THE FUTURE OF GLOBAL CORPORATE CITIZENSHIP: TOWARDS A NEW THEORY OF THE FIRM AS A POLITICAL ACTOR
Guido Palazzo Professor of Business Ethics University of Lausanne Ecole des Hautes Etudes Commerciales (HEC) 619-BFSH-1 CH – 1015 Lausanne-Dorigny, Switzerland Email:
[email protected] Phone: +41 21 692 3373
Andreas Georg Scherer Professor of Foundations of Business Administration and Theories of the Firm University of Zurich Universitätsstr. 84 CH – 8006 Zurich, Switzerland Email:
[email protected] Phone: +41 44 634 5302 Fax: +41 44 634 5301 October 17 2008 Unedited paper draft for private use only. For correct quotation please see the original publication published in: The Handbook of Research on Global Corporate Citizenship Eds.: A.G. Scherer, G. Palazzo Cheltenham, UK: Edward Elgar Publishing 2008, pp. 577-590.
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The future of corporate citizenship: toward a new theory of the firm as a political
actor Guido Palazzo and Andreas Georg Scherer
Introduction
What is the responsibility of business in society? The potential answers to that question depend on the specific cultural, political and economic constellation of the society in which corporations operate. Whenever the constellations will change the answers will change. During the second half of the 20th century business operations were framed by relatively stable legal and moral parameters imposed by national governments and homogenous social communities. The 21st century has started with the rise of the transnational corporation and the erosion of both the national regulatory power and the clearness and homogeneity of moral custom (Palazzo and Scherer 2006; Scherer and Palazzo 2008). As a result, the traditional taken-for-granted division of labor between business and politics is blurred. Business activities are politicized because of the growing global problems with unintended social and environmental side effects, the growing power of business actors on the global playing field and the self-regulatory activities of some of them (Scherer and Palazzo 2007). The debate on corporate social responsibility has started to reflect upon the theoretical and practical consequences of globalization only recently. However, the faster the societal context changes, the less useful the established concepts of corporate responsibility become. In the highly influential CSR pyramid of Carroll (1991), for instance, there seems to be no place for the privatization of human rights violations. Carroll's concept is implicitly building on the idea of the intact nation state in which human right violations are sanctioned by the government. Respecting these rights is thus rather a taken-for granted element of legal requirements. Ethics has more to do with fairness or honesty toward customers or employees,
3 and it is difficult to categorize the avoidance of slave labor in one’s supply chain merely as ‘expected’. However, given the lack of legal governance on the global playing field, the avoidance of slave labor does not belong in Carroll’s category of legal responsibility, because there is yet no global legal framework that can be applied directly to non-state actors: ‘[t]he state-centric framework of international human rights law and attendant institutions is at present ill-equipped to regulate powerful non-state actors like TNCs, which are, by definition, not constrained by notions of territorial sovereignty.’ (Kinley and Tadaki 2004, p. 1021) And finally it is also not compatible with the idea of merely ‘desired’ but not ‘expected’ corporate philanthrophy. What is the responsibility of business in society under these conditions? As Carroll himself has argued, corporate responsibilities derive from societal expectations ‘at a given point in time’ (Carroll 1979, p. 500). The privatization of human rights violations points beyond the descriptive power of the common understanding of CSR as manifesting in Carroll's pyramid. Moving from the 20th to the 21st century, from the national industrial society to the global knowledge society, from a national or international to a global business logic, one has to admit that the traditional answers we have given in the past and the problems we analyze today, no longer fit. We need a thorough evaluation of the emerging global problems, fresh answers and new theoretical concepts (Walsh 2005). The concept of corporate citizenship may be helpful in this respect as it reminds us of the new political mandate of the global business firm that goes beyond the traditional understanding of social responsibilities merely as a response to the expectations of the most powerful actors in society (Carroll 1979; Strand 1983). This new corporate political responsibility, however, also points in a direction other than the common analysis of political behavior of business firms with the help of concepts such as ‘political strategy’ and ‘corporate lobbyism’ (Boddewyn and Brewer 1994; Hillman Keim and Schuler 2004). This line of management research has developed an instrumentalist view on how business firms may ‘influence public policy decisions’ (Hillman and Hitt 1999,
4 p. 825) so that their economic interests are served. However, this instrumentalist view of ‘power politics’ seems to widen the legitimacy gap even further and to intensify the lack of corporate accountability. It appears that we need a much more enlarged concept of politics that is able to respond to the loss of corporate legitimacy (Palazzo and Scherer 2006), to integrate the various initiatives of private actors contributing to the production of global public goods (Kaul et al. 2003; Matten and Crane 2005), and to help re-establish democratic political order beyond and above the nation state (Scherer and Palazzo 2007). The late Iris Young has suggested such an enlarged concept of politics that may help us to find new theoretical ground. Following her proposal by ‘political’ we mean a process ‘in which people organize collectively to regulate or transform some aspects of their shared social conditions, along with the communicative activities in which they try to persuade one another to join such collective actions or decide what direction they wish to take’ (Young 2004, p. 377). As we shall emphasize below communicative action and deliberative politics are key concepts in our endeavor to further develop corporate citizenship and to contribute to a new theory of the firm. The exciting group of scholars from various disciplines who have contributed to this handbook have made the attempt to tackle some of the questions and to propose new research directions. However, this is only the very beginning of a long scientific journey in uncharted waters. Many questions are still open and many aspects of the debate still waiting for a thorough analysis. In fact, while outlining the role of business under the postnational constellations (Habermas 2001), the handbook has even provoked new questions that have to be dealt with on the future corporate citizenship research agenda. In this concluding chapter, we would like to outline a few topics that emerge from the discussions of the handbook and from our point of view should be on top of the future research agenda.
5 The meaning and the limits of responsibility
Iris Marion Young (Chapter 7) has proposed a shift from a liability to a social connectedness model of responsibility. Her key argument is that being linked to a social or environmental problem means that one has the moral obligation to engage in joint efforts to solve the problem. The impact of a corporation and not so much its legal cover are the yardstick of such a forward looking concept of responsibility. Others suggest a shift from causality- to capability-based responsibilities where the corporation’s capacity to resolve problems of common concern will be the key factor (Wettstein 2005). These approaches do not deal with accusations but focus on solutions. These ideas may help us to reconsider the concept of corporate responsibility and to respond to the challenges of expanding global supply chains, where responsibility often disappears in the ramifications and fragmentation of collaborative networks and where corporations tend to act as externalizing machines (that is, someone else should solve the problem, not me) (Bakan 2004). Anecdotal evidence shows that responsibility is expanding in at least four directions, following already a social connectedness logic: First, since the early 1990s, corporations have been asked to deal with human rights and working conditions downstreaming their supply chain. Some corporations have acknowledged a certain responsibility for the monitoring of their suppliers’ behavior. Second, there is a tendency to hold corporations accountable for the impact of their products on their customers or even for the behavior of the customers themselves. Banks have to control the sources of their customers’ money. Tobacco companies are obliged to invest in smoking prevention programs. Caterpillar is criticized for selling their bulldozers to the Israeli army, Daimler for selling a luxury Maybach car to the king of Swaziland. And McDonald’s and Coca Cola are expected to join society’s fight against the future obesity and diabetes pandemic. Third, corporations are joining the fight against key global challenges such as AIDS or global warming. Fourth, the global knowledge society is reintroducing the question
6 of historical responsibility on the agenda of many companies: The role of corporations such as IBM, Volkswagen or Unilever in the Third Reich is being examined again (see for example, Forbes 2007). The war in Vietnam and the business activities in Apartheid South Africa are additional historical responsibility frontiers. Some corporations such as Volkswagen have started to deal with their past and are considering it a key element of their corporate citizenship responsibilities (Grieger 2007). Others hesitate to open that Pandora’s box. These examples show the dilemma of a social connectedness model of corporate responsibility. The ever-enlarging societal expectations toward corporations have led to a multiplicity of citizenship activities that downstream, upstream and sidestream the supply chain. Where do these activities stop? Are corporations for instance responsible for their first tier suppliers or should they control for the human rights performance of their second and third tier suppliers as well? This is not only a theoretical question, because some corporations already do go that deep. And if we assume that corporate responsibility has to go that deep, what does that mean for corporations such as Wal-Mart with its more than 60 000 suppliers? What should the role of McDonald’s be in the fight against obesity and where does that fight risk the corporation’s existence? Where are the limits of responsibility and how can it be managed along highly complex supply chain networks? What does it mean to be a good (global) corporate citizen within the context of a social connectedness model of responsibility? These questions are not limited to the supply chain problematic. Rather it appears that there is a growing uncertainty both in practice and in scholarly debates on where the limits of responsibility may be for companies operating in an increasingly competitive environment. Finally, corporations cannot be responsible for any social misery or environmental disaster (Margolis and Walsh 2003; Scherer et al. 2006, Scherer and Smid 2000).
7 Toward a new concept of corporate politics
In the managerial literature, politics is defined as ‘power in action’ (Pfeffer 1981, p. 7; Hollingsworth 1998, p. 491). Corporate politics is usually understood as a power game, in which self-interested corporations fight for scarce resources, and try to avoid regulation or to influence public opinion in their favor (Bonardi and Keim 2005; Bonardi et al. 2005; Keim 2001). Consequently, corporations are not political actors in a strict sense. They are not obliged to legitimize their activities as long as they stay within the limits of laws and moral custom. ‘The emphasis in economic theory on freedom of choice in the market sphere suggests that legitimization in the market sphere is “automatic’ and that markets thus avoid the typical legitimization problem of the state’ (Peters 2004, p. 1). Corporations thus are perceived as depoliticized private business actors who try to influence public political processes, institutions and actors in order to promote their private profit maximization goal. Politics in this sense does not go beyond mere lobbyism. The dominating neoliberal private/public and business/politics divide is challenged by the discussion on global corporate citizenship in our handbook. On the global playing field, corporations become political (Matten and Crane 2005) or politicized (Scherer and Palazzo 2007) actors in a different sense. First, the politicization of the corporation is building on the observations that global business activities provoke problematic collective effects and bindings (Palazzo and Scherer 2006). This is of particular relevance against the background of potential contradictions between a corporation’s (global) citizenship engagement and its lobbyism activities. The influence of the pharmaceutical companies on the global regulation of patent protection, the aggressive lobbyism of oil companies against national and global political attempts to fight global warming or the tobacco industry’s subversion of health politics illustrate the problem. Second, corporations participate in solving global political problems. As outlined in our book, anecdotal evidence shows that corporations assume direct
8 political responsibilities, where governmental actors are not able or willing to do so (Crane, Matten and Moon in Chapter 2). As a result, the concept of a politicized corporation points beyond the idea of politics as backdoor bargaining. The debate on global corporate citizenship that unfolds in our handbook shows that the power game concept of politics is too narrow. The mainstream liberal understanding of politics becomes problematic, because both the growing impact and the growing involvement of corporations in global politics provokes questions of legitimacy (Palazzo and Scherer 2006; Scherer and Palazzo 2007). It seems difficult to interpret the corporate citizenship activities that are discussed under the power game paradigm. The participation of corporations in multistakeholder processes of global governance is based on the transparency of public discourse, and lobbyism follows the logic of conspiratory backdoor bargaining (de Jonquières 1998; Rondinelli 2002). The UN Global Compact’s study on responsible lobbyism illustrates the growing need for a critical discussion of the narrow understanding of corporate politics. The future debate on global corporate citizenship will have to examine critically the established understanding of politics, the interface of CSR/CC and lobbyism and it will have to reconceptualize the taken-for granted private/public dichotomy. Where are the limits of and what are criteria of responsible lobbyism? How can corporations align their CSR communication and their lobbyism activities? What are the required mechanisms of control and accountability?
Governance without government
One of the key insights of many contributions to our handbook is that under the postnational constellation, corporations create more negative side-effects for society, are under more public pressure due to their sometimes doubtful impact and have started to increase their efforts to solve the problems to which they are connected. When under pressure, corporations
9 often start to engage in self-regulatory activities. They formulate a code of conduct and communicate it to their suppliers. However, these measures are often highly ineffective because they are not linked to enforcement mechanisms and thus provoke even more pressure from civil society. A much more promising engagement emerges where corporations collaborate with civil society actors and transnational or national political bodies in order to solve the social and environmental problems in which they hold a stake (Zadek 2004). We have described this as ‘the corporate embeddedness in processes of democratic will-formation and problem solving in a transnational context of political governance’ (Scherer and Palazzo 2007, p. 1110). Obviously, by participating in multistakeholder initatives of rule setting and enforcement, private firms have started to become an actor in global regulatory processes. In contrast to a national regulatory context, under the postnational constellation, non-state actors play an active role in what has been described as governance with and without government (see, for instance, the contributions of Wolf, Kobrin, Doh and Zürn, Chapeters 11-14, respectively). Self-regulatory initiatives with standards, monitoring processes and labels are for instance progressing in the global garment industry (MacDonald and MacDonald 2006) and in forest products (Bartley 2003). On the one hand, these emerging governance standards, frameworks and control mechanisms might help to fill the global legal vacuum for multinational business activities. On the other, they suffer from a democratic deficit in all their dimensions (Koenig-Archibugi 2004; Wolf 2005). The formulation and enforcement of laws has been under the control of elected governments in the national context. In that tradition, our understanding of democracy includes at least three elements that are problematized by the governance without government logic. First, it shifts regulatory power from elected bodies to private actors. Second, it replaces hard law by soft law. Third, it challenges the democratic ideal of civic sovereignty and representativity. As a result, both, the actors, and the processes they start to develop and
10 control rules, provoke legitimacy problems (Palazzo and Scherer 2006; see also Boddewyn 1995). Habermas (2006, p. 176) reminds us that
only states can draw on the resources of law and legitimate power. Even if nongovernmental actors can satisfy the initial regulatory needs of cross-border functional systems through private forms of legislation…these regulations will not count as ‘law’ if they are not implemented by nation-states, or at least by agencies of politically constituted international organizations.
Therefore, the debate on corporate citizenship, as far as it accepts the idea of the globally politicized corporation, has to develop effective and legitimate concepts for the ‘nonelectoral democratic accountability’ and the ‘public control over public decision-making’ (MacDonald and MacDonald 2006, pp. 90 and 92) of the regulatory efforts of global multistakeholder initatives. The concept of moral legitimacy through communication (Habermas 2003; Palazzo and Scherer 2006; Risse 2004) and the concept of deliberative democracy (Habermas 1998; Nanz and Steffek 2004; Scherer and Palazzo 2007; Scherer et al. 2006) are key aspects in this endeavor. However, there are a number of problems that need to be addressed: How can global corporate responsibility efforts be aligned with the idea of democratic accountability? What is democracy beyond the nation state and what role do nonstate actors play in it? What characterizes the legitimacy of soft law processes and outcomes? What conditions have to be fulfilled in order to make companies and NGOs legitimate actors in political processes? How can regulatory initatives without governmental power deal with the free-riding challenge that is the unavoidable side-effect of soft law? What role can existing transnational institutions such as the WTO, IMF, ILO or the World Bank play in these regulatory processes?
11 Leadership and moral innovation
There is a broadly shared assumption that leadership is a key driving force of corporate ethics and corporate responsibility (Carlson and Perrewe 1995; Paine 1996; Parry and ProctorThompson 2002, Treviño et al. 2003; Weaver et al. 1999). Ramus (2001) argues for instance that supervisory support is essential for CSR engagement and Parker discovered that it is a key aspect of a corporation’s engagement in self-regulation (Parker 2002, p. 99). We suggest that leadership is of particular importance for corporations that assume a political responsibility as discussed in our handbook, simply because such an engagement can point far beyond traditional business operations and responsibilities (see Maak and Pless, Chapter 19). However, despite this assumed causality, the link between CSR and leadership has achieved ‘surprisingly little research attention’ (Doh and Stumpf 2005, p. 3, see also Bies et al. 2007; Waldman and Siegel 2005). While some companies might be influenced by what Treviño et al. (2000, p. 130) have called ethically neutral leadership, others might take a proactive role and ‘make values an explicit and evident part of the leadership agenda’ (Treviño et al. 2000, p. 130). Ethical leadership might help to transform the taken-for granted understanding of corporate responsibility and establish new standards within and across industries. Examples that illustrate the key role of leadership in CSR/CC are the decision of Nike to make its suppliers network transparent, BP’s decision in the early 1990s to acknowledge global warming as a fact or Chiquita’s concept of radical third party control. These corporations act as institutional entrepreneurs (DiMaggio 1988; Dorado 2005) and propel more sophisticated concepts of corporate citizenship among their peers. As a consequence, standards that once were considered innovative, proactive and voluntary, thus might become a new industrial standard that is enforcable. Logsdon and Yuthas (1997, p. 1218), for example, note that ‘what was considered to be post-conventional behavior in the past, such as the social desirability of
12 voluntarily reducing air pollution from factories to protect public health, became subject to conventional moral reasoning with the passage and implementation of state and federal air pollution legislation in the 1960s and 1970s.’ The future CC debate needs to examine the role of leadership in this process of institutional change. Especially on the global playing field’s absent or weak context of clear, standardized and enforceable mechanisms and institutions of governance, the debate on transformational leadership (Antonakis and House 2002) might offer important insights for the understanding of the relevance of some corporations’ proactive engagement for the change of responsibility standards. Transformational leadership abilities are explicitly valuebased and foster an ‘awareness of moral and ethical implications to transcend self-interest for that of the greater good’ among followers (Antonakis and House 2002, p. 7). The emerging literature on positive psychology (Snyder and Lopez 2002) and positive organizational scholarship (Cameron et al. 2003) may also be fruitful in this respect (see Adler, Chapter 17). Building upon the extensive literature on institutional entrepreneurship, transformational leadership, positive psychology and organizational scholarship will be important for the understanding of many of the widely neglected dimensions of corporate citizenship: Under what conditions will business leaders take over social and environmental responsibility? How do corporations and managers learn and unlearn to act on a specific level of responsibility? How do corporations and managers learn from each other? How do multistakeholder initatives such as the Forest Stewardship Council emerge? How do responsibility standards and societal expectations emerge or change over time? How does moral entrepreneurship drive the transformation of industrial standards?
The dark side of responsibility
13 Paradoxically, corporate citizenship behavior often leads to more critique from civil society. It is criticized by NGOs for not going far enough or for just being a facade with business as usual in the background (Laufer 2003). Developing methods to evaluate the reality behind the rising tide of citizenship communications will be a key challenge in the future. However, in recent years, an even more severe critique of the whole corporate responsibility movement has been raised (Banerjee 2007). It has been argued that multinational corporations use their citizenship activities in order to disguise the neocolonial exploitation of resources in developing countries (Banerjee 2003), often doing more harm than good to local stakeholders (Blowfield and Frynas 2005; Frynas 2005; Livesey 2001), excluding those who are most affected from corporate decision making (Khan et al. 2007) and stabilizing existing hegemonial ideologies and distributions of power (Levy 2008). In the discourse on corporate responsibility, ‘the values of the colonial power are routinely privileged in framing, interpreting and addressing’ the issues at stake (Khan et al. 2007, p. 107). It will be an important scholarly frontier, to understand these potential imperialistic tendencies that exist in the conceptualization of corporate citizenship as well as in the concrete behavior of corporations and the demands of NGOs (see Edward and Willmott, Chapter 18, Banerjee, Chapter 20 and Mir, Marens and Mir, Chapter 23). As long as scholars, corporations and NGOs are mainly coming from a Western context, corporate citizenship with a high probability will be understood in a Western way. How can the debate on global corporate citizenship avoid the two traps of imperialism and relativism? How can the contributions of scholars, companies and stakeholders from the developing world be strengthened and receive more visibility?
Conclusion
14 Taking into consideration all the questions that might follow from the politicization of the global firm, we are convinced that the future debate on the role of business in society will have to follow an interdisciplinary logic. The fast transformation of the societal context in which corporations operate, cannot be ignored. This global transformational process is examined by scholars in various disciplines. Of course, these scholars rarely use the terminology of the business and society field, but without a deep understanding of these overarching political, legal, sociological and philosophical discussions, the impact of scholars in the CSR/CC field will be limited. Thus, the main goal of our handbook is to embed the debate on corporate citizenship in that interdisciplinary context. It is a first attempt to discuss the consequences of globalization for this debate with scholars from political philosophy, political studies, legal studies and other neighboring disciplines, and to understand their analysis of the changing dynamics of business actors, political actors and civil society. We have to continue that dialogue across the different language games. The dominating theory of the firm characterizes the company as a private actor with a limited liability and a focus on shareholder value (Jensen 2002; Sundaram and Inkpen 2004). It builds upon a strong concept of property rights, believes in the magic of the market, and trusts in the stability and regulatory power of (national) law and moral custom that together constitute ‘the basic rules of the society’ (Friedman 1970, p. 218). It draws a clear line between public and private, business and politics, corporate governance and corporate responsibility. Within the business and society field, this concept has rarely been questioned but rather has been taken for granted. Most of the authors of our handbook while focusing on a variety of topics, share the assumption that this understanding of the firm is coming under the pressure of globalization. On the global playing field, the transnational corporation is rising as a new Leviathan (Chandler and Mazlish 2005). Global political institutions are still incomplete and lack the capacity to legitimately set and enforce standards of economic conduct for private business
15 firms (Braithwaite and Drahos 2000). At the same time, business firms operate as political actors and influence governmental institutions or take over public responsibilities that traditionally have been assumed by the state only. It is obvious that these developments lead to a democratic deficit that can only be compensated if these corporate political actions can be embedded in processes of public deliberation and control. The new concept of deliberate democracy may be helpful in this respect as it shows us how legitimate policies and institutions can emerge from the collaboration of public, private and civil society actors (Palazzo and Scherer 2006; Scherer and Palazzo 2007). However, the picture appears to be incomplete as long as we focus only on political processes outside the firm while neglecting the corporate decision making process. Therefore, we suggest that in as much as corporations engage in global governance their internal processes and structures have to become more democratic (Driver and Thompson 2002; Parker 2002; Scherer and Baumann 2007; Scherer et al. 2006). This obviously has consequences for corporate governance structures (see also Thompson, Chapter 21). These have to be changed and become more transparent, inclusive and participatory so that democratic control over corporate action will be enhanced even when multinational corporations operate beyond governmental control or shift their activities into environments where democratic state institutions are weak and the rule of law is absent. It appears that a new theory of the global firm is necessary, and it will without any doubt emerge from the debate on the consequences of the postnational constellation for the order of society. We hope that our handbook will make a contribution to that debate.
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