Assessing the Compatibility of Business Ethics and Sustainable Development

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Examensarbete i Hållbar Utveckling 56

Assessing the Compatibility of Business

Ethics and Sustainable Development

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Uppsala University Uppsala Center for Sustainable Development (CSD)

Assessing the Compatibility of

Business Ethics and Sustainable Development

Matthias David Witt, BA UZH in Economics and Business Administration Date of Seminar: 2012/02/13

Date of Submission: 2012/02/20 Date of Resubmission: 2012/02/20

MSc in Sustainable Development 2010 - 2012

Degree Project E in Sustainable Development (1GV038), 30 ECTS Supervisor: Gloria Gallardo

Contact details: Matthias David Witt Langholzstrasse 32 CH-6333 Hünenberg See Switzerland

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ABSTRACT

Since 1987, the United Nations has promoted sustainable development as a form of development that takes into account and balances economic, ecological, and social considerations. To achieve sustainability, the United Nations has repeatedly required private businesses—among other actors—to assume a broader set of social responsibilities. This is though highly contested in the corporate world and among economists. To throw light on this debate, the aim of this paper is to assess whether contemporary theories of business ethics are compatible with the Brundtland notion of sustainable development. For that reason, the responsibilities for sustainable development that corporations should assume are deduced from the Brundtland Report; followed by an introduction to the field of business ethics and a detailed discussion of major contemporary theories reflecting instrumental, integrative, political, and ethical approaches to corporate social responsibility. By comparing the different responsibilities the compatibility of sustainability with each discussed theory on business ethics is assessed. This paper finds that the compatibility is low for instrumental theories, moderate for integrative and political theories, and high for ethical theories on business ethics. Nevertheless, ethical theories assume a normative perspective on sustainable development, idealizing how corporations ought to act in a sustainable world. In reality, the world is far from sustainability. This is not least a result of national economic and legal policies maintaining conditions and structures that continue to promote globalization and free markets. It is argued that the combination of fierce competition and corporations’ opportunities to take advantage of weak legal systems in emerging and developing countries leads firms to further subscribe to an instrumental approach to business ethics. It is suggested that international politics develop a global legal framework based on sustainable development that provides competitive conditions at arm’s length.

At the same time, recent management research is presented that suggests that corporations can promote sustainability if they contribute solutions to the social and environmental problems of our time. The pursuit of sustainability, therefore, results more from business opportunities than from any ethical convictions.

Keywords: Sustainable development, business ethics, corporate social responsibility (CSR),

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LIST OF TABLES

Table 1: Overview of milestones in the economic development, political and environmental awareness, UN conferences on environment, development and sustainable development, and theories and related approaches on CSR

between 1950 and 2020...4

Table 2: Responsibilities of corporations for sustainable development ...23

Table 3: Theories on Corporate Social Responsibility ...28

Table 4: The UN Global Compact...38

Table 5: The benefits of participating in the UN Global Compact ...39

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LIST OF FIGURES

Figure 1: Parsons’ AGIL paradigm...7

Figure 2: The relationship between ethics and the law...10

Figure 3: The three dimensions of sustainable development ...15

Figure 4: The Pyramid of CSR ...31

Figure 5: The stakeholders of the corporation...33

Figure 6: Compatibility of instrumental theories with proposed responsibilities for sustainable development...41

Figure 7: Compatibility of integrative theories with proposed responsibilities for sustainable development...42

Figure 8: Compatibility of political theories with proposed responsibilities for sustainable development...43

Figure 9: Compatibility of ethical theories with proposed responsibilities for sustainable development...44

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LIST OF ABBREVIATIONS

CC Corporate Citizenship

CSR Corporate Social Responsibility

FDI Foreign Direct Investment

MNC Multinational Corporation

NGO Non-Governmental Organization

TNC Transnational Corporation

UN United Nations

UNCED United Nations Conference on the Environment and Development

UNCHE United Nations Conference on the Human Environment

UNGA United Nations General Assembly

UNGC United Nations Global Compact

WCED World Commission on Environment and Development

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1 INTRODUCTION

Man has the fundamental right to freedom, equality and adequate conditions of life, in an environment of a quality that permits a life of dignity and well-being.

(Stockholm Declaration, Principle 1, 1972)1

1.1 Background

During the World Summit on Sustainable Development (WSSD) in Johannesburg in 2002, held on the tenth anniversary of the UN Conference on the Environment and Development (UNCED) in Rio de Janeiro, the then UN Secretary-General Kofi Annan (2002) stated that:

And more and more we are realizing that it is only by mobilizing the corporate sector that we can make significant progress. The corporate sector has the finances, the technology and the management to make this happen (Annan, 2002, para. 5-6).

By ‘this’ Annan meant sustainable development. Speaking in front of executives, he urged them to consider their businesses as important and leading actors for making sustainable development happen. Although Annan’s call to action was easy to understand, he gave the auditions no answer about how corporations could play an active role and successfully promote sustainable development in practice. If corporations are to be concerned with sustainable development, they should have access to some form of reliable academic guidance for adequate corporate behavior for sustainability (Moon, 2007). The scientific foundation for the role of business and its contribution to sustainable development remains vague, even though the number of academic articles on this subject has increased lately (Moon, 2007; Payne & Raiborn, 2001; Porter & Kramer, 2011; Rushton, 2002; Steurer, Langer, Konrad & Martinuzzi, 2005).

According to some scholars, the research on corporate behavior for sustainable development has thus to be seen as a part of the broader concept of business and society relations (Garriga & Melé, 2004; Hansen, 2010). The research field of ‘business and society’ (Schwartz & Carroll, 2008) focuses on exploring the “relationships that exist between business and society” and “the contributions each can make to a better quality of life for all people” (Wood, 1991, p. 385). While the relationship between business and society has been

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extensively researched, both the purpose and extent of this relationship have been subject to a highly controversial discourse among scholars in the past (for an overview see Whetten, Rands & Godfrey, 2002). Originally, there are two opposite perspectives on the social role of business. One the one hand, businesses, based on their influential position and the “far-reaching scope and consequences of their decisions” (Lee, 2008, p. 58), are obligated to consider the social consequences and recognize the responsibilities resulting from their corporate activities. Corporations are acting socially responsible if, and only if, corporate outcome is “desirable in terms of the objectives and values of our society” (Bowen, 1953, p. 6). Hence, corporations are assumed to follow the primacy of social well-being. On the other side, Friedman (1970, p. 34), a fierce proponent of neoliberalism and awarded with the Nobel Prize in economics in 1976, notes that the only responsibility of business is “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Primacy is given to profit maximization, and social concerns are only taken into account if their consideration maximizes shareholder value (Garriga & Melé, 2004).

Considering this substantial difference between the diametrically opposed perceptions of Bowen (1953) and Friedman (1970), Wallich and McGowan (1970) point out that the social role of corporations respectively their social responsibilities would always remain controversial if they could not be aligned with shareholder interests. Consequently, they introduced a ‘new rationale’ that promotes the social responsibilities of corporations without compromising the interests of their shareholders. Assuming that corporate organizations are embedded in and interacting with society, and if this surrounding society deteriorates for some reasons, corporations are likely to lose the basis for their commercial operations (Wallich & McGowan, 1970). As a result, corporations have a long-term interest to support and sustain the well-being of the society in which they operate (Lee, 2008).

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resources (Rockström et al., 2009)2 and an uneven distribution of accumulated wealth among regions, nations and individuals (World Bank, 2009). Inequality both within and between countries has proven to be one of the main obstacles to human development (UN, 2009). Multinational corporations (MNCs, also referred to as transnational corporations, TNCs) are generally understood to play an active role in both promoting and taking advantage of globalization through the expansion to and diversification of production into new regions and markets (Deresky, 2008). On the other side, non-governmental organizations (NGOs) are assumed to have evolved as counteracting force in the face of the steadily increasing power of MNCs (Palazzo & Scherer, 2006). Spar and La Mure (2003) assess the impact of NGOs on global business and note a tendency of NGOs to blame MNCs for growing social inequality and environmental degradation.

Scherer, Palazzo and Matten (2009) adduce two reasons for reconsidering the social responsibility of MNCs. First, globalization reduces the capacity of national governments and institutions to regulate and enforce socially desirable corporate behavior. Second, MNCs are increasingly exposed to heterogeneous social, cultural and political values due to their global activities. Consequently, MNCs are assumed to often operate in ‘legal limbo’ as they are no longer subject to a given legal system, but can rather choose between many alternative frameworks considering economic factors. This means that people affected by economic and political decisions are less and less involved in the decision-making process (Palazzo & Scherer, 2006).

Table 1 provides an overview of important events for the economic development, the increase in political awareness for environmental issues, the corresponding UN conferences on the environment and sustainable development, and the historical development of theoretical approaches to corporate social responsibilities (CSR) between 1950 and 2020. As can be seen from Table 1, all four dimensions are interlinked, yet economic development and its consequences having preceded the political awareness for environmental issues and actions by the United Nations (UN). Indeed, it took the international community almost four decades to address the need for sustainable development. Interestingly, the academic debate about CSR has evolved in parallel with the economic development.

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Table 1: Overview of milestones in the economic development, political and environmental

awareness, UN conferences on environment, development and sustainable development, and theories and related approaches on CSR between 1950 and 2020.

Source: Author based on Baylis, Smith & Owens (2008); Crane & Matten (2010); McNeill (2001).

If the implications of globalization call for greater corporate responsibilities, Walsh (2005) notes that established management theories hitherto do not sufficiently answer questions regarding type and scope of such responsibilities in a global context. For example, can MNCs regulate themselves, and if so, why? Should MNCs provide global public goods such as education, health, and environmental protection? What are limits to corporate responsibility? Providing answers to these questions has traditionally been the objective of studies on business ethics. Although attached with little importance in the past (Crane & Matten, 2010), theories on business ethics have gained attention and become more important in the management discourse lately (Scherer et al., 2009).

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adopting and promoting sustainable development. This raises the question of whether theories of business ethics can also serve as academic basis for corporate sustainable behavior.

1.2 Aim of the study

The aim of this paper is to assess whether contemporary theories of business ethics are compatible with the notion of sustainable development. Therefore, this paper seeks to explore and outline the role of business for sustainable development and to compare this role to the social roles of business suggested by selected theories of business ethics. The purpose of this thesis paper is to answer the following research questions:

(1) What type of responsibilities for sustainable development does the Brundtland Report suggest corporations should assume?

(2) Which contemporary theories of business ethics, if any, are possible to combine with the notion of sustainable development and the responsibilities for sustainable development of corporations?

(3) If the theories discussed in (2) are deficient, are there any present contributions to the business management literature that take into account the responsibilities for sustainable development of corporations?

1.3 Scope and limitations

Although the idea of sustainable development is a relatively new one, a large number of varying definitions of sustainable development exist in the academic literature. For the aim of this paper, the notion of sustainable development is limited to the classic definition provided by the Brundtland Commission in 1987, which was later adapted during the World Summit on Sustainable Development in Johannesburg in 2002.

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1.4 Methods

This study is exclusively based on a literature review of the academic discourse on corporate responsibilities, which is the main subject of business ethics theories; an analysis of the Brundtland notion of sustainable development regarding the expected corporate sustainable behavior; a compilation of selected business ethics theories; and a comparison of these selected theories with the expected corporate sustainable behavior according to the Brundtland notion.

In the 1950s, the American sociologist Parsons developed his theory on the basic functions that every system is required to maintain if it is to persist (Holton, 2001). According to Parsons (1951, 1961), any system is faced with four interconnected problems:

(1) The extraction and distribution of resources among the system.

(2) The definition of system goals, including the provision of resources to achieve these goals, which requires a system to prioritize its goals.

(3) The coordination and maintenance of viable relationships among different parts of the system.

(4) The adherence all parts of the system to appropriate values, which motivate interaction within the system and resolve conflicts between different parts of the system.

According to Parsons (ibid.), the existence of these problems requires any system to develop the following abilities:

(a) Adaptation, or the ability of a system to interact with the environment and adapt to changing external conditions.

(b) Goal attainment, or the ability of a system to define and pursue goals.

(c) Integration, or the ability of a system to establish and secure cohesion and inclusion based on broad and converging values and norms.

(d) Latency, or latent pattern maintenance, or the ability of a system to maintain the basic structures and value patterns, and thus enabling the integration throughout time.

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To fulfill these four functions, a system forms specific subsystems that deal with the respective tasks (Parsons, 1977). In a broad and abstract action system, these subsystems consist of:

(a) A behavior system based on needs that organizes individual actions.

(b) A personal system based on motives that aligns individual actions with set goals.

(c) A social system based on social roles that enables interaction between and integration of different actors.

(d) A cultural system based on values that organizes the values, norms, and symbols of a system on which different actors interact in the system.

Each action, whether of individuals or groups (including organizations), is always a result from these four subsystems. Moreover, each subsystem can be subdivided further, using the four required functions for the system. For example, the social system consists of an economic system (adaptation), a political system (goal attainment), a commonwealth (integration), and a cultural system (latency). Figure 1 depicts these connections in detail.

Adaptation Goal attainment A G Behavior system Latency Integration L I A

Economic system Political system

Cultural system L I Personal system L I G Commonwealth A G Social system Cultural system

Figure 1: Parsons’ AGIL paradigm. Source: Author based on Parsons (1951; 1961; 1977).

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(hereinafter WCED), 1987) envisions a lasting system for humanity on earth. It is assumed that the Brundtland Report (ibid.) describes the world as social system, which requires Parsons’ four abilities to persist in the future. For the purpose of this paper, a firm’s responsibilities for sustainable development can then be classified into economic responsibilities (related to resources and economics), political responsibilities (related to goal definition and achievement), social responsibilities (related to integration and securing

cohesion), and ethical responsibilities (related to culture and values).

1.5 Outline

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2 CONCEPTUAL FRAMEWORK

2.1 What is a corporation?

The corporation is the prevalent type of business entity in most market economies (Crane & Matten, 2010). Gutenberg (1951) states three constitutive features of the company, including the principle of profit maximization, the principle of private property, and the principle of autonomy. These principles are usually stated in a nation’s economic order and allow companies to freely engage and invest in economic activities within the boundaries of the national law. From a legal perspective, corporations are normally regarded “as independent from those who work in them, manage them, invest in them, or receive products or services from them” (Crane & Matten, 2007, p. 42). Corporations are thus separate entities in their own right, which has significant implications for the understanding of the responsibilities of corporations:

(a) Legally, corporations are broadly considered as artificially created entities. As ‘artificial persons’ corporations are entitled to certain rights in society, but are also obliged to legal responsibilities similarly to individual citizens.

(b) Although the shareholders own corporations through their shares, corporations exist independently of them. Shareholders’ responsibilities for a corporation’s misconduct, including debts and damages to people and the environment, is legally limited to their equity stake in the company.

(c) Where the shareholders do not manage corporations themselves, appointed managers and directors have a fiduciary responsibility to represent the shareholders’ interests for the benefit of the shareholders. Narrowly defined, corporate executives are generally expected to protect shareholders’ equity against external claimants, while putting their personal interests aside.

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Figure 2: The relationship between ethics and the law. Source: Adapted from Crane and

Matten (2007).

On the other side, why, can be argued, should corporations assume a broader set of responsibilities that go beyond legally binding obligations? These reasons are outlined in subsequent parts.

2.2 Economic growth and profit and shareholder value maximization principles

In economics, two basic assumptions are that personal needs are unlimited while the resources to meet these needs are limited. This means that all needs cannot be satisfied in an economy at a given point in time. However, an economy can gradually improve and meet increasingly more needs. In neoclassical economic thinking, economic growth (also economic progress) is mainly the result of profit-maximizing activities and initiatives on part of corporations (Henderson, 2005). In their own interests, firms maximize their profits by maximizing the difference between its total revenues and its total costs. According to Brickley, Smith, Zimmerman & Willett (2003, p. 25), a firm creates value “whenever it sells something whose benefit to the customer is greater than the costs incurred by both the company in producing the product and the customer in owning it.” Based on the price, the created value is shared between the customers and the corporation. The more customers are willing to pay above the settled price, the more value they capture. By contrast, a firm that can perfectly differentiate its customers according to their willingness to pay captures the entire value (Hirshleifer, Glazer & Hirshleifer, 2005). (For a generic discussion of value creation and capture, see Lepak, Smith & Taylor, 2007).

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value. Shareholders, through their investment, are by definition the residual claimants of the firm (Fama & Jensen, 1983) and, therefore, entitled to the residual value created by the firm. Lately, shareholders are increasingly interested in the return on their investments, that is the cash that they receive from the firm (Brickley et al., 2003). Managers on part of the firm can increase shareholder value when they find ways to increase present and future cash payouts to shareholders, primarily by either increasing revenues or reducing costs. Importantly, Brickley

et al. (2003, p. 33) emphasize, “creating value is not sufficient for maximizing shareholder

value. It is also important for firms to capture that value.” In a competitive environment, firms may have difficulties in capturing value for a considerable time. Even if the firm finds a way to generate profits (for example, through a process innovation that decreases the production costs), competing firms will eventually imitate the successful firm to profit for themselves (Hirshleifer et al., 2005; Lepak et al., 2007). Competition, therefore, leads to lower prices and reduces the value that the innovating firm can capture. Most notably, competition benefits customers, who can buy highly valued products and services at competitively low prices (Brickley et al., 2003).

From an economic point of view, the maximization of profits and shareholder value seem to be desirable principles. On the other side, this one-sided orientation of firms is said to be the cause of some of the largest environmental and social problems of our time. Therefore, the shareholder value principle is challenged against the notion of sustainable development in subsequent parts.

2.3 Brief history of environmental issues on the international political agenda

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pollution of the atmosphere, watercourses, and oceans.3 Nevertheless, such issues were “hardly the stuff of great power politics” nor of the UN General Assembly (UNGA) (Baylis, Smith & Owens, 2008, p. 353).

Then, in the late 1960s when environmental problems became more apparent, the involved Swedish government proposed to hold an international conference on environmental issues. Only a few years later, the first UN Conference on the Human Environment (UNCHE) was held in Stockholm in 1972. The defined goal was:

[To] provide a framework for comprehensive consideration within the U.N. of the problems of the human environment in order to focus Governments’ attention and public opinion on the importance of this question and also to identify those aspects of it that can only or best be solved through international co-operation and agreement (UNGA, 1968, quoted as in Galizzi, 2005, p. 961).

The main achievement of this conference was the creation of the UN Environment Programme (UNEP) and that many governments formed special environment departments to prevent further environmental degradation (Chasek, Downie & Welsh Brown, 2010). Nevertheless, it became shortly afterwards clear that the countries of the South would not be willing to refrain from their legitimate demands for development and financial aid (Sachs, 1999). Referring to the proclamation of the Second Development Decade by the UNGA in

1970, 4 the countries of the South claimed that environmental and development questions had

to be dealt with integratively rather then separately. According to Baylis et al. (2008), the political interest for a conference on both the environment and development was present shortly after the UNCHE in Stockholm. Yet, the global economic downturns of the 1970s and the intensification of the Cold War pushed environmental concerns down on the international political agenda (Mitchell, 2010).

3_{These effects are often border-crossing and require both attention and action by more than one state. Such} circumstances were subsequently considered by the Brundtland Report (WCED, 1987, p. 49): “National boundaries have become so porous that traditional distinctions between matters of local, national, and international significance have become blurred. Ecosystems do not respect national boundaries. Water pollution moves through shared river, lakes, and seas. The atmosphere carries air pollution over vast distances. Major accidents—particularly those of nuclear reactors or at plants or warehouses containing toxic materials—can have widespread regional effects.”

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Despite economic and foreign-policy related matters, the deterioration of the natural environment continued nevertheless. In the early 1980s, the recognition of new environmental challenges such as acid rain, a thinning ozone layer and the possibility of climate change, in combination with supporting scientific facts and figures, raised the political and public interest for environmental issues again (McNeill, 2001; WCED, 1987). Yet, at this time both environmental and development concerns had to be considered as a single issue. These considerations, then, formed the basis for the Brundtland Commission and its much-noticed report on sustainable development (Rist, 2002).

2.4 Brundtland definition of sustainable development

The classic notion of sustainable development was developed by the WCED, convened by the UNGA in 1983 and chaired by the former Norwegian Prime Minister Gro Harlem Brundtland, and first introduced by its Commission Report (commonly referred to as “Brundtland Report” respectively “Our Common Future”) in 1987. The report, which was the first one of its kind, was intended to build on the insights from the earlier Stockholm conference in 1972 and to include the development demands of the countries of the South. Sustainable development was thus defined as:

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. ... in particular the essential needs of the world’s poor, to which overriding priority should be given (WCED, 1987, p. 54).

Although Meadows (1972) had pointed to the limitations of growth almost two decades before the Brundtland Report was published, the Commission explicitly recognized social, technological, and environmental limitations to future growth (WCED, 1987). Whereas the political aim was to accommodate the concerns for the environment in industrialized states and the demands for development of developing countries, the report made also clear that further economic growth was essential to overcome the inhumane situation of the world’s

poorest (WCED, 1987).5 So with the Brundtland notion of sustainable development, demands

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for environmental protection and development were transformed into the idea of environment-friendly economic growth (Baylis et al., 2008), which has been heavily criticized by some scholars (Rist, 2002; Sachs, 1999).

Twenty years after the UNCHE in Stockholm in 1972 and five years after the publication of the Brundtland Report, the UNCED was held in Rio de Janeiro in 1992. The primary objective of the conference was to carry forward the discussion about how environmental and development issues could be interlinked (UN, 1993). Yet, as Baylis et al. (2008, p. 480) note, the outcome of the conference was “the legitimation of market based development policies to further sustainable development, with self-regulation for transnational corporations.” The main accomplishment of the conference were the adoption of Agenda 21, a plan of action addressing sustainability issues at supranational, national and especially sub-state level, and a convention on the preservation of biodiversity (UN, 1993).

One decade later, the WSSD was held in Johannesburg in 2002 with a focus on globalization, poverty eradication and improvement of living conditions, not least on the African continent (UN, 2002). From then on, all actions for sustainable development were dedicated “to ensure a balance between economic development, social development and environmental protection as interdependent and mutually reinforcing pillars of sustainable development” (UNGA, 57th Session, p. 2).

Figure 3 depicts the concept of sustainable development based on the initial Brundtland Report and the extended definition from the WSSD in Johannesburg in 2002. As shown, sustainable development requires the balance of environmental, economic, and social needs. Sustainable development is the progress towards an economically and environmentally viable, socially and environmentally bearable, and socially and economically equitable end state, that is, sustainability.

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Figure 3: The three dimensions of sustainable development. Source: Adapted from Elkington

(1998).

It is thanks to the UN conferences that environmental concerns were first added to the international political agenda, and successfully reflected the underlying changes in the scope and perception of environmental problems (Chasek et al., 2010; McNeill, 2001). However, as Annan (2002) notes the goal of sustainable development can only be achieved if corporations play a major, leading role and accept a broad set of economic, social, political, and ethical responsibilities. In the following, the details of these responsibilities are derived from the Brundtland Report in 1987 (WCED, 1987).

2.5 Expectations on business from a sustainability perspective

As early as in Gro Brundtland’s foreword, the report suggests a crucial role for corporations for making sustainable development happen:

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possibilities for bringing about far-reaching changes and improvements (WCED, 1987, p. 16).

In the following paragraphs, the Brundtland notion of sustainable development (see 2.4) is studied and analyzed regarding statements indicating the role of corporations for sustainable development. These statements are deduced from the comprehensive, over three hundred pages counting Commission Report (WCED, 1987) and classified to make a subsequent comparison with selected business theories on CSR possible. For this classification, Parsons’ theory on systems (1951, 1961, 1977) is applied.

2.6 Classification of the corporate responsibilities for sustainability

Applied on the Brundtland Report (WCED, 1987), Parsons (1951, 1961, 1970) theory of social systems implies that corporate responsibilities can be classified into economic responsibilities (related to resources and economics), political responsibilities (related to goal definition and achievement), social responsibilities (related to integration and securing

cohesion), and ethical responsibilities (related to culture and values). This classification will

simplify the subsequent comparison with CSR expressed in the business literature.

2.6.1 Economic function of corporations

Considering the economic role of business, which constitutes the core function of business, the Commission (WCED, 1987) expects corporations to take on greater responsibilities in three areas: (1) foreign direct investment (FDI), (2) transfer of technology, knowledge and managerial skills, and (3) innovation of new technologies.

First, foreign trade has proven to be an important driver of economic growth and increasing prosperity. Many developing countries have traditionally relied on the extraction and export of non-renewable resources (such as fossil fuels and minerals) to earn foreign exchange for their own development process. Since the need for increasing export volumes, resulting from the absence of feasible alternatives, has revealed the risk of unsustainable overexploitation and impoverishment of the natural resource base in the long-term, developing countries must develop alternative goods and services for export. The Commission (WCED, 1987) recognizes that:

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enjoy access to industrial country markets for non traditional exports where they enjoy a comparative advantage (WCED, 1987, p. 90).

In this respect, MNCs have become to play an important role in developing a diversified export structure, usually with the consent of developing countries. With the use of foreign direct investments, MNCs can set up own manufacturing sites, enter into joint ventures as partners, or grant license agreements to local manufactures (Deresky, 2008). Consequently, MNCs are involved in the mining and manufacturing sectors as well as in the production of primary commodities in many developing countries (WCED, 1987). Yet, if MNCs are to have a positive influence on long-term sustainable development, they are required to strictly observe the principle of sovereignty of the host countries, respect their environmental concerns, and to fairly share managerial skills and technological knowledge with domestic corporations (ibid.).

Second, “[m]any developing countries ... need assistance and information from industrialized nations to make the best use of technology. Transnational corporations have a special responsibility to smooth the path of industrialization in the nations in which they operate” (WCED, 1987, p. 31). Technological progress will continue to change social, cultural, and economic patterns and can thus positively affect sustainable development. If used and managed wisely “new and emerging technologies offer enormous opportunities for raising productivity and living standards, for improving health, and for conserving the natural resource base” (ibid., p. 217). Yet, “[t]he real challenge is to ensure that the new technologies reach all those who need them, overcoming such problems as the lack of information and in some cases an inability to pay for commercially developed technologies” (ibid., p. 94).

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2.6.2 Social function of corporations

The Commission notes that “[r]ising poverty and unemployment have increased pressure on environmental resources” (WCED, 1987, p. 23). Since the majority of people affected by environmental pollution and degradation tend to be poor and lack the capabilities to complain effectively, corporations get away with externalizing the negative impacts of their activities on these underprivileged people. Moreover, these people living in affected regions often have no other alternatives but rather depend heavily on the natural resources, which in itself deteriorate the livelihood of these people. From a sustainability perspective, the social function of corporations is consequently understood as promoting social development. This includes (1) the opportunity of employment, (2) the provision of public goods such as education and health, which not least (3) improve the position of women in society.

First, the Commission notes that “[t]he principal development challenge is to meet the needs and aspirations of an expanding developing world population. The most basic of all needs is

for a livelihood: that is, employment” (WCED, 1987, p. 64).6 Employment is especially

needed for a large number of young people in developing countries, who comprise most of their population. Since agriculture can only absorb a limited number thereof, corporations have the responsibility of providing sustainable employment opportunities for a growing population (ibid.). As much as employment is important, corporations are also responsible to pay sufficient wages, which will “enable poor households to meet minimum consumption standards” (ibid., p. 64).

Second, employment is just one of many elementary needs. A ‘life of dignity and well-being’ (UNGA, 1972) presupposes also access to food, education and health care. Yet, present population growth rates already compromise many governments’ abilities to provide adequate levels of the very same goods and services (WCED, 1987). Many governments, furthermore, lack funding for maintaining present provision levels, let alone for increasing them. Consequently, the quality of education and health care services deteriorate (ibid.). This does not only open new possibilities for corporations, it also places a responsibility on them. After all, the Commission (ibid.) holds that:

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Economic and social development can and should be mutually reinforcing. Money spent on education and health can raise human productivity. Economic developments can accelerate social development by providing opportunities for underprivileged groups spreading education more rapidly (WCED, 1987, p. 64).

Third, the Commission (WCED, 1987) argues that rapid population growth is a main driver of both environmental and economic challenges. The human population on earth has increased 2.7-fold from 2.5 billion in 1950 to 6.9 billion in 2010 (UN, 2011a). By 2050, the UN expects the world population to grow additionally to 8.1 billion (low scenario), 9.3 billion (medium scenario), or 10.6 billion (high scenario) (ibid.). While the population in the developed world is expected to grow only slightly, developing countries will face a large increase in their

population levels.7_{Since these rapid increases are substantially driven by the status of women}

in society, socio-cultural values and disparities in economic and political power, sustainable development must enhance social development, and be designed to “improve the position of women in society, to protect vulnerable groups, and to promote local participation in decision making” (WCED, 1987, p. 49). Corporations are expected to contribute to this development by offering employment and education to people in developing countries, yet with a special focus on women. If these women can be included into the formal economy and earn their own income, female empowerment is enhanced and fertility rates are expected to decline. A higher status of women in society in the developing world can thus help to lower fertility rates and decelerate population growth in these parts of the world.

2.6.3 Political function of corporations

The Commission recognizes that, “[m]aking the difficult choices involved in achieving sustainable development will depend on the widespread support and involvement of an informed public and NGOs, the scientific community, and industry. Their rights, role and participation in development planning, decision making, and project implementation should be expanded” (WCED, 1987, p. 36). Companies are thus required to take into account effects of their operations, actions, and investments. For example, setting up a hydropower project should not only be understood as a mean of producing electricity, but also take into account the positive and negative effects upon the local environment and living conditions of local

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societies. Consequently, the expected political function of corporations includes beyond compliance with national law and regulations especially (1) cooperation with political institutions, particularly in developing countries, (2) increased basis of legitimacy of corporate decisions through stakeholder discourse, and improved and all-encompassing accounting of corporate actions and transparency, and (3) establishment of international code of conducts for sustainable development.

First, the Commission (WCED, 1987) recognizes that corporations constitute a critical link between people and the environment, since they have a significant impact on the way natural resources are used for development and economic growth. Hence, “[l]arge industrial enterprises, and transnational corporations in particular, have a special responsibility” for sustainable development (ibid., p. 229). These companies are equipped with scarce technical skills and know about the highest safety and health protection standards available, and hence are expected to accept the responsibility for constructing safe facilities, developing safe operational processes design, and training its staff adequately (ibid.). Consequently, corporations, together with its technologies and processes, play a crucial role for the success of sustainable development. Governments, both in industrialized and developing countries, should aspire after a closer cooperation with corporations for mutual benefits (ibid.). Nevertheless, small, poor, developing countries continue to mistrust large corporations. Comparable with the colonial era, these countries experience negotiations with the latter repeatedly to be one sided, with large corporations taking advantage of “a developing country’s lack of information, technical unpreparedness, and political and institutional weakness” (ibid., p. 93). Developing countries find it thus difficult to defend their position against financially independent MNCs when it comes to concerns regarding the introduction of new technologies, the development and exploitation of national resources, and the sustainable use of the environment. The Commission then argues that MNCs must take steps to reduce the information asymmetry, and engage with governments in developing countries to build mutual trust and counteract conflicts (ibid.).

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expected to carry out environmental assessments based on the same criteria as required in industrialized countries prior to major investment in developing countries. Moreover, corporations have the responsibility to fully inform relevant national and local authorities regarding “the properties, potentially harmful effects, and any potential risks to the community of the technology, process, or product being introduced” (ibid., p. 230). This is particularly important for the implementation of new technologies, which often bring new hazards, and thus requires MNCs of enhancing and adopting their risk assessment and risk management policies. The relevant information about a specific investment should then be communicated to nearby residents in an easy to understand way. By sharing the resulting information, risk assessment, and recommendation with the host country’s government, the latter is empowered and capable of making well-founded decisions regarding a specific investment and the resulting benefits for its country (ibid.). Where sustainability considerations are significant, investments should be rejected, even though the might be financially attractive in the short run. Where manageable risks allow companies to implement projects, they must institute environmental and safety audits, and subsequently disclose the results to local government and other interested parties (ibid.). Moreover, corporations are required to work collaboratively with “the local government and community in contingency planning and in devising clearly defined mechanisms for relief and compensation to pollution or accident victims” (ibid., 230). From the corporate perspective, enhanced transparency will thus increase the basis of legitimacy of corporate decisions and operations in developing countries.

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2.6.4 Ethical function of corporations

The concept of sustainable development presupposes that economic exchange is only beneficial for all involved if “[t]he sustainability of ecosystems on which the global economy depends” is guaranteed and “the economic partners must be satisfied that the basis of exchange is equitable” (WCED, 1987, p. 76). None of these conditions were met in 1987, when the Brundtland Report was published. While the responsibilities outlined in the economic, social, and political function of corporations are designed to eventually bring about economic equity and sustainability, international efforts concerning the regulation of MNCs have proved extremely difficult to negotiate and unsatisfactory in purpose and scope (ibid.). Corporations should thus (1) voluntarily commit to a broader sense of social and environmental responsibility that go beyond simple compliance with regulations, and accept certain special responsibilities where required. Further, (2) corporations should encourage sustainable consumption standards, and (3) aim towards a global ethic and social justice. First, to this end, all industrial enterprises together with trade associations and labor unions should “establish [and adopt] company or industry-wide policies concerning resource and environmental management, including compliance with the laws and requirements of the country in which they operate” (ibid., p. 222). Moreover, sustainable behavior requires corporations to change their values and attitudes towards the use of environmental resources, people inside and outside their operations both at home and overseas, and their role in society in general. Corporations are thus expected to establish corporate code of conducts, which reflect these values and control corporate behavior at firm level.

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Third, throughout the Brundtland Report, the Commission tries to elevate sustainable development to ‘a global ethic’ (WCED, 1987, p. 303), which could be the decisive factor for future human survival and well-being. The quality of life on earth depends on all actors’ efforts, including the willingness and cooperation to alleviate international poverty, to reinforce peace and enhance security around the world, and to manage the global commons in a sustainable way (ibid.). These efforts require a common set of broadly shared values and attitudes, and a global ethic could be the reference point for sustainable development and social justice.

The previous sections named and described the economic, social, political, and ethical responsibilities of corporations for sustainable development as outlined in the Brundtland Report (WCED, 1987) and seen by all official institutions belonging to the UN. In Table 2, these responsibilities are briefly summarized.

Table 2: Responsibilities of corporations for sustainable development

Economic Social Political Ethical

(1) Use of foreign direct investment (FDI) as driver of economic growth and increasing prosperity

(1) The opportunity of employment and fair salaries, enabling poor households to meet minimum consumption standards (1) Close cooperation with political institutions, particularly in developing countries, reducing the information asymmetry, building mutual trust and counteracting conflicts

(1) Voluntarily commitment to a broader sense of social and environmental responsibilities beyond regulatory compliance, and accept certain special responsibilities where required, controlling and guiding corporate behavior at firm level

(2) Transfer of technology, knowledge and managerial skills to make the best use of technology

(2) The provision of public goods such as education and health to accelerate and raise human productivity (2) Broader stakeholder discourse and disclosure of relevant information, enhancing transparency and increasing legitimacy of corporate decisions and operations (2) Promotion of values and attitudes encouraging sustainable consumption standards world-wide (3) Innovation and diffusion of new, environmentally sound technologies (3) Improving the position of women in society through employment and education, lowering fertility rates and decelerating population growth

(3) Establishment of international codes of conduct for sustainable development,

controlling and guiding corporate behaviour for sustainable

development at supranational level

(3) Promotion of a global ethic, a common set of broadly shared values and attitudes, enabling sustainable development and social justice

Responsibilities

Role of corporations

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In 2.7, the concept of business ethics is briefly introduced for a better understanding of the following discussion of theories on CSR in 2.8. These theories provide an instrumental, an integrative, a political, and an ethical approach to corporate responsibility. In 3, these theories are compared to the corporate responsibilities for sustainable development derived in 2.6.

2.7 Framing business ethics

2.7.1 What is business ethics?

Crane and Matten (2010, p. 5) define business ethics as “the study of business situations, activities, and decisions where issues of right and wrong are addressed.” As such, business ethics aim to answer the fundamental question of whether corporations have responsibilities to make moral decisions beyond their economic core function of supplying goods and offering services on a profitable basis. Since the early 1950s, when Bowen (1953) launched the discussion about the social role of corporations, a number of theories defining and justifying these potentially wider responsibilities have been presented (Whetten et al., 2002). Though some of these theories are complementary, scholars have differed greatly in their conception of what such responsibilities should be. To answer the question of whether corporations can have a moral responsibility in the same way as individual people do, it is important to have a basic understanding of morality, ethics and ethical theory.

2.7.2 Defining morality, ethics and ethical theory

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Ethical theories can be divided into consequentialist and non-consequentialist theories. Reasoning in non-consequentialist theories is based on generally applicable rules and principles. Actions are judged based on their underlying motivations and principles without

regard to the desirability of their outcomes. By contrast, consequentialist theories understand

these rules and principles to be context-dependent and subjective. The morality of actions is judged based “on the intended outcomes, the aims, or the goals of a certain action” (Crane & Matten, 2007, p. 91). For example, corporations act morally right if their activities lead to a desirable outcome such as the provision of goods and services. This differentiation, and the actual difficulties in combining these perspectives, will become clearer in the subsequent outline and discussion of theories on business ethics.

To sum up this short introduction to ethics, one can say that business ethics theories typically aim to contribute to “the enhancement of ethical decision-making” in the business context (Crane & Matten, 2007, p. 9). As is shown in the following, the number of situations with moral uncertainty has increased lately, and more ‘ethical decision-making’ is, therefore, required.

2.7.3 Why is business ethics important?

The Great Depression in the 1930s had disastrous consequences on individuals, societies, and entire nations (Tricker, 2009). These circumstances raised the question of the power relations between the state and corporations. Berle and Means (1932) describe this relation as follows:

The rise of the modern corporation has brought a concentration of economic power which can compete on equal terms with the modern state—economic power versus political power, each strong in its field. The state seeks in some aspects to regulate the corporation, while the corporation, steadily becoming more powerful, makes every effort to avoid such regulation. Where its own interests are concerned, it even attempts to dominate the state (Berle & Means, 1932, p. 357).

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The future may see the economic organism, now typified by the corporation, not only on an equal plane with the state, but possibly even superseding it as the dominant form of social organization (Berle & Means, 1932, p. 357).

Although White (2008) argues that the corporation as an economic organization will never replace the state since “the part cannot supersede the whole” (2008, p. 402), it seems likely that Berle and Means’ prediction has come true nowadays. As Kegley (2009, p. 208) notes “MNCs have grown dramatically in scope and potential influence with the globalization of the world political economy since World War II.” These MNCs obtain their power through large-scale, worldwide economies, strategic flexibility, and the control over technology use and production location (Deresky, 2008). The paradox is that a majority of the people themselves have gained from the increasing power of MNCs by an increased supply and lower prices as a result of competition (for a discussion on the mechanism of competition, see

2.2), but blame the very same MNCs for financial scandals, human rights violations,

environmental side-effects, collaboration with repressive regimes and other problematic issues (Palazzo & Scherer, 2006). At the same time, it has become increasingly difficult to influence the actions of MNCs in a positive way, even if people are interested (Spar & La Mure, 2003). Tricker (2009) notes that the complexity of the financial system has made it almost impossible for an individual shareholder to have an influence on the behavior of the company:

[Since] an individual might invest in a pension fund, which invests in a highly geared hedge fund, which invests in an index tracking fund, which invests in the shares on a given stock market index ... it can be difficult for the [individual] to exercise any influence over ... the company in which his funds have been invested, which was the original intention of the corporate concept (Tricker, 2009, p. 18).

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and should not—survive if it does not take responsibility for the welfare of all of its constituents and for the well-being of the larger society within which it operates” (2002, p. 16-17). Corporate legitimacy is at stake, and moral responsibilities of corporations have become a very critical issue for corporations, especially for MNCs with global operations (Palazzo & Scherer, 2006).

Potential solutions to these issues are the topic of theories on CSR, which offer a wide range of approaches to corporate moral responsibility and enhanced legitimacy. A selection of these theories is outlined and discussed in the following section.

2.8 Corporate Social Responsibility

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Table 3: Theories on Corporate Social Responsibility

Type of theory Approaches Short descirption Authors and references

Instrumental theories

(focusing on achieving economic objectives through social activities)

Maximization of

shareholder value Long-term value maximization Friedman (1970), Jensen (2002)

Stakeholder management Balances the interests of the stakeholders of the firm

Freeman (1984)

Corporate philanthropy Searches for social legitimacy and processes to give appropriate responses to social issues Carroll (1979) Political theories (focusing on a responsible use of business power in the political arena)

Corporate citizenship The firm is understood as being like a citizen with certain involvement in the community

Matten and Crane (2005)

Ethical theories

(focusing on the right thing to achieve a good society)

Universal rights Frameworks based on human rights, labor rights and respect for the environment UN Global Compact (2000) Integrative theories (focusing on the integration of social demands)

Source: Adapted from Garriga and Melé (2004).

2.8.1 Instrumental approach to CSR — Shareholder Perspective

From an instrumental perspective, the corporation is perceived as an instrument for the creation of wealth. Social wealth is maximized if each corporation in the economy maximizes its total market value (Jensen, 2002). The only social responsibility of corporations is thus to maximize its profits, and decisions are solely made upon economic considerations. Consequently, social activities are accepted if, and only if, they create value for the corporation. Garriga and Melé (2004) suggest calling this group of theories instrumental theories as they conceive CSR as a mere, strategic tool for the profit maximization. Theories included in the instrumental group discuss primarily shareholder value maximization.

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moral responsibilities. Typically, management is employed on behalf of the shareholders, and their primary responsibility is thus to the owners of the firm (ibid.). This responsibility is of fiduciary kind, and requires corporate executives to:

[C]onduct the business in accordance with their [the owners of the business] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom (Friedman, 1970, p. 33).

This concludes that corporate behavior is driven by the primacy of profit maximization, and the only legitimate stakeholders are the company’s shareholders. Social activities by the corporation are only desirable if their outcomes are compatible with shareholders’ interest. In these cases, and although corporations are tempted to rationalize these efforts as an exercise of its social responsibilities, these expenditures are entirely justified in the self-interest of the corporation (Friedman, 1970). Consequently, a corporation’s engagement in CSR is first an attempt to increase its reputation under ‘the cloak of social responsibility’ (ibid.). Moreover, any corporate engagement in CSR for other reasons than the above is counterproductive due to the following reasons (Friedman, 1970):

(a) Problem of competing claims: The main objective of firms should be economical, not social. CSR distracts firms from further development and impairs their economic efficiency.

(b) Competitive disadvantage: Investing in CSR will cause competitive disadvantages for the firm. For example, environment-friendly products will increase production costs. (c) Lack of competence: Firms would not gain any competence through dealing with social

issues. Friedman (1962) argues that investing in CSR is an inefficient use of money since firms have no core competence in CSR and therefore lowers shareholder value by investing in it.

(d) Fairness-domination by business: If firms obtain excessive concentration of power, it may threaten the power of other institutions.

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help[ing] to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces [other than the market].” Clearly, the shareholder perspective on CSR has a neo-liberal bias towards the free market ideology. Globalization and free trade increase the opportunities for profits, and thus increased social welfare. Moreover, free trade is seen as a major driver of development. As Krauss (1997, p. 51) notes “the way to help poor people abroad is to open our markets to them not to force them to adopt ... human rights standards.” Indeed, even some economists from developing countries argue that “a lousy job is better than no job at all” (Martinez-Mont, 1996). If corporations trade with and invest in developing countries, corporations contribute to economic development and enhanced productivity, and wages and labor standards will increase (Irwin, 2002). Consequently, “efforts to limit international trade or to shut down the sweatshops are counterproductive” (Irwin, 2002, p. 214). From an economic point of view, economic development is a necessity for democratization and social and environmental standards in developing countries (Barro, 1997).

2.8.2 Integrative approach to CSR — Philanthropy and Stakeholder management

Rather than existing independently from its environment, the corporation is understood as a part of its environment from an integrative perspective. The corporation is embedded in a network of economic, social, and political relations. The corporation interacts with society on social aspects, and social legitimacy is critical for its existence, continuity, and growth (Palazzo & Scherer, 2006). Consequently, corporate management should consider social expectations, and integrate them into its business so that corporate behavior reflects social values. Preston and Post (1975) note that the content of business responsibility is contextually determined, with space and time altering the values of society over time. Therefore, the role of corporations and its responsibilities may change throughout time and different locations. As Garriga and Melé (2004, p. 59) note integrative theories “are focused on the detection and scanning of, and response to, the social demands that achieve social legitimacy, greater social acceptance and prestige.”

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economic aspects, first followed by legal concerns and later by ethical and philanthropic aspects. Subsequently, Carroll (1991) visualizes his perception of CSR in form of a pyramid, convinced that it would help managers to “see that the different types of obligations are in a constant tension with one another” (1991, p. 42). Figure 4 depicts this pyramid.

Figure 4: The Pyramid of CSR. Source: Adapted from Carroll (1991) and Hansen (2010).

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Although Carroll’s (1991) approach to CSR proposes a broader set of corporate responsibilities, it is important to understand that “a company will only ever be socially responsible if this fits in with its economic goal of maximizing profit” (Crowther & Claydon, 2009, p. 262). As a result, efforts towards increased CSR are inevitably economically motivated.

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Figure 5: The stakeholders of the corporation. Source: Adapted from Ulrich (2008, 2010).

As depicted, the corporation has obligations to a wide range of groups that are affected by its activities. This view reflects the opinion that the purpose of the organization is to create value for many different stakeholders, including earnings for shareholders, salaries for employees, benefits for customers, taxes for government, and employment for local communities (Post et

al., 2002). Since various stakeholders, by definition, “have different views as to what is

valuable because of unique knowledge, goals, and context conditions” (Lepak et al., 2007, p. 185), corporations must identify to whom and for whom they are responsible, and what these responsibilities entail. Lately, the impact of governments and local communities, NGOs and media on corporations has increased (Spar & La Mure, 2003). Although each of these groups has its own perception of responsible corporate practices (Garriga & Melé, 2004), Rushton (2002) notes:

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perception as to what constitutes responsible corporate behaviour, and then develop a strategy to satisfy these expectations so far as possible [since] successful companies are those that can operate in harmony with the needs and aspirations of their stakeholders (Rushton, 2002, pp. 137-138).

A stakeholder approach to CSR requires corporations to integrate its identified stakeholders into their managerial decision-making process, and thus helps the company to grasp both strong and weak signals received from its environment. A stakeholder approach does therefore “not only enhance a company’s sensitivity to its environment but also increases the ... understanding of the dilemmas facing the organization” (Kaptein & Van Tulder, 2003, p. 208).

2.8.3 Political approach to CSR — Corporate citizenship

There are theories of CSR that study the political power of corporations in the relationship with society. It is assumed that corporations with economic power do have political responsibilities. The corporation must accept social duties and rights and a certain involvement in the community. Garriga and Melé (2004) suggest calling this group political

theories. Matten and Crane’s (2005) theoretical conceptualization of Corporate Citizenship

(CC) is widely recognized (Baumann & Scherer, 2010), and focuses on how corporations can use their power in a responsible manner in the political sphere.

The notion of CC emerged in the late 1990s and has mainly been used among corporations to combine their social responsibilities. Yet, corporations have used CC in many different ways,

and consequently, its usage has neither been consistent nor particularly clear (Matten &

Crane, 2005). Carroll (1999) suggests that CC is an extension of already existing work on

CSR, and thus builds on his earlier CSR pyramid (1991). Matten and Crane (2005) classify

the traditional understanding of CC into two categories:

(1) A limited view on CC, which consists of a corporation’s engagement in strategic philanthropy focusing on its immediate business environment and local communities. Rather than traditional philanthropy in Carroll’s sense (1979), CC is a rational,

long-term investment motivated by the self-interest of the corporation (Porter & Kramer,

2006). Firms do so because a profitable business depends on a stable social,