2009
J.C. Arias, Kate Patterson
RELATIONSHIPS BETWEEN CORPORATE
SOCIAL RESPONSABILITIES’ PROMOTION
AND CORPORATE PERFORMANCE IN THE
MULTINATIONAL CORPORATIONS
J.C. Arias (PhD, DBA), Kate Patterson (MBA)
Abstract
The responsibility of companies has historically been defined in purely economic terms. For example,
Friedman (1990) considered maximization of shareholder wealth as being the sole objective and
responsibility of a well-managed company. This perspective, though, generally viewed corporate social
responsibility activities as a distraction rather than a goal. From this perspective, any expenditures of
resources in the interests of social responsibility was at the expense of shareholders, and the interests of
shareholders and other stakeholders were defined implicitly as conflicting and mutually exclusive. Today,
though, stakeholder theory maintains that stakeholders should be considered as an important component
in a company’s overall business plan. By sharp contrast, neoclassical economic theory treats companies as
unitary actors that seek to maximize their profits. The stakeholder approach to doing business suggests that
all people who hold a legitimate interest in an entity have a right to be heard, and to have their views must
be considered as well. Today, the stakeholders in a corporation include not only shareholders and officers,
but also customers, lenders (including those other than creditors), employees, creditors, suppliers and the
community at large. The vast majority of multinational corporations, though, compete in environments
that are characterized by a lack of regulatory or other oversight. This paucity of regulatory guidance
has compelled many corporations to forego their responsibilities to their stakeholders in favour of more
profits in the near term, a practice that some observers believe is no longer a sustainable approach to
doing business in an increasingly globalized marketplace. To gain some additional insights into how these
forces are playing out in the real world today, this study examines the scholarly and refereed literature to
identify the salient issues involved in stakeholder theory as they apply to multinational corporations, and
what companies can do today to ensure their long-term profitability while balancing the needs of all of
their stakeholders. A summary of the research and findings is presented in the conclusion, followed by
personal reflective journal in the appendix.
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Introduction
According to Mcmenamin (1999),
today, it is not possible, or even desirable,
for a company to seek to achieve
shareholder wealth maximization in terms
of profitability to the total exclusion of all
other considerations. Indeed, this author
reports that, “In the management of a firm
there are a diverse group of interests, often
conflicting interests, which need to be
recognized and included within the goals and
objectives of the firm” (p. 40). For example,
there is the primary group of the company’s
managers who are responsible for operating
and controlling the company on a day-today basis on behalf of the shareholders, the
actual owners of the enterprise. Further,
in larger publicly owned companies, there
is a principal-agent relationship between
shareholders and managers, with managers
acting as agents on behalf of shareholders as
their principals (Mcmenamin, 1999).
This separation of ownership and control,
or agency relationship, particularly in
large corporations, can result in conflicts
and problems between the interests of
managers and the interests of shareholders.
Mcmenamin notes that this conflict of
interests is known as the agency issue or the
agency problem. “In addition to the interests
of shareholders and managers, there are
other ‘stakeholders’ whose interests need
to be considered,” he says. “That is, other
groups exist who can be considered to have
a legitimate interest, or stake (economic or
otherwise) in the goals and objectives of the
firm” (p. 40). For instance, all corporations
have employees, customers, and community
groups, all with interests that are frequently
different and even competing that must
be taken into account. Proponents of the
stakeholder theory suggest an all-inclusive
approach to management by recognizing the
rights of all the diverse interest groups in
managing the activities of the corporation;
further, stakeholder theory applies equally to
public sector and not-for-profit organizations
(Mcmenamin, 1999).
General overview
Multinational corporations have become
increasingly common in recent years, a
process that suddenly accelerated in the
late 1990s, particularly in the fields of
telecommunications and energy; further,
approximately one-third of the $3.3 trillion
in goods and services traded internationally
in 1990 was comprised of transactions within
a single firm (Korten, 1995, p. 43). The
globalization of markets, the increased need
for working capital, and new technology,
combined with an improved investment
environment, are contributing to this
acceleration today as well (Miller, 2000).
According to Rao (1999), “Globalization,
with its corollaries of global products, global
consumers and the global marketplace,
appears to signify the crystallization of the
entire world as a single place. The questions
are: what economic, political or cultural
parameters does this process of globalization
render invisible? What groups of people or
regions are excluded from this discourse?”
(pp. 58-9). These fundamental issues have
emerged as the result of the globalization of
the world’s marketplace, a process that has
been driven by two primary technological
forces. First, transportation costs have
decreased dramatically with the introduction
of improved physical communications
such as better vehicles, modern aircraft;
containerization; and expanses of interstate
and international motorways. Second, and
more spectacular, advances in computing
power and in telecommunications through
the introduction of a wide range of computerbased systems, satellite technology, and,
more recently, fibre optics; these innovations
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J.C. Arias, Kate Patterson
have fundamentally improved the ease,
speed, quantity, and quality of international
information flows around the world (Cable,
1995).
According to Mayer (2001), though,
today, just a few multinational corporations
are increasingly consolidating their hold on
the global economy. “Given their impact
on our lives,” he advises, “it is predictable
that individuals will in various ways
accommodate their lives to the dynamics and
beliefs of corporate values” (p. 215). These
trends have resulted in many observers
suggesting that multinational corporations
owe a higher duty to the communities in
which they are situated, with various theories
being advanced on how best to accomplish
this end. In reality, though, most major
multinational corporations are constrained
only by various laws and regulations in these
venues that do not pertain to their ethical
conduct, and the consequences have been
both severe and pervasive in many cases.
In order to determine how a multinational
can compete in an increasingly globalized
economy today, this study examines
multinational corporate governance policies
and what issues have emerged in recent
years to compel these companies to afford
greater attention to their responsibilities
to all of their stakeholders rather than just
a few shareholders. Stakeholder theory
maintains that there are constituents other
than the shareholders of the corporation to
whom the corporate leadership has certain
responsibilities; these constituents are
groups that are likely to be affected, either
directly or indirectly, by the decisions of
executives. Therefore, these stakeholders
are said to have a “stake in the corporation”;
stakeholder theorists recognize that corporate
managers may act from various incentives
and a number of stakeholder theorists
recognize that the interests of noninvesting
stakeholders may not always override the
financial interests of shareholders (KarakeShalhoub, 1999).
Problem statement
According to Mayer (2001), “The vast
majority of international trade and business is
carried on by large multinational corporations
whose pursuit of ever-increasing global
market share is breaking down traditional
patterns of life and community, imposing a
dynamic of rapid change on many segments
of most societies, and severely degrading
the natural environment on which business,
communities, and human life ultimately
depend” (p. 215). “Readers may rightly
ask about the corporate responsibilities that
accompany those rights. Suffice it to say
that the responsibilities are few. With the
exception of those activities either banned
by government (child labour) or mandated
by government (minimum wage, job safety,
etc.), the corporate entity operates largely in
a do-as-you-please environment” (Gates &
Schmidheiny, 1999, p. 313).
Research question
The primary research questions that will
guide this study are:
1. What are corporate responsibilities
in general and how do they affect
multinational corporations in particular;
and,
2. Can an ethical multinational corporation
compete in a globalized marketplace
where other similarly situated companies
may not be so concerned about
stakeholder rights?
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Purpose
study
and
significance
of
Claims that various types of corporate
activity have a detrimental impact on
human welfare are certainly not new, but
the assertions today represent different
issues both in terms of their origin and their
content. According to Ratner (2001), these
claims “emanate not from ideologues with
a purportedly redistributive agenda, but
from international organizations composed
of states both rich and poor; and from
respected nongovernmental organizations,
such as Amnesty International and Human
Rights Watch, whose very credibility turns
on avoidance of political affiliation” (p.
435). Just as importantly, these groups have
not attempted to undermine capitalism or
corporate economic power per se; rather,
they have levelled increasing amounts
of criticism at certain types of corporate
behaviour that has clearly transcended
accepted norms of human rights law based
on widely ratified treaties and customary
international law (Ratner, 2001).
These claims are virtually all based on
the concept that corporations – particularly
multinationals -- should be held accountable
for their actions within their sphere of
operations. “Corporations, for their part,
have responded in numerous ways, from
denying any duties in the area of human
rights to accepting voluntary codes that could
constrain their behaviour” (Ratner, 2001,
p. 436). In fact, this very point is echoed
throughout the literature; for example, “At
the turn of the 20th century, corporations
tended to disregard the public interest willynilly.
And even as recently as one-half century
ago, corporations had so much power over
the marketplace and so little responsibility to
society” (Sriramesh & Vercic, 2003, p. 450).
Despite these trends, things are changing,
though, as Ratner points out: “The last decade
has witnessed a striking new phenomenon in
strategies to protect human rights: a shift by
global actors concerned about human rights
from nearly exclusive attention on the abuses
committed by governments to close scrutiny
of the activities of business enterprises, in
particular multinational corporations” (p.
435). This closer scrutiny has profound
implications for those companies who would
seek to expand their market share into the
global marketplace.
Research method of the study
The research method used in this study
will consist of an exploratory approach
comprised of a critical review of the scholarly
and refereed literature, with an emphasis on
identifying the corporate responsibilities of
multinational corporations today based on
historic trends and events.
Literature Review
Background and overview
It just makes good sense the companies
must be concerned with their profitability;
clearly, without profits, the company would
simply cease to exist and there would be
no benefits accruing to anyone. In recent
years, however, there has been an increasing
amount of attention paid to the underlying
ethics of how companies, and particularly
multinationals, compete in an increasingly
globalized marketplace, and precisely what
responsibilities are associated with doing
business abroad. These questions are not
new, but they have assumed increasing
importance today. Citing studies by J. Scott
Armstrong, Mayer reports that in the 1970s,
there was fairly global and homogenous
response to increasing corporate pressures
to make decisions with their bottom line
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J.C. Arias, Kate Patterson
foremost in mind identified. Armstrong
surveyed approximately 2,000 management
students from ten countries to play the
roles of corporate board members of a
multinational pharmaceutical company; the
author posed the question of whether the
company should remove a drug that had
been found to endanger human life from the
market. As board members, fully 79 percent
refused to withdraw the drug and sought
legal and political actions to either delay
or stop government efforts to ban the drug
(Mayer, 1999).
Likewise, the Bhopal tragedy caused by
Dow Chemical and the Exxon Valdez oil spill
are just some of the better-known instances
of the disasters that took place in the late 20th
century that clearly demonstrated the power
of the multinationals to cause enormous
devastation on the health and safety of
neighboring communities if unconstrained.
Not surprisingly, these events have resulted
in a demand for the imposition of corporate
responsibilities (Mehmet & Mendes, 2003).
Unfortunately, these authors point out
that, “These patterns of immediate denials
and downplaying or withholding of vital
information seem a constant theme in these
corporate activities which have devastating
impacts on local communities. Such exercise
of power without responsibility is a serious
flaw in the workings of global governance.”
(Mehmet & Mendes, 2003, p. 122). In order
to identify precisely what responsibilities
such multinationals have, it is first necessary
to define and describe them; these issues are
discussed further below.
Corporate responsibilities – What
are they?
According to Pava (1999), things have
changed in fundamental ways for most
companies today. “Most of us, most of the
time,” he says, “look at business through
the commodity-based lens. Business is
action-oriented. Defining the corporation
in this way does not necessarily entail an
amoral view of the business corporation.
The best example of a business ethics
built upon a commodity-based view of the
corporation is the now-familiar ‘stakeholder
theory’” (p. 6). The stakeholder theory
maintains that corporations must recognize
their responsibilities to various stakeholder
groups in society, beyond just their
own stockholders; in this regard, these
responsibilities include:
1. Providing customers to produce safe,
high-quality products at reasonable
prices;
2. Treating suppliers with honesty and with
integrity;
3. Ensuring that employees and managers
are provided with profitable work
opportunities and to be rewarded in an
open and just way;
4. Being good corporate citizens with
regards to local, national, and global
communities; and,
5. Providing their shareholders and
creditors with a fair return on their
invested capital (Pava, 1999).
While the stakeholder theory assumes
that corporate executives are responsible
to stockholders, it also maintains that there
are other groups that are directly affected by
the conduct of the company. For example,
employees, consumers, creditors, suppliers,
and legal subsystems are representative
constituents who have a vested interest in
the corporation and who might affect, in one
way or another, corporate decision making;
consequently, corporate executives have a
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direct responsibility to promote the interests
of these groups. Nevertheless, there remains
significant disagreement among stakeholder
theorists concerning whether stakeholders’
interests of these groups take precedence
over the financial interests of stockholders,
just as there is disagreement over which
of the stakeholders’ interests should be
the predominant ones (Karake-Shalhoub,
1999).
By sharp contrast, social demandingness
theorists maintain that corporations have a
fundamental responsibility to protect and
to promote certain interests of the general
public. According to Karake-Shalhoub:
They [social demandingness theorists]
agree with the stakeholder theorists that
the interests of stakeholder groups are
important, but they believe that these
interests do not override nonstakeholders’
interests or demands for such things as
safety, health, freedom, and prosperity.
As with the stakeholder theory, this
one repudiates the notion that there
is some balanced or sensible list of
tangible responsibilities that corporate
executives always have toward society.
The list varies as the nature and ranking
of the interests or demands of the public
change. (p. 6).
Furthermore, many companies are seeking
to decentralize and make basic corporate
functions such as buying, selling, financing,
developing, producing, and servicing, more
efficient and effective by changing their
mode of internal organization; these changes
have placed greater reliance on worker
initiative and a less rigid division of labour
(Dunning, 1999).
Today, groups or circles of workers (or
‘associates’) are being empowered to make
front-line decisions based on their own best
judgments concerning the best way to run
a production line or a specific machine,
reduce costs at all stages of production,
and improve quality. As a result, “Middle
strata (such as supervisors), as a result, are
becoming increasingly irrelevant” (Dunning,
1999, p. 433). The fundamental goal of
these new business models is to improve
company performance by facilitating the
flow of information both within the firm,
and between the firm and its network of
suppliers and clients; and by establishing new
incentive regimes for labor, whose greater
involvement and increased responsibilities
is being rewarded with longer tenure,
extensive training, and better compensation
(Dunning, 1999).
In reality, though, the key challenge
facing multinational corporations and their
leadership today does not so much concern
the difficulties related to guiding individual
behaviour, but rather in providing an ethical
framework for corporate behaviour (Casmir,
1997). In this regard, Casmir suggests
that when the individual is the subject of
investigation, the majority of attention
is afforded to straightforward issues of
compliance, while the value of the policy or
procedure to which compliance is directed
receives little or no attention. “Additionally,
the largest issues of responsibility and value
relate to systemic problems and collective
actions. Clearly this is also the case in
international business. There are unethical
employees and they do harm (judged by
any number of standards and measures),
but their compliance to laws and corporate
policies will not solve many of today’s
difficult problems” (Casmir, 1997, p. 190).
The primary objectives and day-to-day
activities of multinational corporations have
become the focus of concern; however, the
primary constraint involved here concern
developing an adequate public rather than
merely private ethic (Casmir, 1997).
According to Casmir, “Today, many
lament the weak morality of commercial
corporations. Thus, an adequate discussion
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J.C. Arias, Kate Patterson
of ethics must focus on both the individual
and corporate levels. But the discussion of
corporate responsibilities has been severely
hampered by dominant social conceptions
which make such a discussion difficult” (p.
190). Indeed, while it is frequently difficult,
if not impossible, to provide a “one-sizefits-all” guide concerning the critical issues
related to business ethics, the stakeholder
theory provides a useful framework for
investigating and pinpointing corporate
responsibilities while at the same time
providing a company’s leadership with a
powerful reminder that their stockholders
are not the only legitimate stakeholders
involved (Dunning, 1999, p. 433).
Unfortunately, it would appear that these
trends have created more questions than
answers, and the underlying issues have
been perhaps better described than they
have been understood by most observers
today. In his essay, “Community, Business
Ethics and Global Capitalism,” Mayer
(2001) advises that, “The field of business
ethics is in a quandary. No unified theory
has been accepted by its many scholars and
practitioners, and, according to some, little
practical guidance to business managers
has been generated” (p. 215). This is not
to say, though, that multinational managers
do not have any tools at their disposal to
help them make these judgment calls; it is to
say, though, that many have not recognized
the need or accepted these responsibilities
in a meaningful way. For example, Mayer
points out that, “Rather than trying to
apply the most abstract moral theories
(Utilitarianism, Kantian Deontology, or
Aristotelian Eudiamonism) to ongoing
ethical quandaries, business ethicists as well
as managers of multinational enterprises can
usefully examine the customs and mores of
a particular community to discover viable
ethical norms (or microsocial contracts)” (p.
215). This type of attention to the particular
extant norms, though, must be balanced
by the corporate regard for broader, more
universally applicable standards, a process
that is inherently confounded by a wide
range of social, cultural, geographic as well
as a need to continue to focus on a company’s
bottom line. In this regard, Andrew Carnegie
recognized early on the responsibilities of
wealth while at the same time maintaining
a clear differentiation between personal and
corporate responsibilities. For example,
in his 1889 essay appropriately titled “The
Gospel of Wealth,” Carnegie pointed out
that the man of wealth has a duty:
. . . to consider all surplus revenues
which comes to him simply as trust funds,
which he is called upon to administer,
and strictly bound as a matter of duty
to administer in the manner which,
in his judgment, is best calculated to
produce the most beneficial results for
the community - the man of wealth thus
becoming the mere trustee and agent for
his poorer brethren, bringing to their
service his superior wisdom, experience,
and ability to administer, doing for them
better than they would or could do for
themselves (in Krauz & Pava, 1995, p.
113).
In 1919, in the case of Dodge v. Ford,
the State of Michigan Supreme Court held
that “[a] business corporation is organized
and carried on primarily for the profit of
the stockholders” (Tsuk, 2003, p. 1861).
This concept of corporate responsibility
has remained the standard for the doctrine
of fiduciary duties; Tsuk notes that this
concept is based on the assumption that
market competition, “as manifested in the
profit motive,” is in and of itself a sufficient
constraint on corporate power. “Legal
doctrine does not exist in a vacuum,”
though he notes. “Over the past century
legal scholars and political scientists helped
legitimize the shareholder-centred vision of
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the corporation by suggesting how different
interests would help direct corporate power
toward socially beneficial aims.” (Tsuk, p.
1861).
In fact, during the middle of the 20th
century, this sharp distinction between
personal and corporate responsibilities
began to change and the nature of corporate
social responsibility today has become
focused on transforming these concepts
into a set of standards that can be called
upon by corporate leaders when they are
faced with situations where the ethical
alternative may not be so readily discernible
though (Krauz & Pava, 1995). According
to Mayer, “These more universal standards
are called hypernorms, and would limit the
moral free space of microsocial contracts
by forbidding acts which violate the most
fundamental principles of human existence”
(p. 215). In response to violations and
perceived violations of these fundamental
principles, the following small set of claims
is representative of the challenges being
made today concerning private business
activity and the venues in which they take
place:
3. In response to public concern, that
American companies and their agents
are violating the rights of workers in the
developing world, the U.S. government
endorses and oversees the creation of a
voluntary code of conduct for the apparel
industry;
1. The United Nations Security Council
condemns illegal trade in diamonds for
fuelling the civil war in Sierra Leone
and asks private diamond trading
associations to cooperate in establishing
a regime to label diamonds of legitimate
origin;
6. Citizens of Burma and Indonesia sue
Unocal and Freeport-McMoRan in
United States courts under the Alien Tort
Claims Act and accuse the companies
of violating the human rights of people
near their operations; the corporations
win both suits without a trial.
2. The European Parliament, concerned
about accusations against European
companies of involvement in human
rights abuses in the developing world,
calls upon the European Commission
to develop a “European multilateral
framework
governing
companies’
operations worldwide” and to include in
it a binding code of conduct;
7. Holocaust survivors sue European banks,
insurance companies, and industries
for complicity in wartime human
rights violations, and, with the aid of
the U.S. government, achieve several
multimillion-dollar settlements (Ratner,
2001, pp. 436-7).
4. The South African Truth and
Reconciliation Commission, in a
searching study of apartheid, devotes
three days of hearings and a chapter of
its final report to the involvement of
the business sector in the practices of
apartheid;
5. Human Rights Watch establishes a special
unit on corporations and human rights;
in 1999, it issues two lengthy reports,
one accusing the Texas-based Enron
Corporation of “corporate complicity in
human rights violations” by the Indian
government; and another accusing
Shell, Mobil, and other international
oil companies operating in Nigeria of
cooperating with the government in
suppressing political opposition;
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J.C. Arias, Kate Patterson
Stakeholder
Theory
and
Its
Implications
for
Multinational
Corporations.
Stakeholder theory is fairly straightforward
in its approach to developing effective and
ethical corporate governance regimens. The
term “stakeholder” first appeared in the
business lexicon after its introduction by
Robert K. Merton in the 1950s, and it first
appeared in the 1963 management literature
at Stanford Research Institute (Kakabadse,
2001). The stakeholder concept was defined
originally as being “those groups without
whose support the organization would cease
to exist” (Freeman, 1984, p. 31 cited in
Kakabadse, p. 25). Freeman was the first
scholar to provide a theory that examined
the role and impact of actors with divergent
agendas on an enterprise, firm; in his works,
he sought to provide an understanding of
the dynamic relationships that a typical
company develops with its external
environment, and its behaviours within this
environment (Kakabadse, 2001). This body
of early research emphasized the fact that a
wide variety of internal and external actors
have an impact on a company’s actions. As
a result, stakeholders today are regarded
as being “any group or individual who can
affect or is affected by the achievement of
the organization’s objectives and as such
firms should identify their direct and indirect
stakeholders” (Kakabadse, p. 25). Along
these lines, Donaldson and Preston (1995)
maintain that individual stakeholder groups
are not so readily discernible; however, it is
the interests that groups represent (internal or
external) that can be highlighted. Therefore,
Kakabadse suggests that today, it is the
“interest” that is the critical variable rather
than the individual stakeholders involved.
According to Mcmenamin (1999), “What
is needed is for the concept of shareholder
to be broadened to that of ‘stakeholder.’
All those affected by corporate behaviour
— the general public, workers, consumers,
and the surrounding community — ought
to have some representation on corporate
boards” (p. 53). In the private sector, the
primary stakeholders are, of course, the
company’s owners; in the public sector,
though, the primary stakeholders are citizens
as exemplified by a wide range of citizens’
charters, patients’ bill of rights, and so on.
In addition, a company’s employees, lenders
(besides its creditors) and any others who may
have a direct economic interest in the entity
are regarded as secondary stakeholders;
while potential investors and their advisers,
stockbrokers, tax authorities, members of the
public and other users of published accounts
are considered to be “tertiary stakeholders”
(Mcmenamin, p. 54). Those corporations
that subscribe to the stakeholder theory of
corporate governance consider these actions
to be part of their “social responsibility”;
these enterprises tend to believe that
encouraging and actively promoting good
stakeholder relationships is vital for the
long-term benefit and competitiveness of
the company. According to Mcmenamin:
For example, providing good value for
customers enhances customer loyalty
and improves competitiveness, which
in turn creates value for the firm,
allowing it to create even greater value
(wealth) for its other stakeholders such
as its employees. Stakeholder theory is
reflected in the ‘partnership’ approach
taken by many organizations in their
relationships with suppliers, customers
and community groups. (p. 54).
The stakeholder approach to corporate
management is also a comprehensive one
in that it must recognize the rights of all
the diverse interest groups rather than just
the rights of the shareholders. As a result,
numerous organizational goals are likely to
emerge, just one of which the maximization
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of shareholder return on investment; in
fact, this author suggests that for some
multinationals, this aspect may not even
be the most important goal (Mcmenamin,
1999). In their book, Rethinking Business
Ethics: A Pragmatic Approach, Buchholz and
Rosenthal point out that effective stakeholder
management by multinational corporations
demands attention to the legitimate interests
of all appropriate stakeholders, including the
government as just one among the variety
of types of stakeholder; in fact, this is the
very basis of the stakeholder model which
precludes assigning any inordinate attention
to the interests of any one constituency
over another. In this regard, Donaldson and
Preston emphasize that:
To be sure, it remains to implement in law
the sanctions, rules, and precedents hat
support the stakeholder conception of the
corporation. . . . Yet over time, statutory
and common law are almost certainly
capable of achieving arrangements
that encourage a broader, stakeholder
conception of management--one which
eschews single-minded subservience
to shareowners’ interests--while at the
same time restraining the moral hazard
of self-serving managers. (p. 91).
The responsibilities of multinational
corporations to society at large as well as
their stakeholders in particular has received
greater attention in recent years, particularly
in view of the above-cited instances of
extreme abuses by some companies as well
as others that are not as well known. For
instance, in the UK, the Prince of Wales
Trust recently sponsored a meeting of the
Prince of Wales Business Leaders Forum
devoted to the topic of “responsible business”
(Kennedy, 2000, p. 206). According to this
author, “North American readers may find
this obscure, but as one who has lived in
the UK for many years, I can tell you it is
an event of note in the business community
there. Closer to home, hundreds of articles
and a score of books have been published
every year for the past twenty years extolling
the virtues of stakeholder management”
(Kennedy, p. 206). The need to assess
stakeholder interests while competing on
a global basis though carries with it some
inherent difficulties that may not be readily
discernible to the casual observer. For
example, “Duties of care and loyalty emerge
in the corporate setting as restraints upon
managerial behaviour. Corporate profits do
not belong to the managers -- they belong to
the shareowners. These duties thus compel
managers (1) to conduct business in such as
way that contributes toward increasing these
profits, and (2) not to use corporate profits
to serve personal purposes, or the purposes
of anyone other than shareowners” (Radin,
2003, p. 620).
Despite these restrictions and frequently
indiscernible limitations, though, a number
of organizations have been established in
North American college campuses that are
concerned with the associated issues that
have emerged from the stakeholder theory
of the corporation, including concepts such
as business ethics, corporate responsibility,
corporate community relations, and
corporate citizenship. Kennedy suggests
that one reason the shareholder value theory
of the global marketplace has gained such
popular acceptance is that it has struck a
responsive chord among the citizens of the
world. “And as far as it goes, it is true,” he
adds. “I have argued that the shareholder
value theory of the corporate world, though
perfectly valid, went wrong in its exploitation
of stakeholders when it forced their backs
so much to the wall that each and every one
of them had to respond aggressively, so that
the future viability of corporations is today
threatened” (Kennedy, p. 206). The author
cautions, though, that these observations are
not advocating one position over another,
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J.C. Arias, Kate Patterson
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but rather they are simply the reality of doing
business in the international marketplace
today.
According to Kennedy, “Corporate
managers and board members should take
heed, or they will be overwhelmed by the
forces set in motion against them. There
is nothing wrong with the idea that people,
even theoretical ‘people’ like corporations,
should do ‘right.’ It just belongs in the
province of religion, not commerce.” (p.
206). Clearly, what is “right” in any given
setting can be a highly subjective matter, but
the vast majority of people appear to have a
fine-tuned sense of justice that can readily
detect when something does not pass the
“smell test.” In this regard, Radin suggests
that, “Ignoring stakeholder concerns might
not affect short-term performance, but it
can have a serious negative impact on longterm performance. If we have not learned
anything else from the experiences of such
companies as Enron, Arthur Andersen, and
WorldCom, we should have learned that life
catches up to you. This is true for individuals,
organizations, and society at large”
(emphasis added) (p. 621). Therefore, if a
multinational corporation seeks to develop
a comprehensive set of ethical guidelines
by which it intends to prosecute its business
interests abroad, there is much to consider
but there are a number of issues involved
that may not be readily discernible to the
casual observer. These issues are discussed
further in the analysis section following a
description of the methodology employed
below.
Methodology
As noted above, this study employs a
critical review of the scholarly and peerreviewed literature in an exploratory fashion
to answer the guiding research questions. In
his book, Social Research Methods (5th ed.),
Neuman (2003) reports that, “Reviewing the
accumulated knowledge about a question is
an essential early step in the research process.
As in other areas of life, it is best to find out
what is already known about a question
before trying to answer it yourself.” (p. 96).
According to Wood and Ellis (2003), a wellconducted literature review can produce a
wide range of positive results including the
following:
1. It helps describe a topic of interest
and refine either research questions or
directions in which to look;
2. It presents a clear description and
evaluation of the theories and concepts
that have informed research into the
topic of interest;
3. It clarifies the relationship to previous
research and highlights where new
research may contribute by identifying
research possibilities which have been
overlooked so far in the literature;
4. It provides insights into the topic of
interest that are both methodological
and substantive;
5. It demonstrates powers of critical
analysis by, for instance, exposing taken
for granted assumptions underpinning
previous research and identifying the
possibilities of replacing them with
alternative assumptions;
6. It justifies any new research through a
coherent critique of what has gone before
and demonstrates why new research is
both timely and important.
Both primary and secondary sources will
be consulted, and a qualitative assessment
will be made as to the relevance of the
Arias, J.C., Patterson K.- Relationships between Corporate Social Responsibilities’ Promotion and Corporate Performance in the Multinational Corporations
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104
material for the purposes of this analysis.
Analysis
It would seem reasonable to assert that if
a multinational corporation seeks to ensure
that its behaviours afford the maximum
protections and benefits for all of its
stakeholders; it would be at a competitive
disadvantage compared to those which did
not. After all, any efforts that are directed
at initiatives that do not contribute to a
company’s overall profitability would
seem to detract from its ability to compete
effectively, particularly in a globalized
marketplace; however, this is not always
the case and studies have shown time and
again that to the extent that a multinational
seeks to achieve this balance is the extent to
which it will enjoy an improved reputation
and facilitate consumer loyalty (Rao,
1999). In this regard, Krauz and Pava
point out that although there is not a oneto-one relationship between corporate social
responsible activities and profitability,
nevertheless, these initiatives represent
“a signal of the presence of a style of
management that extends broadly across the
entire business function and leads to more
profitable operation” (p. 31). These authors
conclude that “it is exactly this ability to
sense, adapt, negotiate with, and cope with
these forces that is . . . the sign of managerial
excellence and hence profitability” (Krauz
& Pava, p. 31).
In his book, Managers and National
Culture: A Global Perspective, Peterson
(1995) reports that, “International business
operations have changed rather dramatically
in the latter years of the twentieth century.
The first international presence of a German,
American, or Japanese firm may have been
through exporting a product or establishing
a sales operation in another country” (p. 5).
A few years later, though, companies
may have established an international
division to assist in the management of
operations in a variety of countries. Even
more recently, the same companies may
be attempting to compete on a global basis
such as exemplified by Unilever (Peterson,
1993). A key feature of the modern global
economy has been the emergence of what
Dunning terms “alliance” capitalism (also
called relational, collective, stakeholder and
collaborative capitalism). “While retaining
many of the characteristics of hierarchical
capitalism,” the authors advises, “the
distinctive feature of alliance capitalism
is the growing extent to which, in order to
achieve their respective objectives, the main
stakeholders in the wealth-seeking process
are needing to collaborate more actively and
purposefully with each other” (p. 119).
This level of collaboration includes
the conclusion of closer, continuing, and more
clearly delineated intra-firm relationships,
such as that required between functional
departments and between management and
labour; the growth of a variety of interfirm
cooperative agreements between suppliers
and customers and among competitors; and
the increasing recognition by governments
and companies alike concerning the
requirement to work as partners if the
economic goals of the enterprise itself and
society at larger are to realized (Dunning,
2001).
The stakeholder theory suggests that
by taking into account the broader interests
and responsibilities that go hand-in-hand with
multinational enterprises, a firm stands to
fulfil its obligations in such a manner that the
public will naturally support it (Rao, 1999).
Likewise, Karake-Shalhoub (1999) reports
that the most commonly endorsed argument
in support of the stakeholder theory is the
performance one, which has been advanced
by some strategic management theorists,
who emphasize the advantages that accrue
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to multinational corporations that subscribe
to the stakeholder approach.
This view is in stark contrast, though,
with some other traditional views about how
105
companies should behave in a globalized
marketplace; a comparison of such
assumptions is provided in Table 1 below.
Table 1. Comparison of Paradigm Assumptions Concerning Firm Behaviours and Their Implications
Neoclassical
Environmental
Goals
Maximize
wealth
consumption and
through
economic expansion
Survival and quality-of-life issues
Economic growth
Sustainable development
environment
Social, political, cultural, economic
Social, political, cultural, economic,
biophysical
Resource constraints
Financial, human, technological
Financial,
natural
Progress
Unlimited growth and resources
Limits to growth, limited resources
Strategy focus
Resource conservation and utilization
Resource conservation
Nature of relationship
Anthropocentric, reversible processes
Holistic, irreversible processes
Time span
Short to medium, focus on present
and
immediate future
Ecological time span, longterm, future
generations
Stakeholder groups
Shareholders,
institutions
Context of external
customers,
human,
technological,
public, Shareholders, customers,
institutions, planet
public,
preservation, future generations
Source: Rao, 1999, p. 57.
In his essay, “Transaction Costs and the
Historical Evolution of the Capitalist Firm,”
Pitelis (1998) observes that the neoclassical
view holds that “institutions are sets of
rules, compliance procedures, and moral
and ethical behavioural norms designed to
constrain the behaviour of individuals in the
interests of maximizing the wealth or utility
of principals” (p. 999). The proponents of
the neoclassical approach to competing in a
global marketplace maintain that corporate
law requires managers to exercise their
power to maximize shareholder value, not the
interests of other corporate constituencies,
specifically workers; however, the collapse
of Enron and the enormous losses suffered
by its rank-and-file workers identified
serious problems with this shareholdercentred vision of corporate law (particularly
the
short-term
shareholder-wealthmaximization norm) (Tsuk, 2003).
According to Prakash (2000), neoclassical
economists view the social objective of
business is to maximize shareholders’
wealth; by contrast, stakeholder theory
maintains that multinationals should (and
in some cases do) design corporate policies
by taking into account the preferences of
multiple stakeholders; stakeholders being
“any group or individual who can affect
or is affected by the achievement of the
organization’s objectives” (p. 5). In a
similar vein, the literature on corporate
social performance, responsibility, and
Arias, J.C., Patterson K.- Relationships between Corporate Social Responsibilities’ Promotion and Corporate Performance in the Multinational Corporations
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responsiveness suggests that companies
have inherent societal responsibilities other
than the goal of maximizing shareholder
wealth. For example, Ostas (2001) points
out that some authorities on corporate social
responsibility may simply adopt a formalist
perspective that naturally assumes that the
relevant “law” comprises a set of singular and
well-defined commands. “When a corporate
social responsibility issue arises,” Ostas
notes, “the manager is advised to consult inhouse counsel, and the legal consequences of
alternative actions will be made clear. The
manager has no real discretion; he or she
must simply follow ‘the law’” (p. 261). By
contrast, Prakash notes that corporate social
performance policies are frequently adopted
by many multinational companies simply
because they are the “right things to do” (p.
5). However, in her book, The Governance
of Corporate Groups, Dine (2000) points out
that:
A major difficulty with stakeholder
theory, at least as it has been applied in
Britain, is that the term ‘stakeholding’has
been used to refer to a very wide range
of interests which are loosely related at
best … If the category of stakeholding
interests is widened to include those of
all potential consumers of the company’s
products, for example, or to refer to
the general interest of society in the
sustainability of the environment, there
is a danger that the idea of stakeholding
will cease to be relevant. (p. 20)
Of course, different stakeholders and
institutions have different expectations;
sometimes expectations may even be
mutually exclusive; Rao makes the point,
though, that all of these frameworks have
been based on Western perspectives to the
virtual exclusion of other worldviews, a
fact that compelled many researchers to reexamine their underlying tenets in the face
of the new realities of the 21st century if
companies want to attract and retain loyal
customers. According to Kennedy, though,
“Consumer loyalty is at best a nebulous
concept. Does it mean a consumer is
willing to buy something more than once
or shop regularly at the same retail outlet?
Or does it mean a consumer has a regular
and immutable pattern of buying only one
brand and not another?” (p. 149). Taken
together, this means that identifying where
consumer loyalty stands at any point in
time is challenging, but it is a basic precept
to ensuring the survival of almost every
organization today.
Based on the important nature of
developing consumer loyalty, it is little
wonder that so much attention has been
focused on attempting to quantify it. The
results of a survey of food-buying behaviour
in 1997, for example, found that: fewer than
one in four consumers in any food category
relies on a brand; 26 percent of consumers
who do have a preferred brand buy instead
what best fits their budget at the time; 37
percent of those who think of themselves as
brand loyal indicate they try other brands all
the time; and, 71 percent of those surveyed
who did switch brands said they experienced
no difference from the switch (Kennedy,
2000). Likewise, a 1998 survey of traveller
brand loyalty determined that fully 65
percent of travellers avowed loyalty to a
particular brand in 1998, a decrease from 75
percent in the same survey in 1997; however,
45 percent of the leisure travellers surveyed
indicated they were more than willing to
change brands, and business travellers
reported that their brand allegiance (which
is frequently obtained at great expense
through airline or hotel loyalty programs)
was important only when it was convenient
for them. Similarly, a 1996 research study
of loyalty to 500 separate brands concluded
that only 12 percent of consumers were
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“highly loyal to any brand” (Kennedy, p.
150).
Given these constraints, multinationals
are at a distinct disadvantage, it would seem,
in attempting to garner additional market
share particularly if they are distracted by
issues involved the potential stakeholders
that are involved. In this regard, Kennedy
reports that, “Loyalty is dead, the experts
proclaim, and the statistics seem to bear
them out. On average, U.S. corporations lose
half their customers in five years, half their
employees in four, and half their investors
in less than one. We seem to face a future
in which the only business relationships
will be opportunistic transactions between
virtual strangers” (p. 151). Notwithstanding
these dismal conclusions, though, the fact
remains that multinationals have succeeded
in attracting new customers whilst balancing
their responsibilities to their shareholders
and stakeholders alike. In fact, Radin
(2003) points out that convincing arguments
can be and have been made that attention to
multiple stakeholders can actually improve
a multinational’s overall profitability in the
long-term if not the short-term as well. In
reality, consumer choice, legal regulations,
and global competition all make assessments
of what products are acceptable to consumers
in one venue or another (Fort, 2001). Because
corporations are legal entities but not actual
“people,” some authorities suggest that they
are fundamentally incapable of assuming
a moral position on these matters; in other
words, a corporation can neither be considered
to be a moral agent nor be said to have social
responsibilities. The following statement is
illustrative of this point: “A corporation .
. . is nothing more than a legal fiction that
serves as a nexus for a mass of contracts
which various individuals have voluntarily
entered into for their mutual benefit. Since it
is a legal fiction, a corporation is incapable
of having social or moral obligations much
in the same way that inanimate objects
are incapable of having these obligations.
Only people can have moral obligations or
responsibilities” (Dalton & Metzger, 1996,
p. 66). Nevertheless, these authors also
make it clear that:
Just as the forest is not itself a full-fledged
biological entity, so the corporation is
not a full-fledged person. Gulf Oil Co.
does act in some sense of that term,
but its acts are vicarious ones, and its
personhood is thus greatly restricted.
But, corporate agency is not restricted
to such an extent that moral appraisal
of its action is ruled out. There are
actions of the corporation which can
be morally blameworthy even though
the corporation’s agency status is much
more restricted than that of full-fledged
moral agents. (p. 491)
According to Krauz and Pava (1995), the
leadership of many multinational corporations
perceives corporate social responsibility
activities as being legitimate endeavours
that are also in their own best interests. In
terms of socially responsible behaviours on a
company’s bottom line, the findings reported
to date are largely inconsistent and there is
evidence to support both the neoclassical and
stakeholder approaches (Blackburn, Doran
& Shrader, 1994). In their book, Work and
Life Integration: Organizational, Cultural,
and Individual Perspectives, Kossock and
Lambert (2005) point out that the results
of 60 years of scientific research on criteria
between 1917 and 1976 was the identification
of the “criterion problem”; this term
describes the inherent difficulty involved
in the conceptualization and measurement
of performance constructs, particularly
when financial performance measures are
multidimensional and are used for different
purposes. In this regard, Blackburn et al.
report that the most widely used measures
of corporate social responsibility are
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reputational indexes; however, the primary
constraint associated with this measure is
its undetermined reliability. “An equally
prevalent reputational measure of social
responsibility has been provided by the
Council on Economic Priorities (CEP),”
they advise.
“The CEP reported the
pollution control performance of 24 firms
in the paper and pulp industry; this measure
has been subsequently used as a proxy for
social responsibility in numerous studies”
(Blackburn et al., 1994). Reputational
measures are insufficient for a number
of reasons, though. For example, this
technique assumes that social responsibility
is a one-dimensional concept that can be
delineated in an investigation of the firm’s
pollution control record; however, this
assumption requires yet another assumption
concerning the commonality of interests of
all stakeholder groups. The validity of these
assumptions becomes unwieldy in view of
the number of affected stakeholder groups;
likewise, the pollution control measure has
only been provided for a single industry
which represents an enormous constraint
on the external validity of the findings since
it is most likely inappropriate to assume
that the dimensions of social responsibility
are comparable across all industries. In
this regard, Blackburn and his colleagues
point out that, “The interests of stakeholder
groups and their ability to affect corporate
activities are also likely to vary with respect
to the nature of the industry, be it upstream
manufacturing, consumer products or
service oriented” (p. 196). Still another
technique designed to assess the impact of a
company’s social responsibility behaviours
using reputational measures was advanced
by McGuire et al., who employed the
Fortune reputational measure comprised
of executive rankings of firm performance
within certain industries. According to
Blackburn et al, the largest ten companies
within each industry were rated on eight
separate dimensions: 1) financial soundness,
2) long-term investment value, 3) use of
corporate assets, 4) quality of management,
5) innovativeness, 6) quality of products
and services, 7) ability to hire and maintain
qualified personnel, and 8) community and
environmental responsibility. It remains
unclear, though, whether these researchers
used only the social responsibility measure or
an aggregate measure of all eight dimensions
(Blackburn et al., 1994). The McGuire et al.
study cited previous work suggesting strong
correlation between the Fortune rankings
and financial performance as being sound
evidence of the validity of the measures,
while Blackburn and his colleagues point out
that the opposite is most likely true in reality.
In still other studies, there has being a strong
“halo effect” identified within the Fortune
rankings. According to Blackburn et al, “The
results of the principal component analysis
report in these studies suggests that financial
performance is most likely the source of the
“halo effect” since the public information
that is available is generally limited to
financial results, a fact that may help to
explain McGuire et al.’s findings that past
performance was more strongly correlated
with socially responsibility behaviours than
future performance. “At a minimum,” they
add, “the evidence casts suspicion on the
use of the Fortune reputational survey as
a valid measure of social responsibility”
(Blackburn et al, p. 197). Therefore,
developing
appropriate
criteria
for
multinational corporations to assess the
impact of socially responsible behaviors
requires the accurate conceptualization
and measurement of success. The terms
“conceptual,” “theoretical” and “ultimate
criterion” describes the full spectrum
of corporate performance and includes
everything that ultimately defines success
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J.C. Arias, Kate Patterson
for a given enterprise (Kossek & Lambert,
2005). According to these authors:
The ultimate criterion is strictly
conceptual and therefore cannot be
measured or directly observed. It
embodies the notion of true, total,
long-term, and ultimate worth to the
employing organization. Implicit in
this model for analyzing criterion
contamination, deficiency, and the like
is the questionable assumption that we
all know and agree about the conceptual
definition of performance or success
(i.e., the idea that the ultimate criterion
is obvious and uncontroversial). (Kossek
& Lambert, p. 322).
Likewise, the definition of what constitutes
satisfactory job performance, a successful
career, an effective organization, and so on
also requires the ability to make decisions
about what will constitute facets of success
and what will be considered irrelevant for the
corporation’s unique purposes. According to
Kossek and Lambert, in most organizations,
“The most powerful stakeholders set the
agenda and decide what will legitimately
define success. In addition, the most
powerful stakeholders influence how these
dimensions of success are actually measured
and by whom” (p. 322). In multinationals,
it is generally the company’s management
that determines how best to conceptually
define and then measure their success along
these dimensions; however, this definition
necessarily involves a value judgment
concerning whose values are important.
“The values of various stakeholders might
lead to widely varying definitions of
performance or success.” (p. 322). Clearly,
then, developing clear measures of success
transcends mere financial performance,
but it does not obviate the need to remain
profitable for the company’s long-term
survival.
Conclusion
The last few years have witnessed
fundamental changes in the social and
political arena of the global marketplace.
Markets that were formerly restricted have
now eagerly embraced the principles of free
market economies, and the focus of many
multinational corporations has shifted to these
emerging markets (Rao, 1998). Likewise,
the past few years have also witnessed a
trend away from the neoclassical view of
corporate responsibilities toward one that
emphasizes the stakeholder relationships
that influence companies and communities
alike, indeed, not only on a local or national
level, but also on a truly global scale (Radin,
2003). Neoclassical theorists have long
maintained that the primary obligations of
a company’s leadership is to maximize the
return on investment of their shareholders,
but increasingly, stakeholder theorists are
justifying their rationale with substantive
examples of how multinationals can achieve
their organizational goals while balancing
the needs of all of those affected by their
enterprise. One of the primary limitations
of this analysis, though, is also related to its
primary strength. The analysis of the extant
data at any given point in time provides the
researcher with a “snapshot” view of the
state of affairs, but given the nature of the
international marketplace today, this view is
of only passing value.
Recommendations
Based on the foregoing, it would seem
that any company that seeks to achieve
its organizational goals in an increasingly
globalized marketplace must pay careful
attention to how it is perceived by its customers
and potential customers. Companies that
invest too heavily in social responsible
activities may jeopardize their profitability,
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thereby failing their shareholders; likewise, to
the extent that such companies fail to engage
in such social responsible activities at all, or
only in superficial ways, may threaten their
company’s survival by driving customers
and potential customers away. Therefore,
a careful balance of the neoclassical and
stakeholder approach to doing business in
the international marketplace is required
today.
The primary issue that emerged from the
analysis of the literature was that corporate
managers today are faced with some
profound challenges as they seek to achieve
their organizational goals in an increasingly
competitive, international marketplace. On
the one hand, a company’s management
has a primary obligation to ensure that
they manage the enterprise’s affairs in a
responsible way that ensures the long-term
survival of the company; on the other hand,
these same managers are being confronted by
a wide range of external forces over which
they have little or no control, but which must
be taken into account in formulating strategic
business plans. Perhaps the most glaring
issue in this analysis concerned the need to
balance these needs while conforming to a
standard that appears in many cases to be a
highly elusive moving target. For example, a
company might well be regarded as a highly
ethical enterprise because of its commitment
to a certain set of ideals in one country, while
the people of another nation might view
the same set of standards with contempt
and disdain. Further complicating this mix
is a highly volatile international political
situation today that may adversely affect
even the best-laid plans of a multinational
today.
Another issue to emerge from the
research was just how much attention has
been devoted to the subject of socially
responsible corporate behaviours, perhaps
as a reflection of a world that is becoming
smaller by virtue of telecommunications
and improvements in transportation, or
perhaps as a reaction to disastrous effects
carried by greedy corporate behaviour in
the marketplace which derived onto painful
consequences against the doer agent. Issues
that may not have even been considered
important just a few years ago have assumed
critical importance for many multinationals
today. What was not surprising was that the
research to date on the relationship between
corporate profitability and social responsible
behaviours showed mixed results; what was
surprising, though, was that there has been
such a paucity of reliable measures that can
accurately assess the impact of these actions
on a company’s financial performance.
Given its relevance and importance today,
this would seem to represent a principal
component of any company’s strategic
business plans, particularly for those who
would seek to expand their operations into
foreign locales. Even for those companies
who merely wish to establish a presence in
the global marketplace through a Web site,
for example, understanding why and when to
engage in activities that may detract from a
company’s short-term profitability in favour
of developing a “corporate halo” must be
viewed with some degree of suspicion
notwithstanding the underlying need to “do
what is right.” Knowing what is “right”
today involves much more than it did just a
few years ago, it would seem, and even the
most environmental friendly and socially
responsible multinationals may fail to reap
the full benefit of their investments abroad if
they fail to take into account these sometimes
nebulous concepts. Nevertheless, it became
abundantly clear as the research progressed
that this is what is required today, and those
managers who ignore these realities do so at
their companies’ peril.
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