Information about social corporate responsibilities:

Although businesses have become increasingly aware of stakeholder pressure to demonstrate a commitment to their
corporate social responsibilities (CSR), this does not necessarily mean the adoption of an integrated and strategic
approach to CSR. Rather, as Michael Porter (Harvard Business School, Boston) and Mark Kramer (John F Kennedy
School of Government, Massachusetts) have recently argued in the Harvard Business Review (December 2006),
current approaches to CSR are fragmented and disconnected from business goals. This has resulted in disparate
and reactive initiatives designed to mollify vocal stakeholders or deflect attention from questionable business
practices, and these have justifiably been criticised as "feel good" marketing campaigns which have failed to generate
bottom line benefits.

Porter and Kramer suggest a new approach to CSR which both (i) acknowledges the interdependence of companies
and the broader community, and (ii) enables companies to develop a tailored, rather than generic, CSR strategy. In
this way, companies will "make the most significant social impact and reap the greatest business benefits". This note
provides a summary of Porter and Kramer's article, giving particular attention to the practical issues of creating a
tailored corporate social agenda.

1.1 Background

Companies which have responded to their CSR have usually done so for one, or a combination, of the following four
reasons/principles - moral obligation, sustainability, compliance or reputation. "Moral obligation" refers to the
compulsion for companies to be "good citizens" and "do the right thing". The sustainability argument emphasises the
need for companies to have regard to the natural environment from which resources are drawn. The compliance or
"licence to operate" argument reflects a pragmatic response to agendas set by Government regulators, and the
reputation impetus is all about creating a positive impression on consumers, staff and shareholders.

Porter and Kramer identify the individual deficiencies of each of these principles as a sufficient justification for CSR
(eg they argue that the sustainability school of thought raises questions about balancing long term objectives against
short term costs, but offers no framework for resolution). Fundamentally however, Porter and Kramer argue that there
is an inherent weakness in all four school of thought, namely they "focus on the tension between business and
society, rather than their interdependence". Further "each strategy creates a generic rationale that is not tied to the
strategy and operations of any specific company or the places in which it operates".

Porter and Kramer argue that the deficiencies in approach to CSR have resulted in unco-ordinated and non-strategic
activities that "neither make any meaningful social impact nor strengthen the firm's long-term competitiveness".
Having set the scene, Porter and Kramer suggest a new approach to CSR to achieve these outcomes.

1.2 A new approach

Porter and Kramer's new approach has two key elements. Firstly, they suggest that a CSR strategy should be
predicated on an acceptance of the interdependence of business and society, ie "successful corporations need a
healthy society" and "a healthy society needs successful companies". Porter and Kramer suggest that the points of
intersection between companies and society are both "inside-out" linkages (ie internal activities which affect the
external environment such as "hiring practices, emissions and waste control") and "outside-in" linkages (ie social
conditions which affect a company's capacity to conduct business, eg rules and regulations, local education and
health supports). This platform of understanding implies that both business decisions and social policy have shared
values, and lifts CSR from a "nice to do" (which is reminiscent of the moral obligation argument or philanthropic
approach to CSR) to the "have to do" (which, although not acknowledged by Porter and Kramer, is an extension of
the sustainability argument).
Secondly, and this is the real benefit of Porter and Kramer's thesis, they argue that each company should create a
tailored (rather than a generic) corporate social agenda, and provide a practical tool to chart that agenda ie "to
identify those areas of social context with the greatest strategic value".

1.3 The practice of developing a new CSR strategy

Porter and Kramer's practical tool to developing a new CSR strategy encompasses the following steps:

1. Choosing which social issues to address.  "The essential test that should guide CSR is not whether the
cause is worthy, but whether it presents an opportunity to create shared value - that is, a meaningful benefit
for society that is also meaningful to the business". Porter and Kramer argue that companies should sort
social issues into three categories - (i) generic social issues which affect all companies; (ii) value chain
social impacts which have a direct affect on the company's ordinary course of business; and (iii) social
dimensions of competitive context which significantly affect the underlying drivers of a company's
competitiveness in a specific location. Once the social issues have been categorised they should be
ranked, ie prioritised, for action.
2. Creating a corporate social agenda.  The selected social issues should be identified in an explicit and
affirmative corporate social agenda. This agenda will reflect an approach to CSR which is both responsive
to stakeholder concerns and anticipated risks, and strategic (ie integrates inside-out and outside-in
linkages).
3. Organising for CSR.  The corporate social agenda should be integrated into affirmative business practices,
ie to ensure that operating management is engaged in processes that identify and prioritise social issues
based on their "salience to business operations and their importance to the company's competitive
context". Further, Porter and Kramer suggest that measurement of outcomes is critical to the agenda, and
that "value chain and competitive context investments in CSR need to be incorporated into the performance
managers with P&L responsibility". In particular Porter and Kramer argue for the measurement of the CSR
initiatives in terms of social impact (although omit to discuss what those measures might be).

1.4 Conclusion

Porter and Kramer offer a new approach to CSR which focuses on identifying the shared values between a particular
company and its social context, and developing a tailored and strategic response. Using Porter and Kramer's tool to
map social opportunities, and practical steps to identify, develop and organise for CSR, companies now have a new
CSR framework to enhance business and social outcomes. If companies are able to successfully use this model (and
Porter and Kramer's article provides numerous case studies to that effect) then the benefits will be reaped in terms of
both a competitive advantage and social enhancement.
Corporate Social Responsibility in India is arguably the first comprehensive, well-researched book on the
subject in the country. The author uses Indian examples, case studies and CSR role models from the
Indian industry to explain the gap between Indian business needs and current practices. Practices and
researches in economically developed counties have also been used extensively. As the Indian industry
begins to enter international markets, it is going to be imperative to integrate CSR with business goals
for long-term sustainability and healthy economic, social and environmental impact. The book helps in
understanding the meaning of business beyond financial numbers and tries to explain how even CSR can
be used as a marketing tool and for business benefits. It dwells comprehensively upon the concept of
CSR, from its inception as ph8ilanthropy till its journey to a form where now it is mandatory to be
sensitive about CSR in businesses.This ready reckoner and guide for senior managers, CEOs, CFOs, HR
and taxation officials in INdian and multinational companies, management students and academicians
approaches CSR as a critical business need, not a philosophy. Sanjay K. Agarwal is a Chartered
Accountant working with organized retail business. His areas of interest include Corporate and Factory
Accounts and Direct and Indirect Taxation.

Economic integrations

Q: What is the rationale behind regional economic and financial integration?

[Charles Wyplosz] The general rationale is that when countries integrate themselves, they
provide "favours" resulting in wider and better opportunities for all and similarly, borrowers can
tap the world pool of savings and they are supposed to benefit from that. That is the theory,
though empirically, there is little evidence of these effects.

On the other side, what I believe is the bigger benefit; is that it makes it much more difficult for
governments to trick the domestic financial system to favour particular borrowers, to milk savers
through variable interest rates and so forth. The general theory that integration is good for better
allocation of resources is not the big thing, the big thing is that it makes it harder for
governments to play with financial markets.

Looking at welfare and competitiveness, indirectly the theory of integration says that firms are
able to borrow on better terms, access better investment opportunities, and these should
eventually show as "faster growth" that is the first-principles argument, but there is little
evidence this has happened to any great degree.

On Trade:

Q: What is the case for free trade to exist? And how can an integrated economic region
balance the needs of individual participants and the overall system?

[Charles Wyplosz] The case for free trade is much stronger than the case for free capital
movement. The case for free capital movement is weak, because financial markets suffer from
very serious failures (right now is a nice example of that). Financial markets do not operate like
the textbooks say they should. The case for free trade assumes that the goods market operates
well, and the fact is that they do, in practice, operate like that unless governments tinker with
them. The evidence that free-trade boosts growth and raises income levels around the world is
very strong. In fact, every country that has managed to raise its standards of living has somehow
integrated itself commercially with the rest of the world, it's probably a necessary condition.

The allocation of resources across a region depends on a financial-system. This is not only a
free-trade issue. If the financial system was working well, then it would support free-trade. It
does not work too badly, but it is crisis prone, and sometime stands in the way of proper
resource-allocation. I don't see a big problem in this area, and in keeping resources in line with
the requirements of trade.

Q: What are your views on protectionism?

[Charles Wyplosz] I have not seen a good case for this (protectionism). There are military and
strategic issues that are clearly not economic, and we cannot really comment on these as when
the military says "we need this" that is the end of the argument. I have never seen a good case for
protectionism, but I can see a case for slowing down trade integration because it can be highly
disruptive to domestic firms, markets and people's income in the short-run; and therefore we
cannot do 'shock therapy' trade opening but I don't see any case for companies to act with
special-needs.

I think the USA is pretty open. There is protectionism there, like anywhere else, so some
industries have managed to get some protection, but by and large the US is open. China has
integrated itself pretty fast in the world economy, and has been rewarded with double digit
growth rates in the past two decades or so. They still have some restrictions, largely because of
old-industries who would not be able to swim if dropped in the water of global competition, and
these industries are tied to the military establishment, meaning there are political reasons for
China to go-slow, but by and large they are on their way to becoming increasingly integrated.

It has created some anguish in the US and Europe as Chinese competition is vigorous, but that is
the nature of competition. It hurts the laggards and benefits the smart ones- the smart ones will
take the take the advantages and not say anything, and the laggards will complain.

Q: What is the key rationale behind the WTO and what have the key successes and failures
been of the WTO as an organisation?

[Charles Wyplosz] The GATT which gave way to WTO, was set up as a way of organising
world-negotiations on trade integration. There are over one hundred and eighty countries
involved. The principle of trade integration is that you don't have special bilateral regional needs,
but trade becomes a multi-lateral thing which, of course, means very difficult negotiations with
so many countries involved!. GATT and the WTO have, though, served the world pretty well,
and trade integration has increased dramatically over the past forty or fifty years, and countries
that began to integrate themselves took advantage in terms of standards of living. Things do,
though, have to be slow. They cannot happen overnight. Trade integration does modify the
economic structures of countries so things have to happen slowly and gradually, and that's the
way GATT has been working, it is a very slow and gradual process.

Looking at the Doha round. We have gone a very long way in terms of trade integration, and
what has not been integrated yet are the most politically sensitive issues in every country. What
Doha is now doing is getting after the very hardcore of political resistance to integration, which
is exactly why it is not working- every country or group of countries has their favourite
champion and pet industries, and have given up on protecting a big chunk of the rest and now we
are down to the bone. It may not succeed, but I am not worried about that as trade integration is
already very deep and developed, and even if we stay where we are, we are doing pretty well.

The view of the WTO is that we have to keep moving forward all the time- and we have got a
big part of the way to full integration, and maybe now we have to sit back happily, and wait for
these resistances to be slowly eroded.

On Regionality & Globalisation

Q: Looking at Europe as a case study. What have been the key successes and failures of
Europe’s economic and financial integration and single currency? What is the future of
Europe?

[Charles Wyplosz] It's hard to be upbeat about Europe, but in fact, I am, at the very least about
what has been done so far. What is interesting about Europe as a case for integration is that the
Europeans, at the time they began regional integration, went way ahead of GATT. There were
strong political and geo-strategic regions for the Europeans to do that, so they were willing to
make sacrifices to go to complete market integration- it's not one hundred percent, but close.
What this meant was that pressure groups, and interest groups who were fighting for protection,
lost to the overarching political objectives of Europe's integration. Once these interest groups
were defeated locally, individuals had nothing to fear from GATT, from world-integration, and
that is why Europe has been pro-GATT and pro-WTO. There are famous exceptions, such as
farmers, but that is not a specific exception to Europe. WTO fans don't like regional integration
because they see it as undermining world-integration. That is true in a small way, but when
countries integrate locally they inevitably destroy some pro-protectionist lobbies, and once they
have done it regionally, it is easier for them to integrate globally- so I don't see regional
integration as a threat to WTO.

Europe has been an extraordinary success story. Many parts of the world (though maybe not
recently), have been thinking of emulating Europe- I have in mind South East Asia and South
America. These regions have, though, simply not been able to do it for various reasons such as
politics and protectionism. Europe has been able to achieve an incredible degree of trade
integration, less so financial integration, and has been able to create a single currency. The single
currency has been an enormous success, it has achieved complete exchange rate stability across
the Euro area (by removing exchange rates!) and we do take it for granted- but the European
experience was one of bruising exchange rate volatility, with recurrent currency crises, and this
is now gone.

The price to pay for having a common currency in Europe has been to do a half-baked job- in the
sense that governments have not been, and are still not, willing to give up sovereignty in fiscal
policy matters. Even before the Euro was launched, we all recognised that there were weaknesses
built in the European construction, and that if these were not attended to, they could turn out to
be a big problem. And here we are today! The fiscal indiscipline in a number of countries has
created the current debt crisis, and we will have to draw lessons and create solutions to prevent it
happen again. While I am not surprised at the debt crisis itself, I am surprised at the political
reactions and policy mistakes which have been made over the past few months which have given
the Euro area a bad name around the world.

Looking at the addition of more countries to the European integrated zone. Clearly, the more
countries you have, the higher the probability that one of these will misbehave. There is a sense
in which the expansion of the Euro area is making the whole system more fragile, if you like you
may have one link in the chain which becomes weaker- and the longer the chain, the more likely
this is to occur. On the other side of this, we have to consider that the wider the Euro area, the
more it protects countries, and the less exchange rate volatility worries occur, and the objective
therefore is to have all countries within the European union within the monetary union, because
they are all part of the single market. If some countries like the UK and Sweden adamantly
refuse, so be it, we are not going to start a war for them to join the Euro!

Q: Is there a case for Asian Economic Integration? Would it lead to a single Asian
currency?

[Charles Wyplosz] In some ways, South-East Asia is where Europe was two-decades ago;
where we were concerned about exchange rate movements within the single market. The degree
of trade integration within the South-East Asian region is very deep, much more so than Europe
when it was at a similar stage in development. The situation is, though, rather special because of
the overwhelming size of China. Some of my Asian friends say that, "all the other Asian
countries are just provinces of China" - this is, of course, an exaggeration, but nevertheless there
is a very deep degree of integration. Countries in the region are, though, rocked regularly by
exchange rate fluctuations and therefore they do need to find a way to stabilise their exchange
rates. In that sense, Asia is a paradigm of Europe with a need for exchange rate stability. On the
other side, from a political point of view, Asia is nowhere near where Europe was even in 1957
at the time of the Treaties of Rome. By then, Europe had deep consensus that it had to quiet-
down national sentiments, for the better common good. We do not see similar noises in South-
East Asia. Firstly China has overwhelming size and influence- but even if we put China to one
side, there is not the degree of trust between countries that existed within Europe in the 1950's
when we started our way. The result is that the Asian's find it very hard to make concessions to
each other and to transfer tiny bits of sovereignty to a common undertaking. It is very clear in the
case of exchange rates. They are trying to pool foreign exchange reserves through the "Chiang
Mai" initiative, for example. It is moving, but at a snail's pace- and the reason is that anytime
they come close to giving up a bit of sovereignty (for example, on foreign exchange reserves)
they pull back politically- so I think that is the big difference between the region and Europe.
Eventually, they will move in the right direction, but it will take time, and the more time goes,
the more China will dominate- this of course makes things more complex.

I hope that Asia grows into a benign political power. We don't know for sure as observers, and
even the participants themselves do not know as the regimes are, in general, not open. China is
not a specific danger at the moment, at least not now, but it is impossible to do anything of
substance in South-East Asia without Chinese support, and China is unwilling to take-on the role
of regional leader- in the sense that it would have to give up some of its sovereignty. If China
wants to be the good mother, it has to behave like a mother and make sacrifices for the kids.

As for whether Asia will have a single currency? not anytime soon. Maybe in the longer run this
could happen, but given the size of China, the Renminbi just might be the de-facto Asian
currency.

Q: Is there a case for economic integration for Africa?

[Charles Wyplosz] My understanding of Africa is that there is very limited regional trade
integration, and that most of the trade is with developed countries. In that sense, they are not
interested in regional integration. Of course, if they were, it would be a huge benefit for their
own regional development.

Q: What are your views on the potential successes and failures of the Union of South
American Nations (USAN)?

[Charles Wyplosz] There are definitely similarities between Africa and Latin America. Until
recently, there was little trade integration, and most of their trade was with the US and Europe,
and they were not, therefore, widely excited about trading with each other. There is also deep
political resentment, and the rivalry between Brazil and Argentina is not helpful- and like Africa,
there are many countries with a high degree of corruption, so governments are not necessarily
working for the good of their people. On the other side, there are a number of countries in Latin
America that have made enormous progress over the past twenty years. Chile and Brazil are the
two shining examples, and may show the route for success to other nations in the region, and that
might lead the Latin American's to have their own regional integration as they stand to benefit
from that like anyone else.

The lessons they can learn from Europe is that if they have the political will to do things
regionally, they will invariably break the protectionist interest-groups, which makes it easier for
each country to integrate. That was the secret of Europe's integration, we managed to push-back
resistance to integration- both trade and finance, because there was political will to do something
European. For a long time, Europe was a big collective ambition, and now it is a bad word!

Q: Is there a case for global economic integration? And does regionalism work in a highly
globalised business environment?

[Charles Wyplosz] I think we are a long way towards global-integration. GATT and WTO
agreements have given us a very high degree of trade integration, and there has been quite a bit
of movement towards financial integration, but various crises have shown that there could be a
worst-case-scenario where financial turmoil would lead to a roll-back of trade integration. That
hasn't happened this time round, but it was a big and real fear.

I feel we are globalised in many respects, and that is certainly for the better of the world,
although it creates room for contagion when trouble appears- and so there are periods where it
seems to hurt, but in the good periods (which are hopefully most of the time) there are huge
benefits to globalisation which accrue to most of the people of the world.

There is this interesting comparison between trade and finance and between the WTO and the
IMF. The case for trade-integration is overwhelming, and we have built the WTO with its
tribunal to deal with disputes- which is the first world authority which we have- as the tribunal
can make decisions which are binding on countries. In many respects, countries have given up
some sovereignty to this tribunal, this is a huge and underrated achievement as it is the first and
only case of total reduction of sovereignty and I think it works pretty well. In the financial
markets, we have nothing of the sort. We have the IMF, who act as a "fireman" for countries in
trouble, but it has no real authority unless countries sign letters of intent which give temporary
authority as and when needed. If we consider a world lender of last resort, this would be nice in
theory, but the fact is that a lender of last resort has to commit resources. We currently have
central banks acting in this function, and when a national central bank intervenes, it is the local
tax-payers who are on the line- and that is acceptable at a national level, although people are
grumbling. Tax-payers, when they discovered how much the UK spent on bailing out the Royal
Bank of Scotland, were understandably upset- but that is tolerable. Having a lender of last resort
which would commit tax-payers from all over the world? that is simply not fathomable. There is
no willingness from the average citizen in any country to allow a world lender to spend money
on his or her behalf, and all this discussions which are occurring on a world lender of last resort
are totally beside the point to what is really needed.

Looking at the need for a global authority to oversee financial markets. Yes there is a need, but
there are lots of needs that remain unfulfilled- and that specific need will remain unfulfilled too.
We were talking before about a global lender of last resort, and if we talk of banking and
financial market regulation, it is exactly the same thing. Every country would have to accept the
authority of a third party which is not a country, and could be just a number faceless bureaucrats-
and that is just not politically possible. To go around that, we have the IMF which intervenes in
emergencies, but it has limited means. In the area of regulation- we have the BASEL group on
Banking supervision, and the Financial Stability Board. All of these things have no authorities
delegated to them, but they have the power to make proposals- and it is then up-to governments
to accept, but I think that at the current stage of our world's development, this is as far as we can
go in this regard.

Q: Can economic & financial integration impact ‘macro’ topics such as climate change,
conflict, resource competition and population growth?

[Charles Wyplosz] All of these things are issues where we have externalities, and then it would
be much better to co-ordinate, than to let each country go it alone. Of course when there are
negotiations, they often fail because countries are not willing to make compromises for the
common good. The good thing about integration is that it makes us more dependent on each
other- so the fate of any country of the world now, economically, depends on the economic-fate
of all the other countries, and therefore it becomes easier to accept, recognise and deal with these
externalities. The more we are integrated, the more we have a common destiny, and the more we
have a common destiny, the more we should be able to compromise with each other, and so
globalisation is making people gradually citizens of the world, and so maybe their governments
will recognise that there is a need to give up nationalistic objectives for the common good.

Q: Do you see a need for de-politicisation of resources such as Oil?

[Charles Wyplosz] The problem with the oil market is that it is hugely politicised through
OPEC. Here we have a cartel- one of the grossest words in economic jargon. This cartel has been
trying to manipulate oil prices for the past thirty or forty years which is extremely bad- but
fortunately the power of the cartel is limited- partly because they don't have all the oil producing
countries in their group- and partly because of their own deep internal disagreements- meaning
they rarely manage to speak with one voice. In my view, there is too much politicisation in the
oil market, and if we can de-politicise oil, we can make the markets a better place.

Q: By de-politicising such issues, will we help the world's poor develop ?

[Charles Wyplosz] Life is unfair, and the distribution of wealth around the world is unfair. For
decades we thought the solution for that was to channel resources from the privileged to the
under-privileged, it has not been a stunning success- and that's now a big debate around the
world bank, specifically, "how to channel resources in a way that really helps". We haven't
found the answer yet, and I certainly don't have the answer. Like everybody else, I say that the
inequalities around the world are totally unfair, and unacceptable, but I have a very humble view
of what we can do- as we have now had around fifty years of development policies including aid,
the world-bank's efforts, regional development banks and so forth- and I don't regard them as
much of a success.

We have the exact same problem at a national level. In every country, you have the divide of rich
and poor, and if you take the richest countries in the world- such as those in Europe and the
USA, they still have a poverty problem. We have alleviated the problem in a very small way-
and we understand now why helping people doesn't help them, so it's exactly the same problem
across the world as within nations. There are some people and some countries that just can't "do
it". And how to make them "do it"- by which I mean, doing what it takes to become reasonably
well-off, is the key, and we have not yet found a solution, and have tried everything we have so
far- which is a failure.

Q: How can integrated economies bear better resilience to recessions and global macro-
events?

[Charles Wyplosz] Regional integration can help global integration when it substitutes for
global integration- insofar as when it does things at a regional level, which cannot be done at a
global level, for example, we can have a common currency in Europe, but we cannot have it at a
world level, it would make no rational sense. When you can do more regional integration,
without reducing integration at the world level, that's ok- the danger, of course, is building
fortresses and undermining the global system- which would be a big step back.

When you are completely isolated, say in the example of North Korea, in many ways you are
completely independent from the rest of the world- so world trade can go down the drain, and it
wouldn't do much to North Korea. The problem is that the North Korean population is starving
because of their lousy system, and the system is lousy because their economy is so very closed.

If North Korea were integrated in the global system, it would be as rich as South Korea. A
paradigm is buying a car. When you buy a car, you can have a car accident- a pretty nasty one,
and that's part of the deal. Global integration is helping people around the world, most of the
time, but we have to accept that now and again we have accidents which affect all of the world-
and that is part of the deal with globalisation. In the same way we decide to take our cars, with a
certain degree of nervousness, while it's good to be globalised- and we should drive carefully!
We have organisations like the WTO giving us driving rules for what we can and can't do, and
we have the ambulance coming from the IMF when you have had a crash- so it's pretty much the
same story- you can't have just pure goodness, there will always be drawbacks to everything.
Each crisis is a good lesson about things which were not right, or overlooked, or unknown- and
from crisis to crisis, we learn.

---------------------------------------------------

We can see, therefore, that by surrendering relatively small amounts of sovereignty, the world
has achieved a deep and powerful level of economic integration which, for most participants, has
created a general increase in standards of living. We can also see, though, the devastating
inequities created for those who are not able to participate in the process (for a variety of
political reasons) and are left in conflict and poverty. Alongside this, we can also clearly see the
weaknesses created within the system as a result of sovereign participants being reluctant to
participate fully, only surrendering enough authority and supremacy to participate for individual
gain- and not enough to bring stability to the overall system.

This weakness is a very deeply rooted and profound stumbling block to true globalisation. Until
the rationale with which any sovereign nation participates in integration can be aligned with the
greater need of the world economy, the system itself will be fundamentally flawed.

As Noam Chomsky pointed out, "NAFTA [as it as passed] became an 'investor rights'
agreement, not a 'free trade' agreement- driving the economies of each of the three participating
countries [the US, Canada and Mexico] down towards a kind of low-wage, low-growth
equilibrium. They didn't say it, of course, but it would also be a high-profit equilibrium". The
Labor Advisory Committee (set up by US Congress within the trade act) also observed that
NAFTA would have a devastating effect (in their view) on labour markets in America and
Mexico, along with destructive environmental consequences as NAFTA supersedes state and
federal legislation. They also, though, observed the benefits to American investors, and the fact
that in a normal functioning democracy, issues as significant as this would have been the subject
of intense public consideration and debate (which they were clearly not). These may seem like
extreme criticisms of a generally-applauded free-trade agreement, but if you look at how
sovereign participants engaged themselves in relatively recent history- driving people by force
from land, and enforcing laws giving preferences to certain markets (in the form of subsidies,
tariffs and preferential prices) you can see they have basis. In a US case, for example, Whirlpool
Corporation were persuaded to build a factory in Tulsa rather than Mexico, because the
Taxpayers of Tulsa County were, indirectly, made to pay 25 percent of the corporation's capital
costs. That is one of the realities of 'free trade' in a global theatre where market participants
(actors- in the form of governments and corporations) have motives which are often not in the
best interest of the theatre itself. Looking at the advent of the US Steel industry, the amount of
Fortune 500 companies who benefit from state-industrial-policies, the global cotton markets and
more, you can find numerous examples which counter free-trade principles.

In this sense, we see that alongside the visible global conflicts using military machinery, there
are numerous severe conflicts occurring behind the scenes using economic and policy weapons.

Fundamentally, though, the case for economic integration is clear and rational. Our levels of
development, technology and mobility now mean that borders have largely become a
phenomenon for mapping rather than serving any functional role in our world. Our civilisation is
in the pivotal point of a huge upheaval where we are moving, perhaps too quickly, towards the
ultimate goal of being a unified global market, rather than a number of sovereign markets linked
by complex treaties.

Globalisation in this sense becomes inevitable rather than an option. As Kofi Annan once
commented, "...It has been said that arguing against globalization is like arguing against the
laws of gravity, but I believe we have underestimated its fragility." and as John Sweeney
observed, "In its current form, globalization cannot be sustained. Democratic societies will not
support it. Authoritarian leaders will fear to impose it. From the suites of Davos to the streets of
Seattle, there is a growing consensus that globalization must now be reshaped to reflect values
broader than simply the freedom of capital."

For humanity though, the key is that globalisation is finally enabling the overwhelming bulk of
humanity to 'join the conversation' economically, and socially. Franklin D. Roosevelt once
observed that, "True individual freedom cannot exist without economic security and
independence." and we now see those words have grown from being true at a national and
regional level to a global space. As Mr. Wyplosz stated above, "The more we are integrated, the
more we have a common destiny, and the more we have a common destiny, the more we should
be able to compromise with each other, and so globalisation is making people gradually citizens
of the world."
Leaders

Transformational Leadership
by
Colonel Mark A. Homrig
21 Dec 2001

Clearly the leader who commands compelling causes

has an extraordinary potential influence over followers.
James MacGregor Burns

The current research in leadership is overflowing with articles and books describing the virtues
of “transformational” leadership. Recent authors include Noel Tichy, The Leadership Engine
(1997), John Kotter, On What Leaders Really Do (1999), and articles written in the Journal of
Leadership Studies by Dong Jung, Walter Einstein and John Humphreys (2001) to name a few.
James MacGregor Burns coined this term in 1978 to describe the ideal situation between leaders
and followers. James Keagen used Burns’ ideas to build a developmental model of leadership
that explains further the continuum between transformational and transactional leadership. What
radical new form or fad of leadership is this? What is the difference between transformational
leadership and transactional leadership and which is the most effective? How does a leader get
everyone performing to their potential? Are there any pitfalls with transformational
leadership? What is the relationship between leadership and management? What are the
attributes of the transformational leader? Finally, what conclusions can be drawn about the
usefulness of transformational leadership?

After reading Burns, Kotter, Tichy, Jung, Einstein, Humphreys, and the biographies of military
leaders from throughout the ages, the conclusion seems quite clear. Leadership principles are
timeless, while, the models that examine those principles may change. The transformational
model offers one of many good ways to examine leadership and the type of leader, and follower,
who are ideally suited for today’s and tomorrow’s strategic environment. This is especially so for
the profession of arms and in particular the Air Force. While all the services and government
agencies espouse leadership principles, this paper more closely examines the Air Force. No
doubt the similarities and differences between the services and government agencies are very
interesting.

Since Burns coined the term’s transformational and transactional leadership, it might be useful to
look at his definitions. Burns wrote, “I define leadership as leaders inducing followers to act for
certain goals that represent the values and the motivations-the wants and needs, the aspirations
and expectations-of both leaders and followers.” [Italics original] The leader is not merely
wielding power, but appealing to the values of the follower. In this sense, values mean, “A
principle, standard, or quality regarded as worthwhile or desirable ,” (Webster’s New Riverside
University Dictionary). Burns insists that for leaders to have the greatest impact on the “led,”
they must motivate followers to action by appealing to shared values and by satisfying the higher
order needs of the led, such as their aspirations and expectations. He said, “. . . transforming
leadership ultimately becomes moral in that it raises the level of human conduct and ethical
aspiration of both leader and the led, and thus it has a transforming effect on both.”

Burns and much of the current literature make the point that the way leaders influence followers
is based on their shared sense of what is important, worth doing well, and expending energy on
it. In a sense the more significant the endeavor, the more the undertaking itself takes on an
importance greater than either the follower or leader. “Such leadership occurs when one or more
persons engage with others in such a way that leaders and followers raise one another to higher
levels of motivation and morality. Their purposes, which might have started out as separate but
related, as in the case of transactional leadership, become fused.” The goals, then, take on a life
of their own. In business, this leads to market domination and profit. In the military, this leads to
professionals leading inspired subordinates through tough budgets, difficult deployments, the
rigors of combat, and ultimately victory. Burns recognized that “transformational” leadership
does not stand alone in the leadership lexicon. As mentioned, he coined another leadership term,
“transactional.”

Transactional leadership is based on a transaction or exchange of something of value the leader

possesses or controls that the follower wants in return for his/her services. “The relations of most
leaders and followers are transactional-leaders approach followers with an eye to exchanging one
thing for another: jobs for votes, or subsidies for campaign contributions.” The transactional
style is precisely what happens in a contracting scenario. The contractor provides the specified
service purchased. Liontos explains, “This only works well when both leader and led understand
and are in agreement about which tasks are important.” Transformational leadership and
transactional leadership are not at odds with one another, but complement each other as the
circumstance dictate. There is no magic formula or checklist that dictates when one is more
relevant than the other in any given situation. When to make the transition is an art borne of
experience and education.

Bernard Bass, a disciple of Burns, points out the relationship between transactional and
transformational leadership. “The best leadership is both transformational and transactional.
Transformational leadership augments the effectiveness of transactional leadership, it does not
replace transactional leadership, (Walsman, Bass, & Yammarino, 1990).” “Transaction”
continues to be an effective tool, and a necessary tool, for leaders at all levels. Transformational
leaders, whose choice would be to gain agreement by appealing to the values of the followers or
peers, finding the road blocked, may resort to the transactional style. “When the transformational
leaders sees himself/herself in a win-lose negotiation he tries to convert it into a win-win
problem solving situation. If this is not possible, then he or she can display the transactional
skills necessary as an effective negotiator, (Walsman, Bass, & Yammarino, 1990).” On the
surface it appears that the “transactional” style provides the basis of most leader-follower
encounters. Why, if the transactional style “works,” not just stick to the tried and true?

While the transactional style may be the most prevalent, it produces results that may not be as
high as with the transformational style. To explain this phenomena, Karl Kuhnert and Phillip
Lewis examined R. Kegan’s six stage developmental theory. Kegan’s theory is that people may
develop higher-order leadership traits as they mature. The six stages range from 0-5; Khunert
and Lewis explored stages 2, 3, and 4. They used these stages to examine “transactional (stage
2),” “higher-order transactional (stage 3),” and "transformational (stage 4),” leadership traits. It
may be useful to use Kegan’s model of these stages to distinguish between the previously
mentioned leadership traits.

A stage 2 leader, for example, is explicitly transactional. What they do for the organization is
done for whatever the organization has promised in return for the person’s output. In other
words, their “. . . commitment to the organization is one of reciprocity.” A stage 3 leader,
however, is the bridge between a stage 2 transactional leader and a stage 4 transformational
leader. The stage 3 leaders are able to operate apart from personal goals and agendas to focus on
being connected to their followers and even sacrifice their personal goals to maintain those
connections. Trust and respect between leader and follower develop and form the bond between
them resulting in mutual support, promises, expectations, obligations, and rewards. This creates a
hazard for a stage 3 leader most easily exacerbated in an ethical dimension. “Stage 3 leaders may
feel ‘torn’ in situations of conflicting loyalties (e.g., loyalty to the organization versus loyalty to
their subordinates).” This feeling of competing loyalties may tempt these leaders to engage in
situational leadership to resolve the dilemma of conflicting loyalties.

Stage 3 leaders, while being transactional, do exhibit some of the qualities of a transformational
relationship with their followers. For example, “. . . they [the stage 3 leaders] use relational ties
to motivate followers to believe work is more than the performance of certain duties for certain
concrete payoffs. Followers may perform at exemplary levels with little immediate payoff in
order to maintain the respect of their leader.” This begins to look like a transformational
relationship, however, a key element is missing for this to be a stage 4 transformational
relationship. “Although followers who are persuaded by higher level transactional leaders may
expend extraordinary effort to maintain a certain level of mutual regard with their leader, their
beliefs and goals typically have not changed (Bass, 1985).” It is this factor that differentiates
transformational leadership from the higher-order transactional style. In the transformational
relationship, followers integrate the leader’s goals and values.

Leaders that are at stage 4 don’t have competing loyalties. They have developed an internal
compass of where they are going and why. “This is because stage 4 leaders have developed a
subjective frame of reference (organizing process) that defines their selves, not in terms of their
connections to others (the hallmark of stage 3), but in terms of their internal values or standards;
that is what Burns (1978) called end values. At this stage, leaders are able to take an objective
view of their goals and commitments; they can operate from a personal value system that
transcends their agendas and loyalties.” Transformational leaders have internalized a sense of
commitment to their goals and articulate this in such a way to their followers so as to convert
their followers to a high level of commitment as well. As stated earlier by Bass, leaders learn to
use the best style of leadership for the situation. “Sometimes transformational leaders use
transactional methods to lead, but stage 4 leaders have the ability to understand the available
options and to act in the manner that is most appropriate to the situation.” The military
professional must weigh the pros and cons of these leader/follower relationships to judge which
is best and when. This is by no means an easy task and usually results in a great deal of thought,
for being a leader is work!
Before we can determine which leadership style most effectively serves the profession of arms, it
is necessary to reflect on the kind of leaders and followers who will most likely succeed in a
challenging environment. Business literature has proclaimed their preference, “…today’s
networked, interdependent, culturally diverse organizations require transformational leadership
to bring out…in followers…their creativity imagination, and best efforts, (Walsman, Bass, &
Yammarino, 1990).” Is this what is desired in senior military leaders? People, who think on their
feet, are creative, come up with the best solutions, don’t need to be closely supervised and do
what is necessary just because it is the right thing to do? This is exactly the type of leader and
follower who needs nurturing, developing, and rewarding in the Department of Defense. All
people, including those not in uniform, are part of the team-ideally this would extend to all
government employees and to all who do business with the government.

To be effective now and in the future, almost all of the leadership literature and the author’s
personal experience agree that, people can not be treated like sheep, blindly herded from place to
place. Their expertise, experience and intuition need to be encouraged, not stifled, if challenging
situations are to be negotiated successfully. Avolio states, “What most organizational leaders
agree on, however, is that their organizations must move away from encouraging employees to
‘leave their brains at the door’, to systems where employee’s intellectual capital is nurtured,
developed, and more directly rewarded.” For government, military, and Air Force effectiveness,
the thrust of this paper asserts that everyone must be treated as and expected to be a valued
member of the team. “The Air Force of tomorrow and beyond must encourage individuals to be
comfortable with uncertainty and willing to make decisions with less than perfect information.”
This would seem to be intuitive. Of course high performing organizations want all their people,
leaders and followers, contributing to their maximum potential-to give their all for the good of
the organization. How do you get there from here?

In most organizations there is a transaction process that pays people a salary to perform their
work. Additionally, in professions the new entrant also begins an enculturation process. This
process ingrains in the individual the goals and values of the profession. For leaders and
followers to adopt the transformational model, they must all be in tune with the same culture and
share similar values. In the Air Force, initial and subsequent training and education imbues the
individual with core values, encouraging them to conform their behavior to the ethical and moral
standards of the Air Force. Why? The core values serve as a starting point so all understand what
behaviors and conduct are acceptable and should be emulated. They act as beacons vectoring
people to the path of professional conduct. (Little Blue Book)

. . . [V]alues are internalized so deeply that they define personality and behavior as well as
consciously and unconsciously held attitudes. They have become an expression of both
conscience and consciousness. [Italics original] Hence, holders of values will often follow the
dictates of these values in the absence of incentives, sanctions, or even witnesses . . . .

In the final analysis, transformational leadership, in the military should fuse the leader’s vision
so strongly in the follower, that both are motivated by high moral and ethical principles. This
process raises them above self-interest to perform their exacting duties, even to the ultimate
sacrifice, for the GOOD of the nation.
How do leaders develop the bonds necessary to make transformational leadership possible?
Bernard Bass has four interrelated components that he views as essential for leaders to move
followers into the transformational style.

 First is idealized influence. He maintains that genuine trust must be built between
leaders and followers. “If the leadership is truly transformational, its charisma or
idealized influence is characterized by high moral and ethical standards.” Trust
for both leader and follower is built on a solid moral and ethical foundation.
 The second component is inspirational motivation. “Its [transformational
leadership’s] inspirational motivation provides followers with challenges and
meaning for engaging in shared goals and undertakings.” The leader’s appeal to
what is right and needs to be done provides the impetus for all to move forward.
 Next, is intellectual stimulation, “. . . intellectual stimulation helps followers to
question assumptions and to generate more creative solutions to problems.” The
leader’s vision provides the framework for followers to see how they connect to
the leader, the organization, each other, and the goal. Once they have this big
picture view and are allowed freedom from convention they can creatively
overcome any obstacles in the way of the mission.
 Lastly, is individual consideration, “ . . . individual consideration treats each
follower as an individual and provides coaching, mentoring and growth
opportunities.” This approach not only educates the next generation of leaders,
but also fulfills the individuals need for self-actualization, self-fulfillment, and
self-worth. It also naturally propels followers to further achievement and growth.

One may get the impression that transformational, participative decision-making is based solely
on the consensus of the leader and follower. This is after all the military, and leader and led often
times can not afford the luxury of debate as to the best course of action in combat. Accordingly,
while the transformational style offers a good model for many cases of problem solving, “Under
various conditions, directive leadership is more appropriate and acceptable to all concerned than
is participative leadership.” Certainly there is a time and place for input to be heard, such as the
planning process where consensus is the leader’s goal:

The Transformational leader strives to achieve a true consensus in aligning individual and
organizational interests. In true consensus, the interests of all are fully considered, but the final
decision reached may fail to please everyone completely. The decision is accepted as the best
under the circumstances even if it means some individual members’ interests may have to be
sacrificed.

After the planning phase, it is up to the leader to implement the plan or direct the operation. As
inspiring as this sounds, inevitably there is the however comma.

Most powerful tools are potentially double-edged. Transformational leadership, or pseudo-

transformational leadership has a potential immoral and unethical dimension that could be
exploited by an unscrupulous leader inflicted on naïve and unsuspecting followers. Bass and
Steidlmeier in their “Ethics, Character and Authentic Transformational Leadership,” say:
“Fundamentally, the authentic transformational leader must forge a path of congruence of values
and interests among stake holders, while avoiding the pseudo-transformational land mines of
deceit, manipulation, self-aggrandizement and power abuse.” Hitler may be viewed as a case
study in transformational leadership gone wrong. He appealed to the values and ethics of the
German people, but, it could be argued that instead of fulfilling his follower’s higher order needs
and aspirations he lead them to ruin. He was a powerful, charismatic leader that would probably
fit the definition of a pseudo-transformational leader, because his aim ultimately did not lead to
the betterment of his followers, but rather his own fulfillment through abuse of power. There is
yet another argument that warrants attention.

Bass and Steidlmeier gave another warning, “Transformational leadership is seen as immoral in
the manner that it moves members to sacrifice their own life plans for the sake of the
organization’s needs. There is no moral justification for the vision of the CEO [military leader]
becoming the future sought by the employees.” In order to overcome their warning, the leader’s
agenda must be uplifting and as Burns said, “. . . transforming leadership ultimately becomes
moral in that it raises the level of human conduct and ethical aspiration of both leader and the
led, and thus it has a transforming effect on both.” As stated earlier, transformational leadership
may be double-edged, however, with high moral values as ethics espoused by both leader and
led, the dark side is mitigated and the forces for good are championed. Now that up and
downsides of transformational leadership have been explored, how does this relate to
management?

When discussing leadership inevitably a discussion of management ensues. So, what if any, is
the relationship between transformational leadership and management? According to Kotter,
“The fundamental purpose of leadership is to produce change, especially nonincremental change.
The fundamental purpose of management is to keep the current system functioning.” So,
leadership is distinguished by appealing to the values of the follower by, “. . . satisfying the basic
human needs for achievement, a sense of belonging, recognition, self-esteem, a feeling of control
over one’s life, and the ability to live up to one’s ideals.”

Management on the other hand, “. . . develops the capacity to achieve its plan [the leaders] by
organizing and staffing [Italics original]-creating an organizational structure and set of jobs for
accomplishing plan requirements, staffing jobs with qualified individuals, communicating the
plan to those people, delegating responsibility for carrying out the plan, and devising systems to
monitor implementation.” So while leadership works hand in hand with management, their focus
is different. Leadership envisions the future course and management builds the administrative
processes to get there, producing orderly results, and maintaining the desired end-state.

At this point it may be useful to list some attributes of transformational leadership that a research
of the current literature has highlighted to further portray the attributes of this leadership style.

 Authentic transformational leadership builds genuine trust between leaders

and followers.
 “ . . . without the continuous commitment, enforcement and modeling of
leadership, standards of business ethics cannot and will not be achieved in
organizations…badly led businesses wind up doing unethical things.
  Transformational leaders concentrate on terminal values such as integrity
and fairness. They see the responsibility for their organization’s
development and impact on society.
 They increase the awareness of what is right, good, important, and
beautiful, when they help to elevate followers’ needs for achievement and
self-actualization, when they foster in followers higher moral maturity,
and when they move followers to go beyond their self-interests for the
good of their group, organization, or society.
 The truly transformational leader who is seeking the greatest good for the
greatest number and is concerned about doing what is right and honest is
likely to avoid stretching the truth or going beyond the evidence for he/she
wants to set an example to followers about the value of valid and accurate
communication in followers.
 There is a moral justification for the transformational leader’s efforts to
achieve value-congruence between the leader and the led. When it is
achieved, both are more satisfied emotionally. (Meglino, Ravlin &
Adkins, 1989). Much of this congruence results in leaders being seen by
followers as more considerate, competent, and successful (Weiss, 1978)
and followers are more satisfied with their jobs.
 Leadership and followership in transformistic organizations are predicated
less on positional authority and more on interdependent work relationships
centered on common purposes.
 Kelley (1995) indicates that leadership and followership are equal but
different activities often played by the same people at different times.
Individuals who assume leadership roles have sound visioning,
interpersonal and organizational skills, and the desire and willingness to
lead. Effective followers are distinguished by their capacity for self-
management, strong commitment and courage.
 When organizational participants are empowered to act as effective
leaders and followers based on core values and a unifying purpose, the
potential for unprecedented advances and exceptional outcomes are
greatly enhanced.
 Transforming leadership is elevating. It is moral but not moralistic.
Leaders engage with followers, but from higher levels of morality; in the
enmeshing of goals and values both leaders and followers are raised to
more principled levels of judgement.

The ingredients necessary for transformational leadership to occur may be summarized in a

variety of ways. In the author’s mind, it seems obvious that one of the most important
characteristics of a great leader is his/her ability to make sound judgements and good decisions
based on their internalized vision. A leader who can make reasoned judgements and decisions in
the context of the ideas embodied in this paper surely would be successful. At the risk of
oversimplification, the below ten tenets may be a useful summation of this paper:

1. Leaders have high moral and ethical values.

2. Leaders express genuine interest in followers.
 3. Leaders have an inspirational vision.
4. Genuine trust exists between leaders and led.
5. Followers share leader’s values and vision.
6. Leaders and followers perform beyond self-interest.
7. Participatory decision-making is the rule.
8. Innovative thinking and action is expected.
9. Motivation is to do the right thing.
10. Leaders mentor.

Thus, the goal of transformational leaders is to inspire followers to share the leader’s values and
connect with the leader’s vision. This connection is manifested through the genuine concern the
leaders have for their followers and the followers giving their trust in return. Leaders exhort
followers to support the leader’s vision by sharing ideas, imagination, talents, and labor to reach
agreement and attain virtuous goals for the good of the leaders, followers, and the organization.
Both leaders and followers rise above their self-interests for the betterment of all, and both
achieve genuine satisfaction. Authentic transformational leadership, because of all the reasons
mentioned above, raises leaders above their self-interest and short-circuits pseudo-
transformational leadership tendencies. Management in the end codifies the changes and puts in
the administrative structures necessary to solidify their maintenance. But it is through the
leader’s hard work that followers come to share the leader’s goals and values to transcend their
self-interest and accomplish the mission.

In conclusion, the merits of transformational leadership should speak for themselves. In light of
the ambiguous strategic environment, it would appear to be obvious that most large
organizations, the federal government, the military, and the Air Force require leaders and
followers steeped in the same core values and energized to tackle the tough issues together.
When transformational leaders are connected with their followers great things can happen. When
leaders and led are on the same strategic page all their energy is focused to achieve maximum
results with less oversight, because the leader has articulated the target goal so everyone
understands the direction to move toward. To put this into the context of combat, below is an
excerpt from an Army officer in Afghanistan. It is an example at the tactical level but the hope is
that it would follow at the strategic level as well:

A Chechen commander was killed. On his body was a diary that compared fighting the US with
fighting Russians. He noted that when you take out the Russian leader, the units stops and mills
about, not sure of what to do next. But he added that when you take out a US leader, somebody
always and quickly takes his place with no loss of momentum. A squad leader goes down, it may
be a private that steps up to the plate before they can iron out the new chain or command. And
the damn thing is that the private knows what the hell he is doing.

When leader and led values are in sync, followers don’t have to be supervised -- they will know
what to do when the time comes, and isn’t that the goal of good leadership?
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