The corporations of today are no longer sheer
economic entities. These are the engines of economic and social
transformation. Kenichi Ohmae argued in The Borderless World:
Power and Strategy in the Interlinked Economy that
“A Corporation is a social institution whose responsibilities
extend far beyond the wellbeing of its equity owners to giving
security and a good life to its employees, dealers, customers,
vendors, and subcontractors. Their whole life hinges on the
wellbeing of the corporation.”
Corporations are the power houses that generate employment
provide education and health care and give sustenance to the
society. Good governance needs to ensure that the corporations
take in to account the interests of all constituencies in
which they operate. A business entreprise’s corporate actions
must be compatible with long term societal needs such as the
quality of environment and welfare of local community. It
has been increasingly demonstrated that the ultimate competitiveness
and corporate success is dependent as much on investors, employees,
customers, creditors and suppliers as on shareholders.
Business is caught in a struggle between escalating demands
for social and environmental responsibility versus urgent
needs for profitability to survive a more competitive world.
People have little faith in governments’ ability to change
things. They acknowledge the corporation as the most powerful
social construct of the present era and, most importantly,
they are willing to reward corporations who are responsive
to their concerns. Market capitalization in 21st century has
little to do with profit but much more on how the corporation
impacts the people and the planet. In the first 6 months of
2000 biotech companies raised $20 billion on stock market
to finance research into genomics with related revenues not
expected for many years. Companies were selling equity stakes
in good ideas and using the capital to implement the ideas.
With the onset of a new economic system based on knowledge
rather than capital, the conflict between business, state
and stakeholders can be resolved by viewing each of them as
partners who create economic and social value through collaborative
problem-solving. The mission of business can thereby be redefined
to serve capital, society and planet by integrating stakeholders
into a more productive whole through the process of collaborative
governance.
We are already witnessing a slow but steady shift towards
collaboration as the knowledge economy unfolds. Mobil is a
classic example of a contemporary global USMNC. It has gone
beyond legal obligation and profit seeking goals to champion
social responsibility. Corporation of 21st century have to
become institutions that are formally designed to serve both
capital and society. Shareholders, employees, customers and
other stakeholders perform equally essentially functions of
the socio-economic system we call a corporation. Yet remedying
of society’s ills is too daunting a task to be undertaken
by the government or business alone. It was the co- operation
between business and state that produced one of Britain’s
finest companies East India Company. We need a triple bottom
line approach where state, civil society, business works in
collaboration to result in economic, social & ecological
development.
The collaboration is economically efficient. It has been proven
that co-operation between shareholders, state and stakeholders
can raise the value of corporation several fold. It can alleviate
the problem caused by the lightning pace at which speculative
capital flows. The company has a better chance to get “patient”
capital. Studies have indicated that the resources contributed
by stakeholders are greater than the financial investments
of shareholders by roughly a factor of ten. Business does
not simply redistribute resources resulting in a zero sum
game but is inherently a production institution that creates
value for all its constituencies. Stakeholders are the integral
part of the extended “corporate community”.
In his celebrated article “The Collaborative Enterprise” (Greenleaf
Publishing), William E. Halal, Professor of Management, at
George Washington University, USA argues that the well-accepted
tenet of involving stakeholders in decision making was abandoned
by most American corporations during the 1990s. While the
average pay of CEOs rose almost 30% annually to several million
dollars per year, employee wage rise stagnated at less than
1%. The same companies often fired tens of thousands of workers,
even while their firms were reasonably profitable. Competitive
pressures may have justified these actions, but it came as
little surprise to see that corporations still favour financial
interests rather than the balanced treatment of current stakeholder
theory.
This paradigm needs to change with the onset of knowledge
economy. The significance of this tectonic shift is that knowledge
behaves differently from capital. In Mr Halal’s words capital
consists of tangible assets (factories, land, money, etc.)
that are limited and can be used for only one purpose. But
knowledge is a fluid, intangible asset that can be transferred
at little cost and its value increase, when shared. Ray Smith,
the CEO of Bell Atlantic, who is often called the ‘Father
of the Information Age’, explained: ‘In the Information Age,
wealth is a function of information, vision, and properties
of the mind. Unlike capital, knowledge can’t be used up. The
more of it you dispense, the more you generate’.
This insight explains why collaboration between the corporation
and its stakeholders is beneficial. The end result is not
one plus one equals two, but much more. The business stakeholders
are indeed the civil society, which is becoming more and more
vocal. Like all partnerships, stakeholder collaboration is
a two-way working relationship that combines the capabilities
of partners to create added value for their mutual benefit.
The final result of any collaboration is an exchange in which
the firm gains economic resources while stakeholders gain
various benefits. If this relationship can be attained, stakeholder-
interests are served while the firm simultaneously improves
its competitive advantage. Similarly collaboration is required
between the business and the state. Collaborative problem
solving, therefore, offers the key to uniting economic performance
and social responsibility.
Mr Halal asserts substantial evidence that collaboration works
for all the partners involved. In fact shareholders, management
employees and state all are stakeholders of the corporation.
Results from a simulation of resource flows among stakeholders
and the firm illustrate the instrumental role of collaboration
in improving both social and economic performance. Survey
data of 540 managers concludes that the majority hold normative
views supporting collaborative stakeholder relations.
A wave of business alliances is under way in which technology,
market access and other assets are integrated. Why all this
sudden co-operation, even among competitors? These assets
represent various forms of knowledge, and so they can be combined
and shared to create new ventures. The Wintel-consortium,
for instance, is a cluster of hundreds of co-operating firms
organised around Microsoft’s Windows and Intel ‘s chips. Trends
show that similar alliances are forming with employees, customers,
suppliers, government and stockholders.
Managers increasingly engage employees in solving business
problems because it is estimated that employee knowledge comprises
70% of all corporate assets. In many cases, people are organised
into complete self-managed business units, which are held
accountable for performance and left free to choose their
co-workers, methods, suppliers and other aspects of the work.
At Hewlett-Packard, for instance, employees view this practice
as ‘running your own business’ with all the benefits that
it implies.
Companies are also forging partnerships with customers through
‘relationship marketing’. For instance, Dell Computer ‘s direct
sales approach ‘wires ‘ buyers into the firm ‘s operations,
taking the client a working partner in creating value. This
type of collaboration eliminates salespeople, inventory and
retail stores while delivering customised PCs at discount
prices.
Companies have learned that collaborative relations with their
suppliers can reduce inventories, improve quality, assure
timely deliveries, lower costs and develop better product
designs. Chrysler and its suppliers, for example, have formed
such close working relationships that the company thinks of
these partners as an ‘extended enterprise’.
Business -government consortia have rejuvenated American cities
and states, such as Indianapolis and Pennsylvania. Italy has
become famous for the productive collaboration of networks
of small firms guided by local governments. Singapore is a
choice business location because its government provides the
most sophisticated information infrastructure in the world.
In today’s society successful companies will increasingly
be those that recognise that they have responsibilities to
a range of stakeholders that go beyond compliance with the
law. A number of disparate but interconnected forces such
as deregulation and globalisation, rapid advances in communications
technology and the rise in the power of the consumer and civil
society have now combined to bring corporate responsibility
to prominence in many corporate boardrooms. In this information
age, the ramifications of not addressing best practices in
corporate governance could range from bad press coverage to
complete market exclusion. These are perilous times for the
social construct of modern capitalism.
If in the past the focus was on enhancing shareholder value,
now it is on engaging stakeholders for long-term value creation.
This does not mean that shareholders are not important, or
that profitability is not vital to business success, but that
in order to survive and be profitable a company must engage
with a range of stakeholders whose views may vary greatly.
If in the past corporate social responsibility was simply
seen as profitability plus compliance plus philanthropy, now
responsible corporate citizenship means companies being more
aware of and understanding the societies in which they operate.
This means senior executives and managers being able to deal
with a wide range of issues including greater transparency
and accountability, human rights abuses, sustainability strategies,
corporate governance codes, workplace ethics, stakeholder
consultation and management.
Many still argue that corporate citizenship of the social
responsibility is not a proper concern of business, following
Milton Friedman’s line that the business of business is business
and the sole social responsibility of a company is to maximise
profits for its shareholders, The most recent exponent of
the view is David Henderson formerly the Chief Economist of
OECD, getting involved with wider societal issues takes a
company’s eye ‘off the ball’ and risks a drop in productivity,
companies are ill suited to such work and there is no legal
or democratic basis for it. Social investment is a misuse
of shareholders’ money, which should instead be returned to
them for their use as they see fit. This was all part of the
1980s shareholder value debate, which succeeded in increasing
the focus in many companies on their core business activities,
including aligning social investment much more closely with
business strategy. The idea that business has a broader ‘societal
responsibility’ or ‘citizen-ship’ role is strengthening with
the development of the global economy. The enhanced legitimacy
and liberation of private enterprise in the late 1980s and
early 1990s coupled with exponential growth in enabling global
networking technology have led to the dominance of what can
be called ‘global informational capitalism’.
There is no doubt that one of the most important socially
responsible things a business must do is to be profitable.
Only being profitable a business can provide sustainable jobs
for its employees, good returns for investors and prosperity
for the communities in which it operates. A business, which
cannot bring profits loses its purpose and, has not right
to exist. But unless the zeal for profit is balanced by the
need to develop human capital and protect the planet from
pollution the net benefit to the society can be negative.
Good corporate governance requires corporations to manage
company’s wider influences on society for the benefit of the
company and society as a whole. Good corporate governance
must result in good corporate citizenship. Good corporate
citizenship is closely associated with the idea of ‘sustainability’.
It is also synonymous with the concept of ‘corporate societal
responsibility’. The new word ‘societal’ is used to avoid
the limited interpretation of the term ‘social responsibility’,
when translated into Continental European cultures and languages,
as applying to social welfare issues only. The term ‘societal
responsibility’ covers all dimensions of a company’s impacts
on, relationships with and responsibilities to society as
a whole.
In the past, nation-states were concerned above all with sovereignty
and security. Nowadays, states are expected to fulfill a pre-eminently
welfare-based role. Formerly, multinational corporations (MNCs)
were concerned almost exclusively with productivity and profits
for shareholders. Presently, stakeholders require that MNCs
also deliver products and services in an ecologically sustain-able
and socially responsible way. Mobil advertorials provide an
excellent example of how an MNC lives up to its social responsibility
by the standards of the Organisation for Economic Co-operation
and Development (OECD). MNC participation in global governance
may be legitimated and enhanced not only by its efficient
provision of welfare but also by its recognition of stakeholder
rights and commitment to stakeholder democracy.
Stakeholders may have differing degrees of influence at differing
times, and they may not be receptive to forming partnerships
for various reasons. Unions gain strength in tight labour
markets, for instance, which makes them less willing to collaborate
and more likely to raise demands. While such changes in bargaining
power are always occurring, the knowledge economy is moving
the firm and its stakeholders toward partnerships because
co-operation is now economically efficient, as noted earlier.
The advantages of collaboration run through the above trends.
Alliances with other firms are common today because partners
find them beneficial. The same is true for other stakeholders,
although it may not be as obvious. Employee collaboration
can improve financial performance considerably, which -when
allows employees to share the gains and satisfy higher-order
needs for autonomy, esteem. Bringing clients into operations
likewise can help firms deliver greater value at reduced costs,
which then improves sales and profit. Business-government
partnerships or private public partnership provide firm’s
supportive economic conditions while communities benefit from
taxes. jobs, etc. and shareholders are usually motivated to
assist with corporate strategy because of the benefit of increased
profitability.
Mr Halal in the article on The “Collaborative Enterprise”
cited above quotes a study conducted in 1995-97 in an attempt
to estimate how managers view these issues. The study surveyed
540 mangers along Likert ten-point scales describing the extent
to which 14 stakeholder practices are used in the respondent’s
company. The survey was conducted by professionally employed
to MBA students who circulated the questionnaire to managers
they know. Focus groups of three confirm validity by ensuring
that questions reflected their intended meaning.
The most intriguing finding is that stakeholder. Collaboration
combining social and financial goals is generally accepted.
This may startle some, but the data is rather clear on this
point, even after making allowances for possible inaccuracies
in the results. This conclusion is further supported by the
finding that such practices are needed and should soon enter
the mainstream.
Other prominent sources confirm this view. For instance, a
survey of 200 corporate community relations professionals
found that 87% of their companies communities encourage collaboration
with local communities. And Fortune magazine ‘s annual rating
of America’s Most Admired Companies is weighted by how well
managers serve their customers, treat their workers and behave
toward their communities, in addition to financial measures.
It is also worth noting that management pay is increasingly
tied to measures of client and employee satisfaction, as well
as to financial targets.
But other data in the study points to conflicting views. Social
performance is not often measured, stakeholders are rarely
represented on the board of directors, and the needs of some
groups are frequently slighted. The problem of poor employee
involvement is reflected in the results, as well as many notorious
events, such as downsizing.
These two faces of the same data suggest that most managers
accept the need for collaboration in general terms, but few
actually practise it to a serious extent or have made corresponding
changes in corporate governance. Stakeholder collaboration
seems to be characterized more by good intentions than actual
practice. The study does not offer reasons for this gap, but
possible causes include the confusion noted earlier over the
compatibility of profit versus social responsibility, the
vague sense that stakeholder involvement is doing good rather
than a competitive advantage, and the tenacious ideological
belief that the true mission of business in a capitalist economy
is simply to make money.
A global economy powered by sophisticated information networks
has increased the pace of competition and change, making it
imperative that business focus even more keenly on its economic
performance. Meanwhile, the creative destruction of global
capitalism is also causing an unprecedented wave of social
disorder, spurring world-wide demands for responsible corporate
behaviour that are not likely to be satisfied with mere palliatives.
Thus, the central force driving these developments -the Information
Revolution. Thus, the central tension between corporate profitability
and social responsibility. Unless some form of resolution
is achieved, the most likely outcome is a serious backlash
against free markets, capitalism and the business corporation,
as today ‘s protests demonstrate.
Fortunately, the very cause of this crisis also offers the
possibility of its resolution. As the various forms of evidence
in this study illustrate, the Information Revolution now presents
the advantages of collaboration to resolve the profitability
-responsibility dilemma. If corporations could develop some
democratic form of governance able to unify stakeholders’
interests into a productive whole, it may then be possible
to transform business into an institution that is formally
designed to serve both capital and society. Managers would
continue to strive for productivity, innovation, profitability
and other competitive goals -but they would do so more effectively
by harnessing the knowledge of their stakeholders. Conversely,
stakeholders would continue to strive for social benefits
-but they would achieve more by forming pragmatic working
relationships with management.
The diverse functions served by various stakeholders appear
to be as essential to the health of corporations as diverse
organs are to the health of the human body. It makes little
sense to claim that the heart, the brain or the lungs are
more or less important because they are all essential components
of a biological system. Similarly, it seems clear that shareholders,
employees, customers and other stakeholders perform equally
essentially functions of the socioeconomic system we call
a corporation.
Business has a franchise from the society that requires it
not only to create wealth for the good of the company but
to apply the power of its combined resources to help remedy
society’s ills and provide value to all stakeholders. Governance
structures must recognize this fundamental purpose of the
business. Our success would lie in the ability of the business
to synergies with the state and stakeholders to address the
challenges of economic competitiveness and human development
through sustainable solutions.
Recent debate on corporate governance has focused more on
regulatory and constitutional issues, competitive issues being
all but ignored. It is important, therefore, to restate the
primary role of the directors. Their job is to maximise value
for all stakeholders.
While there are definite advantages in establishing corporate
governance codes in developing economies such as India, there
is little evidence that the discipline provided by Cadbury’s
Code and Hampel report has minimized the number of scams.
Indeed Australia, which was rated as having one of the best
practices in corporate governance has had maximum high profile
corporate failures. Code enables companies to rely on minimum
standards enough to do the box ticking. Also once the compliance
reaches 100% level there is no scope for improvement. ‘In
the rapidly changing and fiercely competitive world of today
company’s eyeballs need to be fixed only on 3 words: innovation,
innovation and innovation. A culture of compliance is anathema
to the spirit of enterprise and entrepreneurship. We need
governance that puts a premium on innovation, risk taking
and entrepreneurial skills. Boards, therefore, have a challenging
role to ensure that the corporation complies with the law
without losing its focus on performance. Corporate governance
is way beyond disclosure and compliance. The ultimate wealth
creation will come only from performance. Our competitive
position in the world will be determined by the effectiveness
with which we govern the corporation to create value for itself,
its people and the planet.
