Managing Responsibly

Alternative Approaches to Corporate Management and Governance

Venkataraman Nilakant, Jane Buckingham

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781409427452
• eBook ISBN: 9781317101437
• Topic: Business
• Subtopic: Business General
• Index: Business

In the wake of financial meltdown and environmental disaster, employers increasingly demand that managers have an understanding of ethical decision making, corporate social responsibility and values-based management. Business ethics is therefore increasingly being taught in business schools and is a rapidly developing research topic. Managing Responsibly explores the limitations of the thinking that dominates Western corporate and business culture. Contributors then draw on non-Western traditions and experience to suggest workable inter-cultural models to enhance organizational effectiveness in an increasingly globalised environment. With chapters written by specialists in economics, management, ethics, health sciences and history, the editors - one a historian and one a management specialist - ensure a truly interdisciplinary overall approach. Part One highlights the acute need for less self-interested approaches to management if local and global communities and the environment are to escape on-going damage and exploitation. Part Two draws on values from Indian and Maori traditions to propose alternatives to Western models of business ethics. Part Three suggests ways of approaching the challenges of developing sustained ethical leadership in the contemporary globalised economy. This original addition to Gower's Corporate Social Responsibility Series will appeal to a wide range of teachers, researchers and higher level students of management, as well as practitioners participating in executive development programmes. It will also serve the needs of those with a more specialist interest in business ethics and in sustainable and responsible management.

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Introduction: Globalizing Corporate Social Responsibility – Challenging Western Neo-liberal Management Theory

Jane Buckingham and Venkataraman Nilakant

The Context of Business

Theories of management and organization are rarely, if ever, neutral or value-free. Our ideas of how to manage and lead corporate organizations are heavily dependent on the nature of our context. In other words, time and place influence not only our ideas of the world, but also our models of management and governance. In particular, our institutional environment – the norms, values and myths – is particularly important to how we view management and leadership.

At the time of writing, the world faces multiple challenges. Four are particularly significant. First, economic growth in the developed countries has slowed down, thanks to the global financial crisis of 2009–10 that largely resulted from the irresponsible actions of financial institutions in the United States. In both the United States and Europe, soaring unemployment, increasing bankruptcies and the threat of depression have led to greater intervention by governments in the conduct of business. In the United States, the middle class, long held as the bastion of free market capitalism, now appears to be an endangered species. Second, our consumption-driven lifestyles have endangered the physical environment through increased carbon dioxide emissions that have contributed to global warming. Climate change has severely alarming consequences for multitudes of people across the world. Third, while deregulation and globalization have brought prosperity to many regions in the world, they have also deepened the divide between the rich and the poor. The world today is a very unequal place. Fourth, the rise of trans-national religious fundamentalism has resulted in the globalization of terror.

Paradigm Change or Business as Usual?

In these tumultuous times, these four challenges call into question our prevailing values and beliefs about the appropriate conduct of business. How relevant are our prevailing theories and models of corporate management in a changing world?

There are those who would argue that our prevailing models of management and leadership are robust and do not need any fundamental changes. There are others who view these models of management and leadership as part of the problem. This book is based on the premise that we need to re-examine our current models of management and leadership if we are to survive the present and enrich the future. First, let us examine the current model.

Persistence of Flawed Economic Theories

While there are multiple reasons for the global financial meltdown of 2009, our prevailing model of corporate management is also partly to blame. Ghoshal (2005) argues that bad economic theories of management are destroying good management practices. Referred to as ‘the contractarian perspective’ in this book, these economic theories view organizations, not as social arrangements, but as a nexus of contracts (Jensen and Meckling 1976). They assume that managers act solely to enhance their self-interest, which differs from the welfare of the shareholders. For that reason, managers cannot be trusted to act in the best interests of shareholders. Consequently, shareholders have a claim on the fiduciary duty of managers.

Ghoshal (2005) argues that the mindless adoption of these theories has led to bad management practices. Research has shown that using a set of good management practices characterizes high-performance organizations. Pfeffer (1998) identified the seven ‘high performance management practices’ that can lead to innovation, productivity and sustained profitability as follows: employment security, selective hiring, self-managed teams and decentralization, extensive training, reduction of status differences, sharing of information, and high and contingent compensation. However, there is little evidence of the widespread use of these practices in contemporary corporate organization (Pfeffer 2007).

The extreme case of Scott Paper illustrates the dysfunctional consequences of management practices based on the economic model. Corporate executive Albert (Al) Dunlap, who claimed that shareholders were the number one constituency, took over Scott Paper in the United States in 1994. Nicknamed ‘Chainsaw Al’, he promptly fired 11,000 employees and sold several businesses (Beer and Nohria 2000). By doing so, he tripled shareholder value as Scott Paper’s market value rose from about US$3 billion in 1994 to about US$9 billion by the end of 1995. As Beer and Nohria note: ‘The changes at Scott Paper unfolded like a military battle plan. Managers were instructed to achieve specific targets by specific dates. If they didn’t adhere to Dunlap’s tightly choreographed marching orders, they risked being fired’ (Beer and Nohria 2000: 136). However, the short-term success had devastating long-term consequences: ‘Dunlap trebled shareholder returns but failed to build the capabilities needed for sustained competitive advantage – commitment, coordination, communication, and creativity. In 1995, Dunlap sold Scott Paper to its long-time competitor Kimberly-Clark’ (Beer and Nohria 2000: 137).

Ghoshal (2005) argues that the management practices that underlay Scott Paper are a direct consequence of flawed economic models of organization. He identifies agency theory and transaction cost economics as particularly damaging, yet these became the dominant theories of organization in the last two decades:

Combine agency theory with transaction costs economics, add in standard versions of game theory and negotiation analysis, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder-value-obsessed, win-at-any-cost business leader of which Scott Paper’s ‘Chainsaw’ Al Dunlap and Tyco’s Dennis Kozlowski are only the most extreme examples.

(Ghoshal 2005: 85)

Despite overwhelming evidence that these economic theories are flawed, they have continued to persist in management education, research and practice. Why is this so? One reason could be that social science theories, even the positivist ones, are not value-neutral. They incorporate implicit assumptions about what the world is like or what it should be. One might argue that an ideology of neo-liberalism underlies present economic theories of organization.

There is little doubt that the rise of neo-liberalism in the 1980s and 1990s has strongly shaped our current theories of management and business. Neoliberalism views individual freedom as the indicator and goal of human progress. In the neo-liberal perspective, individual liberty has priority over other concerns (Rawls 1971). However, neo-liberalism goes beyond Rawls’moderate formulations to assert that personal liberties, including property rights, should take precedence over all other goals (Nozick 1974). Taken together, neo-liberalism ‘proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade’ (Harvey 2005: 2). Individual utilities and personal well-being are best served by pursuing self-interest – hence the ultimate goal of human action from a neo-liberal perspective is the pursuit self-interest. The philosophical foundation of neo-liberalism is more than two thousand years old. Its intellectual origins can be traced to the work of Plato, Hobbes, Mandeville, Bentham and Machiavelli (McCloskey 2006). However, in the last two hundred years, in the field of economics, it has led to a narrow view of self-interest maximization as the sole motivation of human conduct, leading to a neglect of other ethical issues that may also be important in explaining human conduct. Neo-liberalism is a major cause of economic deregulation and the diffusion of free market capitalism to different parts of the world.

The prevailing, yet relatively recent, model of corporate management is part of the neo-liberal revolution that has swept across the world since the early 1980s. In the 1980s, along with the rise of neo-liberalism, there was a transfer of power and control from corporate managers to shareholders (Useem 1993, Useem 1996). It has long been held that the purpose of business is to make a profit. Under shareholder capitalism, this was refined further. The purpose of business was redefined as the enhancement of shareholder value. In simple terms, the prevailing model of corporate management privileges shareholders over other stakeholders. This view is now so entrenched in the business psyche and in business schools that it is taken for granted (Sundaram and Inkpen 2004). Yet, not long ago, Peter Drucker, considered the father of modern management, argued that the purpose of business was to create a customer. He regarded the goal of making a profit as false and irrelevant (Drucker 2001).

Ideology of Neo-liberalism

An ideology of ‘liberalism’ underlies the economic model of corporate management (Friedman and Friedman 2002). The two main premises that shape theory within this ideology are: (a) a commitment to individual freedom, and (b) a belief in human failings (Ghoshal 2005). Taken together, these lead to a theory of management in which individual self-interest is seen as the driving force of human interactions. As this theory is based on an ideology of individual freedom, it avoids issues of morality and ethics, since these are seen to fall within the purview of individual liberty. The result is an economic model of corporate management where the notion of justice is the freedom to pursue individual self-interest as long as this does not disadvantage shareholders (Sen 1987, Boatright 1996, Stiglitz 2004). But, as Ghoshal reflects: Why should shareholders be privileged over other constituents?

We also know that the value a company creates is produced through a combination of resources contributed by different constituencies: Employees, including managers, contribute their human capital, for example, while shareholders contribute financial capital. If the value creation is achieved by combining the resources of both employees and shareholders, why should the value distribution favor only the latter? Why must the mainstream of our theory be premised on maximizing the returns to just one of these various contributors?

(Ghoshal 2005: 80)

The current economic theory of corporate management is based on the premise that a business firm is a nexus of contracts between different constituents such as shareholders, managers, employees, suppliers, customers and the community. Each constituent is expected to act rationally, which is defined as the pursuit of self-interest. Pursuit of self-interest is not only rational, but it also makes the system economically efficient. Economists argue that the shareholders, as investors, bear the most risk if the enterprise were to collapse. Therefore, the economic theory argues, it is the duty of managers to promote the interests of shareholders over others (Jensen and Meckling 1976, Boatright 1996).

This means that the starting point for any alternative model of corporate management would have to be based on different principles of justice. Clearly, shareholder value enhancement as the exclusive goal of corporate management needs to be re-examined. Corporate management has responsibilities that extend beyond shareholders. Yet to argue so without an economic basis would be to risk sermonizing. There are two main reasons to contest the exclusive attention to shareholder value in business firms. First, as discussed above, the idea of focusing exclusively on shareholder value is based on flawed economic theories. Second, as a practical goal, it is limiting and fails the test for a healthy business enterprise.

Efficiency, Fairness and Sustainability

As a human enterprise, the firm also needs to be fair. It must necessarily adhere to principles of justice that are part of its wider environment. In addition, it must endure beyond the short term. In other words, it needs to be sustainable. Therefore, any theory of corporate management must address three main issues: efficiency of the enterprise, the fairness of its dealings, and sustainability of its activities. If a business enterprise were not efficient, it would not be sustainable regardless of how fair it is. Similarly, if a business enterprise were not seen to be fair, it would find its legitimacy questioned and its long-term survival would be at risk.

Would an organization that is both efficient and fair necessarily be sustainable? This depends on our notion of fairness. As Rappaport notes: ‘investment and corporate managers have a mutually reinforcing obsession with short-term performance, with earnings the most widely accepted metric’ (Rappaport 2005: 65). If fairness is defined as exclusive attention to the short-term interests of a small group of investor-shareholders, the enterprise as an ongoing entity may not be sustainable in the long term. The case of Scott Paper, discussed above, attests to this notion. Therefore, for a business to be sustainable in the long term, it would have to redefine its goals, and particularly its notions of justice and fairness.

Fairness needs to be defined more broadly as the opportunity for stakeholders such as shareholders, employees, customers, suppliers and the community to enhance their welfare as long as their pursuit of their interests does not disadvantage others. Implicit in this understanding of fairness is an inclusive attention to the interests of a larger range of people recognized as stakeholders. This definition does not challenge the fundamental assertion of economic theory that people pursue their self-interest, but requires the firm to attend to the interests of stakeholders other than financial shareholders or those with a dominant role in the company’s governance. Although limited access to wealth and corporate power may restrict the opportunities for the wider groupings of stakeholders to act in their own interests, fairness would require that their self-interest be taken into account in company activity. Sustainability requires the capacity to manage the tensions between fairness and efficiency likely to arise in the long term as a firm pursues profit. Broadening the stakeholder base and adopting a notion of fairness, which includes the interests of a wider range of stakeholders, can provide social and intangible resources such as loyalty and flexibility, which will support the firm in a complex economic environment. It is relatively easy for an organization to be both efficient and fair in the short term when the notion of fairness is limited to attention to the needs of a circumscribed group of stakeholders. However, in the long term, such a limited notion of fairness may be incompatible with efficiency. Allowing a broader stakeholder base to pursue self-interest in ways that support company efficiency but are not detrimental to others’ welfare builds a broader-based social capital investment into the firm’s ongoing efficiency. Recognition of the interests of stakeholders, such as employees, customers and the community, gives the firm an investment base with deeper economic and social roots, and so gives it a wider range of resources for dealing with possible competition between the self-interests of various stakeholder groups and economic challenges.

Adopting a notion of fairness broader than the one that exists in current economic theory renders both theory-building and practical action inherently complex. But it also encourages management thinking that is more nuanced, relevant and rich. Taking this one step allows for a more truly libertarian interpretation of the ‘self-interest’ basis of economic theory than the current neo-liberal approach. Current theory views shareholder welfare in terms of resources. The company is required to provide increasing resources to shareholders in terms of dividends. At the same time, majority shareholders are of greatest value to the company, and the company is inclined to work harder to both attract and retain high capital investing shareholders (Young and O’Byrne 2001: 5–8). As Booth notes: ‘It is a normative statement that creating shareholder value (CSV) is the correct goal of the firm’ (Booth 1998: 1). Even while retaining the current neo-liberal understanding of justice as primarily an aspect of individual liberty, expanding the notion of fairness to include the interests of broader, less well-resourced groups of stakeholders begins to challenge existing corporate practice.

In addition to limiting the firm’s practice of fairness, exclusive focus on shareholder wealth creates organizations typically characterized by a culture of compliance and control. While there is movement towards developing more integrated and consultative business models which recognize the ‘self-organizing’ character of employee interactions within firms and which break up internal hierarchies, command-and-control hierarchies remain dominant in both the private and public sector (Woods 1996, Olson and Eoyang 2001, Seddon 2005). Focus on shareholder wealth tends to create firms with a command-and-control hierarchy, where employees, including managers, are expected to do what they are told in the pursuit of a single goal. In this context, the opportunity to develop sustainability in terms of the firm’s human capital and its capacity to inspire and support research and development are severely limited. Employees, particularly those with high aspirations, are likely to find the culture highly constraining, and the culture itself tends to stifle innovative thinking from the lower ranks (Manz and Simms 1993). The organizational culture in such firms is not oriented towards personal growth and development, despite often having substantial human resource procedures in place. As a manager at Scott Paper during Al Dunlap’s tenure observed: ‘I have a [profit] goal of $176 million this year, and there’s no time to involve others or develop organizational capability’ (Beer and Nohria 2000: 136).

The critiquing of the position taken by Scott Paper is implicit in corporate social responsibility (CSR) arguments, which emphasize the importance of integrating community into the functional orientation of the company. As Joseph argues: ‘CSR in reality is the alignment of business operations with social values’ (Joseph 2009: 403). When the company’s goal of serving the interests of the shareholder is widened to include the interests of multiple stakeholders – including employees, suppliers, customers and the community – the limited capacity of command-and-control hierarchies in discovering and answering to these broader interests becomes evident. The broader stakeholder approach to the firm cannot ensure that groups other than shareholders will be treated m...

Table of contents

• Cover Page
• Title Page
• Copyright page
• Contents
• List of Figures and Tables
• Notes on Contributors
• Preface
• Acknowledgements
• 1 Introduction: Globalizing Corporate Social Responsibility – Challenging Western Neo-liberal Management Theory
• PART I MAKING MANAGERS RESPONSIBLE
• PART II TRADITIONAL VALUES AND ETHICAL MANAGEMENT
• PART III CREATING ETHICAL LEADERSHIP
• Index