Corporate responsibility and governance: the responsible corporation in a global economy

Citation

Lenssen, G., Bevan, D. and Fontrodona, J. (2010), "Corporate responsibility and governance: the responsible corporation in a global economy", Corporate Governance, Vol. 10 No. 4. https://doi.org/10.1108/cg.2010.26810daa.001

Corporate responsibility and governance: the responsible corporation in a global economy

Article Type: Guest editorial From: Corporate Governance, Volume 10, Issue 4

A financial crisis, a crisis of governance?

When this special issue appears, it will be almost two years since that infamous Monday, 15 September 2008, when Lehman Brothers filed for bankruptcy after a strenuous weekend of failed attempts to save the oldest US investment bank, and notable also by the refusal of the US government to shore up its solvency. It unleashed the biggest bankruptcy in US corporate history and a financial crisis which soon became an economic crisis, and ultimately a crisis of governance with trust – in the institutions and persons that should ensure the stability of the global system – falling to an all time low.

Financial instability continues with the sovereign debt crisis in the Euro zone and resolution is not yet in sight. Substantial government debt reduction will be on the agenda in virtually all OECD countries for years to come, putting severe strains on welfare state spending and economic stimulus expenditures. Sluggish economic growth, inflation (stagflation) and social unrest are likely to become serious political challenges.

There have been plenty of commentaries and reviews on causes and consequences of the credit crunch, some thoughtful and even comprehensive. Martin Wolf, the associate editor and chief economist of the Financial Times, has been leading the soul-searching for policy-makers as well as for professional and academic economists in exemplary ways. See the on-line texts and debates at www.ft.com as well as the FT publication The Future of Capitalism, with excellent contributions from thought leaders like Amartya Sen, Paul Krugman, George Soros, Niall Ferguson and others.

Broadly, the positions in the wider debate on “the crisis” can be located on a scale going from “it was (just) an accident” to “it is a revelation”. The first perspective believes that:

…there was a unique and extraordinary set of circumstances at play which led to a temporary disruption. It could not really have been foreseen; but lessons will be learned, deficiencies will be fixed and (let’s hope) we will be back to normal very soon.

The second perspective holds that “the crisis” reveals the fundamental instability and lack of sustainability of the global economic and financial system, coupled with the threat of climate change and other macro challenges, which thus requires a complete overhaul of global governance institutions and processes and a new set of rules and controls for corporations in every industry sector. The commentators from this second perspective hold that a “plumber’s fix” approach to a flawed system can at best give only temporary relief.

As events have evolved over the last 24 months, leading commentators who tended at first to hold the latter view, have shifted to the middle ground and are now tempted to end up in the “it was an accident” camp. This change of mind might be reversed soon in the face of continuing events.

Of course, this is a crudely polarised picture of the debate, which has contained many sophisticated positions that escape easy classification. Nevertheless the temptation to underestimate the length and depth of the disruptions and discontinuities which are in play is all too real. In the beginning of 2010, with financial institutions returning to profitability (again paying out large bonuses) and real or wishfully imagined economic “green shoots” being spotted everywhere, it was easy to understand a need to believe that “the worst is over”, a desire to “go back to business as usual” as soon as possible, and to “stop the gloom and doom messages” that continue to spread uncertainty in the collective psyche of the markets and its key actors.

This was shown (again) to be short-sighted. With the massive interventions of governments and central banks, the economic system is still in intensive care. Its vital organs seem to function again; but it cannot survive outside the intensive care room. The vital question is how the consequences of treatment will affect the system. Large government debts are requiring tax increases and curbing of expenditure, and this may lead to inflationary pressures and a need to tighten monetary policy – all of which may in turn impede growth, give further rise to unemployment and social unrest, and so forth.

Even if governments and international policy-makers muddle somehow through the current challenges, the danger exists that “a plumber’s fix” (stopping the leaks without tackling the causes) will cause much long-term damage.

There can be no doubt that capitalism has historically shown remarkable flexibility through its cycles of crisis and adaptation. However, given the worldwide scale of and resulting interdependencies in today’s global markets, the “collateral damage” of capitalism’s evolutionary adaptation through successive disruptions might fatally undermine it. The negative impacts – in terms of costs to society, diminished trust in the institutions and the elites who run them, unsolved or enhanced social and environmental problems, etc. – might be deemed as unacceptable.

A crisis of governance, a crisis of knowledge?

The boundaries of governance between governments and markets have shifted and continue to do so. The perceived retreat of government from the 1980s onwards has been reversed. There has been an emerging array of global policy initiatives in “G groups” of different sizes, while global and national regulatory oversight is strengthening, and the geopolitical power shift from the West towards Asia is accelerating. In a nutshell: politics is back and economics is in disarray.

Only recently the conventional wisdom held that economics dominated, while politics was in retreat. This was based on the infamous “Efficient market hypothesis” (EMH) of the neo-classical school which posited that free markets evolve towards equilibrium and optimal outcomes through the behaviours of self interested rational actors, free access to information, free forces of supply and demand and the absence of artificial regulatory interventions.

For anybody who is old enough to have observed the ascendency of this school over the last 40 years, it is quite obvious how this thinking has pervaded the minds of the political class, policy-makers and academics. It has also trickled down into corporate strategy, management research and management education. Associated theories with EMH like Agency theory (AT), Rational choice theory (RCT) and Transaction cost theory (TCT) are dominating the curriculum at our business schools.

Two generations of leaders in the political, academic and corporate worlds have not known anything else but one dominant theoretical framework for politics and economics based on a single hypothesis: EMH.

Karl Popper (1902-1994) arguably one of the most influential theorists of knowledge of the last century, warned that theories are always provisional and incomplete. Provisional because they will sooner or later be falsified and replaced by a better ones. Incomplete because theories only explain parts of reality and are unsuited for other parts of reality (Popper, 2005). The pretence of an “overall theory” explaining everything in a particular field for ever needs to be greeted with extreme caution, since this comes dangerously close to belief systems like religions or ideologies which should be clearly separated from science. Theories will sooner or later be falsified as knowledge and understanding develop.

Popper’s pupil Thomas Kuhn (1996) however warned that theories could insulate themselves from falsification by becoming a scientific paradigm: a set of basic assumptions which resists falsification. A paradigm is widely and generally accepted and reinforces itself by (selective) empirical observation and by a double heuristic: the more it is believed in, the more people act according to the core beliefs, and the more evidence is seemingly produced to reinforce the central truth of such beliefs.

This can hold for a long time, but a paradigm can preserve its immunity against critical inquiry only as long as it can hold on to its practical problem-solving capability. This is what appears to have happened following on from “the crisis”. The debate on EMH between academic economists, economic policy-makers and market and investment analysts continues to rage. Interestingly enough more practically minded analysts are admitting the fundamental flaws of EMH while a not insignificant number of academic economists are trying to preserve it and uphold its supremacy (see the ongoing debate at www.ft.com under “The future of capitalism”.) Popper (2006) stressed the importance of learning from mistakes and embracing the falsification of cherished theories with grace for the sake of the progress of knowledge.

The simplicity and elegance of EMH and its associated theories and the ease with which these allowed for econometric modelling and making predictions is baffling but nevertheless misleading. Thoughtful economists like John Kay, who have long maintained that markets are instruments which can solve only certain problems and are quite inept for others, were largely ignored. Defining the ultimate verdict that will be passed on EMH is a subject which goes beyond the scope of this editorial.

What is important within this scope is to consider the effect EMH has had on managerial culture and managerial knowledge. Agency Theory makes a particular contribution to EMH. Agency Theory gave rise to the shareholder value movement (SVM) which Jack Welsh recently called “the biggest folly on earth”. Yet for a long time he too believed in it and cashed in bonuses and stock options while at the helm of General Electric. Paul Polman, CEO of Unilever has recently been equally outspoken against SVM in a discussion forum with the FT chaired by Stefan Stern.

John Kay warned already in 2004 at the annual EABIS colloquium at Vlerick Leuven Ghent School of Management that the set of assumptions underlying SVM had brought about a managerial pre-occupation with finance to the detriment of real economic value creation. He stated that these assumptions were misleading, not delivering on their own promises and undermining the credibility of free enterprise and the market system. He demonstrated his case with plenty of empirical evidence which showed how firms like Daimler, ICI, Marks & Spencer and others actually destroyed shareholder value by abandoning a stakeholder-oriented value creation strategy in favour of a strategy of shareholder value maximisation through short-term stock value maximisation.

The main winners from such a strategy were (and are) speculative investors, fund managers and senior corporate executives whose behaviour, decisions and rewards are driven by short-term bonuses and stock options. Governments benefited too through increased tax revenues on corporate profits, especially, but not only, in the financial sector. Those who lost out were the long-term investors and all the other stakeholders. John Kay and a handful of other observers were preaching in the desert, no matter how much evidence and logic they produced. A dominant paradigm is indeed insulated from empirical falsification which is the hallmark of Popper’s (2006) golden rule on the progress of knowledge, and by consequence of liberty and of the “Open Society”.

We are left with a managerial culture which seems to be bereft of a sense of public responsibility, practical wisdom, the art of balancing risk and prudence, the art of balancing between short-term and long-term interests of the firm, between different stakeholders, between self-interest and common interest, and ultimately between efficiency and morality. Once balances are lost, social systems small and large start collapsing; slowly and unnoticed at first but with increased turbulence over time.

In management education, the balance between management as an art and management as a science was lost a long time ago, and we have educated two generations without such a balance. Evidently, we need a solid scientific grounding for management, but when the science is based on a false paradigm which has ultimately lost its problem-solving capacity and thus its credibility, we are teaching bad science. Practical wisdom and virtue which stem from the maturity gained through experience and critical reflection is often painfully absent in management education. Management educators seldom have practical experience themselves or even deny that practical experience is a source of verifiable knowledge.

At heart EMH and SVM generally underpinned the simple beliefs that the business of business is business and that governance is the business of governments but with as little interference as possible. The purpose of this editorial is not to elaborate on how EMH entered into corporate strategy and decision-making, giving rise to predatory market strategies and to the false assumptions about the rationality of market participants, nor the way EMH impedes the advance of collaborative strategies for better governance in industry sectors.

Rather, in this editorial, we reassert that the business of business is to ensure a good governance of its own affairs (corporate governance) as well as a good governance of global and industry sector stability and sustainability (global governance). Governance deficits in the global economy originate from two contextual failures: market failures and government failures. Companies exploit market failures and government failures in highly profitable ways in the short-term; but in the long-term these exploits can undermine the stability and sustainability of entire industry sectors with ripple on effects to other the entire economy. This became painfully obvious during the financial crisis. Business has an implicit long-term interest in an adequate governance environment and consequently industry-leading companies have a long-term interest to recast their relationships with governments and regulators from a more exogenous, (agency) lobbying approach to a more endogenous, (stakeholder) co-governance approach. This is not yet widely apparent in the financial sector (and, some would say, quite the contrary) but it is already evident and realised in other sectors (for example, FMCG and Oil).

Conceptualising the role of business within a governance framework

Until recently the debate on corporate responsibility and accountability has focused on “the role of business in society”: how business can create shared value for the firm and society by integrating social and environmental issues into its strategy. This has been at the heart of the CSR-beyond-philanthropy discourses and has been convincingly argued not least by Porter and Kramer (2006).

Recently, the acronym ESG has come into use: environmental, social and governance (sic) issues in the business environment need to be addressed by companies. Originally this was about addressing governance failures, e.g. in fighting corruption. But increasingly ESG is cast in a wider role of “business in the polity” and contributing to good governance by self-regulation and co-regulation along with governments and NGOs.

The financial economic crisis has however thrown up more basic questions about the role of “business in the economy”. It was argued that banks had increasingly ignored their basic mission as credit providers to the real economy and instead preferred to maximise profits by speculative investment banking. The role of business in the economy in general is considered to pursue economic value creation for shareholders, customers, suppliers and employees. Each firm has a specific purpose in the form of a value proposition to business stakeholders.

These three dimensions of the role of business: in the economy, in society and in the policy can be placed within institutional governance theory.

Governance is in this context a broader concept than Corporate Governance. It refers to “the mechanisms by which the behavioural regularities that constitute institutions are maintained and enforced” (Crouch, 2005, pp. 10-20).

This concept of Governance stems from economic sociologists of the neo-institutional school like Hollingsworth and Boyer (1997), who emphasise the embeddedness of institutions. Firms are institutions which are embedded in economic, social and political environments. These environments can be considered as spaces of economic, social and political governance.

In each of these spaces, the firm is exposed to role expectations like obeying rules and regulations but it can also influence governance processes in a pro-active way.

With a number of adaptations of neo-institutional theory, the role of business from a governance perspective can thus be schematised as shown in Table I in a comprehensive new framework for corporate responsibility and accountability.

We are pleased to present in this special issue a range of academic (A), consulting (C) and practitioner (P) papers which fit these dimensions of governance. The boundaries between the categories are overlapping and some papers touch on more than one dimension of governance.

Table I

Commensurate with the call for papers, one could argue that there is an additional level of governance underpinning the above institutional framework: the level of “personal governance”, i.e. the role of the person in the institutional context consisting of personal values, professional norms, virtue ethics that guide preferences and behaviours.

Economic governance

• •

  Peter Löscher (P Keynote) “Making the global economy more sustainable”

• •

  Bruno Berthon (C Keynote) “Responding to the crisis: redefining corporate value”

• •

  Chris Marsden (P Keynote by invitation) “Economics, the financial crisis and corporate responsibility”

• •

  Lutz Preuss (A) “Tax avoidance and corporate responsibility: you can’t do both”

• •

  Philippe Haspeslagh (C) “Corporate governance and the current crisis”

• •

  Heiko Spitzeck and Erik Hansen (A) “Stakeholder governance – how stakeholders influence corporate decision-making”.

Societal governance

• •

  Mario Minoja, Maurizio Zollo and Vittorio Coda (A) “Stakeholder cohesion, innovation, and competitive advantage”

• •

  Jorge Arevalo and Deepa Aravind (A) “The impact of the crisis on corporate social responsibility: the case of UN global compact participants in the USA”

• •

  Manuela Drews (A) “Measuring the business and societal benefits of corporate responsibility”

• •

  Georges Ulrich, Sybille Sachs and Bruce Millett (A/C) “Perception, reflection and communication: an empirical case study within the pharmaceutical industry”.

• •

  André Sobczak and Ligia Coelho Martins (A) “The impact and interplay of national and global CSR discourses: insights from France and Brazil”.

Political governance

• •

  Jan Aart Scholte (A) “Governing a more global world”

• •

  Stefan Schepers (C) “Business-government relations: beyond lobbying”

• •

  Mick Blowfield (A) “Outsourcing governance: Fairtrade’s message for C21 global governance”

• •

  Andreas Rasche (A) “Collaborative Governance 2.0”

• •

  Elise Crawford and Cynthia Williams (A) “Should corporate reporting be voluntary or mandatory?”

• •

  Salla Laasonen (A) “The role of stakeholder dialogue: NGOs and foreign direct investments”.

Personal governance

• •

  Isaac Mostovicz, Nada Kakabadse and Andrew Kakabadse (A) “Self- or rule-based governance: analysis of choice-making behaviour”.

Acknowledgements

The Guest Editors gratefully thank the following reviewers for their invaluable help in reviewing the papers and providing helpful and sometimes detailed feedback to our authors and contributors: Daniel Arenas, Antonio Argandoña, Matthew Gitsham, Antonio Gomes Mota, Céline Louche, Atle Midttun, Kevin Money, Jeremy Moon, Mette Morsing, Nigel Roome, Luk Van Wassenhove, Maurizio Zollo.This special issue follows from the 8th Annual Colloquium of EABIS – The Academy of Business in Society at IESE Business School, September 2009. The programme of the Colloquium can be found at the back of this special issue.

Gilbert Lenssen, David Bevan, Joan Fontrodona

About the Guest Editors

Gilbert Lenssen President of the Academy of Business in Society since its foundation in 2002. He is also Professor of Management at Leiden University and former Professor of International Management at the College of Europe (Bruges/Warsaw) and Visiting Fellow at Templeton College, University of Oxford. He is a member of the Board of the European Foundation for Management Development (EFMD) and a member of the editiorial board of Corporate Governance: The International Journal of Business in Society, member of the editorial board of The Journal for Strategy and Management. He is also Visiting professor at Cranfield University, Henley Management College, and ENPC Paris and has been a Life Fellow of the Royal Society of Arts (London) since 1995. He is a former Global Vice President of BP Solar International (London/Madrid, 1995-1999). During this time, he built the global solar business and in particular the “sustainable development solutions” strategy for business in Africa and Asia. Before this time, he was an Executive in Marketing, Planning and Human Resource Management, Corporate Affairs and Corporate Communications for British Petroleum (BP) in USA, Germany, UK, Spain (1975-1995). Among his corporate achievements are the diversification of the retail business, a “federal organisation” for manufacturing in chemicals, the “greening” of BP’s corporate and retail image and strategy. Throughout his corporate career he was intensely involved in management development and learning, for which he developed and implemented new approaches.

David Bevan Director of Academic Affairs at EABIS since October 2008, His research interests are framed within the critical management studies Special Interest Group at the Academy of Management with a particular focus on business ethics/corporate social responsibility and the political economy. Along with this specific focus he is also interested in the related areas of sustainable business management, managerialism and professionalism. He is currently on the faculty of Royal Holloway University of London, School of Management where he is attached to the Centre for Research into Sustainability. Additionally, he has been a Visiting Professor at various institutions: the Graduate School of Management, (Grenoble Ecole de Management); DePaul University (Chicago), Grande Ecole des Hautes Etudes de Commerce (HEC) Paris. He has devised and delivered modules on Sustainable Business Strategy for the MBA courses at HEC Paris and RHUL since 2005. He also is a named expert in Sustainability for the University of London at the United Nations and a delegate on the International Labour Office Academic Working Group for Decent Work (2009-2012). He worked in the commercial sector for 30 years before retraining and starting his academic career in 2002. He spent time as Business Development Director at a merchant bank where he was involved in seven corporate start-up/exit cycles in IT and property management. More recently he was project director of a management consulting practice, programmes and projects with experience across the public and private sectors.

Joan Fontrodona FelipAssociate professor and chairman of business ethics and academic director of the IESE Center for Business in Society. He holds a PhD in Philosophy and an MBA in Management. The Center for Business Ethics (Bentley College), Harvard Business School and Universidad Francisco Marroquín (Guatemala) all welcomed him as a visiting scholar/fellow. He is the Chairman of Etica, Economía y Dirección (the Spanish branch of the European Business Ethics Network), and member of the executive committee of the Association of Spanish Entities adhering to the United Nations’ Global Compact (ASEPAM). He also serves on the academic board of the Academy of Business in Society (EABIS). He is a member of Forética, as well as associate researcher at the Enterprise and Humanism Institute of the University of Navarra. He also serves on the Commission for Social Responsibility of the Board of Auditors Censors of Catalonia (Colegio de Censores Jurados de Cuentas de Catalunya).