Corporate Social Responsibility (CSR) U4S4P45

Milton Friedman - "Few trends so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible" (Friedman, 1962).

Of course, this was written at a time when Communism (and by association socialism) were the number one enemy of the free american.

CSR is not an issue for strategy makers in organisations of all types and sectors.

Questions...

• Does the org have a 'moral' responsibility to be a good citizen, or to consider the objectives of stakeholders other than the owners?
• Is there a clear distinction between CSR and corporate governance
• If you believe the organisation has a wider responsibility, how great an impact upon an organisation's objectives should these other stakeholders exert? Should this wider responsibility have an impact on the organisation's ability to make a profit or deliver a service?
• How much will this responsibility cost - and does the cost outweigh any benefit?
• Will acknowledging this responsibility have any impact in reality on the way the org operates?

CSR can present a problem for governments due to strong corporate lobbies arguing for the status quo.
Governments also have competing priorities, and prosperity vs society arguments may come up.

There is frequent relocation of manufacturing activities to developing economies to save costs. But these countries often have lower social standards, and so the potential for unwanted externalities may increase.
If the org is a "citizen" within society, then how bound should the organisation be by norms and morals that guide and influence behaviour in that society?

But what about ethics? Corporate ethics involve establishing and following a set of standards that regulat conduct and interaction with a variety of interested stakeholders - u4s4p52. So an ethical strategy is the product of negotiation with the various concerns of stakeholders (Goodpaster, 1991). But who should the manager answer to when conflict arises? Shareholder? Government? Consumer? Society?

CSR itself is potentially unethical - it does not properly reward shareholders for the risk they are exposed to by investing their capital.

However if employees believe their organisation is unethical their motivation may deteriorate leading to a failure of organisational purpose, and potentially even bigger failures.

Enron and Parmalat were both "brought down" by unethical employees. In this case all stakeholders lost out, including shareholders (except maybe competitors).

Stakeholder analysis

A stakeholder analysis will allow you to assess the relative importance of each potential stakeholder group in order to manage their impact on the strategy process.

Stakeholders attain power from:-

• Formal authority (manager, director etc)
• Organisational structures and procedures (particularly in bureaucracies)
• Control of decision processes (ability to influence the context of decision making - director's wife...)
• Control of knowledge and information (knowledge and information are sources of power as they are important to the achievement of competitive advantage)
• Boundary management (the ability to monitor and control transactions with other parties outside the organisation - brokers, secretaries, etc)
• Control of technology

Winstanley et al (1995)'s stakeholder power matrix can be used to understand where a stakeholder group might hold and seek to exercise power. It's a typical matrix with quadrants, with continuums for operational power and criteria power.

Operational power is the ability to affect the operation of the firm. Criteria power is the ability to influence decision making. The four quadrants are

• Arm's length power (power over rules of the game)
• Comprehensive Power (major shareholders of a firm)
• Operational Power (key groups of employees or suppliers of key materials/services)
• Disempowered (end customers for a niche product or staff with unmarketable skills)

Salience
...The salience of stakeholder claims. Salience == prominence, importance, significance. The interests of the most salient stakeholder feature most prominently in a manager's thoughts. A definitive stakeholder has the most salience and is the most significant stakeholder for any organisation.

Agle(1999) et al says salience results from:

1. the power the stakeholder has over the actions of the organisation - their ability to influence decisions
2. the legitimacy of their claim over the organisation, which can be based on moral or legal grounds
3. the urgency with which an organisation feels it needs to satisfy stakeholder claims or respond to their demands

Stakeholders with most authority and whose claims need to be met most urgently are the most salient to managers.

In organisations where only owners are salient, strategy will focus on shareholder value.

Stakeholder Groups U4S3P34

Lynch 2003

1. Those who have to carry out the actions necessitated by the strategy
2. Those who have a stake in the outcome

Hitt et al (2003) list three groups

1. Capital market stakeholders
2. Product market stakeholders
3. Organisational stakeholders

Argenti (2003) splits stakeholders into primary (Managers, Employees, Customers, Shareholders, Communities) and secondary (media, suppliers, government [local/regional/national], creditors, ngos). Primary stakeholders provide resources without which the firm cannot operate.

Agency theory of the firm (manager is the owner's agent) creates a potential conflict of interest - moral hazard - where managers may use their discretion to control assets for their own benefit.

Moral Hazard - actions by party A which affect party B but cannot be monitored or evaluated fully by party B

Purpose as a public statement u4s2p24

Pearce (1982) said a mission/purpose/vision etc normally have the following components

• product or service, market, and production and delivery technology
• company goals
• company philosophy
• company self-concept (understanding its place in its environment)
• present and future public image
• attitude to stakeholders etc.

But don't expect to find anything about values, beliefs or strategic direction!

Not for Profit organisations u4s2p20

Most NFPs do not have shareholders in the traditional sense, and they exist to fulfil the objectives set out in legislation or the founding documents. However managers in nfps should recognise that there are still implicit wishes of donors and resource providers, eg government, charitable donors. NFPs are not above the "shareholder vs stakeholder" debate.

Sometimes there are issues finding quantifiable measures in NFPs. Sometimes the approach is cost-benefit analysis (when making decisions), other times efficiency and effectiveness (where the decision has already been made and your job is to implement).

Resources - the opportunity cost of the provision of public services etc. should be recognised.

The market - the justification that a market makes more efficient allocation of resources is sometimes used to support the reduction in the public supply of services.


Does privatisation of a NFP alter its purpose? Would a requirement to act more like a business enable the delivery of purpose more effectively?

Profit in for-profit organisations

u4s2p12 Issues:-

1. profit as a source of purpose in for-profit organisations
   
   • assumes key influence over strategy is from shareholder(s)
   • objectives of all other stakeholders take second place (org does not accept a role in delivery of benefit to wider stakeholders)
     HOWEVER, for all for-profit orgs, profitability is crucial
2. measuring profit
   What measures should be used? Profit? Income? Value added? NPV?
   
   • Economic Profit - over a particular time period, short run or long run. Can be
     
     • Normal Profits - economic profit of a normally efficient organisation in a "perfect" market
     • Abnormal Profits - profits in excess of normal earned by an org exploiting its competitive advantage
   • Accounting Profit (net profit after interest and tax, or before tax, or operating profit - net before interest and tax) 
   • ROCE, ROSE
   • Residual Income
   • Economic Value Added
   • Net Present Value
3. the importance of risk
   Shareholders are the principle providers of funds and so have a special moral status which means they are due rewards for the risk they incur through their investment
4. the significance/demands of survival
   Recognising that many firms have a day to day struggle to survive, and the "perfect" market does not exist, so turbulence and strong competitive activity can affect establishment of purpose. In a very hostile environment it may be that "survival is the only sensible purpose (Lynch 2003).
5. a stakeholder perspective
   This assumes that Grant's assessment of the potential outcomes of the shareholder approach is invalid, and that net negative externalities are developing because of the shareholder approach. But a stakeholder perspective is more complex than a shareholder-only one. The stakeholder perspective requires that interests of all stakeholders are considered during the strategy process.
   
   • Resource Dependence theory - this is a theory that only stakeholders who contribute significant resource to the firm should be considered, rather than all.
   • The role of government - a stakeholder perspective recognises that governments may intervene in the organisation whereas a shareholder perspective prefers a limited role for government

Reflections on Unit 4 - The Organisation: Stakeholders, purpose and responsibility

The Learning Outcomes are - be able to

• review the strategic purpose of the organisation, and observe how different perspectives can have an impact upon the choice of strategy to pursue
• prepare a stakeholder analysis which describes the balance of exchange of resources and power in your organisation, to identify where stakeholder priorities may be in conflict, and appreciate how managers can mediate between stakeholder groups to deliver a consensus
• develop an appreciation of the relevance of corporate social responsibility to modern strategic thinking, and the impact that corporate citizenship, ethics and environmental responsibility may have upon the organisation

 The context is whether or not your strategy should be to create value for shareholders primarily, or a wider body of stakeholders.

Sloan (1967) supported shareholders. Drucker (1988) supported shareholders. In whose interests should the firm operate?

Grant also supports the shareholder view for 4 reasons.

1. If you're not seeking profit maximisation then your attractiveness to providers of capital will be reduced and you eventually won't exist.
2. If managers are not pursuing profits single-mindedly, then owners will replace them with managers who will.
3. Companies that are doing well and making money are more likely to be inclined to treat their employees well and behave more responsibly than those who are struggling or failing.
4. Diluting organisational purpose makes the process more complex which undermines success.

Stakeholder:- Any group or individual who can affect or is affected by the achievement of the organisation's objectives.

Stakeholder theory is the alternative to shareholder theory. Stakeholder theorists argue that a focus on profit can allow a large number of externalities to emerge.

Smith (2003) attributes problems and scandals at Enron, Global Crossing, Tyco and Worldcom to shareholder theory.

Less sensational example:-

A restaurant may create noise, congestion, smell and obesity which are all not accounted for in the cost of its food. Stakeholder theorists regard these externalities as important, and to be successful organisations should focus on their impact on a wide range of stakeholders (including shareholders) rather than just shareholders.

u4s2p10 - Organisational Purpose. Some definitions

Purposes or Objectives?

Purposes reflect the values and beliefs of the main stakeholders in an organisation, recognise culture and reflect the politics of stakeholder relationships. Purpose statements are normally called mission statements.

Objectives are more specific. Express particular stakeholder group expectations, or milestones. More likely to be quantifiable.

NATO - example of an org with a changed purpose.