Corporate Citizenship

(Corporate Governance and

Stakeholder Theory)

Essential Readings:
•Gray R., Owen D. and Adams C. (1996), Accounting and Accountability changes and
challenges in corporate social and environmental reporting, Prentice Hall. (Chapter 2)
•Gray, R., Adams, C. A., Owen, D. (2014), Accountability, Social Responsibility and
Sustainability, Pearson. - (Chapter 3)
•Kim, Nofsinger and Mohr – Chapter 11
 Learning outcome
• critically evaluate the stakeholder view of the firm
• define corporate citizenship/corporate social
responsibility
• understand the origins, importance and different drivers
of corporate social responsibility
• participate in the debate on corporate social
responsibility issues
• discuss the international aspects of corporate citizenship
Corporate Governance from Alternative
Perspective
From the perspective of agency theory,
corporate governance is mainly about the
incentive systems and monitoring mechanisms
designed to protect shareholder interests.
From the stakeholder perspective, corporate
governance is the mechanism that ensures
corporations take responsibility for directing their
activities in a manner fair to all stakeholders.
 Stakeholder View of the Firm
 Stakeholder theory identifies ‘stakeholders’ as individuals, or groups of
individuals, who have legitimate interest in a company (Pearce, 1986), and
whose interests are recognised as vital to the company’s long-term
survival (Jones, 1995).

 Some stakeholder groups are of more importance than others are,

depending on the resources they control (Ullmann, 1985).

 Companies have varying responsibilities to each of their stakeholders.

 These relationships between managers and stakeholders are based on a

moral or ethical foundation.

 Adoption of a stakeholder mentality does not necessarily mean that

companies have to change their beliefs to conform to those of their
stakeholder groups.

 Sturdivant (1979) contends that managers should consider the conflicting

interests of their stakeholder groups when planning corporate strategy.
 Company Stakeholders
http://www.youtube.com/watch?v=Ih5IBe1cnQw

Secondary Stakeholders

En
Primary Stakeholders
t
en

vir
m

o
ern

nm
ers
v

en
Em
Go

t
o ld

p
COMPANY

l oy
kh
oc

ee
St

s
MANAGERS
Cu

rs
s

l ie
to

rs
me

pp
Co

to
Su

eti
rs

m
m

mp
un
ity Creditors
Co

Society
 Ullmann’s (1985) three dimensional model

1. intensity of stakeholder demands’

2. ‘strategic posture’

3. ‘economic performance’
 The Managers’ Goal
In a stakeholder view, the managerial objective is to
maximize sustainable organisational wealth by
optimizing the relationships among each stakeholder
group.
Many companies now have an organisational unit
responsible for communicating with stakeholders. e.g.
public relation office
Good corporate citizens strive to conduct all business
dealings in an ethical manner, make a concerned effort
to balance the needs of all stakeholders, while working
to protect the environment.
 Principles of corporate citizenship
Ethical Business Behaviour
1. Engages in fair and honest business practices in its
relationship with stakeholders.
2. Sets high standards of behaviour for all employees.
3. Exercises ethical oversight of the executive and board levels.

Stakeholder Commitment
4. Strives to manage the company for the benefit of all
stakeholders.
5. Initiates and engages in genuine dialogue with stakeholders.
6. Values and implements dialogue.
 Principles of corporate citizenship

Community
7. Fosters a reciprocal relationship between the corporation
and community.
8. Invests in the communities in which corporation operates.

Consumers
9. Respects the rights of consumers.
10.Offers quality products and services.
11.Provides information that is truthful and useful.
 Principles of corporate citizenship
Employees
12. Provides a family-friendly work environment.
13. Engages in responsible human-resource management.
14. Provides an equitable reward and wage system for
employees.
15. Engages in open and flexible communication with
employees.
16. Invests in employee development.
 Principles of corporate citizenship
Investors
17. Strives for a competitive return on investment.

Suppliers
18. Engages in fair trading practices with suppliers.

Environmental Commitment
19. Demonstrates a commitment to the environment.
20. Demonstrates a commitment to sustainable development.
 Corporate Social Responsibility

Proponents of the stakeholder view argue that

companies have a social obligation to operate in
ethically, socially, and environmentally responsible
ways. This active approach is referred to as CSR
or corporate citizenship.
 CSR-Legal Foundations
The legal underpinnings of the stakeholder view of the
firm stems from property rights:
 Shareholders who own the firm, do they not have the
property rights?
 Property – can be defined as a “bundle” of rights, which
may be limited, e.g. a land-owner
 The U.S. government, various state governments, and
courts have formalized the rights of stakeholders in
corporations.
 The determination of which rights are held by the
corporation (and its owners) and which rights belong to
various stakeholders, continues to evolve.
13
 CSR – Drivers
 Globalisation and market forces

 Greater power of global firms should fill the activities formerly

left to the government

 Ethical consumerism

 Social awareness and education

 An increasingly popular environmental movement

 Crises and their consequences - A rising desire in the capital

markets to punish firms not meeting ethical standards

 Laws & regulation

14
 CSR - Development
Early Roots of CSR in the UK
1.Industrial revolution in Britain in the 18th century : Terrible living and working
conditions of people involved in early industrialisation moved many members of
the 'higher classes' to write extensively on the evils of industry

2.Thomas Carlyle (1795-1881) - one of the first writers to produce novels

encouraging a social consciousness

3.By Victorian times social-oriented movements were being established based

on philanthropic and Christian value. There was a slow realization among certain
circles of society that unethical corporate behaviour could have a detrimental
influence on society.

E.g. "Any given accumulation of commercial wealth may be indicative, on the

one hand, of faithful industries, progressive energies, and productive ingenuities … or,
on the other, it may be indicative of mortal luxury, merciless tyranny, ruinous chicane.
Some treasures are heavy with human tears …" (Ruskin, 1862, p.180).
15
 CSR - Development
4. There were also individuals who championed environmental
issues, e.g. William Morris, opposed the tapping of a Surrey
river – one of the earliest cases of environmental lobbying
through the courts

5. CSR as a discipline in its own right (and the terminology

surrounding it) originated in 1950s ( Boatright,1999)

6. The consciousness of CSR has grown continuously since

the first roots of industrialisation in England to the gradual
growth of business around the world.

7. The sole aim of companies to maximise profitability and

maximise shareholder wealth has come seriously into
question in more recent times BUT HOW RECENT?
16
 CSR - Development
8. Pursuing profit at the expense of damage to environment,
local communities, employees and other stakeholders is
not a route many people support any longer

9. Move from narrow agency theory perspective to broader

stakeholder perspective of corporate governance

10. Fears of high consequence risks such as global

environmental disaster, terrorism and nuclear war, have
focused people's attention on environmental and social
issues.

17
 CSR - Development
 Genuine impact of the Modern Company Law Review in
terms of forcing greater attention on a variety of
stakeholders is DEBATABLE
E.g. OFR debacle
 Guidelines on social, ethical and environmental
disclosure published by the Association of British
Insurers (ABI)
 Ground breaking as it represents a call from the
institutional investment community for greater social
accountability from companies
18
 CSR- Approaches
 Caring for company staff & their families (includes two approaches):

 The paternalistic approach - the ‘the employer as benefactor’

 The innovative approach - focuses on qualification and training, as
well as social investment (insurance and loan benefits), which
enhance the capacity, professional and social capital of employees.

 Social activities benefiting the local community: e.g. improvements in

the urban environment, public relations interests with a social impact,
and support for orphans, children and elderly people in institutions.
 Community-based development projects

e.g. Mark and Spencer builds a trade network with the community -
guaranteeing regular fair trade purchases; Establishment of education
facilities for adults, as well as HIV/AIDS education programmes.

 Investment in energy efficiency and environmental protection

19
 CSR – Importance
Doebele (2005) – The importance of corporate responsibility
 CSR was a “central” or “important” consideration in investment decisions
(85% of executives and investors surveyed v.s.44% five years ago)
 CSR practices could help a company’s bottom line (84%)
 Brand enhancement (61%)
 Better staff morale (67%)

Does CSR improve financial performance?

 Superior social and environmental ratings, as well as better corporate

governance, also have the best performing shares
"You can make a fast buck by ignoring corporate social responsibility but
you can't run a long-term sustainable business without it!” - Pension fund
director 20
 Corporate Governance
and Stakeholder Theory
Aligning managerial incentives with multiple stakeholder
groups and measuring overall performance can become
a noisy and chaotic process.
There is still no consensus on how to measure and report
on changes in stakeholder welfare. No standards for the
disclosure of non-financial information.
Organisational theory states that the firm will only value
CSR goals if the company executive exhibits strong
leadership in instilling corporate responsibility within the
company’s culture.
 Summary
The stakeholder view of the firm does not
focus on the maximization of shareholder
wealth but rather an optimization of the
sustainable economic wealth of all
stakeholders.
The modern evolution of the stakeholder
view of the firm advocates that companies
have a social obligation.
Videos and links
Xinjiang supply chain risks intensify and extend beyond China’s
borders Human Rights Outlook 2019
https://www.maplecroft.com/insights/analysis/xinjiang-supply-chain-risks-intensify-and-extend-beyond-chinas-borders/

Historic new Uyghur forced labour law in the USA: other countries must not
become dumping grounds for Uyghur forced labour products

https://www.antislavery.org/new-uyghur-forced-labour-law-usa-other-countries-must-not-become-a-dumping-ground/
Seminar Session
 WAL-MART’S BATTLE WITH STAKEHOLDERS
Wal-Mart operates over 3,500 discount stores in the US (Wal-Mart, Super
Centres, and Sam’s Clubs). The firm generates over $10 billion in profits per year.
The company is the largest corporate employer in the US within 1.3. million
employees, and plans to open about 300 new stores every year.
But Wal-Mart seems to be coming under increasing pressure from different social
groups for its business practices. Coalitions of community groups have worked to
keep Wal-Mart from coming to their towns. Hundreds of communities have been
successful. A recent class-action lawsuit was filed against Wal-Mart on behalf of
female employees, arguing that they were being paid less than their male
counterparts. Many politicians have noticed that a large proportion of Wal-Mart’s
employees end up on public health care assistance. The firm has endured
allegations of child labour law violations, the hiring of illegal immigrants, and
violations of worker rights.
Wal-Mart’s view is much different. It claims that its low prices help everyone in the
community. Also by giving $170 million to charity, it is the largest corporate cash
contributor in the US Wal-Mart targets 90 percent of its charitable contributions at
the local level where Wal-Mart customers and associates live and work.
Whether Wal-Mart has been a good corporate citizen or not is being actively
debated. However, one thing seems obvious – Wal-Mart has done a poor job of
actively engaging many of its stakeholders to optimize their mutual interests.
Having adversarial relationships with employees, potential customers, politicians,
and civil rights activists do not seem to like wise business choices.
 Criticisms
 It is difficult to assess the stakeholder view because it is
not a well-defined theory.
 Even critics of CSR agree that companies should act
responsibly and should be seen doing so. However,
critics also argue that deviating too far from the profit-
maximizing role of companies would be harmful to
society.
 Economic progress comes from profit-related activities.
When managers involve themselves in stakeholder
engagement activities, higher costs and impaired
business performance are likely to follow.
 Index Value

50
60
70
80
90
100
110
120
130
01.01.1999
04.03.1999
07.05.1999
09.07.1999
09.09.1999
10.11.1999
12.01.2000
14.03.2000
18.05.2000
19.07.2000
19.09.2000
20.11.2000
24.01.2001
27.03.2001
31.05.2001
01.08.2001
02.10.2001
03.12.2001
07.02.2002
12.04.2002
14.06.2002
15.08.2002
16.10.2002
17.12.2002
24.02.2003
29.04.2003
30.06.2003
29.08.2003
Dow Jones STOXX 600 Index
DJ STOXX Sustainability Index

30.10.2003
600 other European firms.

05.01.2004
05.03.2004
10.05.2004
09.07.2004
09.09.2004
10.11.2004
Comparing the performance of European
firms that sustain corporate citizenship to

11.01.2005
14.03.2005
17.05.2005
18.07.2005
 Corporate Citizenship at American Express
American Express is the world’s largest travel agency and a large issuer
of credit cards. It has a presence in 160 countries and more than 40
percent of its 84,000 employees work outside the US. The firm has had
“company values” long before the term become vogue. American Express
values:
– Developing relationships that make a positive difference in their
customers’ lives;
– Providing outstanding products and unsurpassed service;
– Upholding the highest standards of integrity in all actions;
– Working together across boundaries, to meet the needs of their
customers and to help the company win;
– Valuing employees, encouraging their development, and rewarding their
performance;
– Being citizens in the communities in which employees live and work;
– Exhibiting a strong will to win in the marketplace and in every aspect of
the business;
– Being personally accountable for delivering on commitments. Note that
only three of the eight values can clearly identified as relating to the
business bottom-line of the firm. Many of these values are clearly
grounded in moral and social objectives. (continued …)
 Corporate Citizenship at American Express (cont’d)

Note that only three of the eight values can be clearly identified as relating to the
business bottom-line of the firm. Many of these values are clearly grounded in
moral and social objectives.
These values are far more than just statements for the company coffee mug.
American express ensures that these values become an integral part of
mainstream operations by surveying each employee on how the company has
performed with respect to these values. The results of this survey are then used
as one of the several measurements used to determine compensation issues of
managers. Social goals can really only be effective in the long run when
objectives can be measured and when progress success or failure is tied to
managerial compensation.
 International Aspects

Corporate citizenship has different historical

roots in different regions of the world and is
viewed with different perspectives.
A stakeholder view of the firm is also reflected in
many laws internationally.
A survey of firms actively engaged in CSR…
 What Role Will Your Chosen Company Play
Increasing Good Business and Good Society?

60%

50% U.S.

Europe
40%

Asia-Pacific
30%

20%

10%

0%
Leader Partner Supporter
Data Source: Corporate Citizenship in the New Century: Accountablility, T ransparency, and Global Stakeholder Engagement, T he
Conference Board, Research Report # R-1314-02-RR, July 2002.
How Effective are Your chosen company’s Efforts
Today to Address the Citizenship Factors that will
Assure Your Success Tomorrow?
60%

U.S.
50%

Europe
40%

Asia-Pacific
30%

20%

10%

0%
Extremely Somewhat Mixed results Not very effective Not effective at all
effective effective
Data Source: Corporate Citizenship in the New Century: Accountablility, Transparency, and Global Stakeholder Engagement, The Conference
Board, Research Report # R-1314-02-RR, July 2002.
Seminar Questions on
Tesco Plc
CSR Reporting
1) About the company:
– Scope of their operations (do they have subsidiaries? Do they have supply
chains? Do they have foreign customers/markets?)
– Which industry does your company belong to? What kind of CSR activities do
you think are most important to them?

2) In your view (a theoretical perspective), who do you think the

primary and the secondary stakeholders are?

3) Looking at the reporting, identify the stakeholder groups for whom

companies have reported information?
– Identify at least three stakeholder groups.
– Provide examples and quotations from Tesco’s latest report (available
on MyLearning page).
4) How responsive has Tesco been to current issues that
may have concerned their stakeholders:
 What are the current issues?
 Which stakeholders are most affected?
 Which remedies has Tesco devised and have they been
communicated with its stakeholders?

5) In your view, have all key stakeholders been addressed

in Tesco’s report? How do you classify stakeholders?
6) In your view, do you think Tesco has provided relevant
information for each stakeholder group? If not which
aspects and why not?
7) Can you identify any engagement techniques that
Tesco company has adopted?
8) Critically evaluate these techniques
9) Have you found evidence in support of stakeholder
theory and legitimacy theory
10)Do you think Tesco has discharged its accountability?