assessed industries for the corporation to be
excluded from the portfolio. Of course, special funds may use specific negative
screens based on religious, ethnic or other ethical principles if investors in these funds
demand or accept such screens.
The basis for positive screens is the disclosure of responsibility-related
principles and authentic information regarding their practice, as well as the
application of ESG (Environmental, Social and Governance) principles in corporate
operation. From the perspective of the funds, these principles can be laid down in the
statutes of the fund or they can be determined in a directive by the owners of the fund.
As regards responsible operation, positive screens may be general or limited to certain
areas – ecological footprint, social impact or emission –, while they also may be tied
to certain ESG performance indicators. Similarly, there are funds which may require
the audited disclosure of the ESG principles and an active and systematic dialogue
with stakeholders based on the disclosed information. Positive screening is often
complemented with the ‘best in class’ approach in the course of which the
corporations in a given industry are ranked according to their performance relating to
sustainability or some of its sub-aspects and only the best are selected as investment
targets.
Negative and positive screens represent the first and second generation of the
inquiry and decision-making procedure of the SRI funds. Today’s responsible funds
use a combination of negative and positive screens, generally complemented with the
‘best in class’ approach. Third generation procedures are methods by which
investment decisions are taken based on responsibility performance embodied in
measurable and public performance indicators, reports, and certified by third parties.
Fourth generation SRI tools complement the earlier tools (negative and positive
screens, best in class and performance measurements) with stockholder activism. This
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means that the fund influences the corporation to include greater responsibility, better
performance, and stockholder interests and values to the largest possible extent in the
operation of the corporation. Stockholder activism is especially important because it
uses responsibility for stockholder value creation beside the stakeholder one: the
responsible performance of corporations targeted for investment is generally
objectionable, and the stockholders’ presumption of interest assumes that a change in
responsible operation and stakeholder value creation through stockholder activism
increases the value of the corporation thereby creating (financial) value increase for
stockholder investors as well.
The different tools of responsible investment are basically political: partly
they try to lessen potential environmental and social impacts stemming from the
conflicts of the operation of the economy, i.e. from negative externalities; and partly
they use institutions and methods which can and want to reduce these conflicts or
influence the outcome of the conflicts. In the case of responsible investments, the
prime goal is to make profits, either by eliminating conflicts brought about by
negative externalities or by limiting these, by using tools and creating institutions
which reduce the consequences thereof. While SRI institutions may engage in ‘public
deliberations, collective decisions and the provision of public goods or avoidance of
public bads’ their explicit aim is to meet economic expectations, with being mindful
to contribute to society or enhance social welfare through applying screening
processes, evaluating ESG performance or stockholder activism.
Social impact investment
The term social impact investment (SII) first appeared at the Bellagio Conference
organized by the Rockefeller Foundation in 2007. Since then numerous studies and
conferences have dealt with the topic. In 2013 a special section was devoted to it at
the Davos World Economic Forum. More and more SII funds were set up and the
initial few hundred million dollars managed in funds soon exceeded a billion dollars
(Freireich & Futon, 2009). There are two basic forms of social impact investment:
investments primarily aimed at social integration – including education, healthcare
and areas of micro-financing – and investments in projects promoting ecological
sustainability, with special emphasis on renewable energy, food production and
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sustainable agriculture, mainly in the developing world. Thus social impact
investment operates with the ‘explicit aim of contributing to society or enhancing
social welfare’ beyond economic motivations.
Social impact investment originally appeared as a criticism of donations and
of the development trap in the second half of the nineties. The criticism relating to
donations was, on the one hand, that projects supported by donations were
unsustainable from the point of economic value creation and therefore, when donors
withdraw from the projects they often come to a standstill – thereby putting the social
goal and earlier invested money and energy at risk – and on the other hand, that the
‘market’ and the projects to be supported are to an ever-increasing degree created by
goal determination of donors rather than by true social need or social impact. SII may
be seen as SRI 2.0: the basis for selecting an investment is no longer the negative or
positive screening of the traditionally operating corporation in the traditional
economy but some – in the majority of cases measured on the social goal rather than
on the return on investment maximum achievable in the market – social or
environmental impact equal to the financial return on investment. It even happens that
in the case of SII the goal is modified and the order reversed: the social impact
becomes equal or primary, and the financial return serves the sustainability of the
investment.
Some authors – like the Morgan Stanley study that first defined it as an
independent area – speak of SII as an independent and growing investment category
(Reeder & Colantonio, 2013; Alnoor & Rangan, 2014). SII can be viewed as an
independent investment category because it requires specific investment strategic and
risk management principles and an independent institutional structure for these
principles and their practical implementation, and it also requires the setting up and
application of new evaluation mechanisms, standards and benchmarks. The most
important actors of the SII market are investment management organizations, funds,
institutes and consultancies evaluating and measuring impact using standards,
institutions for reporting and data collection, NGOs and corporations participating in
the processes of supporting and strengthening social impact.
Social impact investment represents a new generation of managing
externalities and the inclusion of the Triple Bottom Line criteria into corporate
operation. Here, the operation is market-based, i.e. profits are a pre-condition while
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the goal of operation is to reduce negative externalities and to trigger and support
positive externalities. SII institutions assume that negative externalities occur
primarily in areas of the environment, while positive externalities may mainly be
triggered in areas of developing human resources – education, healthcare and housing
– and in areas of valuable and direct economic value creation – job creation and
financial micro brokerage.
The two most frequently raised questions in connection with SII are – as is the
case in examining the performance of responsible funds – the financial yield
expectations from the investments and the modes of measuring the social impact
complementing the yield. According to various organisations analysing and
determining SII, whether an investment can be deemed to have a social impact does
not depend on the size of the yield expectations. There are social impact investments
which have similar return on investment expectations as those of high-risk
investments, whereas there are those which value social impact higher than financial
yields. On the other hand, there is an ever-increasing number of investors who – not
least due to their fiduciary responsibility – expect and realize a yield that can
generally be expected through their social impact investment (Grabenwarter &
Lichtenstein, 2011).
Measuring impact is helped by various standards, tools of process
management, indices as well as certificates and accreditations. This is in order to, on
the one hand, lay down disclosure principles and to establish the expected processes
necessary for achieving the impact and, on the other hand, to have corporate goals,
activities and results measured by a stakeholder or professional third party. Social
impact can be measured on results achieved – based on a pre-determined indicator –
or on the process that leads to the desired and adequate social impact. These impact
evaluation systems are stakeholder-focused: whether they look at the result or the
process, their point of departure is that “Value is created when business adds to the
capital or well-being of its stakeholders. It is destroyed when a business reduces their
capital or undermines their well-being” (Laszlo, 2008, p. 120).
Following the 2007 Rockefeller Foundation conference, concerned investors
and organizations set up the Global Impact Investment Network (GIIN) to assist
organizations, corporations and NGOs in becoming more efficient in meeting
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environmental and social challenges by promoting investments. The establishment of
the organization was announced at the Clinton Global Initiative conference in 2008.
Since then the organization has been supporting entities and individuals active in
social impact investment with research, with a uniform standard (IRIS) helping
investors and other stakeholders, and with educational and training material. Parallel
to this initiative, the movement of ‘B (benefit) corporations’ got underway in the
United States. The aim of these corporations and their movement was – based on a
system of evaluation criteria similar to that of GIIN – to have ‘B Corporations’
recognized by the various legislative bodies. This would allow their managers to carry
on stakeholder value maximizing activities taking stakeholders’ interests and values
into account besides their fiduciary responsibility aimed at maximizing profits for
their stockholders. Legislation relating to ‘B corporations’ has so far (end 2017) been
enacted in thirty three states of the US3
. The significance of the regulation is that ‘B
corporations’ are not defined according to a uniform standard approved by the state,
but that it provides corporate leaders, stakeholders and – separately – stockholders
with the opportunity of adopting any of the approved and disclosed standards and
directives (GRI, GIIN, etc.) prepared and certified by third parties, thereby becoming
‘B corporations’.4
Responsible banks
The prime objective of responsible funds, operators of social impact investments and
‘B corporations’ is to screen and limit negative social or ecological effects stemming
from business operation and to promote positive social impact with the help of
investments – i.e. the incorporation of stakeholder interests and values into business
operation. This is one of the possible responsible manifestations of the financial
intermediary system: allocating capital through investments. At the same time, for the
successful operation of the economy, the effective and responsible functioning of the
whole financial intermediary system is indispensable: the system provides the
financial means necessary for economic activities, collects and allocates idle financial
3
For the actual status of states with laws for B corporations see:
http://benefitcorp.net/policymakers/state-by-state-status
4
The approved list of standards can be found at: http://benefitcorp.net/third-party-
standards/list-of-standards
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assets (savings) in the interest of a more effective functioning of the economy in
various ways not limited in time or space. This carries substantial moral hazard in
addition to negative externalities. Moral hazard stems from the fact that the collection
and reallocation of unused capital, not limited in time or space, happens amidst
significant information asymmetry, putting the players of the transaction and their
environment at incalculable risk (partly unknown due to information asymmetry,
partly immeasurable due to the complexity of interactions). The regulation,
supervision and control of the financial intermediary system attempts to contain moral
hazards and systemic risks. However, moral hazard cannot be eliminated through a
control and regulatory system that primarily serves aspects of profitability and
effectiveness, since it is screening system level financial risks and moral hazard
stemming from information asymmetry in order to secure the stability of the system.
Besides system level moral hazard, individual moral hazard – for the
screening of which the control system is not suitable – appears ever more often.
Managing these individual moral hazards on a system level requires decision-makers
to take steps that lead to banks pocketing profits, while taxpayers take the bills. The
‘Too Big to Fail’ principle, in which taxpayers have to bail out banks, leads to further
moral hazards since it suggests to bankers that they may take incalculable risks and
will still be bailed out. Following the 2008 financial crisis, and in some cases even
earlier, financial institutions themselves recognized that – due to the extremely
important role that financial intermediaries play in the economy – managing moral
hazard and negative externalities, taking positive social impacts in the course of
operation into account, and including stakeholder interests and value in business
operations is a priority for financial institutions.
Looking at the above one might think that responsible banking is a modern
phenomenon. However, at the dawn of the Industrial Revolution social financial
institutions were set up for the prohibition of usury and the avoidance of usurers.
Religious ethics of the time laid down exact rules for lending money. It was a prerequisite
for getting a loan that the debtor had to be hard-working, responsible
towards their family and environment, and prepared to take a personal risk. It was not
allowed to lend money for luxury purchases: that was the territory of the ‘loan shark’
usurers. The Monte di Pieta organization, brought to life by the Catholic Church in
the sixteenth century against usurers to lend money to the poor and destitute on a non-
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profit basis, formulated the following principles: loans are to be given primarily to
members of the local community or to people with close local links; loans should be
relatively proportionate to the guarantees offered; beneficiaries need to be involved in
social activities; oaths to be taken by beneficiaries that they are taking the money for
necessities, and there was an acceptance of voluntary deposits remunerated at interest
rate (Milano, 2011). During the Industrial Revolution in the second half of the
eighteenth century, more and more credit and banking societies, initiated by local
communities for the personal financial development of the members of the
community, were founded to secure the financial needs of their members – mainly
middle class citizens and better-off workers. Credit societies collected deposits from
their members and invested these in the local economy (Weber, 2011). The first credit
society in the United States was established in 1816 (Milano, 2011). These credit
societies and local communal banks became the model for the ethical social banks in
the twentieth century.
Social and ethical banks
The basic philosophy of social and ethical banks can briefly be summarized as
financial institutions being ‘banks with a conscience’. Their prime goal is to include
sustainability – financial, social and ecological – in decisions related to financial
processes. Their investment policies, risk management and screening criteria do not
differ from those of responsible funds. These banks take ESG aspects into account
when making lending or investment decisions, and they use positive and negative
screens to filter negative impacts, to support and promote positive social effects.
Besides acting with the aspects of environmental and social sustainability in mind,
these financial institutions put special emphasis on the development of borrowers, on
increasing the financial awareness of underbanked groups, and on reducing financial
segregation. This purpose is served by the various micro-lending and micro-financing
tools introduced and operated, as well as the expansion of responsible lending, and
furthering of financial awareness. Micro financing does not merely mean the lending
of small amounts but also helping and supporting borrowers in order that repayments
and the small, livelihood-ensuring enterprises can continue.
In Europe there are a number of social banks among the most important
financial institutions. Their balance sheet total exceeds 10.5 billion euros and they
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produce an annual growth of 13-15% compared with the 1-3% growth rate of
mainstream banks. According to prognoses, social banks will provide banking service
to more than one billion people by 2020 (Benedikter, 2011). The most significant
such institutions in Europe are the German GLS Bank (Gemeinschaft für Leihen und
Schenken), the Dutch Triodos Bank, the Italian Banca Etica, the Swiss ABS Bank and
the Danish Merkur Bank. These financial institutions founded the Global Alliance for
Banking on Values (GABV) in March 2009 so that “trends can be set to change the
boundaries of mainstream finance, and contributions can be made to the growth and
development of social innovation in the financial sector. The Alliance is a global
alliance of innovative banking institutions, focused on delivering social finance
products and basic financial services, while financing community based development
initiatives and social entrepreneurs thereby fostering sustainable and environmentally
sound enterprises, and fulfilling human development potential including poverty
alleviation, while generating according to a triple principle: for People, Profit and the
Planet” (Benedikter, 2011, p. 2). Similar goals were formulated by the International
Association of Investors in the Social Economy (INAISE) founded back in 1989 that
organized the small financial organizations, communal banks and credit societies into
a group.
The economic crisis further strengthened consumer demand and support for
the ethical social banks. Already prior to the crisis, international civil organizations
believing in the importance of ethical banking accepted a common declaration about
the principles according to which financial institutions should operate in the future.
The Collavecchio Declaration was accepted in 2003 at the Davos World Economic
Forum. The premise for the declaration was that financial institutions have played a
role in irresponsibly channeling money to unethical companies, corrupt governments,
and egregious projects. […] However, most financial institutions do not accept
responsibility for the environmental and social harm that may be created by their
transactions, even though they may be eager to take credit for the economic
development and benefits derived from their services. […] Similarly, the vast
majority of financial institutions do not play a proactive role in creating financial
markets that value communities and the environment. […] For example, during
financial crises, financial institutions have charged indebted countries high risk
premiums while at the same time relying on public bail-outs. They have spoken out
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against innovative solutions to the debt crisis […] their voice has been absent in
efforts to address tax havens, a problem that blocks progress towards equity and
sustainability” (Collavecchio Declaration, 2003). The declaration lays down six
commitments which financial institutions should ideally adhere to. These are:
commitment to sustainability, commitment to ‘do no harm’, commitment to
responsibility, commitment to accountability, commitment to transparency, and
commitment to sustainable markets and governance. It also names the first steps
necessary for putting these principles into practice. The declaration urges financial
institutions to build stakeholder interests and values into their business operation, to
reduce information asymmetry and the risks of negative externalities stemming from
it and to try to manage moral hazards due to unsustainable and unethical operation.
The 2007/2008 crisis amplified the demand for the implementation of the
principles formulated by the Collavecchio Declaration and for regulatory intervention.
One of the important causes for the crisis was that in 2006 more than 160-190
thousand billion worth of dollars liquidity was looking for investment opportunities
(Kimmit, 2008; Kaufer, 2010). This huge free liquidity (by comparison: global GDP
is 52 thousand billion dollars) did not only dramatically overheat the market but
‘naturally’ found its way to poisonous financial products. After a while maintaining
the level of placing assets was only possible by taking dramatic risks. This lead to
unmanageable moral hazards and later to terrible negative externalities – primarily
swallowing tax payers’ money. At the same time, existing regulatory tools and
institutions made the controlling of processes and prevention of risks build up
impossible – not least of all because of the multi-level yet non-democratic stakeholder
interests and bonds between the regulators and the financial institutions (Kwak &
Johnson, 2010). The non-democratic, asymmetric and oligarchical regulatory system,
which excluded certain stakeholders from processes of information flow, influencing,
cooperation and regulation, made it impossible to keep processes under control, while
the costs of the negative externalities had to be carried primarily by exactly these
groups.
The politics of responsible finances
Challenges of risk society (Beck, 1986), the power and legitimacy of oppressive
discourses striving for exclusivity (Foucault, 1999) and the importance and readiness
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to take dramatic moral risks during crises of the financial intermediary system
indicate that there is a need for a new politics of responsible financial management.
The need is not for giving up competition and economic meritocratism, but for what
authors such as Scharmer (2010) call ‘Capitalism 3.0’. This creates the institutional
framework and channels for equality-based discourse for the stakeholders in order for
negative externalities and moral hazards to become manageable and reduced to a
minimum in a democratic way. This means both the ‘reoccupation of a part of the
commons’, and the creation of commons which counteracts the risks of negative
externalities, may reduce inequality or represent the interests of future generations
(Barnes, 2006). But there is more to it: there is a need for rethinking the political
economics of capitalism; this could be capitalism 3.0 (Scharmer, 2010).
Looking at it from the angle of responsible operation and sustainability,
capitalism 1.0 – the traditional free competition that followed the Industrial
Revolution – brought about huge economic growth, along with dramatic externalities,
unmanageable inequality and poverty, and environmental and social damage.
Capitalism 2.0 – from the same angle – meant regulated competition based on a
liberal democracy where regulatory institutions and processes representing
stakeholder interests – institutions of legislation and supporting democratic
participation, trade unions, institutions of the welfare state, public services supporting
human resources, supervisory bodies controlling financial and economic processes
and central banks – tried to reduce the effects of negative externalities. Capitalism 2.0
had its limitations: on the one hand, it only really functioned in OECD (or developed)
countries, and on the other hand, it could only handle a part of the negative
externalities. Inequality of wealth and income distribution kept growing, quality of
life and perceived well-being did not increase, crises deepened and the impact of their
consequences became wider spread (Stiglitz, 2012; Piketty, 2014). Capitalism 3.0 – in
the words of Scharmer – is an “intentional and inclusive ecosystem economy that
upgrades the capacity for collaboration and innovation across all sectors and systems”
(Scharmer, 2010, p. 5). Capitalism 1.0 was an ‘ego system’, a self-interest driven
economic system in which growth and efficiency were the result of the self-interest
driven actions of players. In capitalism 2.0 it was the invisible hand of the market that
was meant to limit unbounded self-interest complemented by some selected and
efficiently organized stakeholders who were therefore capable of setting limits, with
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the political elite representing the interests of ownership and ruling state regulation,
with labour rights representatives of organized trade unions and later with issueguided
and globally organized NGOs. However, capitalism 2.0 was not able to put up
enough barriers against overpowerful stakeholders’ forcing through their interests and
the negative externalities stemming from this, and against the dramatic impacts of
moral hazards that hit stakeholders without information and political representation –
mainly future generations (Kaufer, 2010). Capitalism 3.0 must be a politically
directed ecosystem where stakeholder self-interest assertion by some stakeholders is
effectively limited by a way of thinking that takes into account the collective
viewpoints of the sum total of stakeholders operating in the system as a whole. Egosystem
thinking must be replaced by ecosystem consciousness (Scharmer, 2010).
Ecosystem consciousness requires that stakeholders recognize that the perspectives of
the sum total of stakeholders must be made apparent when making an individual
decision, thus externalities must be internalized (Greenwald & Stiglitz, 1986; Endres
& Fraser, 2010), and political institutions and processes must be created which
radically reduce information asymmetry and enhance the involvement of groups
without organized interest representation – among others the future generations – or
reduce the possibility of their exclusion. Part of this is the development of the systems
of cooperation: the institutionalization of spaces for public dialogue which makes it a
condition for the legitimacy of decisions that all stakeholders, or organizations
legitimately representing the interests of all stakeholders, participate in such decisions
to the greatest degree possible, and the creation of methods for social will-forming
where the process itself ensures the internalization of negative externalities. The
implementation of third generation, fundamental social rights must be part of these
processes. These must go beyond the necessarily (power politically determined)
unequally utilized public services and public political institutions, for example,
manifested in an unconditional basic income (van Parijs, 1995).
In all this, the role and responsibility of the financial intermediary system – as
economic and social actors with the most effective and most significant resources –
could be of key import. Financial system 1.0 strove exclusively to support
stockholders, their interests and common profit maximization. Following Piketty
(2014) – growth of labour is lower than growth of capital – actors of the financial
system were, based on self-interest, right when they formed an alliance with
stockholders in the interest of value increase and profit maximization. Negative
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externalities develop in weak stakeholder groups, especially in future generations
which are unable to voice their opinion now, yet will presumably have to carry the
costs of ecological damage. Financial system 2.0 recognized that stockholderfinancial
interest assertion must be limited because the processes create
unmanageable risks, as was underlined by the 2007/2008 financial crisis. Besides,
financial organizations appeared which – as part of their strategy of self-interest
enforcement – suggest and support the inclusion of stakeholder interests and values in
business operation (Kaufer, 2010). This, however, is still not the ecosystem way of
thinking. Financial system 3.0 – the politics of responsibility and the institutions of
stakeholder democracy through the operation of the financial intermediary system
becoming operative – will come into effect when the entirety of the financial
intermediary system will be ruled by the common desire for shared value creation and
the legitimacy of its institutions and decisions. In order to achieve this, our focus
should be directed at complex wellbeing and quality-of-life based value creation
rather than at economic value creation as a basis for growth measured in monetary
terms. It also seems necessary that GDP as the prime indicator of economic growth,
i.e. the measuring system for monetized social transactions, be exchanged for a
complex accounting and indicator system primarily measuring the common and equal
growth of human and economic capital (Stiglitz et al., 2008). The seeds of this and of
the financial system 3.0, taking the interests of every stakeholder of the financial
system into account, are to be found in the funds and institutions – primarily in the
social and ethical banks, and social impact funds – whose main goal is to reduce
negative externalities and to maximize social impact. The purpose of their profit is the
sustainability of impact maximization and not the continuous increase of profits.
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8. RESPONSIBLE RESEARCH AND INNOVATION
The State of the Union
On 13 September, 2017 President Jean-Claude Juncker delivered his regular State of
the Union address in the European Parliament. The speech was presented at a
momentous time for the European Union. Under Juncker’s watch the Union has gone
through a series of crises: Brexit, the refugee influx, the emergence of the far right in
several countries and some member states, Poland and Hungary, introducing policies
that explicitly contradict the shared values of Europe. According to one of the
founding fathers, Jean Monnet, “Europe will be forged in crises, and will be the sum
of the solutions adopted for those crises” (Monnet, 1978, p. 417). Acknowledging
Monnet’s dictum, President Juckers did not address the crises but the opportunities
that lay ahead of the Union: “The wind is back in Europe’s sails. But we will go
nowhere unless we catch that wind. (…) We should chart the direction for the future.
As Mark Twain wrote, years from now we will be more disappointed by the things we
did not do, than by the ones we did. Now is the time to build a more united, stronger
and more democratic Europe for 2025” (Juncker, 2017).
The State of the Union was, actually, a follow up to the document released
earlier in 2017 addressing the future of Europe. In that document five scenarios for
Europe were presented from offering a more limited Union as an economic merger to
a full union of the United States of Europe. The document was offered in a format that
all future EU scenarios were supported by illustrative snapshots showing readers what
that scenario will entail in ‘real life’. There is only one theme that runs through all
illustrative snapshots: European policies and deployment of connected autonomous
cars. Connected cars illustrate how European flows of people, goods, and capital will
be disrupted by most of the scenarios and how they would flow unobstructed if the
favoured ‘Doing much more together’ would prevail. Juncker in his State of the
Union picks up on this theme not only by claiming that he is presenting a ‘sixth
scenario’ for the future of Europe, but also by endorsing openly a car dominated
future “regime of automobility” (Böhm et al., 2006, p. 2-4). One of the key political
initiatives proposed is his claim “to make our industry stronger and more
competitive” (Juncker, 2017, p. 3.). This is significant, as Juncker asserts, because
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“they make the world-class products that give us our edge, like our cars. I am proud
of our car industry” (p. 3. my emphasis).
The State of the Union speech by the President is a ritual political act offering
a ‘status report’ on the assumed and politically desired shared understanding of the
state of affairs, as well as it is a performative claim about the common desirable
future told from a position of power. The State of the Union is actually ‘wordmaking’
(cf. Jasanoff, 2015): there is a list of upstream proposals and suggestions of
what is bureaucratically doable and strategically desirable from the policy apparatus
and other key stakeholders, which is then filtered through the politically attractive and
performatively advantageous by the political staff and the leader’s team. Once uttered,
the performative act is soon transduced into downstream policy action in innovation
funding programs, regulatory measures and new institutional structures. All the words
in the Juncker speech on industrial innovation, carefully selected, support the act of
‘world making’: “world-class” artifacts encapsulating the excellence of European
innovators, offering the union an “edge” in the competition between communities.
Research and innovation in mobility is, clearly, focused on the concept of the
car. The car was both a blessing and a curse in the 20th
century (cf. Featherstone et al,
2004) creating what John Urry (2004) calls the ‘system of automobility.’ The “steeland-petroleum
car” enabled “the car-driver to travel any time in any direction along
the complex road systems of western societies that link together most houses,
workplaces and leisure sites” (Urry, 2004, p. 28.). It ‘strapped’ the driver and
passengers into armchairs, surrounding them with sources of information and pleasure
(Urry, 2006). The system of automobility created an arrangement of fluid
interconnections in which autonomous humans combined with machines acquired a
capacity for free movement along the paths created for the purpose (Thrift, 1996;
Urry, 2004). The 20th
century may be called the century of the car.
With advances of mobility technologies, artificial intelligence, the emergence
of autonomous and connected vehicles, in the 21st
century a new post-automobility
system may emerge in which the system of automobility gives way to a more liquid
technology arrangement (Bauman, 2007; Sheller, 2004) of mobilities populated by
interconnected, autonomous smart ‘mobility-things’ (Hansson, 2015). ‘Vehicular
cyberization’ (Sheller, 2004) has been happening at a growing pace since converging
infrastructures of transportation and information were created in the last decade of the
previous century. Post-car mobility may transform the “car”: new materials, new
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forms of propellants, new interior and exterior designs emerge recreating people and
object carrying mobility things. Post car mobility things may also rearrange desires,
inhabitations, socialities as well as urban ‘scapes’ and vice versa (Urry, 2004; Sheller
& Urry, 2000; Sheller & Urry, 2006; Sheller, 2004).
It is not accidental that European futures and cars are so connected. Research
and innovation, investment in new technologies lay at the heart of European
competiveness, as “innovation is at the basis of transforming the EU into a knowledge
based economy” (Moedas, 2016). This agenda, promoted by many, is most forcefully
driven forward by the European Round Table of Industrialist. The European Round
Table of Industrialists (ERT) is a forum of leaders of European companies
with combined revenues exceeding €2,250 billion. This group, of about 50 Chief
Executives and Chairmen of major multinational companies of European parentage
covering a wide range of industrial and technological sectors, since its
conceptualization has been in the forefront of the research, innovation and
competiveness debate. In the transport and mobility arena, given that the members
comprise of the biggest manufacturers of transportation and mobility infrastructure
unsurprisingly, they have been pushing European infrastructure and spatial policy that
enabled an integrated network of modern high-speed roads, railways and other
physical and virtual infrastructure across the European continent between the 1960s
and 1980s (Jensen & Richardson, 2004). ERT is in discussion with the commission on
a regular basis (according to lobbyfacts.eu, an independent lobby transparency site,
ERT met European Commission officials 51 times in 2016) and seeks to contribute
pro-actively to the debate on policy priorities and long-term policy direction. ERT
involvement in innovation and policy has a direct impact on how sociotechnical
imaginaries (Jasanoff, 2015) of mobility are formulated and how certain technologies,
like the automobile, are locked in by European power discourses.
Juncker’s speech and the White Paper on the Future of Europe represent
power discourses that frame research and innovation; they not only perform potential
political visions but also animate techno-social futures. These futures are created
through, open and hidden, performances and interactions of power, of techno-social
visions and of sociotechnical imaginaries; they are also shaped by our key concepts of
how research and innovation is conceptualized and regulated. Technology is not a
blank slate as it is not only a driver for competiveness and job creation. The car as
technology in the 20th
century created socialities of commute, family life and
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community (Urry, 2004); opened up or closed down visions of the future, locked in
technologies as well as urban scapes. Thus, research and innovation in automobility,
as in many other territories, is far too important for our common social future to leave
it in the hands of innovators, politicians or businessmen only.
Knowledge as a public good
Many think that technology develops through its internal dynamic and then, without
any other influence, shapes society to fit its designs (Winner, 1986). Others believe
that the role of research and innovation is to bring technology fixes for the main
challenges facing contemporary societies (see critically: Kuhlmann & Rip, 2014).
Again, others are raising basic questions about the goal and purpose of science based
innovation; the pathways in which specific technological options are foresighted on
implicit suppositions and value judgements that are open to being challenged and
contested; the need for recognizing and deliberating alternative techno-social avenues
that are effectively excluded by those currently endorsed, and the possibility of
imagining different futures and different ways of doing research and innovation to get
there (Raman & Mohr, 2014).
Innovation, or rather knowledge that forms the basis of or is created during the
innovation process, is a classic public good. Knowledge, information, and ideas are
non-rivalrous – the consumption of one individual does not detract from that of
another –, and non-excludable – it is difficult or impossible to exclude an individual
enjoying the good –, thus satisfying the two critical properties defining a public good
(Samuelson, 1954; Stiglitz, 1998; Verschraegen & Schiltz, 2007). While knowledge,
information and ideas are public goods, technologies for disseminating information or
artifacts, designs encapsulating knowledge and ideas are not. While it would be hard
to exclude someone from learning Joseph Stiglitz’s concept of knowledge as public
good, his book written together with Bruce Greenwald ‘Creating a Learning Society’
is a private good and is sold on the market. While the line between knowledge as
public good and specific pieces of knowledge as private goods is clearly defined by
intellectual property and patent regulations, the nature of a ‘knowledge good’ may
change over time. Some dissemination technologies lose their private nature after a
certain time; also authors may choose to give up their private rights and make specific
knowledge semi-public through ‘open access’ or creative commons regulations. It
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may happen the other way around: television broadcast was aired as a public good
until television wave scrambling was made possible; now some programs may only
be seen for a fee (Verschraegen & Schiltz, 2007).
Research, innovation and the provision of public goods are closely connected.
In H2020, the 8th
framework program for research and innovation funding in the EU,
28% of research funding went to corporate entities, making this sector the second
largest beneficiary of public contributions to research and innovation after higher
education institutions (EU webgate, 2017). Scherer (2017) therefore rightly notes that
“exploring the conditions and contributions of responsible innovations” (p. 8) should
be among the areas where political CSR research is to make contributions to better
understand corporate strategies and underlying normative or descriptive concepts.
Political CSR is concerned with the corporate provision pure public goods (Scherer et
al. 2016). However, public/private good transitions may also happen by public
deliberation and collective decisions. Policy decisions may lead to rival goods being
made non-exclusive like education or healthcare; or non-rivalrous when copyrighted
knowledge is offered as openly accessible. The challenge is to find the right balance
between knowledge/innovation public/private good ratio.
Innovation, of course, is a complex economic concept. From a microeconomic
perspective, innovations (both product and process) may help companies better
compete on the market: process innovations reduce marginal costs of production;
product innovations minimalize elasticity (and thus increase price and maximize
profits) because of the lack of available substitutes. Therefore, unsurprisingly,
companies are not particularly interested in making their new knowledge/innovation
become public goods. Also if new knowledge is not marketable (because it is nonexcludable),
companies will not be incentivized to innovate, therefore they will
underinvest in innovation, which, in turn will lead to market failure: the undersupply
of innovation by corporations (Arrow, 1962). There are also other market failures. It
may be the case that innovation remains a private good with positive externalities. It
is hard for corporations to stop other companies use ideas that are, or cannot be,
patented; thus innovation spillovers will save innovation costs for competitors. This
again will lead to underinvestment and undersupply, as not all investments in
innovation may be appropriated from potential users. Another reason to innovation
related market failure is the indivisible and uncertain nature of costs of innovation.
Innovation projects have major up-front fix costs, while in most cases such costs are
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not compensated by revenues or pay off only in the long run. Any innovation exercise
carries an element of potential failure, thus uncertainty, to really generate new
knowledge and potential user take-up; this again may lead to underinvestment in
innovation activities. Market failure may also stem from what is called the ‘patent
race’ when companies are working towards the same innovation but the winner takes
all the returns once IPR protection is granted. These market failures need to be dealt
with, since as Arrow (1962) notes “in a free enterprise economy the profitability of
innovation requires a suboptimal allocation of resources” (p. 616-617). Intellectual
property rights (IPR) originating from a Coarsean appropriation of property rights are
powerful, even if challenged, ways of dealing with issues of excludability.
Appropriating property rights in the form of IPR, however, creates a thin line for IPR
theory; to walk the line IPR law tries to preserve adequate incentives for companies to
innovate while avoiding the gift of excessive monopoly power, which leads to
socially inefficient exploitation of the created knowledge/innovation. Tradeoffs
between strong and weak IPR regimes as well as the benefit of alternative regimes,
such as prize systems, are widely and continuously discussed in both academic and
policy literature (cf. Halls & Helmers, 2010; Brandstetter et al., 2010; Stiglitz &
Greenwald, 2014; Sweet & Maggio, 2015). Public funding of basic research is a way
to deal with appropriation and uncertainty. The system of public funding for
universities doing basic research originated from Vannevar Bush, former MIT vice
president, dean and president of the Carnegie Institute. He was tasked to design an
apparatus that could fund science in the postwar years; Bush penned the historic
report ‘Science: the endless frontier’ which became the basis for the National Science
Foundation in the US (Bush, 1945). Public funding was extended to private firms
creating a form of Pigovian subsidy to compensate for the positive externalities of
innovation benefiting other companies. A reverse process was initiated by the BayhDole
Act of 1980 by which universities and SMEs were awarded ownership and
patenting rights of innovations originating from publicly funded research; this opened
the avenue to create private goods from a public good in order to incentivize
commercialisable basic research done by universities (McDevitt et al., 2014).
Thus, ‘exploring the conditions and contributions of responsible research’ and
innovation is not easy. It is not straightforward to exclude economic motivations or to
address the explicit aim of contributing to society or enhancing social welfare in the
research and innovation territory (Scherer et al., 2016). Knowledge and innovation are
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contested public/private goods; regimes of regulation and policy, whether initiated by
public authorities, or private entities in some form of co- or self-regulation struggle to
address the challenges of ‘creating a learning society’ (Stiglitz & Greenwald, 2014).
Such challenges also arise from co-governing public goods, and there is a dynamic
interaction of cooperation and competition between public and private actors securing
the provision of common goods (Tosun et al., 2016). In the case of
knowledge/innovation it may not the direct provision of the public goods by
corporations that is societally beneficial, but the corporation being ready to engage in
public deliberation about the provision of a specific innovation good as public or
private. Even more importantly, the corporation may engage in collective decisionmaking
regarding innovation from its early stages that may hold the key to the
politicization of the corporation and its enhancing social welfare through creating a
more democratic corporate polity.
The participatory turn
The participatory turn originates in the political science idea that new public policy
arrangements are to be developed in which citizens can directly be involved in
policymaking (Tholen, 2015). These arrangements would facilitate dialogue and
deliberation among citizens as well as citizens and public policy decision-makers.
Such participatory endeavours are not limited to public policy, but emerged as a
consequence of a number of factors, also discussed in this book, commencing the
rethinking of concepts of power, social interactions and knowledge. This
conceptualization of the (post)modern human condition entails late-modernity seen as
a liquid arrangement (Bauman, 2007); as having to live with ‘incalculable delocalized
interdependence’ manifesting in a risk-society (Beck, 2006); leading to a fragmented
society, the decentering of identities and thus to neo-tribalism (Maffesoli, 1996). This
created diminishing legitimacy of representative democracy as well as distrust in
traditional forms and processes of knowledge creation and epistemology that inform
democratic decision-making.
One of the earliest examples of an innovative participatory process of
decision-making was the 1975 Berger Commission in Canada in which indigenous
North Americans were actively engaged on the Mackenzie valley oil pipeline and on
the development affecting the local native people (Berger, 1977). A number of
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emerging environmental and social conflicts in the 1970s and 1980s seemed to pose
complexities of social and natural systems that have created fundamental difficulties
in traditional decision making processes; in case of the natural systems the decoupling
of identifiable causes and effects lead to incalculable risks, while in case of
social systems the increasing multiplicity of value systems, worldviews and identities
pointed to an ever more pluralist society (Wittmer et al, 2006). It has been argued by a
number of authors that representative democracy and the application of single
perspectives are incapable of coping with the apparent complexity in decisionmaking,
and so the inclusion of multiple perspectives including those of different
publics should be sought through participation and deliberation. At the societal and
institutional level a number of researchers have observed a political concern about the
loss of trust in institutions, those of governance and science in particular, in the areas
of environmental and risk-centred decision-making as a justification for involving the
public through participation. This is again linked to a search for a pluralistic decision
making process in order to reflect the nature of contemporary societies (Cass, 2006).
Collins and Burgess (1999) summarise the socio-cultural aspects of contemporary
society that frame the participatory turn as encompassing “(i) socio-cultural pluralism;
(ii) the gathering sense of powerlessness; [and] (iii) the shifting social and realist
constructions of the environmental crisis” (Collins & Burgess, 1999, p. 2 quoted in
Cass, 2006).
The participatory turn informed much of what has been discussed in this book.
However, nowhere has it been so controversially looked upon as in the process of
knowledge creation and dissemination. While science, innovation and technology
permeate the culture, society and politics of modernity “the dominant discourses of
economics, sociology and political science lack vocabularies to make sense of the
untidy, uneven processes through which the production of science and technology
becomes entangled with social norms and hierarchies” (Jasanoff, 2004, p. 2). The
idea that social norms and hierarchies rooted in different publics has mainstreamed in
corporate strategy, based on ethical claims, via Freemanite stakeholder theory; it has
been accepted in political science and public policy as a critique to representative
democracy via Habermasian communicative ethics; and has permeated sociology and
political theory via the understanding of Beckian risks. The emergence of a
deliberative, participatory idea of co-creation in business and society is based on a
postmodern understanding of ethics as void of grand narratives or as universal moral
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claims having limited legitimacy. It has, however, been challenged and questioned in
epistemology: truth claims invariably are seen as holding some level of universality;
any other approach risks being grouped in the radical anti-science camp of
Fayerabendian 'anything goes' radicals.
Far from being simple, technology cannot be understood outside social
interactions of a community; Science, technology and society (STS) literature has
shown the multilevel interconnectedness of society and technology. Artifacts are not
to be understood outside the community that creates or consumes them; as
technological determinism, technology acceptance is oversimplifying the relationship
of technology and society. It singles out one stakeholder and picks one specific stake
to be analyzed after they have been already been invented or deployed. Langdon
Winner (1986) in his formative article “Do Artifacts have Politics” proposes two
ways in which artifacts can contain social or political properties. Technologies with
flexible features are strongly compatible with certain socio-political values, while
those with intractable features require certain socio-political ideals. Winner claims
that societies influence and hold sway over technological advances by emphasizing
the importance of understanding the implications of technologies before they are
introduced to ‘users’. Others maintain that technology and society should not be
conceptualized as separate spheres influencing each other but rather as being mutually
constitutive (MacKenzie & Wajcman, 1999).
In the late 1960s and early 1970s, originating from the ‘participatory turn’,
several participatory practices of technology assessment were being experimented
with. Influenced by theories of deliberative democracy, Habermasian communicative
action and participatory models of technology assessment new formats of
participation in technology diffusion pathways were experimented with. ‘Planning
cells’ bringing together a random group of citizens provided with information
deliberated controversial planning issues involving technology in Germany in the late
1960s (Dienel, 1978); ‘Citizens Jurys’ in the US experimented with representative
and legitimate decision making processes to empower citizens and counter the
dominance of interest groups, professional lobbyists and think tanks on public
discourse on technology adoption in the early 1970s (Crosby, 1974); while in the
1980 the idea of ‘consensus conferences’ was introduced by the Danish Board of
Technology as a trial of a new form of public engagement to technology assessment
(Andersen & Jager, 1999). Academics also developed formal and constructive
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approaches to reflexive engagement with and assessment of technology addressing
citizen panels with technological innovations having potentially problematic
dynamics and wider societal repercussions (Voss & Amelung, 2016). Constructive
technology assessment methods were developed to stimulate discussions and analysis
to contribute to a social debate on the diffusion of certain technologies (Rip et al,
1995; Schott & Rip, 1997; Rip & Te Kulve, 2008). All of these participatory
processes may be seen as an “ongoing innovation journey, working against a
technological black boxing of basic features of political order and democracy [...] to
make underlying political principles and assumptions explicit, as opposed to hiding
them in claims of scientific neutrality and universal functionality.” (Voss & Amelung,
2016, p. 761.)
Participatory and constructive technology assessment designs reflect the
socio-political and co-productive nature of innovation and technology; it is not a
blank slate or black box to be assessed independent of its social and political context;
multiple stakeholders may have different claims on impact as well as being involved
in the innovation journey itself. Such approaches reinvigorate the territory of research
governance by expanding the scope of research and innovation as well as technology
related scientific research beyond formal compliance with risk regulations or ethical
guidelines. There is also a shift in focus from innovation to have impact beyond
economic/business benefits or only deliver technological fixes to our grand challenges
(Raman & Mohr, 2014). Research and innovation as well as technology requires a
‘social licence to operate’ stemming from the notion that the key stakeholder of
technology is the polity as a whole; while the materiality and sociality of research and
innovation creates a much greater power to transform society than other forms of
knowledge, because sociotechnical imaginaries (Jasanoff, 2015), techno-social
regimes or regulatory science (Jasanoff, 2003) have the capacity to become embedded
in material arrangements, transform socio-cultural relations and shape the
environment to a previously unseen degree. (Raman & Mohr, 2014)
This shift in focus is exemplified in the recent criticism of ‘permissionless
innovation’, a term coined by Google’s Chief Internet Evangelist Vinton Cerf (Cerf,
2012), to mean the notion that experimentation with new technologies and business
models should generally be permitted by default. Unless a compelling case can be
made that the new invention will bring serious harm to society, innovation should be
allowed to continue unabated and problems, if they develop at all, can be addressed
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later (Thierer, 2014). The techno-optimistic vision of permissionless innovation rests
on the fetishization of human technological creativeness and the faith that technology
and progress are bundled together, therefore any political oversight or social control
may hinder its effectiveness and power to further the wellbeing of humankind. The
‘participatory turn’ aims at bringing the ‘social licence to innovate’ to life by creating
processes and methods in which different publics may become part of the decisionmaking
process regarding innovation. However, participation only works if proper
structures and appropriate institutions are created that embed multiple perspectives
and knowledges into the research and innovation process. As Jasanoff (2003) puts it:
“participation alone, then, does not answer the problems of how to democratize
technological societies. […] What has to change is the culture of governance, within
nations as well as internationally; […it is no longer the issue] whether the public
should have a say in technological decisions, but how to promote a meaningful
interaction among policy-makers, scientific experts, corporate producers, and the
public” (p. 238, emphasis in original).
The history of responsible research and innovation
The concepts of ‘responsible innovation’ and ‘responsible research and innovation’
go back until the turn of the millennium. Not surprisingly these ideas also stem from
the societal processes described in Chapter 3 and are related to the emergence of
responsibility, stakeholder orientation and engagement in different areas of business
and institutional operation. Also, at the same time when challenges of business ethics
emerged in the 1970s and ‘80s, discussions concerning the ethical, legal and social
implications of research and research integrity (in nuclear energy, medical sciences
and genome editing) also appeared (Fischer & Rip, 2013). However, it was only at the
beginning of the 2010s that the concept of responsible research and innovation (RRI)
gained traction in a science, research and innovation policy context. The background
of the emerging policy level discussion was the GMO debates (Grove-White et al,
2000), geoengineering (Royal Society, 2009), the dilemma of control for emerging
technologies and the idea of public participation in setting research agendas as well as
discussions about the social desirability of research and innovation (Fisher et al,
2006). A number of meetings took place in Brussels at DG Research and in London at
the French Embassy in the Spring of 2011 at which expert from academia and policy
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tried to come to a common understanding of the concept of responsible research and
innovation (Owen et al, 2012). This process has been taken forward by Gilles
Laroche, Head of the Science in Society Programme, creating a number of funding
instruments to assist research and coordination in the 7th
Framework Program of the
EU on RRI and also establishing an expert group to advise the EC on issues of
developing appropriate governance frameworks to assist the mainstreaming of RRI.
He also seeked an opinion on the subject from the European Group of Ethics, the
group providing Commission high quality and independent opinion on ethical aspects
of science and new technologies in connection with EU legislation or policies. At the
London meeting Rene von Schomberg from the DG Research and Innovation of the
European Commission circulated a paper on the basic idea of RRI. The definition
used in this paper was to become the first definition of RRI as “a transparent,
interactive process by which societal actors and innovators become mutually
responsive to each other with the view on the (ethical) acceptability, sustainability and
societal desirability of the innovation process and its marketable products (in order to
allow for the proper embedding of scientific and technological advances in our
society” (von Schomberg, 2011, p. 9). On one of the follow up meetings on Science
and Society in Europe EU Commissioner Mary Geoghegan-Quinn stated that
“Research and innovation must respond to the needs and ambitions of society, reflect
its values and be responsible…our duty as policy makers (is) to shape a governance
framework that encourages responsible research and innovation” (Geoghegan-Quinn,
2012). This marked the first tangible, high-level support for the concept (Owen et al.,
2012).
In the coming years several other definitions and descriptions have emerged
about responsible research and innovation as “taking care of the future through
collective stewardship of science and innovation in the present” (Stilgoe et al, 2013,
p. 1570). Stigloe and his co-authors emphasized four dimensions that are of key
import in RRI: anticipation, reflexivity, inclusion and responsiveness (ibid).
Anticipation involves systematic thinking about potential problems and available
alternatives in innovation; reflexivity refers to a critical approach to activities,
commitments and assumptions of the innovation process as well as scrutinizing
underlying value systems and beliefs that influence innovation; inclusion refers to the
active engagement of stakeholders for the purpose of a more socially embedded
decision-making process and enhancing mutual learning; while responsiveness entails
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the capacity to shape or redirect the innovation process in reaction to the expressed
values of stakeholders and others publics, as well as create an institutionalized coresponsibility
for the innovation outcomes (Lubberlink et al., 2017). Other authors
have extracted some key characteristics that are shared across of the different
European definitions of RRI as (a) focus on addressing significant socio-ecological
needs and challenges; (b) a dedicated attempt to anticipate potential problems, assess
available alternatives, and reflect on underlying values, assumptions and, beliefs, (c) a
commitment to actively engaging a range of stakeholders for the purpose of
substantively better decision making and mutual learning, and (d) a willingness
among all participants to act and adapt according to these ideas (Wikinson & Carew,
2014). A recent definition claims that “responsible innovation is essentially an
attempt to govern research and innovation in order to include all stakeholders and the
public in the early stages of research and development. The inclusion of different
actors and the public is, in turn, meant to increase the possibilities to anticipate and
discern how research and innovation can or may benefit society as well as prevent any
negative consequences from happening” (Burget et al., 2017, p. 15).
In 2001, the ‘Science and society’ action plan in the EC was launched to set
out a common strategy to make a better connection between science and European
citizens. In 2007, under the Seventh Framework Programme for research and
technological development (FP7), ‘Science and Society’ became ‘Science in society
(SiS)’ with the main objective to foster public engagement and a sustained two-way
dialogue between science and civil society. This effort is pursued under part V
‘Science with and for Society’ of Horizon 2020 in the Eighth Framework Programme.
Since 2010 the focus of SiS has been to develop a concept reconciling the aspirations
and ambitions of European citizens and other research and innovation actors. The EU
in its policy documents currently defines RRI as “a process for better aligning R&I
with the values, needs and expectations of society. It implies close cooperation
between all stakeholders in various strands comprising: science education, definition
of research agendas, access to research results and the application of new knowledge
in full compliance with gender and ethics considerations” (Council of the European
Union 2014). The EC has also formulated responsible research and innovation in
terms of several key areas: (a) public engagement; (b) gender equality; (c) science
literacy and science education; (d) open access; (e) ethics; and (f) governance (EC,
2015). The then incoming EU Commissioner for Research and Innovation, Carlos
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Moedas in his speech in Brussels in June 2015 set three goals for EU research and
innovation policy, which he summarized as “Open Innovation, Open Science and
Open to the World” (EC, 2016).
Parallel to the emergence of the concept of responsible research and
innovation in the EU, similar approaches to research and innovation emerged in other
parts of the globe. Responsibility at the Chinese Academy of Science is understood as
trying to benefit society to the maximum extent, as well as being aware of injustice
and avoid the potential risks of using a specific technology. They set up four general
policy principles: (a) responsibility; (b) sustainability; (c) serving the societal needs;
(d) and fostering economic development. The Academy also emphasizes societal
responsibilities, as scientists being aware of their responsibilities in political decisionmaking,
in science communication, in teaching young researchers about S&T ethics
and in avoiding conflicts of interest (RRI Practice, 2017). In the US Arizona State
University (ASU) is a leading example of awareness about RRI. ASU, ranking 17th of
768 U.S. universities, adopted a transdisciplinary approach in teaching and research to
its activities, integrating education, research and innovation, and also its outreach
activities towards local publics, non-profit and corporate partners. ASU also
established a network structure in which horizontal activities are not centrally
governed, but rather facilitated or supported by the university administration.
According to Crow & Dabars (2015): “In the course of a decade, ASU reconstituted
its curriculum, organisation, and operations through a deliberate design process
undertaken to build an institution committed to the pursuit of discovery and
knowledge production, broad socioeconomic inclusiveness, and maximisation of
societal impact. The academic community has been consciously engaged in an effort
to accelerate a process of institutional evolution that might otherwise have proceeded,
at best, only incrementally, or possibly in the face of crisis” (p. 60). In India the
concept of responsible research and innovation is not used, however the idea of
‘Access, Equity and Inclusion (AEI)’ can be linked with RRI in the Indian context.
Key elements of RRI such as societal engagement, open access/science, gender
equality, ethics, governance and science education have been part of policy discourse
and programs in S&T and Innovation based on the AEI framework (Chaturvedi and
Srinivas 2015).
Several authors, however, have voiced criticism about the Global North
dominance in the conceptual development of responsible research and innovation.
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Some have voiced their concerns whether RRI is an appropriate method to anticipate
local and specific vulnerabilities of indigenous populations in Global South contexts
(Di Giulio et al, 2016), while others have pointed to the normative liberal foundations
of the concept that may lead to a ‘decent non-liberal peoples dilemma’ in countries
with different political traditions then those of the liberal polities of the global North
(Wong, 2016). The European Commission’s recent ‘Open to the world’ goal may
imply the involvement and engagement of non-European countries in a mutually
acceptable, shared RRI definition, however in emerging economies of the Global
South (BRIC) and also in the more advanced economies such as Japan or Australia,
there is little awareness of the concept of RRI. It is apparent that considerable work
needs to be done before RRI is recognised as a concept that offers traction in nonEuropean
contexts, while the normative liberal foundations need to be re-thought in
order for Global South policy-makers to embrace the concept to the full. As Forsberg
and her co-authors (2017) claim: “[b]y engaging with major global S&T players and
their sometimes different and often differentiated needs, it may become clear that
research and innovation may have to be responsible in ways that are not an immediate
priority for those nations where the RRI discourse has so far largely developed” (p.
2).
Responsible research and innovation and its stakeholders
The concept of RRI revolves around stakeholders of research and innovation: it aims
at ‘societal desirability of the innovation process’ as well as for a ‘proper embedding
of scientific and technological advances in our society’ (von Schomberg, 2013).
However, in most of the RRI discourse ‘stakeholders’ are used as a catch all phrase
denoting ‘societal actors’ without pointing to who they are and why they count in the
research and innovation process (cf. Freeman, 1984). The basic concepts of RRI –
anticipation, reflexivity, inclusion and responsiveness – require stakeholder
involvement and engagement. Anticipation requires alternative sets of knowledges to
be represented in the innovation process to assess the potential of alternatives;
reflexivity involves an open dialogue about the different assumptions and beliefs that
animate the innovation process; inclusion requires a diversity of societal actors to be
included beyond the usual suspects of industry players, research institutions and
global NGOs in the environmental field; while responsiveness aims at establishing
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institutionalized ways of stakeholders taking co-responsibility for the innovation
process as well as the potential outcomes.
I argue that stakeholders in the innovation process are those groups who have
a stake in or a claim on both the innovation process and the potential innovation
outcome (Freeman, 1984). In order to ensure proper social embedding and ‘to
anticipate and discern how research and innovation can or may benefit society’
stakeholder claims need to be understood, assessed and prioritized. I also claim that
since research and innovation are based on a ‘social contract’ between researchers,
innovators and the society (Guston, 2004, 2008; Rip, 2011; Bird & Ladyman, 2013;
Brown & Guston, 2009); researchers, innovators and societal actors are involved in
co-producing the cognitive, the material, the social and the normative basis of the
research and innovation process (Jasanoff, 2004); and R&I involves a division of
moral labour between the different social actors (Rip, 2014) stakeholders must
participate in determining both research and innovation agendas and take part in the
research and innovation process, based on their potential claims or stakes, from its
early phases. According to Clarkson (1994) there is no stake without risk. Research
and innovation place stakeholders at risk because they have either invested some form
of capital (human, financial, knowledge) in the research and innovation process either
directly or through public channels, and are impacted by the outcome of the research
and innovation activity in a number of ways (directly through its negative or positive
impacts on stakeholders; indirectly through technology determining common technosocial
futures), therefore they do have a diverse set of stakes in the process (Clarkson,
1994). Given the public funding of research and innovation, and the levels of
uncertainty in research and innovation processes (Poel et al, 2017) all stakeholders are
voluntary and involuntary stakeholders at the same time. As Brown and Guston
(2009, p. 364) argue, the social aspects of research and innovation as well as its right
based nature is to be understood as a way of initiating a discussion on what sort of
research is appropriate, legitimate, desirable (Raman & Mohr, 2014). Stakeholders
have different risks, claims, interests and values, therefore it is important to have
some clarity on what these stakes and claims may be, and who or which stakeholder
group should be involved in a specific research and innovation process. This is a
rephrasing of Freeman’s classic question of finding an answer to ‘who or what
counts?’ in the research and innovation process.
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The most cited example of strategic stakeholder theories is the powerlegitimacy-urgency
model of Mitchell et al. (1997). The authors, as discussed in
Chapter 2, propose that the various stakeholder approaches should be organized into a
theoretical structure in order to explain the degree of attention managers should pay to
the different stakeholders during strategic management processes. A comparable
stakeholder theory for responsible research and innovation should aim at
understanding potential stakeholder claims in order to re-define the ‘culture of
research and innovation governance’, as well as to create a model for the ‘meaningful
interaction among policy-makers, scientific experts, corporate producers, and the
public’. This then would assist the creation of appropriate governance models of
research and innovation processes as well as stakeholder selection and prioritization
in participatory approaches by decision makers in setting research agendas, funding
schemes and cooperation of different actors in the early phase of innovation
processes. From a stakeholder perspective the triad of anticipation, reflexivity, and
responsiveness (as inclusion is a direct reference to the engagement of stakeholders)
are related to three dimensions of stakeholder attributes: the distribution of moral
labor they denote, the epistemic qualities and approaches they contribute to and the
power or social embeddedness they represent in the innovation process. Moral aspects
of responsibility are emphasized by scholars who understand RRI as a new division of
moral labor (Rip, 2011; 2014) or criticize the second order separation of technology
and ethics as misleading (Martin & Freeman, 2004); epistemic aspects of
responsibility are dealt with by authors who work in the realm of social epistemology
and innovation (Raman & Mohr, 2014; Rooney et al., 2014) or co-production of
knowledge by science and society (Polanyi, 1962; Bijker 1995; Jasanoff, 2004); while
the power discourses and power rationalities of certain actors animating technology,
research and innovation are dealt with scholars who write about the ‘politics of
artifacts’ (Winner, 1980), ‘technologies of humility’ (Jasanoff, 2003) or
‘sociotechnical imaginaries’ (Jasanoff, 2015). If we conceptualize RRI as the
‘inclusion of different actors to anticipate societal benefits of R&I and prevent
negative consequences from happening’ we need to create a stakeholder mix in each
innovation project that brings all three dimensions – the moral, the epistemic and the
power/participatory – into the inclusion process through involving and engaging the
stakeholders best suited for the purpose. The goal of RRI is to anticipate, reflect and
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respond to the moral, epistemic and power aspects of the social embodied in the
different stakeholders invited to, involved and engaged in the innovation process.
Anticipation is the ‘negative impacts prevented or mitigated’ through the
division of moral labor by different stakeholder groups; being aware of uncertainty
may be dealt with by the epistemic qualities represented by the different stakeholder
knowledges participating in the process; and uncovering different pathways of
prevention/mitigation may be arrived at by stakeholders holding positions of power or
determining policy through power discourses. Reflexivity is understood as being
confronted with and critically thinking about different ‘responsibilities, values and
motivations’ in the division of moral labor; about the different epistemologies and
perceived realities embedded in the diverse knowledges engaged in the process; and
what governance structures may be applied by the different power players to arrive at
desired and negotiated outcomes. Responsiveness, at the same time, means that the
organization is able to and does adjust the innovation process through a recalibration
of roles and responsibilities or a re-division of moral labor inside and outside the
organization; by understanding, reflecting on and addressing ‘events and changing
circumstances’ impacting different groups of stakeholders; as well as safeguarding the
achievement of the desired and agreed innovation outcomes through appropriate
processes and governance structures (cf. Lubberlink et al., 2017).
As opposed to the stakeholder theory of the firm by Mitchell et al. (1997)
where the goal of the theoretical construct is to assist managers in dealing with the
different stakeholders groups, the aim of the stakeholder construct in RRI is to assist
the selection of diverse stakeholders representing the moral, the social epistemic and
the power-political aspects of the social to better embed the innovation process in
society through proper and diverse stakeholder inclusion. Groups representing moral
claims in the research and innovation process would be NGOs, CSOs and social
enterprises; epistemic claims would be addressed by stakeholders with diverse types
of theoretical or practical knowledge, expertise and experience; while power
discourses are animated by funding agencies, policy or industry representatives
familiar with the governance structures, management processes and policy discourses
framing technical-social visions. The goal of such moral, epistemic and power
diversity is to have a broad democratic debate between a wide group of stakeholders
on what research and innovation is appropriate, legitimate, and desirable as well as
open up the research and innovation process to the deepest possible societal scrutiny
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(Raman & Mohr, 2014). We may conceive participatory innovation processes as a
form of action research platforms (Argyris et al., 1985) as it is the ‘practical
knowledge’ embodied in the moment-to-moment dialogic action of each participant,
the ‘communicative co-inquiry’ into the world through collaborative relationships
with each other and the ‘experiential presence’ of persons through sharing their
sensing, feeling, thinking and attending that social desirable and socially legitimate
new knowledge embodied in marketable products or services may be arrived at
(Reason & Torbert, 2001).
The politics of RRI
In accordance with the strategy of the European Commission as represented in the
‘three Os’ – Open Science, Open Innovation, Open to the World – several new
research and innovation governance structures, participatory processes and coproduction
formats are experimented with. Open Innovation as an innovation model is
understood to be “a distributed innovation process based on purposively managed
knowledge flows across organizational boundaries, using pecuniary and nonpecuniary
mechanisms in line with the organization's business model” (Chesbrough &
Bogers, 2014, p. 17). This aims at moving away from a firm-centric innovation
process, claiming that innovation processes take place in webs of innovation, rather
than in clear and singular value chains (Robinson & Rip 2013). The constantly
changing webs of innovation are highly complex processes, structures and governance
models, involving companies and other groups that are effected by or contribute to
research, innovation, market uptake and diffusion such as NGOs, CSOs, regulatory
agencies and consumer group representatives. Quadruple Helix (Carayannis et al.
2016) innovation models “focus on and leverage higher order learning processes and
dynamics that allow for both top-down government, university, and industry policies
and practices and bottom-up civil society and grassroots movements initiatives and
priorities to interact and engage with each other toward a more intelligent, effective,
and efficient synthesis […] with the aim of people, culture, and technology to “meet
and interact to catalyze creativity, trigger invention, and accelerate innovation across
scientific and technological disciplines, public and private sectors (government,
university, industry, and nongovernmental knowledge production, utilization, and
renewal entities as well as other civil society entities, institutions, and stakeholders),
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and in a top-down, policy-driven as well as bottom-up, entrepreneurship empowered
fashion” (Carayannis & Campbell, 2012, p. 4 ). Open science is an attempt to make
scientific research, research data and result dissemination accessible to all levels of an
interested and inquiring society including practices of publishing open research,
campaigning for open access of research outputs, papers and publications generally
making it easier to publish, disseminate and communicate scientific knowledge to a
wider range of different publics. Citizen science initiatives are defined as scientific
work undertaken by members of the public, in collaboration with or under the
supervision of professional researchers, scientists and scientific institutions.
All these changes signal a ‘regime change’ in the evolution of science and its
interactions and cooperation with society or, as the MASIS report (2009) puts it:
“Since World War II, and with the experience of the war efforts to which science
contributed, a new regime of science in society emerged, sometimes called ‘Science,
the Endless Frontier’, after Vannevar Bush’s report to the US President in 1945. The
regime included a strong division of labour, with public research institutes devoted to
missions of societal relevance, and universities being funded for basic research,
without any questions asked about relevance. From the 1960s onwards, this regime
came under pressure, in parallel to national science policies becoming more active.
The regime opened up to new policy instruments, for example strategic research
programmes; and public scrutiny became important, including more accountability as
well as links with various publics. By the 1980s, the earlier regime ‘Science, the
Endless Frontier’ was giving way to a new regime which could be labelled ‘Strategic
Science’. […] Instead of a linear model of innovation (and attendant policy measures
and expectations of immediate benefits), one could speak of a lateral model of
innovation, where innovations and their effects on wealth creation and quality of life
are not limited to a linear chain of innovation. Some of the more interesting
innovations and their impacts derive from new, lateral combinations, and the social
and intellectual mobility of key actors. This applies to innovation‐oriented research,
as well as to expertise and decision‐oriented strategic research. Life sciences and
technologies such as nanotechnologies are linked to innovation, as well as to insight
and expertise, and thus straddle these two components of the regime of Strategic
Science. Environmental and earth sciences, most social and behavioural sciences are
primarily linked to the second component, strategic decision making (e.g. against the
background of the Precautionary Principle)” (MASIS Report, 2009, p. 11-13).
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Thus, corporations turn into political actors by applying the principles of
anticipation, reflexivity, inclusion and responsiveness to their research and innovation
activities through engaging in public deliberations and collective decisions with their
stakeholders in the provision of innovation and knowledge public goods together with
public authorities, public or private research bodies and other public and private
actors. Social embeddedness and the corporate provision of public goods are
facilitated through public engagement, including diverse stakeholders in the
innovation process seen as a key factor in ensuring the societal readiness of corporate
innovations and marketable products. Referring to the innovation activities
exemplified in President Juncker’s State of the Union speech political CSR and RRI
aims at avoiding technology lock-ins and path determinations through ‘industry push’
and ‘policy pull’ (von Schomberg, 2013) by opening up the innovation process to
include a wide variety of stakeholders from the early stages of the innovation process.
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PART III : THE OPERATION OF CSR
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8. STANDARDS AND GUIDELINES
The GRI story
In the spring of 1997 Bob Massie and Allan White, the CEOs of CERES, a company
specialized in sustainability, and of Tellus Institute wrote a letter to their good friend
Ralph Taylor, who was then a director of CERES and whose parents had a foundation
that also supported sustainability projects. At that time White was already receiving
200-300 emails a day in connection with a new initiative aimed at standardizing the
dissemination of corporate information regarding environmental sustainability. The
initiative originated in a discussion at the end of 1996 in which three people took part:
Massie, White and Joan Bavaria, the founder of CERES. At the time CERES had
already been working for quite some time on how sustainability-related measurements
could be unified, while Massie was contemplating how allies could be found for a
standardized reporting system. Find and convincing entailed extensive traveling, for
which funds had to be found. It was obvious that they could not ask for corporate
money – that would have undermined the independence and credibility of the project
– therefore they were trying to get support from foundations. Taylor’s parents lived in
Florida, therefore Massie flew there in order to convince them that the initiative was
worth supporting. After Massie had already spent two days trying to convince them,
they were having lunch in a country club on Palm Beach when –– Taylor’s father,
who had earlier headed a medium-sized local company and had a rather soldierly
manner, turned to him: “So, Bob, let me get this straight. You are telling me that you
are going to set up a system that is going to alter how companies are going to
disclose on their economic, and social, and labor, and environmental impacts, and
you are going to this on a global basis over the next couple of years. And you are
going to do it with a hundred thousand dollars from me.” “Yes, that is what I am
telling you”, answered Massie. “I think your one hundred thousand dollars will
trigger another one hundred thousand dollars and then that’s going to trigger several
million dollars, and then we will then be able to do it. Of course all this is going to
depend on a lot of people being willing to participate. But you will be the first.” A
couple of weeks later the cheque for a hundred thousand dollars arrived which was –
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as was prophesized by Massie – followed by millions of dollars. As a result the
Global Reporting Initiative (GRI) got under way. With the help of the money,
meetings took place with leaders of international corporations and global NGOs and
international organizations – with Greenpeace, WWF, Transparency International,
UNDP, AFL-CIO and the Brussels based ICFTU (International Confederation of Free
Trade Unions). Everybody connected to the initiative responded with interest and
support. By early 1998 the cooperation of numerous organizations and corporations
was secured, everybody espoused the same views and was prepared to contribute their
own reporting initiative to the whole. The second turning point happened when John
Elkington, who was a member of the initiator committee of the formally functioning
organization, raised a point: “If this initiative remains environmental only you will be
history before you get the first guidelines out. Time will have passed you by. You’ve
got to do more than just the environment.” This advice proved to have far-reaching
consequences. This was the moment when the GRI turned into a sustainability
initiative and ensured that ‘economic, environmental and social reporting became a
daily routine for every organization, similar to financial reporting.’ In 1999 the UNEP
(United Nations Environment Programme) joined the process as official collaborator
and in 2000 the first GRI reporting recommendation was published. In 2002 CERES
established GRI as an independent organization with its head office in Amsterdam,
with its own management and a staff of about 60 people and officially involving close
to six hundred institutional stakeholders. As Massie later said – in concord with what
Malcolm Gladwell wrote in his book ‘Tipping point’ – it was an important factor of
the change that “ […] – it wasn’t like we had a strategic plan – the internet made
possible a different kind of conversation and an extremely rapid ability to reach
consensus on a document. So we could meet in a country for two days, get 70% of the
way there, then under the old way things got done, you would have to mail things
back and forth, and the next stage would have taken three years. We literally did it in
three weeks.” (Waddock, 2008, p. 190; Gladwell, 2000).
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The theory of the institutions of responsibility
The theory and practice of responsibility – the point of departure for this book – is in
the early stages of disciplinarization. The transformation of thinking is a long and
evolutionary process and a shift is slow-moving and full of challenges. Change and
permanence, i.e. the evolutionary and disruptive processes, must happen concurrently:
the institutions of society must go through a gradual change without existing
institutions limiting or hindering the process of change. Radical critics of the presentday
socio-economic order often accuse the theory and practice of responsibility of
losing its essence while striving for the legitimacy necessary for a change and in so
doing accommodating to the old traditional paradigm of power and the economy. This
is a real process necessary for success. Change and adjustment – formation,
transformation and stabilization of institutions – to what exists must happen
simultaneously and gradually if it is to succeed.
For the process of the shift to be successful – as postulated by the sociological
and political institution theory – “cognitive or normative constructs that define the
conceivable and appropriate forms of political organization, policy goals, and policy
instruments for attaining those goals” are needed (Amenta & Ramsey, 2010, p. 17-
18.). The structure, purpose and legitimacy of these forms can be very different. What
is common to them is that they offer cognitive patterns, descriptions and paradigms
which help the actors to determine which possible and imaginable directions for
action there are. In other words, the thoughts must be channeled into institutional
frameworks and structures, and they must be transformed into some kind of
manageable order and form of cooperation where the participants know in which
common direction the process is moving. Epistemologically, the thinking and
awareness of political actors who shape and determine the direction of the action is
independent of each other and of other actors – experts, activists and early adaptors.
In part they think alike about the possible directions but they view them critically
from both inside and outside the network. This is why it is important that players
develop the “epistemological communities” of cognitive and normative feasibility,
that is, a common language (Adler & Haas, 1992).
Institutional theories look upon institutions both as possible generators of
change and as maintainers of stability and constancy. The institutions do not create
the framework for the totality of individual actions but they show the structures above
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the individual level which influence political processes and outcomes within the
framework of some rule-governed pattern. The different possible institutional forms
and schemes often exist side by side and it is open for interpretation how the
processes of substitution and change happen. Change is often affected by ‘policy
entrepreneurs’ and ‘policy networks’ offering an alternative to the currently
prevailing institutionalized politics, that is, movers and shakers who are personally
committed, and who act according to their commitment (Mintrom & Vergari, 1998).
It is an especially interesting moment in the process of institutional change when
certain norms no longer enjoy full hegemony and their legitimacy becomes
questionable, while at the same time the challenger institutions have not yet created a
full legitimacy base and a power-supported hegemony for themselves. The collective
actions of the challenger(s) are transmitted by the existing political institutions,
therefore the challenger norms, rules and budding institutions can only count on
success if they find allies, supporters and helpers among the players in the existing
and valid institutions. To achieve this, it is necessary that the players operating within
the framework of existing institutions and challengers thinking similarly or alike
should see the advantages of supporting the challengers. Simultaneously, through the
supporting alliance the way of thinking of the institutional actors who do not think
like the challengers also changes. For this the challengers must adapt to organizational
forms and strategic steps that fit in with the changing political environment (Amenta
& Ramsey, 2010).
According to sociological and political institutionalists – as opposed to the
rational decision institutionalists – institutional change does not occur because certain
institutional operations and organizations serve given goals more effectively, but
because it increases the social legitimacy of the participants in the organizational
operation. In other words, cognitive and legitimate change is a dual and mutually
effective process: through the processes of iterative discursive dialogues of expert
cultures, ‘epistemological communities’, ‘policy entrepreneurs’ and calculating
players of political institutions social adequacy is transformed. This results in
increased social legitimacy of the challenger institutions. The strengthening of these
institutions and their increasing cultural authority generates a further need for
adaptation by the players of political institutions, just as it furthers the expression in
an appropriate institutional framework of the ‘common cognitive maps’ created by the
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expert cultures. All these processes often transgress the boundaries of the immediate
political community and reach a transnational scale: modes of modernity having
social adequacy and legitimacy give the practices of the ‘most developed’ countries
certain authority which – with the support of international organizations – then put
these structures and practices into effect across national borders (Hall & Taylor,
1996). As a result, the institutional practices of responsibility – standards, guidelines,
process descriptions, expert cultures and organizations of policy entrepreneurs – have
significance beyond their mere existence: these institutional processes create the
conditions for the institutional change of responsible operation, the framework for
social adequacy and the power foundation of social legitimacy. Thus standards and
guidelines bring about the institutionalization of the spaces for public dialogue, as put
forward by Habermas, and new modes of social will-forming processes, thereby
creating the conditions for the legitimacy of social decisions.
Epistemological community recommendations
For certain thoughts and suggestions to serve as basis for socio-political processes and
for various communities to see them as imaginable and suitable organizational forms
and as a contextual goal, a common understanding – accepted and internalized
knowledge, an opportunity for verbalizing authoritative statements and the ability to
make suggestions for policies – is needed. It could be a good basis for this if a
network of experts working in different fields came into being which had convictions
based on the analysis of different social processes and practices, building on a
common, normative and principle-based causal logic. For the validation of these
convictions the members of the community must have methods determined and
accepted by members of the expert community, which are suitable for the rating,
evaluation and acceptance of knowledge in the various areas. Also, they must
determine those common social processes and practices dictated by their expertise
which could serve as a basis for common policy and which could contribute to the
development of the public good according to their common conviction. Such
networks – having common ideals, convictions based on principles, and a common
standpoint on validation and policy goals – are called ‘epistemological communities’
(Haas, 1992b). The literature on policy-based decision-making and organizational
operation emphasized in the nineties that uncertainty and the growing complexity of
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decisions often made decision makers turn to epistemological communities for help
when making policy decisions relating to different social processes.
At the same time, uncertainty and complexity make it unclear which
epistemological community is capable of formulating authoritative statements and has
adequate social legitimacy. Also, different communities with competing suggestions
and influences result in the emergence of new epistemological communities. This is
especially true for periods of societal shift. As indicated at the beginning of this book,
CSR and the associated disciplines represent a paradigm shifting train of thought.
Therefore it is natural that in periods of transformation, which were called preparadigm
periods by Kuhn, the various scientific and expert communities are
characterized by frequent and profound arguments about the right methods and
acceptable solutions, and about which are the processes on which problem-solving
can be built. These arguments characterize schools of thought and expert cultures. A
number of eventualities – epistemological, normative and methodological prejudice
(Kuhn, 1962), cognitive bias (Kahneman, 2011) and discursive force of power
(Foucault, 1999) – influence the process whereby a train of thought achieves
sufficient explanatory and authoritative opinion-forming power.
Epistemological communities are formed in a similar way. For the members of
the epistemological community to have common, normative convictions, numerous
arguments, analyses and decisions are necessary. These arguments are not only
shaped by the results, facts and data of scientific research but also by ideological
constructs, theories, generalizations and influences of power: these are constructs
which organize the often diverging results, statements and knowledge crumbs into a
uniform and authoritative narrative. They support the process by signaling in advance
the generalizable consequences of results achieved. Norms especially have a role to
play in setting up theories and processes: these are norms which determine what
exactly the community expects as the ‘right’ action from a person having a specific
identity or from the sum total of persons having such identity. Thus, these norms
determine the expectations towards the actors and decisively influence and determine
the processes and systems as well which turn a ‘fact’ into the basis for authoritative
convictions. Therefore, the emergence of epistemological communities depends on
three fundamental steps: on the existence of empirical proof based on research, the
acceptance of a general theory organized in a uniform narrative, and on the
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introduction of operating rules, recommendations and norms determining the
appropriate action expected by the communities (Bloodgood, 2008). This is the
political process of ‘epistemological-policy’ paradigm shift.
Scientific research and theoretical foundations were important phases of the
emergence of the theory of responsibility which – primarily from the perspective of
ecological damage, risks, consequences and processes – proved that corporate
operation ignoring negative externalities and moral hazards leads to dramatic
consequences. Hundreds of studies – in numerous disciplines from ecology through
economics to psychology – proved the social, economic and political consequences of
irresponsibility. Two decisive theories supported the organization of research results
into a uniform narrative: Elkington’s Triple Bottom Line theory and Freeman’s
stakeholder theory. However, in order for these ‘facts’ and the resultant narrative
constructs to serve as basis for authoritative statements and policy recommendations,
epistemological communities had to emerge.
Methods of establishing guidelines and standards which play an important role
in the development of epistemological communities can be differentiated. These are
typically the own norm- and procedure systems of some identity community – of a
prospective epistemological community – which it publicizes and spreads. Nowadays
there are hundreds of organizations formulating various recommendations, guidelines
and standards in the general area of responsibility. In all these cases, the point of
departure is always some interpretation of corporate responsibility or feasible
business ethics providing the foundation for organizational operation and stakeholder
activity in the given field. The purpose of these organizations and of the standards and
recommendations published by them is partly the definition of the principles and
practice of the organisation as identity community, and partly the support and
spreading if the principles of responsibility.
On the website of Fairtrade International for instance we can read:
“Embracing transparency and stakeholder participation is an important way that we
will be accountable for our work.” The ‘Constitution’ of Fairtrade International is just
such an epistemological community guideline, in which the signatories declare that
they “share a vision of a world in which justice and sustainable development are at the
heart of trade structures and practices so that everyone, through their work, can
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maintain a decent and dignified livelihood and develop their full human potential. The
fair trade movement believes that: Trade can be a fundamental driver of poverty
reduction and greater sustainable development, but only if it is managed for that
purpose, with greater equity and transparency than is currently the norm. […] In
pursuit of this vision, the members of the Association work individually and
collectively, and in partnership with others, to connect the aims of those in more
affluent parts of the world who seek greater sustainability and justice with the needs
of those in the Global South who most need those changes. […] By adopting this
Constitution, the members of the Association re-affirm their commitment to
maintaining and developing a common international system for Fairtrade and to
maximize the impact and effectiveness of that system through partnerships with
others.” (Fairtrade Labelling Organization, 2007/2011). The goal of the ‘Constitution’
is to promote the cooperation of organizations and individuals working within the
same theoretical framework in the interest of commonly professed practical goals.
The ‘Constitution’ defines precisely what members of Fairtrade expect as ‘proper
conduct’ from an individual with ‘sustainability and justice’ identity, or from a group
of such people, wanting to achieve this through fair trade. The organization has
published numerous studies on its website which prove empirically the social and
economic advantages and significance of fair trade in the interests of sustainable
development. It was Fairtrade that developed the change theory framework organising
the steps and activities of the movement into a uniform narrative which can serve as a
theoretical guide for the epistemological community (Fairtrade Theory of Change,
2013).
Greenpeace International – looking at responsibility from an ecological point
of view – has a similar epistemological community creating function with the goal “to
ensure the ability of the earth to nurture life in all its diversity. Therefore […] seeks
to: protect biodiversity in all its forms; prevent pollution and abuse of the earth's
ocean, land, air and fresh water; end all nuclear threats; [and] promote peace, global
disarmament and non-violence” (Greenpeace: Core Values). Here, the scientific
justification is also present as is the need and support for the creation of a uniform
theoretical narrative. This can be found in the case of other international
organizations, such as the Forest Stewardship Council, the Rainforest Trust or the
Climate Reality Project, too. These organizations have recognized in the last decade
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that epistemological communities to influence operations of global corporations
(MNCs) must also be globally organized and of global size. Furthermore, that they
must present and represent scientific discoveries and globally valid empirically
proven evidence to the international community in an understandable and accessible
way, develop a unified theory based on the evidence and the organization founded on
this theory must have global aspirations. This is how the international NGOs,
operating in the same global epistemological space as the actors of leading global and
supra-national corporations, came into being: the epistemological communities of
responsibility – the global justification by research, the theoretical narrative which is
internationally valid and disseminated, and the norms published in form of
international standards and guidelines – made the institutional background of
responsibility and its organizations global, thereby creating the institutions of spaces
for global public dialogue and the carriers of the new global methods of the processes
of social will-forming.
Legitimacy standards
The theory of legitimacy has for long been part of institutional sociology. Following
the legitimacy theories of Weber and Parson, many authors based their analyses of the
operation of institutional actors on the definition of legitimacy. Legitimacy is defined
as “a generalized perception or assumption that the actions of an entity are desirable,
proper, and appropriate within some socially constructed system of norms, values,
beliefs, and definitions” (Suchman, 1995, p. 574). Suchman, in his work on the
different possible strategies for institutional legitimacy differentiates between three
basic forms of legitimacy: pragmatic – self-interest directed –, moral – which rests on
morally appropriate and desirable action –, and cognitive that rests on some generally
accepted assumption or construct. For the shift of responsibility to come about, the
theory and practice of responsibility has to create the conditions of legitimacy for
responsible social decisions. Studies and analyses describing the economic benefits
and business case of responsible business behaviour demonstrate such legitimacy
demands. Examples of such legitimacy references were also shown above in the areas
of responsible HR, responsible marketing and responsible investing. These
‘legitimacy references’ aim at creating pragmatic legitimacy: to find the group with
which, if direct contact is established, the responsible behaviour clearly improves the
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well-being of the given group/community. To acquire pragmatic legitimacy, the
acceptance of the business benefit of responsibility is needed: the creation of such
legitimacy is targeted by indices showing correlations between sustainable corporate
performance and the share price (Footsie4Good, Dow Jones Sustainability index),
indices and researches measuring the performance of sustainable funds and studies
showing the economic returns of responsible HR, responsible marketing and other
strategies that include sustainability in business operation. The bases for pragmatic
legitimacy of responsible business operation are created by the justification of the
business and economic value creating ability of responsible operation.
For moral legitimacy – action that the community/society thinks proper – it is
necessary that the community or its institutions accept that responsibility has the
appropriate consequences, that it carries out the appropriate and desirable processes
and practices, and that it applies the appropriate and socially accepted categories and
structures. In other words, modes of institutional legitimacy are needed which provide
the moral foundation for the institutionalization of the spaces for responsible dialogue
and the processes of responsibility-based social will-forming. It is a frequent practice
to link an issue claiming legitimacy – responsible, sustainable operation and
involvement of stakeholders – to existing organizations, which already have the moral
legitimacy of society, and to look for their support (Suchman, 1995). Thus it is not the
moral foundation that creates the necessary social legitimacy but just the opposite, the
already existing ‘borrowed’ institutional legitimacy (partly the legitimate foundations
and partly the accepted legitimate processes) creates the independent moral
foundation for legitimacy. Responsibility-related guidelines, standards and process
descriptions of certain organizations having substantial social legitimacy serve this
goal of moral legitimacy. The best known standard that aims to entrench the moral
institutional legitimacy of responsible corporate operation is the Global Compact
initiative of the United Nations. The UN is one of the institutions with the strongest
and most wide-spread international institutional legitimacy. Its goal is to help interstate
cooperation with members numbering nearly two hundred. Its specialized
organizations are present in numerous areas of global institutional operation bringing
about international cooperation. The purpose of the initiative is to make corporations
world-wide accept, apply and support practices in connection with sustainability and
responsible operation, and to briefly report on the inclusion of these practices in their
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business operation. The initiative, announced in 1999 by Kofi Annan, Secretary
General at the time, was joined by more than ten thousand supporters representing
corporate and other institutional stakeholders. Institutional moral legitimacy does not
only manifest itself in the UN, as an organization with substantial international
legitimacy, standing by the issue of responsibility, but also in the ten principles
ratified by it – as statement of principle – serving the justification of legitimacy of
responsibility as business activity having the proper consequences. A kind of a moral
declaration, the ten principles formulate ‘rules of business operation’ as businesses (1)
should support and respect the protection of internationally proclaimed human rights;
(2) make sure that they are not complicit in human rights abuses; (3) should uphold
the freedom of association and the effective recognition of the right to collective
bargaining; (4) should eliminate all forms of forced and compulsory labour; (5)
should abolish child labour; (6) should eliminate discrimination in respect of
employment and occupation; (7) should support a precautionary approach to
environmental challenges; (8) should undertake initiatives to promote greater
environmental responsibility; (9) should encourage the development and diffusion of
environmentally friendly technologies; and (10) should work against corruption in all
its forms, including extortion and bribery (UN, Global Compact). Thus, the UN
Global Compact presents its guidelines and initiative to help create institutional
legitimacy for responsibility in that, on the one hand, it supports legitimacy needs
through institutional legitimacy present in other areas and, on the other hand, by
formulating moral principles that define the proper consequences of corporate
application of responsibility, offering a consequentialist moral justification.
The other way of acquiring institutional legitimacy is when the claim is
supported by the definition and prescription of the appropriate and desirable processes
and practices. After many years of work, the International Organization for
Standardization (ISO) published its recommendation regarding corporate processes
and tools of social responsibility, the ISO 26000, in 2010. The standard is legitimized
by the one hundred and sixty-two member states of the ISO and the observer states. In
a like manner, the long and painful process, involving a significant number of global
and local stakeholder organizations, assists the acquisition of institutional legitimacy.
The recommendation aims primarily at the acceptance of the ideal and practice of
responsibility through standardizing responsibility by fitting it into the usual and
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accepted order of corporate operation. It does so by incorporating it into the system of
more than eighteen thousand standards, processes and guidelines of ISO. The aim of
the standard – beyond defining and describing responsibility in detail – is to offer
corporations tools, processes and practices that would help them to incorporate the
principles and practices of responsibility in their operation. The uniqueness of the
‘responsibility standard’ is the voluntary nature of responsibility, therefore – other
than in the case of other standards – it cannot be certified and there is no system for
compliance with principles and practices. ISO 26000 identifies seven core subjects
concerning corporate social responsibility and presents associated guidelines and
areas of action. These are: (1) organizational governance (processes and structures of
responsibility); (2) human rights (due diligence, avoidance of complicity and
discrimination, international legal standards and the main labour standards of the
ILO); (3) appropriate and necessary labour practices (social dialogue/just
remuneration, and health and safety at work); (4) environment protection, procedures
and processes of reducing environmental impact (prevention of pollution, sustainable
use of resources, climate change mitigation and protection of natural habitats); (5) fair
operating practices (anti-corruption, responsible political involvement, fair
competition, promoting social responsibility in the value chain and respect for
property rights); (6) consumer issues (fair marketing, factual and unbiased
information and fair contractual practices, protection of consumer health and safety,
sustainable consumption, consumer service, consumer data protection and privacy);
and (7) regional integration and environment development (integration into the
region, education and culture, employment creation, technology development and
general welfare investments).
[ISO 26000 schematic illustration HERE]
ISO, as an international standards organization, helps creating the institutional
legitimacy of responsibility by, on the one hand, supporting the claim for legitimacy
through its institutional legitimacy in the area of standardization and, on the other
hand, by prescribing standardized processes and practices which formulate the
deontological, normative moral justification of responsibility.
The third way for businesses to acquire institutional moral legitimacy is
through prescribing appropriate and socially accepted categories and structures, and
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applying these categories and structures in their operation. The best known and most
comprehensive such recommendations is the one for responsible corporate operation
targeting international corporations, published by the Organization for Economic Cooperation
and Development (OECD) in 2011. The OECD is an organization with the
goal of coordinating and supporting the economic, trade and financial activities of the
most developed nations. This recommendation, ‘The Principles on Corporate
Governance’ determines the categories, structures, organizational forms, principles
and practices in nine areas – disclosure, human rights, labour and economic
institutional relationships, environment, corruption and bribery, consumer protection,
science and technology, competition and taxation – which should determine the
responsible operation of international corporations. The recommendation devotes
different chapters to the principles of operation, the international and national
structures necessary for sustainable operation and international cooperation in the
interest of achieving it, and to organizational frameworks. These are followed by
annotations including practical explanations and clarifications helping the
interpretation and application of the various categories, principles, organizational
frameworks and forms of cooperation. The OECD helps creating the institutional
legitimacy of responsibility by supporting the claim for legitimacy through its own
political institutional legitimacy on the one hand and, on the other hand, by
recommending structures and modes of operation which define the proper practical
realization of the application of corporate responsibility, i.e. the pragmatic moral
justification of responsibility.
These recommendations and standards are aimed at acquiring moral
institutional legitimacy and the social acceptance of the practice of responsibility. In
the course of acquiring institutional legitimacy all these recommendations were
prepared by some international organization, and ‘use’ its support, which itself has
significant social acceptance and in certain cases also executive power. While the
organizations with executive power – the UN or the ISO – could enforce the
application of the standards, the central element of these recommendations is their
voluntary adoption congruent with the accepted principles and practice of
sustainability. Joining Global Compact is voluntary and it does not provide one with
any rights or duties. Likewise, defaulting on the reporting obligation does not have
any clear and definite sanctions. Similarly, the ISO 26000 standard does not prescribe
or recommend any certification, therefore various organizations can support the
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introduction and application of the standard but they cannot certify that the
corporation ‘satisfies’ its procedural and practical requirements. Of course there are
numerous other standards and recommendations aimed at creating social legitimacy –
e.g. the IFC, the ILO, recommendations of the EBRD, the recommendations and goal
declarations of various international organizations, the Millennium Development
Goals of the UN and the EU directives relating to reporting. In the same way as in the
case of the above-described classification by different categories – ‘proper
consequences’, ‘desirable processes and practices’ and ‘appropriate and socially
accepted categories and structures’ – the content of these standards and
recommendations overlap, since the acquisition of social legitimacy is a complex goal
and supporters of responsibility can count on legitimacy success if they exert their
legitimacy claim in as many different forms and structures as possible and through
different organizations. It was in the first decade of this century that the issue of
responsible operation reached the level of claiming international moral legitimacy
when organizations with legitimacy in other areas supported the acquisition of
institutional legitimacy of responsible operation by offering their own legitimacy.
This process has continued in the present decade and by now the issue of
responsibility has wide social acceptance and stakeholder support – morally based
institutional legitimacy – in the developed countries of the Global North.
Political procedures and recommendations
Politics transforms social oppositions and conflicts stemming from the inevitably
diverse social fragmentation into socially resolvable, manageable and accepted
oppositions and hierarchies. It is an institutionalized activity that takes place in a
system of power and between powers creating the socially accepted institutional
framework for managing these oppositions and conflicts. Broadly defined, politics
concerns the production, distribution and use of resources in the course of social
existence. Politics is about diversity and conflict, about scarcity of resources, broad
desires and aims as well as relations of power, hierarchy, cooperation and the ability
of ‘acting in concert’ (Arendt, 1958). Applying this definition to a Freemanite
stakeholder business operation, the corporation is a multifarious matrix of
stakeholders with a diverse stakeholder fragmentation due to the complexity of
corporate operation and multiple goals and interests. The operability of the
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corporation necessitates the transformation of this fragmentation and conflicts
stemming from it into resolvable, accepted and manageable oppositions, institutional
hierarchies and systems. Within corporations resources are similarly scarce, whereas
goals and desires are broad and, oftentimes, unlimited.
The discourse ethics of Habermas and a politically understood corporate
responsibility take the institutionalized discursive processes of a corporation as the
political model of stakeholder democracy and equality-based social responsibility – as
an institutionalization of the spaces for public dialogue and the modes of social willforming
processes with corporate participation.
Beck’s risk-society model diverges in as much as it is not the rational
justifiability of decisions that creates the possibility for institutional resolution of
stakeholder conflicts but the acceptance of the consequences and the continuous
revision of consensus. In this approach the guarantee for the realization of stakeholder
democracy, equality and stakeholder participation is the setting up of stakeholderpolitical
institutions which do not see universally valid ethical agreements as their
goal but rather the consequence approach where there is stakeholder consensus that is
temporary and can be modified through mutual will. To set up the institutional
framework for managing the inevitable stakeholder conflicts – i.e. deliberative
stakeholder participatory democracy – mutual acceptance of the consequences based
on deliberative consensus and the social legitimacy resting on it must be brought
about. Thus, responsible operation transcends the framework of the traditional
stakeholder-social hierarchy thereby creating new and earlier unperceived oppositions
and conflicts. Its goal is to resolve these stakeholder conflicts and oppositions within
the framework of stakeholder dialogue based deliberative institutions and through
will-forming processes resting on the legitimacy of the TBL principles, or to make
them hierarchically and institutionally manageable.
Another group of recommendations and standards within the social
responsibility universe departs from the recognition that the precondition for
stakeholder participation in resolving conflicts and the creation of equality-based
deliberative spaces is the reduction of the information asymmetry between different
stakeholders. The aim of these recommendations and standards is making processes
accepted which mark operation related information part of the stakeholder public
domain in a uniform, interpretable and workable form. GRI was established with the
goal of setting up a system through which information related to corporate operation
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and sustainability – environmental and sustainability reports – could be made
available in a uniform and easily interpretable format for stakeholders. To achieve
this, it was not only necessary to determine a uniform structure of information in
connection with responsible operation and institutional stakeholder impact, but also to
determine the extent of information and the methods of its definition and
measurement through which information asymmetry could be reduced. Thus,
sustainability reports served both the reduction of information asymmetry and as a
guide for corporate decision makers to methods of measuring and collecting
sustainability-related information.
The story of the emergence of the Global Reporting Initiative (GRI) and the
principles and procedures applied demonstrate this process precisely. Towards the end
of the nineties, the voluntary preparation of sustainability reports by corporations was
considered an accepted though not general practice. Numerous recommendations, layouts
and organizational framework helped corporations preparing such reports but
there was no uniform reporting standard – as opposed to financial reporting with its
uniform and legally recognized system. There were three factors that made GRI
successful: the process of preparing the recommendation, in the course of which
organizations that would not have thought themselves members of uniform political
networks cooperated effectively and transparently; the institutional structure that
ensured – through its receptive, equality-based and multi-stakeholder participation
based operation – that the recommendations complied with the manifold modes of
social legitimacy; and the continuity of deliberative will-forming offering the
possibility of the applicability and continuous renewal of the recommendations
(Brown et al., 2009).
The first GRI recommendation was published in June, 2000. Its preparation
was supported by wide-spread stakeholder participation – from diverse areas (civil,
investor, state, corporate and academic) – and by multi-level and transparent dialogue,
primarily via the internet. Following the completion of the first version, thirty-one
corporations consented to test the process and the recommendations, spending
significant time and resources on its refinement. The results of the tests were built into
the process and in 2002 – with the support of the UN – the GRI was established as an
independent organization with its head-office in Amsterdam. Not much later the new
version of the recommendation, called G2, was published. This was followed by
sectoral recommendations and, in 2006, by the third generation of reporting
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recommendations, the G3. The collaborative work did not stop here and in 2013 the
fourth generation recommendation was published as G4. More than 1500 stakeholder
delegates from 69 countries attended the conference where G4 was accepted. The fact
that the vision and political goal of GRI and CERES were clear from the beginning
played a key role in the success: to increase corporate accountability by offering all
stakeholders the opportunity to get standardized, trustworthy and comparable
environmental and social impact information, similar to financial reports (see GRI
Principles). This was complemented by the fact that the executives of GRI operated as
‘institutional entrepreneurs’ – similar to ‘policy entrepreneurs’ – who had the goal of
changing the existing political institutional order (Levy & Scully, 2007). ‘Institutional
entrepreneurs’ work to change the traffic patterns, rules and standards between the
organization and society. Through this they create and effectively operate the
common communicative platforms of social and business interests and their
discursive cooperative institutions. As their resources and current political and power
positions are insignificant, it is their strategic sense that determines whether they are
capable of taking advantage of the tension in the given institutional system. It is the
strategic merit of the founders and operators of GRI that they were able to recognize
and take advantage of the institutional tensions stemming from stakeholder
information asymmetry and that they called GRI to life as an institution of public,
multi-level and continuous dialogue. They created a new kind of social will-forming
through making their general standard on reporting accepted, and spreading it through
information dissemination and stakeholder inclusiveness supported by the publication
of continuously renewed generations of recommendations.
However, the GRI did not only create the discursive institution for formulating
reporting recommendations but it also brought to life the recommendation for
reporting along similar principles and in the interest of creating institutional
processes. These principles ensured both the reduction of stakeholder information
asymmetry (thereby allowing for the conditions of equality-based discursive space)
and the possibility of stakeholder inclusiveness based management of social,
environmental and economic impact by corporate decision makers (thereby creating
the conditions for the new processes of stakeholder will-forming). For reports
prepared according to the GRI, the recommendations suggest the adoption of the
following principles: materiality, stakeholder inclusiveness, sustainability context and
completeness. Materiality means that the reports have to present indicators and areas
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which, on the one hand, account for the most important social, environmental and
economic impact of the corporation and, on the other hand, significantly influence
stakeholders’ evaluation and opinion of the corporation. Stakeholder inclusiveness
stipulates that corporations should map their stakeholders and indicate in their report
how they create the space for response to sensible stakeholder expectations. The
principle of sustainability context declares that the corporation must be able to place
its own operation and the ensuing impacts in a wider sustainable environment
reaching beyond direct impacts of the corporation, while the principle of
completeness states that the report must give stakeholders sufficiently detailed
information to be able to assess corporate impact in the reporting period. In the
interest of reducing information asymmetry and the equal treatment of stakeholders,
the recommendations prescribe that the report has to extend both to positive and
negative impacts and performance; the data and information supplied has to be
consistent in time and comparable; and it has to give the opportunity for stakeholders
to compare it with the performance of comparable corporations. Information provided
has to be precise and it has to be presented periodically at clearly defined intervals so
that stakeholders can make an informed decision. Further, the data have to be
disclosed in a way that is comprehensible for interested stakeholders. The
recommendations on reporting provides the opportunity for corporate decision makers
– under the subtitle ‘Disclosure on Management Approach’ – to complement the
provided information on given topics and areas with their own strategic approach and
to present the corporate viewpoint, strategic goals and interests. The second
generation recommendations introduced the “in accordance” category where the
report makers could make a declaration that the report was prepared in accordance
with the GRI principles and reporting rules. The purpose of this was to allow
corporations in the beginning of the reporting cycle to use GRI by only reporting on
certain areas without having to prepare a fully-fledged report. The third generation of
the recommendations divided this into six categories and introduced the C (C+), B
(B+), and A (A+) “in accordance” categories. These referred to the application, i.e.
the number and topical structure of the indicators used, and the indication of a third
party verification or certification by using the plus sign. The most important change in
the fourth generation recommendations was the abolishment of the ‘in accordance’
categories with the reasoning that it might appear to stakeholders that they referred to
the social and environmental performance of the corporation and not to the depth of
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the social and environmental report. The recommendation returned to a redefined
version of ‘in accordance’ and when it includes the whole supply chain and the
process of the value chain in the circle of topics and areas that have to be reported on
it forces corporations to broader data collection and impact evaluation.
The four generations of GRI recommendations, their wide-spread corporate
application and the stakeholder legitimacy achieved have made it possible to prepare
uniform reporting rules and processes. For the minimal institutional background for
stakeholder democracy – a radical reduction of information asymmetry between
stakeholders and the corporation, and the availability of information on economic,
environmental and social performance and impact in a comparable and accountable
form – a uniform financial and sustainability reporting obligation must be introduced.
For this, a uniform reporting system has to be worked out, the preparation of which
started in 2009. The process is in a stakeholder dialogue stage about the framework of
principles and forms of the uniform international reporting system published in 2013.
Global corporations and numerous stakeholders participate in the process, with the
support of the responsible investing initiative of the UN (UNPRI). In 2010, under the
patronage of Prince Charles, the International Integrated Reporting Council (IIRC)
was called into being with the goal of creating the organization and standard for
reporting with a broad stakeholder participation and cooperation, similar to that of the
GRI. The process has started and – whether in the IIRC or within other frameworks –
it is very likely that the reporting integration will continue in the interest of creating
the conditions for institutional and social legitimacy of stakeholder democracy
(Hohnen, 2012).
The strengthening of these political conditions was the aim of the European
Parliament when in July 2014 it revised the directive about the corporate obligations
regarding non-financial reporting issued a year earlier. Besides defining more
precisely the social impacts that corporations employing more than 500 people have
to account for – this affects about 6000 large European corporations – the directive
shows a departure from the earlier political doctrine of responsibility. According to
the earlier definition, responsibility is a voluntary activity that takes the values and
interests of stakeholders into account. This time, however, the Union – with member
states incorporating the directive into their legal system by 2016 and corporations
having to prepare their reports according to the directive for the first time in 2017 –
made reporting for certain types of corporations compulsory. Thus, the Union forced
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certain type of corporations defined by size to support the establishment of the
discursive spaces of stakeholder democracy and to manage their social and
environmental impact. Corporations can apply a number of recommendation formats
and rules accepted by different epistemological communities, just as they can choose
freely between the standards of various organizations having moral legitimacy (ISO,
UN, OECD), as they may also use the GRI recommendations. Thus, conditions for the
compulsory inclusion of stakeholder interests and values in business operation in the
European Union – in the case of certain corporations – have been created.
This process means that conditions for the creation of the equality-based
discursive political space have been established and the legitimate modes of social
will-forming have been extended. Before the structures of the discursive political
space and the processes of stakeholder dialogue are analysed, an important detour has
to be made.
Prospect theory and the stakeholders
The inclusion of stakeholder values and interests in business operation is the selfinterest
of the corporations. It follows from stakeholder theory that the success of the
corporation means the maximization of the value created by stakeholders. From a
triple bottom line perspective, the corporation should create the highest possible value
for all stakeholders. Thus, the performance of the corporation can also be defined as
the sum total of value created through its activity for all legitimate stakeholders
(Freeman et al., 2010). This value can simply be financial value, although, based on
the triple bottom line, beyond financial value, social and environmental values should
also be included. A number of researchers, however, have voiced their reservations
about the theory of social and environmental value creation (Harrison & Wicks,
2013). According to this, the application of the triple bottom line endorses the
‘separation thesis’ of Freeman (1994) which looks upon the economic order as a
separate area from the ethics underlying social and environmental values (Wicks,
1996).
Therefore it is especially important that the exact meaning of ‘stakeholder
value’, the maximization of which will be the goal of corporate politics, be defined. In
doing this, stakeholder value theories generally look for some objective, external
factor in order that stakeholder value can be defined and measured in a generally
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applicable way. However, stakeholder value maximization is basically the result of
discursive cooperative processes in which the process of value creation is not only the
task of the corporation but it is a common activity with stakeholders involved. For the
corporation to create the highest possible value for all the stakeholders through its
activity, the active discursive participation of stakeholders is needed. It has already
been argued in this book that the inclusion of stakeholder values and interests is a
political activity in the course of which the corporation, by involving and engaging
stakeholders, sets up the new discursive political institutions of cooperation and
dialogue for the new modes of the legitimate social stakeholder will-forming. Thus,
beyond the ‘factual’ aspects, it is extremely important – in the interest of stakeholder
participation – to define value creation from the viewpoint of the stakeholders as well:
the corporation can count on stakeholder participation if the common value creation
also meets the value expectations of the stakeholders. Accordingly, stakeholder value
can also be defined as ‘the subjective judgment of a stakeholder, occurring at the
individual or collective level depending on the situation, of the total monetary and
non-monetary value experienced as a result of one or more of a firm’s actions.’
(Smith et al., 2011a, p. 11).
Prospect theory (Kahneman & Tversky, 1979) laid the ground for a different
kind of understanding of human decision-making processes thirty years ago. Contrary
to the theory of rational choice and expected utility – according to which human
decisions are the result of weighing up different possible probabilities based on the
same aspects trying to find maximum utility – prospect theory claims that decisions
are determined by presentation (framing effect), its basis is some pre-existing
expectation (reference point) – usually the status quo, and that decisions under risk
are influenced by numerous other heuristics and biases (Kahneman, 2011). The most
important of these is ‘loss aversion’: decisions are mostly influenced by the
minimization of a perceived loss. However, perceived loss does not depend on the
measured and non-relative utility of the loss or gain but on the point of reference:
values under the reference point appear as loss, above it as gain. Prospect theory
claims that the ‘endowment effect’ also influences decisions: the willingness to accept
(WTA) – i.e. the sum for which one is ready to give away or sell already acquired
possessions – is higher than the willingness to pay (WTP) – i.e. the amount that one is
prepared to pay for the same object in case of objects that are owned or assumed to be
already possessed. Human decisions are context dependent: risk averse in the
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perceived loss zones and more risk tolerant in the perceived gain range. And what is
considered to be a loss or a gain is determined by the point of reference – the original
value influenced by personal surmise. Therefore one tries to avoid losses because
‘losses loom larger than gains’ (Kahneman & Tversky, 1979). The result of this is the
need for maintaining the status quo because “individuals have a strong tendency to
remain at the status quo, because the disadvantages of leaving it loom larger than
advantages” (Kahneman et al., 1991, p. 197).
Prospect theory may become especially important in defining stakeholder
value, since according to it, the definition of ‘the subjective judgment of […] the total
monetary and non-monetary value’ is not the maximization of the expected utility
calculated from comparable and identically measured values but according to a point
of reference determined loss-gain calculus. All this significantly influences how
standardized, comparable and reliable information relating to the operation of
corporations helps the process of stakeholder value creation, what effects a reduction
in information asymmetry have on the determination of reference points stemming
from given stakeholder contexts, what kind of stakeholder engagement and behaviour
loss aversion (i.e. the perceived losses and gains) induces as a result, and what value
creating models and measures the various biases – primarily the ‘endowment effect’ –
offer (Smith et al., 2011a).
The assumption in connection with the disclosure of information related to
corporate operation is that authentic and comparable operational information may
create a uniform discursive space for all stakeholders and it may launch processes that
make manageable value maximization through stakeholder engagement possible.
According to prospect theory, the same information means something else for the
different stakeholder groups, since the information is interpreted in terms of different
stakeholder reference points as losses or as gains. The corporation may publish one of
its environmental impact indicators and the ‘improvement’ achieved – expecting the
acknowledgement of stakeholders – yet for some stakeholders the indicator of the
signaled improvement is in the loss zone and therefore they deny their
acknowledgement. Similarly, certain changes may count on the support or rejection of
the corporate action by certain stakeholders depending on the reference point because
it is not the provided utility of the information but the position relative to the
stakeholder reference point that will determine stakeholder behaviour and their
attitude to be risk averse or risk taking.
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Uniform information is important, yet in order to be able to determine
stakeholder decisions, expectations, the readiness for common value creation and its
possible extent and the modes further research is needed. Researchers have just
started to apply prospect theory in various sub-disciplines of economics. Therefore,
further research is required to fully understand how reference point based decision
making, different heuristics and biases influence stakeholder value creation,
participation in the discursive corporate political institutions and the legitimacy of
stakeholder will-forming. The findings of such research may fundamentally influence
how the discursive political institutions created by the corporation must and should be
viewed and how the legitimization of stakeholder will-forming progresses. A topic for
further research could be the method of determining stakeholder reference points and
how they are arrived at. Likewise, it would be interesting to look into the possibility
of moving reference points as well as methods thereof, and how forms of stakeholder
cooperation and the processes of stakeholder value creation are influenced by loss
aversion, risk taking and biases – the framing effect or the endowment effect (cf.
Kőszegi & Rabin, 2006; Kőszegi, 2006).
Change has begun, institutions have been set up and the theoretical and
procedural bases – through guidelines, standards and procedures discussed in this
chapter – for their operation have been created. In what follows the most important
stakeholder institution of corporate politics, the process of stakeholder dialogue will
be discussed.
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9. STAKEHOLDER INCLUSIVENESS AND DEMOCRACY
The GAP turn
In March 2014 President Obama demonstratively stopped to shop in one of the Gap
stores in New York. Beyond the fact that the President presumably likes the
emblematic brand, this time he choose Gap because the company had announced that
they would voluntarily raise the minimum hourly pay of their staff above the official
national minimum wage, thereby being among the first companies that applied the
voluntary ‘living wage’ in the United States. This is higher than the official minimum
wage: a regulation-supported, voluntarily-offered minimum wage that is calculated to
meet basic needs to maintain a safe, decent life. Offering the living wage is part of
Gap’s principles of responsible operation, policies that have been developed over
nearly a decade with the close cooperation of stakeholders. The reporting and
stakeholder processes introduced by Gap have been deemed exemplary by numerous
researchers and activists concerned with responsibility. On the other hand, although
the operation of Gap and its stakeholder inclusiveness policies have been acclaimed, it
does not mean that the complete supply chain of the company would always have
been void of violations of human rights or of environmental rights. Researchers do,
however, claim that inclusiveness-based stakeholder cooperation is capable of
handling problems that arise more quickly, more effectively and, for stakeholders,
more authentically. (Smith et al., 2011b)
Gap was founded by Dan Fisher in 1969 and by the nineties it had become a
large corporation producing and selling numerous successful brands – BabyGap, Old
Navy and Banana Republic – in its network of three thousand shops, cooperating with
emblematic stars like Madonna, Sarah Jessica Parker or Bono. The responsibility turn
of Gap was brought about by the so-called ‘sweatshop’ scandal: in the 1990s it was
uncovered that the products of numerous clothing companies – among them GAP –
sold in Western European and American shops, had been made in parts of the Global
South where deep poverty was dramatic. Their suppliers had the goods produced
under inhumane conditions, for pittances, more often than not using child labour.
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Following the exposure, consumers declared a boycott and the price of the shares of
Gap fell significantly.
In 1992 Gap developed a standard to which their sub-contractors had to adhere
as suppliers. It contained rules relating to human rights, working conditions, the
environment, and to health and safety. In 1995, however, the National Labour
Committee (NLC) investigation revealed a number of dramatic irregularities –
extreme overtime, low wages and the prohibition of a trade union – at one of their
suppliers, Mandarin International in El Salvador. This awakened public interest once
again and Gap was the first to understand that guidelines-based policies are worth
little without control and auditing. Following the new scandal, Gap built a team of
more than one hundred auditors and controllers who continuously monitored whether
their suppliers adhered to the rules. In spite of these efforts, a BBC report still
uncovered violations of human rights at one of the suppliers of Gap in Cambodia.
Here, as witnessed by the report, some children were employed whom the auditors
could not identify since – as the management of The Gap, Inc claimed in their defense
– not even the local doctors could establish the exact age of the youngsters due to
their documents having been lost in the civil war in that country.
The issue of child labour and low wages, which is burdened with numerous
ethical dilemmas, has been an important topic in the literature on ethics (Velasquez,
2011). Gap recognized that the traditional defensive and responsibility negating
attitude taken in these situations would not lead anywhere. The exposure of the
situation was followed by new boycotts and repeated demonstrations in front of the
head office of the corporation, amidst media interest. This spurred Gap to continue on
the road taken earlier and start out in the direction of local cooperation. There were
some antecedents: Levi Strauss – working with multi-stakeholder initiatives (MSIs) –
vigilant of the ethical dilemmas worked out possible processes of cooperation with
local stakeholders: they gave the youngest children a school-going subsidy and
guaranteed that they would get a job after finishing school, while youngsters near
employment age were given training and a replacement wage and finally a job. It
became clear for GAP that soft laws, enforcing the rules, and shifting the
responsibility onto the local government would not solve the problem. Therefore, in
cooperation with two MSIs – New York-based Social Accountability International
(SAI) and Ethical Trading Initiative (ETI) – they worked out the institutions and
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forms of local cooperation involving local stakeholders and together with them they
formulated the precise goals and processes. This holistic approach affecting children,
their families and the suppliers could count on the support of all stakeholders, even
including some of the competitors, with Levi Strauss in the first place. However, even
these steps could not save Gap from a further scandal: in 2007 The Observer reported
an Indian supplier where ten-year-old children were working sixteen hours a day. The
children had been sold by their parents to the factory owner, which meant that they
did not get any pay, they were maltreated and had no hope of ever becoming free. The
children interviewed by The Observer, ten-year-old Amitosh and twelve-year-old
Jivaj and Manik, talked about the dramatic conditions themselves.
However, this time Gap knew what to do. They immediately started an
investigation in cooperation with ETI, they stopped the cooperation with the supplier,
and had their products taken off the shelves of the shops. In addition, Gap launched
the programme already tried in Bangladesh. While some NGOs still kept protesting,
the international stakeholder initiatives and think-tanks as well as numerous media
stood by Gap. The international organization AccountAbility declared that it is natural
that the largest corporations would always be in the forefront of criticism and the
more they do in the interest of a cause, the more they attract public attention. The
question is whether they are prepared to be honest or flee from ethical and political
challenges. The approach to stakeholders has changed fundamentally. In the words of
Dan Rees, CEO of ETI: “It is not a crime to find child labour in your supply chain.
What is important is what you do about it when you find out.” In the experience of
Dan Henkle, vice-president for sustainability, this time the scandal evoked a different
reaction in the stakeholders: “They worked with us, found us to be good partners and
therefore, instead of beating us up their approach was ‘how can we help?’” (Smith et
al., 2011b, p. 75).
The theory of stakeholder engagement
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To discuss the theory of stakeholder engagement, we have to return to the basics of
Freeman’s stakeholder theory. Freeman summarized his theory as: (1) No matter what
you stand for, no matter what your ultimate purpose may be, you must take into
account the effects of your actions on others, as well as their potential effects on you.
(2) Doing so means you have to understand stakeholder behaviors, values, and
backgrounds/contexts including the societal context. To be successful over time it will
be better to have a clear answer to the question “what do we stand for”. (3) There are
some focal points that can serve as answers to the question “what do we stand for” or
Enterprise Strategy. […] (4) We need to understand how stakeholder relationships
work at three levels of analysis: the Rational or “organization as a whole”; the
Process, or standard operating procedures; and the Transactional, or day to day
bargaining.[…] (5) We can apply these ideas to think through new structures,
processes, and business functions, and we can especially rethink how the strategic
planning process works to take stakeholders into account. (6) Stakeholder interests
need to be balanced over time” (Freeman, 2004, p. 231).
The basis for any corporate strategy and operation should be the management
of stakeholders – a collaborative, communicative, conciliatory, agreeing and
motivating relationship. Freeman also reminds us that his book on stakeholder theory
was meant as a strategic management textbook and not as the basis for a new
normative ethics for corporations. As the corporation has or could have numerous and
varied stakeholders with divergent stakes and values, the communicative cooperation
with stakeholders inevitably carries inherent conflicts. Consequently, the fundamental
goal of stakeholder management is that inevitable stakeholder conflicts be
transformed, through corporate strategies, into ethics-based communicative systems
and stakeholders together create long term sustainable value along answers given to
the question ‘what do we stand for?’ assessing the matrix of stakeholder impacts. This
means that strategic management is essentially a political activity: creating and
operating institutions which transform inevitable conflicts stemming from stakeholder
values and interests into resolvable, accepted and manageable institutional
hierarchies. Stakeholder theory thus stems from the Habermasian normative basis of
communicative rationality, which makes communicative reason the basis for
democratic institutions (Scherer & Palazzo, 2011). ‘Political CSR’ as described by
Scherer and Palazzo – the deliberative cooperation of multinational corporations,
NGOs and governments, under uncertain legal and social conditions of legitimacy, in
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a global, post-Westphalian context – aims at redefining the normative social role of
corporations. Political CSR thus offers social legitimation to the deliberative
processes taking account of the linguistic-pragmatic-Foucauldian turn of
communicative contexts (Scherer & Palazzo, 2007, 2008, 2011; Scherer et al., 2016;
Scherer, 2017). Following this line of thought, in the context of stakeholder theory all
corporate activities are essentially political: stakeholder interests and values are
coordinated and managed to create long-term stakeholder value as well as sustain
social legitimacy. Stakeholder engagement is the institutionalisation of deliberative
stakeholder management processes based on communicative reason, taking into
account the behavioural biases and heuristics of ‘subjective’ stakeholder judgement
on value. Stakeholder engagement so understood would be the starting point of and
precondition for a corporate system of stakeholder democracy calling forth the
creation of inter- and intra-corporate institutions and hierarchies (systems of checks
and balances) for the joint, sustainable maximization of stakeholder value.
As discussed in detail in this book, members of the corporate stakeholder
community – corporate citizens – have inalienable stakeholder rights, societal,
political, social rights and obligations, as well as opportunities for participating in the
democratic processes. This is why the corporation is to engage in public deliberation
and collective decisions (Scherer et al, 2016). Corporate citizens are able to
participate in the deliberative democratic corporate processes as well as to have their
identity positions acknowledged (Crane, Matten & Moon, 2008). From the
perspective of the stakeholders, “corporate citizenship describes the role of the
corporation in administering citizenship rights for individuals” (Matten-Crane, 2005,
p. 173). These rights can differ, therefore on the part of the corporation, the
administration of the rights may take different forms of action. As regards social
rights, the administration of these rights is ‘providing’ because the corporation can
offer the stakeholders, i.e. the corporate citizens, these rights. The administration of
human rights means the validation or limitation of these rights, i.e. the administration
of rights is of an ‘enabling’ nature. As far as political rights are concerned, the
corporation provides the opportunity for exercising these rights within the
corporation, and as such the role of the corporation is one of ‘channeling’ (Matten &
Crane, 2005). In other words, the subjects of corporate politics are corporate citizens
who have social, human and political rights stemming from their stakeholder
positions and their status of being corporate citizens. These can be enforced through
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processes of deliberative conflict management and through institutional hierarchies
created by the corporation with due consideration of institutional guarantees,
transparency and accountability (Crane et al., 2004). The process of stakeholder
engagement puts these principles into practice, creating the framework for a
consensus between stakeholders and the corporation and the institutions for control,
cooperation and accountability. It can be the way to create or re-create trust and it can
become part of the institutional hierarchy of corporate governance.
The process of stakeholder engagement
For the corporation to create the possibility for common value maximization of
stakeholders, a new approach to stakeholders is necessary. Freeman (2014) calls this
the ‘value creation stakeholder model’. This goes beyond the strategic view of
priorities and compromises defined by corporations taking stakeholder interests and
values into consideration, or the strategic view of civil society/CSR considering
sustainability, social values and interests when applying stakeholder interests and
values in corporate operation. This model, instead of enforcing value creation in the
interest of achieving compromises and sustainability, views common value creation in
the institutionalized management and harmonization of stakeholder conflicts, , since
“[w]here stakeholders conflict is precisely the place where value can be created”
(Freeman, 2014, p. 98). It is the ethical engagement of stakeholders that is at the
centre of the value-creating approach because engagement requires the enforcement
of such values as respect, dignity, accountability and the honest conviction that we
can help others. Therefore, fairness-based stakeholder engagement creates a moral
partnership of equals (Phillips, 1997; Freeman, 2014).
The basis of value creation is ethically approached engagement, the most
important aspects of which – as laid down by the AA1000 Stakeholder Engagement
Standard of AccountAbility – are materiality, completeness, and responsiveness, all
framed in the discourse of inclusiveness. Materiality refers to the recognition that the
circle of stakeholders must be defined – i.e. there must remain non-stakeholders and
also those towards whom the corporation has no moral obligations because they are
not stakeholders of the corporation (Phillips, 2003) – and that the stakeholders and the
corporation must clarify their material demands, concerns and reservations towards
each other and towards others. Completeness refers to the recognition that the
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stakeholders and the corporation mutually understand each other’s concerns and
commitments – i.e. the claims, assumptions performance/impact expectations
stemming from material issues. Responsiveness means that the stakeholders give
mutual answers to arising concerns and demands (AccountAbility, 2011).
There are many modes and forms of stakeholder inclusivity: from the
observation and analysis of stakeholder interests, through consultation with
stakeholders, to the creation of strategic dialogue and collaborative governance.
Further to the implementation of the above principles, the key to stakeholder
inclusivity is equality, i.e. the creation of a ‘moral partnership’, of empowerment and
collaborative governance. That is, the setting up of a formal process of governance
and cooperation through which the cooperating stakeholders create the commonly
accepted structures and institutions of equality-based discursive political space. The
process of stakeholder engagement fulfils its role in strategic management when it
pays attention to the context (i.e. the interests and values of the different stakeholders
and the corporation and their relationship to each other); it makes appropriate value
choices possible (i.e. corporate decision makers include social and environmental
aspects in their strategic decision making in addition to economic value creation); it
enforces the aspects of appropriate measurability (i.e. they use the appropriate
‘measuring tools’ for evaluating the success of the engagement and strategic
cooperation); and their communication is in line with the principles of engagement
(i.e. they enforce the aspects and practices of equality, accountability, transparency,
honesty and fair feedback) (O’Riordan & Fairbrass, 2014).
The current corporate level processes of stakeholder engagement are, mostly,
one-offs and issue-centred. Even in their widest form they basically only mean some
cooperative form of stakeholder dialogue. Although that dialogue is often
complemented by communication tools (dedicated website, sustainability report),
authenticating and certifying tools (sustainability audit, environmental report,
reporting certification), measurements and rankings (ratings, acknowledgements),
equality-based engagement can only become reality through institutionalized
deliberative stakeholder cooperation and dialogue. Traditional dialogue takes place
under the direction of some external party: the identification of stakeholders and the
evaluation and ranking of their interests and values, followed by a hearing of the
stakeholders in a dialogue with the corporation in a formalized process – often as part
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of the social/sustainability report –, the feedback on corporate operation, social,
economic and environmental impacts, and the formulation of tactical or strategic and
perhaps cooperative undertakings that take stakeholder interests into account. Current
processes of dialogue create corporation-stakeholder relationships in the course of
which – provided the above principles are adhered to – a strategic cooperation is
entered into between the corporation and certain stakeholder groups in the interests of
a mutually beneficial implementation of given causes. Fair, open and respectful
stakeholder engagement can already in its present form become a strategic tool of
corporate operation: engagement based ‘ethical strategy’ makes it possible to
optimally allocate resources at the disposal of the corporation in a way that it creates
value for all stakeholders (Noland & Phillips, 2010).
The most widespread form of inter-corporation stakeholder engagement
processes are the multi-stakeholder forums and organizations (Multi Stakeholder
Initiative – MSI) which many view as the institutional spaces of ‘corporate
democratization’ (Scherer & Palazzo, 2007). Multi stakeholder initiatives – like the
UN Global Impact, Forest Stewardship Council or Social Accountability International
– create the institutions for deliberative reconciliation, supporting the corporations
and the stakeholders by institutional learning and democratic negotiating processes in
finding common interests and establishing processes of democratic cooperation. MSI
may offer epistemological, transformative and legitimizing benefits for stakeholders.
Epistemological benefits may be the depth and quantity of information becoming
common for stakeholders, thereby contributing to a better understanding of the
challenges facing others and the corporation by stakeholders. Transformative benefits
may offer stakeholders becoming capable of re-thinking their own standpoints
induced by information and deliberation, of changing their attitude and understanding
the problems, in turn strengthening the solidarity between the stakeholders and
corporate communities. Stakeholder and corporate legitimacy is increased by creating
new forums for common governance and wider platforms of stakeholder engagement
and participation (King, 2003; Payne & Samhat, 2004).
On the other hand, there are some who are rather critical of the role that MSIs
play in bringing about real political change. Critics note that the ringleaders in these
organizations are always the most significant international civil organizations –
WWF, Greenpeace – and therefore the voice of the smaller stakeholders representing
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a more definite standpoint cannot be heard. The creation of true transparency,
accountability and the principle of representation is very difficult, and therefore these
organizations often become forums of ‘green-washing’ and ‘façade building’. Some
critics go even further, claiming that in reality MSIs – precisely because they cannot
create the conditions for true representation and transparency – become hinderers of
processes of democratic reconciliation and therefore their activity is more harmful
than beneficial (Moog et al., 2015).
In a corporate context the current institutions of stakeholder engagement are
isolated and limited: they do not appear on the levels of corporate governance and
corporate strategic decision making, in the best case they inform them. The intercorporate
institutions of engagement – as critics of MSIs maintain – are as yet
imperfect and cannot sufficiently implement stakeholders’ political expectations
regarding the creation of an equality-based and influence-free discursive space. Thus,
for stakeholder engagement to become stakeholder democracy, new corporate
stakeholder institutions must be set up.
The institutions of stakeholder democracy
For the democratic institutions of common stakeholder value maximization to come
about, stakeholders do not only have to participate in dialogue-based strategic
cooperation with the corporations. It is not enough if the deliberative political
institutions are implemented in a global inter-corporate and inter-stakeholder
framework, but the stakeholders must also have a role in corporate strategic decision
making. In the course of the politicization of corporations it is not sufficient that
corporations – in the interest of promoting democratic social cooperation take over
social roles and duties which were earlier the privilege of the state (regulation,
legislation, education and social or cultural support), or that they participate in global
stakeholder cooperation going beyond traditional, nation state determined reach
(MSIs). Corporations also need to transform corporate institutional decision making
so that stakeholder engagement can really serve stakeholder value maximization
(Scherer & Palazzo, 2011).
In the twenty-first century – as discussed earlier – the frame of corporate
legitimacy has changed radically. Beyond pragmatic and cognitive legitimacy,
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corporations must maintain their moral legitimacy in order to keep their ‘licence to
operate’. Moral legitimacy relates to moral judgement in connection with corporate
impact, processes, organization and management form and reflects a societal logic
that differs fundamentally from narrow self-interest (Suchman, 1995). In essence, the
condition for attaining legitimacy is the inclusion of different stakeholder interests
and values in the operation of the corporation. In addition, for corporations to meet
the challenges of deliberative democracy, the equal, deliberative, institutionalized and
legitimate social will-forming processes must appear not only in inter-corporate
relationships but also in the corporation as stakeholder matrices. Thus, for corporate
operation to adjust to the conditions of stakeholder democracy, the structure of
governance and decision making, the democratic mode of stakeholder will-forming
and the institutional protection of stakeholder rights and values must comply with the
institutional forms of liberal and deliberative democracy. In the interests of bringing
about a moral partnership of equals, it is necessary that stakeholders have ‘universal
suffrage’ for participating in the democratic processes of the corporation and in
strategic decision making, and that the elections allow for the conditions for securing
the ‘stakeholder majority’ necessary for the acquisition and continuous maintenance
of legitimacy; that stakeholders can participate in processes of stakeholder willforming
as ‘informed corporate citizens’; that the procedural conditions for managing
inevitable stakeholder conflicts and ‘corporate rule of law’ be secured; and that the
branches of power be separated and institutions independent of strategic stockholder
or management dominated decision making be set up in the interests of ensuring
accountability. Beyond enforcing moral legitimacy and the principles of democracy –
supported by Rawlsian political philosophical arguments – a practice considering
stakeholder values and interests in strategic decision making also complies better with
the justice requirements of economic efficiency. According to the ‘Stakeholder
Equality Norm’, for the optimal distribution of resources from a stakeholder value
maximization point of view – i.e. to achieve economic efficiency – stakeholders may
receive suffrage in forums of corporate strategic decision-making, primarily in the
board of directors and supervisory bodies (Smith & Rönnegard, 2014).
Currently these institutions are not available or they exist only in embryonic
form. The enforcement of the principles of stakeholder engagement, the sporadic
appearance of the institutions of stakeholder dialogue, and the participation of some
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stakeholders – e.g. representatives of employees or of independent non-operative
directors – on the boards, supervisory bodies or in other bodies of strategic decision
making may mean the beginning of the emergence of stakeholder democracy. Yet,
independent or limited representative participation on corporate boards is not
sufficient for stakeholder democracy to emerge. Stakeholders must get or obtain
‘universal suffrage’ and the participation of stakeholder representatives in bodies of
strategic decision making must be based on periodically recurring democratic
elections. For this to come about, stakeholders need independent and unbiased
information about the operation. For this, independent interactive fora are needed that
share non-confidential business information, operate from the common resources of
the corporation and the stakeholders, with the participation of all interested
stakeholders, and that ensure the freedom of speech. The process may be assisted by
internet-based and mobile tools of communication, providing stakeholders with the
possibility of participating in processes of decision making and voting at low cost,
independent of time or space. It can also provide interactive channels of information
based on equality and sharing, which may radically reduce stakeholder information
asymmetry. For stakeholder conflicts to be transformed into accepted and manageable
oppositions and hierarchies within a corporative institutional framework, clear
operative rules, ‘corporate legal systems’ are needed. Although the germs of this are
detectable in various codes of conduct and there are internal institutions aimed at
enforcing them – supervisory bodies, internal audit and compliance committees –
independent institutions are missing which enforce and sanction the consequences of
norm violation within the corporate political community.
In order for corporations to establish the ‘moral partnership of equals’ within
the framework of deliberative democracy, more stakeholder democracy is necessary.
Stakeholder engagement – i.e. the inclusion of stakeholder values and interests in the
business operation – is the public dialogue of free and equal corporate citizens in the
course of which the processes of opinion- and will-forming takes place through
democratic corporate institutions, and it is their binding, albeit temporary, validity
accepted by all stakeholders that brings about the legitimacy of corporate strategic
decisions and thereby of common stakeholder value creation. All this, of course,
raises a number of problems: how stakeholders to participate in the process can be
identified; on what group size the possibility of participation depends; exactly how
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and with what regularity members of the decision making forums should be elected,
etc. This does not, however, violate the theoretical validity and the feasibility in
principle of the process (Smith & Rönnegard, 2014). Time and dialogue will
overcome these difficulties in the same way as some time back it seemed impossible
that there would once be guidelines and standards for uniform sustainability reporting,
or, in a wider political frame, universal and secret suffrage. Thus, the political-moral
legitimacy of business activity – applying the deliberative democracy concept of
Habermas to corporate stakeholder democracy – will be transformed from the
exposed interest or verbalized opinion of individual stakeholders to the corporate
institutionalization of the spaces of public dialogue similar to the spaces of liberal
democratic political communities.
The institutionalized forms of stakeholder engagement – stakeholder dialogue
and stakeholder participation in corporate strategic decision making – are the basis of
responsible corporate operation. This also means that the fiduciary responsibility of
corporate leaders changes: they no longer only have a responsibility towards the
stockholders, but also towards every stakeholder and the community corporate
citizens as a whole. Thus stakeholders, having become part of corporate operation,
form an equal ‘corporate community’. Fiduciary responsibility no longer binds
decision makers to maximize stockholder value but to maximize common stakeholder
value based on ‘stakeholder sovereignty’. Equality-based institutionalized, democratic
stakeholder engagement is the true politicization of the corporation: ‘inside’ the
corporate stakeholder community it means the creation and operation of
institutionalized spaces of democratic dialogue and participation, whereas ‘outside’
the stakeholder community it means the modes of acquiring and upholding social
legitimacy with the general public. This also means that beside supra-corporate
macro-level stakeholder cooperation as political spaces, intertwined political spaces
of multi- and micro-level corporate cooperation come about, thereby further
decentralizing and breaking up the system of power and the homogenous spaces of
public policy. This helps both stakeholder value maximization, the strengthening of
the multiplying institutions of Habermasian post-liberal deliberative democracy and
the reduction of the risks of Beckian “incalculable delocalized interdependence.”
The politics of the prospect theory
270
As discussed in the previous chapter, prospect theory – the theory of making
heuristics and bias based decisions under uncertainty – can fundamentally influence
the possibilities of stakeholder value maximization and therefore of corporate politics.
Stakeholder decisions are made under uncertainty: decisions, based on unknown
consequences, to cooperate or not stakeholders risk their fundamental values and the
benefits stemming from them. Prospect theory may have numerous impacts on
stakeholder behavior and the possible management of stakeholder-corporate conflicts.
Original research by Kahneman and Tversky proved that in decisions under risk the
most frequent reference point for assessing gains and losses and forming positions of
risk aversion is the status quo (Kahneman & Tversky, 1979). Stakeholders, however,
in their stakeholder decisions may start from a different reference point as they expect
their values and interests to appear in corporate operation – i.e. in a more responsible
attitude. They are, especially concerning environmental or human rights issues, less
interested in only changing the status quo in a given situation but rather in achieving
some zero indicator level. For the corporation, the status quo means the point of
departure in weighing up decision options arising as a result of possible discursive
negotiations. Therefore parties may have different reference points offered not by
available or shared sustainability information but based on stakeholder expectations.
Therefore – hypothetically – corporate decision makers are risk averse; through their
actions they are already in the gain territory. They try to avoid change – since their
reference point is the status quo, consequently, for them, change is in the loss range.
Stakeholders, however, are risk takers, since their reference point is different from the
status quo and for them the status quo is already in the loss range. It requires further
empirical research to establish what kinds of stakeholder positions exist and what
follows from them. Likewise, research could focus on how corporations view their
reference point in connection with available data of operation, what alternative
actions they see for themselves, which conflict management and reconciliation
strategies are possible in view of the different reference points, and how the findings
of prospect theory influence the creation of the deliberative institutional space and its
possible institutions.
Traditional literature on political stakeholder conflicts seldom turns to
prospect theory. One of the analyses using prospect theory in the nineties studied the
introduction of restrictive measures and their acceptance in Latin-American countries.
271
The questions posed were: why did the leaders in some countries (Argentina, Brazil,
Peru and Venezuela) decide to introduce reforms, and why did the population in the
different countries react to the reforms in different ways – supporting in some, while
revolting in others. According to the explanation using prospect theory, hyperinflation
caused such losses for the leaders that they were already in the loss-zone and
therefore their readiness to take risks was much higher than if the status quo had been
the point of departure. While the population of Argentina, Brazil and Peru knew the
devastating effects of hyperinflation from earlier years – and as such they were also in
loss –, the Venezuelan leaders kept the possible effects of the emerging inflation
secret and earlier inflations did not make a major impact either, thus it was the status
quo according to which the population perceived the reforms as a loss and therefore
took to the streets (Weyland, 2002). Other international political examples, conflicts
during the introduction of some policies or the risk-taking tendency of politicians
after a won or lost election, indicate the applicability of prospect theory to decisions
regarding political and social issues, risk-taking inclination and the attitude of the
individual actors (Vis, 2009). To what extent these political conflicts and examples
can be applied to stakeholder conflicts and the stakeholder practice of corporate
operation, and to the ensuing consequences require further research.
It may however be assumed that when interpreting common stakeholder value
creation and the expected reactions of stakeholder engagement we are better off
applying findings of prospect theory than rational choice based on cost-benefit or
expected utility. It is important to understand when and why some stakeholders feel
that they are in loss as we also need to assess why corporate decision makers see a
deviation from the status quo as an avoided loss or as missed gain. The structure of
these, and the uncovering of the differences and similarities in stakeholder decision
making require further research. The disclosure of simple data and the potential of
stakeholder value maximization based on calculations from these data do not provide
sufficient grounds for answering the questions of how stakeholder engagement must
be managed and the different discursive institutions of stakeholder democracy be
created and operated, so that they really serve stakeholder value maximization and
effective stakeholder cooperation. It is similarly important to see how the various
stakeholder reference points in the possible different matrix elements of value- and
interest representation change. Further research is required to see how far reference
272
points depend on traditional stakeholder typologies, such as urgency, power,
legitimacy (Mitchell et al, 1997) or other dynamic stakeholder position approaches.
Likewise, in connection with stakeholder engagement and the creation of discursive
cooperative and conflict management spaces, it could be especially important to see
who, to what extent, and by which means is capable of influencing and shaping
different reference points offering diverse risk-taking and cooperative – i.e. inclusive
and participating – strategies for different stakeholders (Kőszegi & Rabin, 2006;
Kőszegi, 2006). Thus, the confluence of prospect theory and stakeholder focused
corporate operation, the interpretation of the politics of corporations applying the
findings of behavioural economics, could be an independent area of research in the
future.
*****
We do see the future that lies ahead of us.
For corporations, as the actors with the most significant social impact and resources,
to be able to do justice to their role in bringing about new more democratic and more
equal societies, capable of maximizing economic, environmental and social values for
stakeholders to flourish, a re-interpretation of corporations is needed. Corporate social
responsibility is essentially political corporate responsibility: corporations, realizing
the democratic role they must play reinventing democracy in a transnational
globalized world, engage in public deliberations, collective decisions and joint
activities with stakeholders in order to (1) anticipate, respect and be responsive to
values and interests of stakeholders; (2) integrate their stakes and claims into
corporate operations and processes; and (3) take on the provision of public goods or
the restriction of public bads in cases where public authorities or other societal actors
are unable or unwilling to fulfill this role (Scherer et al., 2016; Scherer, 2017). Thus,
political CSR is the inclusion of stakeholder values and interests in business
operation, the management of inevitable conflicts stemming from stakeholder value
differences and the dissolution of institutional hierarchies within the context of power.
The aim of this politics is to reduce the harmful economic, ecological and cultural
273
impact of corporate operation and the realization of stakeholder value maximization
and stakeholder democracy according to the principles of stakeholder well-being and
TBL based corporate success, through corporate political processes, the creation of a
deliberative democratic public political space institutionalized for corporate citizens,
and a free and equal system of checks and balances offering the possibility of
unveiling the development of the stakeholder ‘I’ and of corporate discourse of power.
Corporate operation, as was shown earlier, is progressing in this direction.
Triple Bottom Line and stakeholder theory support the establishment of
epistemological communities of a paradigm shift, and the various guidelines and
standards bring about the moral legitimacy for change. The different areas of
corporate operations gradually become politicized: in the area of responsible
corporate governance, human resources management, environmental management and
responsible marketing, responsible research and innovation the institutional
frameworks and processes of change keep evolving and the conditions for the moral
partnership of equals are being created. The work that is left after the analysis of
political corporate responsibility is to develop a theory, structure and operation of the
political corporation after corporate politics has been defined. This is a task reaching
beyond the limits of this book, and for which further research has to be conducted.
The discourse ethics of Habermas and the political corporate responsibility
based on it sees the political model of stakeholder democracy and responsibility in
institutionalized and equality based discursive processes: the institutionalization of
public dialogue and the modes of processes of social will-forming with corporate
participation. According to Beck’s risk-society model, political social responsibility
presumes the emergence of institutionalized discursive processes, its basis is,
however, not the rational justification of decisions but the acceptance of the
consequences and the possibility of continuous re-evaluation of the consensus. A
Foucaldian political corporate responsibility views discursive institutions with
suspicion – as a manifestation of power – and puts the emphasis on the individual
stakeholder. First the stakeholder self has to be defined and made public, observing
and unveiling the power-based corporate discourse, followed by enforcing
engagement through continuous shaping and development of the stakeholder self. The
‘stakeholder self’ thus established must be represented in dialogue with other
stakeholders parallel to continuous consultation about the own stakeholder interests
274
and values within the own community as a result of the process of dialogue. Both the
unveiled power discourse and the emerged temporary consensus serve the interests of
the whole corporate stakeholder community, i.e. of the corporation, since they secure
the commitment of all stakeholders both through the processes and through reducing
transaction costs, thereby increasing result efficiency.
All this serves a more effective maximization of stakeholder value creation.
The bases for a theory of change are available: a system of measuring output based on
well-being indicators beyond GDP taking quality of life, ecological footprint, and the
development of human capital into account; cognitive heuristics and biases
influencing the process of stakeholder value maximization and its empirical
justification; and a theory and practice of the politicization of corporate operation. For
all this to become a unified new narrative of corporate theory and strategy, the
creation and strengthening of the discursive institutions of a post-liberal deliberative
risk democracy within the corporation, the establishment of a system of checks and
balances and other power limiting institutions, and a corporate strategy applying
findings of prospect theory are needed. Thus, instead of less politics, the further
politicization of corporations leading to true stakeholder democracy is needed.
275
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