THE ADOPTION OF CORPORATE SOCIAL RESPONSIBILTY …
THE ADOPTION OF CORPORATE SOCIAL RESPONSIBILTY POLICIES BY MULTINATIONAL COMPANIES
A THESIS
SUBMITTED TO THE
STANFORD PROGRAM IN INTERNATIONAL LEGAL STUDIES
AT THE STANFORD LAW SCHOOL,
STANFORD UNIVERSITY
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF
MASTER OF THE SCIENCE OF LAW
By
Julien Levis
May 2005
Abstract: The purpose of this paper is to identify potential explanations for the adoption of Corporate Social Responsibility (CSR) policies by Multinational Corporations (MNCs). Building on existing literature and earlier empirical research, I will isolate explanatory schemes that appear most relevant to this discussion. I will first assess the claim that CSR is driven by companies’ concern for virtue and later move to a presentation of CSR as a form of risk-management. I will present the potential normative prescriptions that may arise if any or both of the claims are valid. In the future, I intend to conduct empirical research on this issue in the Oil and gas industry to assess the validity of the theories exposed. The research protocol for this study is introduced in Chapter III.
AKNOWLEDGEMENTS
I am very grateful to all my advisors, the official ones: Thomas Heller, Erik Jensen and Jonathan Greenberg whose help and advice have been crucial for the completion of this thesis; and also the others, my fellow classmates in the SPILS program: Luciana Pires Dias, Stefania Fusco, Pablo Jimenez-Zorrilla, Tamar Kricheli-Katz, Jyh-An Lee, Yu-Hsin Lin, Tony Reynard, Tehila Sagy, Masayuki Sakaniwa, Jeong Seo,and Liang Tang. I dedicate this thesis to all of you who have made my time at Stanford so wonderful.
TABLE OF CONTENTS
Introduction……………………………………………………………………………….5
Chapter I: The Language of Virtue………………………………………………………14
Section I: Accounting for the role of Ethics in the Adoption of CSR Policies………….15
A. Subjectivity and CSR…………………………………………………………………15
B. CSR as an Organizational Process……………………………………………………21
Section II: Assessing the Impact of Virtue-Driven CSR………………………………...30
A. Weakness of the Market for Virtue in a Competitive Environment…………….……31
B. The Legitimacy of Business to define Virtue………………………………………..36
C. CSR as Agency Cost…………………………………………………………….……37
Chapter II: The Appearance of Risk Management………………………………………49
Section I: Section I as a form of Social Risk Management……………………………...49
A. Theoretical Background………………………………………………………………49
B. Illustrations in the Oil and Gas Industry: Environmental Backlashes………………..52
Section II: CSR as a Form of Legal Risk Management…………………………………55
A. The Regulatory Challenge……………………………………………………………55
B. The Struggle for Self-Regulation……………………………………………………..68
Section III: Assessing the Impact of Risk Driven CSR…………………………….……80
A. The Bargaining over CSR……………………………………………………….……80
B. Disqualification of Business as a Regulator………………………………………….85
Chapter III: Tentative Survey Presentation……………………………………………...90
Section I: Actors…………………………………………………………………………90
A. Business Leaders……………………………………………………………………..91
B. Employees……………………………………………………………………….……91
C. Equity and Debt Holders……………………………………………………………...92
Section II: Firms Characteristics………………………………………………………...96
A. Ownership Structures…………………………………………………………………96
B. Visibility……………………………………………………………………………...97
Introduction
Presentation of the Research
• CSR
The social performance of a large corporation comprises three dimensions: corporate philanthropy, corporate responsibility and corporate policy. Corporate philanthropy includes charitable efforts undertaken by a firm that are not directly related to its normal business activities. Corporate responsibility refers to the way in which a corporation behaves while it is pursuing its goal of making profits. The final category, corporate policy encompasses the position of a firm on issues of public policy that affect both business and society as a whole.[1]
The first category, philanthropy, is self explanatory; the second takes the form of self-regulation on social, human rights related and environmental issues; the third may translate into efforts at improving political governance in the political unit hosting the company’s investment.[2] My research will focus on the second category: Corporate Social Responsibility(CSR). Self-regulation may be formalized through the adoption of Corporate Citizenship or Sustainable Development charters.[3] Since the focus of the empirical research in this study is on the Oil and gas Industry,[4] I will concentrate on environmental and human rights issues, the ones that have been most prominent in this industry.
• MNCs
I will concentrate on Corporate Social Responsibility in the context of Foreign Direct Investment (FDI). FDI describes the activity of MNCs establishing subsidiaries, joint ventures or buying existing companies in foreign countries. For these activities, these companies submit to the laws of the host country. When investing in emerging countries, these companies often impose more stringent standards on themselves than local laws would require. Even when local laws impose the same requirements as CSR charters, law enforcement is typically weak in developing countries[5]. Therefore, companies’ monitoring and compliance procedures offer an alternative form of regulation and additional resources for enforcement.
• The choice of the Oil and gas Industry
The oil and gas industry has a number of features that will make it a perfect illustration for the empirical research this study aims to explore. First, it is the one in which one finds some of the largest transnational companies,[6] among which many of the leaders of the CSR movement have emerged. Second, significant variations in the degree of “responsibility” of firms can be observed in this industry. It makes it possible to correlate each firm’s CSR orientation with other characteristics of these firms. Third, this industry is well exposed to the media (which facilitates a measure of the civil society input on CSR). Fourth, environmental and human rights challenges have recurrently emerged in this industry over the past few decades. In an attempt to narrow down the focus, we can observe that major oil companies are generally either publicly traded or state-owned. As I will develop an argument based on Corporate Governance in Chapter I, I will concentrate on publicly traded companies.
Purpose of the Research
Over the last few years, conventional wisdom claimed that there was a business case for Corporate Social Responsibility. However, some authors have been vocal in advocating the contrary view. In particular, a recent, extensive research by Professor Vogel reassessed this claim and argued that there was no sufficient evidence to support it.[7] The debate on the profitability of virtue is a heated one today. My purpose is not to address this question. This would indeed necessitate further empirical research. However, the persistence of the debate clearly illustrates the complexity of identifying firms’ motivations to adopt CSR policies. As part of a wider debate on CSR’s potential to contribute to public welfare, I want to contribute to the understanding of firms’ motivations to enhance their social responsibility. This study sets the theoretical background and aims at designing an empirical research project that I will conduct in the future.
Intended Audience of this Research Project
Firms themselves, public authorities and civil society organizations are the intended audience of this study. Firms seem to constitute the most immediate audience for such a topic, especially their shareholders. Indeed, shareholders’ primary motivation lies in value maximization. However, as I will illustrate in Chapter I, there are doubts about the capacity of CSR policies to maximize value. Shareholders should, hence, be particularly interested in an attempt to understand why the firms they own spend their resources on CSR projects.
A better understanding of the logic underlying CSR decisions would be helpful to two other groups:
- state/administrative authorities and,
- civil society organizations.
States and administrative authorities should have, and have indeed illustrated in the past, a strong interest in the development of the CSR movement. Because CSR most often takes the form of self-regulatory charters and because MNCs so jealously try to keep this regulatory power within their realm, there is a form of regulatory competition between MNCs and States. Beyond this power game, the legitimacy of allowing businesses to control such issues as human rights abuses or environmental externalities is questionable. To address this issue, one needs to examine companies’ motivations to participate in general welfare maximization. Such an approach also requires an examination of the respective roles of states and firms.
Also, as states design the framework that allows for civil society action, they have some control over civil society organizations’ input in the CSR phenomenon. Authors have illustrated that the effectiveness of community and environmental advocacy groups has been enhanced by various forms of facilitative government regulation.[8] Facilitation, these authors argue, may result from provisions that authorize citizen suits against firms, compliance certification requirements in major permit programs and information disclosure provisions such as the Toxic Release Inventory[9]. Governments, as they have an interest in shifting some of the burden of monitoring MNCs behavior to civil society, may need to better understand of the interactions between firms and civil society organizations.
Other non-corporate actors, mainly civil society organizations, also have an obvious interest in CSR. Firms have often adopted CSR charters as a result of pressure from NGOs, as examples in Chapter II will illustrate. NGOs’ campaigns to draw the attention of the media to CSR issues are often the starting point of a true empowerment of civil society. Whether they try to defend certain categories of interests nationwide or globally, or focus on certain FDI projects and their impact on the local communities, civil society organizations must portray a solid case for CSR to firms. CSR decisions may be more personal than rational (as Chapter I will illustrate). Hence, better knowledge of the internal corporate governance mechanisms resulting in firms’ acceptance or rejection of their claims shall help civil society organizations to identify their best potential interlocutors and most efficient arguments. More generally, because NGOs increasingly tend to act like lobbyists, especially within the context of international organizations, they should have an interest in the study of the impact of outside pressures on firms’ CSR policies.
Argument
MNCs today have an increased the potential impact on the environment as well as on labor and human rights face worldwide. The also face broader media exposure. Because MNCs have increased their presence in developing countries that have weak economic and legal environments, MNCs have a growing impact on the socio-economic and political situations in these countries. This leads to two sets of consequences:
• I will argue that managers’ subjectivity is relevant in the analysis of their decision to use CSR policies:
- Managers are concerned about both their personal and their companies’ reputation. They do not want the media to describe them as polluters, exploiters or human rights violators[10] (affect);
- Many managers actually care about sustainable development as a result of a shift (or maybe a continuity) in the ethics of business leaders (values),
MNCs managers are perceived, and may perceive themselves, as having significant responsibilities in a number of global matters. This may cause them to make decisions based on the notion of corporate citizenship rather than on economic rationales. One may wonder whether firms are the most appropriate architects of international development but also whether shareholders should be protected from potential managerial abuses, in case managers disregard shareholders’ interests when designing the firm’s CSR policies. I will examine these questions in the first chapter.
• High-level managers often make the decision to adopt CSR policies under the pressure of civil society organizations, litigation, the media, or out of fear of a regulatory intrusion (by the home country of the firm or, in certain cases, by international organizations).[11] Because these pressures may affect the operations that are the core function of the firm, firms need to protect themselves from the potential drawbacks[12] of their dominant position. One of the drawbacks is the growing likelihood that the social outcry against the firms’ negative externalities will affect the firms’ reputation or even profitability. Another is legal risk either in the form of litigation or regulatory intrusion in the domain of CSR. In this scenario, CSR may have become a form of risk management for the firm. The purpose of implementing CSR may not be to achieve “virtue” but simply to avoid straying towards “vice” and the sanctions that accompany it. In Chapter II, I will therefore argue that a major motivation for managers to support CSR as a method to implement their own regulatory system is to remove the international operations of their firms from the reach of social, state or international organizations’ regulation.
Chapter I: The language of virtue
Chapter II: The appearance of risk management
Chapter III: Tentative survey presentation
Chapter I: The Language of Virtue
Introduction: Ethics over Profits: Enlightened CSR
It is interesting to note, as Clive Crook that: “
it would be a challenge to find a recent annual report of any big international company that justifies the firm’s existence merely in terms of profit, rather than ‘service to the community.” [13]
Although the argument is that companies are mostly paying lip service to the cause of CSR, it is nevertheless striking that there is such a discrepancy between value maximization, the still dominant approach to business, and a business-for-the-community’s-good vision. There seems to be, if not a business schizophrenia, at least a inconsistency between managers’ obligations to their shareholders and the alleged obligations of companies towards the community. The question becomes one of identifying an alternative justification for CSR if profitability proves to provide unstable ground. As we have seen, the substitution of any set of moral standards for shareholder value maximization creates a risk of agency costs. Because managers are spending other people’s money when they engage in CSR, it is not clear that either their legitimacy (as Friedman points out)[14] or their responsibility is sufficient to make their quasi political action desirable.
Quotes from major CEOs illustrate this line of thinking[15]:
- “CSR is essential to the long term prosperity of companies as it provides the opportunity to demonstrate the human face of business.” [16]
- “When companies hitch their wagon to the star of sustainability, everyone is a winner.”[17]
- “… sustainable development builds the platform on which business thrives and society prospers. Indeed within the Royal Dutch/Shell group we have an absolute conviction that sustainable development is the fundamental driver for our long term business success.”[18]
Section I: Accounting for the Role of Ethics in the Adoption of CSR policies
Introduction: Weber and the Different Forms of Rationality
In Economy and Society, Max Weber distinguishes between four forms of rationality and asserts that:
Social action, like all action, may be oriented in four ways. It may be:
- instrumentally rational (zweckrational), that is, determined by expectations as to the behavior of objects in the environment and of other human beings; these expectations are used as “conditions” or “means” for the attainment of the actor’s own rationally pursued and calculated ends;
- value rational (wertrational), that is, determined by a conscious belief in the value for its own sake of some ethical, aesthetic, religious or other form of behavior, independently of its prospect of success ;
- affectual (especially emotional), that is determined by the actor’s specific affects and feeling states;
- traditional, that is determined my ingrained habituation.[19]
Although shareholder value maximization is the most obvious form of instrumental rationality one would expect to drive the action of business organizations:
- Other forms of instrumental rationality may push business leaders to favor certain types of CSR action. I will examine them in Chapter II,
- Business leaders, when they opt for CSR, may not only employ instrumental rationality but also value rationality, affectual rationality and traditional rationality. I will examine them here.
Subjectivity and CSR
1. Affect
a. Reputation as affect
The fact that most responsible firms are generally privately owned or managed by their founders[20] tends to illustrate that personal reputation and affect is one of the motivations that drives managers to opt for CSR. The impact of program such as the TRI that the EPA used to expose the most polluting chemical industries to public scrutiny by publicizing their pollution records also seems to point towards this conclusion. If the second example tends to illustrate a business rationale behind the protection of reputation, one may interpret the first one as demonstrating the importance of individuals’ concern for their own reputation. Empirical research should be designed as to address this question and isolate the respective domain of individual and corporate reputation.
b. The marketing dimension
For some authors, reputation is actually the main driver of CSR. Corporations’ attention to such issues as the environment vary not so much with the level of regulation than with cycles in the public opinion.[21] This is actually supported by TNC managers’ surveys.[22] If enhancement of the firm’s reputation is the explanation most often given in codes themselves for the adoption of codes of conduct, the answers of TNCs’ managers point first at rationalization and risk management before they address the reputation issue. Emphasizing a firm’s reputation may be a form of Corporate Social Responsiveness.
There is an assumption that a showing of ethics may enhance a firm’s reputation. Overcompliance occurs when companies voluntarily submit themselves to more stringent standards than the law would require. Such behavior may aim at setting an example for the business community. It may also result from the intention to send a message to the public that the firm adheres to sustainable development values. Such attitudes may benefit companies and show a positive impact in terms of marketing. Accordingly, firms may actually increase their profits when they decide to abide by standards stricter than the law.
Different studies on this topic[23] have illustrated that the determinant variable lies in the public’s awareness of companies’ environmental efforts.[24] Whether it takes the form of CSR leadership, overcompliance or consumer’s self-interest, it seems that every case of profitable CSR represents a case of successful marketing. Many criticize the fact that CSR might be more a marketing tool than a genuine management guideline.[25] If it is still uncertain whether CSR is an efficient marketing instrument.[26] The market may grant a premium to CSR leaders as Vogel notes.[27] Host countries may also tend to favor socially responsible investors as BP argues.[28] This will need to be tested in the course of the empirical research.
2. Values
a. Firms’ values
French argues that through their internal decision processes, corporations design, not only procedures, but also a set of basic beliefs.[29] He further argues that corporation policies are not limited to the goals of their current managers and that “the melding of disparate interests and purposes gives rise to a corporate long-range point of view.” If corporations are “moral” persons, they should not and limit themselves to cost-benefit analysis. Empirical research shall address the continuity of firms CSR-orientation over time to try to isolate internal patterns of behavior.
b. Managers’ values
However much the conscience and the desire of a corporate president might motivate him to enlist his organization in social causes, his first duty is to preserve and strengthen that organization. […] Most corporations executives (like most runners) prefer the rules of the game. These embody values that are congenial to their thinking, that have contributed to their own prosperity, values that they genuinely identify with the welfare of their society.[30]
The personal value of the managers may have an impact on the decisions they make. A study by Wright and Ferris[31] illustrates that managers who divested in South Africa generally did it to satisfy ethical purposes rather than to enhance the profitability of their firm (divestment generally had a very negative financial impact). The interference of managers’ personal values, if its significance was confirmed, would potentially imply a shift towards a “softer” or maybe less predictable form of law, in which the marketplace is regulated by moral values rather than black letter law. Authors have emphasized how risky this path may be, because of the indefinite character of the new principles firms are expected to abide by.[32] This line of argument will be further developed in the assessment of the virtuous language (section III) under agency cost.
But as managers bring their personal values to the field of corporate decision making, they still need to preserve the legitimacy of their decisions. Weber in “Economy and Society”[33] emphasizes the impossibility for rulers to base their regime on force alone. Weber finds that rulers consistently attempt to cultivate a belief in the legitimacy of their regime. This line of reasoning may be extended to company managers. As agency cost theory illustrates, managers’ interests often diverge from those of their shareholders. But managers’ decisions may be attacked if they do not have a good story to tell as to why the decision made was favorable to shareholders’ interests. Therefore, the business case thesis allows managers with an interest in CSR to gain legitimacy and protection from the business judgment rule if they decide their companies will take the CSR path.
The shifting ethics of the marketplace,[34] executive education, and more generally, elements related to managers’ personality (their business education, their professional background, their networks, their secondary activities,…) are relevant to a study of how managers’ values impact corporate policy and shall be assessed in the course of an empirical study. For example, if it appears that, before entering their current managerial functions or while active, a significant number of them are directly involved in the CSR movement or that they are on the boards of other oil companies than the one they manage, it may affect the kind of information they are exposed to and accordingly the CSR decisions they make.
CSR as an Organizational Process
Besides the external negotiations on CSR issues, CSR also develops within organizations through institutional processes, the exemplarity of certain companies and organizations or the pressure they may exercise on others are among the elements that impact an organization’s receptiveness to the concept of CSR.
3. Institutional integration of CSR
a. Isomorphism, a virtuous circle?
As Tolbert and Zucker emphasize in their landmark article, we need to focus on the process of institutionalization and interpret organizations not as a given fact, but as an evolving reality[35]. Institutionalists stress that organizations are subjected to three types of influence: normative, regulative and cultural cognitive [36]. The regulative pillar is legal rational, the normative pillar is the field of social obligations (based on social expectations), the cultural cognitive-pillar groups the rules that are taken for granted and find their basis in a constitutive schema.
It is noteworthy that legal writers have come to comparable conclusions. Ellickson has described the constant coexistence of law and social norms and occurrences where social norms are applied contra legem. [37] Le Doyen Carbonnier has developed a theory of “non-law” in which he describes sets of norms that, in many cases, do not intersect with law and develop in their own domain: folkways, mores but also ethics, religion, courtesy, etiquette. [38] A synthesis of these two approaches would result in a repartition into three groups:
- the field of law (corresponding to the regulative side of the institutionalist approach),
- a dimension in which norms and law coexist and either cooperate or compete (normative), norms and laws regulate the same issues but their sources are different (legal process v. social process)
- the domain of non-law (cultural-cognitive), which distinguishes itself from the normative by its object (areas not regulated by the law) but is organically very similar since non law is regulated by a social process .
It is striking to see how close a theory of norms and a theory of institutions may be. Recast in Weberian language, the shape taken by the institutionalization process depends on the sources of legitimacy available:
What is important is the fact that in a given case the particular claim to legitimacy is to a significant degree and according to its type treated as “valid”; that this fact confirms the position of the persons claiming authority and that it helps to determine the choice of means of its exercise.[39]
Accordingly, each type of norms may correspond to a certain form of institutionalization process. Organizational change may occur under the realm of the law but may also result from social norms or even from personal representations.
In an influential article, Powell and DiMaggio have contended that “bureaucratization and other forms of organizational change occur as a result of processes that make organizations more similar without necessarily making them more efficient.”[40] They introduce the concept of isomorphism and with it the idea that managers cannot be indifferent to other managers’ behavior. The key element of isomorphism is that the information to which managers have access is provided to them by other members of their professional group. Because information is uniform, decisions tend to be the product of similar reasoning. Trends appear and may be followed, especially as the industry becomes more mature, even if they do not enhance the organization’s efficiency.[41]
The authors insist on the idea that “strategies that are rational for individual organizations may not be rational if adopted by large numbers. Yet the very fact that they are normatively sanctioned increases the likelihood of their adoption”.[42] The rationale for isomorphism is not efficiency. They further argue:
Each of the institutional isomorphic processes can be expected to proceed in the absence of evidence that it increases internal organization efficiency. To the extent that organizational effectiveness is enhanced, the reason is often that institutions are rewarded for their similarity to other organizations in their fields. This similarity can make it easier for organizations to transact with other organizations, to attract career-minded staff, to be acknowledged as legitimate and reputable, and fit into administrative categories that define eligibility for public an d private grants and contracts.[43]
To summarize the argument, there may be a tendency among managers to choose the ease of replicating their peer companies’ business plan rather than to make the effort themselves and take the risk- of conceiving and implementing their own. The authors further list the characteristics according to which firms are more likely to behave in an isomorphic way. I will take them into account when drafting my surveys to see if they are present in the oil companies I will observe.
b. Tradition in the making: the issue of internalization of CSR
The process by which corporations become more responsible is incremental and we need to examine the coordination between the different steps of the CSR process. It is noteworthy that one of the founding articles in corporate governance may be interpreted as prescribing the separation of the initiation and internalization/ratification functions as expressions of decision management and decision control.[44] Because CSR, as described earlier, questions the purpose assigned to firms and, therefore, the criteria of good corporate governance, the repartition of decision functions on CSR issues appears as a highly relevant question. It would, therefore, be interesting to examine whether the strategic move towards CSR and its internalization by firms result from the intervention of unique or distinct actors.
One other question concerns the management level at which the internalization is expected to occur. A study conducted among companies in industries characterized by very different hierarchical structures (the banking and the high-tech industry) illustrated a similar tendency with regards to ethical decisions: namely a lack of communication between managers at different levels. [45] This results in an observed “gap between espoused values and practice”. The authors find that:
such gaps exist in these companies because both their structures and culture inhibit productive dialogue among managers at different levels about regularly encountered value conflicts”. Accordingly “Managers at different levels are generally unaware of the particular dilemmas encountered by their superiors and/or subordinates, and the implications of difficult decisions are not adequately considered. This pervasive lack of communication results in heightened stress for individuals as they privately cope with considerable ambiguity and conflict and, not infrequently in decisions that present legal and financial costs and ultimately undermined espoused corporate values.[46]
Because lower and mid-level managers have performance incentives that may conflict with CSR objectives, it seems preferable that they be excluded from the internalization process. This is however unrealistic since middle-level managers are the key to effective implementation of any corporate policy as Ackerman points out:
The burden for implementing corporate policy on, social issues is ultimately placed on middle level managers, the same managers who are primarily responsible for planning and directing the operations of the business. [47]
As a result, both Ackerman and Filer conclude that the process can only be efficiently implemented through unequivocal leadership by high level managers.
Because social goal setting is so new , so different and so difficult at this point, I believe that for now it must be primarily a role of the Chief executive. The average manager is conditioned by training and incentives programs to view profit as the solitary goal. Few managers view the pursuit of social goals as necessary to personal success; therefore, it is up to the chief executive to move the message downwards, first through senior management and then into the middle and lower levels of organization. This must be done as an exercise not of autocracy but of leadership.[48]
Another solution to this problem may be the formalization of ethical policies in codes of ethics already examined above. Some companies also have tried to address the issue of CSR internalization by creating salary incentives for managers to behave more responsibly, especially in the field of environmental performance[49].
It is also interesting to see that it is relatively common to find provisions for the promotion of code awareness in codes of conduct themselves.[50] This generally takes the form of :
“ an active information policy: a requirement for managers to personally distribute codes to employees, or for management to discuss codes in meetings, or for management to show codes to newly hired employees or a requirement for employees to acknowledge periodically that hey have read the code, or for suppliers to publicly display a sourcing code so that workers know of its existence”[51].
4. Industry Pressure
The oil and gas industry constitutes a remarkable example. On an issue like climate change, companies, such as BP, appear to be leaders in the CSR movement, while others, such as Exxon-Mobil, have made very little or no effort to address the problem.[52] Nevertheless, Exxon has remained profitable (maybe even more so than its socially responsible competitors).[53] Given this situation, it is not surprising to see companies that have already incurred, or are incurring, CSR expenses trying to federate others into CSR groups. Illustrating the need for legal structures, international organizations, and sometimes governments, have increasingly engaged in CSR initiatives. This trend has materialized in attempts to syndicate companies (1) in such CSR forums as the Global Compact,[54] or (2) with the voluntary principles for security and human rights in the extractive industry[55] or (3) to provide guidelines, or even requirements, for companies to behave more responsibly (for example OECD guidelines[56], social and environmental disclosure requirements in numerous recent legislation passed by European countries and in the Global Reporting Initiative).[57]
5. Shareholder pressure
Institutional shareholders, because of the particular weight they have on companies decision-making, at least compared to individual shareholders, have recently played a growing role in recent corporate records. Some of them have used their leverage to enhance the level of social responsibility of corporations. Historically, churches have been among the first institutional investors to advocate CSR[58].
There is a growing recognition that the power and influence of corporate America penetrates the lives of people globally as never before. This awareness is emerging in some relatively new quarters, the institutional church being one. For instance, the Interfaith Center on Corporate Responsibility now comprises 170 Roman Catholic orders, 12 dioceses and 15 Protestant denominations. As investors and as churches concerned about the responsible use of corporate power, these agencies have employed a variety of novel approaches to corporations to press for greater accountability. Letters and meetings with management, attendance at shareholders meetings and the filing of shareholders resolutions, court suits, public education, testimony before the Congress and the United Nations, fact finding trips overseas, research and publications are all methods used by churches in their relatively new corporate responsibility work.[59]
According to Chamberlain, this process is the result of pressure exerted on institutional shareholders themselves:
Pressure on corporate management to recognize larger social responsibilities have been accompanied by pressures on institutional shareholders –usually nonprofit organizations such as churches, universities, foundations and pension funds, but including investment trusts and mutual funds as well- to take positions on the social conduct of the corporations in which they hold shares.
The interest institutional investors’ developed for CSR policies is the product of a wider movement which Madden describes as a clash of culture[60]. The decline of CSR related shareholders’ proposals[61] seem to imply that the influence of institutional shareholders are not the main driver of CSR reforms any more. However, it is interesting to note Useem’s contention that shareholder activism in the 1990’s shifted to a more consensual approach of cooperation between investors and managers.[62] Shareholder voting reports may not provide sufficient information on shareholder activists’ involvement and success in CSR. Shareholder activists’ role in advocating the profitability of CSR has been described as major.[63] For these reasons, my future empirical research should not ignore the possibility for shareholder activism to be a significant driver for the adoption of CSR policies.
Section II: Assessing the impact of Virtue-Driven CSR
Managers’ receptiveness to the aims CSR pursues seems to be a main driver of the adoption of CSR policies by companies. Before I conduct empirical research to establish how justified this view is in the context of the Oil and gas Industry, it is already interesting to perform an assessment of the consequences of virtue driven CSR. I will consider the impact of such policies on both the company and the community. I will concentrate on three issues: can corporations remain socially responsible over time in a competitive environment (A)? Does business have the legitimacy to impose its definition of virtue (B)? Are managers’ decision to pursue CSR policies a form of agency cost (C)?
Weakness of the Market for Virtue in a competitive environment
Since major corporations have especially planning horizons, they may be able to incur costs and forego profits in the short run for social improvements that are expected to enhance profits in the long run. But the corporation that sacrifices too much in the way of earnings in the short run will soon find itself with no long run to worry about.[64]
Supporters of CSR often argue that companies should behave more responsibly, not only with regard to a sense of corporate citizenship, but also based on self interest. Indeed, there would be windfalls in terms of marketing and efficiency that would exceed the costs of CSR. Labor standards enforcement grants access to a more qualified labor force, pollution control often reduces production costs over time. This thesis is explored by an increasing amount of research[65] and a number of organizations. However, the actual cost-benefit analysis seems to be more complex and very little evidence can be gathered that would conclusively support the business case for CSR. Accordingly, it is fascinating to observe the number of theoretical and institutional developments based on such a fragile theory as CSR.
CSR may pay off in the future, but for now, no such equilibrium has been attained that would guarantee that CSR pioneer companies are either maximizing their value or enhancing general welfare, or ideally both. Arguably, such equilibrium may only be reached if a sufficient consensus arises among companies.[66] Indeed, competition will otherwise eliminate responsible companies because their business models will be more costly than those of irresponsible companies, as economists such as Donaldson have argued.[67] Donaldson asserts that:
If one assumes that for any two managerial policies examined under competitive conditions, in the long run (i.e., a free market with the usual assumptions of information, entry, non monopoly, and so on) one policy will satisfy traditional performance measures better than the other, it follows that either a normative stakeholder policy or its opposite will outperform the other in the long run. But if one policy outperforms the other in the long run under competitive conditions, then the other should disappear. Hence, for a given manager to believe that he should attend to stakeholder interests, yet at the same time believe that doing so does worse at achieving traditional performance measures, violates the dictum that ought implies can. The manager may be able to do what he or she ought to do, but only temporarily. This conflicts with his or her obligation derived from B-Normative, which is to treat stakeholders as having intrinsic worth--permanently.
In his book The Market for Virtue Professor David Vogel[68] examines the profitability of CSR and its general impact on companies. Vogel’s main conclusions include the following:
- Green consumerism only has an impact when consumers’ self interest meets a social interest,[69]
- If green investment funds do not perform more poorly than others, they do not perform any better either,[70]
- It is not more difficult or costly for irresponsible companies to recruit qualified employees than for others,
- Socially responsible agendas have proved to be very efficient for the promotion of certain companies, but, in the long run, they generally prove to be too costly and difficult to sustain,
- CSR is firm-specific and is, for example, more often developed in privately - rather than publicly- held companies;
- Given this state of the world, self-regulation should not be relied upon to achieve social goals. CSR will only function efficiently if integrated into a regulatory framework by governments.[71] Otherwise, discrepancies among companies will remain and firms will only be able to maintain their CSR policies over limited periods of time until it becomes financially too burdensome to do so.
For competition not to eliminate responsible companies, it seems necessary that, when establishing the level of tax and regulatory pressure, governments take companies’ CSR efforts into account. Indeed, in the long run, such regulatory input appears to be the only way to balance the cost of CSR and avoid redundancy between governments’ regulatory action and companies’ self-regulation. Government regulation alone may create a Nash equilibrium where all firms opt for CSR. The conclusions of a recent World Bank study on the role of the public sector in strengthening CSR confirms this view[72]. Indeed, the study lists “demand from business and civil society for a level playing field of social and environmental standards that allow the market to reward leaders” as one of the main drivers of public sector’s engagement in fostering CSR. Without such regulatory intervention, MNCs are unlikely to effectively share responsibility.
This conclusion may be drawn from Olson’s approach to the logic of collective action[73]. Olson argues that group size and group behavior determine the efficiency of collective action. Small groups are easier to organize and their members can all know one another personally. Moreover, every member can gain observable benefits as a result of collective action. In larger groups, the free rider problem emerges and since no individual member of the latent group can find sufficient incentive to participate in collective action, such action does not take place. Olson recognizes that, especially in smaller groups, social incentives such as desire to win prestige, respect, friendship, and fear of being ostracized may affect individuals’ decision whether or not to join collective action.
The case of oil plants in Sudan provides a good example. [74] The decision of certain western companies to discontinue their operations in Sudan, in order to sanction this country’s corrupt practices and to cut revenues that would fuel the civil war, proved fully inefficient. Indeed the plants that where exploited by American and Canadian companies were taken over by Indian and Chinese ones that did not adhere to the same principles.
Today, multinational companies do not represent a group in which collective action appears possible yet. It is uncertain whether initiatives such as the Global Compact will create sufficient social incentives for all MNCs to participate in common CSR efforts. Competition seems to be too strong a centrifugal force and the common interest of MNCs appear too scarce. It is not sufficient to argue with Davis that social responsibility is a heavy cost but that companies should pass it on to consumers. [75] If companies around the world are not placed on a level playing field, only some of them will pass on costs to consumers and in a fluid market, consumers will favor companies that do not have such costs to pass on.
The Legitimacy of Business to Define Virtue
There may be dangers in the quasi-political empowerment of corporations as Milton Friedman has stressed: “
Here the businessman–self-selected or appointed directly or indirectly by stockholders–is to be simultaneously legislator, executive and, jurist … The justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. ... If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster ‘social’ objectives, then political machinery must be set up to assess taxes and to determine the objectives to be served through a political process.” [76]
Henderson, former head of he Economics and Statistics Department at the OECD stressed the fact that CSR was built on an assumption that there was general agreement on what companies should do and on the fact they could reasonably do it. Moreover, for Henderson, “international business today appears unable or reluctant to defend itself against unjustified criticism.”[77] As a result, Henderson argues that some NGOs set the aims responsible firms are expected to pursue. This is done in the absence of a true dialogue on the reasonableness and legitimacy of the goals formulated. Further he argues that:
[supporters of CSR] argue that the adoption of CSR by a business will in fact make for long-term profitability , so that there is no question of conflict or tradeoff. They focus selectively on the reasons for thinking this to be true. But for the time being at least, the claim is dubious. It rests on the twin premises that the Doctrine of CSR mirrors society’s expectations, which are both well articulated and legitimate, and that the extent to which a company meets these expectations will now determine its profitability. As has been seen above both premises are open to question.
It seems that the CSR movement advocates values that are defined by business, often under the pressure of civil society as will be exposed in Chapter II, through a process that is submitted to none of the checks and balances that one would expect to find. Indeed given the bearing that CSR policies potentially have on global affairs, it would need to develop the form of legitimacy evoked by Milton Friedman. Scholars in the field of ethics have also formulated the claim that altruistic forms of CSR developed by business leaders were themselves unethical since it did not pursue a legitimate goal of business. Only strategic CSR, CSR action designed to be profitable, would be ethical[78]. In Chapter II, I will develop the argument that MNCs do not have more legitimacy to enforce CSR policies than to design its purposes.
CSR as Agency Cost
Different constituencies within corporations may have divergent interpretations of where the interest of the firm lies. Individuals within each of these constituencies may also have conflicting personal interests. The corporate governance game is the result of the interaction between all those interests. If certain constituencies of the firms are inherently more receptive to stakeholders theory than others, shareholders should want to know it.[79] The decision to adopt CSR policies may be taken when there is a certain balance of power between the constituencies of a firm (and may vary accordingly from one firm to the other). Managers may have different information on CSR or different perceptions of CSR and its profitability in every firm. With a better understanding of the decision process leading to the adoption of CSR measures, shareholders could seek to reduce the specific agency costs –the cost of having companies run by managers who have diverging interests from those of the shareholders’- resulting from CSR and to improve the level of information on its profitability.
When you press a CEO for details of a company's CSR policies, and for their business rationale, you find that every firm believes that its CSR actions fall in the win-win box. No chief executive wants to believe that the firm's various services to the community might reduce social welfare, and none seems willing to admit that his enlightened management practices might reduce profits--what would the shareholders make of that?[80]
Agency cost presumes that managers, because they do not have ownership, do not run companies in the owners (stakeholders) best interest but in their own, and that their personal interest diverges from shareholders’ as Adam Smith’s classical quote on stewardship illustrates:
The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.[81]
Introducing non instrumental forms of rationality, managers may opt for CSR out of personal interest. Leaving aside the possibility of corruption, CSR may converge with managers values or affect rather than express their instrumental rationality. Influenced by their values and affect, managers may come to disregard their shareholders instrumental rationality: the pursuit of value maximization. In this section, I first examine the negative impact managers’ choice of CSR policies may have on a company’s value (1). I will then illustrate that managers may affect share value even when they are completely loyal to shareholders when designing CSR policies (2).
1. The cost of CSR
The debate between shareholder/stakeholder theory is still unresolved and lively.[82] It is interesting, however, to assess business leaders’ position on this debate. Specifically, further research shall investigate whether business leaders believe, as the dominant theory today claims, that their mandate is limited to maximizing shareholder value.[83] Within the context of this study, I will rely on the literature to evaluate possible answers to this question. This inquiry has an echo in the field of corporate governance, because it goes to the core of the problem of agency cost. I have already started to address this question earlier in more sociological terms.
Through monitoring and business mechanisms as well as through incentives, business leaders are expected to treat shareholders’ interests as their personal interest when they manage the company. In the face of CSR decisions, two series of questions arise:
- Does CSR constitute an agency cost problem?
- Does it constitute a new challenge to shareholder value models of corporate governance?
Does CSR constitute an agency cost problem?
One could only answer this question with certainty if there was an incontestable answer to the question of CSR’s profitability. As described earlier, Vogel clearly refutes the notion that there would be a market for virtue. A number of other authors concur in this view: Milton Friedman of course but also Wright and Ferris[84] and McGuire, Sundgren and Schneeweis.[85] Others concluded that CSR did or at least could enhance financial performance: Pava and Krausz,[86] Waddock and Graves,[87] Hamilton and Statman.[88] The purpose of this study is clearly not to solve this delicate debate. As explored further, the question itself might be irrelevant: it may be preferable to wonder how much CSR is profitable rather than whether CSR is in itself profitable[89]. In any case, the question of agency cost shall not find such easy and clear answer as certainty on the question of CSR’s profitability would have allowed. However, an examination of managers’ motivation with regards to CSR should provide us with useful insights.
Starting from the assumption that managers may find an interest, both in terms and affect and values, in supporting CSR as part of the action of their firms, we may assume a divergence of interests between managers and shareholders. Indeed, although shareholders themselves should not systematically be understood as driven exclusively by value maximization,[90] managers cannot assume that stockholders share values and affect with them. Earlier developments have illustrated the difficulty of agreeing on a common definition virtue.[91] Therefore, managers cannot claim that their shareholders’ non-instrumental rationality (especially affect and values) should be satisfied by managers’ CSR actions. CSR’s profitability may be perceived as a justificatory myth managers use to avoid the censorship of their shareholders on CSR actions. A significant number of managers have supported the idea that CSR is profitable.[92] Indeed, managers need to secure wide support from their shareholders for this doctrine to remain free to assign CSR goals to their companies. This may be one of the reasons why a number of managers have advocated CSR vigorously and encouraged the creation of managerial, institutional and cross business-NGO networks that advocate the business case for CSR.
Donaldson perceived the risk that managers would develop a line of argument favorable to the business case in order to avoid the censorship of shareholders. [93] He argued that although the normative (B-normative i.e. “all managers should treat the interests of stakeholder groups as having intrinsic worth”) and the instrumental approach (B-instrumental i.e. “if managers attend to the interests of stakeholders, then they will do better financially”) to CSR could be somewhat reconciled, the risk of divergence of interest was serious:
[…] how is the manager's duty to stakeholders to be reconciled with his or her duty to shareowners? The only comprehensive reconciliation happens in the event that attending to the interests of other stakeholders also happens to serve best the interests of shareowners. If the content of B-Instrumental is true, then reconciliation is possible. If not, the manager's situation becomes conceptually inconsistent. For both of these reasons, managers who accept B-Normative have rational support for acting as if the content of B-Instrumental were true. It must be granted that however strong the reasons are for managers who accept B-Normative to act as if the content of B-Instrumental were true, those reasons do not confirm that it is true. B-Instrumental incorporates an empirical claim--one that is imminently falsifiable.[94]
These developments however illustrate that purely virtue-driven CSR creates an agency cost. This agency costs arises out of the lack of synchronization between managers’ values and shareholders interest. However, this should not bring to the conclusion that reconciliation is impossible. Managers are not compelled to make a choice between full-fledged stakeholder theory and the defense of stakeholders’ interests. Managers may try to strike a balance between the positions of theses two groups.
Does CSR constitute a new form of challenge to shareholder value models of corporate governance?
As to this second question, the answer is not necessarily positive, since even the most prominent proponents of shareholder value maximization admit that value maximization only provides guidance to managers as to how to measure effective management.[95] Accordingly, managers may take external strategic issues into consideration without violating their mandate. But Jensen notes:
A firm that adopts stakeholder theory will be handicapped in the competition for survival because, as a basis for action, stakeholder theory politicizes the corporation and leaves its manager empowered to exercise their own preferences in spending the firms resources”. He argues that “stakeholder theory’s failure to provide a criterion for making tradeoffs” among stakeholders “makes stakeholder theory a prescription for destroying firm value and reducing social welfare. [96]
The problem becomes one of rightly taking external strategic interest into account. Although there is wide demand for responsible management, it seems that those who advocate this type of behavior do not provide managers with clear guidelines as to what precisely is expected from them.[97] On this debate, former SEC commissioner M.H. Wallman claims that US corporate law has been misinterpreted as supporting shareholder supremacy. [98] He argues that the law should be clarified to give managers precise guidelines as to how to consider multiple corporate interests.
Trying to elaborate on such guidelines, scholars in the field of theory of the firm have proposed a model of integration of CSR purposes within firm strategy.[99] According to these authors, there is an optimal level of CSR for every firm that needs to take into account: “its size, level of diversification, research and development, advertising, government sales, consumer income, labor market conditions, and stage in the industry life cycle ».[100] Accordingly managers could develop a cost-benefit analysis of the appropriate level of CSR for their firm and the relationship between CSR and financial performance could be neutral. Accordingly it seems that managers could design CSR action without having to justify a choice between stakeholder and shareholder theory.
2. CSR as Risk
In case we assume that managers are wholly loyal to their shareholders and treat shareholders’ interest as their own self-interest,[101] can we derive that every decision they make will be rational and aim at maximizing shareholder value? Managers may act in good faith and truly believe that they are pursuing their company’s best interest when they decide to behave more responsibly. They may nevertheless fail in their attempt to establish the appropriate level of CSR for their firms (in the theory of the firm perspective exposed by Mc Williams and Siegel, see paragraph above). CSR may, for many firms, represent an investment characterized by a high level of risk. This may be the case under, at least, four sets of circumstances:
- Managers may have incomplete information on the true impact of CSR. Such imperfection is actually very likely only few studies have been released that refute the profitability of CSR. The overwhelming proportion of CEOs surveyed who declared they believed CSR helped maximize value seem to support this claim[102].
- Once managers have taken the path of CSR, it is very difficult for them to reassess their position on the profitability of this process. This refusal to recognize one’s mistakes relates to Jensen’s Pain Avoidance Model (PAM)[103]. Jensen builds on a theory of non rational human behavior that arises under conditions of pain described by biological studies. “While attempting to avoid the pain associated with acknowledging their mistakes, people often end up incurring far more pain, and making themselves worse off, than if they had simply recognized and responded to their errors”.[104] PAM may be an explanation for the behavior of some CSR leaders who have notoriously suffered from implementing this policy choice.[105]
- Paradoxically, managers may, on paper, be right in their view that CSR should benefit their companies, but civil society actually might sanction responsible companies more than others and, hence, annihilate the benefits of CSR to these firms. Authors concur that companies making efforts to behave more responsibly are the ones business critics attack most frequently.[106]
Hilton and Gibbons suggest two explanations for this phenomenon: “a natural time lag between a company changing the way it operates and the rest of the world noticing” but also “ a depressingly unfair tendency of some anti-capitalists to attack the very companies that have the courage to put their heads above the parapet and make a public commitment to social responsibility”[107]. One may answer that it would also be quite unfair if companies could benefit from the positive windfalls of CSR in terms of marketing, without having stakeholders verify their actual commitment to their cause. If such a tendency were confirmed, it would certainly discourage certain companies from engaging in CSR and strengthen the position that CSR is contrary to shareholders’ interests.[108] The rising consensus on CSR among managers may be the result of the first two factors: in a world of incomplete information, managers may persist in the path of CSR, notwithstanding its net cost to companies, for fear of having to contradict themselves. This fear may be illustrated by David Vogel’s examples of companies that stepped back after having conducted an intense CSR policy: the CSR policy was only altered when a change in the management team occurred.[109]
- Assuming that McWilliams and Siegel’s theory of the firm model of CSR adequately formulates the CSR equation, managers may sometimes misevaluate determinants of the appropriate level of CSR for the firm they manage.
Chapter II: The Appearance of Risk Management
When you consider the range of pressures that are leading companies in the direction of social responsibility –for instance , the fear of litigation, the fear of damaged reputation, the fear of being excluded from social investment funds, the need to comply with legislation and regulation- it is pretty clear that the classic and rather pious mantra endlessly trotted out in connection with corporate social responsibility, that being a good citizen is good for business, gives a misleading picture. The formulation that really cut the mustard in the boardroom is that being a bad citizen is bad for business.[110]
Section I: CSR as a Form of Social Risk Management
Theoretical Background
1. From corporate social responsibility to corporate social responsiveness
The Business and Society Theory operated a shift from ethics to “the action oriented managerial concept of corporate social responsiveness (the capacity of a corporation to respond to social pressure).”[111] The first notion, corporate social responsibility or CSR1 is the one criticized by Milton Friedman, it is based on the idea that business has an ethical duty to participate in social achievements. The second notion, responsiveness or CSR2 focuses on social demand as Ackerman’s analysis illustrate[112]:
[…] three generic questions await management attention as it contemplates the response to social demands.
Policy: What position should the corporation adopt with regard o a social demand? Specifically, should it attempt to lead social expectations?
Learning: What has to be understood about the social demand, the alternative available for responding to it, and the economic and organizational implications of implementation?
Commitment: How is the organization to be applied to implementation in the face of dilemmas in locating responsibility, controlling and measuring performance and evaluating managers?
One of the benefits of this line of analysis is that it advocates a much higher level of information than purely value based CSR. By doing so it may override the critics of the stakeholder theory formulated by Jensen[113], namely the argument that it would deprive managers of clearly stated objectives. Social responsiveness is a form of enlightened self-interest: it aims at integrating social demand as far as it remains beneficial to companies. Accordingly such theory is compatible with the theory of the firm approach[114] that purports to find how much CSR is beneficial rather than whether CSR is beneficial in itself. Indeed the learning phase involves research on the economic impact of answering to social demand.
2. Social licenses
As the Research and Policy Committee for Economic Development (CED) concluded:
There is an increasing understanding that the corporation is dependant on the good will of society, which can sustain or impair its existence through public pressures on government. [115]
Gunningham and others have introduced a theory of social license: the idea that modern social actors only license companies that overcomply, because legal requirements no longer match social requirements (the legal requirement would have become insufficient). [116] As a result, society would have a rising leverage. Practically, this means that civil society has the capacity to force companies to curb their policies on certain social issues through protests, use of the media and boycotts.[117] They argue that “not meeting the requirements of the social license will ultimately result in increased regulations or greater economic costs to the company.”[118] In another study, the same authors clarify that overcompliance due to the process of social licenses can only go as far beyond compliance as competition allows. [119] Accordingly, the intensity of overcompliance decreases when the business environment becomes more competitive. For our purposes it means that MNCs are submitted to two conflicting forces: one arising out of civil society that compels them to raise their standards of corporate responsibility and one that is a product of the market and which, in most cases, pushes them in the opposite direction.
B. Illustrations in the Oil and Gas Industry: Environmental Backlashes
Hoffman[120] describes:
Environmental protection as risk management :In this institutional frame, environmental protection is redefined as an opportunity to reduce costs associated with environmental risks.
The authors identify three ways by which environmental protection diminishes risks: it reduces the cost of insurance, the cost of emergency procedures and the liabilities exposure. In this section, I will detail the argument according to which the liabilities incurred are not only legal but also result from civil society’s sanctions.
1. The Santa Barbara oil spill
The Santa Barbara oil spill in 1969 was remarkable because of the public outcry it provoked. Indeed, it was not the most notable spill in terms of the amount of pollution (the Torrey Canyon incident, two years earlier, resulted in ten times more oil spilled). It was caused by the rupture of an Union Oil platform and affected wealthy Californian neighborhoods. After the spill, a local group, the GOO (Get Oil Out), organized a petition and collected 110,000 signatures opposing oil exploitation of the Central California coast. This public attention caused the Nixon administration to issue a moratorium on California offshore development.[121]
2. Amoco Cadiz
The Amoco Cadiz ran aground off the coast of Brittany, France on March 16, 1978, spilling 68.7 million gallons of oil. The French government and French municipalities sued Amoco in the United States and recovered damages for the clean up expenses.[122]
3. The Exxon Valdez
The Exxon Valdez ran aground on Bligh Reef in Prince William Sound, Alaska on March 24, 1989, spilling 10.8 million gallons of oil into the marine environment. Exxon allegedly spent 2.1 billion dollars on the clean up efforts over four years. Even with these expenditures, not all beaches were successfully cleaned[123]. As a result of the reaction to this oil spill, the Oil Pollution Act[124] was passed, mandating safety controls on ocean crude transports. The Act created a fund financed by a tax on oil. The fund would be used to finance the clean-up of spills when the responsible party was unable or unwilling to clean it. The CERES (Coalition for Environmentally Responsible Economies) also used the emotion created by the oil spill to propose the Valdez Principles which gained thirteen signatories among Fortune 500 companies and a total of fifty signatory companies.[125]
4. Brent Spar
As Shell was planning to dump a redundant oil storage platform in the North Sea in the spring of 1995,[126] an intensive media campaign organized by Greenpeace had a tremendous impact worldwide, especially in Europe. The North Sea governments sided with the protesters and consumers boycotts started. Shell’s project had nevertheless gained government approval and was backed by scientific experts’ reports, showing that dumping the platform was the most reasonable solution, even for the environment, since it would be extremely difficult to carry the platform back to the coast. Accordingly, Brent Spar illustrates the new empowerment of civil society, a source of authority independent of governments.
Section II: CSR as a Form of Legal Risk Management
The Regulatory Challenge
Recently, an increasing amount of legislation and other diverse forms of regulation have been passed in order to give legal support to the CSR movement. CSR-oriented regulation may change the face of CSR especially if it starts creating obligations companies had not conceded on their own. It may also even out the playing field for competing companies and eliminate both the advantage of being irresponsible and the reputation premium that CSR leaders expect. In any case, as the example of MNCs’ reaction to the UN’s proposed norms on the responsibilities of TNCS illustrate, MNCs may also perceive authorities’ involvement in regulating CSR as a threat. They may enter into a struggle to maintain their power to regulate their international operations themselves, at least in the domain of CSR. Similarly, companies have increasingly been lobbying to avoid the burden of foreign direct liability, namely, the intrusion of authorities in the regulation of FDI operations via courts’ consideration of claims arising out of activities that took place abroad. Examples taken from the Oil and gas industry (2) will follow a general presentation of the regulatory challenge (1).
1. General legal interventions
a. Promotion of CSR by governments
Many outside actors may play a role in the initiation of CSR by corporations if not in the internalization of CSR. National governments have adopted various attitudes, especially with regard to the question of environmental disclosures. Some states have made such disclosures mandatory for companies operating on their soil.[127] Some have clearly institutionalized CSR within the public sphere like the UK where a Minister for CSR was appointed by Tony Blair. Empirical research on this issue shall include measurements of the influence of home country legislation on companies’ CSR action. I shall also try to measure business leaders’ fear of potential liability suits in the host country as well as in their home countries under the rising concept of foreign direct liability.
In the United States, although the State Department has developed a number of corporate social responsibility sections, they are generally not designed to interfere with MNCs action, only to complements as Assistant Secretary of State for Democracy, Human Rights and Labor Lorne W. Craner asserted:
[The state department has several reasons to support CSR] The first is to pursue our traditional function of promoting trade and business. By supporting economic growth, we are supporting democracy. The strongest foundations for the stability and predictability necessary for a sustainable business environment are democratic governments that protect human rights. Corporate Responsibility help safeguard those values. The second is to promote strong corporate values…promoting legal and ethical behavior as well as respect for human rights and labor rights… The third is to have an important role in supporting and facilitating public private partnerships.[128]
Further, Craner develops the argument that the state does not intend to mandate but simply promote CSR among companies. But he notes that investment should be banned in countries that have odious policies: “In these countries we do not think that there is any way to behave responsibly except by getting out”.[129] Historically, one of the first examples of government influence on firms’ CSR policies was the adoption of the Comprehensive Anti Apartheid Act in 1986 by the US Congress in order to limit investment in South Africa. The purpose of this act was to pressure the South African government to abandon its Apartheid policy. The more recent case of Oil in Sudan, described in more detailsfurther,[130] illustrates that political pressure can annihilate companies freedom of choice to do business in certain places in the name of Corporate Social Responsibility. This provides a clear example of the potential conflict that can arise on the regulation of CSR issues.
b. Promotion of CSR by International organizations
CSR in general
Various international organizations have also instituted CSR actions and invited firms to participate in their efforts:
• One of the first illustrations of this phenomenon was the UN’s Code of Conduct on Transnational Corporations in 1974, which eventually was never adopted. This Code aimed at creating mandatory requirements or voluntary guidelines for transnational corporations and encouraged contribution to the development goals and objectives of the countries in which they operated.
• One significant and more recent example is the United Nations’ Global Compact,[131] a project through which the UN tried to federate companies to follow the path of CSR.
• The World Bank also took this path by favoring the alignment of major bank project finance loan conditions with those of the IFC’s based on the Equator principles.[132]
• The G8 also expressed its support for firms CSR initiatives,[133]
• The OECD adopted a set of guidelines for MNCs.
In further empirical research, I will examine which major oil companies started CSR programs on their own and which ones directly joined a collective project[134]. I will also try to assess how joining such a project has modified the CSR policies of oil and gas companies that already had a CSR agenda, which will facilitate the understanding of the role of international institutions, both in initiating and institutionalizing CSR.[135]
It is interesting to observe that international organizations sometimes play a more active role than states in organizing FDI projects. This may be an occasion for them to measure the impact of a well designed CSR policy. This is especially the case for the World Bank which faced CSR related issues on some Oil and gas projects. For example, the Mount Apo project in the Philippines, where the Philippines National Oil Corporations received the World Bank’s support and launched a project violating the national park’s legal protection without any environmental impact study. The World Bank finally withdrew its support under the pressure of the local community[136].
Focus on human rights
The two first principles of the Global Compact[137] make a very general reference to respect for human rights by MNCs. The OECD guidelines also adopt a very general approach, a timid reference to human rights was only included for the first time in the 2000 revision.[138] In comparison, the 2003 proposed UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights were truly ground breaking. They could have clearly manifested the willingness of an organ of the United Nations to have MNCs as well as states abide by detailed principles on human rights. Most striking were:
- Article 12,[139] which refers to a wide definition of human rights including second and very arguably third generation rights;
- Article 14[140], which lists environmental rights among human rights and refers to a variety of sources of authority for establishing what environmental standards MNCs should abide by;
- Article 15[141] because it provides for self-regulation and the implementation of the norms in all contracts signed by the MNCs.
- Article 16[142] may be one of the most surprising provisions because it provided for UN-based monitoring. The costs and hardships of such worldwide monitoring make such projects seem quite unrealistic. However, arguing that it would get involved in such regulation would have sent a new signal; namely, that International organizations may not want their recommendations to remain moot and may be willing to carry on new responsibilities regulating the behavior of non-state international actors.
- Article 17[143] invited states to participate in the implementation of the norms which seems to aim at creating a whole web of enforcement, where the cooperation between different forms of regulation would be more likely to produce the expected outcome.
Articles 16 and 17 were clearly the source of the hostile reaction of significant actors of the business community.[144] Companies have reacted strongly to the idea that enforcement would not remain the monopoly of states and companies themselves and would be partially transferred to an International Organization.[145] It is noteworthy that the company behind the campaign against the UN norms[146] is actually one of the major players in the oil industry, one that has already faced challenges as to its human rights record, and whose progress in this area have been the object of challenge:[147] Shell. This campaign was successful and although the topic remains on the UNHCR agenda, this organization rejected the norms as a framework for its future work.[148] The UNHCR discarded the norms despite the broad support by NGOs.[149]
- Finally, Article 18[150] called for compensation for the victims of past violations, reinforcing the view that the UN has adopted a much more pragmatic approach in this text than in the Global Compact and intended to create enforceable rights rather than simply to provide guidelines to MNCs.
It is important to understand the contention of MNCs and other institutions that oppose the UN norms because it provides us with an illustration of the strategy followed by MNCs with regard to CSR. The ICC’s attachment to voluntary initiatives and its expressed distaste for any framework that would involve regulation cooperation with outside regulation directly drives us to the question, discussed later in this chapter, of the reliability of self regulation.
2. Illustrations: Human rights in the Oil and Gas Industry
a. Human rights and MNCs
The content of human rights
Donoho[151] outlines the elements that made it impossible to reach an international consensus on the content of human rights. The author highlights the fact that scholars generally group states into three competing views on human rights: western, socialist and developing nations. Typically, the western view is regarded as having shaped current human rights instruments, which are historically derived predominately from European liberal democratic traditions. Commentators characterize developing countries, particularly African and Asian nations, as viewing current human rights standards as culturally biased, since they fail to respect the cultural, political and social heritage that varies from the cultural heritage of the non-western world.
Developing states and scholars frequently object to an alleged overemphasis on individual, justiciable rights and political and civil liberties, as opposed to social welfare, collective rights, consensual dispute resolution, economic development and state interests. While asserting many of the same objections, socialist states also argue for an ideological conception of rights as a social institution and for a hierarchy of rights which are fundamentally different from those espoused by western nations.
Arguably, the collapse of most socialist regimes in the period following the publication of Donoho’s article leaves us today with only two models: the western model and the developing countries’ model. During this same period, developing countries have started to play a key economic role and have become major recipients of Foreign Direct Investment. Accordingly, the western model is facing a less crucial challenge: whereas the socialist model was debating the very existence of capitalism, the developing countries’ vision focuses primarily on redistribution. With the end of the Cold War, ideological competition over the concept of human rights has left the sphere of international relations among states (their existence and values are hardly at stake now) to become a subject of debate between corporations and NGOs. The tension that existed between the western and socialist models disappeared with the latter. None of the remaining models relies on the intention to eliminate the other theory. Accordingly, a cooperative approach is now possible and a compromise between the western and the developing countries’ visions of human rights appears possible.
On the one hand, emerging countries and former socialist economies are moving towards privatized models. These privatizations imply that employees and the community are loosing the substantial rights over companies they were traditionally guaranteed. On the other hand, multinational corporations have adopted a certain vision of socio-economic rights and, to a certain extent, accepted that providing for certain social needs may be the price of an expansion of the free market economy to emerging markets. However, Steiner and Alston point to the fact that economic and social human rights have been a source of conceptual conflict between the North and the South since the 1970s. [152] They argue that the lack of consensus regarding the existence and availability of such rights has made their enforcement problematic.
Human Rights as a vehicle for CSR
Authors have argued that both because of their content and their status in the legal framework (especially their pervasiveness into all areas of the law), human rights would be a particularly suitable theory under which to provide a legal basis for CSR.[153] This argument leaves room for debate because it is based on the assumption that there is a consensus regarding human rights that allows for worldwide implementation and for endorsement by a variety of actors such as MNCs, home and host states, community, etc. As described above, determining the scope of human rights may prove to be at least as delicate an issue as defining CSR itself. This may account for the rising demand for the unification of human rights standards with regards to corporate activity illustrated by the wide NGO support for the UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises. This trend has mainly translated into two phenomena: human rights litigation (b) and human rights law making (a).
b. Human rights as legal risk
• The revival of the Alien Torts Claims Act
Over the last few years a number of human rights litigations have been filed in the United States notably under the Alien Torts Claims Act. There is substantial literature on this issue[154] and it is not the purpose of this study to present it. It is noteworthy than Oil companies have been the most common targets of such litigations, with more or less succes: Unocal on the basis of its operations in Burma,[155] Exxon in Indonesia,[156] Shell in Nigeria,[157] Texaco in Ecuador,[158]…
• Other human rights related issues
Total in Burma
Total, like Unocal was, and still is, involved in the Yadana gas pipeline project for the construction of which forced labor was allegedly used.[159] Total could not be sued by Unocal in Los Angeles because the court had no jurisdiction over it. An action was filed in Brussels on April 25 2002. Another claim for confinement was brought against Total before a French Tribunal in Nanterre.[160] The turmoil of the media campaign launched against Total caused the oil company to initiate a more intensive CSR campaign and to have its project audited by, the former French Minister of Health and founder of Doctors without Borders, Bernard Kouchner[161].
Talisman in Sudan[162]
In late 1997, the US imposed economic sanctions on Sudan and prohibited US companies from doing business with the Sudanese government[163]. This was part of an international policy to ostracize Sudan because of the gross human rights violations that were taking place within its territory. The most interesting element in this case is that the US government did not stop there. Canadian NGOs and the US government pressured Talisman, a Canadian oil company to cease its operations in Sudan. Indeed US pressure groups “were concerned that although US companies were already barred from doing business in Sudan, non US oil companies were undercutting the economic boycott”[164] (this provides an illustration to the argument, formulated in part I, that CSR’s efficiency depends on firms’ capacity and willingness to participate in collective action). Under the threat of being barred from the NYSE, Talisman started issuing shares in January 2002 on the Toronto stock exchange and finally sold its stake in Sudan Oil to Indian state oil company on October 30th 2002. In this case the combined pressure of activists and a foreign government resulted in the withdrawal of an MNC on corporate social responsibility grounds.
The Struggle for Self-Regulation
3. The relative failure of regulation
a. The lack of regulatory framework for Foreign Investment
Authors have pointed out that there was a reaction of CEOs after the failure of the WTO negotiations in Seattle.[165] CEOs may have become aware of the fact that the anti-globalization trend may endanger their companies if they did not design an appropriate answer. The inability of governments to come to an understanding on a Multilateral Agreement on Investment (MAI) may have reinforced the business community’s feeling that it had to take care of the regulation of MNCs itself. As Waelde describes it “ Industry interest in the MAI was low- it was largely seen as a civil servants’ exercise with no immediate relevance to business”. [166] One of a number of reasons that explain the failure of the MAI may be the business fear of being regulated. Piciotto notes:
Following criticism of the draft agreement from a variety of ‘civil society’ organizations, a proposed clause was put forward on Non-Lowering of Standards, covering both environmental and labor standards; but it was not drafted as an exception. It would have precluded any relaxation of such standards only if made to attract a specific investment; a merely symbolic addition, since any such privileged treatment of an investor would in any case be contrary to the NT or MFN clauses. [167]
CSR may be interpreted as the substitution of self-regulation for regulation in a context in which states have proved inefficient: namely managing the risks of MNCs foreign operations. As Waelde describes it, in the aforementioned article, the task of regulating international investment was mostly diverted to Bilateral investment treaties (BITs). However, CSR may be the price for firms to pay to secure their position. BITs are notably investor oriented. Hence, MNCS may be reluctant to the development of other forms of international law that would conversely increase their obligations. In addition, CSR may provide more customized tools to companies to mitigate country risk.[168]
b. Local law
The weakness of local law enforcement
Developing economies often place less importance on legal requirements and the Rule of Law than developed economies. The weakness of emerging countries’ legal frameworks and/or law enforcement mechanisms causes us to believe that local legal standards have a limited impact on shaping CSR policies. That is to say, when FDI companies adopt CSR standards, they are not primarily concerned with complying with existing or anticipated future legal standards.[169]
The contradictory logics of local regulators
Emerging countries’ governments are generally very eager to attract FDI.[170] Because the aims of these countries’ governments are often primarily economic, frequently the governments do not compel or even encourage companies to adopt CSR policies.[171] Public authorities’ (of the country hosting FDI) mission is to maximize general welfare and, therefore, to establish an efficient regulatory framework. In practice their purpose may be interpreted as the maximization of the wealth of the leading group. We will consecutively examine the consequences of each approach for CSR.
• Self-regulation by agents, such as corporations, may pursue objectives similar to those ascribed to governments. The transaction costs for companies to regulate themselves may be lower than the cost for governments to regulate them. Through CSR, certain firms may be voluntarily providing at a lower cost what governments could have pursued through business regulation and financed through business taxation.[172] In some cases, governments may not even have the financial resources to establish the structures needed to effectively monitor firms’ activities.[173] As a result, business may demand that governments take their efforts into consideration and treat them fairly[174].
However, a counter argument could be made that deregulation may be more costly than regulation, not only on the firms’ side but also for governments, as a result of the cost of monitoring[175]. Nevertheless, this phenomenon may be dealt with by introducing monitoring by civil society itself. This empowerment of civil society may be achieved by creating rights of action for private litigants, such as those on which the EPA has increasingly relied.[176] Nonetheless, this option does not result in a complete withdrawal of the regulator. It requires that legislation be enacted and enforced by courts to create rights of action on the basis of companies’ codes of conduct. Without such sanctions reinforcing voluntary codes of conduct, some argue that self-regulation will not serve the community’s interests.[177]
• Taking into consideration Olson’s visions of governments as stationary bandits[178], it is crucial to observe that governments themselves may be driven by the personal interest of their members to appropriate the benefits of FDI through taxation or corruption. As a result, governments, when faced with the question of regulating incoming FDI, may not be exclusively or even primarily concerned with the benefits of FDI for the community. This is simply a preliminary point to make in the context of this study but should be kept in mind for the purpose of future empirical research. Indeed, states may not be advocating for communities’ interests when they negotiate with MNCs and it may be unreasonable to expect a sustainable regulatory equilibrium to arise from the interaction of MNCs and governments alone.
Without presuming what states principal motivations are, one can observe that since the 1980s and 1990s, a growing number of developing countries have adopted FDI-friendly legislation. Such legislation generally demonstrates a desire for economic development. Both regulation and taxation may have a deterrent effect on FDI. Accordingly, assuming that they support the standards imposed by companies on themselves, host countries may tend to favor self-regulation over state regulation in order not to discourage investors. The question for public authorities becomes one of creating the appropriate incentives and regulatory framework for self-regulation to enhance the general welfare[179].
Accordingly, when MNCs investing in developing economies opt for self-regulation, they are arguably not primarily driven by a concern for neither compliance nor competition with state regulation. It is, more likely, an autonomous (from state regulation) phenomenon. Nevertheless, regulation in the home country and business leaders’ fear of litigation[180] remain important variables .
4. MNCS Codes of conduct
The doctrine of enlightened self interest is also based on the proposition that if business does not accept a fair measure of responsibility for social improvement, the interest of the corporation may actually be jeopardized. Insensitivity to changing demands of society sooner or later results in public pressures for governmental intervention and regulation to require business to do what is was unable or reluctant to do voluntarily […]. By acting on its own initiative, management preserves the flexibility needed to conduct the company’s affairs in a constructive efficient and adaptive manner.[181]
However, in certain settings, CSR norms and procedures may only formalize what was already the practice of a firm or industry. “A corporate code of ethics helps to eliminate uncertainty about legal standards and how to live up to them; it informs employees that certain activities can damage the reputation of the company and will be severely penalized.”[182] Many, indeed, have criticized an opportunistic approach to corporate codes of ethics, noting that the “biggest mistake people make is trying to rewrite policies to solve last month’s problem.”[183] Critics also note that “outlining appropriate or inappropriate behavior in a code with the intention of avoiding future problems can be a healthy response.… But if you create a code, especially if it is in response to some problem and it’s inconsistent with the culture as employee perceive it, then it appears to be only window dressing and hypocritical.”[184]
a. Global policies
The spread of CSR norms may take a specific shape because of its global dimensions. Any corporate norm may have a global reach, but the drafting of CSR standards inherently relates to global issues. Accordingly, it is not surprising that global firms have often taken the lead in the CSR movement. The multinational size of these firms necessitates the adoption of specific forms of internal organization. Therefore, the traditional patterns of managements may not apply to them. The impact of globalization on a firm’s organizational structures, on the decisions it makes and on its objectives shall be examined in order to better account for the characteristics of the FDI firm.
Because it widens the scope of the application of norms, globalization may challenge their applicability and even their validity. The bureaucratic model conceived by Weber, did not take the issue of globalization into account. Structures of authority, once spread over the planet and faced with a diversity of situations, may integrate values and organize decision-making differently.[185] In his study of the role Protestant Ethics in the rise of capitalism, Weber describes legal development as parallel to a shift from local to stranger (or Tonnies’ differentiation between Gemeinshaft to Gesellshaft).[186] As this shift occurs, law progresses towards formal rationality. One possible interpretation of the CSR movement may proceed from this analysis: because companies now have global dimensions, because they are confronted to customers and legal systems that are stranger to them, they need to abandon informal action such as occasional charitable activities and formalize their CSR through the adoption of charters. Some of the questions that shall be addressed are whether it is possible for corporations to:
- have a unique Corporate Social Responsibility policy and a set of standards for their worldwide operations.
- behave as responsibly in diversified environments (certain specificities such as the frequency of human rights violations by the host country government or the level of corruption of local officials might be evils companies are ill-suited to cope with). There is debate as the possibility of effectively implementing codes of conduct in a cultural environment that may be very different from the one in which they are drafted.[187] Additionally, global CSR policies may not be Pareto efficient. An argument has been made that the equilibrium between stakeholders’ interests is different in every setting.[188] Accordingly, companies would need to set different types of CSR standards with regard to the characteristics of each of the locations of their operations.
Specific management difficulties arise as the firm reaches international dimensions. Globalization of the firm, if not supported by an efficient flow of information among the different branches, may thicken the “veil of ignorance”, which Rawls describes as the ignorance on the basis of which moral judgment is made.[189] Not only is there a need for a fluid circulation of information, but also for a particularly efficient means of global monitoring. Building an internationally responsible MNC is a challenge, as was illustrated by Shell’s numerous social responsibility issues around the world (Brent Spar, Nigeria and more recently Bolivia).[190]
In his thesis on the global model of organizations, P.J. Mendel argues that the international success of ISO 9000 is due to the intersection of a global managerial culture with international standardization. [191] That is to say, using a unique global standard, if it is proposed in a timely manner, may achieve a beneficial uniformity and help firms simplify the globalization of their operations. According to the author, this is best illustrated by the case of the EU, where standardization as been a major tool of integration.
But one needs to explain “standardization” itself. A justification for it has been found in the “shift in the internal self-conception of the law.”[192] Today, the role of each state’s legal tradition is less, regulations and standards increasingly rely on economic rationality. Accordingly, borders and local specificities lose some of their relevance to the management of international business transactions which leaves room for a growing standardization. This trend allows “professional networks and non governmental organizations [to] claim increased jurisdiction in the new organizational space that re-regulation exposes.”[193]
1 The choice of differentiated norms
Authors have nevertheless made the argument that the choice for a TNC to have universal or specific principles of conduct when it operates abroad may be a function of certain internal characteristics of the firm rather than the product of a unique international trend toward standardization. [194] In a study of 132 TNCs’ and organizations’ codes of conduct, Kolk, van Tulder and Welters noticed that the specificities of a firm’s products or of national business culture had an impact on their choice of whether to adopt a universal code of conduct rather than customized local policies.
Taking the example of Shell, Kolk, van Tulder & Welters assert that it is common in the extractive industry to adopt global codes of conduct. Indeed this industry is “a global business with an integrated product and a need for worldwide management.”[195] They compare it with the example of a company such as Unilever, which needs to adapt its products to local consumers needs and be “more locally responsive.”[196] According to the authors, that explains Unilever’s position that their policy should not be uniform and apply a standardized approach to human rights worldwide. Linking product specificity and human rights specificity seems to be a stretch, but in terms of methodology it will be interesting to take such business model elements into account in the course of my empirical research. The authors also estimate that American companies will be more likely than Japanese companies to adopt CSR standards[197] the business culture of the TNC’s home country would be a highly relevant variable. The authors nevertheless point out that in a vast majority of the cases they have observed, the CSR policies implemented were global codes of conduct.[198] This conclusion has to be balanced against the fact that the study focused on mainly Western companies’ codes.
2 Authorities’ interference
One concern arising from the globalization of firms is the potential interference of home countries with host countries’ internal affairs. What was once called “gunboat diplomacy” still provides a relatively accurate description of some governments’ approach to their companies Foreign Direct Investment, namely logistical and political support is granted by some countries to their companies when they establish branches abroad and when they encounter difficulties. Such interventions by the MNCs’ home countries may come with tradeoffs by companies in terms of the policies they should adopt.
Given the different situations, companies may be submitted to the influence of their home governments (either through dependence on its support or through fear of liability before home courts for actions abroad), to public opinion, to the pressure of their competitors or from International Organizations. In either case, the business organization is then submitted to Corporate Social Responsibility standards that it would not have adopted on its own initiative; and regulators (in the broad sense) other than the host country come into play. I argue that the willingness to avoid both these influences is one of the main drivers for firms to develop CSR as self regulation.
Section III: Assessing the Impact of Risk Driven CSR
The Bargaining over CSR
Foreign Direct Investment is achieved through constant negotiations with multiple parties, including not only business partners, but also media, local communities, NGOs, local administrations and home countries among others. Certain stakeholders have an interest in pressing MNCs to adopt CSR policies. The negotiation that takes place on firms externalities could satisfy Coase’s theorem and provide for optimal outcomes. However, I will argue that these negotiations are inefficient both because their design is not sufficiently rationalized on the firm’s side (1) and because firms’ negotiation partners generally lack legitimacy (2).
1. Firms inefficiency in the negotiation of CSR
• Firms generally do not have the capacity to sustain responsible policies over long periods of time. In his book, The Market for Virtue, Vogel observes that firms’ attachment to CSR principles generally depends on their financial capacity to bear the cost of CSR and on the involvement of its owners in the management. [199] Because these variables fluctuate over the course of a corporation’s life, one cannot expect any single company to provide continuous CSR efforts. These fluctuations put the achievement of any social goals in jeopardy.
These issues flow logically from the difficulty in isolating consistent organizational goals. Vogel’s empirical findings seem to confirm March and Cyert’s insights on the process of goal formation in organizations:
The goals of a business are a series of more or less independent constraints imposed on the organization through a process of bargaining among potential coalition members [the authors describe business firms as coalitions] and elaborated over time in response to short run pressures. Goals arise in such a form because the firm is, in fact, a coalition of participants with disparate demands, changing foci of attention, and limited ability to attend to all organizational problems simultaneously.[200]
As a result, the authors further expose their theory that firms have “multiple, changing, acceptable-level goals”. For March and Cyert firms have “a policy of reacting to feedback rather than forecasting the environment”.[201] March’s later development of a garbage can model of organizational choice and a theory of organizational anarchy puts an even stronger emphasis on irrationality in organizational choice. With regards to self-regulation, these conclusions on the incoherence of firms’ policy orientations do not support firms’ involvement in the management of social and environmental issues.
• Firms may not be bargaining optimally, in Coasean terms, when they respond to the impetus of legal or social pressures.[202] Henderson has formulated this critique and argued that firms did not respond with sufficient assertiveness when faced with social and NGO outcry. A number of reasons may account for this:
▪ The links they may have with NGOs and CSR oriented business councils,[203]
▪ Their fear of affecting their reputation by attacking popular NGOs. The case of Shell with Brent Spar seems to illustrate this type of situation: Greenpeace itself ended up acknowledging that Shell’s original project was not as irresponsible as the NGO had contended,
▪ The fact that, over time, organizations develop defensive routines that are generally sub optimal, as Argyris has argued.[204] The adoption of CSR policies may be one of these routines that managers use to solve the issue of social demand for responsibility.
The complexity of this series of questions makes it necessary to focus part of my empirical research on its solution.
2. Civil society organizations: illegitimate negotiators
A major problem with the theories of social license and corporate social responsiveness is that they assimilate society into active social groups. In their attempt to identify stakeholder and their salience, Mitchell, Agle and Wood note the difference between:
a normative theory of stakeholder identification, to explain logically why managers should consider certain classes of entities as stakeholders [and] a descriptive theory of stakeholder salience , to explain the conditions under which managers do consider certain classes of entities as stakeholders. [205]
The authors develop a distinction between claimants and influencers (compare with Ulrich’s distinction between the involved (i.e. the influencers) and the affected (i.e. the claimants))[206]. Claimants have claims against the firms that they may not exercise, influencers have actual power over the firms, which is the situation that both social licenses and corporate social responsiveness seem to refer to.
Sarah Lister summarized the literature in development studies as identifying representativeness, performance and accountability as the bases for NGOs legitimacy. [207] She also refers to the intuitionalist approach to legitimacy and Scott’s three pillars[208]: regulatory (the recognition of NGOs by regulation), cognitive (the fact that representation by NGOs is taken for granted by their alleged constituency) and normative (convergence between NGOs’ advocated principles and wider social values). This latter approach leaves the efficiency and accountability of NGOs’ actions aside and focuses on the level of acceptance of and adhesion to these organizations.
This question of the legitimacy of civil society is highly debated and I will not take a position on this debate here. However, it is clear that favoring a view of CSR based on risk management puts emphasis on influencers and promotes efficiency and potentially accountability over representativeness and social construct. Conversely, a normative approach to CSR (in the terms of Donaldson) should favor representativeness. Given the level of politicization of CSR today, it seems that the more democratic character of this institutional approach would secure greater support for CSR initiatives. This is, however, a purely theoretical conclusion which the growing collaboration between international organizations and influential NGOs seems to refute.
Additionally, NGOs may not only poorly represent civil society, they may also entertain promiscuous relationships with business and government. This is highlighted by Michael, drawing from elements such as the importance of income streams from corporate members (particularly in the case of Social Accountability International) or financial or personnel links with business or government.[209] Accordingly one may contend that the empowerment of NGOs creates highly sensitive institutional and agency problems that call for a reassessment of the process driving CSR today.
Disqualification of Business as a Regulator
3. The risk of lack of sanction
The corporate reformation will be enduring only if statements of ethical standards are matched by the building of institutions and procedures within the corporation to insure that the standards are enforced. This will involve strengthening the independence and oversight powers of boards of directors and their audit committees. It will involve improving the flow of information to the board and up and down to the organization. It will also require establishing oversight and review committees at different levels. Perhaps most important, it will mean supporting, encouraging and rewarding those individuals who express their own ethical values and who are willing to expose wrongdoing within the corporation, even when it is painful to the company’s short-run financial interests.[210]
Examples from the implementation of the OECD guidelines illustrate the difficulty of relying on implementation by firms themselves:
Based on interviews conducted by the authors and on documents provided by the OECD, it is evident that the process is not working. The Guidelines’ language on implementation is unclear. Some policy makers and observers disagree about who can bring complaints of violations, about whether the guidelines are standards or principles (which have different legal force), and about whether firms are responsible for the actions of their contactors and sub contractors[211].
Firms, like every organization, have a tendency to reduce the constraints to which they are subjected. The forces of what King and Lennox described as “opportunism” are often, as these authors observe, stronger than the incentives to abide by self-imposed norms. [212] In their presentation of formal structure as myth and ceremony, Meyer and Rowan conclude that “Institutionalized organizations seek to minimize inspection and evaluation by both internal managers and external constituents”. Institutionalized rules are analyzed as a way to gain legitimacy, but organizations are tempted to free ride on this ceremonial legitimacy. Self-regulation is unlikely to succeed without external checks and balances.
4. Are firms quasi-political organizations ?
The term “corporate governance” came with the idea, that developed in the 1960’s, that companies had responsibilities in the range of political ones.[213] This idea can actually be traced back to a much earlier period where, in the US, the limited liability feature was only granted to corporations that pursued a public interest. Former incorporation requirements made clear that only a consideration of the general welfare could justify the limitation of a companies’ responsibility. The trend towards CSR appears to be a recurrence of this same pattern: linking the special status granted to corporations with devices designed to ensure that companies will work for the general welfare. But the devices have changed over the century. Public authorities have abandoned the privilege of a priori control over the purpose of corporations. Instead, the control has become an a posteriori one. The market is now in charge of such control. Or is it civil society? Or maybe the corporations themselves? And, if so, which constituents of the corporations?
The main argument made by Milton Friedman in his article on CSR is that business people are not democratically chosen and should, therefore, be kept away from dealing with public issues. [214] The democratic concern expressed by Friedman may actually be formulated in greater detail. Friedman pinpoints the lack of legitimacy of business leaders, but the latter are also lacking a number of other distinctive features without which policy-making cannot be considered to be democratic. First, a business arguably lacks the necessary level of information to make worldwide policy decisions.[215] Second, it lacks the independence without which decision making cannot be an expression of the general will, rather it reflects the will of a smaller group.[216] Ascribing political missions to non-elected bodies without implementing controls on the delegated domains would arguably undermine the democratic system.
Not only do firms lack the appropriate level of legitimacy and independence to run public affairs but their empowerment may also have a negative impact on institutional governance. This argument was developed in contemplation of the overwhelming bargaining power gained by Shell in Nigeria[217] (and could probably be extended to a few other countries and oil companies)[218]. Ite concludes that MNCs empowerment favors the inaction of local government, which in turn causes macro-economical underperformance. To avoid this phenomenon, CSR should also focus on institutional reform.
5. The case for co-regulation
Gunningham and Sinclair argue that the use of multiple regulatory instruments in the field of environmental policies was a solution that “compensate[d] for the weakness of stand-alone environmental policies.” [219] An example of such a combination of normative instruments is the 33/50 program initiated by the EPA with both a voluntary and a command and control regulation aspect. The authors also highlight that not all combinations are complementary. They argue that the combination of command and control instruments with economic instruments is often counter-productive since the former aim at imposing predetermined outcomes on the industry, whereas the latter leave room for more flexibility “by providing a price signal relative to the level of pollution or resource consumption or by creating a purchasable right to pollute or consume resources.”[220] Using this same line of reasoning US Senator Crapo advocated collaboration between different levels of governments and between public officials and private and private actors.[221]
In a recent study, the World Bank proposed guidelines for the public sector to foster the development of Corporate Social Responsibility. [222] The report identifies four ranges of initiatives: mandating, facilitating, partnering and endorsing. The drivers of these types of collaboration may be intergovernmental processes like the ones developed for the Kimberley process or the Kyoto protocol. The driver may also be the demand of CSR conscious investors combined with governments’ desire to promote trade and investment. The authors also see public support for CSR as a way to create a level playing field for free competition (believing that companies should abide by the same standards). It is also a product of Civil society and consumer demands[223].
Chapter III: Tentative Survey Presentation
Because of time constraints and of the difficulty in accessing certain information, the empirical dimension of this study must to be postponed due to the need for further research. I nevertheless want to introduce the empirical tool that I intend to use later to conduct this study in greater detail. Focusing on the FDI projects of the Oil and gas industry, I will attempt to account for the adoption of CSR charters and/or organizational reforms by the firms intended to provide for more responsible corporate behavior. The two phenomena I will analyze are the initiation of such reforms and their internalization by the firm.
Section I : Actors
Business Leaders
Because managers and directors make strategic decisions regarding the strategy of the firm, they play a major role in the adoption of CSR policies.[224] To better account for differences among companies, it may be useful to compare managers’ views of their business environments, especially with regard to their potential liability for the company’s actions abroad or on the value of their reputations (the company’s and their own). Another interesting question is whether companies’ CSR policies vary with the profile of their managers. Such elements as business education,[225] nationality, age group, professional backgrounds or the ownership interest of business leaders may help better understand their decisions. I am currently working on a tentative survey of business leaders.
Employees
Because the amount of bargaining power varies in different types of corporate governance models, employees’ impact on their companies CSR orientation may be subject to major variations. Studies on ISO normalization have illustrated that employees may be the group initiating organizational change. Especially because social rights are encompassed within the field study, it is likely that employees and trade unions have developed an interest in this topic. This is actually the case, especially in Europe, where groups such as Renault, Carrefour, Danone, Suez, Accor, and recently EDF and Rhodia,[226] have negotiated their CSR obligations with their representative trade unions. This goes further than the simple initiation of CSR policies, indeed these groups already had CSR charters before they started negotiations with the unions. By signing such agreements with the latter, firms make employees watchdogs of their CSR activity. I will examine whether such agreements exist in the companies I survey and more generally whether employees and their representatives have taken any position on environmental and human rights issues.
Equity and Debt Holders
1. Shareholders
I will test the hypothesis that shareholders have a significant impact on CSR decisions by examining the content of shareholder’s activism reports published by the Investor Responsibility Research Center. Examining these reports and following up on the shareholders’ actions they describe, I will try to establish how pervasive such action is.[227] I will also try to account for the relative decline of this form of activism.[228] But as noted by Anastasia O’Rourke:
To understand whether and when shareholder activists are successful in their aims, we need to look beneath the surface of final voting results to negotiation processes and the actions of companies. [229]
Hence, I will also survey shareholders activists and companies that have been faced with shareholder activism to better understand how and why activists design their action. Accordingly, I will develop two lines of analysis:
• The first one consists of assessing the input of shareholder activism in the CSR movement.[230] I will try to measure the degree of CSR-related shareholder activism in different companies and see if there is any correlation with the action taken by those companies. Indeed, it is important to note that shareholder activism may have an impact even if the proposals do not have a majority of the votes.
• The second line of analysis aims at determining why shareholder activists have an interest in CSR -and in which type of CSR-. To answer the second question, I will consider shareholder activists’ groups as institutions and try to understand the diffusion of norms and values within this specific type of institutions. I will also examine the degree of independence of these groups and try to determine what external influences may shape their actions (this part of the study will only prove necessary if I see a substantial relationship between shareholder activism and CSR in the Oil and gas industry).
I will basically try to address the same questions with regard to institutional shareholders. Looking at their own publications and surveying representatives of the funds that invest in the Oil and gas industry, I will examine whether they have an interest in CSR.[231] If it is the case, I will also examine whether institutional investors conduct any form of CSR action and what impact such action has on firms’ behaviors.[232]
2. Lenders
Although lenders do not traditionally participate in corporate governance, they may have much more leverage than shareholders do in the specific context of Foreign Direct interests in Foreign Direct Investment projects. The FDI projects are often impossible to carry out without heavy reliance on private equity and bank loans. Because lenders often become the drivers of the project (especially in the context of project finance more than in establishing subsidiaries), they play a role in the design of such operations. It is only logical, corporate social irresponsibility being one of the evils risk management is meant to address today, that banks are now participating in certain CSR initiatives.[233]
Initiatives, such as the Equator Principles, have addressed the need to have lenders verify the compliance of projects they invest in with principles of Corporate Social Responsibility. It is particularly noteworthy that these efforts are not limited to western institutions as is often the case with CSR initiatives[234]. Even though only one Japanese bank (Mizuho bank) has adopted the Equator Principles so far, others, such as JBIC have adopted environmental guidelines to apply to their overseas economic cooperation operations. Moreover, the Nippon Export and Investment Insurance Institute, the only public insurance organization in Japan has adopted similar environmental rules. The banks that apply for public insurance for their loans projects outside Japan must comply with these rules to obtain this insurance.
I will need to inquire about how relevant such analysis is to the Oil and gas industry. Accordingly I will need to establish how heavily this industry relies on debt and investigate its interactions with lending institutions in terms of project design and management.
Section II : Firms Characteristics
Ownership Structures
After I have examined specific groups of shareholders and their behavioral patterns, I will attempt to establish a comparison between Oil and gas companies with different ownership structures to see how such structures affect firms’ CSR choices. The impact of the stakeholders’ theory has been very different in Europe and in the United States, possibly since these regions of the world are characterized by very different structures of capital (very fragmented ownership in the United States versus a larger concentration in Europe). This may imply that ownership structures have an impact on firms’ perception of their own purpose.[235] Salacuse argued that the main difference lies in the fact that in Europe (except the UK), as opposed to the US, corporate governance and CSR are merged into the same debate.[236] Salacuse insists on the importance of culture in explaining these differences. However, in the context of MNCs, culture may be difficult to identify. It is interesting to note that firms’ ownership structures may both flow from the objectives they have pursued and explain how future objectives are shaped. Comparing the CSR initiatives taken by companies from the same industry with different ownership structures will provide useful illustrations.
B. Visibility
Because they have different business models, firms, even within the same industry, are not uniformly exposed to media scrutiny.[237] Factors such as the location of the markets where oil companies sell their products, whether they sell it only to professionals or also to the public, and whether the same brand is used for all of the companies operations,[238] may dramatically affect the media exposure of the companies. I will need to take this variable into account and ensure that it does not affect other results. I will also try to establish whether there is significant causality between media exposure and CSR action and in which direction it operates.
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[1] Corporations and Their Critics vii (Thornton Bradshaw & David Vogel eds., 1981)
[2] For an example of this, see the “publish what you pay” initiative that invites companies investing abroad to disclose what they paid to host countries. The purpose is to improve transparency on the distribution of resources in recipient countries. Publish What You Pay, Home Page, at (last visited Mar. 27, 2005).
[3] This matches the EU definition in its Green Paper :
Most definitions of corporate social responsibility describe it as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. Being socially responsible means not only fulfilling legal expectations, but also going beyond compliance and investing “more” into human capital, the environment and the relations with stakeholders. The experience with investment in environmentally responsible technologies and business practice suggests that going beyond legal compliance can contribute to a company’s competitiveness. Going beyond basic legal obligations in the social area, e.g. training, working conditions, management-employee relations, can also have a direct impact on productivity. It opens a way of managing change and of reconciling social development with improved competitiveness
Promoting a European Framework for Corporate Social Responsibility, Green Paper from the Commission of the European Communities, COM(2001)366 final at 6, available at
[4] And because this industry is not highly labor intensive and hence not very exposed to claims for “social” CSR.
[5] Alice Palmer, Found. for Int’l Envtl Law & Dev. (FIELD), Community Redress and Multinational Enterprises 2 (2003), available at.
[6] Four of the ten largest TNCs in terms of foreign assets were Oil and gas companies in 2002 according to UNCTAD’s WIR, available at
[7] David Vogel, The Market for Virtue (forthcoming 2005).
[8] Neil Gunningham, Robert A. Kagan & Dorothy Thornton, Social License and Environmental Protection: Why Business Go Beyond Compliance, 29 Law & Soc. Inquiry 307, 337
[9] The authors go on to argue that the most needed deices should be procedural (rights of actions for the community, right to be consulted) and comparative (reporting is not sufficient if the community doe snot have the means to compare firm specific information with standards and other companies reports).
[10] “Where brand matters, it may be better to talk than fight.” Living with the Enemy, The Economist, Aug. 9, 2003 at 49.
[11] My assumption is indeed that the governments of countries hosting FDI projects hardly play any role in the promotion of CSR.
[12] One of them is corruption and it is addressed by such CSR initiatives as the “publish what you pay” program (these initiatives, as I mentioned earlier, are outside the reach of this study)..
[13] Clive Crook, The Good Company, The Economist, Jan. 20, 2005 at 54.
[14] Milton Friedman, The Social Responsibility of Business Is to Increase its Profits, The N.Y. Times Magazine, Sept. 13, 1970.
[15] All this quotations are cited by Henderson in guided Virtue (2001)
[16] World Business Council for sustainable development (2000) Corporate Social Responsibility : Making Good business sense, Geneva Switzerland p. 6
[17] William Stavropoulos of Dow Chemical in a speech delivered in February 2000
[18] Sir Mark Moody-Stuart of Shell, in his foreword to a Financial Times guide to « Responsible Investment » 1999
[19] Max Weber, Economy and Society: An Outline of Interpretive Sociology 24-25 (1968)
[20] David Vogel, The Market for Virtue (forthcoming 2005).
[21] Andrew J. Hoffman, From Heresy to Dogma 144 (2001).The author highlights the fact that the cycles in quantity of environment related article in the oil and gas specialized press follow the cycles in public opinion attention on these issues.
[22] See OECD, supra note 88, at 16-18.
[23] Seema Arora & Shubhashis Gangopadhyay, Toward a Theoretical Model of Voluntary Overcompliance, 28 J. of Econ. Behav. & Org. 289 (1995); see also Bengt Kristrom & Tommy Lundgren, Abatement Investments and Green Goodwill, 35 Applied Econ. 1915 (2003) (illustrating that companies can charge to customers more than their abatement costs and accordingly increase their profits).
[24] See also James Hamilton, Pollution as News, 28 J. of Envtl. Mgmt. & Econ. 98 (1995) (discussing the TRI program (the one that preceded 33/50) and illustrating that when the most polluting companies records were released, the value of their shares dropped).
[25] See Paul K. Dreissen, BP: Beyond Petroleum – or Beyond Probity?, . This CFDE report highlights the fact that BP has been spending much more on marketing its “ Beyond Petroleum” policy than on the actual renewable energy program.
[26] Maignan I. & Ferrell O.C., Corporate Citizenship as a Marketing Instrument - Concepts, Evidence and Research Directions, 35 European Journal of Marketing 457 (2001); David Vogel, The Market for Virtue (forthcoming 2005).
[27] id
[28] Anderson & Bieniaszewska, The Role of corporate social responsibility in a oil company’s expansion into new territories, 12 Corporate Social Responsibility and Environmental Management 1 (2005) (illustrating that if social responsibility may be relevant to host governments, performance remains the primary concern
[29] Peter A. French, Collective and Corporate Responsibility 41-46 (1984).
[30] NEIL CHAMBERLAIN, THE LIMITS OF CORPORATE RESPONSIBILITY 202 (1973)
[31] Peter Wright & Stephen Ferris, Agency Conflict and Corporate Strategy: The Effect of Divestment on Corporate Value, 18 Strategic Management J. 77 (1997)
[32] See C. Crook, The World According to CSR, The Economist, Jan. 22, 2005. One problem with the triple bottom line is quickly apparent. Measuring profits is fairly straightforward; measuring environmental protection and social justice is not. The difficulty is partly that there is no single yardstick for measuring progress in those areas. How is any given success for environmental action to be weighed against any given advance in social justice--or, for that matter, against any given change in profits? And how are the three to be traded off against each other? (CSR advocates who emphasize sustainable development implicitly insist that there must be such a trade-off, at least when it comes to weighing profit against either of the other two.) Measuring profits--the good old single bottom line--offers a pretty clear test of business success. The triple bottom line does not. »
[33] Max Weber Economy and Society: an interpretive sociology” [1924] 1968
[34] On this issue see Madden Clash of culture : Management in an age of changing values National planning association 1972
[35] Pamela S. Tolbert & Lynne G. Zucker, The Institutionalization of Institutional Theory, in The Handbook of Organizational Studies 175 (Clegg et al., eds., 1996).
[36] See W. Richard Scott, Institutions and Organizations 51 (2001).
[37] Robert C. Ellickson, Order Without Law (1991).
[38] CARBONNIER, FLEXIBLE DROIT (1998)
[39] Max Weber, Economy and Society: An Outline of Interpretive Sociology 214 (1968)
[40] P. DiMaggio & W. Powell, The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields, 48 Am. Soc. Rev. 147 (1983).
[41] There seems to be a certain consensus on this question among major scholars. See J. W. Meyer & B. Rowan, Institutionalized Organizations: Formal Structure as Myth and Ceremony, 83 Am. J. of Soc. 340 (1977) (“organizations are driven to incorporate the practices and procedures defined by prevailing rationalized concepts of organizational work and institutionalized in society. Organizations that do so increase their legitimacy and their survival prospects, independent of the immediate efficacy of the acquired practices and procedures.”).
[42] id.
[43] id.
[44] Eugene F. Fama & Michael C. Jensen, Separation of Ownership and Control, 26 J. of L. & Econ. 301 (1983).
In broad terms, the decision process has four steps:
· initiation—generation of proposals for resource utilization and structuring of contracts;
· ratification—choice of the decision initiatives to be implemented;
· implementation—execution of ratified decisions; and
· monitoring—measurement of the performance of decision agents and implementation of rewards.
Because the initiation and implementation of decisions typically are allocated to the same agents, it is convenient to combine these two functions under the term decision management. Likewise, the term decision control includes the ratification and monitoring of decisions. Decision management and decision control are the components of the organization’s decision process or decision system”.
And further: “Separation of residual risk bearing from decision management leads to decision systems that separate decision management from decision control”.
[45] Kathy Kram et al., Decisions and Dilemmas: The Ethical Dimension in the Corporate Context, in Corporate Social Performance and Policy Vol. 11, 21 (1989)
[46] id.
[47] Ackerman How companies respond to social demand, Harvard Business Review, 51 p. 98
[48] John H. Filer, The Social Goals of a Corporation, in Corporations and Their Critics (T. Bradshaw & D. Vogel eds., 1981).
[49] See, for example, the case of Shell. Howard Shields, Corporate Social Responsibility and the Oil Industry 27 (1998)
See also the case of Shell, Exxon, BP, Conoco Phillips, Chevron Texaco see. Douglas G. Cogan Corporate Governance and Climate Change: Making the connection CERES June 2003 Observe the limited impact of a shareholder proposal to link executive compensation with the triple bottom line .
[50] This is indeed the case for 60% of the firms surveyed in an OECD study. OECD, supra note 88, at 23.
[51] Id.
[52] David Vogel, The Market for Virtue (forthcoming 2005) describing Exxon-Mobil as a firm widely regarded as a “laggard” with respect to this issue
[53] id
[54] 29 companies of the oil industry are members with two major absents: Exxon Mobil and Chevron/ Texaco. The Global Compact, Home Page, at
[55] This was signed with the support and under the auspices of the UK and US governments. U.S. Dep’t of State, Fact Sheet, at
[56] Org. for Econ. Co-operation & Dev., The OECD Guidelines for Multinational Enterprises, at
[57] 20 oil companies, including all the major ones, are members. Global Reporting Initiative, Sustainability Reporting Guidelines 2002,
[58] see. Anastasia O’Rourke A new politics of engagement : shareholder activism for Corporate Social Responsibility Business Strategy and the Environment; 231 (2003)
[59] T Smith, The Ethical Responsibilities of Multinational Companies, in Corporations and Their Critics 79 (1978).
[60] See Madden Clash of culture : Management in an age of changing values National planning association 1972
[61] A. Bradley, How Institutions Voted on Social Policy Shareholder Resolutions, Institutional Investors Research Center (1994) (cited by Pinto & Branson, Understanding Corporate Law 155 (1999)
[62] USEEM, INVESTOR CAPITALISM 5 (1996)
[63] Anastasia O’Rourke A new politics of engagement : shareholder activism for Corporate Social Responsibility Business Strategy and the Environment; 227 (2003)
[64] NEIL CHAMBERLAIN, THE LIMITS OF CORPORATE RESPONSIBILITY 203 (1973)
[65] See, e.g., Jeffrey Hollender & Stephen Fenichell, What Matters Most (2004); Paul Shrivastava, Greening Business (1996); Bob Willard, The Sustainability Advantage (2002)
[66] “[T]he mixed response to the business evangelists in this area reflects the fact that even those companies in the vanguard of the corporate social responsibility movement […] have only grasped half the story. They have accepted the need for social responsibility within their companies, but they have not realized that this will fail to translate into substantial business –or social- benefit unless they exert social leadership outside their companies.” Steve Hilton & Giles Gibbons, Good Business 63 (2002).
[67] Donaldson, Making Stakeholder Theory Whole, 24 Academy of Mgmt. Rev. 237 (1999). On this question, it is noteworthy that costs are often difficult to estimate. See Satish Joshi et al., Estimating the Hidden Cost of Environmental Regulation, 78 The Accounting Rev. 171 (2001). They point out that only 10% of all environmental compliance expenses appear as such in accounting statements. Accordingly, managers cannot make optimal choices since they have only incomplete information on the real cost of environmental strategies. On this question, it is noteworthy that cost are often difficult to estimate. Joshi, Krishman & Love, Estimating the hidden cost of environmental regulation, 78 The Accounting Rev. 171 (2001). They point out that only 10% of all environmental compliance expenses appear as such in accounting statements. Accordingly, managers cannot make optimal choices since they as only incomplete information n the real cost of environmental strategies.
[68] To be published in 2005
[69] For another deconstruction of the myth of ethical consumerism, see Marylyn Carrigan & Ahmad Attalla, The Myth of the Ethical Consumer - Do Ethics Matter in Purchase Behaviour? 18 J. of Consumer Marketing 560 (2001).
[70] A recent study by the Natural Capital Institute actually tends to prove that there is no significant difference between the portfolio content of so called Socially Responsible Funds and other funds. Paul Hawken & Nat’l Capital Inst., Socially Responsible Investing, at .
[71] Supporting this vision, see also Benjamin J. Richardson, Enlisting Institutional Investors in Environmental Regulation: Some Comparative and Theoretical Perspectives, 28 N.C. J. Int’l L. & Com. Reg. 247 (2002). The author argues that institutional shareholders do not have the expertise to be in charge of the environmental monitoring of companies and that state agencies should be providing firms and investors with the relevant regulatory framework. See also Elisa Westfield, Note, Globalization, Governance, and Multinational Enterprise Responsibility: Corporate Codes of Conduct in the 21st Century, 42 Va. J. Int’l L. 1075 (2002) (arguing that the absence of regulatory framework leads to a race to the bottom in terms of employees rights, only governments could create a fair level playing field).
[72] Tom Fox, Halina Ward, & Bruce Howard, Public Sector Roles in Strengthening Corporate Social Responsibility: Baseline Study, The World Bank Corporate Social Responsibility Practice (2002).
[73] Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups 62 (1971)
[74] see further page
[75] Keith Davis, Five Propositions for Social Responsibility, Business Horizons, June 1975, at 19.;
[76] Milton Friedman, The Social Responsibility of Business Is to Increase its Profits, The N.Y. Times Magazine, Sept. 13, 1970.
[77] HENDERSON, MISGUIDED VIRTUE 68 (2001)
[78] Lantos, The Boundaries of Strategic Corporate Social Responsibility, 18 J. of Consumer Marketing 595 (2001).
[79] Freeman Strategic Management : A Stakeholder Approach (1984) defining the notion of stakeholder: « any group or individual who can affect or is affected by the achievement of the organization’s objective ».
[80] The Union of Concerned Executives, The Economist, Jan. 22, 2005
[81] Adam Smith The Wealth of Nations (1776)
[82] For a recent illustration of the shareholder view, see Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001). The authors argue that there is a convergence between the US and European models of Corporate Governance towards shareholders centered models. For a diverging view that highlights the importance of stakeholders theory in many countries outside the US, see Cynthia A. Williams, Corporate Social Responsibility in an Era of Globalization, 35 U.C. Davis L. Rev. 705 (2002).
[83] For an early occurrence of the opposite view, see David Packard, co-founder of Hewlett-Packard, Speech to Hewlett-Packard employees (DATE?) (“I want to discuss why a company exists in the first place,. In other words, why are we here ? I think many people assume, wrongly, that a company exists simply to make money. […] We inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively that they could not accomplish themselves- they make a contribution to society.”) (cited by Hilton & Gibbons, supra note 24).
[84] Wright & Ferris, supra note 30.
[85] McGuire et al., Corporate Social Responsibility and Firm Financial Performance, 31 Academy of Management J. 854 (1988).,
[86] Pava et al., The Association Between Corporate Social-Responsibility and Financial Performance: The Paradox of Social Cost, 15 Journal of Business Ethics 321 (1996).
[87] Waddock, & Graves, The Corporate Social Performance-Financial Performance Link, 18 Strategic Management J. 303 (1997).
[88] Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds. By: Hamilton, Sally; Jo, Hoje; Statman, Meir. Financial Analysts Journal, Nov/Dec93, Vol. 49 Issue 6, p62,
[89] McWilliams & Siegel, Corporate Social Responsibility, A Theory of the Firm Perspective, 26 Academy of Management Rev. 117 (2001).
[90] Epstein & Pava (I don’t know what this is) (cited by Pava, supra note 86)
[91] See Chapter I Section II B. The legitimacy of business to define virtue
[92] See Greg Bourne, Regional director , BP Amoco Australia and New Zealand, in a speech of February 1999 cited by Henderson, Misguided virtue (2001) « … corporate social responsibility is rooted in hard-headed business logic »
[93] Donaldson Making Stakeholder Theory Whole 24 Academy of Management Review 237 (1999)
[94] id.
[95] “Value seeking tells an organization and its participant how their success in achieving a vision or in implementing a strategy will be assessed. But value maximizing or value seeking says nothing about how to create a superior vision or strategy.” Michael C. Jensen, Value Maximization, Stakeholder Theory, and the Corporate Objective Function, in Unfolding Stakeholder Thinking (J. Andriof et al, eds., 2002) (also published in JACF, V. 14, N. 3, 2001, European Financial Management Review, N. 7, 2001 and in Breaking the Code of Change, M. Beer and N. Norhia, eds, HBS Press, 2000. ). Jensen admits that “we must give employees and managers a structure that will help them resist the temptation to maximize short term financial performance (as typically measured by accounting profits or even worse, earnings per share). Sort term profit maximization at the expense of long term value creation is a sure way to destroy value.”
[96] id at 10
[97] id
[98] See Roger Martin Corporate Social Responsibility: What's a CEO to do ?. Canadian Business. Toronto: Apr 11-Apr 24, 2005.Vol.78, Iss. 8; p. 63 The truth is, there are no widely-accepted standards for Corporate Social Responsibility (CSR). Some standards are beginning to emerge, such as the Global Reporting Initiative, the Global Compact, and the OECD Guidelines for Multinational Enterprises. However, none has gained anything close to wide acceptance, let alone widespread understanding of what they really mean.
Commentators, customers and employees calling for enhanced corporate citizenship have little or no advice for CEOs as to how to trade-off earning returns for their shareholders against performing acceptably-well across this wide array of CSR areas. They demand social responsibility, whatever exactly that means, but at the same time, performance at less-than-acceptable standards will be punished. And as we have seen, whether it be Royal Dutch Shell after the Brent Spar incident; Nike in the wake of Asian sweatshop allegations; or Arthur Anderson after Enron, the punishment can be harsh indeed.
[99] Stephen M.H. Wallman, Understanding the Purpose of a Corporation: An Introduction, 24 J. of Corp. L. 819 (1999).
[100] Abagail McWilliams & Donald Siegel, Corporate Social Responsibility, A Theory of the Firm Perspective, 26 Academy of Management Rev. 117 (2001).
[101] Id.
[102] Note that psychologists have attempted to deconstruct the myth of self-interest. See D. T. Miller & R. K. Ratner, The Power of the Myth of Self Interest, in Current Societal Concerns About Justice 25 (L. Montada & M. J. Lerner eds., 1996). Individuals believe in the power of self interest, they “normalize behavior congruent with self interest and pathologize behavior incongruent with it”. Miller contends that “on the other hand, when engaging in non-vested behavior will not threaten their personal deservingness, they appear to be inclined toward helping others”.
[103]See the surveys cited by Vogel: According to a 2002 survey by Pricewaterhouse-Coopers, “70% of global chief executives believe that CSR is vital to their companies’ profitability.” Jane Simms, Business: Corporate Social Responsibility – You Know it Makes Sense, Accountancy, Nov. 2002. “Another survey reports that 91% of CEOs believe CSR management creates shareholder value.” .Corporate America’s Social Conscience, Fortune; see also Thomas W. Dunfee, Corporate Governance in a Market with Morality,
62 L. & Contemp. Probs. 129 (1999).
[104] See Michael C. Jensen, Self Interest, Altruism, Incentives, and Agency Theory, J. of Applied Corp. Fin., (1994).
[105] Id.
[106] " ‘The more accountable you are, the more vulnerable to being attacked,’ says Richard Sandbrook, a moderate British green who conducted a review of the mining industry's environmental record that was boycotted by most green groups who lobby against mining. […] Moreover, when companies make concessions, NGOs often come back for more. « Where brand matters, it may be better to talk than fight ». Living with the enemy. The Economist; August 9th 2003
Levi’s may also be a good example of a company that overinvested in CSR
[107] On this question, see Vogel who points out that acquiring a positive CSR reputation may well prove a mixed blessing. The more a company responds to public pressures by professing its commitment to CSR, the more likely it will find itself subject to additional public pressures – in part because there will always be a gap between what a business is doing, or says it is doing, and what some CSR advocates want it to do. As the FT recently noted, “Starbucks has become a target of environmental pressure groups partly because its socially responsible image makes it an easy target. Thus the Gap has been subject to more intensive scrutiny from the CSR community than Wal-Mart, Shell more than Exxon-Mobil, Ford more than General Motors and Starbucks more than Kraft.” Hilton & Gibbons, supra note 24, at 63. Hilton and Gibbons suggest two explanations for this phenomenon: “a natural time lag between a company changing the way it operates and the rest of the world noticing” but also “a depressingly unfair tendency of some anti-capitalists to attack the very companies that have the courage to put their heads above the parapet and make a public commitment to social responsibility.” Id. at PAGE NUMBER?.
[108] Id
[109] ""Attacking those who take the lead strengthens the hand of doubters in companies," argues Tom Burke, an ex-head of Friends of the Earth who advises Rio Tinto, a mining firm, on environmental policy. Living with the enemy. The Economist, Aug. 9, 2003.
[110] Vogel, supra note 10 (citing the examples of Ben & Jerry’s and the Body Shop).
[111] Hilton & Gibbons, supra note 24, at 102
[112] W. Frederick, From CSR1 to CSR2, Business & Society, Aug. 1994, at 150
[113] Ackerman, The Social Challenge to Business 62 (1975).
[114] Jensen,. "Value Maximization, Stakeholder Theory, and the Corporate Objective Function" (October 2001). Unfolding Stakeholder Thinking, eds. J. Andriof, et al, (Greenleaf Publishing, 2002). Also published in JACF, V. 14, N. 3, 2001, European Financial Management Review, N. 7, 2001 and in Breaking the Code of Change, M. Beer and N. Norhia, eds, HBS Press, 2000.
[115] See infra Chapter I Section II; McWilliams & Siegel, supra note 89.
[116] Research and policy committee, Social responsibilities of business corporations CED (1971) p. 27
[117] Neil Gunningham et al., Social License and Environmental Protection: Why Businesses Go Beyond Compliance, 29 L. & Soc. Inquiry 307 (2004).
[118] For an illustration in the oil and gas industry, see. J. Barett, Managing energy company security risks in Latin America, Oil & Gas J. (1997). The author argues that good community relations can help tackle the main political risks in the region.
[119] id.
[120] Neil Gunningham et al., Explaining Corporate Environmental Performance: How Does Regulation Matter ? 37 Law & Soc’y. Rev. 51
[121] Andrew J. Hoffman, From Heresy to Dogma 57-58 (2001).
[122] Andrew J. Hoffman, From Heresy to Dogma 57-58 (2001).
[123] In re Oil Spill by Amoco Cadiz, 954 F.2d 1279 (7th Cir. 1992).
[124] Exxon Valdez Oil Spill Trustee Council, Questions and Answers, .
[125] 33 U.S.C. §§ 2702-2761 (2005).
[126] CERES: Network for Change, “About Us,”
[127] Jesper Grolin, Corporate Legitimacy in Risk Society: The Case of Brent Spar, 7 Bus. Strat. Env. 213 (1998).
[128] For example, Denmark, Sweden, and the Netherlands. See Lucien J. Dhooge, Beyond Voluntarism: Social Disclosure and France’s Nouvelles Regulations Economiques, 21 Ariz. J. Int’l & Comp. Law 441 (2004). The author argues that France with the NRE (Nouvelles Regulations Economiques), has extended this requirement to such companies’ operations abroad. This is not clear from the text.
[129] Cited in Reeves Aronson, Corporate Social Responsibility in the Global Village 69-70 (2002).
[130] id
[131] Chapter II A. 2 b
[132] United Nations, The Global Compact, .
[133] International Finance Corporation, Equator Principles,
[134] Sommet D’Evian, Fostering Growth and Promoting a Responsible Market Economy: A G8 Declaration, .
[135] It is interesting to note Kolk, van Tulder and Welters’ opinion. They argue that when codes of conduct are the product of a coalition involving more than one type of institution (for example international organizations and firms) they are more “profound” since “this helps increase the acceptability of stricter requirements.” Ans Kolk, Rob van Tulder & Carlijn Welters, International Codes of Conduct and Corporate Social Responsibility: Can Transnational Corporations Regulate Themselves, 8 Transnat’l Corp. 143, 178 (1999).
[136] In between states and international organizations is the example of the EU and its Green Paper on CSR
[137] Jonathan A. Fox & L. David Brown, The Struggle for Accountability (1998).
[138] Principle 1: The support and respect of the protection of international human rights;
Principle 2: The refusal to participate or condone human rights abuses.
[139] OECD Guidelines for MNEs; General principles; 2. Respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments
[140] Transnational corporations and other business enterprises shall respect economic, social and cultural rights as well as civil and political rights and contribute to their realization, in particular the rights to development, adequate food and drinking water, the highest attainable standard of physical and mental health, adequate housing, privacy, education, freedom of thought, conscience, and religion and freedom of opinion and expression, and shall refrain from actions which obstruct or impede the realization of those rights.
[141] Transnational corporations and other business enterprises shall carry out their activities in accordance with national laws, regulations, administrative practices and policies relating to the preservation of the environment of the countries in which they operate, as well as in accordance with relevant international agreements, principles, objectives, responsibilities and standards with regard to the environment as well as human rights, public health and safety, bioethics and the precautionary principle, and shall generally conduct their activities in a manner contributing to the wider goal of sustainable development.
[142] As an initial step towards implementing these Norms, each transnational corporation or other business enterprise shall adopt, disseminate and implement internal rules of operation in compliance with the Norms. Further, they shall periodically report on and take other measures fully to implement the Norms and to provide at least for the prompt implementation of the protections set forth in the Norms. Each transnational corporation or other business enterprise shall apply and incorporate these Norms in their contracts or other arrangements and dealings with contractors, subcontractors, suppliers, licensees, distributors, or natural or other legal persons that enter into any agreement with the transnational corporation or business enterprise in order to ensure respect for and implementation of the Norms.
[143] Transnational corporations and other businesses enterprises shall be subject to periodic monitoring and verification by United Nations, other international and national mechanisms already in existence or yet to be created, regarding application of the Norms. This monitoring shall be transparent and independent and take into account input from stakeholders (including non governmental organizations) and as a result of complaints of violations of these Norms. Further, transnational corporations and other businesses enterprises shall conduct periodic evaluations concerning the impact of their own activities on human rights under these Norms.
[144] States should establish and reinforce the necessary legal and administrative framework for ensuring that the Norms and other relevant national and international laws are implemented by transnational corporations and other business enterprises.
[145] Stefano Bertasi from the ICC`s Paris headquarters stated: “We don't have a problem at all with efforts that seek to encourage companies to do what they can to protect human rights. We have a problem with the premise and the principle that the norms are based on. These Norms clearly seek to move away from the realm of voluntary initiatives... and we see them as conflicting with the approach taken by other parts of the UN that seek to promote voluntary initiatives.” CSR Europe Background Note: United Nations Norms on the Responsibilities of Transnational Companies, at (quoting Stefano Bertasi).
[146] Julie Campagna, United Nations Norms on the Responsibilities of Corporations and Other Business Enterprises with Regards to Human Rights: The International Community Asserts Binding Law on the Global Rule Makers, John Marshall L. Rev. 1207 (2004).
[147] Shell Leads International Business Campaign Against UN Human Rights Norms UN Observer & International report
[148] See Behind the Mask: A Christian Aid Report on the Impact of Shell’s Activity in the Niger’s Delta. The report argues that Shell has not cleaned up its oil spills neither repaired its pipelines as the company alleges. The report also points at the gaps in monitoring of the community projects Shell initiated..
[149] See Final Update on UN Commission on Human Rights Resolutions April 8, 2004 Dispatch from Geneva on the UNCHR EarthRights International April 28, 2004
[150] See Joint Oral Intervention by Human Rights Council of Australia, Mouvement international d'apostolat des milieux sociaux indépendants (MIAMSI) and World Organization Against Torture (OMCT)
Supported by: Amnesty International, ESCR-Net, RAID, Berne Declaration, Centre on Economic and Social Rights (CESR), Earth Justice, Franciscans International, International Federation for Human Rights (FIDH), International Service for Human Rights, ONZ, Miseror, World University Service and a caucus of nearly 200 organizations and 200 individuals
[151] Transnational corporations and other business enterprises shall provide prompt, effective and adequate reparation to those persons, entities and communities that have been adversely affected by failures to comply with these Norms through, inter alia, reparations, restitution, compensation and rehabilitation for any damage done or property taken. In connection with determining damages in regard to criminal sanctions, and in all other respects, these Norms shall be applied by national courts and/or international tribunals, pursuant to national and international law.
[152] Donoho, Relativism v. Universalism in Human Rights: The Search for Meaningful Standards, Stan. J. of Int’l L. 350 (1991).
[153] Steiner & Alston, International Human Rights in Context 256 (1996).
[154] M. Adddo, Human Rights Standards and the Responsibility of Transnational Corporations 23 (1999).
[155] See for example Emeka Duruigbo, The economics of Alien Tort litigation : a response to an awakening monster : the Alien Tort Statute of 1789 14 Minn. J. Global Trade 1 (2004) and Sonia Jimenez The Alien Tort Claims Act : A tool for repairing ethically challenged US corporations 1. 16 St. Thomas L. Rev. 721
[156] See Nat’l Coalition Gov’t v. Unocal, Inc., 176 F.R.D. 329, 349 (C.D. Cal. 1997); Doe v. Unocal Corp., 963 F. Supp. 880, 892 (C.D. Cal. 1997).
[157] Doe v. ExxonMobil(D.D.C. 2002)
[158] Wiwa v. Royal Dutch Petroleum Co.226 F.3d 88 (2d Cir. (N.Y.) 2000)
[159] Aguinda v. Texaco, Inc., 303 F.3d 470 (2002).
[160] See Christina Fink, Living Silence: Burma Under Military Rule 242 (2001).
[161] J’apporte 14 témoignages, Le Nouvel Observateur, May 22, 2003, available at
[162] The latter was in turn heavily criticized by the media, see Kouchner, Total et la Birmanie, Le Monde, Jan. 5, 2004.
[163] EIA Country Analysis Briefts, Sudan, ; Human Rights Watch, The United States: Diplomacy Revived,
[164] Sudan Oil and Human rights ; Human rights Watch 2003 p. 633
[165] Human Rights Watch, Sudan Oil and Human Rights 633 (2003).
[166] See Cynthia A. Williams, Civil Society Initiatives and “Soft Law” in the Oil and gas Industry, 36 N.Y.U. J. Int’l L. & Pol’y 457 (2004).
[167] Waelde, “International Treaties and Regulatory Risk: The Effectiveness of International Law Disciplines, Rules, and Treaties in Reducing Political and Regulatory Risk for Private Infrastructure Investment in Developing Countries”, Draft Working Paper 1999, p. 13
[168] Sol Picciotto Lessons of the MAI: Towards a New Regulatory Framework for International Investment 2000 (1) Law, Social Justice & Global Development LGD).
[169] I will need to test these hypotheses during the course of my empirical research.
[170] Interviews that I conducted in China and India tend to confirm that CSR policies are generally not adopted out of concern for local government regulation
[171] “[T]he domestic laws, contracts, and rules regulating TNCs are often shaped by countries’ desire to attract investment, and may reflect pressure from multinational institutions or TNCs themselves.” Maria McFarland Sánchez-Moreno & Tracy Higgins, No Recourse: Transnational Corporations and the Protection of Economic, Social, and Cultural Rights in Bolivia, 27 Fordham Int’l L.J. 1663, 1668-69 (2004).
[172] It is actually even common for governments to lower their legal requirements in order to attract foreign investors. See Alfred C. Aman Jr., Privitization and the Democracy Problem in Globalization: Making Markets More Accountable Through Administrative Law, 28 Fordham Urb. L.J. 1477 (2001).
[173] This cost may be lower because firm are likely to have better information on their own externalities, because it may be cheaper and quicker for them to cope with these externalities (especially as far as labor is concerned)
[174] See Aseem Prakash, Greening the Firm 103 (2000).
[175] For an example of such claim, see Caterpillar Tractor Company, A code of worldwide business conduct in The corporate social challenge 321 (1977).
[176] An illustration of this claim may be found in the US telecommunications industry. In this industry, the cost of the Federal Communications Commission monitoring companies’ self-regulatory measures appears to be higher than the cost of regulation in the former system. J. Gregory Sidak, The Failure of Good Intentions: The WorldCom Fraud and the Collapse of American Telecommunications After Deregulation, 20 Yale J. on Reg. 207 (2003). Building on this example, one may argue that self regulation would only save governments’ spending in situations in which governments give a blank check to companies. If authorities want to maintain their level of information on companies’ behaviors, they may actually have to spend more as in the case of the Federal Communications Commission.
[177] W. Naysnerski & T. Tietenberg, Private Enforcement of Federal Environmental Law, 68 Land Economics 28, 28 (1998).
[178] See Kathleen Segerson & Thomas J. Miceli, Voluntary Environmental Agreements: Good or Bad News for Environmental Protection?, 36 J. of Envtl. Econ, & Mgmt. 109 (1998). The authors argue that when the administration has little bargaining power, i.e. cannot threaten to take sanctions in case self regulation prove insufficient , companies do not implement the obligation set up by voluntary codes.
[179] OLSON, POWER AND PROSPERITY 10 (2000)
[180] This question becomes even more crucial as tax competition among countries to attract FDI rises. Vanessa Houlder, Tax Breaks are Weapon of Choice in Fight to Win Investors, Financial Times, Jan. 12, 2005
[181] See developments on the Alien Torts Claims Act above
[182] Research & policy committee, Social responsibilities of business corporations CED 28-29 (1971).
[183] James A. Brickley & Clifford W. Smith, Corporate Governance, Ethics, and Organizational Architecture, in Jim Brickley et al., Designing Organizations to Create Value: From Strategy to Structure (2002).
[184] Jeffrey L. Seglin, An Ethics Code Can’t Replace a Backbone, N.Y. Times, Apr. 21, 2002 (citing Michael Rion).
[185] Id. (citing Linda Klebe Trevino).
[186] See Wisse Decker, The Responsible Corporation and the Subversive Side of Ethics, in People in Corporations, Ethical Responsibilities and Corporate Effectiveness (G.Enderle et al. eds., 1990) (“Different values and standards often pose major problems for the multinational company. On the one hand many company executives uphold the idea that on should behave as a good citizen in the home country and respect the standards and laws in force there, but on the other hand, they have grown up with a set of standards and values which it is not easy to disregard. But can we and should we transfer a social policy that works in the Netherlands to a Third World country? Or would this be moral imperialism , raising our own standards to the status of a world standard?”).
[187] Tonnies, Gemeinschaft and Gesellschaft (1887)
[188] Alice Kwan & Stephen Frost, Made in China: Rules and regulations Versus Corporate Codes of Conduct in the Toy Sector, in Corporate responsibility and Labour Rights: Codes of Conduct in the Global Economy 124 (R. Jenkins et al., eds. 2002). The authors show that in China the content of foreign codes of conduct have little to do with local realities; former firm’s regulations are often the true guidelines for behavior.
[189] Stuart Saint, The Three S’s : Stewardship, Sustainability and Social Responsibility, in Corporate Social Responsibility and the Oil industry 56 (A, Hazarika ed., 1998).
[190] John Rawls, A Theory of Justice 607 (1971).
[191] Sánchez-Moreno & Higgins, supra note 6.
[192] P.J. Mendel, Global Model of Organization: International Management Standards Reforms and Movements (unpublished PhD dissertation, Stanford Sociology Department) (on file with author).
[193] Tom Heller, Global Standards, in Global Standards and Rule of Law 454 (2004).
[194] ibid.
[195] Kolk, van Tulder & Welters, supra note 73, at 164-65.
[196] Kolk, van Tulder & Welters, supra note 73, at 164-65.
[197] However, a similar pattern may be observed in certain cases in the Extractive industry, see Total’s differentiated standards and more specifically its recent decision to create a European social platform, Total, European Agreement on a Platform for Employee Relations at Total, Nov. 23, 2004, .
[198] For illustration of the discrepancy between the level of social responsibility of Asian and western firms see the example of oil in Sudan cited above and see Ethical Corporation June 2002 Special focus on corporate responsibility in Asia
[199] Kolk, van Tulder & Welders, supra note 73, at 161
[200] Vogel, The Market for Virtue (forthcoming 2005).
[201] March & Cyert, A Behavioral Theory of the Firm 43 (1963).
[202] id. at 113
[203] Supporting this opinion, see Henderson, Misguided Virtue 68 (2001).
[204] See the next paragraph and more generally B. Michael, Corporate Social Responsibility in International Development, 10 Corporate Social Responsibility and Environmental Management 115 (2003).
[205] Argyris, Strategy, Change and Defensive Routines (1985).
[206] Mitchell, Agle & Wood, Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts, 22 Academy of Management Rev. 853 (1997).
[207] Ulrich, Critical Heuristics of Social Planning a New Approach to Practical Philosophy (1983).
[208] Sarah Lister, NGO Legitimacy: Technical Issue or Social Construct, Critique of Anthropology 175 (2003).
[209] See W. Richard Scott, Institutions and Organizations 51 (2001).
[210] B. Michael, Corporate Social Responsibility in International Development, 10 Corporate Social Responsibility & Environmental Management 115 (2003).
[211] Leonard Silk, Economic Scene: Ethical Guides for Companies, N.Y. Times, June 15, 1978 (cited by Bradshaw & Vogel, Corporations and their Critics 40 (1978)
[212] Aronson, supra note 133, at 10-11
[213] K ing & Lennox, Industry Self Regulation Without Sanction, Academy of Management J. (2000), available at ...
[214] In 1969 Ralph Nader and several other lawyers launched their project on Corporate Social responsibility with the following statement: “Today we announce an effort to develop a new kind of citizenship around an old kind of private government – the large corporation.” Donald H. Chew & Stuart L. Gillian, Corporate Governance at the Crossroads PAGE NUMBER? (2005).
[215] Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. Times Magazine, Sept. 13, 1970.
[216] See C. Crook, Profit and the Public Good, The Economist, Jan. 22, 2005 (“But on questions such as these, where governments are, it seems, leaving significant market failures unaddressed, the question for businesses is whether CSR can do anything useful to bridge the gap. Many companies at the forefront of the CSR movement have embarked on initiatives of their own, aimed, for example, at reducing greenhouse-gas emissions or at protecting wilderness areas. These would need to be judged case by case, […] There will be good and bad. As a general rule, however, correcting market failures is best left to government. Businesses cannot be trusted to get it right, partly because they lack the wherewithal to frame intelligent policy in these areas.”).
[217] Id. (“Aside from the implausibility of expecting the uncoordinated actions of thousands of private firms to yield a coherent optimizing policy on global warming, say, there is also what you might call the constitutional issue. The right policy on global warming is not clear-cut even at the global level, to say nothing of the national level or the level of the individual firm or consumer. Devising such a policy, and sharing the costs equitably, is a political challenge of the first order. Settling such questions exceeds both the competence and the proper remit of private enterprise.”).
[218] Ite, Multinationals and Corporate Social Responsibility in Developing Countries: A Case Study of Nigeria, 11 Corporate Soc. Responsibilty & Environmental Management 1 (2004).
[219] The same criticis rae indeed formulated in the case of a joint venture including participations by Shell and Enron in Bolivia Sanchez-Moreno & Higgins No recourse, Transnational corporations and the protection of economic social and cultural rights in Bolivia 27 Fordham Int'l L.J. 1663 (2004)
[220] Neil Gunningham & Darren Sinclair, Integrative Regulation: A Principle-Based Approach to Environmental Policy, Law & Soc. Inquiry (1999).
[221] id.
[222] Mike Crapo, Collaboration as a Means to Formulating Mutually Beneficial Environmental Policy, Harv. J. on Legis. 351 (2004).
[223] Tom Fox et al., Public Sector Roles in Strengthening Corporate Social Responsibility: Baseline Study, The World Bank Corporate Social Responsibility Practice (Oct. 2002).
[224] id at 19-23
[225] See Corporations and Their Critics, supra note 1, at xii (“The single most important factor is the orientation of the individuals who are at the apex of the corporate hierarchy. […]. The popular notion that modern corporations are managed by anonymous and interchangeable bureaucrats is misinformed. […]. Many of these individuals have strongly held social convictions, and they are in a position to have these positions reflected in the way in which the company they manage conducts business.”); David Vogel, The Market for Virtue (forthcoming 2005) observes that among the firms which have become leaders in contemporary CSR policies and practice a disproportionate number have a culture that was built in part around norms of corporate responsibility. Many of these firms are either family controlled and/or headquartered in regions with relatively liberal political traditions.
[226] Examine the case of Net impact –originally founded as Students for Responsible Business- in the US that describes itself as “the most progressive and influential network of MBAS in existence.” Net Impact, Home Page,
[227] See L'électricien EDF et le chimiste Rhodia engagent leur "responsabilité sociale" à l'échelle mondiale, Le Monde, Feb. 3, 2005.
[228] On shareholder activism, see also Peter Newell, Managing Multinationals: The Governance of Investment for the Environment, J. of Int’l Dev. 907 (2001), where the author argues that shareholder activism should be balanced by other forms of regulation because it gives voice to groups that only represent a very small proportion of the shareholders
[229] See A. Bradley, How Institutions Voted on Social Policy Shareholder Resolutions, Institutional Investors Research Center (1994) (cited by Pinto & Branson, Understanding Corporate Law 155 (1999)). The author shows how shareholders’ proposals concerning corporate governance improvement match those regarding corporate social responsibility in number but are much more successful
[230] Anastasia O’Rourke, A New Politics of Engagement: Shareholder Activism for Corporate Social Responsibility, Business Strategy & the Environment 227 (2003).
[231] See CERES, U.S. Companies Face Record Number Of Global Warming Shareholder Resolutions On Wider Range Of Business Sectors, at ; see also CERES, CERES and ICCR Set New Records in 2003 Global Warming Shareholder Campaign, at
[232] On this question, see Benjamin J. Richardson, Enlisting Institutional Investors in Environmental Regulation: Some Comparative and Theoretical Perspectives, 28 N.C. J. Int’l L. & Com. Reg. 247 (2002). The author argues that institutional shareholders do not have the expertise to be in charge of the environmental monitoring of companies and that state agencies should be providing firms and investors with the relevant regulatory framework.
[233] For institutional investors’ endorsement of Global Climate Change policies, see ISS, Calpers Oppose Exxon/Mobil Management on Key Global Warming Resolutions (2002), at
[234] « The Wall Street Journal notes that following pressure by ecological activists and shareholder groups, JP Morgan Chase & Co. will adopt sweeping guidelines that restrict its lending and underwriting practices for industrial projects that are likely to have an environmental impact.
The bank also plans to calculate in loan reviews the financial cost of greenhouse-gas emissions, such as the risk of a company losing business to a competitor with lower emissions because it has a better public standing.
And JP Morgan plans to lobby the US government to adopt a national policy on greenhouse-gas emissions, becoming the first big American bank to pledge that kind of activism on such a contentious issue, according to shareholder activists. The bank is also pledging to reduce to $10 million from $50 million the threshold of total capital cost on environmentally-sensitive projects by which it will apply an international standard called the "Equator Principles," which require more stringent environmental review for financing or other work. About 30 banks around the world have adopted those principles, which are based on policies of
the World Bank and its private-sector arm, the International Finance Corp.” World Bank Press review for April 25th 2005
[235] See Ethical Corporation June 2002 Special focus on corporate responsibility in Asia
[236] An empirical study conducted among Czech firms has illustrated that the concentration of ownership is a factor of good environmental performance. Dietrich Earnhart & Lubomír Lízal, Effects of Ownership and Financial Status on Corporate Environmental Performance, William Davidson Working Paper No. 492, Aug. 2002, available at
[237] J. Salacuse, Corporate Governance, Culture and Convergence EBLR 472 (2003).
[238] See Vogel, supra,. The author observes that companies producing goods in developing countries and exporting them to places other than the US or Europe, and companies which market generic products rather than branded ones, face far fewer pressures for improved social performance
[239] Note the moderate international echo of the oil spill caused by a TNC partly owned by Enron and Shell and in Bolivia. Sanchez-Moreno & Higgins No recourse, Transnational corporations and the protection of economic social and cultural rights in Bolivia 27 Fordham Int'l L.J. 1663 (2004)
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