SUSTAINABILITY, CORPORATE SOCIAL RESPONSIBILITY
AND FOOD MARKETS: THE ROLE OF COOPERATIVES
(Keywords: corporate social responsibility, cooperative, power,
trust, food system)
by
Valeria Sodano
Department of Agricultural Economics, University of Naples “Federico II”
V.Sodano, University of Naples
federico II
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Processes negatively affecting food systems sustainability
1. Environmental and human health risks associated with the new
bio and nano technologies. 2. Trade liberalization and
deregulation. 3.Rising power of food corporations and
supermarkets.
Moral concerns
food security, food safety, food quality, food sovereignty, human
welfare, animal welfare, ecological sustainability, transparency,
traceability.
Current suggested solutions
Less state intervention and command-control policies
More market along with corporate social responsibility (CSR)
V.Sodano, University of Naples
federico II
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PAPER’S GOALS AND MOTIVATION
The gap between corporations’ claim on their CSR and their real pursuit
of social goals has been proved by the repeated corporate scandals and by
the real strategies carried out by the main actors in the system.
The paper studies how the peculiarities of corporate
governance systems of cooperatives and investor owned
enterprises lead to a different attitude towards social
responsibility.
The comparison between different forms of corporate
governance is carried out through The New Institutional
Economics of the Firm
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federico II
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THE NEW INSTITUTIONAL ECONOMICS OF THE
FIRM
The incomplete contract theory of the firm (Hart, 1988; Grossman
and Hart, 1986) and the related theory of Hansmann of the
ownership of enterprise (Hansmann, 1996) state that vertical
integration (and hence the firm) occurs when contracts fail because
of their incompleteness, then the party more able to exploit the
residual claims will acquire the residual rights of control.
V.Sodano, University of Naples
federico II
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THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM
In the Hansmann’s model, the ultimate reason for a class of patrons
(i.e. persons with whom the firm has a contractual relationship) to
become firm’s owners is to avoid “power abuses” by the firm.
These power abuses take three forms: 1) the classical exercise of
market (buyer) power towards customers (suppliers); 2) opportunistic
behaviours associated with asymmetric information; 3) the
exploitation of exchange surplus due to a higher bargaining power, in
those bilateral monopoly situations associated with hold-up problems
and transaction specific investments.
Incentives to become owners also stem from benefits associated with
the possibilities to exploit weaker contractual partners.
V.Sodano, University of Naples
federico II
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THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM
In these models any process of vertical integration entails a redistribution
process that will favour the more powerful party, with contradictory equity and
efficiency effects. This result sharply contrasts with the Williamson explanation
of vertical integration (Williamson, 1985), that accounts for the shift from one
organizational form (the long-term contract) to another (the firm) exclusively in
terms of transaction costs minimizing; implying an efficiency improvement
Ultimately the neoinstitutional theory of the firm based on
contract incompleteness proves that firms are forms of
economic organization, alternative to the market, that do not
guarantee for efficiency . Firms can be conceived of as systems
of power. When trust, besides power, affects relationships
inside and outside the firm, exploitation is mitigated and more
equity is achieved in the process of resource allocation.
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federico II
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THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM
Spot markets
High transaction costs
Contracts
Complete, enforceable by a third party
(exercise of bargaining power)
Incomplete, non enforceable by
a third party
High transaction costs
Firms
Exercise of power through:
Formal authority relations
Endogenous enforcement mechanisms
Inside influence activities
Outside influence activities
Market power
Self-enforcing
agreements
Power-based
V.Sodano, University of Naples
federico II
Trust-based
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THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM
Firms
Power-based Competitive
behavior
Trust-based Cooperative behavior
Investor owned firms
Cooperatives
The board of directors, designed by
shareholders, is committed to the
objective of only profit maximization.
Institutionally investor-owned firms have
no responsibilities towards their
stakeholders besides the respect of
formal contracts signed with them, as
settled by law.
Rochdale Principles (1844) undersigned by the
International Cooperative Alliance (1995) :
Limited return on equity. Voluntary and open
membership. Democratic member control.
Member economic participation. Autonomy and
independence. Education, training and
information. Cooperation among cooperatives.
Concern for community.
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federico II
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Requests
CSR
for Responses by cooperatives
Contract
incompleteness
Responses by public
firms
Corrected by trust (symmetric Residual
claims
Nash bargaining solutions for the exploited
through
bargaining game associated with power (inefficient and
hold-up problems)
unequal solutions for the
bargaining game)
Avoiding
negative
externalities
Ethical
concerns
for
community
and
fairness
preferences
boost
the
internalization of social costs
Concerns for stock
values
and
selfish
behaviours
prevent
from the internalization
of social costs
Equity
and
fairness Opportunism
Providing public preferences help to solve free- exacerbates free riding
goods
riding problems
problems
V.Sodano, University of Naples
federico II
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Empirical evidence
Cooperatives and corporate social responsibility: some evidence from the
Italian tomato processing industry
Italy is the second producer (next to California) of processed tomato in the
world. Production is localized in two agro-industrial districts, the southern and
the northern district, with approximately the same size but with a very different
structure and organization.
Results of a wide research project carried out by the University of Naples
during the last three years (aimed to assess the capability of domestic firms to
cope with the changing competitive international scenarios) have clearly shown
that in the northern district the presence of cooperatives, backed by high levels
of social capital, is associated with social responsible behaviours, and that
therefore in this area public support for the sector can benefit the entire
community. Opposite conclusions were reached in the case of southern district.
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federico II
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Empirical evidence
In the research social capital was measured on the basis of trust indicators
accounting both for impersonal trust (in the form featured by Fukuyama, 1995)
and interpersonal trust, this latter related to the attitude of actors towards others’
trustworthiness (McAllister, 1995).
CSR was measured looking at illegal behaviours and frauds and at policies
carried out to foster social and environmental sustainability.
Cases of illegal behaviours were found only in the South, namely the recruitment
and exploitation of illegal African and eastern European immigrants, and the
falsification of tomato purchasing records in order to access extra EU subsidies.
Vice versa in the North, a lot of sustainable good practices were found: fair trade
standards; organic production; traceability systems; transparent communication
policies; support to civil society organizations; engagement in projects with local
administrations.
V.Sodano, University of Naples
federico II
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Conclusions
§ The kind of ownership and governance structure of firms affects
their social responsibility.
§ Investor-owned enterprises are “naturally” much less responsible
than cooperatives.
§ The higher social responsibility of cooperatives depends on ethical
values and social norms on which this form of enterprise is grounded.
§ The evidence that CSR ultimately is possible only in a sociocultural environment rich in social capital and moral codes should
suggest that when this is not the case, only command-and-control
regulations (i.e the state intervention) can promote really sustainable
food systems.
V.Sodano, University of Naples
federico II
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Conclusions
§ Traditional economic literature on cooperatives has widely
denounced their economic weakness, associated with portfolio and
horizon problems, while it has not paid enough attention to their role
in providing positive externalities and social benefits.
§ Taking into account these latter issues should lead legislators and
economists to no longer foster the revision of law on cooperatives in
a way as to turn them in proprietary firms.
§ Instead policies should be carried out in order to support the
cooperative movement and to strengthen ethical attitudes within it.
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federico II
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DEFINITION OF COOPERATIVE BEHAVIOR
A cooperative behavior is a behavior through which one
agent internalizes some of the externalities s/he imposes on
other users, and refrains her/his own use below what would
maximize her/his individual profits.
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federico II
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