Towards different narratives for the value creation of the firm

A conference was held October 19-21 on stakeholder theory at the renowned Darden School of Business. Forty participants were invited, all academics who had recently made important contributions to stakeholder theory or stakeholder management. A fascinating uplifting atmosphere prevailed. This was already demonstrated by the conference location. On the one hand, there were the historical buildings of the University of Virginia, built according to the plans of Jefferson, founder of the University and later third President of the USA, a true architectural jewel. On the other hand, not far off is the extremely modern and generously designed building of the Darden School of Business; a symbol of the will and strength to find and develop new forms of research and teaching in management.

Contained in these illustrative surroundings, in both senses of the word, the discussion took place among the leading scholars of stakeholder theory. The participants agreed that the failure in recent years of the management generation, and the blatant market failure of the financial industry in particular, necessitates that the theory of value creation in firms and their respective management needs to be reconsidered. The dominating opinion is that the “intellectual comfort zone” of the current theory needs to be abandoned, and new theoretical approaches have to be developed on the basis of assumptions that are more humanly relevant and that lead to positive narratives of the value creation of the firm.

In particular, the question was debated as to which of the basic assumptions of the previous theory of the firm and of conventional management understanding have to be changed in order to do justice to the current situation of the operative reality of businesses, and to develop positive narratives for a firm’s value creation. In different sessions, the participants’ requirements of theories were two-fold. Either one extends the current assumptions of the mainstream theories, as stipulated for instance by the stakeholder theory of the firm, which can induce gradual changes in the theories, as a basis for positive narratives for the management. Or one embraces a more radical change of assumptions, which leads to disruptive changes in strategy theories and practices regarding the theory of value creation. The final conclusion was that the time is ripe for a change. Let’s seize it!

 Sybille Sachs

 

 

Trust and Responsibility in the Financial System

Trust and responsibility in the financial system: this is the theme of the 3rd international conference on ethics in finance, to be held next week at HWZ University of Applied Sciences in Business Administration Zurich. Academics, politicians and practitioners from the financial sector will present and discuss their theses on the causes, the course and the prospects of the present crisis.

Trust is one of the most critical components of financial transactions. However, trust has suffered heavily during the past years. Trust among banks, trust among states, trust in currencies such as the Euro, trust in financial products, trust in shares and public bonds: citizens and investors are alienated. How can trust be re-established? One thing is clear: it is not by trying to go back to business as usual as fast as possible.

We need to better understand the reasons, in order to be better prepared for the future. There is no use in asking who is responsible for what happened. But it is important to ask who will, and how they will take their responsibility in the future. It is most obvious that many tend to point at all the others: THEY need to do this, and shouldn’t do that. But when we talk about responsibility, it’s all about ourselves: academics, politicians and practitioners from the financial sector. We should all reflect on the mantras we have been praying for the last decades. We should be critical about what we teach, decide and deliver. There is no simple solution to the challenges of our time. So join us on Thursday and Friday, 25.-26. October at HWZ University of Applied Sciences in Business Administration Zurich, and enter the dialogue on a more stable, and more live-serving future of our financial system!

www.finanzethik-kongress.ch

Christoph Weber-Berg

Tough Anti-Corruption Laws Help Making Resources Work for People

3.5 billion people live in resource rich countries. Many don’t see any results from the extraction of their natural resources. This phenomenon is known as the “Paradox of Plenty” or the “resource curse”. It refers to the paradox that resource rich countries tend to have less economic growth and worse development outcomes than countries with fewer resources. Resource wealth is most often concentrated in the hands of corrupt elites, politicians and industry insiders, meaning for the rest of the population the resources are a curse rather than a blessing. Global Witness estimates that since the starting of the oil boom in the 60ies in Nigeria, the country has lost about $400 billion to corruption. This is a vast figure for a country where large parts of the population live under $1 a day. In 2010, Africa’s oil, gas and mineral exports were worth roughly seven times the value of international aid to the continent ($333 billion vs $48 billion) (http://snipurl.com/258r214 ). Therefore developing countries need to maximize revenue from the finite resources and make sure that revenues go into building schools, infrastructure and hospitals.

The stakeholder network of resource extraction in resource rich but poor countries is pretty sophisticated. Let me name the stakeholders that I think are the most important ones: the extractive companies; the investors; the companies’ host and home governments (including all important offices); the citizens in the host countries; international, national and regional non-governmental organizations; governmental organizations and last but not least international donors.

A global movement of anti-corruption (Global Witness, Publish What You Pay, Transparency International etc.) and human-rights organizations (Amnesty International, Human Rights Watch etc.) has been trying to change the disastrous situation by pushing for transparency measures. A special role has the Extractive Industry Transparency Initiative (EITI). As the EITI is a coalition of governments, companies, civil society groups, investors and international organizations, it is a multisectoral stakeholder network that involves all important stakeholders. EITI increases transparency over payments by oil and mining companies to governments and government-linked entities, as well as transparency over revenues by the host countries’ governments.

But in this August with U.S. regulators setting demanding rules for U.S.-listed firms (http://snipurl.com/258rz3u ) these “soft law initiatives” got important support by “hard law”. In September the European Parliamentary committee has also voted for a draft anti-corruption law. Although the final text of the proposal is yet to be published, they agreed on a detailed project reporting to regulatory authorities starting from a minimum threshold of 80’000 Euros (http://snipurl.com/258rz3u ). The project reporting will enable citizens to follow the money from natural resource deals. As oil majors and other resource firms have already signed up to international guidelines enshrined in the EITI, they believe in transparency and appreciate the new regulations.

If an effective EU directive is established it would enhance the global comparability as well as transparency and would be good for industry and citizens alike. Multisectoral stakeholder groups wouldn’t be jobless: they could try to extend reporting beyond the legal core.

This example shows how important multisectoral stakeholder networks can be to raise awareness and the development of hard law. Let’s hope these new regulations will make resources work for people.

 

Sabrina Stucki

Ethics in a Bottle

In my last blog I listed a number of statements and underlying attitudes I encountered while working in the business world. Here I would like to take a closer look at one of them and evaluate its veracity and possible transformation.

The assertion that “there is no ethics in the business world” is both an observation as also an assumption. As an observation it reflects a simple “is”: personal experiences I shared with you in past postings revealed that human needs are indeed frequently placed behind the short-term imperative of a corporation to post profits and maximize shareholder wealth. In a world where organizational survival is dictated by the mere string of numbers that are published on a monthly or quarterly basis and not by the reality of the personal stories of the involved stakeholders, it is only logical that there will – push come to shove – be an inherent bias and managerial recompense to sacrifice human “ethics” for the sake of the ethic of maximizing profitability. Therefore, there is a certain amount of veracity to this statement as an observation, provided one defines “ethics” as placing the well-being of human beings in the center of our moral considerations.

As an assumption, on the other hand, this statement implies a normative “should”: there should not be any ethical considerations that impede the profitability and shareholder wealth. An individual who once shared this view with me in an unabashed manner revealed also that he made a clear cut distinction between how he valued, and consequently then treated, people in his private circles such as friends and family, and how he did so in his work dealings. This type of an attitude I have come to label “ethics in a bottle”: it is a form of moral compartmentalization where at times radically different standards apply in different types of social contexts. Now, it is naïve to think that we as human beings can ever completely transcend moral compartmentalization (for example, we will continue to be more inclined to help a personal friend in distress, rather than an anonymous individual at the other end of the world, all other things being equivalent). Nonetheless, it is legitimate to question if such a strict demarcation line should be drawn between the personal and professional worlds.

The problem with moral compartmentalization in our economic dealings is that under the guise of “professionalism” almost anything can be justified. Professional organizations and corporations, particularly publically traded ones subject to short-term shareholder wealth maximization, have gone to great lengths to legitimize their institutionalized norms to conform to the prerogatives of profitability or the stock markets. Under the guise of “accreditations”, “codes of professional conduct”, “best practices” and the likes, professional organizations and corporations have created sophisticated constructs to make employees, clients and the public think and feel as if they were upholding the highest of moral standards.

For the professional, the rationale then is often, “if it meets the highest standards of professional codes of conduct, well, than it must be ok for me to do.”

Well, no. Simply because something meets the standards or regulations of a certain corporation, industry or profession, does not make it morally palatable in a larger context. For example, nowhere in the Certified Financial Advisors (CFA) Code of Ethics (http://tinyurl.com/9wxs38) is there any mention or consideration of the secondary ramifications of certain investment tools or choices. Yes, we find the statement that the advisors must “Place the integrity of the investment profession and the interests of clients above their own personal interests.” (As recent scandals, however, illustrate that this rule was nevertheless frequently ignored.). But what about the fact, for example, that speculating in mercantile exchanges can abruptly drive up the price of certain commodities like corn, wheat or rice beyond the capacity of people in third world countries to pay for? Or take the code of conduct in private banking, for example, of Singapore (http://tinyurl.com/bu8m8yl). The transfer of large amounts of wealth of high net worth individuals from poor, developing countries into international tax havens such as Singapore, the Cayman Islands or Switzerland, while certainly in the interests of the client, deprives these countries of these sorely needed resources. While there is mention of money laundering and terrorism, nowhere in its code of conduct is there any consideration of this wider moral dimension of the professional’s actions.

However, since a financial advisor’s or private banker’s circle of professional responsibility is defined only in a very narrow manner driven by the client’s (and the advisor’s or bank’s) interests, both the financial professional and their clients indirectly partake in the creation of human poverty, and that with a clear conscience, extracted as they are of further responsibility by the professional code of conduct they are adhering to (and often also legitimized by Milton Freedman’s position that these ethical consideration is not the purview of the business community, but of the regulatory agencies of countries). This divorce of responsibility of one’s personal, professional activities and the wider social ramifications represents one of the major challenges facing our current status quo in how we structure and manage our economic activities.

What we consequently have is “ethics in a bottle” and by extension, if you will, a form of the “banality of evil”. It’s time for professionals to take the ethics out of the bottle and permit it to imbue all domains of human lives, not just the ones of one’s family, friends, corporation or business clients.

Manuel Heer Dawson

How Economic Individualism leads to Anarchy. And a possible Way Out

In Thomas Hobbes’ (1588-1679) prominent state of nature every individual fights against all other individuals. Each individual does so to survive: When I kill my neighbor he can no more steal my belongings or kill me, I am consequently safer now. Hobbes’ state of nature is an individualism-based condition of anarchy: Neither laws nor governments nor any form of contracts exist. His ultimate objective is to find ways to leave or avoid this condition.

 

The individualistic concept was new then and characterizes many schools of thought in the modern period. Among others, the neoclassical theories in economic sciences of the 20th century generally rely on the methodological individualism. Each individual aims to rationally maximize its utility accordingly.

Through neoliberal politics these theories were implemented in many countries in the last 30 years: The transfer of theoretical concepts like the methodological individualism was essentially (although not exclusively) transferred and supported by such politics into the real world. Today, they structure to large parts the perception of how the economy functions and what it is in reality. This thinking is also based on competition because others are understood as (potential) competitors. The assumption of this politics of deregulation was that market-ruled competition alone establishes the most effective and efficient solutions.

 

Yet, individualism (as also competition) is not bad per se. Every one of us is an individual and it is nothing else than self-evident that individual rights need to be protected. But, the methodological individualism as the one of economic provenience was implemented at the cost of the community. In Switzerland e.g. voluntary community work is strongly decreasing (e.g. there are less football coaches for children). People are too busy with their individual job career and want to score (financially) in their personal competitive game.

 

The strong individualism of today may be seen as a kind of a global state of nature. Some examples: The exploitation of workers and local communities by transnational corporations is fostered by political deregulation and missing cooperative global governance structures: Responsibility is left often to individual managers; because of removing or not establishing regulation it is often made easy for managers of firms to enrich themselves excessively. Conversely, single individuals can trigger shitstorms against firms by posting individually declared violations of political correctness in the social media. And, as mentioned, voluntary community work is decreasing. The neoliberal politics of deregulation thus led at least partly to conditions which for Hobbes were imperative to leave in place.

 

A possible way to balance the corrosive consequences of such overreaching (economic) individualism on communities is that we, the civil society, begin rebuilding voluntary, non-market based cooperation between us citizens. A stronger togetherness between neighbors and friends etc. can foster the creation of values that provide a whole society meaning and vision. The economy can rediscover its role in and for society by cooperating more seriously with and for stakeholders.

 

Of course humans are competition-oriented individuals but they are also cooperative and social beings needing mutual value and meanings. The sociologist Richard Sennett and communitarianists often write about the importance of cooperation and togetherness in civil societies. And the stakeholder theory explains the advantages and appropriateness of an economy understanding itself more as a part of society and related to stakeholders.

 

 

Claude Meier

Awareness and simplification: The KONY 2012 campaign

To increase the awareness level of a message, advertisers and campaign managers know well about the psychological effects of simplifying matters on people’s attention. Short communications are persuasive and affect people’s readiness to engage in different kind of actions. However, short communications have to simplify complex topics an may lead to the problem of not taking into account the entirety of a complex problem, for example by focusing only on a specific relationship among many affected interest groups. To avoid a misleading reduction of complex issues, I argue that the intention to increase the level of people’s awareness by simplifying communications should be accompanied by a careful consideration of the corresponding impacts in a more fine-grained stakeholder network. An insightful example is the viral campaign KONY 2012, which entered the social media in early March 2012.

The core of the KONY 2012 campaign is a short film created by the non-profit organization Invisible Children, Inc. The film documents the brutal abduction and cruel abuse of children by Joseph Kony and his Lord’s Resistance Army (LRA) to use them as child soldiers in an ongoing conflict in northern Uganda. The LRA is a guerilla group and its leader, Joseph Kony, was indicted for war crimes and crimes against humanity by the International Criminal Court in 2005, but still has evaded capture.

 

The KONY 2012 short film spread virally in the World Wide Web, mainly through social media channels like YouTube, Vimeo, Facebook and Twitter. Within a month the clip had been viewed more than 90 million times and the social media campaign raised a tremendous awareness all over the world. Celebrities and politicians started to support the concerns of Invisible Children, Inc. to bring Joseph Kony to justice.

However, criticism about simplifying the complex conflict in northern Uganda arose shortly after the film’s release. Invisible Children, Inc. was accused of providing a black-and-white picture of the situation and of manipulating the public opinion. For example, the film suggests that violence in northern Uganda will come to an end and the abducted children will be able to return to their families as soon as Joseph Kony would be captured. Of course, Kony is a dangerous and cruel individual and bringing him to justice would be important. But reducing the problems in northern Uganda to the faith of Joseph Kony is deceptive. The history of the conflict is far more complex and includes many other interest groups like, for example, the Ugandan army and government, of which many seem highly suspicious too. Further, the film neglects the fact that most LRA forces, including Joseph Kony, fled northern Uganda in 2006 to be dispersed now across three neighboring countries.

 

As the example of KONY 2012 shows, awareness and simplification have to be balanced so that creators of social media campaigns are able to achieve their objectives and at the same time meet their responsibility towards other stakeholder groups affected by complex problems. The narrow spotlight on Joseph Kony led Invisible Children, Inc. to donate funds to support military action for capturing the LRA leader. But what about the rehabilitation and reintegration of former child soldiers as another affected interest group?

AoM-Meeting 2012; People for People

The annual meeting of the Academy of Management  (AoM), at which 12,000 participants from all over the world discussed the latest research results and trends, was held in Boston August 3-7. One presentation type is the “Professional Development Workshops” (PDW), which are about the further education of university teachers. Professors Joe Mahoney (University of Illinois) and Sybille Sachs (University of Applied Sciences in Business Administration Zurich, HWZ) organized and moderated a panel discussion on “Value creation with People for People”. It was the continuation of an initiative that the two had started the previous year at the AoM-Conference with the goal that after years of excessive emphasis on shareholder-value thinking the importance of people should again be regarded as the central focus of interest (see the report of last year). Some impressions of the well attended and comprehensive presentation are noted in the following:

Professor Joe Mahoney (University of Illinois), a leading academic in the field of the Theory of the Firm, demonstrated among other things that managing decisions narrowly oriented to shareholder value often lead to breaks in the social contract that exists between the firm and its stakeholders (e.g. customers, employees etc.). This again leads to the underinvestment of these stakeholders in their firm specific engagement and generally to a lack of commitment of these stakeholders. The firm can thereby suffer a weakening of its resources and a decrease in productivity. In contrast, when stakeholders are involved as people in management decisions, not only can negative effects be avoided but also commonly found innovative solutions can be encouraged (see our book, Chapt.7, p. 114 ff). 

Ed Freeman (Darden Business School), theoretician and founder of Stakeholder-Management, regards the increasing inclusion of People for People thinking as the most central question of business education in our time. He reminded us that in the course of history great thinkers (e.g. Freud, Kant etc.) have acquired fundamental knowledge about human beings that has not been sufficiently regarded and applied in the education of true leaders.

Jim Post (Boston University), professor for Business and Society, who together with other authors has recently published a book on The Historical Development of Social-Responsibility – Idea in Theory and Practice, demonstrated with the example of his own university, how regard of human aspects have changed in teaching. Whereas a few years ago the vision of the Dean in charge was completely oriented to human aspects and required a humanistic mindset from the faculty, this orientation is missing today.

Sybille Sachs (HWZ), professor for Strategy and Stakeholder Theory, demonstrated in her contribution that the aspiration of a more human perspective, and in particular an increased propagation of positive narratives, is not only to be seen in management. In various academic disciplines analogous thoughts are being acquired, which means that there is potential for interdisciplinary cooperation. She illustrated this with quotations from very different scientists, who are advocating a positive humanistic view in their fields. One such quotation is given here: “In particular, we encourage researchers to examine the origins and implications of positive framing. We further advocate for positive leadership (e.g., Cameron 2008) in response to crisis and the outcomes to be gained from crisis events when positive frames and positive leadership are enacted” (James, Wooten and Dushek, 2012, p. 483).

The participants of the workshop agreed at the end of the extremely stimulating discussion that the idea of People for People needs to be continued and deepened in a presentation at the AoM-Meeting 2013. In the meantime information on examples of positive narratives in leadership education or in firms should be exchanged among the participants. Should you also know of examples, we would be happy to publish them in our blog.

Edwin Rühli

What about Fair Play of International Sporting Events?

Sport games are a wonderful celebration of excellence in sports, excitement and pride. The expectation of sporting events is always high and the questions being raised even higher: Will the event help develop the infrastructure and the society of the host country in a sustainable way? Will all the money be well spent? Huge sport games like the Olympics and the European Cup might be vulnerable to corruption in several ways: match-fixing, corporate hospitality, ticket allocations, sale of television rights, corporate sponsoring (for further information please visit http://snipurl.com/24qh8hy ). Above all they represent a big exercise in construction and procurement. Both stand for classic areas that are prone to corruption. In this article I will focus on these two challenges.

The development of infrastructure for international sporting events involves the mobilization of vast resources, complex logistical arrangements and pretty tight timeframes. These challenges probably became a sincere problem for one of the latest European sporting event. In regard of the Euro 2012 allegations of corruption have been made. Ukraine embarked on a program of modernization for Euro 2012. Stadiums were built or renovated, the airports were upgraded and the roads repaired. All this happened without competitive tenders, since in 2010 Ukraine cancelled the tenders for all Euro 2012 projects. Uefa, the governing body of football in Europe, is now under pressure to investigate claims of massive corruption. Opposition politicians claim that $ 4 billion from the state funds were stolen by officials (http://snipurl.com/24qh8s2 ). But also in Brazil the preparation for the World Cup in 2014 and the Olympics in 2016 face some corruption challenges. In June the government coalition deputies approved a bill that would keep the massive infrastructure budgets secret (http://snipurl.com/24qh96c ). Because of critics the text got changed and the budget will be public but just after the public tender process.

In international sporting events many stakeholders are involved: the organizing international organization, the host country, different governments and last but not least the public - just to mention the very important ones. To enhance transparency, the involvement of all these stakeholders is central. A good way to do this is a multisectoral initiative.

In regard of the construction sector the Construction Sector Transparency Initiative (CoST) could be of help (www.constructiontransparency.org). CoST is a country centered multistakeholder initiative designed to promote transparency and accountability in publicly financed construction. CoST’s core is the belief that the processes involved in the construction of public infrastructure must be more transparent.

As all the mentioned critical aspects are important issues for various stakeholders, pressure will increase to make international sport mass gathering events that cost billions of dollars more transparent for them. Then availability of information to the public is of great importance to hold decision makers to account and to ensure better value for money. In this regard issue based multistakeholder initiative represent a promising solution.

Sabrina Stucki