Promoting Corporate Social Responsibility and Sustainability: A Model of Integrity Nihel Chabrak United Arab Emirates University – College of Business & Economics United Arab Emirates
[email protected] The interest for social responsibility and sustainability is recent but has developed rapidly. Originally, Corporate Social Responsibility [CSR] and sustainability were regarded with suspicion by the corporate world as it was assimilated to an extra cost. Only few businesses have made an attempt to practice some aspects of it. Nonetheless, things have changed very quickly. The concepts of CSR and sustainability became widespread and today most businesses have a policy and a strategy for their implementation. Their benefits for the business world came to be seen even enormous. But, this keen interest is related to a new understanding that is ruling progressively academia and the corporate world, according to which, being socially responsible has its payoff when it comes to maximizing shareholder value. Today, there is a rising concern about the commitment of the corporate world towards implementing CSR and sustainability. Corporations are expected to contribute to meeting new priorities, such as conserving human and natural capital. However, the doxic shareholder value maximization [SVM] doctrine inhibits such a shift. In this paper, a new model of integrity is proposed to help promoting socially and environmentally business rationales beyond the SVM doctrine.
The Great Debate on the Corporate Purpose A considerable number of writers over the decades have recognized that the impact organizations have upon society and the external environment suggests a wider concept of accountability than merely to their shareholders. According to Ackerman (1975), corporate
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orientation towards fulfilling their financial promise to shareholders inhibits a larger accountability to community and corporate social responsiveness. For McDonald and Puxty (1979), companies should not be reduced to a simple instrument towards maximizing the shareholders wealth. Companies are part of society and they hold responsibility towards the community. The concerns raised in the 1970s resonate with another debate that occurred earlier. The great debate on the corporate purpose has opposed in the 1930s, Adolf A. Berle to another law Professor E. Merrick Dodd Jr., on the issue of “to whom are corporations accountable?” In the Modern Corporation and Private Property, Adolf A. Berle and Gardiner Means (1932) advocate for the shareholder primacy: “all powers granted to a corporation or to the management of the corporation … [are] at all times exercisable only for the ratable benefit of the shareholders.” Alongside, Edwin Merrick Dodd wrote in Harvard Law Review “For Whom Are Corporate Managers Trustees?” in (1932) to state that the proper purpose of a public company is beyond making money for shareholders. It includes providing secure jobs for employees, quality products for consumers, and contributions to the broader society. He adds: “The business corporation is an economic institution which has a social service as well as a profit-‐making function” (p.1148). Since, Adolf A. Berle view on the consecration of the shareholders interests has been allegedly endorsed by another theory that has turned the shareholder primacy into an ideology. The agency model is based on a fiduciary theory of corporations according to which corporate managers are responsible to act in a manner that would place the interests of the shareholders above everything else except the law (Macintosh, 1999). Since, corporate managers became the trustees for the shareholders and the powers granted in law to them should be exercised entirely for their benefits. As a result, rather than being social institutions that are accountable towards the community and stakeholders (Davis, 2009), as it was defended by E. Merrick Dodd Jr., corporations came to be seen as legal-‐ economic devices to entrench powers and rights of their shareholders.
Challenging the Economic View of Accountability: Promoting CSR & Sustainability: Today, scholars and policy makers are increasingly challenging the economic view of accountability that was diffused by the agency thinking. The corporate world is viewed as
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answerable to a wider range of stakeholders on the impact of its activities on society and the environment. Those stakeholders have not just an interest in being informed but also in shaping business practices to promote a new model of growth and wellbeing. Hence, the definitions of CSR and of sustainability come to moderate the economic view of accountability by extending the corporate purpose to consider social and environmental concerns. CSR is defined to be about a company’s concern for community involvement, socially responsible products and processes, concern for the environment and sustainability (Aras and Crowther, 2008). CSR is a company‘s commitment to operating in an economically, socially, and environmentally sustainable manner, while recognizing the interests of its stakeholders, including investors, customers, employees, business partners, local communities, the environment, and society at large. According to the European Commission, CSR is about undertaking voluntary activity, which demonstrates a concern for stakeholders (Aras and Crowther, 2008). If we trace the history of CSR in terms of the actions taken by firms, then we may think that it goes back to the 1950s. For others, it goes back even to the Industrial Revolution or the Medieval Guild system (Aras and Crowther, 2012). Whether the concern for social responsibility is very old or not, what is important to notice is mainly the growing interest for it in popular consciousness. In our common future published by the United Nation in 1987, Gro Harlem Brundtland states: “when I was called upon by the Secretary-‐General of the United Nations in December 1983 to establish and chair a special, independent commission to address this major challenge to the world community, I was acutely aware that this was no small task and obligation, and that my day-‐to day responsibilities as Party leader made it seem plainly prohibitive. What the General Assembly asked for also seemed to be unrealistic and much too ambitious. At the same time, it was a clear demonstration of the widespread feeling of frustration and inadequacy in the international community about our own ability to address the vital global issues and deal effectively with them”. It is obvious that the world went through different waves of pressure, as portrayed by Elkington (2006), until the international community came to realize that CSR and sustainability are the responsibility of all citizens including the businesses and that a new corporate paradigm should replace business as usual. Issues like climate change has affected concern about CSR through the problem of greenhouse gases emission and particularly carbon dioxide. Average people know the size of their carbon footprint and act to minimize it (Aras and Crowther, 2012). CSR is rapidly moving from the margins to the mainstream of corporate activity, with greater recognition of a direct
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and inescapable relationship between corporate governance, corporate responsibility, business performance and sustainable business development. For Gail Kelly, CEO of Westpac, “the broader role of corporations in society lies in understanding the interdependence between economic growth, social development and environmental protection. For Niall Fitzgerald, CEO of Unilever, “sustainability is here to stay or we may not be”. Finally, for Stephen Harrison AO, Interim CEO, Finsia, “climate change has focused our attention on sustainability issues generally and, as an industry, we need to better reconcile the incentives that drive short-‐term profits with the risks to our economy over the long-‐term”. The corporate world and its top executives raise a growing number of questions related to CSR and sustainability. No longer are they concerned with greenwashing practices – the pretense of socially responsible behavior through artful reporting (Aras and Crowther, 2012). This evolution is explained not only by the increased benefits to shareholders from these social practices but also by the will of people to care about social responsibility. The companies are engaged in social responsible behaviors as a reaction to external pressures. A growing concern with the supply chain of business is obvious. World citizens are more concerned with the exploitation of people in developing countries, especially with the question of child labor and sweat shops. For companies, it is no longer acceptable to say that the conditions under which their suppliers operate are outside of their control and so they are not responsible (Aras and Crowther, 2012). Since more customers have called companies to account, firms should find new business models to spread social responsibilities outside their boundaries until affecting their suppliers. Finally, profound changes in governance and globalization leading to new role for governments and more involvement of civil society are raised.
CSR & Sustainability Challenges: International Community Impotence & Corporate Resistance The implementation of CSR and sustainability emerges however with many challenges. The difficulty arose quietly from the definitions of CSR and of sustainability. The problem for managers is how to balance-‐up the conflicting needs and expectations of various stakeholders today and in the future whilst being concerned with shareholders? Once the primary (in some cases sole) concern was to produce goods and services that might generate the profits to achieve the financial sustainability of the corporation, everything else was written off as
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externalities. Hence, how to imagine the corporate world to start considering the interests of the community and the need to preserve the environment, which might undermine the financial bottom line and the SVM? Then, how to decide which activity is more socially responsible than another? How to build CSR policy and strategy without leading to establish a parallel organization to the existing one, to deal with non-‐economic issues separately from other business issues and to measure a non-‐economic performance besides the economic one? More generally, how to report on it to the interested parties, through a set of separate statements or through an integrated reporting system? Another challenge is related to the definition of sustainability. The actual term “sustainable development” has been around for centuries, but the modern-‐day expression is traced back to the 1980s. In 1983, then Secretary-‐General of the United Nations, Javier Pérez de Cuellar, appointed Gro Harlem Brundtland from Norway to head a special commission to address the rapid deterioration of the human and ecological environments. The resolution establishing the commission by the General Assembly in A/RES/38/161 in 1983 stipulates the following terms of reference: “(a) To propose long-‐term environmental strategies for achieving sustainable development to the year 2000 and beyond.” In 1987, Our Common Future is published to define sustainable development and defined as “[a] development that meets the needs of the present without compromising the needs of future generations to meet their own needs” (World Commission on Environment and Development, 1987) (pp. 4-‐5). But how to implement this concept in practice and what are the expectations from the corporate world to practice sustainability? Since the Brundtland report and the first Rio de Janeiro Summit in 1992, sustainable development became a desirable goal for which implementation has proven difficult. In his 2002 report on implementing Agenda 21, United Nations Secretary-‐General Kofi Annan has raised an undoubtedly gap in enactment and has confirmed that “progress towards reaching the goals set at Rio has been slower than anticipated” (United Nations Economic and Social Council, 2002, p. 4). The main reason behind this gap is due to the difficulty of conceiving the move from theory to practice. Obviously, the elusive definition of sustainable development has led to this dilemma. The universal adoption of sustainable development is undoubtedly due to this vagueness. Sustainable development has gained currency within governments, NGOs and prominent international organizations including the World Bank, the International Monetary Fund and the World Trade Organization. It was also celebrated by the private sector in the form of Corporate Social Responsibility agenda. All have
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proven their unequivocal interest for this new trend but not necessarily for sustainability. The flexibility of sustainable development concept has enabled many actors to adapting it to their own purposes. Its suppleness has consequently led to various interpretations and confusion that compromised the effectiveness of the implementation of sustainability (Chabrak and Richard, 2015). The UNU-‐IHDP and UNEP (2012), in the inclusive wealth report, calls to consider sustainability in an intergenerational perspective on wellbeing. Hence, wellbeing should not just be considered for people living today, but for future populations as well. The report questions the World Commission on Environment and Development (1987) definition of sustainability as it is strictly directed at sustaining the factors that satisfy current needs [food, clothing, shelter, personal relationships, leisure activities]. Yet, those factors would be available in the future only if the society in question had an adequate productive base to produce them. Therefore, “sustainable development requires that relative to their populations, each generation should bequeath to its successor at least as large a quantity of what may be called a society’s productive base as it had itself inherited from its predecessor” (p.15). According to the inclusive wealth report “sustainable development [is] a pattern of societal development along which (inter-‐generational) well-‐being does not decline” (p.15). With this new definition of sustainability, we have even more issues to shift towards this new form of economic growth, mainly for the absence of new metrics for evaluating countries progress in the matter. The report of the High-‐Level Panel Global Sustainability of the UN Secretary-‐General (2012), Resilient People, Resilient Planet: A future worth choosing, calls for a new form of economic growth that works within ecological boundaries and pursuing social equity. It also calls explicitly for going beyond our present generation of indicators, such as the Gross Domestic Product [GDP] and the Human Development Index [HDI]. These conventional indicators do not provide policy-‐makers – particularly planning authorities – with clear guidelines on which forms of capital they should invest for ensuring the sustainability of the productive base of an economy. Meanwhile, many other indicators were introduced as an attempt to track the sustainability of economies, such as the comprehensive wealth accounts and the genuine savings indicator, also called adjusted net savings, that were developed by World Bank researchers in the late 1990s. However, measurement that reflect unsustainable trajectories and highlight which capital assets are in decline and where investments might be
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needed to improve the overall wellbeing of a country are nevertheless not available. An effective implementation of sustainability is still hard to achieve. It is within this context of total impotence of the international community that CSR and sustainability initiatives should be assessed. Many economic friendly versions of CSR and sustainability have been promoted by scholars and supported by the corporate world, such as the eco-‐efficiency and the triple bottom lines [TBL] paradigms. For Schaltegger and Wagner (2006) CSR definitions, based on Carroll (1979, pp.497–505; 1999, pp.268–295) are not appropriate to account for the general economic relevance of corporate societal engagement. CSR should not lead to the establishment of a parallel organization to the existing one in order to deal with non-‐economic issues separately from other business issues and to measure a non-‐ economic performance alongside the economic one. This argument constitutes the departure point toward establishing a business case for CSR and sustainability. As defended by Edvardsson and Enquist (2009) and Vogel (2005), CSR needs to be a proactive approach and a business model for values-‐based companies (Chabrak and Richard, 2015). Schaltegger et al. (2011) propose a business case for sustainability as the new paradigm for the corporate world. It integrates CSR, sustainability and business performance. It is described to be a situation where economic success is increased while performing in environmental and social issues through voluntary activities. In other words, it means that economic success is created through (and not just along with) a certain environmental or social activity. For the purpose, “[a] business case for sustainability has to be created [through adequate sustainability management] – it does not just happen” (p.7). Three requirements have to be met to create a business case for sustainability: [1] the company has to realize a voluntary activity with the intention to contribute to the solution of societal or environmental problems. That is to say, these activities are not just a reaction to legal enforcement and are not conducted for economic reasons as part of conventional business behavior anyhow; [2] the activity must result in a positive economic contribution to corporate success, which can be measured or argued for in a convincing way. For instance, the activity may give rise directly or indirectly to cost savings, customer retention, sales increase or better profitability; [3] a clear and persuasive argumentation must exist that a certain management activity has led to both, the intended societal or environmental effects, and the economic effect. Popularized by Elkington (1998), the TBL approach is a variant of socially responsible capitalism. What distinguishes this approach from the previous one is the concern for natural
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conservation. Elkington (1998) proposes two new lines to be added to the conventional financial bottom line, and an aspiration to decrease absolute environmental impacts accordingly. However, like eco-‐efficiency, the TBL approach remains a win-‐win strategy that consists of allowing the reduction of ecological and human impacts while preserving a financial return in line with the constraint of the cost of capital. Since the major preoccupation of financial capitalism is to maximize shareholder value, any ecological decision that might decrease financial return is to be forsaken (Chabrak and Richard, 2015).
The SVM Myth SVM was always been taken for granted, even if it is more of a political statement than a factual reality. The team production theory of Blair and Stout (1999) provides a stimulating in intellectual evidence of the shareholder thinking fallacy that is behind SVM doctrine. According to Blair and Stout (1999), mainstream economics consider “public corporations [as] little more than bundles of assets collectively owned by shareholders (principals) who hire directors and officers (agents) to manage those assets on their behalf” (p. 248). To preserve shareholders’ interests, agency theory advocates for an outsider model of governance whereby control is shifted from managers to markets through the distribution of available cash flows (Jensen and Meckling, 1976). SVM stipulates that free cash flows should be distributed to investors in forms of dividends and buybacks to be allocated on the market. The outsider model of governance by markets is considered to be the best mechanism to make an optimal allocation of capital (Jensen 1986; Jensen and Murphy 1990) and to improve the performance of the economy as a whole, consistently with the neoclassical theory of market economy (Fama and Jensen 1983a; 1983b). Having made investments without a contractually guaranteed return, shareholders are considered by this paradigm as in the position of having a real interest in monitoring managers to ensure an efficient allocation of resources (Lazonick, 2011). Accordingly, SVM is meant to secure the shareholders’ interests by entrusting corporate control to markets (Chabrak, 2011; Davis 2009). Public corporations are considered to “belong” to shareholders, who will control the corporation through the force of opinion of the market. Hence, public corporations exist for one purpose only that is to maximize shareholders’ wealth (Stout, 2012), and governance is efficient when based on an outsider model. The team production theory adopted by Blair and Stout (1999) takes issue with the prevailing principal-‐
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agent model of the public corporation and the shareholder wealth maximization goal that underlies it, which gives legitimacy to market control. The theory rests on a widely accepted observation that shareholders are not the only group that may provide specialized inputs into corporate production. Even, executives, rank-‐and-‐file employees, creditors as well as the local community [and the environment] may also make essential contributions and have an interest in an enterprise's success. The public corporation is a team of people who enter into a complex agreement to work together for their mutual gain. They are presumed to having entered into “pactum subjectionis” under which they yield control over outputs and key inputs and they participate in a process of internal setting and dispute resolution. That is to say, they have a real interest in governing the corporation and they do it through an internal mediating hierarchy [a board] and not through market mechanisms and agency contracts. Moreover, both Blair and Stout (1999) and Stout (2012) argue for the fallacy of the assumption whereby the shareholders do own the corporation, on which SVM doctrine is postulated. Blair and Stout (1999) recall a striking aspect of corporate law, which is generally disregarded. Corporate law views a corporation as a legal person. When owners fill articles of incorporation, in the eyes of the law, a new entity that is totally separate from its shareholders is born. The shareholder primacy violates the very existence of this entity, and transforms it into a legal fiction, whereas the corporation is an independent legal entity that owns itself. For Stout (2012), shareholders do not own the corporation; they own only shares of stocks, that is a contract between the shareholder and the corporation; a contract that gives the shareholder very limited rights under limited circumstances (exactly as any other contracts between the corporation and debt-‐holders and customers)1. For Stout (2012), considering the shareholders as the owners of corporations is a fable. She argues that it is a mistake to think that shareholders have the only residual claim on the firm’s profits, and that they are “principals” who hire and control directors to act as their “agents” because of a single outdated and widely misunderstood judicial opinion -‐ the Michigan Supreme Court’s 1919 decision in Dodge vs. Ford Motor Company case. According to Stout (2012), The Dodge brothers who were minority shareholders in the Ford Motor Company sued Henry Ford for having stopped paying dividends, while he was doing this for years. The Dodge brothers’ plan was to use the cash dividends from their shares to start a new business: The Dodge Brothers Company. Well aware of their plans, Henry Ford stopped paying dividends to
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More references from Accounting Convivium to be added at this level 9
not giving them the opportunity to create a rival manufacturing company. He allegedly claimed that the company needed to keep its money in order to offer lower prices to consumers and to pay employees higher wages. By siding with the Dodge brothers, the Michigan Supreme Court decision was wrongly considered, as a case about corporate law requiring shareholder primacy. As a matter of fact, it was a case about the duty a controlling majority shareholder owed to minority ones. As a matter of fact, the judge has ordered Henry Ford to pay a small dividend while allowing him to continue with his plans to expand employment and reduce prices. Quoting Freund (1897), Stout (2012) considers a shareholder acting as an owner as a trespasser. Therefore, running a business primarily for the profit of its stockholders is not a legal requirement but rather a managerial choice. Knowing the fallacy of the legal requirement, why do business and policy elites accept the managerial choice of SVM? According to the agency theory, SVM is desirable because it offers the best solution to limit the directors’ discretion, what Jensen and Meckling (1976) called the agency cost problem. According to Davis (2009), if the corporation should be run for shareholder value, it is premised not on the conclusions that shareholders do own the corporation, but on the view that it could be better for all of us if we act as if they do. Nevertheless, Stout (2012) argues that shareholder-‐oriented firms do not perform better and this stance lacks empirical support. Moreover, when the focus is shifted from the performance of individual firms to the performance of the corporate sector as a whole, it is even proved that shareholder primacy is bad for investors collectively and might be at the origin of the tragedy of the commons. For Stout (2012), because there are two ways to obtain value, either to create it or to take it from others, SVM is considered as a theory of value extraction! Despite its own arbitrariness, SVM continues to seem natural, and produces a committed and unconscious adherence of the corporate world towards a simplistic economic view of accountability, without considering the vital responsibility towards the community and the environment. As a form of doxa, SVM goes unquestioned; there is nothing to do except what is done; and what is done is right—and what should be done (Bourdieu, 1977). Managers think they are exercising a managerial choice. In fact, they are simply driven towards maximizing the shareholders value without being able to consider other stakeholders interests. It is against this backdrop of false choice offered to managers that we introduce a new model of integrity to assess the corporate world answer to CSR and sustainability and to uncover its limits and the hypocrisy of corporations. The ecological debate and the business social engagement seem to
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be captured to perpetuate the same paradigm, which celebrates the doxic shareholder value ideology. Rather than striving to resolve the social and ecological problems, the corporate world is perpetuating the same practices that are leading nations to follow an unsustainable growth path with a slight human and ecological touch.
A Model of Integrity According to Erhard et al. (2009), integrity (the condition of being whole and complete) is a necessary condition for workability, and that the resultant level of workability determines for an individual, group, or organization the available opportunity set for performance. Integrity provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage. Integrity is about honoring one’s word. By doing so, individuals create whole and complete social and working relationships with others and an actionable pathway to being whole and complete with oneself, or in other words to being an integrated person. Giving its word to others means also giving its word to itself, even if it is seldom recognize that it has in fact given its word. Erhard et al (2009) give an example of this failure: “think of occasions when the issue of self-‐discipline comes up, and the ease with which we often dismiss it – of course, always “just this one time.” In such self-‐discipline cases, we fail to recognize that we are not honoring our word to ourselves; and, that in doing so, we have undermined ourselves as a person of integrity” (p.23). They add: “[w]e take the conversations we have with ourselves as merely “thinking”. And when in those conversations we give our word, giving our word occurs to us as just more thinking, rather than having just committed ourselves (given our word) to ourselves” (p.23). A person out of integrity with itself is highly unlikely that will not be able to be in integrity with others. She will show up for others as inconsistent, unfocused, scattered, unreliable, undependable and unpredictable. For an organization, integrity is defined as an organization’s word being whole and complete. An organization’s word consists of what is said between the people in that organization, and what is said by or on behalf of the organization. Erhard et al. (2009) give the government’s monopoly on violence to maintain peace by preventing the private use of violence by citizens on each other as an example of a State’s word. Giving its word requires the government to provide compensation for citizens for certain actions such as the case of eminent
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domain where a public taking is ruled to be in the overall public interest the government has promised as part of its word. To honor its word, an organization is expected to either keep its word, or as soon as it knows that it will not, mainly in a situation where it is faced with two conflicting commitments and must choose one over the other, the organization should say that to those who were counting on its word and should therefore clean up any mess it caused by not keeping its word to maintain its integrity. According to Erhad et al (2009), for an organization to keep its word it should do what it said would do and by the time it said it would do it. In this model, organizations that would apply cost-‐benefit analysis to honoring their word may lose their completeness and become untrustworthy, which reduces both the workability of their activities and their opportunity for performance. According to Erhard et al (2009) integrity model, a word consists of each of the following: [1] what the organization says [all what was said to be done or will not be done]; [2] what the organization knows [their word also being constituted by what they know to do and doing it as it was meant to be done]; [3] what the organization is expected to do [Unless it has explicitly said to the contrary, the organization is cause in the matter of what the community expect of it, it is then led to be highly sensitive, and motivated to ferret out those expectations and to take action to manage them]; [4] what the organization says is so; and [5] what the organization says it stands for; all what came first considering [7] moral, ethical and legal standards. Generally, “an organization’s word is given by its actions, and by its agreements, its formal contracts, and its communications through annual reports, policies, slogans, advertising, and the interaction of its personnel with customers, employees, suppliers of all types [including materials, parts, services, and capital]” (p. 59).
Application of the Integrity Model to Promote CSR and Sustainability In progress
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