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Why do Scherer and Palazzo (2011) argue

that there is an increasingly public role for

private business firms? What are some of the
advantages vs. the disadvantages of firms
adopting a stronger public role e.g. in
administration of public goods and services?

Student ID: 1315555

Word Count: 1974

It cannot be denied that the perception of the role of the firm in society
has shifted from solely an economic actor; to an entity that has social,
political and even moral responsibilities (Scherer and Palazzo 2011). In
fact, Scherer and Palazzo (ibid) attempt to redefine the code of corporate
conduct, namely corporate social responsibility (CSR), by introducing the
political dimension, inspired by Habermasian philosophy. They argue that
there is a need for private corporations to adopt an increasingly public role
in society for a number of reasons, which this essay will aim to explain.
After having explained why Scherer and Palazzo (2011) aim to explicitly
articulate the political role of corporations, the following section will
address the desirability of the politicization of the private business firm,
by critically evaluating the advantages and disadvantages of both
situations. It must be noted that, while the term corporate social
responsibility entails a wide range of distinct activities that a firm could
possibly engage in, focus will be maintained on the political aspect of it.
This includes involvement in global governance and engagement in
activities in the public interest such as, provision of public goods and
services, such as healthcare and education, as well as issues relating to
human rights, corruption, and the environment. The terms public role
and political role are interchangeable in the first section. Additionally,
when referring to a corporation, it should be noted that MNCs are the
subject matter, as smaller firms are not considered to have the resources
and capacities to adopt a public role.

Increased responsibilities of private business firms

The traditional theory of the firm asserts that the role of the firm is to
make profits and maximize shareholder value (Sundaram and Inkpen
2004). However, recent phenomena, most notably globalization, have
challenged this view. Scherer and Palazzo aim to explain why businesses
have increased political responsibilities, and propose an extended model of
governance, which entails a stronger public role for business firms, which
includes contributing to global regulation (political) and providing public
goods (public).

They argue that the post-national constellation requires global business

firms to accept a responsibility that goes beyond mere compliance with
societal expectations. The effects of globalization appear to be the most
significant factors contributing to this shift in attitudes towards the role of
the private corporation. Although they propose a variety of different
aspects of the post-Westphalian world order, they are all direct or indirect
results of globalization, which are used as arguments for the politicization
of the private corporation.

Globalization has resulted in an intensification of competition between

global business firms, due to the disintegration of protectionist policies.
This has caused firms to offshore production methods, in an effort to cut
costs, and maximize their profits. Usually, production activities are shifted

to low-cost regions where regulations are often ambiguous since the

regions that they operate in are beyond the reach and enforcement
mechanisms of the democratic rule of law state (Scherer and Palazzo
2011). This is referred to as the widening regulatory gap. Hence, the
responsibility of making politically correct, and moral decisions lies in the
hands of the corporate manager. They are faced with issues relating to
human rights abuses, for example. This type of decision requires the firm
to take a political stance, because they are faced with the decision of
acting in the public interest or their own moneymaking motive, since there
are no binding regulations to act in the public interest.

Another significant aspect of the post-national constellation is the

competition that has emerged between locations of production sites;
because national governments try to lure firms in by offering them
subsidies, tax holidays etc. This emerging competition of locations and
jurisdictions may even lead to a downward spiral in social and
environmental conditions of global governance (Scherer and Palazzo

The regulatory gap widens further when externalities that have

transnational effects are concerned, i.e. deforestation, global warming, the
regulation of financial markets. For social and environmental problems
further up the supply chain, the liability concept of responsibility no
longer holds. Nation-state systems are subject to limitations and do not

have the capacity to regulate this behaviour. International organizations,

which were founded to deal with the governance gaps, can only with
difficulty contribute to these public policy issues due to the principle of
non-intervention in nation state sovereignty, their lack of enforcement
mechanisms, and the influence of national egoisms that often impede
multilateral solutions in the common interest (Scherer and Palazzo 2011).

As a consequence Scherer and Palazzo have concluded that business firms

have become important public role players in the global society.

What are some of the advantages vs. the disadvantages of firms

adopting a stronger public role?

Since the year 2000 over 5,000 business firms have subscribed to the UN
Global Compacts call to engage in self-regulation, which addresses issues
relating to human rights, labour, the environment and anti-corruption, in
order to fill the regulatory vacuum that has emerged as a result of the
process of globalization (Scherer & Palazzo 2011). Hence, it is becoming
increasingly evident that there is an increasingly public role for private
corporations. However, is this trend truly beneficial? Before we embark
upon this section of the discussion, it would be useful to establish what a
public/political role entails. A public/political role could mean various
things in various contexts. In this case (according to my interpretation) a
public role entails the administration of public goods and services, and
compliance with societal expectations regarding human rights, anticorruption,








participation in global regulation, as part of a deliberative democracy.

This section is split into three dimensions of the public/political role of the
private corporation in society (1) administration of public goods/services
(2) Compliance with UN Global Compact Principles (3) political role in a
deliberative democracy.

(1) Administration of public goods/services

Privatization dates back centuries; it has been a popular resort for

governments who want a more efficient and cheaper resort to the
provision of public goods/services (Donahue 1989). It is a cost-saving
strategy that can enhance government performance by reducing its debt,
and foster policy innovation. However, for-profit organizations are
assumed to serve their own economic interests first, rather than the public
interest. In the case of the privatization of the student loan book, for
example, the money would be transferred to private financial institutions,
which is not always desirable (The Independent 2014). The profit motive
of the firm suggests that private financial institutions would charge
higher interest rates to students, which could potentially deter them from
applying to university. This is based on the assumption that the loan book
is sold to a for-profit financial institution since it assumed that not-forprofit organizations would not have the sufficient resources. Either way,
privatization is only a desirable policy if the contractor (the private firm)
complies with governments priorities. In John D. Donahues book, The
Privatization Decision: Public Ends, Private Means (1989), he addresses
this as the problem of agency: how do the principals (government officials)
ensure that their agents (the private contractors) will provide services
according to government expectations. According to Donahue, contractor
compliance with the priorities of government is most likely when the
service to be contracted can be specified in advance, subject to competition

among suppliers, and capable of being monitored by government.

Additionally, the success of the privatization policy depends on the service
that is being privatized. Certain sensitive services cannot be pushed for
privatization, e.g. student loan book, or prisons.

(2) Compliance with UN Global Compact principles

The 10 UN Global Compact principles, which is essentially a CSR

mechanism, address the issues faced by a MNC in its global supply chain.
(UN Global Compact) When dealing with regulatory gaps, this form of
self-regulation is an efficient way of closing the regulatory gap, and
provides an opportunity to the private corporation to act ethically, and for
the greater societal good of the general public. It can also be argued that,
even though this may lead to extra costs for the firm, they can use this as
a PR tool, which could possibly lead to a larger customer base, and
enhance customer loyalty, indirectly contributing to the augmented profits
of the firm (instrumental approach to CSR). The drawback, however, from
the viewpoint of society, is that this form of regulation is non-binding, and
there are no penalties imposed if firms do not abide to these regulations.
Cetindamar and Husoy (2007) allege that companies that participate in
GC receive both ethical and economical benefits. However, the limitation
of this mechanism of CSR, formally or informally, is that it is not
completely applicable to SMEs that cannot afford to employ extra
personnel for auditing purposes and to ensure that they are operating

ethically. Scherer and Palazzo suggest that firms only engage in selfregulation because of the shadow of hierarchy, or in other words, the
fear of having binding regulations imposed on them if they do not adopt
CSR policies. Be that as it may, the motive of the firm is not being
addressed in this essay. As long as the firm is acting ethically, and is
acting in the interest of the society that it operates in, it is deemed
beneficial for society.

(3) Political role in a deliberative democracy

In Scherer and Palazzos work (2011), Habermas deliberative theory of

democracy is discussed as an alternative model, which seems to be better
equipped to deal with the post-national constellation. This involves, the
private corporation being able to express its own interests that does not
exclusively take place in the official governmental institutions but starts
already at the level of deliberating civil society associations (Scherer and
Palazzo 2011). The advantage of this democracy allows and acknowledges
the contribution of both state and non-state actors in global governance.
Scherer and Palazzo also claim that the deliberative democracy will help
to get rid of the democratic deficit. However, this theoretical claim may
not hold in practice. As empirical studies show, the EU has a democratic
deficit due to an immensely complex system of bureaucracy, which makes
the average citizen relatively powerless (The Atlantic 2014). Another
disadvantage of the deliberative democracy idea is that, if MNCs are

included in the deliberation process, they are likely to overrule other

stakeholders interests due to their large size, and plentiful resources
(Fougre 2011). Additionally, economic imperatives are always taken as
prerequisites by MNCs. It is nearly impossible that multi-stakeholder
initiatives can reach a reasonable solution since the conflicting interests of
the various stakeholders involved will pose as an obstacle. Furthermore,
Scherer and Palazzo (2011) raise the question of how the legitimacy of
corporate activities can be normatively accessed when no universal
criteria of ethical behavior are available in a postmodern and postnational world. Furthermore, Fougre explains, with the example of the
nuclear energy case that radical decisions, which are sometimes the most
logical decisions are not taken when considering the interests of all
stakeholder involved. This leads to an inefficient system of regulation. As
opposed to a social, democratic system, the deliberative democratic system
does not comprise of a holistic view, which may lead to unsuitable
decisions being made.


After having critically assessed the selected pieces of literature, I conclude

that the term of political CSR needs to be more narrowly defined in
terms of specifying with precision the way in which the private
corporation would function in society with a more political role. Only
then, can the question of whether the private business firm should adopt a
more public/political role can be appropriately answered. The following
aspects need to be addressed.

(1) The extent to which the private corporation should be politicized

depends on the role of CSR in consumption decisions. If profits are
significantly being sacrificed, is it really worth it for the firm to be
accountable for activities that they may not even be responsible for?

(2) The specification of which public policy issues should be addressed. The
two most important contemporary political questions are environmental
sustainability, more equal distribution of wealth. It can be argued that
these two issues cannot be in the firms interest since they are too
conflicting with the agenda of the firm. The redistribution of wealth,
especially, undermines the whole foundation of the capitalistic markets
that our society is built on.

From the carried out study, however, I believe that the instrumental CSR
approach still holds, but it is problematic to implement the political CSR
theory that Scherer and Palazzo propose. Even if firms are allowed to have
a political viewpoint that is not in the interest of shareholders, does this
also mean that a firm can also hold religious affirmations? (Hobby Lobby)
Hence, there needs to be a clear distinction between political roles and
public roles in society.

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