Fusing the ART, SCIENCE, and TECHNOLOGY of Business.

Governance as Stakeholder Responsibility

James E. Post

Prepared for the “Advancing CSR Theory: An Intercontinental Dialogue”

Montreal, CANADA 12-15 October 2006

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Introduction

Perspective: 30 years of CSR teaching, research, and practical experience.

Our field is a mixture of theory and practice – we need both to build.

We need realism … as well as idealism Hewlett-Packard as a case example How do we know we are not being fooled?

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Challenge we face

Governance is about authority Who has authority to make decisions? What is the source of that authority? How is authority legitimately exercised?

This intercontinental dialogue will explore the implications of these issues.

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A Sobering Story

Hewlett-Packard “leaking” scandal Ethics standards … “H-P Way”

“Every member of the H-P community (including directors, executives, managers, employees, business partners) must adhere to the highest standards of business ethics and comply with all applicable laws.”

What went wrong? Do the ends justify the means?

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From Halos to Horns

“I do not accept responsibility for what happened .…” (Testimony)

“I am not an investigator or a

lawyer ….” (Testimony)

H-P’s lawyers and counsel said “pretexting” was legal (or not illegal).

H-P Board Chair, P. Dunn

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H-P Mark Hurd

“I accept personal responsibility to get to the bottom of this and fix it…”

“This was not the CEOs No. 1 priority.” “The CEO cannot be the backstop for

every process in the company.” (Testimony)

“Processes break in two ways. They break because they don’t have the right checks and balances and because they don’t have the right execution. This one broke down on both fronts. … Like anything else we need to go fix it.” (CNN Money/Fortune interview)

H-P CEO, Mark Hurd

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Just Because You Are Paranoid Doesn’t Mean Hewlett-Packard Is Not Spying On You

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Roots of CSR Theory & Research

Disasters/crises (such as H-P case) Externalities – ecological, consumers, etc. Growth of giant business enterprise Labor-management relations, unions, and

social conflict Competition policy – market abuses

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Development of CSR Field

All research begins with a good question CSR questions

To whom is the corporation responsible? For what? How can we evaluate progress and

performance?

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Canadian Social Performance

Royal Commission on Corporate Concentration - 1976 “The concept of corporate social responsibility is still a

relatively new and therefore an evolving determinant of corporate behaviour in Canada.”

R. T. Mactaggart, et. al., Corporate social performance in Canada, Study 21, RCCC, 1978.

Focus on how the “social contract” was evolving between MNCs and Canadian society.

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Normative theory - CSR 1

CSR – 1 is the theory of how the modern corporation should exist and interact with people, institutions, and all segments of society.

CSR -1 is normative – how the corporation “ought” to act

Normative state – Define ideal or proper “state” of relations between the corporation and society

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Grounded theory - CSR 2

CSR – 2 is the theory of how the modern corporation formulates and implements policies, programs, and practices that accomplish the normative goals.

CSR -2 is process-oriented (responsiveness). How does the corporation translate policy ideas into practice?

CSR 2 is a grounded theory …actual practice.

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Policy and Action – CSR 3

CSR-3 Critical ethical and management issues of our time – human rights, environment, labor rights

Corporate policy rooted in moral correctness “Corporate social rectitude” Legitimacy of governance as the key issue for

corporate and governmental institutions Age of Accountability

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Traditional view of governance

Traditional property rights view emphasizes that the owner of property has dominion over it.

Three rights To use as the owner wishes. To transfer as the owner wishes. To set conditions for others to use it.

New realities affect those rights however.

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PAC Newsletter - headline

“Corporate social responsibility is undergoing a huge transformation” because of new realities. Public Affairs Council, Sept. 2006

Point: The community is no longer geographically defined …. “Even for small companies, the community is now the globe.”

Recommendation: Corporate community activity should be based on your organization’s key competency.

Example -- UPS - transport & logistics – during Katrina, UPS was among the most effective responders.

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New realities

The nature of assets has changed (intangibles).

The modern firm is not factories & railroad cars. It is composed of networks of voluntary relationships.

Culture and history support more “open” approaches to authority and power. Governance requires “legitimate” processes of

leadership and accountability

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CSR at a Crossroads

Old-style corporate social responsibility seems to be morphing into new models.

PR model – good works at the margin of the business/ philanthropy (Buffet, Gates, Branson)

Integrate the concerns – supply chain, subcontractors, transparency, reputation

Corporate re-design for the 21st century Corporation 2020 project

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Integration: Respected Companies

Barron’s financial journal, September 11, 2006 85 institutional investors evaluated 100 largest

companies in terms of “respect”. “… respect is intangible, which may be why it’s

so important.” – Barron’s Top ranked:

Johnson & Johnson, General Electric, Procter & Gamble, Toyota, Berkshire-Hathaway, Pepsico, Exxon Mobil, Goldman Sachs, Honda, Amgen

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5 Factors considered

Factor Most important 2d most important Strong mgt 31% 24% (55) Sound bus. strgy 27% 25% (52) Consistent sales &

profit growth 22% 6% (28) Ethical bus. practice 15% 25% (40) Competitive edge 4% 12% (16)

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Re-design model: 21st c. Principles

1. The purpose of the corporation is to harness private interests to serve the public interest.

2. Corporations shall accrue fair profits for shareholders, but not at the expense of the legitimate interests of other stakeholders.

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Redesign principles …

3. Corporations shall operate sustainably to meet the needs of the present generation without compromising the ability of future generations to meet their needs.

4. Corporations shall distribute their wealth equitably among those who contribute to its creation.

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Redesign principles …

5. Corporations shall be governed in a way that is participatory, transparent, ethical, and accountable.

6. Corporate rights shall not supersede or weaken rights of natural persons to govern themselves.

Source: <www.corporation2020.org>

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The Business School Research Project

To learn how leading business schools are addressing social and ethical issues in curriculum, research, and community.

To assess faculty resources and related support for these areas.

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Key findings

Social and ethical issues are now taught in five distinct sub-areas … ethics, social enterprise (CSR), social entrepreneurship, corporate governance, and sustainability.

Leading schools use one or more of these areas as key focal points for MBA program activity.

Dominant focus on ethics and social entrepreneurship as organizing themes for teaching.

Leading schools are innovating and using these areas as springboard to public awareness and recognition.

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Conclusion

Governance is about stakeholders Who matters? Why? What is the proper way to deal

with stakeholders?

Responsibility is understood through answers we develop to these fundamental questions: To whom is the corporation responsible? For what? How do we measure performance and progress?

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Ethics

20

18

8

1

12

1

109

1

0

2

4

6

8

10

12

14

16

18

20

US Business Schools

9

8

2

0

9

1

5

2

3

0

2

4

6

8

10

International BusinessSchools

Courses

Faculty

Research Center

Journal

Books, articles

Fellowships

Conferences

Studentclubs/competitionsInternships /Outreach

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Social Enterprise

12

56

2

43

7

11 11

0

2

4

6

8

10

12

14

16

18

20

US Business Schools

4

3 3

0

3

1

3

4

2

0

2

4

6

8

10

International BusinessSchools

Courses

Faculty

Research Center

Journal

Books, articles

Fellowships

Conferences

Studentclubs/competitionsInternships /Outreach

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Social Entrepreneurship

16

910

1

4

6

10

13

5

0

2

4

6

8

10

12

14

16

18

20

US Business Schools

7

5

2

1

4

2

3 3

0

0

2

4

6

8

10

International BusinessSchools

Courses

Faculty

Research Center

Journal

Books, articles

Fellowships

Conferences

Studentclubs/competitionsInternships /Outreach

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Corporate Governance

15

17

4

0

16

0

10

2

00

2

4

6

8

10

12

14

16

18

20

US Business Schools

6

8

4

1

7

1

3

1 1

0

2

4

6

8

10

International BusinessSchools

Courses

Faculty

Research Center

Journal

Books, articles

Fellowships

Conferences

Studentclubs/competitionsInternships /Outreach

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Sustainability

16

14

11

0

11

4

1312

6

0

2

4

6

8

10

12

14

16

18

20

US Business Schools

8

6

3

0

7

0

5

2

0

0

2

4

6

8

10

International BusinessSchools

Courses

Faculty

Research Center

Journal

Books, articles

Fellowships

Conferences

Studentclubs/competitionsInternships /Outreach