Reframing Corporate Social Responsibility

Reframing Corporate Social Responsibility: Lessons from the Global Financial Crisis, edited by William Sun, Jim Stewart, and David Pollard, is volume 1 in an important new series: Critical Studies on Corporate Responsibility, Governance and Sustainability. Disclosure: I’m on the Editorial Advisory and Review Board of the series at the request of William Sun, who I’ve already identified as an important voice in corporate governance. See my review of his How to Govern Corporations So They Serve the Public Good: A Theory of Corporate Governance Emergence.

This new volume reflects on corporate responsibility (CSR), focusing on what role, if any, it played in the financial crisis and, perhaps more importantly, how such events might be avoided in the future by more fully integrating CSR into mainstream corporate practices. The editors argue that business discourse and values are currently viewed as independent from ethical norms and ethics, which have never been truly integrated into our model of business.

The key limitations of the current CSR theoretical frameworks are that they essentially talk about business without ethics (in the case of the shareholder value model), ethics without business (in the case of the business ethics model), or business with narrow-minded responsibility (in the case of the stakeholder model).

Alienated CSR is added to business from the outside; these authors hope to reframe it as part of an evolving and dynamic process embedded in business. Simon Robinson makes the point that responsible leadership involves enabling members to critique the group’s evolving myths. Trust is built over time as the coherence and congruence of ideas and responsibility withstand critical challenge. In the case of bailed out banks, the issue of responsibility was largely ignored, reinforcing a detached Wall Street culture, with no sense of shared responsibility to the wider community.

Robinson argues that justifications for their huge bonuses were unwarranted. There is little evidence of better jobs that would lure CEOs away, while there is much evidence of available leaders willing to work for considerably less pay. Second, leaders have less impact than is commonly assumed. Critical is the development of transparent and coherent “compensation philosophies” within the firm as part of their statement regarding social justice. Also important is a shift from charismatic to dispersed leadership models. It should become increasingly difficult to deny any responsibility for knowing the consequences of actions on the wider social environment. Those connections are becoming common knowledge after the latest global financial crisis.

Ralph Tench cites the 2010 Edelman Trust Barometer (2011 is even worse). Only 17% trust information coming from company CEOs. Such information used to be trusted as coming “from the horse’s mouth.” Now CEOs are tarnished, carrying labels of “greed, excessive pay and the abuse of managerial power.” The importance of social media and plain interactivity is increasing. From an Oriella survey, 68% of journalists encourage comments on stories online; 1/4 quote bloggers in their original stories.

Trust has two major components: technical or skill based and ethical benevolence based trust. Perhaps it is time business leaders had something like a Hippocratic oath.  “If managers had taken strategic decisions and choices with a deeper understanding of their corporate social responsibility then maybe some of the outcomes would have been different.”

Brian Jones points to the notion that consensus politics gave way to conviction politics. “The crisis signaled a shift away from rampant neo-liberali individualism and a move to collective responsibility.” There is more emphasis on risk management in corporate governance. Jones calls for more accountability from within, making better use of the knowledge and skills of workers, managers, shareowners and the wider community. “Increased democratice accountability and the spreading of wealth, knowledge and power are necessary steps.”

The chapter by William Sun and Lawrence Bellamy gets to the heart of the matter in examining a separation thesis that separates and isolates identities, justifying excessive self-interest and rationalizing externalization risks and costs. Unlike the view of Berger and Luckmann, which regards socially constructed reality as objective, Sun and Bellamy see an ideological instrument intended to serve and justify particular interests. They step through the players in the subprime loan crash and detail how management was able to take advantage of separated interest parties with limited asymmetrical information.

With conflicting interests between shareholders and stakeholders perceived as taken for granted, managers are viewed as independent agents and mediators (a third party) to sit in the middle of both sides to coordinate the conflicts. With such a privileged and advantageous position, management find it easy to control and manipulate other parties.

The authors look to how the separation thesis can be bridged. One example is that in the US 90% of publicly held companies had employee stock-option programs. Shareowners can simultaneously be employees, managers, consumers and creditors. We need to see whole people, rather than focusing on distinct roles. “By living in a split world, for over two decades, we have placed the hope of corporate social responsibility on managers rather than ourselves.”

We need to develop the critical thinking skills of managers so that they are aware of inherent interconnections and the need to challenge artificially and ideological constructed silos that encourage them to hand power to irresponsible lobbyists.  They pin hopes on building a connection thesis, based on interrelationship, interdependence and mutual understanding to replace the current separation thesis. “Common  alues and objectives could be built and shared, and conflicts and fighting could be minimized and avoided.” Trust could be restored.

Robert J. Rhee argues that US corporate laws have evolved to give board more authority to embrace CSR principles through a fiduciary exemption when boards act to avert or mitigate a public crisis. Corporate law is founded on the principle of social wealth maximization, not maximizing the profit of shareowners. Tineke Lambooy, in examining Dutch law, finds CSR even further embedded with an obligation to report on compliance with the Tabaksblat Code of conduct. However, Lambooy laments the Code could have gone further, for example, by containing specific provisions on management board composition. The next step should be participation of external stakeholders in the decision-making process in line with best practices in the international arena.

Colin Fisher sees three levels of corporate response: Willingness to adjust or even abandon a business model that creates or aggravates social harm. Willingness to at least limit harm caused by business activities. Unwillingness to adjust to ameliorate its effects. He goes on to develops an ethical decision-making flow chart based on Rawlsian analysis that takes into account the distribution of consequences. Paul Manning investigates the dark side of social capital, demonstrating through Bernie Madoff that sociability is morally neutral. “One cause of the credit crunch was an over-reliance on self-regulation and concomitant under-appreciation that markets are human constructions.

Wayne Visser argues we must shift from an age of greed and “Gucci capitalism” to an age of responsibility.  Our incremental approach to CSR fails to keep up with the problems it seeks to address. The “‘inconvenient truth’ is that CSR sometimes pays, in specific circumstances, but more often does not.” CSR 2.0 must clarify and reorient the purpose of business so that it serves society “through the provision of safe, high quality products and services that enhance our wellbeing, without eroding our ecological and community life-support systems.”

Hershey H. Friedman and Linda Weiser Friedman plea for voluntary simplicity. We must redefine progress, along with Jencks, so that it does not focus on material goods but on things such as “physical health, material security, individual freedom, and time to play with our children and smell the roses.” Increased income bears little correlation with happiness, once a person’s basic needs are satisfied. “What does seem to matter considerably more than absolute wealth is relative wealth.” We won’t achieve happiness by running on the hedonic treadmill of materialism and consumption. We need to find rewards for reducing our reliance on scarce resources and debt.

I’ve struggled with these issues myself lately in trying to come up with a way to avoid the “Lake Woebegone” effect of most CEOs being paid above average and the averages ratcheting up each year. I’ve drawn a line in the sand at the median of $10.8 million a year but haven’t figured out how to motivate the executive who is paid $9 million when his counterpart at a similar company earns $20 million. Do we need to build monuments to recognize the sacrifices made by executives who voluntarily choose to accept only $9 million? I hope not.

The last chapter in the book by Justyna Berniak-Wozney looks at CSR in developing countries, specifically Poland. In some respects they are way behind more developed countries. For example, CSR is most commonly associated with charity. In other respects, they are ahead, since under socialism state-owned enterprises built and maintained facilities without any commercial cost-benefit analysis and goals. Berniak-Wozney examines possible strategies for business, public administration, media, NGOs, and academics. Although it would appear CSR in Poland will continue to focus on how a company’s money is spent, instead of more connecting approach earlier put forth by Sun and Bellamy, such engagement may prepare them to join with other segments of society in a more holistic approach.

Hopefully, this book will get a timely reception. The challenges we face have never been greater. There is no end in sight to the current crisis and I don’t see many bankers or Wall Street traders adopting a lifestyle of voluntary simplicity. However, if we don’t figure out ways to better integrate CSR into mainstream business practices we are unlikely to survive challenges like global climate change in our currently recognized form. We cannot depend on “invisible” hands to magically change individual greed into collective good. Fiduciary duty must encompass the whole person and the whole society, as noted in the 2005 A Legal Framework for the Integration of Environmental, Social and Governance Issues into the Institutional Investment by the Asset Management Working Group (AMWG) of the United Nations Environment Programme Finance Initiative and paid by Freshfields Bruckhaus Deringer.

A second report by the group was released in July 2009 entitled Fiduciary Responsibility: Legal and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional Investment (Fiduciary II). The new report builds upon its predecessor by arguing that “Advisors to institutional investors have a duty to proactively raise ESG issues within the advice that they provide, and that a responsible investment option should be the default position.” In other words, ESG/CSR must be embedded into the legal contracts between asset owners and asset managers in just the type of approach advocated by many in Reframing Corporate and Social Responsibility. A third important report is the 20111 Towards a Green Economy: Pathways to Sustainable Development and Poverty Eradication.

We’re on the right track. I just hope excellent advice will be heeded in time.  Let’s build on connections, instead of handing power to experts who would continue to segment our thinking into incoherent stories and insalubrious environments.

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