Responsibility towards the Stakeholders

Globalization has made the boundaries between politics and economy blurred, thereby making the world more interdependent. In the last decades, the labor separation between politics and the economy underwent considerable change. Due to this internationalization, governmental constraints on firms may be less effective often resulting in a “race to the bottom” that pits state against state. A so called laissez-faire mentality was a common practice. 

But the current financial crisis challenged this way of thinking. The private sector expected the governments to take responsibility for the functioning of the economy and the welfare of the nation. 

Unfortunately governments are made up of politicians who want to be reelected. Politicians aren’t saints. They are part of a party, have got a network and act in their self or partisan-interest. One example was this summer’s debt debate in the United States of America. The months of partisan fighting resulted in the downgrading of the US’s AAA credit rating (http://www.bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html ) by the rating agency Standard & Poor. 

There are top managers who want government to also consider the concerns of the country, in a way that they themselves consider the concerns of the company’s mutual stakeholders. Indeed, the gridlock and partisanship in Washington D.C. provoked some top managers to formulate clear expectations towards government. A well known example is Warren Buffet’s statement “Stop Coddling the Super-Rich” in a New York Times opinion page. He concludes with the words: “My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.” (http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html ) Or take the CEO of Starbucks, Howard Schultz, who called for a boycott on campaign contributions to either party until the elected leaders of the United States of America put aside their political posturing and find some common ground on long-term fiscal issues (http://www.huffingtonpost.com/2011/08/15/starbucks-howard-schultz-boycott-campaign-contributions_n_927550.html ). 

This kind of debate, however, doesn’t only exist in America. Also in Europe managers have clearly expressed their expectations of politicians. Diego Della Valle for example, CEO of Tod’s, published an article with the title “Politici ora basta” (Politicians, now it’s enough). He states in Italian newspapers that the politicians’ selfish behavior disregards the concerns of the country and damages the reputation of Italy (http://www.corriere2000.it/2011/10/politici-ora-basta/ ).

These examples show that some top managers realized that an organization can’t be sustainably successful in today’s world without the inclusion of all the stakeholders. No company and no market economy can be sustained without heeding the needs of employees or citizens (Swissquote Magazin Nov/11, 67). 

Instead of concentrating on short term goals like increasing the shareholder value or winning elections, decisions should be made based on sustainable thinking and by including all relevant stakeholders.

Sabrina Stucki

 

Leaders are human beings

Leadership seems not to be divisible; it absorbs the person totally. This credo is accepted in business but also in politics. We experienced this already four years ago when Barack Obama was elected President. Even though he had small children at the time, there was barely any discussion of how he could carry out the two responsibilities, namely the Presidency and fatherhood. But if Michelle Obama had been elected President, certainly everybody would have been discussing this matter. The difference in judging the same situation between a man and a woman is even more astonishing, as both are well educated and successful in their profession.

Recently a similar situation occurred in Switzerland. A 39 year old (young!) man, Alain Berset, was elected as Swiss Federal Council.  His wife is also very successful in her profession. The couple has three young children. Again there was little public discussion that Alain Berset as Federal Council will barely have time to see his three children. We – as a culture - obviously think it is more important that our leaders carry out their professional tasks full-time, rather than that they spend part of their time with family duties. We consider that their duties lie in their professional life and not in their private life as human beings. This is especially true for men.

This understanding asks either for specific personalities and values for leaders, or that failing, it accepts that leaders simply bear the stress due to the tension between their professional and private lives. What is however mostly overlooked is that the values and personalities of such leaders also influence the understanding of leadership in society, which thus far emphasizes an instrumental and not human oriented worldview. Moreover, it hinders men to think about their multiple roles, and how they might coordinate them with their partners.

But why should it not be thinkable that an American President or a Swiss Federal Council work part time? And more provocatively, that a man actually asks to work part time as President or Federal Council? Are the experiences of parenthood so negligible that we prefer our leaders to just be professionals?

If we don't start to see our leaders more as human beings, we can’t expect that they will be humanly oriented. We should change our priorities in this respect. In case studies we carried out with students at the University of Zurich and also in other studies (see e.g. Shellenback, K. (2004). Child Care & Parent Productivity: Making the Business Case), it becomes obvious that shared leadership in firms, leads to higher motivation but also to additional competences based on the experiences of parenthood. These studies also make clear that we need more leaders who are asking for shared leadership and more examples of good practices. So let us look for new ways of leadership in 2012. I am looking forward to your experiences on our blog.

Sybille Sachs

Upper echelons

In the aftermath of the past financial crisis, a lot of people have been really upset about the greedy behavior of managerial decision makers. Especially in the financial industry top managers are still granting exorbitant compensations to each other and don’t consider the widening disparity of incomes and the problematic dissemination of value created by companies. As people got stunned about this obvious exhibition of pure self-interest and the pronounced ignorance of consequences for the society at large, they started to protest. A well-known example is the now fading “Occupy”-movement. However, public, media and even psychiatrists are wondering if those managers’ peculiar behavior is a distinctive expression of narcissistic personality traits, which accumulate in upper echelons.

As a social psychologist I am somewhat prone to take the social context into account to explain a specific phenomenon. People tend to define their self-concept not only by their individual personality, but also through relationships and memberships in social groups. Moreover, once a person perceives herself as a member of a social group and therefore identifies with it, this social identity influences her perceptions, attitudes and behaviors. Therefore, a social identity provides a person with a framework to interpret but also makes sense out of her social environment and adds to the questions of “Who am I?” and “What is my role in society?”.

If we consider the existence of an upper echelon identity, we have to assume the existence of a social group consisting exclusively of top managers. It is not very difficult to find examples of such social groups, for example during the formal World Economic Forum (WEF) or the infamous and informal relationships between members of top management in various globalized organizations. As every social group is based on similarities between its members, power, decisiveness, prestige and high salaries may are distinctive shared characteristics of top managers. If a person then identifies with a social group, those characteristics become part of her self-concept, other in-group members are perceived as more similar and, thus, generally more positively evaluated.

Coming under attack by other social groups, members of social in-groups move even closer to each other, trying to protect their social self-concept by sticking to the well-known values and norms of their shared identity, partly ignoring the concerns of their wider social environment. In the case of an upper echelon identity, the behavior of top managers therefore resembles the one of pure self-interest, described above. But actually, this behavior is not simply driven by self-interest, but also by those managers’ specific upper echelon identity and its corresponding values and norms.

To counteract the described problematic behavior of top managers, much more is needed than to focus simply on personality traits: the values and norms of an upper echelon identity have to be utterly questioned and replaced. This endeavor of changing a powerful and prestigious social group’s norms and values may can’t be accomplished by regulations, but by a paradigmatic shift from self-interest to mutuality as guiding value and shared norm.

Tom Schneider

Dare to care

During a recent conservation with the leaders of various business units in a multinational corporation it became clear how different leaders are used to perceive and treat their employees. One of the participants told the following story: One of his employees was undergoing a difficult personal situation in her family circle. Finally she could no longer carry the burden; so she told to the manager that she was no longer able to perform in her usual manner as she had to unexpectedly take care of a problem in her family. The manger who esteemed this employee and her extraordinary performance decided to support her. Therefore he suggested that she could give priority to her personal problems for a certain time. He restrained from giving her a time limit or any other kind of specifications and restrictions.  

The reaction of the employee was overwhelming. She voluntarily informed him how she resolved her situation step by step and she was obviously even more devoted to her work after this experience than before. The manager himself decided that in the future he would encourage his staff to be open to him regarding their personal situation.

This story is probably not an exception but it confirms important insights we can gain out of studies that are done in the area of “work and care”. People are more motivated to work if they are respected not only as a human resource but as a human being. Doing business is not a purely economic affair but also a human one. And finally, considering employees as human beings provides  not only positive effects in motivation but such employees are more than 30 % in a better physical condition, 25 % have a reduction in stress,  5 % are sleeping better. Due to their improved  work-life balance an increase in productivity of over 30 % could be ascertained  (see for example  Bright Horizon (2010).  Enhanced Employee Health, Well-Being, and Engagement through Dependent Care Supports).

With respect to a systematic approach to motivate employees and other stakeholders to contribute their resources for a firm’s value creation, it is important to keep in mind that stakeholders are ends and not means. This was emphasized by an interviewee as follows: “Employees as stakeholders play an integral role because if you treat employees as interchangeable commodities that can just be switched in and out, you're never going to get the transfer of knowledge; and you're never going to achieve the real efficiency that you can with the development of knowledge and expertise” (see chapter 6 in Sachs, Rühli 2011). Last year the annual meeting of the Academy of Management was guided by the motto “Dare to care” to explore new approaches in the field of strategy and organization. Based on the above stated experiences and studies I suggest that one of the guiding principles for new narratives of leadership should be “Dare to care”.

Sybille Sachs

An ode to the dismal science – or, why this time is different

I remember my first encounters with economics and finance at the university with considerable fondness: the sophistication with which economic activities were organized in our contemporary world and the compelling simplicity of some of the mathematical models proposed made it a joy for me to explore. And yet, already as a college student, it was clear to me that something critical was missing from all these models: they were not grounded in a realistic conception of human nature and the larger world we actually inhabit.

The widely apparent failure of communism with its naïve conception of human nature as essentially selfless and communitarian, made it prone to derision by economists, while at the same time the evident success of capitalism with its conception of human nature as selfish and rational, permitted it to stand often unquestioned in its apparent logic and utility. Over the past couple of decades, however, it has become increasingly clear that also this latter, rational and selfish conception of human nature is an erroneous conception of what it means to be human. Bit by tiny bit (as a facetious saying went - progress in economics occurs one death at a time), there is a shift occurring within the august hallways of our proud economists, management consultants and even managers themselves. Younger economists have been increasingly found looking over the fence of their little fiefdoms, peering into the rapidly sprouting pastures of modern biology, psychology and the complexity sciences in order to find new answers to the most pressing challenges of this day and age.

Will neo-liberalism, with its rational “utility function optimizers”, fall the wayside as communism had? The evidence is increasing that it will; indeed, it may soon be ridiculed as communism had, as being a fanciful and ultimately distorted, if not downright destructive, conception of human beings and how to arrange our social, political and economic activities.

But what will take its place?

That is the question to which nobody today has a compelling answer. Certain is only that insights from such fields such as evolutionary biology, neuropsychology or the sciences of emergence will continue to make forays into our comprehension of ourselves and the world we inhabit. And certain is also that we will have to decide what to do with this new knowledge: to what extent do we wish to experiment in structuring our socio-economic institutions in accordance to the hints we are getting from these sciences? Apart from the fact that we are only at the very, very beginning of this revolution in understanding (humbleness is required!), there remains a certain weariness in passing laws and building foundations on insights gleaned from the natural sciences. Too distasteful are the reminders of our flirtations with eugenics at the beginning of the past century, too aware are we of the deep ethical dilemmas they will inevitably press upon us.

And yet, I posit that this time will be different and that to close our eyes to them will be nothing less than folly. The understanding we will be gleaning will be simply too compelling, the stakes too high, the opportunities too great. For we are rapidly leaving the days of our blundering, collective childhood behind us, increasingly having the knowledge and tools to chart our own course on this planet with deliberation, equipped with more than simply our ideological leanings through which to perceive and structure our reality.

It is with this in mind that I would like to - in a loose, intermittent series of posts - take peeks at some of these insights from the natural sciences and what they may mean for how we think about and organize ourselves socially and economically.

I would be delighted to get your feedback!

Manuel Heer Dawson

 Rating Agencies Challenged

The methodology of the rating agency Standard & Poor is increasingly being questioned after its recent extensive downgrading of the credit worthiness of diverse European countries (see http://www.bbc.co.uk/news/business-16082759). The European Union is even considering creating a European rating agency in order to break the monopoly of the American rating agencies (see http://www.spiegel.de/international/europe/0,1518,773549,00.html). With this, the EU suggests that the methodology of a rating agency is also culturally influenced.

This reminds me of an experience that I made in 1995 in the setting of the first worldwide roundtable talks pertaining to stakeholder relationships, which were organized by Shell in the wake of the “Brent Spar” event and the conviction of Ken Saro Wiwa in Nigeria (see Sachs, Rühli, Kern 2009). During these round-tables, the question was addressed in considerable depth as to what the future of reporting to stakeholders should look like for a firm. The challenge was to come up with a method which does not simply show the financial results of a company, but also takes account of the social and ecological dimensions. It was discovered that the specific expectations for such reporting was strongly dependent on the cultural background of the involved parties. The discussion participants had two basic approaches: transparency of the business operations and the trust in those who carry out these business operations. 

These roundtables revealed that the transparency of indicators which could be measured was most central in the United States. This approach was denominated as a “show me” culture. In Asia, on the other hand, stakeholders regarded trust as the most important indicator, which led to the designation of a “trust me” culture. In Europe, again, stakeholders sought to find a balance between trust and transparency, which some called a “tell me” culture. The result was that the respective cultural background of each participant had a significant effect on the choice of rating criteria.

One can thus reasonably assume that the “show me” culture was most salient with the three largest American rating agencies. The limitations of this approach are however becoming evident: a one-sided focus on quantifiable transparency will not assist us to overcome the current crisis of trust. For this the rating agencies will require evaluation methods which indicate how a broader perspective of trust can be developed (see also Sachs, Rühli, 2011, chapter 5). If the creation of a European rating agency is the solution is currently being debated. In any case, it is clear that rating agencies are having their methodologies challenged.

Sybille Sachs

A trade-off?

A few days ago, I spoke at a conference on impact investing. I was invited to speak on the topic “Trade-offs between profit and social impact?” from an ethical perspective. The deeper I got into the question, the more I discovered how interesting and challenging it was to provide an adequate answer to. Indeed, there are several answers to it. The first and simplest one is: “Yes, of course!” If a corporation doesn’t do anything else but maximizing profits, it doesn’t bother about the social impact of its activities. The “Invisible hand” of the market will turn private vices into public goods. Spending money for “corporate social responsibility” is an undue sacrifice of profits. All followers of the Friedman-tradition will agree on that answer.

I think, however, that the title of my presentation was set by those who invited me to challenge this tradition. 

I discovered that you can look at the question from a different perspective and say: “No! There is no trade-off between profit and social impact.” Profit is the result of a specific impact of money in a creative and productive socio-economic environment.  No profit has ever been made without any social impact at all. So the question regarding a trade-off is not the right one. The right question is the one referring to the quality of the social impact: “Is profit the result of a fair process of value creation, and a fair process of distribution of benefits?”

The trade-off question leads me to the moral category of “fairness”. This is not just because I’m an ethicist. It is because there is no way around the fact that value creation is a process of social interaction. In a business environment, this process is facilitated by the investment of specific resources such as financial capital, human capital, natural resources etc. Different stakeholders represent different resources and potentials. 

Thus, coming back to the initial “trade-off-question” we need to acknowledge that there may be nevertheless be a trade-off between financial profit and social benefit. But we realize that the meaning of our question has shifted away from a perspective of narrow financial interest to a broader perspective of shared value creation. 

Financial profit is just one particular form of benefit that emerges from shared value creation. So: “Yes, there may be trade-offs between different forms of benefit”. But one thing is clear: financial profit at the cost of providers of specific and success-critical resources is not the result of value creation, but of unfair value redistribution. We have seen enough of that recently. 

Financial profit in the context of shared value creation and a fair distribution of benefits is a fantastic thing. The better we understand the signs of our time, the better off we will be in the future.  

Christoph Weber-Berg

The human factor

Last week I was invited to a networking meeting of top-management to present our book to leaders of different industries. The focus of the event was the success factors of strategic management, in the time after the financial crisis and in Europe’s critical economic situation. The participants agreed on one dominant factor for success: human beings. After a long period of narrowing down corporate value creation to a purely financial dimension, which can be measured and negotiated in impersonal markets, the longing for a human dimension has become dramatically noticeable.

The success stories the participants presented are examples of actively motivated individuals, who are inspired to contribute in a meaningful way to value creation. The successful management strategy in these examples depends on the way human beings are willing to contribute. And they emphasize that human beings are motivated, when they are respected and appreciated in their engagement. Confronted with challenging times, and the growing lack of trust in leadership, the relief is seen to be in the hands of human beings.

The participants of the meeting then asked how this crisis of confidence could be overcome. One leader emphasized that successful mangers are also courageous individuals. Leaders have to stand up and advocate sustainable value creation that contributes to the quality of human life, and not to quick short-term profits. They have to support their own people, and respect the experience and knowledge of the people with whom they do business. These kinds of human narratives contrast greatly with the greedy behavior that brought us to the deep crisis of trust in which we find ourselves. Or to quote one manager: “Every company has the employees it deserves. If a company is interested in short-term profitability and it sets the corresponding incentives, it will automatically have selfish and extrinsically motivated people. Companies are what they do (not what they say!).”

Successful business is moving away from the idea of the controlled and defensive management of relations toward a constructive and partnership exchange between leaders of firms and stakeholders. In the late seventies, Chandler was already calling for the visible hands of the leaders (Chandler, A. D. (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: The Belknap Press of Harvard University Press). We recall Chandler’s notion of the "visible hand," because value today is not being primarily created by the invisible hand of the market, but by the active shaping of leaders (see chapter 9 of our book). Not the invisible hand of the market leads to an overall increase in the welfare of society, but the visible hands of the leaders of the firm and its stakeholders. The human factor, not the inhuman factory, matters in rebuilding trust and achieving sustainable value creation.

Sybille Sachs

Engaging People

In the section „Neues aus der Wissenschaft“ (News from the sciences) of the 28^th November edition of the Neue Zürcher Zeitung am Sonntag, an article by the title „Zu guten Taten bewegen“ (To motivate for good deeds), an experiment was discussed that shows that people can be most readily brought to do something for the common good, if they have been provided the opportunity to actively and seriously reflect on a specific topic.  Neither abrupt compulsion nor noncommittal information result in comparably good results.

This insight is all the more remarkable since in our contemporary society, and especially in the economic realm, it is still prevalent to assume that human beings act only on the basis of self-interest. Whence this assumption leads we can see especially well by example of the current financial crisis: erroneous prognoses, ice cold managerial egoism and market failure.

It is time that we depart from more realistic behavioral assumptions in our economic and social realms: active engagement and cooperative collaboration in the value creation process. This is all the more necessary, as in our contemporary knowledge society it is imperative that a highly specialized, sophisticated and broadly strewn knowledge spectrum must be brought together. Self-interest does not fit into this landscape.

In our newly published book (see Chapter 5) we proposed a number of fundamental principles with regard to this issue and also illustrated how positive human behavioral assumptions can lead to innovative value creation. Internal and external stakeholders are therein not perceived as self-serving egoists, but as people who share their knowledge with a positive motivation for the common good. Indeed: “People for People”.

Edwin Rühli

The Limits of Regulation - A Claim for Good Management

A new study from Syracuse University recently revealed the shrinking numbers of fraud prosecutions since the financial crisis in 2008 (http://articles.businessinsider.com/2011-11-16/wall_street/30404680_1_prosecutions-transactional-records-access-clearinghouse-financial-crisis#ixzz1ehpr2kd9, see also  http://tagesanzeiger.ch/wirtschaft/geld/Finanzbetrueger-haben-Justiz-im-Griff/story/28152529).  And the New York Times already in the spring of this year raised the question: “Why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?” (http://www.nytimes.com/2011/04/14/business/14prosecute.html?pagewanted=all). It seems that a serious regulation failure exists based on wrong assumptions of what should guide the actors’ behavior.

In our book we argue that today the underlying basic assumption of the dominant business model, which promotes self-interest as rational behavior, is at risk of having to be revised (see chapter 5). And we mention that already the Nobel Prize Winner Amaryta Sen reflected on the basic assumption of the self-interest of actors in his book "On Ethics and Economics” in 1987. He concludes that the idea that only self-interested values are rational is even harder to defend.

If all human beings are modeled as self-interested actors, and efficient market functioning fails to occur, additional control mechanisms of firms and their actors must exist. These are normally in the form of state laws and regulations, or in some cases voluntary self-regulation (e.g. Global Compact). A continuous need for control is all the more important as some of the actors are not interested in efficient market functioning. And it is the same actors that are also trying to annul all kind of regulations. In as much as state sovereignty is by definition limited to geographical borders, this leaves serious gaps in governmental control of this self-interest. But even a mixture of compulsory and voluntary adherence to regulation will always lag behind a constantly and swiftly changing environment.  It is consequently often up to the discretion of the diverse actors of firms whether or not they exploit such regulatory gaps. Meanwhile, regulators and prosecutors are frequently not able to fulfill their functions in an adequate way, resulting in the lack of prosecutions mentioned above.

To overcome this unsatisfactory situation, new mindsets are necessary: After the first waves of corporate scandals, Ghoshal claimed in his seminal paper that we have to change the basic assumption of strategic management, and that amoral business with its negative impact should not serve as a role model (Ghoshal, S. (2005). Bad Management Theories Are Destroying Good Management Practices. Academy of Management Learning & Education, 4(1), 75-91). In this context, we ask why it is necessary for firms to commit themselves to the worst forms of self-interest and to fight against an endless series of constraints, when they can focus and draw upon the stimulating cooperation of a broad cast of stakeholders for value creation? We propose as a positive approach that the potential of value creation will be unleashed through creating a sense of mutuality in networks of stakeholders, rather than through the self-interest of single parties sometimes violating regulations. Therefore new narratives about leadership are required for good management (http://www.fh-hwz.ch/g3.cfm/s_page/63500/s_name/leadershipprojekt11).

Sybille Sachs

Stakeholder Governance in Social Performance Management 

While social initiatives often come up with and nurture ideas with the potential to change the world, a healthy business approach is required to unleash the full potential of such ideas in the majority of cases. This also applies for microfinance - the response to the demand for financial services of micro-enterprises and poor households in developing and emerging countries, that otherwise would have no or only limited access to the formal financial sector.

Recent events in some of the most advanced markets for microfinance and the at times concomitant controversial media coverage have regrettably tarnished the sector’s reputation lately. They have thus drawn the attention not only of the microfinance community, but also the broader public, to the risks involved in this rapidly growing industry. These risks include increasing competition, governance and regulatory issues such as overindebtedness of clients, bad lending practices of the microfinance institutions and mission drift - to name but a few. Stakeholders at all levels of the value chain, from investors to end clients, are increasingly worried about the negative consequences of a unilateral commercialization of microfinance in pursuit of financial profitability.

The Social Performance Task Force (SPTF), brought together in March 2005 by the Consultative Group to Assist the Poor (CGAP), the Argidius Foundation and the Ford Foundation, has taken on the challenge of addressing the issues the microfinance sector is currently facing. Governed by a 16 member steering committee with members from every region and a fixed number of elected representatives from each of the major stakeholder categories, this multi-stakeholder initiative (MSI) has been initiated to come to an agreement on a common social performance framework and to develop an action plan to move social performance in microfinance forward.

Remarkable from a stakeholder-oriented perspective is the way in which SPTF attempts to reach these objectives. By engaging with diverse microfinance stakeholders, the initiative provides a platform for dialogue, learning and collaboration. Over 1,000 individual members, representing almost 600 different organizations, currently discuss and decide on new resolutions and agreements in annual or online conferences. Moreover, members of the task force are regularly being asked for their opinion and active participation in the development of a social performance framework and an action plan.

Such a deeply embedded stakeholder governance-approach seems to be most efficient and fruitful in a setting that is characterized by social objectives, global activities, and institutional complexity like microfinance. However, the SPTF may also serve as a positive example to learn from for the establishment of governance structures for multinational corporations embedded in complex stakeholder networks.

Marc Moser

Links and references:

Social Performance Task Force (SPTF) - http://sptf.info/sp-task-force

Consultative Group to Assist the Poor (CGAP) - http://www.cgap.org/

 

Argidius Foundation - http://www.argidius.com/

Ford Foundation - http://www.fordfound.org/

 Governing governance

Recent events emphasize the need to reflect on our governance systems at different levels:

At the state level different EU countries, especially Greece but also Italy, were not able to govern their economic risks adequately. At the corporate level, this forced particularly system relevant banks to increase their equity ratio in EU countries. To succeed in increasing the equity ratio, without reducing the incentive bonuses of managers or dividends for shareholders, these banks are now even more conservative in lending money to small and medium enterprises (SMEs). However, SMEs are in turn vital for a prospering economy.  A spiral of interconnectedness has thus been activated that is obviously going in the wrong direction.  

It must be kept in mind that it is not simply single actors that are relevant, but rather networks of actors. One of the major challenges for governance systems under today’s conditions is developing mutuality and network interactions (see Sachs, Rühli 2011, p. 173-178).

At the level of corporate governance, this network view should also be incorporated in an appropriate way so that internal structures and processes are aligned to support mutual value creation with and for stakeholders. In a recent empirical investigation, it was demonstrated that different forms of stakeholder participation existed in the decision making processes of firms. (see Spitzeck, H., & Hansen, E. G. (2010), Stakeholder Governance: How Stakeholders Influence Corporate Decision Making, Corporate Governance, 10(4), 378-391). As an example, stakeholder councils could not only act as sounding boards for system relevant banks, but could also play a role in strategy development and implementation.

Such governance systems, rooted in a stakeholder perspective, will require adaptations of the current legal basis in areas such as property rights, competition law, bankruptcy law, taxation law, corporate law and the responsibilities of the diverse actors in firms and stakeholders. The recent adaptation to limit the power of a few worldwide rating agencies by the EU is an attempt in this direction (http://www.ft.com/intl/cms/s/0/5f8db28c-03ac-11e1-864e-00144feabdc0.html#axzz1dyg7FVCt  ).

Governance at the state, but to a lesser degree also international level, can also be developed further in a stakeholder perspective. The corresponding steps in the political sciences merit more attention and support (see e.g. Reich, R. B. (2009), Government in Your Business, Harvard Business Review, July-August, 94-99).

Sybille Sachs

Considering all relevant stakeholders: A question of will

New and modern strategic management approaches which also consider societal demands still aren’t the norm in many corporations. This becomes clear one sees that even technically highly innovative corporations sometimes follow old strategic approaches.

Last month Apple launched the new iPhone 5 to the market. As its precursor, it was assembled in factories like Foxconn in China. Foxconn won notoriety when 13 workers committed suicide because of working conditions. Some improvements were subsequently made but the situation is still far from satisfactory. From the selling price for an iPhone 4 of $ 560, material costs of $ 187 and the assembly in China comes to just $ 7 (according to isuppli and the German ZDF television broadcast “Frontal 21”). Hence, Apple has a gross margin of $ 366 or 65%, respectively per one sold iPhone. Experts have calculated that if the production would be in the USA, the costs would be ten times higher, but the gross margin for Apple would still be about 50%.

This simple calculation reveals that – although being a technically highly innovative company – the strategic approach of Apple is still guided by the old, short-term profit-maximization strategy for owners and managers, at the expense of other stakeholders. According to such a conception of corporate strategy, society (and with it all stakeholders) gets compensated for the risks that result from the corporation’s activities by means of dividends for the stockholders. This is, however, a very narrow understanding of compensating society.

A broader and more modern strategic view recognizes that besides the stockholders there are also stakeholders like employees, suppliers, clients, communities having relevant and legitimate stakes in a corporation. The reason is that they all contribute to the value-creating process of a corporation and are likely to also carry risks. This gives them the right to be considered in the distribution of the created value.

In the case of the iPhone, this would mean that workers in the factories in China get compensated more appropriately: not only concerning wages but also concerning conditions at the workplace itself, company sponsored accommodations etc. This would result in a shift away from a short-term financial profit-maximization strategy towards a socially more sustainable strategy, fully acknowledging the stakeholder worker’s participation in the value creation chain.

In the long run, it can be assumed that a more appropriate consideration of all relevant stakeholders would lead to a larger and more sustainable value of the corporation (as long as innovation is still provided for): The clients would have no reason to boycott the product because there would be no horrifying pictures in the media following non-compliance with worker rights, no potentially costly juridical process would be menacing, institutional investors had nothing to complain about and the stockholders would have titles with potentially more sustainable values. The figures above show that this would be possible. Lastly it is a question of will and insight of the management to adopt an innovative management approach that considers relevant stakeholders more strongly.

Claude Meier

Links and literature:

Frontal 21 (ZDF):

http://www.zdf.de/ZDFmediathek/beitrag/video/1260876/Gala+%22Cinema+for+Peace%22%3A+Haiti+im+Fokus#/beitrag/video/1457154/Ausgebeutet-f%C3%BCr-das-iPhone

or

http://www.youtube.com/watch?v=jMQCbE54_5g

Isuppli:

http://www.isuppli.com/Teardowns/News/Pages/iPhone-4-Carries-Bill-of-Materials-of-187-51-According-to-iSuppli.aspx

Friedman, Milton (1962): Capitalism and Freedom. Chicago, IL: University of Chicago Press.

Hill, Ch. W. L., Hones, Th. M. (1992): Stakeholder-Agency Theory. Journal of Management Studies 29(2): 131-154.

Shankman, N. A. (1999): Refraiming the Debate Between Agency and Stakeholder Theories of the Firm. Journal of Business Ethics 19: 319-334.

Exploitation for Statistics

At this year’s conference of the Strategic Management Society, I had the distinct pleasure of meeting a former professor from mainland China. We soon engaged in a lively discussion about the various purposes of value creation for a firm. It turned out that she was a very adamant advocate of the view that a firm’s value creation should bring wellbeing to all individuals engaged in this value creation process. Indeed, she confirmed that this is a lack for many employees in China. Foxconn seems to be just the most famous example of innumerable unknown companies treating their employees in a similar fashion –or worse (for more information on this case, see also our book “Sustainable Success with Stakeholders – The Untapped Potential”, Chapter 7, P. 14.).

It is a biting irony that this tendency of employee exploitation is exacerbated by the Chinese government’s policy objective of creating employment for the Chinese population. The quantitative measure of raising the employability rate clearly matters more to the Chinese government than the quality of the conditions under which these employees will have to work under.

Taken by this outspoken critique of the celebrated success story that China is known for, I asked her if I could get some of her papers about specific cases of worker exploitation.

The answer was no.

She explained that she was not allowed to reveal her sources, because her interview partners are afraid of reprisals. Regrettably, however, without transparency of sources and methods, no paper will be accepted by a peer-reviewed journal. Therefore she refrained from writing a paper.

In stakeholder management we call stakeholders such as these employees “silent voices”. Let’s give these people a voice – also without a source!

Sybille Sachs