Finance and economy for society integrating sustainability

Edited by Ce´line Loucheand Tessa Hebb Volume 8: Corporate Social Responsibility and Sustainability: Emerging Trends in Developing Economies Edited by Gabriel EwejeVolume 9: The Human Fa

FINANCE AND ECONOMY FOR SOCIETY: INTEGRATING

SUSTAINABILITY

RESPONSIBILITY, GOVERNANCE AND SUSTAINABILITY

Series Editor: William Sun

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CRITICAL STUDIES ON CORPORATE RESPONSIBILITY,

FINANCE AND ECONOMY

FOR SOCIETY:

INTEGRATING SUSTAINABILITY

EDITED BY SHARAM ALIJANI NEOMA Business School, Reims, France

CATHERINE KARYOTIS

NEOMA Business School, Reims, France

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PART I INTRODUCTION

SOCIETY AT THE CROSSROADS: THE PATH TO A

SUSTAINABLE ECONOMY

PART II UNPACKING THE FINANCIAL CRISIS: CHALLENGES AND

PERSPECTIVES

CORPORATE GOVERNANCE AND INEQUALITY: THE IMPACT OF FINANCIALIZATION AND

SHAREHOLDER VALUE

THE GLOBAL FINANCIAL CRISIS AND

NEO-LIBERAL FINANCIALIZATION

v

THE CONTRADICTION BETWEEN THE TIME VALUE

OF MONEY AND SUSTAINABILITY

FINANCE AND MATHEMATICS: MERGER OR

ACQUISITION

PART III SUSTAINABLE FINANCE: ETHICAL AND

INNOVATION DILEMMAS

ETHICAL ISSUES IN FINANCE

SOCIALLY RESPONSIBLE INVESTMENT AS A

PROCESS FOR ASSESSING CSR STRATEGIES:

THEORETICAL IMPLICATIONS FOR CSR

THE INNOVATION DILEMMA IN THE FINANCIAL

INDUSTRY: FRENCH DOMESTIC CREDIT

INSTITUTIONS

TEN CHALLENGES TO HAVE A SUSTAINABLE

FINANCIAL SYSTEM

FINANCE AS A COMMON: FROM ENVIRONMENTAL

MANAGEMENT TO MICROFINANCE AND BACK

PART IV MOVING TOWARD SUSTAINABLE SOCIAL AND

ECONOMIC MODELS

THE “TRIPLE DEPRECIATION LINE” ACCOUNTING

MODEL AND ITS APPLICATION TO THE

HUMAN CAPITAL

EXPLORING NEW WAYS TO ASSESS THE IMPACT OF MICROFINANCE: WHAT ROLE FOR THE

CAPABILITY APPROACH?

TOWARD A SOCIALLY RATIONAL MANAGEMENT:

INSIGHTS FROM JAPANESE AND ISLAMIC

BUSINESS ETHICS

BUILDING CAPABILITIES THROUGH SOCIAL

INNOVATION: IMPLICATIONS FOR THE ECONOMY

AND SOCIETY

Sharam Alijani, Alvaro Luna, Javier Castro-Spila and

Alfonso Unceta

293

SOCIAL INNOVATION BUSINESS MODELS: COPING

WITH ANTAGONISTIC OBJECTIVES AND ASSETS

Tamami Komatsu, Alessandro Deserti, Francesca Rizzo,

Manuela Celi and Sharam Alijani

315

COPING WITH SOCIAL INNOVATION DILEMMAS:

AN EXPLORATORY STUDY OF MIDDLE

RANGE THEORY

viiContents

LIST OF TABLES

Chapter 4

Table 1 Discounted Cash Flow Analysis with Positive Cash

Flows Early and Negative Cash Flows Late 82Table 2 Discounted Cash Flow Analysis with Negative Cash

Flows Early and Positive Cash Flows Late 83Chapter 7

Table 1 CSR and SRI Motivations and Targets 142Table 2 Breakdown of WBCSD Best Case Studies by Issue 149Table 3 Breakdown of WBCSD Best Case Studies

by Motivation 149Table 4 Breakdown of WBCSD Best Case Studies by

Stakeholder 150Chapter 8

Table 1 Trends in Retail Banking Branches 2009
2013 170Chapter 9

Table 1 Components and Financial Functions (Melicher &

Norton, 2011) 183Chapter 12

Table 1 A Snapshot of the Main Impact Assessment Studies in

Microfinance Literature 257Table 2 Characteristics of a Capabilities-Based

Conceptual Framework 265Chapter 14

Table 1 An Aggregative Model of Capability and

Social Innovation 302Table 2 Methodological Approaches to Impact Measurement 307

ix

Chapter 15

Table 1 Selected Social Innovation Cases: United Kingdom 343Table 2 Social Innovation Business Model Typologies 344Chapter 16

Table 1 An Aggregative Model of Dilemma Approach 357

LIST OF FIGURES

Chapter 2

Figure 1 Share of Global Wealth of the Top 1 per cent and

Bottom 99 per cent, Respectively 29Figure 2 Share of Global Wealth of the Top 1 per cent and

Bottom 99 per cent, Respectively: The Trend 2014
2020 30Figure 3 Financial Assets in Multiples of GDP 35Figure 4 Top 10 Decile Income Share in the United

States, 1917
2007 38Figure 5 Share of All Financial Assets by Net Worth Group in the

United States 43Figure 6 US Distribution of Investment Assets, 2010 44Figure 7 Top Five US CEOs Annual Remuneration versus Top

Five US Fund Managers CEOs, 2013 46Figure 8 Ratio of CEO-to-Worker Compensation in the United

States, 1965
2014 49Figure 9 Change in CEO Pay and Average Worker Pay in the

United Kingdom, 1980
2013 (UK £) 50Chapter 4

Figure 1 Economic Trajectory and Sustainability 79Chapter 5

Figure 1 Joint Development of Finance and Mathematics from

Mutual Relation to Embedding (ca 1000 AD
Present) 96Chapter 7

Figure 1 Objects and Methods of Analysis Used by the Main CSR

Rating Agencies in 2003 143Figure 2 CSR Rating Agency Tradeoff between Scope of

Compilation and Complexity of Analysis 143

xi

Figure 3 Typology of ESG Controversies in the Banking Sector

between 2010 and 2014 (For Vigeo and Sustainalytics

Respectively) 153

Figure 4 Conceptual Framework of CSR as a Set of Two Agency Relations 156

Figure 5 Agency Relation Government
Company’s Management 157

Chapter 9 Figure 1 Direct and Indirect Finance (Mishkin, 2009) 183

Figure 2 Vicious Circle (Reinhart & Rogoff, 2008) 185

Figure 3 Securitization Process 189

Figure 4 Financial Packaging (Lucas, 2008) 190

Figure 5 Financial Packaging (Poszar et al., 2013) 192

Chapter 12 Figure 1 The Goals of Impact Assessment (Hulme, 2000, p 80) 256

Figure 2 The Conventional Model of the Impact Chain (Hulme, 2000, p 81) 262

Figure 3 Outline of the Core Relationships in the Capability Approach 264

Chapter 13 Figure 1 Social Rationality 277

Chapter 14 Figure 1 Social Innovation Empowerment Cycle 298

Figure 2 Multidirectional Effects of Knowledge Exploration and Absorptive Capacity 301

Figure 3 The Capability and Open Social Innovation Cycle 303

Chapter 15 Figure 1 The Social Business Model Framework (Michelini, 2012) 334 Figure 2 Adapted Social Innovation Business Model Canvas 335

Figure 3 Beneficiary as Actor Social Innovation Business Model 338

Figure 4 Beneficiary as Customer Social Innovation Business Model 339

Figure 5 Beneficiary as User Social Innovation Business Model 340

Figure 6 Community-Asset-Based Social Innovation Business Model 342

Chapter 16

Figure 1 Micro-Macro Linkage 353Figure 2 Actor-Situation Model 354Figure 3 Analytical Model of Actor-Centered Institutionalism 354

xiiiList of Figures

LIST OF BOXES

Chapter 8

Box 1 The Innovation Haka in the Banking Sector:

Dematerialization and Digitalization 168

Box 2 Main Organizations Supporting Banking Innovations (Working Groups, Conferences, Awards, Networking) 171 Box 3 Health and Justice
The Two Main Types of Local Banking Clients (Regulated Professions) in France 175

Chapter 15 Box 1 Progetto QUID 322

Box 2 Libera Terra 324

Box 3 Progetto QUID 325

Box 4 Semi di Liberta` and Progetto QUID 326

Box 5 Catering Solidario 328

Box 6 Piano C 330

xv

LIST OF CONTRIBUTORS

Crawley, Australia Ge´rard Be´duneau International Banking and Finance

Institute, Paris, France Julienne Brabet Paris Est Universite´, IAE Gustave Eiffel,

Paris, France Javier Castro-Spila Sinnegiak Social Innovation, San

Sebastia´n, Spain

Sydney, Australia Pascale de Rozario Conservatoire National des Arts et Me´tiers,

Paris, France Alessandro Deserti Politecnico di Milano, Milano, Italy

Fez, Morocco

Microfinance, Brussels, Belgium Soheyla Gholamshahi University of Technology Sydney,

Sydney, Australia

Paris, France

Catherine Karyotis Neoma Business School, Reims, France

xvii

Lagoarde-Segot Kedge Business School, Marseille, France

Sebastia´n, Spain

New York, NY, USA

NY, USA

Westphalian University, Gelsenkirchen, Germany Jacques Richard University Paris Dauphine, Paris, France

Gre´gory

Schneider-Maunoury

Humanis, Paris, France

Jean-Michel Servet The Graduate Institute, Geneva,

Switzerland

Westphalian University, Gelsenkirchen, Germany

Sebastia´n, Spain

EDITORIAL ADVISORY AND

REVIEW BOARD

Fabienne Alvarez

Professor of Management,

Department of Economics and

Business, University of Antilles and

Guyane Pointe-a`-Pitre, France

Ralph Bathurst

Senior Lecturer, School of

Management (Albany), Massey

University, New Zealand

Lawrence Bellamy

Professor & Associate Dean,

Chester Business School, Chester

McCann Fitzgerald Chair of

Corporate Law, Trinity College

Dublin, The University of

Dublin, Ireland

Thomas Clarke

Professor of Management &

Director of the Center for

Corporate Governance, University

of Technology, Sydney, Australia

Barry A ColbertReader & Director of CMA Centerfor Business & Sustainability,School of Business & Economics,Wilfrid Laurier University, CanadaAlexandre Di Miceli da SilveiraProfessor, School of Economics,Business and Accounting, University

of Sao Paulo (FEA-USP), BrazilGabriel Eweje

Associate Professor & Director ofSustainability & CSR ResearchGroup, Department of Management &International Business, MasseyUniversity, New ZealandHershey H FriedmanProfessor, Department ofEconomics, Brooklyn College of theCity University of New York, USALyn Glanz

Dean of Graduate Studies, GlionInstitution of Higher Education andLes Roches-Gruye`re University ofApplied Sciences, Switzerland

xix

Adrian Henriques

Visiting Professor, Department of

Business and Management,

Middlesex University, UK

Øyvind Ihlen

Professor, Department of Media

and Communication, University of

Oslo, Norway

Lin Jiang

Professor of Management, Business

School, Renmin University of

China, China

Eamonn Judge

Professor & Research Director,

Polish Open University, Poland

Elizabeth C Kurucz

Assistant Professor, College of

Management and Economics,

University of Guelph, Canada

Richard W Leblanc

Associate Professor, School of

Administrative Studies, York

University, Canada

Ce´line Louche

Associate Professor, Audencia

Nantes School of Management,

France

Christoph Luetge

Peter Loescher Professor and Chair

of Business Ethics, Technical

University of Munich, Germany

Guler Manisali-DarmanPrincipal of the CorporateGovernance and SustainabilityCenter, Turkey

Malcolm McIntoshProfessor & Director of Asia PacificCenter for Sustainable Enterprise,Griffith Business School, GriffithUniversity, Australia

James McRitchiePublisher of CorpGov.net andConsultant, USA

Abagail McWilliamsProfessor, College of BusinessAdministration, University ofIllinois at Chicago, USARoland Perez

Professor Emeritus, Economicsand Management, UniversityMontpellier I, FranceYvon PesqueuxChair of the Development ofOrganization Science, CNAM(Conservatoire National des Arts

et Metiers), France; President-elect

of International Federation ofScholarly Associations ofManagement (IFSAM)David Pollard

Reader in Technology Transfer andEnterprise, Faculty of Business andLaw, Leeds Metropolitan

University, UK

Professor of Applied and

Professional Ethics, Director of the

Centre for Governance, Leadership

and Global Responsibility, Leeds

Metropolitan University, UK

David Russell

Head of Department of Accounting &

Finance, Leicester Business School,

De Montfort University, UK

Ian Sanderson

Professor Emeritus in Public

Governance, Faculty of Business and

Law, Leeds Metropolitan

University, UK

Greg Shailer

Director, Australian National

Centre for Audit & Assurance

Research (ANCAAR), The

Australian National

University, Australia

John Shields

Professor & Associate Dean,

Faculty of Economics and Business,

the University of Sydney, Australia

Jim StewartProfessor of HRD & Leadership,Coventry Business School, CoventryUniversity, UK

Peter StokesProfessor of SustainableManagement, Marketing andTourism, Deputy Dean, Faculty ofBusiness, Enterprise & LifelongLearning, University of Chester, UKRalph Tench

Professor of Communication,Faculty of Business and Law, LeedsMetropolitan University, UKChristoph Van der ElstProfessor of Law, Law School,Tilburg University, The NetherlandsWayne Visser

Transnet Chair of SustainableBusiness at Gordon Institute ofBusiness Science (GIBS), SouthAfrica; Senior Associate, University

of Cambridge Programme forSustainability Leadership, UKSuzanne Young

Associate Professor, La TrobeBusiness School, Faculty ofBusiness, Economics and Law, LaTrobe University, Australia

xxiEditorial Advisory and Review Board

The publication of this volume would have not possible without a collectiveeffort of researchers who have participated in a series of seminars, collo-quia, and conferences on the themes covered in this book

Two important research groups have been instrumental in stirring larly research and bringing to life this collection Most contributions ema-nate from a series of research sessions held in the Special Interest Group

scho-“Business for Society” at EURAM (European Academy of Management)from 2014 to 2016 The second largest group of contributors has beeninvolved in the SIMPACT project, the acronym for “Boosting the Impact

of SI in Europe through Economic Underpinnings,” a three-year researchproject by a consortium of twelve European research institutions and uni-versities funded under the European Commission’s 7th FrameworkProgramme A third group of contributors conduct scholarly research aspractitioners in the European banking and financial institutions We wish

to express our thanks to all for their scholarly work and intellectual mitment Their names appear on the preceding page in this volume

com-In addition to the above group of researchers, our special thanks go to ourcolleagues at NEOMA Business School, Mr Mark Holdsworth forhis engagement and hard work throughout our internal copyediting process,

Dr Frederic Nlemvo, Chair, Department of Strategy and Entrepreneurshipand Dr Maryline Thenot, Chair, Department of Finance for their suggestionsand academic support Similarly, we wish to thank our colleagues at theInternational Research Center on Sustainability and HABITER ResearchCenter at Reims Champagne-Ardenne University, Dr Franc¸ois Mancebo,

Dr Ste´phane Rosie`re, and Dr Franc¸ois Bost for their interest and support.Our warmest gratitude is addressed to Dr William Sun, “Critical Studies

on Corporate Social Responsibility, Governance and Sustainability” SeriesEditor, whose suggestions and support were particularly appreciated through-out the editing process

The volume chapters provided by EURAM research group were blind reviewed, while all other chapters were simultaneously single-blindand editor reviewed

double-xxiii

PART I

INTRODUCTION

SOCIETY AT THE CROSSROADS: THE PATH TO A SUSTAINABLE

ECONOMY

Sharam Alijani and Catherine Karyotis

By acting in accordance with our moral dictates of moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind, and may therefore be said, in some sense to cooperate with the Deity and to advance, as far as in our power, the plan of our providence.

Adam Smith, Theory of Moral Sentiments

The Golden Age of capitalism was the age of prosperity where economicopportunities could be seized by savvy entrepreneurs in order to generateand distribute wealth In a world dominated by astute businessmen, theaccumulation of wealth constituted the cornerstone of entrepreneurship.The “entrepreneurial capitalism” acclaimed sagacious entrepreneurs,trusted their perspicuity, and extolled their acumen In an entrepreneurialeconomy, entrepreneurs were as much craftsmen and administrators asmanagers and social innovators who brought their intuitions into life andhedged their bets on smart and worldly innovations It was argued thatentrepreneurial economy offered the best of both worlds: an economicorder resulting from the workings of the markets and a social system thatengages individuals to do well without failing to do good

Finance and Economy for Society: Integrating Sustainability

Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 11, 3
23 Copyright r 2017 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 2043-9059/doi: 10.1108/S2043-905920160000011021

3

In a classical economy a sustainable economy could materialize underthe assumptions of a self-regulating market characterized by price, interest,and wage rate flexibility In an increasingly embedded economy character-ized by complex human, social and economic interrelations, the self-regulation economy is confronted with institutions that shape and governmarket organization and its underlying social structures In a famousquotation, North (1977) had noted that the “literature on economicscontains so little discussion of the central institution that underlies theneoclassical economics, the market.” In a market-instituted context, thesocioeconomic system is supported and sustained through complex socialrelationships that are subjected to a pattern of wealth and income distribu-tion and a system of ownership protection and operating rules to reduceagency, information, and transactions costs The workings of such politi-cal-social-economic system were brilliantly scrutinized and criticized byPolanyi (1957) when discussing the social structure and logic of marketeconomies The neoclassical economics offers little or no explanation of thedifferentiation of subjects and collective relationships (i.e., power, hierar-chy, ethnic and social drivers), nor does it pay attention to subject-objectcodifications (i.e., symbols, emotions, senses, and representations) all ofwhich have a direct bearing on the organization and workings of theeconomic system and the market.

In contrast to the Schumpeterian economics (Schumpeter, 1934, 1950)which extolls entrepreneurs and views capitalism as an evolutionary pro-cess of innovation, the neoclassical economics contends to be value-neutral and self-regulating irrespective of the forces that dominate themarket It is important to note that different forms of capitalism, entre-preneurial, state-directed, big firm and oligarchic, are characterized bydistinct modus operandi and modes of governance when deciding aboutresource allocation, production, investment, and employment decisions.Good capitalism is supposed to foster entrepreneurial initiatives, whereasbad capitalism would lead to rent seeking and oligopolistic practices.Rent seekers and oligopolists use their power to advance their ownagenda and maximize their returns at the expense of the community(Buchanan & Tullock, 1967) Dominated by big industrial and financialcorporations, oligopolistic capitalism engages in lucrative activities and issupported by managerial and financial practices that adversely affect theeconomy and society (Baumol, Litan, & Schramm, 2009) Entrepreneurialcapitalism calls for a distinct set of leadership capabilities and qualitiesthat foster business creativity and sagacity and reward ethical values andsocial engagement (Alijani, 2013)

The social, economic, and environmental challenges over the past twodecades have placed the society at the crossroads Financial upheavals andsocial unrests caused political turmoil calling for new modes of governance,institutions, and collective actions One should not forget that the 2008subprime financial crisis was soon to be followed by other downturns andturbulences; the Irish economic crisis in 2009, the debt and banking crises

in Portugal, Italy, Greece, Spain as of 2010 followed by EU currency andinstitutional crisis; culminating in the Brexit crisis in 2016 With this inmind, the question of sustainability should be viewed as an interconnectedand multilevel relationship that requires a closer examination of social,political, and economic action and structure Embeddedness cannot becomprehended without a careful investigation of social relations and theway by which social relations affect institutions, individual behavior, andcollective actions While neoclassical economic theory is constructed onminimal, if not absence, of social relations premise, the observation of eco-nomic action and choices indicates an opposite trend As observed byGranovetter (1985), economists “abstract away from the history of relations,what might be called the historical and structural embeddedness of relations”(p 486) Ignoring such fundamental dimension of our modern industrialand network-driven society is likely to lead to fallacies and misjudgmentsabout the economic life which is overwhelmingly riddled with the question

of self-interest, trust, and transparency Social quandaries and dilemmasare difficult to disentangle in complex actor-networks that operate underaxiomatic and revisable market theories (Latour, 2005)

We begin by studying the consequences of hyper-financialization onpublic goods, public value, and the commons We will proceed further byexamining the dilemmas of management theory and practice and the needfor an expanded notion of corporate social responsibility We will end bypresenting the themes of the volume followed by our concluding remarks

UNPACKING THE FINANCIAL CRISIS: COPING WITH

THE COMMONSThe 2008 subprime crisis and economic meltdown constituted a breakingpoint in the financial constellation of the world economy Prior to the 2008financial crisis, countries around the world had witnessed serious economicdownturns The Mexican Peso debacle in 1994; the East Asian financial crisis

in 1998 and the 1998
2002 economic downswings in Argentina were among

5Society at the Crossroads: The Path to a Sustainable Economy

very many currency and banking crises that shook Latin America and East Asia (Edwards & Naim, 1997;McLeod & Garnaut, 1998) The origin ofthese crises can be associated with different market and institutional factorsincluding trade liberalization policies, speculative short-term currency, andcapital movements along with expansionary macroeconomic policies thatfueled hyperinflation and led to massive currency devaluation Similarly, thefinancial turmoil of the past decade can be traced back to market and policyfailures, corporate scandals, and financialization of the global economy.Hyperfinancialization is associated with the broadening of financial mechan-isms and the deepening of financial transactions in the world markets domi-nated by large banks and corporations (Epstein, 2005; Franke, 1998) ForKrippner (2005) financialization represents “a pattern of accumulation inwhich profits accrue primarily through financial channels rather than resultingfrom trade and production.”Dore (2008)goes further and describes financiali-zation as “a convenient word for a bundle of more and less discrete structuralchanges in the economies of the industrialized world.” The financializationdynamics has been further accelerated by the commodification processwhereby the transformation of goods and services into tradable commoditieshas led to the expansion of sale and distribution channels and the creation ofthe multiple financial and investment networks The marketization of eco-nomic life has engulfed all social relationships and subordinated social ties tothe profit-driven and mercantilist dogma According to Altavater andMahnkopf (1997), market economization “drives not only towards not yetaffected geographical areas, but also inwardly into the refuges of social life.”The drift from a “market economy” to a “market society” has affectedthe organization of the society in its totality, creating a way of life inwhich financial mechanisms dominate every aspect of life including humaneties and values (Griffith-Jones, Ocampo, & Stiglitz, 2010) The intrusion

South-of market forces into the social structure and the inexorable expansion South-offinancial capital was described byPolanyi (1957)as an “unrelenting abnega-tion of the social status of human beings.” Prior to Polanyi, Veblen (1904)had been vocal in criticizing market manipulations by financial titanswhose insatiable greed led to economic upheaval and social turmoil.Veblen seemed comforted by the idea that engineers and machines wouldultimately replace unscrupulous speculators and bring to a halt the inroadsmade by ruthless financiers and financial mercantilists

Commodification and hyperfinancialization raise the question of privateand public goods as well as private and public interests and motivations.According to Ostrom and Ostrom (1977) public goods cannot be safe-guarded in the absence of institutions, norms, and regulations Ostrom

(1990) refers to institutions as the “sets of working rules that are used todetermine who is eligible to make decisions in some arena, what actions areallowed or constrained, what aggregation rules will be used, what proceduresmust be followed, what information must or must not be provided, and whatpayoffs will be assigned to individuals dependent on their actions” (1990,

p 51) In a similar vein, North (1981) defines institutions as “rules, ance procedures and moral and ethical behavioral norms designed to constrainthe behavior of individuals in the interest of maximizing the wealth or utility

compli-of principals” (1981, pp 201
202) By underscoring the opportunisticbehavior of individuals Ostrom reminds us of the need for designing appro-priate negotiation mechanism that emanate from collective actions Theproblem with collective action can arise at three levels: “… the problem ofsupplying a new set of institutions, the problem of making credible commit-ments and the problem of mutual monitoring” (Ostrom, 1990, p 42) Thosewho circumvent the rules put an end to the collective benefits of the com-mons The idea of group benefit and self-interest rationality was challenged

byOlson (1965)who argued that not common interest but coercive actionswould bring individuals to comply with the rule and be prepared to engage

in collective action Economic and social order cannot be achieved in theabsence of institutional mechanisms and compliance procedures, rules towhich economic agents and social actors adhere, and moral and ethicalbehavior that refrain individuals from engaging in nonmutually beneficialpractices As observed by North, institutions “establish the cooperative andcompetitive relationships which constitute a society and more specifically aneconomic order” (1981, p 201)

Similarly, social order requires institutional arrangements and tion to safeguard common goods and ensure accrued social and economicbenefits to the community Rawls’ (1971) definition of primary goods(i.e., civil and political rights, health and intelligence) points to conditionsthat are necessary for social realizations Sen’s idea of social justice high-lights the importance of social capabilities as a requisite for individualempowerment and social achievement (Sen, 2009, pp 231
234).Sen (1999)endorses the idea of justice and considers that individual capability isdirectly linked to a person’s freedom and ability to engage in activities thatenhance her ability Sen acknowledges that social realizations “… areassessed in terms of capabilities that people actually have, rather than interms of their utilities or happiness” (Sen, 2009, p 19)

coordina-In the international arena, hyperfinancialization has been at the origin

of massive capital movements around the world Financial speculation hasaccumulated profits at the top of the social pyramid and led to erratic

7Society at the Crossroads: The Path to a Sustainable Economy

fluctuations in investment and employment, causing a decline in the realwages in the labor intensive goods Trapped by interest and wage rate fluc-tuations, financial investors have resorted to a wide array of hedgingmechanisms Contrary to the tenets of international trade theory, globaliza-tion of trade has not been beneficial to all (Bhagwati, 2000) With growinginequality in both rich and poor countries, financial investors have sought

to abate uncertainty by reverting to countercyclical measures

The complexity of financial markets and products has been the maindriver of the financial chaos and increasing systemic risk.Rochet and Tirole(1996)refer to the problem of systemic risk as a “serious concern in manufac-turing, where trade credit links producers through a chain of obligations, and inthe insurance industry through the institution of reinsurance.” The 2008 crisisdemonstrated how a systemic risk can originate and be magnified throughsuccessive ripple effects The example is provided by investment dynamics inthe mortgage market: from zero investment in 1993, the world financialmarkets reached a total of $600 billion in subprime mortgage originations in

2005, exposing financial intermediaries to the risk of impecunious first timehome buyers in the United States (Gramlich, 2007) The crisis was com-pounded as illiquid assets were transformed into liquid assets without mutua-lizing the risk in the absence of perfect information Since partialinformation and not perfect knowledge and symmetrical information is thebasis of agents’ decision-making, uncertainty can enhance agents’ risk aver-sion.Knight (1921)had acknowledged this point by asserting that “if we are

to understand the workings of the economic system, we must examine themeaning and significance of uncertainty; and to this end some inquiry into thenature and function of knowledge itself is necessary.” Partial knowledge affectsthe process of decision-making and practice of management If we are tounderstand the nature and dynamics of our economic system, we must inves-tigate the theories that explicate its evolutionary process This, in turn,requires an understanding of the interrelations of economic, social, andhuman factors that underpin its epistemology and shape the practice ofmanaging and operating within market-instituted contexts

MANAGEMENT THEORY AND PRACTICE: COPING WITH EPISTEMOLEGICAL QUANDARIES

According to the Aristotelian epistemology, knowledge (gnosis) is ated as a result of human activities and is manifested at three distinct and

gener-yet interconnected levels: thinking (theoria), doing (praxis), and making(poı¨e´sis) In addition, the Aristotelian knowledge trilogy categorized praxis

in terms of good “eupraxia,” and bad “dyspraxia” usage and manner.Ancient philosophers argued that good and bad practices have a directbearing on the organization of activities (polis) and the life and destiny ofcitizens (politeia) In ancient Greece, knowledge of “making” and knowl-edge “doing” was believed to be an integral part of the rules of publicconstitution and an essential practice the good governance

Individual and collective knowledge have an important bearing on thetheories and practice of decision-making and collective action In a posthu-mous article, Ghoshal (2005) underscores the problems encountered inmanagement research, teaching and practice Ghoshal’s diatribe against fal-lacious management theories points to postpositivist age ideologies, most

of which have permeated the management and economic corpus In ing mainstream economic theories, Ghoshal challenges the claim thattheories are intrinsically “value-neutral” but increasingly permeated byideological discourses that extol economic performance and praise theshareholder value Ideologies are value-impregnated beliefs that containbiases and propagate dogmas and as such, seek to magnify certain dis-courses and conceal certain facts about performance, efficiency, expediency,transparency, fitness, and ethics Corporate scandals that led to the demise

review-of Enron, Tyco, and Arthur Andersen have resulted from an analogousideological pattern Corporate executives are all too often busy with theeconomic imperatives and consequently pay little attention to adversesocial effects that their decisions are likely to engender

Ghoshal pinpoints the ambivalence of certain theories: “theories arevalid because of their explanatory and predictive power, irrespective of howabsurd the assumptions may look from the perspective of common sense”(Ghoshal, 2005, p 76) Consider the “Efficient Market Theorem” postulate(Jensen, 1978) which posits that the existence of information of an asset’scurrent price provides the best estimate of its future price One should bereminded that in the absence of symmetrical information, the strong, semi-strong, and weak hypotheses formulated by Fama’s statistical tests canonly hold under specific subsets of available information (Fama, 1970,

pp 413
416) In other words, theories cannot establish the accuracy of thepredictions they are supposed to verify in the first place Another examplecan be provided by different economics and management theories that aretaught in business schools A performative conception of science (Callon,

1998, 2006;Callon & Muniesa, 2005) posits that scientific devices used tostudy the world transform the world in a way that can validate these

9Society at the Crossroads: The Path to a Sustainable Economy

devices and the theories that underpin them For instance, numerous cial algorithms that are developed to optimize investment portfolios underdifferent market information assumptions are considered as performativedevices Similarly, the use of Black and Scholes equation for forecastingoptions prices and hedging against call and put price fluctuations constitu-tes a performative mechanism that is supposed to eliminate financial risksaltogether In the day-to-day practice of financial intermediaries and busi-ness practitioners, the Black and Scholes formula has a concrete interpreta-tion in accordance with a stochastic random process that evolves over time(Hull, 2008) In contrast to a fair game assumption, most investment strate-gies exhibit a pattern of behavior based on the presumption that futurereturns can be predicted by knowledge of past events.

finan-The reflection on performativity cannot be dissociated from the study

of management as an actionable discipline The use of optimization niques has been widely commented in both academic and professionalcircles Faulhaber and Baumol (1988) affirm that most of the ideasdebated in academia and beyond have “emerged from analyses based onthe premise of optimizing behavior in what was intended as descriptive the-ory” (Faulhaber & Baumol, 1988, p 578) In some cases, economists wereinstrumental in providing the invention formula, while in some othercircumstances their role was limited to either providing an optimalityformula or as disseminators of ideas put forward by others Friedman’s(1962) assertion that economic theory is “an engine to analyze” is aproclamation of the fact that not the theory and its assumptions per sebut the testing of its implications matters the most The predictive power

tech-of a theory, its expediency and practicability cannot be dissociated fromits constitutive assumptions and ontological foundations The centralepistemological query in management teaching and research, that of

“common sense” and “truth,” is often viewed as transient and extraneous

to the practice of management The question of pedagogy and impact ofmanagement research on management education and practice has beenwidely debated in academia (Ghoshal, 2005;Ghoshal, Batlett, & Moran,

1999; Pfeffer & Fong, 2002; Porter & McKibbin, 1988) In particular,

“truth” and “action” dichotomy calls for an extension of managementepistemology rejecting fallacies and dogmas and integrating ethics ofaction as its central research foci The question of managerial decisionand performance needs to be placed within the broad canvas of collectiveactions with an emphasis on experiments that explore and engenderalternative forms of management Hatchuel (2005) explores differentmodes of collective action in management “not as a closed repertoire of

organizational forms and rationalities but as an expandable field where cisms and research allow for revision and invention” (Hatchuel, 2005,

criti-p 37) Different forms of innovation, organizational, social, and logical, are contingent upon agents’ experiments, choices, narrations, andactions in pursuit of superior social and economic goals It is equallyimportant to distinguish the difference between what Clegg and Ross-Smith (2003) describe as science of subjects as opposed to science ofobjects: “corporate managers need to be aware of the need for a contextfree science of objects and a context for stable object relations, artfullycontrived so that the object has no effect other than that sought experimen-tally” (Clegg & Ross-Smith, 2003, p 87) Ghoshal reminds his readers ofthe much noted Hayek’s Nobel lecture on the pretense of knowledge

techno-as “it involves a mechanical and uncritical application of habits of thought

to fields different from those in which they have been formed” (VonHayek, 1974)

Designed and tailored by business schools in search of academic macy, name recognition, and power, most business curricula are centered

legiti-on analytical methods and optimizatilegiti-on clegiti-oncepts and tools There is littleinformation about the relevance of knowledge dispensed by professorsand instructors as programs tend to confound research methodologiesand disregard different axiomatic operators such as emotions, symbols,senses, ties, order, power and hierarchy (Hatchuel, 2005) A substantivetheory of management can therefore shed light on the competing concep-tions and interpretations of theoretical constructs in economics, manage-ment and social sciences studies The agency, transaction cost, andrational choice theories embody a certain organizational and hierarchicalorder and rationale to control and perform The combinatory effects ofcontrol and performance lead to a certain form of power relationship that

is characterized, as noted by Ghoshal (2005), by a “ruthlessly hard-driving,strictly top-down, command-and-control focused, shareholder-value-obsessed, win-at-any-cost”attitude (Ghoshal, 2005, p 85) By reproducingand reinforcing a distinct form of power relationship, business schoolscontribute to creating a habitus, a culture manifested by shared beliefsand common practices (Bourdieu, 1977) A business school habitus is bestexemplified by intellectual, social, and cultural activities that reinforcevalues and dispositions of dominant social groups Mintzberg andGosling (2002)argue that the MBA programs teach little in terms of prac-tice of management other than providing some analytical decision-makingtools This results in graduating “individual specialist, not collaborative

11Society at the Crossroads: The Path to a Sustainable Economy

manager, many of whom go into consulting and investment banking”(Mintzberg & Gosling, 2002, p 64).

While economics builds and extends on knowledge-based models,research in sociology, psychology, and anthropology relies on knowledge-based and relational models of action While management studies havebenefitted from research findings in economics, sociology, and psychology,little has been given back to these disciplines by management scholars.Admired and worshiped by some, distrusted and despised by others,managers are pressured to cope with numerous complexities in an ever-changing social environment Yet, the power of ideas, whether they areproven right or wrong and whether they lead to faulty presumptions, falla-cious predications, or erroneous judgments cannot be ignored That is whycorporate managers and decision-makers need to be reminded of theirsocial responsibility and ethical engagement beyond the profit-maximizinggoals

THE NEED FOR AN EXPANDED NOTION OF ETHICS AND CORPORATE SOCIAL RESPONSIBILITYThe debate on stakeholder value and corporate social responsibility hasbeen on the front stage of academic research over the past three decades Asignificant research corpus has scrutinized the role of shareholders and theirsocial responsibility as well as corporate managers’ ethical behavior scan-dals prior to and following the 2008 financial crisis (Freeman, 1999;Freeman, Harrison, Wicks, Parmar, & de Colle, 2010) The shareholdervalue approach has been criticized on the ground that principals, share-holders tend to pursue their narrow interests at the expense of other stake-holders The literature underpins the limitations of CSR theories due to theuneven distribution of “benefits and burdens” as well “fair and injuriousclaims” by stakeholders (Hummels, 1998; Sun, Stewart, & Pollard, 2010).Critics of the separation thesis refute the “maximizing shareholder value”view on the ground that it bears an ideological content that is solely used

to counter the rights of other stakeholders (Freeman, Wicks, & Parmar,

2004) The mischaracterization of stakeholder theory can be associatedwith a tendentious interpretation of managerial behavior that consists oflegitimizing the interests of investors (Donaldson & Preston, 1995;Freeman et al., 2010;Freeman & Phillips, 2002).Sun et al (2010)point tothe ideological and cultural complexity of the separation thesis and aver

that the separation thesis “has been artificially constructed” and its mises are “logically and empirically” flawed.Friedman’s (1971)enunciationthat “no other form of social responsibility other than making money”should be accepted by corporations points to the difficulty of promotingand instilling the idea of social responsibility as a strategic goal in order topromote business efficacy and safeguard social justice The discussion onCSR places the emphasis on corporate executives who have fallen prey tounethical business practices Yet, little has been written on the role ofmiddle managers in monitoring, advocating, and exercising social responsi-bility at lower echelons.

pre-If corporate managers’ primary objective is to maximize shareholdervalue, then would they not miss the broader social missions and objectives

of corporations? By emphasizing the need to deepen and broaden the cept of corporate social responsibility, Porter and Kramer (2011)highlightthe need for reinventing capitalism and accelerating innovation The authorspoint out that corporations have been trapped in what they describe as “anundated approach to value creation,” one that seeks to “optimize short-termfinancial performance in a bubble while missing the most important customerneeds and ignoring the broader influences that determine their long-termsuccess” (Porter & Kramer, 2011, p 4) Porter and Kramer emphasize theneed to take into account the much broader “societal needs” and not becontent with “conventional economic needs” (p 5) Consequently, the roots

con-of shared value should be searched in the communities who must satisfytheir unmet social, economic, and environmental need This, in turn, callsfor a reconsideration of value principles, the creation of new hybrid enter-prises that are willing and capable to cooperate, collaborate, and co-create

by reconceiving products and services, redesigning sustainable value chains,and reinforcing local communities and business clusters The call for recon-ceiving value principles and creating shared value stands in stark contrastwith Porter’s earlier analysis of market forces that push businesses to adopt

a ruthlessly competitive posture to ensure market domination throughprofit-maximization Corporate managers who view value creation from astrictly shareholder value maximization lens propagate an antisocial ideol-ogy that has no place not only in a democratic society but also in corpora-tions who seek to gain efficiency by serving new needs Corporate managersmust therefore be able to address many interconnected problems whichpertain to economic, ethical, and ecological challenges In attesting thatprofit is “the result rather than the driver in the process of value creation,”Freeman et al (2004)acknowledge the impact of ethics and social responsi-bility in transforming not only corporations and organizations but also the

13Society at the Crossroads: The Path to a Sustainable Economy

society as a whole Beyond a mere micro level impact, shared value has reaching societal and macro level implications for the society and economy.Creating shared value through greater social and ecological responsibilitywill ensure a better distribution of wealth and lead to greater economicgrowth By putting shared value back at the center of business developmentstrategy, corporations can help restrain the rate of return on shareholdercapital and by the same token boost the distribution of wealth From amacroeconomic perspective, the reduction of the gap between the rate ofreturn on capital and the growth rate of the economy is a necessary step toreduce income inequality and poverty This is a particularly important pointsince, as noted by Piketty (2015), “the transformation of capital assets,

far-… including financial capital, far-… gives rise to different bargaining processes,power struggles, economic innovations, and social comprises” (p 71)

In this chapter, we have highlighted three distinct yet interconnectedchallenges that modern societies are facing: how to cope with an accelerat-ing pace of financialization and commodification of the economy, how toensure that misconstrued economic and management theories do notdegrade good business practices, and how to reinforce the principles ofsocial responsibility and ethical behavior across the economy The bookhas been divided into three parts Part I focuses on the causes and conse-quences of the 2008 financial crisis and its implications for businesses andthe management practice Part II examines the impact of finance on socialand economic structures and interrelations It is argued that finance must

be put back on the center of a new contractarian social model that servespeople and communities and provides solutions to a wide array of eco-nomic and ecological imperatives Part III investigates alternative models

of management by placing the emphasis on social innovation to cope withthe pressing societal challenges of the new millennium

THEMES OF THE VOLUMEThomas Clarke and Soheyla Gholamshahi go into considerable length todiscuss different dimensions of financialization of the global economy andhow this has produced a more intensive and integrated mode of accumula-tion With the increasing translation of corporations into financial entities,the authors examine how the dominant shareholder primacy mode ofcorporate governance has served to compound inequality The damagingimpact of maximizing shareholder value is investigated, both in terms of

the long-term prospects of corporations, but also in aggressively producingincreased inequality in the economy and society Finally the ultimate para-doxical outcome of agency theory and shareholder value is highlighted asthe explosion of executive reward in the last two decades in the Anglo-American countries.

Peter V Rajsingh advances the thesis that the financial crisis has less to

do with exogenous variables no one could have anticipated than salientfactors linked to human failures These structural, epistemological, andbehavioral issues are aggravated by financial neo-liberalism Finance isintegral to economic activity But under neo-liberalism, the global economyrapidly assumed a particular form of financialization, founded on marketfundamentalism and political and regulatory capture Neo-liberal co-opta-tion of finance, economics, and politics needs to be reversed to place finan-cial and economic activity within a more robust framework

Dirk Baur and Thomas Lagoarde-Segot consider different dimensions offinancialization of the international economy and how this has led to amore intensive and integrated mode of wealth accumulation With morecorporations becoming financial entities, the authors argue that the domi-nant shareholder primacy mode of corporate governance has served tocompound inequality The damaging impact of maximizing shareholdervalue is investigated, both in terms of the long-term prospects of corpora-tions, but also in aggressively producing increased inequality in theeconomy and society Finally the ultimate paradoxical outcome of agencytheory and shareholder value is highlighted in light of exorbitant corporateexecutive financial rewards over the last two decades

The excessive use of mathematical models in finance is aptly discussed

by Se´bastien Lleo and Jessica Li The authors argue that the problem mightactually be associated less with mathematization of finance than financiali-zation of mathematics, as evidenced by the gradual embedding of branches

of mathematics into financial economics Lleo and Li argue that theconcept of embeddedness, originally proposed by Polanyi, is relevant todescribe the sociological relationship between fields of knowledge Afterexploring the relationship between mathematics, finance and economicssince antiquity, they show how theoretical developments in the 1950s and1970s lead directly to this embedding They argue that it has become neces-sary to dissemble mathematics from finance and economics, and propose anumber of partial steps to facilitate this process

The global financial crisis which began in mid-2007 and gave rise tocontagious bankruptcies and bailouts of major financial institutionsrevealed not only the structural weaknesses of global financial system, with

15Society at the Crossroads: The Path to a Sustainable Economy