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Creating a Tipping Point for Corporate Responsibility

By Kelly Robinson,2014-08-12 09:28
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Creating a Tipping Point for Corporate Responsibility ...

    What Will It Take to Create a Tipping Point for

    Corporate Responsibility?

    Sandra Waddock

    Boston College

    Carroll School of Management Chestnut Hill, MA 02467 USA

    +1 617-552-0477

    f: +1 617-552-0433

    waddock@bc.edu

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    What Will It Take to Create a Tipping Point for

    Corporate Responsibility?

    ABSTRACT

    In the context of corporate scandals, growing concerns about human and labor rights in global supply chains, environmental degradation, and globalization‟s impact on developing nations, many questions have arisen about what it will take to restore public trust in corporate integrity. This paper explores the emerging pressures for companies to manage responsibilities more proactively and investigates what elements of internal corporate responsibility management and external corporate responsibility assurance will need to be in place before a „tipping point‟ for responsibility can conceivably be generated. The paper argues that generally accepted responsibility management systems, analogous to accepted quality management systems, will need to be systemically in place within companies. Insufficient alone, responsibility management systems will need to be supplemented by external responsibility assurance systems, comprised of three additional elements: generally accepted principles and codes that provide a foundation of accepted values, globally accepted multiple bottom line audit and reporting guidelines comparable to GAAP within the accounting industry, and credible external verification, monitoring, and certification systems relevant to the various stakeholder and ecological practices involved in managing corporate responsibility.

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    What Will It Take to Create a Tipping Point for

    Corporate Responsibility?

    In the context of corporate scandals, growing concerns about human and labor rights in global supply chains, environmental degradation, and globalization‟s impact on developing nations, many questions have arisen about what it will take to restore public trust in corporate integrity. While many companies claim to have established and adhere to corporate codes of conduct, sometimes affecting their entire supply chains, and while numerous voluntary initiatives have sprung up that provide a range of frameworks that companies can use to manage stakeholder and environmental responsibilities, the wave of corporate (and other institutional) scandals and misdeeds in the early 2000s makes clear that corporate integrity, trustworthiness, and even compliance with the rule of law is problematic. Despite the many voluntary initiatives that have been developed ostensibly to ensure that companies meet their obligations and responsibilities to the broader societies in which they operate, non-governmental organizations (NGOs), environmentalists, and labor unions, critics still question whether voluntary actions by companies to monitor their own behavior can be credible. Further, scans of the companies involved in many of the initiatives to be discussed below suggest that in many ways it is the „usual suspects‟ who are actively developing and promoting corporate responsibility agendas. Despite a great deal of momentum, the push for more responsible companies apparently has yet to reach a tipping point (Gladwell, 2000). This paper will explore some of the initiatives that might potentially be linked together to create just that tipping point.

    A Context of Competing Interests

    Both inside and outside of companies, the outcry against the abuses that have been so prominent in the US press since the collapse of companies like Enron Corporation, Anderson, and WorldCom has raised public awareness about corporate responsibilities. Expectations about how companies should act in the world, with respect to specific stakeholders like investors and employees, to communities where they operate, and to the developing nations whose labor force provides much of the manufacturing capability for the modern transnational company, have steadily grown in recent years, even without the current wave of abuses, frauds, and malfeasance. Evidence for these changing expectations comes in the form of new and emerging institutional forces at play in the environment surrounding companies today that may have some potential to lead to important new governance structures in the future.

    Companies today operate in a complex landscape of competing pressures. For publicly held companies, of course, the dominant pressures of the past 25 years or so have focused largely on financial performance, with an emphasis on „maximization of

    shareholder wealth.‟ Pressures from the financial community have generated the

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    currently dominant model of investor capitalism (Useem, 1999; Kelly, 2001), which tends to shunt aside other stakeholders‟ interests. Accompanied by shifts in CEO

    compensation during the 1980s and 1980s that rewarded high flying financial performance, short-term orientation, (some would say greed, too), and created what one scholar characterizes as the „curse of the superstar CEO‟ (Khurnana, 2002), the financial

    community placed huge faith in CEOs‟ capacity to deliver (financial) value and performance. Pressures from Wall Street and other financial markets and the accompanying cult of the CEO are blamed by many observers for the corporate arrogance, scandals, earnings restatements, and other forms of malfeasance that have plagued corporate America because they focus attention on short-term as opposed to long-term results. Faced with continuing monumental pressures from shareholders and Wall Street to achieve constantly increasing bottom line results, companies too frequently succumb to a „profits at any cost‟ mentality that puts shareholder interests above all others.

Countervailing Pressures

    Yet there are countervailing pressures from other stakeholders to those coming from the financial community. Despite the dominant logic of investor capitalism based largely on Chicago school economic theory, these countervailing pressures have begun to emerge from the strengthening of civil society and voice of the wide range of social, political, and environmental activists, like the ones who became highly visible in 1999 in the Seattle protests surrounding the meeting of the World Trade Organization. One source of new pressures in the direction of more responsible management comes from the growing social investment movement, which has been claimed to be the fastest growing segment of the market since the stock market began plummeting. Social investors demand more responsible practices on the part of companies in which they invest (e.g., Gravitz et al., 2001), which appears to pay off in performance results (or at least creates few penalties) (e.g., Guerard, 1997; Angel & Rivoli, 1997; Waddock, Graves & Gorski, 2000). Pressures for responsibility also come from customers, who are demanding “green” and otherwise responsible products and companies (Rochlin and Christoffer, 2000), as well as from employees are choosing where to work on the basis of corporate reputation for responsibility (Greening & Turban, 2000).

    Today‟s anti-corporate activism is sometimes aimed at specific companies, particularly those that are powerful and dominant within their industries, i.e., those that 123are highly visible (e.g., Nike, Starbucks, and Wal*Mart). Such activism can include

    company-specific websites and campaigns, which feature news, boycott or protest tactics, and relay information that can damage companies‟ reputation and brand image, Such

     1 Part of Oxfam America‟s campaigns. See http://www.caa.org.au/campaigns/nike/index.html. See also,

    e.g., http://www.dogeatdogfilms.com/mikenike.html, 2 E.g., http://www.organicconsumers.org/starbucks/index.htm. 3 One site is devoted to the „best anti-Wal*Mart links, e.g., http://www.bit-

    net.com/~dka/Resources/Best%20Links.html, but see also http://www.walmartwatch.com/, and the

    Teamsters‟s anti-Wal*Mart page, http://www.teamsters63.org/Teamster63/walmart/Walmart_01.html, as

    other examples.

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    websites sometimes also feature chat rooms where complaints and comments are lodged that can raise questions about the company‟s overall level of responsibility. Other websites and activist pressures deal with specific industries or are aimed more generally at big-business per se. The latter tend to emphasize overall anti-corporate, anti-global activism around specific practices, power, and issues (e.g., labor practices, general antic corporate websites, sweatshop watches, and environmental activisms). These types of 456websites have names like Corporate Watch, Adbusters, and Sweatshop Watch, to name

    a few. So powerful are these activists in impacting corporate reputation negatively that the public relations profession and their member companies have begun developing „anti-

    corporate activism‟ tactics and giving advice for dealing with activists to companies 7under fire.

    Anti-corporate activism has been aided by media attention to the current spate of corporate scandals, the negative impacts of globalization on some people, and capacity for communication provided by the worldwide web. Media pressures and popular books have also created significant new pressures on companies with brand identities and 8reputations that matter to them. Books like Naomi Klein‟s No Logo, Charles Derber‟s

    Corporation Nation and more recent People before Profit, Schlosser‟s Fast Food Nation, 9and Barbara Ehrenreich‟s Nickel and Dimed: On (Not) Getting By in America (among

    many others) have raised awareness of the role that multinational giants play in creating problematic social conditions at home and abroad. Such books have created significant reputational problems for certain brand name companies, which have also been targeted by labor, human rights, anti-corruption, and environmental activists. At the same time, by highlighting values other than economic, they have also raised important issues of social justice, safety, manipulation of citizens and consumers by corporations, and power.

    Recognition of natural resource limitations combines with companies‟ exploitation of raw materials to generate additional concerns. Environmental management, sustainability, and company reputation have become considerably more important today, particularly since the European Union‟s issuance of a white paper on corporate social responsibility in 2002 that focuses heavily on issues of environmental sustainability. Additionally, new institutions, such as ratings and rankings of companies‟ stakeholder-related practices (“Best Companies to Work For” and the like) publicize companies‟ practices, for good or for ill. The proliferation of global standards, new

    reporting schemes for multiple bottom line reports, and monitoring companies (all to be discussed in detail below) have enhanced public awareness of issues raised by corporate behavior and raised the stakes for companies that desire to be perceived (or to actually be) responsible.

     4 See: http://www.corpwatch.org and http://www.corporatewatch.org.uk/. 5 For examples, see: http://www.adbusters.org/home/, 6 See, e.g., http://www.sweatshopwatch.org/, http://swatch.igc.org/swatch/codes/ucas/,

    http://www.people.fas.harvard.edu/~fragola/usas/index.html, http://www.uniteunion.org/index.htm, and

    http://www.nlcnet.org/ for some prominent examples. 7 See, e.g., http://www.e911.com/exacts/EA060.html, and http://www.e911.com/exacts/EA060_2.html for

    examples of the ways companies are being advised to respond to activism. 8 For examples of some of the activism generated by this book, go to: http://www.nologo.org/. 9 Notably, this book has now been turned into a play.

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    The corporate scandals in the US of the early 2000s also created numerous calls for reform of corporate governance, mostly in the interest of serving shareholder better, but also creating a context in which transparency and accountability have come to the forefront of thinking about corporate governance. In the US, the Sarbanes-Oxley Act of 2002 (Public Law No. 107-204, 2002) aims to hold executives and auditors more accountable to shareholders. Among other things, Sarbanes-Oxley requires CEOs and CFOs to personally certify the full compliance of the company‟s disclosure documents with SEC requirements, prohibits loans to company officers and directors, and requires reimbursement of incentive-based compensation when a company is found guilty of earnings misstatements (Metzger, Colihan, Stubblefield, and Best, 2002). Many observers, believing that Sarbanes-Oxley is insufficient to create a level of transparency and independence of corporate reporting that would satisfy not just shareholders but also other stakeholders have called for additional reforms. One group, called the Stakeholder Alliance has proposed a “Corporate Accountability Act” that would ensure auditor independence (see http://www.stakeholderalliance.org/CorpAccAct.html). Others call for

    more significant reforms that would bring employees onto boards of directors (as they already are in the German system, for example), bar law-breaking companies from receiving government contracts, and establishing a “corporate duty of loyalty in law to the public good” (Kelly, 2003). Such reforms, if implemented, would have the consequence of opening up corporate activities to a broader array of stakeholders, creating an environment for companies of greater transparency and accountability, which is much demanded by many corporate critics.

    Further, the external environment facing business changed rather dramatically during the 1990s with the evolution of the worldwide web and its almost instantaneous global communications capacity. The Internet provides a revolution in communication stcapacity that allows for the emergence of new organization forms for the 21 century

    analogous to that of the railroad and telephone/telegraph studied by Chandler (1962). ththJust as corporate structure, facilitated in the 19 and early 20 century by these new

    communication and transportation tools, shifted from simpler forms (functional or simple structures) that needed to be managed close to home toward multi-divisional (M-form) structures where control could be extended geographically (Chandler, 1962), so a similar evolution in form has occurred with the advent of the worldwide webthe network

    structure. In large measure, it is this capacity of a network of suppliers and customers to communicate across vast distances that combined with the merger and acquisition phenomenon, the development of workable quality management strategies, just-in-time inventory systems, and cost pressures to create the drive for outsourcing to global suppliers that raised awareness of issues of human and labor rights, sweatshop conditions, child labor, and ecological damage.

    Unlike previous structural evolutions documented by Chandler (1962), today‟s

    network structure is characterized by permeable boundaries, not only within the primary scope of the company‟s responsibilities (Preston & Post, 1975), but, more dramatically, by demands for voice and input into corporate affairs by external stakeholders who have witnessed the impact of corporate activities on employees, local communities, developing

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    countries, governments, and the natural environment (not to mention industrialized nations). Using the very technologies that created corporate network structures and fueled by the instantaneous communication capacity of the web, concerned actors from civil society, environmentalists, labor, and anti-corruption advocates have used their „voice‟ (Hirschman, 1972) in new ways to create a context of new demands on

    companies for responsibility, accountability, and transparency that are becoming harder for companies to ignore.

    Companies with long global supply chains, e.g., most of the footwear and many toy and clothing companies, have been hard hit by scandals associated with labor and human rights practices in the manufacturing companies from which they source their products. Other companies have been targeted for involvement in countries that have abusive regimes in place (e.g., Burma/Myanmar and Nigeria). In some instances the reputational damage has been severe enough to push targeted companies into the lead in developing external monitoring, certification and verification procedures; however, voluntary initiatives by companies alone lack the credibility to satisfy external critics. Such voluntary initiatives on the part of companies will be discussed below as essential components of the emerging set of institutions that need to be in place to provide any degree of credibility to corporate efforts to prove themselves responsible to external critics. Arguably, it will be at least in part a structured system of voluntary initiatives, probably coupled with shifting mandatory and regulatory requirements, involving both internal and external actors in different parts of the world that will create a context for an eventual tipping point toward effective management and reporting of corporate responsibility and corporate citizenship.

    Elements of a Tipping Point

    The landscape of the corporate responsibility „movement‟ has shifted rather

    dramatically since the early 1990s, when a relatively few outside-the mainstream academics and forward-thinking companies were talking about corporate „social‟

    responsibility. In that context social responsibility really took on the connotation of discretionary activities directed at the betterment of society (Carroll, 1979; 1998). Today, a corporate philanthropy, volunteer, or community relations program is no longer sufficient to reassure stakeholders that a company is being responsible. Indeed, the terminology has shifted to reflect the changing scope of demands on companies, from the „do good‟ stuff of philanthropy that used to represent corporate „social‟ responsibility, to new terms that encompass corporate strategies and practices, including corporate citizenship, corporate responsibility, and stakeholder engagement (Andriof & Waddock, 2002).

    In contrast to corporate „social‟ responsibility, which is frequently delimited to discretionary activities (Carroll, 1998), corporate citizenship, corporate responsibility, and related terms have a broader emphasis that involve the company‟s treatment of an interactions with their stakeholders, nature, and the broader societal environments as enacted through their strategies and operating practices (Marsden & Andriof, 1998;

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    Marsden, 2000; McIntosh, Leipziger, Jones & Coleman, 1998; Waddock, 2002). In today‟s climate, as the Conference Board‟s director of research in global corporate citizenship, David Vidal was quoted as saying in the executive magazine Across the

    Board, „Citizenship…deals with primary business relationships that are part of a company‟s strategic vision, and a good business case can be made for corporate citizenship‟ (Vogl, 2003).

    The pressures on companies that have created this business case for corporate citizenship aim for more responsible, accountable, and transparent behaviors. But, especially in the current climate of distrust about corporate integrity and financial audits, corporate critics, social investors, employees, and customers are unlikely to take companies‟ word that they are behaving responsibly at face value. Skeptical stakeholders increasingly demand assurance (some might say more credible assurance than has been provided of late by financial audits) that there is reality behind the corporate rhetoric of responsibility and citizenship. Because pressures related to what we can call corporate integrity come from a wide range of mostly external stakeholders, it is becoming increasingly clear that systems of inter-related institutional structures inside

    and outside companies may be necessary.

    Two kinds of interconnected systems will potentially be needed. Internally, companies will need to develop (and in many cases already are developing): internal

    responsibility management systems that establish corporate standards and codes of

    conduct and ensure that they are being implemented. These management systems are already being supported by a growing array of corporate citizenship/responsibility consultancies, as well as trade, industry, and business association initiatives that provide information and education, and voluntary multi-stakeholder alliances that provide guidance and input into internal corporate management systems from a range of perspectives.

    Externally, there will also need to be a linked set of what might be called responsibility assurance systems, the structure of which is already beginning to emerge.

    To provide credibility to responsibility management systems internally, companies will need to adhere at minimum to globally accepted norms or standards of practice, which are developed internally through accepted responsibility management systems of the type briefly discussed above. For the sake of transparency and accountability, they will also need standardized external reporting structures for what is called the triple bottom line (Elkington, 1998) of economic, social, and ecological responsibility. Finally, to satisfy skeptics, there will need to be a credible system of certification, monitoring, and verification related to reported corporate practices, undertaken by organizations independent of the company and incorporating the views of numerous stakeholders. The outlines of both internal and external systems (see Figure 1) have already begun and will be the focus of the next two sections.

    Figure 1 about here

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Internal Responsibility Management Systems

    In response to the external pressures and criticisms noted above, as well as some specific laws in the US affecting government suppliers (e.g., the Foreign Corrupt Practices Act), many companies have already developed internal corporate codes of conduct. Although many defense contractors have had codes of conduct in place since the scandals of the late 1970s and early 1980s (mostly as anti-corruption and anti-bribery measures), companies in other industries have only recently responded to the pressures for greater responsibility by implementing codes, e.g., in the retail, footwear, toy, and other highly visible brand-sensitive sectors.

    All the codes of the conduct posted on obscure walls, lying unread in desk drawers, or written in English in developing nations, however, will not satisfy many corporate critics. Further, given the dominance of the shareholder wealth maximization model, most companies need a reason beyond admonishments from business ethicists and corporate critics to behave responsibly. For most companies, that means finding a business reason to take responsibility management seriously. The reputational problems that attend more sophisticated customers, employees, and social investors are beginning to supply that reason, as well as mounting evidence that managing responsibly makes good business sense.

    The simple analogy here is to the quality movement, which was hardly taken seriously in most American firms until their Japanese and German competitors were quite literally eating their market share in industries like electronics, consumer products, and automobiles. Even the loss of market share or, indeed, whole industries, was an insufficient wake-up call. It was not until companies in the European Union threatened to stop doing business with suppliers that did not conform to ISO quality standards that there was a serious business reason to implement standardized quality standards (Evan & Lindsay, 2002). Perhaps, as will be discussed below, similar threats will be needed to make corporate citizenship real.

    For some companies, particularly those buffeted by recent scandals of various sorts, corporate citizenship activities are already real. In companies taking their citizenship seriously, internal responsibility management systems are evolving to support these codes of conduct and focus realistically on stakeholder engagement processes (Svendsen, 1998; Lawrence, 2002; Waddock, Bodwell & Graves, 2002; Waddock & Bodwell, 2002). Similar in many respects to quality management systems, responsibility management are systemic management approaches to managing stakeholder and environmental impacts and other responsibilities. Just as with both quality and environmental management approaches, as best practices begin to be more widely disseminated through mechanisms like the Global Compact‟s Learning Forum or case studies and research, it is likely that within the next dozen or so years, generally-applicable and well-respected approaches to responsibility management will be developed and promulgated.

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    Even rigorous implementation of internal codes of conduct and extensive responsibility management systems are unlikely to be sufficiently credible to activists on the outside of the firm. As a result, a growing array of related initiatives that compliment and support internal corporate responsibility management practices but provide external validity, transparency, and accountability has now begun to evolve. It is with the creation of a responsibility assurance system, i.e., the integration of these external verification systems and their implementation by a large number of multi-national companies throughout their supply chains that arguably creates the context for a tipping point.

External Responsibility Assurance Systems

    For the new imperative towards corporate responsibility to „tip‟ over into becoming a business imperative in a business environment that demands continual growth and profits, external institutional forces pushing for more responsibility, transparency, and accountability will likely need to coalesce. Many scenarios that might create this tipping point are feasible in the emerging context of institutional pressures, including, of course, the potential for new government regulation that mandates specific behaviors, practices, or reports. For example, the US Securities and Exchange Commission (SEC) voted in January 2003 to require mutual fund companies to disclose their policies on voting proxies as well as the actual votes. In 1999, the United Kingdom became the first nation to pass a law requiring the trustees of pension funds to disclose their approach to issues related to social responsibility in their investment strategies, or not, as the case may be. France has a similar law that applies to companies listed on the Paris stock exchange instead of pension funds, and Johannesburg‟s Stock Exchange mandates compliance with specific codes of conduct (Vogl, 2003). The UK‟s pioneering

    law set the stage for other disclosure regulations like the SEC ruling in the US, which do not necessarily regulate what a fund does but requires a new level of transparency about decision criteria that make less responsible practices more apparent to critics.

    This type of mandate has potentially interesting effects on funds and the companies whose stock is in those funds, since neither the fund managers nor the companies wish to be seen as irresponsible. In a recent report on the 1999 UK law, the UK group Social Funds reported on a study of the implementation of the British law:

    The report found that 59 percent of the UK pension funds surveyed, representing

    78 percent of total assets, incorporate socially responsible investment into their

    investment strategies. Only 14 percent of funds, representing 4 percent of total

    assets, state specifically that social concerns will not be taken into account. These

    results suggest that larger pension funds are more likely to take socially

    responsible investment considerations into account than smaller ones. (Posted at

    http://www.socialfunds.com/news/article.cgi/article391.html)

    Laws like these and others that may be forthcoming could potentially create a new institutional framework around the level of transparency, accountability, and report content that companies must achieve whether or not they care about being accepted as

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