The role of the firm in society Essay
1. New challenges for corporations In recent years we have seen a chain of changes in the conduct of business only similar to the one brought by the industrial revolution era. However, this time not only technological advances but also political changes, social and environmental regulations and globalization issues have challenged the modern entrepreneur to adopt a model focused not only on a short term going but also on a long-term value creation strategy. Hansmann and Kraakman1 have named these models as “shareholder oriented model” and “stakeholder oriented model”.
Examples such as Enron, WorldCom and the one-week-old Telegraph2 case reflect the peculiar weakness of the “shareholder oriented model”, where companies focus only on today’s stock price performance. Moreover, this new scenario enhances the role of a “global citizen”3, recognizing the interests of the whole set of legitimate stakeholders – employees, suppliers, customers, society and government -, which has to be played by the modern firm on today’s global economy.
2- Generating value for shareholders Creating value for shareholders is essential. Indeed, shareholders bring resources to the company (capital) and the use of these resources requires compensation as are the hours done by an employee, the capital provided by a bondholder, the input of suppliers
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Although generating profits for shareholders is a necessary and major objective for companies it should be neither their sole purpose nor done at the expense of other stakeholders like in the Danone case. The challenge of the modern company is to overcome this “virtual” tradeoff: serving shareholders vs. serving stakeholders. 3- Overcoming the apparent contradiction between shareholders’ value and stakeholders’ interests To develop the car market, Henry Ford decided to compensate its employees enough so they could afford the cars produced by their own company. This contributed to both the booming of the sales of Ford and the emergence of a working class with purchasing power in the US.
Following pressures at industry level from European legislator, Glaverbel, a Belgian glass-manufacturer, decided to participate in the creation of the new European safety standards for glass-handling devices and to buy more expensive devices complying with the new standard before the regulation became mandatory4. The managers of the company wanted to keep the company safe from having its reputation tarnished by accident as well as to avoid potential legal sanctions. These two cases, one dictated by choice, the other one by regulations, demonstrate that a company can increase shareholders’ value and serve stakeholders’ interests simultaneously.
Fulfilling stakeholders’ interests as an instrument5 to increase shareholder’s value. Serving stakeholders’ interests is a powerful instrument to increase shareholders’ value. This policy can be exercised in various situations: – To avoid situations that potentially compromises the business. For instance, in 1995, two non-profit organizations denounced Shell’s operations in Nigeria (violation of human rights), jeopardizing sales6. To solve the crisis, Shell managers reviewed the companies’ practices. Since, Shell has worked hand-in-hand with non-profit organizations to develop and implement best practices.
To improve the company financial performances. Disposing waste represents a significant cost for companies. In general these wastes are generated due to production inefficiencies. Reviewing production processes or implementing a sorting process that increases the quantities of waste reduced, recycled or reused has an impact on the bottom-line. Another example can be found in supply-chain projects, where CO2 emission reductions are extensively being used to justify big investments at UPS7.
Obtaining licenses to operate. This is very important for companies whose business has environmental or potential health impact on its local community. The French company Lafarge, has built reputation to rehabilitate the quarries it exploits after utilization. It is then easier for them than to competitors to obtain mandatory clearances to operate. Innovate and create competitive advantage. The Body Shop has created a strong brand and business by launching natural cosmetics (also made without tests on animals). This posture has attracted a growing niche of social-environmental sensitive customers. These customers are even ready to pay a premium for those products.
From instrumental to intrinsic societal corporate responsibility However, we think that conceiving societal corporate responsibility as an instrument is not sufficient to increase shareholders’ value on a sustainable basis. Its benefits are short-term. The sensitivity to stakeholders’ interests must be structural (or intrinsic) in the company to sustain growth in shareholders’ value. This means that it should be part of the mission and culture of the company. For instance, the Body Shop’s best in class code of ethics with stakeholders was developed at the inception of the company.
In 1999, global stock exchange markets launched the Dow Jones Sustainability Index (DJSI) with the purpose to “track the financial performance of sustainability leaders on a global scale”8. The Index encompasses around 2500 companies in 60 industry groups from 23 countries, with a performance, in industry specific environmental and social criteria, higher than its peers. Those with the 10% upper performance are selected. Updated monthly, this index has shown that these companies have provided a return to its investors 55% higher than the Dow Jones General Index. This is unquestionable evidence of the link between financial result, as recognition by the society, and higher performance on societal corporate responsibility issues.
Societal responsibility has to be implemented in the organization and routinely practiced. Reconciling business requirements and societal responsibility may require many changes. It cannot be the result of a single opportunist decision but needs both time and a longstanding effort. Johnson & Johnson’s societal corporate responsibility was defined in 1943 by Robert Johnson and is still forcefully promoted in the company today.
4 – Implementing societal corporate responsibility: a road map The companies that have built a strong reputation of societal responsibility share some common characteristics that appear to us as key success factors: Develop a code of conduct. More than just a set of statements on a piece of paper, a code of conduct must permeate in the entire organization, in its activities and culture. Companies make their social ambition explicit with all stakeholders, including shareholders. Starbucks Coffee, Body Shop, J&J have inscribed their social responsibility in their mission and thoroughly communicate it to the society. Recently, a J&J Senior Manager started his presentation in our business school by referring to it.
Adopt a corporate policy of transparency of ownership and control. Corporate governance should ensure the transparency of the share holding, list of the board members and top managers and structure and management policies. A regularly changing management may also jeopardize such a process. Leaders who serve for long periods have show more commitment to societal responsibility, vision on the long run, and the standing to convince reluctant board members or managers.
Assess its overall performance considering the legitimate stakeholders’ interests. Robert Kaplan9 propose an adaptation of its world wide tool know as Balanced Scorecard to guarantee a more effective effort on the most critical strategic areas of corporate governance. A necessity has clearly emerged to measure and report the results of a company not just by its financial profits and losses reports, which are treated with suspicion, but also by the full set of impacts between its processes and the society.
An open attitude regarding external involvement. As mentioned above, Glaverbel did not hesitate to participate in the discussion of glass-handling devices with the European legislator to increase safety even-though it knew it would be costly. These companies are convinced that dialog on a continuous basis is more valuable than forced dialog after a crisis that may have paralyzed a company and, as a result, decreased shareholder value.
Incorporate in the decision-making process, non-financial criteria such as environmental and social repercussions, impacts on customer and suppliers and ethical dilemmas evaluation. Develop a set of best-practices. Best practices are the easiest way to focus future activities and measure your relative performance to your competitors. Best practice, to be relevant, have to be focused on the specific areas identified in the industry.
The role of the firm today is to re-direct its efforts towards a vision of excellence where race to market share, cost management and innovation go together with customer satisfaction, societal responsibility, citizenship and environmental awareness, without losing focus on profits. Companies that have been able to correctly balance these interests have achieved higher and sustainable levels of financial performance.
However, this balance is only acquired through a long-standing effort to practice on a daily basis the concepts of societal responsibility on all levels of the organization. The implementation also requires an initial impetus and a strong and continuous support from convinced (vs opportunistic) leaders. Societal responsibility pays-off and those companies that do not expand their aspirations in a multiple set of values, are growing isolated from the global market of tomorrow.