there is a potential for serious market failure under monopoly
conditions.
Newer versions of agency theory complicate the argument a
little by positing a permanent hierarchy of control within the
organization rather than the market metaphor. According to
these new institutional economists, firms arise because of the
nature of market imperfections and the need to keep down
transaction costs among contractors. Nevertheless, attention
still remains focused on the relationships between shareholders
and managers, but this time shareholders are deemed to be fac-
ing a diffuse but significant risk of self-interested opportunism
by managers because the assets of the firm are too numerous
and too ill-defined to fully describe in contractual agreements
(Roberts, 2004).
Whether in its neo-classical or institutional variants, however,
agency theory relies on a mixture of converging economic incen-
tives – pay tied to shareholder value – and power-sharing through
bargaining and coalition-building to bring about cooperative
behaviour between the two principal parties in governance –
shareholders and managers. No other parties are really consid-
ered as having long-term and significant interests in the firm.
It is because of this last point that alternative theories of gov-
ernance have been proposed. Stewardship theory and its pro-
genitor, stakeholder theory, seek to explain how governance
works in practice and how it should work in the future. As we
have seen, agency theory proposes a self-interested model of
management and in-built conflict with shareholders; steward-
ship theory proposes no such conflict of interests because good
managers, by dint of both will and skill, are deemed to be nat-
urally inclined to act in the interests of shareholders since their
interests, and those of other stakeholders in the firm, are broadly
similar and contingent on the long-term wealth creation of the
organization. Essentially, this is a unitary (‘we are all in it together
with the same aims’) and benign view of organizations which
also posits a strong degree of managerial choice, based on their
motivations to act as stewards on behalf of everyone in the busi-
ness and its long-term survival. Although it recognizes that there
are situations when managers may not always exercise good or
well-meaning judgements, stewardship theories are not hung up
on the downside risk of managerial misbehaviour that dominates
314 CorporateReputations,BrandingandPeople Management
agency theory; instead they focus on the importance of building
trust relationships and social networks to coordinate actors in
and across organizations; this, they argue, is more characteristic
of institutional and funding arrangements more likely to be
found in Europe and Asia, e.g. networks of banks, privately
owned and family-owned firms, and the new forms of organiza-
tions we have discussed in the previous sections.
According to the stakeholder theory view, firms are not bun-
dles of assets that belong to shareholders, nor can they be in a
modern world when the key assets are largely intangible and
under the control of employees. Instead, governance structures
and the work of senior managers are aimed at maximizing the
total wealth of the organization for the benefits of those inside
it that contribute firm-specific assets, i.e. their knowledge and
skills, as well as those outside it.
This theory fits in well with the assumptions of reputation
management, which recognizes the importance of constituen-
cies including customers, suppliers, employees, business part-
ners, government, the press, investors and, increasingly, society
at large. Like stewardship theory, this approach is closer to the
models of governance found in continental Europe and Asia–
Pacific countries than the Anglo-Saxon external focus on share-
holder value model assumed by agency theory. It is also more
consistent with insider control and newer forms of organiza-
tions discussed under stewardship theories that are a feature of
continental Europe and Asia–Pacific.
Is there a possibility of convergence? The success of the USA
and its new economy during the 1990s, coupled with problems
in Asia and continental Europe during the same period, pro-
vided a great fillip for outsider, Anglo-Saxon market-based
shareholder value models of governance, and the assumptions
underpinning them. In countries such as Germany, Sweden
and France, there were enthusiastic calls by certain sections of
the business and financial community and supporting political
parties to embrace shareholder value principles and to rid them-
selves of stakeholder constraints. However, as we are all aware,
the problems of Enron and recent scandals in other firms have
brought about a re-think in models of governance among
American and British companies, resulting in the passing of
US legislation such as Sarbanes–Oxley in 2002 and attempts by
Chapter 9 Corporate strategy, corporate leadership, corporate identity 315
the OECD to set world standards on corporate disclosure and
governance. They have also posed similar questions and prob-
lems to enthusiasts for change in continental Europe, with the
most recent answer being a hung parliament in Germany in
2005 because the electorate could not make up its mind
between the two views.
One solution proposed by financial economists and lawyers
who remain wedded to the core principles and benefits of
agency theory is an enlightened shareholder value model, balancing
the interests of investors with those of other stakeholders to
ensure that the long-term interests of shareholders are achieved.
Such an Anglo-Saxon model is in line with global trends in the
internationalization of finance, equity markets and various finan-
cial instruments, which is forcing organizations from all parts of
the world that wish to borrow to conform to certain governance
conditions, e.g. the OECD’s principles of Organization and
Governance. This convergence, inevitably, is on the Anglo-Saxon
model, though critics argue there are limits to such convergence.
A one-size-fits-all model of governance is insensitive to the insti-
tutions, cultures, history and business systems, particularly of
Asian countries such as Japan and China (Kay, 1998).
However, as Clarke and others point out, the ‘sharpest skir-
mish’ has been over the idea of shareholder value in any form
following the scandals of Enron and other examples of corporate
malfeasance (Gordon, 2004). Though there are many Americans
and British lawyers, financiers and business people who still stick
to the dictums proposed by the neo-classical economist Milton
Friedman in the 1970s, and adhered to by certain sections of the
financial and economic media, critics are mounting a spirited
and influential campaign. Friedman’s moral as well as economic
argument was ‘that the social responsibility of business is to
increase profits’; it was only by doing so that the interests of all
were served in the long run.
Enron and other examples of the system breaking down –
Tyco, Global Crossing, Worldcom, Qwest and Arthur Andersen –
have caused economists and moralists to argue that even an
enlightened shareholder value model is inappropriate in a
modern world (Coffee, 2004; Kay, 2004). Critics believe the
ability of directors to monitor executive behaviour and the
temptations of making enormous gains by cashing in the huge
316 CorporateReputations,BrandingandPeople Management
stock options that form the basis of many executive pay packets
have created an unworkable system (Gordon, 2004; Bebchuk and
Fried, 2006). Enron was the classic example of how self-interested
and financially motivated managers could not only poorly serve
shareholders, but also its customers and employees in bringing
companies down. Agency theory has been proven right by Enron
in that such managers were all-powerful in governance and
shareholders needed protection through governance mecha-
nisms and the passing of legislation (such as Sarbanes–Oxley).
However, according to critics, one of agency theory’s most sacro-
sanct principles of tying pay to shareholder value was its undoing.
Perhaps as important, the pursuit of shareholder value has dis-
connected corporations from their moral purposes, according to
stakeholder theorists, which is to serve the wider interests repre-
sented within firms and changing values in society. Trustee theo-
rists, such as John Kay, also argue that the job of governance is to
‘sustain the corporation’s assets’, not merely its financial assets.
‘The difference comes not only because the stock market may
value these assets incorrectly. It also arises because the assets of
the corporation … include the skills of its employees, the expec-
tations of customers and suppliers, and the company’s reputation
in the community’ (Kay, 1997, p. 135). It is in that sense in which
the calls for a new, more socially responsible and sustainable the-
ory of governance have been framed, which lead us into a more
in-depth discussion of the CSR agenda, reputations and branding.
Chapter 9 Corporate strategy, corporate leadership, corporate identity 317
Corporate identity andcorporate
social responsibility
CSR has been touched on in most of the chapters of this book
since it is one of the most rapid growth areas of interest for
modern businesses and is the basis on which a corporate iden-
tity can be built. The case of GE is an excellent illustration but
it is only one of many organizations claiming to follow a CSR
agenda. But what exactly do we mean by CSR and why should
it be of interest, especially given the dominance of the share-
holder value model of governance among so many companies?
To answer these questions, we will outline the case for CSR and
then examine some of the criticisms of this contested concept
from the right, the left and from within, the last of these pos-
itions probably being the closest to our own viewpoint.
The case for CSR
The case that is usually made for CSR is a business case for pur-
suing socially and environmentally friendly policies, rooted in
a stakeholder theory of governance and Rawlsian theory of
social justice. Rawlsian ethics are associated with a ‘theory of
good’, which focuses on defining the characteristics of a just
society. Imagine a society in which there were no laws, social
conventions or political state. Then ask yourself the question:
what principles might reasonable people agree on to guaran-
tee order while placing few constraints on individual free-
doms? When applied to organizations, a theory of good states
that these principles and the outcomes that result from these
principles must be distributed with full consultation and so
that no organizational stakeholders are losers while others are
clear winners. Responsible leaders should place organizational
survival and the long-term interests of its stakeholders over any
single interest (Legge, 1995).
Drawing on these ideas, CSR advocates contend there is a
more or less fundamental tension between the pursuit of private
profit and public good, usually because a pursuit of profit at
the expense of society is unsustainable in the long run. The basic
argument underlying the business case for CSR is two-fold. First,
profit in its own right is not pursued by companies for the public
good but for private gain, which has little or nothing to do with
the public good. If the pursuit of profit is to advance social
welfare, it cannot be left to the hidden hand of the market
and powerful business leaders, a form of very rough justice.
Instead, it often requires active regulation from outside bodies:
in our case of the Financial Services Industry in the UK, this
would be through the FSA and government legislation. Second,
in the pursuit of private gain, companies are driven by their
internal business logic of maximizing revenues and min-
imizing costs to place enormous burdens on society and on the
318 CorporateReputations,BrandingandPeople Management
environment. Economists call this placing externalities on society,
defined as companies taking action that affects others’ welfare
without having the incentive to recognize this impact in their
decision-making, nor fully accounting for it in their evaluation of
the costs and benefits of particular decisions. The consequences
are that these externalities lead to inefficiencies for society if
businesses do not pay their fair share of costs (Roberts, 2004).
For example, there is a concern over the true costs of encourag-
ing people to fly on low cost airlines more than they need to
because of the contribution of frequent flying to global warm-
ing. Thus for many governments, NGOs (non-government organ-
izations) and critics of the Anglo-Saxon shareholder value
model, the untrammelled pursuit of profit yields little or noth-
ing for many ordinary citizens, but costs them plenty. Unless it
is checked either by CSR or by government regulation, private
enterprise is bound to make losers of everyone apart from private
business and its owners.
The business case for CSR
As we have seen from the case of GE, CSR has become big busi-
ness. Its agenda is supported by many governments, business
organizations and professional bodies such as the CIPD in the
UK. The British government has been prominent among them
in making the business case for CSR through its relevant website:
The UK government sees CSR as good for society and good
for business. Better understanding of the potential benefits
of CSR for the competitiveness of individual companies and
for national economies can help encourage the spread of CSR
practice. The Department for Trade and Industry (DTI) …
has therefore supported work exploring the ‘business case’
for CSR. (http://www.societyandbusiness.gov.uk/
businesscasecsr.shtm; accessed 28 February 2006)
The DTI has worked with ‘Forum for the Future’, a sustainable
development charitable organization, and ‘Account Ability’, an
international organization concerned to promote business
Chapter 9 Corporate strategy, corporate leadership, corporate identity 319
performance through social and ethical responsibility, on a
range of projects. Its conclusion from these projects is that:
sustainability makes a positive contribution to business
success … The key was to look at CSR as an investment in
a strategic asset or distinctive capability, rather than an
expense.The debate highlighted the importance of taking a
balanced approach to assessing performance – and the risks
of concentrating solely on one aspect, such as shareholder
value. (ibid.)
There are several international networks promoting CSR
and its more modern focus on sustainable development, includ-
ing the World Business Council for Sustainable Development
(http://www.wbcsd.ch/). Its membership is made up of 180 multi-
national enterprises including the European-based Shell, BP,
Nokia, Michelin, SKF, Novartis, ABB, Volkswagen and Daimler-
Chrysler, and major US-based Dow Chemicals, Ford, General
Motors, Procter & Gamble, Time Warner, GE and HP. The
Council invites ‘companies committed to sustainable develop-
ment and to promoting the role of Eco-Efficiency, Innovation
and Corporate Social Responsibility’. One of the Council’s publi-
cations acknowledges the legal requirement to promote ‘accept-
able returns for its shareholders and investors’ but argues that
‘business and business leaders have … made significant contribu-
tions to the societies of which they form part’ and that respon-
sible leadership is necessary for business and societal progress.
The CIPD in the UK have also been vigorous in pursuing the
CSR agenda and in promoting the need for HR specialists to
champion CSR. Their position is informed by a stakeholder
view of ethics in business, in which employees are one of the
principal stakeholders, and a view that employees’ beliefs and
actions are also the main vehicle for putting CSR into action.
Their policy document on this issue (CIPD, 2002) points out
the traditional role of HR (or personnel) was and is to act as
‘employee champion’, one of the roles identified by Ulrich as
core to the success of HR (see Chapter 10). So the profession
‘has the unique privilege and challenge of reconciling employer
and employee interests’ (2002, p. 14). The document made
the case for HR’s involvement in CSR in helping organizations
320 CorporateReputations,BrandingandPeople Management
deliver on the rhetoric of CSR through systems of good practice
in recruitment, development and communications, helping man-
age trust and risk, the management of psychological contracts
and enforcing ‘whistleblowing’ policies when they observe man-
agers breaching their CSR responsibilities. To do so, they argued,
HR specialists need to broaden their own understanding and
skills. Since publishing their policy document, the CIPD has com-
missioned a series of case studies that showed how a number of
leading UK firms defined and implemented their CSR agenda,
including diversity management at B&Q, environmental man-
agement at BAA, employee well-being at AstraZeneca and com-
munity involvement at British Gas (CIPD, 2005).
Measuring CSR
Inevitably, when making a business case for anything, this turns
on measurement. Numbers are language that business people
understand and need to use to convince the financial community
that pursuing goals other than shareholder value is likely to pay
off for all in the long run. Managers also need measurement for
performance management reasons and to keep them focused. As
a result, many of the companies mentioned in this section have
adopted the ‘triple bottom line’ (3BL) as a performance meas-
ure. The idea was first offered in John Elkington’s (1997) book,
in which he described a framework for measuring and reporting
corporate performance against economic, social and environ-
mental parameters. However, he also made a more far-reaching
claim:
At its broadest, the term is used to capture the whole set of
values, issues and processes that companies must address in
order to minimize any harm resulting from their activities
and to create economic, social and environmental value.
This involves being clear about the company’s purpose and
taking into consideration the needs of all the company’s
stakeholders.
In effect, 3BL is a planning and reporting mechanism, and
a decision-making framework used to achieve sustainable
Chapter 9 Corporate strategy, corporate leadership, corporate identity 321
development. It has been adopted by organizations as diverse
as local government in Australia, major corporations such as
Monsanto, the BBC and British Petroleum, and a range of small
firms (see for example the cases available online at the Business
and Sustainable Development Global Website available online
at http://www.bsdglobal.com/tools/principles_triple.asp). The
financial community is also paying attention in the form of a new
Dow Jones Sustainability Index tracking the economic, envir-
onmental and social performance of more than 300 global
companies, such as Siemens, Nokia and Home Depot, whose
business practices have received the green seal of approval
from a Swiss-based organization, Sustainable Asset Management
(http://www.sam-group.com/htmle/main.cfm). Not surpris-
ingly, consultants have been at the forefront of CSR. Price-
WaterhouseCoopers (2002) published a survey of 140 American
corporations, arguing that companies that ignore the triple bot-
tom line are ‘courting disaster’, concluding that it ‘will increas-
ingly be regarded as an important measure of value’.
Criticisms from the right
We have already discussed the credo of many businesses, ‘the
business of business is business’, which was given moral support
by neo-classical economists such as Friedman during the 1970s.
Currently, there is a battle being waged by economists, corporate
lawyers and business ethics writers who argue there are two
reasons for sticking with the shareholder value/agency theory
model. The first is the agency theory position that managers of
public companies are not owners but are employed by the firms’
owners to maximize the long-term value of the owners’ assets,
within a framework of law that sets out rights and wrongs, the
responsibilities and accountabilities of managers and corporate
leaders. Some business ethics advocates believe that putting those
assets to any other use, such as CSR, is effectively robbing the
owners of their just rewards, and that is unethical (Sternberg,
2000). The ethical decision for a manager who believes that the
business s/he is working for is causing harm to society at large is
either not to work for that business in the first place or to leave it.
322 CorporateReputations,BrandingandPeople Management
Elaine Sternberg, a UK academic and former corporate
executive, believes in two principles of business ethics that under-
lie a shareholder value model. These are ordinary decency and
distributive justice, without which the conduct of business would
not be possible. These principles are based on a theory of rights.
Paramount among these rights are those of property owners,
which must be respected; these, however, do not extend to ‘lying,
cheating, stealing, killing, coercion, physical violence and most
forms of illegality’. Instead, managers should pursue ‘honesty
and fairness’, reflecting the demands of ‘ordinary decency’. Her
second component of business ethics, distributive justice, refers
to the alignment of organizational rewards and managers’ con-
tributions towards achieving shareholder value. Two canons of
modern-day HR, performance-linked pay and merit-based pro-
motion, are manifestations of distributive justice within the com-
pany. So, for Sternberg and others, promoting people on the
basis of anything other than merit or to reward a manager for
anything other than pursuing shareholder value is bad for busi-
ness and bad ethics. No doubt she would applaud the findings of
a survey of the attitudes and values of young financial analysts
reported in August 2005, which concluded that despite all of the
bad press following Enron and other scandals:
many young analysts appeared unconvinced of the
materiality of most [CSR] issues to business; unable to
consider them because of inadequate information, training
or tools; and unwilling to depart from business as usual
because of conflicts with remuneration, career advancement
or culture. (Available online at http://www.wbcsd.ch/plugins/
DocSearch/details.asp?typeϭDocDet&ObjectIdϭMTYxNTc;
28 February 2006)
Criticisms from the left
As is often the case in social debate, the right and left of the
political spectrum often agree on the analysis, but come to
entirely different conclusions on the prescriptions. Such is the
case over CSR. The left criticism, which has been acknowledged
by some business leaders as a legitimate one, has been most
Chapter 9 Corporate strategy, corporate leadership, corporate identity 323
. first place or to leave it.
322 Corporate Reputations, Branding and People Management
Elaine Sternberg, a UK academic and former corporate
executive, believes. executive behaviour and the
temptations of making enormous gains by cashing in the huge
316 Corporate Reputations, Branding and People Management
stock options