Ties that bind

Recently, I had a talk with a catholic priest about people’s participation at the Mass. Not surprisingly, he told me about the continuously declining numbers of participants, but he was more worried about the decreasing level of general social participation in his parish. As a matter of fact he pointed out the additional problems of recruiting or retaining members of various parish-related associations like charities, youth, hiking or card playing groups. In his opinion this phenomenon was not basically a question of religious faith, but mainly one of individualism. As people want to take their lives in their own hands and like to organize more and more aspects of their lives individually, they make ever less use of the parish’s social offerings. Again, this is not a new insight, as Robert Putnam (2000) described in his seminal work “Bowling Alone” various aspects of the American community (political, civic and religious participation, workplace connections etc.) and its decreasing level of social activity or, as he named it, social capital.

I am asking myself what the consequences of this shrinking in social capital are for people’s willingness to participate in collective actions regarding social issues. Let’s take the steadily increasing disparity of incomes and wealth in most of the Western countries as an example: “We are the 99 percent” is one of the corresponding “Occupy”-movement’s slogans. But why are those 99 percent not able to trigger any societal change regarding fairness in the dissemination of income and wealth? “No, we can’t!” seems to be the more adequate slogan.

I think that individualism is part of the problem. If people are striving for their own personal goals, they are not really organized regarding the pooling of shared interests in the context of a social issue. Further, people’s membership in and their feeling to belong to associations, unions and other social groups fosters the development and maintaining of shared values, norms and interests in the context of a social issue. Therefore, not only personal relationships, but also memberships in social groups lead to ties that bind among people.

One possibility to approach a social issue is a stakeholder network. Especially regarding complex social issues for which cooperation among the affected actors is needed to create sustainable solutions, stakeholder networks are a promising organizational form. However, even if stakeholder networks have proved their potential to create value regarding a complex focal social issue, they are no panacea. Stakeholder networks depend heavily on the knowledge and skills of the different stakeholders’ representatives participating in the problem-solving regarding the focal issue at hand. Therefore, through the interactions of representatives in a stakeholder network, the corresponding shared values, norms, and interests regarding the social issue are emerging. These personal interactions, in the sense of people for people, are important for creating sustainable solutions in complex issue-based stakeholder networks.

Stakeholder networks and its organizational form create social capital by supporting two different kinds of ties that bind. On the one hand, there are the already mentioned interactions among representatives of different stakeholders. On the other hand, shared values, norms and interests provide the social glue among individuals. This glue is needed to address complex social issues like the increasing disparity of incomes and wealth.

Tom Schneider

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

 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

Welcome!

Business legitimacy depends on public confidence in corporations and in their leaders and is one of the major problematic issues we face in this first decade of the 21^st century. Guided by an exaggerated notion of shareholder value maximization, business executives took on enormous amounts of risk in finance and operations alike. This in turn has led to widespread mismanagement, market failure and even crimes that have often dominated the news headlines. It has become evident, that the methods from yesterday do not suffice to solve the problems of today and tomorrow.

 We are a group of academics who have extensive experience in engaging firms and stakeholder groups through our teaching and research. Fully committed to unleash the tremendous potential of value creation of people for people, we see strategy as value creation in a sense of mutuality in networks of firms and their stakeholders. This new, more comprehensive understanding of strategy aims to not only improve the quality of life for human beings, but by virtue of more accurately reflecting our reality as pertains to our natural world, it will also ensure its sustainability. It is not the invisible hand of impersonal markets and endless regulation that create value, but the visible hands of leaders in both firms and stakeholder organizations.

 We invite practitioners from diverse firms and organizations, as well as scholars and students from various fields, to support us in our research and as educators of the leaders of tomorrow. There are numerous ways you can contribute. Check out our “Purpose” page for more details on how you can get involved and directly benefit from this project. Leave us your comments to our posts. Or submit to us your suggestion for a post that either we will take up or you yourself will write based on your own experience. We will then publish it right here on this blog.

We need to rise beyond simply analyzing and criticizing and work to creating solutions for a better tomorrow.

 We look forward to hearing from you!

 

Sybille Sachs