The Strategic Position Strategic Purpose and CSR

1. The Strategic PositionStrategic Purpose and CSR EFBL L5, 17/11/09 Prof. Jovo Ateljevic

2. Learning Outcomes (for today) • Identify the components of the governance chain of an organisation • Understand differences in governance structures and the advantages and disadvantages of these • Identify differences in the corporate social responsibility stances taken by organisations and how ethical issues relate to strategic purpose Prof. Jovo Ateljevic

3. Exhibit 4.1 Influences on Strategic Purpose Governance structure Strategic purpose Stakeholder expectations Social responsibility and ethics Prof. Jovo Ateljevic

4. What are Stakeholders? Stakeholdersare those individuals or groups who depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends. • Stakeholder : “Any individual or group who can affect or is affected by the actions, decision, policies, or goals of the organization” • Under the narrowly defined version, stakeholders appear to be those who are instrumental, one way or another, to the firm and its well-being. Prof. Jovo Ateljevic

5. what is a stake? • ….an interest or a share in an undertaking, or a claim. A claim is more than an interest; it is an assertion to a title, or to a right. • The concept of a stake, can range from a simple interest to the extreme of a legal claim of ownership and all the value between  Prof. Jovo Ateljevic

6. Exhibit 4.7 Stakeholders of a Large Organisation Prof. Jovo Ateljevic

7. What is Corporate Governance? Corporate governanceis concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organisation. Prof. Jovo Ateljevic

8. Corporate governance (CG) • CG exists at a complex intersection of law, morality, and economic efficiency. • ...sometimes refers to the way that Boards oversee the running of a company by its managers, and how Board members are held accountable to shareowners and the company. • “Good corporate governance practices instill in companies the essential vision, processes, and structures to make decisions that ensure longer-term sustainability. More than ever, we need companies that can be profitable as well as achieving environmental, social, and economic value for society.” Rachel Kyte | Vice President, Business Advisory Services, IFC Prof. Jovo Ateljevic

9. Exhibit 4.2 The Chain of Corporate Governance Prof. Jovo Ateljevic

10. Issues highlighted by the Governance Chain (GC) • Conflict of interests, between different groups in the GC and individual managers /directors • Directors responsibilities to shareholders, solely to them or beyond, wide range of stakeholders... • Accountability to stakeholders (both the GC and beyond) has major influence on the strategy development(e.g. public sector organizations is more complex and requires more time to develop strategy) • Principal-agent approach applies within the org. –the way in which targets, budgets and rewards are structured Prof. Jovo Ateljevic

11. Problem of Principal-agent relations • One party (“the principal”) contracts another party (“the agent”) to perform some action or to take some decision. • The agent has an information advantage • he/she knows something the principal does not know, • – will know something the principal does not know, • – he/she can take secret actions. • The principal knows that the agent has this advantage (making it a potential handicap!). Prof. Jovo Ateljevic

12. Principal-agent (examples) • owner – manager • insurance company – insured • creditor – debtor • firm – salesmen • voters – government • investor – portfolio manager Prof. Jovo Ateljevic

13. The principal-agent problem ...arises within the firm when ownership and control are separated and the self-interest of managers may lead them to act other than in the interest of the shareholders. The problem is to design monitoring or incentive systems that will make managers act in the best interest of the shareholders. Prof. Jovo Ateljevic

14. Reasons for Imperfect Operation of the Governance Chain • Lack of clarity on end beneficiaries • Unequal division of power • Different levels of access to inform • Self-interest among agents • Measures and targets reflect agent self-interests rather than those of end beneficiaries Prof. Jovo Ateljevic

15. Example – the Enron cor. Scandal • Electricity, gas, paper and communication company • 21000 employees • 80 bil Euro • 2001 reported financial problems, fraud • The assets was inflated, fraudulent non-existent • 4000 people lost they jobs, dissolution of Arthur Andersen, a Big Five accounting firm • The scrutiny revealed 25bil fraud • Many other institutions/firm were involved: banks, Law firms • 2002, 16 top executives plead guilty or were convicted and in the process of being sentenced Prof. Jovo Ateljevic

16. Exhibit 4.3 Benefits and Disadvantages of Governance Prof. Jovo Ateljevic

17. What responsibilities does the firm have to the stakeholders?Business ethics and social responsibility Legal vs. ethicalissues • Legal – law is enacted by govt developed thru case procedures (common law) it’s a rule governing the act • If person breaks a rule, it’s an illegal act and will be punished by the legal system • Ethics is dealing with what is considered to be right and wrong • Globalisation and the Internet open up an increasing number of new and unregulated activities Prof. Jovo Ateljevic

18. Ethics ‘The field of ethics, also called moral philosophy, involves systematizing, defending, and recommending concepts of right and wrong behaviour’ (The Internet Encyclopaedia of Philosophy). The field of ethics comprises:  Metaethics: asks where do ethical principles come from, and what do they mean?  Normative ethics: articulates moral standards that regulate right and wrong conduct Applied ethics: involves examining and analysing the ethical aspects of specific issues, e.g. medical ethics, business ethics Prof. Jovo Ateljevic

19. Normative theory • Part of philosophical ethics that examines standards for the rightness and wrongness of actions • normative ethics is prescriptive rather than descriptive yet moral facts are both descriptive and prescriptive at the same time • It deals with set of questions when we ask question “how should one act morally speaking?” • moral theory and apply ethics ( use of philosophical methods to identify the morally correct course of action in various fields of human life including business). • Kant -one of the main contributors Prof. Jovo Ateljevic

20. Kantian approach to (business) ethics • Philosopher, deontologist (1724-1804), moral and ethical theorists • Respect for persons -the key Kant’s Moral philosophy principles • Kant argued that the highest good was the good will (as an act of duty)- it is an intention behind the action rather than its consequences that make that action good (Bowie, N. 1999) • acts are inherently good or evil, regardless of the consequences of the acts (deontology) • This principle applies to business ethics today • True moral = being honest is right (e.g. businessman is not genuinely honest if he/she earns it to gain reputation) Prof. Jovo Ateljevic

21. Business Ethics and values • Organisation values - to embed a set of ethical values into the organisations goals and strategies and the way it seeks to do what it does • Ethical behaviour - to provide guidance and support to staff for making decisions and carrying out their work in a way that is compatible with the organisation's ethical values and standards • Corporate Culture - to consolidate and strengthen a culture of integrity and openness so as to facilitate a sustainable business • Reputation - to create trust among stakeholders and to facilitate business success Prof. Jovo Ateljevic

22. The main principles (in most of them Kant’s principles apply) 1 The business firm should consider the interests of all the affected stakeholders in any decision it makes. 2 The firm should have those affected by the firm’s rules and policies participate in the determination of those rules and policies before they are implemented. 3 It should not be the case that, for all decisions, the interests of one stakeholder automatically take priority. 4 When a situation arises where it appears that the interest of one set of stakeholders must be subordinated to the interests of another set of stakeholders, that decision should not be made solely on the grounds that there is a greater number of stakeholders in one group than in another. 5 No business rule or practice can be adopted which is inconsistent with the first two formulations of the categorical imperative. 6 Every profit-making firm has a limited, but genuine, duty of beneficence. 7 Every business firm must establish procedures designed to ensure that relations among stakeholders are governed by rules of justice. • A Kantian views an organization as a moral community. Each member of the organization stands in a moral relationship to all the others. Prof. Jovo Ateljevic

23. What is Corporate Social Responsibility? • Corporate social responsibility (CSR)is concerned with the ways in which an organisation exceeds its minimum obligations to stakeholders specified through regulation. • Corporate social responsibility: accountability for the business action that affects people, their community and the environment. • ‘…doing more than is required by law’ (Buhmann, 2006) • encompasses the economic legal ethical and discretionary (philanthropic) expectation that society has of organisations at a given point in time (Carroll, 2004) Prof. Jovo Ateljevic

24. Corporate responsibility:related concepts and issues • It encompasses a number of subjects including: business ethics, corporate governance, business and the environment, and corporate citizenship (businesses in the community), business culture • There has been an historical shift from profit maximization to fulfilling social values • Sustainable development: a framework for balancing social and environmental reproduction • Sustainability - to minimise the organisation's negative impacts on and maximise its positive contribution to the social, economic and environmental wellbeing of wider society Prof. Jovo Ateljevic

25. Corporate Social Responsibility and the recent trends • Social exclusion and an ageing society • Rights Movement • Health • Increasing concern for natural environment • Climate change and energy • Transport • Production and consumption (Scarcity of natural resources) • Promotion of sustainable development globally Business is being asked to assume broader responsibilities to society then ever before, and to serve a wider range of human / environmental values Prof. Jovo Ateljevic

26. New paradigms: Sustainable development • promotion and protection of fundamental rights, • solidarity within and between generations, • the guarantee of an open and democratic society, • involvement of citizens, • involvement of businesses and social partners, • policy coherence and governance, • policy integration, • use of best available knowledge Prof. Jovo Ateljevic

27. The role of business organizations in society • Are companies ‘money machines’ for shareholders? • Should companies take responsibility for the effects of their actions beyond what the law requires? • What they should do? (e.g. donate to charity; build public schools, health care facilities, infrastructure, employ marginalized groups) • What rules corporate’ behavior: laws or business ethics? The role of stakeholders? Prof. Jovo Ateljevic

28. Global corporate jets and their power • ‘New world’ is centered around multinational corporations, global financial markets and a highly concentrated system of technological research and development • The number of global corporations in the world has increased from 7.000 in 1979 to 40.000 in 1995. • These corporations and their 250.000 foreign affiliates account for most of the world’s industrial capacity, technological knowledge and international financial transactions. • Global companies hold 90 percent of all technology and product patents worldwide and are involved in 70 percent of world trade. • While the world economy is growing by 2 and 3 percent per year, the biggest global companies are, as a group, growing at a rate of 8 and 10 percent. Prof. Jovo Ateljevic Karliner, J.1997, 5

29. Corporate behaviour – how ethical they should be? • According (Milton) Friedman a corporation is the property of its stockholders • The question is should it spend the stockholders money for purposes regarded as socially responsible? Friedman’s answer is NO ‘corporate executives must make as much many as possible for their shareholders..,’ • Peter Drucker arguments are in line with the above; he believes that CSR is dangerous distortion of the business principle ‘if you find an executive who wants to take on social responsibilities, fire him.’ • The part of the above arguments are supported by the fact that corporate are created by law therefore law dictates what their directors / managers can or cannot or must do (Henry Ford example) Prof. Jovo Ateljevic

30. The corporate responsibility according to Friedman • There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. (Milton Friedman, 1979 p.126) Prof. Jovo Ateljevic

31. The Freeman’s (Edward) view • Law and common morality should guide our actions in the marketplace just as they guide our actions elsewhere. Nevertheless, given that qualification, which is an important one, Friedman places primary importance on profit maximization as the role of business. Thus managers’ first duties and fiduciary (intrusted) duties are to owners or shareholders. WERHANE, 2000, pp.170 Prof. Jovo Ateljevic

32. Many individuals and groups are affected by corporate business behavior Internal • Employees and Managers • Owners External • Investors and other providers of finance • Local communities • Governments and regulators • Civil Society / NGOs • Customers • Suppliers • Shareholders / Financial Analysts Prof. Jovo Ateljevic

33. Stakeholders Engagement Issues Engaging with stakeholders is not without problems • How powerful stakeholders are? • How active are they? • What risk does non-engagement/non-responsiveness pose? • How do we engage them? • Can we be responsive to all their concerns? • How do we prioritize or balance their concerns? • How do we deal with stakeholders: • reactive, proactive? • directly or indirectly? • accommodate, negotiate or resist? • How do we demonstrate that we have integrated their concerns both operationally and strategically? Prof. Jovo Ateljevic

34. Consumers • Consumer rights (J.F. Kennedy) • Right to safety • Right to be informed • Right to choose • Right to be heard • Clear information • Accurate information • Adequate information http://video.google.com/videoplay?docid=6180036948830658291 Prof. Jovo Ateljevic

35. Con...ed • Correct information • Ambiguous Advertising, may mean several different things (role of social marketing) • Concealing facts • Presenting fact in such a selective way that a false belief is created • Advertising abuses are not quickly forgotten by consumers • Establish effective Consumer Affairs Office Prof. Jovo Ateljevic

36. Community • Community involvement must be planned and organized with the same care and energy that are devoted to other parts of the business • Same measure of cost effectiveness • Corporation should capitalize on its talent and resources • Employees should be involved in community programs • The corporation should get involved in the communities it knows • Not all action should originate in company • Helps others help themselves Prof. Jovo Ateljevic

37. Government: important issues • To what extant government should impose environmental regulations? • Effectiveness can decrease by strict regulation • The international business faces a complex regulatory systems • Engage Early On • Engage Constructively • Present Thorough Analysis and Reliable Facts • Take Public Interest and Public Policy Perspective • Seek Industry-wide approach • Seek Coalitions • http://video.google.com/videoplay?docid=-4657605964561860070&q=&hl=en Prof. Jovo Ateljevic

38. Government role: the top-down approach to CSR • How far the govt should go in regulation CSR? • Some of the govt measures and activities: • Encouraging the spread of responsible business practice • Proactive role of govt in prompting/ participating in CSR & poverty reduction • Investment in community • Workplace; govt define decent minimum standards (health and safety, flexible working, min wage, youth employment etc. • Providing support and guidance and fallible framework for businesses to protect the environment • Governance and transparency Prof. Jovo Ateljevic

39. Supranational engagement in sustainable development: the EU • example of the agriculture sector –the reform of the common agriculture policy (CAP) • The EU sets out a strategic approach to integrating environmental concerns into agriculture (Act from 1999) • Over three-quarters of the territory of the EU is agricultural land or woodland • Previous CAPs contributed to the intensive use of the resources (meaning?) • The ’99 act introcuced a number of measures and incentives: extensification of land use, insentives for farmers and those maintaing countryside • Minimum environmental standards are an integral part of the agricultural support programmes Prof. Jovo Ateljevic

40. Corporation social responsibilities: recent developments • They has always been philanthropic (e.g. donated to charities, sponsored local sport clubs, helped to build communal facilities) • From recently social responsibility has become core of their business plan (some of them try to make the world better place) • Corporation are changing their business philosophy in their core management areas e.g. marketing and promotion, image • Today corporate, as many of their CEOs argue are genuinely concerned about their own actions affecting social and environmental interests not juts for stockholders. As W. Ford the Ford motor chairman remarks: ‘corporations could be and should be a major force for resolving environmental and social concerns in the 21st century’ • Or is all this just a PR tool for businesses? See Shell in action in business http://www.shellgaslpg.com/; • another example - shell is ‘exploiting’ a women sanctity towards fragile natural environment http://it.stlawu.edu/~global/pagessemiotics/testshell.html • ‘despite that she’s not at war with the oil company, she is the oil company’(a lyrical Scottish-accented narrator) http://www.shell.com/home/content/envirosoc-en Prof. Jovo Ateljevic

41. [Corporate] morality and order (law): A pessimistic view The most powerful class of institution on earth, is by any reasonable measure hopelessly and unavoidably demented. The corporation lies, steals and kills without hesitation when it serves the interests of its shareholders to do so. It obeys the law only when the costs of crime exceeds the profits. Corporate social responsibility is impossible except in so far as it is insincere. (Bakan, 2004) Prof. Jovo Ateljevic

42. What is Stakeholder Mapping? Stakeholder mappingidentifies stakeholder expectations and power and helps in understanding political priorities. Prof. Jovo Ateljevic

43. Exhibit 4.9 The Power/Interest Matrix Prof. Jovo Ateljevic

44. Questions Addressed with Stakeholder Mapping • In determining purpose and strategy, which stakeholder expectations need to be most considered? • Do the actual levels of interest and power reflect the corporate governance framework? • Who are the key blockers and facilitators of strategy? • Is it desirable to reposition certain stakeholders? • Can level of interest or power of key stakeholders be maintained? Prof. Jovo Ateljevic

45. What is Power? Poweris the ability of individuals or groups to persuade, induce, or coerce others into following certain courses of action. Prof. Jovo Ateljevic

46. Sources of Power Within Organisations Hierarchy Influence Involvement Control of human resources Control of strategic resources Knowledge possession Prof. Jovo Ateljevic

47. Sources of Power For External Stakeholders Control of strategic resources Involvement Knowledge possession Informal links to internal power Prof. Jovo Ateljevic

48. Indicators of Power For Within Organisations Status Resource claims Symbols Representation Prof. Jovo Ateljevic

49. Indicators of Power For External Stakeholders Status Symbols Resource dependence Negotiating arrangements Prof. Jovo Ateljevic

50. Organisational Purposes • Values • Mission statement • Vision statement • Objectives Prof. Jovo Ateljevic