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Business and Society Review 119:1 61–93
A Real Options Reasoning Approach to Corporate Social Responsibility (CSR): Integrating Real Option Sensemaking and CSR Orientation RICHARD PETERS, ETHAN WAPLES, AND PEGGY GOLDEN
ABSTRACT In this article we explore the conceptual relationship between corporate social responsibility (CSR) orientation and real option reasoning. We argue that the firm’s attitude, communication, and behavior toward CSR will act as significant determinants to the firm’s sensemaking approach to real options; that is, if and how it (the firm) acknowledges, receives, and manages strategic real options. Integrating the previous work of Basu and Palazzo with Barnett, we propose a new model that extends the influence of CSR orientation/character to general strategic decision making while simultaneously developing the attention-based view to real options.
Richard Peters is an Assistant Professor of Management at Xavier University of Louisiana, New Orleans, LA. E-mail:
[email protected]. Ethan Waples is an Assistant Professor of Management at University of Central Oklahoma, Edmond, OK. E-mail:
[email protected]. Peggy Golden is a Professor of Management at Florida Atlantic University, Boca Raton, FL. E-mail:
[email protected].
© 2014 Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.
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INTRODUCTION
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cursory perusal of contemporary strategy literature would support the popularity of real options reasoning (ROR) in theoretical and empirical research. Although not an entirely new concept (see Myers 1977), this approach to project valuation has gained considerable currency as both academics and practitioners revolutionize management thinking in increasingly novel ways (McGrath et al. 2004). While past writers have defined and used ROR differently, there is considerable consensus with respect to treating real options as “preferential access to an opportunity for an investment” (Bowman and Hurry 1993, p. 762). In this way they are similar to traditional financial options such as puts and calls that offer investors advantageous positioning from which to leverage future possibilities while simultaneously minimizing future risks (Husted 2005; McGrath et al. 2004). However, unlike conventional financial instruments, most strategic real options are embedded in contexts of ambiguity, intangibility, and subjectivity and thus are susceptible to the influences of individual cognition (Adner and Levinthal 2004; Barnett 2008; Krychowski and Quelin 2010). Barnett (2008) provides an initial schema to consider the cognitive elements of ROR. He acknowledges the importance of attention structures, mental schemas that prioritize what managers acknowledge and act on, to understanding the heterogeneity in both real option portfolios as well as ultimately, portfolio performance. Context attention structures, he proposes, are relatively cultural and cognitive, while concrete attention structures are more specific, policy oriented, and regulative. These attention structures, Barnett argues, are important to understanding how firms, through their senior managers notice, evaluate and manage real options. Because they assist in filtering, channeling, legitimizing, and prioritizing information and agendas, these inherent firm structures can also be expected to significantly alter and explain strategic behavior and financial performance. While postulating how these structures might affect real option activity, Barnett (2008) stops short of actually suggesting specific antecedents to these attention schemas. Although, obviously a
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sacrifice for simplicity and focus sake, his introduction and discussion of certain structures, like internal/external orientation and innovative identity, without consideration of their potential determinants, somewhat diminishes the richness and veracity of his model. He does suggest that future research may help prescribe specific organizational structures for desired real options outcome, but that will require some insight into the antecedents and contributing factors to such structures. And while Gregoire et al. (2010) provide a useful model that explores the cognitive underlays of one aspect of Barnett’s model, recognition of opportunities (real options), more needs to be done, not only to explain real option sensemaking, but also to further identify what provokes and frames it. To address this need, we propose corporate social responsibility (CSR) as a possible antecedent and influence to the attention structures identified in Barnett (2008). While there are a myriad of possible variables that can be elicited for this endeavor, in the following few paragraphs we will attempt to validate our choice and demonstrate the academic and practitioner benefit its selection affords. Benefits of Study Our first rationale for choosing CSR is the lack of past research linking this important factor to ROR. While other areas of strategy including joint ventures (Chi, 2000) and global operations (Kogut and Kulatilaka 1994) have already been privy to ROR treatment, researchers in social responsibility have been somewhat circumspect and quiet in this arena, creating a substantial intellectual void. It should be noted that Husted (2005) does consider CSR through the lens of real options but his work diverges from ours since he focuses on how socially responsible investments can act as real options and therefore provide tangible benefit. Rather than treat CSR as a real option “type” we attend to it as a precursor for general ROR, regardless of whether the real option investments are socially or traditionally flavored. Thus the scope of consideration and applicability of this work is broader, at least theoretically, than Husted (2005). Beyond the lack of evidentiary research however, we are motivated by the perpetual and contentious debate that haunts the
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“business case” for social responsibility. As our attention has turned from what CSR is or should be to defining its strategic financial benefit (Barnett 2007; Carroll and Shabana 2010; Preston and O’Bannon 1997), the search for a viable and trustworthy link between CSR and financial performance has become a preoccupation, fixation, and even a point of vexation for many an academic and practitioner. In this quest, some have suggested that there are crucial theoretical and empirical variables that are missing from this simplistic bi-correlation (Barnett 2007; McWilliams and Siegel 2000; Pivato et al. 2008; Rowley and Berman 2000) and finding this “missing” link may well solve the ongoing enigma. Might that link be found in ROR, and specifically an attention-based view (ABV) of ROR? While we do not directly hypothesize and test such a model, statements and implications of past research suggest that this may be a definitive possibility and a fruitful vine of inquiry. For example, Basu and Palazzo (2008) (on whose work we will momentarily more formally introduce and on which we will rely heavily throughout the article) argue that CSR may be a predictor of firm behavior and business decisions such as “branding or outsourcing activities” (p. 133). Positioning these behavior and decisions as real option investments, rather than general management activity, may therefore afford us an opportunity to illustrate how a firm’s social responsibility can impact its ROR, and ultimately its financial well-being (Barnett 2008). This then nominates ROR as an alternative to the resource dependency/reciprocity or strategic differentiation argument (Barnett 2007; Brammer and Pavelin 2006) that are normally used to explain the expected financial returns from CSR. Notwithstanding the potential enrichment and clarity that this research may bring to the CSR business case, the question still lingers as to whether CSR, as a classifiable concept, can prove suitable as an antecedent to both contextual and concrete structures. For this to occur, it must assume a character closely aligned with ABV of sensemaking, which argues that managers’ cognitive limited resources require them to be selective in terms of what is noticed and prioritized (Ocasio 1997). This is essential since CSR, as an organizational construct, must be able not only to influence attention structures within the firm, but also to create itself attention structures that encapsulate the attention structures noted by Barnett (2008). This higher-order sensemaking attribute must be
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present since if the ABV argument is that the firm controls its perception through cognitive selectivity, then any organizational variable that participates in the ABV model must embody a cognitive orientation. This is not true of much previous CSR literature however. While some, if not all of the tripartite (thinking, talking, acting), has been previously studied and connected to CSR or some incarnation (Aupperle et al. 1985; Berman et al. 1999; Bhattacharya and Sen 2004; Donaldson and Preston 1995; Fombrun et al. 2000; Husted 2005; Wood 1991), until recently CSR lacked for a parsimonious taxonomy that not only offered typologies but gave true insight on how CSR can be expected to shape the way a firm makes sense of its environment, an integral attribute for our study. Enter Basu and Palazzo (2008), which through their sensemaking approach to CSR, contribute significantly to addressing this deficiency and providing a suitable CSR framework for our line of inquiry. Building on the work of established sensemaking authors (Pfeffer 2005; Weick 1995), they reposition social responsibility away from the content-driven and behavior-laden research of the past to an ideal that cares about motivation, intrinsic firm character, and consistency between what is thought, said, and done with respect to stakeholder engagement. This is somewhat akin to Matten and Moon’s (2008) dichotomy of explicit and implicit CSR as well as Hillenbrand et al.’s (2011) that argues a firm’s CSR comprises both its actions as well as its character. This transition to sensemaking not only benefits general CSR scholarship (cf. Sharp and Zaidman 2010), which seems mired in whats and whens rather than whys and hows, but is of special significance to our particular line of study. Since organizational sensemaking is essentially the way firms perceive and react to their environments (Ring and Rands 1989; Weick 1995), this approach to CSR seems highly congruent to an ABV perspective that, as noted earlier in the text, focuses on structures that influences what information firm actors receive, what information they distribute and prioritize, and what consequential actions they take (Rerup 2009). By stating that their work “locates the phenomenon as an intrinsic part of an organization’s character (i.e., the way it goes about making sense of its world), with the potential to discriminate it from other organizations that might adopt different types of
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sensemaking processes,” (Basu and Palazzo 2008, p. 124), their model fulfills two important requirements for involvement in the ABV treatment of ROR. First, because CSR is viewed as part of the organization’s character, it is highly probable that it will both establish and influence not only concrete attention structures but also higher-order contextual attention structures. This quality is necessary since we seek to treat CSR as an antecedent to existing attention structures (both contextual and concrete) and it is therefore imperative that it exist at a level above these. Second, its ability to distinguish among firm outcomes based on cognitive processes is synonymous with Barnett’s perspective on ROR, which he argues can help researchers describe and explain why firms differ in their management of the real option process (Barnett 2008). Therefore Basu and Palazzo’s tripartite model, as we will in the next section more specifically discuss, seems suitable for antecedent use and thus, may help answer the question of what motivates the structures Barnett described. Of course, Barnett (2008) suggests that possible external variables be looked at as possible determinants and complements of his model. However, organizational variables, such as CSR, hold one distinct advantage over external environment conditions, in that they are largely under the control and discretion of the firm, which is important if the firm is attempting to realize specific real option outcomes through specific cognitive structure manipulation. Thus, in the quest to assist both scholars and practitioners concerned with ROR, we argue that CSR holds tangible benefits. The study of CSR as well benefits from our discourse, not only as already argued before, from the business case perspective, but also by relating specific firm outcomes to alternative CSR types or orientations. As we previously indicated, these outcomes do not have to be “socially flavored,” as in the case of Husted (2005), but can embody multiple types of strategic realities. This therefore positions CSR as more than simply a stakeholder management tool, image enhancement device or marketing ploy, but a tenet of organizational and strategic character that has real potential to impact significant areas of organizational being. Decreasing the social or stakeholder label from CSR may actually help with its acceptance and development in scholarship and practice.
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We formally present our model next and in so doing briefly discuss both Barnett’s (2008) and Basu and Palazzo’s (2008) contributions, paying specific attention to their models. Then we will present arguments that support their linkages and end with a discussion of our statements and a conclusion outlining future research arenas.
THEORETICAL MODEL Figure 1 is an illustration of our model, which, as noted previously, is essentially a marriage between Barnett’s sensemaking model that uses the ABV perspective to explain real option behavior in firms, and Basu and Palazzo’s sensemaking model that seeks to explain how firms think, discuss, and enact CSR within and outside the organizational boundaries. Both these papers are sig-
FIGURE 1
The Relationship between CSR and ROR.
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nificantly notable for their sensemaking approaches, that diverged substantially with earlier, and even later work that have assumed relative rationality and objectivity on the path of management. Barnett (2008) tackles real options through the lens of Ocasio’s (1997) ABV framework, suggesting that structures inherent in the firm influence information and communication in such ways as to determine (1) which options are noticed or recognized; (2) which options are championed by middle management and receptively received by senior management; and (3) which options are held, executed, or abandoned. The structures, he posits, can either be procedural and “actionized” specifically by firm constituents (concrete), or exist within the general social, cultural, and economic climate of the organization. He then proceeds to identify multiple examples of such structures that can potentially influence the three stages of option reasoning indicated in his ABV framework. Basu and Palazzo (2008), similar to Barnett (2008) apply a sensemaking approach to their treatment of CSR. They, like Barnett, argue that the majority of work in their area has been limited to documenting what has happened rather than why it has happened. They present a model that dissects CSR within the firm into a tripartite of cognitive, linguistic, and conative, suggesting that three areas collectively grant a holistic understanding of CSR attitude and behavior. Much like Barnett (2008) they shift the prioritization of behavior determinants away from the environment and toward the firm and its management, proposing that management’s mental perspective surrounding environmental cues are equally, if not more important than the environmental cues themselves. Thus, trying to predict CSR or real option behavior without acknowledging and accounting for sensemaking structures within the firm, both parties argue, represents an underdevelopment and disservice to both fields of research. It is this commonality in both perspective and content between Barnett (2008) and Basu and Palazzo (2008) that encouraged our present discourse. As stated in our introduction, we treat Basu and Palazzo’s treatment of CSR as a higher order attention structure that can be argued to influence both the context and concrete structures indicated by Barnett. Thus, we position Basu and Palazzo’s model as the antecedent to Barnett’s variables, but within the general ABV framework that Barnett uses.
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We therefore seek to explore possible links between their respective variables and constructs. We have identified the benefits to both fields that can be accrued through this exploration and now turn our focus toward discussing these relationships.
THEORETICAL DEVELOPMENT Identity and Real Option Recognition Barnett (2008) suggests that the initial stage in his ABV framework, is the ability and propensity of firms, through top management, to become aware of shadow options, those options that remain hidden until their existence becomes evident to management. Assuming that firms are purposely seeking these shadow options, Barnett concerns himself with determining whether the firm’s search will be more internally or externally driven. He argues that this locational motivation is determined predominantly by the type of attention structures managers contend with, noting that variables such as environmental volatility and new management can turn a firm’s attention and inclination more toward new markets and new resources relative to existing ones. This propensity to notice and opportunistically explore (we shall use this distinction later in our discussion) external versus internal type of shadow options is therefore at the heart of his propositions and model. We thus, in keeping with our central tenet to utilize CSR as a sensory antecedent to Barnett’s model, suggest that CSR orientation, particularly the cognitive element (how the firm thinks of itself relative to its environment) will direct managers either away or toward new markets and resources. With respect to shadow option recognition, we propose that the CSR identity/orientation of the firm: individualistic, relational, or collectivist will be highly influential to the focal direction of management search. Basu and Palazzo (2008) borrow these concepts from Brickson (2007) noting that firms, through their management, vary in their scope of acknowledgement, consideration, and cognitive appreciation of external environment constituents and the stimuli they provide. Individualisitic identities, Brickson (2007) suggests, concentrate primarily on their own well-being
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and see others as competitors rather than colleagues. While not necessarily antagonistic to stakeholders outside the firm, Brickson (2007) argues that an individualistic identity promotes entities to focus on self-sustenance and look inward rather than externally for resources and validation. In contrast, a relational identity is other-focused and motivated by forming strong relationship with stakeholders both within and external to the firm. Thus, unlike an individualistic identity, relational identity entities search for external validation and thus are more likely to seek stakeholder relationships in order to attain such and satisfy their other-centricity (Brickson 2007). Basu and Palazzo (2008) note this type of identity, with specific respect to CSR, promotes firms seeing stakeholders as partners rather than pests (Barnett 2007; Freeman 1984) and thus motivates firms and managers to more greatly consider (compared with individualistic orientation) cognitive stimuli outside the discernable boundaries of the firm. Collective identities, similar to relational identities, promote external consideration and stimuli. However, these two constructs differ in terms of the scale and scope of cognitive consideration. As Basu and Palazzo (2008) propose, collective identities view themselves as part of the bigger social schema and thus grant themselves a more holistic identity compared with a more restricted one for relational identities. Therefore, whereas a firm, which subscribes to a relational CSR identity, might consider the needs of its customers (quality, excellence, fairness), a collectivist type firm would potentially seek resolutions to world hunger or third world illiteracy. This increased cognitive breadth is thus likely to motivate consideration of secondary stakeholder groups (Hillman and Keim 2001) that are less instrumental and more normative in their appeal to the firm (Donaldson and Preston 1995). This holism is also likely to accentuate and even prioritize cognitive stimuli resident far beyond the firm’s traditional boundaries of operation. This variation of CSR identity along the dimension of external environment cognition is consistent with Barnett’s (2008) first proposition associated with shadow option recognition. Barnett argues that the more externally oriented the firm’s attention structures, the more likely managers are to notice new options in new markets. This occurs because the firm’s awareness, motivation, and capabilities, all largely determined by its specific identity
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type, will restrict or expand the scope of the firm’s search for option opportunities (Livengood and Reger 2010). We propose that CSR identity, and its ability to focus managerial attention either inward at the firm and its existing, going concerns (individualistic) or outwards, to primary (relational) and/or secondary (collective) stakeholder constituents, is thus a strong candidate to act as a cognitive antecedent to Barnett’s first level of noticed possibilities. Thus we posit the following: Proposition 1: CSR identity will influence the attention structures of a firm toward either external or internal cognitive orientations. Further, as firms move from individualistic to relational to collective in their CSR identity, the more externally oriented their attention structures become, the more likely they are to notice shadow options in new markets. The opposite holds true such that movement from collective to relational to individualistic will promote internal orientation and increase likelihood of option recognition in existing markets. Legitimacy and Real Option Recognition Beyond noticing shadow options, Barnett (2008) argues that attention structures can also influence whether firms notice potential to acquire new option generating resources (i.e., opportunistically exploring). Barnett (2008) notes that while one firm can inadvertently and/or serendipitously identify an option to expand after entering a joint venture, another firm might have actually sought out a joint venture because of its access to future growth. Here the second firm is both considering new resources (exploring vs. exploiting; cf. Benner and Tushman 2003) and doing so in a manner to further firm instrumental benefit (opportunism). Barnett (2008) though, while making the distinction between seeking shadow options and seeking new option resources, uses the same arguments and rationale for both. Again, he does not inquire as to if companies will opportunistically explore or not, but assuming that they will, considers the ramification of external versus internal orientation on such cognitive activity. Considering that his model rests on the presumption that the firm is inclined to real option thinking, this argument simply seems appropriate
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and therefore we should expect that the more firm’s attentionbased structures are externally oriented, the more likely they are to notice opportunities for new resource acquisition in new markets. Following this logic, we can presume that CSR identity will also affect opportunity exploration such that individualistic identities will promote existing market exploitation whereas relational and collective identities would both favor (by an increasing degree) external opportunistic exploration. This seems to be viable when we consider that, as mentioned earlier in the text, individualistic identities are self-sustaining and focused on instrumental benefit. These types of firms and these types of managers are thus expected to consider the future self-benefit that options provide (opportunistic) (Brickson 2007). However, because of their internal disposition tendency (depending on itself vs. reliance on others), this cognitive consideration is expected to be limited to environments and stakeholders proximally closest to the firm, those that the firm has existing relationships with, that have the greatest potential to provide the greatest potential for instrumental gain, and that the firm has previously capitalized upon. Thus, individualistic firms will tend to favor exploitation relative to exploration and thus are unlikely to notice new option generation resources. While sufficient for individualistic identity, the adequacy of the logic is placed substantially in question when we attempt to apply it to relational and collective identities. As noted previously, Barnett (2008) implies that opportunistic exploration of shadow options requires firms to be proactively motivated to seek their own self-interest. This, however, conflicts with relational and collective identities that are not motivated by personal benefit but by a primary need to contribute the success of others (Brickson 2007). Thus firms that are trying to satisfy the needs of external stakeholders through a relational identity, though more aware of external shadow options, may in fact be less inclined to explore these options opportunistically because of their prioritized others-focus. Thus, to resolve this particular issue, we consider another of Basu and Palazzo’s constructs within the category of cognition: legitimacy. Legitimacy, as defined by Suchman (1995), is the compliance of organizations with norms, institutions, and values
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external to the organization. This attempt to establish credibility in the environment affects not only how firms act, but also how they think, thus enhancing its suitability as a contextual attention structure. Further, because legitimacy is always ascribed to organizations by external actors, its pursuit seemingly encourages the possibility of external orientation and thus the likelihood of exploring new options for future instrumental gain. Suchman (1995) describes three distinct approaches to establishing organizational legitimacy. The first, pragmatic legitimacy, is sought through active engagement of stakeholders that relies heavily on co-option and influence. Basu and Palazzo (2008) note that firms adopting this approach are likely, for example to use media blitzes to convince “important” stakeholders (those whose validation the firm deems most decisive) of their appropriateness. Thus the firm attempts to, in some measure, be the “master of their fate.” Moral legitimacy, similar to pragmatic legitimacy, is active. But Suchman (1995) distinguishes between the two by noting that the former both embraces a wider audience and a tendency toward more cooperation as compared with the latter (Claasen and Roloff 2012). Therefore, in this approach, firms are seen as more receptive and consultative with its environment and more accepting of a wider audience of stakeholder actors (Basu and Palazzo 2008; Castello and Lozano 2011; Palazzo and Scherer 2006; Young 2003). However, though moral legitimacy seems more altruistic than pragmatic, Suchman (1995) clearly indicates that it too is a means to an instrumental end, namely gaining firm legitimacy and the resource benefits that accompany it. Compared with both pragmatic and moral legitimacy, cognitive legitimacy, in Suchman’s (1995) perspective, is however far more passive. While there is inevitably some external environment engagement, this is primarily limited to adopting perceived environmental norms, from comparable institutions deemed already legitimate. Thus legitimacy is sought through mimicry rather than influence (pragmatic) or collaboration (moral) and thus while the outcomes may be similar, the level of proactive stakeholder engagement in this legitimacy approach is expected to be far less than the other two discussed. This returns us to an earlier assumption, which argues that the quest for legitimacy is motivated more by self-interest than a
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concern for the well-being of others and thus all three types of legitimacy behavior may enhance new option generating resource recognition. However, we further argue that proactivity, intimacy, and scope of external stakeholder engagement occurring in legitimacy activity will moderate this relationship and therefore contextually influence this aspect of Barnett’s ABV. Proactivity, we suggest, demonstrates that firms are highly motivated to seek and achieve legitimacy and take directed and vested ownership for this achievement. Thus, both pragmatic and moral legitimacy engage the stakeholder, rather than simply accept cues from them (more akin to the passivity of cognitive approaches) and much like the joint venture firm in Barnett’s description, act based on a purposed agenda. Also, stakeholder engagement intimacy, determined by both the proximity and type of firm–stakeholder relational activity, is also proposed to influence whether the firm recognizes new option generation resources or not. Barnett (2007) introduces the concept of stakeholder influence capacity to argue that the true benefit of CSR to firm success is channeled through the ability of firms to build and sustain strong stakeholder relationships. Though he uses financial performance as the measure of firm successes, his assertions can easily be applied to legitimacy attainment. Fombrun et al. (2000) provide similar sentiments when discussing the role of corporate citizenship in mitigating reputational risk, arguing that direct and involved stakeholder engagement and investment can lead to tangible and intangible firm reward. Direct interaction is likely to place the firm closer to its stakeholder and thus foster both opportunity and access to new resources. But beyond proximity, intimacy is also dependent on relationship type. Pragmatic encourages co-option over collaboration. This may lead to informational exchanges being significantly unbalanced (favoring the firm) and a protocol that is more concerned with convincing than it is with conversing. Moral legitimacy, however, is decidedly more collaborative (Basu and Palazzo 2008; Claasen and Roloff, 2012), which may suggest enhanced access to stakeholder influence capacity and stakeholder resource. Finally, the scope of the stakeholder engagement is important to option recognition since as Barnett (2008) clearly indicates, the
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greater the external orientation, the greater the awareness of new option generating resources. Here again, pragmatic and moral legitimacy diverge. Because pragmatic legitimacy is highly instrumental, its focus will tend to be on issues and constituents closer to the firm’s primary or direct environment. These constituents are likely to be the most influential with respect to ascribing legitimacy to the firm and are such, expected to be prioritized (Mitchell et al. 1997). This therefore may limit the external reach of the firm and lead to the proposition that firm’s engaging in moral legitimacy behavior will be more externally focused than those engaging in pragmatic legitimacy behavior. Thus, considering all our preceding arguments we offer the following: Proposition 2: Firms that engage in either moral or pragmatic legitimacy behavior will be more externally oriented, and thus more likely to identify new option generating resources than firms that engage in cognitive legitimacy behavior. Further, moral legitimacy behavior, because it is more externally oriented than pragmatic legitimacy behavior, will lead to greater identification of new option generating resources. Posture and Real Option Receptivity The second stage of Barnett’s ABV model, which he terms project championing, rests on the position that many shadow options are noticed and developed by middle managers. For these options to be realized (acknowledged, accepted, and acted upon) therefore requires senior management support and sanctification. This, in turn, is a function of organizational receptivity, which, congruent with Barnett, we argue is dependent on both lower management’s willingness to offer option ideas (selling) as well as the firm’s openness to these offers (buying). Because of our need to parsimoniously and integrate the two models, we focus on the “selling” side but demonstrate, throughout our discussion, how what is being sold is highly influenced by what the sellers perceive will most likely be “bought.” In keeping with our thrust to integrate Basu and Palazzo’s model with that of Barnett’s, we propose that the character or posture of the firm contribute to senior management acceptance
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of employee autonomy. This firm posture (Basu and Palazzo 2008) is a distinctly contextual structure that substantially determines how firms perceive and act toward stimuli (Spar and La Mure 2003). It therefore is likely to guide not only eventual firm behavior toward external stakeholders but also direct behavior by internal firm stakeholders, such as employees, who wish to conform to their immediate environment’s character. A similar notion is argued by Maitlis and Sonenshein (2010), which states that politics and the interpretations of management can distinctively influence organizational sensemaking. We also presume like Staw et al. (1981) and Reger et al. (1998) that firm level posture will largely mirror senior management values and ideals and thus demonstrate to the lower ranks what is both acceptable and emphasized. This posture, we further argue, is similar to Barnett’s “wind” that he suggest promotes or hinders autonomy. Considering more specifically the different types of CSR postures firms can adopt: defensive, tentative, and open, we can see more clearly how an organization’s approach to social responsibility may in fact influence its approach to project championing by middle management. A defensive posture, Basu and Palazzo (2008) note, is characterized by a general firm unwillingness to heed the advice and feedback of others, despite evidence suggesting the fallacy of the firm’s previous behavior and/or beliefs. They cite Staw et al. (1981), who argue that defensiveness is used by organizations to negate perceived uncertainty and/or threats that accompany change. This explains why firms with this posture will ignore or avoid contradictory or new information and ideas and thus limit their interaction with the unknown. These organizations may thus find themselves trapped in blind spots (Porter 1980) or competency traps (Levitt and March 1988) because of their unwillingness to look beyond its span of focus, that is, the focus of senior management. This discomfort with the novel and unwillingness to change associated with a defensive CSR posture is unlikely to promote middle management autonomy and correspondingly middle management option championing, especially if these options challenge the firm’s status quo. In fact, rather than just being ambivalent to these new ideas, defensive-minded firms might substantially oppose perceived “hubris” by junior management to question or challenge senior management opinions, which could severely
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undermine senior management receptivity to new strategic options proposed by their subordinates. Firms with tentative postures, unlike those that are defensive, have some willingness to explore the new (Staw et al. 1981). And because of this increased openness these organizations would likely be less opposed to middle management autonomy and real option championing. However, the formidableness of this openness is expected to be tempered by inexperience and uncertainty regarding innovation and change, and thus if or to what extent autonomy will prevail over uncertainty is likely to differ across firms with tentative postures. Nevertheless, because there is some consideration and acceptance of newness, idea diversity, and change in all tentative postures, we expect more championing of options and more management receptivity from tentative postures as opposed to defensive ones. The last posture Basu and Palazzo (2008) discuss is an open posture, which unlike the previous two, demonstrates a distinct level of comfort with newness and change. Here firms, rather than rigidly retracting from change, promote a climate of debate and critical learning. Therefore beyond just a willingness to provide solutions themselves, open posture firms are accepting of information from those within as well as outside of their organization boundaries. This type of openness is thus expected to exaggeratedly engender the wind of autonomy that Barnett (2008). Champions with new option ideas are likely to be rewarded rather than dismissed (defensive) or tolerated (tentative) in this type of environment, which leads us to propose the following: Proposition 3: Firm posture will influence the perceived support for autonomous strategic initiative, which will then influence the percentage of noticed opportunities championed at firms. Therefore, open postures will foster the largest percentage of options championed, followed by tentative postures and lastly defensive postures fostering the least amount of options championed. Justification and Real Option Receptivity As with recognition, Barnett (2008) does not simply discuss whether options will be championed and welcomed but also which
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types of options will be best received. This, as Ocasio (2010) notes, is subset of the larger body of work specifically dealing with issue selling (cf. Dutton and Jackson 1987; Dutton 1997), whereby lower level management competes with other stimuli for senior management’s limited attention resources, and what proposals get noticed and activated are primarily determined by the structures (institutional/cultural, economic, and social) that frame organizational sensemaking (Cho and Hambrick 2006; Yu et al. 2005). Barnett focuses on the concrete structure of option evaluation, that is, the firm’s (senior management) approach to analyzing the content and consequences of option opportunities. With respect to option evaluation, he concentrates on review discipline, an institutional firm-level variable that deals with the level of detail involved and frequency by which options are scrutinized, as well as the demand for measurable outcomes associated with option implementation. Highly disciplined evaluations, in Barnett’s estimation, would thwart the championing of options that are seen as “distant to market”; those that that are highly complex and/or difficult to objectively measure (Amram and Kulatilaka 1999). Thus options that strayed from the norm and/or could not be easily documented, tested, and justified would be perceived as less “salable” and thus either ignored or nixed before ever reaching the senior manager’s ears. Conversely, when projects were evaluated more liberally, that is, with less rigor, the percentage of options championed that were farther from market would likely increase as champions would be less worried that their ideas would be dismissed for lack of hard fact and measurability. Although dealing more with what firms say rather than how they act, Basu and Palazzo’s (2008) construct of justification may indicate how a firm, through its senior management, is likely to interpret and then behave toward elements like option ideas (Ferraro et al. 2005). Language and communication can indicate how senior management practice sensemaking (Taylor and Robichaud 2004) and can give a distinct sense of the firm’s perspective on CSR (Castello and Lozano 2011).Thus the words that are used, specifically their dominant context and prioritized emphasis, may signal to external constituents as well as those inside the firm what the firm treats as important and what type of information it relies upon to validate its decisions and actions.
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Using Ashforth and Gibbs’s (1990) constructs of legal, scientific, and economic as well as adding another original one, ethical language, Basu and Palazzo (2008) show how firms may vary in the rationale they use to excuse or confirm their decisions and behavior. While we, concur with this treatment, we offer an alternative treatment by suggesting that these justification types may also indicate the type and level of evidence and data firms require before supporting an idea or decision, (e.g., pursuit of an option opportunity). It is not far-fetched to presume that a firm that relies on scientific language to justify behavior may also view scientific evidence as a yardstick to evaluate projects and ideas generated in the firm. Further, as Ghoshal and Moran (1996) posit, the words that firms speak can often frame their future endeavors so that a firm that uses economic justification might find themselves prioritizing economic criteria in their future dealings and decisions. Thus we propose that justification language may, concurrent to its role of explaining behavior, also act as a carrier of institutional logic, which are meaningful ways in which firms, through individuals, order their world and pattern their behavior (Castello and Lozano 2011; Thornton 2002; Thornton and Ocasio 1999). Authors such as Thornton and Ocasio (1999), Scott et al. (2000), and Suddaby and Greenwood (2005) have all shown how shifts in these logics resulted in changes in attentional engagement and ultimately in firm behavior. Hence, we propose that differences in justification languages will have a similar effect and present some indication to option champions as to what is expected and preferred by the firm (Dutton et al. 1997) while simultaneously leading to differences in management receptivity to championed real options. Legal, scientific, and economic justification language, because of their inherent nature predicated on fact, whether this be from policy, empiricism, or financial outcomes, indicate to option champions that reviews will be more rigorous and disciplined. Given this rigor, options then, which are closer to the market or the status quo, are more likely to be bought by senior management. In contrast, ethical justification language validates decisions less on fact or data, and more on values and normative obligation (Aupperle et al. 1985; Carroll 1991). While we do not suggest that ethical language is entirely removed from fact, objectivity, or measurement, it is expected that
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rationale based on pursuit of the common good and holistic, normative values that are largely subjective constructs cannot be expected to meet strenuous measurement standards. The examples provided by Basu and Palazzo (2008), AIDS eradication and human rights protection, clearly support our assessment. Therefore, the following proposition is made: Proposition 4: Justification language influences perception of review discipline such that legal, economic, and scientific language will promote the perception of more discipline review and ethical language will promote the perception of less disciplined review. Further, because of these perceptions, legal, economic, and scientific language will encourage options that are close to market whereas ethical language will encourage those distant from market. Consistency and Real Option Reaction The final phase of Barnett’s ABV framework focuses on portfolio management, where he discusses the extent to which options are held, when options are executed and lastly, when options are abandoned. For the purposes of this article we concentrate on the last two areas, execution and abandonment, and now present arguments relating these attention structures to those of the sensemaking model. With respect to option execution, also termed striking, Barnett (2008) posits that the more congruent the option being held is to the firm’s collective identity, the quicker the firm will act to exploit the option. This argument is largely based on the premise that the organization will be more (1) apt to notice and (2) make use of the relationships and actions that seem relatively familiar to the firm. Basu and Palazzo (2008) offer a construct in their conative or behavioral dimension that appears highly congruent and anteceding to this premise of familiarity. External consistency, which they define as the congruence and complementariness of the firm’s overall strategy and its CSR behavior, we posit here will not only influence what and how CSR actions are determined and implemented, but also affect when real options are executed. Greater external consistency, where the firms CSR is embedded in its strategic imperative and managed in that manner (Berman et al. 1999; Donaldson and Preston 1995), is likely to breed
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enhanced familiarity between option and firm identity. Livengood and Reger (2010) propose that the firm’s identity, who and how it sees itself, inclusive of its general strategy, will influence how it chooses to act and compete. This relates to not only, as has already been discussed, who and what it pays attention to, but also what opportunities and capabilities it chooses to invest in and develop. As identity becomes more focused, opportunities that are closest to the prevailing identity or strategic orientation are more likely to be chosen. Thus a firm, high in external consistency will select initiatives (options) that are not only socially conscious but also strategically congruent with the firm’s overall organizational goals (Barnett 2007; Hillman and Keim 2001; Sharp and Zaidman, 2010; Wheeler et al. 2003). Beyond external consistency influencing execution, it may also determine the timing of such execution. Livengood and Reger (2010) consider the timing of firm responses and argue that actions by competitors, which are perceived as directly and seriously threatening to firm identity, will be met by early resistance. This haste to react, they propose, is borne out of a desire to limit benefits competitors might accrue from their (competitors’) initial actions. Thus in their argument, it is consistency between threat and firm identity that spurs expeditious behavior. But a similar argument can be made for opportunity–identity consistency, where the firm strikes an option earlier not to curtail losses but to increase gains. If the speed to quell threats “close to home” is explained by enhanced awareness (attentional engagement), receptivity (attentional selectivity), care (motivation), and capability, then likewise one could expect these factors, present in real options that are consistent with firm strategy, to also positively affect their executions. Because the firm, through its senior management, is already paying attention to these options, their chances of being ignored will be relatively small (Barnett 2008). Further, because of both familiarity and comfort spurred by a perceived history with similar option executions and a belief that the firm already has the tools/capabilities to successfully exploit these options the following is proposed: Proposition 5: Firms high (low) in external consistency will produce high (low) fit between options and firm identity,
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which will lead to options being executed earlier (later) by the firm’s decision makers. Consistency and Real Option Rejection Barnett (2008) then turns his attention to abandonment, which he argues is less about conscious expulsion of options and more about resource denial. Options that lose their attractiveness are marginalized and suffocated and therefore meet inevitable deaths. Rather than attempting to predict which options managers should abandon, his model again focuses on what type of options are likely to be abandoned based on the attention-based structures of the firm. This concept of abandonment, we propose, can be strongly tied to Basu and Palazzo’s (2008) construct of commitment. In their model, commitment, the persistent effort and determination to achieve some desired end, leads to the embedding of behavior, such that the action becomes part of the organization’s modus operandi and even identity (Schein 1992; Weaver et al. 1999). In their treatment of commitment, they distinguish between instrumental and normative (Wiener 1982). Instrumental commitment is motivated and triggered by external cues and rewards whereas normative comes from some internal or intrinsic desire or determination Returning to Barnett (2008), we propose that this dichotomy of commitment cues suggested by Basu and Palazzo (2008) will be expected to influence what type of information firms are listening to and care about, that is, whether external or internal, with respect to their real options. We argue that firms, which enact instrumental commitment, will more heavily utilize external evidence and advice to determine course of future action. These types of firms, for example, might retract or contract from stakeholder relationships and activity based on perceived stakeholder power and institutional demands (Hoffman 1997; Matten and Moon 2008; Mitchell et al. 1997; Moneva et al. 2007). Firms high in normative commitment, conversely, are expected to consider internal values and identity as well as psychological connections to the past, before making abandonment decisions. Burgelman (1991) and Livengood and Reger (2010) all cite the example of Intel’s refusal to abandon its Dynamic Random Access
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Memory or DRAM business, even in the face of contradictory external information and financial losses because of its perceived link to the firm’s identity. Normative commitment firms consider similar emotional and psychological factors but also consider moral implications associated with abandonment (Weaver et al. 1999). Because they view their commitment as rooted in morality and value ethics, rather than instrumentality (Wiener 1982) they are less likely to abandon behavior or stakeholders merely because they are no longer popular or profitable (Bowie 1999; Carroll 1989; Donaldson and Preston 1995; Solomon 1993). Thus, the external stimuli/agitators to abandon, though prevalent and convincing, are likely to be eschewed for the internal motivators to continue to hold on to options, when normative commitment is present. Based on these arguments, we propose the following: Proposition 6: Firms’ high instrumental (normative) commitment will be more (less) externally oriented and thus more (less) likely to abandon real options through resource denial.
DISCUSSION In both Barnett (2008) and Basu and Palazzo (2008), the authors advocate a deepening of our contemporary approaches to ROR and CSR, respectively. Barnett’s ABV and Basu and Palazzo’s sensemaking models provide relatively novel and insightful media to enrich and substantiate these streams of research. Recognizing this, we advantageously seek to integrate the two in an effort to be both complementary as well as unique. While we do limit our discourse to constructs already present in these two models, the marriage between constructs is novel and provides distinctive benefits to each model as well as some avenues for future research. Extending Barnett’s ROR With respect to Barnett (2008), we extend his framework by identifying precursors to his contextual and concrete structures. While his model does provide substantial insight into how
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attention conduits mold and influence managerial attention and action toward real options, as noted earlier, it stops short of specifically identifying antecedents to these structures. We seek to address this limitation by linking CSR sensemaking attributes directly to these structures, thereby enhancing not only the predictive but also the prescriptive power of the model. For example, firm’s desiring exposure to more unique option ideas might find that altering their posture from defensive to open might bolster the wind of autonomy that facilitates option championing. Understanding not only the potential outcomes of attention structures but also their potential causes may help firms more probabilistically plan their option management strategies. But beyond the prescriptive advantages, our arguments and propositions also promote the richness of Barnett’s work by uncovering underlying motivators of his context and concrete structures. One such case occurs in our discussion of legitimacy types where we argue that though all three promote some external interaction, only moral and pragmatic legitimacy, because of their proactivity and intimacy, will foster new option opportunity recognition. Thus, by looking at antecedents and the intricacies within them we may add greater depth, rigor, and possible validity to Barnett (2008). Extending Basu and Palazzo’s CSR Character Basu and Palazzo (2008), at the culmination of their article, make a poignant remark about the future possibilities of their research. They state that “In relating CSR sensemaking processes to elements of a firm’s formal or informal decision making, research might help to uncover multifaceted interrelationships that have potentially greater explanatory power than general business strategy frameworks,” (Basu and Palazzo 2008, p. 133). This is exactly what we have attempted to do here by relating CSR sensemaking to real option reasoning. Discussing how a firm’s CSR orientation (i.e., the way the firm thinks, speaks, and acts regarding social responsiveness and engagement) might influence the sensemaking approach to something as strategically centric to the firm as real options management (i.e., formal and informal decision making) provides many useful implications for both academics and practitioners. One such implication is that CSR-related activity may not be exclusively relevant to traditional social and
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ethical decisions and might thus matter to more general business decisions. So while one might expect the type of CSR language a firm uses, or the CSR posture it adopts to influence how it deals with an oil spill or a HIV prevention drive, one might equally suggest, based on our arguments, that these facets of CSR orientation will also impact manager receptivity to option ideas as well as willingness of subordinates to offer such ideas. While these ideas themselves can be socially flavored, this is not a prerequisite and we have been purposeful in this article not to limit our arguments to generic CSR type scenarios. This is an intentional attempt to promote the generalizability and applicability of CSR to the field of real options management and thus contribute to the greater explanatory power that Basu and Palazzo (2008) envision.1 Future Research Implications Further, and consistent with promoting explanatory richness, we propose that our model might serve as either an alternative to or adaptation of the conventional business case model for CSR. As researchers have contended to prove or disprove the financial advantages of CSR investment, moderators, mediators, new constructs, definitions, and a myriad of empirical and theoretical incarnations have been proposed. (cf. McWilliams and Siegel 2000; Orlitzky et al. 2003; Barnett and Salomon 2006; Barnett 2007). Again, much like our position with respect to past CSR-real options research, we do not seek to critique any of this past work. Instead, we suggest that a sensemaking model, that ties CSR orientation to real option reasoning, might help explain why CSR activity makes a different to firm financial outcomes. Therefore, much like others in the past have argued that the true benefit of CSR to firm performance lies in its ability to cultivate and influence intangible assets like reputation, culture, and research and development intensity (Barnett 2007; Brammer and Pavelin 2006; Branco and Rodrigues 2006; Lantos 2001; McWilliams and Siegel 2000, 2001; Russo and Fouts 1997) we seek to add to this list ROR, and posit that consideration of the stages outlined in Barnett’s (2008) could offer deeper insight into this contentious relationship. Further, as previous writers stated with respect to these intangible assets (Hull and Rothenberg 2008), including ROR variables in a CSR business case
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model might help to improve both theoretical and empirical validity. We, however, suggest this with a degree of caution since not only have we not directly tested this position, but like Barnett (2008), we do not make specific propositions with respect to ROR and financial performance. While this link is relatively implied in his model, as well as ours, neither model makes these prescriptive demands, which are required to evaluate the business case. This we see as a rich vein of future research informative to both the CSR and ROR field. Our final point also concerns another area for future inquisition. As Barnett (2008) notes in his culmination, his model considers option management over a longitudinal landscape, a characteristic previous research had failed to incorporate. But while this evolutionary examination has merit, we argue that it can be further enhanced by considering not only the change in portfolio composition over time, but also the interdependencies between and among options in a firm’s portfolio. Barnett (2008) never accounts for these interrelationships in his model and does not suggest that they are covered in previous ROR literature. However, a return to Basu and Palazzo’s model may hold a pivotal key to uncovering this nuance within Barnett’s sensemaking model. Recall in our discussion of consistency, we focused on external consistency, which assessed the congruence between the firm’s CSR activity and overall strategy. But the other facet of consistency, internal consistency, considers the congruence of all social responsibility initiatives, envisioning these initiatives as a collective whole than rather independent transactions (Basu and Palazzo 2008). This transition to a network treatment of CSR, earlier advocated and discussed in the writings of Rowley (1997), Frooman (1999), Andriof and Waddock (2002), and Maak (2007), suggests that the convergence of stakeholder interests, intensified contemporarily by heightened media coverage, role multiplexity and greater public awareness, and prominence of normative/holistic values, should effectively amplify the relationship between internal CSR consistency and firm performance. This position is supported by others like Whetten and Mackey (2002) who suggest that individuals utilize information about the firm’s behavior from multiple stakeholder sources, including themselves, to assess the organization’s credibility, Dawkins and Lewis (2003) who argue that consumer trust is usurped if CSR behavior is inconsistent, and Fombrun et al. (2000)
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who surmise that firm reputation, an important antecedent to competitive advantage (Brammer and Pavelin 2006; Roberts and Dowling 2002) is accumulated from the capital invested in multiple stakeholder sources (i.e., lack in one can hurt the overall sum). Transitioning back to Barnett’s model we see the potential implications of option interdependencies to real option reasoning especially with respect to retention and rejection. Because firms high in internal consistency adopt holism when managing their internal CSR, their senior management is expected to consider both the individual option as well as its interrelatedness with others in the portfolio before deciding upon maintenance or retrenchment (Roloff 2008; Salazar, Husted, and Biehl, 2012) This holistic or network approach thus adds a new determining variable to Barnett’s model that may actually, like the other variables he discusses (e.g., identity, external/internal orientation, and past losses) help to explain “non-rational” portfolio decisions. For example, a CEO might choose to maintain an option even its individual strategic benefits are nonapparent or nonexistent if he or she believes doing so might improve internal consistency. Conversely, a seemingly viable option might be ignored or abandoned if it is perceived to affect internal consistency. Finally, returning to Barnett’s (2008) longitudinal consideration, it should be noted that Basu and Palazzo (2008) also discuss the possibility of CSR character changing over time. This is also evident in Mirvis and Googins’s (2006) typology of stages of corporate citizenship. It might be interesting to investigate patterns as both CSR character and attention-based outcomes evolve to additionally see whether or not influence of CSR character varies over time and stakeholder engagement maturity.
CONCLUSION The fact that our research was stimulated by contemporary pieces provides ample evidence to suggest that scholarship in these areas continue to progress. Relatively new theories such as ROR and CSR are being explicated and reexamined to uncover truths, unmasks falsehoods, quell disputes, eradicate inconsistencies, and identify new sources for appropriation. This serves as our contribution to this progression, extending both real option and
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CSR literature independently as well as creating a strong bipartite intertwine that we hope produces diverse future efforts.
NOTE 1. We are careful here not to underestimate the importance of previous works like Husted (2005) and Busch and Hoffmann (2009) that are examples of valuable research that linked the concepts of social investment and environmental management to real option management. However, these authors primarily focused on CSR as the driver of the actual option itself whereas here we treat CSR as the antecedent of the option sensemaking process, which may encompass both CSR even nonCSR type options. Thus we are proposing to add to rather than detractfrom this previous line of research.
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