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CORPORATE RESPONSIBILITY AND STAKEHOLDING

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DEVELOPMENTS IN CORPORATE GOVERNANCE AND RESPONSIBILITY

Series Editor: David Crowther

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DEVELOPMENTS IN CORPORATE GOVERNANCE AND RESPONSIBILITY VOLUME 10

CORPORATE RESPONSIBILITY AND STAKEHOLDING

EDITED BY

DAVID CROWTHER

De Montfort University, UK

SHAHLA SEIFI

University of Derby, UK

United Kingdom – North America – Japan India – Malaysia – China

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Emerald Group Publishing Limited

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First edition 2016

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ISBN: 978-1-78635-626-0

ISSN: 2043-0523 (Series)

List of Contributors

Introduction: The Unknown Stakeholder

Multiple Stakeholding

It is normal to consider all of these stakeholder groups separately. It should be noted however that each person will belong to several stakeholder groups at the same time. For example a single person might be a customer of an organisation and also an employee and a member of the local community and of society at large. He or she may also be a shareholder and a member of a local environmental association and therefore concerned about the environment. Most probably that person will also be concerned about the future also, on their own behalf or on behalf of their children.

We can therefore see that it is often not helpful to consider each stakeholder group in isolation and to separate their objectives. Reality is more complex and often there are conflicting pressures upon people because they belong to different stakeholder groupings.

In considering the effect of environmental pressures upon an organisation, and the consequent effects upon the performance measurement and reporting systems of the organisation, it is important to recognise that these pressures, while arising from some of the stakeholders, in the widest context, to that organisation, actually arise from a variety of different sources. ¹ It is equally important to recognise that such environmental influences affect different organisations in different ways and to different extents. Thus for example the environmental pressures upon an organisation engaged in oil recovery or open cast mining will be quite different to those upon an organisation engaged in retailing or in food processing. Not only will the pressures be different for different industrial sectors but they will also differ according to geographical location of the industry and according to temporal factors influencing the local communities concerned and the society at large. Thus it can be expected that due to the differing natures of the environmental pressures being exerted, and the respective strengths of those pressures, organisations will respond differently. It could be expected however that organisations operating in similar industrial sectors and in similar physical and temporal localities would be subject to very similar environmental pressures. Similar pressures upon similar organisations could be expected to be manifest in similar reactions to those pressures, both in terms of changes in operating procedures and in terms of changes in performance measurement and reporting systems. If these similarities in responses to environmental pressures are not evident then it is necessary to investigate the organisations in greater detail in order to elucidate the reasons for these differences in response patterns. First however it is necessary to consider the types of environmental pressures to which an organisation is subject. This is achieved through the construction of a typology of environmental pressures.

One pressure to which all organisations are subject is that of the legal environment within which the organisation operates. While it might be expected that this environment is identical for all organisations, in actual fact this is not the case. As far as the United Kingdom is concerned this environment consists of three distinct components – UK legislation, EC legislation and regulatory frameworks. Regulatory frameworks tend to be specific to individual industrial sectors and also to distinct parts of the country geographically. Thus the building industry has a specific regulatory framework in the form of building regulations but this varies from one part of the country to another. This depends to some extent upon the involvement of the local authority but is also because some parts of the country are classed as National Parks and have building restrictions to discourage such activity, while other parts of the country are classed as development areas where such activity is positively encouraged. Sanctions applied for non-conformity with the regulations can either be in the form of punishment for breach of the regulations or rewards for compliance. Thus farming, for example, has a regulatory framework which involves sanctions for particular activities (e.g. fines for polluting rivers), complete freedom in other areas (e.g. no planning restrictions for agricultural buildings) and rewards in the form of grants or subsidies for compliance with certain regulation (such as ‘set aside’ or conforming to milk quotas). This regulatory framework is specific to this industry and does not apply to others. Some industries operate self-regulatory frameworks while others have frameworks imposed. Thus these regulatory frameworks affect different industries differently.

The framework of legislation on the other hand can be expected to apply to all industries and all firms within an industry to a similar extent. In general terms this is true but it needs to be acknowledged that the impact of such legislation is to some extent dependent upon the perceived geographical location of any particular firm. Thus one firm might be a wholly UK-based organisation and hence pay particular regard to UK legislation. Another firm in the same industry might regard itself primarily as based in another country within the EC and hence pay regard not just to UK legislation but also to EC legislation, and also to the legislation of the other EC country in which it is based. Yet another firm might regard itself as truly global and be prepared to move its operations around the world to exploit legislative differences. One further facet of the legislative framework in which a firm operates which might be important to the way in which that firm operates and reports on performance is the difference between extant legislation and anticipated legislation. The framework is subject to a process of continual change and modification, the impact of which is to gradually increase the statutory requirements for conformity. ² While extant legislation needs to be complied with this is not true of anticipated legislation, which may never achieve actuality. Nevertheless some firms seek to anticipate such legislation, either because of the costs and time scales involved in achieving compliance or because they believe that positioning themselves in the forefront of environmental developments will give them some competitive advantage. Thus the reaction of all firms, even in the same industrial sector, will by no means be universally similar.

Another part of the operating environment of an organisation involves its relationships with the media, and this is of crucial importance as far as pressure groupings are concerned. While in theory the media provides a source of information on current events, in actual fact the role of the media in the context of environmental pressure is far from that of a neutral reporting mechanism. Environmental issues are regarded as newsworthy by the media, and hence used by this industry to provide a vehicle for selling its own products and services, while at the same time purporting to provide impartial news coverage. This is implicitly recognised by all the stakeholders involved in these environmental issues and so all seek to exploit the possibility of media coverage for their own purposes. Thus firms will seek to broadcast their environmental impact when seen to be positive while seeking to hide less positive aspects. Conversely pressure groups will seek to provide newsworthy coverage of issues which are important to their own agendas, rather than seeking to rank such issues according to environmental impact priority. Thus media involvement becomes a weapon for all stakeholders to use to meet their own agendas rather than an impartial method of evaluating issues, and some stakeholders have recognised this and exploited it to a greater extent than have others.

Wider Stakeholding and Its Implications

The growing concern with the effects of the actions of an organisation on its external environment is based upon a recognition that it is not just the owners of the organisation who have a concern with the activities of that organisation. There are also a wide variety of other stakeholders who have a concern with those activities, and are affected by those activities. Indeed those other stakeholders have not just an interest in the activities of the firm but also a degree of influence over the shaping of those activities. Indeed it has been argued that the power and influence of these stakeholders is such that it amounts to quasi-ownership of the organisation. Based upon this there has been, by some people, a challenging of the traditional role of accounting in reporting results. Such a challenge considers that, rather than an ownership approach to accountability, a stakeholder approach, recognising the wide stakeholder community, is needed.

It has been widely recognised that the activities of an organisation impact upon its external environment and therefore it has been suggested that such an organisation should be accountable to a wider audience than simply its shareholders. Such a suggestion probably first arose in the 1970s and a concern with a wider view of company performance is taken by some writers who evince concern with the social performance of a business, as a member of society at large. This concern was stated by Ackerman (1975) who argued that big business was recognising the need to adapt to a new social climate of community accountability, but that the orientation of business to financial results was inhibiting social responsiveness. McDonald and Puxty (1979) on the other hand maintain that companies are no longer the instruments of shareholders alone but exist within society and so therefore have responsibilities to that society, and that there is therefore a shift towards the greater accountability of companies to all participants.

Recognition of the rights of all stakeholders and the duty of a business to be accountable in this wider context therefore has been largely a relatively recent phenomenon. ³ The economic view of accountability only to owners has only recently however been subject to debate to any considerable extent. Some owners of businesses have however always recognised a responsibility to other stakeholders and this is evident from the early days of the Industrial Revolution. Implicit in this concern with the effects of the actions of an organisation on its external environment is the recognition that it is not just the owners of the organisation who have a concern with the activities of that organisation. Additionally there are a wide variety of other stakeholders who justifiably have a concern with those activities, and are affected by those activities. Those other stakeholders have not just an interest in the activities of the firm but also a degree of influence over the shaping of those activities. This influence is so significant that it can be argued that the power and influence of these stakeholders is such that it amounts to quasi-ownership of the organisation. Indeed Gray, Owen, and Maunders (1987) challenge the traditional role of accounting in reporting results and consider that, rather than an ownership approach to accountability, a stakeholder approach, recognising the wide stakeholder community, is needed. ⁴

The desirability of considering the social performance of a business has not always however been accepted and has been the subject of extensive debate. ⁵ Nevertheless the performance of businesses in a wider arena than the stock market and its value to shareholders has become of increasing concern. In many respects this can be considered to be a return to the notion of the Social Contract, which has been used to persuade business to accept their social responsibility.

Social Contract Theory is most often associated with the work of Hobbes (1651) and Rousseau (1762) where a contract, usually considered to be implied or hypothetical, is made between citizens for the organisation of the society and as a basis for legal and political power within that society. The idea is that for the legal and political system to be legitimate it must be one that the members of society would have rationally contracted into. Social contract theory has been applied to the question of business in society in a similar fashion by considering ‘what conditions would have to be met for the members of such a society to agree to allow corporations to be formed’ (Smith & Hasnas, 1999). The conclusions reached by the theorists include that the members of society would demand that the benefits outweigh the detriments implying a greater welfare for the society while remaining ‘within the bounds of the general canons of justice’ (Donaldson, 1982). This can be summarised into three basic requirements that relate to social welfare and justice. Hasnas (1998) suggests that this requires action by the firm in order to satisfy this.

The justice term is less agreed upon but Hasnas suggests that one thing it should require as a minimum is that businesses do not ‘systematically worsen the situation of a given group in society’. This obviously has a strong resonance with stakeholder ideas. Social contract theory has been criticised most usually because, as mentioned earlier, the contract is either argued to be implied or hypothetical. Therefore there is no actual contract (Kultgen, 1987), that members of society have not given any formal consent to such a contract, and that they would be surprised to learn of its existence. Donaldson (1989) freely admits that the contract is a ‘fiction’ but continues that this does not undermine its underlying moral theory. Social contract theory is therefore grounded in moral theory, with a strong basis in ethics. In various chapters in this book contributors argue that there is a strong connection between corporate socially responsible behaviour and ethical behaviour.

An alternative to the attempts to explain, and regulate, relations between organisational stakeholders based upon the rationalities of economic theory is the approach based upon the concept of the social contract. This social contract implies some form of altruistic behaviour – the converse of selfishness. Self-interest connotes selfishness, and since the Middle Ages has informed a number of important philosophical, political and economic propositions. Among these is Hobbes’s world where unfettered self-interest is expected to lead to social devastation. A high degree of regulation is prescribed in order to avoid such a disastrous outcome, but in the process corporations sacrifice all the rights (human, labour, social) for others. Self-interest again raises its head in the utilitarian perspective as championed by Bentham, Locke and John Stuart Mill (Titus & Smith, 1974). The latter for example advocated as morally right the pursuit of the greatest happiness for the greatest number. This perception, as Phillips (2001) describes, could imply that the market economy is simply accepted.

Similarly, Adam Smith’s free-market economics is predicated on competing self-interest. These influential ideas put interest of the individual above interest of the collective. Indeed, from this perspective, collective interests are best served through self-interest. At the same time this corporate self-interest has come to draw disapproval in modern times, as reflected in the current vogue for the tenets of corporate social responsibility. The moral value of individualism has all but vanished.

Crowther and Rayman-Bacchus (2004) suggest that the pendulum has swung too far towards encouraging corporate self-interest at the expense of the public interest. Indeed the continuing conversion of public service provision to market testing by many governments suggests a strengthening belief that the two interests are not in conflict. Self-interest and altruism (promoting the welfare of others over self) need not be in conflict. There is ample evidence that encouraging corporate self-interest (and risk taking) does indeed benefit society (albeit not necessarily to an equal extent). Some of that evidence is however contested, as in the case of Genetically Modified (GM) food (Topal & Crowther, 2004). The European Union (EU) policies intend to pursue a high level of protection of human life and health, but differences between national laws, regulations and administrative provisions concerning the assessment and authorisation of GM food may hinder their free movement, creating conditions of unequal and unfair competition (EU, 2003). There is also abundant evidence to the contrary; that the pursuit of corporate self-interest continues to burden society with additional costs. In the agriculture area examples could be foot and mouth disease, with higher level of costs not very well estimated till now. Nevertheless, during the last two decades most of the world’s nations have set about creating a new, or refining, (capitalist) economic and political institutions that encourage corporate self-interest.

Stakeholder Perspectives on the Contract

With the raising of corporate social responsibility (CSR) to its current prominence in society it is unsurprising that all companies have claimed to be concerned with a variety of stakeholders and take their needs into considering in strategic decision making. For example, the research conducted by Cooper, Crowther, Davies, and Davis (2001) in the United Kingdom shows that certain stakeholders are claimed to be considered by all organisations. These are shareholders, customers and employees, with suppliers and society and the environment also being considered important by the majority of companies. On the other hand, Heard and Bolce (1981) argue that some pressure groups increase the influence of social reporting. Although CSR involves a concern with the various stakeholders to a business there are several problems with this research in identifying socially responsible behaviour (Crowther, 2004).

It therefore becomes imperative at this point to consider what is meant by any definition of CSR. There are three basic principles (Crowther, 2002a, 2002b; Schaltegger, Muller, & Hindrichsen, 1996) which need to be considered: sustainability, ⁶ accountability and transparency. In this sense, Eccles, Herz, Keegan, and Phillips (2001, p. 163) presents the words of Delfgaauw, as Shell’s vice president of sustainable development, that argues that ‘new responsibilities bring new accountabilities. Sustainability is the substance, transparency the process’.

One theme which arises from any consideration of these principles is the extent to which it is possible to assess the accountability of organisations to a broader constituency by reference to an implicit or hypothetical social contract. In the process, it is attempted to show how social contract theory also helps bind the relationship between corporate social responsibility and ethical behaviour. As Shaw (2004) states, one of the characteristics of social entrepreneurs is being ethical as a way to ensure that public money is well used.

This raises questions about the scope and depth of commitment among corporate leaders to social responsibility, a point which is central to this chapter. Assessing this commitment is made difficult ⁷ given what appears to be a runaway free market ideology; a belief system that seems to be elevating the corporation above the nation state, and is being transmitted through corporate global expansion and with US-led government sponsorship. This can be developed in the context of the globalising process by considering the extent to which corporate and social exploitation of Internet technology is helping both corporate bodies and consumers and citizens transform our world into a global village (McLuhan & Fiore, 1968) and then broadened to consider the broader relationship between technological innovation and social change. In examining this relationship it can be shown that technological development is underpinned by a utilitarian perspective, and at the same time technological change is unavoidably bound up with making moral choices.

While governments and consumers alike look to business to continue delivering economic and social benefits, many observers remain concerned about corporate self-interest; a self-interest that is synonymous with those of the managers. Managerial self-interest is unavoidably driven by a combination of shareholder interests (backed up by markets for corporate control and managerial talent), and occupational rewards and career opportunity. The public interest is easily sacrificed on the altar of these managerial motivators (or constraints). So, as Jensen and Meckling (1994, p. 1) argue:

understanding human behaviour is fundamental to understanding how organizations function, whether they be profit-making firms in the private sector, non-profit enterprises or government agencies intended to serve the ‘public interest’.

Moreover, public interest is not homogeneous and therefore cannot be simply represented. Public interest has become factionalised into constituencies and stakeholder groupings, each concerned with their particular interests. Consider for example the ‘not-in-my-back-yard’ protests over the building of recycling plants and mobile telephone masts, yet opinion polls support the former and sales of mobile phones demand more of the latter. In the continental European tradition companies are regarded as partially public bodies, with constituencies that extend beyond the shareholders to include other groups, such as employees (with retirement plans and other benefits), trade unions (with strikes and public contest) and local communities (with social and economic needs).

It has often been noted, from a global perspective, that corporate self-interest seems to be associated with an unequal distribution of economic and social benefits. However, it seems unfair to lay the responsibility for such inequality solely at the door of the corporation. National and regional politics, religious conviction and differentiated moral values all play an immeasurable role in shaping a nation’s life chances. Nevertheless there is worldwide suspicion that corporate egoism is a significant (if not the most important) influence on economic and social development. For example, in an OECD (2003) study about anti-corruption management and reporting practices, the results show that corporations have different behaviour, depending on their sector of operation. Thus most extractive industry corporations(publish lengthy anti-corruption statements while few motor vehicle companies publish any material whatsoever.

Satisfying the Stakeholder Community

In this attempt to satisfy the necessities of the stakeholders can appear other conflicts between the interests of the different groups included in the wider stakeholder community. Sometimes due to this conflict of interests and to the specific features of the company it tries to establish hierarchical levels between the stakeholders, paying more attention to those ones that are most powerful but, of course, their goals are not necessarily more socially responsible than others. In the end the hierarchy will depend on the other goals of the company, it will give an answer to those stakeholders that can threaten the attainment of the economic goals. The difficulties in measuring the social performance of a company are also due to their own concept. This is because the concept of corporate social responsibility is really comprehensive. There are companies whose activities are very different but all of them have to bear in mind their social responsibility, and not only companies, but also people in whatever activity they do. Ethics, codes of conduct, human values, respect for the environment, respect for minorities and so on are values that have to be borne in mind and included in the social responsibility concept. The understanding of the concept can vary geographically depending on the country or the region, because some important problems linked to basic human values are more evident in some countries than in other ones. Equally the understanding can be culturally dependant and can vary from one culture to another. These social problems cannot be isolated because they have got an important relationship with the degree of development of the country or culture, so in the end is the economy that pushes the world. Thus capitalism allows for differences between people, but what is not so equitable is that these differences are not only due to effort or work but are also due to having taken advantage of someone else’s previous effort. And this can be the case of multinational corporations, which sometimes abuse their power, closing factories in developed countries and moving them to developing countries because the wages are lower, or for example, because the security and health conditions are not so strict and so cheaper to maintain for the company. And then the same companies obtain big amounts of profits to use in philanthropic ways.

Development conditions of regions can determine the relationship between CSR and business success, as we have highlighted, if it is allowed in some developing countries to damage the environment or there are no appropriate labour unions and so on, because the lack of requirements or governmental attention, the global players use these facilities to obtain a better economic performance although they can be aware of their damaging policies. But not only is the degree of development to do with CSR, countries or regions are deeply associated with human values through the education and the culture in the country. These values are so deeply embedded inside us that even it is said that people from different regions of the world who have shared the same education, for example, ethic courses at the university, do not share the same human values, because they are marked by their origins. Perhaps it should be understood as the inclusion of ethic courses at the university degrees is of questionable value because in the end people will go on thinking what they thought at the beginning, depending on the values of their original culture. But everything is not so simple, because there have been proofs of situations where different values have been imported from another culture and accepted as one’s own values without any problem (only point out the success of McDonalds food all over the world and even in the former communist countries). So, it shows that the questions related to CSR are complicated and not so simple as they can seem at a first glance.

This complexity can be argued as a disadvantage to take into account when speaking about the creation of global standards about companies and their socially responsible behaviour; there are so many different cases that to establish a general regulation may be really difficult. But at the same time this diversity can be argued to require this regulation, because there have been different initiatives, most of them private, and they have added diversity to the previous one and the subject requires a common effort to try to tackle the problem of its standards and principles. And continual examples of financial scandals have proved that it is not enough to rely on companies’ own codes or human values, that it is necessary to reach an agreement to establish a homogeneous regulation at least at the level of global players, multinational corporations that play globally.

Knowing Our Stakeholders

Increasingly firms accept their accountability to a much wider range of stakeholders and so the stakeholder community continues to increase in size for every organisation. Additionally the increased focus upon transparency shows for each firm a greater diversity in their activities and therefore their stakeholder community. Electronic access to data also makes it easier for interested parties to research corporate activity – something that many more people are choosing to do. The implication of these trends is that the stakeholders to each organisation are increasing in number and diversity. While this is to be lauded it does have the consequence that the classifications of stakeholders discussed earlier have become more problematic. It also raises the question of whether a firm knows who all of its stakeholders are when it makes decisions as once a decision is made then changed circumstances could mean that more and different stakeholders start to appear. It also means that as more stakeholder groupings start to appear then multiple stakeholding, and the conflicts that could arise, become more prevalent and significant. We therefore truly are in the era of the unknown stakeholder – as the interests of all stakeholders become less apparent. With this in mind we have taken a broad approach in this book to consider a variety of issues which can – and do – arise in this new environment.

David Crowther

Shahla Seifi

Editors