Business for Society

Lucia Michela Daniele, Rémi Jardat, Jérôme Méric, Francesco Gangi

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000712100
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

This book is about promoting corporate responsibility in its original meaning: businesses should have a positive impact on society, and society should not only be a lever of making a profit. When we treat social responsibility as an external function of the core business, we are exposed to the worst.

Business for Society seeks to redress the balance and promotes the original idea of corporate responsibility. This first book in the series of the same name sets the scene and presents the key theories across the various management disciplines to answer the following questions: 'How, why and under what conditions can business act for society?' The book narrows and discusses examples of businesses which are making impressive strides in delivering positive impacts for society as well as their bottom lines; but as the concept of corporate responsibility has become more mainstream in recent years, many organisations have adopted the term and reduced it to a marketing message. Areas covered include a historical perspective on the hijacking of business responsibility towards society, management knowledge and value, the Business for Society project against hijacking, accounting for society, finance for society and governance for society and democracy.

The book will be of interest for scholars and students in the fields of corporate social responsibility, business ethics and governance.

1 A historical perspective on the hijacking of business responsibility towards society

Francesco Gangi and Jérôme Méric

1.1 What does hijacking consist of in managerial studies?

Why is it so difficult to give voice to criticism of the capitalist system? Why has such critique weakened rather than strengthened as time goes on? Boltanski and Chiapello (1999) have introduced the hypothesis that critique is ‘recuperated’ by the dominant ideology. We build on this assumption to propose that critique of management practices and discourse is hijacked by the mainstream.

The premises: recuperation of the critique of capitalism

Boltanski and Chiapello (1999) defend the idea that it is necessary to look for ‘ideological changes that have happened alongside recent transformations of capitalism’ (p. 35). Critique often seems to be disarmed by the pleasant faces of capitalism, accompanied by subsequent or precedent moral justifications. Published at the end of the 1990s, Boltanski and Chiapello’s book describes how capitalism’s transformations played out in tandem with a weakening of critique. It goes on to introduce ‘new forms of critique’, which, when advanced 20 years ago, were supposed to be strong enough to resist the new spirit of capitalism of that time. Indeed, the ‘ideology that justifies our engagement with capitalism’ (ibid.: 42) is so strong that critique, defined as a pragmatic stance based on resentment, has to develop patterns of resistance. Boltanski and Chiapello consider several forms of critique. First, the ‘artist’ critique denounces ‘disenchantment’, ‘inauthenticity’ and ‘domination’ in capitalist systems. The ‘social’ critique depicts capitalism as inducing ‘poverty’ and ‘inequality’ while fostering ‘opportunism’ and ‘selfishness’. Thus, the spirit of capitalism responds by providing answers in terms of the ‘excitement’ (for instance, entrepreneurial enthusiasm), ‘social welfare’ (security) and ‘common good’ (guarantee of justice) that capitalism provides.

Management language and literature are the most explicit expression of the spirit of capitalism. Guidelines or best practices for leaders and managers are framed in such a way that economic interest is bound up (or left apart) with moral engagement. Boltanski and Chiapello show how the new faces of capitalism have recuperated to some extent, the criticisms which had been expressed towards the ‘ancient world’. Long-range planning, hierarchy, formal authority and Taylorism have been replaced with personal relationships, empowerment, self-monitoring, participation, multidisciplinary approaches, network organizations, innovation and flexibility. These changes are the foundation stones for the ‘projective city’. They are interpreted as answers to the ‘artist’ critique, which in any case all but vanished two decades ago. In fact, capitalism has actually fed on critique. It has absorbed opposition within its own metamorphosis. In doing so, it moved towards a model based on connectivity, autonomy and flexibility at the expense of a former value promoted by the spirit of capitalism: security. This ideological shift has been described by Pesqueux (2007) as the ‘liberal moment’: freedom becomes much more valuable than security, individual performance is preferred to collective effort, effectiveness overtakes political insight, charity supplements a declining welfare state, local approaches replace great universal stories. Of course, a new criticism emerges in such a context: in a world of connections, what happens to those who cannot connect? How can laws stabilize social relationships in the unsteady world of networks? In their postscriptum, Boltanski and Chiapello make an attempt to moderate the fatalistic vision conjured within their work. However, overall, their research suggests that capitalism is more flexible than its critics and thus evades attack by evasion and shapeshifting. But what about the precise case of criticism of management practices and discourse?

Our position: critique of management is hijacked by dominant theories

Management knowledge is fundamentally pragmatic, according to Peirce’s (1905) understanding. Practice is the very essence of management concepts; conversely, managerial ideologies are instantiated within practice. By nature, management theories are predominantly normative or in search of justification. This leaves little space for inconsistency between ideas and facts, representations and actions. Most of all, it opens avenues for one-track thinking. The ecology and the economy of management knowledge reinforce this phenomenon (see Chapter 3 for more details). Thus, it is unsurprising to find Boltanski and Chiapello describing management discourse as the flagship for the new spirit of capitalism. At the same time, any critical theories which emerge in the field of management knowledge are constrained by the pragmatic imperative as described above. To a certain extent, they are required to demonstrate consistency with extant practice; in doing so, they necessarily adopt mainstream assumptions.

Critiques within the management-knowledge field are never radical: they do not question the capitalist system’s underlying premises. In considering the business-for-society project, neither do we. However, we aim to show that, when management knowledge is under consideration, critiques must be protected from the rapacity of dominant management or shareholder views: appetites which lead the mainstream to hijack critical theories. ‘Hijack’, used literally, means to steal by means of stopping a vehicle or to take control of an airplane by coercing the pilot at gunpoint. We use this word carefully and assert that it is a more appropriate term than ‘recuperation’ or ‘diversion’ to describe what we observe. Academic definitions make a distinction between hijacking and diversion or recuperation, with hijacking combining three characteristics: it is violent, it is morally reprehensible, and it preserves the stolen object for further, diverted, use. When the purpose of a critique is to effect a change in business practice in the interest of society, it is an immoral act of violence to hinder it. Nonetheless, the core of the critique is retained by the hijacker and reflected in the shape of pledges of social or environmental commitment. The moral reprehensibility of the system is seen in the way the original message is twisted to amplify the apparent moral value of a practice which remains fundamentally unchanged. Violence is also evidenced by the pressures exerted by academic and professional institutions, wherein academics and other actors who desire to persist with the critique become progressively caught within the iron cage (Weber, 1934) – a cage created by the system in which management knowledge is created and preserved.

Why do no businesses try to instil in their top managers a higher sense of responsibility, but instead allow them to myopically run operations for the sake of the short term, with no concern for the company’s future (Stein, 1989) – all the while giving pledges about responsible value creation? Probably because they have learned how to neutralize the shareholders – who should ordinarily be interested in the company’s long-term performance. This is a direct consequence of the hijacking of Berle and Means’s ‘Modern Corporation’ by means of agency theory.

Why do no businesses seriously consider their impact on the environment instead of decoupling their assuaging speeches and reports from their increasingly polluting practices? This is probably because they have learned how to neutralize those stakeholders who might denounce such attitudes. This is a direct consequence of the hijacking of stakeholder theory by the mainstream.

Let us present some details about the history of these hijacks, and how this process operates in the field of management knowledge.

1.2 How agency theory hijacked managerialism

In 1932, the economist Berle and the statistician Means (B&M) completed their research on modern American industry. They painted a picture of two interconnected socioeconomic phenomena – namely, the proliferation of the joint-stock company and the separation of ownership from control. In the first case, the reference is to a new legal vehicle, which afforded many industrial companies significant growth. The second reference is to the phenomenon of proprietary dispersion, which ushered in an era of control by managers. This analysis lays the foundations for many theoretical and practical implications, ranging from managerialism to its hijacking by agency theory, conceptions of the economic purpose of the firm, and the duties of those who control it.

Evolution towards the managerial theory of the firm

B&M found that the 200 largest companies in the United States (other than banks) held nearly 59 per cent of corporate wealth and controlled 22 per cent of all the wealth of the country. Armed with these remarkable figures, the two authors were able to identify the new tendency of capitalism, which would subsequently be borne out in the ensuing years and up to the present, namely, a massive concentration of economic power in the hands of the giant corporations and exercised by the ‘new princes’ of these ‘economic empires’ (Berle & Means, 1932: 124), that is, managers.

B&M’s analysis was timely. The financial magnitude of large companies has steadily increased over the years, as confirmed by data on public companies. In 2017, for instance, the total assets of S&P500 listed companies come to about twice USA’s GDP; total assets of FTSE100 listed companies are almost five times as high as the United Kingdom’s GDP; total assets of DAX listed companies are about twice Germany’s GDP (a similar situations obtains in Italy); and total assets of CAC40 listed companies equal around three times France’s GDP.

As argued by B&M, the increased power in the hands of managers is a consequence of the proprietary dispersion of the ‘quasi-public’ corporation (Berle & Means, 1932: 5). Such an entity is characterized by the presence of owners without appreciable control and a control without appreciable ownership. This split between those who own the company and those who control it is, according to B&M, inherent to the corporate system, with firms under management control where no single individual is the holder of an important proportion of total ownership.¹ It is a new configuration of the firm, revolutionizing the classic business model with the co-existence of an entity with a predominantly financial purpose and a management to which the entrepreneurial role is delegated. Focusing on this role, Drucker (1985), a few decades later, would recognize in management the main ‘vector’ that has favoured the development of the business economy. From this perspective, management becomes a techne, a technological innovation which has allowed people with different skills and knowledge to come together within the same organization and be productive (Drucker, 1985).

Indeed, the innovation which was managerial control, as described by B&M, has become so impactful over the years that it has significantly fuelled the debate on the broader theory of the firm, particularly with reference to decision-making and business aims. In relation to the first aspect, ownership, once separated from control, becomes exclusively the holder of a security which confers rights and obligations towards the company, and assumes a more passive than active role. As we will describe in the following sections, this aspect favours the conception of the firm as a legal fiction, according to the proponents of agency cost theory (Jensen & Meckling, 1976). The figure of the professional manager, who shares the same entrepreneurial spirit, is added to the heroic figure of the entrepreneur-owner described in the Schumpeterian model (1934) – someone with the ability to transform an invention into innovation and therefore into a business opportunity. Some years later, around the 1980s, scholars of managerial theory would introduce the new concept of widespread innovation which is rooted in the roles of top and middle management, and on interorganizational links within the company (Drucker, 1985; Imai et al., 1984). As Drucker argued, in that period experience taught us that the size of firms under management control does not impose a limit on innovation. On the contrary, the large companies are also the most innovative (Drucker, 1985). The limit is one of structural inertia, and an entrepreneurial management works against such an organizational bond. This new vision of the company and the innovative capability of the managerial system are widely reflected in the present day. For instance, a giant corporation like Google (around $800 billion in capitalization in 2018) is identified not only with founders Larry Page and Sergej Brin but also with its CEO Sundar Pichai, who is among the world’s most respected CEOs (Reputation Institute, 2018). The same can be said of Apple, which from founder Steve Jobs has passed into the hands of CEO Tim Cook, increasing its market value by 60 per cent (estimated at around $1 trillion in capitalization in 2018).

Thus, the biological metaphor of the company, within which a firm is identified with its founder, is overtaken by an evolution towards the managerial firm. The company is no longer just a reflection of the innovative entrepreneur’s personal values and ideas, but now also of those of the managers who work in and for the company (Harris & Freeman, 2008). In order to understand the economic essence of the company, the role of equity must not be confused with the entrepreneurial function. External forces acting within the financial markets, institutions and society continually assess the company’s performance. The risk capital loses its uniqueness and becomes a resource like any other. The entrepreneurial spirit is no longer a metaeconomic phenomenon, which classical economics struggled to identify, but can now, as part of the managerial firm, be integrated into theory (Drucker, 1985).

However, despite this evolution leading to the overlapping of the functions of manager and nonproprietary entrepreneur, the diversified body of managerial theories all converge on the possibility that managers could pursue objectives which do not coincide with profit maximization. Theoretically, profit maximization should be the main incentive stimulating innovation, the development of the firm – and of the whole capitalistic system – according to the entrepreneurial spirit of creative destruction (Schumpeter, 1947). This potential gap between managerial behaviour and business purpose, which should imply the adoption in any case of the option of maximizing profit, is what attracts the attention of agency theorists, who focus on the potential misalignment of the objectives of managers and shareholders. They draw attention to the costs of this gap, among which we find the expenses of compliance with a presumed but at the same time not generally accepted social responsibility of the firm (Friedman, 1970; Jensen & Meckling, 1976). Rather than curbing a vague concept such as the maximization of company value (equity), ‘agency’ theorists concentrated attention on the alleged divergence between managers’ and shareholders’ goals and on the incentives designed to close this gap. In doing so, they focused on one of the aspects identified by B&M in 1932 as a possible consequence of the separation of ownership and control, and ignored other factors such as community concerns and the role of managerial companies as social institutions.

Indeed, profit is a simple concept (the difference between revenues and costs), yet at the same time ambiguous when the business purpose is identified with its maximization. In other words, profit in itself is not under question (Sen, 1987), but rather its origin, and the choice about which type of profit should be maximized: short term or long term? With what degree of risk should it be pursued – not only financial risk but also social? For which principal, if the organization of the production factors no longer competes passive owners?

In general terms, the discussion about whether a lack of profit maximization misaligns managerial and proprietary objectives does not make sense, at least if the temporal preferences and conditions of uncertainty within which managers execute their actions are not defined. Outside of economic models based on principles of perfect efficiency and rationality, time orientation and risk cannot be generalized as they will vary from individual to individual and depend on the degree of uncertainty underlying the various decision-making alternatives.

Observing companies’ actual behaviour, we see that decisions cannot always be explained in terms of profit. Based on these premises, historically, managerial theories have proposed different alternatives to pure profit maximization. Dimensional growth in terms of sales volumes (Baumol, 1959) increases the company’s power, reduces risk and increases stability. In a corporate survival orientation (Marris, 1963), profit is not a goal to be maximized at any cost, but a means of strengthening the company’s capital structure. ‘Maximum profit’ can be replaced by ‘maximum safety’. For Drucker (1954), the latter can be measured in terms of market position, innovation, attraction and retention of qualified human resources, availability of financial resources, and profitability. For Galbraith (1967), the first condition to be met in identifying an orientation which diverges from the monolithic and underdetermined goal of maximum profit will concern the degree of decision autonomy of the corporate governance managerial structure (the essence of technostructure). Thus, in a managerial perspective, other decision logics come into play, in addition to profit, such as the need for security, containment of risks, prestige, creativity, image and business continuity. Must these goals be a priori in opposition to shareholders’ interests? In increasing shareholder value, can we also imagine management solutions which mitigate risks rather than excessively exposing the company to them? Can the prestige and the good reputation of management and of a company be limiting factors for opportunistic behaviour? Agency theorists, who maintain a belief in the risks of excessive managerial discretion, generally overlook such aspects (Williamson, 1964). By adopting a pessimistic view of human nature (Ghoshal, 2005), agency theory sees the discretion of the manager as a source of opportunism and tantamount to a policy of maximizing manager usefulness at the expense of the owners’ interests. An excessive level of discretionary spending, or investment in personally preferred projects, are assumptions about the outcomes of managerial discretion which do nothing to advance managerial theories beyond the potential conflict with the logic of pure profit or the failure to increase shareholder value. The negative consequences of such a theoretical approach are inevitable if the financial market acts in myopic way or management focuses exclusively on maximizing shareholder interests in the short term, ignoring other kinds of performance, such as corporate social performance and sustainable competitive advantage. With regard to the latter, the agency perspective adds nothing with regard to the conceptual gap in the managerial perspective which ought to be addressed, namely the n...