A strategic approach of Corporate Social Responsibility (CSR) : Monopoly rents and new corporate governance Marianne Rubinstein Université Paris 7 & CEPN

I. Is CSR compatible with profit seeking ? II. Strategic Approach and Monopoly Rents III. The role of CSR in New Corporate Governance

I. IS CSR COMPATIBLE WITH PROFIT-SEEKING ? CSR DEFINITIONS Green Paper Promoting a European framework for corporate social responsibility, European Commission (2001) : « Corporate social responsibility is essentially a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment. ( … )Most definitions of corporate social responsibility describe it as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. »  Integrate social and environmental concerns in the corporate objective function. Mc Williams, Siegel and Wright (2006) : « We define CSR as situations where the firm goes beyond compliance and engages in actions that appear to further some social good, beyond the interests of the firm and that which is required by law ». Business for Social Responsibility, the San Francisco based CSR membership organization, defines CSR as « achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment ».  No consensus

IS CSR COMPATIBLE WITH PROFIT-SEEKING ? WHAT THE STAKEHOLDER THEORY TELLS US CSR is an application of the stakeholder theory where a stakeholder « can affect or is affected by the achievement of the organization ’ s objectives » (Freeman 1984). Stakeholder theory cannot be fully justified by instrumental considerations (Donaldson and Preston 1995) : - Weaknesses of analytical arguments ; - No empirical evidence (more than 300 empirical studies). A solution ? Make a distinction between Stakeholder management (= building better relations with primary stakeholders to develop competitive advantage) and Social issue participation (= using corporate resources for social issues not related to primary stakeholders), cf. Hillman and Keim  Strategic approach of CSR.

Generic Social IssuesValue Chain Social Impacts Social Dimensions of Competitive Context Good citizenship Mitigate harm from value chain activities Strategic philanthropy that leverages capabilities to improve salient areas of competitive context. RESPONSIVE CSR Transform value-chain activities to benefit society while reinforcing strategy STRATEGIC CSR II. Strategic Approach and Monopoly Rents The Porter and Kramer framework (2006). « Generic Social issues may be important to society but are neither significantly affected by the company’s operations nor influence the company’s long term competitiveness ».. « Value chain social impacts are those that are significantly affected by the company’s activities in the ordinary course of business ». « Social imensions of competitive context are factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates »

The Porter and Kramer framework (2006) Every company needs to sort social issues into these three categories and select those which have a positive impact on the company. For example, carbon emissions may be a generic social issue for a Bank, a negative value chain impact for a transportation-based company or both a value chain impact and a competitive context issue for a company like Toyota. Strategic CSR involves both inside-out dimension (when corporate activity affect society) and outside-in dimension (when external social conditions influence corporations) working in tandem to improve the competitive advantage of the company. Strategic CSR improves the competitive advantage.

Finally, if we follow the Porter and Kramer framework (industrial economics), the strategic approach is no more than a way to capture monopoly rents. Different ways to capture those rents : Product differentiation : -Vertical differentiation : at the same price, the hybrid car is prefered to the non-hybrid car ; -Horizontal differentiation which depends on the agent preferences : recycled paper versus better quality of paper but not recycled. Differentation between the socially responsible firms and the others. Advertising on CSR Barriers to entry : For example Marvel (1977) : Lord ’ s Althorp factory act of 1833

Such an analysis of strategic CSR is incomplete. With the emergence of a new type of firm, traditional corporate governance (shareholder model) becomes ineffective. In this context, CSR could be a way to define firm boundaries, and to reinforce property rights and hierarchy. III. What about the role of CSR in defining a new corporate governance ?

New firm and new governance (brief summary) Tradtional firm (Chandler 1990) : -  Vertically integrated and physical asset intensive (economies of scale and scope) -  High degree of control over its employees -  Firm boundaries approximated by the property of physical assets -  Owned by disperse investors  Traditional corporate governance (shareholder model) focused on the conflict between managers and shareholders New firm : -  Non vertically integrated and lesser importance of physical assets -  Strategic importance of human capital combined with weakened control over its employees -  The boundaries of the firm are fuzzy  Inadaptation of traditional corporate governance (cf. the Saatchi and Saatchi case in Rajan and Zingales 2000) ;  Necessity of a new corporate governance : « In the current environment, where human capital is crucial and contracts are highly incomplete, the primary goal of a corporate governance system should be to protect the integrity of the firm, and new precepts need to be worked out » (Zingales 2000).

Firm boundaries, property rights and hierarchy (1) Firm boundaries :  In the network-firm, the main firm is responsible for the subcontractors (e.g. Nike or Mattel)  Incentives and coordination mechanisms are included in CSR. Property rights and hierarchy :  Codes of conduct on CSR as a voluntary initiative of corporations.  Lexical analysis (Bethoux, Didry, Mias, 2007) : o Protection of the company property (on information, on employees ’ intelectual productions) o Assertion of managerial hierarchy

Firm boundaries, property rights and hierarchy (2) Property rights and hierarchy :  Codes of conduct on CSR are a voluntary initiative of corporations.  Lexical analysis (Bethoux, Didry, Mias, 2007) : Protection of the company property : The notion of the company property covers mostly information (customers information, financial information), intellectual production and discoveries. Assertion of managerial hierarchy : the employee can be individually defined as witness, investigator, suspect and the guilty. Codes define how to report acts violating the code, the company policy or the general law to the hierarchy. In the prevention of risks, the hierarchical dimension of control appears through these frequently mentioned verbs : monitor, inspect, assess, audit, control, review, evaluate. The exchange of gifts is not prohibited, but controlled by codes of conduct

Conclusive remarks