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V.Sodano, University of Naples federico II 1 S USTAINABILITY, CORPORATE SOCIAL RESPONSIBILITY AND FOOD MARKETS : THE ROLE OF COOPERATIVES (Keywords: corporate.

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Presentation on theme: "V.Sodano, University of Naples federico II 1 S USTAINABILITY, CORPORATE SOCIAL RESPONSIBILITY AND FOOD MARKETS : THE ROLE OF COOPERATIVES (Keywords: corporate."— Presentation transcript:

1 V.Sodano, University of Naples federico II 1 S USTAINABILITY, 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

2 V.Sodano, University of Naples federico II 2 Processes negatively affecting food systems sustainability 1. E nvironmental 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)

3 V.Sodano, University of Naples federico II 3 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 P APER S GOALS AND MOTIVATION

4 V.Sodano, University of Naples federico II 4 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.

5 V.Sodano, University of Naples federico II 5 THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM In the Hansmanns model, the ultimate reason for a class of patrons (i.e. persons with whom the firm has a contractual relationship) to become firms 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.

6 V.Sodano, University of Naples federico II 6 T HE N EW I NSTITUTIONAL E CONOMICS OF THE F IRM 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.

7 V.Sodano, University of Naples federico II 7 Contracts Complete, enforceable by a third party ( exercise of bargaining power) Incomplete, non enforceable by a third party Exercise of power through: Formal authority relations Endogenous enforcement mechanisms Inside influence activities Outside influence activities Market power Self-enforcing agreements Spot markets High transaction costs Power-based Trust-based Firms High transaction costs T HE N EW I NSTITUTIONAL E CONOMICS OF THE F IRM

8 V.Sodano, University of Naples federico II 8 Firms Investor owned firmsCooperatives 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. 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. Power-based Competitive behavior Trust-based Cooperative behavior T HE N EW I NSTITUTIONAL E CONOMICS OF THE F IRM

9 V.Sodano, University of Naples federico II 9 Requests for CSR Responses by cooperativesResponses by public firms Contract incompleteness Corrected by trust ( symmetric Nash bargaining solutions for the bargaining game associated with hold-up problems ) Residual claims exploited through power ( inefficient and 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 Providing public goods Equity and fairness preferences help to solve free- riding problems Opportunism exacerbates free riding problems

10 V.Sodano, University of Naples federico II 10 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. Empirical evidence

11 V.Sodano, University of Naples federico II 11 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. Empirical evidence

12 V.Sodano, University of Naples federico II 12 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 socio- cultural 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.

13 V.Sodano, University of Naples federico II 13 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.

14 V.Sodano, University of Naples federico II 14 D EFINITION 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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