Stakeholder Governance, Business Ethics and Corporate ...economia.unipv.it/alma/Filatotchev Lecture 3.pdf · Ethics and Corporate Social Responsibility ... stakeholders control the

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Stakeholder Governance, Business

Ethics and Corporate Social

Responsibility

Prof. Igor Filatotchev

Session 3

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“M&S Scheme Targets

Disadvantaged”

“Marks & Start”: work experience for 2,000 pupils; 200 parents returning to work; 200 homeless; 100 disabled, 100 young unemployed

A “costly scheme, but will benefit the company’s financial performance and ultimately shareholder value”

Luc Vandevelde, M&S Chairman (FT, 4 Feb 2005)

“For a substantial minority of consumers corporate reputation is very important, and these consumers tend to be wealthier”

Rita Clifton, Chairman, Interbrand

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Aims and Objectives of This

Session• To introduce main concepts of the Stakeholder-

Agency framework

• To outline basic principles of “business ethics” and

Corporate Social Responsibility (CSR)

• To link this discussion to the topics of subsequent

sessions and case analyses

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Corporate Stakeholders

“Stakeholders are individuals and entities that can be influenced by, or can impact on, a firm”.

Hill, C & Jones, T.M. (1992) ‘Stakeholder-Agency Theory’Journal of Management Studies, 29(2), 131-154.

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Corporate Stakeholders• Shareholders

• Managers

• Employees

• Banks and other lenders

• State

• Customers

• Suppliers

• Local community ...

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Stakeholder Model of Corporate

Governance

• Although top managers are technically stakeholders, their

primary role is one of contracting on behalf of the firm

(directly or indirectly) with other stakeholders as well as with themselves.

• Top managers are at the centre of a ‘hub and spoke’

stakeholder model because they contract with all other stakeholders.

• Corporate Governance is the means by which other

stakeholders control the decisions of a firm’s senior managers.

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Stakeholders’ Objectives

• make decisions aimed at building shareholder value

• consider and care for the interests of employees (working environment, training, retirement arrangements, etc.)

• take account of the needs of environment and the local community;

• work to maintain good relations with both customers and suppliers;

• comply with all the applicable legal and regulatory requirements.

Managers must:

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Stakeholders’ Channels of

Influence

• through monitoring of executives, i.e. using their

‘voice’ inside the firm;

• through incentive systems for executives;

• through ‘exit’ on capital, labour and product

markets;

• through legal and regulatory environment;

• through bargaining power in stakeholders’ relevant

markets

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Stakeholders’ Salience

• A stakeholder's power to influence the firm, usually

market power

• The legitimacy of a claim (a stakeholder's risk of

loss)

• The urgency of the claim, determined by the

dedicated nature of the asset supplied to the firm.

The degree to which firms should give priority to the claims of different stakeholders depends on their salience:

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Modern Agenda

• Corporate Social Responsibility (CSR)

principles

• Business Ethics

The Stakeholder-Agency Theory underpins two major developments in the corporate sector:

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Corporate Social Responsibility

• Business legitimacy to society

• Philanthropy and voluntary efforts to do “good” in

environments and social spheres

There is no common understanding of the meaning of corporate social responsibility (CSR). Rather there appears to be at least two competing models:

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Models/Frameworks of the CSR

• The responsibility of firms towards society given the power

those firms derive from being sanctioned by society to operate.

• Societies efforts to ensure corporate legitimacy over the years have been given practical expression through the

levying of corporation tax and regulation on health and safety and the environment.

• However this is in direct contrast to the idea of CSR as part of a tradition of voluntary philanthropy exemplified by the

likes of Andrew Carnegie

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Corporate-level Response

• “Ethical CSR” -compliance with the firm’s

economic, legal and ethical functions.

• “Altruistic CSR” - philanthropy that have no position

within the domain of business.

• “Strategic SCR” - the potential to increase the

social performance of business by translating the

identified social needs into a business case.

Corporate Social Responsibility debates prompted a number of corporate responses:

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Strategic CSR

• The Stakeholder model describes both wants

and needs of groups of stakeholders and the

reciprocal contribution that the same

stakeholders make to the business.

• An understanding of the evolving need of

society gives rise to entrepreneurial invention.

• Entrepreneurial inventions contribute to the

competitive advantage

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• Human rights

• Animal welfare

• Arms trading with oppressive regimes

• Sweatshop labour

• Environmental considerations.

In 2002, the Co-operative Bank lost nearly £ 4.4 m worth of

business from companies it turned down on the grounds of:

Case Example: Co-op Bank

Overall, Co-op has declined to do business with 41 companies

Source: Financial Times

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“While our ethical stance clearly leads to lost

business, the customer value analysis shows

that it has a very positive impact on our overall

profits”

Simon Williams, Directors of Corporate Affairs

The CSR policy at Co-op was responsible for

£30m or 24% of pre- tax profits in 2002

Financial Times, 6 May 2003

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2003-

•Value of business lost rose from £4.4m to £6.9 m since 2001

including:

•Losses from rejecting arms dealers - £ 700,00, animal

welfare - £556,000

•The profit contribution from a growing number of motivated

customers rose by a third, to £40 m

•An increasing number of loan accounts and Visa card

holders joining for ethical reasons

Source: FT, 6/5/2004

Case Example: Co-op (continued)

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Business Ethics and Corporate

“Code of Conduct”

• Organisational level - the role of business in the national and international organisation of society.

• Individual level- the behaviour and actions of

individuals within the organisation, in particular

the role of managers in the strategic management

process.

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Corporate Response

• Employee safety and diversity

• “Corporate citizenship”

• Company’s reputation, etc.

The heads of McDonald’s, Diageo, UBS, Merk and other blue-chip companies are among those who develop specific

measures and targets for their leadership teams on CSR and

business ethics. Assessment targets include:

These criteria are often incorporated in formal governance

systems

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“Indicator related to health, safety, environment

and employee satisfaction are included, among

the others, in my performance contract are are

thus used for determining my bonus and form

part of my performance review”

Olav Fjell, CEO of Statoil, Norway.

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Stakeholder Theory: A Critique

• Too general definition: ‘A stakeholder is

simply any group or individual who affects of is

in any way affected by the organisation’

• It is incompatible with the definition of

‘business’. (‘An activity of maximising long-

term owners’ value’)

Sternberg, E. (1997) ‘The Defects of Stakeholder Theory’, Corporate Governance, 5(1): 3-9.

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Stakeholder Theory: A Critique

• Diverse stakeholders:

- too many objectives to balance

-‘dual roles’ of stakeholders (workers as ‘employees’

and workers as the local community)

• It is incompatible with corporate governance:

- what is the nature of agency problem?

- concept of accountability (‘an organisation is

accountable to everyone, therefore, it is accountable to no one’)

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Stakeholder Theory and

Globalization

• MNCs and diverse stakeholder

constituencies:

- too many objectives to balance

- multiple (conflicting) priorities in different

locations

• Entry Decisions and CSR

- low production costs and “sweatshop” labour

- global supply chains and “national” ethics

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Learning Outcomes

• “Good Corporate Governance” goes way

beyond the “manager-shareholder” dichotomy

• Firms should take into account diverse

interests of different stakeholder constituencies

• Principles of CSR and business ethics are

increasingly integrated into formal governance

systems

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Reading

• Cannon, T. 1994. Corporate Responsibility.

Pitman Publishing.

• Gospel, H. and Pendleton, A. (Eds). 2005.

Corporate Governance and Labour

Management: An International Comparison,

Oxford: Oxford University Press.

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Questions?