D
Damages
▶ Pollution (Separate Entries on Carbon,
e-Waste, Ecoefficiency)
Damaging Products
▶ Unethical Products
Dame Anita Roddick
Samuel O. Idowu
London Metropolitan Business School, London
Metropolitan University, London, UK
Basic Biographical Information
Dame Anita Roddick was born Anita Perella in
Littlehampton in West Sussex, England, during
World War II on October 23, 1942. Her parents,
Italian immigrants, were the owners of a cafe in
Littlehampton called the Clifton Cafe, and it was
in her parents’ business that Anita, her two
sisters, and her brother were exposed to their
strong work ethic which was to remain with
Anita for the rest of her life.
At the age of 10, Anita’s sense of moral out-
rage was awakened when she read a book about
the Holocaust. This was later to be instrumental
S.O. Idowu et al. (eds.), Encyclopedia of Corporate Social Responsibility,
DOI 10.1007/978-3-642-28036-8, # Springer-Verlag Berlin Heidelberg 2013
in all her activities during her life – she did
everything that was possible for her to campaign
against injustices across the globe. She trained as
a teacher which was perhaps the reason for taking
up an educational opportunity to work in
a kibbutz in the Holy Land in 1962. This experi-
ence for her was to turn into an extended working
trip around the world as a result of an incident in
the kibbutz where she worked.
It was on her return to the United Kingdom
that she was introduced to a Scotsman – Gordon
Roddick who she married in 1970 and were
blessed with two daughters Justine and Sam.
Major Contributions
In 1976, Anita Roddick made a remarkable
change to the world of socially and environmen-
tally responsible business practices when she
established The Body Shop in Brighton, Sussex,
England, with a simple goal – expressing this in
her own words “to create a livelihood for myself
and my two daughters while my husband, Gordon
was trekking across the Americas.” She noted
further that, “it was not only economic necessity
which inspired the birth The Body Shop.”
“My early travels had given me a wealth of expe-
rience. I had spent time in farming and fishing
communities with pre-industrial peoples, and
been exposed to body rituals of women from all
over the world. Also the frugality that my mother
exercised during the war years made me question
retail conventions. Why waste a container when
D 750
you can refill it? And why buy more of something
than you can use? We (The Body Shop) behaved
as she did – mother in the Second World War, we
reused everything, we refilled everything and
we recycled all we could. The foundation of
The Body Shop’s environmental activism was
born out of ideas like these.”
Anita Roddick started to talk about fair trade
to poor farmers of the third world well before
anyone thought about the matter. She
should probably be credited with the title of the
originator of “Fair Trade” philosophy.
The Body Shop expanded throughout
the world because of a simple idea which Gordon
suggested, perhaps in an attempt to be frugal in
his own way – “self-financing” more new
stores. This simple ideology was responsible for
the franchise business used by The Body Shop
to accelerate its worldwide growth – the results
of this simple idea are loud and clear to us all.
Dame Roddick believed that businesses as
a result of their privileged positions in society
have the power to do good which was why
the mission of The Body Shop states that
“to dedicate our business to the pursuit of
social and environmental change. We use our
stores and our products to help communicate
human rights and environmental issues.” The
Body Shop continues to champion issues relating
to these areas.
In her attempts to draw attention to human
rights issues around the world, Dame Anita
Roddick was an outspoken campaigner for the
following human rights cases around the world:
• The Ogoni people who were seeking justice
and reparations against Shell
• Exxon (Mobil) Esso for issues relating to their
environmental records
• Sweatshop practices by some multinationals
in some less developed parts of the world
• The Angola Three who had served over
35 years in solitary confinement in Angola
prison for crimes they did not commit
Similarly, Dame Roddick’s social conscience
and the desire to fight to protect the environment
and human rights globally continue to thrive even
after her demise through her creation – The Body
Shop which abides by what one could refer to as
Dame Anita Roddick
its five philosophies or as the company puts it;
their DNA which are:
1. Fight Against Animal Testing
2. Support Community Trade
3. Activate Self Esteem
4. Defend Human Rights
5. Protect Planet Earth
During Anita Roddick’s lifetime, the
following were some of the major contributions
she made to our world either in her
personal capacity or in collaboration with The
Body Shop.
She was until her death the Patron of the
following organizations:
• 1991–2007 – Schumacher College for Human
Scale Education
• 1994–2007 – Association for Creation
Spirituality
• 1996–2007 – Body and Soul (women and
families with HIV and AIDS)
• 1998–2007 – EMMA (Ethnic Minority Media
Awards)
• 2002–2007 – Findhorn Foundation College
• 2002–2007 – My Acre of Africa, South Africa
She campaigned for the following in
collaboration with The Body Shop:
• 1985 – Stop the dumping of toxic waste in
North Sea, Greenpeace.
• 1986 – Campaign against whaling of sperm
whales, Greenpeace.
• 1987 – Acid Rain pollution, Friends of the
Earth.
• 1987 – Published first “Green” Diary, Friends
of the Earth.
• 1980s – Against Animal Testing for
cosmetics, collected four million signatures
through shops.
• 1990 – The Body Shop Foundation set-up.
Over first 6 years of operation donated more
than 3.5 million pounds to 180 charitable
groups.
• 1990 – Set-up project to refurbish three
Romanian orphanages. Work extended into
Albania and Bosnia.
• 1991 – Funded Unrepresented Nations and
Peoples organization.
• 1993–1998 – Ogoni Campaign against Shell
and Nigeria.
Dame Anita Roddick
• 1994 – Marked 50th anniversary of UN
Declaration of Human Rights, launched
“Make Your Mark” campaign with Dalai
Lama, in partnership with Amnesty Interna-
tional. Three million thumbprints collected in
34 countries. 17 prisoners of conscience
released.
• 1997 – Self-Esteem Campaign with its contro-
versial mascot, Ruby, exposes myth of the
perfect body.
• 2000 – The Body Shop Human Rights Award
launched, biennial award of $300,000 to
selected grassroots groups fighting for human
rights globally.
• 2001 – Challenging Exxon-Mobil, World’s
No 1 Global Warming Villain and
campaigning for renewable energy for world’s
two billion poorest people, Greenpeace.
• 2001 – Challenging Globalization/Free Trade
agenda of WTO, Trade Justice Coalition.
• 2001 – Sweatshop Labor and workers’ rights
in Free Trade Zones, National Labour
Committee.
• 2001 – Free the Angola Three.
• 2001–2002 – Positive Energy Campaign with
Greenpeace.
• 2002 – The Body Shop Human Rights Award.
This second award was on the issue of the right
to housing.
• 2003 – Help Stop Violence in the Home –
Domestic Violence Campaign with Refuge
(the UK’s largest single provider of accommo-
dation and support to women and children
experiencing domestic violence).
She personally supported the following
campaign groups:
• Mother Jones
• University of Creation Spirituality
• World Development Movement
• People and Planet
• Trade Justice Coalition
• National Labor Committee
• Body and Soul (HIV/AIDS)
• Federation of Southern Co-Operatives (Poor
Black Farmers support group)
• Free the Angola Three
• Greenpeace, Challenging Exxon-Mobil,
World’s No 1 Global Warming Villain
751 D
and campaigning for renewable energy for
world’s two billion poorest people,
Greenpeace
• Trade Justice Coalition, Challenging
Globalization/Free Trade agenda of WTO
• Amnesty International UK
• Reprieve UK
The following were some of the Awards she
was deservedly given: D
• 1984 – Veuve Clicquot Business Woman of
the Year
• 1988 – OBE (Order of the British Empire)
(Other Buggers’ Efforts, according to Sam,
her daughter)
• 1991 – Center for World Development
Education’s World Vision Award, USA
• 1993 – Banksia Foundation’s Australia
Environmental Award
• 1993 – Mexican Environmental Achiever
Award
• 1993 – National Audubon Society Medal,
USA
• 1994 – Botwinick Prize in Business Ethics,
USA
• 1994 – University of Michigan’s Annual
Business Leadership Award, USA
• 1995 – Women’s Business Development Cen-
ter’s First Annual Woman Power Award, USA
• 1996 – Women’s Center’s Leadership Award,
USA
• 1996 – The Gleitsman Foundation’s Award of
Achievement, USA
• 1997 – United Nations Environment
Programme (UNEP), Honouree, Eyes on the
Environment
• 1999 – British Environment and Media Award
• 1999 – Chief Wiper-Away of Ogoni Tears,
Movement for the Survival of the Ogoni
People, Nigeria
• 2001 – International Peace Prayer Day
Organisation’s Woman of Peace
• 2003 – DBE (Dame Commander of the British
Empire)
Sadly, Anita Roddick passed away on Septem-
ber 10, 2007, a few weeks to her 65th birthday.
She would be remembered as a lady who made an
extraordinary contribution to the world of social
responsibility.
D 752 Danger

Cross-References Definition

▶ Body Shop Data can be defined as factual information often

▶ Community in the form of facts or figures obtained from
▶ Corporate Social Responsibility experiments or surveys. The word “data” also
▶ Greenpeace (NGO) refers to the information for computer
▶ Human Rights processing, for example, texts, numbers, sounds,
images, simply in a form that is suitable to be
processed by a computer. On the other hand,
References and Readings “data protection” refers to the prevention of
misuse of data, particularly information about
www.anitaroddick.com/aboutanita. Visited on 3 Aug
2010. individual people. Corporate social responsibility
www.financial-inspiration.com/Anita-Roddick.bigraphy. is a concept whereby companies integrate social
htm. Visited on 3 Aug 2010. and environmental concerns into their business
www.news.bbc.co.uk/1/hi/uk/6988343.stm. Visited on 3
operations and into their interaction with
Aug 2010.
www.woopidoo.com/bigraphy/anita-roddick/index.htm. their stakeholders on a voluntary basis. With
Visited on 3 Aug 2010. their CSR reports and other communication
tools, data and information are valuable content
for the business entities, but at the same time,
data protection is an important issue on their
Danger CSR agenda.

▶ Risk Management, Environmental

Introduction

The term “data protection and CSR” needs to be

Dangerous Products defined and clarified. Data is the raw material, and
after processing, it can be used and even misused.
▶ Unethical Products Data can be understood as an unidentified data
record or a field or an attribute in a database. Data
items contain facts about unidentified entities, that
is to say, they are not connected to the entities they
Data Care refer to Bercic and George (2009, p. 192). Data
protection is ensuring that confidential and personal
▶ Data Protection information regarding a stakeholder is maintained
and processed in a secure and legally compliant
manner and is prevented from passing from one
person or entity without the consent of the individ-
Data Protection ual. It is the implementation of administrative, tech-
nical, or physical measures to guard against the
Kadir Atilla Toker unauthorized access to data. It protects people
University of Izmir, İzmir, Turkey whose personal details are held on computers
against improper use or storage of the data. Another
word which is directly linked to the data protection
Synonyms is the security of data. Security is a dynamic issue
that has evolved enormously over the last few
Data care; Information protection; Information decades. The aim to implement information secu-
security; Preventing information misuse rity is not just to protect confidentiality and
Data Protection
availability of information but also is to deliver real
business benefits. Information security helps to
decrease the risk of information through the appli-
cation of a suitable range of security controls.
The second term of this article, corporate
social responsibility (CSR) has numerous defini-
tions, one of the most comprehensive of which is
given by the World Business Council for Sustain-
able Development as: “The continuing commit-
ment by business to behave ethically and
contribute to economic development, while
improving the quality of life of the workforce
and their families, as well as the local community
and society at large.” It is a broad-based move-
ment in business that encourages companies to
take responsibility for the impact that their activ-
ities have on customers, employees, communi-
ties, and the environment. According to the
European Commission’s definition of CSR, it is:
“A concept whereby companies integrate social
and environmental concerns in their business
operations and in their interaction with their
stakeholders on a voluntary basis.” In the articles
since 1960s, CSR has many faces and interpreta-
tions. It has been defined by the EU as an
ethic-based idea expressing voluntary social and
environmental concerns in corporate interactions
with stakeholders. And since information
security or data protection has vital importance
for both the corporation and its stakeholders,
human aspects of security need to be balanced
with the technical solutions.
The protection of personal data represents one of
the most recent emerging legal issues. On one hand,
the privacy of individuals is challenged by various
new means of data collection and communication.
On the other hand, the growth and development of
the information economy are heavily dependent on
the level of the freedom of the business units in
gathering, processing, and distributing various
kinds of information. Data protection and corporate
social responsibility are both the terms which can
be defined by the importance of information and
communication. Information is basically “the new
corporate currency” for the business, and therefore,
data protection is an important issue field in the
information age that we are facing through. Many
companies today gather and store data for
753 D
marketing and other purposes (Matwyshyn 2010,
p. 580). They collect as much information as pos-
sible about their customers in the name of targeting
products more effectively and increase their
revenue.
On one hand, the concept of protection of per-
sonal data was named by Samuel Warren and Louis
Brandeis more than a 100 years ago simply as the
“right to be left alone,” and privacy was identified D
by them as a concept that is destined to define the
limits of the personal sphere of an individual. They
also argued that privacy is natural and reasonable
and that it represents the key aspect of individual
freedom. On the other hand, although personal
privacy has been aggressively safeguarded for 100
years, the demand for transparency in business life
is more serious as a pressure in the globalized age.
Since the end of the nineteenth century, a lot of
legal devices have been designed in order to
improve transparency. But for about two decades,
the pressure has been severely intensified, and
transparency has taken over the most important
current management science debates.
Furthermore, discussions about the role of busi-
ness for wider social issues have intensified since
the 1950s concurrent with the economic globaliza-
tion and failures of the markets to solve the envi-
ronmental and social problems. Business had to be
concerned primarily with the economic results of
its decisions; today, business must also consider
and weigh the legal, moral, and social impact and
repercussions of each of its decisions. Therefore,
although social responsibility is an area of concern
that has always existed, with the CSR action of the
business, it is more visible and open to the debates.
It is fair to assert that the law is not adequately
addressing information security problems in corpo-
rations at the present time. It is only in the last two
decades, however, that great emphasis has emerged
in this area. This has resulted in a growing interac-
tion between the government, business, and the
stakeholder briefly society as a whole. Socially
responsible corporate conduct beyond dictated by
information security law is warranted by the nature
of the information security problems the corporate
sector faces.
The growing importance of social responsibil-
ity activities of businesses and their growing
D 754 Data Protection

Data Protection,
Fig. 1 Conceptual
overview of information Realization of a secure and social responsible society
security in a society

Delivery of value to society

Creating information value

Information use &

Data Protection
transparency

Company policy

Information Security Management

Social responsibility management

Conscientious corparate mindset and harmony with society
Laws and regulations
CSR Charter of EU

interaction between all stakeholders of the soci-
ety reveal the fact that there is an enormous data
to handle. As stakeholders try to meet their inter-
ests through ever more sophisticated processes,
corporate has had to become more competent at
recognizing stakeholder interests and meeting
those that are legitimately the corporation’s con-
cern (Madsen 2009, p. 639). Corporations, like-
wise, have greater opportunities to consult with
their stakeholders and to gain valuable feedback
and input. As shown in Fig. 1, social responsibil-
ity action requires social responsibility manage-
ment which is guided by ethical norms and CSR
charter (Ricoh Global 2010). Then, information
transparency and information protection are the
two requirements that are components to reach
a social responsible and secure society.
Furthermore, Internet-based tools provide the
interactive drive of dynamic transparency,
including tools such as e-mail, blogs, web
forms, web site FAQs, electronic newsletters,
audio and video podcasts, customer- and
user-provided web content, and the array of the
newer Web 2.0 social media applications such as
Facebook, Twitter, LinkedIn, Flickr,
etc. The various kinds of corporate stakeholders –
customers, shareholders, suppliers, employees,
government regulators, NGOs, the general pub-
lic, etc. – make use of such Internet-based tools to
search for information that is important for them
to convey their needs and desires. It is through
such tools that corporations reveal information
requested by their stakeholders and seek to obtain
useful information from stakeholders. In dynamic
transparency, information flows multidirec-
tionally in a complex network (Madsen 2009,
p. 640). The quality and the kind of information
exchanged will vary and differ according to
industry, environmental conditions, and stake-
holder and corporate needs. Sometimes, the
Data Protection
information requested or distributed is interesting
but irrelevant; sometimes, it is vital to the very
quality of life of the stakeholders and they have
the right to know.
Customers and corporations are communicat-
ing with each other more than ever as social media
has become a part of ordinary people’s lives. In
2008, approximately $1.6 billion was spent on US
online social network advertisements. According
to eMarketer, total US spending on advertising in
2010 is $ 153 billion. Online social network ad
spending is $25.8 billion in 2010. TV reached $59
million twice as much as online, the newspapers
ads constitute $ 22.8 billion, radio $15.3 billion,
and magazines $14.7 billion. The figure shows that
online ads are increasing rapidly. The biggest
advertising medium after television is online
media. Business enterprises have pages, “friends,”
fans, and send and receive messages. All the
companies have their CSR activity reports on the
internet. CSR actions of companies are more vis-
ible than before, and customers as well as other
stakeholders have grown accustomed to such vis-
ibility; they are leading a demand for more trans-
parency. In essence, they are asking companies to
act in a more transparent manner, and every day,
more information is available for all stakeholders.
On the other hand, poor data quality and lack of
information security can affect an enterprise at
both operational and strategic levels; current prob-
lems in data quality reportedly cost US businesses
more than $611 billion every year in postage,
printing, and staff overhead. Data quality has mul-
tiple dimensions, such as accuracy, timeliness,
completeness, and credibility; these dimensions
are relative and need to be defined in the context
of the end use of data. For example, while 85%
accuracy of the name, address, and phone number
of doctors may be acceptable for an insurance
company targeting physicians as potential cus-
tomers, this metric would not be acceptable for
organizations that need to notify prescribing doc-
tors about a drug recall.
Business organizations are collections of indi-
vidual actors, and at the same time, they are com-
plex structures that do society’s work. As they are
human-driven, companies operate according to
a set of values. Besides, all corporate activities
755 D
including CSR rely on information technology
infrastructure; as our society becomes more
dependent on the Internet, specific actions need
to be taken to establish data protection. Because
of this complex structure, data protection is even
more important today as required by society, and
guided by the legal framework of countries. More-
over, the privacy community is also large – there
are lots of data protection authorities, experts, D
academics, and privacy advocacy groups as well
as technologists writing about privacy-enhancing
technologies. There are also many international
conferences and workshops dealing with privacy
and data protection issues (e.g., 2010 IEEE 26th
International Conference on Data Engineering,
World Data Protection Report, etc.). So the infor-
mation exchange is enormous.
Corporations are closely connected with soci-
ety, and their CSR actions are not just an addi-
tional element in corporate policy, it is
a voluntary commitment to internalize in corpo-
rate strategy practices, pivotal decisions that con-
tribute to social development. It is essential for
corporations to promote social continuity and
harmonize with the demands of society. Data
protection is one of today’s need, and every com-
pany must take responsibility for managing and
securing both its own information and its cus-
tomers’. Therefore, free flow of information and
the data protection are always linked with legal
framework nearly in all countries of the world.
This persisting tension between data protection
and free flow of information is already obvious in
the OECD Guidelines of 1980.
The growing use of computers to store infor-
mation about individuals has led many countries
to pass laws designed to protect the privacy of
individuals and prevent the disclosure of informa-
tion to unauthorized people. In the 1970s, the
decade before the OECD Guidelines were
declared, some countries had already begun to
enact privacy laws applicable to the public and
private sectors. The world’s first data protection
law was passed in the Germany in 1970. In 1973
and 1980, one third of the OECD’s 30 member
countries enacted legislation intended to protect
individuals against abuse of data related to them
and to give individuals the right of access to data
D 756
with a view to checking their accuracy and appro-
priateness (Wright et al. 2011, p. 119).
Furthermore, although not all of the member
states have fully implemented the EU Data Protec-
tion Directive which was adopted in 1995, EU
Commission has initiated infringement proceed-
ings against the nonconforming members and
emphasized the direct link between data protection
and fundamental rights. In 2000, the EU included
the right to personal data protection as one of the
rights enshrined in the Charter of Fundamental
Rights of the European Union adopted in Nice
and also included in the Constitutional Treaty for
Europe. Article 8 of the European Convention on
Human Rights Charter provides the right to the
protection of personal data and the right to be
processed fairly for specified purposes and on the
basis of the consent of the person concerned or
some other legitimate basis laid down by law.
Everyone has the right of access to data which has
been collected concerning him or her and the right
to have it rectified. It is also important that compli-
ance with these rules shall be subject to control by
an independent authority.
It has been fashionable in some circles for
much of the past 10 years to announce the death
of data protection and, indeed, some jurisdictions
have taken very much a minimalist approach to
data protection law at the national level. The ele-
vation of data protection to a constitutional right
and the Fundamental Rights of the European
Union may now strengthen the hand of privacy
advocates in many EU Member States where
they will be lobbying for a stricter interpretation
and implementation of the data protection
principles. The introduction of data protection at
a constitutional level is an important development.
Even if it is a natural progression in the
development of EU data protection rules, the Con-
stitutional right will inevitably influence and har-
monize Member State practices (Cannataci and
Mifsud-Bonnici 2005, p. 6).
Identifiable efforts in the Area of Data protec-
tion could be:
• Annual reports – Provide reports, e-studies
with an overview of the most important events
regarding information security incidents and
activities, in order to improve corporation
Data Protection
security and also cover issues that are cur-
rently shaping the future of security.
• Compliance with laws and regulations – Create
compliance programs that are in accordance
with laws, regulations, standards, and other
conventions related to information security.
• Information security training – The aim is to
raise and improve awareness of information
security by continuously conducting compliance
education and training programs for security
processes and technical countermeasures.
• Assistance for consultation and reporting –
Create a company helpline in order to both
consult employees and to assist employees in
reporting problems that for various reasons they
are unable to handle.
Although legal documents clearly issued data
protection, the link between data protection and
CSR is not apparent in these legal documents.
Data protection is a legal issue, but the link
between the CSR and data protection is drawn
by the business ethics. Relationship between law
and business ethics in the context of corporate
information security or data protection is not well
defined. It has debunked the two dominant argu-
ments against corporate investment in informa-
tion security (Matwyshyn 2010, p. 579) – that
legal compliance equals social responsibility
and that shareholder earning maximization limits
spending on information security.
After the invention of computers in 1970s,
the integration of information technology into
corporate operations during the last two decades
has changed the ways that companies handle
information – both sensitive internal information
and personally identifiable consumer information.
Companies have increasingly centralized financial
information and business partner and customer
information in companies’ internal computer
systems because not all business entities are
currently regulated by information security statutes,
and much of information crime involves data not
necessarily deemed particularly “sensitive” by law
at present. Many entities that aggregate large
amounts of information do not fall into any of the
legal categories of statutorily restricted data.
The biggest economic losses arise out of stolen
personally identifiable information frequently not
Data Protection
protected by federal law, such as social security
numbers and credit card information. Therefore, it
is fair to assert that law is not adequately addressing
information security problems in corporations at
the present time. Socially responsible corporate
conduct beyond dictated by information security
law is warranted by the nature of the information
security problems the corporate sector faces.
Although it is true that information security
legal doctrine is underdeveloped at the present
time, the law is also inadequate to limit harms to
third parties from corporate information security
conduct, yet the harms are undeniable. One data
breach could greatly diminish the value of such an
intangible asset. For example, the damage that
a corporate insider can generate in one episode of
information theft has been, in at least one instance,
approximated to be between $50 million and $100
million (Matwyshyn 2010, p. 583). Similarly,
corporate proprietary information protected solely
by trade secret law could lose all value in an
information crime incident because the informa-
tion’s status as a trade secret is entirely contingent
upon its confidentiality. By some estimates, the
information crime economy is now equally or
more lucrative than the drug economy for its
participants. Therefore, responsible corporate
conduct requires more than simply comporting
conduct with the lowest possible floor set by law.
As discussed, a company’s ignoring of information
security concerns can hold dire consequences – we
can say irreparable damage to corporate assets.
The five most common information security errors
visible today in corporate information security
include a lack of information security planning
overall, nonresponsiveness to external reports of
breaches, inadequate partner vetting and voluntar-
ily granting criminals access to information, theft
by employees, and a failure to update existing
security. It is vital and logical to call for inclusion
of information security in corporate codes of
conduct.
The responsibilities of business cannot be
understood solely through the bilateral relations
between the company and the parties with which
it interacts. When a business partner’s sensitive
data is compromised, a breakdown of commercial
trust occurs and both entities may suffer public
757 D
relations consequences and information asset
devaluation. Data breaches impose costs on the
economy and society as a whole. For shareholders,
corporate information vulnerability also means that
their investment is impacted – the value of assets of
the company in which they have invested dimin-
ishes. As such, a duty to minimize harm to others
includes minimizing damage to social systems.
Vulnerable databases, websites, and business D
practices can result in information harms –
compromised corporate information, stolen iden-
tities, and hijacked machines used for mean
purposes. In the context of information security
issues, parties engaging in information exchanges
have an expectation that their information
exchanges with a company will not harm them.
As such, this expectation of safety entails trusting
that the parties with whom they are transacting
have updated the state of their information secu-
rity to the state of the art. If merely doing business
with someone causes harm through security com-
promise, trust is eroded. A complicating factor in
this trust relationship is the difficulty of verifying
the information security status of contracting
parties. As such, parties are at an information
disadvantage about each other’s information
security.
Expertise in information security matters is
still an exclusive commodity that is just begin-
ning to filter into the public and corporate con-
sciousness. Companies in a position to use their
in-house expertise to help establish better infor-
mation security minimum standards to assist in
supporting our economy and social institutions
should take the lead and do so as part of their
corporate social responsibility programs.
According to ethical rules, all the parts are both
responsible in each other’s information security.
Key Issues
Personal data include all information that makes
it possible to identify an individual, a company,
or an organization. Due to the widespread use of
information technology today, protecting per-
sonal data is a CSR issue. Given the rise in the
international transfer of personal data, it has
D 758
become essential to protect these data in order to
guarantee fundamental liberties, especially the
right to privacy, which is an integral part of
human rights.
Data protection is just what it sounds like:
protecting important data from damage, alter-
ation, or loss. Although that sounds simple
enough, data protection encompasses a host of
technology, business processes, and best prac-
tices. According to the laws in many countries,
data protection is a legal issue, and the link
between the CSR and data protection is not well
defined. The relation is mostly drawn by the
business ethics.
Customers and corporations are communicat-
ing with each other more than ever since social
media has become a part of ordinary people’s
lives. The growing importance of social respon-
sibility activities of businesses and their growing
interaction between all stakeholders of the soci-
ety reveal the fact that there is an enormous data
to handle. Therefore, the protection of personal
data represents one of recent most emerging and
important legal issues. On one hand, the privacy
of individuals are challenged by various new
means of data collection and communication; on
the other hand, the growth and development of
the information economy is heavily dependent on
the level of freedom of business in gathering and
processing the various kinds of information. It is
fair to assert that law is not adequately addressing
information security problems in corporations at
the present time.
Future Directions
The demands of a twenty-first-century business
are such that customers expect the business to
operate at all times. In an increasingly global
economy, downtime is not tolerated by cus-
tomers, who can readily take their business else-
where. The inability of a business to operate
because of a data loss, even a temporary one, is
driving many businesses to deploy extensive data
protection scheme. All types of businesses –
including health care, financial, manufacturing,
and service – operate around the clock, or at least
Data Protection
their computer systems do. Even when no
humans are around, computers are available to
take and place orders, send orders to the ware-
house, and manage financial transactions. Data
protection strategies need to take into account all
these business expectations.
Data protection is a legal issue but the link
between the CSR and data protection should be
drawn by the business ethics. Relationship
between law and business ethics in the context of
corporate information security or data protection
should be well defined. Expertise in information
security matters is still an exclusive commodity
that is just beginning to filter into the public and
corporate consciousness. Companies in a position
to use their in-house expertise to help establish
better information security minimum standards to
assist in supporting our economy and social insti-
tutions should take the lead and do so as part of
their corporate social responsibility programs. The
greater social good needs corporate leadership in
this area that is currently absent.
Cross-References
▶ Business Ethics
▶ Business in Society
▶ Business Strategy
▶ Corporate Responsibility
▶ Corporate Social Responsibility
▶ Knowledge Management
▶ Right to Privacy
References and Readings
Bercic, B., & George, C. (2009). Investigating the legal
protection of data, information and knowledge under
the EU data protection regime. International Review of
Law, Computers & Technology, 23, 189–201.
Bowen, H. R. (1953). Social responsibilities of businessman.
New York: Harper & Row.
Cannataci, J. A., & Mifsud-Bonnici, J. P. (2005). Data
protection comes of age: The data protection clauses
in the European Constitutional Treaty. Information &
Communications Technology Law, 14(1), 5–15.
Caroll, A. B. (1999). Corporate social responsibility: Evo-
lution of a definitional construct. Business and Society,
38(3), 268–295.
David Henderson
Friedman, H., & Friedman, L. W. (2009). The role of infor-
mation technology in corporate social responsibility.
Northeast Decision Sciences Institute Proceedings
2009. Uncasville, Connecticut, April 1-3: 234–39
Madsen, P. (2009). Dynamic transparency, prudential jus-
tice, and corporate transformation: Becoming socially
responsible in the internet age. Journal of Business
Ethics, 90, 639–648.
Matwyshyn, M. A. (2010). CSR and the corporate Cyborg:
Ethical corporate information security practices. Journal
of Business Ethics, 88, 579–594.
Polcak, R. (2009). Aims, methods and achievements in
European data protection. International Review of
Law, Computers & Technology, 23(3), 179–188.
Ricoh Global. (2010). Conceptual overview of the
Ricoh Group’s information security (10 Mar 2010).
http://www.ricoh.com/about/security/outline/index.html.
Accessed 8 Nov 2011.
Tsiakis, T. (2009). Contribution of corporate social respon-
sibility to information security management. Information
Security Technical Report, 14, 217–222.
Wright, D., De Hert, P., & Gurtwirth, S. (2011). Are the OEC
D guidelines at 30 showing their age. Communications of
the ACM, Review Articles, 54(2), 119–127.
David Henderson
Renginee G. Pillay
School of Law, University of Surrey, Guildford,
Surrey, UK
Basic Biographical Information
Professor David Henderson is a British economist.
He started out as a civil servant as an economic
advisor in HM Treasury before becoming Chief
Economist in the UK Ministry of Aviation.
He was then a staff member of the World Bank
from 1969 to 1975. Moreover, he worked as
an academic at Oxford University (Fellow of
Lincoln College) and at University College
London, where he was a professor of economics
from 1975 to 1983. He became the head of the
Economics and Statistics Department at the Organi-
zation for Economic Cooperation and Development
(OECD) in 1984 and worked there until 1992. In
1985, he gave the BBC Reith Lectures, which were
published in the book Innocence and Design:
The Influence of Economic Ideas on Policy. In
1992, Henderson was appointed to the Order of
St. Michael and St. George as a Knight Commander.
759 D
Since leaving the OECD, Henderson has been
an independent author and consultant and has
acted as visiting fellow or professor at the
OECD Development Centre (Paris), the Centre
for European Policy Studies (Brussels),
Monash University, the Fondation Nationale
des Sciences Politiques, the University of
Melbourne, the Royal Institute of International
Affairs, the New Zealand Business Roundtable, D
and the Melbourne Business School. He is cur-
rently a visiting professor at the Westminster
Business School, London.
Major Contributions
Professor Henderson is one of the most important
and influential critics of CSR. He has written two
books on the subject: Misguided Virtue and The
Role of Business in the Modern World. In the
former, he explains how the idea of CSR rests
on a mistaken view of issues and events and that
its general adoption by the business world would
reduce welfare and undermine the market econ-
omy. Like Milton Friedman, Henderson sees
shareholders as owners of the corporation and
argues that managers should act in their interests
and their interests alone: since shareholders are
presumed to want to maximize their financial
gains, it follows that maximizing profits should
be the goal of the corporation. For Henderson,
the business case for CSR simply does not stand
up to scrutiny. In his view, instead of boosting
profitability, exercises such as “stakeholder
engagement” and the “triple bottom line” would
be very costly to companies.
In his second book, Henderson looks at
economic performance over the previous century
to contend that a free market economy where
corporations engage in profit-making is the best
route to economic growth and development. As
such, in his opinion, the proponents of CSR who
wish to give capitalism a “human face” are actu-
ally propounding a notion which will reduce
aggregate social welfare.
Very recently, in December 2009, Professor
Henderson published an article in the journal
Economic Affairs, entitled “Misguided
D 760 Day Laborers

Corporate Virtue: The Case against CSR, and

The True Role of Business Today.” The article Decent Work
draws on the arguments put forward in the two
books discussed above. He reiterates his criticism Liangrong Zu
of CSR, arguing that corporations should be Enterprise, Microfinance and Local Development
allowed to do what they do best: maximize profits Program, International Training Centre of the
as that is what contributes to economic progress ILO, Turin, Italy
and general welfare within a competitive market
economy. For him, CSR or “corporate citizen-
ship” will, on balance, cause substantial harm Synonyms
as it will make the world poorer and more
overregulated and should, therefore, be Better work; Good work; Productive work
abandoned.

Definition
Cross-References
Decent work is concerned with the availability of
▶ Agency Theory employment in conditions of freedom, equity,
▶ Business Case for CSR security, and human dignity. It is
▶ Corporate Citizenship a multidimensional concept introduced by the
▶ Friedman, Milton International Labour Office (ILO) in 1999. It
has four key components: employment condi-
tions, social security, rights at the workplace,
References and Readings and social dialog. Decent work sums up the aspi-
rations of people in their working lives. It
Henderson, D. (1986). Innocence and design: The influ- involves opportunities for work that is productive
ence of economic ideas on policy. Oxford: Blackwell.
and delivers a fair income, security in the work-
Henderson, D. (2001). Misguided virtue: False notions of
corporate social responsibility. London: The Institute place and social protection for families, better
of Economic Affairs. prospects for personal development and social
Henderson, D. (2004). The role of business in the modern integration, freedom for people to express their
world: Progress, pressures, and prospects for the
concerns, organize and participate in the deci-
market economy. London: The Institute of Economic
Affairs. sions that affect their lives and equality of oppor-
Henderson, D. (2009). Misguided corporate virtue: The tunity, and treatment for all women and men.
case against CSR and the true role of business today. Decent work is central to efforts to reduce
Economic Affairs, 29(4), 11–15.
poverty and is a means for achieving equitable,
inclusive, and sustainable development. The ILO
works to develop decent work-oriented
approaches to economic and social policy, in
Day Laborers partnership with the principal institutions and
actors of the multilateral system and the global
▶ Sweatshops economy. The Decent Work Agenda, developed
by ILO, offers a basis for a more just and stable
framework for global development. The ILO pro-
vides support through integrated decent work
country programs developed in coordination
Decent Jobs with ILO constituents. They define the priorities
and targets within national development frame-
▶ Green Jobs works and aim to tackle major decent work
Decent Work
deficits through efficient programs that embrace
each of the strategic objectives. The Decent Work
Agenda is part of the first Millennium Develop-
ment Goal (MDG 1) of halving extreme poverty
by 2015.
Introduction
The concept of decent work was introduced by
the ILO Director General Juan Somavia in his
first report to the International Labour Confer-
ence in June 1999. He stated that the primary
goal of the ILO today is to promote opportunities
for women and men to obtain decent and produc-
tive work, in conditions of freedom, equality,
security, and human rights. Since its formulation
in 1999, ILO has undertaken a considerable num-
ber of conceptual, empirical, and operational
studies on the decent work paradigm. The studies
have comprised an elaboration of models, strate-
gies, and policies; the development of indicators
and indices on decent work; empirical investiga-
tion of interrelationships among different compo-
nents of decent work; and promotion of decent
work approaches at the country level.
The decent work concept reflects both conti-
nuity and innovation in ILO thinking on work-
related issues. At a minimum, it may be regarded
as a device to capture, in a simple and succinct
manner, the essence of ILO’s mission and areas
of work. Since its foundation in 1919, ILO has
focused its efforts on promoting rights at work,
employment, social security, and industrial rela-
tions. This is reflected not only in its thematic
reports, policy advice, training and operational
activities but most of all in the numerous conven-
tions and recommendations the organization has
promulgated over the past 90 years. These labor
standards provide the legislative framework for
policies relating to all four components of decent
work in countries around the world.
The intellectual contribution of decent work
goes beyond giving an elegant expression to
ILO’s objectives and areas of work. Substan-
tively, it lies above all in providing a unified
framework for its major areas of work. Without
this framework, it is all too easy and tempting to
761 D
treat ILO efforts in the four areas in a separate and
self-contained manner. This indeed has been the
general practice in the functioning of the Office
for most of the time. The decent work framework
draws attention to the relationships between its
different components in at least three distinct
ways.
First, it points to the different domains of
operation of these components. For instance, D
rights at work pertain primarily to the domain of
norms and legislation, although their implemen-
tation depends heavily upon adequate capacity,
institutions, and resources. Likewise, social dia-
log is in the first instance a matter of providing
a suitable legislative and institutional infrastruc-
ture. In contrast, the achievement of employment
and social security objectives requires substantial
real resources, in addition to an enabling policy
and institutional environment. The different
domains of decent work components thus bring
together questions relating to rights at work,
voice and representation, and human security
and employment. Their differential demands on
scarce resources are pertinent to the formulation
of plans to achieve decent work goals.
Second, the decent work framework exposes,
and invites an analysis of, the complementarities
and trade-offs among its different components.
For instance, does social security have an adverse
effect on the volume of employment? Does social
dialog lead to higher productivity and improved
remuneration? Is there a conflict between the
quality and quantity of employment? What is
the impact of collective bargaining on the volume
of employment? The decent work framework
seeks to provide policy and institutional options
that optimize the synergy among its different
components.
Last, the decent work paradigm provokes
questions about its universality and particularity.
A criticism that has been leveled against ILO’s
traditional work on standards, employment,
social security, and industrial relations is that it
is based on the model of industrial market econ-
omies and is applicable at best only to the formal
sectors in other countries, thereby excluding
large swathes of their economies and working
people. The overall approach and terminology
D 762
of the decent work framework lends itself more
easily to analysis of structural and institutional
diversity, thus facilitating a universalistic
approach to the world of work. The next section
elaborates on this point.
Decent Work: Goals and Features
Decent work is captured in four strategic objec-
tives: fundamental principles and rights at work
and international labor standards, employment
and income opportunities, social protection and
social security, and social dialog and tripartism.
These objectives hold for all workers, women and
men, in both formal and informal economies; in
wage employment or working on their own
account; in the fields, factories, and offices; and
in their home or in the community.
Rights at Work
Rights at work constitute the ethical and legal
framework for all elements of decent work.
Their objective is to ensure that work is associ-
ated with dignity, equality, freedom, adequate
remuneration, social security and voice, and rep-
resentation and participation for all categories of
workers. Rights at work form part of the broader
agenda of human rights, which in turn derive
from a long tradition with deep philosophical,
theological, and juridical roots. Human rights
have been variously regarded as natural rights
deriving from nature, as supernatural with divine
ordination, as moral and ethical rooted in human-
istic philosophy, and as legal entitlements based
on national legislation and international agree-
ments. Their content has also tended to vary
according to different schools of thought and
ideological trends, evolving from the classical
rights to life, liberty, and property to a wider
notion embracing political, civil, cultural, social,
and economic rights. The Charter of the United
Nations and the Universal Declaration of Human
Rights gave a powerful fillip to the human rights
movement, endowing it with a universal
meaning.
Employment and Work
Employment is a vital component of decent work.
Employment in the decent work paradigm refers
Decent Work
not just to wage jobs but to work of all kinds –
self-employment, wage employment, and work
from home. It refers to full-time, part-time, and
casual work and to work done by women, men,
and children. For decent work to obtain, certain
conditions must be satisfied. There should be
adequate employment opportunities for all those
who seek work. Work should yield a remunera-
tion (in cash or kind) that meets the essential
needs of the worker and the family members.
Work should be freely chosen, and there
should be no discrimination against any category
of workers, such as women, migrants, or minor-
ities. Workers should be protected against acci-
dents, unhealthy and dangerous working
conditions, and excessively long hours of work.
They should have the right to form and join
representative and independent associations to
represent their interests and engage in collective
bargaining and in discussions with employers and
government authorities on work-related issues.
An essential minimum of social security also
forms part of decent work. Some of these attri-
butes of employment are discussed further under
rights at work, social security, and social dialog.
Work that meets the above conditions is
a source of dignity, satisfaction, and fulfillment
to workers. It motivates them to give their best
efforts and furnishes a sense of participation in
matters affecting their livelihood. It provides
a propitious foundation for skills enhancement,
technological progress, and economic growth. It
also contributes to harmonious working relations,
political stability, and the strengthening of
democracy.
Social Protection
The purpose of social protection is to provide
security against a variety of contingencies and
vulnerabilities. These include ill-health, mater-
nity needs, accidents, unemployment, destitution,
extreme economic fluctuations, natural disasters,
and civil conflicts. A sound social protection
strategy should also address the needs of vulner-
able groups, such as orphaned or abandoned chil-
dren, single mothers, female-headed households,
widows, old persons in need, and the disabled.
Social protection policies should thus aim to
Decent Work
reduce suffering, anxiety, insecurity, and mate-
rial deprivation. They should promote health,
confidence, and a willingness to accept technical
and institutional innovations for higher produc-
tivity and growth.
The above definition of social protection goes
beyond the more limited notion of security for
work-related situations, in at least two ways.
First, the coverage of protection extends beyond
the workers, and even their family members, to
embrace vulnerable and insecure persons outside
paid employment, and indeed the labor force.
Second, the contingencies and vulnerabilities
are redefined beyond the conventional insecu-
rities identified in the ILO conventions on social
security, to include destitution, extreme eco-
nomic fluctuations, and natural and human catas-
trophes. This more comprehensive definition of
social security has the advantage of covering the
full range of vulnerabilities of all members of
society, not just those of limited sections of the
population, who are often among the more
privileged groups in some countries.
The conceptually more adequate notion of
social protection does not imply of course that
all countries are in a position to design and imple-
ment the requisite policies and measures. The
items and levels of social protection furnished
to the population will naturally depend upon
their past traditions, stages of development, and
resource mobilization. Starting with a more com-
prehensive definition of social protection should
at least enable countries to make choices on
priorities through a consideration of the entire
spectrum of contingencies, hopefully through
a democratic process.
Social Dialog
Social dialog provides voice and representation
to participants in the production process. It is
a means for them to defend their interests, to
articulate their concerns and priorities, and to
engage in negotiations and discussions with
other actors in the production system and with
the public authorities on social and economic
policies. It serves to empower the weaker part-
ners in the economy and to bring about a better
balance of bargaining power in the market place.
763 D
Social dialog can thus be a vital element in
a representative and participatory democracy.
Organizations of enterprises and workers are
a vital part of a full-fledged and participatory
democracy. They provide a channel for their
members, not only to work together on immedi-
ate issues affecting their businesses and liveli-
hoods but also to interact with other segments of
society on issues of broader concern. They facil- D
itate consultations with public authorities on
a wide range of social and economic questions.
Governments can play a vital part in promoting
such organizations by providing an enabling
environment and a suitable policy framework.
The single most important requirement is the
existence of effective freedom of association for
all citizens to form organizations of their own
choosing. This in turn requires not only
a suitable legal framework but also its full imple-
mentation in terms of appropriate procedures and
facilities at all levels, as laid down in the ILO
conventions on freedom of association. Govern-
ments can also do much to ensure the autonomy,
representativity, and accountability of such orga-
nizations. What is more, they could create insti-
tutions and mechanisms such as tripartite bodies,
national economic and social councils, and plan-
ning commissions with full representation of all
significant organizations of workers, enterprises,
and voluntary agencies. It is particularly impor-
tant to ensure that women in all their roles,
including domestic responsibilities, are fully
represented in these bodies. This should contrib-
ute to improved policy-making and implementa-
tion and a more effective representation of the
interests of the weaker and vulnerable segments
of society.
Decent Work Components:
Interdependencies and Priorities
The four components of decent work influence
each other in a myriad of ways. The essence of
the decent work approach is to maximize the
synergies among its different elements and find
policy and institutional options to overcome
conflicting relationships and constraints.
Rights at work affect all aspects of work. For
instance, rights to a minimum wage and a healthy
D 764
working environment affect the form and volume
of employment. The right to freedom of associa-
tion and collective bargaining has consequences
for the degree and pattern of social protection. It
also affects the nature and substance of social
dialog.
Social dialog provides a vehicle for negotia-
tions on rights at work such as social security,
minimum wages, and conditions of work. Social
dialog also makes it possible to influence the
implementation of these rights as well as to mon-
itor achievement. Collective bargaining has an
obvious impact on the structure, level, and con-
ditions of employment. It also provides a forum
for negotiations on the form and content of social
security. Tripartite and broader forms of social
dialog involving governments, enterprises,
workers, and civil society agencies exercise an
influence on all dimensions of decent work
through their impact on macroeconomic and
other key social and economic policies.
Employment levels and status affect social
security in obvious ways. High levels of remu-
nerative employment obviate the need for certain
types of social security. The content, delivery,
and financing of social security are influenced
by the proportion of the labor force in different
work categories. The latter also have an impact
on the form of worker and enterprise organization
and mode of negotiations. Employment levels
and remuneration affect the content of collective
bargaining. They also affect the ability of
workers to negotiate on a range of issues
pertaining to rights at work.
The links between social protection and the
other components of decent work are self-evi-
dent. The coverage and benefit levels of social
security affect employment through their impact
on labor supply, investment levels, productivity,
and worker response to change and innovation.
They also influence the bargaining power of
workers in social dialog and their ability to secure
other rights at work. These interdependencies are
brought out graphically in Fig. 1.
While there is general agreement on the
interdependence between elements of decent
work, there are sharp differences of views on
their nature and direction. In general, two
Decent Work
distinctive schools of thought have tended to
hold opposing views. With some oversimplifica-
tion, these might be described as neoclassical and
institutional schools. The former holds that state
and other interventions in the free functioning of
market forces, unless designed to correct market
failures, lead to inefficiencies in resource alloca-
tion and hence to slower growth, wage and
employment expansion, and material progress
for workers and enterprises. The institutionalists,
on the other hand, maintain that apart from
correcting market failures, interventions that
establish rights at work, collective bargaining,
tripartite consultations, minimum wages, and
social security; contribute to political and social
stability; and reduce economic inequalities and
higher productivity, innovation, and risk-taking.
In concrete terms, adherents of the neoclassi-
cal school argue, for instance, that interventions
such as minimum wages, social security financed
through taxation or levies on enterprises, and
collective bargaining have an adverse impact on
growth, employment, and wages because of dis-
incentive effects on investment, savings, innova-
tion, and risk-taking. Some of these measures,
such as unemployment benefits and welfare pay-
ments, also tend to exacerbate unemployment.
The institutionalists contend that state inter-
ventions tend to mitigate economic fluctuations
and help maintain economic activity and employ-
ment at high levels. Minimum wages and social
protection serve to improve worker productivity
through improved nutrition, better health, and
greater security. Trade unions, collective
bargaining, and tripartite consultations provide
a mechanism for worker participation and infor-
mation sharing, thus increasing mutual trust,
sense of responsibility, and motivation for better
work. All this should lead to fewer conflicts,
higher productivity, and better quality of work.
Income security during periods of unemployment
enhances workers’ receptiveness to technological
change and acts as an incentive to the acquisition
of new skills.
In the context of developing countries, both
the preceding arguments are somewhat modified
to take into account their economic and social
differences. Many economists argue, for
Decent Work 765 D
Decent Work,
Fig. 1 Interdependence
between rights at work, Rights
employment, social at work
security, and social dialog

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instance, that the setting up of minimum wages market systems; and encouraging entrepreneur-
and the operation of trade unions and collective ship and innovation. This requires a more active
bargaining have particularly negative economic state role in regulating monopolies, promoting
and social effects because they apply only to nascent industries, encouraging social institu-
a small minority of the labor force. They distort tions, and providing security for the vulnerable
the economies, accentuate inequalities among the groups.
working people, and hold back investment and The contrasting positions taken by the two
job creation. The establishment of social security schools of thought have not been fully resolved
schemes under these conditions has a similar neg- by empirical research. Those in favor of free
ative impact, according to them, further eroding markets, including flexible labor markets, have
the competitive position of developing countries pointed to the superior economic performance of
in an increasingly integrated global economy. countries with fewer state interventions and labor
Institutional economists, on the other hand, standards such as Australia, Chile, Hong Kong
argue that precisely because of extreme underde- (China), New Zealand, and the United States.
velopment and mass poverty, the state has to play They also hold up the impressive economic per-
a more important role in relieving destitution; formance of the South East and East Asian coun-
overcoming structural barriers to growth and tries and of China, Vietnam, and now India, as
building institutions, including trade unions and examples of economic reforms spurring rapid
D 766
growth, employment generation, and poverty
reduction.
Other scholars draw the opposite conclusion
from the same data set. They attribute the supe-
rior economic performance of most Asian coun-
tries to a carefully thought-out policy of active
state intervention in a variety of areas. They fur-
ther point to the excellent social and economic
performance of countries such as Austria, Ire-
land, the Netherlands, and the Nordic group.
Their success has resulted from combining free
market policies with extensive social security and
active labor market policies, supported by insti-
tutional cooperation between strong trade unions,
employers’ organizations, and the public author-
ities. These researchers also point to the relatively
poor performance of most African and Latin
American countries since they initiated free mar-
ket policies in the 1980s.
More specific research, investigating, for
example, the impact of minimum wages, of col-
lective bargaining systems, and of core labor
standards on investment, growth, employment,
and poverty reduction, has yielded mixed results.
It is difficult to draw any clear-cut conclusions.
Evidently, a great deal depends upon the nature
and extent of state interventions and labor stan-
dards, the manner in which they are introduced,
and the social, economic, and institutional fea-
tures of the countries concerned. There is, how-
ever, widespread agreement that respect for
fundamental civil, political, social, and economic
rights, including core labor standards, is essential
for human dignity and indispensable for political
stability and sustainable and equitable develop-
ment. The essence of the decent work approach is
precisely to overcome potential trade-offs and
constraints through institutional innovation, rais-
ing the capabilities of the working people and
promoting social dialog among the major social
and economic groups and between them and the
state authorities.
Decent Work Performance: Indicators and
Measurement
Decent work performance is measured by indica-
tors relating to its different components. Indica-
tors provide information on the extent to which
Decent Work
a specified objective or outcome has been
achieved. However, it is rarely possible to devise
an indicator that measures “perfectly” a given
objective or outcome. Because of conceptual
and data limitations, indicators can at best give
an approximate estimate of performance in
a given domain.
Ideally, indicators should provide a direct
measure of the specified objective. For instance,
if the objective is a healthy population, the indi-
cator should give information on the number or
proportion of people who are sick. As this infor-
mation is seldom available, recourse may be had
to indirect measures such as life expectancy.
Often, it is difficult to give a precise meaning to
a general objective. For instance, one of the attri-
butes of decent work is remunerative employ-
ment, but the term “remunerative” must first be
defined, before a suitable indicator to measure it
can be developed. Often, it is more difficult to
obtain a direct measure, so an indirect measure
may have to be used. For instance, the nutritional
status of children may be measured directly by
intakes of various food nutrients or indirectly
(and more easily and cheaply) through weight or
height for age. The accuracy and comparability of
data are other issues that must be considered
when selecting and using indicators.
There is rarely one single indicator of the
desired outcome, and a combination of several
may give a more accurate measure of a specified
objective. Thus, the degree of gender discrimina-
tion in employment may be captured by wage
differentials, opportunities for training, prospects
for promotion, and gender division of skills and
responsibilities. Moreover, the indicators may be
either quantitative or qualitative: for instance,
quantitative indicators of social security may
relate to the proportion of people receiving dif-
ferent types of benefits, while qualitative indica-
tors concern the quality and effectiveness of
services. Thus, in order to obtain an accurate
picture, it may be necessary to combine several
indicators into an overall indicator or index.
Some analysts have proposed a threefold clas-
sification of indicators: input indicators (policy
variables), process indicators (institutional vari-
ables), and outcome indicators (data on the
Decent Work
effectiveness of those policies and institutions).
The different types of indicator are then com-
bined into an overall index of the different com-
ponents of decent work and of decent work as
a whole. The construction of an index raises
questions about the weight to be given to differ-
ent indicators and also the formula to be used for
combining qualitative and quantitative indica-
tors. Similar but more acute problems arise
when synthetic measures are derived by combin-
ing indicators from different domains. The
Human Development Index developed by the
United Nations Development Programme is an
example of such a synthetic indicator combining
indicators of health, education, and income.
Key Issues
People throughout the world face deficits, gaps,
and exclusions in the form of unemployment and
underemployment, poor quality and
unproductive jobs, unsafe work and insecure
income, rights which are denied, gender inequal-
ity, migrant workers who are exploited, lack of
representation and voice, and inadequate protec-
tion and solidarity in the face of disease, disabil-
ity, and old age. Nearly 200 million people are
unemployed – more than ever before. Half the
world’s workers live on less than US$2 a day. Of
these unemployed, the ILO estimates that 86 mil-
lion, or about half the global total, are young
people aged 15–24. One out of every seven chil-
dren in the world today is still involved in child
labor of some kind. Accidents and diseases at
work cause two million fatalities a year – an
average of 6,000 per day.
The global jobs crisis is one of the biggest
security risks we face today. If we choose to
continue along the present path, the world risks
becoming more fragmented, protectionist, and
confrontational. A continued lack of decent
work opportunities, insufficient investments,
and underconsumption leads to an erosion of the
basic social contract underlying democratic soci-
eties: that all must share in progress. Experience
from many countries suggests that the risks of
disorder are higher where the need for decent
767 D
work opportunities is ignored. Recovery from
crisis is faster where communities can come
together to work for reconstruction. Decent
work is an important part of the global peace-
building agenda.
Future Directions
D
Although few disagree with the Decent Work
Agenda in principle, in reality, achieving decent
work poses challenges and controversies. The
Decent Work Agenda requires national and
international actors to commit to the objective
of creating quality jobs globally and to pursue
cooperative solutions to this challenge. However,
governments struggle to convince their publics
that development and job creation abroad is
imperative to prosperity and employment at
home. Some governments also face the tempta-
tion to close markets and lower labor standards
and to remain competitive in a world economy
that is blamed for depressing wages and working
conditions.
Various actors can have an impact on the
provision of decent work, although existing con-
ditions and incentives do not always lend them-
selves to advancing the Decent Work Agenda.
Here are some of the key actors:
– National governments create decent work
through economic and industrial policies.
However, the forces of globalization – such
as downward pressures on wages and reduced
macroeconomic policy flexibility – have
diminished the ability of national govern-
ments to achieve this goal on their own.
– Businesses create jobs from the local to inter-
national levels, and those operating across
borders can affect international wages and
working conditions. Multinational enterprises
typically locate operations in countries where
wages are at their lowest and so-called
worker’s rights are less prominent. This is
antithetical to the Decent Work Agenda,
although it does contribute to economic
development.
– Trade unions assist employees in advocating
for elements of decent work, from a so-called
D 768 Deception

living wage to health insurance to work-

place safety standards. Trade unions face Deception
the challenge of meeting their members’
immediate needs at home while supporting ▶ Cheating
job creation and “workers’ rights” around the
globe.
– International financial institutions provide
loans or other assistance to national govern- Deceptive Advertising
ments and require loan recipients to imple-
ment certain policy measures. Existing ▶ Greenwashing
programs generally exclude employment tar-
gets and have even been known to have
a negative impact on job creation in the short
term, as jobs which exist only through govern- Declaration of Human Rights
ment market distortions are replaced with eco-
nomically viable employment. ▶ United Nations Universal Declaration of
– Trade negotiators can forward the Decent Human Rights
Work Agenda globally by including labor
standards in trade agreements, while legisla-
tors (among others) can support their imple-
mentation. However, many countries view the Decrease Negative Development
campaign for labor standards as an effort by
other countries to make their own industries ▶ Mitigation
more competitive.

Cross-References Definitions of Social Responsibility

▶ Corporate Social Responsibility Brigitte Planken

▶ Sustainable Development Department of Business Communication Studies,
▶ UN Global Compact Department of Communication and Information
Sciences, Radboud University, Nijmegen,
The Netherlands
References and Readings

David, B., Anne, C., & Farhad, M. (2003). Seven indica-
tors to measure decent work: An international
comparison. International Labour Review, 142, 179.
Dharam, G. (2003). Decent work: Concept and indicators.
International Labour Review, 142, 113.
Ghai, D. (2006). Decent work: Objectives and strategies.
Geneva: ILO.
Ignacy, S. (2004). Inclusive development and decent work
for all. International Labour Review, 143, 161.
ILO. (2002). Towards a policy framework for decent
work. International Labour Review, 141, 161.
Richard, A., Igor, C., Philippe, E., Farhad, M., & Joseph,
A. R. (2003). Measuring decent work with statistical
indicators. International Labour Review, 142, 147.
United Nations. (2007). Full and productive employment
and decent work. New York: United Nations.
Introduction
Social responsibility is the ideological notion that
organizations should not behave unethically or
function amorally, and should aim (instead) to
deliberately contribute to the welfare of society
or societies – comprised of various communities
and stakeholders – that they operate in and inter-
act with. As such, the notion of social responsi-
bility is effectively taken to apply to all and any
organizational entities, whether a government,
a corporation, and institution, or an individual,
dealing with society at large when conducting
Definitions of Social Responsibility
core (commercial) activities. In recent decades,
however, social responsibility has come to be
acknowledged as particularly relevant in relation
to corporate behavior, that is, in relation to the
way in which businesses and managers behave
and conduct themselves in societal relationships,
and the extent to which these actors commit
themselves to socially oriented initiatives aimed
at improving the quality of life in and overall
well-being of society. Ideally, for a business
to be regarded as socially responsible, it
should acknowledge responsibility for its impact
on the environment, consumers, employees, com-
munities, stakeholders, and all other members
that make up the public sphere. Furthermore, it
should (pro)actively promote public interest by
encouraging community development and by
avoiding and eliminating (corporate) practices
that could harm society and the public at large,
regardless of legal obligations that may also
apply. Effectively, social responsibility in busi-
ness (i.e., Corporate Social Responsibility or
CSR) constitutes the acknowledgment, and
inclusion of public interests in all corporate deci-
sion-making and corporate policy that go toward
achieving the economic bottom line. In this
sense, it is closely related to business ethics and
notions such as the ethical corporation, corpo-
rate citizenship, and sustainable business.
Social responsibility in business has been (re)
defined in the literature over a number of decades,
and to this day, there is still no universally agreed
upon, single definition of the concept. Although
the notion of CSR can be traced back to the early
twentieth century (e.g., Clark 1916), Bowen
(1953) is commonly credited as the first scholar
in the management literature to address the topic
of corporate social responsibilities, positing that
organizations are obliged to “pursue those poli-
cies, make those decisions, or to follow those
lines of action which are desirable in terms of
the objectives and values of our society” (p. 6).
Bowen’s work subsequently led to abundant
discussion in the literature on the nature and
characteristics of social responsibility in business
(e.g., Carroll 1991; Wood 1991; Swanson 1995),
and on the extent to which businesses should be
obliged to acknowledge social responsibilities
769 D
and fulfill their social duties. Broadly speaking,
two main perspectives in the discussion sur-
rounding social responsibility in business have
emerged over the years: the economic perspec-
tive and the duty-aligned perspective (Swanson
1995). The economic perspective largely focuses
on what is considered to be the firm’s primary
social responsibility, to make profits for its share-
holders. This view, in its extreme form, was per- D
haps most clearly expressed by the economist
Milton Friedman (1970), who, in an article in
The New York Times Magazine, showed himself
to be vehemently opposed to the idea that any
organization operating in a free enterprise system
should have to develop a “social conscience,” and
“take seriously its responsibilities for providing
employment, eliminating discrimination,
avoiding pollution and whatever else may be the
catchwords of the contemporary crop of
reformers” (p. 1). For Friedman, clearly the only
obligation a business had to society at the time
was to make profit and achieve its economic
bottom line, while staying within the law.
The second perspective on social responsibil-
ity, the so-called duty-aligned perspective
(Swanson 1995), acknowledges that social respon-
sibility for business extends beyond the single
obligation to promote financial gain and contribute
to economic growth, as suggested by the school of
thought embodied by Friedman, and entails
additional social duties (see also Carroll 1991).
For example, in what has since become a much-
cited definition of CSR, John Elkington (1997)
acknowledged responsibility toward achieving an
ecological and social bottom line, in addition to
achieving the economic bottom line, coining
the well-known phrase “triple bottom line”
(TBL), which is widely referred to nowadays
both in the management literature and by compa-
nies and business practitioners around the world as
“people, planet, profit” (Elkington 1997).
Additional obligations, beyond economic,
such as those defined by Elkington (1997; see
also Carroll 1991) are said to be motivated by
either “positive or negative duty” (or both).
According to Swanson (1995), if a company
feels a sense of positive duty with respect to its
social responsibility, this manifests itself in
D 770
the (selfless) intention to engage in (voluntary)
corporate practices and activities aimed at
benefiting communities, improving quality of
life, etc. (signifying a proactive stance). On the
other hand, in the case of negative duty,
a company effectively feels the need to engage
in socially oriented corporate practices and activ-
ities which are not aimed only and primarily at
doing good, but at compensating for, or
exempting a company from, any blame or liabil-
ity it may have incurred (signifying a reactive,
defensive stance). In the latter case, deliberate
socially responsible behavior is engaged in pri-
marily for PR purposes, and only in the second
instance to benefit the community, improve qual-
ity of life in society, etc. It is the second perspec-
tive that acknowledges the multifaceted nature of
social responsibility for businesses as stretching
beyond economic obligation, which has enjoyed
the greatest popularity in the management litera-
ture, and which has been used as a starting point
for many academic enquiries on CSR, and its
effects, in recent years.
Carroll’s much-cited model of social respon-
sibility for business (1991) was one of the first
attempts to distinguish between, and define, the
different types, or dimensions, of social respon-
sibility that firms have to society. Carroll distin-
guishes four types, economic, legal, ethical, and
philanthropic (or discretionary) responsibility,
which together are said to form an interrelated
theoretical construct of CSR as a whole. From
a practical perspective, they constitute the
domains within which organizations can develop
and implement CSR policy (see also Elkington
1997). Carroll further posits that the four respon-
sibilities can be ranked in terms of their relative
importance, corresponding to the relative priority
they should have for firms. He depicts this in
terms of a Pyramid of CSR, in which economic
responsibility (the obligation to provide society
with products, services and employment, pay
taxes, and make profit) forms the base of the
pyramid, and the firm’s most important social
obligation to society. The next two layers of the
pyramid are regarded as relatively less essential,
and are made up of the legal and ethical respon-
sibilities, that is, the firm’s obligation to operate
Definitions of Social Responsibility
within the law (legal responsibility) on the one
hand, and to engage only in activities or practices
that are in accordance with societal norms and
values not codified in laws and to minimize doing
harm to stakeholders (ethical responsibility) on
the other. Finally, the tip of the pyramid signifies
the fourth obligation (philanthropic or discretion-
ary responsibility), namely, the firm’s social duty
to strive to be a good corporate citizen, by con-
tributing to the community and improving quality
of life in society. This top layer constitutes social
responsibility “above and beyond the call of
duty,” in the sense that complying with this obli-
gation is entirely at the discretion of the firm. In
practice, any activities or practices in this domain
tend to be largely voluntary.
With the publication of models such as
Carroll’s Pyramid, the discussion of social duties
on the part of organizations had already begun to
shift from defining social responsibility as
a construct, to acknowledging and incorporating
the notion of social responsiveness, and the idea
that CSR itself was being implemented by firms
as a reaction and response to (external) stake-
holders’ needs and demands. The basic concern
underlying this shift was that the emphasis on
responsibility and its characteristics had focused
the discussion almost exclusively on defining the
obligations felt by business; how that sense of
obligation actually came about or subsequently
manifested itself in corporate action or perfor-
mance was being overlooked. It was the
social responsiveness movement that emphasized
corporate action, reaction, and proaction, and
considered how organizations take on a social,
in addition to an economic, role in society.
Wood (1991; see also Swanson 1995) is
a proponent of the social responsiveness perspec-
tive. Her model of Corporate Social Performance
(CSP) depicts how firms act on their social duties
and interact with society and stakeholders.
The model identifies three criteria by which to
measure corporate social responsibility: “legiti-
macy,” “public responsibility,” and “managerial
discretion.” CSP, the effective enactment of
social responsibilities in terms of “principles,”
“processes,” and “outcomes,” is regarded by
Wood as “something that might emerge in its
Definitions of Social Responsibility
own right, from a company’s adherence to prin-
ciples of responsibility, acting through processes
of responsiveness” and not merely as “a natural
extension of preexisting business policy” (Wood
1991, p. 3). From this performance perspective,
firms must formulate, implement, and, most
importantly perhaps, measure social goals and
programs as well as integrate an ethical aware-
ness and sensitivity throughout the organization
into all their decision-taking, policy-making, and
corporate actions, in order to be able to respond
adequately and appropriately to stakeholder
needs and demands. Given its emphasis on social
results and outcomes, CSP reflects an orientation
toward familiar criteria by which business per-
formance in general is assessed, including qual-
ity, quantity, efficiency, and effectiveness. CSP
also reflects the Stakeholder Theory orientation to
strategic management which has become increas-
ingly popular since the 1980s (Freeman 1984), in
the sense that CSP regards stakeholders (i.e.,
company “owners” beyond shareholders) and
company functions as linked and, to a degree at
least, as interdependent. Ultimately, the CSP per-
spective is perhaps not so different from earlier
models of social responsibility such as Carroll’s
pyramid; in both schools of thought, the underly-
ing concern is what managers actually “do” with
social responsibilities, in terms of implementa-
tion and outcomes.
Key Issues
Despite the many publications on CSR and defi-
nitions of social responsibility in business that
have proliferated in recent decades, social
responsibility remains a fluid concept today.
There is still no universally accepted definition
of the concept, and as a result, companies con-
tinue to define and put into practice CSR policy
aimed at fulfilling the different social responsi-
bilities at their own discretion and on their own
terms. This has meant that corporate practices
differ widely, across industries, cultures, and dif-
ferent organizational types. One thing seems to
be evident, however. Although the economic
bottom line continues to be the baseline for
771 D
measuring corporate success, many firms nowa-
days are increasingly seeking to maximize profits
in more socially and environmentally responsible
ways, by incorporating and integrating CSR and
CSP into their organizations. Across business
sectors, there is a discernible drive to become
more aware of, and sensitive to, the economic,
social, and environmental impacts of corporate
activities and business practices, and this is not D
only the case in developed countries, but extends
to emerging economies, such as China and India.
The business case for CSR suggests that socially
responsible firms will be able to differentiate
themselves from their competitors, attract better
talent, improve risk management practices and
gain a social license to operate (e.g., Berman
and Webb 2003; World Business Council for
Sustainable Development 2000). These potential
advantages, in turn, are taken to contribute posi-
tively to the bottom line. Increasingly, there are
also external pressures for organizations to com-
ply with social responsibilities beyond the eco-
nomic, caused by, for example, government
regulation, shareholder advocacy, ethical con-
sumerism, and globalization. Over the past few
decades, developments such as those outlined
above, have compelled many corporations to
(begin to) enact social responsibility more
actively. Also, to meet demands from stake-
holders for greater transparency and for social,
as well as financial, accountability, more and
more companies are now reporting their socially
responsible performance, in addition to their
financial performance (see e.g., Global Reporting
Initiative).
Future Directions
Social responsibility remains a largely voluntary,
unregulated, and nonbinding principle, to be
adhered to, and implemented at the individual’s
or organization’s discretion. However, in recent
years, the notion of social responsibility has
begun to gain at least some degree of normative
status. For example, although nonbinding, the
United Nations Educational, Social and
Cultural Organization’s Universal Declaration
D 772
on Bioethics and Human Rights, developed by
the UNESCO’s International Bioethics Commit-
tee and adopted in 2005, essentially aims to pro-
vide a universal framework of (ethical) principles
that should guide biomedical activities, in order
to ensure that they comply with international
human rights law (Faunce and Nasu 2009).
Based on an analysis of the Declaration’s social
responsibility, technology transfer, and transna-
tional benefit principles as they apply to private
and public corporations, as well as states, Faunce
and Nasu (2009) argue that the declaration has
gone some way to promote a normative intersec-
tion between international human rights law and
bioethics as academic disciplines.
More recently, in May 2010, the International
Organization for Standardization (ISO) approved
the draft ISO 26000 for processing as a Final Draft
International Standard (FDIS). ISO 26000 is to
provide normative, universal guidelines for
adopting and disseminating social responsibility.
The standard was developed by a multi-
stakeholder ISO working group which included
experts and observers from 99 ISO member coun-
tries and 42 public- and private-sector organiza-
tions (ISO 2010). It stresses that “the need for
organizations in both public and private sectors to
behave in a socially responsible way is becoming
a generalized requirement of society,” and aims to
“encourage voluntary commitment to social
responsibility” and provide “common guidance on
concepts, definitions and methods of evaluation”
with respect to social responsibility (ISO 2008). It
incorporates “global agreement” on the definition
and “core subjects” of social responsibility, as well
as “guidance on how to integrate and implement
social responsibility throughout an organization”
(ISO 2010). Still, the standard is referred to and
presented explicitly as a guideline for dialogue and
collaborative action only, not as a constraining or
certifiable management standard (ISO 2010).
The development of global, standardized
guidelines for (corporate) social responsibility
(reporting) will remain an important aim in the
future to create and establish best practices, allow
for valid performance comparisons between
organizations, promote accountability and trans-
parency, and increase competitive advantage.
Definitions of Social Responsibility
Cross-References
▶ Altruistic CSR
▶ Base of the Pyramid
▶ CSR Frameworks
▶ Philanthropic CSR
▶ Pyramid of CSR
▶ Sustainability (World Commission on
Environment and Development Definition)
References and Readings
Berman, J. E., & Webb, T. (2003). Race to the top:
Attracting and enabling global sustainable business:
Business survey report. Washington, DC: World Bank.
Bowen, H. R. (1953). Social responsibilities of the busi-
nessman. New York: Harper & Row.
Carroll, A. B. (1991). The pyramid of corporate social
responsibility: Toward the moral management of orga-
nizational stakeholders. Business Horizons, 34(4),
39–48.
Clark, J. M. (1916). The changing basis of economic
responsibility. The Journal of Political Economy,
24(3), 209–229.
Elkington, J. (1997). Cannibals with forks: The triple
bottom line of 21st century business. Oxford: Capstone
Publishing.
Faunce, T. A., & Nasu, H. (2009). Normative foundations
of technology transfer and transnational benefit prin-
ciples in the UNESCO universal declaration on bio-
ethics and human rights. Journal of Medicine and
Philosophy, 0, 1–26. doi:10.1093/jmp/jhp021.
Freeman, R. E. (1984). Strategic management:
A stakeholder approach. Boston: Harper Collins.
Friedman, M. (1970). The social responsibility of business
is to increase its profits. New York Times Magazine,
33(13), 122–126.
ISO. (2008). Social responsibility. Retrieved September 7,
2010, from http://isotc.iso.org/livelink/livelink/fetch/
2000/2122/830949/3934883/3935096/home.html?node
id¼4451259&vernum¼0
ISO. (2010, May). ISO 26000 on social responsibility
approved for release as final draft international stan-
dard. Retrieved September 7, 2010, from http://www.
iso.org/iso/pressrelease.htm?refid¼Ref1321
Swanson, D. L. (1995). Addressing a theoretical problem
by reorienting the corporate social performance
model. Academy of Management Review, 20(1),
43–64.
Wood, J. (1991). Corporate social performance
revisited. The Academy of Management Review,
16(4), 691–718.
World Business Council for Sustainable Development.
(2000). Corporate social responsibility: Making good
business sense. Geneva: WBCSD.
Deming 14 Points Model
Deliberation
▶ Dialogue
Dematerialization
▶ Resource Efficiency
Deming 14 Points Model
Catalina Soriana Sitnikov
Faculty of Economics and Business
Administration, University of Craiova, Craiova,
Dolj, Romania
Synonyms
Deming’s 14 points for management; Deming’s
14 points on quality management; Deming’s 14
principles
Definition
The ideology of W. Edwards Deming has been
outlined as follows: “Dr. W. Edwards Deming
taught that by adopting appropriate principles of
management, organizations can increase quality
and simultaneously reduce costs (by reducing
waste, rework, staff attrition, and litigation
while increasing customer loyalty). The key is
to practice continual improvement and think of
manufacturing as a system, not as bits and
pieces.” Dr. W. Edward Deming is considered
as the creator of quality revolution in Japan. His
discoveries are statistical and provide influential
comprehensions of outstanding quality manage-
ment; in his book named Out of the crisis are
outlined the Deming’s 14 points on quality man-
agement. These can be highly converse to the
traditional rules of management. However,
when there is a change from quantity to quality
773 D
one must perform some radical yet original
modifications in manufacture, action, manage-
ment, and marketing. It is especially applicable
with any company focused on fabrication and
delivery of goods. The points describe principles
that anyone can accompany and effect even
among a big number of workers.
Numerous executives might have rested on
traditional understandings and commonsense D
rules so far in their direction plan. They might
have never considered such powerful out of the
box notions. Deming extracted them from the
thorough statistical analyses and computation,
and interpreted them through simple messages
that anyone could comprehend and go with
them. Nevertheless, these 14 points on quality
management are not simple concepts.
Introduction
With the post-World War going back to usual
production plans, Deming lectured that checking
products for quality after they were produced was
unworthy. Alternatively, he recommended
a process recognized as “statistical quality con-
trol” that would use closely supervised perfor-
mance standards to gauge the quality as a good
was being produced. The objective of statistical
quality control was to collect data that would
enable the continuous improvement of produc-
tion processes, which would in turn improve
quality control. Establishing such statistical con-
trols could be expensive, but Deming claimed
that setting up quality rules finally rescued
company’s money.
Another significant principle of Deming’s
convictions was that top management was mainly
to denounce quality downfalls. He strongly
credited that, given the right instruments and
operation environment employees would attempt
to produce the highest quality goods feasible. In
Deming’s personal remarks, “the basic cause of
sickness in American industry and resulting
unemployment is a failure of top management
to manage.” He credited that firm leadership
guided to an outstanding work force that did not
concern management and did not concern taking
D 774
opportunities when searching for ways to amelio-
rate the quality.
If powerful leadership is the sound word for
executives in quality conditions, then authoriza-
tion is the central notion for employees in
Deming’s system. Enhanced education and train-
ing are the major elements in contacting
employees and making them conceive that their
intensified involvement in the work system is
a fundamental function of improving quality.
Responsibility, contribution, and teamwork are
considered as mandatory for a quality workplace
to be built. The 14 points were planned to formu-
late strong management undertaking to quality,
process plan, and control by statistical instru-
ments, successive investigation and improvement
of quality problems, and an investing in policy
that insists on quality rather than the cost. More-
over, they were planned to take off all borders to
employee involvement and teamwork. They also
emphasized on efficient contact between admin-
istrators and workers, riddance of numeric targets
and ratios for workers, and company-wide
coaching and education.
The Japanese were the first to accept
Deming’s 14 Points, and with considerable
accomplishment. As an example, in 1951,
Deming found out of a Japanese plant which
enlarged the production in just 1 year and was
anticipating earning an extra 25 % enhancement
the very next year, with no rise for the times
worked. All this occurred because of simply
improving quality. Many American and Euro-
pean corporations chose to disregard these
impressive outcomes and almost disintegrated
as a result. Analysts assert that by the time Amer-
ican production factories comprehended that
quality control was a relevant matter, it was the
late 1970s and Japanese corporations, such as
Honda and Sony, were already capturing large
parts of the American customer market. In the
1990s, the majority of American companies have
welcomed quality control customs. Analysts
reveal that when corporations began accepting
these criterions, many moved too far, becoming
stuck down in quality control diagrams and cal-
culations of trivial operating elements. In too
many occasions, American business went from
Deming 14 Points Model
disregarding statistical quality control to practic-
ing it to every singular aspect of a business, no
matter how unimportant. This overemphasis
rapidly vanished, and has been put back by
a commitment to extensive quality control that
is revolutionary in the American workplace.
Profound Knowledge
Conforming to Dr. Deming, before any company
can correctly carry out the 14 points, it must
obtain Profound Knowledge. Profound Knowl-
edge includes four parts: Knowledge of Systems;
Knowledge of Variation; Knowledge of Theory
of Knowledge; and Knowledge of Psychology.
The company and its members must comprehend
systems’ theory and manage the institution as
a system. It is significant to know that everybody
in the system has a supplier and a client and also
that all constituents inside the structure act in
conjunction for a communal target or objective,
which is to enhance the system and all its
connected pieces.
All members of the company must compre-
hend primary statistics, especially the theory of
variation. Corporations’ executives must deduce
that there will constantly be diversity in all sys-
tems. This variety can come from defects of the
system or joint causes and singular occurrences
known as exceptional causes. This comprehen-
sion also comprises knowledge about loss of
functions in connection with adjustment of
a system, especially losses that are unknowable,
for example, the increasing outcome of an
unhappy client. Dr. Deming has revealed that an
industry that only accounts for knowable losses
is a lost industry. Executives must comprehend
the theory of knowledge as illustrated by
Dr. Deming. Merely declared, any plan of action
by executives needs forecast. Forecast needs
a full grasp of basic statistics. The best forecast
arrives when the action to be forecasted is in
statistical control.
Additionally, executives have to understand
psychology to comprehend better individuals.
Individuals differ; diversity exists amid them.
People learn in various ways and at different
Deming 14 Points Model
learning grades. Business directors must compre-
hend and come to be awarded of these discrepan-
cies and deviations in order to improve the
system in which all take part. Particularly, they
must understand the notions of intrinsic and
extrinsic incentives as they carry out the leader-
ship function within the organizational system.
One should discern by now that the four functions
of Profound Knowledge cannot be parted. Each
of them interacts with the others. Hence, under-
standing psychology is not accomplished without
comprehension of systems and deviation. Man-
agement in creating resonant forecasts uses the
learning achieved in systems, deviation, and psy-
chology. Once the corporations’ managers obtain
Profound Knowledge, the 14 points can be
considered as the new theory of quality-based
management.
Edwards Deming summarized 14 quality prin-
ciples, which must be used simultaneously to
obtain quality, being assigned to different indus-
tries, affecting government, schools, hospitals,
etc. The next is a succinct debate of every point:
Point 1 – Create constancy of purpose toward
improvement of product and service: Many
managers have inclined to be myopic in their
reasoning. They are more attracted by the current
problems, and accord brief or no regard of the
future problems. Displaying a substantial revenue
now does not suggest a lot although if the firm is
out of industry in the future. The majority of firms
incline to reside on their nearest difficulties with-
out sufficient concern to the future. According to
Deming, “It is easy to stay bound up in the
tangled knots of the problems of today, becoming
ever more and more efficient in the future, but no
company without a plan for the future will stay in
business.”
“Constancy of purpose” needs management be
dedicated to long-term reasoning, rather than just
changing strategies to arrange the quarterly report
appear valid. Management must hold that the
company will be acting for a long time and then
found the strategy on the long term. It will take
time for individuals to conceive that management
is serious, and the zeal and involvement of
workers will only come if management really is
loyal to them and the company. Hence, the
775 D
management must motivate the workers to
remain combative in the market and call up
about the significance of steadiness in jobs and
new possibilities, which may be reached in later
phases. Occasioning such an understanding of
aim in manufacturing quality products will act
as the motivation to work competently without
prosaic disposition. A stability of aim requires
novelty, for example, long-term designing for it, D
expenditure in research and education, and con-
tinuous improvement of goods and service.
Point 2 – Adopt the new philosophy: World is
in a new economic era. Western management
must wake up to the trial, must comprehend its
duties, and take on direction for transformation.
Assume that the new system of beliefs means
modification. The changes required in industry
need a completely new view on management
and industry by bringing up the anticipations of
quality. Prior to solving a difficulty, it must first
be admitted that a problem exists. Deming
stressed out that since the American and some
Western industries were doing so well in the
1950s, they did not understand that they had
a trouble with quality. The idea was, that “we
must have been doing something right” when
actually, there was just no competition amid com-
petitors due to the post-War situation of other
countries. The customer’s requests and percep-
tions change very fast, and the competition in the
market grows at a rapid rate now. As it is said
“philosophy of one century is the common sense
of the next,” people must embrace new systems
of beliefs conforming to the market tendencies
and technology turns. Quality must turn out to be
the new religion. According to Deming, “The
cost of living depends inversely on the goods
and services that a given amount of money will
buy, for example, reliable service reduces costs.
Delays and mistakes raise costs.” Customers of
products and services end up rewarding the
obstructions and errors, which diminish their pat-
tern of living. Tolerance of acceptability degrees
and faults in structures is the barrier between
quality and productivity.
Point 3 – Cease dependence on inspection to
achieve quality: Rather than examining the qual-
ity of product succeeding manufacturing, inject
D 776
quality by the start. This will secure that no raw
material is needless for the cause of quality. The
original method of reasoning is to check
defectuous quality out. A better approach is that
quality checkup should be used to comprehend
how companies do, and not be left to the finished
product, when it is hard to conclude where in the
system an error took place. Quality should be
created without the reliance on mass checks for
the following:
• Checkup neither ameliorates the quality nor
assures it. Checkup is too late. The quality,
whether excellent or critical, is already in the
good.
• Mass checking is inaccurate, expensive, and
worthless. It does not cause a fair parting of
good articles from defectuous articles.
• Checkers fail to fit with each other. They fail
to consent with themselves. Customary
checkups come to be unsound by way of
monotony and lethargy.
• In comparison, the checkup of small patterns
of product for control charts to attain or to
keep statistical control can be a qualified posi-
tion. Checkers of supplier and client have time
to balance their tools and experiments, to com-
prehend talking the equivalent language.
Point 4 – End the practice of awarding busi-
ness on the basis of price tag: This is one of the
points that American and Western industries have
the toughest time embracing. It has been
a collective custom in America and Western
Europe for a corporation to keep some dealers
of a material, or good, and to grant their activities
to the last applicant. “A buyer’s job has been,
until today, to be on the alert for lower prices, to
find a new vendor that will offer a lower price.
The other vendors of the same material must meet
it. The policy of always striving to bring down the
cost of anything bought, with no consideration to
quality and service, can bring good suppliers and
good service out of business.” Equating the ben-
efits of employing numerous dealers or one dealer
it can be referred to that an initial pace should be
decreasing the complete expenses caused by
spending time and money to look for better
dealers and move rapidly among them for insig-
nificant monetary profits.
Deming 14 Points Model
Advantages of using multiple suppliers are as
follows:
1. Numerous sources of goods can soften short-
term difficulties when additional dealers
cannot encounter customer timetables due to
quality defects. Speaking differently,
employing multiple sellers is a security net
for their personal incapacity to bring forth
quality merchandise in an opportune mode.
2. Price motivation. By financing numerous
dealers, a client can successively practice con-
straint to suppliers to diminish their unit cost.
“There is a feeling that the best deal is always
being made and that suppliers are being kept
from gouging the customer.”
Advantages of using a single supplier are as
follows:
1. It enables a dealer to be creative and create
a careful spending in his operations on account
of the fact that he can reckon on long-term
trade with a customer.
2. Operational advantages. Two dealers can both
manufacture exceptional materials, but there
will be distinctions between them. An alter-
ation in material from one salesman to the
other will bring a loss in time.
3. “Lot-to-lot variation from any one supplier is
usually enough to give fits to manufacturing. It
is reasonable to expect that variation between
lots from two suppliers will give even more
trouble.”
4. “Simplification of accounting and paperwork
from decrease in number of suppliers and
fewer shipping points.”
5. When one depends on quality portions, then
reduced time and less amount of money are
consumed on examination of pieces accepted.
“Two or more suppliers for the same item will
multiply the evils that are necessarily inherent
and bad enough with any one supplier.”
A customer will serve his corporation best by
improving a long-term connection of allegiance
and responsibility with a unique supplier. Instead
of employing pattern manuals by which suppliers
must fit for business, a better approach is enthu-
siastic participation by the supplier’s control with
Deming’s 14 Points.
Deming 14 Points Model
Point 5 – Improve constantly and forever the
system of designing, manufacture, and service to
enhance every operation and action in the corpo-
ration, to enhance quality and work rate, and so
constantly diminish expenses. Enhancement is
not a one-time deed – executives are committed
to ameliorating the quality successively. “Putting
out fires is not an improvement. Finding
a point out of control, finding the special cause
and removing it, is only putting the process
back to where it was in the first place. The obli-
gation for improvement is a ceaseless process.”
The invention of product, service, and
process must be established. It is the executives’
task to work successively on the procedure
(design, incoming supplies, preservation,
enhancement of equipment, surveillance,
coaching, retraining, etc.).
Most of the other matters refer directly to this
one.
There is no closing matter in the system of
quality management. The company structures
and services must carry on developing continu-
ally in order to hold up with the market. Moving
to new technologies by developed services also
finally diminishes the costs.
Point 6 – Institute training on the job: Fre-
quently there is brief or inexistent coaching, and
employees do not know when they have com-
pleted their jobs properly. It is very hard to delete
unsuitable coaching. Deming emphasizes that
coaching should not finish as long as performance
is not in statistical control and there is something
to be acquired. An instructed employee has more
output and quality than an uninstructed one, so
giving coaching times will radically enhance the
quality of the individual, and clearly it helps in
better performance with respect to goods’
quality.
Point 7 – Institute leadership: Skilled leaders
have constantly created marvels along the
company’s development. A corporation can
show impressive growth if potential leaders are
acknowledged and stimulated and by advancing
the leadership abilities of other regular
employees. It is the management’s duty to
uncover the inhibitors impeding employees
from getting self-esteem in their works.
777 D
“Leaders must know the work that they super-
vise.” Without a good understanding of the sys-
tem, management cannot efficiently reply
employees’ inquiries, coach employees in their
positions, enhance operations and devices, or
comprehend others’ recommendations for
enhancement. Without a correct command about
the system, the manager ends up concentrating on
quantity and not quality. D
Point 8 – Drive out fear: There is frequently no
reward for problem working out. Proposing new
concepts is too dangerous. People are frightened
of wasting their raises, developments, or posi-
tions. “Fear takes a horrible toll. Fear is all
around, robbing people of their pride, hurting
them, robbing them of a chance to contribute to
the company. It is unbelievable what happens
when you unlose fear.” Several managers believe
that creating a terrible feeling in the employees
would give more quality and output to labor. In
fact, just the other way round occurs; if an indi-
vidual is not gladly performing then certainly he
cannot do a task impeccably, in spite of his inten-
tion. Consequently, driving out tension and fear is
necessary, as everybody will begin functioning
effectively for the corporation. Therefore, stimu-
lating efficient two-way contact means to
eliminate fear inside the company will cause
everybody acting effectively and more produc-
tively for the firm.
Point 9 – Break down barriers between
departments: There are many inconveniences
when departments have different targets and do
not act as a crew to work out difficulties, fix
policies, or explain new guidelines. “People can
work superbly in their respective departments,
but if their goals are in conflict, they can ruin
the company. It is better to have teamwork,
working for the company.” Now the majority of
the corporations split themselves to departments
so that tasks would end quicker upon splitting up
and handing out to various departments. In par
with the aforementioned approach, it is signifi-
cant to recall that two departments are not two
distinctive nations where individuals do not know
each other. The employees in design, sales, and
manufacture must work in conjunction to face
difficulties and solve them. This gets the
D 778
company to better management in quality and
revenue with better designing.
Point 10 – Eliminate slogans, exhortations,
and targets for the work force: This is also an
adverse concept for traditional practices, when
slogans or admonitions are instituted; they call
for more quantity in manufacturing than concen-
trating on quality of the goods. This will seriously
harm the quality management process. “Slogans
never helped anybody do a good job. They gen-
erate frustration and resentment.” Slogans as
“Zero Defects” or “Do it Right the First Time”
are excellent on the outside. The inconvenience is
that they are regarded as indications that manage-
ment does not comprehend employees’ problems,
or concerns. There is a common tradition of
setting objectives without specifying how they
are going to be fulfilled. The employees should
have a smooth and peaceful, quality environment
in the firm.
Point 11 – Eliminate work standards (quotas)
on the factory floor: “Management by Objectives
(MBO)” is a highly significant term in rules of
management; this procedure focuses to determine
a list of goals, which have to be completed within
the defined period. This was seen to be a highly
efficient procedure. However, Deming’s 14
points in quality management entirely denounce
this procedure as this once more centers on
quantity rather than quality of goods. “Quotas or
other work standards, such as measured day work
or rates, impede quality perhaps more than any
other single working condition. As work stan-
dards are generally used, they guarantee ineffi-
ciency and high costs.” An appropriate work
standard would clarify what is and is not adequate
in relation to quality.
Point 12 – Remove barriers to pride of work-
manship: Responsibility of a supervisor must be
changed from quantity (numbers) to quality.
Setting points for workers and ranking them in
the corporation would mean more completion
inside the company, which is very poorly for the
quality. Individuals are considered as merchan-
dise, to be used as required. If not necessary, they
are sent back to the market. Managers carry on
with many difficulties but incline to get reticent
regarding employees’ matters. They frequently
Deming 14 Points Model
form “Quality Control Circles,” but this is gener-
ally a method for a manager to claim to be doing
something about a matter. Management rarely
grants employees with any power, nor does it
function upon their suggestions. Hence, inside
corporations eradicate yearly or excellence rank
and MBO entirely.
Point 13 – Institute a vigorous program of
education and self-improvement: Individuals
must obtain new comprehension and qualifica-
tions. Education and retraining is a contribution
in individuals, which is needed for a long-term
plan. Instruction and training must match
employees into new positions and duties. An
employee has to rise even succeeding the
moment he/she comes into the corporation.
Allowing him/her comprehend the new technol-
ogy, and methods will make him/her choose to
remain in the corporation for a longer time, while
an employee would invariably reflect about leav-
ing his/her position if he/she has no chance to rise
or give his/her personal inputs. “In respect to self-
improvement, it is wise for anyone to bear in
mind that there is no shortage of good people.
Shortage exists at the high levels of knowledge,
and this is true in every field. One should not wait
for reimbursement for a course of study. More-
over, study directed toward an immediate need
may not be the wisest course.”
Point 14 – Everyone must undergo transfor-
mation continuously and indefinitely: just like
goods and services. Place everybody in the cor-
poration to work to complete the change. The
change is everyone’s task. Top management has
to urge these 13 points. Every worker, comprising
managers, should acquire an accurate concept of
how to enhance the quality continually, but the
initiative must advance from top management.
With this point Dr. Edwards Deming created the
Plan, Do, Check, Act (PDCA) Process that is
usually known as Deming Cycle.
Key Issues
The 14 points grant a new management system of
beliefs for corporations’ managers. This manage-
ment system of beliefs is quality powered.
Deming’s 14 Points on Quality Management
Research reports that bad management abilities
and inferior quality react in considerably business
downfall. This high failing percentage can be
diminished by assuming Dr. Deming’s system
of beliefs of management. Dr. Deming has
frequently pointed up that this is not a different
fast fix way out. It acquires time and involve-
ment. It acquires Profound Knowledge.
Future Directions
A closer glance at Deming’s work feels relevant.
One of the objectives of Deming’s Total Quality
Management (TQM) movement was to formulate
a culture for transformation within a company. In
order to produce change, the manager of the
corporation must enact to the arduous task of
building a vision, which the workers will wel-
come. Deming formulated the theoretical struc-
ture of 14 quality management points. These 14
actions are not in any specific arrangement but
portray the thoughts of Deming.
As businesses pass through the transformations
that will take place as time goes by, it is significant
to apply constantly the PDCA model. If businesses
turn it into a custom of planning their course of
action, carrying out the theories of Deming and
revising the outcomes, later corporations can act in
the best mode to reach customer requests. When
management follows the criterions and executes
100 % of their attempts to completing corporation
objectives, serving the requirements of
employees/customers/community members, then
the corporations can carry on with the modifica-
tions and live in the new millennium.
Companies around the world should apply the
leadership efficiency models presently summa-
rized by Deming’s 14 points and the PDCA learn-
ing cycle. When practiced in an accurate fashion
by people dedicated to performing with 100 %
drive and organized by people in leadership
places disposed to affiliate to their convictions,
then accomplishment should follow. The key is
for the managers to act in conducts coherent with
the best concerns of their people/organization. Of
same significance is for the management team to
embrace the outcomes of their deeds – both good
779 D
and bad. By changing the procedure and remov-
ing origins of unsuitable deviations, managers
will ease the production of quality goods. More-
over, employees will labor within favorable,
healthy working conditions. The high level of
interactive trust joined with the inspiration from
managers to engage in firm growth will enable
employees to take part actively in the whole
business process. With good vision, employees, D
and approaches, corporations will accomplish
their goals, and activities will flourish. Manage-
ment competence in the twenty-first century will
perfectly be described by faultless customer ser-
vice, employee fidelity, high standards, and
personal growth.
Cross-References
▶ Kaizen
▶ Plan-Do-Check-Act (PDCA) Cycle
▶ Responsible Leadership
▶ TQM
References and Readings
Deming, W. E. (2000a). Out of crisis. Cambridge,
MA: MIT Press (first MIT press edition). ISBN
0-262-54115-7.
Deming, W. E. (2000b). The new economics for industry,
government, education (2nd ed.). Cambridge,
MA: MIT Press. ISBN 0-262-54116-5.
Masters, R. (2004). Fourteen points for quality and lead-
ership in managing successful firms, Fort Hays State
University, www.sbaer.uca.edu/research/sbida/1992/
pdf/02.pdf. Accessed 29 May 2011.
Deming’s 14 Points for Management
▶ Deming 14 Points Model
Deming’s 14 Points on Quality
Management
▶ Deming 14 Points Model
D 780
Deming’s 14 Principles
▶ Deming 14 Points Model
Demoraphic Variedness
▶ Diversity
Deontology
▶ Ethical Theories
Design for Environment
Jean D. Kabongo
University of South Florida, Sarasota-Manatee
College of Business, Sarasota, FL, USA
Synonyms
Eco-design; Environmentally conscious design;
Green design; Sustainable design
Definition
The term design for environment (DfE) refers to
a series of techniques, principles, and methodology
used particularly in engineering, economics, tech-
nology, business, environment, and policy disci-
plines to incorporate environmental considerations
into the design, process, and manufacturing of
products and services (Hendrickson et al. 2002).
Design for environment is closely linked to the
approach of industrial ecology (Udo de Haes
2002). Industrial ecology strives to reduce waste
generation and to maximize the use of waste mate-
rials and by-products at the end of the life cycle,
introducing them as alternative raw material
whenever and wherever possible (Allenby 1994).
Deming’s 14 Principles
The goal of this resource substitution rationale is to
improve competitiveness through the reduction of
material use and energy consumption. In fact,
industrial ecology is considered by many experts
as the “science of sustainability.” Design for
environment is one of the four strategies for the
implementation of industrial ecology at the firm
level, according to an early model proposed by
Graedel and Allenby (1998). Several other defini-
tions of design for environment have been pro-
posed. For instance, Graedel and Allenby (1998)
conceived design and environment as “an engi-
neering perspective in which the environmentally
related characteristics of a product, process, or
a facility are optimized.” This conceptualization
shows that the environmental or ecological
design of products and processes implies that the
implementation of sustainability within firms is
first and foremost about changing systematically
the ways in which products and services are
designed and consumed. This way of conceptual-
izing products and services expresses itself by the
systematic integration of environmental concerns
into the design. This integration implies the com-
bination of different techniques and methods of
evaluation including material and energy flow
analysis, life cycle analysis, and environmental
impact evaluation. Theoretical thoughts on the
product and service design imply that the funda-
mental idea of ecological design is to make sure
that all environmental concerns and constraints
are fully integrated in the process of any prod-
ucts and services to be produced (Brezet and van
Hemel 1997; Fiksel 2009). In that way, design
for environment becomes a component of the
definition of a product to be processed and
a service to be used. Thus, as Anastas
(2003) argues, eco-industrial practices, upon
which design for environment is based, will
lead to clean and more sustainable products
and services.
Introduction
Traditionally, in the creation of new processes
and products, engineers were concerned with
the careful inclusion of certain properties such
Design for Environment
as performance, reliability, and cost. Over the
past decades, there has been growing interest on
the reduction of the environmental impacts of
new processes and products (Diwekar 2003).
This interest has been motivated by changes in
regulations, widespread public concern and
development in new corporate environmental
practices (Graedel and Allenby 1998). Design
for environment is a methodology used to change
radically the way, in our economies, natural
resources have been used, products and services
have been manufactured, distributed, consumed,
and disposed. The underlying rationale is that
environmental quality is compatible with indus-
trial activities. This win-win approach means that
(1) industrial systems can be designed to achieve
both environmental quality and economic effi-
ciency, (2) design for environment can help com-
panies achieve competitive advantage through
resource management and efficiency from envi-
ronmental practices, and (3) design for environ-
ment will enable companies to simultaneously
meet cost, quality, and performance goals; reduce
environmental impacts; and conserve resources,
which means eco-efficiency. According to the
World Business Council for Sustainable Devel-
opment: “Eco-efficiency is achieved by the deliv-
ery of competitively priced goods and services
that satisfy human needs and bring quality of life,
while progressively reducing ecological impacts
and resource intensity throughout the life-cycle to
a level at least in line with the Earth’s estimated
carrying capacity.”
Designing for environment has several charac-
teristics that make it an interesting way to apply the
principles of sustainable development (Fiksel
2009). First is the ability to transform natural
resources into useful goods and make a better use
of by-products that can be harmful to the environ-
ment. The case of paper and pulp industry provides
a good illustration. The de-inking process, used by
many paper mills in the making paper from vege-
table fibers such as wood pulp, generates a huge
amount of slag sent to landfills. These landfills can
have adverse impacts of the environment. This
amount of slag can be better utilized in other indus-
tries instead of being sent to landfills. The entire
process of making paper can be redesigned to
781 D
incorporate environmental considerations. For
instance, as Kent Pope (1999) explains, modern
fluidized bed boiler technology provides a means
for successful thermal oxidation of these high ash,
high moisture waste streams, producing process
steam and/or electricity while reducing the mill’s
reliance on costly fossil fuels for steam production.
Second is the ability to measure the efficiency of
production or “productivity” in a way that keeps D
better track of the good things we produce than the
bad. With design for environment, our economic
systems can extend the analysis, track down the
by-products, and measure their impacts on the
environment. Third, by inference, design for envi-
ronment acknowledges the importance of environ-
mental preservation while supporting industrial
growth. Fourth, design for environment integrates
environmental knowledge and risk analysis with
concurrent engineering concepts. This is the view
of Graedel and Allenby (1998) in their definition of
design for environment when they use the terms
engineering perspective. Fifth, design for environ-
ment is both a management approach and an engi-
neering discipline. Design for environment is
a management approach in that it is grounded in
environmental management systems, a subset of
management disciplines. It is also an engineering
discipline because it focuses on product design and
manufacturing processes with environmental con-
cerns in mind. Sixth, since the enterprise is the
place where products and processes are designed,
design for environment is a way for a firm to
integrate sustainable development into its strate-
gies. Seventh, the approach of design for environ-
ment brings together a variety of stakeholders.
These include (1) firm engineers who design and
determine by-products of product and process,
(2) employees who are trained to manipulate and
interact with waste products, (3) management who
manage operations from raw materials to waste
disposal and costs, (4) shareholders who are
concerned with environmental liabilities and future
investments in clean technology, (5) consumers
who deal with end-of-life disposal of product,
(6) government officials who are concerned with
the effect on the environment from processes and
products, and (7) suppliers who are concerned with
improvement of packaging and components, and
D 782
others. Eighth, design for environment is
a multidisciplinary approach. It encompasses
a variety of disciplines: occupational health and
safety; consumer health and safety; ecological
integrity and resource protection, pollution preven-
tion, and toxic use reduction; transportation; waste
reduction and management; disassembly and dis-
posability, recycling, and remanufacturing.
The motivations for design for environment
are rooted in the history of “industrial metabo-
lism” for more than 150 years across various
scientific traditions. By late 1960s, many experts
expressed their environmental concerns and
skepticism of the accelerated economic growth
in industrialized countries (Commoner 1971;
Odum 1971; Georgescu-Roegen 1971). The
accumulated empirical evidence of the
unsustainable conditions under which industrial
systems were operating gave strong motivations
for a shift from what Kenneth Boulding (1966)
called a “cowboy” economy to a “spaceman
economy,” which would have similar character-
istics as a sustainable economy. The motivations
for design for environment are twofold: macro-
economic and microeconomic. At the macroeco-
nomic level, manufacturing and supporting
products can have adverse impacts on the envi-
ronment: excessive waste generation, which can
lead to disruption of ecosystems and depletion of
natural resources. Also, at the macroeconomic
level, there is evidence that current patterns of
global industrial development and growth exceed
sustainable limits for resource utilization in terms
of raw materials, fuel, and water. Similarly, the
approach taken with waste management is not
sustainable: landfills and incinerators present var-
ious environmental concerns and are not consid-
ered the ultimate solution. Exceeding sustainable
limits represents a big threat for the future of
humankind (climate, agriculture, wildlife, indus-
try, quality of life), as expressed by Nicholas
Georgescu-Roegen in his 1971 classic The
Entropy Law and the Economic Process. Because
of all these concerns with problems of waste
generation, the value of the materials, and the
control of pollution, industrial systems have to
change the way they manufacture goods and ser-
vices. Frosch and Gallopoulos (1989) strongly
Design for Environment
argued that creating a sustainable industrial eco-
system is highly desirable from an environmental
perspective and, in some cases, economic per-
spective as well. At the microeconomic level,
several studies found that the methodology of
design for environment should enable companies
to reduce costs, minimize environmental impacts,
reduce future liability, reduce the time to bring
products to market, improve their corporate
image and market position, and increase
profitability.
Several key principles of design for environ-
ment have been identified and applied. These
include eco-efficiency approaches, a product life
cycle perspective, and integrated cross-functional
product development. The first principle of
design for environment is captured by eco-
efficiency approaches or productivity from envi-
ronmental practices, which are based on “doing
more with less.” Eco-efficiency approaches apply
at least three principles: pollution prevention,
environmental responsibility, and sustainable
resource use. The pollution prevention principle
or clean production is an operational strategy
understood as the continuous application of an
integrated, preventive environmental strategy
applied to processes, products, and services for
environmental benefits. The principle of pollu-
tion prevention focuses on the introduction of
changes in management and processes, reduction
of pollutants and emissions from the sources, and
reduction of wastes. It relies on a variety of tech-
niques including efficiency of production sys-
tems and substitution of hazardous materials by
less hazardous ones. The environmental respon-
sibility is the application of corporate social
responsibility to the manufacturing of clean prod-
ucts and services. As part of eco-efficiency
approaches, environmental responsibility
encourages companies to use more recycled
products and environmental friendly materials.
The principle of sustainable resource use goes
beyond the boundaries of a single firm to include
the evaluation of a product and product system as
a whole. As such, sustainable resource use
includes supplier and customer impact on
resource consumption, which forms the basis for
the approach of industrial ecology.
Design for Environment
The second principle of design for environ-
ment is life cycle assessment (LCA). LCA is
defined in ISO 14040 as a “technique for
assessing the environmental aspects and potential
impacts associated with a product by compiling
an inventory of relevant inputs and outputs of
a system, evaluating the potential environmental
impacts associated with those inputs and
outputs, and interpreting the results of the
inventory and impact phases in relation to the
objectives of the study.” This assessment takes
into account all the steps in the value chain:
components and raw material acquisition, and
material development; product manufacturing/
assembly; product delivery to consumer; product
use by consumer; and product disposal and/or
recovery. The third principle of design for envi-
ronment is integrated cross-functional product
development. Cross-functional integration often
is considered an important element in
a successful new product development program
of any kind. In the case of design for environ-
ment, all the variables dealing with the incorpo-
ration of environmental concerns are carefully
integrated.
Design for environment measures the effec-
tiveness of new environmental friendly products.
These include at least several metrics
1. Energy usage: energy consumed in product
manufacturing, total energy consumed during
product life cycle, renewable energy con-
sumed during life cycle, power/fuel used dur-
ing consumer operation.
2. Natural resource usage: amount of water con-
sumed during manufacturing operations,
water consumption during product end use,
mass or volume of nonrenewable material
used in product life cycle, mass or volume of
renewable raw material used in product life
cycle.
3. Restricted, watched, or banned material use in
production: mass of toxic or hazardous mate-
rials used in production processes, total mass
of waste generated in production, hazardous
waste generated in life cycle, air emissions
and water effluents generated, greenhouse
gases and ozone-depleting substances released
over their life cycle.
783 D
4. Recovery and reuse: product disassembly and
recovery time, percent of recyclable materials
at end of life, percent of product actually
recovered and reused, purity of recovered
recyclable materials, percent of recycled
materials input to product.
5. Source volume: total product mass, useful
operating life of product, percent of product
disposed or incinerated, percent of packaging D
recycled during life cycle.
6. Exposure and risk: ambient concentrations of
hazardous by-products in various media and
estimated annual population incidence of
adverse effects to humans or environment.
7. Economics: average life cycle cost incurred by
manufacturer, purchase and operating cost
incurred by the consumer, cost savings asso-
ciated with improvements in product and pro-
cess designs.
The techniques, principles, and methodology
of design for environment have generated a series
of environmental design practices such as design
for recovery and reuse, design for disassembly,
design for waste minimization, design for energy
conservation, design for material conservation,
design for chronic risk reduction, and design for
accident prevention.
Key Issues
The adoption of design for environment brings
many environmental issues to light. Many
experts recognize that design for environment is
a complicated, rather messy, process, with
numerous competing and conflicting require-
ments, criteria, and information (Fu et al. 2000;
Li et al. 2009). Design for environment main
techniques and methodologies have been intro-
duced and applied in a variety of industry sectors.
Several examples including green car
design, green computer design, and green archi-
tecture design have been documented and
publicized. Because of resource constraints, it
can be argued that largely big corporations will
afford and systematically apply design for envi-
ronment techniques and methodologies. How-
ever, small firms also are finding innovative
D 784
ways to develop and practice design for environ-
ment to some extent. The product life cycle
from conceptual design through to disposal and
other end-of-life options varies in extent,
duration, and complexity. As a relatively new
series of methodologies and techniques of
designing product and processes with integration
of environmental concerns, design for environ-
ment raises several critical issues. Examples of
these issues include material selection,
manufacturing processes, energy consumption,
and end of life.
Since the rationale behind the design for envi-
ronment is the creation of products and processes
with less environmental impacts, the selection of
material from which the products will be
processed is an important environmental consid-
eration. Designers need to make sure that the
conditions of extraction and the use of energy of
the materials to be selected comply with the over-
all underlying principles of design for environ-
ment. If, for instance, the extraction of
a given material is connected with very
serious environmental impacts, this can compro-
mise the entire design for environment process.
Similarly, the content of hazardous substances in
products and parts acquired and to be introduced
in the manufacturing processes represents
another crucial problem in material selection.
Designers need to be mindful of government
legislation and even take a proactive approach,
which might be very difficult. The company
can invest heavily in certain materials and sub-
stances that might be banned or restricted in
upcoming legislation. This might also compro-
mise relationships with key suppliers and the
overall production and distribution channel.
However, the use of some hazardous materials
might represent a good business opportunity for
certain company operations. The issue becomes
a choice between what is good for the environ-
ment and what is good for the company’s
profitability.
The development of clean manufacturing pro-
cesses used for design for environment is another
crucial issue. Changes in manufacturing pro-
cesses are necessary. This is often accompanied
by heavy investment in new equipment over
Design for Environment
a long period of time. Because the techniques
and practices of design for environment are
intended to address changing environments and
markets, the development of manufacturing pro-
cesses is often associated with innovation, tech-
nology, and organizational learning. The results
of several case studies (reference) showed that, to
be efficient, internalizing new design for environ-
ment techniques, practices, and technologies
required that certain departments, functions, and
activities undergo significant changes and adap-
tations. Thus, the internal operationalization of
manufacturing processes raises challenges that
require specific competencies and capabilities
specific to an industry sector. Similar to material
usage, the energy consumption is yet another
important issue in design for environment. Dur-
ing the design process, the amount of energy
a given product is supposed to use and its lifetime
can be estimated. However, the real amount of
energy used by a consumer during the “use
phase” is difficult to know due to a variety of
factors. Life cycle assessments of many products
such as electronics indicate that the energy con-
sumption in the “use phase” is the most signifi-
cant contributor to the product’s total
environmental impacts. Perhaps the most impor-
tant environmental issue in design for environ-
ment is the disposal of the product or end of life.
The rationale of design for environment implies
that any products will be disposed of in an envi-
ronmentally friendly manner, which can be by
recovery, reuse, or recycling. The end of life is
highly regulated in certain industry sectors where
the producers are held financially responsible for
the disposal of the products (extended producer
liability). However, much more needs to be done
in terms of educating consumers to end-of-life
matters.
Future Directions
The growing interest in environmental issues has
lead to a change in perspective with business.
Once regarded as a burden and financial risk,
environmental issues increasingly represent path
Design for Environment
to economic benefits and competitive advantage.
This in turn makes design for environment
a promising area for research. These benefits are
not only tied to the improvement of corporate
image or the anticipation of external pressures,
they also ensue from the minimization of
resource consumption, waste, and pollution,
which are the principles and techniques of design
for environment. The understanding of the many
ways different companies are trying to achieve
environmental goals can take several directions.
Four directions are outlined here. First, there is
a need to understand the changing incentives
related to market demands or regulations. These
changing incentives can make more and more
companies develop new products and processes
with environmental considerations. Second, cur-
rent methodologies and techniques of design for
environment are still complex and, to some
extent, expensive. Future research may focus on
low-cost product and process designs to achieve
environmental goals. Third, design for environ-
ment techniques and methodologies rely mainly
on mathematical and computer-aided modeling
tools. This has generated multiple approaches to
handle design, manufacture, disassembly, reuse,
and recycling of products within industry sectors
and variations in the extent to which environmen-
tal concerns are considered. It might be interest-
ing to streamline these variations and focus on the
analysis of environmental concerns of design
for environment on single industry sectors.
Fourth, economic and engineering issues pre-
dominate in design for environment techniques
and methodologies. Many methods used for envi-
ronmental analysis are not appropriate for design
decision making. The success of design for envi-
ronment initiatives cannot be attributed exclu-
sively to environmental engineering actions that
are under the sole control of technical depart-
ments. Because of their complexity and cross-
functional implications, they require strategic
changes and the development of capabilities to
make them operational and successful within
organizations. Future research may want to
focus on the analysis of the integration of design
for environment tools into management science
research and practice.
785 D
Cross-References
▶ Business for Social Responsibility
▶ Consumer-Driven Corporate Responsibility
▶ Corporate Social Responsibility
▶ Corporate Sustainability
▶ Eco-efficiency
▶ Environmental Impact Assessment
▶ Industrial Ecology D
▶ ISO 14000 Standards Series
▶ Supply Chain Management
References and Readings
Allenby, B. R. (1994). Integrating environment and
technology: Design for environment. In B. R. Allenby
& D. J. Richards (Eds.), The greening of industrial
ecosystems (pp. 137–148). Washington, DC: National
Academy Press.
Anastas, P. (2003). Green engineering and sustainability.
Environmental Science & Technology, 37, 423A.
Billatos, S. B., & Basaly, N. A. (1997). Green technology
and design for the environment. Washington, DC:
Taylor & Francis.
Boulding, K. E. (1966). The economics of the coming
spaceship earth. In H. Jarrett (Ed.), Environmental
quality in a growing economy (pp. 3–14). Baltimore:
Johns Hopkins University Press.
Brezet, H., & van Hemel, C. (1997). Ecodesign:
A promising approach to sustainable production and
consumption. Paris: United Nations Environment
Program (UNEP).
Commoner, B. (1971). The closing circle: Nature, man,
and technology. Westminster: Random House.
Diwekar, U. (2003). Greener by design. Environmental
Science & Technology, 37, 5432–5444.
Dowie, T. (1994). Green design. World Class Design to
Manufacture, 1, 32–38.
Fiksel, J. (2009). Design for the environment: A guide to
sustainable product development. New York: McGraw
Hill.
Frosch, R., & Gallopoulos, N. (1989). Strategies for
manufacturing. Scientific American, 261, 144–152.
Fu, Y., Diwekar, U., Young, D., & Cabezas, H. (2000).
Process design for the environment: A multi-objective
framework under uncertainty. Clean Products and
Processes, 2, 92–107.
Georgescu-Roegen, N. (1971). The entropy law and the
economic process. Cambridge: Harvard University
Press.
Graedel, T. E., & Allenby, B. R. (1998). Design for
environment. Upper Saddle River: Prentice Hall.
Hendrickson, C. T., Hovath, A., Lave, L. B., &
McMichael, F. C. (2002). Industrial ecology and
green design. In R. U. Ayres & L. W. Ayres (Eds.), A
D 786
handbook of industrial ecology (pp. 457–466).
Northampton: Edward Elgar.
Li, C., Zhang, X., Zhang, S., & Suzuki, K. (2009). Envi-
ronmentally conscious design of chemical processes
and products: Multi-optimization method. Chemical
Engineering Research and Design, 87, 233–243.
Odum, H. T. (1971). Environment, power, and society.
New York: Wiley.
Pope, K. (1999). Paper sludge: Waste disposal problem or
energy opportunity. Energy products of idaho. www.
energyproducts.com. Accessed Jan 14, 2012.
Udo de Haes, H. A. (2002). Industrial ecology and life
cycle assessment. In R. U. Ayres & L. W. Ayres (Eds.),
A handbook of industrial ecology (pp. 138–148).
Northampton: Edward Elgar.
World Business Council for Sustainable Development
(WBCSD). www.wbcsd.org
Destruction
▶ Risk Management, Environmental
Developing Core Competence
▶ Competitive Advantage
Development
Rodica Milena Zaharia
Department of International Business and
Economics, Academy of Economic Studies from
Bucharest, Bucharest, Romania
Synonyms
Economic evolution; Economic growth;
Economic progress; Industrialization
Definition
Development may refer to a broad scale of
domains: science and technology, social science,
business, psychology, religion, and so on. It is
Destruction
also a common term that suggests evolution,
improvements, expansion, elaboration, progress.
The term development is being used in various
contexts and is being qualified as economic
development, human development, international
development, democratic development, and
social development (Mohammadi 2010).
In economics, development is many times
assimilated to economic development or eco-
nomic growth.
There are enormous definitions for develop-
ment in social science and in economics. Devel-
opment can be considered as that combination of
measures or actions, small scale or large scale,
adopted by a community, alone or in partnership
with other communities, which enables, unbinds,
or secures the effort, entrepreneurial and aspira-
tional potentials of the individuals of that com-
munity, or nudges its productive potentials to (or
supports them in) activities with learning spill-
overs or know-how spinoffs (hence, improving
terms of trade over time) causing decades-long
income per capita growth and building up of
variety and flexibility in its productive structure
that leads to attainment, with reasonable resil-
ience, of basic living standards for that commu-
nity (Mohammadi 2010).
Introduction
Development is one of the most used concepts in
economics. There is not a unanimous opinion
about how should be define development despite
the fact that there is a very rich literature devoted
to this subject.
Mohammadi proposed a schematic approach
to as represented in Fig. 1 (Mohammadi 2010).
However, the concept of development refers
mainly to the macroeconomic level. The most
common approach is the development of a certain
country, mostly in an international context.
The concept evolved mostly after the Second
World War. The disintegration of historical
empires (especially British, French, Spanish,
and Dutch) brought into the world new countries
that faced difficulties in sustaining their econo-
mies independently.
Development
Development Increasing the effort and entrepreneurial
implies potential of individuals.
measures and Increasing the productive potential
actions through activities with learning spillovers
and knowledge spinoffs.
Development, Fig. 1 Schematic Approch of Development
Development as Growth
The first vision about development was mostly
quantitative and described development as the
capacity of an economy to generate and sustain
the growth of its final product (gross domestic
product – GDP – or gross national product –
GNP). This approach was preferred also in the
context of the First Development Decade
launched by the United Nations Organization.
This stage was dominated by quantitative indi-
cators designated to measure the level of the
development: the level of the GDP per capita
and the rate of GDP growth. The first develop-
ment decade established certain targets in order
to increase the progress in developing countries:
each developing country should achieve
a minimum annual growth rate of 5% in aggre-
gate national income by the end of the decade,
and 1% of the combined national income of
advanced countries should be designated for
development assistance.
Development as Industrialization
The second vision regarding development was
related to the structure of the economy and its
capacity to develop modern sectors, capable to
produce output and to increase the use of labor
force. These approaches were sustained also by
some theories (as structuralism) and partially by
Marxist view, as developed countries were those
with the most advanced industry and the most
diverse economic structure. Development as
industrialization was followed largely by former
communist countries. Following the soviet
model, these countries forced industrialization
and industry diversity in order to reduce the
dependency from capitalist countries for indus-
trial goods and capital goods. Also, industrializa-
tion is related to import substitution orientation
787 D
Decades of long income Basic living
per capita growth standards with
Increase the varety and reasonable
flexibility in productive suppleness
structure
D
(followed by Latin American countries, India,
and some African countries, as Ghana, in the
first decades after their independency), the main
goal being similar: to reduce the dependency
from imported goods and to increase the level of
processing of natural local resources.
Development as Reducing Poverty and Social
Inequalities
The failure of development decades initiated by
United Nations Organization in terms of reducing
the gap between advanced countries and new
comers brought dissatisfaction among specialist.
It was stated that development is a more complex
process that crosses the line of quantitative
approach and economic understandings. There
have been added to the development process
elements referring to equitable distribution of
welfare and to the share of people that live in
poverty. However, the main focus remained on
economic dimension and on quantitative fea-
tures. Thus, development was considered as
a process of a long period of economic growth
(measured as the growth of real GDP per capita),
as long as people living under the line of absolute
poverty do not raise and the inequality of income
distribution does not increase (Meier 1995:7).
Development as Sustainable Development
and Human Development
The evolution of the state of the art of developing
countries, oil crises and the collapse of the gold
exchange standard, the preoccupations regarding
the end of resources, and the growing importance
of environmental issues, together with the con-
cerns about the human quality of life, demanded
the enlargement of the developing concept by
including more than economic dimension. Thus,
new approaches regarding development have
D 788
been evolved, among through two are the most
well known: sustainable development and human
development.
Both of them have been embraced with the
same enthusiasm as they have been critiqued.
Sustainable development, whose fundaments
have been established by the Brundtland
Commission in 1970, enforced the idea of the
necessity to approach more complex the concept
of development. Development, as a process that
must have positive consequences not only for
present generation but for the next generations
also, needs to take into account how the economic
goals can be achieved in the context of environ-
mental and social constraints. Embedding
elements related to environmental protection,
natural resources savings, and alleviation of pov-
erty and illiteracy, sustainable development
became a very strong concept in attractiveness,
but very weak in measurability.
Human development is a creation of the
United Nations Development Programme
(UNDP). Human development was defined as
a process of enlarging people’s choices and
enhancing human capabilities. It has created an
index, Human Development Index (HDI), that,
despite the many critics that specialists addressed
to it, became a very powerful indicator used to
evaluate the level of development of a country.
The HDI is putting together elements that embod-
ied quantitative and traditional indicators for
measuring development (as income per capita)
with qualitative aspects meant to reveal the peo-
ple’s choice and the possibilities to enhance
human capabilities, as education and life expec-
tancy at birth. This index was considered
a necessity and a response to criticism addressed
to older approach to development that focused
too much on abstract and quantitative indicators
as economic growth or GDP per capita. The
philosophy of human development is, ultimately,
to put people’s quality of life in the core of the
development concept.
Approaches to Development
An interesting view of what development means
is offered by Craig Murphy in his book UNDP:
a better way? In this book, he explained that there
Development
are three major approaches to development, as
a process of countries to improve their status on
the international arena: development as effi-
ciency, development as freedom, development
as growth.
Development as efficiency is considered to be
that approach that focused “on the goal to help
a state become equal to the most powerful states
in the world. It requires understanding the
sources and flows in complex, real-world
systems, and creating interventions, fabricated
systems (such as incentives for import substitu-
tion), designed to move goods to where they are
most needed” (Murphy 2006:43).
Development as freedom relates evolution of
a country to the creation of democracies. The will
of the people will enforce any decision, as long as
those decisions are based on collective desires
and needs.
Development as growth roots in the economic
theory, “that sees the incentives provided by
unregulated markets as the best way of ensuring
that natural resources, human labor, and capital
will be combined to produce the most goods. It is
the abundance of those goods that promises to
eliminate destitution, and with it, the deepest of
human inequalities. This is not the promise
offered by managerial systems efficiently allocat-
ing goods to those who need them most” (Murphy
2006:43).
Theories of Development
In the vision of Michael Todaro, there are five
types of theoretical approach that explain the
process of development and propose ways of
overcoming underdevelopment (Todaro 2010).
These approaches are models of linear stages of
development, models of structural change, inter-
national dependencies, neoclassical approach,
and the new growth theory.
Linear stages of growth have been inspired by
the success of Marshall Plan developed in Europe
after the Second World War. In the theory of
linear stages, development is considered to be
a natural way of evolution. Each country starts
from a traditional society, where agriculture is the
predominant sector in the economy, the level of
productivity is low, and access to knowledge and
Development
knowledge application in the economy is little.
This is the case of underdeveloped countries, and
in the vision of supporters of this theory (as
Walter Rostow), each country passes through
this stage.
The second phase is that of transition – when
investments in infrastructure appear, internal and
external trades increase, and production growths
and productivity start to rise. Even though society
remains in its fundamentals a traditional one, the
seeds of modernization and growth start to pro-
duce effects.
The third stage is the expanding – when the
resistance to change decreases, industry grows
rapidly, technology becomes more accessible,
and more and more sectors receive investments.
This stage means dramatically changes not only
in the structure of the economy but also in the
mentality of the society.
The fourth phase is the way to maturity. The
technology spreads around all sectors, new indus-
tries develop, and new techniques are incorpo-
rated in more and more domains.
The last stage is the mass consumption
society – when services become the dominant
sector in the economy and the mass production
allows divers, cheap products, higher profits,
higher wages, and increased welfare. This is the
stage of a developed country, and there is
a natural way for any country to go through
these stages. There were a lot of critics addressed
to this theory. Mostly Marxists condemned this
approach, accusing that this is a new form of
colonialism that induces the idea that underde-
velopment is only a phase in the development
way and it is not necessary to put so many efforts,
especially from international community, to
eradicate it. Also, it was considered to be
a theory that induces an antiforeign aid behavior,
so much recalled by the international community.
Another critic mentioned the untruth behind
this approach, naming the case of the USA that
passed over traditional society. This means that
these stages are not necessary natural and coun-
tries can jump directly to the third phase.
The second group of theoretical approaches to
development is that of structural changes. Devel-
opment is a result of changes in the structure of
789 D
the economy, meaning the orientation from the
traditional sector (in general, subsistence agricul-
ture), with zero marginal labor productivity and
surplus of labor force, to the modern sector (in
general, industry). Capital and technology are
key factors in the development process. The
model have been developed by the Nobel Prize
laureate and extended by John Fei and Gustav
Ranis. Later, Hollis Chenery and his fellows D
advanced the theories of structural change,
underling the constraints of development, which
are internal (resource endowments, size of the
population, governmental policies) and external
(international trade agreements, technology
access). Some assumption of this theory brought
it under critics: the entire surplus has to be
invested in the modern sector, which is not the
case. In most of the country, entire work force
surplus is absorbed by the modern sector, which
is not the case in reality, and in reality, the con-
sequences of the structural change vision led to
a less equal society.
International dependency is a group of theo-
ries inspired by Marxist theory of exploitation of
poor countries by developed, colonial countries.
These theories approach development as
a process that depends on international con-
strains, shaped by the interests of advanced coun-
tries, former colonial empires. These countries
promote those international policies in order to
keep former colonies in a further dependency
(through international trade arrangements or
through international financial institutions, as
International Monetary Fund or World Bank).
Development is dictated, thus, not by poor coun-
tries’ needs, but by the interests or rich countries
that sustain corrupt governments and fuel civil
wars or false democratic revolutions. The critics
addressed to these theories viewed the main focus
of their approach, international relations, arguing
that they ignored internal factors and the potential
of good, sound economic policies promoted by
national governments. There are former colonies
among rich countries and countries that have
never been colonies and are still poor.
The neoclassical approach was determined
mostly by the vision promoted by Ronal Reagan
in the USA and Margaret Thatcher in UK. Their
D 790
governments placed the virtues of the market
mechanism in the central of their policies and
promoted in their countries and in the world the-
sis as free market, privatization, and minimum
state interventions. Development was consider
a result of the market mechanism: if the free
market works, then resources are allocated better,
productivity increases, efficiency grows, and the
final result is an increasing welfare for the entire
society, even unequally.
The critics addressed to this approach were
based mostly on the failure of these policies
applied in the case of former communist coun-
tries. The free market mechanism did not work as
they expected, and the virtue of free markets has
been eroded by the social factors and by the
poverty in those countries where privatization
and price liberalization brought high rate of
unemployment, huge inflation, and social unrests.
Finally, the new growth theory or the theory of
endogenous growth tries to reconcile both the
neoclassical approach with the new factors of
growth, namely, technology, human capital,
investments in education, infrastructure, and
international influences among countries. The
new theory of growth recognizes that today,
interdependencies among countries under global-
ization can foster or, on the contrary, slow down
the effects of theoretically correct economic pol-
icies promoted by a government.
The new theory of growth is still in its infan-
cies. New events as international financial crisis
are arguments in sustaining some aspects of this
theory; others, as weak use of productive capac-
ities in poor countries, are considered to be
lacunas of the theory.
Key Issues
The key issues in development are related to
major concerns regarding the situation of less
developed countries. Several aspects are requir-
ing a lot of attention.
Extreme poverty is a major gap for develop-
ment in many poor countries, most of them from
Sub-Saharan Africa. These countries that
encounter the largest number of poor people are
Development
stuck in a trap that do not allow them to use any of
the international conjuncture that may help them
(growth in international trade or investments) nor
to increase the use of national resources. Another
worry is coming from the fact that the number of
poor people grows in middle income countries,
transforming the performance of these countries
into a volatile success.
Another key issue is the increasing size of
global population, mostly in middle income
countries and among the poor people. Together
with the increasing number of people, crises like
food shortage, water crisis, and resources end are
becoming more and more acute.
The interdependencies that arose between
countries cannot be ignored, and they have to be
integrated into new models of development. It is
clear that the changes imposed by the present
financial crisis will change the approach of devel-
opment not only at the international stage but also
at the national level.
Future Directions
Development, as a concept, needs to answer to
several challenges. One is the lack of a unitary
approach and the vision regarding the notion.
This richness of the concept makes it difficult to
be measured. There is not a unanimous opinion
about how development should be measured and
not a unitary indicator that evaluates the level of
development. Despite the enlargement of the
notion, real income per capita or real GDP per
capita is still the most used indicator in appreci-
ating the level of development.
Adding to the previous challenge are the new
dimensions that are adding to the concept of
development. As largely the concept become, as
difficult to evaluate and to measure it converts.
The concept risk transforming itself into a vaguer
and vaguer notion, even it enriches in meanings
and attractiveness and, thus, no other alternative
is possible. Who can be against something that is
so charming?
Another direction is the evolution of the con-
cept not only on a vertical ax but also on
a horizontal one. The political dimension of the
Dialogue
development process, its linkage with other con-
cepts as international trade, international produc-
tion, migration, security, and so on, tends to
transform development from a concept into an
ideology.
Cross-References
▶ Economic Growth
▶ Poverty
▶ Sustainable Development
References and Readings
Cypher, J., & Dietz, J. L. (2009). The process of economic
development. London: Routledge.
Mandal, N. B. (2009). Global encyclopedia of welfare
economics. New Delhi: Global Vision.
Meier, G. (1995). Leading issues in economic develop-
ment (6th ed.). New York: Oxford University Press.
Mohammadi, M. S. (2010). Rational reconstruction of
development. http://development-definition.net/
Murphy, C. N. (Ed.). (2006). The United Nations devel-
opment programme: A better way? Cambridge:
Cambridge University Press.
Todaro, M. (2010). Economic development (12th ed.).
New York: Longman.
Development from Below
▶ Base of the Pyramid
Development of New Renewable
Energy Technologies
▶ Sustainable Energy Management and CSR
Developmental Corporate
Responsibility
▶ Corporate Responsibility Maturity
791 D
Dialogue
Zerrin Toprak
Department of Public Administration,
University of Dokuz Eyl€ul, İzmir, Turkey
Synonyms D
Deliberation; Discussion; Negotiation
Definition
The word “dialogue” is formed with the combi-
nation of the Greek words dia and logos. Dia
means “by means of” and “via,” whereas logos
means “word or meaning, statement, expression;
to indicate or reveal something; to come
together.” Dialogue is the conversation of two
or more people with two different views on
a subject. Therefore, dialogue expresses the dis-
cussion of two different views rather than the
fact that the parties consist of two or more people
in the conversation. In this sense, it is distin-
guished from monolog. Dialogue, a basic instru-
ment in ensuring democracy, is a preference of
quality of life that entails social reconciliation
which might develop in peaceful meeting
media provided by political and administrative
preferences.
Introduction
As a philosophical concept, dialogue features
two formal uses. The first one is the discussion
method Plato (427–347 B.C.) used in the sense
of identifying the truth, while the second one is
the use by Hegel and the Hegelians. In Hegel
(1770–1831), dialogue is not a method but the
doctrine itself, that is to say, the doctrine or
theory on a subject itself. According to Hegel,
no philosophical idea is fully right or fully
wrong at the beginning; then, a thesis on
a subject and the opposite or contrary thesis to
that thesis should be combined. From this arises
D 792
synthesis, which is truer. As is well known,
Hegel expressed them as thesis, antithesis, and
synthesis. According to Hegel, the synthesis,
resulting from the dialogue of two opposite
ideas, is not a completed or concluded idea.
Synthesis is a new thesis; this new thesis has
a new antithesis. They are also synthesized,
and a new synthesis is attained. This thesis-
antithesis-synthesis process is continuously
renewed and carried on, and Hegel called this
negotiation process “dialectic.”
Key Issues
A subject’s “openness to new developments and
changes” under current conditions is made
comprehensible by this process. Making these
evaluations undoubtedly requires “free media
and political atmospheres” which also respect
the personal rights and freedoms that democratic
states, shaped by universal law, adhere to or must
adhere to.
Indeed, innovative and creative ideas also
have a specific period of use. One day, we may
not need to use them, or they might bear perma-
nence. This phenomenon shows the requirement
of continuous assessment of subjects and also
keeps the need for social negotiation on the
agenda. On the network of the developing global
relations, studies for social-corporate cooperation
cannot be confined only to local and national
levels. The rational use of natural resources,
which are inputs for public or nonpublic invest-
ments in particular, is increasingly engaging
international agenda and may become a subject
for conflict. In this case, the provision of dialogue
to put the idea “peace at home, peace in the
world,” as Atat€ urk (1881–1938) stated, into
action is also continuously important for cooper-
ation for the environment in international
relations.
Attended in Stockholm by the representatives
of 113 countries, 19 intergovernmental agencies,
and more than 400 intergovernmental and
nongovernmental organizations, the “United
Nations Conference on the Human Environment”
(June 5–16, 1972), the first comprehensive
Dialogue
meeting on the environment, is one of the impor-
tant international steps to ensure international
dialogue and social awareness. Under the influ-
ence of these activities, some essential institu-
tional and legal measures have been taken so
far, and national and international organizations
have been made for feasibility. Furthermore, the
titles “Consulting and involving the general pub-
lic” and “Partnerships,” shown within the six
elements (http://www.gdrc.org/uem/la21/6-key.
html) of Local Agenda 21, are directly related to
participation and provide social dialogue.
Indicators of quality of life underlie interna-
tional agreements, as essential factors affecting
development of settlements multidimensionally.
In international approaches focusing on urban
development, “social development” is stated to
be an important factor in dealing with almost
every subject such as the conservation of histor-
ical works and cultural heritage and spatial
planning (strategic approach to planning).
A series of rules become outstanding for urban
development. These rules seem to depend on
(Landry 2006) the following:
• Creating economic values and taking
decisions together in administration
• Providing and being able to sustain sectoral
cooperation for resource efficiency
• Determining the threats and opportunities
created by multiculturalism and being able to
turn threats into gains using opportunities
provided by cooperative projects
• Strengthening the constitution of an informa-
tion society and evaluating information and
endeavors from various groups of the
informed society such as the youth, the
elderly, women, and men
• Being able to meet and use past and present
information and experiences in attaining
objectives
• Being able to carry the responsibility of
success and failure in programs, where results
are obtained, and realizing the conditions for
using the programs again
In the basic approach of international agree-
ments, the connection of the feasibility of these
rules with sectoral and interest groups is put
forward on the network of global relations.
Dialogue
The gains for social development by the imple-
mentation of integrated action plans targeted by
international agreements or targeted outputs are
as follows:
• Creating political determination and adminis-
trative facilitation of central and local
governments
• Forming innovative and creative strategies
envisaging effective participation to ensure
monitorability
• Forming and sustaining social and economic
development as well as integrating govern-
ment and action plans which also include
other sectors
• Enhancing social sensitivity by creating
awareness
• Sharing information for developing interinsti-
tutional and interorganizational cooperation,
making citizens conscious and informed and
involving them in dialogues
• Strengthening local administrative units
and local service units by participatory mech-
anisms and local, regional, and cross-border
cooperation
• Strengthening public, civil-academic-private
sector relationship networks and ensuring
that they trust each other
• Looking at the concepts of youth, children, the
handicapped, and senior citizens (the elderly)
and introducing the expectations of these
groups to the society
• Attaching importance to the individual with
all its social and cultural aspects, for the
sound sustainability of the society; preparing
public for a productive and peaceful life; and
establishing social partnerships for good
government
• Developing the social dynamics of participation
in government at local level
The relationship between the sustainability of
urban life and democratic sustainability leads to
the willingness to create common action plans for
the development of common strategies by coun-
tries and for their applicability. Citizen satisfac-
tion is associated with the integration of
democratic participation and the provision of ser-
vice effectiveness. For creating sustainable and
sound cities, access to city-dweller rights and the
793 D
ownership of rights and obligations are being
made widespread for the settled foreigners just
as they are available to citizens.
Making social cooperation widespread, join-
ing uninformed and disconnected practices,
preventing the waste of labor, time, and money,
and attaining peace underlie all these objectives
outstandingly. International agreements bring
“local participation” and “national and interna- D
tional cooperation” to a partnership, the owner-
ship of which is required to be acknowledged at
state/national and local levels. In local govern-
ments, the philosophical approach of “subsidiar-
ity” is undoubtedly structured, depending on the
preacceptance of state and government powers.
This makes it important to train legal decision
makers for the development of governance
practices.
In comments concerning the reason for the
tendency to encourage different cultures, instead
of the disappearance of everybody in an incorpo-
rated crowd in large-scale areas, it is noted that
people in cities, who have similar sociocultural
bases or interests, may cooperate so as to make
and/or strengthen connections. In this evaluation,
the harmful effects of polarization are also con-
sidered. It is of great importance, in terms of the
Council of Europe (2004), that different cultural
and ethnic groups live peacefully together, and
participate, in public life. Local integration is
considered on the grounds of “qualified educa-
tion, organization in social spheres, and the
mutual cultural expansion of institutions”
together with a series of policies establishing
the “participation” connections on the mutual
interaction network (Council of Europe 2004).
In an atmosphere where the possibilities for
foreigners to participate with the local people in
administration and where political mechanisms
are in place, the preferences in using the place for
the purpose of accommodation also influence
togetherness.
Foreign residents should not live far from
the local society. Accordingly, it is necessary
to benefit from the positive impacts of social
integration in urban development. Furthermore,
the importance of the fact that citizens and other
foreign settlers in the city play a role in the
D 794
development of cities is closely related to
ensuring solidarity. It is of increasing impor-
tance to evaluate the status of foreign settlers
in the process of their participation in the
government of the city. Therefore, strategies
in connection with the Convention on the
Participation of Foreigners in Public Life at
Local Level to ensure the participation of
foreigners in public life at local level just like
a “citizen” are developed in the activities of the
Congress of Local and Regional Authorities of
the Council of Europe.
As has been seen, studies on external migra-
tions draw the new dialogue – requiring subjects
into the area of interest of authorities and public
opinion. Recently, migration movements to some
countries have been increasingly observed, for
various reasons such as with business, education,
and political purposes or under the compulsory
influence of climate changes. One dimension of
the mentioned population activity from abroad is
the migration of retired foreigners to coastal
settlement units at a striking and gradually
increasing rate. The movements of foreign retired
populations, which begin with touristic purposes
depending on the convenient climate and which
gradually turn into settlement under the attrac-
tiveness of acceptable living standards, can be
related to different matters. The cross-border
population mobility created by retired foreign
population owing to their “age” can also be
termed “final destination tourism” (Toprak
2009). External migrations into the country, in
particular, lead to extraordinary demands, which
vary by country and which influence and renew
the indicators of quality of life in the country.
The discussion of these new demands undoubt-
edly entails different intercultural dialogue in
the society. In other words, determining the
profile of foreign residents is of importance,
in terms of the indicators of quality of life,
and their effects on sustainable development
objectives included in the strategic planning
of the city. Therefore, examining the legal rela-
tions of foreigners with local authorities will shed
light on the fundamental issues of the research,
which are studied in terms of participation in
public life.
Dialogue
Some studies show us that the demand of
service by foreign settlers from local and central
authorities and their willingness to influence
them are increasing (Karaman 2008). However,
they do not seem very active in sociocultural
activities and taking part in public life due to
linguistic problems. In connection with this, for
the time being, they do not seem willing to use the
right to elect and to be elected.
It is a crucial point that depending on wrong or
incomplete information, social and cultural rela-
tionships between foreigners and local citizens
are not evaluated. So as to attain this objective,
it is necessary to develop projects and strategies
to ensure joint activities. As international out-
look, in the European Security Condition at the
threshold of the twenty-first century, heads of the
states and the governments of the Organization
for Security and Cooperation in Europe (OSCE)
members declared their pledge to create a more
coherent, democratic, and free OSCE region, in
which members could coexist peacefully, and
individuals and communities could live in
freedom, prosperity, and security. In order to
fulfill this pledge, they also decided to take
new humanitarian, political, military, economic,
environmental, legal, peace-preserving, and
political dialogue improving measures.
The European Framework Agreement on
Transborder Cooperation between local commu-
nities and local governments is based on an
important dimension of endeavors toward
improving local governments at the European
Council. Peace, tolerance, and sustainable devel-
opment have been the three important indicators
in shaping the Europeanist ideology. In order to
reach these goals, local, regional, and transborder
cooperation has been promoted. Although the
idea of cooperation is not being rejected by public
authorities, not all countries have been successful
in implementing it. It can be said that administra-
tive barriers will be removed step by step through
transborder cooperation. Likewise, inner-border
cooperation is not free of troubles, either. In fact,
the agreement is not based on the principle of
cooperation between peoples of common culture
and race in both sides of the border. Therefore, it
can be said that this kind of communication
Dialogue
will strengthen cultural ties and remove the feel-
ing of loneliness, thereby enabling him to con-
sider himself a citizen. In other words, it is
a strategic approach for administrations to keep
communication channels open that would
preserve social peace.
The fact that various cultural and ethnic
groups live peacefully in a place and participate
in public life is considered very important in
present Europe. The social differences caused
by deep economic cliffs in society and the social
negative effects they cause are more or less sim-
ilar in every country. The agenda of integration in
the social sense deals not only with social condi-
tions, psychological needs, and interpersonal
relations in poor societies but also with different
culture, socioeconomic structure, and religious
and ethnic values. The threshold of trust between
people and their neighbors is important for
participation. On the other hand, the low thresh-
old of trust toward foreign residents in a country
is an urgent problem that requires solving. In the
settlement of this problem, the preferences of the
administrations, which consider these activities
in decision making, have an important role as
much as the participatory programs developing
social dialogues. In support of this, the roles and
responsibilities of citizens of like-interest sectors,
in increasing the efficiency of both democratic
participation and urban services, should be “diag-
nosed,” and the society should be reintroduced
and reconciled with its surroundings.
It is known that participation of the groups
who are left disadvantaged, due to sociocultural
differences and financial insufficiencies, in the
public participation mechanisms in administra-
tive and political dimensions will be effective in
maintaining the operation and sustainability of
democracy. Enabling the disadvantaged groups
to participate in administration and/or attaching
importance to facilitating this is now a strategic
acceptance, having reached the ethical level in
the developed democratic perception at interna-
tional level. In other words, they are rapidly far
from being subjects which the public administra-
tions pretend not to see. The clearest dimension
of this process is the integration of the subjects
mentioned in Agenda 21, which serves the
795 D
development of democratic life provided by the
1992 Rio Summit and in which the transfer to the
local action plans is aimed at.
Formed and created by the great financial gaps
in society, the social differences and social
negative effects are nearly similar in every coun-
try. It is considered that more participation in the
process of decision making encourages helping
the creation of trust and cooperation within D
different cultural groups. In connection with
this, foreign residents’ living far from the local
society is not regarded appropriate in terms of the
benefits of social integration. Therefore, it is
becoming increasingly important to evaluate the
situation in terms of foreigners and their partici-
pation in the process of partnership in city admin-
istration which local people have within legal
developments currently being regulated. On the
other hand, foreign residents should not live far
from the local society. Accordingly, it is neces-
sary to benefit from the positive impacts of socio-
cultural integration in urban development.
The impacts of local citizens and immigrants on
urban politics are shown in the following
diagram.
As is demonstrated in Fig. 1, the social capital
in cities has not been confined only to local
citizens. Whether from abroad or within the
country, and regardless of their cultural/ethnic
connection, newcomers have been included in
dialogue, and efforts have addressed the require-
ment of developing information together and
designing programs concerning innovative nego-
tiation media. Adoption of innovative and devel-
opmental ideas and the financing for feasibility
have been sought, and the stage of action plans to
carry out the goals has been envisaged. Evalua-
tion of the outputs of actions and of the success of
the outcomes of outputs and determination
of new strategies constitute the main elements
of “negotiation system” (Karaman 2009).
In prediction/strategic planning studies for the
future of settlements, it is considered important to
evaluate the predictions of social capital and to
serve the development of social capacities by
creating synergy in negotiation media for sustain-
able and healthy cities. In order to stimulate
creative potentials without being stopped by
D 796
IV
Integrated action plans and
feasibility for the development
of social capacities
III
The evaluation of ideas
Adoption of developing and
innovative ideas/consensus
Dialogue, Fig. 1 Cycle of effective elements in ensuring social cooperation and dialog
“institutional bigotry,” unofficial meetings are
targeted. The development of media for people
to find opportunities to acquire new information
from each other and to learn together in cities is
a modern approach which is dwelled upon by
public administrations (Toprak 2007). So as to
attain this objective, it is necessary to develop
projects and strategies to ensure joint activities
and technology. The recommendations of the
Council of Europe Parliamentary Assembly
toward the participation of immigrants and
foreign residents in political life in the member
states of the Council are stated below. Accord-
ingly, the assembly acknowledges that lawful
residence of noncitizens within national territory
is now acknowledged by the European societies
and that the number of long-term immigrants
and foreigners legally settled is rising.
The assembly underlines the view that respect
for human rights in Europe is independent of
citizenship and country of origin. As is well
known, principles of nondiscrimination have
been laid down in numerous international instru-
ments binding for Council of Europe member
states – Recommendation 1500 (2001).
Especially the principles of the Convention on
the Participation of Foreigners in Public Life at
Local Level, dated May 1, 1997, have an impor-
tant role in the development of democracy; how-
ever, the development of administrative and legal
Dialogue
V
Evaluation of action outputs and outcomes
as well as determination of new strategies
I
Effects of immigration and migration
on citizens and urban life
II
Development of information on foreign and
local communities and design of
innovative/common negotiation programs
implementation instruments entails a distinct
strategy. Basically, it is necessary to initiate
these studies by viewing that foreign social
capital might contribute to local social capital in
its sociocultural and economic aspects (Karaman
2008). As has been observed, this issue has for
a long time constituted the permanent dialogue
agenda of the European countries, which
continuously receive migration.
Likewise, the report on the participation of
immigrants and foreign residents in the political
life in the Council of Europe member states pre-
sents an overall evaluation concerning the state in
the Council of Europe member states and gives
concrete examples concerning the participation
of immigrants in the political process in
some countries. Thus, the content of the report
is evaluated below.
“Enjoyment of human rights in Europe is inde-
pendent of citizenship and country of origin.
Principles of non-discrimination have been laid
down in numerous international instruments
binding for Council of Europe member states.
As required by the philosophy of democratic
legitimacy, all groups in the society are required
to participate equally in the political process.
Lawful non-citizen residents contribute to
a country’s prosperity. Furthermore, it is also
acknowledged that they have the rights to
influence the political rights in the country
Dialogue with Stakeholders
concerned” – Recommendation 8916 doc (2000).
The use of communication technologies to
enhance the contribution of national and interna-
tional experience and information to practice is
becoming more and more indispensible. Studies
for e-democracy and e-government implementa-
tion principles are increasing. Furthermore, the
Council of Europe has long taken the lead on
digital policies relating to government action as
exemplified by the Committee of Ministers
Recommendation Rec(2004)15 on electronic
governance and Recommendation Rec(2004)11
on legal, operational, and technical standards for
e-voting.
International organizations hold multi-
dimensional meetings that encourage the society
to claim the ownership of the events which are
related to it. These negotiation media for the
education of every section of the society assume
functional roles in the provision of dialogues at
every level. Indeed, the basic ground for the
strategic decisions for all aspects of human life
is to “inform” affected and affecting actors and
to enable them to participate in “the decision
process.” An important convention that may
democratically influence general administrative
preferences is “the Convention on Access to
Information, Public Participation in Decision-
Making and Access to Justice in Environmental
Matters done at Aarhus, Denmark, on June 25,
1998.” As regards its principles, this convention
puts forward the basic elements of international
democratic structuring by associating them with
environmental protection.
Future Directions
The most important reason why international
democratization endeavors have become wide-
spread is that today the rights no longer have
any priorities to be noticed and recognized in
the development of human rights, and it has
been realized that the omission of a right from
the list of human rights has a negative effect on
the others. In other words, according to the
author, “what is more important than the mathe-
matical addition of human rights is to consider
797 D
the rights as a product. If a right has a value of
zero, this might cause others to become zero,
too.” As a matter of fact, also from international
perspective, not only legal regulations but also
information and dialogue can provide effective
supervision to ensure success in the implementa-
tion of human rights, by creating public opinion
pressure.
D
Cross-References
▶ Integrative Management Approach of CSR
▶ Local Agenda 21
▶ Rio Declaration on Environment and
Development (UN)
References and Readings
Council of Europe. (2004). Foreigners’ integration and
participation in European cities. Strasbourg: Council
of Europe.
http://www.gdrc.org/uem/la21/6-key.html. Accessed 9
Jan 2010.
Karaman, Z. T. (2008). Willingness of foreign retired
residents to participate in local public life and strategic
approaches to relationship networks within the local
community; example of Antalya, Turkey. European
Journal of Economic and Political Studies (EJEPS),
1(2), 24–64, 38–40.
Karaman, Z. T. (2009). Democratic gains in public admin-
istration at local level in terms of CSR: Theory- and
practice-based approaches-Turkey and Izmir metro-
politan city. In S. O. Idowu & L. F. Walter (Eds.),
Professionals’ perspectives of corporate social
responsibility (pp. 319–344). Berlin: Springer.
Landry, C. (2006). The creative city (pp. 244). London:
Demos.
Toprak, Z. (2007). Yerelde yönetişim olgusunda
demokratik kazanımları teorik ve pratik temelli
yaklaşımlar- T€ urkiye ve İzmir, Vol. 2. In Bölgesel
Kalkınma ve Yönetişim Sempozyumu, İzmir.
Toprak, Z. (2009). Yabancı emekli yerleşiklerin yerelde
kamusal hayata katılım istekliliği ve yerel halkla
ilişkileri (Antalya için bir yaklaşım). Yönetim Bilimleri
Dergisi, 7(2), 102–105.
Dialogue with Stakeholders
▶ Engagement/Stakeholder Engagement
D 798 Dignitas in Roman Culture

This interest is unlikely to wane any time soon

Dignitas in Roman Culture as more attention is directed toward how inter-
locks affect board independence, board decision
▶ Guanxi and CSR making, and company performance. The richness
of board interlock research has generated
a myriad of interpretations as to the purpose and
Dilemmas roles of corporate ties. Mizruchi (1996) put
forward five main reasons for interlocks across
▶ Tourism Aporia individual and company dimensions: “collusion,”
“co-optation and monitoring,” “legitimacy,”
“career advancement,” and “social cohesion.”

Directional Strategy Reasons for Interlocks

Collusion
Interlocks represent intentional attempts by organizations
▶ Business Strategy
to engage in practices that restrict competition
Co-optation and monitoring
Interlocks are used by firms to co-opt resources to deal
with environmental uncertainty and to exert
Director Ethics interorganizational control
Legitimacy
▶ Agency and Corporate Governance Interlocks are used to increase a firm’s environmental
legitimacy through prestigious connections
▶ Bonuses and the Recent Global Financial
Career advancement
Crisis
For the individual director, interlocks are ways to advance
one’s career
Social cohesion
Director Interlocks Interlocks are in effect social ties among members of the
upper capitalist class
Suzanne Young Source: Mizruchi (1996)
La Trobe Business School, La Trobe University,
Melbourne, VIC, Australia

Synonyms
Director networks
Definition
Board interlocks are where a person affiliated
with one organization sits on the board of direc-
tors of another organization.
Introduction
Board interlocks have received considerable
attention over much of the twentieth century.
Key Issues
Board interlocks are seen to reduce indepen-
dence. The growing prevalence of and interest
in independent nonexecutive directors can, in
part, be attributed to the confluence of corporate
regulators seeking to increase board indepen-
dence and the popular belief that independent
directors are more likely to be better stewards of
the firm. That is, these independent directors are
less likely to be driven by the same kinds of
self-interest that supposedly drives executive
directors. In the UK, the Cadbury (1992) report
and others since all emphasized and promoted
the importance of nonexecutive directors. Simi-
larly, the New York Stock Exchange rules
require companies to have a majority of
Director Interlocks
independent directors and define what is meant
by “independence.” Following the lead of the
UK and the USA, the Australian Securities
Exchange (ASX) Corporate Governance Coun-
cil (2007) recommended in its second edition
of Corporate Governance Principles and
Recommendations that the majority of the
board directors be independent.
But there are still questions as to whether
board independence and company performance
are linked. Despite problematic research findings,
the business community still views board inde-
pendence as a precondition for improved perfor-
mance and “best practice” governance is viewed
as one where director independence, as proposed
by agency theory, prevails.
Adopting a structural approach, agency theory
presupposes that conflicting interests between
owners and agents can be effectively resolved
through ensuring the directors, in representing
owners, are truly independent of management.
Agency theory suggests that the dangers of too
close a relationship between executive and
nonexecutive directors may lead to collusion
between principal and agent and capture of
nonexecutive interests. In response to legislative
reforms separating the roles of CEO and Chair,
there has been an increase in the prescribed num-
ber of independent directors, and their dominance
in various subcommittees such as audit and remu-
neration committees is used to lessen conflicts of
interest.
In contrast, Stewardship theory (Davis
et al. 1997) argues that board members actually
seek to collaborate and work as stewards for the
company, criticizing the overemphasis by agency
theorists in particular on control and opportunis-
tic behavior. Davis et al. (1997) suggested
a model that highlights the reinforcing cycles of
collaboration and control whereby each is used as
a way of breaking down the dysfunctions of
complacency and groupthink, distrust, and infor-
mation silos, respectively. Hence, this suggests
interlocks can improve collaboration and reduce
distrust.
Another theoretical lens through which to
examine board structures and dynamics is the
resource dependence perspective of firms. The
799 D
resource dependency model implies that internal
and external agents, who control critical
resources, influence managements’ decisions.
As such, executives and managers in influencing
major directive decisions “enact” their environ-
ment in order to alter the course of the organiza-
tion. From the resource dependence perspective
then, boards establish links between the organi-
zation and its environment through establishing D
contacts and providing access to information
through personal and professional networks
(Pfeffer and Salancik 1978). Hence, interlock is
a form of social capital that provides access to
information flowing through the network. In
applying this to board networks, we can see the
use of co-optation of board members as a way of
acquiring these resources and reducing uncer-
tainty. In addition board interlocks are used to
influence diffusion of technology, policy, and
strategy and provide a social context that favors
managerial dominance, thereby showing how
power, trust, and resources flow between organi-
zations to foster cooperation.
Team production theory suggests that boards
should represent those stakeholders that add
value, assume unique risk, and possess strategic
information, rather than being solely interested in
shareholder interests. Blair and Stout (1999)
identified three conditions for team production
theory to apply. First, the solution to the produc-
tion problem requires a coordinated effort from
two or more individuals. Second, at least some of
the resources that team members invest must be
firm specific. Third, outputs or rewards from the
team venture must be nonseparable. Boards act as
good exemplars of the team production problem
as directors must often act in concert – rather than
independently – and use specific skills in order to
resolve problems for rewards that are often not
directly attributable to specific actions. Team
production theory, as such, suggests that boards
benefit from insiders having substantial input in
decision making. This challenges the widely held
view promoted by agency approaches, shareholder
activists, and market commentators – manifested
through governance codes and securities
exchanges – that boards need to be staffed
by a majority of nonexecutive or outside or
D 800
independent directors. This view is often amplified
in times of high levels of economic and regulatory
uncertainty. In such times, decision making in the
upper echelons requires simplified decision rules
as it is impossible to completely understand
the intricacies of the contemporary business
environment. This necessitates the collection and
coordination of dispersed knowledge through
planning and control procedures.
In broadening the examination of board prior-
ities and decision making, it is useful to look to
Social Comparison Theory (SCT). Social com-
parison processes (Festinger 1954) involve social
actors and decision makers constantly relying on
a wide range of social comparisons to secure
equity in the setting of their expected rewards.
The theory proposes that people have a need to
evaluate their opinions and abilities and, in the
absence of objective criteria, social criteria are
used. Actors will prefer to make comparisons
with others who are perceived as similar: Opin-
ions might be evaluated in closed social circles,
or in groups and abilities might be measured
against those who are thought to possess similar
attributes. Further, people are motivated to make
the comparisons when they believe the opinion or
ability of others is important and when the refer-
ent group is important to the individual. When
applied to the governance field, we could argue
that task uncertainty and complexity, such as that
experienced by a company board, will prompt
members of a group to seek others to assist in
finding solutions to problems presented to the
group. Sociometric data from the 1930s, 1940s,
and 1950s led Festinger (1954) to conclude that
people associated with a group tend to be mem-
bers of the same socioeconomic class. This is
consistent with Mizruchi’s assertion that inter-
locks are social ties among members of the
upper capitalist class, as the CEO often recom-
mends potential directors who share similar
experiences and other personal characteristics,
positive social comparisons may be more likely.
Each theoretical perspective provides
different justifications as to whether board
independence is key for optimal decision making,
and hence whether board interlocks are beneficial
or not. Agency theory would propose that
Director Interlocks
interlocks lead to nonindependence and therefore
suboptimality, while stewardship, resource
dependence, team production, and social compar-
ison the converse.
Future Directions
There is continuing debate around why interlocks
exist in the first place. More work is required,
however, to understand the problematic nature
of board interlocks and its relationships with
issues of board independence.
In Anglo-American systems, board interlocks
are seen as problematic as they seem to mean that
directors lack independence. However, in rela-
tionship-based systems, board interlocks are fun-
damental and do not seem to reduce performance
or lead to problematic decision making.
As regulation and codes are increasingly seek-
ing to shape or impose optimal board structures in
areas of independence, these questions are worth
considering: Why, given less-than-convincing
links between board composition and perfor-
mance, are independent boards still advocated?
What, if any, is the new or emerging defense for
an outsider-dominated or independent board? As
boards are increasingly moving to being staffed
by independent directors, are interlocks used as
a substitution?
Cross-References
▶ Agency Theory
▶ Stewardship Theory
References and Readings
Blair, M., & Stout, L. A. (1999). A team production theory
of corporate law. Virginia Law Review, 85(2),
247–328.
Cadbury, A. (1992). The financial aspects of corporate
governance: The code of best practice. London: Gee
Publishing.
Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997).
Toward a stewardship theory of management. The
Academy of Management Review, 22(1), 20–47.
Disclosure (CSR Reporting) 801 D
Eisenberg, M. A. (1999). The conception that the corpo-
ration is a nexus of contracts, and the dual nature of the Director’s Duties
firm. Journal of Corporation Law, 24(4), 819–836.
Festinger, L. (1954). A theory of social comparison pro-
cesses. Human Relations, 7, 117–140. ▶ Company Directors and CSR
Haunschild, P. R., & Beckman, C. M. (1998). When do
interlocks matter? Alternate sources of information
and interlock influence. Administrative Science
Quarterly, 43(4), 815–844.
Mizruchi, M. S. (1996). What do interlocks do? An anal- Directors’ Remuneration: Report
ysis, critique, and assessment of research on D
interlocking directorates. Annual Review of Sociology, ▶ Greenbury Report (UK)
22, 271–298.
Palmer, D. (1983). Broken ties: Interlocking directorates
and intercorporate coordination. Administrative
Science Quarterly, 28(1), 40–55.
Pfeffer, J., & Salancik, G. R. (1978). The external control Disadvantageous Differential
of organizations: A resource dependence perspective.
New York: Harper & Row. Treatment

▶ Discrimination

Director Networks
Disclosure (CSR Reporting)
▶ Director Interlocks
Philipp Schreck
Institute of Managerial Accounting,
Ludwig-Maximilians-Universit€at M€unchen,
Director of Sustainability Munich, Germany

▶ Chief Sustainability Officer

Synonyms

Corporate citizenship reporting; Nonfinancial

Director Responsibility Toward disclosure; Nonfinancial reporting; Social and
Shareholders environmental disclosure; Sustainability
reporting; Triple bottom-line reporting
▶ Agency and Corporate Governance

Definition

Corporate social responsibility (CSR) reporting

Directorate refers to a company’s systematic disclosure of
information on its social performance. The term
▶ Management social performance is understood in a broad sense
and refers to social, environmental, and gover-
nance issues that are typically not covered by
financial performance metrics. In contrast to
Directors managerial accounting, CSR reports primarily
address external stakeholders such as customers,
▶ Management investors, and the public. In absence of formal
D 802 Disclosure (CSR Reporting)

Different Reporting Firm-level

Determinants
Approaches Implications

Country and Industry Level Quantitative Differences Direct Effects

• reporting history
• cultural background
• regulatory environments
• industry’s social and
environmental impact
• etc.
• reporting frequency • lower cost of equity capital
• reporting scope (materiality, • access to SRI markets
completeness) • customer reputation
• amount of performance • employee reputation and
indicators satisfaction
• etc. • etc.

Company Level Qualitative Differences Indirect Effects on

• corporate social • report quality Financial Performance
performance (CSP) • report form (stand -alone, • price per share
• stakeholder pressure integrated, online) • price/earnings ratio
• financial ressources • assurance (yes/no, • market value to book value
• firm size limited/reasonable) • return on equity (ROE)
• ownership structure • etc. • return on assets (ROA)
• etc. • etc.

Disclosure (CSR Reporting), Fig. 1 Determinants and firm-level implications of different reporting approaches

mandatory rules, CSR reports significantly vary
in form (design, distribution media, reporting
frequency, etc.) and content (scope, quality, etc.).
Introduction
Subsumed under the umbrella term corporate
social responsibility (CSR), the role of business
in society continues to be an intensively debated
topic in academic research, business practice,
politics, and the media alike. Not least due to
a number of ethical scandals of large, multina-
tional companies, there has been an increasing
pressure on companies to assume social and envi-
ronmental responsibilities going beyond their
narrowly defined economic interest. Various
stakeholders such as investors, employees, or
customers have been shown to base their invest-
ment, job, or consumer decisions upon their
perceptions of the respective company’s corpo-
rate social performance (CSP).
Consequently, the demand for information on
companies’ CSP has increased and has been
followed by a notable upsurge in voluntary CSR
reporting. Today, most publicly traded compa-
nies and many small- and medium-sized
companies publish CSR reports. Such disclosure
has taken place in the form of specific sections in
annual reports, corporate websites, or stand-alone
CSR reports. For the aforementioned
stakeholders, such reports are an important
source of information as they are easy to access
and are thus a way to evaluate a company’s CSP.
It can thus be concluded that the main purpose of
a CSR report is to disclose information on
the company’s CSP to its stakeholders in
a reasonable and balanced way.
However, in absence of formal mandatory
rules comparable to those of financial reporting,
managers can and do to a large degree exert
discretion as to the kind, amount, and quality of
CSR information they disclose. In light of these
differences, this article provides an introductory
overview to CSR reporting in general and some
selected, more specific issues in particular. It is
structured as follows: In the main section (“key
issues”), it begins with a brief outline of the
historical development of CSR reporting, its
main objectives, and its current proliferation. It
then proceeds as summarized in Fig. 1. It first
describes different patterns of CSR reporting
that can be found in the variety of reporting
strategies companies actually apply. Apart from
Disclosure (CSR Reporting)
differences in their design, reports primarily vary
both quantitatively and qualitatively. The article
then moves on to the explanation of different
reporting patterns by discussing determinants of
CSR reports that have been investigated in theo-
retical and empirical studies. Finally, the article
discusses firm-level implications of different
forms of CSR reporting.
Key Issues
The Development of CSR Reporting:
From Margin to Mainstream
History
Although its origins can be traced back to the
early twentieth century, CSR reporting only
gained considerable attention in the 1970s when
several countries led the way toward the dissem-
ination of CSR reporting practices (Mathews
1997; Owen and O’Dwyer 2008). For example,
German companies started supplementing their
financial reports with social statements
(Sozialbilanz), the purpose of which was to give
an annual account of the costs and benefits of
their operations to society as a whole. In France,
a law introduced in 1977 required large compa-
nies to publish an annual bilan social which pri-
marily focused on human resource issues such as
the employees’ health and safety conditions or
their education and training. In the UK,
a powerful social audits and human resource
accounting movement emerged and tried to
push companies’ disclosure strategies beyond
a mere marketing-oriented policy which primar-
ily aimed at providing benign information to the
public. At the same time, many US firms started
including social and environmental issues in their
annual reports. This development was accompa-
nied by a lively debate propelled by professional
accounting associations, corporations, and
researchers. It mainly focused on the theoretical
foundations of a broader approach to corporate
reporting, attempts to measure corporate social
performance, and the possibility to standardize
reporting practices.
CSR reporting received another substantial
boost with the rise of environmental reports in
803 D
the 1990s, powered not only by companies in
Western European countries, such as the UK,
Germany, the Netherlands, and Scandinavian
countries, but also by specific legislation in the
United States and Australia. This development
was characterized by improvements in the quan-
tity and quality of the disclosed information due
at least in part to an increasing application of
environmental management systems and stan- D
dards such as EMAS or the ISO 14000 and the
AA1000 series of standards. Along with an
increasing implementation of such standards
came a growing focus on quantifiable objectives
and performance indicators. These helped
improve the quality of the disclosed information
by allowing for a comparison of a company’s
environmental performance over time and rela-
tive to other companies.
Since then, CSR reporting has developed into
a mainstream management trend. As will be
discussed in more detail below, this trend has
been characterized by:
– A constant rise in the number of reports glob-
ally, including companies in Asian and
African countries
– A movement beyond the sporadic and selec-
tive disclosure of information toward more
systematic and comprehensive information
on nonfinancial performance, including social,
environmental, and governance issues
– An increasing quantification of the reported
information
– As well as an increasing professionalization
through the application of specific reporting
and assurance guidelines and standards, and
the involvement of professional bodies such as
consultancies, audit firms, business and indus-
try associations, etc.
Objectives of CSR Reports
The general goal of CSR reports is to provide all
interested stakeholders of a company with reli-
able and comprehensive information that enables
them to assess the company’s social perfor-
mance. The report should thus provide
a reasonable representation of how a company’s
operations positively or negatively affect their
stakeholders. Whether CSR reports also include
D 804
economic issues depends on which form compa-
nies choose for their reports. So-called integrated
reports follow the idea of sustainability which
includes the social, environmental, and economic
dimensions. However, most companies provide
detailed economic information in their conven-
tional financial reports only and devote their
CSR report to mainly social and environmental
issues.
The specific issues on which companies are
expected to disclose vary with company-,
industry-, and country-specific contingencies.
Depending on these factors, companies are typi-
cally expected to report on their management’s
strategic posture to CSR as well as on the
company’s performance with respect to, e.g.,
the natural environment, product responsibility
issues, labor practices, human rights, governance
standards, and the company’s relation to society.
Current Proliferation of CSR Reports
Although numbers vary, several international
surveys suggest that CSR reporting is continu-
ously growing by any measure. Three of the
best known such surveys are provided by
KPMG and PriceWaterhouseCoopers, large
international consulting and auditing firms, and
by CorporateRegister.com, a UK-based organi-
zation which globally surveys CSR reporting
practices. According to KPMG’s international
survey from 2008, 83% of the world’s 250 largest
companies either issue a specific CSR report or
include information on their social performance
in their annual reports. In their joint survey, Craib
and PriceWaterhouseCoopers (2010) found that
in 2010, out of more than 600 of the largest
companies worldwide, 40% had published a full
CSR report (as opposed to 31% in the previous
year). Similarly, a CorporateRegister.com report
from 2010 finds that even though countries differ
in how many of their companies issue CSR
reports, the number of reports has been increasing
since 1992 in all regions. In a study from 2011,
the authors identified almost 6,000 CSR reports
published in 2010. Another clue for the develop-
ment of CSR reporting practices can be derived
from the number of companies that issue a CSR
report for the first time. This number has steadily
Disclosure (CSR Reporting)
grown from about 500 in 2006 to 1,000 in 2010
(CorporateRegister.com 2011).
Content-wise, there has been a shift from
a certain bias toward environmental issues in
the early 1990s toward more balanced and com-
prehensive CSR reports, which also include
social issues such as the company’s community
relations, its ethical standards, health and safety
issues, etc. With respect to the application of
international reporting guidelines, in 2010,
almost 40% of reports were issued according to
the guidelines of the Global Reporting Initiative
(GRI). A similar growth trend can be witnessed in
companies’ decisions to include independent
assurance statements in their CSR reports. Since
1997, the number of reports with assurance state-
ments grew by an annual rate of 20%, leading to
a total number of 650 assurance statements by
2007 (CorporateRegister.com 2008).
Differences in CSR Reporting Approaches
The general absence of mandatory national and
international CSR reporting standards has led to
a broad variety of CSR reporting approaches. The
purpose of this section is to provide an overview
of the differences that can be observed in current
CSR reports. Such differences can mainly be
distinguished along quantitative and qualitative
criteria.
Quantitative Differences
First, CSR reports quantitatively differ with
respect to reporting frequency. Most companies
issue CSR reports once a year or biannually. The
exception to this rule is made by the minority of
companies that either update their reports more
than once a year, or publish CSR reports only
every third year or in even larger intervals.
Second, CSR reports quantitatively differ with
respect to their content, that is, the broadness and
depth of the information disclosed. More specif-
ically, reports can be distinguished according to
the extent to which they follow two important
principles for defining reporting content. Materi-
ality refers to the information’s importance for
assessing a specific organization’s social perfor-
mance. Completeness requires that enough infor-
mation is disclosed so that all stakeholders can
Disclosure (CSR Reporting)
assess the company’s performance with respect
to all relevant dimensions in the context of CSR.
Since companies can themselves decide how
far they adhere to these principles, CSR reports
vary to a large extent in how much information
they actually contain. One possibility to assess
a given report’s content is to look at the extent to
which the company reports certain key perfor-
mance indicators. For instance, GRI identified
a number of key performance indicators in each
performance area (environment, health and
safety, etc.). The amount of report content can
thus be approximated by looking at how many of
these indicators are included in a report.
Qualitative Differences
CSR reports also vary with respect to qualitative
criteria. These concern the CSR report’s quality
as well as its form. To identify differences in
reporting quality, that is, to distinguish good
CSR reports from poor ones, readers of CSR
reports can evaluate to which degree they comply
with qualitative reporting principles similar to
those established in financial reporting. In anal-
ogy to such principles, the Global Reporting
Initiative’s most recent standard G3 defines as
qualitative reporting principles:
– Balance: The report should contain both pos-
itive and negative aspects of a company’s
CSP.
– Comparability: The report should allow stake-
holders to compare a company’s social perfor-
mance over time and relative to other
companies.
– Clarity: The report should allow stakeholders
to access and understand the information.
– Accuracy: The information should be accurate
and detailed.
– Timeliness: Reports should be published
according to a regular schedule, and informa-
tion should be available in time.
– Reliability: In principle, the methods used in
preparing the report should be traceable for
outsiders and thus enhance reporting quality.
In recent years, numerous rankings have
emerged which aim at evaluating the quality of
CSR reports. Depending on their specific rating
methodology, they come to different conclusions.
805 D
Among the most commonly known ratings are
the Good Company Ranking (jointly provided by
Deloitte and Kirchhoff), the IÖW/future e.V.
Ranking, the CRRA by CorporateRegister.com,
the Global Reporters Surveys of Corporate Sus-
tainability Reporting (jointly provided by UNEP,
S&P, and SustainAbility), and the GRI Reader’s
Choice Awards.
Additionally, various differences in CSR D
reports do not necessarily refer to the quality of
the disclosed information (good vs. poor report)
but to the form in which the information is
disclosed. More specifically, differences can be
found with respect to the following three criteria.
First, CSR reports differ in their design and the
media through which they are published. CSR
reports can be published online, that is, either as
interactive websites or through the provision of
a downloadable version of the report. Alterna-
tively or in addition to online content, companies
publish CSR reports as part of their mandatory
annual report (so-called integrated reports).
Finally, and this is by now the dominant report
form, CSR reports can be published as stand-
alone reports, that is, as separate publications
that refer to CSR (and sometimes also include
data on economic performance).
Second, CSR reports differ in whether and to
what extent they apply national or international
reporting standards and guidelines. Although
various attempts by national governments, supra-
national organizations, and business initiatives
have been started to establish common standards,
the Global Reporting Initiative’s (GRI) sustain-
ability reporting guidelines are now the most
widely used standard worldwide. GRI is
a network-based organization that initiated
a multi-stakeholder dialogue to promote the
development of commonly accepted guidelines
for the publication of CSR reports. The guide-
line’s current version, G3, was published in 2006
and provides detailed principles and indicators
that companies use to report on their CSP.
According to GRI’s website, almost 1,900 orga-
nizations issued their CSR reports according to
these guidelines in 2010.
Third, CSR reports differ in whether they
include an assurance statement. Companies to
D 806
an increasing extent try to establish credibility by
mandating a third party to have their reports
externally and independently assured. Despite
several efforts to standardize CSR reports assur-
ance, for instance through the AA1000 or the
ISAE 3000 assurance standards, there is no glob-
ally well-established, dominant form of assur-
ance, yet. Consequently, companies that decide
to have their CSR report assured apply a variety
of different approaches: All kinds of organiza-
tions such as audit firms, certified bodies, or tech-
nical expert firms, can potentially provide
assurance for CSR reports; companies can have
their entire report assured or only parts of it; and
they can choose the level of assurance. For
instance, providers of assurance can either make
statements of limited assurance, in which they
basically state that nothing has come to their
attention that would make them doubt that the
disclosed information adequately reflects the
company’s CSP. Or they include a statement of
reasonable assurance in which they confirm that
the disclosed information adequately reflects the
company’s CSP.
The proliferation of such assurance reports is
still relatively limited in number. In their analysis
of the determinants of a companies’ decision to
adopt assurance in their CSR reports, Simnett
et al. (2009), found 2,113 sustainability reports
issued over the period 2002–2004, only 31% of
which contained independent assurance reports.
Moreover, the authors found that a mere 42%
percent of these assurance reports were provided
by organizations that belonged to the auditing
profession. According to GRI’s website, slightly
more than 36% of all GRI reports issued in 2010
included an assurance statement of some kind.
Determinants of Differences in CSR Reports
After the description of reporting differences, it is
worth trying to determine explanations for why
such differences exist. To this aim, the following
section will present reasons for why companies
voluntarily disclose CSR information at all,
which factors determine the quality of this infor-
mation, and why some companies decide to
include assurance statements in their reports.
Most generally, CSR reports are issued to
Disclosure (CSR Reporting)
diminish informational asymmetry between com-
panies and their stakeholders. But given that the
provision of such information is costly and purely
voluntary, why would companies have an interest
in disclosing it? Numerous theoretical and empir-
ical studies have sought to investigate this issue.
Before presenting some of their most important
results, it is important to note that at least in an
empirical context, a clear distinction between
drivers of reporting quality and its quantity is
impossible because an increase in information
disclosure is often associated with enhanced
information quality. Therefore, what follows is
a discussion of those determinants that were
found to explain variation in the quality of CSR
reports, irrespective of how the construct of
“reporting quality” was operationalized in the
respective studies (for recent examples of
such studies, see Brammer and Pavelin 2008;
Clarkson et al. 2008; Cormier et al. 2005;
Dhaliwal et al. 2011).
Determinants at the Country and the
Industry Level
Empirical studies have repeatedly found
intercountry differences with respect to the dis-
semination of CSR reports. As mentioned, certain
countries (among them Germany, France,
Scandinavian countries, and the UK) have tradi-
tionally led the way in CSR reporting so that CSR
reporting practices are more common in these
countries. Given such specific historical develop-
ments, varying cultural backgrounds, and diverg-
ing legislative environments, it is rather obvious
that the regional background of a given company
determines the likelihood that it publishes a CSR
report.
Additionally, certain factors at the industry
level explain differences in the provision and
quality of CSR reports. For example, industry-
specific regulation can require the disclosure of
certain information, as does the Toxic Release
Inventory (TRI) which obligates US companies
in various industries to report releases of certain
chemicals. Moreover, an industry’s social and
environmental impact affects the disclosure of
CSR information through its influence on the
demand for such information. The higher
Disclosure (CSR Reporting)
a given industry’s impact, the higher its scrutiny
and pressure to publicly account for its opera-
tions. The industry also influences the kind of
information that is typically disclosed in CSR
reports. Companies that operate in heavy-
polluting industries (oil and gas, mining, paper
and pulp, etc.) typically place their focus on envi-
ronmental reports, while human resource or gov-
ernance issues are dominant in financial and
service firms.
Determinants at the Company Level
To begin with, corporate social performance has
often been used to explain differences in CSR
reports: Whether a company voluntarily discloses
CSR information is then considered a function of
its actual CSP. In this vein, numerous theoretical
and empirical studies have analyzed the relation
between CSP and voluntary CSR disclosure.
Arguably, this relation has gained significant
attention mainly because its clarification would
help understand whether CSR reports actually
serve their purpose in that they provide
a reasonable representation of a company’s social
performance. The empirical relationship between
CSP and voluntary CSR disclosure has mainly
been addressed from two different theoretical
perspectives.
On the one hand, economics-based
approaches focus on the shareholder perspective
and derive their arguments from the theoretical
accounting literature. There, it has been argued
that managers disclose their private information
because rational observers would interpret
nondisclosure as “bad” news. Analogously, CSR
disclosures are understood as a company’s
attempt to reveal its true performance type
which would predict a positive, complementary
association between CSP and CSR reporting:
Companies with superior performance disclose
their information, others do not. The assumption
here is that the information disclosed is of high
credibility in that it truly reflects performance and
cannot be easily imitated by poor performers.
On the other hand, studies based on sociopo-
litical theories consider CSR disclosure as
a function of external pressure which companies
try to encounter by issuing CSR reports. This
807 D
argument especially applies to poorly performing
companies and their need to sustain their legiti-
macy. The sociopolitical perspective thus posits
a negative relation between disclosure and actual
performance: The poorer a company’s CSP, the
higher its need to publish extensive CSR reports.
As this argument assumes that the disclosure
level does not reflect actual performance, it
implies that the respective companies actually D
disclose low-credibility information.
Despite extensive efforts to investigate the
CSR disclosure/performance relationship, empir-
ical studies have so far failed to provide unam-
biguous results. Specifically, they have not
succeeded in dispelling widely spread skepticism
against corporate reporting practices. Critics seri-
ously doubt that CSR reports reflect companies’
desire for transparency and accountability and
consider them as rather public relations–oriented
“greenwashing” instruments.
Apart from CSP, various other company-
specific factors can influence the disclosure of
CSR information. For example, firm profitability
is often expected to influence the provision of
CSR information because of the costs involved
in the preparation and release of CSR reports.
Despite this argument’s intuitive appeal, most
studies actually failed to provide evidence for
its empirical validity. Another often-discussed
factor is stakeholder pressure. Investors, cus-
tomers, the media, or social and environmental
lobbying groups often expect companies to pro-
vide CSR information, albeit to varying degrees.
Accordingly, the quantity and quality of CSR
reports might less depend on the company
owners’ or management’s desire for accountabil-
ity but on the external stakeholders’ awareness
for social and environmental issues and the pres-
sure they put on the company. Closely related to
stakeholder pressure, studies have often identi-
fied firm size as a main driver of CSR disclosure.
The basic idea is that the larger a company, the
higher its visibility and its public attention which
increases the pressure to legitimize business
activities through the publication of CSR reports.
Also, a company’s cost of equity capital has been
found to influence the likelihood of issuing CSR
reports. Apparently, companies with higher costs
D 808
of equity have higher incentives to provide more
value-relevant information to capital markets in
order be able to raise more capital at lower costs.
Finally, some studies have argued that
a company’s ownership structure would have an
influence on its decision to release CSR informa-
tion. According to this argument, highly concen-
trated ownership would result in lower pressure
to publicly disclose private CSR information
because fewer shareholders would benefit from
such information.
Determinants of Assurance
As mentioned above, some companies seek to
increase the credibility of their CSR reports by
mandating external and independent bodies to
assure their report. Only a few studies have inves-
tigated which factors drive companies’ decision
to have their report assured (e.g., see Kolk and
Perego 2010; Simnett, et al. 2009). Besides the
fact that larger companies tend to be more likely
to involve professional assurors, virtually nothing
is known about company-specific determinants.
However, there is growing evidence that several
industry- and country-related determinants are
able to explain variation in the adoption of assur-
ance statements. Specifically, empirical studies
have found that the decision to adopt assurance
statements is a function of both the company
country’s legal and sociocultural environment
and the industry to which the company belongs.
The more stakeholder-oriented countries are, and
the lower the quality of their legal environment,
the more likely are companies to adopt assurance
statements. Moreover, the studies suggest that
companies that operate in industries with a high
social and environmental impact have a greater
need to increase user confidence in the credibility
of their CSR reports and are thus more likely to
include assurance statements in their CSR
reports.
Firm-Level Implications of CSR Reporting
In light of the discussion to this point, it is rea-
sonable to assume that managers who decide to
issue CSR reports expect their disclosure not only
to incur costs but also to have positive financial
implications via its impact on the company’s
Disclosure (CSR Reporting)
stakeholders. This last section will discuss the
validity of this assumption by first offering argu-
ments for why CSR disclosure might have finan-
cial implications before shortly reviewing
empirical evidence as to whether CSR disclosure
actually does have such implications.
The question why CSR disclosure might have
financial implications can be addressed by exam-
ining the effects that such disclosures might have
on different stakeholders. Of the many effects
which have been investigated in the literature,
the following three belong to the most commonly
discussed. First, CSR reporting can send
a positive signal to capital markets in general.
Good CSP is often considered a sign of
a company’s general competencies such as
a forward-looking and risk-reducing manage-
ment style, high resource efficiency, or superior
innovativeness. Therefore, the market might
value those firms higher that signal superior
CSP through their disclosure. Specifically, CSR
reporting might lower the company’s cost of cap-
ital, for instance, through reducing informational
asymmetry or sending a positive signal to socially
responsible investment (SRI) funds. Since SRI
firms systematically screen companies according
to their social performance, and since CSR
reports positively influence such screenings,
voluntary CSR disclosure can be expected to
ease access to SRI capital markets. Second,
CSR reporting might be able to enhance corpo-
rate reputation in consumer markets. In certain
industries such as the textiles, foods and drinks,
or the toy industries, buyers have become
increasingly aware of the company’s ethical and
environmental reputation and are sometimes
willing to pay price premiums for these compa-
nies’ products (ethical consumerism). Thus, if
CSR reporting is assumed to enhance corporate
reputation, it can enable the company to achieve
premium prices in their markets. Third, voluntary
disclosure of a company’s social performance
might have financially positive effects through
its impact on the company’s (potential)
employees. Especially, highly skilled employees
might feel attracted to companies with a good
CSR reputation so that CSR reports could enable
access to valuable human capital. Moreover, if
Disclosure (CSR Reporting)
employees care for their employer’s social
performance, their motivation can be enhanced
when CSR reports convincingly demonstrate that
the company seriously engages in CSR.
Despite all these arguments’ intuitive appeal
and their prominence in the literature, whether
CSR disclosure actually does have financial
implications ultimately remains an empirical
question. However, empirical evidence has so
far been less convincing than the conceptual
arguments summarized above. In an effort to
test the idea of a business case for CSR, there is
a long history of studies that investigate the link
between corporate social and financial perfor-
mance (Schreck 2009 provides a comprehensive
review). Since many of these works employ dis-
closure indices to approximate social perfor-
mance, they also offer insights into the financial
implications of CSR disclosure. Studies that
aimed at measuring the impact of CSR disclosure
on companies’ market and book values or their
cost of capital have only produced mixed results.
Although there is growing evidence that CSR
reporting does have indirect effects on financial
performance (most prominently through its
impact on corporate reputation, especially in con-
sumer markets), there are hardly any generaliz-
able results on its overall financial implications:
Whenever a study demonstrates a certain effect,
another study argues that it has been overstated or
even provides evidence for exactly the opposite
effect. In summary, these results suggest that
there is no reason to expect simplistic relations
between corporate social performance, CSR
reporting, and financial performance.
Future Directions
Given the pace at which CSR reporting has devel-
oped throughout the last 30 years, it can be
assumed that these reporting practices will con-
tinue evolving and changing in the coming years.
CSR reports have not only increased in absolute
numbers but also in growth rates. It is thus very
likely that the global trend of a steadily increasing
number of CSR reports will continue. What
remains to be seen is how these reports will
809 D
develop with respect to form of publication,
assurance, and reporting guidelines used.
More and more companies choose to publish
web-based CSR reports. This form of publication
has many advantages over conventional print
reports, such as being environmentally friendly,
making regular updates possible, and allowing
for an integration of interactive elements and
social media, which have gained in importance D
concerning stakeholder communication. In light
of these advantages, this development is wel-
come, in principle. However, web-based reports
bear the risk of violating the principles of com-
parability (especially over time) and timeliness
(when readers cannot understand when which
update is done). It will therefore be important to
observe to which extent companies shift to
online-only reports and how this development
relates to widely accepted principles of CSR
reporting.
Another open question lies in the dissemina-
tion of various forms of assurance statements as
a way to enhance credibility. Despite the success
of some internationally renowned standards,
readers of CSR reports in most instances need to
trust in the reports’ credibility without being able
to rely on objective third-party information. In
absence of legislative standards, assurance state-
ments will thus gain in importance. Since it is the
very function of CSR reports to provide informa-
tion on a company’s CSP in a reasonable and
balanced way, it is of great importance that com-
panies let their information be verified by inde-
pendent third parties.
Finally, it will be important to follow the
development of integrated CSR reporting.
Rather than issuing separate reports, some com-
panies already publish one comprehensive, inte-
grated sustainability report. That is, one single
report including information on a company’s
economic, social, and environmental perfor-
mance. In line with the normative notion that
companies should be accountable not only to
their shareholders but to a broader set of stake-
holders, this integrated form of reporting might
be the most promising approach to taking stock
of a company’s performance in a comprehensive
way. Whether this kind of report will develop
D 810
into the most common one is closely connected
to the further development of international
guidelines. GRI has succeeded in becoming the
most widely accepted and used standard by now.
The use of common standards such as that of
GRI will help to come closer to reliable, compa-
rable, and comprehensive CSR reporting prac-
tices. Given the fundamental importance of
sustainability issues in today’s society, this
would be a desirable development from
a societal point of view.
Cross-References
▶ Corporate Social Performance Measurement
▶ CSR Communication
▶ CSR Measurement
▶ Environmental Accounting
▶ Integrated Reporting
▶ Reporting Frameworks
▶ Reporting Sustainable Development
▶ Social Accounting
References and Readings
Brammer, S., & Pavelin, S. (2008). Factors influencing the
quality of corporate environmental disclosure. Busi-
ness Strategy and the Environment, 17(2), 120–136.
Clarkson, P. M., Li, Y., Richardson, G. D., & Vasvari,
F. P. (2008). Revisiting the relation between environ-
mental performance and environmental disclosure: An
empirical analysis. Accounting, Organizations and
Society, 33(4/5), 303–327.
Cormier, D., Magnan, M., & Van Velthoven, B. (2005).
Environmental disclosure quality in large german
companies: Economic incentives, public pressures or
institutional conditions? European Accounting
Review, 14(1), 3–39.
CorporateRegister.com. (2008). Assure view. The CSR
assurance statement report. London:
CorporateRegister.com.
CorporateRegister.com. (2011). CRReporting awards’11.
Experienced stakeholders judge the World’s leading
CR reports. London: CorporateRegister.com.
Craib, & PriceWaterhouseCoopers. (2010). CSR Trends
2010. Toronto: Craib Design and Communications.
Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G.
(2011). Voluntary nonfinancial disclosure and the
cost of equity capital: The initiation of corporate social
responsibility reporting. The Accounting Review,
86(1), 59–100. doi:10.2308/accr.00000005.
Disclosure of Stakeholder Engagement
Kolk, A., & Perego, P. (2010). Determinants of the adop-
tion of sustainability assurance statements: An inter-
national investigation. Business Strategy and the
Environment, 19(3), 182–198.
Mathews, M. R. (1997). Twenty-five years of social and
environmental accounting research: Is there a silver
jubilee to celebrate? Accounting, Auditing, & Account-
ability Journal, 10(4), 481–531.
Owen, D. L., & O’Dwyer, B. (2008). Corporate social
responsibility: The reporting and assurance dimension.
In A. Crane, A. McWilliams, D. Matten, J. Moon, &
D. S. Siegel (Eds.), The oxford handbook of corporate
social responsibility (pp. 384–409). Oxford: Oxford
University Press.
Schreck, P. (2009). The business case for corporate social
responsibility. Understanding and measuring eco-
nomic impacts of corporate social performance.
Heidelberg: Physica.
Simnett, R., Vanstraelen, A., & Wai Fong, C. (2009).
Assurance on sustainability reports: An international
comparison. Accounting Review, 84(3), 937–367.
Disclosure of Stakeholder
Engagement
▶ Stakeholder Engagement Disclosure
Discretionary CSR
▶ Philanthropic CSR
Discrimination
Claus Strue Frederiksen and Morten Ebbe
Juul Nielsen
Department of Media Cognition and
Communication, Centre for the Study of Equality
and Multiculturalism, University of Copenhagen,
Copenhagen, Denmark
Synonyms
Disadvantageous differential treatment; Racism;
Stigmatization
Discrimination
Definition
Discrimination is one of the most debated topics
within the field of business ethics and CSR. Within
this academic field, there are roughly three different
perspectives from which one can examine the sub-
ject of discrimination. First is the legal perspective,
in which scholars debate, among other things, the
legal implications of local and global antidiscri-
mination laws and the implications of different
verdicts. Second is the instrumental perspective,
in which scholars, for example, debate the financial
implications for companies that actively fight dis-
crimination and attempt to include every employee
within the company by implementing diversity
management programs. Third is the normative per-
spective, in which scholars focus on the debate
regarding how to define discrimination and the
implications of discriminatory recruitment policies,
which differentiate among applicants on the
basis of race, gender, or other seemingly morally
irrelevant features. In this entry, we focus solely on
the normative perspective.
Generally, discrimination is perceived as being
a morally bad thing, i.e., something that individuals,
governments, and companies should refrain from.
The problem with discrimination, as ordinarily
defined, is that the discriminatee, i.e., the person
being discriminated against, is subject to disadvan-
tageous differential treatment because of some
morally irrelevant feature like skin color. Thus,
most of us find it morally reprehensible if a store
owner, because he is a racist bigot, does not want to
hire Black people. However, even though almost
every scholar in the field condemns bigotry and
racism, this does not mean there is no controversy
surrounding the topic of discrimination in the
academic field. On the contrary, there is much
debate concerning the normative implications of
discrimination. In this regard, the origin of the
debate seems to be how to define discrimination,
i.e., in what situations is it appropriate to classify an
action as being discriminatory.
Three Ways of Defining Discrimination
Some scholars, including Jan Narveson, believe
that discrimination involves disadvantageous
differential treatment based on morally irrelevant
811 D
features, such as gender or skin color. In this regard,
Narveson argues that a discriminatory act
involves at least three agents: a discriminator who
discriminates, a discriminatee who is discriminated
against, and a favored individual who benefits from
the discrimination against the discriminatee. As
Narveson points out, the challenge is to determine
what constitutes a morally irrelevant feature.
However, even though there might be some bor- D
derline cases, some features, including skin color,
gender, eye color, and religious preferences, seem,
other things being equal, morally irrelevant, at least
in regard to companies’ recruitment policies.
According to this definition of discrimination, an
employer who, other things being equal, prefers to
hire people with blue eyes, rather than people with
green or brown eyes, is discriminating against
people with green and brown eyes. Notice that
Narveson does not believe that discrimination,
according to his definition, is always morally
wrong (Narveson 2002).
Other scholars, including Kasper Lippert-
Rasmussen and David Wasserman, argue that an
action is not necessarily discriminatory just
because it involves disadvantageous differential
treatment based on a morally irrelevant feature
(Lippert-Rasmussen 2006a, b; Wasserman 1998).
According to these scholars, an employer who
prefers to hire people with blue eyes, rather than
people with green or brown eyes, is not discrim-
inating against people with green and brown
eyes. Even though the employer’s recruitment
policy correctly can be characterized as idiosyn-
cratic, it should not be characterized as discrim-
inatory. In essence, Lippert-Rasmussen believes
that A is discriminating against (or in favor of)
B if the following three conditions are met. First,
A treats B differently from C. Second, the
differential treatment is (or is believed by A to
be) disadvantageous (or advantageous) to B.
Third, the differential treatment is the result of
B and C being (or believed by A to be)
members of different socially salient groups
(Lippert-Rasmussen 2006a, b). According to
this definition, an action is only discriminatory
if it involves so-called socially salient groups.
Socially salient groups are characterized such
that membership is perceived as important, both
D 812
by group members and non-group members, in
a wide range of social contexts. Note that it can
be difficult to determine what features denote
membership in a socially salient group. However,
people with blue eye color do not seem to be
members of a socially salient group since eye
color does not seem to play a role in most social
contexts. Race, gender, and religious preferences,
on the other hand, seem to come into play in
many social contexts. Notice that an employer
who treats individuals who are members of
different socially salient groups differently is
not necessarily discriminating against (or in
favor) of anybody since disadvantageous
differential treatment is only discriminatory if it
is explained by the fact that the individuals are
members of different socially salient groups.
Also, as Lippert-Rasmussen himself points out,
it is not all cases involving differential treatment
of nonsalient groups, which we do not
feel involves discrimination. If, for example,
insurance companies “discriminate” against
people with certain genetics profiles, this
does not qualify as discrimination according to
Lippert-Rasmussen’s definition since people with
a specific genetic profile are not members of
a salient group (Lippert-Rasmussen 2006a).
However, proponents of a definition of discrimi-
nation involving salient groups argue that even
though the definition clearly has its limitations, it
seems to have one major advantage which
outweighs its disadvantages, namely, that it
seems to capture our ordinary use of the
term, since ordinarily when we speak of
discrimination, we implicitly speak about
discrimination against (or in favor of) socially
salient groups.
Thus, according to both Narveson and
Lippert-Rasmussen, discrimination is not always
morally wrong. However, some scholars, includ-
ing James Rachels, define discrimination in a way
that implies that discriminatory actions are
always morally wrong (Rachels 2003).
According to this definition, discriminatory
action involves treating some people differently
than others when there is no morally relevant
difference between them that would justify it.
Supporters of this definition thus agree with
Discrimination
Narveson; an employer, who prefers to hire peo-
ple with blue eye color, rather than people with
green or brown eyes, is discriminating against
people with green and brown eye color. However,
unlike Narveson, these scholars also believe that
this kind of behavior is morally wrong. Note also
that if a Buddhist woman is only interested in
dating men who share her religious conviction,
she is, according to Narveson, discriminating
against people with other religious beliefs. In
this case, most of us feel, like Narveson, that the
Buddhist woman is not doing anything morally
wrong, even though she is clearly differentiating
between people because of their religious prefer-
ences. However, according to Rachels, the Bud-
dhist woman does not seem to be discriminating
against people who do not share her religious
beliefs since religious preferences, in this case,
actually seem to be morally relevant. We will
elaborate further on when and why discrimina-
tion is wrong, but the important point here,
according to this last definition of discrimination,
is that the context seems to determine whether
a feature is morally relevant or not. One major
advantage of this definition is that it seems to
capture our immediate intuitions about discrimi-
nation, namely, that discrimination is morally
wrong. When we think of discrimination, many
of us think of a racist person or a male chauvinist
who discriminates against Black people or
women. For many of us, discrimination is thus
a negatively value-laden term, i.e., something
that we should refrain from. However, it still
seems relevant to ask why and when discrimina-
tion is morally wrong (or when, if one supports
the last definition, an action is discrimination and
thus morally wrong). We will examine this
question below.
Introduction
Scholars not only discuss how to define discrim-
inatory actions, they also debate why discrimina-
tion is morally wrong. As mentioned above, some
scholars believe that discrimination per se is mor-
ally wrong; however, these scholars also have to
demonstrate why discrimination is wrong and
Discrimination
when disadvantageous differential treatment is
discrimination (and thus morally wrong). In this
regard, the point seems to be that it is wrong to
treat some people differently on the basis of mor-
ally irrelevant features. The challenge, however,
as indicated above, is to demonstrate when
a feature is morally irrelevant. Before taking
a closer look at this challenge, it is worth noting
that scholars have different perspectives on why
discrimination is morally wrong.
The Wrongness of Discrimination
Some scholars, including Larry Alexander, argue
that if a person is incorrectly judged to be morally
inferior, for example, because of the color of his
skin, and is treated accordingly, then this behav-
ior represents a failure to respect the recipient.
And this failure of respect is morally wrong,
regardless of its consequences (Alexander
1992). In this regard, it is important to note that
many scholars, including Alexander, who believe
that discrimination can be morally wrong regard-
less of its consequences, also believe that dis-
crimination can be morally wrong because of its
consequences. These scholars thus do not reject
the idea that discrimination can be wrong in vir-
tue of its consequences. They just do not believe
that that is the whole story. In contrast, other
scholars, including Lippert-Rasmussen, believe
that discrimination can only be wrong in virtue
of its consequences. In this regard, it is important
to note that focusing solely on the consequences
does not necessarily mean favoring a utilitarian
approach to discrimination. Lippert-Rasmussen,
for example, argues in favor of a kind of
prioritarian account, in which bad effects are
morally worse if they affect individuals who are
relatively worse off, ordinarily meaning mem-
bers of weak and marginalized socially salient
groups (Lippert-Rasmussen 2006a). Other
scholars, including Narveson, argue that most
morally wrong discriminatory actions are wrong
not because they are discriminatory, but because
they are unjust. The point is that lynching a Black
man because of the color of his skin is both
discriminatory and morally wrong, but the
(main) reason why it is morally wrong is not
that it is discriminatory, but that it is morally
813 D
wrong to lynch an innocent man, regardless of
the color of his skin (Narveson 2002).
A somewhat similar view can be found in the
writing of Iris Marion Young, who argues that
oppression of weak and marginalized socially
salient groups is the main problem and that we
therefore should focus on oppression instead of
discrimination (Young 1990).
There thus exist a variety of views on why D
discrimination is morally wrong. However, the
main debate does not concern why discrimination
is morally wrong, but instead when is discrimi-
nation morally wrong. As mentioned above,
many of us might feel inclined to spontaneously
answer that discrimination is always wrong
because we immediately connect discrimination
to racist or chauvinistic actions. However, as
illustrated above, some plausible definitions of
discrimination do not imply that discrimination
is necessarily morally wrong.
When Is Discrimination Wrong?
For the sake of simplicity, in the following we
will assume that discrimination is not necessarily
wrong. Additionally, our main focus will be on
discrimination in relation to recruitment policy.
In this regard, five issues seem to be especially
relevant. The first issue is affirmative action,
which some scholars refer to as reverse discrim-
ination. The second concerns reaction qualifica-
tions, i.e., whether and to what degree companies
should take account of the reaction of their recip-
ients when they evaluate job candidates. The
third issue concerns the distinction between
direct and indirect discrimination and whether
these kinds of discrimination are equally wrong.
The fourth issue concerns whether companies
have a right to discriminate, i.e., whether private
companies have the right to hire who they want
and thus also have a right to discriminate against
certain groups if they want. The fifth issue con-
cerns group representation, i.e., whether compa-
nies are discriminating if some socially salient
groups are underrepresented.
Since readers are able to find an elaborate
discussion about affirmative action elsewhere in
this encyclopedia, we will only say a few words
about the subject. Many opponents of affirmative
D 814
action argue that affirmative action is morally
wrong because it is a form of discrimination. In
this regard, they argue that to prefer Black candi-
dates to White candidates is on a par with good,
old-fashioned discrimination, where the candi-
date’s skin color plays a role. Instead of discrim-
ination against Black people, companies that
have implemented affirmative action programs
are discriminating against White people. Some
proponents of affirmative action, including Prue
Burns and Jan Schapper, deny that affirmative
action is a kind of discrimination (Burns and
Schapper 2008). In this regard, they argue that it
is misleading to use the term discrimination in
relation to affirmative action since discrimination
is not a neutral, but rather a pejorative, term and
thus, at best, devaluates the positive intentions
behind affirmative action. Other proponents,
such as Young, argue that even though affirma-
tive action is a kind of discrimination, it is cer-
tainly not on a par with “good old” racist
discrimination since discrimination against
Black people is oppressive and contributes to
further marginalizing a socially salient group,
whereas affirmative action is aimed at including
weak and marginalized groups. As Young argues,
sometimes equality, understood as inclusion of
all groups, is better served by treating groups
differently (Young 1990).
Another heavily debated topic concerns the
discussion regarding so-called reaction qualifica-
tions. The origin of this debate is a popular and
simple recruitment slogan, which states that com-
panies should always hire the best qualified
candidates for a job (HBQ). As Alan Wertheimer
and Alexander argue, this seems to imply that
companies, in many cases, not only should con-
sider the technical qualifications of the appli-
cants, but also the reaction qualifications, i.e.,
the reactions of the recipients, i.e., customers,
business partners, coworkers, etc. (Alexander
1992; Wertheimer 1983). A company operating
in a male-dominated and chauvinistic society
thus, according to the HBQ principle, should
hire a less technically qualified male as its new
sales manager instead of a more technically qual-
ified female, if the female applicant, due to the
recipient’s reactions, will be less effective. Thus,
Discrimination
gender, race, and other seemingly morally irrele-
vant features, according to the HBQ principle,
can “disqualify” otherwise technically qualified
candidates because they will be less efficient than
candidates with the “right” race and gender. The
question thus is whether companies should base
their recruitment policies on HBQ or if they
should disregard reaction qualification and focus
solely on technical qualifications. Even though
this might not be an issue for many companies,
since their recipients are neither racists nor chau-
vinists, it is highly relevant for a number of com-
panies operating in countries or local
communities in which socially salient features
like race, gender, or religious preferences matter
a great deal to customers, business partners, or
other stakeholders. In this regard, it is also impor-
tant to note that even though many countries have
antidiscrimination laws prohibiting companies to
discriminate against candidates on the basis of
race, gender, religious preferences, etc., these
laws are very difficult to enforce and in many
countries they are not (if they even exist) taken
seriously by the authorities. The question regard-
ing reaction qualification is thus highly relevant
and might be one of the most difficult questions
regarding discrimination and recruitment policy
since disregarding reaction qualifications seems
to be in conflict with maximizing profit. If the
business of business is business, then companies
should recruit new employees in accordance with
HBQ. However, this seems to imply that compa-
nies in some instances should discriminate
against candidates because they have the
“wrong” race, gender, religious background,
etc. Many scholars believe that none of the
options seems attractive since they do not want
to abandon either HBQ or accept that companies
should discriminate against members of weak
and marginalized socially salient groups. How-
ever, nobody has been able to come up with
a generally accepted solution, which means that
the debate is ongoing.
A related issue concerns the distinction
between direct and indirect discrimination. If
a company does not want to hire a Muslim
woman solely because of her religious prefer-
ences, and thus not because she will be less
Discrimination
efficient than other applicants, then the company
is said to be directly discriminating against Mus-
lim women. Now, most scholars believe that
direct discrimination based on, for example, reli-
gious preferences is morally wrong. If, on the
other hand, the company does not care about
religious preferences, but does not want to hire
the Muslim woman because she wears a religious
head scarf, which is in conflict with the
company’s dress code, then this is a matter of
indirect religious discrimination, unless the com-
pany has good reasons, for example, regarding
safety, not to revise its dress code, such that the
Muslim woman’s head scarf is not in conflict with
the dress code. In this regard, some argue that
direct and indirect discrimination are equally bad,
or at least almost equally bad, because it does not
seem to matter to the person being discriminated
against whether he or she is rejected because of
her religious belief or because of a nonjustified
rule that is in conflict with his or her religious
beliefs. However, others believe there is a huge
difference between the two kinds of discrimina-
tion because the one, direct discrimination, is
intended, whereas the other, indirect discrimina-
tion, is not. Additionally, some argue that com-
panies have a right to decide on dress code.
Others, however, claim that just as companies
should not have the right to decide what skin
color its employees should have, they should
not have the right to have a dress code that
excludes certain groups, unless it can be justified.
This debate brings us to the fourth issue
regarding discrimination and recruitment policy.
This issue concerns whether companies have
a (moral) right to discrimination. Some scholars,
including Narveson, argue that companies have
a right to discrimination (Narveson 2002). Since
private companies are not obligated to hire any-
body, they are not obligated to hire A rather than
B, but can freely choose to hire B instead of A on
whatever basis they like. Companies can thus, if
they want to, choose to hire the best qualified
person for the job, the least qualified person for
the job, the funniest person for the job, the whitest
person for the job, or the most feminine person
for the job, etc., if they want to (unless it is a listed
company and its shareholders complain). Notice
815 D
that this view does not imply that discrimination
is morally praiseworthy, but only that companies
have a (moral) right to discriminate. However,
many scholars disagree, mainly because they
believe that discrimination is a matter of disre-
spect, and companies should not be allowed to
disrespect people, or that the consequences of
discrimination are so bad that it should not be
allowed. D
The fifth and final issue concerns group repre-
sentation, i.e., whether companies discriminate if
some socially salient groups are underrepre-
sented. Some scholars, including Young, argue
that if a socially salient group is underrepre-
sented, this indicates that the group members
are being subjected to unjust differential treat-
ment (Young 1990). If, for example, a company
that has an equal number of male and female
employees only has 20% female employees in
manager positions, then this, accordingly, indi-
cates that the company discriminates against
women. Basically, the argument suggests that if
men and women are equally qualified to be man-
agers, they should be equally represented in the
attractive positions in the company, and if they
are not equally represented, this indicates that the
company discriminates against the underrepre-
sented group. In this regard, some argue that
men and women are not equally qualified and
that this is the reason why they are not equally
represented. This is, of course, an empirical
claim, which in many cases does not seem espe-
cially convincing. However, even if it is true,
which it might be, at least in regard to some
socially salient groups that are less educated
than average, this does not mean that these groups
are not victims of discrimination. According to
some scholars, these groups, even though they are
not being discriminated against by the company,
are instead being discriminated against by soci-
ety, which does not truly respect the members of
these groups. The point is that members of these
groups have to fight harder to prove their worth
and this, according to some, means that to treat
members of these groups equally, we should treat
them (positively) differently, which means
a return to the debate regarding affirmative
action.
D 816
Key Issues
In relation to CSR and discrimination, several
issues seem worth noting. First, companies
should be aware of the differences among the
legal, instrumental, and normative implications
of discrimination. Second, it is important to note
that discrimination (at least in the discussion
regarding the normative implications) is defined
differently by different scholars. Third, the main
normative discussions regarding discrimination
and CSR concern companies’ recruitment poli-
cies, including affirmative action, reaction quali-
fications, the distinction between direct and
indirect discrimination, whether companies have
a (moral) right to discriminate, and whether the
underrepresentation (in attractive positions) of
a socially salient group is a sign of
discrimination.
Future Directions
Companies that want to base their CSR policies
on solid moral ground have a major challenge
when it comes to discrimination since it is very
difficult to determine what kinds of principles
companies should base their recruitment policies
on. Should they involve affirmative action pro-
grams? Or should companies just act in accor-
dance with HBQ and hire the best qualified
person for the job? And how does a company’s
purported goal of antidiscrimination and inclu-
sion of all socially salient groups fit with other
company guidelines, including a dress code?
Finally, should companies try to ensure that all
socially salient groups are represented equally in
their attractive positions? When it comes to dis-
crimination, there seem to be numerous hard
questions and no easy solutions.
Cross-References
▶ Affirmative Action
▶ Equal Opportunity
▶ Human Rights, Non-discrimination
Discrimination Against the Aged
References and Readings
Alexander, L. (1992). What makes wrongful discrimination
wrong? Biases, preferences, stereotypes, and proxies. Uni-
versity of Pennsylvania Law Review, 141(1), 149–219.
Burns, P., & Schapper, J. (2008). The ethical case for affir-
mative action. Journal of Business Ethics, 83, 369–379.
Lippert-Rasmussen, K. (2006a). Private discrimination:
A prioritarian, desert-accommodating account. San
Diego Law Review, 43, 817–856.
Lippert-Rasmussen, K. (2006b). The badness of discrimi-
nation. Ethical Theory and Moral Practice, 9, 167–185.
Narveson, J. (2002). Respecting persons in theory and prac-
tice. New York: Rowman and & Littlefield Publishers.
Rachels, J. (2003). The elements of moral philosophy
(4th ed.). London: McGraw-Hill.
Wasserman, D. (1998). Discrimination, concepts of.
In R. Chadwick (Ed.), Encyclopedia of applied ethics
(Vol. 1, pp. 805–814). London: Academic.
Wertheimer, A. (1983). Jobs, qualifications, and preferences.
Ethics, 94(1), 99–112.
Young, I. M. (1990). Justice and the politics of difference.
New Jersey: Princeton University Press.
Discrimination Against the Aged
▶ Ageism
Discrimination Against the Young
▶ Ageism
Discussion
▶ Dialogue
Dishonesty
▶ Corruption and National Development
Dissemination
▶ Micro-disclosure
Diversity
Distinction Between Philanthropy
and Core Business Activities
▶ Business Case
Diversity
Christina Keinert-Kisin
Department of Labor Science and Organization,
Vienna University of Technology, Vienna,
Austria
Synonyms
Demoraphic variedness
Definition
Diversity is defined as the state of being different
or varied. When speaking of diversity in an
organizational context, one typically refers to
a varied combination of demographic attributes,
characteristics, and expertise contributed by indi-
viduals. Diversity in the corporate context recog-
nizes that restriction to individuals from part of
the talent pool only equates to a restriction of
skills and knowledge at the same time.
In short, diversity embraces difference(s) and
propagates the inclusion of so far underrepre-
sented groups, be they women or ethnic, reli-
gious, national, or sexual minorities, as well as
individuals of different professional or educa-
tional backgrounds, on teams and on all hierar-
chical levels of the organization. While the
definition of diversity can hence comprise
a broad variety of differences, each of which
poses very different challenges, the most com-
monly understood dimensions of diversity both in
the literature and in corporate communication are
gender and ethnicity. Women are commonly sub-
sumed under the “minority” label: While women
do not constitute a minority, numerically, neither
in the general population nor in the business
817 D
environment, they remain a small minority in
the upper levels of the power hierarchy.
The recognition and appreciation of difference
also recognizes there may not be “one way” of
doing business or management, but different
approaches stemming from different walks of
life. Historically or commonly underrepresented
individuals are perceived as valuable contribu-
tors: Their skills and knowledge are recognized D
as valuable assets under the diversity concept.
In any discussion of diversity, its relation to
equal opportunity will need to be thought over:
Diversity and equal opportunity are different, but
partially overlapping, concepts. If equal opportu-
nity is realized, the corporate workforce and lead-
ership will inevitably become more diverse than
it presents itself today. However, diversity can be
seen as more results-oriented than equal opportu-
nity: Equal opportunity is content with setting the
institutional framework for all individuals to suc-
ceed based on their talents, skills, and accom-
plishments; diversity implies a more proactive
approach in creating demographically varied
teams and organizations for the sake of con-
sciously including different perspectives, values,
thoughts, and experiences. Consequentially, an
organization committed to diversity will go fur-
ther than an organization that is merely commit-
ted to equal opportunity. Where equal
opportunity strives to stop exclusion, diversity
promotes active and conscious inclusion. Diver-
sity management then refers to proactive efforts
to manage difference within an organization.
Introduction
The academic interest in the corporate diversity
concept can be largely divided into two perspec-
tives: a values and business ethics based view on
diversity, and the competition based case for
diversity.
From a philosophical perspective, the value-
based advocacy for diversity is rooted in modern
constitutional and civil/human rights thought:
The individual is to be judged and should be
able to succeed based on personal merit, not
advantage or disadvantage through group
D 818
membership. From this civil/human rights per-
spective, equal opportunity is realized by the
expressed abolition of historical discrimination
and legal restrictions on the grounds of birth,
race, or gender, as well as by expressed prohibi-
tion of unlawful discrimination inter alia on the
labor market. From a business, organizational,
and labor ethics point of view, the organizational
social contract demands fair treatment of all
employees. Organizational ethics are concerned
with “right” behavior and the creation of harmo-
nious and productive relationships within organi-
zations. Equitable and just treatment of all
employees with regard to basic working condi-
tions including pay, appreciation of accomplish-
ments, and career advancement is central to these
efforts. Independent of potential competitive
advantage, such fair employment relations, and
with them equal opportunity and diversity, are
ends in and for themselves.
Overall, the “moral case” for diversity in orga-
nizations is focused on equal opportunity and
nondiscrimination and is presented as a matter of
social justice and fairness. This justice and fairness
approach to diversity is present in many corporate
value statements. It is criticized in parts of the
literature as paternalistic, in the sense that it overly
focuses on minority members’ need for protection.
The business case for diversity, on the other
hand, focuses on competitive and strategic
advantage of a diverse workforce, and even
more so of executive and top teams: avoidance
of groupthink, innovative problem-solving, the
inclusion of hitherto unconsidered perspectives
and knowledge, better access to target
markets and valuable knowledge on consumer
segments and communities, enhanced discussion
culture, more effective exercise of control, and
the creation of organizational commitment as
well as employer branding are among the major
advantages creating a competitive edge analyzed
in the literature. The increasing focus on the
business case of diversity is criticized by some
scholars, as it represents a departure from the
rights-centered nondiscrimination discourse,
which benefits the “diverse individual,” while
for the business case of diversity the organization
is the beneficiary.
Diversity
As the diversity literature has moved from
rather anecdotal evidence of diversity benefits to
solid empirical backing for the benefits of diverse
leadership – numerous studies have found
enhanced financial performance for organiza-
tions with gender or ethnically diverse top
teams – one reproach remains to be made toward
the competitive advantage-focused approach:
Diversity in business has become a reality. Glob-
alized business opportunities, substantial immi-
gration even to European countries that have long
been relatively ethnically homogeneous, the mas-
sive influx of women into the workforce, and an
aging working population present very real chal-
lenges to the organizations of the near future.
Good diversity management will not be
a question of competitive edge, but an existential
necessity, particularly since workplace conflict
expressed in actions such as harassment and
bullying has been found to occur in crucial tran-
sitional periods toward change as a form of back-
lash among the hitherto dominant group.
Strategies in the actualization of equal opportu-
nity for the best talents, mitigation and prevention
of backlash, and thus true appreciation for
difference and its benefits will remain
a challenge and priority, both for practitioners
and academia as a major topical issue in the
CSR and business ethics debate as well as in the
strategic HR field.
Key Issues
The major key issue in the diversity literature
of the past 15–20 years has been the elaboration
of a more than anecdotal case for diversity.
The majority of studies has focused on leadership
and workforce diversity benefits through
change of perspective or leadership style, group
performance, and improved stakeholder
relations.
As for change of perspective, a person’s sex,
ethnicity or race, religion, or other minority status
make him or her draw from different life experi-
ence, as well as consider social relations, insights,
and knowledge of the groups they are coming
from in their decisions and actions.
Diversity
Differences in perspective between minority
and majority members in business include the
following core business topics:
Different demographic groups hold funda-
mentally different views on employment equity.
It has been found that women and non-Caucasian
men hold more favorable attitudes toward equal
opportunity than Caucasian men do. This differ-
ence has been explained in the literature through
“moral proximity” of an ethical issue: Ethically
doubtful actions or thoughts are better understood
by individuals who experience a personalized
impact of such actions on their own economic
and social well-being. Through personal experi-
ence of discrimination in the workplace –
women, for instance, have been found to report
significantly more harassment and bias in their
working lives than their male peers – minority
members can bring valuable perspectives on
increased inclusion and diversity and raise aware-
ness regarding more hidden forms of discrimina-
tion. Essentially, minority members who succeed
in climbing up career ladders have found ways
and strategies to circumvent stereotype, demo-
graphic favoritism, and glass ceiling(s). They
can function as agents for change and as the
“minority conscience” of their teams.
Other studies on gender differences
established that the majority of male managers
and professionals, particularly CEOs, surveyed
believe women are actively encouraged to partic-
ipate in career development activities, yet high-
performing women overwhelmingly disagree.
A substantial proportion of male CEOs underes-
timate the size of the female talent pool and see
the reason for women’s lagging behind in career
progress in their lack of relevant line and strategic
experience as well as family responsibilities.
Both statistics on female managers’ childlessness
and on women’s line and strategic experience
cast doubt on the accuracy of these perceptions
of women’s career commitment and qualifica-
tions. Women executives on the other hand
name male stereotyping, preconceptions of
women’s roles and abilities, and exclusion from
networks as the main career barriers. Whereas
male executives believe women’s chances have
increased substantially, women directors feel
819 D
male executives are still more comfortable with
appointing their mirror images. Clearly, there is
a gap in perception between majority and minor-
ity members on the availability of suitable minor-
ity candidates and on the barriers that hinder
minority members’ career upward mobility.
With regard to business ethics and manage-
ment ethics studies, gender differences in ethical
reasoning include women’s greater awareness of D
fairness in rewards, remuneration, and promotion
practices. Managers’ sex is an important predic-
tor for their attitudes regarding ethically doubtful
hiring and promotion practices. Women were
found especially sensitive to hiring less-qualified
candidates, friends, and the allocation of bonus or
compensation payments within informal power
structures.
In the field of sexual harassment, clear gender
differences have been found across national
boundaries: The more severe the harassment,
the more likely men and women will agree on
the wrongful quality of the behavior and its qual-
ification as harassment. The “less severe” the
action or behavior, the more reluctant men across
professions and nationalities are to qualify the
behavior as harassment. While male views are
institutionalized in corporate management by
majority situation, law has taken the opposite
side: the victim-centered approach. Financial
implications of harassment are severe, with esti-
mates saying the average Fortune 500 company
loses $6.7 million a year, excluding the costs of
lawsuit, merely through decreased work effec-
tiveness, motivation, increased absenteeism, ill-
ness, and turnover. Additionally, lawsuits can
turn into multimillion dollar losses and severely
affect shareholder value.
Organizations ranking high on sexual harass-
ment simultaneously depict high rates of racial
harassment and other forms of unfair employee
treatment. All the more important it would be to
have members of vulnerable social groups partic-
ipate in decision-making on strategies aiming at
the prevention of such abuse. Interestingly, vari-
ous empirical studies have established that
women supervised by women are less likely to
become victims of harassment than women
supervised by men: More diverse supervision,
D 820
management, and leadership hence promise to
reduce incidents of harassment within the
organization.
Besides these differences in perceptions of
harassment and of barriers to more (gender)
diverse leadership, men have over the past
decades been found to hold much more tradi-
tional views on women, their abilities, and role
in society than women, and this applies over
national and cultural boundaries and generations,
from recent student to manager populations. Such
propensity to traditional and stereotypical views
is likely to impact upon perceptions of merit,
performance, and suitability for management
positions of candidates. Stereotypes regarding
ethnic, religious, or sexual minorities are less
studied in the diversity literature. In other con-
texts, majority members have been found to carry
greater prejudice and stereotypical attitudes
toward minority members, their abilities, place,
and behavior when they have not been exposed
to representatives of those minorities in their
personal and professional lives. Segregation in
professions and functions therefore very likely
helps uphold prejudice and stereotype also
toward other minorities.
As for diversity and leadership style, from the
early 1980s onward, a branch of the women in
management literature has propagated
a fundamentally different “feminine” leadership
style: Women managers are portrayed as more
interactive, people-oriented, empathic, and coop-
erative managers, who lead by participation and
interaction. The “feminine” style has been
presented as the management style of the future.
Whether or not a generic “feminine” manage-
ment style as such exists has been subject to
much debate in the literature.
The impact of diversity within teams on group
performance has been studied extensively:
Diverse teams have been found more effective
than their homogeneous counterparts in problem
solving, particularly for highly complex and
nonroutine tasks. Diversity in demographic traits,
as well as in lifestyles and values, increases the
knowledge base at hand, thereby enhancing the
likelihood of innovative results. The greater
breadth of perspective stemming from different
Diversity
professional, ethnic, or gender backgrounds
accounts for a greater propensity to consider all
relevant issues before reaching a consensus; it
can hence reduce insular decision-making.
Furthermore, diversity within groups may result
in greater openness to change. Diverse educa-
tional and functional background has been
repeatedly linked to better strategic decision-
making in the literature: Diverse group members
hold the potential to have underrepresented
values, experiences, attitudes, and cognitive
approaches included in strategic decisions, and
such divergent or rare perspectives can spark
thinking “outside the box.” Overly homogeneous
groups on the other hand can be trapped in
“groupthink” and rely on already established
consensus.
Diverse groups are thought to be more effec-
tive than nondiverse groups in nonroutine
problem-solving situations, and for the tackling
of highly complex problems, where the ability of
a team to accept different perspectives is crucial
for success. In turbulent environments and where
teams have the task of developing new strategies
rather than of implementing existing ones,
diverse groups hold the potential to perform
better. The literature suggests that in routine sit-
uations, heterogeneous teams may be at
a disadvantage, for precisely the advantage of
broader perspectives and more debate may
delay consensus, and thus prolong the decision-
making process (one of the suggested “down-
sides” of group diversity, discussed in further
detail below).
Large-scale simulations directly comparing
performance of heterogeneous and homogeneous
groups are relatively rare: An early study from
1983 juxtaposed the performances of all-male,
all-female, and mixed-gender groups in the task
of creating an innovative egg-catching device.
Group interactions and results were observed
and the mixed-gender group did best. A 2001
larger scale study of group performance and
their demographic composition – with focus on
gender composition again – simulated the devel-
opment of a corporate marketing strategy for
a large student sample. Group gender composi-
tion significantly impacted upon performance:
Diversity
Both the higher ratio of women than men and the
percentage of women significantly and positively
affected group performance: Groups with
29–67 % women performed best; overall,
“single-gender” groups performed poorly.
“All-men” and “all-men with few token women”
teams performed worst.
An area where diversity and its impact on
group performance has come under particular
scrutiny is corporate board composition. Notori-
ous corporate breakdowns and scandals are asso-
ciated with shortcomings in control and in the
supervisory tasks for which corporate boards are
in place; “clubby elites” and corporate “mono-
cultures” have collected the blame for many such
oversight failures. Researchers have noticed out-
spoken boards constitute an asset, and female
participation on boards has been linked with
increased debate culture and outspoken board
character. Generally, people seem to be less crit-
ical of members of their own race and gender.
This general phenomenon aside, women are so
far largely excluded from such “clubby elites,”
which can be an additional advantage when inde-
pendent control and oversight are needed.
“Board independence and board diversity go
hand in hand” best sums up these ideas. Whether
out of conviction or as practical acknowledge-
ment of these findings, institutional investors are
known to push for female and minority presence
on boards. Large pension funds have in the past
expressed clear preference for diversity on cor-
porate boards, and some institutional investors
have guidelines in place requiring them to with-
hold their votes for corporate board appointments
in the case minimum diversity requirements are
not met.
On the firm level, the impact of diverse lead-
ership on firm performance has been the subject
of various studies, mainly American ones:
Several studies have found a positive relationship
between the percentage of women and minority
directors on corporate boards and firm perfor-
mance measured with the help of return on assets
and return on investment, all while controlling for
changes in the market. One study contradicts
these findings and detects a negative relationship
between the percentage of women on the board
821 D
and accounting measures of performance (the
number of women on board in this particular
study remains very low; the authors therefore
suggest they are but token members with little
opportunity to exercise actual influence). For
Canadian firms, significant correlations between
the number of women directors on boards and
firms’ revenue, assets, numbers of employees,
and profit margins have been established. The D
US-based research center Catalyst, specialized
in research on women in management, has
established a link between gender diversity in
top management and firm financial performance
for the Fortune 500:
For 353 Fortune 500 companies, diversity and
relevant financial information were available for
the years 1996–2000, an economically prosper-
ous period, producing a sample of firms from
various industries. Ranked by above- or below-
average gender diversity in top management,
the top quartile significantly outperformed the
bottom quartile on return on equity and total
return to shareholders. Notably, these data show
a statistically significant link between gender
diversity on top management teams and financial
performance, but no causal link. Rivaling expla-
nations for these findings are as follows: Highly
qualified women may constitute a scarce human
resource who then self-select into the more prof-
itable companies, or financially successful com-
panies may be better able to afford diversity.
The literature has also addressed the “down-
side” of diversity, a potentially adverse effect on
group performance: The inclusion of formerly
absent or marginalized, and thus “counter-main-
stream,” perspectives not only increases debate
and innovation but also challenges established
ways of doing business. Loss of cohesion and
increase in conflict may therefore be side effects
of increasingly diverse teams. While rather
homogeneous groups may hold similar views
and experience little latent conflict, a positive
relation between cultural heterogeneity and
issue-based conflict has been established. Dis-
agreement may harm team performance, particu-
larly in time measures. Furthermore, lower levels
of member satisfaction are measured in diversi-
fied groups; turnover for people who are different
D 822
from their peers is higher; gender-diverse groups
have in the past perceived themselves less effec-
tive than single-gender teams on a subjective
level – a result that was not confirmed on the
objective level of group performance. These so-
called disadvantages of diversity on teams sug-
gest that integration and acceptance of minority
members by their majority peers are crucial
for the success of diverse teams. Shortcomings
in acceptance of diversity and integration of
more diverse team members in the form of
a majority backlash, on the other hand, can pre-
vent diversity benefits from being realized. It can
harm group and firm cohesion and, ultimately,
performance.
Another benefit of diversity that enjoys sub-
stantial attention in the literature is the improve-
ment of stakeholder relations:
Generally speaking, in unstable, highly
dynamic, or hostile environments, strategically
tied stakeholder relations can serve as anchors
against environmental insecurity for the firm.
The inclusion of minority members may serve
to deepen community ties and enhance stake-
holder relations with the groups from which
these minority members come, as well as with
supporters of the integration of these groups
including society at large, the public at hand,
and politicians, NGOs, or the media. Key stake-
holder groups central to the core business activity
and success of firms include consumers, inves-
tors/shareholders, and employees.
As has been mentioned already, institutional
investors tend to press for diversity on corporate
boards. Furthermore, 45 % of investors are
women – gender diversity efforts may appeal to
this investor segment. Yet other potential inves-
tors are likely to be open to arguments of
enhanced group and firm performance through
diverse workforce and leadership.
As for consumers, theory on effective sales
strategies says the higher the similarity between
company representative and consumer, the
higher the likelihood of success for the transac-
tion. This hypothesis has been confirmed for eth-
nic minorities in the USA in the case of
demographic similarity between sales personnel
and consumers, but not for gender similarity.
Diversity
Independent of direct consumer contact,
understanding of target markets, needs, and
expectations can drastically improve the devel-
opment and offer of products and services. In the
consumer market, female buyers have a powerful
say in purchasing decisions – they are known to
control the majority of consumer spending deci-
sions overall. The design and implementation of
products appealing to women in particular there-
fore is a major challenge for service and con-
sumer goods industries, above all. Firms with
key employees and decision-makers who mirror
the general population or their target markets are
thought to be better prepared to understand con-
sumer needs and to develop products and services
that can meet these needs. Various case studies
have shown partially dramatic profitability
increases through the inclusion of ethnic minority
members from Hispanic over African American
to Asian background, especially for business
branches catering to these minorities or operating
in minority-dominated geographic areas.
A female director for Nike is cited in the literature
for having ignited innovation in the market for
women’s sports and footwear by recognizing
female consumers’ need for color-coordinated
sports product lines.
From a firm internal perspective, employees
form a core stakeholder group as a major deter-
minant of both current and future organizational
performance and prosperity. Main strategic HR
issues include the access to and attraction of top
talent, the development of talent within the orga-
nization, and the achievement of loyalty and
commitment, hence the retention of key
employees and avoidance of turnover through
opt-out, in short the optimization of human
potential and the minimization of loss in poten-
tial. In an effort to attract diverse talent, female
and minority members in senior positions signal
equal opportunities that are put to practice in the
concrete organization.
Internally, they can work as crucial role
models and mentors. Women managers in
Europe cite stereotyping and lack of role models
as the major barriers to women’s career develop-
ment; the role model’s and mentor’s own experi-
ence on gender or minority-specific challenges,
Diversity
barriers, and opportunities can create substantial
value added to mentoring relationships and their
success. Particularly, when taking into account
the fact that mentors have been found to produce
greater career returns for male mentees, and
that the success of mentoring efforts is favorably
influenced if mentor and mentee have “a lot in
common,” one has to note a need for successful
female mentors in order to develop female talent.
Demographically similar role models and
mentors may provide a sense of identification
for junior potential of minority gender, ethnicity,
or religion, an identification these juniors
may otherwise lack in the current composition
of senior organizational members. Again, much
emphasis in the literature is placed on women.
Junior women face hardship finding suitable
mentors, lack role models, and face unique
challenges in upward mobility compared with
their male peers. Inter alia, they have to
signal more clearly their managerial aspirations
to be considered for promotion. Female
seniors can make a difference by pointing out
these unique challenges, substitute to a certain
extent women’s restricted access to informal net-
works, and identify suitable women for
nominations.
Besides the function as role models and men-
tors, women and minority members in strategic
positions bring particular awareness of gender
and minority-specific barriers not only to mentees
but also to their senior peers. Despite a “women’s
agenda” being frowned upon expressedly by
senior executives, and women directors indeed
confirming a fear of becoming “single-issue”
directors with such an agenda, the overwhelming
majority of women on corporate boards has in the
past pressed for diversity through, inter alia,
equal opportunity initiatives for high performers,
retention efforts for high-performing women,
better reconciliation of work and family, and the
attraction of additional women for the board. The
number of women on Fortune 500 boards is
linked to a higher number of women corporate
officers, women officers with line experience,
and the proportion of women with high-ranking
titles and among the firm’s top earners. This may
be due to women on corporate boards serving as
823 D
role models for women in the executive suite of
these firms and/or through their active function-
ing as change agents.
The attraction and, possibly even more so, the
retention of highly qualified women should be
a key concern for HR professionals. Not only do
women make up the majority of many economi-
cally relevant university graduates in both the
USA and Europe – for instance, for Europe, D
they form close to 60 % of all tertiary graduates
in 2005, and thus constitute a substantial part of
the junior talent pool at hand – the risk of losing
highly qualified women seems higher than for
their male counterparts: Professional women
report more bias and harassment on the job, less
financial remuneration in managerial jobs com-
bined with a greater need for financial reward,
and their gender being a limiting factor in promo-
tion, remuneration, opportunities, and access to
clients. Little surprisingly, they also report
greater intention to quit and seem more prepared
to change employer when faced with obstacles to
advancement compared with male managers. The
development, training, and experience they have
collected create expectations for advancement in
the first place, and powerful incentives to sell
their human capital outside their organization.
The substantial “opt-out” of professional and
managerial women from large corporations to
self-employment and smaller firms and the sub-
sequent brain drain has been a popular research
subject in the literature in the 1990s. For those
women who choose to stay with their employer,
long-term studies have shown that female middle
managers report downscaling of their senior man-
agement ambitions and decreasing satisfaction
levels over the course of several years. More
generally speaking and looking beyond the
much-researched situation of women in the cor-
porate world, turnover for highly qualified staff
that are demographically different from their
peers has been found to be higher, and satisfac-
tion levels of these minority members within
groups tend to be lower than those of majority
members. Knowing this, one can easily conclude
that retention of highly qualified women and
other minority members within organizations
has to be a key concern – and who can better
D 824
work on retention than individuals who have
experienced similar challenges and barriers?
Overall, diversity in leadership and on top
teams promises to effectively address issues and
interests of so far underrepresented constituencies,
thereby strengthening both corporate reputation
and stakeholder relations to these constituencies.
Greater awareness of women and non-Caucasian
men for equal opportunity, women director’s
empirically confirmed stronger monitoring of
equity, and justice policies in recruitment, as well
as firsthand knowledge on minority consumer
markets and needs, suggest minority members in
leadership can create substantial value added from
a strategic point of view. Apart from that, they can
function as role models for diversity put into prac-
tice and as positive signals to internal and external
stakeholder groups.
Finally, the crucial stakeholder state and pol-
itics, or society at large, should not be omitted:
Equal opportunity and antidiscrimination legisla-
tion has been continuously sharpened over the
past decades; particularly in Europe, the focus
of the public discourse has shown a rising impa-
tience in the quest for measurable results and
successes in more diverse leadership. Sharper
sanctions and binding minimum requirements
are being discussed in many European states as
well as on the EC level to a higher extent through-
out the year 2010. “Early movers” and pioneering
companies may gain competitive advantage and
create goodwill for early actions and results.
The implementation side of diversity, diver-
sity management is dealt with in rather descrip-
tive manner so far: 44 % of the corporate ethics
codes issued by the 200 largest companies
(compiled with the SCOPE Core Company list)
mention the nonacceptance of discrimination,
rendering it the most important single issue
regarding staff/internal treatment of employees.
Diversity is not explicitly mentioned in this sam-
ple’s codes, yet 40 % of US companies overall
self-report they have diversity management
programs.
Consensus among scholars seems to be that
diversity management needs to incur major, sys-
tematic, and planned efforts to organizational
change toward the acceptance and appreciation
Diversity
of difference. Lip service paid to diversity on
corporate websites or one- to two-day seminars
on the subject matter will likely not bring about
drastic change. Measures proposed in the litera-
ture include senior executive initiation and con-
tinuous support, caucus groups among minority
members within the organization with institution-
alized direct communication with senior execu-
tives, diversity and sensitivity training, formal
mentoring programs, seminars on personal devel-
opment with special emphasis on the needs and
challenges of minority members, childcare facil-
ities on site, career pathing according to individ-
ual lifestyle needs, the establishment of
accountability for diversity by making it an exec-
utive performance criterion, and the reform and
rethinking of entire personnel systems.
Diversity management has been depicted as
a transformational process: Firstly, diversity
management efforts are initiated, often on the
senior level. With the transformation of the entire
HR function toward greater diversity on all levels
of the organization comes an impact on individ-
ual career outcomes. Collective attitude is
transformed in a positive way also through the
generation of organizational benefits. Finally,
public recognition for the successful diversity
management, manifested inter alia in the collec-
tion of awards, may be achieved.
Some authors have contributed to the classifi-
cation of organizations according to their dealing
with diversity: It has been suggested organiza-
tions move on a continuum, from monolithic
organizations over plural to multicultural organi-
zations. Monolithic organizations commit them-
selves to an equal opportunity plan only. Plural
organizations achieve first successes in the inte-
gration of minority members, yet they tend to
assimilate them into a dominant existing culture.
Finally, the multicultural organization truly
values differences and integrates individuals
into a common culture.
Future Directions
With regard to research subjects, one has to note
that the literature has put a major focus on gender
Diversity
so far: Women have within recent decades risen
from almost inexistent in professional life to the
majority of graduates in fields highly relevant to
corporate activity, and therefore undoubtedly
constitute the single largest group that remains
underrepresented in many professions and func-
tions. An enhanced focus on cultural, ethnic, reli-
gious, or age diversity in organizations and on
teams and the unique benefits and challenges this
diversity can offer a fruitful field of further
research.
Research has overall remained interested in
showing the benefits of diversity – a substantial
business case for diversity in the workforce and in
organizational leadership of organizations is now
well established. Future efforts in research may
want to focus on the managerial aspects of diver-
sity. Standardized methodology for the measure-
ment of diversity programs’ success is yet to be
developed.
Organizational determinants for success or
failure of diversity management efforts on both
the individual manager and the organizational
climate level merit further research. Questions
to be asked include the following: What is being
done currently by which type of organizations,
which strategies work in that they produce mea-
surable results, and which organizational cli-
mates enhance or hinder success of such
programs?
Research may consider enhanced empirical
efforts to confirm or further develop the theoret-
ical transformation processes and characteriza-
tion of organizations on a diversity management
continuum.
As mentioned initially, diversity in the work-
force is a trait brought about by the globalized
economy, migration movements in the quest for
labor and economic opportunities, female
employment, and other demographic changes.
Organizations and academia will have to deal
with this larger than ever workforce diversity on
a broader scale than on the “war for talent” or
competitive edge plane: Diversity in the work-
force, with all its opportunities and challenges,
has become a reality across countries, industries,
and functions. There seems to be unanimous
agreement on the fact that a lack in proper
825 D
diversity management can easily lead to organi-
zational backlash from the side of in-group/
majority members, enhanced confrontation, fail-
ures in the acceptance and integration of minority
members, and overall a deteriorating work and
organizational climate. Strategies for openness to
change within the organization, especially
including the challenges majority members will
pose, deserve further theoretical and empirical D
attention.
On the more philosophical and business ethics
plane, one particular aspect that is very present in
the diversity literature merits challenge and
thought: Minorities are presented as rather homo-
geneous and “predictable” entities; minority
members are assigned (desirable) traits on the
basis of group association. The possibility of
opt-out or dissociation of minority groups,
which can be an issue for national and
religious minorities, is as little considered as the
diversity within minorities themselves. The
psychology literature has long found that differ-
ences within one gender or race are bigger
than differences between the genders and races.
In this sense, minority members become stereo-
typed once again, this time under a positive and
appreciative heading and intent. Furthermore,
the discourse on including “differing” perspec-
tives carries the notion of there being an
established “norm.” While the diversity literature
undoubtedly promotes inclusion and appreciation
of difference, business ethics researchers may
want to deal with the potentially troublesome
side effect of the discourse on diversity and its
benefits: a further othering of historically stereo-
typed and marginalized social groups and further
promotion of stereotypes through the diversity
discourse.
Cross-References
▶ Business Case
▶ Corporate Codes of Conduct
▶ Corporate Mission, Vision and Values
▶ Cross-Transfer
▶ Equal Opportunity
D 826
References and Readings
Carter, D. A., Simkins, B. J., & Simpson, W. G. (2003).
Corporate governance, board diversity and firm value.
Financial Review, 39, 33–53.
Cox, T. H., & Blake, S. (1991). Managing cultural diver-
sity: Implications for organizational competitiveness.
Academy of Management Executive, 5, 45–56.
Dass, P., & Parker, B. (1999). Strategies for managing
human resource diversity: From resistance to learning.
Academy of Management Executive, 13(2), 68–80.
Eagly, A. J., Johannesen-Schmidt, M. C., & Van Engen,
M. L. (2003). Transformational, transactional and
laissez-faire leadership styles: A meta-analysis comparing
women and men. Psychological Bulletin, 129, 569–591.
Erhardt, N. L., Werbel, J. D., & Shrader, C. B. (2003).
Board of director diversity and firm financial perfor-
mance. Corporate Governance, 11(2), 102–111.
Lorbiecki, A., & Jack, G. (2000). Critical turns in the
evolution of diversity management. British Journal
of Management, 11, 17–31.
Milliken, F. J., & Martins, L. L. (1996). Searching for
common threads: Understanding the multiple effects
of diversity in organizational groups. Academy of
Management Review, 21, 402–433.
Richard, O. C., Murthi, B. P. S., & Ismail, K. (2007). The
impact of racial diversity on intermediate and long-term
performance the moderating role environmental con-
text. Strategic Management Journal, 28, 1213–1233.
Robinson, G., & Dechant, K. (1997). Building a business
case for diversity. Academy of Management Executive,
11(3), 21–31.
Van der Walt, N., Ingley, C., Shergill, G. S., & Townsend,
A. (2006). Board configuration: Are diverse boards
better boards. Corporate Governance, 6(2), 129–147.
Dividend
Berna Kirkulak Uludag
Department of Business Administration,
Dokuz Eylul University, İzmir, Buca, Turkey
Synonyms
Bonus; Gain; Interest; Share
Definition
Dividend is a payment to shareholders and it is
made from the earnings of a company. In a way,
Dividend
dividend is returning wealth back to the share-
holders. When a company earns profit, it has two
options to exercise: (1) the company can reinvest
the earnings in the business and transfer the
money into its owner’s equity (called retained
earnings) and (2) the company can distribute the
earnings to the shareholders (called dividend).
Introduction
Dividend payments make the stocks more attrac-
tive for investors to purchase. In general, stocks
provide two types of returns: (1) capital gains and
(2) dividends. Only stocks give their owners/
holders rights to receive dividends. Other finan-
cial instruments such as bonds, bills, and notes do
not give such rights to their owners.
There are mainly three types of dividends:
(1) cash, (2) stock, and (3) property dividends.
Cash dividends are in the form of cash (usually
check or electric transfer) made out of company’s
earnings and they are taxable to the receivers in
the same year of the dividend payment. Cash
dividends are beneficial since they provide liquid
income to investors. Further, these types of divi-
dends have significant impact on cash flow state-
ments. Cash dividend is known as a use of cash in
the cash flow statement. When a company
declares cash dividend payment, its retained
earnings account is decreased and current liabil-
ities (dividends payable) account is increased.
When the cash dividends are delivered to share-
holders, both dividends payable and cash
accounts are decreased.
Dividends that are distributed in the form of
company stocks are called stock dividends. Stock
dividends increase the number of stocks out-
standing and decrease the stock prices due to
diluted stocks. Stock dividends neither alter the
market value of the company nor affect the share-
holders ownership percentages. The stockholders
have the same proportional ownership prior to the
declaration of the stock dividends. In comparison
with cash dividends, stock dividends are usually
not taxable to the shareholders. The reason is
that stock dividends are not income for the
shareholders.
Dividend
Stock dividends and stock splits are similar to
each other. The stock split is defined as a stock
dividend exceeding 25%. The main difference is
a matter of accounting application. While the
stock splits result in reduction in par value per
share, there is no change in par value per share for
stock dividends. From the investors’ perspec-
tives, the function and the impact of stock splits
and stock dividends are same. Both of them
increase the number of outstanding shares and
do not affect the shares value, assets, and liabil-
ities of the issuing company.
Property dividends occur when a company’s
board of director decides to pay dividends in the
form of property/assets. Property dividends do
not always refer to land, building, or equipment;
they can be in the form of marketable securities of
the issuing or subsidiary company. This type of
dividends is less common than cash or stock
dividends. Property dividends are preferable
when the shareholders have interest in
a particular property that the company holds.
Property dividends can have positive impacts on
the shareholders’ wealth in the long run. When
the distributed property is appreciated by the
time, the shareholders may have substantial cap-
ital gain. Further, the companies with low cash
reserves may prefer property dividends to reward
their existing shareholders and attract more
investors.
In addition to above-mentioned dividend
types, companies may sometimes distribute
extra (special) dividends to the shareholders.
Extra dividends can be considered as bonus pay-
ments and they are not repeated. Extra dividends
are paid when the companies have excess cash.
Stock repurchases (stock buybacks) are alterna-
tives to cash dividends in particular to extra div-
idends. Stock repurchases occur when a company
buys back its own shares. Stock prices are likely
to increase following the stock repurchase
announcements due to decrease in the number
of shares outstanding.
It is important to understand how the dividend
process works and when the shareholders receive
dividends. Regarding the dividend payments,
there are four important dates: (1) declaration
date, (2) record date, (3) ex-dividend date, and
827 D
(4) payment date. These dates make investors
know whether or not they are eligible to receive
dividends and when they will receive the
dividends.
The declaration date is the day when
a company’s board of directors announces that
the company will distribute dividends to share-
holders. Dividend declaration indicates the
company’s dividend payment commitment to its D
shareholders. This day is also known as
announcement date. The board of directors
announces ex-dividend date, record date, and
payment date on the same day. On the dividend
declaration date, the company’s board of direc-
tors also announces dividend size and dividend
payout. Dividend declaration date is important
not for existing shareholders but also for potential
future shareholders. It is common practice that
stock prices are likely to increase before or on the
declaration date. Dividend payment announce-
ment reflects the company’s future plans.
The record date is set by the dividend paying
company in order to know which shareholders
will receive dividend payments. A shareholder
who registers himself/herself on the date of
record is eligible to receive dividends.
The ex-dividend date is the most important
day in the dividend payment process and it is
the second business day prior to record date. On
the ex-dividend date, the stocks are traded
“EXcept the DIVidend.” Since the investors are
aware of the fact that they will not receive the
dividend payments on or after the ex-dividend
date, the stock prices are relatively lower around
ex-dividend date. Therefore, investors must own
the shares prior to ex-dividend date.
The payment date is a day when the company
pays the dividends to its shareholders. The divi-
dends can be paid either by check or directly to
the shareholder’s bank account. Along with the
payment, shareholders also receive tax vouchers.
Dividend Policies
When a company decides to pay dividends to
shareholders, it must establish a dividend policy
that reflects the company’s current situation and
D 828
future prospects. The dividend policy shows how
much the company pays out. There are three
types of commonly used dividend policies:
• Constant payout ratio dividend policy: shows
that company pays the same percentage of
earnings as dividends to shareholders in each
dividend payment period. This approach is not
beneficial to shareholders when the earnings
start to decline.
• Regular dividend policy: shows a fixed
amount of dividend payment to shareholders.
This policy implies stable earnings and low
uncertainty for investors who receive regular
income for their investments. Regular divi-
dend payments can be interpreted as a positive
signal about the firm’s future earnings.
• Low regular and extra dividend policy: shows
payment of low regular dividends,
supplemented by additional dividends when
the company generates sufficient earnings.
Extra dividends are paid to shareholders
when the firm has excess cash. This type of
dividend policy provides a regular income and
attracts outside investors. However, additional
dividend payments may increase share-
holders’ expectations toward company.
Dividend Theories
The question of what determines the dividend
payment policy is often referred to as dividend
puzzle which has not been yet solved. There are
several theories developed to explain why some
companies pay dividends and why others not.
None of the theories is able to explain dividend
behaviors solely, and it seems that dividends will
be a long-standing debate in the future. The most
commonly used dividend theories are as follows:
Dividend Irrelevance Theory
This theory is based on the premise that dividend
policy has no effect on the firm value (Miller and
Modigliani 1961). Dividends are irrelevant and
they have no significant impact on the investors’
stock purchase decisions. The value of a com-
pany depends on its earnings and risk of its assets.
This argument is assumed to be true if there are
Dividend
no taxes, transaction costs, flotation cost of issu-
ing shares, and asymmetric information between
investors and managers about the company’s
future earnings.
The Bird in the Hand Theory (Dividend
Preference Theory)
This theory states that future earnings are associ-
ated with high risk. The uncertainty embedded in
future earnings results in high discount on capital
gains. Since the dividends are more predictable
than capital gains, many investors prefer divi-
dend paying stocks rather than non-dividend-
paying stocks. High dividend payouts lower
the cost of capital and increase the stock prices
(Gordon 1959; Lintner 1962). Dividends usually
provide steady income; however, capital gain is
risky. In other words, a bird in the hand is worth
more than a bird in the bush. The bird in the hand
implies dividends which are seen safe and regular
income for investors.
Clientele Effect Theory
The clientele effect theory states that stock price
of a company moves according to the reactions of
investors to the changes in the company’s poli-
cies. Hence, companies are careful when declar-
ing changes in dividend policy, and it is
a common practice that companies adjust their
dividend policies to satisfy the investors. Since
dividends are considered as personal income and
the taxes levied on dividends are higher than
those on capital gains, tax status of investors
plays key role in making decisions of purchasing
or selling stocks. While some investors prefer
high dividend yields, the others prefer low divi-
dend yields depending on their tax positions.
When a company’s dividend policy changes,
investors adjust their positions and the stock
prices move accordingly (Miller and Modigliani
1961).
Information Content (Signaling) Theory
In particular, cash dividend payment decision has
significant impact on the firm value. If a company
distributes cash dividends regularly, this implies
stability and reliability. According to signaling
theory, dividend-paying firms give positive
Dividend
signals about their current and future expected
earnings to outside investors (Miller and Modi-
gliani 1961; Bhattacharya 1979). In addition,
changes (increase, cut, and omissions) in divi-
dend payments also convey information about
the prospects of the company. The empirical
findings document that consistent with the signal-
ing hypothesis, stock markets have positive reac-
tions to dividend increases or initiations and
negative reactions to dividend decreases or omis-
sions. Since regular dividend payments increase
the investors’ interest in purchasing shares, many
companies are reluctant to omit or cut dividend
payments.
Agency Theory and Free Cash Flow
Hypothesis
Information asymmetry between principles and
agent induces agency costs that arise from mon-
itoring agents. There is a close relationship
between corporate governance structure of
a company and dividend payment policy.
Ownership concentration can reduce information
asymmetry and agency costs which arise when
ownership and control are separated. Large
shareholders (block/institutional) are influential
in the company’s decision-making process and
they are more concerned about their wealth max-
imization. Therefore, they have more incentives
to monitor the managers (Shleifer and Vishny
1986). In the companies with high ownership
concentration, dividend payments have low sig-
naling role and they are less informative to the
market. In dispersed ownership, the control is
diluted and high agency costs occur. Managerial
ownership is another substitute to reduce agency
costs of free cash flow.
It is important to note that dividends are paid
from cash flows not from earnings. Corporate
earnings may not reflect the ability of a company
whether or not the company is able to pay divi-
dends. Due to different accounting systems, earn-
ings can be inflated or deflated. Indeed, cash flow
is a key factor in dividend payments. Cash flow
hypothesis posits that cash dividend payments
can limit cash available to managers. The reason
is that managers are likely to use company’s
resources for unnecessary consumption and
829 D
investment opportunities (empire building).
High level of cash dividend payments mitigates
empire-building problem and decreases agency
costs by reducing free cash flow available to
managers (Jensen 1986). High dividend pay-
ments also reduce retained earnings and push
companies to go to capital markets where the
companies are required to provide more informa-
tion. Shareholders can reduce agency costs by D
improving the monitoring activities provided by
the capital markets (Easterbrook 1984).
Further, debt payments have negative impact
on cash flows available to managers. Lenders
(financial institutions) may also impose restric-
tions (covenants) on dividends in order to ensure
payback payments and avoid unnecessary cash
outflow from the company (Jensen and Meckling
1976).
Tax Preference Theory
Companies are subject to corporate income taxes.
When the board of directors decides to pay divi-
dends, the shareholders are subject to personal
income taxes. Dividend payment decision of
a company leads to double taxation. In general,
taxes levied on dividends are heavier than those
on realized capital gains. An increase in the per-
sonal income tax rate may push shareholders to
retain earnings or use DRIPs. It is important to
note that taxes are paid on dividends when they
are received; however, the taxes on capital gains
are not paid unless the stocks are sold. Due to tax
disadvantage, investors prefer capital gains over
dividends or the company pays low dividend
payouts in order to attract investors who are in
the high-tax brackets. On the other hand, it is the
common case that in spite of the tax disadvantage
of dividends, many companies pay dividends
regularly.
Residual Theory
This theory argues that a company should give
priority to finance its projects with positive Net
Present Value (NPV) and then pays dividends to
shareholders when there are residual earnings.
Raising capital through retained earnings is less
expensive than issuing stocks. Residual dividend
policy reduces costs of issuing stocks and
D 830
flotation. Since issuing shares is costly and it
dilutes ownership structure, existing shareholders
may desire to use retained earnings. Thus, divi-
dend payments will be distributed to shareholders
after the funds are allocated for investments and
all the expenses are covered. This theory is con-
sistent with pecking order theory.
Major Dividend Determinants
Dividend payments have significant impact on
investors’ choice. Economic instability and high
volatility in stock markets push some investors to
seek dividend-paying stocks. In practice, many
companies retain some part of earnings and pay
the rest as dividends. Dividend payment decision
is given by a board of directors. However, this
decision is not an internal choice of a company at
all. There are several factors affecting dividend
payment decision. Some of those are listed in the
following:
Earnings
Among the major determinants of dividend pay-
ments, future earnings and past dividend payment
records play key roles. In accordance with their
earnings, companies adjust their dividend pay-
outs. Since the earnings fluctuate time to time,
managers adjust dividends smoothly with respect
to their earnings that are the key drivers to have
stable dividend payments. Companies with stable
earnings will pay a higher portion of their earn-
ings out as dividends (Lintner 1956). Dividend
payment decision is strongly associated with the
profitability of a company. In general, profitable
companies pay dividends. However, this is not
valid all the time. In some cases, profitable com-
panies do not pay dividends. They reinvest their
earnings in their businesses in order to finance
future growth. On the other hand, interestingly,
even financially distressed companies try to pay
dividends regardless of their limited cash flow.
This suggests that managers are willing to keep
a long history of continuous dividend payments
and they care about their reputations. They do not
want to be the first managers who failed to gen-
erate insufficient cash to pay dividends after long
Dividend
dividend payment histories (DeAngelo and
DeAngelo 1990).
Size and Growth Potential
Cash dividend paying companies are usually
large in size and they are associated with high
liquidity and high profitability. Large and well-
established companies have better access to
external resources such as capital markets and
they can borrow at lower costs. However, small
companies are heavily dependent on their inter-
nal resources and they may face difficulties while
meeting the requirements of external funds.
Therefore, small companies are likely to pay
low or no dividends. Further, companies which
have high growth potential and invest intensively
in R&D tend not to pay cash dividends. High
growth companies, like those in technology-
related industries, prefer to retain their earnings
in order to make investments in profitable busi-
ness (Fama and French 2001).
Legal Protection and Ownership Structure
Dividends can be perceived as an outcome of
legal protection for minority shareholders. In
general, dividends are not mandatory payments.
A board of directors decides whether or not to pay
dividends to the shareholders. Legal require-
ments for dividend payments vary from country
to country. Countries (i.e., common law coun-
tries) with better minority shareholder protection
regulations and companies with better corporate
governance are likely to pay high dividends
(La Porta et al. 2000). Dividend payment policies
can be regulated by laws mandating minimum
percentage of dividend payouts. Mandatory div-
idend payments are seen as substitutes for legal
protection to minority shareholders. Turkey,
Greece, and Chile are examples for mandatory
dividend payment applications.
Others
Apart from the above-explained factors that
affect dividend payment decisions, macroeco-
nomic environment (including financial crisis,
inflation, and deflation) can also affects dividend
policies. For example, when the interest rates
increase, thus cost of borrowing becomes more
Doctrine of Doing and Allowing
expensive, shareholders may prefer to retain
earnings in order to finance investments.
Key Issues
Dividend payout ratio shows the percentage of
earnings paid to shareholders in the form of div-
idends and it is calculated as dividing the divi-
dends paid to shareholders by net income per
share. High dividend payout ratios are attractive
to shareholders and outside investors. However,
it is important to have sustainable payouts.
A dividend reinvestment program or dividend
reinvestment plan (DRIP) allows shareholders to
buy more shares with their cash dividends at little
or no commission. Rather than receiving cash
dividends, some shareholder may choose to
invest their money in the company’s equity. The
shareholders are subject to taxation that they
receive and reinvest the cash dividends. The rea-
son behind DRIP is that shareholders expect that
the shares will be appreciated in the future. The
advantage of DRIPS to company is reduction in
the cost of delivering dividend checks to
shareholders.
Future Directions
The question of “why some companies pay divi-
dends and the others not” has been investigated
for many researches over a broad time span. Yet,
there has been no definite answer to solve the
dividend puzzle. In recent years, finance litera-
ture has come up with a discussion of
disappearing dividends. Many studies present
that the number of dividend paying companies
is decreasing both in developed countries and in
emerging markets. Unfortunately, little is known
about what drives the companies to increase, to
cut, or to omit dividend payments. Future studies
are needed to give useful insights about changes
in dividend payment policies. In addition to this,
impact of changing financial environments,
including mergers and acquisitions, financial cri-
ses, and liquidation, on dividend policies seems
very challenging to pursue dividend studies.
831 D
Cross-References
▶ Business Performance
▶ Profit Maximization
▶ Shareholder Rights
▶ Shareholder Theory
References and Readings D
Bhattacharya, S. (1979). Imperfect information, dividend
policy, and “the bird in the hand” fallacy. Bell Journal
of Economics and Management Science, 10(1),
259–270.
DeAngelo, H., & DeAngelo, L. (1990). Dividend policy
and financial distress: an empirical investigation of
troubled NYSE firms. Journal of Finance, American
Finance Association, 45(5), 1415–1431.
Easterbrook, F. H. (1984). Two agency-cost explanations
of dividends. American Economic Review, 74(4),
650–659.
Fama, E. F., & French, K. R. (2001). Disappearing divi-
dends: Changing firm characteristics or lower propen-
sity to pay? Journal of Financial Economics, 60(1),
3–43.
Gordon, M. J. (1959). Dividends, earnings and stock
prices. The Review of Economics and Statistics, 41,
99–105.
Jensen, M. C. (1986). Agency costs of free cash flow,
corporate finance and takeovers. American Economic
Review, 76(2), 323–329.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the
firm: Managerial behavior, agency costs and owner-
ship structure. Journal of Financial Economics, 3,
305–360.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny,
R. W. (2000). Agency problems and dividend policies
around the world. Journal of Finance, 55(1), 1–33.
Lintner, J. (1956). Distribution of incomes of corporations
among dividends, retained earnings and taxes.
American Economic Review, 46(2), 97–113.
Lintner, J. (1962). Dividends, earnings, leverage, stock
prices and supply of capital to corporations. The
Review of Economics and Statistics, 44, 243–269.
Miller, M., & Modigliani, F. (1961). Dividend policy,
growth and the valuation of shares. Journal of
Business, 34, 411–433.
Shleifer, A., & Vishny, R. W. (1986). Large shareholders
and corporate control. Journal of Political Economy,
94(3), 461–488.
Doctrine of Doing and Allowing
▶ Ethical Theories
D 832
Doctrine of Double Effect
▶ Ethical Theories
Doing Bad
▶ Corporate Social Irresponsibility
Doing Business Responsibly and
Up-Keeping Energy for the Future
▶ Sustainable Energy Management and CSR
Doing Business the Altruistic Way
▶ Altruistic CSR
Doing Business the BOS Way
▶ Blue Ocean Strategy and CSR
Doing Business the Christian Way
▶ Christianity and CSR
Doing Business the Ethical Buddhist
Way
▶ Buddhist Ethics and CSR
Doctrine of Double Effect
Doing Business, the Buddhist Way
▶ Buddhist Ethics and CSR
Doing Business, the Confucian Way
▶ Confucian Ethics
Double Cross Dialogue Approach
▶ Integrative Management Approach of CSR
Dow Jones Sustainability Indexes
(DJSI)
▶ Dow Jones Sustainability Indices
Dow Jones Sustainability Indices
Maud H. Schmiedeknecht
Konstanz Institut f€ur Werte Management
(KleM), Institute for Intercultural Management,
values and communication, Konstanz, Germany
Synonyms
Dow Jones sustainability indexes (DJSI)
Definition
The Dow Jones Sustainability Indexes (DJSI)
track the performance of companies that lead in
corporate sustainability in their respective sectors
or in the geographies they operate. The Sustain-
able Asset Management (SAM) Indexes GmbH
publishes and markets the indexes, the so-called
Dow Jones Sustainability Indexes in collabora-
tion with SAM. All indexes of the DJSI family
Dow Jones Sustainability Indices 833 D
are assessed according to SAM’s Corporate Sus- Dow Jones Sustainability Indices, Table 1 The Dow
tainability AssessmentTM methodology. Jones sustainability index family
Index First Published
DJSI World DJSI World September 8,
Introduction 1999
DJSI World November 10,
Enlarged 2010
The indexes of the Dow Jones Sustainability
DJSI World 80 August 26, 2008
family, the underlying corporate sustainability
DJSI World ex August 29, 2008 D
assessment methodology, as well as the monitor- US 80
ing and review process will be introduced in this DJSI Europe DJSI Europe August 4, 2010
entry. DJSI Eurozone August 4, 2010
DJSI Europe 40 August 4, 2010
The Dow Jones Sustainability Family DJSI Eurozone 40 July 22, 2010
Corporate sustainability is an approach that cre- DJSI Nordic November 10,
ates value for shareholders and stakeholder by 2010
embracing opportunities and managing risks DJSI North DJSI North September 23,
America America 2005
deriving from economic, environmental, and
DJSI United States September 23,
social developments. Investors are diversifying 2005
their portfolios by increasingly investing in com- DJSI North August 26, 2008
panies leading in the field of sustainability. Com- America 40
panies with sustainability management are DJSI United August 26, 2008
perceived to be successful by tapping the poten- States 40
tial for sustainability products and services on the DJSI Asia Pacific DJSI Asia Pacific January 16, 2009
DJSI Asia January 16, 2009
one hand and minimizing sustainability risks and
Pacific 40
costs on the other. The precept is that corporate DJSI Japan 40 July 31, 2009
sustainability creates long-term value for DJSI Korea DJSI Korea October 20,
shareholders. 2009
The aim of the Dow Jones Sustainability DJSI Korea 20 October 20,
Indexes (DJSI) is to track the performance of 2009
leading companies in the field of corporate sus- Source: Dow Jones Sustainability indexes 2012 & Dow
tainability. The Dow Jones Sustainability World Jones Sustainability indexes 2011
IndexSM (DJSI World) and respective subsets
assess the top 10% of the largest 2,500 companies different regions, different sectors, different cur-
in the Dow Jones Global Total Stock Market Index rencies and other exclusion criteria. As Table 1
(DJGTSM) based on long-term economic, envi- shows, in the last years, the Dow Jones Sustain-
ronmental, and social criteria. The Dow Jones ability Indexes have been divided into various
Sustainability World 80 IndexSM (DJSI World geographically focused indexes such as the
80) tracks the performance of the largest compa- World, Europe, North America, Asia Pacific,
nies globally that are included in the Dow Jones Nordic, and Korean indexes.
Sustainability World Index. The 80 companies are Besides customized sustainability indexes
weighted by their sustainability score. The Dow covering different regions, indexes can also
Jones Sustainability World Enlarged IndexSM cover different sectors of leading companies. In
(DJSI World Enlarged) represents the top 20% of the selection process, no industry is excluded. In
the largest 2,500 companies in the DJGTSM. the composition of the Dow Jones Sustainability
The DJSI methodology facilitates customized World Index, investors have the possibility in
sustainability indexes such as indexes covering subsets of the index to apply filters against certain
D 834 Dow Jones Sustainability Indices

sectors. The sector classification of the DJSI Dow Jones Sustainability Indices, Table 2 Dow Jones
World is based on the supersector classification global total stock market index (DJGTSM) & DJSI sectors
of the DJGTSM Index. All the companies of the DJGTSM Index
DJSI World are assigned to one of the DJSI Supersector DJSI Sector
sectors based on the company’s primary revenue 1. Auomobiles & parts Auto parts & tires
source. Automobiles
2. Banks Banks
In Table 2, the 19 DJGTSM Index
3. Basic materials Forestry & paper
supersectors and the 58 DJSI sectors are listed
Aluminum
below:
Steel
There are also subsets of indexes excluding
Mining
companies that generate revenue from certain 4. Chemicals Chemicals
investments. For instance, investors can select 5. Construction & Building materials & fixtures
the Dow Jones Sustainability World Index, Materials Heavy construction
excluding gambling and tobacco (DJSI World 6. Financial services Financial services
ex Gambling and Tobacco). 7. Food & beverage Beverages
The following list shows exclusion criteria: Food Producers
• Adult entertainment: companies that produce 8. Health care Healthcare providers
adult entertainment services Medical products
• Alcohol: companies that produce alcoholic Biotechnology
beverages Pharmaceuticals
• Armaments: companies that produce and/or 9. Industrial goods & Aerospace & defense
supply armaments for military sales such services Containers & packaging
as ships, submarines, missiles, ground Diversified industrials
combat systems, aircraft, and defense Electrical components &
equipment
electronics
Electronic equipment
• Cluster Bombs: companies that produce clus-
Industrial engineering
ter munitions systems Industrial transportation
• Firearms: companies that produce firearms for Support services
non-military markets Waste & disposal services
• Gambling: companies that are involved in 10. Insurance Insurance
gambling, for example, betting shops and 11. Media Media
online betting services, casinos, and gaming 12. Oil & gas Oil & gas producers
clubs Oil equipment & services
• Landmines: companies that have had allega- Pipelines
tions or indications of involvement with anti- Alternative energy
personnel landmines 13. Personal & Durable household products
• Nuclear: companies that deal with nuclear, for household goods Furnishing
example, operating nuclear power plants, sell- Home construction
ing nuclear generated energy, or generating Nondurable household
products
revenues from uranium mining
Leisure goods
• Tobacco: companies that produce tobacco or
Personal products
tobacco products Clothing, accessories &
The main advantage is that the DSJI method- footwear
ology offers customized sustainability indexes Tobacco
covering different regions and sectors and offer- 14. Real estate Real estate
ing the possibility to exclude certain sectors. (continued)
Dow Jones Sustainability Indices 835 D
Dow Jones Sustainability Indices, Table 2 management, and labor practices are all manage-
(continued) ment practices and performance measures that
DJGTSM Index are applicable to all companies. The general
Supersector DJSI Sector criteria account for approximately 40–50% of
15. Retail Food & drug retailers the assessment. Industry-specific criteria differ
Specialized consumer service between sectors. Economic, environmental, and
General retailers
social challenges and trends of a particular indus-
16. Technology Software
try are taken into account. The industry-
Computer services & internet
specific criteria account for at least 50% of the D
Communication technology
assessment.
Semiconductors
Computer hardware &
The following four sources of information
electronic office equipment are used for the Corporate Sustainability
17. Telecommunications Fixed line telecommunications Assessment:
Mobile telecommunications 1. Company questionnaire: SAM distributes the
18. Travel & leisure Gambling questionnaires to the Chief Executive Officers
Hotels, restaurants, bars, and and heads of investor relations of all compa-
recreational services nies in the DJSI World investable stocks uni-
Travel & tourism verse. The company questionnaire – specific
Airlines to each of the DJSI sectors – is the most
19. Utilities Electricity
important source of information for the
Gas distribution
assessment.
Water
2. Company documentation: The company sub-
Source: Dow Jones sustainability indexes 2012,
mits documents such as sustainability reports,
pp. 14–15
environmental reports, social reports, and
annual financial report as well as general com-
pany information published in brochures or on
websites.
Corporate Sustainability Assessment 3. Media and stakeholder analysis: SAM ana-
The methodology of SAM is the Corporate Sus- lyzes company-specific issues regarding repu-
tainability AssessmentTM. As shown in Table 3, tational, financial, and compliance risks by
a number of criteria and sub-criteria describe screening publicly accessible information
opportunities and risks deriving from economic, and stakeholder commentaries. They verify
environmental, and social dimensions of compa- the company’s track record, incidents, and
nies. The criteria are based on standards, best crisis management with media and stake-
practices, audit procedures, and experts. The sus- holder reports.
tainability performance of a company is quanti- 4. Contact with companies: SAM research ana-
fied by these criteria. The leading sustainability lysts contact the companies directly to clarify
companies in each sector are assessed through the questions that might arise from the assessment
corporate sustainability score. of the various sources.
Corporate sustainability criteria are identified The sustainability score is calculated for each
through the assessment of economic, environ- company based on these four sources. In SAM’s
mental, and social driving forces and trends. For Sustainability Information Management System
each dimension and for all industries, general and (SIMS), the sustainability score is calculated
specific criteria are identified. General criteria are based on a predefined scoring and weighting
the same for every sector. Corporate governance, structure. The questions have a predetermined
human capital development, risk and crisis score for the answers, a weight for the questions,
D 836
Dow Jones Sustainability Indices, Table 3 Corporate sustainability assessment criteria
Dimension Criteria
Economic Corporate governance
Risk & crisis management
Codes of conduct/Compliance/
Corruption & bribery
Industry specific criteria
Environment Environmental reportinga
Industry specific criteria
Social Human capital development
Talent attraction & retention
Labor practice indicators
Corporate citizenship and
philanthropy
Dow Jones Sustainability Indices
Sub-criteria
Board structure
Nonexecutive chairman/lead director responsibilities and committees
corporate governance policy
Audit conflict of interest
Diversity: gender
Board effectiveness
Entrenchment provisions
Senior management remuneration
Risk governance
Risk optimization
Risk map
Risk review
Risk strategy
Codes of conduct: focus
Codes of conduct: systems/procedures
Corruption and bribery: scope of policy
Codes of conduct: report on breaches
Codes of conduct/anticorruption & bribery: business relationships
Brand management, customer relationship management, innovation
management, gas portfolio, grid parity, etc.
Assurance
Coverage
Environmental reporting; qualitative data
Environmental reporting; quantitative data
Environmental management systems, climate strategy, biodiversity,
product stewardship, eco-efficiency, etc.
Human resource skill mapping and developing process
Human capital performance indicators
Personal and organizational learning and development
Coverage of employees through predefined performance appraisal
process
Percentage of performance-related compensation for each employee
category
Balance of variable compensation based on corporate and individual
performance
Corporate Indicators for performance-related compensation
Type of individual performance appraisal
Communication of individual performance to upper management
Payout type of total performance-related compensation
Trend of employee satisfaction
Grievance resolution
Labor KPIs
Group wide strategy – financial focus
Input
Measuring benefits
Type of philanthropic activities
(continued)
Dow Jones Sustainability Indices 837 D
Dow Jones Sustainability Indices, Table 3 (continued)
Dimension Criteria Sub-criteria
Social reportinga Assurance
Coverage
Social reporting, qualitative data
Social reporting, quantitative data
Industry specific criteria Social integration, occupational health & safety, healthy living,
bioethics, standard for suppliers, etc.
a
Criteria assessed based on publicly available information only D
Source: Dow Jones sustainability indexes 2011, p. 11

and a weight for the criteria. The combination of
these weights leads to the total score for the
question.
Corporate Sustainability Monitoring and
Review
In the corporate sustainability monitoring pro-
cess, SAM assesses the company’s involvement
in economic, environmental, or social crisis situ-
ations. SAM compares the company’s crisis man-
agement with their stated principles and policies
in their company documents such as their Code of
Ethics and Code of Conduct.
The membership of a company in the Dow
Jones Sustainability Index family depends on
how the listed companies manage critical issues.
Companies can be excluded from the index fam-
ily if they mismanage crises. The logic behind is
that economic, environmental, or social crisis
situations can negatively affect the company’s
reputation, which reduces the total sustainability
score.
The following economic, environmental, and
social issues are reviewed in the monitoring
process:
• Illegal commercial practices (cases of corrup-
tion, tax and balance sheet fraud, and money
laundering, etc.)
• Layoffs or workforce conflicts (cases of
strikes, etc.)
• Human rights abuses (cases involving child
labor and discrimination of people, etc.)
• Catastrophic events or accidents (workplace
safety issues, product recalls, and ecological
disasters, etc.)
In addition, the DJSI World and its subsets are
also continually reviewed for changes to the
index composition by special corporate actions
such as mergers and takeovers, initial public
offerings, delisting, and bankruptcy. These cor-
porate actions affect the component companies
and their sustainability performance.
The Dow Jones Sustainability Indexes are
reviewed regularly in order to ensure that the
index compositions represent the leading sustain-
able companies in each DJSI sector. While the
DJSI World is reviewed quarterly and annually,
the DJSI World 80 and DJSI World ex US are
reviewed annually. On the annual review date in
September, the resulting changes to the index
composition are announced. The annual review
methodology selects these leading sustainability
companies from the DJSI World investable
stocks universe. It The DJSI World investable
stocks universe is derived from the components
of the DJGTSM. In addition to these selection
criteria, the DJSI World investable stocks must
fulfill market capitalization requirements, that is,
DJSI World components that have a free float
market capitalization above USD 500 million.
Key Issues
The objective of the Dow Jones Sustainability
Indexes (DJSI) is to measure the global stock
market performance of the leading sustainable
companies in all sectors in different markets. In
order to achieve this objective, transparency is
required. Therefore, SAM publishes and updates
D 838
regularly data and information on all aspects of
the index composition and methodology.
Future Directions
In general, providers of corporate sustainability
assessments and ratings face various challenges,
for example, lack of data availability and credi-
bility of information. For the assessment of the
corporate sustainability performance of
a company, raters such as SAM depend on suit-
able company information. In addition to pub-
licly available data such as media reports, raters
depend mainly on sources of information pro-
vided by the companies, especially on the com-
pany questionnaire and company documentation.
In this context, questions and critics of credibility
of the information arise. Furthermore, companies
have often problems measuring the data due to
the complexity of the corporate sustainability
topic. Challenges also result from the commercial
use of the ratings. Due to the business relations
between the companies and the raters, often the
lack of transparency and lack of independence is
criticized.
Overall, as companies increase their sustain-
ability effort, the role of assessments and ratings
in the field of sustainability gains importance. In
future, it will be crucial improving the reliability
of corporate sustainability assessments and rat-
ings. Various disciplines in practice and research
can and should tackle these challenges.
Cross-References
▶ Corporate Governance Reporting
▶ Corporate Responsibility
▶ Corporate Responsibility Index
▶ Corporate Social Responsibility
▶ Corporate Social Performance
▶ CSR Measurement
▶ FTSE4Good Index
▶ Principles for Responsible Investment
▶ Reporting Sustainable Development
Downsizing
▶ Socially Responsible Investing
▶ Sustainability
▶ Sustainability (World Commission on
Environment and Development definition)
▶ Sustainability Assessment Models
▶ Sustainability Rating
References and Readings
Dow Jones Sustainability Indexes. (2011). Dow Jones
sustainability world indexes guide book. Version
11.6, 1 Sept 2011. http://www.sustainability-index.
com/djsi_pdf/publications/Guidebooks/DJSI_World_
Guidebook_11%206_final.pdf. Accessed 5 Jun 2012.
Dow Jones Sustainability Indexes. (2012). Dow Jones
sustainability world indexes guide book. Version
12.0, 30 August 2012. http://www.sustainability-
index.com/images/djsi-world-guidebook_tcm1071–
337244.pdf. Accessed 15 Sept 2012.
Dow Jones Sustainability Indexes in collaboration with
SAM. (2012a). Factsheets. http://www.sustainability-
index.com/07_htmle/publications/factsheets.html.
Accessed 5 Jun 2012.
Dow Jones Sustainability Indexes in collaboration with
SAM. (2012b). Setting the standard for sustainability
investing. Brochure. http://www.sustainability-index.
com/djsi_pdf/publications/DJSI_Brochure_2012.pdf.
Accessed 5 Jun 2012.
Fowler, S. J., & Hope, C. (2007). A critical review of
sustainable business indices and their impact. Journal
of Business Ethics, 76(3), 243–252.
Windolph, S. E. (2011). Assessing corporate sustainability
through ratings: Challenges and their causes. Journal
of Environmental Sustainability, 1, 61–80.
Downsizing
▶ Restructuring
Doyukai
▶ Keizai Doyukai
Dual Board
▶ Two-Tier Board
Due Diligence
Due Diligence
Berna Kirkulak Uludag
Department of Business Administration,
Dokuz Eylul University, İzmir, Buca, Turkey
Synonyms
Agreed upon procedures; Background check
Definition
Due diligence has two main definitions. Firstly, it
is a process of assessing risks and opportunities of
a proposed transaction, although it is not simply
an audit in that context. Secondly, it is the
standard of care required during a particular
transaction, particularly prior to that transaction.
In both contexts it involves investigating the
accuracy of the information related to prospec-
tive investment or business decision and
evaluates the future potential of the subject
matter of the transaction.
Introduction
The primary goal of due diligence is usually to
provide complete and accurate information about
a potential investment. Due diligence can provide
formal outputs such as a checklist or a detailed
SWOT (strengths, weaknesses, opportunities,
and threats) analysis of a transaction from partic-
ular perspectives. In most commercial transac-
tions it involves combining several
multidisciplinary perspectives.
The goal of a due diligence process is to give
a clear picture about the prospective investment
and allow the investors to be ready to come up
with an informed decision about their investment.
A common example of due diligence is
conducted as part of a contract that involves
a change in the ownership of stocks or assets of
a company.
839 D
Due diligence is conducted by the potential
acquirer (buyer) and its team members such as
managers, lawyers, bankers, and other profes-
sionals. The target company (seller) and its man-
agement provide information and legal
documents upon the request of the acquirer. Due
diligence can also be conducted in cooperation
with key persons such as customers, suppliers,
employees, trade organizations, and other rele- D
vant stakeholders. The process is beneficial to
venture capitalists companies, appraisers, law-
yers, insurance experts, accountants, consultants,
acquiring companies, investment banks, and
other financial institutions. It can also be useful
to Directors of companies when it is used to
ensure proper management decisions are made.
During the due diligence process, information
about the financial, legal, commercial, and man-
agerial issues are collected. The risks or threats
associated with the business are, within the limits
of the due diligence framework, identified. The
process is associated with assessing risks and also
involves the identification of the company’s
future potential. The objective of due diligence
is not limited to determination of the risks and
returns or presentation of the shortcomings and
benefits of the business. It also focuses on the
post-deal implementations and management
decisions.
There are several reasons for conducting due
diligence. Some of those include:
• Confirm the accuracy of information provided
prior to investigation, especially in the context
of a transfer of assets or shares
• Identification of the current situation of the
business
• Avoid misunderstandings between investors
and the target company
• Identify the risks (both firm-level and macro-
level), shortcomings, returns and benefits of
the business
• Avoid unprofitable investments
• Reveal hidden facts and potential problem
areas such as pending lawsuits and contingent
liabilities
• Expose risks and liabilities
• Verify past records of the target company
D 840
Since due diligence can be very broad and
deep, there is no standard time set for the process.
It is difficult to estimate or identify in advance
how long due diligence will last. It may take
a period of weeks or even months, or it may be
as short as a few days. The duration of the process
depends on the content and the complexity of the
transaction and also on the commercial drivers in
respect of timing. Further, the number of people
involved in analysis and the accessibility of the
information affect the duration of due diligence.
In the case of professional consultancy company
involvement, the speed of due diligence will
often be fast.
In general, the due diligence process is applied
in two types of transactions: (1) sale and purchase
of asset transactions and (2) sale and purchase of
share transactions. The type of the transaction has
significant impact on the due diligence process.
While asset transactions involve selling/buying
the target company’s assets including products
and services to the acquirer, stock transactions
involve selling/buying of the target company’s
shares to the acquirer. The most common exam-
ples of asset transactions are sale of fixed assets
and real estate. The most common share trans-
actions include merger, acquisition, initial public
offering (IPO), and partnership deals. In general,
the level of due diligence in share transactions is
greater than that of asset purchases.
Due Diligence Process
A common example of due diligence occurs in
merger and acquisition transactions. Each merger
and acquisition has its own unique set of facts and
circumstances. The prospect buyer of a target
company wants to see whether it is worth acquir-
ing that business or to ascertain the risks in
doing so.
Prior to entering a deal, the potential acquirer
and the target company agree to the terms of due
diligence. They both sign a letter of intent (LOI)
or equivalent document that allows the parties to
negotiate major issues. Due diligence is then
conducted after the letter of intent is signed
between the acquirer and the target company.
Due Diligence
The letter of intent usually specifies the deadline
for reaching agreement, a series of triggers for
terminating the acquisition, the expenses of due
diligence and drafting (Bruner 2004).
It is usually very important to keep the details
of due diligence process confidential before
assets are finally transferred or a deal is done. In
particular, in the case of stock purchases (rather
than asset purchases), information leakage may
harm both the target and acquiring companies’
share price. In order to avoid leaks, the
acquirer and the target company enter into
a Confidentiality Agreement (known as
nondisclosure agreement) which is requested to
keep all information learned as confidential. This
agreement is a precaution in particular when the
acquirer decides not to buy the business or stocks.
Confidentiality agreement prevents the prospec-
tive acquirer and due diligence team members
from divulging private information about the tar-
get company. It is crucial for the target company
not to disclose any confidential information of the
business until the acquirer signs a confidentiality
agreement (Boggs 2007).
After having signed the confidentiality agree-
ment, the acquirer is allowed to access the due
diligence data room. The target company
arranges a data room where the relevant materials
are held under strictly controlled conditions.
A due diligence data room is used to disclose all
the data required about the target company and it
is useful to remove skepticism about the deal,
avoid time consuming, and lessen the price pres-
sure. The acquirer and the consultants can access
to the data room for a limited period of time in
order to read materials and get insight into the
target company. Data rooms are also beneficial
for the target company, because it can gain the
confidence of the acquirer and maximize the bid-
ding price. There are two types of due diligence
data rooms: (1) traditional data room and
(2) virtual data room. Traditional data room is
a physical and a paper-based room. In compli-
cated and large-scale business deals, traditional
data rooms are not appropriate for conducting due
diligence. On the other hand, virtual data rooms
save document traffic and administrative time.
Virtual data rooms provide internet portals that
Due Diligence
allow users to access the documents secure and
fast from any, or from a particular, point. The
ease of access, saving time and money through
virtual data rooms may attract more acquirers to
the bidding if it is a public or competitive
transaction.
The acquirer can ask additional questions to
the target company to address some critical
issues. In this case, the target company should
provide additional data in response to acquirer’s
questions/checklist. The information requested is
divided into categories and analyzed by people
based on their expertise. The parties involved in
due diligence create a checklist of needed infor-
mation. The checklist covers several questions
about the financial situation, products, customers,
competitors, marketing, sales, distribution,
research and development, management and per-
sonnel, and legal issues. In addition to written
documents, interviews and site visits are
conducted in order to confirm the given facts. In
particular, face to face, in-depth interviews can
be helpful to explode the opinions of people
accompanied with their body languages which
should also be taken into consideration.
Due diligence provides a solid foundation for
valuation analysis, deal negotiation and post-deal
integration for organizations. It has significant
impact on pricing of the subject matter of the
target company. In particular, financial due dili-
gence is influential on the valuation which deter-
mines the amount of money to be paid to the
target company. The valuation and the financing
procedures are based on the new information
revealed during due diligence process. Detection
of a false statement or a problem provides
a suitable ground to reduce the bidding price
which can be negotiated in the favor of acquirer
(DePamphilis 2003). Determining a value of the
target company depends on the valuation tech-
nique (which includes asset-based, income-
based, and market-based approaches) used in
the transaction. In the case of income-based
approach, the information provided through
financial due diligence (sales, costs, profits, etc.)
and the information provided from commercial
due diligence (market potential and competition
in the market) are used together to calculate
841 D
the true value of the target company. However,
when applying market-based approach, due
diligence may provide limited assistance. Addi-
tional information, including current and past
share prices of the target company, is needed
(Picot 2002).
A through due diligence process creates
a mass of information. The reports of all experts,
materials, working papers, and summary memos D
should be taken altogether in order to construct
a final report. A final due diligence report is
prepared and submitted to acquirer for decision-
making or analysis. The final report is a compiled
study of expert’s reports and opinions (including
lawyers, accountants, tax specialist, bankers,
consultants, etc.) from different disciplines. The
report highlights important issues, gives further
insight about the target company and it includes
suggestions about the deal.
In the light of the information provided by due
diligence, negotiations take place or decisions are
made. If the acquirer and the target company
agree on the basic terms of the deal, they decide
to make agreement. Post-integration procedure
begins after signing the agreement. Further,
the agreement may provide legal protections in
the form of warranties or indemnities which are
decided to be required during the due diligence
process. The acquirer should rely on what has
been disclosed by the target company. In this
case, the acquirer may ask for additional protec-
tion in order to confirm the accuracy of what has
been presented. The sale agreement contains war-
ranties and indemnities made by the target com-
pany. A warranty is a contractual assurance that
shows what has been conveyed is complete and
true. The target company warrants that the data
and the documents provided during due diligence
are up to date and accurate. The warranty acts as
a collateral provision in order to protect the
acquirer. When the target company breaches
a warranty, it is responsible for the loss and dam-
age. Indemnity provisions serve as a security
against damage or loss. The target company pro-
viding indemnity is promising to recover the
damage. Indemnity provisions provide clear con-
tractual remedy for the breach of a covenant,
presentation or a warranty.
D 842
Due Diligence, Table 1 The main due diligence topics
Due diligence topics Focus of enquiries
Financial Validation of historical information, review
of management and systems
Legal Contractual agreements, problem-spotting
Commercial Market dynamics, target’s competitive
position and target’s commercial prospects
Source: Howson (2003)
Types of Due Diligence
There are different types of due diligence.
According to content of the business deal, due
diligence topics can change. The most commonly
used due diligence types focus on financial, legal,
and commercial issues. Table 1 summarizes the
primary due diligence topics, focus of enquiries
and expected results. The other due diligence
topics includes human resource, culture, insur-
ance, risk, property, tax, environment, informa-
tion technology (IT), pension, etc.
Financial Due Diligence
Conducting financial due diligence requires spe-
cial skills and knowledge. Therefore, qualified
accountants, namely, certified public accountants
(CPAs), and people who are experts in finance
should take part in the process. Financial due
diligence is necessary in order to confirm the
assumed financial situation of the target com-
pany. Financial due diligence pushes the target
company to update the financial statements and it
questions the accuracy of the financial state-
ments. A review of the financial statements con-
sists of analysis of the balance sheet, income
statement, cash flows, and related supportive doc-
uments. The financial due diligence includes the
analyses of historical financial performance, cur-
rent financial situation, and future financial fore-
casts of the target company. A financial review
requires financial ratio analysis, trends analysis,
and examination of related documents.
Financial due diligence allows the acquiring
company to reveal hidden facts and
Due Diligence
Expected results
Confirm underlying profits. Provide basis for
valuation
Warranties and indemnities, validation of all
existing contracts, sale and purchase agreement
Sustainability of future profits, formulation of
strategy for the combined business, input to
valuation
inconsistencies in the information provided by
the target company (i.e., contingent liabilities).
Some topics of the investigation includes capital
structure, profitability, costs and expenses,
liquidity, trade credits, financial credits, dividend
payment policy, working capital requirement,
fixed assets, off-balance sheet items, and pricing
policy of the target company. The financial due
diligence is primarily focused on the potential
risks which affect the value of the target com-
pany. It is a helpful process in ensuring the accu-
racy of the accountancy regarding the tax
obligations. Tax due diligence is additionally
conducted in order to verify the tax duties, iden-
tify the opportunities for tax planning, and detect
the tax risks which may have impact on the value
of the target company.
The success of financial due diligence depends
on the accuracy of the information provided by
the target company. In particular, in cross-border
deals, the quality of the financial statements
becomes a matter. In some cases, the statements
contain errors and important documents are miss-
ing. Further, language barriers in the financial
statements can make the transaction more
complicated.
Getting ready for financial due diligence is
a stressful process in particular for the target
company. The high level managers may impose
high pressure on technical and administrative
staff to provide good-looking financial state-
ments in a short period of time. In order to meet
expectations, employees violate some rules and
manipulate the financial records. This sabotages
the success of the due diligence. Further, exag-
gerated expectations, unrealistic objectives, and
inadequate research by the acquirer may cause
Due Diligence
financial due diligence to fail. Incomplete due
diligence process is one of the major reasons
that business deals end up with financial disasters
(Rosenbloom 2002).
After having reviewed the documents, the
financial experts and the advisers of the acquiring
company prepare a report regarding the financial
situation of the target company. This report will
be gathered with other reports prepared by other
field experts in order to have final due diligence
report.
Legal Due Diligence
A legal due diligence consists of a scrutiny of the
legal affairs of the target company and it is effec-
tive in protecting investors from risks. However,
it is not a substitute to contractual protection. In
order to avoid risks related to target company
status, ownership structure, assets, agreements,
commitments, intellectual property, etc., the
acquirer asks for a scrutiny of the legal docu-
ments. This improves the acquirer’s bargaining
power and ensures that acquirer is not subject to
any uncovered legal risks. Legal due diligence is
usually carried out by lawyers. The target com-
pany provides the documents and information
requested by the acquirer. The lawyers
check whether or not the target company has
any significant legal problems. The lawyers can
also ask key contracts, list of patents, copyrights,
and other intellectual property documents,
insurance coverage, employment agreements,
pending law suits against and initiated by the
target company.
Legal due diligence is very important in cross-
border transactions which require longer time and
special knowledge about foreign country’s regu-
lations and systems. It is important to deal with
the differences in tax laws, labor laws, and land
ownership laws. Therefore, most acquiring
companies hire professional consultants to carry
out cross-border transactions. Professional
consultant companies usually collaborate with
local professionals in order to gain better under-
standing of a different business environment,
laws and regulations. Local partners usually
843 D
provide assistance in understanding the political,
economical, and cultural issues related to
business deal.
After having reviewed the documents, legal
due diligence report is prepared by the lawyer
and consultants of the acquirer. The legal due
diligence report provides the summary of the
information reviewed and the information asked
but not provided, and any detection of false state- D
ments. The lawyers and the consultants who
involve in legal due diligence, take also parts in
closing the deal. The lawyers write the terms and
the conditions of the agreement.
Commercial Due Diligence
It is known as market due diligence. Commercial
due diligence enables the acquirer to investigate
the market performance of the target company.
The results of commercial due diligence provide
a valuable guidance toward the demand for the
target company’s products and services.
Commercial due diligence requires
a combination of internal data with insights
from customers, suppliers, and experts. A data
room is set for internal analyses. Internal market-
ing analysis covers the issues of marketing plan-
ning and strategies, sales budgets, sales
projections, regional distribution of sales, pricing
policy, product policy, distribution channels,
advertising strategy, participation in fairs and
exhibitions, etc. External market analysis focuses
on the market position of the target company and
analyzes the major customers, geographic distri-
bution of customers, the positions of competitors,
suppliers, and market opportunities. In this con-
text, site visits, interviews with major customers
and suppliers may become necessary.
The primary interest of commercial due dili-
gence is future growth of the target company.
This can be achieved through focusing on
projected sales and future earnings. The informa-
tion provided through commercial due diligence
reflects into value of a target company. The
knowledge gained from the investigation of com-
mercial due diligence is useful in price
negotiations.
D 844
CSR and Due Diligence
In recent years, corporations have become more
committed to improving people’s lives. Their
policies are shaped by environmental and social
issues in addition to usual business principles. An
increasing number of merger and acquisition
transactions require socially responsible due dil-
igence that extends well beyond the traditional
assessment process. In the context of corporate
social responsibility, due diligence process has
much in common with other due diligence pro-
cesses to avoid and reduce financial and other
risks.
The emerging areas of socially responsible
due diligence include environment, human rights,
and reputational risk. In particular, environmen-
tal due diligence is increasingly being recognized
due to low risk appetite of investors. Some cor-
porations now care not only about environmental
and social issues but they also link these issues
with their long-term financial performances.
Environmental issues including health and safety
risks can result in financial and reputational lia-
bilities. Therefore, companies need to develop
strategies in order to reduce their risks, increase
their reputation and customer loyalty, and hence
become socially responsible investors.
The need for environmental due diligence
stems from the increasing public awareness of
environmental issues and regulations. In particu-
lar, real estate investors, tenants, and their lenders
are concerned about legal compliance with envi-
ronmental, health and safety regulations and
industry standards of good practice, presence of
hazardous materials. Environmental due dili-
gence can help to assess, manage, mitigate those
risks. Failure of legal compliance with environ-
mental regulations may result in serious financial
implications. In order to avoid criminal and
administrative penalties, conducting proper due
diligence provides companies with strong protec-
tion against mismanagement claims by share-
holders and stakeholders.
Among environmental due diligence, a shift
toward a low-carbon economy is taking
a common place. Carbon due diligence stems
from the climate change concern and global
Due Diligence
warming caused by the carbon dioxide (CO2)
emission and other greenhouse gases (GHG).
Since Kyoto Protocol, more public attention has
been focused on climate change and control of
greenhouse gases. Climate change combined
with the rising energy prices drive people to
reduce consumption and lower their emissions.
In response to climate change concerns, regula-
tory authorities are trying to implement economic
solutions such as carbon trading to regulate GHG
emissions. Monitoring carbon dioxide pollutant
can induce significant environmental benefits.
Companies that exceed their carbon limit can
purchase carbon credits from other companies
that have not exceeded theirs. This is known as
“cap-and-trade.” Carbon is being traded like any
other commodity. Carbon trading is used to limit
GHG emissions and it gives a financial incentive
for organizations and corporations to reduce their
carbon footprints. Carbon trading is a way of
climate-friendly sustainable investment and it
supports the business to take part in renewable
energy consumption (Suchman 2008).
Public attention accompanied with legal com-
pliance is pushing to become a carbon
constrained society. In particular, industrial orga-
nizations are becoming more concerned about
how to develop carbon strategies in order to
reduce energy consumption costs. Carbon due
diligence is designed to enable companies to
lower their carbon emissions. The aim is to quan-
tify and decrease the carbon footprint and climate
change risk exposure of human activities. In this
context, emission verification is crucial to gain
credibility among stakeholders to assess risk and
mitigation options accurately. In addition to this,
carbon due diligence helps companies to have
idea about the impact of carbon emissions on
corporate reporting, profitability, firm value,
mergers and acquisitions, and other business
transactions.
Another CSR issue which is becoming a hot
topic is human rights. The concept of corporate
responsibility for human rights has entered into
corporations’ lives lately. In 2011, the United
Nations Human Rights Council endorsed UN
Guiding Principles on Business and Human
Rights. The principles were designed to provide
Due Diligence
a standard for addressing and preventing the risks
on human rights associated with business activi-
ties. It is a fact that global corporations play
increasingly crucial roles at international and
national levels. There has been a significant
shift in responsibility toward corporations that
they are viewed as social, economical, and polit-
ical actors in the economy.
Human rights are increasingly taking place on
corporate agenda for commercial and reputa-
tional success. In addition to public concern,
institutional investors such as fund managers,
pension funds, and banks have expectations
from companies to build their legitimacy on com-
pliance with ethical and human rights issues.
Human rights abuses at workplace can damage
reputation and result in a fall in company’s share
price. Accordingly, companies may end up with
low market values. Therefore, it becomes
a necessity for companies to exercise due dili-
gence not only to be responsible to society but
also to manage visible/invisible unsystematic
risks and to avoid financial losses (i.e., lawsuits,
drop in share prices, etc.)
In the wake of several business failures, com-
panies try to address human rights effectively. In
particular, the recent global financial crisis
revealed the fact that there is a need for compa-
nies to incorporate human rights into their busi-
ness plans for sustainable business models. It
should be the company’s policy to run the busi-
ness with respect for people and build its rela-
tionship with its stakeholder in the same manner.
Additionally, companies can train their
employees to understand their CSR policy and
to motivate them to take part in all CSR activities.
Human rights due diligence enables companies to
reduce the risk of their activities harming the
rights of others, and it helps them to take neces-
sary steps to mitigate or remedy abuses. What is
unique about the human due diligence is to make
sure business respects human rights. Conducting
human rights due diligence requires a company to
establish a human rights policy, assess human
rights risk, integrate the commitments of respect-
ing human rights into its corporate policy and
finally track an report performance (Sherman
and Lehr 2010).
845 D
Key Issues
In some cases, financial due diligence can be
perceived as audit. This kind of definition
only limits the scope of due diligence. While
audit covers the past and the present financial
status of the target company, the financial due
diligence provides financial historical review
and it also considers the future prospects of the D
target company. The financial due diligence ben-
efits from audit reports, however, it is an in-depth
report on the financial health of the target
company and it also considers post-integration
period.
In order to understand whether or not the deal
makes sense financially and socially, due dili-
gence is essential. The companies should reflect
their CSR policy in their operations to minimize
the risks and maximize the sustainability of their
products and services. The efforts in this field are
based on the commitments to respect to society.
Future Directions
Due diligence is not simply a checklist of the
required information. It provides useful insight
information about the target company and it
reveals the hidden facts and critical issues. The
scope of due diligence should be broad and deep.
The parties involved in due diligence should not
focus on the cost of the process. Rather, they
should pay attention to quality of the information
and risks associated with the deal.
In order to reduce risks, it is important to
allocate ample time for due diligence. However,
in today’s fast-paced environment, the duration
of due diligence processes is short. This leads to
poor and incomplete due diligence that results in
merger and acquisition failures which may have
negative impacts on economy, employment, and
society. It would be interesting to investigate the
duration of due diligence process depending on
size of the deal, type of the industry, and type of
the deal (being cross-border or local). Yet, there
has been no study investigating the impact of the
duration of due diligence process on the success
of the deals.
D 846 Duties of Directors

Cross-References
Duty
▶ Disclosure (CSR Reporting)
▶ Mergers and Acquisitions ▶ Responsibility Concepts

References and Readings

Boggs, B. W. (2007). An analysis of the: Agreement and Duty and Obligations to One’s
plan of merger (Working Paper). Knoxville, TN:
University of Tennessee College of Law.
Parents
Bruner, F. R. (2004). Applied mergers and acquisitions.
Hoboken: Wiley. ▶ Filial Piety and CSR
DePamphilis, D. (2003). Mergers, acquisitions, and other
restructuring activities – an integrated approach to
process, tools, cases, and solutions. London: Academic.
Howson, P. (2003). Due diligence: The critical stage in
mergers and acquisitions. Aldershot: Gower Publishing.
Picot, G. (2002). Handbook of international mergers and Duty and Obligations to Society
acquisitions. New York: Palgrave Macmillan.
Rosenbloom, A. H. (2002). Due diligence for global deal
making: The definitive guide to cross-border mergers ▶ Corporate Social Obligation & CSR
and acquisitions, joint ventures, financings, and stra-
tegic alliances. Princeton: Bloomberg Press.
Sherman, F. J., & Lehr, A. (2010). Human rights due
diligence: Is it too risky? (Working Paper No. 55).
Harvard Corporate Social Responsibility Initiative,
Harvard University. Duty and Responsibility to
Suchman, E. G. (2008). Carbon due diligence: What is it Community
and why do it? Bloomberg Corporate Law Journal,
3(3), 330–337 Summer.
▶ Corporate Social Obligation & CSR

Duties of Directors Dynamic

▶ Agency and Corporate Governance ▶ Organic