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Week 11: Corporate Social Responsibility of MNEs and Governing Global Corporations and
Reference & Readings
Stakeholder
A stakeholder’s view of the firm
Corporate social responsibility (CSR) practices
Corporate governance
Ownership types
Principle-agent conflict
Principle-principle conflict
Governance mechanisms
Key concepts
Peng, (2021), Global Strategy, 5th ed. USA: Cengage Learning.
Chapter 11 & 12
Corporate Social Responsibility of MNEs
The stakeholder view of the firm
Main areas of CSR for MNEs
Student presentations / discussions on MNEs’ CSR reports
Three perspectives on CSR
CSR and corporate performance
Governing global corporations
Board of directors
Governance mechanisms
A Fundamental debate on the nature of the firm
The CSR debate centers on the nature of the firm in society. Why does the firm exist?
One side of the debate argues the “the social responsibility of business is to increase its profits, which leads to efficient capital and product markets”
Advocates of shareholder capitalism argue that if firms attempt to attain social goals, managers will lose their focus on profit maximization
A Stakeholder View of the Firm
A stakeholder is “any group or individual who can affect or is affected by the achievement of the organization’s objectives”
Primary and secondary stakeholder groups
Primary stakeholder groups are those on whom the firm relies for survival and prosperity
Secondary stakeholder groups are defined as “those who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival”
CSR advocates argue that all stakeholders have an equal right to bargain for a ‘fair deal’
A Stakeholder View of the Firm (cont.)
Source: Adapted from T. Donaldson & L. Preston, 1995, The stakeholder theory of the corporation: Concepts, evidence, and implications (p. 69), Academy of Management Review, 20: 65–91. Copyright © 1995. Reprinted by permission of Academy of Management Review via Copyright Clearance Center.
A big picture perspective
Goal for CSR is global sustainability, defined as the ability “to meet the needs of the present without compromising the ability of future generations to meet their needs”
Drivers of global sustainability efforts:
Rising levels of population and inequity, high levels of poverty in some countries,
Increasing important roles of NGOs and other civil society
Effects of industrialization on the environment crisis e.g. global warming
Moral Obligations of Multinational Enterprises?
Multinational corporations have power that comes from their control over resources and their ability to move production from country to country
Moral philosophers argue that with power comes the social responsibility for corporations to give something back to the societies that enable them to prosper and grow.
What do you think?
Learning from CSR/Sustainability reports
Corporate Social Responsibility reports (or sustainability report) can be found from many multinational companies’ websites. E.g.
Woolworths Group (woolworths.com.au -> “sustainability”)
Peabody (peabodyenergy.com -> “sustainability”)
CSR reports can also be found in websites of the following organizations and be downloaded for free
The Sustainability Disclosure Database
https://www.globalreporting.org/reportregistration/verifiedreports
The UN Global Compact www.unglobalcompact.org/ (“Who We are” -> “Our Participants”)
These reports provide information about the CSR activities of the companies in different areas. However, be aware some companies also use these reports for “greenwashing”
Student presentations
Every student please download and discuss a recent Corporate Social Responsibility report (or sustainability report) of a multinational company
Each student please have a brief presentation introducing the report you have examined
Please consider the following in your presentation:
What are the main businesses of the company;
What are the main areas covered in the report;
What are the main highlights in the report
CSR for MNEs recommended by international organizations
MNEs and Environment
Should respect the host country laws and regulations concerning environmental protection (OECD, UN)
Should supply to host governments information concerning the environmental impact of MNE activities (ICC, UN)
MNEs and Human Rights
Should respect human rights and fundamental freedoms in host countries (UN)
Note: OECD= Organisation for Economic Co-operation and Development (OECD); UN= United Nation; ICC = International Chamber of Commerce; ILO = International Labor Office
CSR for MNEs recommended by international organizations (cont.)
MNEs and Employment Practices
Should cooperate with host governments to create jobs in certain locations (ICC)
Should respect the rights for employees to engage in collective bargaining (ILO, OECD)
MNEs and Host Governments
Should not interfere in the internal political affairs of the host countries (OECD, UN)
Should consult governments and national employers’ and workers’ organizations to ensure that their investments conform to the economic and social development policies of the host countries (ICC, ILO, OECD, UN)
Should reinvest some profits in the host countries (ICC)
CSR for MNEs recommended by international organizations (cont.)
MNEs and Laws, Regulations, and Politics
Should respect the right of every country to exercise control over its natural resources (UN)
Should refrain from improper or illegal involvement in local politics (OECD)
Should not pay bribes or render improper benefits to public servants (OECD, UN)
MNEs and Technology Transfer
Should develop and adapt technologies to the needs of host countries (ICC, ILO, OECD)
Should provide reasonable terms and conditions when granting licenses for industrial property rights (ICC, OECD)
The three perspectives on CSR
Industry-based view
Rivalry among competitors
Threat of potential entry
Bargain power of suppliers
Bargain power of buyers
Threat of substitute
The three perspectives on CSR (cont.)
Resource-based view
CSR-related resources can include tangible technologies and processes as well as intangible skills and attitudes
Do CSR-related resources and capabilities add value?
CSR-related resources are not always rare.
The advantage based on CSR-resources will only be temporary if competitors can imitate it.
Does the firm have organizational capabilities to do a good job on CSR?
The three perspectives on CSR (cont.)
Institution-based view
Formal institutions
Informal institutions
Four responses of MNEs
Reactive strategy: little or no support by top management
“not my problem”
Defensive strategy: focuses on regulatory compliance
“what’s the point”
Accommodative strategy: CSR as a worthwhile endeavor
“if it is easy”
Proactive strategy: Actively participate in policy discussions, build alliances with stakeholders and voluntarily go beyond what the regulations require
“green crusaders”
CSR and corporate performance
The CSR-economic performance puzzle: Does CSR improve economic performance?
From CSR to global CSR: Critical Debates
Domestic versus overseas social responsibility
Potentially increases profits, provides employment to host countries and increases standards of living there
However, often domestic employees and communities pay the price for this expansion
Active versus inactive engagement overseas: To what extent should an MNE use threats or its power to impose its values in a country?
Race to the bottom (“pollution haven”) versus race to the top: Some companies may move to a country to escape environmental regulations
Corporate Governance
Definition
“the system by which companies are directed and controlled“ -European Corporate Governance Institute
Key elements
involves regulatory and market mechanisms, and the roles and relationships between a company’s management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed.
Concentrated versus Diffused ownership
concentrated ownership and control – founders usually start up firms and completely own and control them on an individual or family basis
diffused ownership – publicly traded corporations owned by numerous small shareholders but none with a dominant level of control
separation of ownership and control – the dispersal of ownership among many small shareholders, in which control is largely concentrated in the hands of salaried, professional managers who own little (or no) equity
Ownership types
Family ownership
The majority of large corporations throughout continental Europe, Asia, Latin America, and Africa feature concentrated family ownership and control
State ownership
State-owned enterprises (SOEs) are de facto owned and controlled by government agencies; thus, SOE managers and employees have little motivation to improve performance
And many other ownership types, e.g.
“institutional ownership” which refers to the ownership stake in a company that is held by large financial organizations, pension funds etc.
Private ownership versus state ownership
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Trends in Ownership Changes
In the Anglo-American world
Large institutional investors have both the incentive and the resources to closely monitor and control managerial actions.
Ownership of US firms has gradually become more concentrated in the hands of institutional investors in recent decades.
UK corporations have also experienced a similar transformation in their ownership patterns
Since the 1980s, SOEs have failed to deliver satisfactory performance due to an incentive problem.
Privatization has reduced the SOE share of the global GDP from over 10% in 1979 to under 5% today.
Principal-Agent conflicts
Arising from the relationship between shareholders and professional managers
Principal-Principal conflicts
Such conflicts are between two classes of principals: controlling shareholders and minority shareholders
Principal-Agent Conflicts
Agency Theory
Because the interests of principals and agents do not completely overlap, there will inherently be principal-agent conflicts, which result in agency costs
Conflicts persist because of information asymmetries between principals and agents (agents always know more about their tasks than principals)
Principal-Agent Conflicts(cont’d)
Agency Problems
Excessive on-the-job consumption
Low-risk, short-term investments
Empire-building (excessive diversification)
In SOEs, agency problems are also extensive
Reducing Agency Problems
While it is possible to reduce information asymmetries and minimize agency problems, it probably is not realistic to expect to completely eliminate such problems
Principal-Principal Conflicts
Principal-Principal Conflicts
Instead of between principals (shareholders) and agents (professional managers), the primary conflicts are between two classes of principals: controlling shareholders and minority shareholders
Tunneling and related transactions
Board of Directors
Key features
Board size
Board Composition: Otherwise known as the insider/outsider mix
Leadership Structure: Involves whether the board is led by a separate chairman or by the CEO who doubles as a chairman—a situation known as CEO duality
Board Interlocks: When one person affiliated with one firm sits on the board of another firm
The role of Boards of Directors
(1) control, (2) service, and (3) resource acquisition functions
Directing strategically: Directors must strategically prioritize
Internal Governance Mechanisms
Voice-based mechanisms
Shareholders’ willingness to work with managers, usually through the board, by “voicing” their concerns.
“Carrots” and “sticks”
Carrots: Very high pay for performance?
Sticks: Dismissal
Global 2500 MNEs: Involving 40% of all CEO changes in 2002
External Governance Mechanisms
Exit-based Mechanisms: The Market for Corporate Control
The takeover or mergers and acquisitions (M&A) market.
The stock of a firm will be undervalued by investors when managers engage in self-interested actions and internal governance mechanisms fail.
In the 1980s, nearly half of all major US corporations received a hostile takeover offer.
Internal and External Governance Mechanisms:
A Global Perspective
Source: Cells 1, 2, and 4 adapted from E. R. Gedajlovic & D. M. Shapiro, 1998, Management and ownership effects: Evidence from five countries (p. 539), Strategic Management Journal, 19: 533–553.
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