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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 Corporate Reputations, Branding and People 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 Corporate Reputations, Branding and People 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 and corporate 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 Corporate Reputations, Branding and People 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 Corporate Reputations, Branding and People 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 Corporate Reputations, Branding and People 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

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