Corporate Governance and Sustainability

Challenges for Theory and Practice

Suzanne Benn, Dexter Dunphy, Suzanne Benn, Dexter Dunphy

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136009341
• Topic: Business
• Subtopic: Business History
• Index: Business

In recent years, as corporations and governments have increasingly been confronted with managing the expectations of a society newly alerted to the social and environmental risks of economic development, recognition is dawning that achieving a sustainable world is dependent upon the democratic management and equitable distribution of these risks for now, and for the future. This book, the first to explore the themes of corporate governance and sustainability, argues that a better system of governance on a number of levels holds the key.

Contributed to and edited by a distinguished international team, this book recognizes the complex and contested nature of both sustainability and governance, and that these key concepts have been redefined considerably over time.

As sustainability poses new and major challenges for the theory and practice of corporate governance, this book, ideal for postgraduate students of business and management, identifies and addresses these challenges.

Part I

Introduction

Governance and sustainability challenges

Chapter 1

New forms of governance

Changing relationships between corporates, government and community

Suzanne Benn and Dexter Dunphy

INTRODUCTION

This chapter provides a framework for analysing corporation—government—community interactions. This framework is developed within the context of the forms of governance required to coordinate these interactions and achieve social and environmental sustainability.

Corporations and governments are now confronted with managing the expectations of a society newly alerted to the social and environmental risks associated with economic development. There is dawning recognition at many levels of society that achieving a sustainable world is dependent upon anticipating and reducing risks where possible and on the equitable distribution and democratic management of the remaining risks. However, action of this kind is reliant upon relevant interest groups being prepared to move beyond narrow self-interest and on the capacity for enlightened policy-making by government and corporate leaders. Fundamentally, these are requirements of governance, for they relate to the structures and processes which determine the sharing of responsibilities and the appropriate allocation of power in society (Bressers and Rossenbaum 2003; Clarke 2004). Governance of this kind entails not only transparency and accountability but also active collaboration between a range of social actors (Clarke 2004). As Bertels and Vredenburg (2004) argue, governance at the level of the multiple stakeholder or interorganizational domain must consider the complex interdependencies between the actors.

In the face of these demands for governance, the traditional closed decision-making of the powerful bureaucracies and corporations of the industrial era is no longer either appropriate or acceptable. This raises two key questions. How equipped is the standard body of democratic theory to deal with issues of governance that relate to sustainability? To the extent that democratic theory is inadequate, can the leading concepts of management theory provide guidance for more appropriate models of governance and norms of management practice that will foster the transition to a sustainable society?

DRIVERS OF CHANGE

Global pressures from above and below

Climate change, toxic waste legacies and human rights abuses are examples of the issues of global survival which are mobilizing actors at two levels on the world stage. From above, governments, corporations and NGOs are negotiating agreements designed to enable a more equitable distribution of social and environmental risk within and between the generations. Examples of the so-called ‘globalization from above’ include the global Stockholm Treaty for Persistent Organic Pollutants, the UN Global Compact and the Global Reporting Initiative (Falk, quoted in Beck 1999:38).

At the same time, organized by transnational NGOs, assisted by activist individuals and spread on the internet, the ‘globalization from below’ movement has emerged, reflecting a re-emphasis on sustainability values, often linked to post-materialist concerns. Both ‘globalization from above’ and ‘below’ are forcing organizations to open up their decision-making structures and processes for perusal and participation. For example, the worldwide movement for corporate reporting on sustainability and CSR issues is increasing the transparency of corporate decision-making.

The discourse of risk and uncertainty

Complexity, chaos, uncertainty and change are now almost standard terms in the lexicon of most organizations. On the one hand, risk, as the language of rational discourse, has become the ‘generic unit of governance’, useful in justifying a governmental focus on efficiency and cost—benefit based decision-making (Fisher 2003). On the other hand, we see the emergence of a World Risk Society dominated by themes of uncontrollable financial, ecological and terrorist risk; according to Beck a new public is surfacing that is united by fear (Beck and Beck-Gernsheim 2002: 46). In these conditions, it is not surprising that there is a widespread loss of faith in traditional systems of authority (Kochan 2003). Feigning ‘control over the uncontrollable’ (Beck and Beck-Gernsheim 2002: 41) by governments and corporations is a recipe for mistrust.

Corporations in particular are suffering a crisis in credibility, demonstrated by repeated surveys and polls in recent years. For example:

According to the 2002 global survey conducted by Environics, 48 per cent of people have little or no trust in public companies (Business in the Community, Research Review 2004; Grayson and Hodges 2004).

The 2003 Mori Trust Monitor carried out on behalf of the British Medical Association found that 60 per cent of British adults do not expect corporate leaders to tell the truth (Grayson and Hodges 2004).

Increasing shareholder activism and the upsurge in the socially responsible investment industry demonstrate growing public preparedness to question corporate power. An apparent factor is heightened recognition of the powerful role that corporates have played in setting priorities in the capitalist world (Stanfield and Carroll 2004). The recent dramatic collapses of corporations such as Enron confirm belief that corporations cannot maintain their relative independence unless a new system of governance is installed to ensure transparency, morality and ethics (Clarke 2004). The passing of the Sarbanes— Oxley Act in the US is an illustration of one government's reaction to this perceived need.

However, such legislation needs to be accompanied by structures and processes designed to enable governance of the shared responsibilities for the management of social and environmental risk. The interconnected phenomena of increased information flows, heightened conditions of risk and uncertainty and growing mistrust of established institutions point to the importance of public inclusion and external assessment. Corporations and organizations of all types are now aware that they must obtain a ‘licence to operate’ from a sceptical and aware public (Elkington 1998). In an ecological age and a discursive society, increasingly challenged by conditions of uncertainty and risk, organizations regard legitimacy and symbolic capital as key resources and sources of power (Beck 1992; Tsoukas 1999). In Livesey's (2001:78) words: ‘the function of corporations has become, willy-nilly, political, and the production of green ideologies may be as important to competitive survival as the production of goods and services’.

THEMES IN POLITICAL THEORY

Traditional systems of democracy

Risk brings with it the need for coordination and control: matters for the governance of nations and of all types of organizations. The question is how to redesign current systems of governance to ensure that power is exercised in a way which is inclusive and where the parties can be held publicly accountable.

How well equipped is democratic political theory to deal with these new challenges for governance? In the capitalist world, two constellations of ideologies are typically contrasted as opposing systems of democracy: the ‘New Right’ and social democracy. The former is associated with a belief in individual freedom and property rights, free enterprise and market fundamentalism; the latter with a more proactive role for the state whose contract is to intervene in order to protect collective interests. Each ideology has apparent compatibilities and incompatibilities with a system which could support the democratic management of risk and the development of a sustainable society.

Reflecting the public choice reasoning that individuals in organizations will always act in their own self-interest, ‘New Right’ principles support the devolution of state authority to decentralized decision-making arenas (Pierson 1993; Bellamy 1999). This may seem to privilege civil society and foster more community-based involvement in decision-making. However, the New Right principles of minimalist government, individualization and market fundamentalism do not in fact support the protection and management of public goods (Eckersley 1992; Giddens 1998; Stewart and Jones 2003).

In the other camp, supporters of social democracy argue that specific policy incentives implemented by an interventionist state are crucial if corporate governance is to take account of the precautionary principle and encourage production of ecologically and socially responsible goods and services (Mol and Sonnenfeld 2000). However, critics of social democracy highlight the reliance of its governance systems upon bureaucratic rationality. In this view, the dependence of the interventionist social democratic state on administrative and planning systems restricts the sense of community and collaboration necessary for effective participatory risk management (Goodin 1992; Farrell and Morris 2003).

Given these limitations on both sides, an increasing number of political theorists now argue that neither system is suitable for dealing with complex decision-making, particularly where it involves social and environmental risk. Basically, both points of view rest on shared understandings of liberal pluralism: both aim ‘to reach a fair and efficient compromise’ between differing individual points of view (Miller 1993: 74). Limitations to the principle of fair and reasonable assessment of individual preferences are well recognized. They include the difficulties in ensuring individual preferences are aggregated fairly and preventing voters from strategically manipulating their vote (Miller 1993: 80). These limitations are compounded when powerful actors such as corporations have considerable economic resources and strategic interests at stake in the allocation and management of risk. The ideal of consensus reached between the interest groups leads to an emphasis on short-term social stability, which again can be exploited by powerful elites or authority figures and counter the long-term perspective required for genuine environmental governance that produces genuinely sustainable outcomes.

The key principle of the pluralist tradition is the competition between interest or pressure groups which are seen as composed of coalitions of like-minded citizens. The assumption is that all citizens have similar capacity (such as time and information) to form interest groups. Hence many minorities which do not are effectively excluded. Pluralist theory also does not give consideration to the potentially diverse make up of any particular interest group — homogeneity within the group is assumed whereas there can be very diverse interests within a group.

These issues become further problematic when alternatives presented to voters involve highly technical and interdisciplinary areas of knowledge associated with high degrees of uncertainty. The dependence of many environmental decisions on knowledge of this kind further compromises the...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• List of illustrations
• Notes on contributors
• Series editor’s preface
• Acknowledgements
• Introduction
• Part I Introduction Governance and sustainability challenges
• Part II Limitations of existing models of corporate governance
• Part III Redesigning governance for sustainability
• Index