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

Reaping the Full Worth of Networks

In a recent quantitative study on the interconnectedness of transnational companies by three researchers at ETH (Swiss Institute of Technology) in Zurich (you can download the PDF here http://arxiv.org/abs/1107.5728) it was shown that there is worldwide a core group of 147 firms with the highest interrelationship of financial property rights. Although those firms represent just one percent of the 43,000 investigated firms, they controlled more than 40 % of the others based on ownership relationships. This interconnectedness on the basis of financial relations makes it evident, that firms in today’s economy are acting in a network-view and some are in the words of the authors “too interconnected to fail”.

Network interactions are not necessarily a risk. Besides the financial dominance, there are other interactions such as for example exchanging knowledge or experience. Therefore although interactions in networks may raise the risks for the participants, there are also the chances of possible benefits. Important is the insight that firms are creating value in a network of interactions, and not only in a value chain as suggested by traditional strategic management approaches. We could see in our empirical studies that if firms and stakeholders are aware of the networks of value creation, they are able to develop products or services with superior value (see Sachs, Rühli, 2011, p. 148). Suva, the Swiss insurance company we analyzed, implemented the New Case Management method of focusing on the recovery process from a network perspective. When customers are involved in an accident, in addition to receiving the best medical care, their families and employers, physicians and hospital, and the case manager are all involved in the recovery process. Thanks to this network approach, accident victims are able to return to their jobs earlier and to be reintegrated into the work process more quickly and comprehensively than without an interconnected process. This benefits not only the patient but also the firms and society.

Sybille Sachs