Business Strategy and Sustainability 9781780527376, 9781780527369

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BUSINESS STRATEGY AND SUSTAINABILITY

DEVELOPMENTS IN CORPORATE GOVERNANCE AND RESPONSIBILITY Series Editors: Gu¨ler Aras and David Crowther Recent Volumes: Volume 1: NGOs and Social Responsibility Volume 2: Governance in the Business Environment

DEVELOPMENTS IN CORPORATE GOVERNANCE AND RESPONSIBILITY VOLUME 3

BUSINESS STRATEGY AND SUSTAINABILITY EDITED BY

GU¨LER ARAS Yildiz Technical University, Istanbul, Turkey

DAVID CROWTHER De Montfort University, Leicester, UK

SRRNet Social Responsibility Research Network www.socialresponsibility.biz

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2012 Copyright r 2012 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78052-736-9 ISSN: 2043-0523 (Series)

CONTENTS LIST OF CONTRIBUTORS

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INTRODUCTION

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CHAPTER 1 ACCOUNTING, SUSTAINABILITY AND EQUITY Gu¨ler Aras and David Crowther

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CHAPTER 2 THE GLOBAL FINANCIAL CRISIS: A FAILURE OF CORPORATE GOVERNANCE? Andrew Chambers

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CHAPTER 3 SUSTAINING MULTINATIONAL STRATEGIC PERFORMANCE THROUGH VALUE CHAIN BASED COMPETITIVE ADVANTAGE Pınar Bu¨yu¨kbalcı

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CHAPTER 4 NORMS OF CORPORATE SOCIAL RESPONSIBILITY: DENSIFICATION OR DEGENERATION? Dominique Bessire and Emmanuelle Mazuyer

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CHAPTER 5 ONLINE REPORTING OF SUSTAINABILITY: A STUDY OF GLOBAL CLOTHING SUPPLIERS M. Azizul Islam and Victoria Wise

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CHAPTER 6 COMPARATIVE CORPORATE SOCIAL RESPONSIBILITY IN THE UNITED KINGDOM AND TURKEY Fulya Akyildiz v

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CHAPTER 7 THE RELATIONSHIP BETWEEN CSR, PROFITABILITY AND SUSTAINABILITY IN CHINA Qingqing Yang and David Crowther

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CHAPTER 8 SUSTAINABILITY STRATEGIES IN PUBLIC SERVICE Linne Marie Lauesen

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CHAPTER 9 A SUSTAINABILITY EXAMPLE PLANNING IN THE SPANISH PUBLIC SECTOR Esther Ortiz Martı´nez

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CHAPTER 10 MILLENNIUM’S DILEMMA: GENETICALLY MODIFIED PRODUCTS FROM THE SOCIAL RESPONSIBILITY PERSPECTIVE R. S-eminur Topal and Hande Gu¨rdag˘

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CHAPTER 11 CHALLENGES OF ENVIRONMENTAL ACCOUNTING IN TOURISM DESTINATION AS A TREND OF SUSTAINABLE DEVELOPMENT Vanja Vejzagic´, Sandra Jankovic´ and Milena Persˇic´

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ABOUT THE CONTRIBUTORS

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INDEX

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LIST OF CONTRIBUTORS Fulya Akyildiz

Department of Public Administration, Usak University, Turkey

Gu¨ler Aras

Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey

Dominique Bessire

Faculty of Law, Economics and Management, University of Orle´ans, France

Pınar Bu¨yu¨kbalcı

Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey

Andrew Chambers

Department of Accounting & Finance, London South Bank University, UK

David Crowther

De Montfort University, UK

Hande Gu¨rdag˘

Department of Political Science and International Relations, Ufuk University, Turkey

M. Azizul Islam

School of Accounting, Economics and Finance, Deakin University, Australia

Sandra Jankovic´

Faculty of Tourism and Hospitality Management, Opatija, Croatia

Linne Marie Lauesen

Center of Corporate Responsibility, Copenhagen Business School, Denmark

Esther Ortiz Martı´nez

Department of Accounting and Finance, Faculty of Economics and Business Studies, University of Murcia, Spain vii

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LIST OF CONTRIBUTORS

Emmanuelle Mazuyer

CNRS (French National Centre for Scientific Research), University of Lyon, France

Milena Persˇic´

Faculty of Tourism and Hospitality Management, Opatija, Croatia

R. S- eminur Topal

Department of Biology, Yildiz Technical University, Turkey

Vanja Vejzagic´

Faculty of Tourism and Hospitality Management, Opatija, Croatia

Victoria Wise

Graduate School of Business, Deakin University, Australia

Qingqing Yang

De Montfort University, UK

INTRODUCTION The word sustainability is on everybody’s lips – in business, in government and in society. There are of course many aspects of sustainability which might be considered to reflect Brundtland’s three pillars of economic, environmental and social sustainability. Others of course have different definitions which include such things as governance or supply chain management. Nevertheless business has recognised the significance of the concept and is responding by developing strategies to cope, although some would say that this is little more than window dressing. The debate continues however as to just what is meant by the term sustainability as far as business is concerned and how can this be achieved. This book is designed to address this debate and set it within the context of the global business and societal environment. Equally we have seen that stakeholders are increasingly exercising their power not just in their own interests but also in the interests of long term sustainability. So it is necessary to develop some methods of analysing and measuring sustainable CSR activity in such a way that it is universally understood, and can be evaluated by interested parties. It will therefore become of assistance to societal decision making. Although the relationship between organisations and society has been subject to much debate, often of a critical nature, evidence continues to mount that the best companies make a positive impact upon their environment. Furthermore the evidence continues to mount that such socially responsible behaviour is good for business, not just in ethical terms but also in financial terms – in other words that corporate social responsibility is good for business as well as all its stakeholders. Thus, ethical behaviour and a concern for people and for the environment have been shown to have a positive correlation with corporate performance. Indeed, evidence continues to mount concerning the benefit to business from socially responsible behaviour and, in the main, this benefit is no longer questioned by business managers. It is clearly accepted that good corporate governance is fundamental to the successfully continuing operating of any company; hence much attention has been paid to the procedures of such governance. Often however what is actually meant by the corporate governance of a firm is merely assumed without being made explicit; often it is assumed to be concerned with how the ix

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company conducts its annual meeting, deals with auditors etc. Increasingly this has been extended into a more general concern with the management of investor relationships. In reality of course it affects all of the operations of a business and its relations with all of its stakeholders – a much more wideranging concern than is sometimes appreciated. Just as there has been a vast increase in interest in, and concern for, corporate governance so too has there been a similar growth in interest in sustainability. A growing number of writers over the last quarter of a century have recognised that the activities of an organisation impact upon the external environment and have suggested that such an organisation should therefore be accountable to a wider audience than simply its shareholders. Such a suggestion probably first arose in the 1970s and a concern with a wider view of company performance is taken by some writers who evince concern with the social performance of a business, as a member of society at large. Thus, there has been a general recognition of the idea of sustainability and that this is an issue which needs to be addressed – at a societal level, at a local level, at a personal level and at a business level. Thus, the term sustainability has become ubiquitous both within the discourse of globalisation and within the discourse of corporate performance. Sustainability is of course a controversial issue and there are many definitions of what is meant by the term. A simple definition of sustainability is that life will just carry on unchanged. This is a comfortable definition which enables those of us who accept it to make as little effort as possible to change our way of life. It may be comfortable but plainly it is unrealistic – things are changed even by us carrying on in an unchanged manner! At the opposite end of the spectrum is the deep green approach of returning to the illusory golden age prior to industrial development, with a cosy but unquestioned assumption that life was simpler and therefore happier then. This too is unrealistic and plainly another sort of sustainability must be sought. Another approach to sustainability, which is common for many people is that sustainability is concerned with the use of environmental resources – and so we must make sure that we do not print out emails and that we recycle our bottles and the problem has been addressed. This may be slightly facile but this approach to sustainability implies that society must use no more of a resource than can be regenerated. This can be defined in terms of the carrying capacity of the ecosystem and described with input – output models of resource consumption. Viewing an organisation as part of a wider social and economic system implies that these effects must be taken into account, not just for the measurement of costs and value created in the

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present but also for the future of the business itself. Such concerns are pertinent at a macro level of society as a whole, or at the level of the nation state but are equally relevant at the micro level of the corporation and the individual. Alongside a recognition that corporations are accountable to their stakeholders has come a development of the principles upon which this demonstration of accountability should be based. Inevitably this is predicated in accounting as a mechanism by which such action can be measured and reported. In generic terms this has come to be called either social or environmental accounting. The objective of environmental accounting is to measure the effects of the actions of the organisation upon the environment and to report upon those effects. In other words the objective is to incorporate the effect of the activities of the firm upon externalities and to view the firm as a network which extends beyond just the internal environment to include the whole environment. In this view of the organisation the accounting for the firm does not stop at the organisational boundary but extends beyond to include not just the business environment in which it operates but also the whole social environment; it therefore merges into corporate social responsibility and into sustainability. Environmental accounting therefore adds a new dimension to the role of accounting for an organisation because of its emphasis upon accounting for external effects of the organisation’s activities. In doing so this provides a recognition that the organisation is an integral part of society, rather than a self-contained entity which has only an indirect relationship with society at large. This self-containment has been the traditional view taken by an organisation as far as their relationship with society at large is concerned, with interaction being only by means of resource acquisition and sales of finished products or services. Recognition of this closely intertwined relationship of mutual interdependency between the organisation and society at large, when reflected in the accounting of the organisation, can help bring about a closer, and possibly more harmonious, relationship between the organisation and society. Given that the managers and workers of an organisation are also stakeholders in that society in other capacities, such as consumers, citizens and inhabitants, this reinforces the mutual interdependency. This led to the development of what has become known as triple bottom line reporting – reporting on environmental effects and social effects as well as the financial effects of corporate activity. And recently the concept of merging the three together into integrated reporting has become the latest approach. In this volume the various authors have sought to address the relationship between sustainability and business practice, whether it is at a global level or

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a societal level or at a business unit level, whether in the commercial sector or in the public sector. And the debate contained in this volume flows through all of these levels within the varied contributions. And the debate addresses such central issues as governance, environmental problems and corporate social responsibility as well as sustainability itself, because these concepts are inextricably interrelated. The approaches taken by the various authors reflect the divergence of opinions in the field whereas the fact that the authors come from many difference countries shows the unification of concern for the topic as one which is of global interest and global relevance. These contributions combine together to make a distinctive contribution to the discourse. This book is a part of the series on Developments in Corporate Governance and Responsibility which is published in association with the Social Responsibility Research Network. Each book in the series focuses upon one of the factors that influence societal or business behaviour and thereby contribute towards social responsibility. This particular volume focuses upon the increasingly important topic of sustainability and its link to business strategy. The purpose of the book therefore is to explore this issue and its significance around the world. In doing so it inevitably also considers the relationship between these and corporate performance and corporate social responsibility. This is also something we consider at our conferences. Indeed this book was prepared for our 11th conference in Lahti, Finland where all delegates have received a copy. The conference extends the discourse just as this book does. Gu¨ler Aras David Crowther Editors

CHAPTER 1 ACCOUNTING, SUSTAINABILITY AND EQUITY Gu¨ler Aras and David Crowther INTRODUCTION The social responsibility of organisations – commonly known as corporate social responsibility (CSR) or corporate responsibility – has become an important issue in contemporary international debates (see Aras & Crowther, 2007a). More recently, however, the discourse has changed to that of sustainability, and many corporate reports which used to be designated as environmental reports and subsequently as CSR reports have now been repackaged as sustainability reports. CSR, however, is more problematic as it is often perceived that there is a dichotomy between CSR activity and financial performance with one being deleterious to the other and corporations having an imperative to pursue shareholder value. Moreover, there is no agreed upon definition of exactly what constitutes CSR (Ortiz Martinez & Crowther, 2005) and therefore no agreed upon basis for measuring that activity and relating it to the various dimensions of corporate performance. Consequently, much of the previous research regarding CSR deals with this issue and the problems in development of standards for definition and reporting for such indeterminate activity (see Crowther, 2006). Although this problem is widely recognised, it is equally widely accepted that the impact of corporate activity upon society and its citizens – as well as all stakeholders including the environment – is considerable and has an Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 1–21 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003005

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impact not just upon the present but also upon the future. Moreover, these stakeholders are increasingly exercising their power not just in their own interests but also in the interests of long-term sustainability. So it is necessary to develop some methods of analysing and measuring sustainable CSR activity (see Aras & Crowther, 2007b) in such a way that it is universally understood, and can be evaluated by interested parties. It will therefore become of assistance to societal decision making. It is fairly obvious that the resources of the planet are finite and this is a limiting factor to growth and development. The depletion of the resources of the planet, however, is one of the factors which has helped create the current interest in sustainability. Of particular concern are the extractive industries and such things as aluminium are becoming in short supply. In the United Kingdom the mineral resources such as tin and lead have been fully extracted long ago and the thriving industries based around them are long gone.1 As other resources – such as coal – are extracted in total, the companies based upon them disappear, as do the jobs in those industries. This is an obvious source of concern for people. Probably most concerning is the extinguishing of supplies of oil, because much economic activity is only possible because of energy created by the use of oil. Indeed many would argue that the wars in the Middle East,2 particularly the problems in Iraq, Iran and Libya, are caused by oil shortages, actual or impending, and the problems thereby caused, rather than by any fundamental concern for political issues. Most people have now heard of Hubert’s Peak,3 and engaged with the debate as to whether or not it has been reached (Bower, 2009; Deffeyes, 2004). Certainly it has in parts of the world such as the United States and the North Sea, but it is less certain if it has been reached for the world as a whole. Nevertheless, the whole crux of sustainability – and sustainable development – is based upon the need for energy and there are insufficient alternative sources of energy to compensate for the elimination of oil as a source of fuel. Consequently, resource depletion, real or imagined, and particularly energy resources, is one of the most significant causes of the current interest in sustainability.

THE EFFICIENCY OF ACCOUNTING Accounting, from its inception, has been harnessed generally to dominant political interests and ideological views. They have been part of hegemonic discourses and have aroused controversy and public debate. The development of accounting in the early twentieth century worked hand in glove with

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early management theory, designed to order the workplace in such a way as to maximise management control and to minimise the power of the workforce both in terms of decision making, and expertise and discretion regarding the work. Accounting has also been used to legitimate the corporate values of performance over other values such as truth or ethics and has been co-opted to manipulate figures in favour of large-scale fraud, as has been revealed in recent years. Management accounting principles and techniques supported Frederick Taylor’s ideas of scientific job design (specialisation) and productivity in terms of reducing work criteria to those that could be measured and that would produce higher productivity in terms of profit and/or cost, thereby dispensing with the unwanted humanistic considerations altogether. Similarly, classical management’s emphasis on hierarchical chains of command and rules and procedures were supported by kindred ideas regarding the practice of management accounting (Covaleski & Aiken, 1986). Concepts of discipline and surveillance, taken much further by Foucault in his analysis of organisations, are also made more acceptable through reference to accounting techniques. Accounting has been used as a form of control, through its emphasis on precision, rules, measurement and material, as opposed to psychological or humanistic outcomes (Jackson & Carter, 1998) to legitimate the increasing control exerted particularly over employees in the workplace. Accounting techniques have been used efficiently in bringing about structural and cultural change in industries undergoing privatisation. Thus, Ogden and Anderson (1999) have shown how delegation of work was introduced into newly privatised water companies in such a way as to make the new managers strictly accountable while at the same time suggesting that they were being empowered – which some managers accepted as part of the corporate values while others realized that their newly gained power was limited to operational boundaries and was being subjected to tight financial constraints. Accounting was also used in the privatisation of the electricity industry as a means of shifting power and status from professional electricians to managers (Carter & Crowther, 2000). In both cases values changed from those of professional standards of maintenance and safety to market criteria of high profits and low costs. One of the roles of accounting is of course to exercise control through the measurement of performance. The inadequacy of accounting has been recognised by many, such as Johnson and Kaplan (1987) who argue that the role of accounting has changed so that it is no longer relevant to managerial needs. It has also been argued (Crowther, 2002) that although one aspect of

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managerial need is that of internal control of organisational activity and resource allocation, this is not in fact the prime need for accounting information which is used for the semiotic purpose of creating the desired impression of an organisation. The ability to measure efficiency was predicated in the certainty arising from the Cartesian view of the world with its essential certainties which could be measured. This point was argued by Sombert (1915) who stated: Thought in economic activities then becomes more definite and conscious, in other words, more rational, and modern science has tended to make it so. But it has also helped to make it more exact and punctual, by providing the necessary machinery for measuring time.

This was of particular importance for the development of management accounting as early cost management systems emphasised the need to control the level of input resources consumed per output unit. This was particularly true of labour, as a unit of resource consumed, because labour normally comprised the greatest factor cost of production in any nineteenthcentury industrial organisation. Different industries developed control measures to serve their own particular requirements, and the exacting temporal practices of scientific management (see Clark, 1987) were resonant with key features of management accounting, and the natural evolution of this concept was to ascertain the standard cost of a process and the concomitant comparison of variances between actual and standard performance. Organisational changes in the form of vertically integrated, and later divisionalised, businesses also led to the development of innovative forms of accounting. Thus, for example, return on investment (ROI) was developed in order to be used centrally in vertically integrated firms to guide decisions on capital allocation between various activities. At a later date, when divisionalised businesses delegated the responsibility for using capital efficiently to managers, ROI also came to be used to judge local performance. Similarly, flexible budgets were developed to assess and control business units subject to variations in output. Every business will develop a number of performance measures that it considers are key indicators of operational success and these tend to be tailored to the particular firm. Accordingly, each firm will develop various performance metrics targeted at the perceived critical variables. Whilst there is a degree of variability in these operational measures, there is far more uniformity in the use of financial performance metrics. Most companies, and where appropriate their divisions, use the level of profits earned as

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a measure of performance. Whilst the level of profit is important, on its own it is poor indicator of performance. Instead, profit adequacy requires expression in relation to the amount of capital resource utilised in the generation of that profit. The most common method of achieving this evaluation is through the measure of return on capital employed (ROCE). This is determined by the result of the firm’s or division’s net earnings before tax (NEBT) divided by the capital employed in the economic unit. The widespread use of ROCE reflects the fact that the measure has many positive features. Specifically, it uses routinely collected accounting data, and as such it benefits from having low data collection cost and having the objectivity that is inherent in financial accounting numbers. In addition, ROCE makes possible performance comparisons across divisions of different size and business activity. One of the purposes of accounting therefore is to enable the evaluation of performance and thereby allow decisions to be made regarding the future of the business. Thus measures such as ROI and ROCE have been developed for this purpose. Sadly though these accounting measures equate efficiency with effectiveness and ally them to cost reduction – something to which we will return later. So producing for less cost is considered to be desirable and is assumed to lead to sustainable competitive advantage. And of course the prime ways of reducing costs include both their externalisation and reducing the variable cost of labour by getting rid of people. The evaluation of performance is partly concerned with the measurement of performance and partly with the reporting of that performance, and with the greater importance being given to social accountability the changing reporting needs of an organisation are also being recognised. Thus, Birnbeg (1980) states that accounting is attempting to supply various diverse groups with different needs for information, and that there is a need for several distinct types of accounting to perform such a function. Similarly, Gray (1992) considers the limitations of the traditional economic base for accounting and questions some of its premises such as the desirability of growth, the existence of rational economic man, the exclusion of altruism and the ignoring of the way in which wealth is distributed. He argues that there is a need for a new paradigm with the environment being considered as part of the firm rather than as an externality and with sustainability and the use of primary resources being given increased weighting. Rubenstein (1992) goes further and argues that there is a need for a new social contract between a business and the stakeholders to which it is accountable, and a business mission which recognises that some things go beyond accounting.

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THE INTRODUCTION OF SUSTAINABILITY One of the most used words relating to corporate activity at present is the word sustainability. Indeed, it can be argued that it has been so heavily overused, and with so many different meanings applied to it that it is effectively meaningless. For example, according to van Marrewijk and Werre (2003), there is no specific definition of corporate sustainability and each organisation needs to devise its own definition to suit its purpose and objectives, although they seem to assume that corporate sustainability and CSR are synonymous and based upon voluntary activity which includes environmental and social concern, implicitly thereby adopting the EU approach. Thus, the term sustainability currently has a high profile within the lexicon of corporate endeavour (Aras & Crowther, 2008a). Indeed, it is frequently mentioned as central to corporate activity without any attempt to define exactly what sustainable activity entails. This is understandable as the concept is problematic and subject to many varying definitions – ranging from platitudes concerning sustainable development to the deep green concept of returning to the ‘golden era’ before industrialisation – although often it is used by corporations merely to signify that they intend to continue their existence into the future. Indeed, their accounting leads them to the assumption that cost reduction equates to efficiency and therefore continued existence. This is true even when their cost reduction sacrifices future capability at the expense of present cash flow by the elimination of technical experience and expertise in the manner categorised by many people (see, e.g., Carter & Crowther, 2000). This represents a misunderstanding of the meaning of sustainability as mere continued existence (Aras & Crowther, 2008b). The sustainability discourse is of course significantly different and has implications in terms of managing corporate behaviour. Sustainability implies that society must use no more of a resource than can be regenerated. This can be defined in terms of the carrying capacity of the ecosystem (Hawken, 1993) and described with input–output models of resource consumption. Viewing an organisation as part of a wider social and economic system implies that these effects must be taken into account, not just for the measurement of costs and value created in the present but also for the future of the business itself. This approach to sustainability is based upon the Gaia theory (Lovelock, 1979) – a model in which the whole of the ecosphere, and all living matter therein, is co-dependent upon its various facets and formed a complete system. According to this theory this complete

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system, and all components of the system, is interdependent and equally necessary for maintaining the Earth as a planet capable of sustaining life. Such concerns are pertinent at a macro level of society as a whole, or at the level of the nation state but are equally relevant at the micro level of the corporation, the aspect of sustainability with which we are concerned in this chapter. At this level, measures of sustainability would consider the rate at which resources are consumed by the organisation in relation to the rate at which resources can be regenerated. Unsustainable operations can be accommodated for either by developing sustainable operations or by planning for a future lacking in resources currently required. In practice organisations mostly tend to aim towards less unsustainability by increasing efficiency in the way in which resources are utilised. An example would be an energy-efficiency programme. Sustainability is a controversial topic because it means different things to different people. Nevertheless, there is a growing awareness (or diminishing naivety) that one is, indeed, involved in a topical debate about what sustainability means and, crucially, the extent (if at all) it can be delivered by corporations in the easy manner that they promise (United Nations Commission on Environment and Development; Schmidheiny, 1992) and others assume. There is a further confusion surrounding the concept of sustainability: for the purist sustainability implies nothing more than stasis – the ability to continue in an unchanged manner – but often it is taken to imply development in a sustainable manner (Hart & Milstein, 2003; Marsden, 2000), and the terms sustainability and sustainable development are for many viewed as synonymous. As far as corporate sustainability is concerned, the confusion is exacerbated by the fact that the term sustainable has been used in the management literature over the last 30 years (see, e.g., Reed & DeFillippi, 1990) to merely imply continuity. Thus, Zwetsloot (2003) is able to conflate CSR with the techniques of continuous improvement and innovation to imply that sustainability is thereby ensured. An almost unquestioned assumption, however, is that growth remains possible (Elliott, 2005) and therefore sustainability and sustainable development are synonymous.4 Indeed, the economic perspective of postCartesian ontologies predominates and growth is considered to be not just possible but also desirable – even essential (see, e.g., Spangenberg, 2004). So it is possible therefore for Daly (1992) to argue that the economics of development is all that needs to be addressed and that this can be dealt with through the market by clear separation of the three basic economic goals of efficient allocation, equitable distribution and sustainable scale. Hart (1997)

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goes further and regards the concept of sustainable development merely as a business opportunity, arguing that once a company identifies its environmental strategy then opportunities for new products and services become apparent. There seem, therefore, to be two commonly held assumptions which permeate the discourse of corporate sustainability. The first is that sustainability is synonymous with sustainable development. The second is that a sustainable company will exist merely by recognising environmental and social issues and incorporating them into its strategic planning. We reject both of these assumptions – both are based upon an unquestioning acceptance of market economics predicated in the need for growth. While we do not necessarily reject such market economics, we argue that its acceptance has led to these assumptions about sustainability which have confused the debate. Thus, we consider it imperative at this point to reiterate the basic tenet of sustainability, that sustainable activity is activity which enables (or at least permits) continuance into the future. If this tenet of sustainability is accepted, then it follows that development is neither a necessary nor desirable aspect of sustainability. Sustainable development may well be possible, and even desirable in some circumstances, but it is not an integral aspect of sustainability. Our second point is that corporate sustainability is not necessarily continuing into the future with little change except to incorporate environmental and social issues – all firms are doing this in some way. Nor is corporate sustainability a term which is interchangeable with the term CSR. And environmental sustainability – the context in which the term is generally used – is not the same as corporate sustainability.

CORPORATE SUSTAINABILITY Sustainability is a fashionable concept for corporations, and their reporting previously described as environmental reporting and then CSR reporting is now often described as sustainability reporting (Aras & Crowther, 2009a). Corporate websites also tend to discuss sustainability. But it is apparent that sustainability and sustainable development are used as interchangeable terms. It is equally apparent that all corporations claim to have engaged with sustainability and solved the attendant problems.5 It is apparent, therefore, that a very powerful semiotic (Guiraud, 1975; Kim, 1996) of sustainable activity has been created – conveniently as Fish (1989) shows that truth and belief are synonymous for all practical purposes. It has been

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argued elsewhere (Aras & Crowther, 2008b) that this is a deliberate ploy as one of the effects of persuading people that corporate activity is sustainable is that the cost of capital for the firm is reduced as investors are misled into thinking that the level of risk involved in their investment is lower than it actually is. The traditional view of accounting is that the only activities with which the organisation should be concerned are those which take place within the organisation6; consequently, it is considered that these are the only activities for which a role for accounting exists. Here therefore is located the essential dialectic of accounting – that some results of actions taken are significant and need to be recorded while others are irrelevant and need to be ignored. This view of accounting places the organisation at the centre of its world and the only interfaces with the external world take place at the beginning and end of its value chain. It is apparent, however, that any actions which an organisation undertakes will have an effect not just upon itself but also upon the external environment within which that organisation resides. In considering the effect of the organisation upon its external environment, it must be recognised that this environment includes both the business environment in which the firm is operating, the local societal environment in which the organisation is located and the wider global environment. The discourse of accounting can therefore be seen to be concerned solely with the operational performance of the organisation. Contrasting views of the role of accounting in the production process might therefore be epitomised as either providing a system of measurement to enable a reasonable market mediation in the resource allocation problem or as providing a mechanism for the expropriation of surplus value from the labour component of the transformational process. Both strands of the discourse, however, tend to view that labour as a homogeneous entity and consider the effect of organisational activity upon that entity. Labour is of course composed of individual people; moreover, these individual people have a lifetime of availability for employment and different needs at different points during their life cycle. The depersonalisation of people through the use of the term labour, however, provides a mechanism for the treatment of labour as an entity without any recognition of these personal needs. Thus, it is possible to restrict the discourse to that of the organisation and its components – labour, capital etc. – and to theorise accordingly. The use of the term labour is a convenient euphemism which disguises the fact that labour consists of people, while the treatment of people as a variable cost effectively commodifies these people in the production process. In order to create value in the transformational process of an organisation,

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the commodities need to be used efficiently, and this efficient use of such commodities is measured through the accounting of the organisation. When this commodity consists of people, it implies using them in such a way that the maximum surplus value can be extracted from them. The way in which this can be achieved is through the employment of young fit people who can work hard and then be replaced by more young fit people. In this way surplus value (in Marxian terms) can be transferred from the future of the person and extracted in the present. As people have been constituted as a commodified variable cost, they become merely a factor of production which can be exchanged for another factor of production, as the costs determined through the use of accounting legitimation. Thus, it is reasonable, through an accounting analysis, to replace people with machinery if more value (profit) can be extracted in doing so, and this has provided the imperative for the industrial revolution which has continued up until the present. Accounting is only concerned with the effect of the actions of an organisation upon itself and so the effect of mechanisation upon people need not be taken into account. Thus, if mechanisation results in people becoming unemployed (or possibly unemployable), then this is of no concern – except to the people themselves.

DEVELOPING A FULL DISCOURSE OF SUSTAINABILITY In this chapter we have sought to show that the accounting discourse of operational performance is predicated in cost reduction as a means of achieving efficiency7 while the sustainability discourse is predicated in other factors. For example, one factor it is predicated in is the environmental sustainability discourse which is epitomised by such work as Jacobs (1991), Welford (1997) and Gray and Bebbington (2001). Equally, a second is predicated in the going concern principle of accounting as epitomised by the corporate reporting described earlier. Thus, the two discourses tend to run in parallel without actually communicating – and corporate sustainability requires this communication. Although seemingly incompatible, all of these discourses are actually based on an acceptance of a conventional view of the transformational process, as shown in Fig. 1. This model assumes that inputs (of capital labour and finance) are used to make goods and services through the employment of the operational factors of production (e.g. employees, suppliers etc.) in order to make goods and

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Inputs: Capital Labour Finance

Added value through operations

Fig. 1.

Outputs: Goods & services Profit

The Conventional Transformational Process.

services with a resultant profit. The implications of this conventional view of the transformational process are that the inputs can be freely acquired in the desired quantities and that the operational factors of production are commodified. This view of the process enables mediation through the market and is legitimated by the views of such as Spangenberg (2004). There are, however, two fundamental flaws with this form of analysis, from a sustainability perspective: 1. The input referred to as capital actually represents environmental resources and these are quite definitely finite in quantity (Daly, 1996). Thus, the market cannot mediate adequately as the ensuing competitive bidding will raise the price but will not bring more of the resource into the market because there is no more in existence. Substitution can compensate for shortages only to a limited extent; it is difficult, for example, to see the extent to which more finance or labour can compensate for the absence of oil or any other fuel. 2. The factors of production are not actually commodities, rather they are stakeholders of the organisation. It may aid analysis to commodify them but they require benefits from the organisational activity. In particular, when resources are recognised to be finite, market mediation in this way does not satisfactorily accommodate the requirements of all stakeholders to the organisation. Thus, these stakeholders need to become a part of the output section of the transformational process. As far as inputs to the transformational process are concerned, it is apparent that environmental resources are finite and effectively fixed. Currently all the resources of the planet are in use (some would say overuse), and the resources for one corporation can only be increased by taking them from another through the process of competition in the market place. This highlights two alternative routes to development. The first is through the substitution of environmental resources with other inputs – of labour or finance. The second is through making better use of the available environmental resources – effectively doing more with less. Both require technological development in order to bring into

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effect, and so sustainable development essentially requires technological development – also known as research and development – in order to be tenable. This is the first point of intersection whereby sustainability comes into conflict with organisational accounting. Technological development for sustainability requires more efficient use of environmental resources whereas accounting efficiency requires more effective use of financial resources. Sustainable development, therefore, requires greater use of human resources, particularly highly skilled people, in order to develop that technology, and this of course will incur additional cost. Accounting efficiency requires the replacement of people – particularly skilled and therefore expensive people – with relatively low-cost techniques such as programmed change initiatives, business process re-engineering, and computer-based management systems and therefore with low-cost unskilled people.8 We therefore argue that the use of conventional accounting to a large extent is in direct opposition to the concept of sustainability.

INTRODUCING EQUITABLE SUSTAINABILITY A further problem with the conflict between accounting and sustainability derives from the output part of the transformational process. Accounting assumes that the corporation is run on behalf of its shareholders and investors and that outputs therefore consist only of goods or services for sale and profit for distribution. Additionally, however, there are a wide variety of other stakeholders who justifiably have a concern with those activities, and are affected by those activities. Those other stakeholders have not just an interest in the activities of the firm but also a degree of influence over the shaping of those activities. This influence is so significant that it can be argued that the power and influence of these stakeholders is such that it amounts to quasi-ownership of the organisation. It therefore follows that these stakeholders are more than a part of the transformational process and that how the effects of the actions of the corporation – both positive and negative – are distributed is an essential part of sustainability. Our argument therefore is that sustainability can only exist if equity also exists. Hence, we introduce the term equitable sustainability (Aras & Crowther, 2008c) to reflect the argument that sustainability cannot exist without equity in the distributional process. It is our argument that sustainability is presently not really either understood by theorists or addressed by corporations, despite the many claims that are being made. Indeed, we regard much analysis – based on the notion of mediation through the market – as being both complacent

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and obfuscatory concerning the issues which need to be addressed. It is only by introducing the concept of equity into the analysis that we can start to address the question of sustainability. The environmental strand of the sustainability discourse extends this by recognising a wider set of inputs and outputs in the form of the triple bottomline approach to performance measurement. Essentially this however is an acceptance of the traditional model of the transformational process with more effects recorded. Our argument is that this does not actually lead to corporate sustainability without a consideration of the distributional impact of the corporate activity. Thus, in our model none of the stakeholders are merely factors of production but are also affected by – and hence concerned with the results of corporate activity, as described through the transformational process. This is essentially a balancing model of corporate activity. In other words, we are stating for example that the conventional view of sustainability in terms of either using no more of a resource than can be regenerated or not limiting the choices of future generations9 – in other words stasis (Aras & Crowther, 2009b) – is neither a realistic nor an ethical model of sustainability. An ethical view of sustainability, predicated in a Utilitarian philosophy, would allow actions, as long as full evaluation of the consequences are made and as long as all stakeholders understand and accept the implications. Then it would be ethical behaviour if the net effect of summation of effects was positive. Thus, it could be acceptable to affect the environment and hence the possibilities for future generations if this condition was met. Part of our argument is that there are inevitable conflicts between the requirements and expectations of different stakeholders,10 but that these conflicts will be exacerbated as the implications of finite environmental resources become more overt. It is therefore apparent that the expectation of all stakeholders must be addressed and outcomes must be deemed acceptable – in other words satisficed (Simon, 1981) – by all in order to avoid these conflicts. Accounting, however, assumes that these stakeholders are merely resources to be utilised in the seeking of returns to investors – the second source of conflict between accounting and sustainability.

A TRADITIONAL VIEW OF ORGANISATIONAL ACCOUNTING Thus, although risk management, efficient management, regulation, international standards and corporate governance are all necessary for

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sustainability and for sustainable business (Aras & Crowther, 2009b), there are actually two discrete discourses concerning corporate sustainability which are operating in parallel with each other – as we described earlier. Although seemingly incompatible, both are actually based on an acceptance of a conventional view of the transformational process. Traditional accounting theory and practice assumes that value is created in the business through the transformation process and that distribution is merely concerned with how much of the resultant profit is given to the investors in the business now and how much is retained in order to generate future profits and hence future returns to investors. This is of course overly simplistic for a number of reasons. Even in traditional accounting theory it is recognised that some of the retained profit is needed merely to replace worn-out capital – and hence to ensure sustainability in its narrowest sense. Accounting of course only attempts to record actions taking place within this transformational process, and even in doing so regards all costs as things leading to profit for distribution. Thus, surplus value (in Marxian terms) can be transferred from the future of the person and extracted in the present. As people have been constituted as a commodified variable cost, they become merely a factor of production which can be exchanged for another factor of production, as the costs determined through the use of accounting legitimate. Thus, it is reasonable, through an accounting analysis, to replace people with machinery if more value (profit) can be extracted in doing so, and this has provided the imperative for the industrial revolution which has continued up until the present. Accounting is only concerned with the effect of the actions of an organisation upon itself, and so the effect of mechanisation upon people need not be taken into account. Thus, if mechanisation results in people becoming unemployed (or possibly unemployable), then this is of no concern – except to the people themselves. This of course is also an inevitable outcome from a system which is predicated in Utilitarian theory as the present economic system undoubtedly is. Arguably this is the root cause of many of the problems of overproduction and overconsumption existing alongside the commodification and exploitation of people – but this is another story which will be told elsewhere.

THE TRANSFORMATIONAL PROCESS REVISITED In order to explain our alternative approach to developing sustainable practice, we need to go back to the transformational process which describes

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corporate activity. This model assumes that inputs (of capital, labour and finance), through the employment of the operational factors of production (e.g. employees, suppliers etc.), are used to produce goods and services with a resultant profit. The implications of this conventional view of the transformational process are that the inputs can be freely acquired in the desired quantities and that the operational factors of production are commodified. We have therefore argued that the use of conventional accounting to a large extent is in direct opposition to the concept of sustainability. Our model of sustainable corporate activity seeks to resolve this into on model which recognises both the transformational process within a corporation but also the distribution of the benefits as being equally significant to sustainability. There are a number of problems with this economic view of corporate activity, encapsulated in the way that accounting for corporate activity has evolved.  Firstly, the economic view of corporate activity is that efficiency is all that matters – so economies of scale, deregulation of markets, globalisation etc.  Secondly, efficiency is always equated as cost reduction – producing at a lower financial cost because finance is a scarce resource.  Thirdly, cost reduction is sustainable – so business migrates around the world in search of ever lower costs of production – cheap labour and cheap raw materials.  And finally, substitution is always possible – labour by technology, one source of energy by another etc. These are all incorrect. The other main problem with the traditional economic view of corporate activity is the assumption that stakeholders are a part of the factors of production – to be used to provide the surplus which is distributed to the owners and investors of the corporation. So employees and suppliers are merely a part of the production process; the effects of corporate activity can be externalised to society at large with impunity; the environment is a free resource to be used for financial gain. And the future – also a key stakeholder – can be neglected. But it is still possible to talk about sustainable corporate activity. Let us return to the transformational process and redefine the terms. When we say capital, what we really mean is natural resources. Labour means people, while finance is unchanged.

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We accept that value is created through corporate activity, but a crucial part of this is the distribution of the effects – positive and negative – to all stakeholders, including society, the environment and the future. This does not of course actually lead to corporate sustainability without a consideration of the distributional impact of the corporate activity. Thus, in our model none of the stakeholders are merely factors of production but are also affected by – and hence concerned with the results of corporate activity, as described through the transformational process. A reconsideration of sustainability shows that when resources are limited, the way to manage sustainable development is through more efficient use of those resources. Thus, all corporations are practicing cost management and efficient operational management as a matter of course but also as a means of achieving sustainability. Conventionally, corporations grow by consuming more resources, but redefining the problem shows us that natural resources are finite and are being fully committed at present – if not actually being over-committed. So growth through the use of more natural resources is not possible. These are the scarce resources – not finance. Consequently, efficiency must be redefined away from financial efficiency and applied to the use of natural resources. Growth requires us to do more with less. So innovation, technology and R&D become more important. So we must redefine the transformational process to provide a more realistic description of the input resources used and the potential for substitution and to highlight that growth must come through technological improvement rather than through the use of more resources. The sustainable transformational process therefore is illustrated in Fig. 2.

Inputs:

Outputs:

Natural Resources (finite) Workers (variable) Finance (infinite)

Fig. 2.

Added value through activity

Goods & Services Surplus or Deficit

Distribution to Stakeholders

The Sustainable Transformational Process.

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Moreover, in our model none of the stakeholders are merely factors of production but are also affected by – and hence concerned with the results of corporate activity, as described through the transformational process. We deliberately use the term distributable sustainability in order to reflect one of the key components of this argument. That is, true sustainability depends not just upon how actions affect choices in the future but also upon how the effects of those actions – both positive and negative – are distributed among the stakeholders involved. A central tenet of our argument is that corporate activity, to be sustainable, must not simply utilise resources to give benefit to owners but must recognise all effects upon all stakeholders and distribute these in a manner which is acceptable to all of these – both in the present and in the future. This is in effect a radical reinterpretation of corporate activity. It is necessary to consider the operationalisation of this view of sustainability. Our argument has been that sustainability must involve greater efficiency in the use of resources and greater equity in the distribution of the effects of corporate activity. To be operationalised the effects must be measurable and the combination must of course be manageable. This can be depicted as a model of sustainability (Fig. 3). This acts as a form of balanced scorecard to provide a form of evaluation for the operation of sustainability within an organisation. It concentrates upon the four key aspects, namely:    

Strategy Finance Distribution Technological development

Manageable (strategic)

Measurable (financial)

Equitable (distributional)

Efficient (technological)

Fig. 3.

The Facets of Sustainability.

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Moreover, it recognises that it is the balance between these factors which is the most significant aspect of sustainability. From this a plan of action is possible for an organisation which will recognise priorities and provide a basis for performance evaluation. To summarise, sustainability requires a radical rethink and a move away from the cosy security of the Brundtland definition. We therefore reject the accepted terms of sustainability and sustainable development, preferring instead to use the term durability to emphasise the change in focus. The essential features of durability can be described as follows:  Efficiency is concerned with the best use of scarce resources. This requires a redefinition of inputs to the transformational process and a focus upon environmental resources as the scarce resource.  Efficiency is concerned with optimising the use of the scarce resources (i.e. environmental resources) rather than with cost reduction.  Value is added through technology and innovation rather than through expropriation.  Outputs are redefined to include distributional effects to all stakeholders.

CONCLUSIONS A conventional accounting view of corporations is that they are able to grow by acquiring more resources. Moreover, they are able to shed costs (and people) at will in order to conserve their capability in difficult times for future growth and development. In this chapter we have contrasted this view of corporation with the needs of sustainable development. In doing so we have developed a model outlining the circumstances in which such development is both possible and acceptable to all parties. In doing this we are not arguing for or against sustainable development (as others do) but merely acknowledging that it can be. Our central argument is that a radical rethinking of corporate accounting is essential in order to prioritise the key features of sustainability which are in conflict with the central tenets of accounting.

NOTES 1. Although some mines are currently being reworked for minerals which were previously discarded but are now considered valuable.

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2. And most probably any other parts of the world also – it would be instructive to correlate the presence of oil with conflicts. 3. In 1956 M. King Hubbert developed a model of oil production which showed that when the midpoint of oil reserves was reached, future production would slow down and less would be available. Although originally developed for US oil production, it has been shown to be equally valid globally. This midpoint is known as Hubbert’s Peak and has arrived or soon will arrive; at that point oil supplies start to get less with obvious implications in an environment in which demand continues to increase. 4. In other words, the assumption which was prevalent 30 years ago continues to be mainstream today also – that corporations need to develop and grow in order to continue to exist. 5. See Aras and Crowther (2008a). The claim regarding all corporations engaging with sustainability is based on their research regarding all firms in the FTSE100. 6. Essentially the only purpose of traditional accounting is to record the effects of actions upon the organisation itself. 7. Indeed accounting privileges finance and equated efficiency with the use of minimum finance, and therefore with cost minimisation in the short term. 8. This is based on the outmoded idea of knowledge management – meaning the codification of knowledge so that unskilled people can simply follow the manual (Nonaka & Takeuchi, 1995). 9. As defined in the Brundtland Report (WCED, 1987) and used as the standard definition of sustainability. This report is also used as the standard work to justify that sustainable development is possible without significant change – a flawed argument as shown in this chapter. 10. Balancing these conflicting requirements and expectation has of course always been one of the tasks of the managers of a corporation. Until recently, however, the environment has not been treated as one of these stakeholders and future generations are still not taken into account in this balancing, except in very rare circumstances.

REFERENCES Aras, G., & Crowther, D. (2007a). Sustainable corporate social responsibility and the value chain. In D. Crowther & M. M. Zain (Eds.), New perspectives on corporate social responsibility (pp. 119–140). Shah Alam, Malaysia: MARA University Press. Aras, G., & Crowther, D. (2007b). Is the global economy sustainable? In S. Barber (Ed.), The geopolitics of the city (pp. 165–194). London: Forum Press. Aras, G., & Crowther, D. (2008a). Governance and sustainability: An investigation into the relationship between corporate governance and corporate sustainability. Management Decision, 46(3), 433–448. Aras, G., & Crowther, D. (2008b). Corporate sustainability reporting: A study in disingenuity? Journal of Business Ethics, 87(Suppl. 1), 279–288. Aras, G., & Crowther, D. (2008c, Jan./Feb.). Towards equitable sustainability. Ivey Business Review. Retrieved from http://www.iveybusinessjournal.com/article.asp?intArticle_ID¼734 Aras, G., & Crowther, D. (2009a). Making sustainable development sustainable. Management Decision, 47(6), 975–988.

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Aras, G., & Crowther, D. (2009b). The durable corporation: Strategies for sustainable development. Farnham: Gower. Birnbeg, J. G. (1980). The role of accounting in financial disclosure. Accounting, Organizations & Society, 5(1), 71–80. Bower, T. (2009). The squeeze. London: Harper Press. Carter, C., & Crowther, D. (2000). Unravelling a profession: The case of engineers in a British regional electricity company. Critical Perspectives on Accounting, 11, 23–49. Clark, P. (1987). Anglo-American innovation. Berlin: Du Gruyter. Covaleski, M., & Aiken, M. (1986). Accounting and theories of organizations: Some preliminary considerations. Accounting, Organizations & Society, 11(4/5), 297–319. Crowther, D. (2002). A social critique of corporate reporting. Aldershot: Ashgate. Crowther, D. (2006). Standards of corporate social responsibility: Convergence within the European Union. In D. Njavro & K. Krkac (Eds.), Business ethics and corporate social responsibility (pp. 17–34). Zagreb: MATE. Daly, H. E. (1992). Allocation, distribution, and scale: Towards an economics that is efficient, just, and sustainable. Ecological Economics, 6(3), 185–193. Daly, H. E. (1996). Beyond growth. Boston, MA: Beacon Press. Deffeyes, K. S. (2004). Hubbert’s Peak: The impending world oil shortage. American Journal of Physics, 72(1), 126–127. Elliott, S. R. (2005). Sustainability: An economic perspective. Resources Conservations and Recycling, 44, 263–277. Fish, S. (1989). Is there a text in this class? The authority to interpret communities. Cambridge, MA: Harvard University Press. Gray, R. (1992). Accounting and environmentalism: An exploration of the challenge of gently accounting for accountability, transparency and sustainability. Accounting, Organizations & Society, 17(5), 399–425. Gray, R., & Bebbington, J. (2001). Accounting for the environment. London: Sage. Guiraud, P. (1975). Semiology. London: Routledge & Kegan Paul. Hart, S. L. (1997). Beyond greening: Strategies for a sustainable world. Harvard Business Review, 75(1), 66–76. Hart, S. L., & Milstein, M. B. (2003). Creating sustainable value. Academy of Management Executive, 17(2), 56–67. Hawken, P. (1993). The ecology of commerce. London: Weidenfeld & Nicholson. Jackson, N., & Carter, P. (1998). Labour as dressage. In A. McKinlay & K. Starkey (Eds.), Foucault, management and organization theory. London: Sage. Jacobs, M. (1991). The green economy – Environment, sustainable development and the politics of the future. London: Pluto Press. Johnson, H. T., & Kaplan, R. S. (1987). Relevance lost: The rise and fall of management accounting. Boston, MA: Harvard Business School Press. Kim, K. L. (1996). Caged in our own signs: A book about semiotics. Norwood, NJ: Ablex Publishing. Lovelock, J. (1979). Gaia. Oxford: Oxford University Press. Marsden, C. (2000). The new corporate citizenship of big business: Part of the solution to sustainability. Business & Society Review, 105(1), 9–25. Nonaka, I., & Takeuchi, H. (1995). The knowledge creating company. New York, NY: Oxford University Press.

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Ogden, S. G., & Anderson, F. (1999). The role of accounting in organisational change: Promoting performance improvements in the privatised water industry. Critical Perspectives on Accounting, 10, 91–124. Ortiz Martinez, E., & Crowther, D. (2005). Corporate social responsibility creates an environment for business success. In D. Crowther & R. Jatana (Eds.), Representations of social responsibility (Vol. 1, pp. 125–140). Hyderabad: ICFAI University Press. Reed, R., & DeFillippi, R. J. (1990). Causal ambiguity, barriers to imitation, and sustainable competitive advantage. Academy of Management Review, 15(1), 88–102. Rubenstein, D. B. (1992). Bridging the gap between green accounting and black ink. Accounting, Organizations & Society, 17(5), 501–508. Schmidheiny, S. (1992). Changing course. New York, NY: MIT Press. Simon, H. (1981). The science of the artificial (2nd ed.). Cambridge, MA: MIT Press. Sombert, W. (1915). The quintessence of modern capitalism. New York, NY: E. P. Dutton & Co. Spangenberg, J. H. (2004). Reconciling sustainability and growth: Criteria, indicators, policies. Sustainable Development, 12, 74–86. van Marrewijk, M., & Werre, M. (2003). Multiple levels of corporate sustainability. Journal of Business Ethics, 44(2/3), 107–119. WCED (World Commission on Environment and Development). (1987). Our common future. The Brundtland Report. Oxford: Oxford University Press. Welford, R. (1997). Hijacking environmentalism – Corporate responses to sustainable development. London: Earthscan. Zwetsloot, G. I. J. M. (2003). From management systems to corporate social responsibility. Journal of Business Ethics, 44(2/3), 201–207.

CHAPTER 2 THE GLOBAL FINANCIAL CRISIS: A FAILURE OF CORPORATE GOVERNANCE? Andrew Chambers The United Kingdom is a major player in the global financial markets and also has a reputation for leading-edge corporate governance. Lessons to be learnt from the UK experience are likely to have application globally. Let us start by considering the five pillars of UK corporate governance. First, there is the Financial Reporting Council (FRC) who elegantly wordsmith the UK Corporate Governance Code (previously termed ‘the Combined Code’) but, unlike their remit in the fields of financial reporting, actuarial affairs and external auditing, the FRC has no corporate governance enforcement powers. The FRC determines the standards for financial reporting, external auditing and actuarial affairs and, for each, the FRC monitors and enforces their application. The respective professional bodies are backup. There is no equivalent corporate governance professional body – as has now come about for remuneration consultants following recommendations first made by Sir David Walker (2010).1 Indeed, due to the discretionary character of most of the United Kingdom’s best practice for corporate governance, there is very little that could be enforced currently. The second pillar of corporate governance is the Financial Services Authority (FSA) which does not enforce the Code that is not contained within their Listing Rules. The FSA interprets its listing rules 9.8.5 and

Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 23–44 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003006

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9.8.62 as imposing merely a disclosure obligation with respect to both the principles and the provisions of the Code – despite the wording of this rule implying that the Code’s principles should be applied. It is true that for entities the FSA regulates, the FSA imposes particular standards of corporate governance. Whereas the FRC’s 2006 Code stated that listed companies should explain how they apply both the main and also the supporting principles of the Code, this was watered down to just the main principles in the 2008 Code, and now the FSA’s listing rule has been amended to bring it in line with this watering down. Is corporate governance less important than financial reporting, external auditing and actuarial affairs, that its oversight should be so light touch as to have little grip at all? Surely not! Over 50%, and rising, of the 100 largest economies in the world are companies, not countries. So the proper governance of companies is crucially important.3 In the wake of the financial crisis, governments, regulators, other market participants and even companies themselves have tried to pin much of the blame on the owners of companies. Indeed this has led to the FRC (2010a) producing the world’s first stewardship code for owners. It was Sir David Walker’s proposal, accepted by the FRC, that shareholder stewardship should be separated from the UK Corporate Governance Code and covered more fully by a separate Code, ratified by the FRC. But it is insufficient. It is moving the deck chairs and adding some more deck chairs as well. Sir David suggests that arrangements to monitor the extent of adherence to this Stewardship Code should be put in place by the FRC, but that this Code too should have only a ‘comply or explain’ status – which indeed is the case.4 At least this represents progress to monitoring (but not enforcing) one part of corporate governance. Almost all the enforcement burden is being dumped on the owners – the third pillar of corporate governance – on the basis that if shareholders are well informed they should and must make their voices heard. Privately, everyone knows it will always be an unequal contest. To pin the blame, and the responsibility to do better in future, upon shareholders is doomed to failure and will allow management to carry on as before – which they wish to do. Managements and boards hold most of the cards. High dependence on shareholders will never work since they have insufficient powers. At the same time as blaming owners for not taking enough interest in how their companies are run, the FRC is holding to the traditional line that directors, not shareholders, are responsible for the governance of their companies. Can you have it both ways? Whose company is it, anyway? In

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the current version of the UK Corporate Governance Code, the FRC (2010b) has dusted down and reproduced for the first time wording from the 1992 Cadbury Report, as follows: Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.

The fourth pillar of corporate governance is, or should be, the professions, notably external auditors. They have been hugely disappointing – with little motivation to take on extra work while they have been pampered by monopoly rights to practise auditing. Cadbury’s (1992) intention was that auditors would review all directors’ assertions on Code matters that were objectively verifiable. The Cadbury Report (1992) stated: Companies’ statements of compliance [with the Cadbury Code] should be reviewed by the auditors before publication. The review should cover only those parts of the compliance statement which relate to provisions of the Code where compliance can be objectively verified.

Since 2003, as set out in the Listing Rules, auditors have been expected to review only 9 of the now 52 provisions of the Code, and none of the 42 principles. The complexity of the Code grows with each update (as Fig. 1 indicates), but external auditor review has not been increased. Five of the original Cadbury provisions, which continued to be reviewed by the external auditors after the publication of the 1998 Combined Code, are now no longer reviewed. The additional provisions that are now reviewed do not represent audit expansion into other areas – rather, they are a consequence of audit committees being addressed by a larger number of provisions commencing with the 2003 Code; and so the overall result has been a considerable narrowing of auditor attention. Gone is auditor review of provisions on (a) a formal schedule of matters reserved to the board (2003: A.1.1), (b) directors taking independent advice (2003: A.5.2), (c) the selection of non-executive directors (2003: A.7.1), (d) their terms of appointment (2003: A.7.2), (e) their service contracts (Cadbury: 3.1) and (f) non-executive determination of executive remuneration (Cadbury 3.3). In the light of (a) the development of auditing standards on assurance engagements, (b) the new possibility of limiting auditor liability and (c) the

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Main principles

Supporting principles

Principles

Provisions

Fig. 1.

General Addressed to institutional investors Total General Addressed to institutional investors Total General Addressed to institutional investors

Cadbury Code

Greenbury Code

Combined Code

Revised Combined Code

1992

1995

1998

2003, 06 & 08 14 3

UK Corporate Governance Code 2010 18 0

0

0

0

17 21 5

18 24 0

0

0

0 14 3

26 35 8

24 42 0

Total

0

0

17

43

42

General Addressed to institutional investors

19 0

39 0

44 3

48 0

52 0

Total

19

39

47

48

52

The Growing Complexity of the UK Corporate Governance Code.

Sarbanes-Oxley s404 experience of auditors of US quoted companies, it should be possible for external auditors to assume an expanded role in providing assurance on directors’ corporate governance assertions. Many of both the principles and provisions of the Code are wholly or partially verifiable independently. It is claimed there is little or no appetite for external auditor review on the part of companies, or investors or auditors, but it could make an effective contribution to enhancing corporate governance. The fifth pillar of corporate governance is statute and mandatory regulation. Here the UK approach has been disappointing. Even when, rarely and against vested interests, aspects of corporate governance have become mandatory by statute or by regulation, they have been successfully fabricated so as to lack teeth. Even when statute and regulation come into play, the imperative seems to have been to build in enough ‘wiggle room’ for companies to be able to ignore anything they wish to ignore. You may remember the fuss in the United Kingdom when the EC suggested that audit

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committees should be made mandatory for public interest entities. The United Kingdom’s rearguard action led to a paragraph in the 2006 Directive which effectively avoided the mandatory requirement.5 Member States may allow or decide that the provisions laid down in paragraphs 1 to 4 shall not apply to any public-interest entity that has a body performing equivalent functions to an audit committee, established and functioning according to provisions in place in the Member State in which the entity to be audited is registered. In such a case the entity shall disclose which body carries out these functions and how it is composed. (bolding added)

PUBLIC INTEREST ENTITIES True to form, it is no surprise that ‘public interest entity’ (which, by EC requirement, must include all listed companies but other entities only at the discretion of individual member states) has been defined in the United Kingdom in the minimal permissible way – it excludes large privately held companies, mutuals, large professional partnerships and so on – about all of which the public has a real interest – as the current financial crisis has clearly shown. Think, for instance, of the need to widen choice in the audit market.

COMPLY OR EXPLAIN The Walker Review tells us that five of the six main areas of reservation expressed by contributors following Sir David’s draft report were in effect calls by the contributors for Sir David to water down his draft proposals.6 Most contributors to both the Walker and the 2009/10 UK Corporate Governance Code reviews have been companies or their proxies. A nonbinding approach to corporate governance, with so much wiggle room that almost any best practice may be got around, suits them well. The wider societal interest has been insufficiently articulated and taken account of. So, a key question is to whom should the FRC listen? Should the FRC lead from the front or go no further than a lowest common denominator broad consensus approach? Their progress report (2009) on their 2009 consultation about the planned 2010 Code was not promising. They said: Almost all commentators y said that they continue strongly to support the principlesbased approach of the Code and the flexibility provided by ‘comply or explain’, and that they would not want the perceived advantages of this approach to be lost. For this reason the FRC intends to adopt three guiding principles when assessing the lessons to

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ANDREW CHAMBERS be learnt from the financial crisis and the case for changes to the Code and its accompanying guidance during the next phase of the review. These are:  Where there is a demonstrable need for best practice to be clarified or strengthened, this will be addressed either through amendments to the Code or additional, nonbinding guidance; y and  We will seek to avoid an increase in the overall level of prescription in the Code and to preserve its principles-based style.

‘Comply or explain’ is appropriate in the sense that a company should explain if it does not comply. But discretion on compliance should not be as broad as it is. Consideration should be given to making some current ‘comply or explain’ corporate governance provisions mandatory; and to requiring shareholder approval for departure from any aspect of the Corporate Governance Code. Some might say that an approach with more mandatory rules has been shown, as with the US experience, not to be more effective. But how much worse might the US experience have been without their Securities & Exchange Act, without their Sarbanes-Oxley Act (with penalties of up to a $5,000,000 fine and prison for 20 years)7 – and so on? Sir Adrian Cadbury supported a principles-based approach to corporate governance, rather than a rules-based approach. He has argued that rules can be ‘got round’ more easily than principles. For instance, if a rule stated that the chairman should not also be the chief executive, then a company could observe the rule by designating one person as the CEO and another as the chairman, even though the reality might be different. On the other hand, if there were a principle that excessive concentration of power at the top of the company should be avoided, then such a principle might be harder to avoid. However, this approach does require that a company discloses how it applies the principles and it also requires the principles to be mandatory. For the United Kingdom, in these regards, disclosure has been inadequate and applying the principles is not mandatory. Indeed, by their nature, principles would be harder than rules to make mandatory.

APPLY OR EXPLAIN? Related to this, the suggestion (already adopted in the Netherlands and by King III in S. Africa) is that it should be ‘apply (the principles) or explain’ rather than ‘comply (with the provisions) or explain’. This is not a good move in the right direction as there is even more wiggle room for a company

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to say they apply a principle when they probably don’t. For instance, almost every company would be likely to say they avoid excessive concentration of power at the top of the business, regardless of the reality. So it seems that a change to ‘apply (the principles) or explain’ would make corporate governance even more light touch, if that were possible.

WIGGLE ROOM It would be surprising indeed if companies or their suppliers supported the concept of more robust corporate governance requirements. It seems they will readily agree to any corporate governance guidelines so long as they are toothless and do not fetter their discretion to do whatever they like. We should be asking the question: ‘Who are the real owners of corporate governance?’ The extent of wiggle room is truly amazing. The phraseology of the UK Corporate Governance Code allows companies to claim full compliance with a number of provisions even when they are not complying with the best practice expressed in those provisions. In such cases, therefore, a company is complying with the Code even if they are not complying with what the Code expresses as best practice. Examples of excessive flexibility within the Code, allowing a company to claim compliance when it deviates from best practice, include the following (references to the 2010 Code):  A company may be fully compliant with provision A.3.1 even if the chairman was not independent when appointed to the chairmanship.  A company may be fully compliant with provision B.1.1 when it judges a director to be independent notwithstanding that the director ‘fails’ to meet some of the stated independence ‘criteria’.  A company may be fully compliant with provision D.1.3 even when the remuneration of its non-executive directors includes share options.  A company may be fully compliant with provision C.3.5 even if it has no internal audit function.  A company may be fully compliant with provision C.3.6 when the board does not accept the advice of its audit committee on the appointment, reappointment or removal of the external auditors. This would not be possible for a company quoted in the US: s301 of the Sarbanes-Oxley Act (2002).  Any listed company is fully compliant with provision C.3.2 (second bullet) even if it has no risk committee of the board composed of independent directors.

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Even when statute and regulation come into play, the imperative seems to have been to build in enough wiggle room for companies to be able to ignore anything they wish to ignore. There is no need to get shareholder approval if a company wishes to disregard a main or supporting principle or a provision. There is no disciplinary oversight by the FSA of listed companies in general (other than those it regulates) except to enforce disclosure standards. Then there is the advisory (‘non-binding’) nature of members’ votes on their companies’ remuneration policies which the Walker Review has recommended should remain non-binding.8 This was a classic example of apparently tightening up corporate governance but in fact not doing so. Since 2002 there has been a statutory requirement that shareholders vote on the remuneration policy of the board,9 but the vote is just advisory, and this is now within the 2006 Companies Act but still advisory only. In 2009 the almost 60% vote against by Shell’s shareholders did not modify the payment of full bonuses to Shell’s top executives who had failed to meet their performance targets. Also in 2009 the 90.4% vote against RBS’s remuneration policy did not modify the packages given to the new top team; and the equivalent vote at the 2008 AGM was unable to impact the large severance payment received by Sir Fred Goodwin who left the company shortly afterwards. The right of shareholders to vote on the remuneration committee report goes further than owners’ powers in most other areas, but it doesn’t work. Walker has proposed that a vote of less than 75% in favour of the remuneration report should mean that the chair of the remuneration committee would be obliged to stand for re-election at the next AGM – a tentative step in the right direction but not expected to achieve very much, as Sir David himself infers.10 Indeed, the 2010 Code counsels that all directors of FTSE 350 companies should be subject to annual election11 – a controversial change as it may encourage short-termism.

WATERING DOWN Was it a slip of the pen that the FRC’s consultation on the 2010 Code revision project referred to it as the 2007 Code when its date is June 2008 – nine months after the UK government supported Northern Rock, and three months before Lehman Brothers collapsed? If any time were inopportune to water down the Code, in two detailed and one serious general way, surely it was June 2008. In detail, the Code was changed to endorse company

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chairmen in some circumstances belonging to audit committees and also filling the chairman role for more than one FTSE100 company. The more serious, general change was the end of the guidance that companies should explain in their annual reports their application of the 26 supporting principles in the Code.12 A new cloud has appeared on the horizon which is a further watering down. The FSA’s old two-tier listing structure (‘Primary’ and ‘Secondary’) continues but is re-labelled so that ‘Primary’ becomes ‘Premium’ and ‘Secondary’ becomes ‘Standard’.13 For years ending after 31 December 2009, the UK Corporate Governance Code applies to overseas ‘premium’ companies for the first time. Prior to this new requirement, 45 out of 171 overseas primary companies already voluntarily observed the Combined Code, so this is a small improvement. But ‘Standard’ tier companies are now required to observe only the minimum standards required by EU directives, whereas ‘Premium’ tier have to observe what are termed ‘super-equivalent’ standards (including the UK Corporate Governance Code etc). Companies within the ‘Standard’ tier still have to prepare a corporate governance statement, but it need not be in line with the Corporate Governance Code. Does this mean it will become ‘standard’ practice to ignore the UK Corporate Governance Code? ‘Standard’ tier is now available for the first time to UK listed companies whereas previously it was for overseas companies only – hence the watering down. Companies opting for ‘standard’ tier will not be included in the FTSE UK Index Series, and so the Stock Exchange and the FSA do not expect many to exercise this new opportunity to opt into ‘Standard’ tier as they would then lose market visibility. There are 15 indices in the FTSE UK Index Series – including the FTSE100, FTSE250 and the All-Share Indices. The All-Share Index represents 98–99% of UK market capitalisation and is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices.

VALUES AND ETHICS, BEHAVIOUR AND PROVISIONS, MONITORING AND ENFORCEMENT Sir David says: y in an array of closely related areas in which prescribed standards and processes play a necessary but insufficient part y behavioural improvement is more likely to be achieved through clearer identification of best practice and more effective but, in most areas, nonstatutory routes to implementation so that boards and their major owners feel ‘ownership’ of good corporate governance. (bolding added)

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Sir David’s report overlooked the fundamental importance of values and ethics,14 relying instead on better articulation of discretionary corporate governance best practice as the means to improve behaviour. This is whistling in the wind. This UK discretionary code approach to corporate governance, dating back to 1992, with five amended versions since 1992, has largely failed to achieve the required behavioural changes. The 2010 fine-tuning of a failed approach will make no significant difference. I am not convinced, as Sir David is convinced, that more corporate governance regulation would hold little prospect of improving behaviour. We don’t know. It hasn’t been tried. Sir David said: The behavioural changes that may be needed are unlikely to be fostered by regulatory fiat.

Inconsistently, with respect to finance, Sir David supported tougher capital and liquidity requirements and a tougher regulatory stance on the part of the FSA.

He considered that the ‘comply or explain’ approach to guidance and provisions under the Combined Code provides the surest route to better corporate governance practice. (bolding added)15

Why tough, mandatory regulation on financial matters but not for corporate governance – when we have tried repeatedly to get the ‘comply or explain’ approach to work effectively? Our UK Corporate Governance Code has main principles, supporting principles and provisions. By analogy, the main principle on our roads is ‘drive safely’. A supporting principle is that ‘speed kills’. Careful enunciation, refinement and communication of these principles is important, but without rules, monitoring and sanctions there would be carnage on our roads, just as there has been carnage in our financial institutions and in other entities. At one end of the continuum, improving drivers’ values and ethics might impact positively on road behaviour. At the other end of the continuum, enforced rules can change behaviour and provide better assurance that important principles are observed.  Behaviour without values and ethics is unprincipled and unpredictable.  Behaviour, without effective oversight, risks being self-serving and harmful.

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Using this driving analogy, some drivers would drive safely even if there were no speed limit, no monitoring and no sanctions. Likewise, some companies would be committed to high standards of corporate governance. It is the other companies (and indeed even the best of companies when they have their backs to the wall) that are the problem and why mandatory rules, monitoring and sanctions have their place. The only problem with that (as with speed limits, monitoring and sanctions which might prevent a driver behaving optimally on an empty dual carriageway at 3 am) is that mandatory corporate governance requirements might sometimes impede optimal corporate performance. But we haven’t had optimal corporate performance, have we? Sub-optimal performance resulting from mandatory regulation where necessary is a smaller risk compared to the risk arising from having no rules, no monitoring and no enforcement. Certainly corporate governance principles are crucially important. But then enforceable rules (developed from carefully defined principles) need to be introduced to raise the probability that the principles will be followed by those who may be reluctant to do so, or by those who would claim to apply the principles (especially under an ‘apply or explain’ regimes) whereas in reality they did not. To mix metaphors, the UK approach to corporate governance is to prescribe the patient with a placebo. Over the years we have refined the placebo again and again, but it is still a placebo. Arguably it contains trace elements of active ingredients. But it has failed to work. It can be strengthened by more prescription. And we are a long way from prescribing a dosage that would be toxic or would have significant harmful side effects, as Sir David Walker feared.16

OWNERS AND BOARDS IN CHARGE? It is now apparent that ‘comply or explain’ means UK corporate governance is so light touch as to have hardly any grip at all, and influential groups would like to keep it that way. The rights of owners are muted. The management holds most of the cards. The boards are under the thumb of top management, and shareholders lack sufficient rights to exercise effective control. The Exocet option of voting directors off the board will rarely be a prudent course for shareholders to take, and their other enforcement options are very limited. And, through greed, owners are often as guilty as their companies of encouraging excessive risk-taking.

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It is disingenuous to expect more active owners to solve our corporate governance problems without giving owners the powers to do so. There is a lack of realism in pinning on owners most of the responsibility to enhance corporate governance. We are given the impression that all would be well if only shareholders were more actively engaged. This won’t work. To start with, the interests of owners are not necessarily more responsible or more prudent than those of managements and boards. And the powers of owners are insufficient to call boards to account. There are no significant proposals to increase shareholder powers. The Walker Review contained proposals to encourage more active involvement of shareholders of large financial institutions – for instance:  the annual re-election of the chairman of the board;  the chairman of the remuneration committee to stand for re-election the following year if the remuneration committee’s report gets less than 75% support of those voting;  any executive remuneration above the median of executive board members’ remuneration to be disclosed and justified in the remuneration committee’s report;  disclosure if any senior executives have received or may receive enhanced pension benefits; and  that the FRC, with an extended remit, should develop a Principles of Stewardship Code for institutional investors and fund managers. How many of these proposals will be taken forward, and whether they will have any bite, still remain open questions.

RISK MANAGEMENT AND INTERNAL AUDIT Some may recall the UK’s Chancellor of the Exchequer (2008) castigating Northern Rock’s board in these terms. He said: Far more attention needs to be paid to risk taking, by board members. It really is quite extraordinary that boards themselves didn’t more fully understand what risks they were allowing their banks to be exposed to. y The first line of defence, not just for shareholders but for everyone else, is to make sure that boards are up to the job. Now I think the regulatory system needs to ask some serious questions to ensure that people have the risk monitoring measures in place. Northern Rock didn’t, for example – they weren’t nearly as robust as they should have been.

In passing, it is interesting to note that a 2009 study (Nestor & Ladipo) found that banks perform better when the board chairmen have banking

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experience, which was a Walker recommendation, though watered down in his final report following protests from chairmen who failed to come up to the mark.17 Walker also recommended increased time commitment from non-executive directors – between 30 and 36 days for a major bank – and that chairmen of bank boards should devote at least two-thirds of their fulltime to their chairmanship duties. Both these recommendations are at best only marginal increases over what has on average applied in the past to medium and large companies of all sorts. Walker further recommended that board evaluations might be less frequent but should be more rigorous, with external facilitation and explained in the annual report. Sir David recommended that risk management must be strengthened. Sir David is, however, behind best practice in recommending that large financial institutions have board risk committees comprising only a majority of nonexecutive directors and with the chief financial officer being a possible member.18 The FRC’s 2008 and 2010 Corporate Governance Code’s equivalent recommendation is that all members of a board’s risk committee should be independent (not merely) non-executive directors, but the Code only supports having a board risk committee if the audit committee does not subsume those responsibilities. The Corporate Governance Code does not go so far as Sir David in recommending that all large, financial companies should have a board risk committee separate from its audit committee.19 The move to establish risk committees of boards, especially in financial institutions and other ‘systemic risk’ entities, is a significant development. Note that these are to be board committees (largely or exclusively comprising non-executive directors) rather than risk committees at executive level which are often well established. It was a feature of the global financial crisis that boards were insufficiently on top of the risks that their companies were running. We should, however, be aware of the risk that setting up a board committee can, unless the board is careful, mean that important matters within the remit of the committee may be shunted across to the committee and thereafter neglected by the board itself – a sometimes dysfunctional characteristic of audit committees, for instance. The FRC suggested to the House of Lords Inquiry into concentration in the audit market (and this was adopted as an Inquiry recommendation) that outside advice to board risk committees should be obtained from a party other than the company’s external auditors so as to encourage the use on ‘non-Big 4’ firms by large companies.20 Mr. Griffith-Jones of KPMG told the Inquiry that ‘to mandate the auditors out of the loop because the risk advisors have to be, as it were, not the auditor would be a mistake; we need to be careful with the definitions we use. y’21 One was immediately put in

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mind of the wiggle room in the intricate wording in the Auditing Practices Board’s Ethical Standards for Auditors which has been used to justify auditors providing non-audit services such as internal auditing for their audit clients, as with KPMG’s work on behalf of Rentokil Initial. The ‘small print’ does indeed matter. During the press conference launching the report, the Committee chairman suggested that the ‘Big 4’s’ time in front of the Committee was not their finest hour. Sir David also recommended that the removal of the chief risk officer should have the prior agreement of the board and that the Chief Risk Officer’s (CRO’s) remuneration should be approved by the chairman of the board or the chairman of the board’s remuneration committee. Sir David recommended that the CRO should have a status of total independence from individual business units and should serve the main board and its risk committee. Sadly, Sir David went along with the view that the CRO may have an internal reporting line to management. It would have been good to have seen stronger arrangements recommended – for both CROs and for internal audit. More specifically that internal audit should be mandatory and regarded as a cost of running the board; providing overall assurance to the board on governance processes, risk management and internal control; and reporting to the chairman of the board (possibly via an independent company secretary) both functionally and also for pay and rations. He who pays the piper calls the tune. Sir David misunderstood and understated the role of internal audit in the contemporary world, which we address later. Risk management and internal audit functions of companies in all sectors should be regarded as costs of running the board and these functions should report on their work and also for ‘pay and rations’ to the board or to its independent chair, so that boards thereby receive more of the assurance they need, independent of management. The board’s assurance vacuum is an acute issue. This would not diminish the quality of assurance that risk management and internal audit would be able to give to management at all levels. Assurance is strengthened if it is provided by a party who is independent of the receiver of that assurance. In 2009 ACCA recommended that internal audit should be mandatory for listed companies which The Institute of Internal Auditors (United Kingdom and Ireland) did not as they were concerned about challenging the ‘comply or explain’ UK approach. It should indeed be mandatory for boards of public interest entities to receive assurance, independent of management, that (a) the policies of the board are being implemented by management and (b) significant internal and external risks to the company have been identified and are being mitigated.

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Addressing the same concern, Lord Myners (Financial Times, 2009) quite recently suggested that companies should be encouraged to establish independent ‘secretariats’ serving nonexecutive directors to reduce dependence on information provided by company executives and auditors.

It was Lord Smith of Clifton who said in a House of Lords debate, on 8 December 2008 that crucially, boards, and particularly non-executive directors need assurance independent of management which requires a much greater enhancement of the role of internal audit

and then, in a further debate eight days later, that the function of internal audit must be strengthened.

It is interesting to speculate why internal audit has emerged virtually unscathed from the crisis. Was it because they did a good job, or that there were low expectations about their remit? The internal auditing profession lowered expectations so that internal auditors would emerge unblamed. Being cynical, at least this means there is not an expectations gap for internal auditors, as there is for external auditors. That Sir David saw internal audit as no part of the solution speaks volumes. He said: Discussions in the context of this Review process suggest that failures that proved to be critical for many banks related much less to what might be characterised as conventional compliance and audit processes, including internal audit, but to defective information flow, defective analytical tools and inability to bring insightful judgement in the interpretation of information and the impact of market events on the business model22 (bolding added)

But surely internal audit has a role in identifying and communicating to the board ‘defective information flow, defective analytical tools and inability to bring insightful judgement in the interpretation of information and the impact of market events on the business model’. By persuading Sir David that the global financial crisis was others’ fault, the profession of internal auditing lost a once-in-a-generation opportunity to enhance their role for the benefit of investors, other stakeholders, boards of directors and indeed society generally. The field has been left wide open for chief risk officers to fill the board’s assurance vacuum at internal audit’s expense. While Sir David’s recommendations on the CRO are welcome, he addressed inadequately how boards should obtain the assurance they need that the policies of the board are being implemented by the management and that there are no banana skins round the corner, known or not to

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the management, over which the company may slip in the future. And external stakeholders, including shareholders, also need better, more comprehensive assurance. It was Paul Moore, head of regulatory risk at HBOS from 2002 until he was made redundant in 2004, who said: people like him need to report direct not to executive management but to non-executives whose job it is to rein in management.23

See also Kadabadse, Moore, and Associates (2010). I find it interesting to note that Indian Corporate Governance Voluntary Guidelines (2009) says: In order to ensure the independence and credibility of the internal audit process, the Board may appoint an internal auditor and such auditor, where appointed, should not be an employee of the company.

Very few anticipated the crisis. Paul Moore, head of regulatory risk at HBOS from 2002 until he was made redundant in 2004, famously chided HBOS at the Treasury Select Committee for their excessive sales culture, but the complete collapse of the securitisation and wholesale money markets was seen as a risk by very few. In September 2008 Lord (Eddie) George, previously Governor of The Bank of England and now sadly deceased, said he knew of nobody who saw the sudden freezing up of the wholesale markets. Certainly the auditors missed it. ‘What value audit?’, as the Treasury Select Committee asked!

EXTERNAL AUDIT Perhaps there is a need for the external auditing profession, regularly and collectively, to assess systemic risk and then for external auditors to take account of that assessment when formulating their audit opinions? If that were so, a proportion of the audit assurance underpinning an audit opinion would be derived from access by the audit practitioner to best quality assessment of systemic risk undertaken by the profession as a whole. The medical profession works in this way. And, incidentally new company law in India is likely to exclude the external auditor from providing internal audit services.24 The wiggle room in the APB’s Ethical Standards for external auditors has allowed the head of audit at one Big-4 firm to contend that they are absolutely clear that also providing the internal audit services for one of their external audit clients ‘falls fairly and squarely within what is expected of the ethical

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standards of the Auditing Practices Board.’25 The July 2011 annual report of the Audit Inspection Unit gave this arrangement the Audit Inspection Unit’s (AIU’s) approval. After Arthur Levitt was made chairman in 1993, the SEC became increasingly concerned about auditor independence through increased inroads into non-audit work. The accountancy profession in turn became increasingly concerned about the SEC. Lord Sharman, former chairman of KPMG International, issued a challenge at Institute of Chartered Accountants in England & Wales’s (ICAEW’s) annual dinner in June 2000. He said: I say to chairman Levitt: get your tanks off our lawn.

Well, Arthur Levitt resigned prematurely a few months later.26 Enron collapsed a few months thereafter.27 Arthur Andersen had provided many non-audit services to Enron, their audit client, including most of Enron’s internal auditing. Then, in a short space of time, we had the Sarbanes-Oxley Act of 2002 which outlawed most non-audit services being provided by a US issuer’s external auditors. In the United Kingdom the FRC’s Auditing Practices Board devised some too clever ethical standards so that audit firms could continue to provide non-audit services where they would otherwise be conflicted. And in the United States, the Public Company Accounting Oversight Board (PCAOB), set up by the Sarbanes-Oxley Act with many of their staff coming from the technical departments of large public accounting firms, devised an unnecessarily elaborate audit response to s404 of the Act, allowing Tony Blair (2005) to say: Sarbanes-Oxley has provided a bonanza for accountants and auditors, the very professions thought to be at fault in the original scandals.

CONCLUSION In conclusion, it has been said that greed is good28 (Gekko, 1987) – if so, we have had too much of a good thing. Greenspan (2003) said that it is not that folk have become more greedy, but that the avenues to express greed have become much greater. Perhaps Greenspan was being too sanguine about human nature. Certainly, many interested parties are currently demonstrating their determination not to close off Greenspan’s avenues. Sir David Walker pointed out that corporate governance has failed.29 This is the broad consensus, with which the FRC (2009) concurred in their

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2009 progress report on their Combined Code consultation. Corporate governance failed to prevent the crisis. Corporate governance failed to prevent dysfunctionalities that resulted in the crisis. It is alarming that, in keeping with this widely held view that corporate governance has failed, the changes being made are so anodyne as to have no prospect of succeeding. Some may say that no approach to corporate governance could have succeeded in preventing the crisis. How can we know that, when we persist in persevering with a failed approach and when there are untried approaches which common sense suggests could succeed much better?

NOTES 1. Recommendations 38 and 39, and Annex 12 (Draft Walker Report in July 2010). 2. Listing rules 9.8.5 and 9.8.6: ‘(5) a statement of how the listed company has applied the Main Principles set out in the UK Corporate Governance Code, in a manner that would enable shareholders to evaluate how the principles have been applied;’ ‘(6) a statement as to whether the listed company has: (a) complied throughout the accounting period with all relevant provisions set out in the UK Corporate Governance Code; or (b) not complied throughout the accounting period with all relevant provisions set out in the UK Corporate Governance Code and if so, setting out; (i) those provisions, if any it has not complied with; (ii) in the case of provisions whose requirements are of a continuing nature, the period within which, if any, it did not comply with some or all of those provisions; and (iii) the company’s reasons for non-compliance.’ 3. Calculated based on value-added which is a similar basis to the gross domestic product of nations which is used in this comparison. Year 2000 data had it as 51/49; by 2004 it was 53/47. (http://www.corporations.org/system/top100.html, accessed on 12 January 2012). 4. The Walker Review, pp. 17 and 18: Recommendations 17 and 18. 5. UK lobbying led to the addition of this paragraph 5 to Article 41, Chapter 10 of The 8th Directive, European Union, 2006 (Subject: Directive of the European Parliament and of the Council on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council. Directive 84/253/EEC [to be found in 9.6.2006, Official Journal of the European Union, L 157/103]). 6. The Walker Review, pp. 10 and 11.

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7. s906 of The US Sarbanes-Oxley Act (2002) introduced these maximum penalties for lapses in corporate governance certification responsibilities, also introduced by the Act. 8. The Walker Review, p. 119. 9. The seven Schedule B Provisions of the 1998 Combined Code were omitted from the 2003 Combined Code in view of the separate regulations which had come into force: Directors’ Remuneration Report Regulations 2002, SI 2002/1986. Initially a statutory instrument attached to the 1985 Companies Act, the requirement is now within the 2006 Companies Act. 10. The Walker Review, p. 119. 11. Provision B.7.1. 12. Paragraph 3 of the preamble to the 2008 Combined Code read (bolding added): ‘The Listing Rules require UK companies listed on the Main Market of the London Stock Exchange to describe in the annual report and accounts their corporate governance from two points of view, the first dealing generally with their adherence to the Code’s main principles, and the second dealing specifically with non-compliance with any of the Code’s provisions. The descriptions together should give shareholders a clear and comprehensive picture of a company’s governance arrangements in relation to the Code as a criterion of good practice.’ The equivalent paragraph in the 2006 Preamble started: ‘The Code contains main and supporting principles and provisions. The Listing Rules require listed companies to make a disclosure statement in two parts in relation to the Code. In the first part of the statement, the company has to report on how it applies the principles in the Code. This should cover both main and supporting principles.’ 13. Extracts from Listing Rules: 9.8.6R 31/12/2009

In the case of a listed company incorporated in the United Kingdom, the following additional items must be included in its annual financial report: y (5) a statement of how the listed company has applied the Main Principles set out in Section 1 of the Combined Code, in a manner that would enable shareholders to evaluate how the principles have been applied. (6) a statement as to whether the listed company has: (a) complied throughout the accounting period with all relevant provisions set out in Section 1 of the Combined Code; or (b) not complied throughout the accounting period with all relevant provisions set out in Section 1 of the Combined Code and if so, setting out: (i) those provisions, if any it has not complied with; (ii) in the case of provisions whose requirements are of a continuing nature, the period within which, if any, it

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LR 9.8.7 06/04/2010

An overseas company with a premium listing must include in its annual report and accounts the information in LR 9.8.6R (5), LR 9.8.6R (6) and LR 9.8.8R (9).

LR 9.8.7A 06/04/2010

(1) An overseas company with a premium listing that is not required to comply with the requirements imposed by another EEA State that correspond to DTR 7.2 (Corporate governance statements) must comply with DTR 7.2 as if it were an issuer to which that section applies. (2) An overseas company with a premium listing which complies with LR 9.8.7 R will be taken to satisfy the requirements of DTR 7.2.2 R and DTR 7.2.3 R but (unless it is required to comply with requirements imposed by another EEA State that correspond to DTR 7.2) must comply with all of the other requirements of DTR 7.2 as if it were an issuer to which that section applies.

LR 9.8.9 01/07/2005

The requirements of LR 9.8.6R (6) and LR 9.88.8 R relating to corporate governance are additional to the information required by law to be included in the listed company’s annual report and accounts.

DTR – Refers to the FSA’s Disclosure and Transparency Rules. EEA – The European Economic Area comprising EU member states and Norway, Iceland, Lichtenstein and (for some purposes) Gibraltar. 14. ‘Values’ gets just two incidental mentions, once each in Annexes 4 (p. 145) and 12 (p. 172). ‘Ethics’ is referred to once in a quoted comment from a contributor, which The Walker Review did not fully endorse; and once in Annex 2 to acknowledge that the Institute of Business Ethics contributed to the review. 15. The Walker Review, p. 11; see also p. 6, bolding added. 16. The Walker Review, p. 10. 17. The final version of the Walker Review report allowed that leadership qualities could be an acceptable alternative to financial acumen for a chairman of a financial institution. 18. The Walker Review, p. 95. 19. The Walker Review, Recommendation 23. 20. After eight months of this Inquiry, the House of Lords Select Committee on Economic Affairs published their report on 30 March 2011. The Committee considered that while national measures to address the audit oligopoly will be insufficient, the United Kingdom is in a position to take a lead. The pattern is that the government responds to the House of Lords report and a debate is also held in the House of Lords – both within two months of the report’s appearance. The government’s response, from DBIS, is at http://www.publications.parliament.uk/pa/ ld201012/ldselect/ldeconaf/157/157.pdf and is also available in hard copy. The Financial Reporting Council (FRC) responded to the Committee on 30 June 2011 (http://www.frc.org.uk/publications/pub2597.html). Late 2011, in response to a

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recommendation of the House of lords Committee, the Office of Fair Treading made an official referral of the audit profession to the Competition Commission, having satisfied themselves that there were available potential remedies to the perceived problem of audit market concentration. 21. Q256. 22. The Walker Review, p. 93. 23. Reported on BBC Radio 4 Today programme, 30 October 2008. 24. The Companies Bill, m2009 s127 (http://www.mca.gov.in/Ministry/actsbills/ pdf/Companies_Bill_2009_24Aug2009.pdf) 25. KPMG now does most of Rentokil Initial’s internal auditing. ‘We are absolutely clear that this falls fairly and squarely within what is expected of the ethical standards by the Auditing Practices Board.’ (Oliver Tant, KPMG’s head of audit, quoted in Accountancy Magazine, September 2009, p. 8). 26. Arthur Levitt resigned as chairman of the SEC in February 2001. 27. Enron collapsed in November 2001. 28. Gordon Gekko said: ‘Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.’ 29. The Walker Review, p. 9.

REFERENCES Blair, T. (2005, May, 26). Speech on compensation culture delivered at the Institute of Public Policy Research. University College, London. Retrieved from http://www.number10. gov.uk/output/Page7562.asp Cadbury, S. A. (1992). Report of the Committee on the Financial Aspects of Corporate Governance (‘The Cadbury report’). Gee & Co., London [The third recommendation at p. 54]. Chancellor of the Exchequer Alistair Darling. (2008). Downing Street press conference, 13 October, answering a question. Financial Times. (2009). Myners urges ‘radical’ shake-up of boards. Financial Times, 6 April. FRC. (2009, July). Second Consultation Review of the Effectiveness of the Combined Code. Financial Reporting Council. Retrieved from http://www.frc.org.uk/documents/pagemanager/frc/ Combined_Code_2009/Web_changes_to_2009_REview_of_the_Combined_Code_July_ 2009/Combined%20Code%20review%20progress%20report%20July%202009.pdf FRC. (2010a, June). The UK Stewardship Code. Retrieved from http://www.frc.org.uk/ corporate/investorgovernance.cfm FRC. (2010b, June). The UK Corporate Governance Code. Retrieved from http://www.frc.org.uk/ corporate/ukcgcode.cfm. p. 1. Gekko, G. (1987). Speech. Retrieved from http://www.americanrhetoric.com/MovieSpeeches/ moviespeechwallstreet.html George, L. E. (2008, September, 3). Annual lecture of the Worshipful Company of Chartered Accountants. Cass Business School.

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Greenspan, A. (2003). Testimony to Congress 2003. Indian Corporate Governance Voluntary Guidelines (2009) issued by the Indian Ministry of Corporate Affairs, Part IV E AUDITORS – Appointment of Internal Auditor. Retrieved from http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec 2009.pdf Kadabadse, A., & Moore, C., & Associates. (2010). The RiskMinds 2009 risk managers’ survey: The causes and implications of the 2008 Banking Crisis. Cranfield School of Management. Nestor, S., & Ladipo, D. (2009, May). Bank boards and the financial crisis – A corporate governance study of the 25 largest European banks. Nestor Advisors, London. Retrieved from http://www.nestoradvisors.com Walker, S. D. (2009, November 26). A review of corporate governance in UK banks and other financial industry entities – Final recommendations. The Walker Review. Retrieved from http://www.hm-treasury.gov.uk/d/walker_review_261109.pdf

CHAPTER 3 SUSTAINING MULTINATIONAL STRATEGIC PERFORMANCE THROUGH VALUE CHAIN BASED COMPETITIVE ADVANTAGE Pınar Bu¨yu¨kbalcı INTRODUCTION During a UN Commission meeting in 1983, Norwegian Prime Minister Brundtland came to state one of the most comprehensive definitions of sustainability: ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs’ (WCED Report, 1987). Since then, themes related to sustainability proliferated and passed beyond the ‘macro’ level by also adopting ‘mezzo’ and ‘micro’ levels as unit of analysis. To state this more specifically, a macro perspective reflects a community level point of view, while a mezzo perspective adopts organisation and institution level focus point, and a micro perspective adopts an individual level research view. Within this framework, the issue turns out to be a debate of providing sustainability to the community, to the institutions (‘business enterprise’ being one of them) and to the individuals. Such fragmentation is especially necessary in literature as it is the aggregation of research on multiple levels that will lead to seminal contributions in many respects. Literature suggests evidence of how devastating the outcomes could be when Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 45–65 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003007

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there is conflict among these different levels regarding the meaning and implications of sustainability (e.g. Baumgartner & Ebner, 2010; Linnenluecke, Russell, & Griffiths, 2009). At the mezzo level, sustainability efforts of organisations are mainly observed in terms of performance indicators. However, research in this regard should especially focus on pattern-specific dynamics of sustainability related improvement in performance. In an organisational setting, these efforts primarily aim to create value for all stakeholder groups related to the organisation. Yet, to turn this value into improved performance requires developing the necessary competitive means to create and sustain superior performance (Porter, 1998). This process becomes a challenge especially for the ‘multinational enterprise’ (MNE) which allocates all its activities and resources over a wide variety of geographical regions (Prahalad & Doz, 1987). To successfully maintain the dispersion of resources among the necessary activities based on region-specific variables is of critical importance in creating value and thus contributing to long-term objectives of the organisation (Kogut, 1984, 1985). In compliance with these, this study argues that an organisation should create value through exploiting its resources and turning them into competitive advantages (CAs) in order to make its performance sustainable in the long run. In this regard, strategic performance indicators, which consist of items reflecting the degree of organisational sustainability on a value-based perspective, are adopted as the anchor to trace the pathway to long-term focused firm performance. Accordingly, it is attempted to present a pattern representing how a multinational corporation allocates its resources to create a value-adding system which is supported by embracing a certain type of CA to sustain its strategic performance. Following this notion, an empirical research study focusing on foreign direct investment (FDI) patterns of MNEs operating in Turkey in terms of Porter’s (1998) ‘value chain’ framework and generic strategies of cost and differentiation is presented. The main aim of this research is to empirically reveal the impact of value-adding organisational efforts on strategic-firm performance improvement, which is a major mean to provide organisational sustainability.

THEORETICAL FOUNDATIONS Use of Competitive Advantage to Create Value According to Michael Porter (1998), there are two basic types of CA a firm can possess: low costs or differentiation. These combine with the scope of a

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firm’s operations (the range of market segments targeted) and lead to ‘three generic strategies’ for achieving above-average performance in an industry: cost leadership, differentiation and focus. The main motive in ‘costleadership strategy’ has been pointed out as ‘striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals’, while the main motive in ‘differentiation strategy’ has been emphasised as ‘seeking to differentiate the company’s product offering from rivals’ in ways that will appeal to a broad spectrum of buyers’. Focus strategies of both types adopt the same motives, but concentrate on a narrow buyer segment (Thompson, Strickland, & Gamble, 2007). The requirements for each generic competitive strategy differ. To state this in a more specific way, strategies based on cost-leadership advantages focus on cost reductions and efficiencies by attempting to maximise economies of scale, maintaining operational efficiency, implementing costcutting technologies and stressing reductions in overhead and in administrative expenses. A low-cost leader is able to use its cost advantage to charge lower prices or to enjoy higher profit margins. On the other hand, strategies dependent on differentiation are designed to appeal to those customers with a special sensitivity for a particular product/service attribute, and thus require skills such as strong marketing abilities, new product development, building corporate reputation for quality and technological leadership and maintaining strong coordination in marketing channels. Finally, a firm pursuing a focus strategy should have the skills to serve isolated geographic areas and to tailor the product to the somewhat unique demands of the small-to-medium-sized customer (Akan, Allen, Helms, & Spralls, 2006; Pearce & Robinson, 2003). When it comes to the use of two main generic strategies, namely ‘cost leadership’ and ‘differentiation’ simultaneously, Hill (1988) argues that a combination of differentiation and low-cost may be necessary for firms to establish a sustainable CA. He claims that these two CA sources should be used in order to support each other for sustainable competitiveness. However, they should be employed within the right context and be supported with a right combination of resources to fully operate in the expected direction. Particularly in global markets, the firms’ ability to integrate the means of competition necessary to implement the cost-leadership and differentiation strategies is thought to be critical in developing CA. Compared to firms implementing one dominant generic strategy, the company that successfully uses integrated cost-leadership/differentiation strategy is believed to be in a better position to adapt quickly to environmental changes, learn new skills and technologies more quickly and effectively leverage its core competencies while

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competing against its rivals (Hitt, Ireland, & Hoskisson, 2005). More specifically, in a global context, firms may choose to internationalise to gain more cost advantages by, (1) increasing sales to realise economies of scale, (2) gaining access to low-cost labour and (3) gaining access to low-cost raw materials. On the other hand, firms may also choose to invest in foreign markets to implement a product/service differentiation strategy by being locally responsive in certain respects (Barney & Hesterly, 2008). Apart from the specific motives behind the internationalisation efforts, as Porter (1998) states, the goal of any generic strategy is ‘to create value for buyers at a profit’. Building on this ‘value’ concept, which is the brickstone of CA, Porter (1998) created the ‘Generic Value Chain’ and defined it as follows: y a systemic way of examining all the activities a firm performs and how they interact y for analyzing the sources of CA. Such a chain, and how it performs individual activities, reflects a firm’s history, its strategy, its approach to implementing its strategy, and the underlying economies of the activities themselves. (p. 33)

According to Porter (1998), value activities can be divided into two broad types: primary activities and support activities. Primary activities are the activities involved in the physical creation of the product and its sale and transfer to the buyer as well as after-sale assistance. On the other hand, support activities support the primary activities and each other by providing purchased inputs, technology, human resources, and various firm-wide functions. Regarding the spread of activities in the value chain, Porter (1986a) describes primary activities in the chain as consisting of upstream activities and downstream activities. ‘Upstream activities’ are those economic activities (inbound logistics activities, operations activities, some outbound logistic activities) which are performed in the early stages of the value-adding process and which occur close to the firm’s suppliers but far away from the buyer; and ‘downstream activities’ are those activities (some outbound logistic activities, marketing and sales activities, service activities) that occur closer to the buyer but far away from the firm’s supplier. According to Porter (1986a), a firm that competes internationally must decide how to spread the activities in the value chain among countries. He proposes that downstream activities, which are more related to the buyer, should be located at the buyer’s location. Upstream activities and support activities, on the other hand, can be decoupled from where the buyer is located in most industries. Moving on from this point, he further argues that downstream activities create CAs that are largely country specific (a firm’s

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reputation, brand name, service network etc.), and that CA in upstream and support activities often grows more out of the entire system of the countries in which a firm competes rather than from its position in one single country. Also, in industries where downstream activities are vital to CA, there tends to be a more multidomestic pattern of international competition (as in many service industries); and in industries where upstream and support activities such as technology development and operations are crucial to CA, global competition, in which the location and scale of value-chain activities is optimised from a worldwide perspective, is more common. When thought if in the global context, the value chain is getting more and more globalised each day to meet the needs of global producers and their customers. According to a recent OECD Report (2007), the globalisation of the value chain is motivated by a number of factors, one of which is the desire to increase efficiency, as growing competition in domestic and international markets forces firms to become more efficient and to lower costs. Also, the need to enter new emerging markets and to provide access to strategic assets which can help access to foreign knowledge are among other important factors. As stated by UNCTAD, what is distinct about the rise of international production systems as opposed to earlier MNEs is, first, the intensity of integration both on a regional and global scale, and, second, the emphasis on the efficiency of the system as a whole. In accordance with these, the value chain is becoming fragmented, as business functions are differentiated into ever more specialised activities (WIR, 2002). Regarding the management of this fragmented value chain, Gupta and Govindarajan (2001) point out that managers should first evaluate the optimality of the firm’s global network for each value-chain activity along the dimensions of activity architecture, competencies at different locations, and coordination across locations and then, based on this evaluation, they should design and execute necessary actions to eliminate the sub-optimalities in the whole value-chain system.

Concept of Sustainability in Terms of Organisational Performance Sustainable development suggests an evolving process that restores the balance needed for long-term organisational and societal well-being (Blackburn, 2009). Accordingly, as a principle, the concept of sustainability bases on the triple bottom line of economic, social and environmental performance (Gladwin, Kenelly, & Krause, 1995). Relatedly, in a recent

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study, Russell, Haigh, and Griffiths (2007) demonstrate that there are different perspectives related to corporate sustainability. These perspectives see the corporation as (1) working towards long-term economic performance; (2) working towards positive outcomes for the natural environment; (3) supporting people and social outcomes or (4) the one with a holistic approach. The strategic viewpoint adopts a holistic approach which takes all related actors and operations into consideration. In a supporting manner, Slater and Narver (1994) also emphasise the need to understand the consumer’s entire value chain in a holistic manner to create superior value for them. They further argue that this holistic view should entail a dynamic perspective which takes into account both present and future needs of the consumer. Within this strategic–dynamic framework, sustainability efforts are mainly traced in terms of performance indicators, which include the long-term effects of organisational operations at all levels. In an organisational setting, these efforts primarily aim to create value for all stakeholder groups of the corporation. Yet, to turn this value into improved performance requires developing the necessary competitive means to create and sustain superior performance (Porter, 1998). After all, firms are not only interested in acquiring and leveraging CA, but also in sustaining such advantages over time (Peng, 2009). To many authors, the most important way for managers and organisations to reach and stay at the top of the competitive business environment is to learn the use of organisational resources to build a CA (George & Jones, 2006). Related to this debate is the need to create and manage an ‘ambidextrous organisation’ (Raisch, Birkinshaw, Probst, & Tushman, 2009) which will integrate different skills and capabilities to create value across differentiated units (Jansen, George, van den Bosch, & Volberda, 2009). However, managers are limited in their ability to understand the sources of sustained CA due to the so-called causal ambiguity, which is the relative difficulty of deciphering causal links between organisational resources and outcomes (Lado, Boyd, Wright, & Kroll, 2006; Lippman & Rumelt, 1982). This causal ambiguity actually comes from the ‘exploration–exploitation’ relation in the organisations. As defined by March (1991), exploring is based on searching, variation, risk taking, experimentation, play, flexibility, discovery and innovation, while exploitation relates to refinement, choice, production, efficiency, selection, implementation and execution (p. 71). Moving on from this debate, it will not be wrong to claim that exploring resources is not enough to obtain the desired outcomes. To reach these outcomes requires exploitation of these resources in a way that supports firm performance. Use of CA to proliferate organisational resources

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explored and allocated throughout the value chain is thus of great importance for revealing the potential value presented by these resources. To state it in other words, an organisation explores the needed unique resources and allocates them throughout the value chain; however, exploiting them in a large sense depends upon the use of CA to support the value chain. Value proposition, which is presented as a result of these systemic efforts throughout the value chain, should be based on differences from competitors, not only in terms of products and services, but also in terms of specific processes contributing to their creation. However, apart from the production or service creating activities, the value chain of an organisation also entails several internal and external actors taking part throughout the operation and thus being named as the ‘organisation’s stakeholders’. Following this notion, Humphrey and Schmitz (2002) distinguish two ‘enforcing agents’ within the value chain, one of them being the lead firm of the global value chain and the other being the external agents consisting primarily of government agencies, transnational organisations or NGOs. In a similar vein, Walters and Lancaster (2000) emphasise that the value chain is a business system that creates end-user satisfaction and realises the objectives of other member stakeholders. This is an important viewpoint in defining the value chain as it points to its effects on all organisational stakeholders, which is an important anchor to provide organisational sustainability. After all, organisational sustainability can be maintained by providing an optimal value proposition that meets the needs of immediate stakeholders, and strategic performance stands as an effective way of measuring the integrity of this value proposition. Supporting this, Baumgartner and Ebner (2010) propose the concept of visionary–holistic sustainability strategy as a tool to derive CA through focusing on sustainability issues within all business activities. According to the authors, visionary strategies occur in two different forms: in a ‘conventional way’ and in a ‘systemic way’. ‘Conventional visionary strategies’ are based on market opportunities and are part of the strategic management process as long as the sustainability issues lead to market advantages. These strategies focus on ‘outside-in’ inputs for strategy formulation. On the other hand, ‘systemic visionary strategies’ combine this view with an ‘inside-out’ perspective. In other words, the conventional visionary strategy is very much oriented towards its impact on the market, whereas the systemic visionary strategy combines outside-in and inside-out perspectives to achieve a unique competitive position (pp. 78–85).

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In this context, strategic performance indicators are important to trace effectiveness as they are comprehensive enough to put forward a marketplace-based view which considers the value-added created by organisational operations. Such a market-based view is important as it considers the split – effects of all operations from the view points of general organisational stakeholders both for the outside-in and inside-out effects.

MODEL DEVELOPMENT AND HYPOTHESES TESTING The Conceptual Model and Related Hypotheses As labeling a company an MNE requires that the company has value-added facilities in more than two countries (Cohen, 2007), taking the dispersion of FDI among value-chain activities into consideration while analysing certain motives and mechanisms within the international enterprises’ network is assumed to provide a useful framework by many scholars (e.g. Chakravarthy & Perlmutter, 1985; Porter, 1986a, 1998). In the same vein, Kogut (1984), points out the robustness of the concept of value-added chain as a tool to explain the advantages firms gain through international operations. While discussing these advantages, Porter’s generic strategies of ‘cost leadership’ and ‘differentiation’ have been highly referred to in international strategic management literature (e.g. Yip, 1992). Direct investments made by foreign firms in host countries have been considered to be important anchors of international business activities especially in the last few decades. FDI represents the ultimate point of penetration to foreign markets. In other words, the territorial expansion of a firm’s production outside its national boundaries has been achieved by extending itself through making FDIs (Dunning & Lundan, 2008; Wilkins, 2003). As stated in recent OECD report, ‘foreign direct investment (FDI) reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise)’ (Christiansen, Goldstein, & Bertrand, 2007, p. 20). Here, the lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. In international business literature, MNEs are defined as firms that engage in FDI by directly controlling and managing value-adding activities

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in other countries (Caves, 1996). Accordingly, it is a widely accepted criterion that a company is expected to have value-added facilities in more than two countries, before being classified as a multinational (Cohen, 2007). Thus, studying the role of FDI in relation to value-creating activities of a firm is highly desired in literature. Exploiting the resources allocated throughout the value chain in a way to support the organisation-wide objectives requires the use of certain CA. The source of these advantages may come from resources allocated in upstream or downstream activities and the scope and type of organisational functions used to exploit these resources may vary throughout the chain. Supportively, Kogut (1984, 1985) emphasises the role of ‘international marketing’ by stating that marketing may be highly differentiated by country and market segment, but the firm may still exploit upstream CAs by linking shared resources across product lines and countries. According to Kogut (1984, 1985), the task of international marketing (and related functions) is to differentiate products/services (by using marketing tools and by adapting itself to country-specific characteristics if necessary) which embody the shared resources across product lines and countries. To make a departure from this point, it can be claimed that the source of differentiation may come from upstream or downstream activities in the value chain; but the role of marketing activities become prominent in either case, as differentiation requires the ability to offer buyers something attractively different from competitors. To communicate this difference, marketing related activities become critically important and should be designed in accordance with the local environment’s unique needs. Harzing (2000) also supports this view by pointing out that it is mostly the ‘adaptation of marketing activities’ that makes companies locally responsive. On the other hand, in terms of production activities, Porter (1986b) puts forward the point that configuration issues deal largely with the location of production facilities for components and end products mainly due to structural characteristics which represent concentration costs. Moving on from this point, the current study adopts a framework picturing the relationship between FDI made in upstream and downstream activities in the value chain and strategic-firm performance. Here, dispersion of FDI represents the exploration and allocation of organisational resources. Strategic-firm performance relates to the long-term oriented contributions of organisational operations and thus represents the sustainability-oriented aspect of organisational performance. Within this relationship, CA employed by the organisation represents the means employed by the organisation to exploit its resources to sustain its strategic-firm performance in the long run.

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Based on these arguments, it is hypothesised that H1. FDI made in upstream activities will be exploited through costleadership advantages, which in turn are expected to cause an increase in the overall strategic performance of the firm. H2. FDI made in downstream activities will be exploited through differentiation advantages, which in turn are expected to cause an increase in the overall strategic performance of the firm.

Method Sample The target population of the study consists of firms that made FDIs in Turkey. To follow a systemic process, the 2009 member list of International Investors Association of Turkey (YASED) was chosen as a sampling frame, as it includes firms that have profiles directly fitting the purposes of this study. Data were collected throughout a six-month period starting from September 2009 and ending on February 2010, from respondents holding managerial positions in their companies. Out of 213 firms listed in YASED, 148 firms were included in the study due to time constraints and unavailability of managerial level respondents during the research period. In the end, the number of valid questionnaires totalled 95, with the percentage of valid questionnaires being 88.78%. Firms are almost equally dispersed in terms of their sizes with 33.7% of them being small firms (firms employing 250 or less employees), 31.6% being medium-sized firms (firms employing more than 250 to 1000 employees), and 29.5% being large firms (firms employing more than 1000 employees). In terms of industry, ‘Manufacture of Chemicals and Chemical Products’ (including petroleum, pharmaceuticals, cosmetics etc.) has the highest share in the sample (24.2%), followed by ‘Financial Intermediation’ firms (13.7%), and next by ‘Transport, Storage and Communications’ firms and ‘Manufacture of Food Products and Beverages’ firms with an equal share of 11.6%. Overall, 57.9% of the firms are manufacturing firms, while 42.1% of them are service firms. When the location of a headquarter is specifically examined, it is revealed that most of the firms in the sample have their headquarters in the United States (18.9%), followed by Germany (17.9%), France (12.6%), Great Britain (7.4%), Switzerland and Holland (with equal shares of 6.3%).

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Finally, as most questions in the questionnaire required a high level of information regarding firm strategies, operations and corporate network– wide relationships, the position of respondents was considered to be an important issue throughout the research. Largely satisfying this requirement, 24.2% of the respondents in the sample are CEOs or general managers, 21.1% are assistant managers or directors, 35.8% are managers, 17.8% are specialists or experts and 1.1% hold other positions in the company.

Measures FDI Dispersion among Value-Chain Activities. Level of FDI made in each primary value-chain activity is measured by simply asking the respondents to indicate the ratio (dispersion) of their investments in a way that reflects their company’s FDI position in Turkey. Type of CA. A fifteen-item, six-point rating scale ranging from ‘1 ¼ does not affect at all’ to ‘6 ¼ affects totally’ is used to measure competitiveness. The items are adapted from the study of Nayyar (1993) and the respondents were asked how much these items affected their firm’s competitiveness. Among those fifteen items, nine attempted to measure differentiation-based competitiveness (e.g. ‘providing product(s)/services with many differentiating features’, ‘creating premium product/service quality’ and ‘new product/ service development’, while six of them attempted to measure cost-based competitiveness (e.g. ‘providing high operating efficiency/cost control’, ‘managing raw materials cost and availability’). For scale purification, an exploratory factor analysis was run to determine the number of factors to be extracted. Regarding the overall measures of intercorrelation, which indicate the appropriateness of factor analysis, Bartlett test of sphericity and Keiser–Meyer–Olkin Measure of Sampling Adequacy (KMO–MSA) have been referred to. As can be seen in Table 1, results revealed two factors for both Differentiation-Based CA and CostBased CA. As can be seen in Table 1, results revealed two factors for both Differentiation-Based CA and Cost-Based CA. Among these factors, Image and Operations Differentiation includes items such as having high influence over distribution channels, targeting highpriced segment(s), building/maintaining brand equity, building/maintaining brand reputation, and spending a high amount of money on advertising activities. Product and Service Differentiation includes items such as providing product(s)/services with many differentiating features, creating premium product/service quality, providing extensive customer/consumer

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Table 1.

Factor Analysis Results.

Factor Name

Variance Explained

Differentiation-based CA Factor 1 – Image and Operations Differentiation Factor 2 – Product and Service Differentiation KMO measure Bartlett’s test

27.763% 27.005% .792 230.436

Cost-based CA Factor 1 – Direct Cost Factors Factor 2 – Indirect Cost Factors KMO measure Bartlett’s test

32.945% 30.585% .731 138.544

po0.01.

service, and new product/service development. The reliability of the factor scales was calculated through Cronbach’s alpha coefficients, which were found to be .75 and .77, respectively. On the other hand, Direct Cost Factors consist of items such as providing high operating efficiency/cost control, managing raw materials cost and availability, and product/service cost reduction; while Indirect Cost Factors consist of such items as making improvements and innovation in manufacturing/service processes, pricing below competitors, and having highly skilled functional personnel. The Cronbach’s alpha coefficients for the factors were calculated as .76 and .56, respectively. Strategic-Firm Performance. A four-item, six-point rating scale ranging from ‘1 ¼ strongly disagree’ to ‘6 ¼ strongly agree’ is used to measure the strategic performance of the firms in the last three-year period (e.g. ‘the objectives set while entering the market has been largely accomplished’, ‘the experience gained in Turkey in terms of know-how and managerial experience is reverse transferred to both home and other countries within the network of our MNE’, ‘the value added by our company to host country’s (Turkey’s) macro and micro economic factors is high’, ‘our company exploits the resources it acquires by operating in Turkey in a way to strengthen the global competitive position of the whole MNE’). All items have been derived from preliminary qualitative studies based on in-depth interviews conducted with experts coming from both academic and managerial backgrounds. Finally, the Cronbach’s alpha coefficient for the scale was calculated as .72.

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Results A moderator variable may reduce or enhance the direction of the relationship between a predictor variable and a dependent variable. The moderating effect is usually expressed as a significant interaction between predictor and moderator variable. To reveal this possible interaction effect, the main effect of the predictor variable on the dependent variable is entered the equation before the interaction term. Following this, the interaction terms is entered the model in a stepwise method. If the change in R2 (DR2) for the interaction term is statistically significant, it is said to have a moderating effect, and the moderator hypothesis is supported (Aldwin, 1994; Baron & Kenny, 1986; Holmbeck, 1997). Accordingly, to reveal the expected moderating effects of cost-based CA (consisting of direct cost-based CA and indirect cost-based CA) and differentiation-based CA (consisting of image- and operations-based differentiation and product- and service-based differentiation) on the relationship between FDI investments and strategic-firm performance, stepwise multiple regression analysis is employed. Results of regression analyses are seen in Tables 2 and 3. In all equations, the control variables, firm size, sector, and firm age is the first block entered. Throughout the analyses, no significant effects of these control variables are observed, indicating the nonexistence of any external effects that could possibly to stem from these variables. As can be seen in Table 2, to test Hypothesis 1, the variables were entered in the following order for each criterion: control variables, percentage of Upstream FDI, and the interaction terms. The effects of all interaction terms were analysed through different regression runs, one for the interaction between Upstream FDI and Direct Cost-based CA and the other for the interaction between Upstream FDI and Indirect Cost-based CA. Additional to cost-based CA dimensions, to be able to determine any other possible effects, regression analyses were also run for differentiationbased CA dimensions in the same manner. In support of the first hypothesis, regression results indicate that both direct cost-based CA (bi ¼ .71, po.05) and indirect cost-based CA (bi ¼ .67, po.05) cause significant interaction effects on the dependent variable – strategic-firm performance – which labels their role as moderator. Also, the variance explained for the overall model significantly increased in each case (DR2 ¼ .04; DF(1,80) ¼ 3.99 and DR2 ¼ .05; DF(1,80) ¼ 4.14; respectively), indicating the strength of moderation effects in the overall regression equation’s explanation power.

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Table 2.

Regression Results for Upstream FDI and Strategic Firm Performance. M1 M2

Control variables Firm size Sector Firm age Main effect Upstream FDI Moderator UpFDI  DirCost UpFDI  IndCost UpFDI  ImOpDiff UpFDI  ProSerDiff D in R2 F for D in R2

M3

M1 M2

M3

M1 M2 M3 M1 M2

M3

.16 .15 .10 .16 .15 .10 .16 .15 .10 .16 .15 .10 .14 .11 .13 .14 .11 .13 .14 .11 .13 .14 .11 .13 .09 .09 .09 .09 .09 .09 .09 .09 .09 .09 .09 .09 .06 .62 .71

.06 .57

.06 .10

.67 .18

.00 .04 .22 3.99

.06 .70

.00 .05 .22 4.14

.00 .22

.00 .37

.83 .00 .06 .22 5.84

Notes: Provided in the table are the results of sequential regression runs to reveal the combined effects of Upstream FDI and four types of CA on Strategic Firm Performance. In the first model, Strategic Performance is run against the control variables only, while the subsequent models include Upstream FDI and Type of CA Dimensions sequentially in a hierarchical sense. M1, M2 and M3 are the control variables, main effect, and moderator models, respectively. Two-tail significance values are reported. po.05; po.01.

Additionally, although not having been hypothesised, the analyses revealed the significant effect of the interaction of product differentiationbased CA with Upstream FDI (bi ¼ .83, po.01). Once more, the variance explained for the overall model significantly increased when the interaction term is entered the equation in the third model (DR2 ¼ .06; DF(1,80) ¼ 5.84). Next, as seen in Table 3, the same method was followed and the variables were entered in the following order for each criterion to test Hypothesis 2: control variables, percentage of Downstream FDI, and the interaction terms, one for the interaction between Downstream FDI and Image and Operations Differentiation-based CA, and the other for the interaction between Downstream FDI and Product and Service Differentiation-Based CA. Additional to the differentiation-based CA dimensions, once more to fully capture the effects of any other interactions, regression analyses were also run for cost-based CA dimensions.

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Table 3.

Regression Results for Downstream FDI and Strategic Firm Performance. M1 M2

Control variables Firm size Sector Firm age Main Effect Downstream FDI Moderator DownFDI  ProSerDiff DownFDI  ImOpDiff DownFDI  DirCost DownFDI  IndCost 2

D in R F for D in R2

M3

M1 M2 M3 M1 M2 M3 M1 M2 M3

.16 .15 .13 .16 .15 .14 .16 .15 .12 .16 .15 .15 .14 .11 .08 .14 .11 .11 .14 .11 .12 .14 .11 .13 .09 .09 .10 .09 .09 .09 .09 .09 .11 .09 .09 .09 .07 .73

.07 .13

.07 .27

.07 .30

.67 .07 .23 .27 .00 .04 .28 3.27

.00 .28

.00 .06

.00 .28 .01 1.11

.00 .28 .02 1.28

Notes: Provided in the table are the results of sequential regression runs to reveal the combined effects of Downstream FDI and four types of CAs on Strategic Firm Performance. In the first model, Strategic Performance is run against the control variables only, while the subsequent models include Downstream FDI, and Type of CA Dimensions sequentially in a hierarchical sense. M1, M2 and M3 are the control variables, main effect, and moderator models, respectively. Two-tail significance values are reported. po.05; po.01.

The results provided partial support for Hypothesis 2. Specifically, it was found that, the significant effect existed only for the interaction between Downstream FDI and Product and Service Differentiation-Based CA (bi ¼ .67, po.05). Also, the variance explained for the overall model significantly increased (DR2 ¼ .04; DF(1,80) ¼ 3.27) when the interaction term is entered the model.

DISCUSSION AND CONCLUSIONS Among the four views, this study adopts the ‘holistic’ one to draw a research framework which handles corporate sustainability on a rather strategic basis. The hypotheses developed from this perspective aim to integrate the competitive objectives of the firm with its foreign expansion decisions and further attempt to relate this to the firm’s strategic performance, which is assumed to be an important indicator of long-term corporate sustainability.

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Strategic-firm performance requires an integrative viewpoint which focuses on performance in terms of satisfying primary stakeholders. Within this framework, it aims to increase performance by making contributions via meeting the overall strategic objectives, improving experience based know-how to meet the expectations of related units within the MNE network and by creating value additions for both the home and the host country. Such an integrative perspective is based on the premise that it is necessary to create value for primary stakeholders, if the firm desires to base its existence on a long-term – in other words, sustainable – performance. Taking this notion as the departure point, analyses have been conducted to reveal certain relationships between the investment decisions of MNEs and strategic-firm performance, as well as the possible leveraging role of CA within this relationship. In terms of the relationship between FDI made in upstream activities and strategic-firm performance, the role of cost-based CA is found to be in the expected direction. Specifically, it is found that both direct cost-based CA and indirect cost-based CA moderates the relationship between FDI made in upstream activities and strategic-firm performance in the positive direction. To put it in other words, when the direct investments made in upstream activities located in foreign countries are exploited through cost-based CA dimensions, then the firm becomes much more capable of improving its performance in terms of strategic objectives. Thus, in this aspect, the research findings correspond with those of previous similar study of Porter (1986b). Accordingly, it can be argued that the main motive to make investments in production-oriented activities, in other words to locate them ‘abroad’, is to exploit ‘economic arbitrage’ advantages presented to the firms in those regions or countries. According to Ghemawat (2001, 2003), economic arbitrage consists of differences in consumer incomes and differences in costs and quality of natural resources, financial resources, human resources, infrastructure, intermediate inputs and information and knowledge. As supported by the current results, firms choose to invest in value-chain functions which will enable them to manage inbound logistics (such as activities associated with obtaining raw materials, components, merchandise and consumable items from vendors; receiving, storing, and disseminating inputs from suppliers, and inspection; and inventory management), production operations (such as activities associated with production, assembly, packaging, equipment maintenance, quality assurance and environmental protection), and outbound logistics (such as activities associated with finished goods warehousing, order processing, order picking and packing, shipping, delivery vehicle operations) in foreign countries or regions mainly to exploit

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the economic arbitrage advantages presented by those locations. This finding should be regarded as valuable as it presents empirical support for the location-specific advantage argument in Dunning’s (2000) eclectic paradigm. Furthermore, the results suggest the importance of a cost-based CA to leverage the firm’s strategic performance. On the other hand, regarding the role of differentiation-based CA in the relationship between FDI made in downstream activities and strategic-firm performance, some unexpected results as well as the expected ones are revealed. Contrary to expectations, the results indicate that there is no significant role of image- and operations-based differentiation in the relationship between FDI made in downstream activities and strategic-firm performance. When the composition of the image- and operations-based differentiation scale is considered, two possible explanations come into play. Firstly, as variables related to distribution channels exist in the scale, it is possible to trace the moderating effects of this dimension in terms of outbound logistics activities which in part rely on distribution activities. Secondly, the moderating effects of items that aim to measure the importance of high-priced segments, brand reputation and advertising activities for the firm might be traceable in the wider framework of the value chain. After all, to maintain a brand reputation and support it with advertising is an outcome of the proper functioning of value chain and a leverage factor for all the activities in the chain. Similarly, the effects of choosing a high-priced segment is a decision that combines both cost and differentiation considerations and requires a holistic viewpoint. The other dimension of differentiation-based CA – product and service differentiation – is found to moderate the relationship between downstream focused FDI and strategic-firm performance positively. In other words, firms that invest in downstream focused FDI exploit this investment and turn it into increased strategic-firm performance with the help of product and service differentiation-based CA. This finding is complementary with the study’s preliminary expectations in that it emphasises the importance of new product and service development along with adding differentiating features to the existing ones, creating premium product/service quality and providing extensive customer service. Investments made in downstream activities which consist of marketing and sales (such as activities associated with sales force efforts, advertising and promotion, market research and planning, and dealer/ distributor support) and service operations (such as activities associated with purchasing and providing raw materials, supplies, services and outsourcing necessary to support the firm and its activities) are buyer-oriented activities

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and thus should be differentiated in accordance to buyer expectations and needs. However, additional to the hypothesised relationship between downstream focused FDI and strategic-firm performance, another important result has been obtained regarding the role of product and service differentiation-based CA in the relationship between Upstream FDI and strategic-firm performance. Specifically, it was found that product- and service-based differentiation acts as a moderator in the relationship between upstream focused FDI and strategic-firm performance, as well. In other words, it is possible for an MNE to exploit and leverage its foreign investments made in upstream activities by supporting it with a business model based on product and service differentiation. Here the innovation-oriented nature of this differentiation dimension, mostly depending on new product and service development, stands as a possible justification which enlightens the role of innovativeness in providing sustainable firm performance. More specifically, moving on from this finding, it can be argued that any innovative attempt to improve product and service quality and a new product development process leverges the investments made, regardless of them being oriented towards upstream or downstream activities in the value chain. To conclude, the present study’s findings extend the current literature on global value chains by handling the issue from a sustainability based functional-level perspective. Previous studies mostly focus on more macrolevel factors regarding the governance of value chains (e.g. Gerrefi, Humphrey, & Sturgeon, 2005; Gibbon, Bair, & Ponte, 2008; Humphrey & Schmitz, 2002) or the chain functions’ direct relation to corporate social responsibility projects, activities and strategies (e.g. Cruz & Boehe, 2008). This study contributes to the literature mainly as it links the investment decisions of firms – which represent a more internal-oriented firm process – with certain strategic outcomes – which take different stakeholder groups’ interests into account and thus represent an external-oriented process. This two-fold nature is assumed to be of high importance to interpret the competitive position of the firm within a sustainability-oriented viewpoint.

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CHAPTER 4 NORMS OF CORPORATE SOCIAL RESPONSIBILITY: DENSIFICATION OR DEGENERATION? Dominique Bessire and Emmanuelle Mazuyer INTRODUCTION Corporate social responsibility (CSR) is an emerging field whose norms are still being written and rewritten. The concept of CSR as we know it today1 started in the United States in the 1970s and 1980s and slowly spread to other developed countries in the 1980s and 1990s. The French for corporate social responsibility is Responsabilite´ sociale de l’entreprise (RSE), a nearly literal translation which however diverges to some extent from the original English. The concept is still unclear despite having been the subject of an increasing number of academic and professional papers, in management as well as in law journals. In the present study, we shall use the definition as set by the European Commission (2001), which defines 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’. The European Commission in its Communication to the Parliament (2006) has stressed the fact that ‘it is about enterprises deciding to go beyond minimum legal requirements and obligations (our emphasis) stemming from collective agreements in order to address societal needs’. The second part of the definition is often omitted, but is at the crux of the problem of Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 67–95 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003008

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determining where CSR begins and ends. Corporate practices which involve ethical, social or environmental problems are defined as CSR practices only if companies go above and beyond their legal obligations. It should also be noted that the definition does not specify which guidelines to take into account in order to identify the standards to be applied in any given circumstances. On a practical level, CSR may first be defined as voluntary practices adopted by various kinds of organisations (most often large companies), usually formalised via codes of conduct and of ethics, ethical or professional whistleblowing, reports on societal needs, labels, certifications, etc. CSR may also be defined as the goal of these practices, whether social or societal, related to ethical, humanist, social, or environmental problems. This contrasts with traditional business goals, such as making money and being profitable, competitive and productive. Lastly, these practices are part of the way in which companies relate with their stakeholders. Some analyses make a distinction between internal stakeholders (shareholders, management, employees) and external stakeholders (competitors, consumers, governments, lobbies, communities, etc.) (Carroll & Na¨si, 1997). Others differentiate primary stakeholders (those who have formal contractual links with the company) such as shareholders, employees, suppliers and clients, from external ones such as competitors, lobbies, governments, communities, the public, etc. – that is what is generally referred to as ‘civil society’ (Carroll & Bucholz, 2000). These various practices, undertaken either for social or societal reasons and directed at stakeholders, make up CSR as defined in this chapter, without prejudice to the material delimitation of this field which could also be the subject of another analysis (Brabet, Lavorata, Maurel, & Morin-Delerm, 2010). There is a growing number of norms and regulations concerning these practices. It is difficult to account for them because analysts state their own opinion on them according to their beliefs and representations which may be quite different, depending on their field of study; the result is that they can often be quite different or even in complete contradiction with each other. For example, many lawyers only see them as ‘soft law’: declarations of intent rather than actual lasting norms, evolving outside the judicial system. Managers, on the other hand, will mix voluntary measures taken by private actors, national or international law, norms for international certification, and the framework given to these practices by the legal system, as far as norms in question cover ethical, environmental or social problems. For these reasons, gathering both the opinions of a scholar in law, and a scholar in management may help us to avoid seeing things through the lens of a single discipline, a situation that would stop us from fully understanding CSR, which is an inherently interdisciplinary subject.

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We have just mentioned the increasing number of norms. Is it possible and indeed do we have a right to speak of normative densification? For the purposes of this chapter, the term ‘norms’ is taken in the broader sense: it includes rules, standards, guidelines, codes, directives, etc. The power of norms lies in their capacity to provoke a certain kind of action, to guide behaviour, to influence practices and/or be the basis on which to judge behaviour, whether it stems from a moral, judicial or social order (Mazuyer, 2009). In etymological terms, ‘densification’ refers to a process which increases the density of an object of whatever kind. This process can be understood in terms of surface covered. We speak either of urban densification (which consists of an increasing amount of people living on the same amount of land2) or the densification of networks (whether they be of communication, distribution, etc.). It can also be understood in terms of internal structure: densification in this sense improves, for instance, the properties of wood by compressing it. In the first sense, densification is essentially quantitative, and in the second, qualitative. By analogy, the term ‘normative densification’ seems to lead us in two different but not mutually exclusive definitions. The first would be an essentially quantitative ‘surface’ densification, referring to the proliferation of norms, often criticised both by doctrine and lawyers. A century ago there were already complaints about ‘the decline of law’ (Ripert, 1949), its proceduralisation (Jeammaud, 1998) and its instrumentalisation.3 Partly through the influence of management science and of changes in business, rules and regulations are becoming increasingly numerous and technical, leading to the growing complexity and instrumentalisation of the law. The second would be a densification ‘in substance’ of a more qualitative kind. Norms would have become actually more powerful and would therefore profoundly change company practices, and even the entire regulation system of contemporary capitalism (Gendron, Lapointe, & Turcotte, 2004). It is by this measure that we shall more closely examine CSR norms. These spontaneous and voluntary norms tend, in a dynamic move, to adapt and develop according to company needs. This increase in the number of CSR norms could therefore be referred to as a phenomenon of densification, at least ‘on the surface’ (Section ‘CSR Norms: An Impressive Proliferation’). Is this first kind of densification accompanied by a densification ‘in substance’? These norms sometimes have a legal basis, and therefore produce normative effects which change and occasionally surprise their very authors. However, very few CSR norms match the usual definition given for CSR, ‘going beyond minimum legal requirements and obligations’, and few grow to acquire a significant normative force. Moreover, in most cases, it is the companies who determine the content and type of their actions. CSR

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could then be considered as a kind of step backwards, in the sense that by infiltrating extra-juridical fields (such as ethical and societal), it becomes a moral bail for supporters of non-intervention by national law, thus justifying deregulation and self-regulation via technical rather than juridical norms (Section ‘CSR Norms: A Trompe L’oeil Densification?’). This ambiguity has been already underlined by Capron and Quairel (2004).

CSR NORMS: AN IMPRESSIVE PROLIFERATION CSR has become a field for the creation of a large number of rules and regulations and tools from all kinds of nature and sources, and their effects are just as varied. This frenetic activity makes the field a ‘tangled web’ of norms, resulting in a ‘cacophony’.4 For instance, the Observatoire de la Responsabilite´ Sociale des Entreprises, or Corporate Social Responsibility Observatory (ORSE), in a guide published in 2005, noted that ‘in the past 15 years, CSR tools, codes of ethics, principles, rules and guidelines have multiplied’. This 106-page guide presents the main tools: 16 out of an estimated total of 300.5 Since 2005 the number of norms has been continuously increasing. Describing them has become consequently a daunting task and it is therefore not our intention to provide an exhaustive list. Our goal is to provide an introduction to the tight network of norms created. Some are national in scope, and others international. Some were initiated by a company or group of companies, others by international organisations, and others still by non-governmental organisations. Some cover all dimensions of CSR whilst others just cover one (environmental, social, etc.). Some apply equally to all sectors, some to specific ones. Some norms regulate actions, some concern reporting, and others provide guidelines for setting up CSR management or auditing systems. Some are certifiable; some are not. Some norms are voluntary, some mandatory. In addition, they go by different names: norms (as mentioned before, we use this generic term for the purposes of this report), guidelines, recommendations, principles, codes, notices, directives, regulations, charters, certificates, etc. Finally, their legal status varies enormously and covers everything from ‘soft law’ to ‘hard law’. In our chapter, we shall try to introduce some order to this ‘jungle of norms’ by classifying them according to their source and authors. One type of CSR norms is spontaneous in nature and is generally created by companies or groups of companies (Section ‘An Increasing Number of Spontaneous Norms Created by Private Organisations’). Another type covers those created by a public institution (such as international or European

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organisations and national institutions) trying to control private CSR norms initiatives (Section ‘Public Attempts to Create Guidelines for CSR’). Finally, the last type covers mixed norms of management, audit or certification. They are created by third parties (organisations of a diverse nature, such as standard-setting or non-governmental organisations), in order to serve as standards and be picked up by actors in the private sector (Section ‘Midway between Privately Sourced and Publically Sourced Norms: ‘Mixed’ Norms Involving Management, Certification and Labelling’).

An Increasing Number of Spontaneous Norms Created by Private Organisations The main source of CSR norms is constituted by the different kinds of norms created by companies. This trend started with multinationals but spread to small and medium-sized businesses. These tools include codes of conduct, ethical charters, principles and manuals, all of whose juridical nature varies,6 as well as whistleblowing. According to the European Commission, a code of conduct is ‘a formal statement of the values and business practices of a company and sometimes of its suppliers. A code is a statement of minimum standards together with a pledge by the company to observe them and to require its contractors, subcontractors, suppliers and licensees to observe them. It may be a sophisticated document, which requires compliance with articulated standards and have a complicated enforcement mechanism’ (European Commission, 2001). The definition given by the OECD (1999, 2000) says codes of conduct are ‘commitments voluntarily made by companies, associations or other entities, which put forth standards and principles for the conduct of business activities in the marketplace’. By way of definition, we may say that codes of conduct and similar tools are voluntary commitments made by companies to respect certain ethical values and certain norms (most notably social or environmental), with minimal impact on their commercial activities.7 Whistleblowing guidelines are the result of unilateral action undertaken by the management of a company (especially since the American Sarbanes-Oxley Act of 20028). Employees are encouraged to use these tools to alert others of their colleagues’ illegal activities, or activities which go against company rules.9 The judicial status of these tools will depend on how they were created. Most are unilaterally adopted by the management of the company, but some CRS tools may be negotiated through dialogues with workers’ representatives on a national, European or international level (e.g. whenever they involve

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social dialogue within a company, or questions relating to health and safety in subsidiaries of a large company). This means that some CSR acts will be company agreements or international framework agreements (IFA), if adopted by a group and an international federal union (for a more in-depth study, please read Drouin, 2010). Finally, they may also be a mere contractual obligation, such as annexes that a company might ask their commercial partners to sign during the negotiation of a contract, and which leave the partners contractually bound to the company. For example, a company may require a supplier to accept a ‘Suppliers’ Ethical Guide’, in which they vow not to use child labour. If they break this contract, the company who wrote the guide may suspend or terminate the contract due to non-fulfillment of contractual obligations. Contrary to many law scholars’ impression that CSR acts are just examples of ‘soft law’, some evidently show all the characteristics of ‘hard law’.

Public Attempts to Create Guidelines for CSR Norms which try to serve as guidelines for CSR practices can be organised according to their origin: international or European, and national. International or European Norms The main international texts covering the central themes of CSR in general (human rights, social rights, environmental regulations) may serve as guidelines for spontaneous and private norms. This is most notably the case for the United Nations Universal Declaration of Human Rights (1966), the International Labour Organisation’s tripartite Declaration on Fundamental Principles and Rights at Work (1988), the Rio Declaration on Environment and Development (1992) and the United Nations Convention against Corruption (1990). But there are also general frameworks written by international organisations, specifically aimed at companies and private actors. For example, the United Nations Global Compact (published in 1999 and rewritten in 2003), in which the United Nations, NGOs, and multinationals pledge to respect ten principles, of which two concern human rights, four work conditions, three the environment and the remaining one the fight against corruption (for a general introduction to the Global Compact, please read the following work, published for its 10th anniversary: Boisson de Chazournes & Mazuyer, 2011). The Caring for Climate Initiative (1997) is an addition to

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the Global Compact in which company presidents who signed the Compact pledge to act against climate change (http://www.unglobalcompact.org/ docs/issues_doc/Environment/Climate_English.pdf). The OECD’s founding principles for multinationals were written in 1976 and have been revised on several occasions since (OECD, 2007). They contain voluntary principles and policies for companies. Governments subscribing to the founding principles encourage companies acting on their territory to respect them. The Global Sullivan Principles were written in 1977 by Reverend Sullivan. Directed at South African companies, they attempted to counter apartheidera policies. Their principles for social and economic justice and equal opportunity were recognised in 1999 by the UN and rewritten so that they can now apply to all companies. On a European level, the European Commission published its green paper ‘Promoting a European Framework for Corporate Social Responsibility’ in 2001 to encourage debate on CSR between the major actors: unions, NGOs, companies, groups of companies, etc. This led to a Commission communication on CSR, published in 2002. In 2006, the Commission published another communication on ‘Implementing the partnership for growth and jobs: Making Europe a pole of excellence on Corporate Social Responsibility’ (de la Rosa, 2010; Mazuyer & de la Rosa, 2009). Separately, the European Economic and Social Committee published ‘Information and measurement instruments for CSR in a globalised economy’ in 2005, and in 2006 it gave its opinion on the European Commission communication. The European Parliament also adopted several resolutions on CSR, particularly after the publication of the Commission’s communication on CSR (European Parliament, 1999, 2004, 2007). The European Union has adopted a certain number of directives in some fields, for example on a greenhouse gas (GHG) emission allowance trading scheme (10 December 2002), on environmental liability (20 February 2004), on electronic waste (August 2005), on promoting biofuels as credible alternatives to oil in transport (April 2003), and so on. The Eco Management and Audit Scheme (EMAS) is a more specific European scheme created in 1995 to act as a guideline for voluntary ecomanagement actions. Revised in 2002 and 2004, it enables any organisation wishing to do so to evaluate, improve and publish its work on limiting its impact on the environment. This would be done within the framework of a recognised, standardised and credible eco-management system. The EMAS explicitly incorporates ISO 14001 requirements (see Section ‘Midway between Privately Sourced and Publically Sourced Norms: ‘Mixed’ Norms Involving Management, Certification and Labelling’).

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National Initiatives Each country has developed its own approach. This study focuses primarily on the situation in France. The first explicit reference to CSR can be found in Article 116 of the New Economic Regulations Act (Nouvelles Re´gulations e´conomiques, NRE), which was passed in 2001, establishing a new requirement for listed companies to carry out social and environmental reporting. Further progress in terms of the regulation of CSR practices was made in 2008, with the publication of a Labour Administration circular which defined the procedure to be followed by labour inspectors when assessing the whistleblowing measures that many companies have introduced in recent years (for an analysis of these measures, see Adam, 2005, 2006; Coeuret & de Savin, 2006; Desbarats, 2008; Waquet, 2007). Another initiative of particular importance was the Grenelle Environment Forum, a series of large-scale conferences which began in 2007 and resulted in the promulgation of two Acts, known as Grenelle 1 and Grenelle 2. Between July and September 2007, representatives of the state and territorial authorities worked alongside companies, trade unions and non-governmental organisations to draw up proposals which were then evaluated between 28 September and 19 October 2007 by the general public, members of parliament and various advisory boards. The four conclusive round-table discussions which took place on 24, 25 and 26 October 2007 were an opportunity for the five groups of representatives mentioned above to come together to hold global negotiations and to agree on 268 commitments, all of which were adopted by the French president. The Act known as Grenelle 1 came into effect on 3 August 2009. Its 57 articles propose measures concerning energy and construction, transport, biodiversity and natural habitats, governance and, lastly, risks to health and the environment. An overall report evaluating the Grenelle Environment Forum, drawn up by the firm Ernst and Young and presented on 2 November 2010, indicates in its conclusion that the event represented a true legislative landmark, since it gave rise to almost 450 articles of law and around 70 tax provisions. The Act known as Grenelle 2, which ensures ‘national commitment to the environment’, was brought into effect on 12 July 2010 and established a certain number of the commitments drafted during the Grenelle Environment Forum. The 248 articles which make up this important Act were developed in detail by the French parliament. They announce measures concerning six main fields: construction and urbanism, transport, energy, biodiversity, waste management and health risks, and governance. The theme of CSR has given rise, moreover, to a large number of specific instruments which explicitly refer to sustainable development or deal with

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related issues. These have resulted in a number of plans of action which are inevitably constantly evolving. Key examples include the climate plan (2004), which aims to bring France in line with the targets established by the Kyoto Protocol concerning the reduction of GHG emissions; the environmental health plan (2004), which addresses national health risks associated with air, water and chemical pollution; the environment charter (2004), which promotes ‘the individual’s right to live in a balanced and healthy environment10 and the air plan (2003), which aims to ensure that France respects European directives regarding new emission ceilings and the measures to be taken in the event of a peak in pollution levels. Elsewhere, certain issues relating to CSR have been integrated into the current body of laws. Article 53 of the new Public Procurement Contracts Code (2004), for example, includes environmental protection in its list of bid selection criteria, whilst the law concerning town planning and urban renewal, known as the Borloo Act (2003), explicitly draws a link between urban renovation and sustainable development, since it aims to restructure the areas labelled as sensitive urban zones (ZUS) ‘with a view to achieving social integration and sustainable development’.11

Midway between Privately Sourced and Publically Sourced Norms: ‘Mixed’ Norms Involving Management, Certification and Labelling These standards fall halfway between practice-governing norms and voluntary practices, since they are drawn up by standard-setting organisations and adopted on a voluntary basis by companies. Primarily technical in nature, they serve as a frame of reference for private actors (for an example of the use of standards in European law in the field of health and safety, see Supiot & Vacarie, 1993). Standards developed by the International Standardization Organization (ISO) play a central role. The ISO brings together national standard-setting institutions from 159 countries, on the basis of one member per country; its main office, situated in Geneva (Switzerland), is responsible for coordinating the network as a whole. It is a non-governmental organisation involving representatives from both the public and private sectors. Some of the member institutions either form part of the governmental structure within their country or are commissioned by the government, while others belong to the private sector and have been set up by industry association partnerships at national level. A total of 17,000 standards have been published by the ISO. The OHSAS 18001 standard (Occupational Health and Safety

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Assessment Series) has become the main reference point with regards to company ‘safety’ standards. OHSAS 18001 establishes norms for the management of health and safety in the workplace. Its purpose is to support companies (if they so wish) in their management of health and safety by providing them with evaluation and certification procedures which are compatible with other international management standards. The standard ISO 14064 (2006)12 provides a similar example, but for a different field, namely the environment and the reduction of GHG emissions. This standard applies to all organisations, regardless of their size, location, nature or stage of development, and sets out requirements concerning the creation, fine-tuning and management of a GHG inventory, as well as the ensuing assessment procedures and written reports.13 In 2007, the standard ISO 14064 and the GHG Protocol Corporate Standard were officially linked together by a memorandum of understanding.14 The ISO system offers two other standards on the subject of carbon emission assessments; these apply to the organisations which validate and verify the GHG declarations made by companies. Today, the most emblematic example of a CSR-related ISO standard is ISO 26000, which provides social responsibility guidelines (QuairelLanoizele´e, Capron, & Turcotte, 2010). It was adopted in September 2010 and aims to guide organisations in taking on social responsibilities, to give them a framework allowing them to assume these responsibilities, identify and communicate with stakeholders, and demonstrate credibility when communicating on the subject, to improve the results obtained, to enhance client relationships through increased satisfaction and trust, to promote common terminology which is specific to the field of social responsibility, and, finally, to ensure consistency with regard to existing documents and other ISO standards (see the in-depth critical analysis of this ISO standard given by Daugareilh, 2010). One of numerous international initiatives, the Global Reporting Initiative (GRI), which was set up in 1997 by the United Nations Environment Programme (UNEP) and the American Coalition for Environmentally Responsible Economies (CERES) and run today by an independent organisation, aims to provide companies with guidelines on putting together a sustainable development report.15 A number of other norms have also become well known. Some of these are the result of individual private initiatives, others of collective ones. The SA 8000 standard (SA for social accountability), developed by the Council on Economic Priorities, concerns working conditions, the prohibition of child labour, forced labour, etc. The AA 1000 series (AA for ‘AccountAbility’), launched by the Institute of Social

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and Ethical Accountability (ISEA) in November 1999, proposes guidelines to encourage companies and their stakeholders to work together in evaluating the company’s social and ethical performance. In the financial sector, the Principles for Responsible Investment (PRI) resulting from an initiative launched by the United Nations in 2006 prompt investors to incorporate environmental, social and governance (ESG) concerns into their overall management system. The Equator principles, a set of principles signed by large international banks and presented in 2003, lead these banks to consider social, societal and environmental criteria when financing a project. Other norms have been put in place by non-governmental organisations; to be able to display the corresponding labels, companies must undergo a process of certification. Once again, we are limited to mentioning just a few of the main standards. Many of them relate to the environment (for a more detailed study of the main labels associated with the battle against climate change, see Mazuyer & Michallet, 2011). The Forest Stewardship Council (FSC) label was created in 1993 by the international NGO of the same name. It was established and distributed on the initiative of environmental protection agencies (WWF, World Resources Institute, etc.) in partnership with various economic actors in the wood industry. The label denotes that a number of criteria have been met, including clear adherence to environmental regulations, an awareness of the environmental impact of wood processing and the implementation of certain measures to preserve natural forests. Products which carry the label Max Havelaar are certified fair-trade products, that is to say, they have been produced and sold according to international fair-trading standards. On a national scale, the Agence de l’Environnement et de la Maıˆtrise de l’Energie (ADEME – French Environment and Energy Management Agency) proposes the ‘Bilan carbones’ method,16 which allows businesses to keep track of their GHG emissions, in accordance with both the international standards mentioned above and any legally binding agreements which apply.17 Indeed, it is increasingly rare for GHG emissions reporting to be left to the discretion of the company: the environment code now requires it of any legal entity governed by private law which employs more than 500 people.18 In the construction sector, the High Environmental Quality (HQE) standard was born of a research and awareness-raising programme concerning the environmental quality of buildings, launched in 1995 within the framework of the Urban Development, Construction and Architecture Plan (PUCA). The experimental HQE approach seeks to reduce the environmental impact of constructing new buildings and renovating old ones.

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This is an example of the way in which technical standards are gaining ground in sectors involving social rights, environmental protection and other fundamental CSR-related issues. Can this combination of voluntary company practices, proposed standards, labels and reference points be considered a source of densification of norms ‘in substance’? Does it augur a new (legislative or non-legislative) method of regulating capitalism?

CSR NORMS: A TROMPE L’OEIL DENSIFICATION? It is clear, then, that CSR has given rise to a very dense body of norms. But does that justify describing it as an example of densification of norms? In fact, an analysis in substance of this body of norms leads us to question the reality of such a phenomenon. The proliferation of norms gives rise to opportunism and their very content remains ambiguous (Section ‘Between Opportunism and Ambiguous Discourses’). Moreover, it cannot be denied that the actual impact of these norms remains very limited (Section ‘A Lack of Substance in CSR Norms’). Various factors put together lead us to believe that this apparent process of densification of norms conceals a change of stakes and a struggle between partisans of opposing regulatory methods; the overall quality of the resulting norms is inevitably affected. Is CSR a source of actual densification, and if so, of what type? Can it only develop in opposition to traditional rules of law (Section ‘CSR: The Symbol of a New Regulation of Capitalism?’)?

Between Opportunism and Ambiguous Discourses Formal densification in the field of CSR norms runs counter to the notion of ‘substantial’ densification. Indeed, the former is a source of confusion and opportunism. These perverse effects are reinforced by the ambiguity of discourses. The Proliferation of Norms: A Source of Confusion and Opportunist Behaviour Already in 2002, the European Commission highlighted the fact that ‘the proliferation of different CSR instruments (such as management standards, labelling and certification schemes, reporting, etc.) that are difficult to compare [was] confusing for business, consumers, investors, other stakeholders and the public and this, in turn, could be a source of market

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distortion’. This is even more clearly the case when norms are in contradiction with one another. The BREEAM and HQE standards, for example, are the two systems of environmental certification most widely used in the European construction industry today. The English method has existed since 1990 and inspired all of the others, including the HQE standard, which was created in France in 2005. But each system of certification follows methods of calculation and evaluation that are specific to the characteristics of the country where it was established (weather conditions, socio-economic data, regulations, etc.). Faced with a range of diverging norms, managers may feel confused and choose to follow a wait-and-see policy. This, at least, is the approach identified in 2009 by Jean-Charles Remy-Verdier, an international property consultant (Duffaure-Gallais, 2009). Companies put their own interests first, when choosing to take measures against child labour, in order to discipline their suppliers; measures against corruption, in order to establish authority over their employees (notably in the banking sector) or measures promoting environmentally friendly production methods, in order to appeal to the consumer. This practice is condemned and described as ‘pick and choose’ (Daugareilh, 2007) or ‘selfservice’ (Supiot, 2004). As a matter of fact, it amounts to letting companies choose for themselves which obligations they want to accept when carrying out activities on a transnational scale. Moreover, these obligations depend on the territory where the activities take place. Companies which are based within the European Union or carry out activities there, for example, are obliged to respect the norms of European Public Order, both with regard to environmental and social matters. A code of conduct which does not conform to this set of directly applicable, mandatory norms is therefore not acceptable. On the contrary, it must respect the so-called ‘superior’ norms or at least the set of norms in force at the time. Elsewhere judicial ‘localism’, which is skilfully used by companies and plays a role in their selection of norms, clearly prevents the development of a strong core of rights in places where the need is perhaps greatest, notably where social rights and environmental protection regulations are weakest, such as in a number of developing countries. With no genuine commitment on the part of the company, adopting a code does not in itself guarantee that employees and the environment will be adequately and consistently protected by all the branches of a transnational firm. From a more general perspective, it is also worth noting the significant difference between the standard-setting processes in the field of CSR and in the financial sector. While in the domain of economics and finance a singlestandard principle applies (the seven bodies of standards defined by the

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Financial Stability Forum: international accounting standards, codes of corporate governance, core principles for effective banking supervision, etc.) (Bessire, 2010), in the field of CSR, the inverse situation prevails and there is a chaotic proliferation of norms. The result of this state of affairs is hardly a happy one. Economic and financial standards, which support the values of the financial sector, are imposed on a growing number of actors, regardless of their differences. They acquire considerable normative force, less through the actions of the legislating body itself than under the pressure applied by actors within this fast-developing compliance industry, such as, for example, credit-rating agencies or large Anglo-American auditing firms (Power, 1999; Rose, 2007). In the case of CSR norms, on the other hand, the situation resembles a chaotic marketplace: actors are allowed to ‘browse the market’, choosing the norm which suits them best (Pesqueux, 2010). The densification of CSR norms therefore involves an increase in range but not in depth. It is like a varnish that cracks under the slightest impact, a whitewash that cannot withstand the streaming rain of a thunderstorm. Economic and financial standards, for their part, penetrate the inner workings of the economy and ultimately, of society. When there is a conflict of interest between economic and social forces, the unified set of financial and economic standards inevitably gets the upper hand over the disordered mass of CSR norms. The Ambiguity between Normative Statements and Assertive Statements The fact that CSR acts contain very few normative statements explains their weak effect. John Searle’s classification of speech acts (Searle, 1972 [2009]) may help us to carry out an analysis in substance of the normative value of CSR texts. Following on from the work carried out by Austin (1962), Searle (1972 [2009]) distinguishes between different types of speech acts: ‘assertive’ acts, which commit the speaker to the truth of the expressed proposition (e.g. informing); ‘directives’, which correspond to the speaker’s attempt to obtain something from his interlocutor (e.g. asking); ‘commissives’, which commit the speaker to some future action (e.g. promising); ‘expressives’, which express the psychological state of the speaker (e.g. thanking); ‘declarations’, which, in their strongest sense, modify an institutional state (e.g. declaring war) and ‘performative’ acts, which do precisely what they say they are doing. This typology is expanded by Jeammaud (2011), who suggests dividing the category of directive acts into ‘imperative’ acts (or ‘orders’) and ‘normative’ acts (using the rules of law as a reference point) and dividing the category of declarative acts into performative acts, institutive or constitutive acts, and decisional acts.

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It goes without saying that adopting these terms mutatis mutandis in order to label different categories of CSR norms would be a risky move, since some of them can only apply to norms arising from state law, or more specifically, to legislative statements. However, they can prove relevant and useful when considering some of the norms arising from other sources, including CSR acts and practices, in as far as they allow closer analysis of the wording used in CSR norms that determines their actual effect. When a code of ethics states, for example, that ‘the employee must respect the company’s ethical principles’, there is no doubt that this is normative. Conversely, how are we to interpret a phrase (the like of which is often encountered in CSR acts) such as ‘the company adheres to the legislative and statutory regulations in force’? One might be tempted to place it in the category of declarative acts, since it supposedly refers to an existing reality. Yet relying on such a supposition would be a mistake, welcomed no doubt by the author of the statement, whose discourse in fact conveys a desire to side-step any external control which might seek to verify whether the assertion is true or false. Instead, we could create a subcategory within the declarative acts category to denote affirmative acts, that is to say, declarations of general intent, which either have no direct effect or are not subject to controls due to their general nature. These correspond to Searle’s assertive acts in so far as they claim to describe a state of affairs. By proceeding in such a way, we can place most CSR norms, according to their wording, into one of two categories: normative or assertive. It is worth pointing out that assertive statements are common when it is a matter of the company’s own commitments, whilst normative statements are common in CSR clauses aimed at a third party. Professional whistleblowing measures aimed at company employees are a clear example of this. They command a particular response; an action is expected, namely that of denouncing practices which go against the company’s ethics. They seek to impose on employees an obligation to act, even if the effects are limited in practice by a large number of factors, notably involving judicial or administrative protection of the employee’s individual rights and freedoms. In the same way, a code of ethics drawn up by a company for use by its commercial partners will often contain normative statements, sometimes even hinging on a drastic sanction, such as the suspension or indeed the breaking-off of commercial relations if the ethical commitments are not respected.19 Does CSR consist of creating commitments for other people? No – we believe that, strictly speaking, CSR practices should commit only their author, namely the company itself.

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A Lack of Substance in CSR Norms The CSR standards suffer from a lack of substance, both in terms of commitments and level of sanctions. Uncertainty with Regards to the Level of Commitment The use of ideal types of commitment as identified by American authors (see in particular Maon, Lindgreen, & Swaen, 2010; Zadek, 2004) is particularly useful for evaluating approaches to CSR and the level of business engagement. ‘Defensive’ behaviour is characteristic of the first type. These firms refuse any kind of social responsibility on the grounds of their limited resources or small size. The second is the ‘complying’ type of company, mainly located in states which are fairly advanced in a legal context, and they consider themselves to be socially responsible when complying with the applicable norms. The next type is the ‘managerial’ company which integrates CSR practices into its daily activities for the production process and also implements tracking devices. A company can also become engaged ‘strategically’, whereby CSR approaches become an intrinsic part of their commercial, industrial and financial strategies, and so on. The final level of CSR commitment is the ‘civil’ level, whereby the company has not only integrated CSR as a fundamental part of its own strategy, but also promotes a model based on a CSR commitment both in its own activities as well as in its communication with stakeholders. According to the results of a previous study (Mazuyer, 2011b), the majority of French companies are far from reaching this final stage and most of them are adopting logic of compliance. Finally, very few norms for corporate CSR practices are consistent with the definition given by the European Commission’s Green Paper, which requires ‘to go beyond minimum legal requirements and obligations’. The results of an empirical study focusing on the implementation of commitments in the workplace by French companies concerning their adherence to the Global Compact support this analysis (Mazuyer, 2010c). Weakness (or Absence) of Sanctions The aim of normative CSR initiatives should be to bring about a change in behaviour and, where appropriate, provide for the monitoring or evaluation of these changes. Leaving aside the obligations created by the company’s CSR initiatives aimed at its stakeholders, we will deal only with the company’s CSR initiatives which concern its own affairs. Some examples of the norms most often referred to in corporate discourses show the weakness of the sanctions.

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If we take the case of ISO 26000, entitled ‘Guidelines for social responsibility’, it is claimed on its official website that it ‘is not a management system standard. It is not intended or appropriate for certification purposes or regulatory or contractual use. Any offer to certify, or claims to be certified, to ISO 26000 would be a misrepresentation of the intent and purpose and a misuse of this International Standard. As ISO 26000 does not contain requirements, any such certification would not be a demonstration of conformity with this International Standard’. The negotiators of the standard have clearly wanted it to be neither a basis for legal sanction in the case of non-compliance, nor a regulatory or contractual measure (for a detailed analysis, see for instance Igalens, 2009; Quairel-Lanoizele´e et al., 2010). For the GRI, the goal was to achieve a level equivalent to that of financial reporting, based on comparability, credibility, rigour and verification of the information provided. The analysis that Quairel (2004) conducted on the first version of this standard has pointed to the ambiguities in the nature of these reports and their recipients. The GRI clearly needs to be largely improved before being considered a ‘generally accepted’ quantifiable standard. A new version of the standard, version 3.1, was released in 2011, following version 3 in 2006. However, it is sure that this version measures up since it was thought necessary to provide a deeper reform in 2013. For the Global Compact, the absence of legal constraints and control of commitments made by multinationals has been subject to a great deal of criticism. This has led the organisation to strengthen its norms and to exclude companies which make no effort to integrate these norms in their activities (http://www.novethic.fr/novethic/v3/rse-responsabilite-sociale-d-entreprisearticle.jsp?id¼35). In 2003, the organisers of the United Nations imposed a commitment procedure asking partners to publically demonstrate the practical application of the principles of the pact. The organisations (companies, associations, local authorities, etc.) adhering to the pact thus agree to make progress each year in at least one of these 10 principles and report annually on their progress to the United Nations. Many representatives of civil society have nevertheless seen a regression in this proposal as it provides an opportunity for companies to choose the principles they agree to respect. It does not even refer to sanctions based on the analysis of the truth or effectiveness of CSR practices, but rather to a penalty for failure to report the progress (on this specific question see Deumier, 2010). At the French level, the report to the government issued in 2004 by the ORSE on the application of Article 116 of the NRE Act of 2001 was hardly encouraging. According to the ORSE, the majority of the 700 companies concerned had not followed the law. Some companies, especially larger

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ones, had certainly issued a specific report, often called ‘sustainability report’, but only half of the CAC 40 companies had committed to a sustainable development approach, as formalised in the report or in a letter from the president. The report noted that the smaller the company, the scarcer the information in terms of pages and themes for sustainable development. Over 80% of the 130 smallest companies in the SBF 250 devoted less than five pages to social and environmental information. Worse still in terms of the Global Compact, some companies do not even issue the report, as required by Act. It should be noted that the law does not provide for the direct monitoring of application by the state; however, the company’s stakeholders could take legal action – and impose financial penalties upon the company – to force the companies to produce the information provided for under Article 116 of the NRE Act, but it is not difficult to imagine that the potential effectiveness of this type of control is much less than that established by the state. The October 2010 report on the evaluation of the Grenelle Environment Forum (Grimfeld et al., 2010) noted, meanwhile, that almost 200 decrees have yet to be adopted, which augurs badly for any effective implementation in the short or medium term of submissions by companies. CSR: It Looks Good, but Only on Paper The substantial weakness of CSR norms relates to the belief in the virtues of ‘transparency’. That is to say, better informed stakeholders (investors, employees, consumers, etc.) are likely to put more pressure on companies to change their behaviour. As a consequence, those companies who behave in a responsible manner are deemed to be in a better position for recruiting competent employees, to raise capital at lower cost, and to attract new customers and retain existing customers more easily. These companies would have a competitive advantage. Most of these norms therefore focus on the communication of progress and not on actual social and environmental progress. For example, in terms of the Global Compact, it should be noted that in 2011, over 2,000 companies were deleted from the list of participants; this was not because of a lack of progress, but due to several breaches in the obligation to report any progress. The Differentiation Programme, whose goal is to change business practices by enhancing transparency, dialogue and the monitoring of stakeholders, was also launched that same year. Creating a public platform was supposed to allow stakeholders to make more informed choices and by doing so, to exert pressure on businesses (http://www.unglobalcompact.org/ COP/differentiation_programme.html).

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Communication on CSR has therefore become a strategic issue for companies which increasingly use considerable resources for this purpose. It is not sure that the quality of information has thus improved, especially in terms of effective advances as to accountability. In this regard, the assessment of the sustainability reporting developed under section 116 of the NRE Act speaks for itself: ‘These documents, often produced by communication departments with attractive photos and texts, paint a very limited portrait of the company on environmental and social aspects, which are not directly useful to investors and unsatisfactory to NGOs’ (http://www.novethic.fr).

CSR: The Symbol of a New Regulation of Capitalism? The analysis of the densification process of CSR norms underscores a tension, or even an opposition, between the intensity of densification on surface and the ambiguity of densification in substance. This observation raises a new question: what does this paradox signify? The answers to this question vary greatly depending on the theoretical position adopted. At one extreme, the tension is simply ignored, in ‘an abundance of professional literature, produced by experts in ‘business ethics’ proceeding generally in the celebration of the phenomenon and the new union of the ethics and business’ (Postel, Rousseau, & Sobel, 2009), rallied around the slogan ‘ethics pays’. At the other extreme is the most virulent denunciation, which views CSR either as a new avatar of colonialism (Banerjee, 2000), or sees this phenomenon as a smokescreen designed to hide and preserve the irreducible conflict between capital and labour (Coutrot, 2005; Guilhot, 2004; Lordon, 2003). However, to overcome this opposition between the extreme positions that tend to oversimplify a phenomenon of great complexity, we believe it appropriate to consider CSR in a broader perspective, which deals with the regulation contemporary capitalism.20 The uncontrolled proliferation of norms seems to be characteristic of an emerging field where various multiple actors with different interests confront each other and where ideological struggles express themselves. Developments seem to be controlled by the instable balances of power between the different actors – stakeholders in the usual CSR terminology – trying to impose their vision of regulation. At first glance, the most striking phenomenon is the privatisation of regulation that conveys the expansion of the body of CSR norms. Further analysis shows that the ambiguity of the densification of norms in this field could be the expression of the symbolic transformation of the means of regulation at work in contemporary capitalism.

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Are CSR Norms Instrumentalised? As seen in Section ‘An Increasing Number of Spontaneous Norms Created by Private Organisations’, the largest share of the body of CSR norms comes from private sources. It is of course possible in some cases to observe cooperation between public institutions and private actors. The ISO 26000 standard therefore is the result of a process never seen before in the international arena. With an unprecedented gestation period of nearly a decade, the standard was elaborated with the help of corporate representatives, governments, the ILO, trade unions, consumer groups and NGOs from all parts of the world (Daugareilh, 2007). In terms of corporate responsibility, such a collaboration of all the stakeholders is probably a necessity, because otherwise it would be difficult to regulate the relationships and transnational activities of companies (Szurek, 2003) which carry out business across national borders. However, the policy has its limits. Densification in the field of CSR norms carries at least two risks: first, the control of technocratic bodies (government by experts), of dubious legitimacy, on issues that affect the common good, resulting in the erosion of democratic processes; and, secondly, a rampant process of the privatisation of law. On a political level, Pesqueux is shocked by the encroachment of management in the public sphere, which removes from the institutions the monopoly of action for the public good, and institutionalises private organisations. He referred to this phenomenon as the ‘de-institutionalisation of the institution’ (Pesqueux, 2007). In its analysis of the phenomenon of ‘Tetranormalisation’ (conflict between the four main body of norms: social, environmental, commercial and economic and financial), the collective work coordinated by Bessire, Cappelletti and Pige´ (2010) also points out this monopolisation of the standard-setting process by organisations without democratic legitimacy (‘colonisation’). This emphasises the decline of politics induced by the precedence given to standard-setting bodies whose only legitimacy is based on so-called expertise. In a detailed analysis of ISO 26000 (whose development process is often held as the textbook example), Igalens (2009) questions the ‘legitimacy of the ISO to provide answers to political questions’. His conclusion is clear: ‘neither the composition of the ISO structures nor the development process [y] offers the guarantees and the characteristics, particularly democratic ones, that we are entitled to expect in a text setting out the relationship between actors on the international scene, such as international organizations, governments, NGOs, companies and nature and citizens’. From a wider perspective, which includes a broader range of norms than just those from the CSR,

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Pesqueux (2010) notes that ‘the norms of ‘the liberal regime’, means of characterizing the period which began in the 1980s, are perfectly ‘representative of a weakening of the nation-state’s sovereignty in favour of a partial and biased sovereignty, that of interest groups’. In other words, according to him, these norms are ‘the realization of privatisation as a process: a situation where private norms are addressed to the social body, regardless of their representation’. From a legal standpoint, it should be noted that the relationships between CSR and the legal system, which are understood as complementary in most definitions, are in fact marked by opposition and competition.21 The European Parliament, in its resolution of 15 January 1999, was affected by this situation and stated emphatically that ‘codes of conduct are no substitute for international norms and the responsibilities of governments and cannot serve as instruments to make multinational companies immune to government control and justice’. The inherent risk in the uncontrolled development of these codes is the privatisation of law or a private government. Delmas-Marty (1998, see also 2004) denounces the danger of a ‘hidden motive of blocking the intervention by legislators which has supposedly become unnecessary but which in reality results in privatizing the rule of law and thus transforms the company owner, who is directly involved as a potential defendant, into a legislator, policeman and judge’. On a very practical level, Quairel (2004), in a close analysis of the GRI shows similarly that it ‘it should be considered as a private standard-setting institution which supports the voluntary publication of social information only to escape the risk of more stringent regulations’. However, rather than talking about actual ‘privatisation of law’, we prefer to consider the codes of conduct as the expression of a desire for deregulation pursued by business leaders. In this case it is exploiting the law as a tool, as ‘a form of self regulation and a means of introducing greater flexibility in managing labour relations’ (Supiot, 1989). What is true for labour relations is also true for other fields of CSR: relationship with suppliers and customers, protection of the environment, human rights and communities. Densification of norms, by intruding in areas which were previously extra legal (ethical, societal), becomes moral currency for advocates of non-intervention by law of the state, justifying deregulation and self-regulation. Beyond this phenomenon of weakening state regulation, it seems today that a major transformation in the regulation of contemporary capitalism is being played out. This is the thesis being defended by researchers from different disciplines.

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Towards a Major Transformation of the Regulation System for Contemporary Capitalism? Adopting a perspective fuelled largely by management sciences, Gendron et al. (2004) base their vision of the emerging system of regulation on the example set by the European Union, which they consider iconic. They make three observations: the European Commission ‘clearly recognises the existence of a new cluster of control brought about by civil society’ and it ‘does not wish to interfere in the definition of substantive criteria, allowing itself the task of recognizing and identifying ‘the good codes’ rather than developing its own reference code of conduct’, emphasizing ‘a recognition of emerging social compromise’. But ‘even if it does not define them itself, the Commission does not fail to refer explicitly to reference standards’. Gendron et al. (2004) imagine a system of regulation that will be both public and private, with cooperation between national regulatory systems and international standards, both in terms of procedural and substantive norms. They believe that this system ‘initially will be voluntary, but will contain mandatory aspects, for example, in terms of disclosure and credibility of information’. Some economists, who appeal to the French ‘theory of regulation’, develop a more critical, but also perhaps more pessimistic, view of the densification of CSR norms. They see it as ‘a new attempt to reconcile the necessity of efficiency and the ethical requirement of social justice, an articulation in particular historical form or another is essential to the social viability of capitalism’ (Postel et al., 2009). CSR norms in this context could herald ‘a method of reconstruction of the Fordist regime’ (ibid.) that began to unravel in the mid 1970s (see also Cazal, Chavy, Postel, & Sobel, 2011). Postel et al. (2009) point out two issues involved in the process. ‘Either CSR will evolve from the micro level to the macro level and will develop a new institutional form of territorialization and politicization of social and economic conflicts, enabling environment and wage pressure on capital and transnational logic. Or CSR will be only a movement to cover the increased pressure of the capital on these two ‘fictitious commodities’ that are ‘work’ and ‘earth’, and the prophecy of Marx, Keynes or Polanyi to capitalism will inevitably collapsing again before us’.

The perspective developed by Gendron et al. (2004) and the one outlined by Postel et al. (2009), as different as they may be, converge on several points: the advent of a new system of regulation is a process which is still erratic and the final configuration that will result from this process remains unclear. They all agree on the complexity of this new regime of regulation.

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CONCLUSION In this chapter we have asked a few questions: Have CSR norms entered a process of densification? If so, what type of densification is it? Is this a densification which refers to a quality, as in the case of the densification of wood, whereby its properties are improved (densification in substance)? Or is it simply a quantitative densification, as in the case of the densification of an urban area (densification on the surface)? Our analysis shows that CSR norms are engaged in a process of densification, whose nature remains problematic. In the latter sense, densification on surface (quantitative densification), no one can deny that CSR is the site of abundant and constant production of norms (‘inflation’ to use Dean Carbonnier’s term) which muddles actions, practices, norms of diverse sources and with mixed results. However, in the former sense, the answer is uncertain for ‘substantive’ or qualitative densification. Densification of CSR norms is a source of complexity, multiplication and opposition between CSR norms themselves, on the one hand, and between CSR norms and economic and financial norms on the other. With the current global financial crisis, the second group of norms tends to overshadow concerns of CSR. The obligations attached to reporting are more important than those attached to the intrinsic commitments, likewise those relating to environmental protection are more important than those relating to the social domain (Bazillier, 2011). Furthermore, the main feature of CSR is to provide a body of norms that is being built, if we follow the usual definitions, in addition to the legal system. Yet few CSR norms supplement the rules of law, simply because the interests of their principal authors, companies, are often in conflict with the public interest that CSR is supposed to defend. Very few of these norms, as we have seen, are meant to have actual effects. They are merely general statements of intent or they overlap with the legal, conventional or contractual norms already applicable. And even when they do, penalties are non-existent or insignificant. In this sense, the expansion of the body of CSR norms could be seen as a phenomenon of degeneration. However, legal analysis may modify this decision. One needs to distinguish between CSR instruments which have actual normative potential and, within this same group, those with normative effect. This normativity can first be seen in the general sense, as the ability to cause behaviour or change norms of conduct. It can, for example, be evaluated in terms of the existence of monitoring, the desire of an effective implementation or a real improvement in practices, provided that evaluation systems be planned and

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actually run. Another degree of normativity can then be achieved when, among these norms of behaviour, some become rules of law (‘hard law’). Law effectively confers the characteristic of legal norms on the provisions of CSR acts in several ways. For instance, a code of conduct may contain obligations which become contractual when accepted by the company’s commercial partner. It can also become a source of disciplinary obligations, subject to judicial review, at the expense of employees if it relates a company’s policies and procedures and if it has followed the formal procedure. It can also be at the root of a company’s commitment, sanctioned if not respected on different foundations according different areas of law: unilateral employer commitment, use and misleading advertising. This assessment contradicts the usual definition of CSR as a complement to law and in excess of legal requirements and regulations. Thus, the normative densification process under way in the field of CSR seems particularly complex and its outcome uncertain. Some elements suggest that the proliferation of CSR norms (chaotic, confusing and not very compelling for companies) could be just the tip of a more powerful fundamental shift, which could lead to the densification of norms, not only on surface but also in substance, a process of densification which is if not legal, at least social. Some norms seem to dominate due to the importance given to them by different actors; they become compelling. Others tend to ‘harden’, because a gradual process of convergence and articulation between them takes place, which can result, in some cases, in ‘hard law’. At the end of this still fairly chaotic process, a new, not yet clearly defined form for the regulation of capitalism emerges. The institutions which carry this new regulatory framework have not yet been invented.

NOTES 1. We speak of its current state because both CSR practices and its ideology have much older historical roots, whether it be in business ethics, social paternalism, the Church’s social doctrine, the American ‘labour problems’ school or the institutional theory of business. To learn more about these influences, please read our study (Mazuyer, 2010a). 2. It is the former definition which appears at the top of the results when you type ‘densification’ into Google.fr. 3. In labour law, for example, this phenomenon has justified declarations of ‘the simplification of the law’, or its ‘modernisation’. See, for example, the new French Labour Code, which according to many is not any easier to use despite its

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reorganisation. One of its critics, Docke`s (2007), defines ‘decodification’ as ‘a process which consists in working for the inaccessibility and absurdity of the law’. 4. From the very clear metaphors of Dispersyn (2010, p. 541). 5. http://www.orse.org/site2/maj/phototheque/photos/docs_outils_rse/goel_guide_ to_instruments.pdf 6. They could, according to their content and the system of law, be simple, general declarations of intent without legal effect, just as laws are often seen as no more than contractual obligations, unilateral acts from employers, unofficial rules and internal company rules. See below. 7. For a critical view of their normative reach, please read Mazuyer (2010b). 8. Aims to restore investor confidence in the American markets via new internal review methods for companies listed on the stock exchange. 9. According to CNIL definition (2005) from its ‘document d’orientation’ adopted on 10 November 2005 in order to put into place whistleblowing systems. A more precise definition was also provided: ‘systems (telephone number available 24/7, email, postal address, etc.) which enable employees to alert (anonymously or otherwise) their bosses or a committee specially chosen by a third party, at no personal risk, of any irregularities or unprofessional conduct to which they were privy within their company, and which they believe may incur damage to said company financially, legally, in terms of health or security risks, or to its reputation’ (p. 14). 10. This charter, as we shall see later on, has progressively taken on legislative value. 11. It is worth clarifying that these legislative initiatives do not strictly concern CSR if we keep to the above definition which evokes ‘voluntary practices’ adopted by companies, but we mention them here to illustrate the growing awareness of CSRrelated issues, particularly where sustainable development is concerned. 12. Within the ISO international certification system, standards belonging to the ISO 14000 family address environmental management. ISO 14004 (2004) provides guidelines on how to set up, implement, update and improve an environmental management system, as well as how to co-ordinate it with existing management systems. 13. The standard ISO 14064 concerning GHGs consists of three parts, see infra for standards ISO 14064-2:2006 and ISO 14064-3:2006. 14. Signed on 3 December 2007, this memorandum links the International Organization for Standardization, the World Resources Institute and the World Business Council for Sustainable Development. 15. We have now reached version 3.1 of the GRI guidelines (one of the main standards that deals with CSR reporting) and a new version is to be published in 2013. 16. ADEME is a public establishment of an industrial and commercial nature, which offers expertise and advice to companies (http://www.ademe.fr). The ‘Bilan carbones’ method is one of its trademarks. 17. Notably European directive no. 2003/87 (13 October 2003), which established a GHG emissions trading scheme within the European Union. 18. Article L.229-25 of Act no. 2010-788 (12 July 2010) concerning national commitment to the environment (article 75). 19. An example of this might be a subcontractor who uses child labour. 20. Cochoy and Lache`ze (2009) also purport this excess based on what they call illusion sociology. For them, ‘in the world of CSR, everyone is deluding himself: the

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company illusionist, but all the spectators; that is to say all the stakeholders, not to mention intellectuals, naive but also critical, who select what they like in the field of practices, happy to have finally found a theme that makes the capitalism that they need to study and the management that they need to study accessible’. 21. Even if these relationships also result in a form of reciprocal complementarity, see Mazuyer (2011a).

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CHAPTER 5 ONLINE REPORTING OF SUSTAINABILITY: A STUDY OF GLOBAL CLOTHING SUPPLIERS M. Azizul Islam and Victoria Wise INTRODUCTION Corporate sustainability focuses on three key organisational aspects including social, environmental and financial performance. It deals with how to organise and manage human actions in such a way that they meet physical and psychological demands without compromising the ecological, social and economic base which enables these needs to be met (Unerman, Bebbington, & O’Dwyer, 2007). The fundamental view of sustainability is that organisations should not pursue economic gains at the expense of society (e.g. human rights violations), ecology (e.g. greenhouse gas emissions) and the future generations. The main aim in this chapter is to focus on corporate social and environmental sustainability. In particular, this chapter focuses on the online social and environmental sustainability performance reporting practices of three global supply organisations operating in Bangladesh which is regarded as a developing nation. Social and environmental sustainability activities and associated reporting is a central part of the analysis as it appears that global garments supply organisations in developing nations respond to meet the needs of those stakeholders who are affected by their operations. Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 97–113 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003009

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For listed companies in a developing nation such as Bangladesh, the preparation of annual financial reports is mandatory and the cost of preparation and distribution is considerable; however, it is not mandatory for privately owned or small and medium-sized enterprises (SMEs). Relative to the interest in the financial reporting practices of listed companies, there is relatively little interest from stakeholder groups such as government, employees, consumers, suppliers, regulatory bodies, non-government organisations (NGOs) or the media in the financial reporting practices of privately owned companies or SMEs. In Bangladesh, this stakeholder disinterest is considered to be an important contributing factor to the low level of voluntary reporting of corporate sustainability information. While social and environmental sustainability reporting is becoming a mainstream issue for all companies, the research in this area tends to focus on the reporting practices of large listed companies (see, e.g. Islam & Deegan, 2008). Considerably less attention has been directed at understanding and explaining the engagement of privately owned organisations or SMEs in socially and environmentally sustainable initiatives or in the voluntary reporting by them of such activities. Privately owned companies may experience business legitimacy crises and need to disclose sustainability information in order to preserve or repair public perceptions of their legitimacy. Sustainability reporting practice is an action that can be taken in order to maintain the legitimacy of business practices. While sustainability reporting is not yet widespread in the context of Bangladesh, a number of important cases do exist. In this case study analysis of three privately owned companies in the Bangladesh readymade garments industry, it is noted that the primary motivation for such reporting appears to be the influence of multinational garment-buying companies responding to social pressures from the global media and consumers. The utilisation of online sustainability reporting is seen as an attempt to legitimise business methods and is explained in this chapter through the lens of legitimacy theory. Organisations may choose online disclosure of their sustainability programmes in order to meet the demand of global expectations. Rowbottom and Lymer (2010) citing several recent studies argue that the Internet has become a key source of corporate information. Earlier, Rikhardsson, Andersen, and Bang (2002) had also noted that the Internet was increasingly commonly being used as a communication medium as its advantages included a low cost of access, low marginal communication costs, flexibility in designing, customising and updating information and the extensive possibilities for combining different forms of presentation (such as

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text, graphics, sound and video). Online delivery is also responsive to global community expectations and so the Internet is a useful medium for companies when disclosing information in response to stakeholder pressures. Therefore, it can be expected that online sustainability reporting may be underpinned by stakeholder expectations for organisations to be accountable to the wider global community for their social and environmental impacts and practices. In this chapter, a set of significant case studies based on social and environmental sustainability by unlisted companies in Bangladesh is presented. This set of case studies is used to illustrate the nature of voluntary online sustainability reporting that occurs within a developing country subject to considerable international scrutiny of its business practices. It is likely that a primary motivation for such reporting is the influence of multinational garment-buying companies that are, in turn, responding to pressure from the global media and consumers. Therefore, a major concern raised in this chapter is whether business practices in Bangladesh indicate a general need for further strengthening of its business regulation, monitoring and oversight if the country is to meet international norms for socially and environmentally responsible business conduct. By focusing on the websites of privately owned companies, the analysis presented in this chapter provides a first attempt to examine the motivation for such companies in the Bangladesh readymade garments industry to use online sustainability reporting. Specifically a categorisation of the observed online disclosures within the Hackston and Milne (1996) framework is provided and the disclosures are rationalised through the lens of legitimacy theory. The remainder of this chapter proceeds as follows. In the next section, a review of the literature outlining relevant perspectives on global expectations of sustainable business practices is presented. This is followed by an outline of the research method that has been adopted, and then a selection of illustrative case studies is presented and discussed. Finally a set of concluding remarks is presented which summarises how Bangladesh privately owned companies appear to be managing the legitimisation of their business practices through the use of sustainability reporting online.

ORGANISATIONAL RESPONSE TO GLOBAL SUSTAINABILITY EXPECTATIONS This section commences with an examination of various perspectives on global expectations and norms for sustainable behaviour in business.

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Evidence from the relevant literature is then provided to demonstrate the emerging importance of the Internet as a medium for the reporting of various types of corporate information. Many companies in Bangladesh supply readymade garments to multinational clothing retail companies based in Europe, the United States (US) and other major markets. Apparent motivations for multinational companies sourcing products from a developing country such as Bangladesh include that products can be sourced at relatively low prices. In the quest of the cheapest price, many multinational companies have been observed to have shifted production location to developing countries (Custers, 1997; Kabeer & Mahmud, 2004; Wilkins, 2000), and as a result clothing manufacturing in many developed countries has almost disappeared (Shelton & Wachter, 2005). Multinational companies headquartered within developed countries have moved their production to low-wage developing countries such as Bangladesh, Vietnam, Thailand, Indonesia, India, China and Cambodia among others, typically outsourcing their products to suppliers located in these countries (Rahman, 2004; Wilkins, 2000; World Bank, 2007; WTO, 2004). While multinational companies are becoming increasingly dependent on suppliers from developing nations (Haltsonen, Kourula, & Salmi, 2007), the pressure on multinational companies from various stakeholder groups pushing for socially responsible production has also grown significantly. Stakeholder concerns over social and human rights are becoming a key issue in major strategic international business decisions. NGOs have pressed hard for change by explicitly asking for the support of human rights in corporate practices (Dicken, 2003; Frenkel & Scott, 2002; Wah, 1998). A range of different NGOs and trade unions have become involved in organisational networks to exert collective pressure on corporations to implement workplace sustainable policies (Braun & Gearhart, 2004; Hughes, Buttle, & Wrigley, 2007). In conjunction with NGOs, the global media has been playing a crucial role in raising awareness and concern over multinational companies’ operating practices in developing countries. For example, some high-profile multinational clothing and sports retail companies have been repeatedly exposed to media criticism about the exploitation of workers in their supply companies in developing countries (De Tienne & Lewis, 2005; Spar, 1998). Companies operating in Bangladesh have faced numerous campaigns that have highlighted poor working conditions. Issues frequently raised relate to the employment of child labour, human rights abuses, poor working environments and inadequate factory health and safety measures resulting

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in frequent accidents and deaths. These issues have generally been seen as among the most important ethical issues in international business (Guvenli & Sanyal, 2002; Haltsonen et al., 2007). Historically, Bangladesh has been the focus of considerable international attention over the issue of the participation of children in industry (Rahman, Khanam, & Absar, 1999). In 1992/1993, Bangladesh faced the threat, in the form of the Harkin Bill (US), known as the Child Labor Deterrence Act (Custers, 1997) of an official boycott intended to prohibit the importation of any goods to the US that had been wholly or partly produced using child labour (Mollison, 1999). In December 1992, US-NBC broadcast negative news accusing the manufacturer members of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) of employing thousands of Bangladeshi child labourers. In response to these pressures, in the mid-1990s the BGMEA took a number of initiatives relating to the elimination of child labour from the garment sector. In 1995, it collaborated with the United Nations Childrens’ Fund (UNICEF) and the International Labour Organisation (ILO), signing an agreement to move children under 14 years of age from garment factories to schoolrooms. This significant improvement in social performance initiated by the BGMEA demonstrates how organisations can and have responded to stakeholder pressure in order to legitimise business practices. The working conditions experienced by the Bangladeshi readymade garment workforce also create great concerns. In general, working conditions in Bangladesh have been far below Western standards (Custers, 1997). There is frequent international criticism that the workers in Bangladeshi clothing factories are not in a position to enjoy basic human rights. They often work in an inadequate health and safety environment, experience physical and verbal exploitation, societal vulnerability and face the threat of loss of employment (Paul-Majumder, 2001). Alarmingly, the garment sector is notorious for fires. Between 1990 and 1997, 50 garment factories in Bangladesh were reportedly affected by fire; 87 workers died and about 1,000 were injured (Saman, 2001). In November 2000, a fire in a garment factory killed 800 workers and many were trampled to death as they tried to escape the building through the only stairwell only to find the exit doors were locked (Parr & Dhanarajan, 2002). Thus, many high-profile multinational companies face great pressure due to the extensive campaigns of NGOs and the various ‘scandals’ reported in the media relating to child labour exploitation and poor working conditions

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at their suppliers’ factories (Egels-Sanden & Hyllman, 2006; Frenkel & Kim, 2004; Haltsonen et al., 2007; Hughes et al., 2007; Kolk & van Tulder, 2004). As a result, multinational companies exert considerable pressures on the garments enterprises who are their suppliers (Kolk & van Tulder, 2002; Radin, 2004; Sethi, 2002; van Tulder & Kolk, 2002). A joint consideration of ‘media agenda theory’ and ‘legitimacy theory’ provides an expectation that the media can influence and shape community concerns, and that sustainability reporting is influenced by societal concerns as represented by media pressures (Deegan, Rankin, & Tobin, 2002). Extending this thread, it is expected that companies in Bangladesh are likely to respond to pressures exerted by multinational buying companies. With the above discussion in mind, it is argued that if Bangladesh companies operate with low business standards their sustainability will be threatened as multinational companies have available options to source elsewhere in places where business practices are better. The view offered in this chapter is that if Bangladeshi companies desire to survive and to achieve a competitive advantage, they must not only engage in socially and environmentally responsible actions which achieve global norms and standards, but importantly they must demonstrate these actions and associated accountabilities voluntarily through some form of reporting. Thus, the discussion so far leads to an investigation of the online sustainability reporting practices of privately owned companies in the readymade garments industry in Bangladesh. It can be argued that in the absence of institutional requirements and stakeholder pressures for companies to provide information, media and consumer calls for social accountability could drive the need to legitimise business actions. Whether and how companies conform to the expectations of the wider global community can be explained by a theoretical framework such as legitimacy theory. The perspective grounded in legitimacy is that organisational practice must respond positively to societal concerns shaped by media or civil society organisations such as consumer advocates and NGOs, and take corrective action and make appropriate disclosures in order to maintain their legitimacy. Legitimacy theory posits that the motivation for managers to report social and environmental sustainability information is to demonstrate compliance with society’s expectations, perhaps reflective of a view that compliance with its host community implies a license to operate (or a ‘social’ contract) (Deegan, 2002). The theory of legitimacy can be applied when organisations respond to global expectations or broader local community expectations (Islam & Deegan, 2008).

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Newson and Deegan (2002) claimed that legitimacy can be threatened even when organisational performance is not deviating from societal expectations of appropriate performance. They argued that this might be because the organisation has failed to make disclosures that show it is complying with society’s expectations, which in themselves might be changing across time. Earlier, Hogner (1982) had argued that to be perceived as legitimate, organisations could undertake social and environmental disclosures. Consistent with Hogner (1982), Lindblom (1994) later argued that the processes of social disclosure have been empirically verified as a tool of legitimation. Deegan (2002) points out legitimisation strategies may vary between countries and broad comments made about how managers react to particular events may need to explicitly consider national, historical and cultural context. Thus, case studies of practices within nations, such as the case studies presented in this chapter, are likely to reveal how managers within different national contexts are reacting to societal perceptions and pressures for change. As indicated in this literature review, an important factor that has emerged as a significant motivation underpinning corporate sustainability reporting by companies is their apparent desire to legitimise their business practices. In the context of the case studies presented in this chapter, legitimacy theory is utilised to explain online sustainability reporting practice within Bangladesh’s readymade garments industry.

RESEARCH METHOD Yin (1989, p. 13) argues that the case study method is a ‘preferred strategy when ‘‘how’’ or ‘‘why’’ questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context’. The contemporary event under investigation in this chapter is ‘how’ the business reporting of social and environmental sustainability initiatives and practices occurs. Whether the reporting approach conforms to global norms and standards is also considered. In this regard, a descriptive case study approach is adopted to facilitate the analysis. An exploratory case study approach is also adopted to focus on ‘why’ companies might be reporting their operations in a particular manner. That is, why a type or mode of reporting is occurring; and, are companies, particularly unlisted companies in the Bangladesh

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Table 1. Strategy

Case study Archival analysis Experiment Survey History

Relevant Situations for Different Research Strategies. Form of Research Question

Requires Control Over Behavioural Events?

Focuses on Contemporary Events?

How, why Who, what, where, how many, how much How, why Who, what, where, How many, how much How, why

No No

Yes Yes/no

Yes No

Yes Yes

No

No

Source: Adapted from Yin (1989, p. 17).

readymade garments industry, reporting their sustainability practices in response to global expectations? The research event (the mode of sustainability reporting) under examination is beyond the control of the researchers. Yin (1989) advises that suitable research methods where the focus is on a contemporary event that is not under the control of the researchers include the survey method, archival research or the case study method (see Table 1). A case study approach is suitable as it can proceed by using archival data obtainable from publicly available (secondary) sources such as electronic media (Internet) reports.

SELECTED CASE STUDIES Yin (1989, p. 146) argues that case study reporting should focus on significant individual cases which are either unusual or of general public interest and/or the issues are of national importance, either in theoretical, policy or practical terms. In this chapter, three case studies involving sustainability reporting by significant Bangladeshi readymade garments companies have been identified. The companies chosen are all members of the BGMEA and are significant suppliers to high-profile multinational companies in major Western markets including the US and Europe. The reporting practices of the selected cases illustrate how unlisted companies in developing economies such as Bangladesh, can and have been, proactive in anticipating the information needs of stakeholders to avoid adverse

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consumer and media reaction; in short the companies have engaged in legitimising actions.

Case Study 1: Ananta Group Ananta Group (AG) is one of approximately 4,200 garment companies with membership of the BGMEA. Company members of BGMEA are privately owned and they are also SMEs. The managing director of AG has served as an elected chairman of BGMEA’s social compliance cell which is an industry organisation that voluntarily monitors and makes individual garment company compliant with buyers’ guidelines. AG’s customers (its ‘buyers’) are typically top-brand importers and retailers and which include GAP, Wal-Mart (US), M&S (UK), Mode, Adams, Woolworths, George (ASDA), Dunnes Store, National School Wear, Mackyas, Trutex, Banner Charles Vogele, H&M (Europe). AG provides a social responsibility report which is readily accessible (one ‘click’) from its online ‘homepage’. In this report (Ananta Group, 2011), AG provides the following information to stakeholders regarding its community commitment and its environmental stewardship. ‘Commitment to Our Community Ananta is deeply conscious of the needs of the communities it operates in and hopes to create strong goodwill among its neighbours. Some of our social initiatives include  Monthly blood collection from employees and donation campaigns  Free biannual eye camps for examination and treatment  Disaster rescue and aid for victims of annual floods and cyclones Environmental Stewardship Ananta develops all its facilities and products with strict consideration to the environment. In particular, Ananta has taken care to focus on several areas including:  Investing in biological Effluent Treatment Plants to decontaminate all waste water discharge  Biannual tree plantation programs to help offset our carbon footprint  Rainwater harvesting to reduce the impact on our freshwater supplies’. (Ananta Group, 2011)

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Additionally, AG also provides information concerning its workforce in an online report in which it outlines details about the programmes it has initiated in support of workers’ welfare. Details about these programmes are as follows. .

‘Human Capital At Ananta we believe that our employees are our greatest asset. The wage and benefit programs that Ananta offers far exceed the standards set by international agencies and the national legislature. These include:         

Medical facilities with in-house doctors and nurses Group life and health insurance plans for all employees Free, biannual eye camps for examination and treatment Free day care centre located within our own premises Employee savings schemes and emergency fund Transportation facilities for remote employees Cultural club with professional music and dance instructors for employees Safety programs and routine drills to prepare for emergencies A strict no-recruitment policy for under-aged candidates’. (Ananta Group, 2011)

In the Human Capital Report provided AG sets out a statement of its management philosophy regarding its workforce. The Human Capital Report states that Ananta has a progressive management committed to recruiting and developing the best talent in the apparel manufacturing industry. Ananta believes in continuous human resource development and provides all employees with extensive training and counselling. All of our employees are encouraged to set their own development goals and everyone participates in biannual performance reviews to determine promotions and bonuses. (Ananta Group, 2011)

On the basis of the theoretical discussion in the literature review provided earlier in this chapter and on AG’s online sustainability reporting as summarised in this section, it could be presumed that the potential motivation for the sustainability reporting is to maintain business legitimacy. Consistent with the legitimacy theory perspective AG is disclosing online sustainability information about how it acts in a manner consistent with global societal expectations. The apparent need for organisations to comply with the ‘license to operate’ derived from the ‘social’ contract (Deegan, 2002) is reflected throughout AG’s online sustainability report.

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AG’s sustainability reporting is consistent with the findings noted by Wise and Ali (2010) in their study of the reporting practices within Bangladesh’s banking sector. It is also consistent with a number of the six disclosure categories contained in Hackston and Milne’s (1996) research framework which are community involvement, human resources, environment, energy, product and safety, and other. It is feasible that AG’s worker welfare disclosures might be in response to the negative media reports experienced by its multinational buyers about inhumane working conditions in the Bangladesh readymade garments industry. AG’s report makes specific mention of embedded processes aimed at ensuring it does not engage child labour. It is also of interest that AG appears to have been responsive to predominant buyers’ direct demand for maintaining workers’ rights and welfare. AG addressed environmental issues and placed its discussion within the context of a low-carbon footprint system. Wise and Ali’s (2010) study noted that Bangladesh’s banks did not make any environment-related disclosures. However, unlike banks, readymade garments companies are directly responsible for releasing effluents and thus polluting environments. Thus, the presence of environmental performance information within AG’s sustainability reporting is quite likely to be related to the severity of international pressures in this regard from its important stakeholder groups.

Case Study 2: Mohammadi Group Mohammadi Group (MG) is a parent company of several subsidiary companies in different industries including the readymade garments industry, real estate, power generation, information technology services and high-tech entertainment. Its customers include a number of well-known brands including ‘H&M, C&A, Sara, Esprit, Sears, Wal-Mart and Target Stores’ (Mohammadi Group, 2011). Like AG, some of MG’s senior executives serve on influential industry organisations. For example, the company’s founder Mr. Annisul Huq has served on the board of the BGMEA for over a decade and as its President and Vice-President over different terms. Further, Mr. Huq is currently the President of the Federation of Bangladesh Chamber of Commerce and Industries (FBCCI) which is an important trade body in Bangladesh. MG voluntarily discloses sustainability information online: this is located under the banner ‘CSR’ (corporate social responsibility) which appears on MG’s home page. One ‘click’ from the homepage provides ready access to

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its social responsibility information. However, other related sustainability information is spread around MG’s webpages. For instance, MG provides a group service philosophy on another webpage labelled ‘Who we are’ in which it states that the prime motive of the group is the ‘service of mankind’. On this webpage it discloses that Profits earned by the group are mostly spent on education and health care of poor children. This has made Mohammadi an organisation different than others in Bangladesh. (Mohammadi Group, 2011)

In the context of MG’s stated primary motive, its CSR report is more easily assimilated as it provides details relating to its ‘for children only’ education programme. These details show that an MG supported school programme, which commenced in 2005, currently supports 50 students and offers technical education, a daily assembly and cultural instruction, a yearly study tour, sports events, a picnic and a prize distribution ceremony. Educational supplies including uniforms are provided to students free of cost. MG’s report makes specific mention of its aim to help to make children more self-reliant so that they may work independently without further training or internship. It is not unreasonable to assume that this educational programme is in response to the adverse global media publicity and concerns expressed by stakeholders over the exploitation of child labour during the 1990s. MG’s CSR report also discloses details of another programme, yet to be introduced, aimed at supporting adult workers in improving their literacy skills. This proposal appears to be a strategic response to the call for improved workers’ welfare and can be interpreted as a legitimising action by the organisation. Overall, MG’s online sustainability reporting demonstrates measures initiated to promote the future welfare of children through educational programmes and workers’ welfare. However, no mention is made about any measures to mitigate the environmental impacts of its business operations, community involvement, energy, product and safety – all categories anticipated within Hackston and Milne’s (1996) framework for reporting social and environmental performance.

Case Study 3: Babylon Group The Babylon Group (BG) commenced its operations in 1986 and now has 14 different independent business units within its group, with a workforce

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numbering 10,000, and a turnover of $90 million in 2009 (Babylon Group, 2011). Its focus is primarily within the readymade garments industry and it identifies its prominent multinational buyers as including Kohl’s, J C Penney, Tesco, Mothers Work, Jones, Charming Shoppes Inc., Wal-Mart, Sears, Inditex, Haggar, K-Mart, PVH, Arcadia Group Plc., Dimensions, New Look, Celio, Jules, Monoprix, H & M (Hennes & Maurits) and Zara (Babylon Group, 2011). The group provides an online social responsibility report which is one ‘click’ from its homepage where a menu categorising its socially responsible activities is located. In addition to a dedicated CSR report, BG makes other related statements on its webpages. For instance, under the banner ‘About Us’ the group states that In all the different production the workers have to go through a process of continuous and rigorous training to maintain a high standard of production set by the management. The group also caters this driving force by ensuring facilities that exceed the minimum set by international regulators. It maintains a fair price shop, medical and day care services, scholarship programs and other benevolent initiatives for the employees and their family members. As part of their commitment towards the society, the group has established a medical service station open for all. Babylon distributes relief materials including cash to the victims in any part of the country during natural adversities. (Babylon Group, 2011).

Within the CSR report, BG provides detailed information about its scholarship programme in support of underprivileged students, health-care facilities at each of its factories and plants including details of blood donation programmes and health camps, development initiatives for disadvantaged children such as drawing training and handwriting competitions, natural disaster relief and rehabilitation assistance and donations, and entertainment and welfare programmes aimed at improving the working conditions of its employees which include financial assistance for employees’ children. Importantly BG takes sustainability reporting to a higher level by providing information about environmental and ecological impacts and initiatives. BG acknowledges the potential threat its particular form of business operations pose to the environment and it mentions mitigation action it has undertaken. Consistent with legitimacy theory predictions, BG has responded to the perceived need to mitigate concerns about its business operations and to maintain its social contract by providing broad disclosure of its sustainability activities and programmes.

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CONCLUDING REMARKS The examination in this chapter shows that online sustainability reporting is already provided voluntarily by companies in the Bangladesh readymade garments industry with each of the cases examined adopting this particular mode of reporting. This occurs in the absence of a mandatory regime for reporting (online or otherwise) by unlisted companies in Bangladesh. In this literature review and case study analysis, it is argued that the primary motivation for online sustainability reporting is the immediate influence of stakeholder (multinational garments buyers) and global media pressures. Thus, it can be reasonably concluded that the motivation for online sustainability reporting is consistent with current research in legitimacy theory which suggests that organisations will adopt particular strategies, including disclosure strategies, as a result of their perceptions about societal expectations of organisations (Deegan & Blomquist, 2006; Islam & Deegan, 2008). Legitimacy strategy is responsive to the changing shape of social and consumer pressures and their actors across time. The global media and the consumer community have expressed concerns about the issue of child labour and workers’ welfare in Bangladesh. The shape of these pressures has changed across time with greater concern now being focused on working conditions for females and disadvantaged workers and ecological issues in developing countries. In summary, it can be concluded that in order to satisfy powerful stakeholder groups such as buyers’ and consumers’ advocates, business organisations as represented by the cases in this study have responded and they have reported their sustainability actions online. The real sustainability performance of organisations as manifestly evident in the provision of workers’ saving schemes, welfare funds, medical facilities, education opportunities for workers’ families, cultural and sporting opportunities could be captured directly in financial reports such as the balance sheet and income statement. Social and environmental action together with the financial information already identified and reflected in the financial reports would provide a holistic solution and would improve accountability to an organisation’s stakeholder groups. Since the Internet is a cost-effective outlet for the dissemination of information, there is a clear opportunity for organisations to provide online financial reporting inclusive of sustainability disclosures, not only to build and to preserve legitimacy but also to achieve accountability.

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REFERENCES Ananta Group. (2011). Social responsibility, online report. Retrieved from http:// www.amanta-bd.com/how-we-differ-social.htm. Accessed on 19 May 2011. Babylon Group. (2011). CSR, online report. Retrieved from http://www.babylongroup.com/. Accessed on 20 May 2011. Braun, R., & Gearhart, J. (2004). Who should code your conduct? Trade union and NGO differences in the fight for workers rights. Development in Practice, 14(102), 183–196. Custers, P. (1997). Capital accumulation and women’s labor in Asian economies. London: Zed Books. Deegan, C. (2002). Introduction: The legitimising effect of social and environmental disclosures – A theoretical foundation. Accounting, Auditing and Accountability Journal, 15(3), 282–311. Deegan, C., & Blomquist, C. (2006). Stakeholder influence on corporate reporting: An exploration of the interaction between WWF-Australia and the Australian minerals industry. Accounting, Organisations and Society, 31, 343–372. Deegan, C., Rankin, M., & Tobin, J. (2002). An examination of the corporate social and environmental disclosures of BHP from 1983–1997: A test of legitimacy theory. Accounting, Auditing and Accountability Journal, 15(3), 312–343. De Tienne, K., & Lewis, L. (2005). The pragmatic and ethical barriers to corporate social responsibility disclosure: The Nike case. Journal of Business Ethics, 60, 359–376. Dicken, P. (2003). Global shift: Reshaping the global economic map in the 21st century. London: Sage. Egels-Sanden, N., & Hyllman, P. (2006). Exploring the effects of Union-NGO relationships on corporate responsibility: The case of the Swedish clean clothes campaign. Journal of Business Ethics, 64, 303–316. Frenkel, S., & Kim, S. (2004). Corporate codes of labour practice and employment relations in sports shoe contractor factories in South Korea. Asia Pacific Journal of Human Resources, 42(1), 6–31. Frenkel, S., & Scott, D. (2002). Compliance, collaboration and codes of labour practices: The Adidas connection. California Management Review, 45(1), 29–49. Guvenli, T., & Sanyal, R. (2002). Ethical concerns in international business: Are some issues more important than others? Business and Society Review, 107(2), 195–206. Hackston, D., & Milne, M. (1996). Some determinants of social and environmental disclosures in New Zealand companies. Accounting, Auditing & Accountability Journal, 9(1), 77–108. Haltsonen, I., Kourula, A., & Salmi, A. (2007). Stakeholder pressure and socially responsible purchasing. Finance, Marketing and Production, 47–56. Special Issue. Hogner, R. (1982). Corporate social reporting: Eight decades of development at US Steel. Research in Corporate Performance and Policy, 4, 243–250. Hughes, A., Buttle, M., & Wrigley, N. (2007). Organisational geographies of corporate responsibility A UK-US comparison of retailers’ ethical trading initiatives. Journal of Economic Geography Transnational Retail, Supply Networks and the Global, 7(4), 491–513. Islam, M., & Deegan, C. (2008). Motivation for an organisation within a developing country to report social responsibility information: Evidence from Bangladesh. Accounting, Auditing & Accountability Journal, 21(6), 850–874.

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Kabeer, N., & Mahmud, S. (2004). Globalisation, gender and poverty: Bangladeshi women workers in export and local markets. Journal of International Development, 16, 93–109. Kolk, A., & van Tulder, R. (2002). The effectiveness of self-regulation: Corporate codes of conduct and child labour. European Management Journal, 20(3), 260–271. Kolk, A., & van Tulder, R. (2004). Ethics in international business: Multinational approaches to child labour. Journal of World Business, 39(1), 49–60. Lindblom, C. (1994). The implications of organisational legitimacy for corporate social performance and disclosure. Critical Perspectives on Accounting Conference, New York, NY. Mohammadi Group. (2011). CSR, Online report. Retrieved from http://www.mohammadigroup.com/. Accessed on 20 May 2011. Mollison, S. (1999). Was ridding the garment factories of child labour a success? Save the Children Publication, South and Central Asia’s Children, No. 9, Spring. Newson, M., & Deegan, C. (2002). Global expectations and their association with corporate social disclosure practices in Australia, Singapore, and South Korea. The International Journal of Accounting, 37, 183–213. Parr, J., & Dhanarajan, S. (2002). Stitching values together: Implementing core labour standards through management training in the Bangladesh ready-made garment sector. NY: IBLF and Oxfam. Paul-Majumder, P. (2001). Occupational hazards and health consequences of the growth of garment industry in Bangladesh. In P. Paul-Majumder & B. Sen (Eds.), Growth of garment industry in Bangladesh: Economic and social dimension – Proceedings of a national seminar on ready-made garments industry (pp. 172–207). Dhaka: BIDS Publication. Radin, T. (2004). The effectiveness of global codes of conduct: Role models that make sense. Business and Society Review, 109(4), 415–447. Rahman, M., Khanam, R., & Absar, N. (1999). Child labor in Bangladesh: A critical appraisal of Harkin’s bill and the MOU-type schooling program. Journal of Economic Issues, 33(4), 985–1003. Rahman, S. (2004). Global shift: Bangladesh garments industry in perspective. Dhaka: Centre for Development Research, Bangladesh (CDRB) Publication. Rikhardsson, P., Andersen, A., & Bang, H. (2002). Sustainability reporting on the internet: A study of the Global Fortune 500. Green Management International, Winter, 57. Rowbottom, N., & Lymer, A. (2010). Exploring the use and users of narrative reporting in the online annual report. Journal of Applied Accounting Research, 11(2), 90–108. Saman, H. (2001). Paid work and socio-political consciousness of garment workers in Bangladesh. Journal of Contemporary Asia, 31(2), 145–160. Sethi, S. (2002). Standards for corporate conduct in the international arena: Challenges and opportunities for multinational corporations. Business and Society Review, 107(1), 20–24. Shelton, R., & Wachter, K. (2005). Effects of global sourcing on textiles and apparel. Journal of Fashion Marketing and Management, 9(3), 318–329. Spar, D. (1998). The spotlight and the bottom line: How multinationals export human rights. Foreign Affairs, March/April, 7–12. Unerman, J., Bebbington, J., & O’Dwyer, B. (Eds.). (2007). Sustainability accounting and accountability. Oxford: Routledge.

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van Tulder, R., & Kolk, A. (2002). Multinationality and corporate ethics: Codes of conduct in the sporting goods industry. Journal of International Business Studies, 32(2), 267–283. Wah, L. (1998). Treading the sacred ground. Management Review, 87(7), 18–22. Wilkins, M. (2000). Globalisation and human rights: The apparel industry in the developing world. International Affairs Review, 14(1). Wise, V., & Ali, M. (2010). The nature of corporate social responsibility disclosures by Bangladeshi commercial banks. AIUB Journal of Business and Economics, 9(2), 121–138. World Bank. (2007). Clothing and export diversification: Still a route to growth for low income countries? Washington, DC: International Trade Department, the World Bank MSN MC2-201. WTO. (2004). The global textile and clothing industry post the agreement on textiles and clothing. Discussion Paper No. 5. World Trade Organisation, Geneva, Switzerland. Yin, R. (1989). Case study research: Design and methods. Applied Social Research Methods Series. Vol. 5. London: Sage.

CHAPTER 6 COMPARATIVE CORPORATE SOCIAL RESPONSIBILITY IN THE UNITED KINGDOM AND TURKEY Fulya Akyildiz INTRODUCTION Corporate social responsibility (CSR)1 has become such an important and popular concept along with the rise of the importance of sustainable development (SD) in the world. Nowadays, CSR is focused on goals such as poverty reduction and SD. It has become clear to the business world that SD is no longer only the concern of governments and related nongovernmental organisations (NGOs), and that they should also immediately start becoming concerned about the sustainability of resources and human development along with their financial sustainability. In this sense, establishment of multi-stakeholder dialogues and partnerships among all these actors has also become extremely important. Acting in accordance with socially responsible companies, enterprises measure their success on economy, society and environment in the long term. Therefore, if enterprises carry out their activities in a responsible way against environment and society, they think that they will achieve long-term gain. In this case, Friedman’s doctrine in the shape of ‘the main responsibility of enterprises to maximise their profits’ is now generally not accepted. The studies, even the ones resulting in less profit, prove that Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 115–153 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003010

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business management is more aware of the obligation of helping community (Hackston & Milne, 1996). Also, the costs of responsible environmental activities and safely run programmes are very low when compared with the costs of chemical spills, waste, accidents, product returns and customer boycotts (Clikeman, 2004). For example, the oil company BP had to make very large expenditures to address the environmental pollution from the accidental oil spill in the Gulf of Mexico in 2010. Although there seem to be different priorities and values in different countries that influence how CSR is defined, a common thread can be seen. CSR appears to mean minimising the negative social, environmental and human rights impacts of corporate activities and influence while enhancing the benefits to society that companies can provide. In effect, CSR ultimately seems to be based on the need for corporate accountability and compliance with standards that reflect society’s values generally and the concerns of stakeholders in particular (The Law Society, 2002). The CSR models of the United States and the United Kingdom are relatively well defined.2 As the phenomenon of CSR establishes itself more globally, the question arises as to the nature of CSR in other countries. Is a universal model of CSR applicable across countries, or is CSR specific to country context (Robertson, 2009, p. 617)? Even if limited, this study answers this question. As the research is limited to just two countries, the CSR could not be talked about in global perspective. In this study, CSR is compared between the United Kingdom and Turkey. It not only indicates a huge difference on CSR in the United Kingdom and Turkey, but also examines how CSR is understood and applied to two countries different from each other socially, economically and legally as well as the conditions and factors affecting CSR practices in Turkey and the recommendations that Turkey can take from the United Kingdom. In the world, there is no consensus on the definitions and concepts of CSR. The CSR movement draws on a history of corporate accountability to society. Although there is no general consensus on what constitutes CSR and how much of it ought to be prescribed for businesses, several CSR themes overlap similar ideas in the field of business ethics. Because of this uncertainty and because of the importance of business ethics in the modern economy, it is absolutely necessary for managers to understand CSR and implement it correctly.3 Similarly, it is just as important for public stakeholders to understand the issue so as to effectively distinguish beneficial CSR from its perversion in ‘pernicious CSR’. Only after people appreciate the complexity of the CSR issue and its implications for ethics and social justice can the CSR

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movement be adopted as a sound business practice that enhances corporate productivity and promotes social stability (Olowski, n.d., p. 3). The history is important as it explains the corporate interest of public and sensitivity oriented CSR. To watch the line of historical development of CSR in a country allows us to acquire important information about each country’s social structure and government perception because CSR considers all of them. Legislation is another object of comparison. The presence of statutory legislation addressing CSR is just as important as the sensitivity of governments on this issue. Therefore, in this study the relevant legislation of both countries is used for comparison. Another object of comparison is actors of CSR. In this study, actors of CSR were chosen as comparison objects as CSR is no longer relevant just to business or business world. CSR includes different groups in society: international and national NGOs,4 national governments, global and local companies and local communities.5 The mentioned actors use CSR, especially in today’s fight against poverty. Other objects of comparison are definition and perception of CSR and its application in both countries. The modern approach of CSR is to include human rights and environmental practices, and the traditional approach is to do charity. CSR reports by companies provide another method of comparison. CSR reporting is important in reflecting the performance of a company. Equally, it has been argued that ethical behaviour, corporate governance, CSR and environmental accounting are inextricably intertwined in determining the performance of a firm. Indeed, these arguments are slowly becoming embedded in professional practice (Crowther, 2004, p. 142). The United Kingdom and Turkey were selected for study for the following reasons: 1. Today CSR is not limited just to the developed world, even though it is of Anglo-American origin. United Kingdom and Turkey are in its limits. Today it includes Europe and other regions. 2. In two countries, a team consisting of academics from both countries is sensitive to the meaning of CSR. This team includes many academic organisations and has included many academic publications on CSR. 3. These countries are excellent examples of a developed economy (the United Kingdom) and a developing economy (Turkey). 4. The European Union (EU) has published many documents on CSR. These papers are important to Turkey, which continues discussion about

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EU membership. The purpose of this study is to interpret these papers published by EU as a sample of the United Kingdom. This study has used the method of comparative documentary analysis. This study will be used to provide a point of entry for further comparative work that examines the Europeanisation or universalisation of CSR policy content and actors in a number of European states (and beyond). Such study is expected to be valuable because different states have different CSR policies and practices if they have CSR at all.

CORPORATE SOCIAL RESPONSIBILITY CONCEPTION IN THE UNITED KINGDOM The definition of CSR has evolved over the decades, but it generally has become more precise as to the types of activities and practices that might be subsumed under the concept. Early definitions were often general and ambiguous. Over the decades, definitions of CSR have reflected concerns such as:  seriously considering the impact of company actions on others,  the obligation of managers to protect and improve the welfare of society and  meeting and even exceeding economic and legal responsibilities and obligations. A more comprehensive definition of CSR is that it encompasses the economic, legal, ethical and discretionary or philanthropic expectations at a given point in time. This definition specifies four different but interrelated categories of responsibilities that business has towards society. This characterisation also attempts to place the traditional economic and legal expectations of business in context by combining them with more socially oriented concerns such as ethics and philanthropy (Visser et al., 2008, pp. ix–x). In the United Kingdom, CSR today is considered the business contribution to SD. There are many definitions, but those of concern talk about how business takes account of its economic, social and environmental impacts in the way it operates – maximising the benefits and minimising the downsides. But they are not talking about altruism: CSR should be good for both long-term business success and the wider society. The government in the United Kingdom thinks that CSR should tackle inequalities and deprivation in communities and ensure SD. Government

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needs help from business. Government aims to encourage businesses to help tackle issues of social exclusion and build stronger and healthier communities. In turn, business will gain through new market opportunities and customers. And companies say that there is an increasing awareness of CSR among the workforce, which means these companies need to look to their CSR records to attract and retain the best people (DTI, 2004, pp. 3–4). The investment community’s approach towards CSR appears to be particularly orientated towards risk management, as exemplified in guidelines issued at the end of last year by the Association of British Insurers (ABI).6 The ABI called on companies to assess and disclose social, ethical and environmental risks on the basis that a company can put its business at risk if it fails to respond appropriately to social, ethical and environmental matters.7 One other issue has been identified by CSR Europe: ‘CSR is about integrating the issues of the workplace, human rights, the community and the marketplace into core business practices’ (2010a). CSR has a value creation meaning in the United Kingdom. As value creation, CSR provides the following benefits:      

shared value (business institutions and communities), increased competitiveness and innovation, a sustainable business model, business integrated into the community, the development of human capital (key in developing countries) and incorporation into the business strategy.

The EU’s policy-making bodies, the UK government and business organisations clearly come down on the side of retaining the status quo: that is, continuing to pursue a voluntary approach to CSR. For example, GSK (2001) made the following response to a 2001 green paper. It is a response that typifies the business position: ‘GSK supports the European Commission (EC)’s efforts to encourage business to voluntarily develop corporate citizenship initiatives. The EC’s efforts should, however, be limited to encouraging engagement between businesses and stakeholders, promoting transparency in corporate policies on matters of social and environmental significance, and fostering an environment of trust and goodwill between all players. Shortly, CSR must not be used as a new way for governments to further regulate businesses.’ There is a voluntary approach to CSR, but there is also little evidence that other actors disagree on how to define CSR. For example, following responses was made to the green paper on CSR. The TUC’s (2001) response

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is similar to others who rejected the continuation of the voluntary approach: ‘The TUC supports the ETUC’s resolution on CSR adopted in October 2001, which emphasises that CSR must be developed in a legislative and contractual environment and within the framework of the European Social Model [y] Here, the danger is not that a voluntary framework for CSR might undercut already existing legal requirements, but rather than a voluntary framework might perpetuate the tendency for CSR to ignore employment relationships and be developed without the involvement of trade unions’. As the WWF (2001) states: ‘The voluntary commitment alone is not sufficient to the scale of the industrial, economic, and social transformation foreseen in the challenge of SD’. The Friends of the Earth (FoE) (2001) also makes the case for regulation: ‘There are many ways the EU could create the necessary regulatory and legislative framework that will encourage CSR to flourish but will also ensure that companies remain accountable for their actions in terms of environmental sustainability and a just society. [y] However we remain very concerned that CSR maybe used as a convenient excuse by companies to undermine necessary legislation and regulation that support SD. [y] While CSR can be valuable in terms of promoting better corporate behaviour it can never be seen as an alternative to good public policy and legislation.’

Historical Process Social responsibility is an inescapable demand made by society. CSR begins with charity in both the West and the East.8 The idea that wealthier members of society should be charitable towards those less fortunate is a very ancient notion. Royalty through the ages has been expected to provide for the poor. The same is true of those who have had vast holdings of property from feudal times to the present. Poverty became the subject of law when the New Poor Law of 1834 was enacted in Victorian England. This law also included the subject of charity. Somewhat later in the century, in 1869, the Charity Organization Society (COS) was established to coordinate the multitude of private charities and philanthropies that were being founded.9 Many charitable people gave to the poor through the senior organisation members. Some of the wealthier business leaders – steelmaker Andrew Carnegie in the United States is a good example – became great philanthropists who gave

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much of their wealth to educational and charitable institutions. Others developed paternalistic programmes to support the recreational and health needs of their employees. The point to emphasise is that these business leaders believed that business had a responsibility to society that went beyond or worked in parallel with their efforts to make profits (Heald, 1970, p. 76). As a result of these early ideas about businesses’ expanded role in society, two broad principles emerged: charity and stewardship. These principles are the historical foundation stones for the modern idea of CSR (Frederick, Pos, & Davis, 1992, p. 33).10 Unlike traditional charity, today we are witnessing the interchangeable use of the concepts of CSR and SD in the United Kingdom and other developed areas of the world. The term CSR, however, has a longer history than that of SD. The notion first emerged in one form or another in writings dating back to the 1950s, mainly those from the United States. Early definitions emphasised the importance of relating ‘business responsibility’ to ‘business power’. Later, in the 1970s, a ‘stakeholder approach’ emerged that highlighted the importance of balancing the multiplicity of interests represented by internal and external constituent groups and individuals (Crane & Matten, 2004). During the 1980s, the focus on CSR shifted from developing new and revised definitions to further research on CSR, resulting in a splintering of writings and the emergence of a range of alternative concepts and themes (Welford, 2004). The speeding of globalisation after 1980 not only strengthened large and multinational corporations but also strengthened the criticism against globalisation. One response to these criticisms was the World Summit on Sustainable Development (WSSD) in Johannesburg, South Africa, in September 2002. WSSD influenced the development of CSR in the United Kingdom. At WSSD there was as much focus on business as on poverty and the environment. As WSSD recognised, partnership – between business, government and civil society – is the key to the progress we need on international SD (DTI, 2004, p. 3). Besides, governments made many commitments at WSSD, including progress on the ambitious Millennium Development Goals (MDGs). They also agreed to promote CSR.

Legal Statue In the United Kingdom, the government is responsible for ensuring minimum legal standards (DTI, 2004, p. 4). Although there is no legislation requiring any social or environmental accounting or reporting in the United

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Kingdom,11 there have been a number of recommendations from the EC,12 based on their Fifth Action Programme on the Environment. As part of its concern, the EU has particularly focused on business actors, exhorting them to make a substantial contribution to SD via their CSR policies and practices. In this respect, the EU has made an explicit link between the two ideas. Although there appears to be little disagreement in the EU about the critical elements of SD and CSR policy (each is commonly thought to be comprised of economic, social and environmental pillars), a significant dispute has emerged concerning the values associated with their implementation. Policy actors are divided between those who support a voluntary approach (most of the main EU policy-making bodies and many business organisations) and those who prefer regulation (such as trade union bodies and environmental interest groups). As part of a subsequently connected strategy, during 2001 the EC published a green paper (EC, 2001) on CSR. This policy paper resulted from a period of consultation with business actors, trade unions and ‘social partners’ (ENDS Daily, 2001) and subsequently led to the 2002 commission communication (EC, 2002) titled ‘Corporate Social Responsibility: A Business Contribution to Sustainable Development’. In this 2002 document, which drew on the earlier 2001 green paper, CSR was defined 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 as they are increasingly aware that responsible behaviour leads to sustainable business success’ (EC, 2002, p. 3). In the 2002 commission communication, which summarised the outcome of the consultation process (EC, 2002, p. 4), the EC states that there were ‘significant differences between the positions expressed’ (ibid., p. 4) by the various interests. In brief, the businesses that participated called for the retention of a voluntary approach to CSR and a rejection of a ‘one-size-fitsall’ solution. The businesses are said to have opposed calls to regulate CSR, claiming that such a move would be ‘counter-productive’ because it would stifle innovation and creativity. By contrast, the 2002 communication noted that trade unions and civil society argue that voluntary initiatives are insufficient as a means of protecting workers’ and citizens’ rights. Instead, they advocate a regulatory framework that would establish minimum standards. Investor groups were said to want improved disclosure and transparency with regard to company practices, rating agencies’ methodologies and investment management of ‘socially responsible investment’ (SRI) funds and pension funds. Consumers’ organisations were described as underlining the importance of ‘trustworthy and complete information’ about the ethical,

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social and environmental conditions in which goods and services are produced and traded. Crucially, the 2002 communication set out a ‘European Action Framework’ for CSR, discussing how to improve knowledge about CSR, facilitate the exchange of good practices and develop management skills. In particular, small- and medium-sized enterprises (SMEs) are singled out for attention on the basis that they require additional assistance (compared to larger firms) if they are to fully adopt ‘good’ CSR practices. The communication then discussed related issues such as the promotion of convergence and transparency of CSR tools and practices; codes of conduct; management standards; measurement, reporting and assurance; labelling; SRI; the launching of an EU multi-stakeholder forum on CSR; and the integration of CSR into all EU policy areas (Fairbrass & Lane, 2006, p. 8). The UK’s approach to CSR has been well documented. Throughout its development, as with the evolution of the EU’s CSR policies, international and global forums have clearly had an impact, helping to shape the UK’s CSR policies and strategies. In terms of the most recent development of the UK’s CSR model, the Labour Government, on coming to office in 1997, began work on revising CSR strategy. In 1999, the UK government identified four main themes that are said to constitute the UK’s approach to SD and CSR (DETR, 1999a, p. 8) and that mirror those of the EU:    

social progress that recognises the needs of everyone, effective protection of the environment, prudent use of resources and maintenance of high and stable levels of economic growth and employment.

The UK’s CSR model, in common with that of the EU, is partly the product of a consultative process (DETR, 1998, 1999b) that combined the contributions of a range of actors, including UK business organisations. In a similar manner to the processes and practices at the EU level, the UK government has set out to monitor and evaluate progress by establishing CSR objectives and reviewing progress against those targets (DETR, 1999c, 2001). Crucially, in common with thinking and discourse at the EU level, the UK government also sees CSR as the business contribution to SD goals (Department of Trade and Industry (DTI) 2004, 2005). The UK view also accords with the EU’s in so far as the business contribution is to be voluntary. The EC also produced an Environmental Management and Audit Scheme (EMAS) in 1993 as well as 1992 report titled ‘Towards Sustainability’. This was followed by such initiatives as the green paper ‘Promoting a European Framework for Corporate Social Responsibility’ and more

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recently ‘Corporate Social Responsibility: A Business Contribution to SD’. Although this does not have the force of law, it provides recommendations with respect to best practice. Some countries within the EU have gone further and made mandatory requirements with respect to environmental reporting (Crowther, 2004, pp. 140–141). As these countries mentioned reporting is a genuine action not a mask. Although they do not have the legal obligation, in the United Kingdom many companies need to modernise and reform if they are to continue to succeed. All listed companies have to comply with the combined code.13 Guidance on the code known as the Turnbull Report (after its chairman) provided that companies should manage non-financial risk. The UK white paper moves further towards greater integration of social, environmental and ethical issues into mainstream business practice. Under current legislation, all companies must have a health and safety policy and keep health and safety records, although there is no explicit requirement for companies to include health and safety matters in their annual reports. The UK government and the Health and Safety Commission (HSC, 2010) have launched a joint strategy statement ‘Revitalising Health and Safety’14 that is designed to promote greater corporate responsibility for ensuring that risks to workers’ health and safety are properly controlled within their organisations. The top 350 UK companies were called on to publish details of their health and safety policies, goals and performance in their annual reports commencing 2002. The HSC has published guidance in support of this initiative that sets out recommendations concerning coverage of health and safety reports.15 The publication of reports on health and safety activities and performance arguably demonstrates to all stakeholders a company’s commitment to the effective management of health and safety. Even additional voluntary business schemes based on improved internal communication, thorough training and up-to-date policies are perhaps needed to demonstrate a full commitment to CSR in the realm of health and safety. The UK’s company law requires companies to prepare their financial statements according to UK Generally Accepted Accounting Practice (UK GAAP), and this assumption must be disclosed in the notes to the company accounts under the heading of accounting policies (Concise Accountancy, 2010).

Actors In the United Kingdom, the actors closely related with CSR and SD16 are businesses, government, civil society and the EU.

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The main focus of CSR is voluntary. However, the policy framework must use the right mix of tools – including fiscal and regulatory measures where appropriate – to boost socially and environmentally responsible performance. Where regulation is the right solution, it should be well designed and focused (DTI, 2004, p. 4). Many of the standards on corporate responsibility have been spearheaded by NGOs with corporate involvement and consultation. However, government has also been active and released its own guidance and tools in this area even before the UK government had the CSR ministry. The current UK coalition government, however, abolished the Ministry of CSR. The government did not appoint a new CSR minister. The department of Business, Enterprise & Regulatory Reform (BERR) led the former UK government’s CSR initiative. It published two reports:  Business and Society, Corporate Social Responsibility Report 2002  Business and Society, Developing Corporate Social Responsibility in the United Kingdom. Companies are the other important actors on CSR. Business has a big role to play in enabling us all to reap the benefits of globalisation without adverse social and environmental impacts. And companies stand to gain by rebuilding trust; approaching business decisions with a wider CSR perspective can help them do that. Douglas Alexander, the former UK minister for CSR, observed that a company with a CSR policy appeared to pursue the following approach (The Law Society, 2002):  it recognises that its activities have a wide impact on society;  in response, it actively manages the economic, social, environmental and human rights impact of its global activities and  it seeks to achieve these benefits by working closely with other groups and organisations. Over the past two decades or so, many international, national and subnational actors in the public, private and voluntary sectors have developed CSR policies and strategies. One self-proclaimed leader in this respect is the EU. The EU has explicitly sought to shape thinking about CSR (and SD) within its boundaries and beyond. Although the EU directly choose business as a target about CSR, the EU is not in direct communication with the business in the United Kingdom. The EU has been largely ineffective in reaching its target audience among UK firms. On the whole, it had failed to communicate directly with the firms and had not played a major role in shaping their views about CSR. For example, as a survey made by Focus Groups (2005), most firms have reported little awareness of the EU as

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a source of inspiration, guidance or ideas. Most have reported using alternatives, including international bodies or forums such as the International Labour Organisation, the United Nations (UN) and British organisations such as BitC. Many of the firms surveyed have found the EU ‘too remote’ and ‘unable to speak the same language as them’. It appears that the EU’s involvement is rather limited with regard to CSR (either in terms of the topdown or bottom-up flow of ideas). Many of the professional and service-oriented NGOs that were influential in structuring the mainstream CSR agenda assumed certain characteristics that shaped their approaches and the reformist nature of their demands and proposals. Not only ‘neoliberals’ but also many activists and NGOs were critical of what they saw as state failure, and they sought a ‘third way’ involving voluntary or softer regulatory approaches as opposed to ‘command and control’ regulation. They also stressed the role of collaboration and partnerships rather than confrontation. Compared to corporatist entities such as trade unions, which had been one of the principal agents of change in previous decades, NGO activism in the 1980s and 1990s was relatively fragmented. Presenting a common, more powerful civil society front was difficult given the considerable tensions that existed between NGOs and trade unions, which were concerned with the colonisation of the world of labour standards and labour rights by organisations that were unaccountable to workers. North–South tensions were also apparent, given the reality or perception that CSR was very much a northern agenda that had not been shaped through the effective participation of southern organisations and actors. The relative isolation of many NGOs from mainstream democratic politics also meant that this sector of civil society was not empowered through its relations with political parties as the labour movement had been. Furthermore, the types of demands put forward, as well as the tactics used, were conditioned by the tendency for many NGOs to become involved in the burgeoning CSR industry through service delivery and consultative and commodified activities. There was, in fact, a blurring of the distinction between an important sector of ‘civil society’ and ‘business’ (Utting & Ives, 2006, p. 14).

Corporate Social Responsibility Practices Each company differs in how it implements CSR. The differences depend on such factors as the company’s size, sector, the market in which is operates, its culture and the commitment of its leadership. In the United Kingdom,

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some companies focus on a single area such as the environment while others aim to integrate a CSR vision into all aspects of their operations; still others have a specific team responsible for CSR, which then works across functional silos to implement socially responsible practices. In the United Kingdom, a growing number of companies have come to understand the value of assessing their social and environmental performance on a regular basis. There are a huge range of process and reporting standards now available. Some of the most influential and successful are AccountAbility 1000 (from the Institute of Social and Ethical Accountability), the Global Reporting Initiative guidelines and SA8000 from Social Accountability International. In different ways, they assist an organisation in defining goals and targets, measuring progress made against these targets, auditing and reporting on performance and providing feedback mechanisms.17 A significant step forward in the relationship between business, society and the environment has been made with Business in the Community’s Corporate Responsibility Index, the first business-led, voluntary and self-assessed index to publicly benchmark the responsible business practice of a range of companies in different industry sectors. The index is a business tool for companies to evaluate their own performance and compare it with those of their peers. The United Kingdom is increasingly seen as one of the leading contributors internationally on CSR thinking and practice. Some socially responsible companies recognise that they can play a leadership role in influencing the behaviour of others from business partners to industry colleagues to neighbouring businesses. For example, the Extractive Industries Transparency Initiative brings together business, NGOs and governments to improve transparency in the revenues received by poorer countries from the operations of these vital industry sectors that in turn will support growth and stability in those countries. The United Kingdom has big oil companies such as BP. These companies have been included in the CSR initiatives after the 1980s because the 1980s and 1990s were not good years for the reputation of these large oil companies. Exposes of malpractice in relation to the environment, human rights, local communities and conflicts were rife. Against this backdrop, several North American and European oil companies embarked on a makeover in order to win friends and placate enemies. They did this not only through the proverbial use of public relations and philanthropy but also by proactively promoting CSR. When we search the web pages of large companies, we mostly witness that the companies’ CSR policies are criticized by government, society and social organisations. For example, big oil companies, such as BP causing

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environmentally large losses, have CSR policies focusing on environment and climate change. But the same situation is not valid for smaller companies such as Desire Petroleum plc. 18 In addition, today many businesses provide ‘disaster relief’ as an extension of traditional philanthropy policy. Especially MNCs and large companies provide disaster relief to disaster victims of natural disasters in many parts of the world. British Telecom provided relief of this kind in Haiti in 2010 when a devastating 7.0 magnitude earthquake hit Haiti early in the year.

Corporate Social Responsibility Reporting Another criteria used in comparison of the United Kingdom and Turkey’s social responsibility approaches is social responsibility reports published by enterprises. In the United Kingdom, the majority of FTSE 100 companies produce a CSR report, but 31% do not. In recent years, the nature and quality of reporting within CSR reports has been very variable. Yet for stakeholders, it is important that the actual reporting practices of companies provide information in proportion to their impact on stakeholders. For example, where a company has a significant impact on the local community, the community is interested in being able to access the relevant information and is disappointed when no information or insufficient or irrelevant information is provided. It is known that CSR reporting is important. From a stakeholder perspective, the need is therefore for sufficient transparency and information to enable them to make fully informed decisions in relation to a given company and where necessary to hold them to account. If we examine the Companies Act (2006), which places an obligation on quoted companies to provide a business review within the directors’ report in order to inform members (shareholders) of the company and help assess how the directors have performed their duties (Article 172), it must contain relevant environmental and social information to the companies’ activities (Article 417). The obligation to provide a business review only applies to quoted companies above a certain size to prevent the placement of undue burdens on smaller companies. In practice, all members of the FTSE100 index are required to provide a business review. The actual non-financial information that a business review should disclose, when relevant, includes certain broad issues, the corresponding

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policies and the effectiveness of those policies. The range of issues specified includes:    

environmental matters company employees supplier relationships social and community matters.

It might be expected that different sectors would have significantly different profiles of disclosure, given the differences in the nature of the issues they face. However, a similar pattern of disclosure was shown across all industries, with the following main exceptions:  The oil and gas and basic materials (including mining) sectors scored well in health and safety disclosure.  The telecommunications sector scored well in environmental product analysis and employment practices.  The financial and industrial (including defence and construction) sectors were the lowest scoring sectors across many aspects. This was particularly marked in the areas of child labour, forced labour, security practices and disclosures concerning unlawful behaviour. The number of FTSE 100 companies issuing CSR reports has reached a record high, according to research from business advisory firm Deloitte – 80 of the UK’s top 100 companies report on CSR in their annual report and accounts, compared to 56 companies in 2005. This compares with 56 companies in 2005. According to the research, the number of companies producing a stand-alone CSR report has more than tripled from 21 in 2002 to 69 in 2006. The number of companies receiving independent third-party assurance on CSR reporting has risen by 83% in these five years (CSR Europe, 2010b). However, Henriques (2010) has investigated the annual reports of companies (between January and September 2009) included in the FTSE100 index. But the analysis made by Henriques probably has not satisfied many companies. The most reported area of environmental information was ‘emissions, effluent and waste’, which includes CO2 emissions; this information is often required by other regulations and so is more readily available. Yet even here, only one-third of companies surveyed reported quantitative information, and 18% did not mention the issue at all.19 The worst-performing environmental issue areas were transport, environmental legal compliance and environmental expenditure.

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The disclosure of high-quality social information was better than that of environmental information. More than 90% of companies provided quantitative or qualitative indicators of social performance – or at least identified social issues. However, this is largely accounted for by the reporting of labour issues, which includes health and safety. If labour issues are excluded, then social issues were quantified in only 39% of reports, with 13% identifying no non-labour social issues at all.20 Of the other categories of social issue, the area of human rights was least well-served, with just 25% providing measures of some sort; most of this was achieved through the reporting of supply-chain activities.

CORPORATE SOCIAL RESPONSIBILITY CONCEPTION IN TURKEY The conceptions of corporate governance and CSR are closely related with each other. These conceptions are new for Turkish business firms and managements. The reason for this late recognition in Turkey was the delayed development of competitive liberal economy, private initiative, private enterprise and managements.21 Corporate governance can be defined as an approach of public responsibility to business management aimed at reorganising the relationship of the society with the private corporate sector. This relationship had to be based on trust, ethical behaviour, moral values and confidence created by the transparency of real financial results, accountable and responsible business managers and members of corporations’ boards of directors (Aysan, 2008, pp. 124–125). The principles mentioned also are basic principles of CSR.22 In Turkey, CSR focuses more on philanthropy rather than subjects such as workers’ rights and workers’ safety because these require more time and effort.23 CSR as corporate philanthropy has the following effects:    

Corporate philanthropy and sponsorships are provided. Short-term benefits are available but these are not always sustainable. Limited funds are available. Its impact is diluted because limited budgets are allocated to many charities.  Corporate competencies and other business assets are not fully utilised.

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 There is a misalignment between business and social responsibility strategies and functions.  It results in minimal social and business impact of social programmes. However, there is a confusion about the definition of CSR in the business environment, and this confusion can also be seen in practices of CSR. However, it has been observed that business environments endeavour to improve both their business activities and society. Among these efforts, sponsorship activities and social projects carried out with various NGO’s are ranked first. In this context, to implement CSR in a more effective way, there is a need to discuss and share in detail the definition, goals and outcomes of CSR with other social actors in the business world. Private and personal leadership is an important factor to strengthen CSR in Turkey. Many companies announcing the names with CSR activities have leaders who are personally interested in CSR such as Guler Sabanci, Rahmi Koc. Participation of stakeholders is limited in various partnerships established with NGOs and with joint projects.

Historical Process The experience of the philanthropic stage of CSR in Turkey goes back to the Ottoman era when the waqf (foundation) was the premier institutional mechanism for philanthropic provision of public services such as education, health and social security. Today, most family-owned conglomerates in Turkey have an associated waqf. In this sense, the public demand from companies is shaped within the historical waqf philosophy, and social responsibility becomes identical to donations and philanthropic actions of the companies (Bikmen, 2003). Turkey’s increased integration with international bodies, developments, events and campaigns has also been an important element for the country’s consciousness about CSR and related issues. The United Nations Conference on Human Settlements (Habitat II) in Istanbul in 1996 played an important role in terms of enabling the citizens of Istanbul to observe people discussing the eradication of poverty and discrimination, the promotion and protection of all human rights and fundamental freedoms for all and the provision of basic needs such as education, nutrition and life-span healthcare services. This created an atmosphere for the issues related to SD and CSR to be discussed and debated in Turkey.

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Followed by those positive developments comes another incident that affected most of the stakeholder groups – civil society organisations, businesses, government and others. It is the 1999 Izmit earthquake that killed more than 17,000 people in northwestern Turkey, which was heavily felt in the industrialised and highly populated urban areas of the country. The vacuum created by state failure in the aftermath of the earthquake – characterised by ineffectiveness and incapacity to provide relief services – was filled by immediate civic mobilisation, both individual and corporate. After the earthquake, many NGOs and volunteer groups became actively involved in the rescue processes as well as the reconstruction and rehabilitation of the destroyed areas. Search and Rescue Association (AKUT), a small voluntary search and rescue association, became the most prominent element of this civic mobilisation. In fact, it was pronounced as the second most trusted institution in the country after the armed forces (Adaman, Carkoglu, & Senatalar, 2001). The earthquake, in this respect, had a crucial impact on values of volunteerism and participation among Turkish citizens, highlighting the need of activism for development. Besides the natural disaster, both international issues and economic (specially 2001 economic crisis) and social crises in Turkey created an environment for the discussion of CSR in which business had a major role to play and monitor and benefit civil society. In Turkey, the concept of CSR has developed in conjunction with the concept of corporate governance. Two concepts developed recently were considered as a way to restore public confidence and trust in private enterprise, which had been tarnished by the corporate scandals of the last decade around the world (Aysan, 2008, p. 125). Legal Statue Although there is no specific law on CSR in Turkey, there are issues that found a space in two sources. The first source is the national laws that are related to CSR. According to Odaman (2004), the constitution protects consumers with law number 4077, and the labour law number 4587 forces companies to employ disabled people, which represents positive discrimination. The others are as follows:    

Public Procurement Law No. 4734 Environment Law No. 2872 Union Law No. 2821 Declaration of Wealth, to combat against Bribery and Corruption Law No. 3628

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 Banking Law No. 5411  Renewable Energy Law No. 5346 Besides these laws trying to limit negative company effects, there are also supportive laws for companies’ involvement in CSR. CSR-related tax incentives are stated at Income Tax Law (Gelir Vergisi Kanunu). According to Article 89 of this law, companies benefit from tax incentives for their charitable contributions and donations on the field of education that, in fact, triggered the support of corporations to special campaigns such as ‘100% Support to Education’ and ‘Girl’s Let’s Go to School’, which are organised by the Ministry of Education and UNICEF. The other leading document in Turkey regarding CSR implementation that can be considered as a sort of legislation is the ‘Corporate Governance Principles’ issued by the Capital Markets Board of Turkey (2003), which regulates the functioning of capital markets in Turkey.24 The principles were first announced on 4 July 2003, following the preliminary works conducted based on the ‘OECD Corporate Management Principles’, which were announced in 1999. The application of the principles by the corporations is on a voluntary basis. However, companies are obliged to include in their annual reports, firstly, whether these principles are applied or not. If not, they should give detailed explanation with justification why these principles are not applied. If the principles are applied partially, then the companies should give detailed explanation in their annual reports about how they plan to mitigate the problems emerged between the stakeholders as a result of conflict of interest and whether the company has any plans to apply the principles in the future. This information about the level of the application of the principles by the particular company should be made public as well. The motto of the board is very simple: ‘Apply the principles. If you do not apply them, explain why you do not’ (Turkey Corporate Social Responsibility: Baseline Report, 2008, p. 47). The legal development of CSR in Turkey was significantly based on the 2002 Johannesburg World Summit on SD. After this date, implementation of reporting sustainability or reporting social responsibility has been given importance. During the summit, approaches on the social responsibility of businesses in Turkey, explained in Turkey’s national report dated 2002, were discussed. The basic issues according to the report are the following (Ozkol, Celik, & Gonen, 2005):  to treat laws related to environment and social values sensitively;  to release information and take care of protecting the environment and social values during production, distribution and after sale services and activities;

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 to accept and apply the principles of transparency and accountability;  to contribute to the solution of regional and social problems and  to exhibit the same behaviour in the format of the whole of corporate internal and external relations such as recruitment and service procurement. In Turkey, practices based on the above-mentioned principles developed over time with the influence of supervisory mechanisms formed by members of professional organisations and associations and developing public awareness about environmental and social values. Despite all these developments, there is no legal regulation and sanctions on CSR reporting in Turkey.

Actors Drivers of CSR in country context can be classified by different stakeholders groups. The possible drivers are as follows:    

corporate governance and financing institutions, multinational companies, civil society organisations, regulatory bodies for CSR (government and international recognised treaties) and  media. Ownership of Turkish companies is highly concentrated, with families or individuals being the dominant shareholders. Demirag and Serter (2003) indicated that Turkish companies do not have the structure of unlimited shareholders but of limited shareholders, which are dominated by family members. Therefore, drivers of CSR in Anglo-Saxon corporate environment such as institutional investors or investor activism are not valid in Turkey. Philanthropists such as Vehbi Koc (Founder of Koc Group, the first Turkish Fortune 500 company), Sakip Sabanci (founder of the Sabanci Group), Izzet Baysal and Kadir Has have been actively involved in community-development programmes through donations to hospitals, schools, museums and so on. However, in the last decade, more businesspeople have become actively involved in efforts for the eradication of social problems. The TEMA Foundation (The Turkish Foundation for Combating Soil Erosion and for Reforestation and the Protection of Natural Habitats) was founded by two prominent Turkish businessmen Hayrettin Karaca and Nihat Gokyigit. TOG Foundation (Community Volunteers Foundation) was founded by Ibrahim Betil, a retired bank chief executive officer. Ali Koc (president of Koc Group) recently led the global compact initiative media

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campaign in Turkey. So, it is possible to claim that business society in Turkey is shifting from passive philanthropy to active involvement with society (Turkey Corporate Social Responsibility: Baseline Report, 2008, p. 44). But it can not say that all endeavours are sufficient. Multinational corporations (MNCs) have more influence on the CSR agenda in Turkey than any other driver such as governmental agencies and regulations, corporate governance structure or culture. MNCs mostly have groupwide strategies for CSR, as the drivers such as corporate governance structures, investors and NGOs are putting more pressure on MNCs. Therefore, with greater scrutiny over them, the CSR practices as well as the experiences are often more advanced and more deeply integrated into the core business. By providing new practices and developing strategies for partnerships with stakeholders and joint ventures with locals, a transfer of CSR practices to the local partners has started. Mainstream CSR practices come with the pressure from international buyers with the issues of environmental and social standards. The pressure is especially high in the textile sector when issues like child labour and ‘sweatshops’ in developing countries got more attention. A lot of awareness raising has been taking place in the sector from the buyers’ side as well as from international organisations and local NGOs. In this sense, efforts of the joint initiative to improve conditions and observance of labour rights for garment workers and their families in a specified number of Turkish garment-producing facilities is an important activity (Turkey Corporate Social Responsibility: Baseline Report, 2008, p. 48). In Turkey, there is an association established as special for CSR. The Corporate Social Association of Turkey, which was founded in 2005 for the purpose of developing both local and global CSR awareness for SD and social success, is celebrating its fifth anniversary. The government and companies in Turkey remained silent about being open, transparent and accountable for a long time. Public Financial Management and Control Law (Kamu Mali Yonetimi ve Kontrol Kanunu, Law no. 5018, accepted in 2003) is an important step towards being open, transparent and accountable with respect to the administration of accounts. The law also includes state-owned enterprises. The United Nations is actively involved with the CSR issues in Turkey. The UNDP’s aim is to find practical solutions to Turkey’s development challenges, and it has implemented more than 80 programmes across the country since 1986. UNDP’s strategy for 2006–2010, formulated with and agreed to by the Turkish government, highlights three core areas by which UNDP will support the implementation of Turkey’s development agenda through project implementation and policy advice: (1) capacity building

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for democratic governance, (2) action and advocacy for poverty reduction and (3) environment and SD. In addition to these core areas, UNDP Turkey is emphasising the role of women, private sector, capacity development and information and communication technology in its policies and programmes. UNDP in Turkey is creating partnerships between government, business and civil society organisations (CSOs) to stimulate entrepreneurship within Turkey and between neighbouring countries to quicken the pace of SD. For example, with microfinance sector development projects, UNDP Turkey aims to promote microfinance in Turkey as a component of Turkey’s overall povertyreduction strategy. The climate-change communication project aims to enhance general awareness and knowledge on climate-change–related issues in Turkey and help them take into account the process of national planning and policy. UNDP has recently been running the Partnership for Development with the Business Sector Project, which aims to strengthen the UNDP’s development partnership with the business sector in Turkey. The programme is also charged with the promotion and membership processes of the Global Compact initiative in Turkey, which encourages the business involvement into development issues as the companies promote and market themselves through the UN’s reputation. All of these efforts created an atmosphere of CSR that it is trying to find a place for itself between its philanthropic nature and a business case. From philanthropic nature to development initiatives, community awareness of the broader economic and social role that companies can play in development by reinforcing positive dynamics increased. The research in 2007 conducted in partnership with GfK and Capital Business magazine announced society expects that companies focus on and support education, followed by health, environment and acts of violence in families. Education is also the first expectation of the corporate agenda followed by the issues of unemployment, ethical behaviour, social security and health (Turkey Corporate Social Responsibility: Baseline Report, 2008, pp. 45–46).

Corporate Social Responsibility Practices Nowadays the companies in Turkey either launch many CSR activities or join in activities initiated by NGOs about education and health. The Kardelens Project is run in the field of education. It is an internationally recognized project and has won many prizes. Another campaign called ‘Hey Girls, Let’s Go to School’ has been implemented jointly by the PublicPrivate-Civil Society and the UN.

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Participation in CSR activities widened especially after 2003. In 2003, government changed the income tax and corporate income tax laws (Kurumlar Vergisi Kanunu). The new arrangements provide tax cuts to contributors of health and education through CSR projects. Therefore, sensitivity of social issues may not be the only reason for the increase in the number of CSR projects. However the success of these activities and campaigns, which have raised large amounts of supplementary funds for the education system in Turkey, largely derives from the fact that Turkish society sees education as a priority for its children. An important subject to be considered while assessing the CSR practices of companies is the sustainability of these practices with respect to international standards.25 Although some companies’ CSR practices in Turkey are very successful and genuine, some companies’ practices are just window dressing.26 For example, in June 2010, Yesim Textile27 was selected as the company with the best CSR practice among six companies around the world by the United Nations Global Compact (UNGC), Social Accountability International (SAI) and the Center for International Private Enterprise (CIPE).28 Yesim sought SA8000 certification and in 2005 became the first ready-to-wear producer in Turkey to be SA8000 certified. In 2008, Yesim upgraded its CSR principles by formally committing to the 10 principles of the UNGC. The company’s employees emphasised that, in addition to addressing the issue of overtime, SA8000 certification brought greater attention to health and safety, better training and improved communication with management (Kohl & Nadgrodkiewicz, 2010, p. 53). Social responsibilities of companies usually comprise social, economic and environmental issues. However, when CSR practices (projects and campaigns) carried out in Turkey are examined, it has been found that companies are mostly implementing the CSR projects for social purposes (education and health, etc.). It is concluded that CSR projects have little economic and environmental purposes.29 CSR practices of public institutions, NGOs, companies and other actors (stakeholder groups) in Turkey were examined in literature research with the following findings:  The companies in Turkey implement CSR projects which are focused on a social problem.  Although CSR projects in Turkey are not related to specific problems, they have been a reason for competition among companies over time.  This attitude of companies also affects consumers’ stance on the market. CSR projects carried out by companies may influence consumers’ preference when they select a product.

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 In recent years, some companies in Turkey have practised their CSR activities with NGOs. The reason for this could be the intention of leaving positive impression on society, although they are mainly benefitting from tax cut. Because corporate income tax Law explains that ‘the sum of grants and donations made with a receipt to foundations, associations working for public interest and organisations and institutions been in activities of scientific research and development, granted the tax exemption by the Council of Ministers can be downloaded from corporate income for the year’.  Finally, the CSR is widely known as a business case and considered especially on the basis of marketing and reputation. By projects through sponsorships, many companies and stakeholder groups are actively trying to be involved with and shape this process. Companies mostly convert their ad spending to CSR projects. Thus, on the one hand companies advertise while on the other hand they benefit from tax credits with CSR projects. In this sense, the crowning CSR projects have transformed the traditional charity approach to a more modern, corporative and profitable area with tax cut.

Corporate Social Responsibility Reporting Since the 1980s, the number of academic studies relating to social and environment-oriented statements made by businesses has increased. The literature indicates that CSR reporting practices are different among developed and developing countries and even among sectors. The majority of the empirical studies made about the CSR reporting applications of businesses are about applications in developed countries (the United States, the United Kingdom and Australia). The explanations in those reports are qualitative: number of working, equal opportunity, pay and compensation, disability-related policy, staff training and so on (Gao, Heravi, & Xiao, 2005). However, there is a very little empirical research by businesses in developing countries relating to models of social and environmental reporting. Thus, the stage of economic development is an important factor that affects businesses’ environmental and social reporting practices. And it will be the only guide which studies the results of developed countries’ generalisations according to developing countries (Gao et al., 2005).

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Obstacles in sustainable socio-economic development often arise in the country and out of country. These obstacles are briefly described in the following text (Shiraz, 1998, pp. 58–59). One of the most important problems with regard to reporting of environmental and social impacts on business activities in developing countries is the lack of regulations that require businesses to provide annual reports on their social and environmental issues. In developing countries that have these regulations, it is observed that these regulations discourage enterprises that have environmentally damaging activities in their work process. As a result, although many companies are aware of their activities which are harmful to the environment and the community, they do not mention these in their reports. Therefore, it can be said that these reports are a window or a mask. When CSR reports published by companies in Turkey are examined, companies generally seem to have a positive attitude on CSR. However, engagements in issues like environmental protection, human rights and employee participation or rights (especially with regards to laws and regulations) need to be developed. Basar and Basar (2006, p. 222) have analysed CSR in the annual reports of the companies included on the Istanbul Stock Exchange (ISE) 100 index. The companies in Turkey explain in their reports mostly the field of human resources and secondly the field of health and safety. Energy is the least explained, followed by environment. When the subjects are examined according to sectors, it is determined that businesses located in the industrial sector explain most about health, safety and human resources, and businesses located in the service sector and the financial sector explain most about human resources. However, Turkey has positive developments on the CSR reporting (or sustainable reporting) and SRI. In Turkey, ISE launched its Sustainability Index project in conjunction with the Sustainable Development Association in August 2010. The ISE Sustainability Index (ISESI) aims to provide a platform for Turkish companies to profile the best practices in corporate sustainability to investors. ISESI will enable Turkish and international investors to benchmark listed companies for their leadership in the development of sustainable business in Turkey. Turkish and international investors may use the ISESI as a tool to understand the importance of the management of sustainability for the short- and long-term health of business. In 2010, institutional and retail investors across Europe were increasingly considering concepts such as sustainability and social responsibility for

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risk minimisation in the wake of the financial crisis. Since 2000, CSR and sustainability have become an increasing priority for investors. The landscape is different. Three key trends have emerged: firstly, increases by corporations in CSR reporting, both voluntary and mandatory, and in demand for that reporting; secondly, a trend by institutional investors towards transparency in proxy voting and the incorporation of social and environmental standards and best practices into investment policies; and thirdly, the incorporation of social and environmental matters into stock analysis, academic business curricula and financial professional training (Istanbul Stock Exchange Sustainability Index (ISESI) Project 2010–2011, 2010, p. 7).

COMPARATIVE OF CORPORATE SOCIAL RESPONSIBILITY CONCEPTIONS IN THE UNITED KINGDOM AND TURKEY As stated previously, there is no consensus on the definition of CSR. Definitions are different according to each country. The research done in more than 30 countries by GlobeScan since 1999 confirms this assertion (Definition of CSR in Different Countries, 2010). Over the years, GlobeScan’s research has revealed that understanding of the term ‘corporate social responsibility’ differs greatly from country to country, with developing nations appearing to focus more on product quality attributes and industrialised countries defining CSR according to labour issues, the environment and community involvement. In the United Kingdom, CSR today is considered to be the business contribution to SD. In contrast to the United Kingdom, CSR in Turkey is considered to be more corporate philanthropy and perceived more as the practices of assisting charity through foundations inherited from the Ottoman Empire. Indeed, today many companies establish foundations and perform charitable activities through those foundations. Expectations of people are in this direction. Nowadays charity has become outdated in the developed countries like the United Kingdom.30 While in Turkey, charitable donations are still very important. The United Kingdom (in addition to Canada, Australia and Indonesia) is the foremost in environmental protection. CSR is a notion that is still far from the level of full indoctrination for the executors. A debate rages on in the business, academic, civil and political communities as some people struggle to articulate CSR, whereas others challenge the efficacy of the CSR movement itself. An unfortunate

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consequence of the uncertainty surrounding this issue is the confused state of actual CSR in the business world. For some managers, CSR is an integrated part of the firm’s mission statement; for others, it is merely a public relations tool placating the interests of stakeholders. However, for many managers, socalled CSR commitments are tricks to cheat both the public and the government by masking socially and economically detrimental business practices. This latter practice, known as ‘pernicious CSR’, lends credence to critics and threatens to undermine the CSR movement if it is not addressed and exposed in the near future (Olowski, n.d., p. 4). Examination of some CSR practices in Turkey show that CSR is perceived as more of a public relations tool. Many businesses organise CSR projects without understanding the logic behind CSR. This kind of businesses see it as a profitable practice. In the United Kingdom many businesses are more conscious about including rights of the staff and environmental issues. This approach can be seen in the CSR reports of these businesses. However, a comprehensive study has not been done on this approach.

Comparative Historical Processes In Turkey and the United Kingdom, charity is in the initial phase of CSR. However, businesses in the United Kingdom abandoned their charity functions with the changes in management style, application of modern management techniques to businesses and the development of social policy vehicles. Today the businesses in the United Kingdom spend more effort on contributing to SD by producing the solutions to environmental problems. The Johannesburg Summit influenced the development of CSR in the United Kingdom and Turkey. The growth of the global economy has seen benefits across the world but also increasing public concern about business activities and a decline in trust. At the WSSD in Johannesburg in September 2002, there was as much focus on business as on poverty and the environment. As the WSSD recognised, partnership – between business, government and civil society – is the key to the progress we need on international CSR and SD. Especially large enterprises in Turkey have vaqifs (foundations) – a traditional and historical Turkish institution. Under the effect of their emotions, business owners do charity work by means of these foundations. Before the emergence of CSR understanding, these kind of activities were also produced by the owners of several businesses in good faith. Together with CSR, these activities act as advertisements for the businesses which are mainly interested in attaining profitability.

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Comparative Legal Statues No legislation requires any social or environmental accounting or reporting in either the United Kingdom or Turkey, although the UK government has a responsibility to ensure minimum legal standards. But in Turkey, government has no such compulsion. The UK’s approach to CSR has been well documented. Throughout its development, as with the evolution of the EU’s CSR policies, international and global forums have clearly had an impact in helping to shape UK CSR policies and strategies. The UK government does pay attention to the EC’s recommendations about CSR. The EU has particularly focused on business actors, exhorting them to make a substantial contribution to SD via their CSR policies and practices. In this respect, EU has linked the two ideas explicitly due to recommendations of EC about SD. In a document (EC, 2002) titled ‘Corporate Social Responsibility: A Business Contribution to Sustainable Development’, CSR is defined 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 as they are increasingly aware that responsible behaviour leads to sustainable business success’ (EC, 2002, p. 3). Therefore, businesses in the United Kingdom have accepted a voluntary approach to CSR. The same approach is valid for Turkey in maintaining EU accession talks. Many decisions published by the EC have recommended protecting consumers. The decisions made by the EC have affected the legislative process in Turkey. In Turkey, an environmental law and a regulations of environmental impact assessment (EIA – Cevresel Etki Degerlendirmesi Yonetmeligi) has been made. This regulation (Article 2/d) predicts monitoring and supervision before operation, during operation and after operation of projects included the regulation scope. This is a legal requirement. Even if it is expressed that the businesses in Turkey have a voluntary CSR understanding, they included these CSR regulations as mandatory. As stated earlier, the 2002 Johanenesburg World Summit has also affected the CSR actors in the United Kingdom. In short, the decisions of the EU and other international organisations’ activities about CSR is partly closer to each other’s understanding of CSR in the United Kingdom and Turkey.

Comparison of Actors CSR’s actors are common in the United Kingdom and Turkey. For example, although not a member of the EU, Turkey is affected by the EC’s decisions.

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In the United Kingdom, the actors closely related with CSR are businesses, government, civil society and the EU. The main focus of CSR is voluntary. Many of the standards on CSR have been spearheaded by NGOs with corporate involvement and consultation. However, government has also been active and released its own guidance and tools in this area even before the UK government had the Ministry of CSR, which was abolished by the current UK government. Companies are the other important actors in CSR. Business has a big role to play in enabling us all to reap the benefits of globalisation without adverse social and environmental impacts. Over the past two decades or so, many international, national and sub-national actors in the public, private and voluntary sectors have developed CSR policies and strategies. One self-proclaimed leader in this respect has been the EU, which has explicitly sought to shape thinking about CSR (and SD) within its boundaries and beyond. Although EU directly chooses a business for CSR, EU does not communicate directly with the businesses in the United Kingdom. Many of the professional and service-oriented NGOs that were influential in structuring the mainstream CSR agenda assumed certain characteristics that shaped their approaches and the reformist nature of their demands and proposals. In Turkey, the possible drivers of CSR are companies, MNCs, NGOs, government, international organisations and media. The CSR activities of big companies in Turkey tend to be applied through their own foundations. Philanthropists such as Vehbi Koc, Sakip Sabanci, Izzet Baysal and Kadir Has actively involve themselves in community development programmes through donations to hospitals, schools and museums, among others. However, in the last decade more businesspeople have been actively involved in efforts to eradicate social problems. MNCs have more influence on the CSR agenda in Turkey compared to any other driver such as governmental agencies and regulations, corporate governance structure or culture. Mainstream CSR practices come with pressure from international buyers with the issues of environmental and social standards. In Turkey, there is an association established as special for CSR. The Corporate Social Association of Turkey was founded in 2005 for the purpose of developing both local and global CSR awareness for SD. The United Nations is actively involved with the CSR issues in Turkey. UNDP Turkey’s aim is to find practical solutions to Turkey’s development challenges, and it has implemented more than 80 programmes across the country since 1986. UNDP in Turkey is creating partnerships between government, business and CSOs to stimulate entrepreneurship within Turkey and between neighbouring countries to quicken the pace of SD.

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All of these efforts have perhaps created an atmosphere of CSR that seeks to find a place for itself between philanthropic and business. From philanthropic nature to development initiatives, there has been more community awareness about the broader economic and social role that companies can play in development by reinforcing positive dynamics. But the corporate management philosophy of both countries is different. Turkey is not like the Anglo-Saxon model. This situation affects companies’ CSR activities. The ownership of Turkish companies is highly concentrated, with families or individuals being the dominant shareholder.31 Turkish companies do not have the structure of unlimited shareholders but of limited shareholders who are dominated by family members. Therefore, drivers of CSR in Anglo-Saxon corporate environment such as institutional investors or investor activism are not valid in Turkey.

Comparative Corporate Social Responsibility Practices The CSR activities of businesses in the United Kingdom focus mostly environmental issues. More and more businesses in Turkey in the areas of education, health and social issues are implementing CSR activities, and businesses in Turkey implement CSR activities in more and more social areas such as education and health. The reason for this difference is that social development differences exist in both countries. Education and health policies in the United Kingdom and Turkey are different. In Turkey, the number of people deprived of education and health services is more than in the United Kingdom. All of this prompts enterprises to produce CSR activities in these areas in accordance with society’s expectations. This case is compatible with Maslow’s hierarchy of needs. Education and health are considered as more fundamental needs than addressing environmental problems. However, if the environment collapses, life ends. CSR projects are not related to basic causes of problems anymore and they have been a subject of competition among companies over time. CSR projects carried out by companies may influence consumers’ preference when selecting a product. In the United Kingdom, society wants environmental sensitivity from business. For this reason, businesses focus on environmental issues. This development towards high environmental perception and execution has been due to the harmful environmental activities of many businesses. In recent years, some companies in both countries have practised their CSR activities together with NGOs. The reason for this may be the positive impression left on the community by some civil society organisations as well

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as the effect of the Johannesburg Summit, because the summit influenced the development of CSR in the United Kingdom and Turkey. At the WSSD, there was as much focus on business as on poverty and the environment. The WSSD recognised partnership between business, government and civil society.

Corporative Corporate Social Responsibility Reporting Another criterion used in comparing the UK’s and Turkey’s social responsibility approaches is the CSR reports published by enterprises. It is known that CSR reporting is important. Today, hundreds of companies operating in Europe, Asia and the Americas prepare periodic reports announcing their own social responsibility activities. CSR reports as a natural extension of financial reporting extend the scope of business reporting in businesses’ statements of environmental, economic and social performance (Clikeman, 2004). CSR reports show the dimensions of businesses’ economic, environmental and social activities by annual or separate reports offering financial and non-financial information about business trips of domestic and business stakeholders (Heemskerk, Pistorio, & Scicluna, 2010; Thompson & Zakaria, 2004). CSR reporting is to extend the scope of traditional financial reporting in the direction of social benefit (Basar & Basar, 2006, pp. 214–215). The literature indicates that CSR reporting practices are different among developed and developing countries and even among sectors. The majority of the empirical studies made about the CSR reporting applications of businesses are about developed countries’ applications. The explanations in those reports are qualitative: number of workers, equal opportunities, pay and compensation, disability-related policy, staff training and so on. However, there are a very small number of empirical research projects that show relation of businesses in developing countries to models of social and environmental reporting. Together with globalisation of economic activities and technological knowledge and practices, CSR reporting has been the focus for research in both developed and developing countries. Indeed, the socioeconomic development of developing countries’ environmental and social issues constitutes the focus of SD. The general conclusions of CSR reporting in the United Kingdom and Turkey are as follows. In the United Kingdom, the most reported area by businesses included in the FTSE 100 index is environmental information. The most reported area of environmental information was ‘emissions,

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effluent and waste’, which includes CO2 emissions; this information is often required by other regulation and so is more readily available. Yet even here, only one-third of companies surveyed reported quantitative information, and 18% did not mention the issue at all. The worst-performing environmental issue areas were transport, environmental legal compliance and environmental expenditure. In the United Kingdom, human rights issues in businesses’ CSR reports were in general poorly reported. For example, extractive companies did not report security issues at all, despite the fact that half of the companies in the oil and gas sector in the FTSE 100 are participants in the Voluntary Principles on Security and Human Rights. This sector also includes some companies that have signed up to the UN Global Compact, which is designed to promote human rights and which has a partnership with the GRI. The businesses in Turkey that are included in the ISE 100 index explain mostly the field of human resources and secondly the field of health and safety in their reports. Energy is the least explained field, followed by environment. However, Turkey has positive developments in CSR reporting (or sustainable reporting) and SRI. In Turkey, the ISE launched its Sustainability Index project in conjunction with Sustainable Development Association in August 2010. The ISESI aims to provide a platform for Turkish companies demonstrating best practices in corporate sustainability as profiled to investors. Turkish and international investors may use the ISESI as a tool to understand the importance of the management of sustainability for the short- and long-term health of business.

CONCLUSION Nowadays, CSR goes far beyond the old philanthropy of the past. However, the EU’s policy-making bodies, the UK government, the Turkish government and business organisations clearly come down on the side of retaining the status quo – that is, continuing to pursue a voluntary approach to CSR. This is despite articulated opposition to these ideas and values by the trade unions, environmental and other social groups. Combined with one of the underpinning principles of the European project – namely, the neoliberal paradigm – this has contributed to the continuing preference for a voluntary rather than mandatory approach to CSR. Perhaps this is because of the power of the arguments made (at least a perception of the merits of the arguments) or perhaps because of the manner in which they have been communicated.

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It may be the product of the de facto economic power of business actors. Moreover, there may also be other institutional and structural factors that may have resulted in this outcome (Fairbrass & Lane, 2006, p. 12). As parallel to a voluntary approach, today, in Turkey CSR does not go forward as a project-based activity produced by companies’ public relation departments. When the web pages of many institutions and companies are examined, it is found that the CSR projects are only related to social, economic and environmental aspects of the community. CSR projects still do not take into consideration human rights or the rights of employees. This perception can be interpreted as the transformation of traditional charity activities, which is very common (including national and local governments) in Turkey, into modern corporate philanthropy. But in many companies, no measurement is made about which projects are compliant with company’s stakeholders (customers, suppliers, employees, shareholders) and which projects are successful. During CSR study in the United Kingdom, we could not find too many CSR projects like in Turkey. CSR in the United Kingdom appears as an SD activity included in the annual reports of companies. Therefore, CSR includes direct activities made towards stakeholders by companies. The Johannesburg Summit was very important for the development of CSR in both the United Kingdom and Turkey. Governments, companies and civil society made many commitments at WSSD, including progress on the ambitious MDGs. They also agreed to promote CSR. Besides the UN, EU made many arrangements like intentional advice on CSR. If Turkey is accepted as a member of the EU, it will implement this arrangement. In short, the countries have social and economic differences that have created different understanding of CSR. The decisions of the EU and other international organisations’ activities about CSR have partly affiliated to each other in terms of understanding of CSR in the United Kingdom and Turkey. In spite of their distinctions and similarities, in both countries an academic environment has been interested in CSR, although the United Kingdom is much ahead of Turkey in respect to the numbers and features of academic studies on CSR. Still, a pleasing academic climate has developed that is moving along and sharing experiences in CSR. This study was conducted in this academic climate.

NOTES 1. ‘Corporate social responsibility’ is also referred to as ‘corporate responsibility’ (CR).

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2. The studies explaining the conception of CSR in Turkey are more limited. However, the United Nations Development Programme (UNDP) and the European Commission are institutions that are studying CSR practices as a means of integration, competitiveness and social unity within the framework of Turkey’s candidacy for the European Union (EU). The common aim of these studies is to attract attention to the importance of CSR towards ensuring sustainable development in Turkey. 3. Another problem is the lack of ‘common language’ between business and academia in this field. Therefore, a terminological CSR dictionary was adopted (see Visser, Matten, Pohl, & Tolhurst, 2008). 4. For a long period of time, NGOs played the role of independent consciousness or police in the formation of public interest and opinion about companies. Over time, NGOs have been included in the CSR agenda and have begun attempts to participate in partnership and publicly in the form of various collaborations with companies. 5. It should be considered that socio-economic structure, as social and cultural feature, belongs to each society because this feature affects the society’ expectations from companies about CSR. 6. The ABI is a trade association for Britain’s insurance industry. 7. ABI report, ‘Investing in Social Responsibility: Risks and Opportunities’. 8. See, the examples of the Ottoman Empire and India, Singer (2004); Das Gupta and Das Gupta (2005, pp. 31–73). 9. London alone had some 700 philanthropic societies devoted to every conceivable human misery or affliction (Himmelfarb, 2011). 10. Corporate philanthropy is the modern expression of the charity principle. The stewardship principle is given meaning today when corporate managers recognise that business and society are intertwined and interdependent. This mutuality of interests places a responsibility on business to exercise care and social concern in formulating policies and conducting business operations. 11. However, the UK company law requires companies to prepare their financial statements according to UK Generally Accepted Accounting Practice (UK GAAP) and this assumption must be disclosed in the notes to the company accounts under the heading of accounting policies (Concise Accountancy, 2010). 12. The European community has done many arrangements on CSR. New European standards in this area are contained in the new Information and Consultation (Icon) directive that aims to ‘establish a general framework setting out minimum requirements for the right to information and consultation of employees in undertakings or establishments within the European Community’. Icon advocates greater employee involvement and follows the current trend in encouraging more stakeholder participation (The Law Society, 2002). The European Commission’s definition of CSR is, ‘A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.’ Corporate Social Responsibility is part of the Europe 2020 strategy for smart, sustainable and inclusive growth (European Commission– Enterprise and Industry, 2010). 13. ‘Internal Control: Guidance for Directors on the Combined Code’ (1999), also known as the ‘Turnbull Report’, is a report drawn up with the London Stock Exchange for listed companies. The committee that wrote the report was chaired by Nigel Turnbull of The Rank Group plc. The report informs directors of their

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obligations under the Combined Code with regard to keeping good ‘internal controls’ in their companies and having good audits and checks to ensure the quality of financial reporting and to catch any fraud before it becomes a problem. 14. This strategy statement was published in June 2000 by the then Department of Transport and Local Government. More information can be found at http:// www.hse.gov.uk/revitalising/index.htm 15. Further information can be found at http://www.hse.gov.uk/revitalising/ annual.htm 16. In many of the published strategies and policies, an explicit link is made between SD and CSR, wherein the latter is seen as a means of helping to achieve the former. 17. For more information, see: www.accountability.org.uk, www.globalreporting. org, www.cepaa.org/ 18. See http://www.bp.com, http://www.desireplc.co.uk 19. The relevant companies were Amlin, AstraZeneca, BAE, compass, F&C, Friends Provident, Home Retail, HSBC, Old Mutual, Petrofac, Serco, Shire, Standard Life, Thomson Reuters. 20. The relevant companies were 3i, AstraZeneca, Friends Provident, Hammerson, SBC, Reed Elsevier, Thomson Reuters. 21. Turkey took steps to integrate its economy with developed countries. However, this integration process brought new challenges such as competitiveness which certainly acted as an impediment for companies to set up CSR practices mainly due to the pressure of cost and profitability. The state’s economic role has been diminishing for the past last decades, but it does not mean that companies were able to replace the state. 22. See Aras and Crowther (2009, pp. 1–41). 23. For example, until now 142 workers working in shipyards in Tuzla and Yalova have lost their lives. Even though the pressures from public forces the shipyard businesses to take measures, but these remain insufficient (Tuzla Tersanelerinde Bir Olu¨m Daha, 2010). 24. Corporate Governance Codes announced by the Capital Markets Board (CMB) of Turkey created a certain level of awareness and understanding for reporting of stakeholder policies and hence implementation of CSR. However, there is still need for further development. As the reporting process is underdeveloped, assurance systems are far from being complete and functioning. Therefore, tools of implementation are a key need for Turkish business. 25. Just as good corporate citizenship goes beyond statements and declarations, participation in the United Nations Global Compact (UNGC) goes beyond signing a name on the dotted line. As companies commit to implementing the 10 principles of the UNGC, they undoubtedly seek the best mechanisms to ensure that the principles are reflected in their performance. Although there is no single best approach, certain mechanisms may prove useful for many companies around the world. One example is the SA8000 global social accountability standard for decent working conditions developed by Social Accountability International (SAI). 26. For these concepts, see Crowther (2004, pp. 140–160). 27. As one of Turkey’s largest employers (founded in 1983), the company has a large national presence. Based in Bursa in northwest Turkey, it directly employs around 3,000 workers in its garment and home textiles facilities.

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28. The companies – Beraca (Brazil), Rosy Blue Diamond (Thailand), Sabaf (Italy), TDE (Bolivia), TNT (Argentina) and Yesim (Turkey) – vary greatly in size, age and corporate structure, but they are united by a desire to share best practices and practical solutions to challenges that many other UNGC members face. 29. For a comprehensive study of CSR projects practiced in Turkey, see Akyildiz (2007, pp. 138–183). 30. ‘Today social responsibility goes far beyond the old philanthropy of the past – donating money to good causes at the end of the financial year – and is instead an all year round responsibility that companies accept for the environment around them, for the best working practices, for their engagement in their local communities and for their recognition that brand names depend not only on quality, price and uniqueness but on how, cumulatively, they interact with companies’ workforce, community and environment. Now we need to move towards a challenging measure of corporate responsibility, where we judge results not just by the input but by its outcomes: the difference we make to the world in which we live, and the contribution we make to poverty reduction.’ Gordon Brown, Chancellor of the Exchequer (DTI, 2004, p. 2). 31. See Demirag and Serter (2003).

ACKNOWLEDGEMENT This study was made during an academic visit within the Center for Research into Organisational Governance in Leicester Business School at De Montfort University. I would like to thank Prof. Dr. David Crowther for his contributions.

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CHAPTER 7 THE RELATIONSHIP BETWEEN CSR, PROFITABILITY AND SUSTAINABILITY IN CHINA Qingqing Yang and David Crowther BACKGROUND The concept of corporate social responsibility (CSR) has been widely used in the world, and it is related to the idea that organizations should be not only concerned about making a profit but also engaged in actions which benefit society beyond the interests of the firm and whatever is required by law (McWilliams, Siegel, & Wright, 2006). The concepts and definitions of CSR are different according to different academics, and the impact of business on the shareholders from CSR considerations could be analysed and used by different CSR models. These CSR models could take three main forms: social–economic, stakeholder and triple-bottom-line (Zu, 2008). CSR in China has become important and essential through a company’s whole business and strategy-making process. Nowadays, firms in China do not have an increasing position in the global market, although China has a sound and fast developing economy with high gross domestic product (GDP), consumer price index (CPI) and other economic indicators. And the official statistical outcomes showed that there is a serious crisis about CSR in some fields of China. For example, more than 263,500 people died in industrial accidents in two years, 2004–2005 (Fewsmith & Zheng, 2008). Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 155–175 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003011

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Another example is related to the milk powder that contains tricyanamide, which has a toxicity that affected some babies (CSR-China.net, 2008). Thus, it is apparent that several firms pay most attention to profit rather than social effect. There is no doubt that CSR is a new entity for Chinese native firms and some other firms, even though large-scale companies have only a superficial knowledge in CSR activities. In addition, the business culture in China is another challenge for firms’ CSR considerations (Schwalbach, 2010). Firms in China often set shortterm business goals which are related to financial performance such as increasing earnings per share, and business goals force managers to make decisions according to the concept of making money as soon as possible. In addition, CSR reporting in China has a short history. The first CSR report in China came from the Shell Corporation (CSR-China.net, 2008), and almost no native corporation disclosed CSR information in China before 2005. In 2007, the industry of state electricity grid was the first state-owedenterprise to produce a CSR report; several state-owed enterprises followed. Furthermore, the environmental reporting which began in the 1970s and 1980s supplied a basic model for CSR reports and audits, and an environmental report has been considered in an increasing position as a component of a firm’s comprehensive annual report in Europe (Chandler & Werther, 2010). CSR reports also have been considered an essential and important tool for firms to communicate with stakeholders, and the advantages of these CSR reports of transparency and honesty are that they supply external observers with effective chances to evaluate the organization, its managers, and policies (Chandler & Werther, 2010). According to KPMG (2008), there was a 30% jump from 2005 to 2008 in the percentage of largescale companies that disclose CSR reports; about 79% of the world’s largest companies provide the CSR information in a publicly available form. Thus, whatever the concepts or actual activity, Chinese firms have low sensitivity and consciousness about CSR when compared with European firms in the early years. However, the consciousness of CSR’s importance has increased in China of recent years. For example, the CSR alliance of Chinese financial corporations, which consists of several responsible and excellent corporations and entrepreneurs, was established at Peking University from April 2006 (CSR-China.net, 2008). This alliance combines the integral power of different industries. Meanwhile, this alliance is a nongovernmental organization which has the most influence power and credibility in the field of CSR in China. Moreover, the CSR alliance of Chinese financial corporations emerged through this former conference, and this alliance facilitates the increase and enhancement of native corporations’

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CSR through the process of making a profit. Corporations, society and nature can thus coexist and develop in a harmonious and balanced environment. Then in 2008, the first CSR evaluation of Chinese financial corporations was held (CSR-China.net, 2008). This conference represented increasing numbers of native corporations in China that started paying attention to the sustainability of the business through taking more responsibility for CSR (CSR-China.net, 2008). These activities all meant that the corporations in China started to focus on the powerful influence and positive effect of CSR considerations. As one of the developing countries in the world, China shows how CSR considerations can also be analysed and viewed from the point of view of developing countries. Moreover, according to Pollard, Stewart, and Sun (2010), there are several reasons for considering CSR in developing countries when compared with developed countries, and these reasons are as follows:  Developing countries have the most profitable growth markets for business because the developing countries represent rapidly expanding economics.  Actually, social and environmental crises will give more influence to developing countries in the world.  Social and environmental effects will give developing countries both positive and negative influences in the field of economic growth, investment and other business activities.  Developing countries face a different series of CSR challenges and characteristics that are quite different from developed countries. Furthermore, Visser, Matten, Pohl, and Tolhurst (2007) have pointed out that CSR has distinctive characteristics in developing countries, including the following:  CSR benchmarks such as CSR codes, standards, management system and reports are less formalized and institutionalized in developing countries when compared with developed countries.  Formal CSR is often used in large-scale and international companies, especially the firms which have been recognized as multinational brands or have obtained a certain status in the global market.  CSR is associated with philanthropy or charity in a large scale of developing countries – for example CSR is often been reflected through corporate social investment in education, health, environment and other community services.  The most important and effective way for business in developing countries to make a social impact refers to making an economic

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profit – for example through investment project, job creation, taxes and technology transfer.  The order which related to the CSR banner is often different in developing countries – for example improving work conditions, supply-chain integrity and poverty alleviation.  Many firms which take CSR issues in developing countries will present themselves as dilemmas or trade-offs – for example strategic philanthropy versus political governance, job creation versus higher labour standards or development versus environment. Therefore, there is a special circumstance for CSR considerations in developing countries, especially in China. Moreover, the concept which combines economic profits with CSR considerations played a prominent role during the 1970s and 1980s, and this concept was based on Friedman’s (1970) views, which pointed out that an organization’s main responsibility is to its shareholders. Then a new perspective aligned CSR with profit-making outcomes when a firm faces increasing competition and a changing global business environment (Lee, 2008). To satisfy different requirements from different shareholders, the firm which takes the CSR considerations should adjust a series of business actions. Actually, the social preferences from shareholders can affect corporate profit strategies (Free, 2010). As a strategy to maximize profits, CSR considerations are also affected by the shareholders’ preferences. In detail, the firm will take a non-strategic form of CSR if the shareholders have preferences which need monetary utility and ignore corporate social performance (Free, 2010). According to Kizmueller (2008), there are four basic combinations of stakeholders, shareholders preferences and CSR considerations:  The firm which is purely profit oriented will focus on maximizing profits, and just take considerations in CSR when shareholders demand it.  And if the shareholders of the firm take care of the corporate environmental and social conduct, CSR considerations will often be taken as an element of the business strategy. Furthermore, the motivations of firms that engage in CSR considerations through business are still based on a large-scale profit orientation. According to Aras and Crowther (2010), CSR is widely accepted by firms to help them achieve the target of obtaining profitability. As a result, CSR issues and considerations certainly influence both profitability and financial performance of a firm in a certain way, and CSR considerations can maximize their social performance as well as their financial results (Nussbaum, 2008).

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Corporate reputation is one of the most common driving forces to facilitate firms consideration of CSR (Visser et al., 2007). Good corporate reputations, together with CSR considerations, will help business:     

retain and recruit top talent, facilitate strong partnerships, increase sales, enhance shareholder value and withstand crises.

Furthermore, from the economic perspective, there is a relationship between a firm’s CSR activities and its economic performance. According to Bhattacharya, Smith, and Vogel (2010), several research efforts on CSR have moved to focus more on how CSR can contribute to profit maximization. Strategic CSR could also be used to capture a firm’s market value and competitive advantage. Furthermore, academic resources have both positive and negative viewpoints about the relationship between CSR and profitability – but not in China. On the other hand, CSR also risks potential negative financial effect to the firm (Heugens & Dentchev, 2007). According to (Mullerat, 2009), CSR policy is only credible when the company supervises and audits its day-today business. In addition, The Economist argues that CSR has nothing to do with a firm’s core business strategy, because ‘the proper business of business is business’ (European Commission, 2002). The European Commission points out that CSR should not be able to improve business, although most firms believe that CSR can generate competitive advantages in the whole market (European Commission, 2002). Note that there is relatively limited academic research on the relationship between CSR and the profitability of a firm in a developing country. In addition, several firms in China still concentrate on profits which can meet business targets, and they have less consciousness in the field of CSR activities. CSR report verification is generally defined as a process of obtaining and evaluating objective evidence in order to make sure a disclosure made by a firm about its environmental, social or economic performance is appropriate and correct (Visser et al., 2007). Moreover, CSR report verification often examines the performance data and whether management has considered policies such as codes of conducts and international agreement. Companies which trade in the financial market can rank highly on the Dow Jones Stock Index because evidence of CSR improves their reputation (McWilliams et al., 2006).

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DEFINING CSR There have been many attempts to define and clarify the definition and concept of CSR. Basically, a good definition of CSR was presented by the Institute of Directors, a UK-based trade group: CSR comprises the actions that manage the impacts that both businesses and other organizations have on the environment and society beyond the entities’ legal obligations. In particular, CSR activities determine how organizations interact with their employees, suppliers, customers and parties and how willing they are to protect the environment (Lea, 2002). The concept of CSR was mentioned initially by Friedman (1970), who pointed that the social responsibility of an organization is to make profit. Other practical definitions of CSR have been put forth by other academic resources. According to McComb (2002), CSR is generally defined as the notion that firms look beyond profits to their larger role in society. CSR also refers to a firm linking its operations with transparency, values, employee relations and compliance with legal requirements. However, as a corporate philosophy, CSR can be seen as a driving force to strategic decision-making, partner selection, hiring practices and, ultimately, brand development (McComb, 2002). A much better definition of CSR has been argued by Crowther and Green (2004), who have pointed that all definitions of CSR are pertinent and represent a dimension of the issue. The best definition of CSR is related to what is – or should be – or the relationship between CSR and the global market, local government and individual citizens – for example the relationship between a firm and its stakeholders (Crowther & Green, 2004). From an economic perspective, the document titled ‘A Guide to Corporate Social Responsibility’ states that CSR is  a method of analysing the interdependent relationships between businesses and economic systems,  a method of analysing the extent of social obligations that a corporation has to its society,  a method of considering political regulations on how these obligations can be met and  a way to generate benefits for a firm that meets identified obligations (United Nations, 2009). Moreover, CSR is a factor that has influenced the relationship between business and society over the past 20 years, and several firms have recognized that CSR concepts and theories could facilitate improvements in their own social impacts and in addressing social considerations that will help

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their long-term success. According to United Nations (2009), there are three basic drivers of CSR: 1. Values: Changing values have been noticed within businesses that are responsible for the production of goods not only with wealth creation but also with environmental goods. 2. Strategy: It is very important for the strategic long-term development of a firm to consider society and the environment. 3. Public pressure: Firms will become more socially responsible when they acknowledge and respond to pressure from consumers, media, states, local governments and other public bodies. From another perspective, CSR could supply more opportunities for greater market access, cost saving, better productivity and more innovation for firms as well as increased social benefits and general community development (Mullerat, 2009). With the development of CSR concepts, the standard and principles of CSR regulations become more important and essential. In general, there are about nine principles in four processes that relate to CSR in the United Nations Global Compact, and these extensive consultation processes address: 1. human rights, 2. labour and 3. environment (Mullerat, 2009).

DEVELOPMENT STORY OF CSR CONCEPTS CSR concepts date from the early twentieth century. In 1929, the dean of the Harvard Business School mentioned that business should recognize the magnitude of its responsibilities for the future of society (McNally & Company, 1982). With the development, discussion and debate of CSR issues, most current CSR considerations are related to environmental and ethical issues throughout the business process. CSR is a controversial topic that continues to attract attention even after the argument about whether CSR is relevant to business (Freeman & Liedtka, 1991). Moreover, the specific concept of CSR was initially put forth by Friedman (1962), who pointed that an organization’s social responsibility is to make a profit when it engages in open and free competition without deception or fraud.

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A company which has a story of adherence to CSR creates success for itself (Mackay, 2007). Broadly, a firm’s CSR considerations address protecting the environment, acting with integrity and adhering to the highest ethical standards, ensuring a safe and healthy workplace and so on (Mackay, 2007). In recent years, CSR policies of socially responsible investing (SRI) have often been adopted by investment fund managers and investors through the process of strategic decision-making (Asongu, 2007). Furthermore, Crowther and Green (2004) have pointed out that as a subject, CSR can indicate the social and environment effects from organizational behaviour. CSR also can improve a company’s reputation and competitive advantages in the whole market so that the firm’s financial performance can also be improved (Asongu, 2007). Finally, the vision related to the economic and legal obligations is narrow and incomplete. CSR is more about emphases on avoiding harm to other people and the society, meeting stakeholders’ expectations, contributing available recourses to communities and helping society improve the quality of life and environment (Asongu, 2007). Moreover, although CSR has several principles and concepts within its development process, its practical understanding of still requires the context of both place and time.

THEORIES AND STRATEGIC CSR The relevant theories and approaches of CSR can be classified into about four parts: instrumental, political, integrative and ethical theories (Phadtare, 2011). The stakeholder theory of CSR states that a firm is responsible for a variety of supporters within a society, and this theory could reinforce CSR considerations (Keinert, 2008). The theory of the triple-bottom-line is a new concept that points out that the success factors of a firm are determined not only by the traditional bottom-line but also by other performance criteria such as CSR considerations (Keinert, 2008). Moreover, according to Crowther and Green (2004), traditional bottom-line accounting primarily considers internal factors in its profit-and-loss statement and ignores the potential costs that result from corporate activities in the external social environment. Finally, CSR theory is also reinforced by a strategic meaning that indicates that CSR could facilitate a firm’s sustainable competitive advantages through certain considerations for the social and natural environment (Keinert, 2008). Meanwhile, strategic CSR is about deciding the issues initially such as which department should take actions in CSR fields, the agenda of creating a CSR plan and determining which part of CSR to emphasize

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(Porter & Kramer, 2006). Through the strategic CSR, the firm can have the greatest social influence and obtain larger business benefits (Porter & Kramer, 2006). In addition, Armstrong (2010) has pointed that CSR strategy should be integrated with both the business strategy and human resource (HR) strategy. Because HR strategy has the closest relationship with organizational behaviour both outside and within the firm, CSR strategy can help a firm obtain better performance by combining with HR strategy. Criticism of CSR arises from the opposite viewpoints, although several concepts, theories and announcement explain and analyse why CSR should be considered through the business process. The main criticisms are the following:  CSR lacks the legitimacy of the political system (Brittan, 2003).  Voluntary elements of CSR will increase costs and decrease revenues in both the short and long term, and CSR actions will reduce the degree of competition and reduce both economic freedom and market efficiency (Henderson, 2001).  According to Doane (2005), a business should keep its eyes on making money and nothing else. The death of CSR may not be a bad thing. By using academic criticisms of CSR, it is easier for a corporation to effectively analyse and address CSR issues. Several studies focus on the impact from CSR considerations on a firm’s financial performance as related to income, profitability ratio and so on. Meanwhile, many articles and research have reported the link between CSR and profitability. There also is some evidence to indicate that a positive relationship exists between CSR and improved financial performance (Andersen, 2004). Maignan found a positive relationship between CSR and return on investment, sales growth and profit growth, and these conclusions were based on information and data from an integrated survey. According to Stewart, the performance of the most successful companies is based on the criteria which are closely connected with how corporate citizenship is defined, reputation management, efficiency of management, product quality, innovativeness and responsibility to the community through the progress of the decision-making. Research by Verschoor has pointed that companies which commit to ethical behaviour or emphasize compliance with a certain code of conduct have obtained better financial performance from a study of the 500 largest corporations in the United States. And research by Ruf and Colleague has found a link between CSR and financial performance. The hypothesis in that research was that changing CSR performance is positively related to current and future changes

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in financial performance after controlling for size, industry and the prior year’s financial performance. The analysis supported the hypothesis. Moreover, the financial performance in that research was measured by two indicators: growth in sales and return on equity. In addition, CSR research started to focus on organizational investigations into the link between CSR and profitability and how CSR can improve a firm’s competitive advantages and financial outcomes (Macdonald & Marshall, 2010). According to Macdonald and Marshall (2010), some business consultants and researchers believe that aligning the social and the economic elements of a firm’s responsibility could bring large profit to the business. A series of evidence indicates that the positive outcomes from implementations of CSR activities:      

boost the sales of products and increase a firm’s market share of the firm, increase reputation and brand management, improve a firm’s image compared with other competitors, attract and retain talent and promote employee productivity, decrease production costs and attract more investment and achieve better credit ratings.

In short, CSR can increase the profits and is thus of great economic significance (Macdonald & Marshall, 2010). Furthermore, CSR could be considered as a competitive business strategy as well as an obligation for many firms; for example an American pro-business organization that has business for CSR, treats CSR as a method of achieving a its final goal of profit making as well as activities that respect ethical values and protect the social environment (Macdonald & Marshall, 2010). In addition, business benefits from CSR activities both tangibly and intangibly, such as raising more capital through SRI funds and decreasing risk premiums, improving resource efficiency, improving staff motivation, engaging a better quality of supplier, expanding business relationships, enhancing reputation and strengthening brand image as well as supplying the responsible products and services (Barth & Wolff, 2009). The experienced business benefits from CSR activities will be treated as potential incentives for the effective implementation of a CSR instrument (Barth & Wolff, 2009). Moreover, according to Fernando (2010), there are a series of advantages for firms when they take CSR considerations and activities:  improved financial performance,  enhanced brand image and reputation,  increased sales and customer loyalty,

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 increased ability to attract and retain employees,  reduced regulatory oversight and  facilitated innovation and learning. Except for direct positive influence in the field of financial performance, the benefits from CSR activities could be considered as potential factors that will visibly influence a firm’s profitability ratio. The potential beneficial factors which lead to positive financial performance will be analysed and illustrated in a separate part of this literature review. From the perspectives of managers, CSR performance is closely associated with financial outcomes such as profitability ratios and solvency ratios. According to DiPiazza, business leaders believe that social responsibility is a means of achieving profitability, and a millennium poll of more than 1,000 chief executives in 33 nations in Europe, Asia and Americas shows that several CEOs consider that a firm’s profitability also takes into account socially responsible actions towards employees, shareholders and society. From the economic perspective, the theory of the firm could be applied to analyse the relationship between CSR performance and profit outcomes. The topic which combines economic profits with CSR activities became more important during the 1970s and 1980s, and this discussion was often built on Friedman’s (1970) viewpoints that the core responsibility of an organization is to its shareholders (Fernando, 2010). A new viewpoint from Lee (2008) points out that a firm can survive through combining CSR performance with profitmaking process in a highly competitive global business environment. Management is required to make adjustments to fit different stakeholders according to the broad interpretation of CSR such as environmental responsibility and sustainability (Lee, 2008). In other words, the activities analysed under the economic CSR viewpoints are used to increase profits and reduce the cost of consumers. According to Devinny (2009), several research articles which focus on the economic profit of CSR performance indicate that there is no definite answer to how CSR facilitates the profit-making process, but Heath and Ni have pointed that a positive relationship between CSR activities and firm’s performance can be found through an extensive literature review.

POTENTIAL BENEFITS AND PROFITS FROM CSR ACTIVITIES The theory of the firm for studying the benefits of CSR was introduced by Jones, and this theory points that, as a result of higher returns and

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profits, companies which repeated transactions with stakeholders on the basis of trust and cooperation were found to be honest, trustworthy and ethical. McWilliams et al. (2006) developed a formal model of profit maximizing and CSR. In this model, two companies produce identical products, but one firm could add an additional social characteristic or specialty to the firm’s products, and these products were valued by certain consumers and potential stakeholders (McWilliams et al., 2006). Managers in this model have the ability to determine the level of resources to devote to CSR performance through a cost–benefit analysis, and managers also evaluate the cost of satisfying the demand for CSR activities. Managers thus have the power to decide what amount of CSR is the optimal point for their profit-oriented firms (McWilliams et al., 2006). From the research, we can conclude that the firms should consider CSR as a strategic investment with positive profit outcomes. Based on the theory from McWilliams and Siegel, tested that theory empirically using firm-level data and information on both social environment and accounting profitability, and they found that firms with higher attributes in social environment performance had superior financial performance. By contrast, Heugens and Dentchev (2007) pointed that CSR has approximately seven major risks, most of them related to the negative financial effect from CSR activities. For example the CSR issues for firms will be increased by the poor risk communications, and this negative factor will lead to problems of safety and environment. Aras and Crowther (2010) have shown that there is a negative link suggesting that CSR is a cost for the firm and reduces overall financial performance. In addition, the resulting cost from CSR activities will make the firm less competitive and suffer negative economic impacts (Aras & Crowther, 2010).

REPUTATION MANAGEMENT As an important element of today’s business, reputation management plays an essential role in profit making. Through improved reputation management, a firm can obtain more competitive advantages and market shares in an entire industry. Thus, the positive relationship between CSR and reputation management can indirectly improve a firm’s financial performance. CSR performance can be considered as the important factor that reinforces the good reputation of a firm with social theory (Klewes & Wreschniok, 2009). The norm of normative reputation is related to the normative or social

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reputation and corresponds to the demands of CSR, and the intangible resource of reputation is the main source of competitive advantage of a firm. Indeed, a value-creating reputation could be seen as a special product of years of superior competence as perceived by stakeholders, and a strong reputation management can generate a series of benefits to a firm in crisis. Moreover, the good reputation management could be seen as the source of the initial credibility. According to Moore and Seymour (2005), reputation management could help firms distinguish themselves with the globalization, transparency and rising CSR expectations, and thus more and more firms have paid more attention to the link between corporate reputation management and competitive advantage. The best stakeholders such us customers, investors and employees can be attracted and retained through the strong corporate reputation (Moore & Seymour, 2005). A survey of more than 100 large European companies in 2003 by the Chicago-based multinational insurance broker Aon found that ‘weak reputation’ was considered the second biggest of 17 listed threats such as ‘product liability and ‘employee accident’ (Moore & Seymour, 2005). Furthermore, risk-management committees related to reputation management have been established by many organizations in recent years. For example, Barclays Bank has established a ‘brand and reputation’ committee that pays the same attention to reputation management as financial and operational concerns in recent years. This recognition from Barclays indicates that firms need to effectively manage reputation risk (Hancock, 2005). Another survey has concluded that some 93% of corporate directors of FTSE 100 companies in October 2002 believed that disclosure non-financial information could improve a firm’s reputation and management decisions (Hancock, 2005). Meanwhile, one model indicates a direct link between reputation and financial performance such as share price and credit rating through a survey of about 500 US and 250 UK companies (Hancock, 2005). This finding shows that the reputation accounted for about 27% of the FTSE 250 companies’ market shares, and damaged reputations required about four years to restore (Hancock, 2005). According to Harris, about 75% of international firms have corporate reputation inspection systems in place (from a survey of about 800 CEOs in Europe and North America), and about 60% of UK firms actively monitor their reputations. From the CSR perspective, Coombs (2011) has pointed that CSR becomes a core factor and driver for good reputation management. In addition,

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both CSR considerations and reputation management are dependent on the stakeholders’ expectations and that reputation managers pay as much attention to CSR considerations and activities as to investors and financial outcomes (Coombs, 2011). Finally, in the financial industry, reputation is established by trust with all stakeholders and can influence the entire value of financial services firm as much as intangible economic assets (Idowu & Filho, 2009). For a financial service firm, strong and effective reputation management could facilitate its business sustainability. The financial industry (financial service firms and banks) engage in CSR considerations to enhance their intangible assets. Idowu and Filho (2009) have pointed that both bankers and financial services professionals manage CSR and reporting in Europe. The observation shows that the financial industry considered reputation management as an important competitive advantage that could improve financial performance, and a series of CSR activities could increase profitability indirectly through enhanced reputation. In the crowded marketplace, CSR plays an important role through brand differentiation based on special ethical considerations. According to McElhaney (2008), several companies begin to classify CSR considerations as a business strategy, and CSR considerations will lead to success in creating profits, increasing sales, expanding market shares and improving brand differentiation. In the long term, CSR activities can improve a firm’s economical performance and sustainability to a large extent, thanks to brand differentiation (McElhaney, 2008). CSR can be a source of brand differentiation for outperforming other competitors in the highly competitive global market and obtaining competitive advantages when facing so many regulations and difficulties resulting from globalization (McElhaney, 2008). For example, the Body Shop brand grew on the basis of ethical sourcing of its products, and Starbucks has embraced fair-trade coffee in Europe (McElhaney, 2008). Nowadays, brand differentiation is seen as the core of a firm’s success, and it needs protection by the strategist who contributes CSR considerations to the firm’s decision-making process (Chandler & Werther, 2010). In general, there are three main benefits of CSR brand differentiation: positive brand building, brand insurance and crisis management (Chandler & Werther, 2010). Chandler and Werther (2010) have indicated that brand differentiation from CSR activities has several advantages – for example higher brand differentiation could make a firm’s products more easily recognized and more competitively special.

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INCREASED STAKEHOLDERS’ VALUES ‘Stakeholder’ is closely related to the term ‘stockholder’, and it can be delineated by managerial function. The following groups are within the scope of ‘stakeholder’:           

top managers, employees in senior management positions, other employees, company owners, customers, suppliers, capital investors, competitors, the state, associations and organizations, and the general public, which is often represented by news media (Armstrong, 2010).

According to Freeman (1984), stakeholder theory has pointed that the managers should satisfy different requirements from stakeholders such as workers, customers, suppliers and local communities that will affect a firm’s financial outcome. From that point of view, managers should consider certain CSR activities that are related to non-financial information and social correspondence as well as requirements from stockholders or firm owners. The rationale for CSR and stakeholder values was also analysed by Armstrong (2010), who shows that the corporations can obtain strong competitive advantages by attributing CSR activities to primary stakeholders. The research into some 500 firms from Armstrong (2010) found that investing in stakeholder management via CSR considerations actually provides a competitive advantage which can be treated as an effective resource and as positive profit-making capabilities for the whole firm. In addition, CSR activities will affect primary stakeholders directly, and these activities can benefit both stakeholder values and shareholder wealth (Armstrong, 2010). From the study of Fernando (2009), the economic perspectives of CSR indicate that CSR activities are related to how business firms maximize stakeholder values while balancing conflicting stakeholder interests. Thus, the effect on profitability ratios that resulted from CSR considerations can be analysed from stakeholder values through the annual report.

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The licence to operate can be protected by CSR considerations and activities, and firms will obtain long-run efficiency without spending a large amount of money competing with other business firms through a right licence to operate (Willard, 2005). The firms have fewer inspections and paperwork from both national and local government agencies, and they may have preference or ‘fast-track’ treatment when applying for operating permissions, licences or other formats of government permits (Fernando, 2009).

SUSTAINABLE DEVELOPMENT A firm’s performance can be enhanced by CSR strategy for sustainable development. CSR strategies supply several benefits to firms from both internally and externally. Externally, CSR strategies can create a positive image and goodwill and obtain a certain respect from competitors, customers, government agencies, investors and media. All of these external benefits can promote shareholder values and long-term sustainable development. Internally, CSR strategies form a sense of customer loyalty and employee trust. Drakakis-Smith has redefined the components of ‘sustainability’, and this definition contains a broad range of issues, with the concept of sustainability combining environmental, economic and social factors (Roosa, 2008). In fact, CSR considerations have been linked to the ambitions of sustainable development after the year 2000 with the Final Declaration of the European Council of Lisbon (Lenssen, 2006). The communication of the 2002 commission pointed out a clear link between CSR and firms’ sustainable development, and the commission also showed that CSR activities resulting from social and commercial pressure progressively led to firms’ value changes. In addition, CSR considerations have been considered an essential part of sustainable development at both the local and the international level (Lenssen, 2006). Finally, Spedding and Rose (2007) pointed out the benefits for sustainable development from CSR consideration from both internal and external viewpoints.

DISCLOSURE AND CSR REPORTING Firms paid attention to CSR disclosures and CSR reporting according to profits and other financial positive outcomes, although CSR activities are voluntary for all organizations. CSR disclosure or CRS reporting can also

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facilitate a firm in obtaining better financial performance under certain circumstances. For CSR reporting standards, a number of CSR standards are available for firms for reporting their CSR activities (Calder, 2008). First, SA8000 is a multinational social accountability standard for working conditions. The fields of accountability from the SA8000 address:         

child labour, forced labour, workplace safety and health, the right to organize, discrimination, workplace discipline, working hours, wages and management systems for HRs (Calder, 2008).

The Global Reporting Initiative, which is also called ‘a common framework for sustainability reporting’, is the second widely recognized system for firms which actively report on CSR issues, and this framework pays more attention to a firm’s sustainability as well as to human rights (Calder, 2008). Reporting from the Global Reporting Initiative addresses a firm’s economic, environmental and cooperative social performance, and CSR reporting is the practical process of measuring, disclosing and being responsible to both internal and external stakeholders for the firm’s performance through the process of achieving sustainable development (Calder, 2008). From the 1970s and 1980s, there were several models for CSR reports and audits through the whole evolution of CSR reporting. Nowadays, CSR or environmental reporting is of increasing importance as a component of a firm’s comprehensive annual report (Chandler & Werther, 2010). The auditing firm KPMG has reported that there was about 30% increase from 2005 to 2008 in the number of large firms which generated CSR reports, and about 78% of the world’s largest firms now supply their CSR information in publicly available forms (Chandler & Werther, 2010). However, firms that engage in ‘greenwashing’ or whose reports lack authenticity will receive negative attention, probably because CSR reporting now receives more attention in the global market (Chandler & Werther, 2010). In addition, as pointed out by Donovan and Gibson, legitimacy theory has shown the relationship between profitability and CSR disclosure: firms can obtain a better profitability ratio when their reports do not contain information which will interfere with the firm’s financial successful performance. Moreover, companies will disclose certain information related to

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social environment and performance when the profits are low (Chandler & Werther, 2010). In this way, positive CSR disclosure maintains investor, customer, supplier and other stakeholder loyalty and investments. Schwester (2010) has pointed out that the primary measure of a firm’s profitability performance is net income. The techniques of profitability analysis include EPS analysis, common-size analysis and alternative measure of income. And profitability is not as same as profit, and it can only be measured by financial ratios which use figures from the income statement, the balance sheet or other parts in an annual report. The annual report of a firm offers a useful additional source of data for assessing a firm’s profit performance, as well as supplying an appreciation for trends and shifts in the balance of the firm’s activities (Vause, 2009). Research data indicate that disclosure of CSR can facilitate a firm in achieving higher profitability ratios when compared with the preceding year, which did not have a CSR report. Furthermore, although this finance company has addressed CSR activities before the year 2009, the positive impacts on profit are not obvious because stakeholders such us customers or investors could not observe the CSR programs directly and quickly. Most important, reputations need the support of previous CSR report disclosures. From the perspectives of finance, both the main profitability ratios and total asset turnover increased after the year of issuing CSR reports formally, and these positive impacts extended to the following year. For finance companies in China, the positive effects on profitability from previous CSR reports can be observed and approved in the short run, but the effects from CSR activities without previous promotion need a long time to be observed.

CONCLUSIONS Managers classify CSR issues not only as environmental issues but also as supplying a fair-trade system and transparent financial information for investors. The comprehensive awareness of CSR activities from managers supply more guarantees for all stakeholders, and the attitudes which are related to integrity of those managers can also generate a higher reputation in the whole industry. Meanwhile, the wealth and fair right of the main stakeholders in this company such as shareholders, customers, employees and local communities can be protected more through CSR programs as well as devotion and charity activities.

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Moreover, from the aspect of literature review, evidence indicates that positive outcomes from the implementation of CSR activities:      

boost the sales of products and increase a firm’s market share, increase reputation and brand management, improve the firm’s image compared with other competitors, attract and retain talent and promote employee productivity, decrease production costs and attract more investment and achieve better credit ratings (Macdonald & Marshall, 2010).

All of these potential CSR benefits for this finance corporation have been observed and analysed in this research, so we can conclude that there is a positive relationship between profitability and CSR in other viewpoints. The main groups that have been affected by the CSR issues are industry associations, shareholders, local communities, customers, suppliers, competitors, employees and non-governmental organizations. Generally speaking, it is obvious that there is a strong positive relationship between CSR activities and short-run profitability in China. In the long run, the positive effects on profitability from CSR activities are not obvious but will be observed and discovered.

REFERENCES Andersen, B. (2004). Bringing business ethics to life: Achieving corporate social responsibility. New York, NY: ASQ Quality Press. Aras, G., & Crowther, D. (2010). A handbook of corporate governance and social responsibility. Surrey, UK: Gower Publishing, Ltd. Armstrong, M. (2010). Armstrong’s essential human resource management practice: A guide to people management. London: Kogan Page Publishers. Asongu, J. J. (2007). Strategic corporate social responsibility in practice. Lawrenceville, GA: Greenview Publishing Co. Barth, R., & Wolff, F. (2009). Corporate social responsibility in Europe: Rhetoric and realities. Northampton, UK: Edward Elgar Publishing. Bhattacharya, C. B., Smith, N. C., & Vogel, D. (2010). Global challenges in responsible business. Cambridge: Cambridge University Press. Brittan, S. (2003). How economics are linked to ethics. Financial Times, 2 September, cited by Sparks, R. (2003, May 19). A pragmatic approach to CSR, School of Management, the London School of Economics. Calder, A. (2008). Corporate governance: A practical guide to the legal frameworks and international codes of practice. London: Kogan Page Publishers. Chandler, D., & Werther, W. B. (2010). Strategic corporate social responsibility: Stakeholders in a global environment (2nd ed.). London: Sage.

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Coombs, W. T. (2011). Ongoing crisis communication: Planning, managing, and responding (3rd ed.). London: Sage. Crowther, D., & Green, M. (2004). Organisational theory. London: CIPD Publishing. CSR-China.net. (2008). Social responsibility. Retrieved from http://www.csr-china.net/. Accessed on 7 April 2011. Devinny, T. M. (2009). Is the socially corporation a myth? The good, the bad, and the ugly of corporate social responsibility. Sydney: Bayan Publications. Doane, D. (2005). The myth of CSR: The problems with assuming that companies can do well while also doing good in that markets don’t really work that way. Stanford: Stanford University Press. European Commission. (2002). The commission communication concerning corporate social responsibility: A business contribution to sustainable development. COM (2002) 347. Fernando, A. C. (2009). Business ethics: An Indian perspective. New Delhi: Pearson Education India. Fernando, A. C. (2010). Business ethics and corporate governance. New Delhi: Pearson Education India. Fewsmith, J., & Zheng, Y. N. (2008). China’s opening society: The nonstate sector and governance. New York, NY: Routledge. Free, R. C. (2010). 21st century economics: A reference handbook. London: Sage. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman. Freeman, R. E., & Liedtka, J. (1991). Corporate social responsibility: A critical approach. Business Horizons, 34(4), 92–98. Friedman, M. (1962). Capitalism and freedom. Chicago, IL: University of Chicago Press. Friedman, M. (1970). The social responsibility of business to increase its profits. New York Times, pp. 122–126. Hancock, J. (2005). Investing in corporate social responsibility: A guide to best practice, business planning & the UK’s leading companies. London: Kogan Page Publishers. Henderson, D. (2001, June). Misguided virtue: False notions of CSR, New Zealand Business Roundtable, cited by Sparks, R. (2003, May 19). A pragmatic approach to CSR, School of Management, the London School of Economics. Heugens, P., & Dentchev, N. (2007). Taming Trojan horses: Identifying and mitigating corporate social responsibility risks. Journal of Business Ethics, 75(2), 151–170. Idowu, S. O., & Filho, W. L. (2009). Professionals perspectives of corporate social responsibility. London: Springer. Keinert, C. (2008). Corporate social responsibility as an international strategy. Vienna: Springer. Kizmueller, M. (2008). Economics and corporate social responsibility. Mimeo, European University Institute. Klewes, J., & Wreschniok, R. (2009). Reputation capital: Building and maintaining trust in the 21st century. Berlin: Springer. KPMG. (2008). KPMG international survey of corporate responsibility reporting 2008. Amsterdam: KPMG Global Sustainability Services. Lea, R. (2002). Corporate social responsibility: IoD member opinion survey. London, UK: The Institute of Directors. Lee, M. D. P. (2008). A review of the theories of corporate social responsibility: Its evolutionary path and he road ahead. Internal Journal of Management Review, 10(1), 53–57. Lenssen, G. (2006). Corporate responsibility and competitiveness. London: Emerald Group Publishing.

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CHAPTER 8 SUSTAINABILITY STRATEGIES IN PUBLIC SERVICE Linne Marie Lauesen This chapter aims to answer the question, ‘How can public service use sustainability to create a business case, and who are the winners and losers of this strategy?’ It also seeks to investigate the possibility that public service can both integrate sustainability objectives and enhance the quality of services for the people while benefiting the environment and finance. It also investigates whether there is a business case in public service for the benefit of either the service providers alone or the public in general by identifying the winners and losers of this strategy. As a phenomenon and as concrete practice over the past 20 years, public service has been in transition more or less all over the world since the era of new public management and governance began in the 1980s (Hood, 1991; Kettl, 2000; Lægreid & Christensen, 2010; Osborne & Gaebler, 1983; Pollitt & Bouchaert, 2004). From being a part of the public administration in the Weberian era for centuries, the state has disaggregated and decentralized public agencies into several units of independency that are regulated through contracts with the state based on performance imperatives and agreed-upon outcomes and tolerated constraints. Some former public agencies have in various places in the world been privatized and become profit-oriented such as the gas, oil, telecom and transport sectors, while in other places the costrecovery principle of natural monopolies such as water delivery, wastewater transport and purification and waste handling remain non-profit entities

Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 177–201 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003012

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(Lauesen, 2011a, 2011b; Lægreid & Christensen, 2010; Pollitt & Bouchaert, 2004). Although successes or failures in the public sector are still being debated worldwide in both academic and practitioner worlds, public service is a central place to ask ourselves several questions. What are the qualities and prices of public service? What value for money do we get as citizens and customers? How can public service continue the transition into a normative consensus that benefits the purposes they are put in the world to serve? For whom and what does public service act in the end seems to be a question in vigorous debate – especially in the for-profit public-service sector (Hall & Lobina, 2009; Hall, Lobina, & Corral, 2010; Lauesen, 2011a, 2011b). This debate will continue long after this chapter appears. The purpose of this essay is not to address the rigorous conflicts taking place between certain public-service companies but to address the opportunities for the public service to recognize their social responsibilities while creating a business case of sustainability that benefits both the server and the served when used cleverly and responsibly. Many examples are seen to work out well, and this chapter focuses on the cases that succeed primarily in creating both sustainability while creating service with quality for both people and the environment. First we will have to define a set of terms that can be understood in complex ways, such as the terms ‘quality’ and ‘value’ – what is contained in these abstract and expandable notions? To understand why and how conflicts of public service exist, we must ask, what do we really expect of public service? It is not possible to explain the exhaustive interpretations that people and academic thinkers have on these terms, but if some general terms and examples can be applied, it would help service providers understand both the conflicts and how to act on them if intended.

SUSTAINABILITY AS A FUNCTION OF QUALITY AND VALUE Quality is often defined as cognitive perceptual attributes or properties, and researchers often disagree about which terms should be appropriate in determining quality(Reeves & Bednar, 1994). Business research in marketing attaches value to the properties of quality (Zeithaml, 1988) and measures this in terms of ‘money’ and customer ‘expectations’. The idea of connecting

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quality to values through a persistent market – that is determining measurable accounts to products and properties – relies on the idea of an invisible hand controlling the market by competition (March, 1994; Smith, 1776/1976), and it assumes there is a reliable way to control quality and value. But discussions and debates arise when discussing the quality or value of abstract phenomena such as service. Garvin (1987) operates with eight critical dimensions of quality that can serve as a framework for strategic analysis of services: (1) performance, (2) features, (3) reliability, (4) conformance, (5) durability, (6) serviceability, (7) aesthetics and (8) perceived quality. Likewise Parasuraman, Zeithaml, and Berry (1985, 1988) found 10 attributes to the notion of service quality from empirical evidence derived through focus-group interviews: (1) reliability, (2) responsiveness, (3) competence, (4) access, (5) courtesy, (6) communication, (7) credibility, (8) security (9) understanding or knowing and (10) tangibility. Parasuraman et al. also found four specific gaps between heterogeneous segments such as customers’ expectations versus management perceptions; between management perceptions and service-quality specifications, service quality and service delivery; and between service delivery and communication. These confirm that Reeves and Bednar (1994) are right, even when it comes to empirical evidence, that what different people of different roles seems to expect or value as quality – even when agreeing in specific terms applied to quality, the wider content of these attributes is incommensurable and ‘different definitions of quality are appropriate in different circumstances’ (Reeves & Bednar, 1994, p. 440). Having problems defining the terms ‘quality’ and ‘value’, how do we get about defining ‘sustainability’? If we follow Reeves and Bednar, to address quality we need to look into specific circumstances to explore ‘the roots of various definitions of quality, identifying their strengths and weaknesses, and examining the trade-offs inherent in accepting one definition of quality over another’ (ibid., p. 141). ‘Sustainability’ suffers the same problem as the definition of ‘quality’ in academia. The definitions applied to the notions are as vast as its literature mass, which makes Aras and Crowther point to its theoretical dilution (2008a, p. 434) and instead return to the root of its basic definition of the Gaia hypothesis (Lovelock, 1979). The Gaia hypothesis is ‘a model in which the whole of the ecosphere, and all living matter therein, is co-dependent on its various facets and formed a complete system y interdependent and equally necessary for maintaining the Earth as a planet capable of sustaining life’

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(Aras & Crowther, 2008b). From this departure, Aras and Crowther (2008a) have developed four core issues of sustainability of equal importance: 1. ‘Societal influence’ is defined as a measure of the impact that society makes on the corporation in terms of the social contract and stakeholder influence. 2. ‘Environmental impact’ is defined as the effect of the actions of the corporation on its geophysical environment. 3. ‘Organizational culture’ is defined as the relationship between the corporation and its internal stakeholders, particularly employees. 4. ‘Finance’ is understood in terms of an adequate return for the level of risk undertaken. If we are willing to assume that sustainability is a function of quality and value, then we need to analyse the interlinkage between these notions, and a good place to continue is to investigate how much quality and value is inherited in Aras and Crowther’s model of sustainability. First, we immediately see that the ‘impact that society makes on the corporation’ – the concept that underlies Aras and Crowther’s notions of ‘societal influence’ considers the sustainability concept to be permeated of stakeholder relationships as a prime function. Ever since R. Edward Freeman coined the term in 1984, ‘stakeholder theory’ has had two main features – value and quality – as the basis of business ethics (Freeman, 1984/ 2010). The value of regarding ‘the other’ as equally important as ‘yourself’ makes corporations engage in stakeholder relationships. If only financial return were considered, then we would not talk about stakeholders, but only shareholders. By the very notion of stakeholder, we imply that all kinds of human beings – and even non-humans such as the environment, nature, animals and other species (Starik, 1995) – have a right or a stake that must be heard in regard to the interests of the businesses (ibid.). So when Aras and Crowther address the ‘impact that society makes on the corporation’ (Aras & Crowther, 2008a), they implicitly see a group of stakeholders all embedded in the vast term of ‘society’ – stakeholders who have or could have a claim, a risk or a stake in what the corporations are doing. The quality or value of addressing this term in regard to sustainability is to say that the interest of society (and its innumerable stakeholders) and the possible conflicts inherited when expectations of the corporations meet the expectations of society is a quality or something valuable in itself. Taking responsibilities towards these societal interests means addressing other qualities and values that might differ from the corporation.

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Second, ‘the effect of the actions of the corporation on its geophysical environment’ assumes that the term ‘environmental impact’ inherits a morality of taking care of what surrounds us. ‘Sustainability’ consists of the very contraction of two single words – ‘sustain’ and ‘ability’, meaning the ability to last and live long and to remain and rebuild the very entity in which we are living and who we are as a corporation and as human beings. The acknowledgement of the viability of the geophysical environment means to accept that if we harm the environment, we are not even sustaining ourselves or our company in the long run. We are then also harming ourselves. The quality and value of this second term is to take care of the surroundings that make it possible for the corporation to live and to use natural resources, but not to forget to preserve and give back what has been taken (Aras & Crowther, 2008a). Third, ‘the relationship between the corporation and its internal stakeholders, particularly employees’ addresses the issues of who actually makes the company run. Substantially, the answer could be the leader, but leaders do not make anything run by themselves – they make others run it. And these others are the employees, including the leader (Mintzberg, 2001). So to make the company sustainable in itself, it has to preserve the employees and their interests in staying with and working for the company (Aras & Crowther, 2008a). To do that, incentives must provide quality and value for the employees and thereby directly to the company itself in matters of labour to make the company run(be productive). The employees as stakeholders have a stake in the company, and if risks become too high or incentives too low, then the company risks losing employees, reputation, customers and so on. Again, quality and value are inherited in this term of sustainability, which also can be seen as the company’s eventual sustainability. Fourth, in considering ‘adequate return for the level of risk undertaken’ in terms of finance, Aras and Crowther address what many sustainability theorists tend to forget in the enthusiasm of altruism – that the interest of a company is to engage in financial gain and minimize losses in order to exist in their market (Mintzberg, 2001). So to address adequate return while taking a risk is not to neglect what businesses are based on in the first place in order to survive in a competitive market that does not allow unfinanced businesses (or even non-governmental organizations, NGOs) to live. So what makes for adequate return for the risk undertaken? Because Aras and Crowther remind us that ‘sustainability is focused on the future and is concerned with ensuring that the choices of resource utilization are not constrained by decisions taken in the present’ (2008a, p. 438), we must

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regard the financial return as being long term. Short-term expectations of return for the level of risk undertaken does not match a sustainability investment necessarily, but it can do so in some instances. For example, when companies invest in green-energy substitution, these investments have a medium-term return – say, from 10 to 25 years. Some would consider this long term, but others short term relative to the history of the company and its chances for survival in a competitive market. Other returns will be difficult to measure – for instance, the investment in highly skilled personnel. Adequate return could be when the equilibrium of increased sale of highquality products or services has been reached after this investment. These four issues of sustainability will be considered in our analysis of empirical examples of cases of public service – which explains their personal views of different phenomena allocated to the terms of quality and value – in the case session of this chapter. But first, to understand the institutional setting in which the public service operates, we suggest a framework for the analysis based on the neo-institutional theory of limited rationality – a comprehensive and humanistic variant of rational choice theory.

THE THEORY OF LIMITED RATIONALITY Rational choice theory is a non-philosophical, neo-classical economic theory inspired by Adam Smith (1723–1790), who – in contrast to other rational choice variants – did not see human beings as utilitarians who seek to maximize their own benefit on behalf of others (Bennett, 2008) but as moral sentimental persons acting in a self-regulating market environment (Smith, 1776/1976). From the Smithian perspective, Herbert A. Simon coined the term ‘bounded rationality’ adding the perspective that human beings’ irrational behaviour and perceptions of reality limits rational behaviour prescribed by traditional rational choice theory. In particular, Simon and James March wrote in 1958 a book titled Organizations in which they developed the theory of ‘bounded rationality’ that March later called ‘limited rationality’. Simon and March’s ideas have become a sociological theory expanded into the neo-institutional ideas blended with cognitive and behavioural psychological and cultural aspects. March (1994) resumed the history of rational choice and explained how the modernization of limited rationality has been evoked by the criticism and constraints of the former purely economical theory.

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March describes the historical, economical, Smithian-inspired definitions of rational choice as terms of rationality meaning intelligent or successful to actions ‘that have desirable outcomes’ made by ‘procedures for making choices’ (March, 1994, pp. 1–2). These decision-making processes are consequential and preference-based in the sense that ‘actions depend on anticipations of the future effects of current actions’ and that these consequences are ‘evaluated in terms of personal preferences’ (ibid., p. 2). The core aspect of rational choice is the assumption that each decision is made on a basis of a variety of alternatives known and evaluated by the decision maker. The problem of the old version of rational choice is that the theory assumes that decision makers ideally know all these alternatives before decision-making, which evidentially is shown and empirically measured as being untrue (ibid., p. 4). Consequences allocated to the environment are uncertain, and knowledge of the actions of decision makers is cognitively limited by the complexities of the environment affecting the issues at stake. Therefore, March shows how actors must deal with uncertainties in terms of risk management and simplification of complex knowledge and unknown knowledge, which is among the instruments of limiting the undesired consequences of the known knowledge and the imaginative exploration of the unknown knowledge (ibid., p. 7). Limited rational choice therefore deals with the ‘problems of attention’ and the ‘coping of information constraints’ of the abstract world. March shows us how ‘framing’ becomes crucial not only to decisions but also to simplifying analysis before decision-making (ibid., p. 12). ‘Frames’ are beliefs made about a certain problem that is addressed in the process of definitions of consequences of alternatives, and these frames are inherited by the personal experience and experiences of others and are taken into considerations in the decision-making process. March asks (p. 13), How can quality of debts be accessed and values of contracts be measured? The problem of ambiguity about facts and potential conflicts over them are normally described in a statistical manner with ‘numbers’, which March sees having elements of ‘magic’ over them to secure the decision maker the ‘rightful decision’ but which can give an unwarranted security that limits the scope of potentially undefined other problems. Even if costs in terms of numbers are decreasing, it does not necessarily mean that the effect, value or quality is decreasing – for example in cost-of-living calculations (p. 16). Risk and risk taking are essential to limited rationality theory. Risk preferences mean any deviation in observed behaviour from the behaviour

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that would have been observed if the decision maker had the utilities for money equal to the decision-making due to maximizing monetary value – in other words, the best choice without monetary or affective constraints that also is known as aggregate decision behaviour to aggregate predictions (p. 35). How do decision makers estimate risks when acknowledging their own limited knowledge even after consulting every possibility in their network of other knowers and perhaps the network of their primary network’s own network? March shows that the unpredictable world with incomplete knowledge and incomplete contracting (i.e. the failure to establish understanding with critical people in the environment) makes decision makers want to treat uncertainties as ‘something that have to be removed’ so that the environment can be controlled as much as possible (p. 39). But dealing with risks also means risk taking, March argues. Risk taking is often based on probability estimations, but in fact if we recognize the failures of our own knowledge limits, our cognitive constraints of understanding complexities and the unknown and unexpected consequences of uncertainties, then we see how the construct of risk is a risk in itself and therefore biased (ibid., p. 47). Knowledge storage and conservation in organizations is another issue of limited rationality central to Simon and March’s development of organizational theory (1958). In his book from 1994, March sums up the essentials of knowledge and information issues within organizations. Much of the knowledge base of an organization consists of different ways of coping with information constraints (1994, p. 9). Now acknowledging the cognitive constraints and irrationality of humans dealing with complex issues is linked with the problem of ‘attention’ and ‘search’ (p. 23). March talks about how problems are fuelled with energy, and the reduction of energy of complex problems calls for a prosperity of attention. And because humans cannot cognitively store enough information about the complexity of many problems, they must reveal attention and simplify information to be able to choose from among alternatives. The decision maker must cope with incomplete knowledge and knowledge biases, and in this awareness risk taking becomes crucial to decision-making. In many organizations, information and certain knowledge is spread among a number of individuals who are more or less prone to share or even store knowledge in the organization. The accumulative knowledge of the organization is then part of the risk management and risk taking as a part of organization risk strategies (p. 52). The last issue to be mentioned here is March’s discussion of financial issues in the neo-classical economist term arising from rational choice – the

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‘maximizing’ or ‘satisficing’ way of decision-making. Maximizing involves choosing the best alternative to maximize outcomes, whereas satisficing means choosing an alternative that exceeds some criterion or target that fits expectations and falls within budgets (March, 1994, p. 18). March shows how empirical results cannot prove that actors use maximizing more than satisficing, which means that both choices are interwoven in any kind of decision-making (ibid., pp. 19–20). In the old rational choice theory, the idea of utility-maximizing agents that are concerned about either profit maximization or budget maximization (for instance, in non-profit publicservice companies) is more blurred than first assumed. This very short review of limited rationality from the perspective of Simon and March (1958) and March (1994) is by no means exhaustive. But the relevance is quite obvious compared to the inventions in the paradigm of new public management, where rational choice theories are combined with other neo-classical economical theories such as public choice, agency theory, historical institutionalism and organizational institutionalism (managerialism) (Lægreid & Christensen, 2010), which are shortly presented in the light of the above in the next session.

New Public Management As stated in the introduction, public service has been in transition worldwide in the last two decades, and in the light of rational choice (in its postmodern institutional sense of limited rationality), we see these ideas implemented as new managerial instruments for risk management, total quality management, contracting, budget-account models and so on (Lauesen, 2011a, 2011b; Lægreid & Christensen, 2010). New public management has operated as a panacea to the solution to the theoretical and practical perceived misfit of Weberian bureaucracy within public administration. Whether or not one agrees with this vision, we must acknowledge that leaders and politicians, public officials and economists from academia have persuaded many governments to follow this trajectory. To be able to follow an institutional analysis with respect to the contextual framework of public service, we must address and accept this framework and work on the premises that lay within the reality of new public management. This chapter will not examine the vast literature of new public management, but interested readers are referred to the works of Per Lægreid and Tom Christensen (2010), Pollitt and Bouchaert (2004) and Hood (1998).

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Public Service and Sustainability As mentioned in the introduction, we will distinguish between two types of public service: for-profit and non-profit public service. Even though the reader might assume that the fourth parameter of sustainability – finance – is mainly relevant for the first type, we also show from the cases how finance in non-profit public-service sectors inherits the financial issues as rational choices of management and decision-making based on the ideas of March (1994). We discuss two types of cases: one for-profit privatized public service and one non-profit public service. The first is a case from a small Danish electricity, telecommunications and natural gas company; the second is a case of a small Danish water company. Both companies are in the same small town of Svendborg in the south of an island named Funen. These versions of small and medium-sized enterprises (SMEs) were chosen as critical cases (Flyvbjerg, 2006) over large or even multinational companies (MNCs) because no company is too small to use sustainability in its business concept and benefit from this strategically while doing good for social and environmental causes.

Case 1: SEF – An Electricity, Telecommunications and Natural Gas Company in Svendborg1 SEF is a privatized, public-service provider of electricity, telecommunication and natural gas selling its services in a highly competitive market in Svendborg, a small Danish town of approximately 60,000 inhabitants. SEF has a monopoly of its own net, and the company is regulated by the Energy Authority.2 The free market, though, means that customers are not bound to SEF and can buy services from other companies as well who, according to the rules and regulation, use SEF’s net. The company has a long history from its establishment in 1906, when only three employees took care of a single generator providing electricity for local shops and industries, until now, when its utility area matches the municipality of Svendborg. In 2011, the company had approximately 90 employees, mainly technicians, sales and administrative personnel. Practically every environmental impact of SEF’s productivity is stated in national legislation and controlled accordingly by authorities. The company has a representative board of 45 people appointed from the cities of Svendborg,

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Gudme and Egebjerg. Even if the company were able to create a profit out of its services, it would be obliged through the company’s constitution to invest this profit in the interests of the public rather than create a financial return for shareholders. This means that the company today has an equity capital of more than h133 million. SEF has a long history of providing different sustainability services for Svendborg’s citizens. In 1935, a pumping station was created to pump water from Svendborg Strait to cool the generators, and the subsequently heated water was transferred to the local city swimming pool to heat its water. ‘Our goal to be among the cheapest electricity companies in Denmark was also successful in 2010, and this goal we pursue continued. From our customer satisfaction surveys, we know that price – along with safety and security – is an important parameter when choosing an electricity supplier’, says CEO Sydfyns electrification, Anders Banke.

As part of SEF’s sustainability vision, it has partnered with an organization that provides CO2-neutral websites hosted by ingenco2 (‘no CO2’ – my translation). The initiative of this organization is based on the argument that today’s Internet and computer use cause more CO2 emissions than does aviation. The aim will be that businesses large and small and from all industries will join forces to neutralize the CO2 emitted by their websites. It happens when companies together make a purchase of certified CO2 allowances cleared by the Domestic Energy Agency (DEA). The entire CO2 quota is audited by Deloitte. In addition, investments are made in renewable energy (e.g. wind turbines) by building new renewable-energy sources and reducing the long-term need for coal and other polluting energy sources. This organization also invests in CO2-reducing projects in Africa installing energyefficient stoves that reduce local deforestation, improve health, create local jobs and reduce CO2 emissions. The volume of CO2 reductions is verified by Gold Standard. In addition, the organization has recently engaged in a REDD þ project to protect endangered rainforest in Ecuador in cooperation with the World Land Trust. Apart from reducing CO2, the project also helps to protect endangered animal species in an area that is recognized worldwide as one of 25 unique natural areas. SEF’s CO2-neutral website certification covers 100,000 views per month. But some of the main part of the sustainability work provided by SEF is its educational and free counselling services for customers in their choice of sound energy resources as well as SEF’s vision of building windmills. SEF helps customers choose from among a variety of energy-saving products that the Danish state supports financially. SEF adds to this financial support by reducing the cost every time a customer buys an energy-saving product.

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This initiative is called ‘A Helping Hand to House Owners’. Customers looking to improve energy savings in their households get cash contributions from both SEF and the state. We give a one-time grant for energy saving projects, which the DEA has approved. To be eligible, applications submitted before the energy-saving project started and the project must result in energy savings of at least 2,000 kWh per year. All savings are converted to kWh regardless which energy improvements made, and each kWh trigger 25 cents in the grant if the application is approved. Projects must have attached an accurate calculation of energy savings to send it in along with the application form. When applying for a grant, the transferable right to report the energy savings for DEA is thereby given to SEF.

Anders Banke wrote to me in an email (9 November 2011) ‘One of the objectives of these energy optimizations companies of Funen is that they become more competitive and thereby can expand and create more jobs in southern Funen’, he continues. ‘And our new headquarters which we are building at the moment is the first domicile in South Funen of Energy Class 1. This means the first self-producing energy house that actually creates more energy than it uses. We are also helping to ensure the infrastructure that we can establish windmill in our fields. We distribute wind energy in our area. We have also invested in the IRD developing fuel cells as an estimate of future energy technologies. We are also in Go2green which is a PPP cooperation in South Funen where we together with other local companies try to help companies to help create new energy-efficient solutions for businesses and individuals. We are building a demo in the area of Tankefuld where we will demonstrate how a single-family house can be built today in the energy class 1 without it costing a fortune’.

Case 2: VA – A Water, Wastewater and Waste Company in Svendborg3 VA is a non-profit, public-service provider of freshwater, wastewater purification and waste handling as a natural monopoly in Svendborg. The company has 80 employees, mainly technicians, sales and administrative personnel. Practically every environmental impact of the company’s productivity is stated in the national legislation and controlled accordingly by the authorities. Pricing is set by the municipality and the city council, and citizens’ needs and rights are conserved by the democratically elected board members and the formal owner, the municipality of Svendborg. This alone secures a high level of social responsibility as implicit in the Danish legislation and the controlling municipal authority (Lauesen, 2011a, 2011b).

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No one had ever imagined that VA should be the first small water company to voluntarily produce an environmental and CSR report without a political or a legislative demand and to be certificated to a CSR programme as a large multinational water company in Denmark. But director Ole Øgelund did not have any doubts of the benefits this would provide both society and the company in the end. As Ole says: We are a small, publicly owned company doing crucial public service for our citizens and customers, and we do not have to think about creating an economic profit of our doings for any stakeholders. We are practically ‘the environment’ – we extract water from a scarce and for now very clean groundwater resource, and we have to protect our core business areas – not only for our own survival, but for future generations. We cannot afford to neglect this responsibility – especially when we extract water from a scarce resource such as groundwater, but also while we transfer and purify wastewater and deliver it back to nature again.

VA has been through a major institutional transformation since 2007, when public water services were aggregated from the municipality and separated into a publicly owned but privately organized water company (see Lauesen, 2011a, 2011b). A new water sector law rearranged the entire public water service and recentralized the regulatory aims to the state, the competition authority, which via benchmarking and price caps controls all public water companies in Denmark in pure economical efficiency and effectiveness parameters. This new regulation puts a great deal of economic pressure on the water sector, but Ole is not troubled by this fact. From the very first environmental report that we made in 2009, we saw that even though we accomplish all environmental targets and objectives set by the legislative frame in Denmark and for years had worked on being better and better to save the environments from pollution from wastewater, we had a lot of work ahead of us when it came to energy consumption. It was an eyeopener for us to actually see on paper how much energy we use in our production. We had a great potential in contributing to the mitigation of the climate changes and at the same time benefit economically from the same manoeuvre. We are not focused on economic profit, because we are living as a cost recovery company. But we are damned obliged to do the best we can on our environmental performance. And we can get better all the time. It never stops. Now we have 3 years of experience in energy reduction, and it is going the right way: Down in energy consumption. But we are far from our goal. Now we have invested in solar panels, solar energy for heating, geothermal heating, and we produce our own biogas on one of our wastewater plants. It is a good step forward, but we can do a lot more. My idea is that every penny we save in energy reductions should be used for new investments in other energy reduction initiatives. And it should be continued until we are only using green energy all way around. And I am right now looking for a large landfield to buy to make a huge solar-panel park. Not only for us, but my idea is, that privates could also invest in this park and benefit from the production of green energy. I am also considering

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buying a windmill and producing more clean energy to substitute our energy consumption with that. As the new Water Sector Law evolves, possibilities to do this are coming right up. I really look forward to do this. And now we are rearranging the entire management system to be concerned about quality targets, environmental targets, freshwater and wastewater security, food security and CSR. Right now all members of the leader team are being scholared into this programme. And soon the rest of the employees will be too. (conversation with Ole Øgelund, director of Vand og Affald, Svendborg, 4 November 2011)

Societal Influence Multiple stakeholder relationships are relevant for both for-profit and nonprofit public-service companies. As utilities, both companies share the same kinds of stakeholders, according to their businesses. The main stakeholders are owners, employees, board members, customers, citizens, land and property owners (in regard to the infrastructure of cable and pipeline networks), suppliers, consultants, NGOs (typically environmental), news media and especially municipality and state authorities. The first case of SEF as a small electricity, telecommunications and gas provider is competing for customers in a local environment with large, effective and price-concerned multinational companies offering the same service. This creates both economic pressure of competition as well as a sustainability pressure on the small company, which must compete with the large companies that already have entered the CSR-market more or less voluntarily.4 To survive in the ‘great market’ of public-service providers, SEF has to be one step ahead in attracting customers and being among the first movers in ‘sustainability competition’. Conversely, the second case of VA as a small water, wastewater and waste company owned by the municipality and driven as a non-profit, cost-recovery company has a monopoly status, which means that customers cannot choose another company from which to receive water or to have wastewater and waste collected. They are bound to the municipality company, which gives this company a number of advantages from not having real competition, but it also means that this kind of company is legally bound by a restrictive state regulation that, through a complex benchmarking and reporting system, simulates a so-called quasimarket and sets a price cap for the price of water, wastewater and waste deliveries and transport that cannot exceed a certain economic level. This is done to match the real competition market, which is the contextual frame of the first case.

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But the first case is also regulated with a price cap system, because even though SEF acts in a competition market, complexities in the ownership of the infrastructural network complicates the ‘real market’ (the reference is based on an interview with a chief of the competition authority in August 2011). For shareholders of both for-profit and non-profit kinds of public service companies – privately respectively the municipality – a variety of public stakeholders exists naturally. To focus on the latter in terms of ‘societal influence’, citizens, land and property owners are prone to react immediately if construction works of cable and pipeline infrastructure violate their real or perceived legal rights. The social concerns of citizens are not only stated legally but also constitute a main purpose of both directors of the two companies in the described cases. They consider the environment almost altruistically, but between the lines there is also a general societal expectation of public service being good to citizens and customers as well as the environment and climate. With the ongoing debate about climate changes, citizens are aware of what to expect from their providers – which also is expressed by the politicians in the local community who represent the citizens and who require the public-service companies to live up to the societal expectations, as do environmental NGOs. As stakeholders in public-service companies, NGOs hold a variety of interests. This chapter cannot cover every NGO as stakeholder but will concentrate on NGOs that are concerned about sustainability. NGOs as environmental stakeholders are often present when the physical placement of cable and pipeline infrastructure meets natural environment constraints. Public-service companies also can obtain permission to place infrastructure in natural environments – both protected and unprotected by law – if the arguments for this placement exceed arguments for preservation of the natural area. For example, in 2008–2011 a major basin pipeline of 2.5 m internal diameter had to be installed for overflow of rainwater to a natural river running through the centre of Odense. All of the natural environment around the river was environmentally protected, but to avoid overflow in the city environment where people live close to each other, the need to direct rainwater overflow to this river was deemed more important than environmental protections, and the local water company was allowed to install the overflow pipeline through a wood. Conditions were that the installation methodology had to be as gentle as possible and avoid deforestation, which was done by tunnelling the pipe under the woods and only digging the last few metres. Trees were only cut to allow the passage of

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machinery to enter the river. In this case, NGOs such as Denmark’s Society of Nature Protection and the Danish Angling Association were involved in the processing to take their considerations into account as were different (as many as 10) authority interests in the area (Holm, 2008). Official reports from SEF and VA found on their respective web pages5 show how memberships of NGOs, whose interests are based on perspectives of sustainability, are crucial to both organizations. SEF notes its membership in a CO2-neutral website host, an NGO investing in windmills and other CO2-neutral technology to provide sustainable Internet solutions. In its Green Report with Social Responsibility (2010), VA notes its membership in Key2Green, an NGO servicing a lot of sustainability and transparent solutions, among those a reporting tool for environmental reporting as well as chemical substitution for a more sustainable and green impact. Many other stakeholders could be mentioned in this chapter, but due to the limitations of this book, we have presented some of the most considerably stakeholders of public-service companies in Denmark. As the cases show in relation to the theory of limited rationality, we can almost directly see the way that stakeholder management is aligned with risk management as previously explained. An almost indefinable distinction between purpose and risk in stakeholder management is observable. The complexity of public-service companies, whose main purpose is to serve customers and community and take stakeholder demands in consideration when working to meet their purpose, makes it impossible to distinguish to which degree their actions are characterized by risk management or purpose considerations. It is both. Risk management is to deploy every risk (i.e. every known or imagined risk) applied to the actions of the company as well as the concern of the different interests or stakes that multiple stakeholders might have in this matter.

Environmental Impact The effects of these companies actions on the geophysical environment were already mentioned in the example from Odense with the basin pipeline overflow to a local river. In the cases of SEF and VA, we also see that environmental impact is of crucial concern. SEF addresses its environmental impact on its website6 in terms of energy-saving projects of its ‘A Helping Hand’ initiative and CO2-neutral website. The company commits itself to educate and counsel its customers in reducing energy consumption even if this means that the total sales of energy decreases, which is not likely. One possible effect of this view towards

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sustainability is changing customers’ perceptions of energy reduction while their demand for energy increases. In 2010, SEF joined a new 10-year energy-savings agreement to be evaluated after 3 years, as stated in its annual report. This energy-savings agreement requires an 80% reduction in kWh compared to 2009. With this new agreement, SEF’s energy advisers in 2010 continued to work on energy savings for public and private companies. Furthermore, energy conservation has become a commercial market, which means that customers, especially companies, receive grants to implement energy savings. In addition, commercial agreements and acquisitions of energy savings realized directly from other market players must be included in meeting the increased energy austerity. Until now, SEF has not invested directly in green-energy sources, but indirectly through its financial support in the form of grants for customers buying clean-energy sources. For instance, if a customer invests in solar cells, the agreement with the authorities reduces pricing 1 to 1. This means indirectly that if more and more companies install solar cells, it becomes an indirect part of SEF’s production line by monetary compensation. As with energy from windmills, such compensation is only one-third at the moment in Denmark (SEF Annual Report, 2010). But now times are changing. As a main project and with the objective of being among the first movers in its local area, SEF has initiated a variety of concrete projects to mitigate climate change as well as provide green energy. A plan of investing in a concrete windmill (or more), to build its new domicile in energy class 1 and build a green demo house are among the initiatives that SEF has in its own project pipeline. VA’s director has discussed how he feels obliged to take care of the environment because he addresses the interests of his company, whose production depends on the well-being of the environment: to be able to deliver freshwater calls for protection of groundwater resources and purification of wastewater affects the well-being of natural water basins that receive the purified water. Even though environmental legislation dictates many of these concerns, the director expresses his vision of how the company must perform better and better and never stop considering environmental targets. He does not explicitly state what would happen if they did not consider these issues. These answers he takes for granted, mainly because environmental issues in the Danish water business have been addressed since the 1980s. Before then, all wastewater was flowed directly into the ocean as in many other Western countries (Koh & Brooks, 1975). The ocean was considered capable of diluting all wastewater and only contaminating deep waters. This belief proved very wrong, and oxygen depletion and fish killings were seen around the world from this practice.

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But even being environmentally efficient, the construction of its first environmental report in 2009 was an eye-opener for VA. By focusing for more than 30 years on protecting water basins and optimizing these targets, another demanding target appeared just a few years ago: climate pollution. Now water companies have more responsibility to reduce their emissions to the air, which is not regulated in Denmark for SME water companies. In 2010, VA’s emission of CO2 was approximately 3,800 tonnes of CO2.7 SEF’s emissions the same year were approximately 11,400 tonnes of CO2.8 The directors of both companies take their responsibility seriously. The director of VA also has concrete plans to invest in green energy in a solar-cell park and in windmills in the future and thus substitute all energy consumption with green energy and create sound bottom lines both financially and ecologically. We can imagine a variety of reasons for both cases and their initiatives and plans, both financially and socially. The former will be addressed later in the section titled ‘Finance’, and the social reasons could be interpreted also according to the risk management of limited rationality. As we saw in the previous section, stakeholder management was argued as being implemented partly as a kind of risk management. What could the risks be in relation to social responsibility? One risk to SEF is customers who become critical consumers of electricity and other products and shift to other suppliers. SEF is an SME in a competitive market, and customers could choose another supplier as the customers’ sustainability awareness grows and the range of clean-energy options becomes cheaper and more locally available. This risk is not the same in VA as a natural monopoly. Customers cannot change suppliers. But there is a risk of pressure from political awareness on the part of the municipality as owners or politicians become more aware of clean technologies. The implicit risk of not being the ‘first mover’ in this competition of awareness is being caught between political stakeholder demands and a power relation is undesirable. Showing that the water company takes responsibility in the global debate of climate change mitigation limits the political pressure for legislative constraints.

Organizational Culture The relationship between the companies and their internal stakeholders, particularly employees, is addressed in the strategic values of both companies. Being aware that employees are the drivers of a sustainable production requires taking care of them and preserving the knowledge stores of these companies.

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As the theory of limited rationality shows us, managers of all kinds of organizations must have strategies for preserving knowledge, especially the knowledge of individual employees, and enhancing the culture of sharing and conserving knowledge in the organization. This also means reducing the probability that employees will move out of the organization and thus cost the organization critical competences and skills. Public-service companies have a relatively high risk of losing highly skilled employees when wages are low. As compensation, lifelong job security for public employees became an incentive to prevent employees from job shopping. This is no longer possible, because this kind of job security was phased out in 1998 when the old official employment was replaced with job contracts similar to those seen in the private sector (Ibsen & Christensen, 2001). From a risk-management perspective, highly skilled personnel no longer had any reason to stay in public service if they were not rewarded with salaries commensurate with those found in the private sector. Statistics of wage levels in Denmark still show a wage gap between private-sector employees and public-sector employees (ibid.). Now what do public-sector employers do to keep loyal personnel in the organization? An interview with another director of a public water company in Odense revealed that his organization included a high level of autonomy in decisionmaking and that creating one’s own job was one strategy that was proving successful (based on an interview with Director Anders Baekgaard of VCS Denmark, October 2011). Job satisfaction is among the viable instruments in both public and private sectors, mainly so that a company can survive in either a competitive product market or a competitive job market. Fortunately, the non-profit case has an obvious benefit: non-profits are living as natural monopolies, which preserves customer loyalty. There is little risk of a declining or competitive real market. Revenue and customers are secure in the public water sector in contrast to the privatized, marketbased electricity, telecommunications and gas sectors. VA did not suffer noticeably in the financial crisis (Lauesen, 2011a, 2011b), nor did SEF even if it was more vulnerable to market constraints.

SUSTAINABILITY AS A BUSINESS CASE IN PUBLIC SERVICE The three points of Aras and Crowther’s (2008a) sustainability model discussed previously consider the stakeholder relationship according to risks

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and appropriateness of addressing stakeholder issues including environmental targets. None of this would make any sense to an organization if no financial targets were attached to the companies – either profit targets or other implicit financial targets – even for a non-profit public-service company. The theory of limited rationality also addresses the classical economic issues of financial ‘maximizing’ and ‘satisficing’ as two complementary and indistinguishable factors (at least empirically) (March, 1994). We saw that the neo-classical issue of the budget-maximizing agent was not found empirically, which sustains the theory of sustainability as a way for decision makers to count more than economic profit or budget maximization in maintaining viability in running a serious business or – to take another term from Aras and Crowther – a ‘durable’ business (Aras & Crowther, 2009).

Finance The last point of Aras and Crowther’s sustainability model therefore naturally concerns organizational finance and addresses ‘adequate return for the level of risk undertaken’ (Aras & Crowther, 2008a, p. 437). The most evident assumption is that any business could benefit morally, financial and environmentally by sustainability and could use it as a strategy. We want to find out what makes businesses likely to invest in sustainability in the first place. A naive and sometimes rather provocative question asked of many of the companies researchers is, Why bother do anything else but follow the law? If this does seem good enough in terms of visions of sustainability, then another question is asked: Why not? This second question comes not from scepticism about sustainability as strategy but from curiosity about what goes on – what managers think and whether they learn from each other and from others in the organization. This line of questioning blasts away at the last evidence of the old rational choice theory or other neo-classical economist theories that assume that humans are utility maximizing: what do they (both individually and organizationally) gain from it? Answers to the question of adequate return for the level of risk undertaken have been rather surprising. They are similar (almost institutional) no matter whether from directors or employees in the public sector and no matter whether they are for-profit or non-profit. A certain degree of altruism or philanthropic issues can be seen, but no one makes political hay of this on behalf of their financial interests. And that is the point about why

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sustainability should be a business case as well as one of altruism and philanthropy, and that this is actually possible even in SMEs, publicly owned or privatized, for-profit and non-profit. The business case for sustainability as a strategy lies in the question about whether an economy is bound to do better in all matters of sustainability whether societal, environmental, cultural or financial. Financial gain for a for-profit public-service company such as SEF or a non-profit company such as VA comes from the following elements:      

trust and honesty from transparency in what they do, commitment to higher purposes that profit or budget maximizing only, customer loyalty if for-profit companies meet societal expectations, customer satisfaction if non-profit companies meet societal expectations, durability of the company as well as the society and innovative strategies that create value for money or more for less.

Financial gains are made not by mere marketing or branding. Customers are too well-educated to be tricked by window dressing. Marketing is not enough in a competitive environment in which customers can choose from among better alternatives. Companies must be transparent to gain trust from stakeholders (Pedersen, 2006), and tricks of the trade are easily spotted by customers, critical NGOs, news media and authorities in highly regulated areas such as public service. And the costs are devastating to all parties. Trust, commitment, customer loyalty or dissatisfaction, durability and value for money are important to business. In terms of energy reduction to meet societal expectations, there is a financial business case. Energy is costly, and energy reduction also means cost reduction. Whether a company is an energy provider such as SEF, which encourages its customers to save energy, or is an energy consumer who wants to re-invest saved money in other energy-saving initiatives, the business case exists. If SEF encourages customers to buy less by saving energy, then it gives SEF the new possibility of selling other products to customers in order to maintain their business:  They can provide new green-energy products.  They can change from black energy to green energy.  There are limits to how low one can go in energy reductions, but there are a variety of possible substitutions for green energy. Society never will run out of energy needs; it is merely a question of which kind – sustainable or fossil.

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If VA uses energy reductions for new initiatives in further energy reductions, it not only maintains its budgets but also provides better service for the same money. Does this sound budget maximizing? Consider the opposite. If VA minimized costs for its customers, who were former using municipal utilities, there comes a time when investments will be needed, and no company wants to suddenly raise the price for water. We actually saw water utilities in Denmark that did so, and now their infrastructures suffer from lack of maintenance. The picture is easier to catch if we look elsewhere in Europe. In Norway, water prices are kept very low because water is regarded as something that should be almost free. This means that maintenance and reinvestments have been very minimal in Norway, and the average leakage percentage is about 50% compared to Danish conditions in which leakages are less than 10%. In 2010, Bergen had the following situation: In Bergen the water resource mainly comes from snow melting resources from the high mountains. The leakage percentage is almost 50%, but normally this is no problem due to a high level of free water stemming from snow. But in 2010 the snow did not fall as usual. Actually only 10 percent fell this year. The citizens of Bergen had no water in several month due to lack of snow and lack of maintenance. Instead, the citizens had to buy expensive imported water on bottles, which gave the municipality a lot of criticism due to their policies. It came to a shock that water resource was scarce, and the municipality had to focus a lot of catching up on maintenance and raising prices in order to secure the water resource and delivery for the citizens. (Magnar Sekse, No Dig INFO, 2/2010 and proceeding at the annual meeting of SSTT, Bergen, May 2010)

FOR WHOM AND WHAT – WINNERS AND LOSERS As we have tried to show, sustainability as a strategy in public service ideally produces only winners and no losers in this perspective. Compared to the economic strategies of shareholder revenues only, we might talk of a paradigm shift that incorporates sustainability in a business case. If every businesses in the world were committed to sustainability, we would find no losers, not even shareholders. If businesses and their shareholders can benefit from sustainability, then we could argue as some theorists do, that sustainability is not for real but only for business because it is not really altruistic or philanthropic enough (Knudsen, 2010). The question here is simple: What is the problem? If businesses – whether public or private – can benefit (not necessarily profit) by being sustainable in a competitive or regulated context and doing good for others and the environment, then why not?

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The issue is, of course, how they do it. If sustainability is used as an excuse to raise prices, then there will be losers – the customers. The customers will always pay the price of sustainability. But the theoretical counterargument is that customers ideally will shop around for the cheapest and most sustainable product or service, and the necessity for innovation and competition in quality, value and price eventually will make losers become winners. This is especially true if sustainability is used as an ongoing process that enhances the ecology of our ways of life, our businesses and our planet with a continuous reinvestment in sustainability.

CONCLUSION The idea of this chapter was to demonstrate how a strategy for sustainability can be obtained not only by large, privatized and multinational companies but also even for small- and medium-sized private and public-service companies. The examples drawn in this chapter aim to raise awareness that enough small increases in sustainability bring the ideal of the full sustainability for all and everything on our living planet closer to reality. The social enterprise literature proved this argument long ago. A small sustainability initiative can grow and include more and more people and businesses and initiate more and more sustainability initiatives done by others sharing the same visions and ideas (Visser, 2011). Literature until now, however, has emphasized private businesses as well as partnerships between businesses and NGOs and social enterprise initiatives and neglected the public service as a way to add to this movement. There is a general and taken-for-granted idea that public-service and state and government entities are implicitly socially responsible or already sustainable. Not enough, as it turns out. Public service is first obliged to serve the public and social interests in many countries. But we still have to ask ourselves – the business world as well as to the public world – are we sustainable enough? Which world do our descendants inherit from us? Are we satisfied with that? To make our own strategies requires answers to these complex questions.

NOTES 1. This case is based on published descriptions on SEF‘s web pages at http:// www.sef.dk (only in Danish). 2. http://energitilsynet.dk/

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3. This case is based on an interview with the director of VA in November 2011, the web page http://www.vandogaffald.dk (only in Danish) and observation studies from January to November 2011. 4. Danish Accounts Act, LBK nr 323 af 11/04/2011, y 14. 5. http://www.sef.dk and http://www.vandogaffald.dk 6. http://www.sef.dk 7. Green Report and Social Responsibility 2010: http://vandogaffald.dk/om-os/ planer-og-grønne-regnskaber 8. Annual Account 2010: http://www.sef.dk/sites/omsef/aarsrapporter-og-vedtaegter/ Documents/2010_Koncernen.pdf. In this document, the actual KwH is not transferred into a CO2 calculation. Therefore, the same CO2-equivalent factor that VA use is used in my estimation. The data are not verified, and the interesting part is not the particular number, but only the comparison between CO2 amounts in general sizes. The CO2equivalent factor used for comparison was given to me in 2010 by SEF, which is also a supplier for electricity for VA. Therefore, the amount is rounded down conservatively to the nearest hundreds in large numbers.

REFERENCES Aras, G., & Crowther, D. (2008a). Governance and sustainability: An investigation into the relationship between corporate governance and corporate sustainability. Management Decision, 46(3), 433–444. Aras, G., & Crowther, D. (2008b). Evaluating sustainability: A need for standards. Social & Environmental Accounting, 2(1), 19–35. Aras, & Crowther. (2009). The durable corporation in a time of financial and economic crisis. Economics & Management, 14, 15. Bennett, J. (2008). The theory of moral sentiments. Adam Smith. Retrieved from http:// www.earlymoderntexts.com/f_smith.html Flyvbjerg, B. (2006). Five misunderstandings about case-study research. Qualitative Inquiry, 12(2), 219–245. Freeman, R. E. (1984/2010). Strategic management: A stakeholder approach. New York: Cambridge University Press. Garvin, D. A. (1987). Competing on the eight dimensions of quality. Harvard Business Review, 65(6). Hall, D., & Lobina, E. (2009). The private sector in water in 2009. University of Greenwich, PSIRU, Business School, London. Available at www.psiru.org/reports/2009-03-Wcompanies.doc Hall, D., Lobina, E., & Corral, V. (2010). Replacing failed private water contracts. Report. A seminar at the Public Service International, 20 January, Jakarta. Holm, E. (2008). Byomdannelse under overfladen. Banebrydende afløbsprojekt ved Odense Havn. Odense Vandselskab. Hood, C. (1991). A public management for all seasons? Public Administration, 13–19. Hood, C. (1998). The art of the state. Culture, rhetoric, and public management. Clarendon: Oxford University Press. Ibsen, F., & Christensen, J. F. (2001). Løn som fortjent? Nye lønformer i den offentlige sektor. Copenhagen: DJØF, Jurist- og Økonomforbundet. Kettl, D. F. (2000). The global public management revolution: A report on the transformation of governance. Washington, DC: The Brookings Institution.

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Knudsen, J. S. (2010). The organization of CSR as a means of corporate control: From dogooding sideshow to mainstream? In K. Buhmann, L. Roseberry & M. Morsing (Eds.), Corporate social and human rights responsibilities: Global legal and management perspectives (pp. 175–200). Hampshire, UK: Palgrave MacMillan. Koh, R. C. Y., & Brooks, N. H. (1975). Fluid mechanics and waste–water disposal in the ocean. Annual Review of Fluid Mechanics, 7, 187–211. Lauesen, L. M. (2011a). CSR in publicly owned enterprises – Opportunities and barriers. Social Responsibility Journal, 7(4). Lauesen, L. M. (2011b). New public management and corporate social responsibility in Danish water companies. Proceedings from the 1st conference on organizational governance, 15–16 September, De Montfort University, Leicester, UK. Lauesen, L. M. (forthcoming). New public management and corporate social responsibility in Danish water companies. Social Responsibility Journal. Lovelock, J. E. (1979). Gaia. A new look at life on Earth. USA: Oxford University Press. Lægreid, P., & Christensen, T. (2010). The Ashgate research companion on new public management. Surrey, UK: Ashgate. March, J. (1994). A primer on decision-making: How do decisions happen. New York: The Free Press. March, J., & Simon, H. A. (1958/1993). Organizations. USA: Wiley. Mintzberg, H. (2001). The five basic parts of the organization. In J. M. Shafritz, J. S. Ott, & Y. S. Jang (Eds.), Classics of organization theory (7th ed.). Forth Worth, Texas: Harcourt College Publishers. Osborne, D., & Gaebler, T. (1983). Reinventing government. How the entrepreneurial spirit is transforming the public sector. New York: Penguin Books. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implications for future research. Journal of Marketing, 49, 41–50. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64(1), 12–40. Pedersen, E. R. (2006). Making corporate social responsibility (CSR) operable: How companies translate stakeholder dialogue into practice. Business and Society Review, 11(2), 137–163. Pollitt, C., & Bouchaert, G. (2004). Public management reform. A comparative analysis. Wiltshire, UK: Oxford University Press. Reeves, C. A., & Bednar, D. A. (1994). Defining quality. Alternatives and implications. Academy of Management Review, 19(3), 419–445. SEF Annual Report. (2010). Retrieved from http://www.sef.dk/sites/omsef/aarsrapporter-ogvedtaegter/Documents/2010_Koncernen.pdf Sekse, M. (2010). Velkommen til Bergen, NoDig Info, 2/2010, Scandinavian Society of Trenchless Technology. Smith, A. (1776/1976). An inquiry into the nature and causes of the wealth of nations. USA: The University of Chicago Press. Starik, M. (1995). Should trees have managerial standing? Toward stakeholder status for nonhuman nature. Journal of Business Ethics, 14(3), 207–217. VA Green Report with Social Responsibility. (2010). Retrieved from http://vandogaffald.dk/ om-os/planer-og-grønne-regnskaber Visser, W. (2011). The age of responsibility: CSR 2.0 and the new DNA of business. Wiley. Zeithaml, V. A. (1988). Consumer perceptions of price, quality, and value: A means-end model and synthesis of evidence. Journal of Marketing, 52(3), 2–22.

CHAPTER 9 A SUSTAINABILITY EXAMPLE PLANNING IN THE SPANISH PUBLIC SECTOR Esther Ortiz Martı´ nez THE METHODOLOGY The planning methodology used to elaborate strategic sustainable economic development for the period 2007–2013 is based on two items: technical studies and different modes of participation. Although independence is the example applied by the public sector, the main point to highlight here is the initiative’s sustainability because a common framework is used. Every step is taken by applying the widest consensus and using governance from the regional public sector. Finally, everyone who wants to make suggestions and add to the plan is given the chance to help design the future ‘map’ for our region. It is a way to listen to all voices, suggestions and opinions, taking advantage of all possibilities opened by new technologies, and at the same time to involve everyone, from the beginning to the end, through the most representative associations and organisms, working hard with them to design the general framework for regional development and after that to reach and follow the planned objectives. The basis of the plan is that there is strength in numbers because the involvement of everyone will make it easier to cope with the challenges of planning. The probabilities of success will be larger if everyone works to Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 203–212 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003013

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obtain the same targets. To comply with regional development objectives, everyone is important. In this example, sustainability means to bear in mind the following points:  the departure point in order to design the future because the present is the basis for reaching the future;  never forget the organizational culture and societal influence because they are part of every step of the process;  the impact of the development on the environment in order to ensure its care and preservation;  the participation of all society and the consensus; and  the financial point of view, elaborating proper financial forecasts, because meeting objectives will require counting financial resources, which have to be properly programmed. Nowadays, it is possible to reach a bigger number of citizens using the new technologies, so ways of participation try to minimize the use of resources while looking for a wide majority and consensus. Although there have been done other plans using various methods of participation in the past, in this example for the period 2007–2013, we have opened the biggest convocation ever seen in the region. The result has been the following different ways of participation as summarized in Fig. 1:  personal interviews with more than 30 relevant figures from different regional ‘worlds’ such as the financial, political, cultural y interviews that were called ‘voices’;

Collective and individual participation

Citizenship participation

Territorial discussions on line

Personal interviews

Regional Administration Offices

Implication Discussion TOUR Tables

www.horizonte2010.carm.es Fig. 1.

Ways of Participation. Source: Own elaboration.

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 the participation of the citizenship through a discussion forum included in the web site of the initiative, with more than 350 people coming into the discussion;  territorial discussions online and through the web site to follow the discussion from a territorial point of view, bearing in mind the specific features of one or all of the 45 municipalities in our region;  using regional administration offices to obtain the point of view of all the citizens who have fulfilled some kind of administrative requirements and perhaps are not used to using the web site;  workshops with experts about the future of the Region of Murcia from international trends to regional challenges;  a customized bus which has visited 45 municipalities and 2 public universities in the region, with laptops inside by which to take suggestions from everyone and  more than 30 discussion tables with more than 400 people. The other methodologies were technical studies, such as:  updating of the analysis of the current situation of the Region of Murcia with the identification of its competitive factors in the framework of the European Union;  identification of the most important regional clusters;  determining the financial forecasting;  strategic environmental evaluation;  analysis of previous planning;  integration of the Region of Murcia into the National Framework for the European Funds; and  population projections from regional official statistics offices. At the beginning, in order to start the process of elaborating the regional development plan, we created a committee with the regional government, trade unions and the employers organization. So there were three travellers in this trip in order to adopt strategic decisions. This committee was the origin for all methods of participation as core members. The mix of the ways of participation and the technical studies have been a tool to apply governance widely for which it has been complimented. Besides this, the use of top-down and bottom-up strategies has been a useful tool to take note of individuals’ suggestions and then run a deep analysis to obtain general conclusions (Ortiz Martı´ nez, 2011).

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THE OBTAINED STRATEGY AND THE WAY TO IMPLEMENT IT Concluding the process of elaboration of the development planning, we obtained a strategy tree, with five big strategic objectives, which are broken down into 25 intermediate objectives. The branches of this tree include goals in development, employment, new technologies, social aspects and so on. So this regional map fixes the next way for this region and is a compromise by all of the signers of the development plan as integrated in committee. At this point, the committee changed from elaboration to implementation because it is the starting point for compliance with this strategy. This strategy only includes goals that can be approached by the regional government, bearing in mind its competencies. These are the commitments adopted by the regional government because they are affordable. To achieve implementation, the central government must be considered critical to the development of the region, and for this reason the central government was added to the implementation committee. Every strategic goal established a list of quantitative challenges, which should be obtained at the end of the planning period. These objectives were calculated bearing in mind the trends and starting point in the region. When the development planning was signed, these goals were an important challenge – but the economic environment was then positive. Nowadays when the economic situation is much worse, coping with these objectives will be harder work. What is true is that to develop a strategy implies adopting a compromise, so it is compulsory to make sure that implementation and fulfilment are possible. Although the planning is alive and must be flexible to adapt to changes in the environment, unexpected situations can make implementation of the design even harder. In spite of the deep change in future prospects since the end of planning, the final strategic objectives have not changed and remain desirable, even more now than before. But what has changed significantly has been the environment that surely will require a harder effort to meet the goals. Regional development planning for the period 2007–2013 is the general framework on which must be based any more specific planning tool. So what must be adapted to future changes must be specific actions required to reach the established objectives. In this way have been specific plans for the region been developed such as industrial development, an agreement for education, agricultural development and so on, or even specific planning

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focused on a specific place in the region (e.g. environmental planning for the northwest). Besides this, this planning required flexibility in order to respond to unexpected changes; this is achieved through ongoing contact with planning partners who meet each other at least twice a year to analyse how planning objectives are included in each budget and to analyse the performance when the budget is done and expenses have been paid. There also has been an exercise to establish a priority in performance, bearing in mind today’s even scarcer resources.

THE COHERENCE If when the strategy was designed the sum of the strengths was important, now in the nowadays conjuncture it is even more important to make sure that everyone works in the same direction. Because of this, we have developed a simply electronic tool designed ad hoc in order to supervise any specific planning done in the region to ensure coherence with the regional framework of the development plan. It is an easy tool for analysing how the studied planning complies with the strategic objectives of the regional plan. Through a brief questionnaire, we try to guarantee that every initiative is included in the same framework. Each one of the five strategic objectives of the regional planning creates a pentagon, and so the specific planning depending on the subject contributes more or less to one or more of the strategic objectives. The ultimately signed agreement for promoting employment in the region for the period 2011– 2014, included in Fig. 2, is an example of the consensus environment because it is met between the regional government, trade unions and the employers’ organization. In order of more importance are objective 4, welfare and social cohesion; followed by contributions to objective 1, about economic growth and employment; and objective 2, science and technology. This is guaranteed through a procedure required for all plans or every initiative in which details are required about the contribution of planning to every strategic objective and the actions to meet it. This report of contribution must be added to the plan for definitive endorsement. Until now, we have analysed more than 70 planning events or concrete actions to be in force in the period 2007–2013. The coherence of the general framework is absolute, and the policymaking is based on consensus as one of the regional government’s guiding

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Fig. 2. Contribution of the Regional Agreement for Promoting the Employment 2011–2014 to the objectives of the Regional Development Planning. Source: Report of contribution of the Regional Agreement for Promoting the Employment 2011–2014 to the objectives of the Regional Development Planning 2007–2013.

principles, always bearing in mind the main regional socio-economic actors through the different committees. So, regional development planning has contributed to the National Strategic Reference Framework for programming European Funds in the period 2007–2013, and specifically European Funds programming documents of the Region of Murcia for the same period. The exercise has been to design a general strategic framework and obtain consensus in order to choose activities co-financed by European Funds and to establish priorities. Finally, every action contributes to the general strategic objectives (Ortiz Martı´ nez, Salas Herna´ndez, Lorenzo Iba´n˜ez, & Franco Candel, 2008). If the European Union fixes a general strategy – in this moment, the Lisbon strategy – compliance requires the efforts of all member states. In the case of Spain, it is included in the National Reform Program to which the Region of Murcia adds from the challenges included in its regional development planning. In the regional planning other projects are included for set-up during the period 2007–2013 – for example the creation of a regional observatory of prices. This is a tool of study and analysis of prices, their trend and evolution in order to be useful for informed regional planning. In this case,

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partners in regional development – trade unions and the employers’ organization – are represented.

THE PERFORMANCE: BOTH FINANCIAL AND OBJECTIVES Any strategy that is not followed step by step after it has been developed is a waste of time and effort. Each step is necessary, and for this reason those who agree to a plan also create a performance committee that has its own rules, procedures and so on in order to have a formal and an effective performance tool. There should be at least two main meetings of this committee: first to analyse the degree of compliance of the draft budget to the strategy, and second to discuss the performance data obtained from the comparison between financial forecasts included in the planning and the finalized budget. Although the analysis of the performance must not be only bearing in mind financial data, it must also include the level of performance of the objectives, through the use of the indicators included in the own planning. The figures initially foreseen in the budget that are included in the strategy can be modified afterwards as part of the actual budget. Conclusions can be drawn from the analysis that the established challenges are different than envisioned, as happens for example with changes in the labour market. It is often necessary to prioritize different goals because of a conjuncture of changed conditions – that is modifying financial forecasts because of a

Financial forecasts 2007- 2011 3% 24%

Draft budgets 2007-2011 4%

OE 1 30%

OE 2

20%

OE 1 32%

OE 3 OE 4 20%

Fig. 3.

23%

OE 5

OE 2 OE 3

13%

OE 4 31%

OE 5

Weighting of Each Strategic Objective in the Financial Forecasts and in the Draft Budgets. Source: Own elaboration.

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changed financial situation or other conclusion. Planning is not something fixed and static; it is alive and must be flexible. For this reason, consensus and coordination among committee members and staff is critical in finding answers which were not previously determined. A good example is included in Fig. 3, which shows that the forecasts from before 2011 have changed the actual budget. The important change in the conjuncture has increased the importance of the expenses in the objectives, which have been reprioritized. Objective 1 is now about growth and quality in employment, and objective 2 now covers research, development and innovation, changing from 53% to 63% of total expenses. An integrated performance system is something on which we go on working because both sides, finances and objectives, must be kept in mind. It is desirable to try to automate it, which means linking indicators to official sources when they exist, and also developing some kind of web questionnaire to make the work of the information suppliers easier.

COMPLIMENTS TO THE PLANNING The sustainability of this example of regional strategic planning has been determined by different comments and compliments from diverse organisms and institutions:  In the meetings of the Spanish Program of Reforms, the central government highlighted the importance of including regional development strategies, because it was a way to specify the contribution of Spain to the Lisbon strategy as a member state.  The European Commission complimented us in the performance committees of the European Funds because it is desirable to design a general strategy, obtained from the consensus, and then deduce the program of the European Funds from it for the same period 2007–2013.  The Regional Social and Economic Board published a positive analysis of the regional development planning 2007–2013. The analysis pointed out that it is a good practice because of the technical way of doing and with a lot of other advantages.  The National Social and Economic Board mentioned our planning in its Annual Memory 2007 as one of the few regional maps existing in Spain.  Again, the European Commission more recently has chosen the regional planning as an example in Spain and with only eight member states

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chosen, because of the governance in the elaboration methodology and the consensus within the Framework of the European Social Fund (ESF).

CONCLUSIONS This chapter tries to show through an example how it is possible to design a strategy – regional development planning – in the public sector. The methodology used to design the strategy has received compliments from different organisms and institutions. The described example is the regional development planning for 2007– 2013. The period was chosen because it is the European Funds programming period. In our region, the European Funds traditionally have been an important source of income in the public budget. Although this situation has changed, the coherence between the different documents of planning and programming has always been successful, and so we keep on this way. The methodology is based on two complementary and parallel elements: the ways of participation and technical analysis. The application of induction through bottom-up methodology has allowed us to reason from detailed facts to general principles. The ways of participation have been the tool to consider all points of view, from an individual one to a territorial one, thanks to the new technologies that today make this process easier. The results are included, for example in the previous analysis, in the SWOT matrix and in the development of the strategy. The other element has been the use of a top-down methodology, which means reasoning from the general to the particular and using the results of technical studies. For example, we have determined the region’s competitive advantages in order to include them in the strategy. The consensus and partnership used for all of the process and adding the trade unions and employers’ organization from the beginning has guaranteed the success of the design, the performance and the required flexibility to meet circumstances such as the current economic crisis. The coherence between all of the initiatives and the general developmental framework included in the planning is a tool to check that every step is taken in the right way and thus complies with the general strategy. The strategy will not be completed without at least an analysis of the initial situation, a SWOT (strengths, weaknesses, opportunities and threats) matrix, quantitative goals, and financial forecasts. These are necessary parts for evaluating the performance of the strategy.

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Although the creation of a performance tool is as important as the design of a strategy, the plan must be flexible and able to change, depending on a lot of factors which were considered in the design phase. A clear example of an appropriate performance system can be our planning committee. When the economic situation deeply changed, we were able to establish priorities. So the plan has been a flexible tool for making decisions because it was formed with all those who signed the planning.

REFERENCES Ortiz Martı´ nez, E. (2011). Designing economic development based on cooperation. Social Responsibility Review, (2), 6–13, ISSN 1759-5886. Ortiz Martı´ nez, E., Salas Herna´ndez, L., Lorenzo Iba´n˜ez, M. V., & Franco Candel, S. (2008). La programacio´n de Fondos Estructurales de la Regio´n de Murcia: del 2000–2006 al 2007–2013. Presupuesto y Gasto Pu´blico, No. 53, 4/2008, pp. 27–38.

ALL OF THE MENTIONED DOCUMENTS AND EXAMPLES ARE AVAILABLE AT THE FOLLOWING WEB SITES: http://www.hitos2020.es/ http://www.horizonte2010.carm.es/ http://www.observatoriopreciosmurcia.es/ http://www.sifemurcia-europa.com/

CHAPTER 10 MILLENNIUM’S DILEMMA: GENETICALLY MODIFIED PRODUCTS FROM THE SOCIAL RESPONSIBILITY PERSPECTIVE R. S-eminur Topal and Hande Gu¨rdag˘ INTRODUCTION Globalization has affected science inevitably with a motto of ‘Knowledge conquers the mind’. However, global efforts and harmonization are needed and are established through international rules, laws, norms and standards. The potentially positive and negative results of globalization have altered the production relations and complicated the demographic scale. Despite increasing limitations on the traditional methods that use natural resources, biotechnology remains a rare branch of science that does not experience any ecological or seasonal scarcity of resource. However, the advances in biotechnology and genetic engineering have fostered new research techniques, especially in genetic modification. The transgenic technology is used to transfer one or more genes to another organelle for obtaining a whole different organism with entirely different characteristics. In this way, a future development cannot be determined from something that occurs today.

Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 213–230 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003014

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In this regard, today the common points come with the definition of ‘biodiversity includes; all living systems into the area, living organisms’ within sub-species-amongst species ‘and the ecological dimension to diversification, the level of biological organization and hierarchical structure comprising a difference’. Genetic diversity amongst populations of living organisms is provided in the metamorphosis of all, including hereditary size (FAO, 2001a). In accordance with these, biodiversity has evolved and left people undecided about the expectations or doubts on this new dimension of this issue and stimulated debate on the concept of biosafety. Around the world, researches have focused on the precautions in eliminating health risks, and the aspects of ethics and social responsibility. And the debates have focused on the effects of genetically modified organisms (GMOs) and genetically modified products (GMPs) on health, ecology, economy, medicine, law and ethics and society. In the absence of a specific external mandate defining the scope of this assessment and a generally accepted definition for ‘biotechnology’, ‘biosafety’ or ‘capacity building’, establishing the formal scope of this assessment has been an interactive process. The guiding philosophy of the assessment has been to be as broad as possible in order to cover capacitybuilding activities relating to both biosafety and those more focused on modern biotechnology. In addition to those previous examples that may contribute to both biosafety and biotechnology capacity-building objectives, the projects focus more explicitly on the development of biotechnological applications and their use and commercialization. These are only a small selection of activities carried out by various types of institutions and partnerships throughout the world. It is important to note that many projects focusing on biotechnology applications address traditional as well as modern biotechnology. Those projects have at least some elements that focus on modern biotechnology applications. In this respect, sustainability refers to the ongoing long-term impacts of capacity-building projects after the project has finished. It is a criterion which captures the way in which projects have lasting effects on the capacity in a country, thus reducing the need for ongoing external assistance. It is a critical element for all capacity building and is a perennial issue for donors and recipients alike. Criteria for considering sustainability in the specific context of the case studies included reference to:  sustainability elements built into project planning and modes of delivery,  stakeholder participation,

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 domestic support for projects and  diversity of financial support. Although capacity building for biosafety and biotechnology involves challenges and constraints similar to those of capacity-building endeavours in other areas, it also poses unique challenges. Prominent amongst these are the challenges it poses to existing ethics, morals, norms and policies. The lessons learned in capacity building for biotechnology and biosafety, and how these issues are balanced with the development of the technology, will be groundbreaking in many ways.

Transgenic Products and debated health risks There is a general consensus on the idea that the gene-transfer process can cause serious health problems due to the artificial alterations in gene arrangements or structures. Allergic reactions, Alzheimer’s disease due to artificial protein consumption, enzymatic damages and metabolism disruptions, carcinogenic risks, increase in mad cow disease, Morgellons disease or syndrome, lack of vitamin synthesis, antibiotic resistance, changes in immune system, cellular mutation and changes in normal body microflora are all debated as possible health risks in humans. In addition to organ damage (gastric bleeding, abnormal cell growth and swelling in lung tissue), sterility problems, increasing death rates (including newborn babies), growth and immunity problems and blood and liver cell damage are experienced in animals that are fed genetically modified foods. The risks have been increased not only with the digestion-resistance genes in genetically modified foods but also with their transference to the organs and the circulation system. Various studies have shown that these genes can be traced in the blood, liver, spleen, intestines and kidneys. Despite the outcomes of such studies, those evidences are somehow turned upside down and inside out and the new outcomes are used to back the thesis that the modified foods are safe (Peace, 2004). Another important aspect is that there has been no comprehensive study on the long-term affects of this technology on human and animal health because its use is still considered very early. This means that the debate continues in the sense that GMOs and GMPs are still an unknown in the sense of being either a gift or a curse (Barclay, 2000; Gill, 2000; Po¨pping, 2000; Topal, 2002, 2006, 2007).

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The effects of GMOs on Agriculture, Biodiversity and the Ecosystem All of the life forms are interconnected pieces of a larger system. When the biosphere was taken as an integral, we human are a function of this whole. ‘Biological variety’ or ‘biodiversity’ is a generalization of all the living, like a photo album. The superiority or richness of some forms puts them in a position to affect the whole ecosystem. So proper knowledge should be gathered about biodiversity, and necessary protection measures should be taken. To achieve that goal, all interactions between all species should be examined. One environmental risk related to the biodiversity capacity-building activities is the process called gene escape. The pollen performs the gene spread from the natural gene to plant propagation. Pollen may spread to the environment with a variety of carriers, usually wind, water or animals. Genetically modified floral pollens of plants move with what has been called the ‘no ticket passenger’ model with wind, birds, bees, insects, mildew and bacteria. They can move several miles from the source and affect plant species and genetic pollution. Thus, in GM and non-GM populations, hybrids occur through foreign cross-fertilization. Thus, with pollen or seeds, the escape of genes between varieties also becomes common. With gene transfer as a result of environmental emissions, the targets are not limited to known plants but may develop through neighbouring farms, and agricultural characteristics of ecosystem change and lead to famine or natural disasters. However, the problem of these techniques in the production of gene products is to make permanent changes. In addition to that, due to the effects of cross contamination, natural and local properties of local varieties also change permanently. Thus, pollens are the most important factor in genetic pollution. Genes from transgenic crops will disrupt the transition properties of wild species, and plant genetic resources will be damaged. In addition to these, birds and other wild creatures (herbicide feature) flora can be adversely affected in terms of species and numbers may decrease. This issue can also create serious problems for conservation and the sustainability of natural life. Yet another phenomenon called ‘seed pollution’ may create dangers of exhaustion for seeds and non-GM species. Indeed, oil seeds and pollen can travel approximately 2.5 km; sugar cane pollen can travel even longer distances (e.g. W3 km). Genetic contamination of wild maize species of transgenic corn has begun to show up in official reports. Changes in the genetic structure of wild flora can destroy the value of their genetic resources. In a study conducted at the University of Arkansas, a transition from transgenic rice to the wild rice

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gene, which is a source of the red rice gene, was identified. Herbicides that are developed for transgenic plants absolutely kill all species, not only transgenic ones. It is impossible to avoid being affected by this type of herbicide when applied to large areas of wild flora. However, there is a high probability of extinction in the second year with the transfer of the terminator genes to related species through pollens. Gene escapes from genetically modified transgenic material and into noninfected populations to future generations is becoming unavoidable. The cross-fertilization of GM and non-GM populations that will develop between future generations with high productivity will spread even more rapidly. The original species will be lost completely over time. In this case, the situation will be further fuelled as the size of the original variety and types of gene loss, described as ‘genetic pollution’ becomes more common. In terms of elimination of the risk, this danger must run in the direction of limiting the loss of native species and varieties and natural geographic distribution (Fox, 2004). On the other hand, the use of the transfer of genetically modified crops from pests and animal viruses for non-peaceful purposes should not be ignored as a threat. There is always the possibility that a marker gene may become an antibiotic-resistant gene or ‘terminator technology’. With the formation of new types of plant and soil bacteria and given high doses of antibiotics, transgenic plants can be developed that are resistant to viruses; more virulent viruses (high pathogenic activity) may lead to the emergence of virulent types, as has been proven experimentally at the University of Michigan. Virus genes, other viruses and retroviruses can interfere with genes, and new viruses with enhanced pathogenecity may result. In a period as short as 8 weeks, mixtures of these genes can be experimentally proven. Pararetrovirus groups show many similarities with hepatitis-B and HIV in terms of the future potential for further risk (Berlan & Lewontin, 2000; Browaeys & Gouyon, 2000; Fox, 2004). In this context, the ecologic decay caused by the loss of biodiversity via biologically transfers should also be discussed. Indeed, The FAO Committee on Biological Diversity within the reconciliation of the related parties in decision II/15 explained that ‘the original natural structure that occurs from the perspective of agricultural biodiversity may also affect the future’ (2001). Discussions on the subject, in terms of genetic changes in how long the ‘danger’ may be, are not clear yet, and precise information on the border remains unknown. Today, genetically modified crop and animal products, genetically modified micro-organisms (bacteria, yeast, moulds) bread, beer, cheese and viticulture products have been used directly and indirectly used

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in various production of enzymes and amino acids to produce or obtain food additives. The changing face of the modern world has made the phenomenon of biodiversity affect countries’ environmental and agricultural importance. This situation is also very important in countries suffering from food security and poverty. Productive agricultural regions in terms of improved agriculture have similar problems, so these drawbacks should not be ignored (Diamond, Riley, & Bebb, 1999; Topal, 2002). These issues must be considered, most especially in developing countries. The ecological effects of gene flow should be a priority for all states, and it should be defined as a potential ecological hazard. GMOs should be determined, potential hazards must be clearly defined and the probability of gene escape should be calculated. Accordingly, if the risks and dangers are large, then alternative approaches should be mandated to restrict or prevent the flow of GM genes to the population should be determined. In terms of preventing the escape of GM and non-GM farming areas should be separated. In this regard, computer simulation models will be useful. However, in developing countries, because of small-sized farms, this application of ‘sanctuary zone’ is not permitted to function. Essentially, this final expected solution could not be sufficient to solve the problem (Browaeys & Gouyon, 2000). Organic farming is most sensitive to the issue of gene escape, because these areas may be damaged by GMOs. Extensive screening in this regard should be planned for these areas. In Canada, for example organic agriculture is concentrated, and farmers in this region have rejected these areas for the cultivation of canola because of the possibility of gene oscillations. In this context, in many countries, organic farmers have initiated legal action against biotechnology companies. Organic farm produce must be audited by a certification body when the term ‘GM product’ is selected, but still today these groups are excluded from the ranks with the claim that ‘they are trying to oppose the rules’ (FAO, 2002b). Ecosystems are extremely complex structures. In particular, with transgenic plants, new organisms can produce unknown risks into a system. Depending on the time and place, gene flow amongst species may arise as a result of the interaction of genes; a population with a different character is always possible. Besides this, the cost of uniform types and the use of pesticides, foreign dependence, seed renewal every year (the ‘terminator gene’ system), cultivar mixtures and transgenic varieties have potentially raised a serious problem. GMO’s gene variations by cross contamination and natural competitive concerns, and future irreversible changes can cause

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potential risks for original species and biodiversity. Also, the power to affect populations of non-GM, in other words, genetic pollution also needs to be considered. The focal points of discussions about the seed industry with gene flow range from forest trees to animal interaction chains, and policy makers, consumers and researchers are discussed as well. Ecological, political, economic, social and pathogenic must consider the environment in terms of a ‘risk management’ approach, and other related interaction problems should be examined (UN COP8, 2006).

The Economic Importance of GMOs The use of a terminator gene to create sterile (non-fertile) seeds is another implementation of this technology that can cause serious trouble for farmers, such as continuous external dependence and a need for seeds which are modified every year. So market dependence and problems such as high seed prices, destruction of local ecoflora and endemic species in agriculture starts to take place. Besides changes in traditional agricultural production system, decays and decreases in the health environment for food and animal production may result (Topal, 2005, 2006). There are two main points in the discussion of gene escape in terms of economic importance: the importance of gene escapes in terms of trade and exportation, and the individual responsibilities of farmers. The interactions of two factors are summarized as follows. If farmers prefer to sell their products at high prices and with the certification of ‘Non-GMO’ on the market, then they face the dilemma of ‘quality versus quantity’. In other words, it will be compulsory to use informative labels, as well as to arrange the prices according to the ones without GMOs. Also it is expected that exports from developing countries (such as the Philippines and Malaysia), which are generally based on a few agricultural products, are not powerful enough to tolerate market losses. In other words, in terms of competition, less-developed countries with limited agricultural possibilities are either forced out of the market or are forced to look for cheaper solutions such as selling GMOs to local markets to obtain greater profits. In this respect, it is proposed that the officials of such countries should prefer and support the products not incurred a genetic evolution in regional entrances and avoid the open field experiments, to also support the local organic food farmers. As a result of following a strategy like this, it is necessary to prefer being a potential in terms of the advantage of reaching selected markets (FAO, 2002a, 2002b), obviously with the assistance of

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necessary guidance and supporting mechanisms, which will be elaborated in detail in the following chapter. On the other hand, a definite increase is seen in imported food consumption in the globalized world as a result of socio-economic changes. Besides all other negativities, increasing hazards have been seen in new biological danger probabilities with international commercial travel and vacations and also in different age groups. Young and old populations are infected with different diseases. The most important point is to determine new risks and dangers and take necessary precautions in food production and sales. Together with such socio-economical changes and scientifictechnological developments, processed foods must be conveyed to end users in a secure way (Fresco, 2000; Harland, 2000). So the existence and common spread of GMOs and GMPs to both local and global markets are issues of concern not only scientifically and medically but also economically. As natural seeds have been in the process of constant transformation with gene alterations, protection of natural ecoflora becomes even harder. And necessary measures should be debated to protect local organic producers as well as ensure that health risks in local and global food supply chains are kept as low as possible.

THE IMPORTANCE OF GMOS AND GMPS IN TERMS OF SOCIAL RESPONSIBILITY AND LEGAL STRUCTURING According to a report by the World Wild Fund (WWF), if the world population maintains to consume the natural resources of the world at current rates, it will be obliged to find and settle two planets similar to ours within 48 years. According to this WWF report, which was published before the World Conference held in Johannesburg, South Africa, the world population had consumed one-third of the natural resources of the world only within the last 30 years. Twelve per cent of forests was destroyed between 1970 and 2002. One-third of the biological variety in oceans and one half in freshwaters have been wiped out. The population of the 350 species of mammals, reptiles and fish that were followed within the same period half and half. According to one report, the ‘consumptive and irresponsible developed countries are the main responsible for being exhausted of natural resources, in a very simple explanation it is high time for everyone to act for protecting the nature in terms of biological variety’ (Radikal Newspaper, 2002).

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In terms of social responsibility, if economic or social damage occurs, depending on the negative results of gene escapes, one must take absolute responsibility and property owners are obliged to do so. This must be a ‘risk of property’ situation. Together with this, the principle of ‘the polluter ought to pay’ in environmental events must be adopted. Although, in agriculture the manufacturer is responsible for protecting those fields in which the ‘pure products’ are produced by selection, because of gene escapes there are various problems in Mexico, the United States and Canada in terms of fields included in traditional and organic agricultural lands. In this situation, the supplies of gene-transferred products are not willing to accept responsibility (FAO, 2002b). Another important interaction is carried out with the enforcement of legal requirements, which are developed according to the viewpoints of patent owners. In developing countries, the extensiveness of small farming prevents retention of escape genes, and a series of economic difficulties follows. This makes tensions unavoidable with important companies of the countries. By extension of GM, serious losses of herb pollens can occur. Within this framework, changes are made by biotechnological activities in terms of economical effectiveness. In specific phenotypic structures (expression of external appearance) especially, changes are made with the coded genes of other organisms in terms of different chemical characteristics, morphological changes, functional benefits and so on. Also, continuity in future generations is enabled. In the end, it is development of future unknowns and less confidence. Modern biotechnology has risks in terms of environment protection and biodiversity, if it only focuses on profits and is implemented senselessly and without control (FAO, 2002b).

THE SOLUTION OF THE PROBLEM, SOCIAL RESPONSIBILITY AND REFLECTIONS IN TERMS OF LAW In this context, consumer, environment and health-protection activities are also maintained. In farming and marketing, expansion of gene-transfer implementations in developed countries causes big problems in Third World countries’ consumption. Thus, apart from the necessity of warning and informing consumers, enabling the sustainability of local species is also very important. By different standpoints today, biodiversity includes multidimensional discussions and cooperation’s with agricultural, social,

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ecological, ethical, medical and legal reflections. For example, genetically modified scab seeds bring about disadvantages such as a contentious external dependence in agriculture and payment obligations for high seed prices. Also, the legal problems (patent, etc.) born by horizontal gene escapes put forward the possible risks of GMOs on socio-economic structure. All of these examples clearly show the necessity of social responsibility regarding the subject (Topal, 2006). The local species which could maintain their development for long years over different generations must be turned into genetically transformed species with state support and farmers’ selection-seeding interventions. As traditional species and seeds are dying out and losing specific characteristics, gene escapes or selections made by farmers should not cause important losses in terms of food and agriculture, environment, economy and transformation in the future, and thus securing policies must be developed (Topal, 2003). As a matter of fact, relevant European Union regulations put forward that ‘if any food product becomes different from its traditional similar, it is necessary to label it that it was transgenic origin’. Although the U.S. Environmental Protection Agency (EPA) specifies that protection of consumers against biogenetic products in terms of food safety must be given particular importance, the American Medical Association holds that the argument for compulsory labelling is not clear yet. Both protection of consumers and sustainability of biological diversity must be re-regulated according to actual necessities. By predicating the international models in terms of health, tourism, industrial and social security, the specific control mechanisms and laboratories must be developed, the qualified personnel and infrastructural enterprises must be carried out. The subject national policies must be developed and followed up (Topal, 2002). There are different strategies regarding the sterility effects of GMOs. The ‘terminator’ strategies are used to sterilize the seeds. However, some farmers cannot segregate seeds. Sterilizing some GMOs or their pollens could be inefficient in terms of cross-fertilization. The transgenic species (without pollen) carrying sterilized genes, which is known as ‘terminator’ technology, is discussed in terms of the restriction of the source of living for farmers, which is provided by allocating to seeds. However, some defend that this can be a guarantee in the aspect of preventing gene escape. But it is a troubled technical with side effects that can be seen from the physiological aspect. Besides, it might provide for fertile gamete ‘escapes’ to reproduce. This way there will be matters that uncontrolled gene escapes will be in the environment (FAO, 2002a; Pryme & Lembcke, 2003).

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According to the twenty-first report published in 1998 of the Royal Commission on Environmental Pollution, ‘scientific approaches should warn the control decisions about what the public opinion is also asked, during the announcement, however; we approve the results about their not being prevented’. There is a statement saying, ‘we believe that the general arguments about GM food shouldn’t be limited only science and it is necessary to take part in more different branches. Also, we only would like to emphasize the importance of giving scientific information’. However, it is informative that there are worries about the usage of GD food and plants and the administration of organized processes. The security assessment criteria was identified in the 2000 FAO and WHO report and should be done in a clear and objective way; it also states that there is a need to find solutions for assessing the differences in principles of complete equivalence in practice (e.g. in different country members of the European Union). It is explained that the differences in the documents were agreed to by the OECD for different products and are accepted because ‘it can be applied according to the real equivalence principles’. Though making all the GM food dependent on all the part evaluations cannot be logical, it is inevitable and necessary to explain the unpleasant conditions and probabilities that clearly might happen (Royal Society, 2004a, 2004b). In the future, the evaluating the security of GM and non-GM food may be done by new techniques. It is suggested that before being put into practice, for definition the techniques’ reflections on the future generations, there’s a need for searching in a long period of time, it is necessary to go on in order to continue the technological developments, but besides these, the organization of ‘normal growing’ of the plants should also be defined. Every kind of study done with GM is required to be done with a ‘Risk Evaluation and Management’ approach. It is necessary for all the groups’ consisting of producer, researcher and legal authority related with this subject, to form a platform where they can share their knowledge and experiences in various areas, and to produce common strategy via mutual knowledge transfer. Because the technique used in biotechnology practices, the genetic change made in living being, with final product and its usage aim, new different risks happen, they require different precautions. So, biosafety, laboratory and indoor area trials (including greenhouse works), leaving it to the environment and using as food should also have different organizations and precautions (Topal, 2002). Biosafety precautions should determine the negative effects on human health, social structure and biological variety before, without blocking the science. This requires institutional and management systems for taking some

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precautions. In this context, the law of biosafety can be dealt with in two parts as an institutional structuralization containing ‘evaluationobservation-control’ mechanisms, including the other law organizations and knowledge share. Security precautions should also be taken into consideration while the modern biotechnology studies are being done. Every institution doing these studies, should also take these precautions into consideration. These precautions are clarified in both international regulations and EU and some other countries’ laws clearly. Also, in our country the first studies should be speeded in order to constitute both the legal and institutional substructure about this matter. National laws, strategies and research agents about biosafety and national improvement and inventions are providing necessary source for organizing practices. The next point is setting the organizing structure having two main components like necessary information, skill and data base and other improving and practicing organizations (Paarlberg, 2000). National laws and research improving activities contain a format analysing other three components like decision point, legal options and key questions. The national biosafety strategy has been argued in a conceptual way and the capacities related with the practice of protocol have been defined. In this context, three conflicting points: transparency, people participation and resources considered as a base. However, more comprehensive organizing systems must be for especially increasing practices in the developing countries – like closed field studies, trade oscillation. The increasing evaluation requirements has brought creating the regular capacity base and has brought clarity to the systems legally and the old decisions have to be updated (Paarlberg, 2000). The importance of National Biosafety strategies is not limited to creating some regulations in order to improve and practice the biosecurity organizations. Authentic biosafety laws enable the biosecurity organizations a national approach. In political, social, ethic, health, economic and environmental matters, biotechnology should provide taking decisions about the safe and appropriate usage of techniques and their products. According to the emergency of the situation, arranging system or national Biosafety laws by being a frame position economic and environmental development and environmental protection should be determined as an only national view. In addition, national strategy should provide a solution for the problems in ethic, legal and social biotechnology matters with a society dialogue by forming some consultation committees. Depending on the national strategy, biosafety arrangements have been designed to influence specific society laws. Some key parts can be used in making an arranging

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frame: (1) legal frame, (2) arranging inspections and arrangements of its product, (3) forming the rules and protection of the transparency in the development of arrangement, (4) risk evaluation and management in risk approaches should be determined separately (ISNAR & FAO, 2004). Ideally, the development of national biosafety should be transparent; society should be informed about the shareholders, special interest groups’ regulations and instructions. Generally this should be related with the government’s experiences in other areas. It is suggested that in the government institutions, the regulations should be introduced to the society before they come into force. An evaluation of risk in the lowest degree and risk management should be published as a transition and groups should be reached. Two matters of the participation and making the society conscious by determining the transparency degree in the arranging system show the society’s point view for the arranging law and specific rules. At the same time it is closely related with the independence and the objectivity of those who prepared the regulation. The transparency of biotechnology products and the risks and benefits in the government’s decision mechanism is the main way in providing the society’s trust in new technologies (Heller, 2003). The attitude of the governments in transparency is useful in the cooperation matter of the societies’ and special groups’ forming legal national biosafety in the decision making process and risk evaluation. Food safety about the biological dangers has been increased within the cooperation of risk analysis national and international governments. Risk analysis is the process of understanding and decreasing a serious, structural and formalized risk, as case by case determinations. Risk analysis is formed of three parts; determining the risk, risk management and risk communication. In all arrangements these approaches should be followed by combining objective and scientific realities and by forming a legal identity soon as possible future guarantee should be provided. Besides becoming widespread fast in the world, the arguments about the transgenic products reacted greatly especially from that aspects of the probable effects to the consumer health and environment have been continued all over the world again about matters both domestic and foreign trade concept and its practice (Topal, 2003, 2006, 2007). The policies that EU applies or will apply about the transgenic products, because of its importance as a trading bloc essential to world trade, have become determining positions for industrial policies. On the other hand, when the strategically importance of industry and food sectors is considered from the export aspect, to face limiting due to the transgenic production in the near future in the export markets will not be the advantage for the

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countries. In addition to this, while supporting the research and development activities about the biotechnology; it has great importance in forming an information infrastructure with qualified staff. Within this frame, appropriate with the biosafety protocol ‘forming of risk evaluation, risk management and following-control, labelling arrangements’ shows emergence preventions. Nation’s integrated risk management providing the increase of quality and productivity in the first place integrated product management etc. Methods being widely used should be one of the most important tools in providing sustainable industrial development and food safety. For this reason, evaluation of every kind of innovation and developments however biosafety concept and risk management, providence, labelling, the necessity of applying the observing essentials, in all evaluation and trade processes, in legal structuring and permissions, should be dealt in the essential of providing guarantee, emergency action plan and strategy should be developed, with the necessity of traceability and consumer/ product guarantee should be acted (Topal, 2006). A number of embassies of major donor countries promote biosafety and biotechnology training activities and research programmes that are not recorded by the country’s aid agency. Moreover, numerous smaller-scale exchanges are organized by educational institutions that are not covered by this review. A stock-taking assessment of countries will be the first step in project design. The stock-taking phase should comprise an independent identification and assessment of the following aspects:  national policies regarding biotechnology and biosafety;  activity regarding the transfer, handling and use of living modified organisms (LMOs);  regulatory development in the country;  status of biotechnology development;  existing technical capacity on biosafety issues, including risk assessment, risk management, monitoring and enforcement;  public information and public participation;  the possibility of common approaches and synergies at regional or subregional levels; and  public awareness and stakeholder participation public awareness. A certain level of general public awareness is necessary for any production to be able to undertake meaningful stakeholder consultations and participation.

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CONCLUSION Sustainable development demands that we seek ways of living, working and being that enable all people of the world to lead healthy, fulfilling and economically secure lives without destroying the environment and without endangering the future welfare of people and the planet. The information theory of nature is a case study of system theory and the implementation of thinking as contributions towards better understanding of the nature of human civilization. The approach of evaluating the quality of species communities in agro-ecosystems mainly on the basis of biodiversity must be analysed critically. The approach of evaluating the quality of species composition and the spatial distribution of plants and animals. This will require a challenging combination of incentives and disincentives, economic benefits and law enforcement, education and awareness, employment in the protected area and employment opportunities outside, enhanced land tenure and control of new immigration. Under the theme of ‘Working together for biodiversity: Regional and international initiatives contributing to achieving and measuring progress towards the near past target*, a significant reduction of the current rate of biodiversity loss at the global, regional and national level as a contribution to poverty alleviation and to the benefit of all life on Earth’. In the long term, however, both are critically important to the well-being of humankind and the Earth systems that sustain them. We will be able to teach the world and policy makers that the short-term policies they develop have long-term impact, and that from this we can help influence the long-term well-being of the planet and humankind. Common strategies for long distance and rapid implementation and even policy dissemination should be developed. These policies should be evaluated and adopted in the context of social responsibility. A basic and common strategy is essential for food security and nutritional status and for the development of governments and international organizations. State-created policies, more good food sources of supply, productionprocessing-distribution and marketing perspective, effective, developers and confirmatory nature should be developed, and agricultural policies, should be developed in the direction to strengthened, appropriate-nutrition. Again, healthcare policy; particularly anti-immune builder, must be handled with attention to vulnerable groups and diseases, medicinal qualities and values should be taken into consideration. Education policy in these issues to inform with content and risk analysis, making the information network to open communication and continuous improvement approach to adopt strategies in the implementation, as an obligation should be adopted.

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A shared collaborative approach must be provided to individuals, institutions and organizations in association with industries, communities and nations for health and safety. In this context, the core of the process will contribute to ‘social responsibility’. Today, social responsibility is improved in many countries that have banned GMO farming. In fact, these products should not be allowed into production on an industrial scale until they have been proven harmless. Social benefit systems in the area of public law require the principle of prudence. Agricultural production is of strategic importance for the ecology and economy of a country, even in the sociology of seeds, vegetable production as main materials, and agricultural wealth of the country and sectoral structure. In this regard, policies in the interest of the country should be developed and a better view of reality provided. Seed and biosafety law should be re-evaluated, and all necessary regulations changed as soon as possible. For future biosecurity threats, serving the interests of the country should be the main priority. Data sensitivity for these reactions, warnings and objectives should be considered as well. Producers, consumers, members of civil society, academics and news media are responsible for coping with these issues. Thus, in international agriculture, economy, environment and consumer and product safety in terms of conscious, transparent and objective policy and implementation strategy should be followed and also fulfil obligations in terms of social responsibility. The country, product and consumer safety must be considered, with social responsibility for agricultural protection, basic consumer rights (to information, selection, purchase and inquiry) observed. Efforts in this regard should be supported by showing responsibility towards future generations. This debt to humanity, society, the entire living world and the universe should be perceived as our duty towards future generations. In light of the scientific evidence about the health risks of GMOs and GMPs presented in various examples in this article, a controlling mechanism for the production and creation of proper farming techniques is urgently required. Both domestic and international regulations and a controlling authority for the subject matter is of utter importance for the preservation of biodiversity. Both scientific and legal liability should be discussed and realized. The information flow on the health risks of GMPs also should be created to raise public awareness. Enlightening labelling information about product ingredients is also crucial for consumer health-protection policies. So far, such a goal does not seem to have been achieved, although there is an increasing amount of discussion and discontentment about the subject.

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The main message that should be driven from this article is that a binding controlling mechanism is needed that would be implemented by the cooperation of the local and international governments and organizations. A policy-making institution that analyses production cycles scientifically and establishes standards of production that are legally binding would be the most important precaution to avoid current and future risks of permanently damaging the habitat we live in.

REFERENCES Barclay, A. (2000). Genetically modified organisms in food: Bane and boon. LabPlus International, 9/10(4). Berlan, J. P., & Lewontin, R. C. (2000, January). Menace of the genetic-industrial complex. Le Monde Diplomatique. Retrieved from www.ensp.fiocruz.br/projetos/esterisco/ impacto10.htm. Accessed on 13 April 2008. Browaeys, D. B., & Gouyon, P. H. (2000, April). Si deve aver paura degli alimenti transgenici? Le Monde Diplomatique. Retrieved from http://www.ilmanifesto.it/MondeDiplo/LeM onde-archivio/Maggio-1998/9805lm08.01.html. Accessed on 13 April 2008. Diamond, E., Riley, P., & Bebb, A. (1999). Genetically modified foods: Adding to the debate. International Biotechnology Laboratory, (August), 8–10. FAO. (2001, August 20). Food security: The role biological diversity in feeding the world. Retrieved from www.fao.org/biodiversityforfood&agriculture. Accessed on 24 September 2008. FAO. (2002a). Gene flow from GM to non-GM populations in the crop, forestry, animal and fishery sectors. Electronic Forum on Biotechnology in Food and Agriculture. Background document to conference 7, May 31–July 6, 2002. FAO. (2002b). Full background document for conference 9: Regulating GMOs in developing and transition countries. Retrieved from http://www.fao.org. Accessed on 17 October 2008. Fox, M. W. (2004). Killer foods. Guilford, CT: The Lyons Press. Fresco, L. (2000). Scientific and ethical challenges in agriculture to meet human needs. Food, Nutrition and Agriculture Alimentation, 27, 4–13. Gill, C. (2000). Precautionary tale turns on genetically – Enhance plot. Feed International, (July), 4–5. Harland, J. (2000). More than a quality assurance issue: What is ‘GMO free’? Feed International, (July), 6–8. Heller, R. (Ed.). (2003). GM nation? The findings of the public debate. Department of Trade and Industry. Retrieved from http://dti.gov.uk/. Accessed on 25 March 2006. ISNAR & FAO. (2004). Transparency, participation and resources. ISNAR-FAO expert workshop on policy planning and decision support: The case of biosafety, transparency, participation and resources. Rome, May 2002, pp. 14–16. Retrieved from http:// www.isnar.cgiar.org/ibs/biosafety.htm. Accessed on 16 September 2009. Paarlberg, R. (2000). The global food fight. Foreign Affairs, 24(May/June), p. 24. Peace, T. (2004). Eating the forbidden fruit: No problem. Memorandum: The current generation of genetically modified (GM) crops unnecessarily risks the health of the population and the environment. Nature Cell Biology, p. 1024.

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Po¨pping, R. (2000). Genetically modified plants. LabPlus International, (September/October), 9–10. Pryme, I. F., & Lembcke, R. (2003). In vivo studies on possible health consequences of genetically modified food and feed-with particular regards to ingredients consisting of genetically modified plant materials. Nutrition and Health, 17, 1–8. Radikal Newspaper. (2002). 2050, the expiration date of the world. Radikal Newspaper, 8 July. Royal Society. (2004a, 28 June). Policy statements and reports-science and education. The future funding of the European science base: A royal society background working paper. 17(4). Retrieved from http://www.royalsoc.ac.uk/document.asp?tip¼0&id¼1340. Accessed on 28 September 2010. Royal Society. (2004b). The future funding of the European science base. A royal society background working paper: 2. Retrieved from http://www.royalsoc.ac.uk/displaypagedoc.asp?id¼12045. Accessed on 28 September 2010. Topal, R. S- . (2002). Biodiversity in agriculture, food and ecosystem Dimension: Social reflections. S.O.S. Istanbul Environmentalist Volunteers Platform Publication, 04. I˙stanbul: Ecem Publishing. Topal, R. S¸. (2003). Control obligations and precautions on transgenic foods: I, II. Biotech – Biotechnology. Sectoral Journal, 14(3), 47–49. Topal, R. S¸. (2005). Transgenic product: Blessing or trouble? Journal of Food Technology, 9(2), 61–64. Topal, R. S¸. (2006). Biosafety and biotechnology. I˙stanbul: Cem Turan Publishing. Topal, R. S¸. (2007). Is it you, Gene or the universe that is changed (1st ed.). I˙stanbul: Yeni Insan Publishing Office. UN COP8. (2006). Convention on Biological diversity. Eighth conference of the parties (COP8). Curitiba, Brazil: 20–31 March 2006. Retrieved from http://www.ecoagriculturepartners.org/ resources/reports.html. Accessed on 30 March 2010.

CHAPTER 11 CHALLENGES OF ENVIRONMENTAL ACCOUNTING IN TOURISM DESTINATION AS A TREND OF SUSTAINABLE DEVELOPMENT Vanja Vejzagic´, Sandra Jankovic´ and Milena Persˇ ic´ INTRODUCTION A tourist destination represents a dynamically regulated system that evolves in space and time. Therefore, it is necessary to anticipate various system reactions to internal and external influences, so that actions can be directed towards the specific goals of supply and demand for products of tourist destinations. A successful process in the life cycle of tourist destination product planning is based on the anticipation and awareness of all participants of supply and demand, as the sustainability values must be perceived within the framework of an integrated destination product. It is necessary to examine assumptions and features of the market valuation of destination business processes from an economic, social and environmental standpoint in line with the principles of sustainable development. This implies the creation of a methodological basis for the recognition, measurement and tracking of complex processes and synergic effects, important for the Business Strategy and Sustainability Developments in Corporate Governance and Responsibility, Volume 3, 231–243 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2012)0000003015

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development of relevant management information-based structures and functions. Measuring the eco-efficiency of a tourist destination represents the basis for building a system of reporting on changes and impacts individual business subjects deployed in the environment. An integrative information system of tourist destinations should provide information on the ecoefficiency of individual business processes, activities, products or a Strategic Business Unit’s (SBU’s) entire life cycle. Obtained information allows for the preparation of an information basis for reporting on environmental aspects within the system of tourist destinations sustainable development reporting.

ECO-EFFICIENCY OF TOURIST DESTINATION ‘Eco-efficiency is achieved by the delivery of competitively-priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life cycle to a level at least in line with the earth’s estimated carrying capacity’ (Lehni, 2000, p. 4). Eco-efficiency represents production capability based on production input with low environmental impact, while reducing the overall quantity of the production input. As a result, overall costs, waste quantity and environmental impacts are lowered, thus establishing a sustainable interrelation between environmental and economical goals for the entire life cycle of a product, which can be measured using the ecoefficiency indicator. ‘An eco-efficiency indicator is the ratio between an environmental and a financial variable. It measures the environmental performance of an enterprise with respect to its financial performance’ (Sturm, Mueller, & Upasena, 2004, p. 1). Life Cycle Costing ðLCCÞ Life Cycle Assessment ðLCAÞ

(1)

In a quantified expression of eco-efficiency, the numerator represents the total value of costs over the entire life cycle of the product or production system. The denominator represents the naturally expressed value of the impact on the environment of product or production system life cycle. The calculation of single index eco-efficiency value of the integrated product of tourist destination at the micro and macro levels requires examination of the dynamics of business changes in a tourist destination. Each SBU index represents eco-efficiency at the micro level as a part of the overall tourist destinations product supply (hotels, restaurants, golf courses etc.). While at the macro level, the index represents the normalised average of all distinct

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values of a tourist destination’s SBU in relation to the level of environmental impact and total business activities of the tourism destination. The microeconomic approach to the calculation of tourist destinations eco-efficiency serves as an analytical instruments of sustainability of each business process, activity, subject or a whole life cycle of a tourist destination product. This shows the indicative interrelationship between the sets of economic and environmental components in the business. The macroeconomic concept of an eco-efficiency-statistical standpoint presents the summation value for the activities incurred at the micro level. However, the management function recognises the market interdependence in relationships, actions and actual business results at the micro level of tourist destinations, and realises that the dynamic complexity of the macro level approach represents more than the sum of all values obtained at the micro level. Overall eco-efficiency dependency of tourist destinations should be considered analogous to the statement that ‘y the overall level of tourist satisfaction depends on the total level of the tourist destination product, which is a result of the synergic effect of all participants in the tourist product supply (not just the sum of the effects of all individual participants) and success in anticipation of tourist wishes for specific tourist product’ (Senecˇic´ & Vukonic´ 1997, p. 88). The characteristics of tourism products of tourist destinations (simple, elementary or integral) are correlated with the interrelations of the market participants involved in the process of designing tourist products, and the manner and level of use of total available tourist resources necessary for its formation. The intention of the process of measuring and improving the overall ecoefficiency of a tourist destination product is to establish a balanced (sustainable) relationship between primary (natural beauty, cultural heritage etc.) and secondary (accommodation, meals, recreation etc.) offers. A secondary tourist offer is the result of human efforts to develop and improve access to primary tourist offers. In its development, qualitative and quantitative characteristics of destinations should not be affected, especially natural resources – a main factor of the eco-environment and a fundamental motivation for a tourist visit. The basis for improving eco-efficiency of activities from the perspective of primary and secondary tourism destinations, is to search through aspects of reduction of energy, water and virgin material use; reduction of waste and pollution levels; extension of function and therefore product/service life; incorporation of life cycle principles; consideration of the usefulness and recyclability of products/services at the end of their useful life and increased

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service intensity. ‘Eco–efficiency optimization is achieved through segmentation and analysis of every particular process in life cycle of a product, concerned with three broad objectives’ (Lehni, 2000, p. 5):  Reducing the consumption of resources (minimising the use of energy, materials, water and land, enhancing recyclability and product durability, and closing material loops)  Reducing the impact on nature (minimising air emissions, water discharges, waste disposal and the dispersion of toxic substances, as well as fostering the sustainable use of renewable resources)  Increasing product or service value (providing more benefits to customers through product functionality, flexibility and modularity, additional services and selling the functional needs that customers actually want. This raises the possibility of the customer receiving the same functional need with fewer materials and less resources) Quantification of presented categories is conducted simultaneously through interrelation of economical and environmental impacts. While tourist destination LCA secures information significant for the understanding of environmental impacts of a product, LCC meets the needs for economical evaluation of technically presented information on a product’s life cycle performance.

LCA of Tourist Destination LCA is a holistic tool used in the evaluation and reporting of the relevant environmental impacts of products. It is a systematic, formally and structurally consistent approach to evaluation of economical and ecological impacts on particular systems, projects, processes, products and services. LCA represents quantitative and qualitative data integrity in the assessment of environmental impacts caused by the use of energy, materials, emissions etc., during the entire life cycle of a product of tourist destination – concept, design, manufacture, transport, distribution, consumption, recycling and waste management. ‘The LCA study is performed to assess whether a product or system meets certain environmental standards, or whether it is environmentally sounder than another product or system’ (Guine et al., 2004, p. 10). From the tourist destination perspective, LCA represents the overall environmental impact value over a lifetime of a tourist destination product, emerging as both a direct and indirect consequence of tourist activity and evaluated by means of a selected functional unit. LCA describes processes of

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energy and materials input transformation into desired product or service including non-product emissions, waste, etc. or output processes through business decision-making processes. The LCA study is based on ISO 14040 and ISO 14044. In environmental accounting, ISO 14040 is important as it offers a standardised methodological framework and technical support required for preparation and presentation of reports on environmental impacts of a product for the duration of its entire life cycle. This allows for the real and potential environmental impact assessment, and furthermore, evaluation of each individual phase of the life cycle of a product (ISO, 2006, p. 2). The issue of LCA study construction is typically addressed through four individual, yet interrelated phases (Fig. 1). The success of a tourist destination LCA study relies on continuous study feedback; the most useful study data is reused and study phases are reconstructed in order to improve each following, and also preceding phase of the study. However, complete accuracy and methodological uniformity in environmental reporting is not possible, as each LCA study requires clearly

Fig. 1. Stages of LCA. Source: PRe Consultants (2008, p. 24). The text and figure taken from ISO 14040:2006-Environmental management – Life cycle assessment – Principles and framework are reproduced with the permission of the International Organization for Standardization, ISO. This standard can be obtained from any ISO member and from the Web site of the ISO Central Secretariat at the following address: http://www.iso.org. Copyright remains with ISO.

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defined goals and system boundaries. Simultaneously, each LCA study requires the clear interpretation of formulation, construction, and LCA element interrelation criteria. The total LCA of tourist destination represents the total value of the environmental impact of all SBUs expressed by the complementary defined objectives and scope of research, and thus by the uniquely defined functional unit.

LCC of Product of Tourist Destination ‘Life cycle costing represents the total cost of ownership of machinery and equipment, including its cost of acquisition, operation, maintenance, conversion, and/or decommission’ (Barringer, Barringer & Associates, Inc., 2003, p. 2). LCC considers economical (monetary) effects of all the previous business activities in prediction of future business costs and risks, while considering all the potential future economical flows. Product life cycle begins by extraction and production input processing, followed by phases of production, distribution, and finally, product consumption. Processes of disassembly at the end of the product life cycle are evaluated from the production-related perspective only, which allows for the liability to be transferred from the consumer back to the manufacturer. LCC explores possibilities for minimisation of capital investments and maintenance costs, while maximising the profits, so that in the structure of costing assets acquisition costs and assets maintenance costs are evaluated separately (Barringer et al., 2003, p. 5). The importance of LCC monitoring emerges from the fact that costs of operation, maintenance and disposal exceed the initial procurement costs by up to 20 times (Barringer & Weber, 1996, p. 2). In other words, almost 65% of all the future costs are determined in the design phase of the product life cycle (Barringer & Weber, 1996, p. 17). ‘Life Cycle Cost means the amortized annual cost of a product, including capital costs, installation costs, operating costs, maintenance costs and disposal costs discounted over the lifetime of the product’ (Executive Order, 1993, sec. 210). ‘LCC value is discounted on net present value (NPV) that represents an economic standard method for evaluating competing longterm projects in capital budgeting. This measures the present worth of the multi-year investments’ (Bhushan & Rai, 2004, p. 7), concerning assets depreciation, interest rate, taxes etc., as follows: Rt ð1 þ iÞt

(2)

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where t is the time of the cash flow; i the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk) and Rt the net cash flow (the amount of cash, inflow minus outflow) at time t. Successful inclusion of all the relevant LCC determinants requires careful consideration of production, consumption and waste management phases in the life cycle of a tourist destination product. This also allows for evaluation of the eco-costs value, and their classification, while considering source, time and type of their origin (Table 1). ‘Environmental costs are the costs of the environmental degradation that cannot be easily measured or remedied, are difficult to value, and are not subject to legal liability’ (EPA, 2008, p. 1). A small proportion of eco-costs is classified as conventional in their origin, while the remaining proportion is often classified as hidden. According to the accounting theory, taking

Table 1.

Structure of Eco Costs. Conventional costs

(Costs of capital, assets, inputs, stock, utility, investment y) Potentially hidden cost Usual (planning, training, Anticipative (R&D, testing examination, data collection, permits, location monitoring, testing, preparation, permits, modelling, corrections, engineering y) recording, marking, insurance, taxes, management fees y)

Consequent (cessation or closure, equipment destruction, area protection y)

Voluntary (feasibility study, recycling, protection, public relations, testing y) Unpredictable costs The costs of adaptation to future requirements: penalisation, penalties, future damage liability, improvement measures, potential national resource damage, loss of property, impairment of personal rights etc., legal expenses y Image costs and interest groups relations costs Corporation image costs: PR cost, investors, insurers, management structures, employees, suppliers, lenders, the community, the legislature y Source: EPA (1995, p. 9).

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and/or ignoring an action in the future often creates a possibility for cost occurrence, which is why this type of eco-cost is classified as unpredictable. The emergence of potential costs and future business risks demands for additional integration of the unpredictability factor into the accounting systems, procedures, and environmental reporting. However, the inclusion of all eco-costs is problematic due to the costs unpredictability factor, with costs increasing from conventional to unpredictable, and with the image costs category characterised as the most unpredictable, and therefore most difficult to measure, quantify and evaluate. Opportunity for the overall eco-cost reduction – as one of the goals of eco-efficiency – lies in the ongoing effort for the current and future environmental costs reduction, capital costs reduction, market share increase, market position improvements and protection and improved public relations.

MODEL OF ECO-EFFICIENCY Negative effects of tourism on the ecosystem of tourist destinations are relatively increasing as the number of guests rises. An additional negative environmental impact is manifested in an increase in all types of waste, above-average pressure on the sanitary infrastructure, increased energy consumption, and increases in harmful emissions to air, water, soil etc. The above may be seriously detrimental to the environmental sustainability of a tourist destination, or may even contribute to its destruction. The integrative approach to the implementation of environmental policy requires the application of relevant criteria for evaluation of the achievements realised under the principles of sustainable development and enables the corrective actions for the management system of tourist destinations in future planning. It requires the application of new instruments and methodological basis of preparation of information within the IT system, so as to enable the transformation of the simply recorded data into useful information in compliance with environmental policy and sustainable development. Options for avoiding the negative effects of excessive commercialisation of the tourist destination product should be taken into consideration in the planning process of product development of tourist destinations according to the principles of sustainable development and continuous improvement of quality of information on the level of the tourist product eco-efficiency of tourist destinations which affects the operation of the environmental management system. This will directly influence legislation

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and implementation of eco-pollution prevention – politics, selection and implementation of legislative demands and ecological norms in regards to tourist destination and products and services offered in tourism, and development of staff consciousness and responsibility in regards to environment protection. It will improve coordination and implementation of eco-plan systems over the life cycle of a product, and coordination of green strategy goal managerial processes. It will directly influence the orientation of business on eco-resources and the achievement of ecoobjectives, and the prevention of damage due to irresponsible behaviour in environmental protection. Information on eco-efficiency will stimulate the establishment of operational control and maintenance of the ecoprogramme and its possible improvements by constant evaluation of eco-results within the proposed organisation’s business policies, goals and tasks. It will influence the introduction of management processes for evaluating, controlling and auditing the environmental management system and search capabilities for the improvement of ecological systems and the results of all segments (SBUs) at the level of tourist destinations. Also, establishing and maintaining adequate levels of communication among participants in a system of internal and external customers will be stimulated, as will be encouraging other market participants to introduce a system for environmental management.

Model of Eco-Efficiency Using AHP The literature covering the areas of sustainable development stresses the need to ensure an information basis for environmental management and to measure eco-efficiency, but does not single out the precise resources which are needed to provide timely information on monetary and non-monetary values of environmental impacts. Aiming for the success formula in the application of the instruments by which to generate information for the environmental management – prerequisites for successful decision making – Bennett emphasises the thesis that it is necessary to ensure the generation, selection, evaluation and use of financial and non-financial information to optimise the ecological and economic business corporations and business to achieve sustainability (Bennett, Bouma, & Wolters, 2002, p. 1). The requirement for a unitary information system as the basis of business decision-making demands for the elimination of the difference between the measuring units – monetary LCC, and natural LCA. Due to this, application of the Analytical Hierarchy Process1 (AHP) method is recommended in order

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to improve the existing models which are not able to provide simple solution implementation for complex decision-making processes (Bhushan & Rai, 2004, p. 15). The AHP method helps the decision maker in solving complex problems, respecting its structure and organisation (setting criteria hierarchy problem) while considering, measuring and synthesising the final result. The AHP method is a valuable tool in complex problem solving, as it acknowledges the problem structure and organisation by setting the problem criteria hierarchy in consideration, measurement and synthesis of the end result. ‘AHP is a method for ranking decision alternatives and selecting the best one given multiple criteria’ (Taylor, 2006, p. 404). The information system of tourist destinations is complex and requires to be designed as a network so that each segment of supply at a tourist destination could assume the role of an SBU for whom the information system should provide relevant information. The main objective of an integrated information system is to meet the requirements for securing information needs of individual participants in the supply structure of the tourism product of a tourist destination. The AHP method opens the possibility of result observation through system interrelations, in which the pairs of alternatives are observed in correspondence with the criteria set, evaluated between themselves and ranked according to the level of impact on the end result. From the criterion impact intensity assessment, a preference scale assigns the compared alternatives with numeric values to different levels of preference (Taylor, 2006, p. 406) in the matrix form. The AHP method is selected as it offers the possibility of an LCC and LCA model information modification-relativisation – so that the overall value of environmental impact and the overall cost of the tourist destination product life cycle could be converted into a unitary value, which would then represent the degree of eco-efficiency. The basis of the LCA and LCC integration by AHP method application stems from the need to retain all the analytical advantages that both models offer in research and result presentation, while improving the existing integrative information system (Fig. 2). Through paired comparison of criteria (LCA and LCC), sub-criteria and the product, and by application of the AHP method, the degree of ecoefficiency of a product and its selected alternatives is calculated. The results of the three LCA sub-criteria (EQ – eco-system quality ¼ 40%; HH – human health ¼ 40%; R – natural resources ¼ 20%) are linked to the results of the two LCC model sub-criteria (LCC – life cycle costing ¼ 80%; EC – ecocosts ¼ 20%). Based on the thesis by which the goal of eco-efficiency is to establish a balanced interrelation between environmental and economic

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Fig. 2. Eco Efficiency Model. Source: Author; based on Barringer et al. (2003), EPA (1995), Emblemsvag (2003), Guine et al. (2004), ISO (2006), Persˇ ic´ and Jankovic´ (2006) and Taylor (2006).

objectives of sustainable development, the impact of the LCA and LCC criteria on the model result is assessed at 0.5 for each of the criteria. The first sub-criterion represents the classical approach to LCC that determines the current NVP of the project. The second sub-criterion represents life cycle eco-costs inherent to LCA, assessed and accepted as the arithmetic mean of the relative share of empirically identified regularity, which amounts to 15–20%, depending on the nature of business activity (DeSimone & Popoff, 2000, pp. 26–28). The calculation of relative values by which the alternatives impact on each of the five criteria, and the calculation of the relative share of the value of the criteria which affects the level of eco-efficiency, is enabled by the derivation of formula that represents the overall relative eco-efficiency levels for each of the products in the model, and thus: PðEEÞ ¼ PðEE1Þ þ PðEE2Þ ¼ 0; 2Peq þ 0; 2Phh þ 0; 1Pr þ 0; 4Plcc þ 0; 1Pec (3)

A1ðEEÞ ¼ A1ðEE1Þ þ A1ðEE2Þ ¼ 0;2A1eq þ 0;2A1hh þ 0;1A1r þ 0;4A1lcc þ 0;1A1ec (4) AnðEEÞ ¼ AnðEE1Þ þ AnðEE2Þ ¼ 0;2Aneq þ 0;2Anhh þ 0;1Anr þ 0;4Anlcc þ 0;1Anec (5) In Eqs. (3–5), P(EE) represents the overall relative level of eco-efficiency of products, compared to the alternatives (A1(EE) y An(EE)) in the model, which is calculated from the sum of relative share of the criteria

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(P(EE1) þ P(EE2)). The total relative value criteria is derived from the sum of all the relative share of appropriate under the criteria. Condition for the sub validity of the statements in the equation, which says that the sum of all the relative share of the eco-efficiency is equal to 1, as follows: PðEEÞ þ A1ðEEÞ þ ANðEEÞ ¼ 1

(6)

Depending on the structure and purpose of research, the decision of the payee ranked values of eco-efficiency can choose the best option for a final decision, in a way of deliberately changing the level of preference criteria or level of criteria itself.

CONCLUSION Environmental accounting is an important indicator of qualitative and quantitative preconditions for successful determination of future development trends and activities in the tourist destination product business planning and market positioning. Lack of standardised methods for monitoring, recording and reporting on the environmental impacts and eco-costs that are caused by activities in the tourist destination has led to the need to combine the environmental and economic views of the business. Current theoretical considerations tried to make the synthesis of ecological and economic business components, through the drafting of ‘hybrid’ eco-reports, but important deficiencies are not successfully removed. As a qualitative contribution to the process highlights the applications of the AHP method that allows access to both maintain the consistency and quality in the presentation of information on the eco-efficiency of tourist destination product. Value relativisation of the research results and impact criteria on the level of ecoefficiency, enables the content and structural connections between the two preceding concept (LCC and LCA) in a consistent system. Aiming for the successful process of strategic and operational decision making of tourist destination management, value relativisation becomes a catalyst for the methodological information synthesis and neutralizations of differences in basally principles of eco-efficiency.

NOTE 1. Method, which was developed by Thomas L. Saaty in the 1970s, is based on mathematics and psychology, and it has been extensively studied since then.

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REFERENCES Barringer, H. P., Barringer, P. E. & Associates, Inc. (2003). A life cycle cost summary. Humble, Texas, USA: ICOMS, Barringer, P.E. & Associates, Inc. Barringer, H. P., & Weber, D. P. (1996). Life cycle cost tutorial. Houston, Texas, USA: Gulf Publishing Company. Bennett, M., Bouma, J. J., & Wolters, T. (2002). Environmental management accounting: informational and institutional development. Dordrecht: Kluwer Academic Publisher. Bhushan, N., & Rai, K. (2004). Strategic decision making. London, UK: Springer Ltd. Cooper, R. (1990). Explicating the logic of ABC. CIMA, UK: Management Accounting. DeSimone, L., & Popoff, F. (2000). Eco efficiency: The business link to sustainable development. Cambridge: MIT Press. Emblemsvag, J. (2003). Life cycle costing: Using activity-based costing and Monte Carlo methods to manage future costs and risks. Hoboken, NJ: Wiley. Environmental Protection Agency. (1995). Environmental Accounting Project: An Introduction to environmental accounting as a business management tool: Key concepts and terms. Washington, DC: ICF Inc. Environmental Protection Agency. (2008). Types of costs. Retrieved from http://www.epa.gov/ osw/conserve/tools/fca/costs.htm Executive Order. (1993). Federal acquisition, recycling, and waste prevention. In Executive Order 12873. Section 210. Guine, J. B., Gorre, M., Heijungs, R., Huppes, G., Kleijn, R., Koning, A., et al. (2004). Handbook on life cycle assessment: Operational guide to the ISO standards. Dordrecht: Kluwer Academic Publisher. ISO 14040. (2004). Environmental management – Life cycle assessment – Principles and framework. Geneve, Switzerland: ISO. ISO 14044. (2006). Environmental management: Life cycle assessment: Requirements and guidelines. Geneve, Switzerland: ISO. Lehni, M. (2000). Eco-efficiency: Creating more value with less impact. North Yorkshire, UK: WBSCD. PRe Consultants. (2008). Introduction to LCA with SimaPro 7. Amsterdam. Senecˇic´, J., & Vukonic´, B. (1997), Marketing u turizmu, Mikrorad d.o.o., Zagreb. Sturm, A., Mueller, K., & Upasena, S. (2004). A manual for the preparers and users of ecoefficiency indicators. Proceedings of the 2004 United Nations conference on trade and development, United Nations Publications, New York, NY. Taylor, B. W. (2006). Introduction to management science (9th ed.). Upper Saddle River, NJ: Prentice Hall.

ABOUT THE CONTRIBUTORS Fulya Akyildiz is Assistant Professor, Department of Public Administration, Usak University, Turkey. Gu¨ler Aras is Professor of Finance and Dean of the Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey. Dominique Bessire is Professor in Management Sciences at the University of Orle´ans, France. Pınar Bu¨yu¨kbalcı works as Assistant Professor in the Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey. Andrew Chambers is Professor of Corporate Governance at London South Bank University, UK. David Crowther is Professor of Corporate Social Responsibility, De Montfort University, UK. Hande Gu¨rdag˘ is Research Assistant, Department of Political Science and International Relations, Ufuk University, Turkey. M. Azizul Islam is Senior Lecturer, School of Accounting, Economics and Finance, Deakin University, Australia. Sandra Jankovic´ is Associate Professor in the Faculty of Tourism and Hospitality Management, Opatija, Croatia. Linne Marie Lauesen studies for a PhD at Copenhagen Business School, Denmark. Esther Ortiz Martı´ nez is Professor in the Department of Accounting and Finance, University of Murcia, Spain. She was Director General in charge of economic development in the autonomous Region of Murcia from 2005 to 2011. Emmanuelle Mazuyer conducts research at the CNRS (French National Centre for Scientific Research) and Head of the team on Social Law (ERDS), University of Lyon, France. 245

246

ABOUT THE CONTRIBUTORS

Milena Persˇ ic´ is Professor in the Faculty of Tourism and Hospitality Management, Opatija, Croatia. R. S- eminur Topal is Emeritus Professor, Yildiz Technical University, Turkey. Vanja Vejzagic´ is Research Assistant in the Faculty of Tourism and Hospitality Management, Opatija, Croatia. Victoria Wise is Associate Professor, Graduate School of Business, Deakin University, Australia. Qingqing Yang works in the Finance sector in China and studies for a PhD at De Montfort University, UK.

INDEX Accountability 1000, 127 accounting, 1–7, 9–15, 17–19, 39–41, 80, 117, 121, 124, 142, 148, 162, 166, 231, 233, 235, 237–239, 241–242 Ananta Group, 105–106 Association of British Insurers (ABI), 119, 148 assurance, 25–26, 32, 36–38, 60, 123, 129, 149 audit, 25–27, 29, 31, 34–39, 42–43, 71, 73, 123 Babylon Group, 108–109 Bangladesh, 97–104, 107–108, 110 biodiversity, 74, 214, 216–219, 221, 227–228 biosafety, 214–215, 223–226, 228 biotechnology, 213–215, 218, 221, 223–226 bounded rationality, 182 brand differentiation, 168 brand management, 164, 173 Brundtland, 18–19, 45 Brundtland Report, 19 business ethics, 42, 85, 90, 116, 180 Business Review, 128

charity, 117, 120–121, 138, 140–141, 147–148, 157, 172 child labour exploitation, 101 CO2 emissions, 129, 146, 187 commitment, 35, 74, 79, 82–83, 90– 91, 105, 109, 120, 124, 126, 197 competitive advantage, 5, 45–46, 84, 102, 159, 162, 164, 166–169, 211 comply or explain, 24, 27–28, 32–33, 36 consensus, 27, 39, 116, 140, 178, 203–204, 207–208, 210–211, 215 consumption of resources, 234 corporate governance, 1, 13, 23–35, 37–42, 45, 67, 80, 97, 115, 117, 130, 132–135, 143, 149, 155, 177, 203, 213, 231 corporate reputation, 47, 159, 167 corporate social responsibility (CSR), 1–2, 6–8, 62, 67–91, 107–109, 115–150, 155–173, 189–190 CSR disclosure, 170–172 CSR Europe, 119, 129 CSR norms, 69–72, 78, 80–82, 84–86, 88–90 CSR reporting, 8, 91, 117, 128–129, 134, 138–140, 145–146, 156, 170–171 CSR risks, 159

Cadbury Report, 25 capital markets, 133, 149 carrying capacity, 6, 232 causal ambiguity, 50

depletion of the resources, 2 developing countries, 79, 100, 110, 119, 135, 138–139, 145, 157–158, 218–219, 221, 224 247

248 Directors’ Report, 128 discipline, 3, 68, 79, 171 eco-efficiency, 232–233, 238–242 ecosystem, 6, 216, 238 efficiency, 2, 4–7, 12, 15–19, 47, 49–50, 55–56, 88, 163–164, 170, 189, 232–234, 238–242 EMAS (Eco Management and Audit Scheme), 73, 123 energy conservation, 193 environmental accounting, 117, 121, 142, 231, 233, 235, 237, 239, 241–242 environmental costs, 237–238 environmental impact, 77, 99, 108, 118, 125, 142–143, 180–181, 186, 188, 192, 232–236, 238–240, 242 Environmental Management and Audit Scheme (EMAS), 73, 123 environmental stewardship, 105 equitable sustainability, 12 European Commission, 67, 71, 73, 78, 82, 88, 119, 148, 159, 210 European Commission’s definition of CSR, 148 European Parliament, 40, 73, 87 financial performance, 1, 4, 97, 156, 158, 162–168, 171, 232 financial reporting, 23–24, 42, 83, 98, 110, 145, 149 foreign direct investment (FDI), 46, 52–55, 57–62 Gaia hypothesis, 179 Gaia theory, 6 garments industry, 98–99, 102–104, 107, 109–110 genetic contamination, 216

INDEX global compact, 72–73, 82–84, 134, 136–137, 146, 149, 161 global markets, 47, 220 Global Reporting Initiative, 76, 127, 171 Global Sullivan Principles, 73 globalization, 167–168, 213 Grenelle Environment Forum, 74, 84 Gulf of Mexico, 116 Hubbert’s Peak, 19 human capital, 106, 119 human rights, 72, 87, 97, 100–101, 116–117, 119, 125, 127, 130–131, 139, 146–147, 161, 171 Institute of Directors, 160 International Framework Agreements (IFA), 72 International Standardization Organization (ISO), 73, 75–76, 83, 86, 91, 235, 241 internet, 98–100, 104, 110, 187, 192 ISO 26000, 76, 83, 86 ISO 26000, entitled ‘Guidelines for social responsibility’, 83 knowledge, 19, 43, 49, 60, 123, 136, 145, 156, 183–184, 194–195, 213, 216, 223–224 Kyoto Protocol, 75 labour, 4–5, 9–11, 15, 48, 72, 74, 76, 79, 85, 87, 90–91, 100–101, 107– 108, 110, 123, 126, 129–130, 132, 135, 140, 158, 161, 171, 181, 209 legislation, 117, 120–121, 124, 133, 142, 186, 188, 193, 238 Life Cycle Assessment (LCA), 232, 234–236, 239–242

Index life cycle costing, 232, 236, 240 Lisbon Strategy, 208, 210 market economics, 8 measurement of performance, 3, 5 Middle East, 2 Mohammadi Group, 107–108 multinational companies, 87, 100–102, 104, 134, 186, 190, 199 multinational enterprise (MNE), 46, 52, 56, 60, 62 natural monopoly, 188, 194 new public management, 177, 185 non-government organisations (NGOs), 51, 72–73, 85–86, 98, 100–102, 115, 117, 125–127, 131–132, 135–138, 143–144, 148, 181, 190–192, 197, 199 normativity, 89–90 OECD, 49, 52, 71, 73, 133, 223 oil, 2, 11, 19, 73, 116, 127, 129, 146, 177, 216 organic farming, 218 organizational culture, 180, 194, 204 ORSE (Observatoire de la Responsabilite´ Sociale des Entreprises), 70, 83, 91 participation, 101, 126, 131–132, 137, 139, 148–149, 203–205, 211, 214, 224–226 performance, 1, 3–5, 9–10, 13, 18, 30, 33, 45–47, 49–62, 77, 97, 101, 103, 106–108, 110, 117, 124–125, 127, 130, 145, 149, 156, 158–159, 162–168, 170–172, 177, 179, 189, 207, 209–212, 232, 234 poverty, 115, 117, 120–121, 131, 136, 141, 145, 150, 158, 218, 227

249 price cap system, 191 Principles for Responsible Investment (PRI), 77 privatisation, 3, 85–87 profit, 3, 5, 10–12, 14–15, 47–48, 115, 155–166, 169, 172, 177–178, 185–191, 195–198 profitability, 141, 149, 155, 157–159, 161, 163–169, 171–173 public interest entity, 27 public service, 131, 177–179, 181–183, 185–187, 189, 191, 193, 195, 197–199 quality, 36, 38, 47, 55, 60–62, 77–78, 85, 89, 128, 130, 140, 149–150, 162– 164, 177–183, 185, 190, 199, 210, 219, 226–227, 232, 238, 240, 242 rational choice theory, 182, 185, 196 regional development plan, 205–206, 208, 210–211 regulation, 13, 26, 30, 32–33, 69–70, 74, 78, 85, 87–88, 90, 99, 120, 122, 125–126, 134, 142, 146, 186, 189–190, 225 remuneration committee, 30, 34, 36 reputation, 23, 47, 49, 55, 61, 91, 127, 136, 138, 159, 162–164, 166–168, 172–173, 181 return on capital employed (ROCE), 5 return on investment (ROI), 4–5, 163 risk, 9, 13, 29, 33–38, 50, 87, 91, 119, 124, 140, 164, 166–167, 180–185, 192, 194–196, 216–217, 219, 221, 223, 225–227, 237 risk management, 13, 34–36, 119, 183–185, 192, 194, 219, 225–226 Royal Commission on Environmental Pollution, 223

250 SA8000, 127, 137, 149, 171 Sarbanes-Oxley Act, 28–29, 39, 41, 71 satisficing, 185, 196 scientific management, 4 SEF, 186–188, 190–195, 197, 199–200 shareholders, 12, 24–25, 30, 33–34, 38, 40–41, 68, 128, 134, 144, 147, 155, 158, 165, 172–173, 180, 187, 191, 198, 225 Shell Corporation, 156 social and environmental performance, 49, 108, 127 social contract, 5, 109, 180 socially responsible investment, 122 SRI (socially responsible investing), 122–123, 139, 146, 162, 164 stakeholder, 15, 46, 50, 62, 98–102, 107, 110, 115, 121, 123, 128, 132, 137–138, 148–149, 155, 162, 169, 172, 180, 190–192, 194–196, 214, 226 strategic performance indicators, 46, 52 surveillance, 3 sustainability, 1–3, 5–19, 23, 45–46, 49–51, 53, 59, 62, 67, 84–85, 97– 99, 101–110, 115, 120, 123, 133, 137, 139–140, 146, 155, 157, 159, 161, 163, 165, 167–171, 177–183, 185–187, 189–199, 203–205, 207, 209–211, 213–214, 216, 221–222, 231, 233, 238–239 sustainability reporting, 8, 85, 98–99, 102–104, 106–110, 171 sustainable development, 2, 6–8, 12, 16, 18–19, 49, 74–76, 84, 91, 115, 121–122, 139, 142, 146, 148, 170–171, 227, 231–232, 238–239, 241 sustainable production, 194

INDEX Terminator Gene, 217–219 theory of the firm, 165 total quality management, 185 tourist destinations, 231–233, 238–240 transformational process, 9–18 transparency, 42, 84, 119, 122–123, 127–128, 130, 134, 140, 156, 160, 167, 197, 224–225 triple bottom line, 49 trust, 76, 119, 125, 130, 132, 141, 166, 168, 170, 187, 197, 225 Turkey, 46, 54–56, 115–117, 119, 121, 123, 125, 127–150 UK Corporate Governance Code, 23–27, 29, 31–32, 40 UK Generally Accepted Accounting Practice (UK GAAP), 124, 148 UNDP in Turkey, 143 UNDP Turkey, 136, 143 United Nations Conference on Human Settlements (Habitat II), 131 United Nations Global Compact, 72, 137, 149, 161 United Nations Global Compact (UNGC), 72, 137, 149–150, 161 utilitarian theory, 14 VA, 188–190, 192–195, 197–198, 200 value chain, 9, 45–46, 48–51, 53, 61–62 Walker Review, 27, 30, 34, 40–43 waqf, 131 websites, 8, 99, 187