Prof. Igor Filatotchev Session 3

Transcription

1 Stakeholder Governance, Business Ethics and Corporate Social Responsibility Prof. Igor Filatotchev Session 3 1

2 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 2

3 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 3

4 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),

5 Corporate Stakeholders Shareholders Managers Employees Banks and other lenders State Customers Suppliers Local community... 5

6 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. 6

7 Stakeholders Objectives Managers must: 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. 7

8 Stakeholders Channels of Influence through monitoring of executives, i.e. using their voice inside the firm; through incentive systems for executives; through exit markets; on capital, labour and product through legal and regulatory environment; through bargaining power in stakeholders relevant markets 8

9 Stakeholders Salience The degree to which firms should give priority to the claims of different stakeholders depends on their 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. 9

10 Modern Agenda The Stakeholder-Agency Theory underpins two major developments in the corporate sector: Corporate Social Responsibility (CSR) principles Business Ethics 10

11 Corporate Social Responsibility There is no common understanding of the meaning of corporate social responsibility (CSR). Rather there appears to be at least two competing models: Business legitimacy to society Philanthropy and voluntary efforts to do good in environments and social spheres 11

12 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 12

13 Corporate-level Response Corporate Social Responsibility debates prompted a number of corporate responses: 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. 13

14 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 14

15 Case Example: Co-op Bank In 2002, the Co-operative Bank lost nearly 4.4 m worth of business from companies it turned down on the grounds of: Human rights Animal welfare Arms trading with oppressive regimes Sweatshop labour Environmental considerations. Overall, Co-op has declined to do business with 41 companies Source: Financial Times 15

16 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

17 Case Example: Co-op (continued) 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/

18 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. 18

19 Corporate Response 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: Employee safety and diversity Corporate citizenship Company s reputation, etc. These criteria are often incorporated in formal governance systems 19

20 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. 20

21 Stakeholder Theory: A Critique Sternberg, E. (1997) The Defects of Stakeholder Theory, Corporate Governance, 5(1): 3-9. 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 longterm owners value ) 21

22 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 ) 22

23 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 23

24 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 24

25 Reading Cannon, T Corporate Responsibility. Pitman Publishing. Gospel, H. and Pendleton, A. (Eds) Corporate Governance and Labour Management: An International Comparison, Oxford: Oxford University Press. 25

26 Questions? 26