T

Tactics literature has been described from an economic

▶ Implementation
Takeover
▶ Mergers and Acquisitions
Tax Evasion
Fátima David and Rute Abreu
Escola Superior de Tecnologia e Gestão da
Guarda, Guarda Polytechnic Institute, Guarda,
Portugal
Synonyms
Business tax evasion; Corporate tax evasion;
Fiscal evasion; Tax fraud
Definition
Tax evasion can be defined as any criminal activ-
ity or any offence of dishonesty punishable by
civil penalties that is intended to reduce the tax-
ation incidence, and depends on economic and
tax structures, types of income, and social atti-
tudes. The concept of tax evasion in the existing
or public finance perspective and very few studies
have discussed the issue from a philosophical or
ethical viewpoint. The basic theoretical model of
tax evasion is a straightforward application of
individual choice under uncertainty and the prob-
lem an individual faces is whether or not to evade
some part of his legal tax liability, given that
there is some probability of being caught if he
decides to evade (Clotfelter 1983).
Thus, the focus of most economic studies of
tax evasion has been the utility-maximizing
behavior of taxpayers, who are subject to detec-
tion and penalty parameters. Consequently, the
level of evasion depends on the amounts set by
the government. Other authors, such as Andreoni
et al. (1998) identify three main moral and social
factors that are relevant in this context: moral
rules and sentiments; the taxpayer’s perception
of the fairness of the tax system and burden; and,
finally, the degree of satisfaction that taxpayers
have with respect to the provision of public goods
and services. For instance, starting with
Allingham and Sandmo (1972), the taxpayer is
modeled as a risk-averse agent who expects to
maximize his net income, and who has the possi-
bility of under-reporting his income, but in doing
so, would face (with a given probability) the
prospect of being caught and fined (on top of
having to pay the full tax liability).
Several authors, such as McGee (2006) and
McGee et al. (2008), simply regard tax evasion
to always or almost always be unethical, because
there is a duty to God to pay taxes, or because

S.O. Idowu et al. (eds.), Encyclopedia of Corporate Social Responsibility,

DOI 10.1007/978-3-642-28036-8, # Springer-Verlag Berlin Heidelberg 2013
T 2498
there is a duty to a local community or to society,
i.e., the citizen has a duty to the State to pay
whatever taxes are demanded. This first perspec-
tive points to the duty to pay taxes because the
government always expropriates citizen’ wealth,
but a responsible citizen knows that this is
a natural duty of contributing to the provision of
the necessities of society, and it is the reason why
the laws, rules, regulations, and standards must
be enforced. Furthermore, the second perspective
argues that the citizen does not have the duty to
give anything to a corrupt government, i.e., this
perspective begins with the argument that the
government promotes an illegitimate tax policy
and that the citizen faces a small level of trans-
parency and ethics; all of these aspects guide him
to have no belief in tax equity. However, the
counterargument that the government derives its
authority from the consent of the governed pop-
ulation is legitimate and thus it is entitled to the
right to promote this. The third perspective is that
there is some ethical obligation to support the
government of the country where you live, but
that duty is less than absolute.
Thus, tax evasion is defined as an irregularity
committed deliberately. Most criminal law
details that tax evasion involves a deliberate act
with the intention to obtain an unauthorized ben-
efit. In the literature review, several of such acts
have been presented, but it is not limited to these,
because corporate tax evasion, one can imagine,
such as: making or changing accounting docu-
ments; purposely inaccurate financial reporting;
improper handling or reporting of money trans-
actions; and authorizing or receiving compensa-
tion for goods not received or services not
performed. Following this, the conceptual dis-
tinction between tax evasion and tax avoidance
hinges on the legality of the taxpayer’s actions.
Tax evasion is a violation of the law. Typically, it
involves deliberately ignoring a specific part of
the law. For example, corporations may under-
report taxable receipts or claim expenses that are
non-deductible or overstated when they partici-
pate in tax evasion. They might also attempt to
evade taxes by willfully refusing to comply with
the statutory reporting requirements. Tax avoid-
ance, on the other hand, is within the legal
Tax Evasion
framework of the tax law. It consists of exploiting
loopholes in the tax law and happens when
procedures adopted by the corporation are
aimed at minimizing taxes, while they are within
the letter of the law; those procedures contravene
the object and spirit of the law. Another example
is when fiscal planning reduces taxes in
a way that is inconsistent with the overall spirit
of the law.
Introduction
There are a few studies that focus on tax
evasion in a particular country, on government
corruption, and they point to reasons why the
citizen does not feel any moral duty to pay taxes
to such a government. Pommerehne and
WeckHannemann (1996) present an empirical
analysis of income tax noncompliance in Swit-
zerland, based on the standard model of tax eva-
sion. Ballas and Tsoukas (1998) discussed the
views of Greek taxpayers. Smatrakalev (1998)
discusses the Bulgarian case. Vaguine (1998)
discusses Russia, as do Preobragenskaya and
McGee (2004) to a lesser extent. Morales
(1998) examined the Mexican reality, concluding
that a Mexican worker’s duty to his family is
sometimes more important than his duty to the
State. McGee (1999) conducted a series of inter-
views to determine how people in Armenia view
tax evasion, finding two main reasons for evasion
to be the lack of a mechanism in place to collect
taxes and the widespread opinion that the govern-
ment does not deserve a portion of a worker’s
income. McGee extended their study to other
countries and surveys of groups in Argentina
(McGee and Rossi 2006), Guatemala (McGee
and Lingle 2005), Poland (McGee and Bernal
2006), Romania (McGee 2005), and the United
Kingdom (McGee and Sevic 2008) found that
there is widespread support for the position that
tax evasion can be justified on ethical grounds in
certain circumstances. In general, these studies
found that taxpayers do not have an ethical prob-
lem with tax evasion because their governments
are corrupt and they feel that they have no ethical
duty to pay taxes to a corrupt government.
Tax Evasion
Others studies have been developed from dif-
ferent religious perspectives. Cohn (1998) and
Tamari (1998) discuss the Jewish literature on
tax evasion. Murtuza and Ghazanfar (1998)
discuss the ethics of tax evasion from the
Muslim perspective. Smith and Kimball (1998)
provide a Mormon perspective. DeMoville
(1998) discusses the perspective of the Baha’i
faith. Gronbacher (1998) addresses the issue
from the perspectives of Catholic social thought
and classical liberalism. Crowe (1944) and
Schansberg (1998) look at the biblical literature
for guidance and discuss tax evasion and the duty
of the citizenry to support the government in this
context. Pennock (1998) discusses the “just war
theory” in connection with the moral obligation
to pay just taxes, and not to pay unjust or immoral
taxes. McGee (1998) comments on the various
Christian views from a secular perspective. In
general, these studies found that the citizen is
morally bound to obey the laws of the country
in which they live.
More recently, Fisman and Wei (2004) have
quantified the effects of tax rates on tax evasion
by examining the relationship in China between
the tariff schedule and the “evasion gap,” which
is the difference between Hong Kong’s reported
exports to China at the product level and China’s
reported imports from Hong Kong. Ott’s study
(2004) presents the results of research on the size
and evolution of the informal economy and tax
evasion in Croatia during the second half of the
1990s. Bilotkach (2006) discusses the issue of tax
evasion by enterprises through underreporting
activity in the Ukraine. Aljaaidi et al. (2011)
explores the perception of Yemeni citizens of
the severity of tax evasion relative to other crimes
and violations. For the authors, the perception of
tax evasion may somewhat explain the degree of
noncompliance with the tax laws.
In this sense, society demands that the individ-
ual citizen, the corporation, and the intermediate
organizations should be effectively protected by
law whenever they have rights to be exercised or
obligations to be fulfilled. Thus, it is immoral for
an individual citizen or a firm to receive the
benefits of the State without paying taxes, or
worse. promoting the use and abuse of tax
2499 T
evasion. Unfortunately, tax evasion has become
a way for firms to decrease their payments to
the State being caused by different factors that
are more relevant: politicizing (e.g., the rise of
the burden of taxes and social security contribu-
tions, the increase in regulation, especially of
labor markets); economic (e.g., unemployment,
and the decline of civic virtue and loyalty toward
public institutions); psychological (e.g., forced
reduction of weekly working time, earlier retire-
ment); and technical (e.g., unchecked system,
inefficient control).
Consequently, powerful institutions, such as
the European Union (EU), the United Nations
(UN), and the Organization for Economic
Co-Operation and Development (OECD) have
enormous potential at levels of public policy
and promote their approaches to social responsi-
bility by using structures and human resources,
and the legal and voluntary framework in accor-
dance with the spirit and letter of the law and
other regulations. Also, at the European Union
(CE 2006), the basic idea is that institutions have
a duty to guarantee the best use of their money
and, in particular, to fight as effectively as possi-
ble against fraud. This is the reason why the
protection of the financial interests of the Com-
munity has become one of the major priorities for
the European Institutions. This covers activities
concerning the detection and monitoring of fraud
in the customs field, the misappropriation of sub-
sidies and tax evasion, insofar as the Community
budget is affected, as well as the fight against
corruption and any other illegal activity harmful
to the financial interests of the Community.
On the one hand, the struggle against tax eva-
sion is truly a private obligation, because who- T
ever practices fraud and evasion infringes the
fundamental beginnings of equality, legality, the
just division of revenue and wealth, loyal compe-
tition, social responsibility, and the responsibil-
ity. As Cooper (2004) states in defense, the social
impact of organizations is very much influenced
by the legal constraints on their activity. Incorpo-
rated organizations actually depend upon the law
for their very existence and all their dealings must
take into account the laws of the land. These laws
and regulations are socially constructed and
T 2500
therefore an important argument in the business
and society field is to consider the role that public
policy or government regulation has to play. On
other hand, the struggle against tax evasion is also
a public obligation, because it causes distortion in
economic activity, limits the quality of the public
services and the social dimension of the State,
and determines the increase in the tax burden
supported by taxpayers. In this sense, combat
with these scourges?? requires an active and per-
manent activities?? with the unlimited purpose of
being effective and efficient.
In this sense, the EU member states adopted
a strategy around four challenges:
– An overall legislative anti-fraud policy (the
development of the regulatory system toward
greater effectiveness and coherence);
– A new culture of operational cooperation (full
participation and concerted commitment of
the national and Community authorities on
the ground);
– An inter-institutional approach to preventing
and combating corruption (the strengthening
of the credibility of the European institutions);
and
– Enhancement of the penal judicial dimension
(adaptation of national criminal prosecutions
to the new obligations of the Treaty).
For a new legislative anti-fraud policy it is
necessary to develop a culture that includes pre-
vention, detection, and cooperation by integrat-
ing all sectors where fraud and corruption might
take place. Thus:
– Prevention denotes the quality of acting in
accordance with clear, easily applicable legis-
lation, including provisions likely to
strengthen sound financial management and
effective control of Community and national
policies.
– Detection presupposes a sound application of
Community and national principles, values,
and norms as well as the sound management
of Community policies and funds.
– Cooperation is related to the progressive
development of administrative cooperation
rules between the European Commission and
the national authorities that allow for better
application of economic and financial rules.
Tax Evasion
Regarding the new culture of operational
cooperation, the European Commission and the
national authorities intended to bring resources
together to encourage a more proactive orienta-
tion of action on the ground. Effective action
against fraud and evasion inside several countries
presupposes the best possible knowledge of their
social, economic, and criminal environment. In
this sense, the technology and the technical
means of gathering, storing, and exploiting infor-
mation must be developed in the light of best
social practice.
The inter-institutional approach to preventing
and combating corruption entails the European
Anti-Fraud Office, under its French acronym –
OLAF (Office européen de lutte antifraude), hav-
ing to cooperate closely and regularly with the
Community institutions, bodies and agencies and
contribute to training actions. Furthermore, it
must encourage transparency and the duty to
communicate. The European Commission will
develop norms and rules on ethics and the con-
flicts of interest oriented toward transparency and
security to avoid Community decisions being
affected by irregular influences. As the Commis-
sion of the European Communities states (CE
2000), the objective is to have a working envi-
ronment where every official at any level is in
a position to be aware of his responsibilities, in
particular with regard to the obligation of loyalty
to the institutions and the obligation to cooperate
to prevent irregularities.
The fourth and last challenge is related to the
enhancement of the penal judicial dimension.
The inclusion in the Treaty of Amsterdam of
Article 280
, the regulations adopted in May
1999 under the co-decision procedure, the inter-
institutional agreement, and the establishment of
the OLAF brings about in a tangible manner the
integration of the national judicial dimension in
the fight against fraud and corruption.
The four strategic guidelines will allow the
European Community to improve in a significant
way the level of protection of the Community’s
financial interests. The implementation of these
strategic orientations will allow the control pro-
visions and the audit capacity of the Commis-
sion’s departments to be strengthened overall
Tax Evasion
with the triple aim of effectiveness, transparency,
and ethical behavior. The institutions and Mem-
ber States must adopt the measures necessary to
ensure an equally high level of protection of
financial interests throughout the Community
and to fight fraud and evasion unrelentingly and
with the utmost vigor (David and Abreu 2008).
Tax evasion is seen as a violation of the
accepted moral norms and values for social,
financial, and administrative behavior. The
moral nature of these values refers to what is
judged as right, just, or good (conduct), because
the absence of ethics implies corruption. Thus,
the corporate code of ethics increased signifi-
cantly, as strategic management nowadays
needs more and more business ethics in order to
compete in the global market.
Key Issues
The concepts of tax evasion and tax avoidance
embrace many dimensions and problems. As no
clear-cut distinction between tax evasion and tax
avoidance exists, it is necessary to define which
practices can be considered as violation or abuse
of tax codes. In addition, it is important to clarify
the context of tax evasion in the corporate code of
ethics.
The scarcity of empirical papers is due to the
difficulties in accessing databases of citizen tax
information because of secrecy laws and the Tax
Authority does not allow researchers to use this
information as it is frequently classified. Cur-
rently, owing to this scarcity of empirical studies,
other types of tax havens abroad make more
sophisticated financial crimes more profitable.
Some of these crimes are money laundering, ille-
gal business (such as: drug trafficking, weapons
market and terrorism) and accounting manipula-
tion (such as: misrepresenting accounting and
taxation income, forgery assets, and ubiquitous
liabilities). In this sense, if tax evasion could be
evaluated, it might be estimated as the value and
size of a shadow economy.
Another key issue is related to the complexity
of the tax system of each country around the
world. At the same time, corporations and
2501 T
citizens fight to belong to the global market.
Thus, the possibilities of tax evasion arise from
the production of tax information and the range of
needs and abilities required to accommodate all
these differences.
Future Directions
New methodologies are needed to measure tax
evasion and connect them to economic changes,
technological improvements, and social tradi-
tions as dimensions of social responsibility, and,
more specifically, to financial performance.
Within this context, firms can use the right strat-
egies toward positive actions, protecting fair and
good behavior, and understand the negative
actions that have an impact on the shadow econ-
omy that seem to include legal activity deliber-
ately hidden from the authorities. Indeed, the
governments must be constantly vigilant to
avoid being associated with corrupt practices,
and global businesses should promote sustainable
development.
It is a matter of urgency for governments and
the European Union to reinforce the fight against
tax evasion undertaken by corporations in order
to increase their revenues through the implemen-
tation of formal internal preventative measures.
The effectiveness of this fight is evaluated, at
some point, in the level of prevention and in the
range of measures in opposition to fiscal fraud
and evasion that integrate ethical behavior into
public service.
Social responsibility is an essential need of the
society and full and open disclosure of information
that yields better fiscal policy to be promoted by T
political-makers. Tax evasion should be fought
with all weapons as tools, actions, and procedures
for everybody who used them, in order to decrease
the range and power of human bad behavior.
Cross-References
▶ Business Ethics
▶ Business for Social Responsibility
▶ Business Tax Evasion
T 2502
▶ Corporate Social Responsibility
▶ Corporate Tax Evasion
▶ Fiscal Evasion
References and Readings
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Technology Transfer 2503 T
Spicer, M. W., & Becker, L. A. (1980). Fiscal inequity and Definition
tax evasion – An experimental approach. National Tax
Journal, 33(2), 171–175.
Tamari, M. (1998). Ethical issues in tax evasion: A Jewish Technology has been defined as “the capabilities
perspective. Journal of Accounting, Ethics and Public of human society to transform natural resources
Policy, 1(2), 121–132. into useful products for human consumption”
Vaguine, V. V. (1998). The “Shadow Economy“ and Tax (Storper and Walker 1989). The most common
evasion in Russia. In R. W. McGee (Eds.), The Ethics
of Tax Evasion (pp. 306–314). NJ: The Dumont Insti- understanding of technology is that of objects
tute for PublicPolicy Research. which fulfill a certain function, but there are
also wider definitions such as technology as
installed techniques of production, operational
processes, or personal know-how and skills of
Tax Fraud workers. If technology is defined as a combina-
tion of some or all of these elements, it has to
▶ Tax Evasion be emphasized that a large component of tech-
nology is tacit knowledge, which is necessary
for manufacturing, maintaining, operating, and
adapting the technology to new environments
Teams (Cohen 2004; Wilkins 2002).
In this sense, technology transfer refers to the
▶ Communities of Practice flow of “hardware” and “software” elements of
▶ Social Capital technology, that is, equipment, methods, proce-
dures, information, and know-how, from one
agent or organization to another, for its further
Teamwork exploitation and development with the objective
of a mutual benefit which can be of commercial
▶ Communities of Practice or social nature. The concept has evolved from
a narrow definition as transfer of technical equip-
ment, engineering knowledge, and blueprints
toward a broader understanding that includes
Technology Commercialization the transfer of the tacit knowledge attached to
the technology, which leads to its dynamic appli-
▶ Technology Transfer cation and to the increasing of the recipient’s
capabilities (Pueyo et al. 2011).

Technology Transfer Introduction

Julia Gottwald, Lea Franziska Buch and
Walter Leal Filho
Research and Transfer Centre “Application of
Life Sciences”, Hamburg University of Applied
Sciences, Hamburg, Germany
Synonyms
Knowledge transfer; Technology commercializa-
tion; Technology valorization
The phenomenon of technology transfer is com-
T
plex, as technology is heterogeneous and the
transfer process occurs in various modalities
and in largely differing contexts. It involves spe-
cific geographical, economic, social, cultural, and
institutional characteristics and a large number of
business sectors, as well as actors ranging from
small and medium enterprises up to entire regions
with varying levels of technological capabilities
and different kinds of objectives regarding the
use of the transferred technology.
T 2504
Technology Transfer, Part 1
Fig. 1 Linear model of
technology transfer
(Source: Wilkins 2002)
Research Development
As a result of the numerous factors influencing
technology transfer and its connections to a wide
range of topics related to economic growth and
social development, as well as cultural systems
and human behavior, such diverse disciplines as
economics, engineering, management theory,
sociology, anthropology and cultural sciences
have approached the concept and its expression
in reality from very different perspectives. The
perceived role of technology transfer differs
accordingly: the focus can lie on corporate or
regional competitiveness, emphasizing techno-
logical, financial, or economic benefits, on inno-
vation and learning processes, or on improving
quality of life and social or cultural change,
from macroeconomic and institutional or
micro-sociological and cultural-anthropological
perspectives, respectively (Reisman 2005).
Two main modes of moving and applying
knowledge through technology transfer can be
described: firstly, the conversion of scientific
and technological knowledge into commercial
products or services; secondly, the process of
transferring technological equipment and knowl-
edge generated in one place or organization to
a recipient country, firm, or community. The first
process spans the stages from research to market
penetration, with a particular focus on the inter-
face between R&D (often done by a university
research institute, a corporate unit, or a govern-
ment laboratory) and commercialization (mostly
carried out by private companies) (Rogers et al.
2001). This transfer process from basic research
via applied research to development and finally
to production, often referred to as “University-
Industry Technology Transfer” (UITT), is
represented by the so-called linear model of tech-
nology transfer as shown in Fig. 1.
Technology Transfer
Part 2
Commercial Market
Demonstration
Deployment Penetration
The second mode of transfer is often explained
exemplarily with the concept of International
Technology Transfer (ITT), whereby in most
cases North-South technology transfer, from
industrialized to developing countries, is meant.
Nevertheless, it can also be applied to
intranational or even intra-firm technology
transfer, and recent literature emphasizes the
need to further investigate South-South and
even South-North technology transfer (Karakosta
et al. 2010; Brewer 2007; UNCTAD 2007).
The main difference to the linear model of
University-Industry Technology Transfer is that
a technology already in use in one place or orga-
nization is transferred to a recipient entity in
order to satisfy a perceived need or fulfill a spe-
cific function. The classic stages of this process
have been described in the five-stage or feedback
model as shown in Fig. 2.
Both University-Industry and International
Technology Transfer have grown significantly
over the past decades. The distribution, however,
varies greatly across geographical areas, technol-
ogies, and firms. The commercialization of sci-
entific research and development in the sense of
the linear model of technology transfer mostly
occurs in the industrialized and, to a lower
degree, in the bigger emerging economies, such
as the BRIC countries (Brazil, Russia, India,
China) or the “Asian Tiger” states. The main
reason these processes have not taken place in
the less developed countries is the lack of finance
and capacity for R&D. The private sector
flows and technology transfer fostered by
governments or multinational organizations
between different countries, on the other hand,
are increasingly also reaching developing
countries, sometimes attracted by favorable
Technology Transfer
ASSESSMENT
AGREEMENT
IMPLEMENTATION
EVALUATION AND
ADJUSTMENT
REPLICATION
Technology Transfer, Fig. 2 The five basic stages of
technology transfer (Source: Metz et al. 2000)
investment conditions, low wages and raw mate-
rial costs, or fuller access to promising local
markets, but also in the framework of develop-
ment cooperation.
Agents of Technology Transfer
Whether from basic research to commercial
products or from one organization to another,
technology transfer is fundamentally the flow of
knowledge from one human being to another.
A close interaction between the provider and the
recipient is vital for the success of the process.
The agents or key actors in the field of technology
transfer can include policy makers, legal and
regulatory bodies, development agencies, financ-
ing institutions, multinational corporations, man-
ufacturers, suppliers, developers, installers,
consultants, academic insitutions, NGOs, com-
munity groups, and other users of the technology
(Schneider et al. 2008; Barton 2007). The transfer
agents are influenced by the characteristics of
2505 T
their environment such as the political and
economic situation, cultural and institutional
influences, educational level and technological
capabilities. Technology transfer can therefore
not be seen as a private transaction between two
parties, but as a process involving a number of
stakeholders.
Mechanisms of Technology Transfer
The channels of technology transfer are often
divided into two categories in the literature:
the commercial channels, which refer to the
flow of tangible assets in the framework of a
commercial transaction, and the noncommercial
mechanisms related to the transfer of knowledge
and capacities (Wilkins 2002; Able-Thomas
1996). Other authors make the distinction
between formal and informal technology trans-
fers, or between artifact, design, and capacity
transfer.
The first important commercial channel of
International Technology Transfer is trade in
goods. The knowledge and technological innova-
tions embodied in imported capital goods and
products can foster learning processes through
reverse engineering, imitation, adaptation, and
follow-on innovation. Another source of ITT is
foreign direct investment (FDI), carried out
mostly by multinational enterprises, which set
up production facilities in other countries.
Through these activities, developing countries
can receive more efficient foreign production
technology and technological spillovers can
occur through labor turnover or vertical
linkages. The transferred skills can also include
marketing expertise and managerial know-how,
apart from engineering design or new production T
modes. A similar mode of ITT is through
licensing agreements. In this case, the licensing
firm pays a royalty, a lump sum, or a share in
profits to the main company and in turn receives
the right to use patents, secret know-how or
trademarks, and to produce or distribute the prod-
ucts developed by the licensor, in some cases
combined with technical assistance (Hoekman
et al. 2005).
One form of technology transfer which
implies higher control of the recipient, is joint
T 2506
ventures, whereby two or more firms share the
provision of equity capital, the investment risk,
but also the control and decision-making author-
ity and the profits of the enterprise. This modality
is used often by companies in emerging econo-
mies that want to absorb scientific knowledge,
advanced technology, managerial skills, and con-
tacts to foreign markets from corporations of
industrialized countries.
International subcontracting, where a pro-
ducer company signs a contract with a manufac-
turer in a developing country for the production
of certain parts or the assembly of products, can
also be a mechanism of technology transfer, such
as machinery, specifications, and manufacturing
skills. In a turnkey contract, the foreign company
usually supplies a whole package to the technol-
ogy recipient, that is, a complete production plant
with all equipment and infrastructure, the provi-
sion of the complete procedures and know-how,
training of the workforce, etc. This form of trans-
fer often occurs when a country is still in an initial
stage of industrial development. It can be a driver
of such development, but can also hamper it by
fostering dependence on foreign technology
(Able-Thomas 1996).
In the context of technology transfer between
universities and industry (UITT), universities use
the formal channels of patents, licensing, and
spin-off companies to transfer research outcomes
to industry or directly to the market. Many uni-
versities have set up technology transfer offices
(TTO) to manage the commercialization of their
research outcomes. Patents and licenses enable
companies to utilize the results of university
research, whereas spin-offs are new companies
that have been founded by university employees
or by graduates in order to commercialize their
research results.
Furthermore, both in a national and interna-
tional context, enterprises as well as universities
also use informal mechanisms of technology
transfer, including capacity building and training,
the exchange of personnel through technical
assistance programs, the exchange of information
at international conferences or trade fairs, the
Technology Transfer
flow of books, journals and other publications,
the movement of persons through immigration,
academic exchange, or project and study visits.
Technology transfer often happens through
a range of these mechanisms.
Impacts of Technology Transfer
Improving technological capabilities is the main
objective of any technology transfer. Above that,
there are several superior goals to be reached by
technology transfer that vary among different
stakeholders, such as economic growth, social
development, or local competitiveness. Specific
benefits for a company or region can include the
creation of new job opportunities, the recruitment
of the local labor force, improvements in levels of
education and technological and managerial skills,
the creation of technological spin-offs and spill-
overs, the creation of new products or the improv-
ing of products and processes, and benefits to
research and development institutions.
Different levels of technological content in the
transfer process have been distinguished in
the literature, each of them with a different
impact on the technological capabilities of the
recipient. The lowest impact is caused by the
transfer of capital goods, which enables the recip-
ient to increase the production capacity. If
the flow of skills and knowledge is included, the
recipient additionally acquires capacities to
operate and maintain the transferred equipment
efficiently. The highest impact is created when
expertise for the generation of technological
change is transmitted. In this case, learning pro-
cesses and indigenous adaptation and innovation
are fostered. In other words, short-term, one-off
deals have a lower impact on the capabilities of
the recipient than repetitive or long-term cooper-
ations (Pueyo et al. 2011).
Factors that can inhibit the positive impact of
technology transfer include, among others, a lack
of bilateral scientific or technological advantages
in the process, a lack of an integrated engineering
and socioeconomic approach to the action, or
a failure to assess appropriately the local cultural
and economic potential for the adoption of the
Technology Transfer
transferred technology, restricting the feasibility
study, for example, to a cost-benefit analysis
(Cohen 2004).
The consequences of the different mecha-
nisms of technology transfer have been investi-
gated through a number of empirical studies with
diverse results so that there is no clear answer
regarding the effectiveness of one or the other
transfer process to benefit the recipients. Recent
literature emphasizes the importance of informal
flows of technology and knowledge for raising
the capabilities of stakeholders, especially in
developing countries.
Barriers and Success Factors for Technology
Transfer
Numerous barriers on the one hand and enabling
factors on the other have been identified in the
literature. They can be grouped into four catego-
ries: firm-specific, industry-specific, region-spe-
cific, and nation-specific factors. Influencing
factors at company level can include, for exam-
ple, stakeholder awareness of foreign technolo-
gies, the level of internationalization and
connections with research institutions of the
firm, the closeness of the relationship between
transferor and recipient, and the level of educa-
tion and technological capabilities of the work-
force. Industry-specific factors include the level
of market development and profitability and the
political and regulatory conditions for the sector.
Region- and nation-specific factors can refer to
levels of economic development, the openness of
the trade and investment regime, the quality
of institutions and business risk, the availability
of human capital, cultural peculiarities, specific
local needs, the degree of connectedness between
stakeholders of academic, political and business
organizations, and the political support for indus-
trial activities.
Some authors also use the classification into
micro- and macro-barriers, depending on whether
they can be resolved by the project participants
themselves, or a division into economic and
financial, political and institutional, technologi-
cal, and cultural and social barriers.
2507 T
Key Issues
Corporate Social Responsibility and
Technology Transfer
The link between corporate social responsibility
(CSR) and technology transfer is relevant for
companies and other institutions in two aspects:
firstly, enterprises that are involved in technol-
ogy transfer as part of their regular business do
this in accordance with their CSR commitment;
secondly, engaging in technology transfer activ-
ities can be one means for a company to fulfill
certain aspects of its social responsibility. The
way CSR is done differs depending on the type
of technology transfer the company is involved
in, such as University-Industry Technology
Transfer (UITT) and International Technology
Transfer (ITT). Examples for each type are
given in Table 1.
CSR and University-Industry Technology
Transfer (UITT)
As described above, the form of cooperation of
enterprises with universities within a UITT
ranges from formal channels, such as technology
transfer offices, joint research projects, and pur-
chase of patents or licenses, to informal channels,
such as student internships, student projects, the
employment of graduates, or conferences.
For enterprises that are involved in UITT as
part of their regular business, carrying out tech-
nology transfer in accordance with the CSR com-
mitment applies both to the method of conducting
research and utilization of the research results.
This may entail the company only using research
results in their technological development that
have been produced in accordance with certain T
standards; environmental, social, and in particu-
lar ethical standards can be of relevance. More-
over, the final result of the transfer process, for
example, the marketable product, meets the CSR
standards, that is, in terms of impact on social and
environmental issues. Finally, CSR also applies
to the cooperation with the transfer partner, for
example, respecting intellectual property rights
and fair collaboration.
T 2508
Technology Transfer, Table 1 Examples of linkages between CSR and technology transfer
Application of CSR strategy to regular technology
transfer activities
UITT • To conduct research in accordance with ethical,
environmental, and social standards
• To develop and market products that meet
appropriate social and environmental standards
• To collaborate in a fair manner with technology
transfer cooperation partner
ITT • To comply with higher social and environmental
standards than mandatory in host country
• To increase the capacity of local employees or local
(supply) companies (e.g., offer training courses and
technical support)
• To support community development (e.g., health and
education infrastructure for the local population)
The motivation for engaging in UITT outside
regular business activities can also be to meet
certain CSR criteria. For example, a company
can consider it part of its CSR strategy to find
solutions for an environmental problem and
therefore engage in technology transfer via
supporting relevant research projects or confer-
ences, with the aim of fostering environmental
innovations. Furthermore, a company can
support a local university or community in the
practical application of technologies. The imple-
mentation of a pilot project can be supported
either financially or with the know-how available
at the company.
CSR and International Technology
Transfer (ITT)
As described above, enterprises, especially trans-
national corporations (TNCs), play a key role in
international technology transfer, with FDI,
trade, and licensing being the most important
transfer mechanisms. A strong link between
CSR and ITT can be observed in FDI in develop-
ing or emerging economies.
TNC have often been criticized for taking
advantage of the lax environmental or social leg-
islations in these countries and for pursuing
exploitative and compliance-oriented strategies.
Accordingly, many CSR strategies nowadays go
above and beyond mandatory fulfillment of
Technology Transfer
Use of technology transfer as a means to fulfill social
responsibility
• To foster R&D in order to find solutions for social or
environmental problems
• To support practical application of new
(e.g., environmentally friendly) technologies at
a university or in a community
• To give developing aid by donating goods (e.g., own
products), offering training or technical support to
organizations or communities in developing countries
higher environmental and social standards,
which can contribute to the improvement of
local workplaces and communities (Reimann
et al. 2012).
However, there are controversial opinions as
to whether the CSR strategy of a transnational
corporation should be global and thus the same
for every country where the corporation does
business, or if companies should develop local
CSR strategies. On the one hand, CSR strategies
locally developed in consultation with respective
host country stakeholder groups can have
a positive impact on ownership and legitimacy.
On the other hand, TNCs might develop less
ambitious CSR strategies for their affiliations in
developing countries because of lower local CSR
standards and pressure (Muller 2006).
Community development in poorer countries
is one field of action for TNCs in this sense.
According to Reimann et al. (2012), community
development is seldom seen as a core part of CSR
in Western countries, whereas it can be critical in
emerging economy settings with low social stan-
dards and insufficient infrastructure. TNCs,
therefore, often need to take an active role in
improving the local conditions.
International technology transfer and the CSR
strategies of transnational corporations are of
great relevance for social and economic develop-
ment in less developed countries. ITT is
Technology Transfer
especially relevant in developing countries where
local universities hardly engage in research and
technology transfer and thus have a low innova-
tion performance. In those countries, TNCs play
a central role for technological development, as
the transfer of technologies through trade or for-
eign direct investment by TNCs is one of the most
important channels for updating their technolog-
ical standards. However, TNCs have mostly
located their R&D in developed countries, so
that there is an asymmetry between technology
possession and the location of technological
need. While in developed countries the technol-
ogy cycle takes the route from research and
development to design and production, in less
advanced developing countries it tends to take
the reverse route, from production and design to
development and research. The literature has
shown that the impact of introducing new tech-
nologies via trade or FDI on the local economy is
rather limited if local enterprises are not in
a position to absorb and apply the new technolo-
gies due to a lack of know-how and education. In
this context, CSR of TNCs can be of relevance
through the creation of links to local firms and the
support of capacity building for employees in
their own affiliations as well as in cooperating
firms, thus contributing to increasing the
capacity of the host country to absorb new tech-
nologies and its technological development in the
long term.
In summary, socially responsible international
technology transfer can take the following forms:
(a) to comply with higher social and environmen-
tal standards than mandatory in the host country;
(b) to increase the capacity of local employees or
local (supply) companies (e.g., offer training
courses and technical support); and (c) to support
community development (e.g., health and educa-
tion infrastructure for the local population).
Additionally, companies which are not originally
involved in ITT as a regular business activity
might incorporate it as a CSR measure. A pro-
ducer of photovoltaic panels, for example, could
support rural electrification projects in deprived
communities by donating solar panels and
offering technical training and support to local
technicians.
2509 T
Future Directions
In the future, the connection between CSR and
technology transfer can be expected to gain more
relevance in the following fields: climate change,
informal technology transfer mechanisms, and
university social responsibility.
Climate Change
In recent years, climate change has become
a relevant topic of international technology trans-
fer (ITT) and for CSR. Climate change is a global
problem which can only be tackled on a global
level. The need for the transfer of environmen-
tally sound technologies (EST) has been recog-
nized in the framework of the international
climate change negotiations. The United Nations
Framework Convention on Climate Change
(UNFCCC) requires its parties to “promote and
cooperate in the development, application, diffu-
sion, including transfer, of technologies, prac-
tices, and processes that control, reduce, or
prevent anthropogenic emissions of greenhouse
gases” (Article 4.1c). The research literature
regarding the transfer of technologies for climate
change mitigation and adaptation has been
growing rapidly.
Efforts to increase the capacity of less devel-
oped and emerging economies to implement cli-
mate change adaptation and mitigation measures
are mostly initiated by governmental entities,
international cooperation agencies, or NGOs.
Nevertheless, the private sector plays a key role
in terms of transferring the appropriate technolo-
gies and know-how to other countries. In recent
years, the Clean Development Mechanism
(CDM) of the Kyoto Protocol has played an T
important role in fostering these kinds of technol-
ogy transfer to developing coutries in order to
foster sustainable development through improve-
ments in waste management, energy efficiency,
deforestation, and other climate-relevant areas.
At the same time, the business activities of
enterprises have a strong impact on climate
change (or on the environment in general). Pri-
vate corporations can evaluate their general tech-
nology transfer activities regarding their impact
on local environments and global warming in the
T 2510
framework of their social responsibility. Most of
the largest transnational corporations are taking
steps to include climate change explicitly in their
CSR reports. However, much work remains to
make this disclosure more comprehensive and
comparable (UNCTAD 2011). In this context,
the integration of energy-efficient production
machinery in a foreign affiliate, for example,
can cost-effectively accomplish the goal of cli-
mate change mitigation and at the same time
transfer know-how about these technologies to
the host country.
Informal Technology Transfer Mechanisms
Most of technology transfer research has focused
on the commercialization of university research
or commercial forms of private sector technology
transfer and, therefore, mechanisms such as
patenting, licensing, FDI and spin-offs have
been the most studied. The literature acknowl-
edges that there are other ways in which technol-
ogy is transferred; however, their outcomes are
harder to measure (Nilsson et al. 2010). Some
studies have demonstrated that these common
indicators for formal technology transfer account
only for a minor proportion of the technology
actually transferred to the market (Lester 2005;
Agrawal and Henderson 2002). For this reason,
there is a need to explore informal technology
transfer mechanisms, such as consulting, co-
supervision, recruitment of graduates, collabora-
tive research, trade fairs, and conferences.
Engaging in such informal technology transfer
can be profitable and at the same time a socially
responsible way for enterprises to cooperate with
universities and other organizations where both
sides can benefit from knowledge transfer.
University Social Responsibility
Universities are key actors in technology transfer
processes. While CSR was originally introduced
in large enterprises, and subsequently also by
smaller firms and organizations, in recent years,
social responsibility practices have also been
adopted by universities, a practice referred to as
university social responsibility (USR). Similar to
CSR, economic, ethic, subsocial, philanthropic,
Technology Transfer
and environmental responsibilities can be consid-
ered as the key components of USR (Tetrevova
and Sabolova 2010). The relevance of USR can
be seen in the context of the Bologna Process and
the trend of universities receiving less public
financial support and becoming more entrepre-
neurial. Technology transfer activities play a key
role for universities in attracting nonpublic
sources of income. This includes formal mecha-
nisms such as patents, licensing and spin-offs, as
well as as informal mechanisms such as consul-
tancy and conferences. In the context of univer-
sity research and technology transfer, the
ethical level of social responsibility, in particular
intellectual property protection, is of major
relevance.
Cross-References
▶ Climate Change
▶ Global Warming
▶ Knowledge Management
▶ Knowledge Transfer, Knowledge
Management and CSR
References and Readings
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technology transfer to developing countries. Renewable
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Agrawal, A., & Henderson, R. (2002). Putting patents in
context: Exploring knowledge transfer from MIT.
Management Science, 48(1), 44–60.
Barton, J. H. (2007). New trends in technology transfer.
Implications for national and international policy.
Geneva: ITCSD.
Brewer, T. L. (2008). Climate change technology transfer:
a new paradigm and policy agenda. Climate Policy,
8(5), 516–526.
Cohen, G. (2004). Technology transfer. Strategic manage-
ment in developing countries. New Delhi/Thousand
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Hoekman, B. M., Maskus, K. E., & Saggi, K. (2005).
Transfer of technology to developing countries:
Unilateral and multilateral policy options. World
Development, 33(10), 1587–1602.
Karakosta, C., Doukas, H., & Psarras, J. (2010). Technol-
ogy transfer through climate change: Setting a
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sustainable energy patter. Renewable and Sustainable
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competitiveness of local economies, industrial perfor-
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Massachusetts Institute of Technology. ▶ Utilitarianism and CSR
Metz, B., Davidson, O. R., Martens, J., van Rooijen,
S. N. M., & McGrory, L. (Eds.). (2000). Methodolog-
ical and technological issues in technology transfer.
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Muller, A. (2006). Global versus local CSR strategies.
European Management Journal, 24(2–3), 189–198.
Nilsson, A. S., Rickne, A., & Bengtsson, L. (2010). Trans- ▶ Virtue Ethics and CSR
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The Journal of Technology Transfer, 35, 617–636.
Pueyo, A., Garcı́a, R., Mendiluce, M., & Morales, D.
(2011). The role of technology transfer for the devel-
opment of a local wind component industry in Chile.
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Reimann, F., Ehrgott, M., Kaufmann, L., & Carter, C. R.
(2012). Local stakeholders and local legitimacy: ▶ Ethical Theories
MNEs’ social strategies in emerging economies. Jour-
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Reisman, A. (2005). Transfer of technologies: A cross-
disciplinary taxonomy. Omega, 33, 189–202.
Rogers, E. M., Takegami, S., & Yin, J. (2001). Lessons Temporary Natives
learned about technology transfer. Technovation, 21,
253–261.
Schneider, M., Holzer, A., & Hoffmann, V. H. (2008). Philippe Callot
Understanding the CDM’s contribution to technology ESCEM Group (School of Business &
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Storper, M., & Walker, R. (1989). The capitalist impera-
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Tetrevova, L., & Sabolova, V. (2010). University stake- Synonyms
holder management and University social responsibil-
ity. WSEAS Transactions on Advances in Engineering
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UNCTAD (2011). Investment and enterprise responsibil-
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Wilkins, G. (2002). Technology Transfer for Renewable
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Institute of International Affairs, 48.

Introduction

Technology Valorization Free, spare time is increasing as economies

develop. Today, an “average” employee
▶ Technology Transfer works less than 1,600 h per annum compared
T 2512
with 3,000 h a century ago. Equally, the rate of
holiday departures, varying between countries,
results from the level of development of the coun-
try, with tourism resulting from the high level of
comfort of the populations. This rate of departure
materializes the desire for holidays, a right
obtained during the twentieth century in most
developed countries. There are still great discrep-
ancies even within the developed countries.
Hence in Europe, the rate of departure of the
Portuguese (around 30%) is nearly three times
lower than that of the Swiss (over 80%). Obvi-
ously, this rate correlates to household incomes,
but there are other variables affecting the high or
limited rate of departure. These include the desire
not to go away or the “favorable” geographic
situation of a permanent resident that does not
induce him to leave his home. Another factor also
at the source of these discrepancies is the way
second home owners respond to the situation.
Indeed, these people tend to consider that going
to their second home is not the same as going on
holiday (Urbain 2008). The phenomenon of sec-
ond homes is not a recent one. In addition to
extending one’s property assets, it symbolizes
being able to go off at leisure to a favorite desti-
nation. Coastal resorts, confirming the attraction
of water as an act of the popularization of tourism
(Boyer 1999), have literally “exploded” demo-
graphically because of the desire of people ini-
tially to go there on holiday, then for a large
number of them to wish to buy a property there.
La Baule, Carnac, and Le Touquet close to Paris,
Biarritz further away, have all experienced
a demographic explosion linked to this phenom-
enon of second homes. However, this phenome-
non also has its downside.
Key Issues
In addition to the impact of infrastructures and
buildings (individual homes or apartment
blocks), there is also the question of relationships
with the true natives. Are the new residents well
accepted? How do they behave? We see every-
where homes that originally belonged to the
locals and handed down over several generations,
Temporary Natives
passing into the hands of these temporary natives
who freely take over the properties. Because of
the law of supply and demand, prices have
exploded in certain sought-after areas. In the
eyes of the natives, these tourists come along
and, in addition to the dwelling, take over part
of “their memory and their history,” creating
a will to resist among the people of the commu-
nity (Prunet 2007). This is the case of numerous
eagerly sought-after islands, such as the Ile de
Groix, which has 2,500 inhabitants in winter and
four times as many at the peak of the summer
season. The issue raised here is that of the sup-
posed differences between the permanent resi-
dents, the true natives, and the temporary
residents who want to make everyone believe,
sometimes successfully, that they are locals,
when they usually have no local roots. It was
just that at one time they fell in love with this
wonderful area and wanted to have a place to stay
there, not forever, but just every summer, or as
a hideaway for long weekends, or simply to make
the most of an investment. It is the question of an
endlessly repeated journey returning to the smells
and tastes of the last visits and reinvigorating
mind and body, just as it happened the first
time. We find ourselves in the scenario of volun-
tarily returning to the destination with the some-
times timid desire to establish long-term roots in
the area as a permanent resident, adopting the
habits and ways of living (especially regarding
food buying) that go with it. This expresses
a strong desire to stand apart from the tourists,
who only come to the place for a while to con-
sume fleetingly, spending a little money, but
unable to imagine settling down permanently in
the way of life and customs of the area. On the
contrary, the temporary native likes to feel rec-
ognized by the inhabitants, going so far as to stop
to find out the latest news, to use first names, or
talk about village locals in order to underline
a sense of belonging with the community. We
would not go as far as saying to mark his territory,
but undoubtedly a little of that comes into it. He
will readily excuse himself for his very long
absence, too long since his last stay, justifying
his lack of presence by a busy life or other impos-
sible reasons for this infidelity. Once he has
Temporary Natives
returned home to his normal residence, he will
spout out anecdotes about this place that he now
knows so well. This highlights the complex rela-
tionship between natives and tourists. Some even
go as far as noticing the presence of lies, boycott,
and secrets (Prunet 2007) in the way that the
natives set about taking control of the situation.
Lies from the inhabitant when he welcomes
a tourist, pretending he is a distant relative; boy-
cott of the establishments managed or run by
tourists. Finally, the secret consists in not reveal-
ing local issues of any sort to the tourist so as to
isolate him from the community. Does the holi-
day resident, our temporary native, receive the
same treatment? There are two existing attitudes.
There are those who do not merge with the cus-
toms of the place, with no particular desire to
integrate into local, community life. Some even
contribute to their rejection, believing themselves
to be a “providential presence” (Meistersheim
2000) and therefore coming up against the resis-
tance of the natives who do not accept this arro-
gant posture. The second attitude relates to
second home residents who expect nothing from
the community. Paradoxically, these people are
accepted more readily than those adopting the
first attitude. Herein lies a subject ripe for
research: seeing if these two attitudes can be
seen in temporary natives with the same conse-
quences. It is clear to see the division being
created between the inhabitants and the invaders
in the form of tourists or temporary natives for
those living there occasionally and wishing to
merge in with local life.
Future Directions
The impact of the phenomenon of second homes
cannot leave anyone indifferent. In terms of vol-
ume (accommodation capacity), it is often quite
simply and by far the method of accommodation
commonly used by the “tourists.” Thus, in
Belgium, in the district of Knokke-Heist, of the
83,268 housing units, second homes account for
99.3%. In terms of beds, out of a total of 540,243,
these homes represent 75% of the total
(De Keyser and Verhaeghe 2010; 2007 data).
2513 T
It takes a real hold of the coastal regions, at the
same time pushing the natives inland. The insular
phenomenon (Prunet 2007) can be recognized
here, with similar, memorable situations taking
place, for example, in Marrakech. Most of these
invasions are made by private, French investors,
investing either in a lucrative business based on
tourism or in a temporary-nature second home.
With the novelty of the cultural variable, we find
here the same causes and the same effects.
The inhabitants of Marrakech have been pushed
back 20 km from the city, encouraged to leave the
heart of the city to new, temporary native
investors. Medina no longer belongs to the
Moroccans the town of Tamansourt, with its
300,000 inhabitants and housing estates, is
becoming a ghetto, a commuter town for
employees of the popular tourist city. By pushing
the local population away from their land, we can
understand how hostile reactions can be created
toward these visitors or tourists. Resistance sets
in and the inhabitants come together, as at Fes, in
an association encouraging them to take in tour-
ists (“Ziyarates Fes” or welcome to Fes). Some-
times, ambivalent attitudes are shown on the part
of the temporary natives. “Their consumption
habits are like the locals, but they behave like
tourists” (De Keyser and Verhaeghe 2010).
In this respect, they try to imitate the natives
with the habits they attempt to assume (particu-
larly with regard to food), but for everything else
they behave like tourists on conquered land.
Because of the rise in the cost of land, the phe-
nomenon has become practically global. Where
a site has sought-after benefits, the natives are
encouraged to leave their heritage behind. They
are pushed out! We find ourselves at the heart of T
an interesting debate. This concerns the power of
money over the history of communities and fam-
ilies and the annihilation of heritage passed down
through the generations. In some cases, it is nec-
essary to call upon sustainable development
because of a lack of responsible investment.
In Saidia, a new Moroccan tourist resort created
as part of the Plan Azur to increase tourism in the
country, nine hotels have been built in addition to
co-owned second homes (180,000 € on average
for a maisonette). The beach is characterless, the
T 2514
Temporary Natives,
Fig. 1 The positioning of
the temporary native in
relation to the four types of
capital linked to tourism
Financial
Assets
dunes flattened, and the biodiversity that held
the sand down is beginning to disappear. Since
there is nothing to hold down the sand any more,
the inhabitants further away are suffering the
consequences. Nothing has been planned for
waste water, but the sea is not far away. After
the euphoria of the creation of jobs, families
living here, the natives, are even hoping that the
tourist complex will be a failure.
Among the four types of assets involved with
tourism (Babou and Callot 2007), where do the
temporary natives fit in? They are at the conver-
gence of three assets, at the point where the social
and financial assets as vectors of tourist activities
(having sufficient income and time, etc.) come
into contact with the spatial assets (Fig. 1).
Indeed, we have already stated that the tem-
porary natives leave in the quest of space, which
draws them like a magnet. They invest in a place
and treat themselves to a house or building in
which they can create another local life for them-
selves. The English have done it in Brittany, then
in the Dordogne, and now in the Limousin
(although with less frequency because of the fall
of the pound against the euro). The Parisians have
Temporary Natives
Air Assets
(Low CO2)
Social
Assets
Tourism (time, culture,
education…)
Space Assets
Temporary
Natives
done it in Normandy (Deauville and Trouville are
known as the 21st arrondissement of Paris) or in
Berry and now in the Champagne region since
good offers are becoming hard to find. We see
these invasions (passive?) increasing at the same
rate as the pictures and word are passed on about
a given destination. The interest in doing this
seems obvious here. It is the proximity and
another way of experiencing “city life in the
country,” taking up Edgar Morin’s metaphor.
The city dweller has a property by the water (as
in Knokke-Heist, Deauville, Biarritz, Damgan,
Argelès, etc.), in the country (Berry, Limousin,
Béarn, Périgord, Champagne, etc.), or in the
mountains (Avoriaz, Courchevel, La Mongie,
Gérardmer, etc.). This proximity is unfortunately
a double trap for the environment and its protec-
tion! Having a property there naturally incites
and encourages the owner to go there, as often
as possible. This enthusiasm therefore involves
an increased frequency in the number of car jour-
neys, which is costly in terms of energy and CO2
emissions! If the owners do not go themselves,
the property could be lent to friends or family.
This in itself helps to offset the problem.
Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
The second trap is linked to the property itself.
Naturally, the fact of owning a second home
increases the size of the carbon footprint or car-
bon audit. Temporary natives are therefore dou-
bly responsible for CO2 emissions! We feel that
the phenomenon is very much linked to personal
income. We have seen the difficulties that can
occur because of the attitudes of these temporary
natives toward the real inhabitants, the locals. We
can now see environmental problems arising
through this very “westernized” posture.
There are already several research questions
that have emerged from the interesting issues
mentioned. For example, what happens to
a town when its living space is given up to these
temporary natives? Is this a transitory phenome-
non in the assumption that the owners will settle
down over the seasons, the holidays, and the
extended weekends until these second homes
become permanent? Or is it a recurring phenom-
enon transforming a certain resort (in the moun-
tains or on the coast) into an occasional dormitory
town, alive at certain times, but a ghost town
otherwise? Should there be some sort of interven-
tion to reduce the number of these second homes
and consequently of these temporary natives?
How can the idea be impressed upon these prop-
erty owners of more responsible and sensible
consumption with regard to a property that, to
them, means escape, pleasure, holidays, and
new social contacts?
Cross-References
▶ Carbon Footprint
▶ Community
▶ Community Relations
▶ Ecological Footprint
▶ Social Sustainability
References and Readings
Babou, I., & Callot, Ph. (2007). Dilemmes du tourisme.
Paris: Vuibert.
Boyer, M. (1999). Histoire du tourisme de masse (Collec-
tion Que sais-je?). Paris: Editions PUF.
2515 T
Callot, Ph. (2006). Marketing et PME (I). Entre sociologie
et marchés. In P. Callot (Ed.), Tourisme et PME
(pp. 15–31). Paris: Hermès Lavoisier.
De Keyser, R., & Verhaeghe, A. (2010). Research on the
second home on the Belgian Coast. 45th Meeting TRC,
Vienna.
Meistersheim, A. (2000). Figures de l’ı̂le. DCL: Ajaccio.
Prunet, A. (2007). L’identité insulaire face au tourisme sur
l’ı̂le de Groix: éloge et pouvoir de l’absence.
In P. Frustrier & E. Siloë (Eds.), Les identités
insulaires face au tourisme (pp. 138–145).
La Roche-sur-Yon: Siloë.
Urbain, J.-D. (2008). Le voyage était presque parfait.
Essai sur les voyages ratés. Paris: Payot.
Territorial Companies
▶ Territorial Social Responsibility and Territo-
rial Small and Medium-Sized Enterprises
Territorial Governance
▶ Territorial Social Responsibility and Territo-
rial Small and Medium-Sized Enterprises
Territorial Metabolism
▶ Region
Territorial Social Responsibility and
Territorial Small and Medium-Sized
Enterprises
T
Mara Del Baldo
Department of Economics, Society and Politics,
University of Urbino “Carlo Bo”, Urbino, Italy
Synonyms
Corporate social responsibility-oriented SMEs;
Local governance; Small and medium-sized
businesses; Social capital; Social cohesion;
Territorial companies; Territorial governance;
Territorial sustainability
T 2516 Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
Definition
Territorial social responsibility is a form of gov-
ernance cultivated through the diffusion of CSR
(Corporate Social Responsibility) and sustain-
ability-oriented strategies which are promoted
by networks of local actors – public and private,
for and nonprofit (institutions, trade union asso-
ciations, universities, chambers of commerce,
businesses, nonprofit organizations, foundations,
banks, professional orders, civil society) – who
come from the same territory and whose policies
are oriented toward sustainable development.
When there is a common aim to improve the
quality of life that ties together individuals and
organizations belonging to the same territory, it is
possible to introduce the notion of territorial
social responsibility, founded on the rediscovery
of shared values that the territory’s economic,
social, and institutional stakeholders know how
to reinforce, thanks to solid networks of relation-
ships. This approach can be applied in specific
social and economic contexts where all local
actors have absorbed a common culture that
spreads in mutual values. The concept of culture
reminds to beliefs, norms, traditions, and
attitudes that drive the behavior of individuals
and organizations belonging to a definite
community.
SMEs (small and medium-sized enterprises)
play a primary role in promoting pathways of
territorial social responsibility, thanks to their
rootedness in and their strong relationships with,
the local community. Small entrepreneurs are
often active members of the territorial commu-
nity to which they are linked, representing its
“creative soul,” and reinvesting their energy and
part of the economic wealth they generate. SMEs
deeply embedded to their respective territories
are characterized by long-term, established
mechanisms and rules. The values at the base of
their strategic orientation are not only linked to
the personal attributes of their entrepreneurs and
managers, but, being profoundly rooted in local
contexts, are also connected to anthropological
factors (historical, social, and cultural) typical
of the local environment, characterized by the
presence of a specific social capital.
SMEs who cultivate a distinctive relationship
with the socioeconomic environment – that is,
who are genuinely rooted in their surrounding
territory and whose sustainable development is
connected to the local context in which they are
inserted – can be defined as territorial companies.
Territorial companies are important protago-
nists in the construction of networks that are
constituted by a plurality of actors with
whom they enter into relationships, utilizing the
exemplary social cohesion that characterizes the
local contexts (city, province, and region) in
which they operate. In this way, they activate
(or support) paths of social responsibility
and sustainability inside the community and the
surrounding territory that are not always exclu-
sively local but often extend themselves into the
national and international contexts.
Introduction
The theme of stakeholder management, like that
of sustainability and CSR-oriented strategies, is
predominately studied in major enterprises. In
comparison, SMEs have received relatively little
attention. There is a small body of literature on
SMEs’ experiences in industrialized countries
and a very limited amount of literature in devel-
oping countries. A systematic analysis of the
possible transferability of sustainability and
CSR concepts for SMEs – such as the discovery
of SMEs’ specific patterns – constitutes a critical
gap in the research which needs to be filled, since
SMEs remain the dominant organizational form
within the member countries of the OECD and
play a critical role in industrialized and develop-
ing economies. Traditionally, though not
exclusively, SMEs have been analyzed locally:
their small size makes it easier to think of them
as economic actors associated with a local
economic context (a province or a region), as
opposed to larger companies which are natural
global players. However, when small firms are
looked at as a whole, their weight critically
affects the economic performance of national
economies. SMEs make up more than 90% of
business worldwide and on average account for
Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
50% of the gross domestic product (GDP) of all
countries and for 60% of their employment
(OECD 2009). In Europe, they make up 99% of
economic activity, employ 66% of the work force
and produce 50% of the value added. These fig-
ures are even higher in Italy, where SMEs com-
prise 99.2% of all companies and employ 79.81%
of the total work force. The Italian socioeco-
nomic system is characterized by the diffusion
of SMEs – normally family businesses – in local
districts which are found all over the county and
are particularly concentrated in Northern and
Central Italy, along the Adriatic Coast and in
few areas of the south. In these local areas,
SMEs embeddedness in the surrounding territory
and socioeconomic context assumes particular
importance in driving the business toward
forms of stakeholder management based on
relationships that are facilitated by sharing com-
mon values which typically express a particular
sociocultural and economic tradition of the terri-
tory in which the company and its stakeholders
are embedded.
A number of characteristics distinguish
SMEs from their larger counterparts: they are
normally legally and economically independent;
they are typically family-owned businesses and
are characterized by strong ties between the firm
and its owner. The objectives pursued by SMEs
are not inevitably growth oriented. Their simple
organizational structures support informal
relations with internal and external stake-
holders. Together, these attributes can be syn-
thesized into three aspects that reflect the
uniqueness of SMEs: their convergence around
a common mission and set of values, facilitated
by their proximity to stakeholders and by the
direct involvement of the owner and/or the
entrepreneurial family in managing the busi-
ness; the simplicity of their organizational struc-
ture, which allows direct and frequent relations
between stakeholders; and their embeddedness
in the surrounding territory. The values of their
entrepreneurs, and those of the entrepreneurs’
family, are transferred to the firm and are shared
with the company’s stakeholders, beginning
with the actors from the local socioeconomic
fabric.
2517 T
In light of these considerations, it is important
to reflect on the following questions: What is the
importance of sharing common values that orig-
inate from – and are reinforced by – the entrepre-
neur’s and the company’s embeddedness in
a cohesive territorial socioeconomic system?
Can “territorial values” (values shared among
actors belonging to the same territory character-
ized by a diffuse entrepreneurship and strong
social cohesion) act as a driver for the diffusion
of CSR and sustainability-oriented strategies?
According to several authors, research on the
relationship between CSR, sustainability and
SMEs differs significantly from the research on
big corporations. The large multinational firms
are not a standard business form against which
other types are benchmarked. A contingent
approach is necessary, in order to take into
consideration the aforementioned specificities
both internal and external: the former relative to
the centrality of the entrepreneur and his system
of values, linked to the values of his family;
the latter linked to the relationships with their
respective local contexts.
In terms of the former, diverse researches
reveal that the process of orientation toward
CSR and sustainability normally is promoted
by the owner-entrepreneur and depends on his
ethical orientation. Entrepreneurial motivations
and aims are placed at the base of the theory of
social success of the entrepreneur. The firm’s
success and the consequent entrepreneur’s social
power are also founded on respect for both
economic balance and on moral values.
In terms of the latter (an SME’s rootedness) on
both the national and international levels,
a proclivity toward collaborating with surround- T
ing stakeholders and a sense of belonging to the
local community seems to be characteristic of
SMEs. They are normally involved in local net-
works characterized by the presence of a plurality
of actors, both public and private and primarily
based on informal relationships. The majority of
common SME-sustainable measures become
manifested in the respective territorial contexts.
SMEs support schools, sports clubs, cultural
institutions, fairs, and local monument protec-
tion, as well as social services through donations,
T 2518 Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
sponsoring, advertisement, resources, technical
and organizational support, as well as personal
and voluntary commitment. The commitment
also includes active membership in trade associ-
ations, examination boards, or church councils.
SMEs are more actively involved with CSR and
sustainability when they have strong network
relationships. Proximity, the feeling of nearness
(which is social, cultural, and physical), and
social consensus can be considered the roots of
innovative approaches to stakeholder manage-
ment and of CSR-oriented strategies, which
are experimented by territorial companies. Terri-
torial companies are SMEs developed in local
contexts characterized by strong cultural and
socioeconomic cohesion and therefore strongly
committed to contributing to the promotion of
the quality of their surrounding territory.
Different studies have focused on the need for
SMEs to adopt responsible behavior owing to the
strong link that they have with the local system.
Some studies have identified factors such as
the culture, history, institutions, beliefs, and com-
munal convictions, as a sort of humus of the
intangible assets of the context, which corre-
spond to a genius loci, connected to a particular
place. Ringov and Zollo’s (2007) interesting con-
tribution offers empirical evidence to test the
assumption that businesses’ socially responsible
behavior is influenced by the specific dimension
of the cultural context in their home country.
Those results are consistent with the findings of
the report on European SMEs and social and
environmental responsibility showing a highest
percentage of SMEs sustainable oriented in
those Nordic countries (i.e., Finland, Denmark,
Norway, The Netherlands, and Sweden) notably
characterized by a more “feminine” and a low
“power-distance” culture.
The symbiotic relationship between compa-
nies and their social context is considered central
to many different theories. While firms are being
“placed,” places are also being “firmed”: compa-
nies are not passive users of locations but are
themselves active in shaping the endowment of
a location. Relationships between a region’s
specific “soft” factors, such as culture and insti-
tutions and the firms, have been investigated both
for transnational firms as well as for industrial
districts, innovative milieus, and clusters. The
mutual influence, the “firm-place relationship,”
occurs because of manifold interactions between
the firms and their region as firms strive to extract
the maximum benefit from the communities in
which they are embedded and communities in
turn attempt to derive the maximum benefits
from the firms’ local operations.
Paradoxically, the enduring competitive advan-
tages in a global economy lie increasingly in local
things – knowledge, relationships, and motiva-
tions. The creation of corporate-shared value is
considered to be a new way of “reinventing
capitalism.” At the same time, engaging locally
seems to be the new imperative; it involves creat-
ing economic value in a way that also creates
value for society by addressing its needs and
challenges through new forms of collaboration.
To follow this objective, large multinational
corporations – frequently disconnected from their
community – should be oriented toward the crea-
tion of local sectoral clusters in the surrounding
community in order to strengthen the connection
between the company and the communities’
success (Porter and Kramer 2011).
Interaction is even more significant for SMEs,
and this helps give prominence to social capital,
intended here to mean the totalization of relations
among individuals inspired by principles of trust,
reciprocal understanding, and shared values.
The success of many SMEs continues to depend
on their rootedness in the territory in which
they were found, thanks to positive external
relationships that come from the quality of
human capital (qualification of the labor and the
specific working culture) and of social capital
(social and institutional cohesion, solidarity, and
interpersonal faith). SMEs are (and have always
been) cognizant that the health of the local envi-
ronment is fundamental to the health of the com-
pany since they are an integral part of the local
community.
SMEs inserted into local contexts character-
ized by diffuse entrepreneurialism, nourished by
shared values between a plurality of local actors,
are able to effectively engage in different
forms of stakeholder dialog. Stakeholder dialog
Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
represents a praxis of valorization of social
and relational capital available at the local
level and a way of confronting, negotiating, and
recognizing reciprocal interests and aims to find
shared solutions through several instruments:
organizing periodic meetings, instituting forums,
and creating stakeholder networks. In SMEs,
stakeholder dialog and the formation of
a stakeholder networks is facilitated by tradi-
tional ties that the business and the entrepreneur
entertain with the surrounding community and in
a climate nourished by continual interpersonal
relations and based on reciprocal trust.
Different scholars in their contributions to the
literature on industrial districts argue that SMEs
in a particular district can collectively improve
their location environment through cooperation.
The firm’s territory of origin does not simply
represent a location (the physical site in which
businesses carry out their activities and
from which they draw their human resources
and primary materials) but constitutes the princi-
ple social and civil environment. The territory
is the totalization of knowledge-related assets
(diffuse entrepreneurial resources, human capi-
tal, know-how), relation-related assets (a system
of economic and social interactions between peo-
ple and organizations), and culture-related assets
(local culture that is constantly developing and
self-reinforcing). In other words, this corresponds
to the local community in which SMEs (the entre-
preneurs, their families, and their workers)
actively play out their “citizenship.”
In Italy, whose socioeconomic fabric is com-
posed of small companies and entrepreneurs and
their families, there are many zones in which
values – in terms of know-how and sense of
belonging to a local community, to the same
culture – inspire entrepreneurial behavior.
A typology of Italian companies’ orientation
toward CSR (which comes from an analysis of
roughly 4,000 companies) presents a behavior
map that reveals five groups of companies: cohe-
sive, multicertificate, aware, mobilizable, and
skeptical (Unioncamere 2003). The first two
types are characterized by an elevated attention
to their stakeholders’ expectations and appear to
be predominantly located in local contexts
2519 T
characterized by diffuse entrepreneurialism and
by the presence of districts and clusters. The
interaction between firm and society is at the
base of the entrepreneurial model of the “Terza
Italia” (“Third Italy”) in which SMEs are orga-
nized predominately in districts, clusters, and in
local territorial systems. The phenomenon of
industrial districts is typically (though not exclu-
sively) Italian. The industrial district represents
an authentic “small social market economy” and
is the paradigmatic expression of a balanced
capitalism “with a human face.”
Diverse researchers, historians, sociologists,
and economists have emphasized the active role
of the entire local society in favoring this type of
development “without fractures” which has char-
acterized the economic model of the Third Italy
(diffused in the north, east, and center of Italy)
after the Second World War (Fuà and Zacchia
1983). They revealed how the objective of
reconciling competition and cooperation have
safeguarded social cohesion and, at the same
time, guaranteed the growth of a diffuse entrepre-
neurship and favored the development of Italian
districts and, more general, of systems of local
production. Putnam (1993) underscored the
importance of a diffuse associative social fabric
in creating social cohesion and promoting
political and administrative efficiency and of the
role given to political subcultures (Catholic and
social communist) in promoting less conflicting
relationships between labor and capital. In these
contexts, there are numerous companies, the so-
called territorial companies, normally small to
medium sized that – thanks to the entrepreneurial
vocation and to their “civil charisma” which
springs from rural culture and from the culture T
of the Italian cities during the humanistic Renais-
sance – offer tangible examples of innovative
routes of sustainable development which, first
and foremost, involves the context of their local
territory but not only, since they push themselves
on a national and international level. The model
of development promoted by territorial companies
has the capacity of staving off economic decline,
environmental degradation, social impoverish-
ment, and pessimism, thanks to the synergy
between an orientation to the future, recuperated
T 2520 Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
by the past, defense of traditional knowledge, of
local culture, of the quality of the environment,
and projection toward the future (i.e., the green
economy), innovation, and research in advanced
and high-tech sectors to care for the environment.
A recent piece of research, which centered on
various cases involving Italian SMEs, allowed
verifying an important connection between
orientation toward sustainability of companies
led by entrepreneurs “champions of CSR” and
the sharing of those values typical of their family
and local context. Local and global orientations
(the “glocal” perspective) combine in a model of
capitalism (the so-called soft or kind capitalism)
which is the heritage of the civil economy of the
country’s historical tradition. Its knowledgeable
and essential links with the territory explain
the success of the most advanced patterns of
local development based on shared strategic
territorial planning.
That is the rationale why different Italian
territories (i.e., Marches, Tuscany, Emilia
Romagna, Trentino Alto Adige, and the Veneto)
offer an interesting laboratory to study the extent
of CSR based on the proactive role of SMEs,
capable of activating innovative forms of territo-
rial social responsibility. In the following table
(Table 1), we synthesize some earliest Italian
experiences that have promoted concrete CSR
and sustainability practices in their respective
local contexts (regions, provinces, towns) based
on the construction of mixed networks in which
private firms (mainly SMEs) flank the organs of
local government and the institutions of civil
society. Those seminal experiences concentrate
in the following Italian territories: Tuscany,
Veneto, and Marches.
The efficacy of CSR and sustainability pro-
jects that begin at the local level is predicated
on the culture and on the values that the diverse,
networked stakeholder-actors share in their terri-
tory and translate into a particular activism and
sensitivity that operates at the local level assum-
ing the contents of social territorial responsibility
whose success is made possible by social cohe-
sion and by a collective identity. Though devel-
oped at the micro- and mesolevels (communal,
provincial, and regional), territorial governance
is initiated by individual businesses (for and/or
nonprofit) and/or public institutions capable of
creating CSR networks, departing from a strong
social cohesion and common values. Local gov-
ernance based on subsidiarity and the shared
values of a spatial and socioeconomic community
is focused on following the public interest by
creating public-private partnerships and operates
through their motivations and values. This
triggers a path of governance in which participa-
tion, coplanning, and dialog are not merely
slogans but the modus operandi in actors’ pro-
cesses of creating value. At the same time, this
approach is based on a symmetrical, bidirectional
model of governing relationships among partici-
pants and aims to foster cohesion by rendering all
the actors active parts of the decision-making
process, putting listening and the shared values
at the center.
Key Issues
Although usually not given a great deal of atten-
tion, the role of SMEs and the entrepreneurs who
operate them is a key part of the CSR and sus-
tainability debate.
Innovative models of local development are
affirmed in time as evidenced by the capacity
of the entrepreneurial fabric and above all of
SMEs to develop relational logic, becoming
a multistakeholder partnerships among public
operators, firms, and civic organizations and
developing networks of relations characterized
by genuine commitment and forms of collabora-
tion aimed at linking economic well-being,
social cohesion, and environmental protection.
The frontier of responsible competitiveness is
marked by values-driven businesses in which
entrepreneurial success is strictly tied to the
capacity to create shared value with stakeholders.
The international and national guidelines in CSR
and sustainability are often both too “far” from
the specific culture, needs, and expectations of
the numerous diverse local environments, as well
as characterized by a lack of efficiency at the
Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises 2521 T
Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises, Table 1 Territorial
governance experiences in Italy
Tuscany The experience of the Province of Lucca
An example of territorial “operationalization” of CSR was experienced in Lucca through two projects: LIFE-
funded Pioneer project – Paper Industry Operating in Network: an Experiment for EMAS Revision – and
COOPERATE project – Corporations Operating in a Responsible and Transparent Environment. The first
project was promoted by a network composed of the Province of Lucca and industrial organizations (private
associations and businesses, local authorities and service providers) and has helped develop a system of
environmental management (EMAS) in the sectors in which this certification was less diffuse. The second
project aimed to diffuse CSR across three industrial districts. Starting with the recognition of best practices at
the European level, it assembled a cluster sustainability report for every district and created local working
groups to promote “CSR cluster policy”
Fabrica Ethica project: Tuscany for social responsibility in businesses and in its territories
The region of Tuscany (department of productive activities) has “spoken to the microbusinesses,” inducing
them to adopt ethical certification SA8000. A regional ethical commission (composed of 39 commissioners
from the region’s productive, institutional, and social levels) has worked through diverse multistakeholder
groups to implement instruments for processes of coanalysis and, later, coplanning and shared updating
Veneto The Venetian “laboratory”: “Veneto Responsabile,” a regional network for CSR
“Responsible Veneto” was born in 2002 as a nonprofit association based in Padua, whose aim was to promote
a business culture oriented toward CSR and therefore to facilitate the diffusion of best practices through the
construction of a network among diverse subjects in the economic-social and institutional context. At the end
of 2006, it became a consortium, equipped with a chart of values and differentiated organs (assembly of
associates, direct council, president, committee, audits, fiduciary committee)
The shoemaking district in the Brenta Riviera
In the provinces of Padua and Venice, the history of the shoemaking district has always been marked by
industrial relationships and union accords characterized by the socially responsible structuring among actors
called to govern the territory. Businesses, trade associations, and unions are all social agents moving from
step to step together across this pathway; such steps include agreements of intent (1995), territorial pacts
(2000), a territory-wide council of shoemakers (2001), and territorial brand (2002)
Marches The Marches region’s responsible businesses system
The first Marchegian territorial network named SIRM project was created in 2005 by a consortium of 120
Marchegian businesses assisted by institutional partners (among them, the Marche region’s social service
ministry) and by diverse civic and institutional organizations (trade unions, nonprofits, consumer
associations). Its scope was to foster synergy among territories, institutions, businesses, entrepreneurial
associations, nonprofit organizations, social actors, and informal networks in civic society. In particular, the
project had two principle goals: to supply contributions to business and organizations, in the Marches Region
for implementing socially responsible systems and to institute a regional registry for SMEs that adopt and
promote socially responsible practices
The Marche region’s I.Re.M. project 2009–2011 – Responsible Businesses of the Marches Region – looks at
completing the inroads already made with SIRM (2005) by inaugurating a second phase of the model of
Marchegian social responsibility, whose goal was to create “ethical territorial networks”: “a form of coalition
between local institutions, businesses, and civic organizations that commit themselves to voluntary,
reciprocally advantageous relationships, and follow a common social objective: to improve the quality of life
and the quality of work in the Marchegian territory” through creating a regional CSR system, developing
regional CSR guidelines, implementing a CSR code of conduct, and developing and applying the Mark of T
Socially Responsible Business

local area, and therefore there is a need for “con-
tingent” and “situational” approaches in terms of
instruments and actions. Thus territorial social
responsibility and the forms of local governance
in which it is realized represent an effective
response.
Future Directions
Within an economic scenario where the behavior
and strategies of big companies are widespread
and where developmental processes that are often
incapable of giving true answers to the requests of
T 2522 Territorial Social Responsibility and Territorial Small and Medium-Sized Enterprises
ethical behavior, of local typicality, of better
thought-out rhythms of life, as well as of less
rushed and superficial human relationships pre-
vail, it is important to reevaluate the role of entre-
preneurs and SMEs, which are profoundly rooted
in the territory in which they operate (territorial
SMEs) and often considered to be of “minor”
relevance.
In SMEs, CSR and sustainability orientation is
strictly connected to ethically oriented core
values and are influenced by the belonging to
a specific local context. These values facilitate
the development of social and ethical networks of
stakeholders which are promoted by territorial
companies that share a minimum mutual set of
local values. The first statement relates to the
importance of fundamental values that lie at the
base of SME’s CSR orientation: family values
and the form of civility typical of the place.
The second relates to the importance attributed
to the values-based relations with diverse stake-
holders, starting with local ones and to the spe-
cific nature of territorial companies.
It is necessary to further develop these
reflections through future empirical research, to
closely examine territorial companies and, more
specifically, their value sets – deepening, in the
process, the body of research on SMEs that
emphasize the social capital for which they are
distinguished.
Future research may attempt a critical evalua-
tion of the model of territorial social responsibility
turning attention to local national and international
contexts characterized by widespread entrepre-
neurship in order to identify, in a comparative
key, the different cultural, anthropological,
and social variables. It also should provide
a foundation to the model of development centered
on the best practices of territorial SMEs. “Can we
build theory around these practices to show how
and why they create value, specifically connecting
purpose and values to specific practices?”
A more profound understanding of these
mechanisms requires, above all, an even deeper
qualitative analysis that is broadened by
a quantitative analysis. A possible methodology
could be represented by development of the study
related to single and multiple best practices, with
the scope of enriching the scientific debate
between scholars and practitioners. Raising
awareness, the virtuous behaviors of SMEs that
lie at the base of so many local experiences – that
often go unnoticed – facilitates dialog among
researchers as well as among businesses, public
officials, and civil society. Lately, one of
the priority areas of the European Commission’s
policy toward SMEs is aimed to support them
through the diffusion of examples of excellence
(the so-called best practices), whose protagonists
are SMEs. The round table stresses the impor-
tance of peer group networking opportunities
whereby individual champions can help col-
leagues from other SMEs better understand the
how to do of leading CSR initiatives which ulti-
mately can make SMEs more performing and
attractive.
The case studies’ method helps develop
propositions and formulate hypotheses on which
theories can be constructed and tested using
broad-based quantitative research designs.
Recently, entrepreneurship scholars have called
for a return to in-depth methods, such as narrative
and case studies. Such approaches are placed in
a body of research which involves both aca-
demics as well as centers promoting CSR and
consulting groups who intend their research to
reach not only their colleagues in the scientific
community but also to professional exponents. In
addition to developing an understanding and an
interpretation of the phenomenon, the purpose is
to present concrete testimonies to entrepreneurs,
institutional actors, and managers, which can pro-
vide the means for evaluating opportunities of
involvement with the community (i.e., the Centre
for Corporate Citizenship at Boston College or
the Copenhagen Business Centre), providing
solutions, and activating a virtuous cycle of
development that places the individual and his
surrounding socioeconomic environment at the
center.
Cross-References
▶ Corporate Social Responsibility
▶ Cross-Cultural Attitudes to CSR
Theory of Corporate Governance Emergence 2523 T
▶ CSR Europe
▶ Social Capital Territorial Sustainability
▶ Social Partnership
▶ Sustainability and Sustainable Development ▶ Territorial Social Responsibility and Territo-
▶ Sustainable Enterprise Development rial Small and Medium-Sized Enterprises

References and Readings

Theories of Justice
Del Baldo, M. (2010). CSR and sustainability: Mission,
governance and accountability in Italian Smes. ▶ Ethical Theories
The experience of BoxMarche, a ‘convivial’ and
‘territorial’ enterprise: toward a ‘territorial model of
sustainability’. In M.G. Baldarelli (Ed.), Civil
economy, democracy, transparency and social and
environmental accounting research role. Some Theory and Practice of Teaching
reflections in theory and in practice deriving from 2nd
CSEAR Conference-Italy (pp. 289–345). Milano: ▶ Education
MacGraw-Hill Italia.
European Commission. (2009). CSR in small
businesses: Good practice examples. http://ec.europa.
eu/enterprise/policies/sustainable-business/corporate-
social-responsibility. Accessed 14 Jan 2012. Theory of Corporate Governance
Fuà, G., & Zacchia, C. (Eds.) (1983). Industrializzazione
senza fratture. Bologna: Il Mulino.
Emergence
Hofstede, G. (1980). Culture’s consequences. International
differences in work-related values. London: Sage. William Sun
Jenkins, H. (2004). A critique of conventional CSR Faculty of Business and Law, Corporate
theory: An SME perspective. Journal of General
Management, 29(4), 37–57.
Governance and Sustainability Research Group
OECD (2009). The impact of the global crisis on SME and (CGSRG), Leeds Metropolitan University,
entrepreneurship. Financing and policy responses. Leeds, UK
Paris: OECD.
Perrini, F. (2006). SMEs and CSR theory: Evidence and
implications from an Italian perspective. Journal of
Business Ethics, 67(3), 305–316. Synonyms
Porter, M. E., & Kramer, M. R. (2011). Creating shared
value (pp. 62–77). Harvard Business Review: How to Corporate governance; Good corporation;
reinvent capitalism – and unleash a wave of innovation
and growth.
Holistic governance
Putnam, R. D. (1993). Making democracy work. Civic
tradition in modern Italy. Princeton: Princeton Univer-
sity Press. Definition T
Ringov, D., & Zollo, M. (2007). Corporate responsibility
from a socio-institutional perspective. The impact of
national culture on corporate social performance. In the theory of corporate governance emergence,
Corporate Governance, 7(4), 476–485. corporate governance is defined by a continuous
Spence, L. J., & Schmidpeter, R. (2003). SMEs, social process of ordering and controlling actions and
capital and the common good. Journal of Business
Ethics, 45(1/2), 93–108.
activities generated in corporate interrelational
Thomson, J. K., & Smith, H. L. (1991). Social responsibility webs through collectively constructed governing
and small Business: Suggestion for research. Journal of rules and instruments. With defined and redefined
Small Business Management, 29, 30–44. intentions from a series of mindsets and experi-
Unioncamere (2003). Models of corporate social respon-
sibility in Italy. Executive summary. Rome: Italian
ential practices, corporate governance aims at
Union of Chambers of Commerce, Industry, Craft channeling corporate activities toward certain
and Agriculture. ends, and in so doing, it is continuously shaped
T 2524
and reshaped by the dynamic interrelationships
of all the governing actors. In this sense, corpo-
rate governance is always redefined by the emer-
gent properties of changing interrelationships and
all the activities of the actors involved in the
governing process. The change of interrelation-
ships is not only driven by the interactions and
mutual influences of all the actors involved, but
also by the internal changing impetus of these
actors that are self-determinate and self-creative
in a systemically coordinated process. That
means all the actors themselves are not fixed at
all, but continuously changing, as a result of
reweaving their “webs of believes and habits of
actions” based on their new experiences obtained
through their interactions (Tsoukas and Chia
2002, p. 570).
The emergence theory of corporate gover-
nance highlights the changing, evolving,
complex, and heterogenic nature of corporate
governance reality that is inherently embedded
in the living experiences of the corporate
governing participants and actors. While fixed
rules and regulations prescribe an abstract frame-
work of corporate governance, in corporate
governance practices those rules and regulations
are subject to reinterpretations and situational
understandings of the governing participants
and actors. The instantly renewing interrelation-
ships of governing actors may bypass or go
beyond certain rules and regulations, and the
dynamic interrelationships can never be truly
captured by post-event rules and regulations. As
emergent processes, corporate governance
reality is unlikely predefined and predetermined
by any prescribed principles, by a set of
simplified, singular, unidirectional, and universal
relationships (such as principal-agent relation-
ship), or by any abstract models (such as share-
holder model or stakeholder model), though the
socially constructed frames may heavily influ-
ence the values and beliefs of the governing
participants and actors through their collective
interactions.
Thus, in reality, corporate governance is
unfixable and less likely universal, but situa-
tional, contextual, and constantly changeable.
There are three ontological dimensions in a
Theory of Corporate Governance Emergence
corporate governance emerging process: context,
time, and space. Corporate governance is a reality
of interrelationships of all the interconnected
actors in the systemic whole of a society, and is
embedded in a social context. The interrelation-
ships are always evolving and contiguously
developing over time and moving toward an
uncertain future. Yet, the changing interrelation-
ships have a trace of dynamically stabilized
patterns manifested in a certain format or shape,
such as in specific forms and structures of corpo-
rate governance. Those three ontological dimen-
sions lay down a foundation underpinning the
emergence theory of corporate governance.
In the governing interrelationships, the action,
inaction, interaction, transaction, and counterac-
tion of the individual and group actors are all in
a dynamic process driven by their internal impe-
tus of change (such as by human genes, instincts,
motivations, and intentions), conditioned by their
historical connections (past developments),
shaped by environmental factors (such as politi-
cal power, economic conditions, sociocultural
values, and technological development),
interrupted by contingent factors (such as unex-
pected incidents, societal crisis, and war), and
influenced by future expectations (individual
and/or collective). The emergent properties of
corporate governance must be holistically under-
stood by the complex and interactive mixture of
historical conditions, internal impetus for change,
environmental constraints, future expectations,
and contingent factors. The five ways of under-
standing corporate governance formulate a basic
analytical framework in the theory of corporate
governance emergence.
Introduction
The theory of corporate governance emergence
(Sun 2009) begins with the basic assumption that
the nature of a corporation is a business process
within the entity, rather than a business process of
the entity. Here, process is a terminology used in
process philosophy and implies self-driven,
autonomous, and continuing changes and trans-
formations, rather than a commonsensical idea of
Theory of Corporate Governance Emergence
process where a clear-cut, discrete, and relatively
enduring entity (an individual or a social entity)
undergoes a transition across time and space by
external forces. In process metaphysics, entity is
viewed as a stabilized effect of ongoing processes
slowed down by conscious sensation, abstract
conceptualization, and collective construction.
Entity is in essence process, both of which are
interchangeable at the bottom level.
Therefore, the corporation is not as solidly
entitative in the whole, or in part, as convention-
ally presumed, but rather a loosening network of
interrelationships and interactions among all the
business and nonbusiness actors, which is com-
plex, dynamic, and continuously evolving and
developing. The existing corporation is an ongo-
ing sequential continuity of processual patterns
emerged from actions, inactions, interactions,
transactions, and counteractions of all the actors.
Such processual patterns are emerging in corpo-
rate governing processes.
Corporate governance issues have been a wide
public concern over last three decades due to the
outbreak and spread of corporate fraud, corporate
failure, corporate collapse, executives being
overpaid, abuse of management power, and cor-
porate social and environmental irresponsibility.
For many, the 2008 global financial crisis was
closely connected to the systemic failure of
corporate governance (Sun et al. 2011). In recent
years, there has been a large increase in the num-
ber of studies concentrating on the question of
corporate governance. And current extensive
analysis of corporate governance has generated
diverse views and insights and resulted in the
creation of different theoretical models. Hawley
and Williams (1996) found four major views in
the corporate governance debate, namely, the
finance model, the stewardship model, the stake-
holder model, and the political model. Based on
Blair’s (1995) typology, Keasey et al. (1997)
summarized the four competing models, includ-
ing the principal-agent, or finance, model, the
myopic market model, the abuse of the executive
power model, and the stakeholder model. In
Clarke’s edited book Theories of Corporate
Governance: The Philosophical Foundations of
Corporate Governance, three major theories of
2525 T
corporate governance are recognized, that is,
agency theory, stakeholder theory, and steward-
ship theory.
Various theoretical models in the current
literature on corporate governance can be basi-
cally categorized into two different perspectives:
the shareholder perspective and the stakeholder
perspective, based on the purpose of the corpora-
tion those models presuppose. For example, the
finance model, the principle-agent model, the
myopic market model, agency theory, and
stewardship theory all belong to the shareholder
perspective, as they share the common assump-
tion that the purpose of the corporation is the
maximization of shareholder wealth. The abuse
of the executive power model, the political model
and stakeholder theory are within the stakeholder
perspective, as they believe in a broad sense of
stakeholding welfare as the purpose of the corpo-
ration. Such a convenient taxonomy has been
widely used in modeling corporate governance
(e.g., Prabhaker 1998; O’Sullivan 2000;
Kakabadse and Kakabadse 2001; Friedman and
Miles 2002). The shareholder perspective can be
viewed as the dominant model and the stake-
holder perspective as its main challenger. There
is a general trend that the recent debate on
corporate governance from mainstream research
scholars has been polarized between supporters
of the shareholding perspective and supporters of
the stakeholding perspective, with both perspec-
tives perceived as if there were a clear-cut and
stable boundary in between the two paradigms.
Both camps in the debate explore specific issues
of corporate governance and each offers its own
diagnosis as the “true” cause of corporate gover-
nance defects and attempts to find an optimal T
solution to the problem. While both perspectives
offer very different and often opposite views and
analyses of corporate governance issues, two dif-
ferent systems of values and assumptions were
embedded in both shareholding and stakeholding
perspectives, such as: shareholder value versus
stakeholder value, private business versus public
interest, economic interest versus social interest,
market efficiency versus social efficiency of the
economy, self-interest human behavior versus
altruist/ethical human behavior, self-regulation
T 2526
versus state regulation, and market governance
versus hierarchical forms of governance.
While corporate governance is theorized in
a much dichotomized way, both perspectives
are, however, constructed upon the entitative
conception of the corporation. The shareholder
perspective assumes corporate actors, like share-
holders and managers, as homogeneous individ-
ual entities conducting corporate behaviors and
actions. This is an individual entity conception of
the corporation. The stakeholder perspective pre-
supposes a “real” corporate entity with its own
mind, will and behavior, a social entity concep-
tion of the corporation. Both conceptions indicate
that understanding the corporation resides on an
either-or choice in between the individual entity
and collective entity, and between the economic
entity and social entity. In extreme cases (such as
in agency theory), the corporation is viewed as
a bundle of assets where the subject of the corpo-
ration is missing, or the subject is confused with
the object. In this regard, the corporation is purely
physical and substantive, and thus, entitative.
The individual or corporate entity constructed
in mainstream theories is driven by a certain
rationality for corporate action and governance
with predefined goals and prebounded human
nature. For example, economic rationality is
embedded in both the shareholder perspective
and the instrumental aspect of stakeholder theory.
It is presupposed that all individual actors of, or in
relation to, the corporation makes decisions and
choices based on rational calculations to pursue
and maximize their own interests. In economics,
the famous metaphor for rational choice is the
prisoners’ dilemma, based on the assumption of
self-interest human behavior and utility maximi-
zation for any decision making. Even in the nor-
mative aspect of stakeholder theory, there must
be a rational choice based on some seemingly
pre-given principles, such as the social
efficiency for economic activities, social welfare,
and a certain moral value. Such a rationality
assumption in corporate governance is consistent
with the “normative-rational” model in orthodox
organizational analysis. The corporation is
regarded as a bounded social system and is nor-
matively rational (Cooper and Burrell 1988),
Theory of Corporate Governance Emergence
characterized by preconceived goals, rational
actions, a linear causal relationship between
actions and outcomes, competing alternatives
for choices, best solutions, and satisfactory out-
comes (Mayntz 1976).
Associated with the entitative and rationalist
conception of the corporation, we have seen some
paradox claims and assertions in the current cor-
porate governance debate. The first assertion is
the ideal model claim. It is argued that there is
only one ideal model existing for corporate gov-
ernance, either the shareholding model or the
stakeholding model. Both sides of the debate
regard their own model as perfect (or at least
relatively prefect) and superior to the others,
and is thus, the only objective “truth” in the
world. The second assertion is the optimal gov-
ernance structure claim. Markets and organiza-
tional hierarchies are regarded as genuine
alternatives of optimal or appropriate governance
structures and mechanisms. The third assertion is
the universal and unitarist governance claim.
Market governance or hierarchical governance
is seemingly universally applicable to all situa-
tions, regardless of context. Traditionally,
a unitarist hierarchical relationship (fiat, supervi-
sion, and monitoring) has long been advocated to
be more suitable for all corporations. In the
principal-agent model, the principal-agent rela-
tionship (a purely contractual relationship) is
assumed to be existent in all organizations and
at every level of management.
From the available data in the current litera-
ture, it is easy to find that the claims for the
superiority of either the shareholding or stake-
holding model, and for the optimal structure of
either market governance or hierarchical gover-
nance, are empirically unsupported. We can
always find sufficient counter-evidence against
these assumptions. It has been found that the
orthodox assumption of economic rationality
and efficiency underpinning most of corporate
governance analyses has been criticized by
a number of scholars. There has been increasing
doubt in the literature about the ability of eco-
nomics and its dominant economic logic to
explain such complicated social phenomena as
corporate governance. The much deeper problem
Theory of Corporate Governance Emergence
with the shareholding and stakeholding perspec-
tives is the intrinsic dualistic and split mode
of thinking in understanding and theorizing
corporate governance. Such logic is not justifi-
able in theory, nor supported in the empirical
experiences.
Thus, the current assumptions underlying the
mainstream shareholder and stakeholder perspec-
tives are invalid. The fundamental limitation of
the entitative and static modes of thinking in
corporate governance research is that the sup-
posed ideal models, of either shareholding or
stakeholding, are abstractly generalized without
the concrete processes of time, space, and
the context within them. The advocated theoret-
ical models seem to be pre-given with no
historical linkages and developments, and no
temporal changes from the past toward the future.
Their principles and values are seemingly
taken-for-granted and believed to be universally
applicable and workable in a single global
marketplace across all contexts and societies.
The governance structures and mechanisms are
determined by the “rational” choice between
dichotomized alternatives, such as market gover-
nance or hierarchical forms, or self-regulation or
state regulation.
Upon further examinations, we can find that
the validity issues of mainstream corporate
governance theories are rooted in the conven-
tional modes of thought and their much deeper
philosophical commitments to conventional sub-
stance philosophy. The individual or corporate
entity as a realistic Being, a concrete and solid
substance, is but a small version of the traditional
Western modes of thinking rested upon the
Parmenidean worldview of permanent Being
and the Platonic reality of ideal forms. While
the Parmenidean cosmology of Being reality is
characterized by preexistence, solidarity,
discreteness, clear-cut boundary, stability and
permanence, the Platonic mode of thought
makes a further distinction between reality and
appearance by referring the former to some
general, universal, and ideal forms, with no indi-
vidual and contextual differences. Such a being-
realist reality ontologically excludes moving,
becoming, change, activities, and experiences.
2527 T
As being is supposed to be permanent and fully
filled in space, there are no time and space dimen-
sions in such an “eternal” reality. The dominant
philosophy of time and space in the West is the
Newtonian concept of absolute space and time,
conceiving space and time as fixed and stable
containers for things to be located within, and
being senseless and independent of change.
The difficulties with substance philosophy are
that it is counter-experiencing and counter-
logical in assuming that a thing does not change
within itself over time and that the future already
exists in the present, since the future and the
present remain the same. It is hard to explain
how a solid, atomic, and unchangeable entity
could act by itself. While substance philosophers
presuppose time and space as an externally
imposed order on objects and events, and as
a singular, mechanistic, objective, and indepen-
dent instrument for measuring and calculating
things, they simply take these assumptions for
granted and forget that these are useful products
of social construction. They also ignore the
importance of different personal experiences of
time and space in reality, the very subjective
spatiotemporal meanings in social lives. The
previous drawbacks fundamentally challenge
the validity of substance philosophy and its appli-
cation to framing and theorizing corporate
governance. The difficulties of substance philos-
ophy cannot be resolved by itself, and yet, we can
only find an easy solution in the alternative
process philosophy.
The theory of corporate governance emer-
gence as an alternative way of viewing and
understanding the reality of corporate gover-
nance resided in process metaphysics, which has T
long been the Western competitive philosophical
intelligence and the fundamental challenge to the
dominant tradition of substance metaphysics.
The crucial differences between the processual
conception of the corporation and the entitative
conception of the corporation can be seen on both
ontological and epistemological sides.
The first and foremost difference between the
two conceptions is ontological. The entitative
view suggests that the corporation is a substantial
entity, or is constitutive of individual atomic
T 2528
entities. As an entity, it presupposes a timeless
and contextless corporate governance reality
located in a simple spatial container of the global
convergent marketplace. The processual view
asserts that corporate reality is constitutive of,
or is reducible to, processes rather than sub-
stances. For individual actors, the processes are
not just physical processes (e.g., the body of
development over time and associated physical
materials), but also mental processes, such as the
inherently changeable and unfixable inner expe-
riences, cognitive affairs, interactions and inter-
relationships with others, and the reweaving of
individual values and beliefs.
Corporate processes unfold and manifest in
the networking of individual minds, ideas,
actions, interactions, events, and activities,
which are changeable over time and changing
under different conditions and circumstances in
different contexts and locations. Corporate
governance is intended to order and to channel
corporate/individual actions, interactions, and
transactions toward certain ends. But in doing
so, it comes out to be an emergent order and
temporary stability, due to the processual nature
of human minds and human actions as the ongo-
ing state of flux and instability with its own inter-
nal impetus and interconnections. The seemingly
substantial reality of corporate governance, like
shareholding or stakeholding value, and hierar-
chical or market governance structure, is that
rules and regulations are only explicit stability
patterns of variable processes of corporate gov-
ernance, and thus, subordinate to processes and
changes.
The second difference between the processual
and entitative views of the corporation is episte-
mological. With the entitative view of the corpo-
ration, knowledge generation is assumed to be an
objective, rational, “scientific,” and accurate rep-
resentation of corporate reality. In process think-
ing, however, the processual reality of corporate
governance could be more apprehensible by our
direct experiences than our conceptual thoughts.
Our explicit knowledge cannot be claimed to
exactly represent the inherently indeterminate
and unpresentable processes. Furthermore,
knowledge itself as our mental activities and
Theory of Corporate Governance Emergence
cognitive affairs is also processual in character,
due to our unfixable thinking, indefinite descrip-
tions, incomplete information, and limited func-
tioning of language.
Thus, the shareholder model and the stake-
holder model do not (and cannot) “mirror” the
constantly changing and transforming processes
of corporate governance. However, they might be
a snapshot of corporate governance reality in
history. When they claimed to be of representa-
tionalist knowledge and accepted in a society,
they are actually the outcomes of our intellects
rather than our pure experiences, and the
outcomes of social construction rather than of
“scientific” revelation. Such theories as explicit
knowledge are nevertheless useful though, in the
sense that they are an artificial means for the
convenience of our human life in attempt to con-
trol and manipulate what is eventually dull, cha-
otic, and uncontrollable in the corporate
processes. Knowledge is our collective construc-
tion that represents the cumulative efforts of
civilization in the process of progressive and
increasingly sophisticated conceptualization
and theorizing, based on the organizing logic of
division, location, isolation, fixation, and
categorization.
With the processual view of the corporation,
a conceptual framework in understanding the
processual reality of corporate governance is
presented by a three-dimensional model of the
corporate governance process, which incorpo-
rates three basic ontological dimensions of social
reality in a processual framework: time, space,
and context. In this model, corporate governance
is understood as a complex, dynamic, and contin-
uously changing network of interrelationships
among all business and nonbusiness actors
with an explicit, or implicit, concern about how
the corporation is directed and controlled. The
corporate interrelationships are part of the sys-
temic whole of societal interrelationships, shaped
and influenced by a complex of historical con-
nections and conditions, internal impetus of
change, and current environmental and contin-
gent factors, with a trace of dynamically stabi-
lized patterns manifested in a certain format or
shape.
Theory of Corporate Governance Emergence
What is emphasized in this model is the chang-
ing nature of corporate interrelationships, and
thus, the changing nature of the corporation and
corporate governance over time. It includes the
transformation of individual actors, their minds,
behaviors, and actions; and the alteration of the
corporation, its goals and objectives, its gover-
nance structures and mechanisms, and its
business and social performances. The change is
both vertical and horizontal. Vertically, the
change is driven or influenced by the internal
(and microlevel) and external (and macrolevel)
factors in a context. Horizontally, all the internal
and external factors are themselves changing
over time. Therefore, a complete understanding
of corporate governance needs to examine the
ongoing processes of interrelationships in
a local context, their historical developments,
and their changing patterns. The vertical and hor-
izontal analyses cannot follow the traditional
research ideology of representationalism and
should not presume the objectivity, rationality,
and universal applicability of a specific research
object of the governance process.
The three-dimensional process model is
valid in understanding all realities, including
the natural world and the social world, since
any reality contains the ontological factors of
time, space, and context. However, unlike the
natural world, corporate governance is not
merely the reality of physical materials, like
a bundle of assets. Rather, corporate gover-
nance is a social reality consisting of human
minds and relations and driven by individual
and collective minds and ideas. Therefore, in
the three-dimensional process model, the most
important element in the contextual analysis
is the reality of mentally interactive activities
and processes, which can be analytically
divided into the microlevel practical-
experiential process and the macrolevel ideal-
constructive process.
The practical-experiential process is a series
of individual or collective minds/ideas driving
individual experiences and activities and coping
with corporate governance practices in ordinary
daily life. The practical experiences are not just in
the form of apparent and observable sensations
2529 T
driven by explicit minds and ideas, but are also in
the shape of directly encountered experiences
driven by implicit minds, intuitions, and the
subconsciousness. The practical-experiential
process is the starting point of understanding
corporate governance, but is not a full picture of
corporate governance reality.
In the social reality of corporate governance,
individual minds contribute to social or collective
minds through social interactions and construc-
tions, but, in turn, are shaped and constrained by
the social minds and constructs. Thus, the practi-
cal-experiential process is inseparable from the
ideal-constructive process, namely, a continuous
process of collective world-making – ideal
productions, selections, and revisions associated
with a cluster of systemic ideas such as ideolo-
gies, paradigms, and perspectives. Both the
practical-experiential process and the ideal-
constructive process interplay in a processual
and systemic whole.
The practical-experiential process may serve
as indicators, triggers, and stimulators to form
certain ideologies/paradigms by some interested
and powerful people or groups. And the ideal-
constructive process may, in turn, shape and
influence individual experiences and practices
of corporate governance by affecting percep-
tions, feelings, and beliefs in the micro fields
such as in the subconsciousness, cognition,
psychology, and emotion. As contextual
processes, both the practical-experiential process
and the ideal-constructive process are continually
changing and transforming from the past toward
an uncertain future, and thereby, new patterns of
experiences/practices of corporate governance
are emerging and unfolding and new constructs T
are produced and selected.
This dual process model of governance con-
struction highlights the nature of corporate gov-
ernance reality as a world-in-making process
performed and/or manipulated by individual and
collective minds and ideas. It is more epistemo-
logical than ontological in the sense that the
representation of ideology (systemic ideas)
instead of the ideology of representation plays
a significant role in the reality making process
of corporate governance.
T 2530
Key Issues
For a genuine and complete understanding of
corporate governance, it is needed to examine
the ongoing processes of interrelationships, their
developments, and their changing patterns. The
key analytical questions in such an examination
would be: Who/what are the actors and factors
involved in the corporate governing process?
How do they interact with each other? What are
the driving forces behind their actions, interac-
tions and transformations? How, and to what
extent, are these forces driving the changes?
What are the patterns of the corporate governing
processes of evolution over time? How stable or
dynamic are the patterns and why? Overall,
examining any practice of corporate governance
and understanding its issues and problems and
possible solutions to them rely best on the inte-
gration of five interconnected ways of analysis:
internal impetus of change, historical develop-
ment and evolution, current societal systems,
values and drives for changes, future expecta-
tions and scenarios, and contingent factors. As
a holistic mode of thinking, such analysis is to
understand deeply and comprehensively how
corporate governance is driven by internal
impetus for change, conditioned by historical
development, shaped by societal systems,
influenced by future expectations, and
interrupted by contingent factors. Based on the
comprehensive analysis and direct experiences,
certain patterns of corporate governance may
emerge from research and the spatial shape of
corporate governance can be identified. Any
problems should be understood and possible
solutions to the problems should be considered
within such an analytical framework.
In the theory of corporate governance emer-
gence, there are no standard answers to what
good governance is and how a corporation should
be governed in the best way. The key theme is
that corporate governance is socially constructed
based on political power. Corporate governance
is judged on the social construction of “faith.”
Any positive changes in corporate governance
toward better “serving the public good” will fol-
low once people realize how the corporate
Theory of Corporate Governance Emergence
governance we know as “real” was socially
constructed and once we employ a processual
framework of time, space, and context, leading
to reflexive dialogue. Living in a processual real-
ity, we cannot “mirror” corporate governance
practices accurately, and cannot construct corpo-
rate governance ideally. To improve corporate
governance one should not force-fit corporate
reality into the established abstract templates.
We need to dive into the underlying living expe-
riences and processes that comprise corporate
practices to understand the internal impetuses
and environmental dynamics that drive the
processes and changes of corporate reality.
As a social construct, corporate governance
problems cannot be solved based on scientific
measures and universal recipes. Rather,
the explicit change of corporate governance can
be initiated and triggered in the sense of collec-
tive construction and discourse formation. The
key factor in context-making is to find or create
a more powerful “attractor” to compete with the
dominant “attractor” and to shift the old one to
the new one to create a new context. Corporate
governance and control must be realized through
our collective representations – representations
of our will, desire and sense-making, representa-
tion of a specific mode of thought and social
convention, and the representation of social
negotiation, selection endorsement, and rational-
ism. In the ideal construction process, corporate
governance is not seen as universally good, but as
partial, selective, and interested.
Future Directions
The theory of corporate governance emergence is
a very new theory, so new that it is a different
mode of thinking grounded in process philosophy
instead of conventional dominant substance
philosophy. It moves away from the traditional
mechanistic, static, linear, and purely rationalis-
tic modes of thinking and analysis (often referred
to Newtonian “scientific” methods) toward an
organic, dynamic, complex, and reflexive mode
of thinking in corporate governance. For future
research, a holistic and multidisciplinary
Third Sector and CSR
approach is encouraged. Direct experiences are
the first sources of analyzing and understanding
the corporate governance process. However, the
sources from the traditional empirical methods,
such as observations and experiments, can be
useful in a way that they should not be regarded
as isolated value-free facts in a simple location,
but as individually explicit experiences (sensa-
tions and interpretations) embedded in a matrix
of cultural, historical, and personal relationships
and connections. The empirical data may serve as
possible triggers that lead to a further rich appre-
hension of the reality, and as symbols and indi-
cators possibly leading beneath the surface of
their appearances.
As socially constructed processes, corporate
governance changes can be facilitated by Partic-
ipatory Action Research (PAR) that involves all
relevant parties in actively examining together
currently experienced problematic actions in
order to change, transform, and improve it
(McRitchie 2010). They do so by critically
reflecting on the historical, political, cultural,
economic, geographic, and other contexts which
make sense of it. In the participative research
process, action is researched, changed, and
re-researched. It is a coresearch process by and
for those involved and impacted. It is a genuinely
democratic or noncoercive process whereby
those impacted determine the purposes and out-
comes of their own inquiry.
Cross-References
▶ Board of Directors
▶ Corporatism
▶ Global Governance and CSR
▶ Shareholder Theory
▶ Stakeholder Theory
▶ Stewardship theory
References and Readings
Blair, M. M. (1995). Ownership and control: Rethinking
corporate governance for the twenty-first century.
Washington, DC: Brookings Institution.
2531 T
Cooper, R., & Burrell, G. (1988). Modernism, postmod-
ernism and organisational analysis: An introduction.
Organisation Studies, 9(1), 91–112.
Friedman, A., & Miles, S. (2002). Developing stakeholder
theory. Journal of Management Studies, 39(1), 1–21.
Hawley, J. P., & Williams, A. T. (1996). Corporate gov-
ernance in the United States: The rise of fiduciary
capitalism (Working Paper, Saint Mary’s College of
California, School of Economics and Business
Administration).
Kakabadse, A., & Kakabadse, N. (2001). The geopolitics
of governance. Hampshire: Palgrave.
Keasey, K., Thompson, S., & Wright, M. (1997).
Introduction: The corporate governance problem –
competing diagnoses and solutions. In K. Keasey,
S. Thompson, & M. Wright (Eds.), Corporate gover-
nance: Economic and financial issues. Oxford: Oxford
University Press.
Mayntz, R. (1976). Conceptual models of organisational
decision-making and their application to the policy
process. In G. Hofstede & M. S. Kassem (Eds.),
European contributions to organisation theory
(pp. 114–125). Amsterdam: Van Gorcum.
McRitchie, J. (2010). Research methods for a liberating
corporate governance. http://www.amazon.
com/Research-Methods-Liberating-Corporate-Gover-
nance/forum/Fx536JJZS6X72E/TxAFM3FE13U955/1/
ref¼cm_cd_dp_ef_tft_tp?_encoding¼UTF8&s¼ books
&asin¼0773438637&store¼books. Accessed 15
Dec 2010.
O’Sullivan, M. A. (2000). Contests for corporate control.
New York: Oxford University Press.
Prabhaker, S. (1998). Governance and stakeholding. New
Economy, 5(2), 119–122.
Sun, W. (2009). How to govern corporations so they serve
the public good: A theory of corporate governance
emergence. New York: Edwin Mellen.
Sun, W., Stewart, J., & Pollard, D. (Eds.). (2011). Corpo-
rate governance and the global financial crisis:
International perspectives. Cambridge: Cambridge
University Press.
Tsoukas, H., & Chia, R. (2002). On organisational becom-
ing: Rethinking organizational change. Organization
Science, 13(5), 567–582.
T
Theory of the Firm
▶ Profit Maximization
Third Sector and CSR
▶ NGOs and CSR
T 2532
Third-Party Verification of
Environmental Reports
▶ Environmental Information Audit
Three Dimensional Management
▶ Integrative Management Approach of CSR
Three Levels of Integration
▶ Jørgensen Model
Three Pillars, 3BL
▶ Triple Bottom Line
TI
▶ Transparency International
Tobacco
John D. Pratten1 and Diane L. Wright2
1
Department of Business and Management
Studies, Manchester Metropolitan University
(MMUC), Manchester Metropolitan University,
Crewe, Cheshire, UK
2
Department of Business and Management
Studies at MMUC, Faculty of Manchester
Metropolitan University, Manchester
Metropolitan University (MMUC), Crewe,
Cheshire, UK
Synonyms
Cigarettes; Smoking; Tobacco products
Definition
Tobacco is processed from the leaves of the Nico-
tiana plant. It is an annual crop, which is stored
Third-Party Verification of Environmental Reports
and then cured. This process allows the slow
oxidization and degradation of carotenoids, and
then is prepared for consumption. It can be used
as an industrial pesticide, but is mainly consumed
as a recreational drug. When smoked, the tobacco
is lit and the vapors inhaled. They reach the lungs,
which triggers chemical reactions in the nerve
endings, increasing the heart rate and stimulating
memory and alertness. Nicotine is one of the
main ingredients of the plant which has addictive
qualities.
It can be smoked, chewed, or inhaled, though
the former technique is by far the most popular.
This can be undertaken in the form of cigarettes,
cigars, or pipes, though the former has the
greatest number of adherents. Tobacco was used
by Native Americans, and the Europeans who
arrived in America popularized the product.
This led to the emergence of tobacco companies,
who sell to about one third of the world’s adult
population. It is used more often by men than
women in developing countries, although in
more economically advanced countries the num-
ber of men smoking has begun to fall, while that
for women continues to rise. China is the world’s
largest producer of unprocessed tobacco,
followed by India, Brazil, the USA, countries
within the European Union, and Zimbabwe. It is
also an important cash crop in Turkey, Indonesia,
the former states of the Soviet Union, and
Malawi.
Introduction
In the last half century, the use of tobacco
products has increasingly been associated with
health risks, and this has led to a great deal of
adverse publicity for the producers and has
resulted in many campaigns to limit their
sales. As such, tobacco could be regarded as
an unethical product, and people and compa-
nies engaged in the growth, preparation, distri-
bution, and sale of its products face similar
accusations.
International tobacco markets are dominated
by five firms: Philip Morris International, British
American Tobacco (better known in the USA as
Tobacco
Reynolds America, Inc.), Japan Tobacco, Altria,
and Imperial Tobacco. In the USA, the industry
has struggled since the 1960s, when the compa-
nies were successfully sued by several states on
the grounds that the companies were aware of the
health dangers and deliberately understated
these, thus contributing to the illness and death
of many citizens. This resulted in large cash
awards to the states. Since then, individuals
have followed the states into the courtroom.
Moreover, high levels of taxation have increased
the prices of tobacco products.
Key Issues
Goods and services may be judged unethical if
they are so judged by society. The entry on
unethical goods suggests that there are four rea-
sons why sections of society may regard any
goods and service as unethical – the way the
company treats its employees, its approach to
the environment, the extent to which it seeks
to assist the community in which it operates,
and the product itself. Thus, it would be
appropriate to examine the tobacco industry in
a similar way.
The major US and UK tobacco companies no
longer try to deny the health problems which are
associated with smoking. Instead, they use their
websites to demonstrate that their business
methods are sound. For example, Imperial
Tobacco’s “Corporate Responsibility Review
2008” defines corporate responsibility as “doing
business in a responsible way. It has many dimen-
sions including how we behave towards
employees, suppliers, customers and consumers,
government, society, communities and the
environment. It is about how we manage our
business to ensure we maintain the high standards
of conduct and performance expected from an
international company.”
The Employees
The ILO estimates that 1.2 million people are
employed in the cultivation and manufacture of
tobacco products throughout the world. Thus, the
industry can argue that it offers work and
2533 T
improved wealth to a section of the international
community.
Child labor is an unfortunate characteristic of
agriculture in general, and has in the past been
a feature of tobacco cultivation. However, the
websites of the major tobacco companies in the
Western world stress that they are equal-
opportunity employers, and also deny that any
of their workers are exploited. They emphasize
the absence of child labor and the payment of fair
wages. Thus, they deny that their treatment of
employees could be regarded as unethical.
The Environment
Production requires the extensive use of pesti-
cides, which can damage the health of those
working in the vicinity. Moreover, the growth of
tobacco takes nutrients from the soil, which has
led to the dependence on fertilizers. Wood is
usually used to cure the tobacco, and this has
led to deforestation.
As with many other global agricultural activ-
ities, the largest profits are made by the multina-
tional companies rather than the farmers.
Production is encouraged, and the tobacco com-
panies’ own manufacturing facilities around the
world, so that in the last few decades, there has
been a glut of the product, leading to lower prices
for the farmers. This has led to further accusa-
tions that the policies of the major companies
have resulted in poverty for the suppliers, who
themselves have been obliged to produce as
cheaply as possible, thus increasing damage to
the environment.
Again the websites of the tobacco companies
in the Western world are anxious to demonstrate
that their production methods are sustainable and T
do not damage the environment. Thus, once
more, they deny that their treatment of ecosystem
could be regarded as unethical.
The Community
The tobacco companies of the Western world
devote part of their income to assist the commu-
nities within which they operate. They are partic-
ularly keen to demonstrate that they are trying to
help the developing world. For example, British
American Tobacco uses its website to describe its
T 2534
charitable and community projects. The compa-
nies suggest that the local communities are
benefitting from such aid, and as such are more
prosperous than would be the case without
tobacco production. Once again, this indicates
that their operations are ethical.
The Product
Tobacco is a highly addictive drug and studies of
its use have consistently reported a much higher
incidence of lung cancer, chronic obstructive pul-
monary disease, and coronary heart disease than
among nonusers. Smoking during pregnancy is
associated with lower birth weight in babies, as
well as premature birth, cot deaths, miscarriage,
and breathing difficulties in early life (Cancer
Research UK). The World Health Organization
estimates that smoking causes 5.4 million deaths
per year, which represents almost 10 % of all
deaths.
Smoking is most prevalent within developing
nations, where the lowest income groups spend
up to 10 % of their earnings on tobacco.
Cigarettes sold in the developing countries often
have a high tar content and are less likely to have
filter tips. Both of these factors increase the
vulnerability of the smoker to tobacco-related
diseases.
Within the Western world, the tobacco com-
panies can claim some level of social responsi-
bility. On its website, Imperial Tobacco explains
in detail its policies against smuggling and mar-
keting to those under the age legally permitted to
purchase tobacco products. It also emphasizes the
need to work within the law to allow “informed
adult tobacco consumers” to consume their brand
of choice. Philip Morris points out that “we
remind people about the dangers of smoking;
we do what we can to keep cigarettes away
from children; we work to develop less harmful
products.” Indeed, the website states clearly that
smoking is addictive and potentially harmful, and
even offers information about how to give up the
habit. However, the companies are unable to deny
that their products are potentially harmful, and as
such should be regarded as unethical. There is
less evidence of such approaches in the less
developed world.
Tobacco
Tobacco Advertising
Smoking was once considered a normal part of
social life. In the first three quarters of the twen-
tieth century, most countries permitted tobacco
advertising, and in the USA, cigarette brands
were regular sponsors of television shows. Such
advertising was particularly effective among
young people. Hastings and Aitken (1995, p. 6)
have pointed out that “within the confines of
doubt that will always exist in social research, it
has now been accepted that tobacco advertising
does influence children’s smoking behaviour,”
and advertising was prohibited. As far as the
tobacco companies are concerned, the best cus-
tomer is the young customer, as he or she will
have a lifetime of smoking ahead of them. Dijk
et al. (2007) in their study in the Netherlands
showed that children smoke to be “cool” and
because they are curious about the habit.
However, by the mid-1960s, tobacco use
became linked to cancer and other diseases. As
public awareness of the potential dangers of
smoking grew, so opinions changed, and it is
now generally regarded, at least in developed
countries, as an antisocial activity. While many
continue to participate, the public’s disapproval
has grown strongly. Also, movies shown in cin-
emas and on television have begun to depict
fewer characters who smoke.
The European Union and the World Health
Organization have both stated that tobacco adver-
tising should not be permitted, and the WHO has
required that the 168 countries which agreed to its
Framework Convention on Tobacco Control ban
tobacco advertising from 2005. Nevertheless, the
tobacco industry spends $12.5 billion annually on
advertising, particularly in the Third World.
Sautter and Oretskin (1997, p. 1011) have noted
that marketing potentially harmful products to
disadvantaged markets allows “the potential for
exploitation of vulnerable markets.”
The Role of Government
The growth of the tobacco plant and its
processing offers employment, especially in the
poorest parts of the world, and the fact that it is
heavily taxed means that many governments have
used its sale as a source of revenue to assist their
Tobacco
development. The consequence is that any
attempt to reduce the level of smoking may
have an immediately detrimental impact upon
the exchequer. A counter argument suggests that
a reduction in smoking-related illnesses will
actually reduce the burden on health services.
However, greater longevity brings additional
financial problems such as pension costs. Thus,
when governments seek to control the levels of
smoking, they are incurring financial difficulties.
There are pressure groups which support the
tobacco industry, and also those which seek to
reduce or even prohibit smoking, so governments
will face opposition from some parts whatever
they do, or even if they do nothing.
Despite the loss in tax revenue, many govern-
ments around the world have sought to discour-
age the habit. For example, in South Africa, the
advertising and promotion of tobacco products
was banned in 1999. This included sponsorship.
In the USA, cigarette advertising on television
and radio was banned in 1971, with advertise-
ments for smokeless tobacco products following
in 1986. From 2010, tobacco companies were
unable to sponsor sports, music, and other
cultural events, and could not advertise or display
their logos on clothes. Cigarette packets must
display a health warning. Magazine advertising
has been limited after an agreement between the
tobacco companies and the publishers. The UK
tobacco industry has suffered from legislation in
recent years. For example, there has been a ban
on the advertising of tobacco and tobacco prod-
ucts, health warnings must be placed on the
packets of all tobacco products, promotion and
sponsorship of sporting events has been
prohibited, the raising of the age at which such
goods can be purchased has been raised from 16
to 18, smoking in public places has been
prohibited, cigarette vending machines are no
longer available to the public. The CSR disclo-
sures made by the producers suggest that they are
responding by offering reassurance that they are
fully aware of their duties to society, especially
the obligation to protect the young from starting
the habit and assisting those who have stopped.
Once they have started, as Wolburg (2008,
p. 73) has noted, “the best smoking cessation
2535 T
efforts in the world will not change the addictive
nature of the product.” Wiium and Wold (2006),
in their study in Norway, discovered that the
home environment is a great influence on
smoking behavior in children. This would sug-
gest that the best way to prevent children from
starting to smoke is to educate them from an early
age, especially within their family circles.
Sandford (2008, p. 223) suggests that “popula-
tion-wide measures are more likely to result in
the denormalisation of smoking and have
a stronger influence on youth smoking.” In
order to achieve this, further legislation remains
a distinct possibility.
The Distribution of Tobacco Products
The distribution of tobacco products varies
according to the legal controls of individual
countries. In some, licensing arrangements are
strict, and only a very limited number of dedi-
cated outlets is permitted to sell cigarettes. In the
UK, licensing arrangements meant that tobacco
sales were largely limited to specialist vendors,
together with newsagents and some general
shops. As the retail industry changed in the
second half of the twentieth century, supermar-
kets began to offer cigarettes at discounted prices,
and this caused a decline in the number of
specialist outlets. The sale of newspapers in
supermarkets and garages saw a serious reduction
in the number of newsagents, and the number of
general shops also declined. Thus, tobacco prod-
ucts are now sold mainly in supermarkets, with
some sales in the remaining newsagents and off
licenses. The national chain of newspaper and
stationery products, WH Smith, ceased the sale
of tobacco. The supermarket chains make no T
reference to their involvement in the tobacco
trade, and the majority of the remaining outlets
is small, and does not involve itself in CSR state-
ments; the defense of the tobacco industry is in
the hands of the producers.
Future Directions
The accusations leveled at the tobacco companies
include the exploitation of employees,
T 2536 Tobacco Products

environmental damage, and a lack of serious con- References and Readings

cern about the communities in which they oper-
ate, as well as serious assertions relating to the Dijk, F., De Nooijer, J., Heinrich, E., & De Vries, H.
(2007). Adolescents’ view on smoking, quitting and
health risks associated with the product. Cer-
health education. Health Education, 107(2), 114–125.
tainly, the Western world’s major companies Hastings, G. B., & Aitken, P. P. (1995). Tobacco adver-
defend themselves vigorously against all of the tising and children’s smoking: A review of
charges except those relating to health. They the evidence. European Journal of Marketing,
29(11), 6–17.
claim to operate in such a way as to benefit the
Sandford, A. (2008). Trends in smoking among adoles-
health and welfare of their employees and the envi- cents and young adults in the United Kingdom. Health
ronment, and point to their community projects as Education, 108(3), 223–236.
a demonstration of their responsible policies. Sautter, E. T., & Oretskin, N. A. (1997). Tobacco
targeting: The ethical complexity of marketing to
As the harm potential of tobacco is undeni-
minorities. Journal of Business Ethics, 16, 1011–1017.
able, tobacco companies no longer deny the Wiium, N., & Wold, B. (2006). Family and school
health risks associated with smoking. Instead influences on adolescent smoking behaviour. Health
they stress the ability of individuals to choose Education, 106(6), 465–479.
Wolburg, J. M. (2008). Smoking cessation: Why do
whether or not they wish to smoke, and then
smokers fail. Journal of Consumer Marketing, 25(2),
claim to be responsible employers who spend 72–73.
a great deal of money seeking to benefit society.
Their justification for the sale of tobacco products
is simply that, knowing the risks, some people
enjoy their use, and should be free to do so if
they wish. Imperial Tobacco emphasizes the Tobacco Products
need to work within the law to allow “informed
adult tobacco consumers” to consume their brand ▶ Tobacco
of choice.
It is clear that the Western tobacco companies
are aware of the health dangers of their products,
and have suffered serious commercial difficulties
as a result of legislation throughout the world Top 100 Companies
aimed at reducing the level of smoking. In order
to limit any further legislation, these companies ▶ Global 100
have sought to develop policies to demonstrate
that they are good and caring employers who try
to help the environment and the communities
which they serve. This may mean that their
methods are judged ethical by some, but their Top Brass
product cannot be defended. As the companies
themselves suggest, individuals should make ▶ Management
their own choices.

Cross-References
Total Quality Environmental
▶ Alcohol Management
▶ Corporate Social Responsibility
▶ Gambling ▶ Global Environmental Management Initiative
▶ Legitimacy Theory ▶ Integrated Quality and Environmental
▶ Unethical Products Management
Tourism Aporia
Total Quality Improvement
▶ TQM
Total Quality Management
▶ Global Environmental Management Initiative
Total Responsibility Management
▶ Institutes of Directors and CSR
Tourism Aporia
Philippe Callot
ESCEM Group (School of Business &
Management), Tours Cedex - 5, Tours, France
Synonyms
Dilemmas; Paradoxes
Definition
An aporia results from acts that lead to problems
relating to logics and for which no (supposedly
satisfactory) solution can be found. A short
definition would therefore be “unsolvable logics
problem.”
Introduction
Here we are going beyond the boundaries of
dilemma (in tourism) in the sense of the
2537 T
eponymous book by the authors (Babou and
Callot 2007). With the massification of tourism
(Fig. 1) during the twentieth century (Boyer
1999), this sector has seen fantastic develop-
ments justifying over-investment, particularly in
the control of land, in response to the phenome-
non and dynamics of the sector. Using the tradi-
tional life cycle graph, we can create a figure of
the tourism life cycle and make hypotheses for its
future.
As an example, Benidorm, the Spanish resort,
is the fruit of this massification of the tourist
phenomenon at the end of the last century. Pro-
liferation of new buildings was a permanent fea-
ture, just as it had been around the Mediterranean.
The promoters, local authorities with no concerns
at first about the impact and disturbance to the
ecosystems and even less about the question of
the carbon footprint, allowed and promoted the
profusion of projects, hotels, and holiday accom-
modation in order to attract customers and then
encourage them to return. For a long time, the
reality of the economic benefits caused the envi-
ronmental conditions of this development to be
ignored (including the issues of environmental
impact, waste matter and water as well). Islands
near and far away (such as the Dominican Repub-
lic, Fiji, the Maldives, the Seychelles, etc.) and
the mountains with the requirement for specific
equipment (e.g., ski lifts), were in turn concerned
by this sectoral development. The aporia was
being set up. . . We must not forget that before
the tourist act comes the journey. This is the first
act materializing the departure from home.
With the popularization of tourism came the
question of how to reach the final destination.
The fossil-fuel powered car for “internal” tourism T
and the aeroplane for inter-regional tourism
were logically the methods commonly used by
tourists seeking space and the exotic and different
cultures. From this particular sector, tourism, we
would suggest that man created good conditions
for a situation that was becoming more and more
complicated to manage, placing the sector into
a system of paradoxes. Was this a question of
self-destruction, as had happened on Easter
Island (Diamond 2006)? The definition of aporia
suggests this form of irreversibility.
T 2538
Tourism Aporia,
Fig. 1 Tourism life cycle No.
graph tourists
1800
1950
Launch
Key Issues
The question raised here is centered on dilemmas
(Fig. 2). As examples, we shall examine those
written by numerous authors regarding widely
developed tourism. Indeed, today the majority
of authors agree in saying that it is time to
approach tourism in a different way (Martin
2002; Perriot 2005; Allemand 2005; Delisle and
Jolin 2007; Magnin 2006; Wirth 2006; Eskénazi
2008; Babou and Callot 2008). This sector must
revolutionize (Babou and Callot 2009) while
integrating the requirements of the World Tour-
ism Organization (UNWTO) which is announc-
ing a doubling of international tourist numbers in
2020 (1.6 billion against 830 million in 2008).
The impact on biodiversity is ongoing; threats on
fauna and flora are real. For humans, the situation
will become increasingly complicated if we
include the pessimistic scenarios of the rising
sea level. Geocide, as described by Virilio
(2009), is setting up camp. There are millions of
people who will have to leave the coastal areas,
but where are they to go? Climate change
(we prefer this expression to global warming) is
making its presence felt. Urged on by man, the
environment is metamorphosing, glaciers are
melting, the temperature is increasing, the whole-
sale release of methane (hydrates) trapped in
Tourism Aporia
Tourism livecycle graph
?
Peak at
1,560 million
tourists ?
Time
1950 2001 2021
2000 2020 2100
Growth Peak Decline?
permafrost is becoming a reality and hurricanes
and cyclones are more frequent (Denhez 2009).
Figure 2 shows the prediction of force 4/5
cyclones or hurricanes for the next decade.
Oxymoron, paradoxes, dilemmas. . . these
terms come together to show the aporia around
an activity that, however, is a synonym of leisure,
rest, relaxation, cultural entertainment, meetings,
hopefully new experiences, and also discoveries
of new places. This activity of dolce far niente
and luxury, compared with the dramatic eco-
nomic situation in certain regions of the world
(Zimbabwe, Bangladesh, etc.) was born from the
unnecessary as expressed by Boyer (1999),
resulting from the idleness of a few and with the
sole aim of occupying leisure time. And then
came the era of mass tourism. We moved from
the status of distinction to that of popularization,
to the democratization of tourism, which became
known, justifiably, as mass tourism. This wave is
spreading out at the same rate as the standard of
living is improving in certain developing coun-
tries. Indeed, a number of countries are now in
turn seeing economic growth, are discovering the
power of tourism, and are taking part in the con-
tinued trend of this massification. The emergence
of tourism (domestic and international) is becom-
ing a reality in places such as China, Morocco,
Brazil, and India. Today, the aporia is opening up
Tourism Aporia
Tourism Aporia, Increase number of cyclones from 1905 to 2005 and ocean temperatures
Fig. 2 The prediction of
force 4/5 cyclones or 25
hurricanes for the next
decade
20
15
10
0
1 2
1905/1930
6 cyclones
completely to the displayed prospects of this sec-
tor. It is potentially a synonym of enrichment for
the very poor countries or those without any other
source of income. It is even the slogan of the
World Tourism Organization (UNWTO), “Tour-
ism enriches.” However, many voices are being
raised against consumer side effects where sup-
ply and demand take it in turn to satisfy needs that
increase with every new experience (Babou and
Callot 2008; Bardolle 2008; Lamic 2008; Lebeau
2008; Christin 2008). As we can see, the chal-
lenges are considerable; indeed, it is necessary to
suppress the side effects while preserving the
interest of populations who can benefit from the
assets of tourism. The stance is eminently con-
structive. It is involved in widening the spectrum
of knowledge and practices while making the
stakeholders aware of their responsibilities. We
can summarize the paradoxes of tourism arising
from its surrounding dilemmas (Fig. 3).
The environmental aporias are increasing in
number. Disneylandization is on the march
(Brunel 2006), confirming tourism as a source
of damage and risks (Callot 2008). For example,
can the resorts, complete with golf courses and
2539 T
variation
R2 = 0,9959
3 4
1931/1994 1995/2005
+ 0,4 °C + 0,8 °C
10 cyclones 15 cyclones
monstrous levels of consumption, have any
meaning when a quarter of the world population
has no access to drinking water? The fourth report
of the GIEC working group indicates that we
should expect “the deterioration of coastal con-
ditions, for example through beach erosion and
coral bleaching, to affect local resources such as
fishing and reduce the value of these destinations
in the eyes of tourism” (GIEC 2007: 11). Here,
the destruction of Gaia is tangible. We could call
it self-mutilation. The supposed enhancement of
certain tourist sites is more a deterioration of the
space and/or disruption of ecosystems there, also
affecting the way of life of the natives. The planet T
is not a theme park (Babou and Callot 2007). The
way forward should therefore be to advocate
thrift and abandon the drunken destruction of
promoters who have little care for environmental
impact and are only focusing on potential profit;
economics once again supplanting ecology and
society. The paradox has reached its height, mak-
ing tourism manna for investors. “If the journey is
philosophy, tourism is economics” (Christin
2008: 36). The aporia of tourism once again high-
lights the classic discrepancy between developed
T 2540
Tourism Aporia,
Fig. 3 The dilemmas for
tourism leading to the
aporias of the sector?
Tourism
equity?
Economical
discrepancies?
Tourism
enriching?
countries and developing countries, since the lux-
ury of having a vacuum to fill (time in this case) is
only conceivable when the primary needs have
been fulfilled. Reeves reminds us that “15% of
humans consume 80% of our natural reserves”
(Reeves 2003). Can mankind go further than
taking a responsible or even ethical stand, or
will we continue to abuse our natural environ-
ment and disregard the rest?
Future Directions
What then are the possible routes? The tourist
camp, as Bardolle calls it (2008: 101), already
has so many detractors that in fact only the timid
defenders of virtuous tourism (does this exist?),
even if not sustainable (surely a contradiction in
terms?), will be those, we fear, who have pros-
pered in the past. One road to follow is through
corporate change procedures. Research on ethics
and morals (in business) and corporate social
Tourism Aporia
Travel &
CO2?
New
experiences?
Dilemmas
Sociology
of
& Time?
Tourism
Social
relationships?
Carbon
Footprint?
responsibility (CSR) starting right from the
beginning, are presumably elements of
a reaction that is finally positive. Does tourism
not follow the model of other sectors of activity
and is it not purely the extension of our acts and
so-called modern ways of living? We should be
concerned about it. Is the eco-citizen stance
compatible with an activity synonymous with
self-discovery and also, with relaxation? Some
fear this not to be the case (Martin in Allemand
2005) by alluding to the retired couple who
believe they have the right to travel often, hoping
to enjoy themselves to the full by finding at their
destination all the ingredients that will compen-
sate for a lifetime of sacrifices and hardship.
Needs and expectations are therefore expressed
around services that imply luxury: swimming
pool, copious buffet spreads, air-conditioned
accommodation, fast transport for transfers from
one place to another. At this stage, ecological
concerns are no longer a priority. To be prevented
access to water at certain times is simply an insult
Tourism Aporia
to humanity, yet this is what happens on certain
islands that supply water exclusively to the rich
tourists during their stay. There is a pressing need
to act and it would be wrong to prolong these
excesses for the sake of individual freedom and
privileges that are as destructive as they are
selfish. The global code of ethics for tourism
(art. 3.2) draws our attention to this topic. “All
forms of tourism development that are conducive
to saving rare and precious resources, in particu-
lar water and energy [. . .] should be given priority
and encouraged by national, regional and local
public authorities.” But do practices always
match this request? We ask the same question
about the popularization, or some would say,
trampling of sites. What is the sense of climbing
the Mont Blanc and destroying its image as well
as its natural essence? Here we can see a very
concrete example of the tourist paradox. Today,
over 30,000 people climb this natural wonder.
How many will there be tomorrow with the
newly wealthy Chinese, Russians, or simply
Europeans? 60,000? 100,000? The planet is not
a theme park (Babou and Callot 2007; Bardolle
2008), but it would seem delusional to believe in
tourist self-discipline (asking them to be thrifty,
to abstain?). The paradox resembles the metaphor
of the great Bergman film (1977), The Serpent’s
Egg (on the theme of the rise of Nazism), in
which we can easily guess the horrors to come
even though this does not seem to be a consider-
ation in the film. Where for some, “tourism is
a basic necessity because it translates a need for
human exchange, discovery and a break from
habit” (Py 2002), others would argue that “deal-
ing with the unnecessary when sections of the
population do not have the essential is at the
root of the dilemmas we are experiencing”
(Babou and Callot 2007). We should like to
expand this difference of opinion by offering our
suggestion regarding the paradox of tourism. Also
on the subject of human exchanges, are we
enquiring about these supposed social differences?
Ecotourism is defined as “a form of responsible
travel in natural spaces that contributes to the
protection of the environment and the well-being
of the local populations” www.ecotourism.org.
Now we will ask the question: have we actually
2541 T
talked to these local populations to find out what
this “well-being” means in their eyes. . . rather
than in ours? Much research could be carried out
as a result of this positioning with regard to the
paradox of tourism. For example, the issues sur-
rounding restrictions are recurrent. They relate of
course to the question of load capacity, broadened
today to include the carbon footprint, or just the
carbon audit. Should every individual have a CO2
quota, preventing consumption excesses? Is edu-
cation (through what medium?) the solution that
will lead to everyone becoming aware of the
issues? Should tourism in its definition integrate
this notion of a quota in order to iron out the
excesses while still allowing some practice of
this noble activity? Can other forms of tourism
meet this necessity to view tourism in a different
light until it becomes an example for conducting
everyday life?
Cross-References
▶ Carbon Emissions
▶ Carbon Footprint
▶ Consumerism
▶ Corporate Social Entrepreneurship
▶ Corporate Social Responsibility
▶ Ecological Economics
▶ Ecological Footprint
▶ Economic Globalization
▶ Global Warming
▶ Managing Change for Sustainability
▶ Pollution (Separate Entries on Carbon,
e-Waste, Eco-Efficiency)
▶ Sustainable Development
▶ Sustainable Marketing
T
▶ Water
References and Readings
Allemand, S. (2005). Les nouveaux utopistes de l’é
conomie. Produire, consommer, épargner. . . diffé
remment. Paris: Editions Autrement.
Babou, I., & Callot, Ph. (2009). Slow tourism, slow (r)évo-
lution? Cahier Espaces, 100 (March), 48–54.
Babou, I., & Callot, Ph. (2007). Dilemmes du tourisme.
Paris: Vuibert.
T 2542 Tourism Sustainability

Babou, I., & Callot, Ph. (2008). L’urgence d’un autre

tourisme. Revue Espaces & Loisirs, 263, (Oct), Toyota Production System
S. 14–19.
Bardolle, O. (2008). De la prolifération des homoncules
sur le devenir de l’espèce. Paris: L’Esprit des ▶ Lean Thinking
Péninsules.
Boyer, M. (1999). Histoire du tourisme de masse. Paris:
Collection Que sais-je? Editions PUF.
Brunel, S. (2006). Quand le tourisme disneylandise la
planète. . . Sciences Humaines, 174 Aug. TQM
Callot, Ph. (2008). Le tourisme source de nuisances et de
risques. Colloque international Entreprises et Lionel John Boxer
Environnement : quels enjeux pour le développement
durable? Paris: Université Paris X Nanterre. Graduate School of Business, Royal Melbourne
Christin, R. (2008). Manuel de l’antitourisme. Paris: Institute of Technology University, Melbourne,
Yago. VIC, Australia
Delisle, M. -A., & Jolin, L. (2007). Un autre tourisme
est-il possible? Presses Universitaires du Québec.
Denhez, F. (2009). Atlas du changement climatique,
3ème édition du global au local, changer les Synonyms
comportements, Paris: Collection Atlas/Monde,
Editions Autrement. 6s DMAIC; Continuous improvement; Quality
Diamond, J. (2006). Effondrement. Paris: Folio Essais,
Editions Gallimard. assurance (QA); Six sigma; Total quality
Eskénazi, M. -P. (2008). Le tourisme autrement. Editions improvement
Beliveau.
GIEC. (2007). Groupe de travail II du Giec, 4ème rapport
de la Mission Interministérielle de l’effet de serre,
http://www.effet-de-serre.gouv.fr/groupe_de_travail_ Definition
ii_du_giec_2007. Accessed June 2008.
Lamic, J. -P. (2008). Tourisme durable : utopie ou réalité? Total Quality Management (TQM) is an
Comment identifier les voyageurs et voyagistes approach to continual improvement that har-
éco-responsables? L’Harmattan.
Lebeau, A. (2008). L’enfermement planétaire. Paris: nesses a range of statistical, management, and
Editions Gallimard. cultural techniques.
Magnin, C. (2006). Tourisme solidaire. Le guide pour
voyager autrement. Le Petit Futé Country Guide.
Martin, B. (2002). Voyager autrement, vers un tourisme
responsable et solidaire. Charles Léopold Mayer Introduction
éditeur.
Perriot, F. (2005). Agir pour un tourisme autrement. The Total Quality Management (TQM) concept
Editions Le Pré aux Clercs. was first propounded in the 1920s by Walter
Py, P. (2002). Le tourisme. Un phénomène économique.
La Documentation française. Shewhart and his protégé W. Edwards Deming.
Reeves, H. (2003). Mal de terre, entretien avec Frédéric Feigenbaum, Ishikawa, and others contributed to
Lenoir. Paris: Editions du Seuil. the development of the term. In recent years, gurus
Virilio, P. (2009). Le futurisme de l’instant. Stop-eject. such as Philip Crosby, W. Edwards Deming, and
Paris: Galilée.
Wirth, E. (2006). Partir autrement. Guide des vacances Joseph Juran popularized TQM, although
alternatives. Paris: Village Mondial, Pearson. they were not inclined to use the TQM term.
In fact, Deming once asked, “What is this TQM?”
After the screening of If Japan Can Why Can’t
We in 1979 on American television, the then
79-year old Dr. W. Edwards Deming was thrust
into the limelight and became an instant celeb-
Tourism Sustainability rity. Deming had been a member of MacArthur’s
program of rebuilding the Japanese economy
▶ Sustainable Tourism from the 1950s and worked in relative obscurity
TQM
teaching applied statistics to manufacturers such
as Toyota. Deming was so admired that his photo
was hung in the corporate headquarters of
Toyota. Despite living five minutes from the
Whitehouse, few in America had heard of him
until the morning after the screening of If Japan
Can Why Can’t We. The next day he was sud-
denly, at the age of 79, in demand to work with
many of the North American corporations that
had ignored him previously. Joe Juran had been
a contemporary of Deming, and was highly influ-
ential in the application of the full spectrum of
applied quality management resources, authoring
many editions of the Quality Management
Handbook. About this time, Phil Crosby
published his book Quality is Free. Suddenly,
“quality” was mainstream.
It is said that quality management has been
around since at least the construction of the great
pyramids of Egypt; how else would the Egyptians
have been able to construct these structures of
perfection without some plan and method to
assure that the buildings worked according to
their plans? For the first half of the twentieth
century, quality had been something to be
controlled by men in white laboratory coats,
who periodically toured production facilities.
The quality control work of these technicians
was done postproduction and provided no assur-
ance that processes would perform as planned. It
is clear to those who favor TQM, that early qual-
ity controllers merely measured production, and
sorted the good from the bad. Eventually, statis-
tical process control, a precursor of TQM, was
accepted and quality assurance – the confirmation
that production processes were capable of deliv-
ering as planned – was possible. However, the
work of quality assurance technicians remained
within the operations system. The words “total”
and “management” were added to communicate
that quality is a management function of strategic
importance.
When Deming was invited to work with
organizations, he insisted on having senior
management as his audience. While he welcomed
the opportunity to address people from through-
out organizations, he would only do so if he was
convinced that the chief executive officer (CEO)
2543 T
was participating and committed. On one
occasion, after Deming had been introduced by
the CEO, “this is Dr Deming he has something
important to say to you,” the CEO walked out of
the auditorium, where his entire workforce was
seated. On reaching the door he realized that
Dr Deming had not begun. On turning around,
he discovered Dr Deming staring him in the face.
Deming demanded, “Where are you going?”
When the CEO replied, “I am busy I have things
to do,” Deming pushed by him and said, “So have
I.” Total, in the sense of TQM, means “total”
organization-wide commitment and involvement
in the process of managing quality.
To engage in TQM, one must be determined to
totally embrace the principles and practices of
TQM into all aspects of the organization. Other-
wise it is not “total” and the impact will be min-
imal and very costly. “Total” implies that more
than just the operations department will engage in
TQM; it implies that all of the organization,
including finance, marketing, accounting, and
general management will engage in TQM with
equal enthusiasm, commitment, and involve-
ment. If that is not the intent then put the initiative
on hold until senior management embraces this
concept of “total.”
TQM started to be applied in the 1980s. While
there were some great successes, there were also
some great failures. One organization that won
the coveted Baldridge quality award went on to
insolvency, which was in part attributed to the
quality program. It went on to insolvency because
the enthusiastic participants of the TQM program
engaged in costly pursuits that were not at all
aligned with the objectives of the organization
and no one noticed the careless and thoughtless T
consumption of cash. The root cause of the
problem was that senior management was not
interested in participating or guiding the process.
By 1990, TQM was mainstream and there
were countless proprietary methodologies being
marketed by professional service firms. While the
common theme was continual improvement,
the integrity and substance varied considerably.
In Australia, integrity of TQM was maintained by
a government initiative, The NIES TQM
Approach, which attracted significant federal
T 2544
government funding if delivered by a qualified
consultant. Consultant’s gained this qualification
by attending a 5-day workshop presented by the
authors of the program at a cost of over $5,000.
While the NIES TQM Approach was sound, it
disenfranchised some competent consultants
who had already achieved substantial and
profit-contributing success with some of
Australia’s major corporations.
An application of TQM in the reduction of
environmental pollution is described in this
1991 article http://intergon.net/phd/BoxerTQM
Env1991.html.
Bearing in mind that the TQM approach was
largely developed by the Japanese, many of the
terms are Japanese, for example, Kaizen, Poke
a Yoke, Hoshin, and Kanban. Kaizen has come
to mean never-ending efforts for improvement
involving everyone in the organization. Poke
a Yoke means mistake proofing. Hoshin Kanri
means capture of flashes of insight. Kanban
means card. There are also Japanese identities
known for having developed tools and techniques
used in a TQM approach. For example, Dr. Kaoru
Ishikawa, Dr. Yoji Akao, and Genichi Taguchi.
There are various tools used in TQM
approaches. While these are commonly referred
to as “The Seven TQM Tools,” it is important to
realize that the Japanese view the number 7 as
a lucky number. TQM is not a finite science, but
rather an approach that draws on a vast repertoire
of tools and techniques. What is important is that
TQM does not happen once. Rather it is incre-
mental and various tools and techniques are
appropriate for use at various steps in the iterative
and incremental approach. Bearing in mind that
TQM is not a finite science, one TQM authority
may differ from another in regard to the tools that
characterize the specific TQM approach. Seven
commonly used tools can be described as
follows:
1. Fishbone diagrams, developed by Dr Kaoru
Ishikawa. These provide a graphical technique
to relate and categorize multiple causes to
a single effect; hence, also referred to as
Ishikawa or Cause and Effect diagrams.
2. Scatter diagrams (X-Y charts) are used to
demonstrate a two-dimensional cause and
TQM
effect relationship between two variables
(X and Y).
Various statistical tools as follows are
useful to understand the data collected from
processes under study:
3. Histograms (also referred to as Gant Charts)
4. Run charts
5. Control charts
6. Pareto Charts, developed by an Italian named
Vilfredo Pareto, who used them to describe
the disproportionate distribution of wealth
among the population, also referred to as
80/20 charts. Pareto noticed that 80 % of the
wealth was owned by 20 % of the population.
By identifying the 20 % of situations that
cause an organization 80 % of waste, focus
can be applied to eliminate the most costly
problems
7. Flow charts, used to graphically represent the
steps in a process and their interrelationships
In an effort to communicate this iterative
approach, Deming introduced a Plan, Do,
Check, Act (PDCA) Cycle in conjunction with
his ideas. While being simple, PDCA is
extremely powerful in communicating the intent
of scientific method and framing continual
improvement. Deming later realized that the
intent of “Check” may be better understood if
referred to as “Study.”
PDCA is intended to be incremental. That is,
it is not something that is done once. Rather, the
PDCA cycle should be worked through repeat-
edly to resolve issue after issue. In doing so,
issues arise once and should not need to be
resolved twice. This is not to say that new issues
do not occur. Rather, controls should be in place
to recognize when issues arise, and processes
should be enacted to resolve issues, all in
a systematic way. The PDCA cycle enables
issue resolution to be determined, trialed, studied,
and then accepted and published in an organiza-
tion’s environmental (or quality) management
system (EMS).
As PDCA is intended to be an incremental
cycle, the four steps of PDCA can be best
described using a wheel as depicted in Fig. 1.
It is helpful to understand the PDCA cycle
within the context of an organization with an
TQM 2545 T
objective of continual improvement and the status The PDCA cycle was adopted by Motorola as
quo defined in an EMS, as depicted in Fig. 2. part of its process control program. Initially,
Standardized processes defined in the EMS, as Motorola established process control charts
guided by ISO14001, objectives for continual using +/ 3 standard deviations (s). However,
improvement define the direction in which efforts it was realized that international competitiveness
are to be made, and the PDCA cycle provides would only be achieved if tolerances for error
a simple framework within which to exert were virtually zero. This led Motorola to double
improvement efforts. Once improvements have the value (from 3 to 6) of the tolerance-
been achieved, they should be defined and monitoring criteria (s) in Shewhart’s quality
updated in the EMS (refer to the entries on control calculations and the coining of the term
“▶ EMS” and “▶ ISO14000 Standards Series”). “6s”. In simple terms, in statistics s (the Greek
In relation to the upward slope depicting the letter sigma) refers to the standard deviation of
Objectives for Continual Improvement, as a population under quality control; hence,
shown on Fig. 2, an EMS provides a wedge that Six Sigma. In Six Sigma, the PDCA cycle is
prevents progress made by the PDCA cycle from similarly intensified to being DMAIC, which is
sliding back. an acronym for:
• Define
• Measure
• Analyze
• Improve
• Control
4. Act 1. Plan
For the purposes of dealing with environmen-
Evaluate Define situation
tal and quality issues, in most organizations,
Standardize Cause analysis PDCA is sufficient. Six Sigma pursuits conducted
Communicate Consider options properly require significant resources and, in
Continue Select solution most contexts, may unnecessarily complicate
and even confound the effective management of
3. Check 2. Do environment and quality. Once mature and
Monitor Plan of action performing well, the PDCA cycle can be
Analyse Assign tasks upgraded to the DMAIC cycle.
Modify Communicate
Other techniques and tools can be applied in
Pilot
a TQM approach, such as, Taguchi’s design
methods and Akao’s Quality Function Deploy-
ment. However, these are quite advanced and
involve techniques not dealt with in this brief
TQM, Fig. 1 PDCA cycle introduction.
T

A P

Objectives for
C D Continual
Improvement

EMS / ISO14001
TQM, Fig. 2 PDCA cycle
in context
T 2546
Key Issues
While huge strides have been made in under-
standing, communicating, and implementing
TQM processes, the biggest issue still plaguing
much of management practice is the lack of
appreciation of the words “total” and “manage-
ment” in TQM. To achieve near-perfect quality is
not simply a matter of teaching people to blindly
follow a series of prescribed steps in making
“widgets,” but to get all employees in an organi-
zation to understand why quality is important and
to be wholly committed to its achievement in
everything they do, including how they relate
to others inside and outside the organization.
In other words, TQM is to a large extent
a motivational issue that requires appropriate
leadership behaviors at all levels of an
organization.
Future Directions
The PDCA cycle will continue to be a useful
method in organizations seeking to engage in
incremental improvement. Many proprietary
PDCA-like methodologies have and will be
coined by professional service firms. While
variations to create a market differentiation
might be appealing, their effectiveness in practice
will depend more on the commitment and
involvement of senior management than any
lexicographic enhancement.
Cross-References
▶ EMS
▶ ISO14001
▶ TQM
References and Readings
Boxer, L. J. (2003). The sustainable way. Melbourne:
Brolga.
http://intergon.net/phd/BoxerTQMEnv1991.html
http://www.intergon.net
Trade Union Recognition
http://www.intergon.net/ISO9000-2000-requirements-jun03.
doc
http://www.slais.ubc.ca/people/students/resumes/C_Payne/
media_pdf/TQMTools.pdf
Walton, M. (1991). The Deming management method
(Reprint). New York: The Berkley Publishing Group.
Trade Union Recognition
Martin Quinn
Business School, Dublin City University,
Glasnevin, Dublin, Ireland
Definition
A trade/labor union is deemed recognized when
an employer agrees to negotiate with the union on
matters of pay and working conditions for the
workers represented by the union. Recognition
may be voluntary or statutory. Voluntary recog-
nition implies an employer agrees to recognize
a union without the use of any legal procedures.
Statutory recognition implies a union must make
an application to be recognized. In most coun-
tries, certain conditions must be met before
a union can be recognized in a statutory sense.
The main exception to this is Scandinavian coun-
tries, where an automatic legal right to represen-
tation exists.
Key Issues
Once a trade union is recognized, either volun-
tarily or by statutory means, employers are typi-
cally bound to fulfill certain duties. Typically,
collective bargaining procedures must be agreed
and the coverage of any agreement is defined.
Bargaining procedures may include; how and
when meetings are arranged; names of employer
and union representatives; time off for union
representatives to attend meetings; how agree-
ments and disagreements are communicated to
workers; conduct during negotiations; specific
matters which are subject to joint agreement, for
example, pay and working hours; and dispute
Transaction Cost Economics 2547 T
resolution, for example, conciliation and arbitra- References and Readings
tion. The extent of any agreement typically
covers matters such as union recruitment activi- Brown, W., Deakin, S., Hudson, M., & Pratten, C. (2001).
The limits of statutory trade union recognition. Indus-
ties, representation on behalf of workers at griev-
trial Relations Journal, 32(3), 180–194.
ance procedures, and arrangements on the Goerke, L., & Pannenberg, M. (2004). Norm-based trade
deduction of union membership dues by the union membership: Evidence for Germany. German
employer. Economic Review, 5, 481–504.
Unions normally favor statutory recognition,
as the benefit of having a legal framework to
force an employer to recognize a union is useful.
Employers may hold the opposing view, that Trade Unionism
voluntary recognition is favorable. The main
argument against statutory recognition is that it ▶ Collective Bargaining/Trade Unions
may not contribute to a sense of trust and coop-
eration needed as a goodwill basis for collective
bargaining (Brown et al. 2003). Employers may Tradition
also engage in nonrecognition strategies. One
form of nonrecognition is to adopt an antiunion ▶ Cultural Differences in Values/Ethics and
stance by attempting to block or hinder unions, Decision-Making
for example, in a voluntary regime to not negoti-
ate, or in a strike situation to bring in outside
workers. A second approach is to adopt a corpo- Traditional Authority
rate culture which is anti-recognition, for
example, using a probation period for new ▶ Authority Versus Bureaucracy
employees or using a young contract-based work-
force. A third approach is to adopt a paternalistic
stance, offering generous pay and benefits, Traditional Economic Domain of
which may yield a low grievance working envi- Marketing
ronment. These anti-recognition strategies form
the basis of an argument for statutory recognition, ▶ Corporate Social Marketing
as such employers are unlikely to engage volun-
tarily. An anti-recognition stance is more typical
of Anglo-Saxon countries, where a belief that Training
trade unions are bad for business remains
somewhat prevalent. Some countries, such as ▶ Apprenticeship
Germany, operate a mandated trade union/
worker representation regime for all but the T
smallest of businesses. In such environments, Transaction Cost Economics
trade unions are viewed as a social norm and
more likely to viewed as organizational partners Suzanne Young
than bad for business (see, e.g., Goerke and La Trobe Business School, La Trobe University,
Pannenberg 2004). Melbourne, VIC, Australia

Synonyms
Cross-References
Organizational economics; Transaction cost
▶ Minimum Wage theory
T 2548
Definition
Transaction cost economics is understood as
alternative modes of organizing transactions
(governance structures – such as markets,
hybrids, firms, and bureaus) that minimize trans-
action costs (Williamson 1979). Transaction cost
theory (Williamson 1979, 1986) posits that the
optimum organizational structure is one that
achieves economic efficiency by minimizing the
costs of exchange. The theory suggests that each
type of transaction produces coordination costs of
monitoring, controlling, and managing transac-
tions. Williamson has defined transaction costs
broadly as the costs of running the economic
system of firms. He has argued that such costs
are to be distinguished from production costs and
that a decision-maker can make a choice to use
a firm structure or source from the market
by comparing transaction costs with internal
production costs. Thus, cost is the primary
determinant of such a decision.
Other researchers have extended the definition
of transaction costs to include any mechanism for
coordinating the actions of individuals, which
includes the costs of deciding, planning,
arranging, and negotiating actions and the terms
of exchange between two or more parties. They
have also included the costs of changing plans,
renegotiating terms, resolving disputes, and
ensuring performance.
This paradigm is used by management
scholars to provide explanation and guidance to
decision-makers as to how to organize transac-
tions and make decisions about use of internal
servicing or production, contract to the market, or
use outsourcing or offshoring.
Introduction
Organizational economics is a field of study
which has been used to provide a theoretical
basis for analyzing organizational structure. In
general, the rationale is that owners of capital,
in seeking profit maximization, structure their
organizations in ways that will optimize their
performance and effectiveness. Boundaries of
Transaction Cost Economics
organizations are not fixed, and the process of
management involves adapting organizational
structure in appropriate ways to deal with the
uncertainties found both internally and externally
through economic and social change. The pro-
duction of goods and services can be performed
internally to the “firm” or sourced from the “mar-
ket.” In this regard, the term “market” is used
where certain functions and services which are
important for the completion of a product or
service being provided by a particular firm are
drawn from providers outside the firm. Many
researchers have used economic theories to
seek to explain the various configurations used
by organizations to cope with increasing
uncertainty.
Hence, the optimal governance mechanisms
which achieve economic efficiency is the
focus of both transaction cost and agency
theory. These theories elucidate how structure
is used to control the behavior of parties deal-
ing with the organization, whether they are
operating from within or externally. Seminal
work by Coase (1937) in the “theory of the
firm” argued that the organizational structure
within which transactions are coordinated will
affect the transaction costs incurred. Such the-
ories are based on assumptions of rationality,
efficiency optimization, and profit maximiza-
tion and suggest that the optimum organiza-
tional structure is one which minimizes
transaction costs. Thus, the “firm” is the opti-
mal structure when it can accomplish
exchanges at a cost lower than when any
other structure is used.
TCE has been used by governments to under-
pin the privatization of public services and the
use of public-private collaborations. The aim has
been to introduce private sector efficiencies into
public service provision and to allow the public
sector provider to focus on core service delivery.
This entry will provide further information
about what variables will impact on this cost
structure and hence provide information as to
how to optimally structure the transaction. It
will go on to review criticisms of this approach
in making structural decisions and propose dif-
ferent approaches.
Transaction Cost Economics
Key Issues
Variables
Costs are difficult to assess, so Williamson (1979)
used four variables as evaluative mechanisms,
namely, frequency of exchange, asset specificity,
uncertainty, and threat of opportunism. Changes
in these variables should shift the weighting in
decision-making between in-house production
and use of the market.
The first variable, frequency of exchange,
refers to buyer activity in the market or how
often the transaction between the parties occurs.
The second, asset specificity, is divided into site,
physical asset, or human asset specificity. Hold-
ing all other variables constant, Williamson
suggested that the market provides the most effi-
cient governing structure for all transactions
using nonspecific assets, as economies of scale
are achieved by suppliers producing standardized
products or services which may be sold to multi-
ple customers. In so far as outsourcing is
concerned, the theory holds that a firm should
contract in the market place for specialist
human knowledge and/or specialist technological
provision in situations when it is more efficient to
do so than to source these from in house. In
limiting the analysis to these two variables,
the theory argues that it is only when the transac-
tion is recurrent and idiosyncratic to the firm
that in-house production should be favored.
Accordingly, economies of scale that would be
achieved in the market place for a standardized
product would in such situations be achievable
by the firm.
The third variable Williamson considered is
environmental uncertainty, which produces
transaction costs by increasing the time and pro-
cesses an organization requires to monitor
and control for environmental diversity. For
example, the inability to detail all specifications
and the costs of bargaining to coordinate
actions, measure performance, and acquire infor-
mation increase the transaction costs of market
exchange.
The final variable identified by Williamson
refers to the threat of opportunism, which is sim-
ply attributed to human nature. By this, it is meant
2549 T
that the opportunistic behavior of vendors
increases the coordination costs of market-based
transactions. In such cases, the use of
a hierarchical or bureaucratic structure and thus
the use of internal service provision may be
favorable as it can act as a control mechanism
for such opportunistic behavior. Williamson
suggested that internal organization can provide
the antidote to reduce the hazards implicit in the
coordination of market exchange through
imparting norms of social behavior, which pro-
mote convergent expectations between the
parties. This can occur through peer pressure,
group control, and behavioral and social norms.
Furthermore, Williamson proposed that the fear
of losing the contract and threats to move the
provision back internally reduce opportunistic
behavior in market transactions. In addition, mar-
ket characteristics, such as the number of com-
petitors in the market, may influence the
contractual specifications and bargaining and
submission processes, as small numbers of
exchange partners may increase the susceptibility
to exploitation by outsourcing vendors.
Williamson’s transaction cost theory has been
elaborated on by other researchers, who do not
discuss the variables in isolation but instead show
their relationships and discuss the outsourcing
arrangement in a more descriptive manner. For
example, opportunism is increased by the very
nature of asset specificity, and so asset specificity
locks organizations into relationships with out-
side vendors, making it difficult for them to alter
internal processes without extensive contractual
negotiations. Hence, a vendor’s willingness to
wield this power may result in increased
bargaining to draft the contract and more detailed T
monitoring of the contractual outcomes once it is
signed. The problem of asset specificity increas-
ing opportunism can thus be solved by using
long-term contracts to reduce opportunistic prob-
lems but only at a cost of specifying all possible
contingencies and policing enforcement. In com-
parison, in a perfectly competitive market, the
large number of buyers and sellers may act to
produce efficient transactions with the lowest
transaction costs. As such, prices and competition
provide market control over internal processes
T 2550
through the very act of requiring external bids for
the provision of services.
As a substitute to explicit long-term contracts,
the firm will often rely on an implicit capital loss
threat in the form of withdrawal of future busi-
ness, although it depends on the relative power of
the parties as to whether the vendor actually takes
this threat seriously. The greater the sunk and
switching costs of contract provision, the less
likely it is that the contract will be changed back
to in-house provision. This often results in
a situation where on re-tendering, a small number
of vendors participate in the process, as the con-
tractual partners have tended to invest in transac-
tion-specific capital and acquire transaction-
specific skills.
Other researchers have similarly suggested
that the external environment produces uncer-
tainty due to the complexity and dynamism of
technologies and markets but have proposed
that in some cases, the costs of reducing this
uncertainty outweigh the costs of internal gover-
nance (Eisenhardt 1989). Such uncertainty may
render decision-makers unable to describe the
complete decision process and, as such, contin-
gencies may be unable to be specified in the
contract for all situations. In such cases,
decision-makers will choose internal production
over the market. This has resulted in a lower
proportion of contracting in professional services
compared to blue-collar activities, due to difficul-
ties in identifying, measuring, and evaluating the
output quality of the former.
Hierarchy and Internal Provision
In criticizing the use of contracts as control mech-
anisms, others have supported the use of
a hierarchical structure. In this way, organiza-
tions exist because of their superior abilities to
control human opportunism through manage-
ment structures and behaviors. This body of
thought is based on seminal work by Weber
(1947) in his “bureaucratic form of organization”
where rational control, employee, and task spe-
cialization narrow areas of decision responsibili-
ties, and the extensive use of rules and procedures
all act to provide behavioral controls over
Transaction Cost Economics
employees. Ouchi (1979) also has argued that
control over people’s behavior, motivation, and
commitment is what makes organizations the
preferred structure compared with markets. As
such, transactions that occur internally use social
relationships to control behavior. Ouchi
suggested that a clan resolves conflict through
group cooperation and relies on a strong culture
to ensure that values are shared and trust is inher-
ent within the organization. Here, teamwork is
a useful coordinating mechanism within the firm
structure for reducing environmental uncertainty
and promoting organizational adaptability. Ouchi
(1979) in elaborating on the use of hierarchical
control further argued however that such control
can actually increase governance costs through
the costs of additional structure and personnel.
Indeed, he has stated that it should only be con-
sidered an option when actual performance can
be measured and evaluated. This is supported by
most agency theorists (Eisenhardt 1989; Fama
and Jensen 1983), who have contended that
a contract should be behavior-based (goods and
services produced in house) only when the tasks
can be monitored.
Criticisms
Furthermore, Williamson has been criticized that
in reducing the threat of opportunism, he limits
the choice to the use of either hierarchy or
explicit, long-term contractual arrangements. In
market arrangements teamwork, clans and rela-
tionships are still important and are evident
where employees are transferred from employ-
ment within the firm to an outside contractor and
when joint ventures are established between
a vendor and a contractor.
Further research investigating specifically
labor force variables has expanded Williamson’s
theory in regard to human asset specificity,
arguing that in situations where technical
expertise is required, the use of a temporary
workforce with specialist capabilities can often
be contracted to provide labor more efficiently
and cost-effectively than retraining the perma-
nent workforce (Pfeffer and Baron 1988;
Atkinson 1984).
Transaction Cost Economics
Other Considerations
These preceding researchers base their arguments
on economic criteria. Indeed, Williamson’s trans-
action cost theory represents a widely accepted
view that organizational members make struc-
tural, sourcing, and contracting decisions based
on economic rationale. Economic theories in this
area suggest the primary decision-making crite-
rion is cost when choosing between governance
structures, the trade-off between coordination
costs when transactions are outsourced, and pro-
duction costs when goods and services are pro-
duced in house. Coase (1937:390) sums the
argument as follows: “The main reason why it is
profitable to establish a firm would seem to be
that there is a cost of using the price mechanism.”
Organizational economics literature focuses
the choice between the use of hierarchy or market
on the basis of reducing costs and increasing
efficiency, while accepting the restriction of
decision-makers’ bounded rationality and con-
tractor opportunism. In making this choice, the
aim, it is proposed, is to direct behavior toward
organizational goals, which the contract achieves
by exerting control through price and the mea-
surement of outcomes, in contrast to the
hierarchy’s use of stipulating input and work
processes and clans, or teams, to maintain cul-
tural control.
In both the public and private sectors,
however, researchers have suggested that
Williamson’s theory does not provide a complete
explanation of what actually does occur, thus
pointing to its prescriptive nature. Each firm
adapts to market signals in its individual way,
and these individual actions can result in differ-
ing governance structures for essentially the same
type of transaction. So solely relying on transac-
tion costs as antecedents to how these decisions
are made is not believed to hold true in the real
world.
Often, TCE has been used to justify
outsourcing of all firm non-core services in the
belief that economies of scale lie in the market
and that the vendor can produce the product/ser-
vice cheaper due to their own specialization.
There are, however, limitations to this approach.
2551 T
First, economic theory does not address how
managers’ perceptions impact on the evaluation
of the relative strategic value of an organization’s
assets. Managers’ self-interest can affect
strategic decisions and the assessment of core
competencies. Secondly, specialization creates
switching costs when a firm moves from internal
provision to an outsourcing arrangement or
between vendors. The higher these cost, the
greater the vulnerability of the firm to the oppor-
tunistic behavior on the part of the vendor.
Thirdly, sunk costs of particular strategies may
make it uneconomical to change form. Fourthly,
some operations may need to be produced in
house if innovation in a strategic area depends
on access to support operations or related tech-
nology. Fifthly, the important consideration in
gaining competitive advantage is in maintaining
a workforce with adequate skills that cannot be
duplicated by others.
Handy (1990) has cautioned that the most
difficult of policy decisions concerns what and
who belongs in the core, what activities and
which people. He argues that too often, organiza-
tions drift into this decision, gradually hiving-off
functions until they are left with what is incon-
ceivable or too inconvenient to give to others.
The key is to maintain control of the business,
the locus of power, and to build alliances with
outsourcing vendors. Focusing on and under-
standing what is “fundamentally” core to adding
value, to innovation, and to strategic thinking
and actions is key. Hence, for organizations
maintaining a strategic and innovative focus as
the key to organizational success and longevity
purely focusing on decision-making based on
TCE may be limiting. T
Future Directions
Pure economic models of governance are typi-
cally based on the premise of decision-making
using linear, step-by-step rationality, an assump-
tion that lacks evidence when assessing human
behavior. The rational model assumes that per-
fect information is available to decision-makers
T 2552
at no cost, that the problem is identified, alterna-
tives are evaluated against rationally selected
criteria, and a decision is made which will max-
imize the utility of the decision-maker. However,
in practice information asymmetry, satisficing
criteria, self-interest, power, and political tactics
often circumvent the decision-making. Such con-
siderations are reflected in TCE’s inclusion of
opportunism, but what is difficult in practice is
identifying this prior to the decision being made
and at what “cost” it is to be included.
Recently, insourcing has begun to occur espe-
cially in the public sector due to poor understand-
ing of the factors that lead to optimal outsourcing.
This has occurred as costs have risen on re-ten-
dering, a loss of control over service provision
has occurred, and a strategic and innovative focus
has been lost. At all times, a focus on strategy and
innovation, rather than simply economics, while
understanding the fit between strategy and struc-
tures, is key.
Also, overlaying a risk identification and
assessment approach to structural decision-
making is an important addition. In this vein, it
is important to understand key stakeholders and
their priorities; identify key inputs and risks to
supply of raw materials, labor, and capital; use
risk management frameworks to maintain supply
and management of these inputs; and reduce
uncertainty and opportunism through relation-
ships and alliances.
Cross-References
▶ Agency Theory
▶ Outsourcing
▶ Privatization
▶ Public-Private Collaborations
▶ Risk Management
References and Readings
Atkinson, J. (1984). Manpower strategies for flexible
organisations. Personnel Management, 16(8), 28–31.
Coase, R. H. (1986). The nature of the firm (1937).
In J. Barney & W. Ouchi (Eds.), Organizational
economics (pp. 80–98). San Francisco: Jossey-Bass.
Transaction Cost Theory
Eisenhardt, K. M. (1989). Agency theory: An assessment
and review. Academy of Management Review, 14(1),
57–74.
Fama, E., & Jensen, M. (1983). Separation of ownership
and control. Journal of Law and Economics, 26,
301–325.
Handy, C. B. (1990). The age of unreason (pp. 87–115).
Boston: Harvard Business School Press.
Ouchi, W. G. (1979). A conceptual framework for the
design of organizational control mechanisms.
Management Science, 25, 833–848.
Pfeffer, J., & Baron, J. (1988). Taking the workers
back out: Recent trends in the structure of employ-
ment. Research in Organizational Behavior, 10,
257–303.
Weber, M. (1947). The theory of social and economic
organizations. New York: Free Press.
Williamson, O. (1979). Transaction-cost economics: The
governance of contractual relations. Journal of Law
and Economics, 22, 233–261.
Williamson, O. (1986). Transaction-cost economics:
The governance of contractual relations. In J. Barney
& W. Ouchi (Eds.), Organizational economics
(pp. 98–129). San Francisco: Jossey-Bass.
Transaction Cost Theory
▶ Transaction Cost Economics
Transaction Spillover
▶ Externalities
Transcendence
▶ CSR and Spirituality
Transnational Corporations (TNCs)
▶ CSR in Africa
Transparency
Transparency
Ananda Das Gupta
HRD, Indian Institute of Plantation Management,
Bangalore, Karnataka, India
Synonyms
Corporate social performance; Corporate
social responsibility; Financial performance;
Performance standards
Definition
Transparency, as used in the humanities and
in a social context more generally, implies
openness, communication, and accountability. It
is a metaphorical extension of the meaning
a “transparent” object is one that can be seen
through. Transparent procedures include open
meetings, financial disclosure statements,
freedom of information legislation, budgetary
review, audits, etc. (http://www.answers.com/
topic/corporate-governance#ixzz1sAUeo2bw).
Transparency has recently become a very pop-
ular word, well-used, but sometimes misused, by
scholars and practitioners. In this context, the
academic literature has analyzed several issues
associated with corporate transparency such as
the ethical justifications for information disclo-
sure the ethical nature of corporate informational
transparency or the use of transparency in man-
agement-employee relationships However,
although extensive, the literature on organiza-
tional transparency is focused either on descrip-
tive analyses or on macrolevel studies that link
information disclosure decisions with public pol-
icy issues.
Transparency depends on accurate, reliable,
and complete records and the management of
these records. Any report or disclosure of infor-
mation is only as good as the quality of its source
information. In addition, transparency is
a function of the degree to which the revealed
information provides a fair and complete
2553 T
insight into the overall corporate activities in
a certain area. Such reports or information
are of little use if records which provide
evidence of companies’ actions and decisions
are not (http://www.answers.com/topic/corpo-
rate-transparency-1#ixzz1sAUOBEaa):
Created and managed appropriately
Identified appropriately as being sources for the
statements made in the report
Reliable nor accurate
Complete and only provide disclosure to
a fraction of the overall activity
Introduction
Since Enron applied for receivership, issues of
transparency, accountability, and honesty have
risen to the top of the public agenda. Corporate
transparency is set of information, privacy, and
business policies to improve corporate decision-
making and operations openness to employees,
stakeholders, shareholders, and the general
public.
The system of checks and balances designed
to ensure that corporate managers are just as
vigilant on behalf of long-term shareholder
value as they would be if it was their own
money at risk. It is also the process whereby
shareholders – the actual owners of any publicly
traded firm – assert their ownership rights,
through an elected board of directors and the
CEO and other officers and managers they
appoint and oversee. In the heels of corporate
scandals including the Enron debacle in 2002,
a series of sweeping changes are being sought,
such as forcing boards to have a majority of T
independent directors, granting audit committees
power to hire and fire accountants, banning
sweetheart loans to officers and directors, and
requiring shareholder’s approval for stock option
plans (Treanor 2009).
More specifically, the following principles
constitute good governance (http://www.guardian.
co.uk/business/2009/nov/22/banks-top-20-earners.
Retrieved 22 Nov 2009):
1. To avoid conflicts of interest, a company’s
board of directors should include a substantial
T 2554
majority of independent directors – independent
meaning that directors do not have financial or
close personal ties to the company or its
executives.
2. A company’s audit, nominating, and compen-
sation committees should consist entirely of
independent directors.
3. A board should obtain shareholder approval for
any actions that could significantly affect the
relationship between the board and share-
holders, including the adoption of antitakeover
measures such as “poison pills.”
4. Companies should base executive compensa-
tion plans on pay for performance and should
provide full disclosure of these plans.
5. To avoid abuse in the use of stock options (and
executive perquisites), all employee stock
option plans should be submitted to share-
holders for approval.
Key Issues
Corporate transparency, a form of radical
transparency, is the construct of removing all
barriers to – and facilitating of – free and
easy public access to corporate, political, and
personal information and the laws, rules, social
connivance, and processes that facilitate and
protect those individuals and corporations who
freely join, develop, and embellish the process.
Radical transparency is a management method
where nearly all decision-making is carried out
publicly. All draft documents, all arguments for
and against a proposal, the decisions about
the decision-making process itself, and all
final decisions are made publicly and remain
publicly archived.
Media transparency is the concept of deter-
mining how and why information is conveyed
through various means. If the media and
the public know everything that happens in
all authorities and county administrations,
there will be a lot of questions, protests, and
suggestions coming from media and the
public. People who are interested in a certain
issue will try to influence the decisions. Trans-
parency creates an everyday participation in the
Transparency
political processes by media and the public. One
tool used to increase everyday participation in
political processes is freedom of information
legislation and requests. Modern democracy
builds on such participation of the people and
media. There are, for anybody who is interested,
many ways to influence the decisions at all
levels in society.
In politics, transparency is introduced as
a means of holding public officials accountable
and fighting corruption. When government
meetings are open to the press and the public,
when budgets and financial statements may be
reviewed by anyone, when laws, rules, and
decisions are open to discussion, they are seen
as transparent, and there is less opportunity for
the authorities to abuse the system in their own
interest.
Future Directions
In government, politics, ethics, business,
management, law, economics, sociology, etc.,
transparency is the opposite of privacy; an
activity is transparent if all information about it
is open and freely available. Thus when courts of
law admit the public, when fluctuating prices in
financial markets are published in newspapers,
those processes are transparent.
When military authorities classify their plans
as secret, transparency is absent. This can be seen
as positive or negative: positive, because it can
increase national security, negative, because it
can lead to secrecy, corruption, and even
a military dictatorship.
A government is transparent when the great
majority of the information that it holds about its
activities, policies, and decisions is accessible for
the general public. Therefore, transparency is
the result of information being available. Thus,
government transparency brings three main
benefits to democratic societies:
• Transparency for participation: democracy
means not only participating in elections but
also participating in public debate and deci-
sion-making between elections. In order
to defend human rights and civil liberties in
Transparency
a constructive and meaningful way, we need
information.
• Transparency for accountability: in a demo-
cratic system, the general public is entitled
to hold the government and public officials
accountable for their actions and the decisions
they made as the political representatives of
the people.
• Transparency for efficiency: reactive access to
information has the benefit of encouraging
public bodies to organize their information.
Proactive disclosure of information encour-
ages better information management and
more effective communication between pub-
lic bodies.
Transparency has recently become a very
popular word, well-used, but sometimes misused,
by scholars and practitioners. In this context,
several issues associated with corporate transpar-
ency have been analyzed such as the ethical
justifications for information disclosure, the
ethical nature of corporate informational trans-
parency or the use of transparency in
management-employee relationships.
Good business ethical practices, based
on the framework of transparency, include
(http://www.answers.com/topic/corporate-transpar-
ency-1#ixzz1sAUOBEaa):
• Publishing a code of conduct/ethics
• Providing examples of business ethics
dilemmas
• Defining ethical tests that can be used by staff
to facilitate decision-making
• Making the company’s conflict of interest
guidelines publicly available to investors and
other stakeholders, as appropriate
• Designating an ethics/compliance officer easily
accessible by relevant stakeholder groups
• Communicating the codes and procedures to
all employees, agents, and other appropriate
stakeholders
• Establishing systems for monitoring and
overseeing the actions of the organization,
its employees, agents, and other critical
stakeholders and detecting/preventing
unethical and/or illegal activities
• Gathering relevant data and reporting on a reg-
ular basis those charged with ethical oversight
2555 T
• Providing code enforcement mechanisms
• Specifying appropriate offense responses
• Providing an easy ethics complaint
self-disclosing process
Despite the differences between different
national styles of corporate governance, there is
convergence on the importance of:
• Transparency
• Integrity
• Accountability
Corporate governance systems should ensure
that:
• Accountancy standards are beyond reproach
• Audit quality is safeguarded
• The board of directors is effective and
properly constituted
• Governance structures are fostering efficiency
and competitiveness of business
• Disclosure and transparency is enhanced to
satisfy all key stakeholders
• The interests of shareholders and other key
stakeholders are protected
• Corporate risks are properly managed
History continues to tick, and Sarbanes-Oxley
Act of the USA was a serious wakeup call. It has
been much debated, and there are very mild pro-
tests in some quarters. Nevertheless, it is a call to
get back to fundamentals and it identifies 58
separate provisions that affect internal auditing,
and the question of directors of boards looking
the other way is unacceptable and must change.
In India, corporate governance had not been
well-understood right up to the early 1990s. The
financial institutions, which were mostly govern-
ment owned and controlled, never monitored the
loans or came in the way of any management and
virtually never divested their ownership stake in T
any firm. There were also constraints on monitor-
ing by external capital markets. With the liberal-
ization of the economy, several positive
developments occurred on the corporate gover-
nance front. First, the Securities and Exchange
Board of India (SEBI) Act of 1992 created
a regulatory body with the explicit mandate to
improve the functioning of Indian financial mar-
kets. Second, the state-run financial institutions
were given incentives for better performance and
a freer hand to monitor their loans. Competition
T 2556
among the financial institutions increased with
the deregulation of interest rates and the gradual
elimination of consortium requirements. Private
sector mutual funds were allowed to compete
with the state monopoly. Third, a takeover code
was introduced in late 1994. Fourth, restrictions on
the entry of foreign investors were eliminated and
regulations on their investments were substantially
clarified. All these developments threw the domes-
tic corporations open to external competition. The
pressure to compete globally in turn put pressure
to follow internationally accepted norms of corpo-
rate governance (Bekaert et al. 2002).
Organizational transparency is mentioned in
reference to financial activities and services.
Firms operating in the financial sector should
combine “right intention, transparency, and the
search for positive results.” Transparency
appears as a process linking ethical aims
(“right intention”) to profits (“positive results”).
Organizational transparency originally was
associated with the disclosure of information
related to a firm’s business activities, through
standardized documentation such as corporate
social reports and financial reports. Overall, it is
possible to identify two main categories of
research on transparency. The first analyzes
transparency from an instrumental perspective
for developing and/or modifying corporate trans-
parency and reporting guidelines; improving the
quality of social and environmental data and infor-
mation; managing records which provide evidence
of corporate activities that have an impact on the
environment, human rights, and public health and
safety; integrating recordkeeping concepts and
practices into audit and assurance guidelines
reviewing sustainability performance and
underlining the role of records and recordkeeping
in assuring sustainability reports; and integrating
recordkeeping concepts and practices into corpo-
rate risk management strategies and consider-
ations (Johnson et al. 2000).
The Code of Business Conduct and Ethics
helps ensuring compliance with legal require-
ments and other standards of business conduct.
All company employees and trainees are
expected to read and understand this code of
ethics, comply with all applicable policies and
Transparency in Stakeholder Relationships
procedures, and ensure that all agents and con-
tractors are aware of, understand, and adhere to
these standards (Leuz and Oberholzer-Gee 2003).
Cross-References
▶ Corporate Citizenship
▶ Micro-disclosure
▶ Responsible Management
▶ Socially Responsible Management (SRM)
References and Readings
Bekaert, G., Harvey, C. R., & Lumsdaine, R. L. (2002).
Dating the integration of world equity markets. Jour-
nal of Financial Economics, 65(2), 203–247 Elsevier,
August.
Johnson, S., Boone, P., Breach, A., & Friedman, E.
(2000). Corporate governance in the Asian financial
crisis. Journal of Financial Economics, 58(1–2),
141–186 Elsevier.
Leuz, C., & Oberholzer-Gee, F. (2003). Political relation-
ships, global financing and corporate transparency.
Center for Financial Institutions Working Papers
03-16, Wharton School Center for Financial Institu-
tions, University of Pennsylvania.
Norway divided by citizen wealth tables. The
New York Times. October 23, 2009. http://www.
nytimes.com/2009/10/24/business/global/24tax.html?
_r¼2&ref¼global. Retrieved 22 Sept 2009.
Treanor, J. (22 November 2009). Government retreats
over naming bank top earners - Top 20 highest paid
employees now unlikely to be identified unless they
have boardroom roles. The Guardian.
Transparency in Stakeholder
Relationships
▶ Stakeholder Accountability
Transparency International
Branco Manuel Castelo
Faculty of Economics, University of Porto:
OBEGEF (Observatory in Economics and
Management of Fraud), Porto, Portugal
Synonyms
TI
Transparency International
Address with Web Link
http://www.transparency.org/
Introduction
Transparency International (TI) is a civil society
organization devoted mainly to the fight against
corruption that was created in 1993. The heart of
TI is its Secretariat, which is based in Berlin, and
fulfills functions of leadership, coordination,
and support. It focuses on the global and
regional fight against corruption and assists
national chapters who fight corruption within
their countries. Although TI does not undertake
investigations of alleged corruption or expose
individual cases, it works occasionally with
organizations that do.
Brief History
TI was created in 1993 in Berlin by a former
World Bank executive, Peter Eigen. He was
assisted in this endeavor by a group of individuals
who shared his concerns. During the 1990s, the
TI movement grew rapidly, so that by the end of
the decade there were already some 70 national
chapters supported by the TI Secretariat in Berlin
(NORAD 2011). One of TI’s early achievements
is the publication in 1995 of the first Corruption
Perceptions Index. Since 2000 until now, TI has
consolidated and strengthened the organization,
as well as expanded its international agenda
(NORAD 2011). According to information
extracted from the TI web page in February
2012 (www.transparency.org), the number of
staff in TI’s Secretariat is over 120 and there are
more than 90 locally established national
chapters and chapters-in-formation and about
27 Individual Members. TI Secretariat’s budget
grew from approximately 2.8 million euros in
2007 to 20 million euros in 2010, whereas the
average number of employees increased from 35
to approximately 120 people in the same period
(NORAD 2011).
2557 T
Mission/Objectives/Focus Areas
TI’s mission is to create change toward a world
free of corruption. Among the numerous princi-
ples TI is committed to respecting, the following
two stand out:
1. Work cooperatively with all individuals and
groups, with for-profit and not-for-profit cor-
porations and organizations, and with govern-
ments and international bodies committed to
the fight against corruption, subject only to the
policies and priorities set by our governing
bodies.
2. Condemn bribery and corruption vigorously
and courageously wherever it has been reli-
ably identified.
Structure of Governance
Nowadays, the Transparency International has an
organizational structure composed of a Secretariat,
an Advisory Council, Individual Members, Inter-
national Board of Directors, and National Chap-
ters. In addition, there is an Annual Membership
Meeting, which is the ultimate decision-making
body. Official Chapter Representatives and Indi-
vidual Members each have one vote.
The TI Secretariat was established to provide
support, coordination, and advice to the national
chapters and leads the organization’s interna-
tional agenda. The national chapters are indepen-
dent civil society organizations registered in their
own countries and internationally affiliated with
TI. They address corruption in their respective
countries, having their own boards and member-
ship structures that set their own agendas and T
implementing their own national programs as
well as agreed global and regional strategies
The International Board of Directors and the
Advisory Council serve the movement overall.
Activities/Major Accomplishments/
Contributions
Through its Secretariat and the national chapters
around the world, TI works at the national and
T 2558 Transporting

international levels to change laws, regulations,

and practices in order to put an end to corruption. Transporting
TI has played a significant role in lobbying gov-
ernments to draft and sign the OECD Anti- ▶ Waste Management
bribery Convention (1997), the UN Convention
against Corruption (2003), and the various
regional conventions (NORAD 2011).
Research is one of TI’s most significant con- Treaties on Human Rights
tributions to the effectiveness of the TI move-
ment (NORAD 2011). Among its products, the ▶ United Nations Universal Declaration of
following stand out: Human Rights
• The Corruption Perceptions Index (CPI) is
a leading measure of perceptions regarding
corruption. It ranks countries by perceived
levels of corruption among public officials. It
Treatment
has been launched in 1995. Since then, it has
▶ Waste Management
been published annually.
• The Bribe Payers Index (BPI) is intended to
complement the CPI by assessing the propen-
sity of companies from the leading trading
Tremolite
nations to pay bribes when doing business
abroad. It was first published in 1999, and
▶ Asbestos
there have been subsequent editions in 2002,
2006, 2008, and 2011.
• The Global Corruption Barometer (GCB)
represents general public attitudes toward Tripartite Arrangements
corruption. It appeared for the first time
in 2003, and subsequent editions were ▶ Social Dialogue
published in 2004, 2005, 2006, 2007, 2009,
and 2010.
• The National Integrity Systems assessments
provide systematic, qualitative analysis of the Triple Bottom Line
principal institutions that contribute to integ-
rity, transparency, and accountability in Catalina Soriana Sitnikov
a given country. Faculty of Economics and Business
Administration, University of Craiova, Craiova,
Dolj, Romania
Cross-References

▶ Bribery and Corruption Synonyms

▶ Corruption and National Development
People, Planet, Profit; Three pillars, 3BL

References and Readings

Definition
Norwegian Agency for Development Cooperation
(NORAD). (2011). Evaluation of transparency Triple bottom line (TBL) accounting widens the
international. Oslo: NORAD. conventional reporting structure to include
Triple Bottom Line
ecological and social performance, in addition to
economic performance.
Spreckley (1981) first introduced the notion of
TBL in a paper in which he specified what enter-
prises or “socially responsible enterprises”
should incorporate in their performance
assessment.
John Elkington (1994) coined the expression
“triple bottom line” in his book Enter the Triple
Bottom Line.
The United Nations 2005 World Summit Out-
come Document clarifies sustainability. It refers
to the “interdependent and mutually reinforcing
pillars” of sustainable development as economic
development, social development, and environ-
mental protection. Furthermore, the notion of
TBL underlies a company having obligations
not only to its shareholders, but also to a wider
spectrum of stakeholders, including the environ-
ment. “Stakeholders” here refers to any entity
(individual or organization) upon which the
conduct of the company, whether directly or
indirectly, has an impact. Complying with the
stakeholder principle, the entity is obliged to con-
sider stakeholder concerns, instead of simply
maximizing the shareholders’ (owners’) wealth.
The TBL introduces an increased range of values
and standards for assessing organizational (and
social) accomplishment (economic, ecological,
and public).
Introduction
The triple bottom line (TBL) is sometimes also
referred to as the 3BL. The triple bottom line
relates to the way a corporation is concerned
with and records on its developments and out-
comes in recognition of people, the planet, and
profit. It considers a corporation’s understanding
and responsibility in its public reporting, deal-
ings, and exposure in terms of the manner in
which a corporate body acts during its environ-
mental, social, and economic activities. As long
as there is no unique generally acknowledged
definition of TBL reporting, in a sentence it can
be described as corporate contact with stake-
holders, which depicts the company’s approach
2559 T
to administering the economic, environmental,
and social extent of its actions. It is additionally
recognized as “corporate social responsibility,”
although some choose to consider the term “sus-
tainability” as more extensive, and they claim
that responsibility emphasises the advantages to
public groups outside the industry, while sustain-
ability gives equivalent significance to the advan-
tages gained by the corporation itself. In this
structure, the term “sustainable” sends to the
evolvement that should not diminish the alterna-
tives open to future. Nevertheless, responsibility
and sustainability are used together to apply to
a company’s responsibilities to the community.
With the confirmation of the United Nations
and International Council for Local Environmen-
tal Initiatives (ICLEI) TBL standard for metro-
politan and public accounting in early 2007, this
came to be the prevailing approach to the full cost
accounting of public sectors. Related UN stan-
dards address the assessment of natural and
human resources to facilitate assessments needed
by the TBL, e.g., the eco-budget standard for
reporting ecological tracking.
The triple bottom line consists of “, economic,
and environmental,” while the expression “peo-
ple, planet, profit” was conceived for Shell by
SustainAbility, influenced by twentieth century
urbanist Patrick Geddes’s concept of “folk, work,
and place.”
“People, planet, and profit” concisely delin-
eate the triple parts of the bottom line and the
objective of sustainability.
“People” (human resource/capital) relates to
proper and favourable business conventions for
employees and the population, and the area in
which a corporation conducts its business. T
A TBL company formulates a corresponding
social framework in which the welfare of corpo-
rate, labour and other stakeholder advantages are
mutually beneficial. A triple bottom line com-
pany tries to benefit numerous constituencies,
not to impose on or imperil any groups. The “up
streaming” of a part of the revenue from the
marketing of finished goods back to the first man-
ufacturer of raw materials is a normal
characteristic. In reality, a TBL industry would
not use a youthful workforce and supervise all
T 2560
restricted corporations with regard to youth
workforce utilization, would pay its employees
fair salaries, would supply secure working con-
ditions and adequate working hours, and would
not otherwise impose on the community or
its workforce. A TBL industry also normally
aspires to “give back” by subscribing to the
force and enlargement of its community with
such effects as healthcare and education. Setting
this bottom line is rather new, difficult and
frequently biased. The Global Reporting Initia-
tive (GRI) has advanced guidelines to allow
corporations and NGOs correspondingly to com-
parably record the social consequences of an
industry.
“Planet” (natural resources/capital) relates to
sustainable environmental conventions. A TBL
company attempts to benefit the natural setting as
much as possible or at least do no damage and
decrease the environmental effect. A TBL effort
diminishes its ecological tracking by, together
with other effects, meticulously handling its use
of energy and nonrenewable resources and low-
ering production waste, as well as transforming
waste into less toxic matter before disposing of it
in a protected and authorized way. “Cradle to
grave” is first with regard to TBL production
industries, which normally conduct a life cycle
appraisal of products to decide what the current
environmental expense might be from the
involvement of raw materials to fabrication,
delivery, and final disposal by the end user. In
TBL, the community should not give a company
that manufactures and trades goods, which will
produce waste, an independent move. It would be
fairer for the company that produces and trades in
troublesome goods to bear part of the cost of its
final disposal. TBL corporations prevent ecolog-
ically damaging practices, such as over-fishing or
other imperilling consumption of resources. Fre-
quently, environmental sustainability is the more
cost-effective path for a company in the end.
Claims that it costs more to be environmentally
aware are occasionally plausible when the direc-
tion of the company is studied over a period of
time. Usually, sustainability-reporting metrics
are better measured and standardised for environ-
mental matters than for social ones. A number of
Triple Bottom Line
well-known reporting institutions and registries
exist comprising the Global Reporting Initiative,
CERES, Institute 4 Sustainability, etc. The eco-
logical bottom line is connected to the notion of
Eco-capitalism.
“Profit” is the economic value produced by
the company after subtracting the costs of all the
materials, and comprising the cost of the capital
invested. Hence, it varies from established
accounting explanations of profit. In the first con-
cept, within a sustainability framework, the
“profit” detail needs to be perceived as the current
economic advantage enjoyed by the host society.
This is the visible economic effect the company
has on its economic setting and is frequently
confused with being connected to the internal
revenue gained by a company or corporation
(which, nevertheless, is a fundamental starting
point for the calculation). Hence, an original
TBL approach cannot be explained as just con-
ventional corporate accounting revenue plus
social and environmental impacts, unless the
“profits” of the other bodies are included and
comprehended as social advantages.
Seven Drivers
In the easiest terms, the TBL plan concentrates
corporations not only on the economic value that
they supplement, but additionally on the environ-
mental and social value that they add – or elimi-
nate. With its reliance on seven closely connected
revolutions, the change in sustainable capitalism
will be one of the most difficult companies have
ever had to deal with. As the world is moving
rapidly into the third millennium, entities are
embarking on an international cultural transfor-
mation. Corporations, much more than govern-
ments or non-governmental organizations
(NGOs), will be in the driving seat. Paradoxi-
cally, this will not make the transformation any
simpler for business individuals to perform. For
many it will be hard, if not unattainable. Never-
theless, there is no reason why the TBL cannot be
adopted widely. It works equally well for large
and small enterprises, under any kind of owner-
ship structure, and in any location (Avery and
Bergsteiner 2011).
Triple Bottom Line
Markets: Planned – Competitive
Revolution 1 will be powered by market compe-
tition. In the foreseeable future, more than at any
distinct period, companies will act in markets,
both national and international, that are more
open to competition. The resulting economic
shocks will change the world. In the incipient
global order, entire markets will equally turn to
absorbing companies, even businesses. Under-
standing how to uncover the market context and
contingencies that can trigger this process will be
dominant factor in future business existence, not
to mention success. Under the circumstances,
a growing number of corporations are already
finding themselves confronted by clients and the
economic markets regarding details of their TBL
undertakings and actions. Moreover, even though
the markets will certainly witness continuous
cycles founded on larger economic, social, and
political drifts, the demand can only increase in
the long run. As a result, companies will move to
a new approach, applying TBL theory and
accounting to create the business situation for
activity and expenditure.
Values: Hard – Soft
Revolution 2 will be powered by the international
change in human and social values. However, the
values are the consequence of the most powerful
programming that each of the businesses has ever
opened. Whenever they transform, as they appear
to do with every subsequent period, whole civili-
zations can evolve. Companies that have been
standing on firm foundations for decades figure
out sometimes that the world as they experience it
is different.
Transparency: Closed – Open
Revolution 3 is rightly under way, as it is being
nourished by increasing global transparency, and
will speed up. As a result, companies will find
their reasoning, urgencies, undertakings, and
actions under increasingly profound examination
worldwide. Several types of uncovering will be
volitional, but others will develop with the brief
direct implications from the majority of the com-
panies. In many aspects, the transparency revolu-
tion is now “out of control.” Even China is being
2561 T
obliged to open up because of such elements as
the international SARS epidemic that it has
helped to generate.
This “opening up” is itself being moved along
by the conjoint arrival of new value systems and
completely new information technologies, from
satellite television to the internet. The breakdown
of numerous types of long established authorities
also suggests that a broad variety of distinctive
stakeholders will increasingly request informa-
tion on what company is going and working out
what to do. Also, increasingly, they are
employing that information to balance, measure,
and rank the performance of rival companies.
A good example could be the approach taken by
Transparency International and its developments.
Life-cycle Technology: Obsolescence –
Recyclability
Revolution 4 is powered by and – in turn – is
a driving force for the transparency revolution.
Companies are being confronted with the TBL
implications either of industrial or agricultural
actions back down to the origins of the supply
chain or about the connections of their end-
products in transition, in usage and – progres-
sively – after their functional life is over. In this
case, there is an obvious change from companies
concentrating on the acceptability of their end-
products at the point of sale to the recent attention
focused on their action from the cradle to the
grave – that is, from the usage of raw materials
right through to reusing or removal. Administer-
ing the life cycles of technologies and end-
products from batteries to jumbo jets to offshore
oil machineries will be an increasingly dominant
focus of twenty-first century business. T
Partners: Subversion – Symbiosis
Revolution 5 will dramatically speed up the pace
at which new types of co-operation are born
among companies, and among them and other
systems – comprising various leading
campaigning groups. Companies that formerly
saw themselves as avowed adversaries will pro-
gressively involve in and advance new forms of
association with their competitors, which are per-
ceived to keep some of the solutions to the
T 2562
accomplishment in the new setting. None of these
will compulsory to terminate the discord and,
sometimes, even a total conflict. Rather,
campaigning groups will have to find out means
of concomitantly stimulating and performing
with the same business – or even the same
company.
Time: Short – Long
People were frequently told that time is short and
so is money. However, moved by the sustainabil-
ity programme, Revolution 6 will advance
a serious change in the way in which companies
comprehend and handle time. This requires the
opening out of the time magnitude, with many
new events occurring every minute of every day.
Quarterly – and even on-line – reporting demands
are major operators for the current/present time.
On the contrary, the sustainability programme is
focusing companies in the other direction – to
“long” time. Assuming that the majority of public
officials and industry leaders consider it difficult
to forecast even 2 or 3 years in advance, the
extent of the challenge is suggested by the fact
that the emergent programme constrains reason-
ing across decades, periods and, in some occa-
sions, centuries. As time-based competition,
established on the basis founded by methods
such as “just in time,” keeps on accelerating the
tempo of competition, the requirement to create
a more powerful “long-term” extension to busi-
ness reasoning and drafting will come to be ever-
more challenging.
Corporate Governance: Exclusive – Inclusive
Finally, whoever the operators are, the economic
purpose of the TBL programme is the responsi-
bility of the corporate council. Revolution 7 is
powered by the revolutions mentioned before and
additionally results in a completely new turn
being put on the previously dynamic corporate
governance deliberation. At present, new ques-
tions are being asked. For example, what is the
activity for? Who should have an opinion on the
way companies are run? What is the proper bal-
ance among shareholders and other stakeholders?
And what stability should be reached at the level
of the triple bottom line?
Triple Bottom Line
The best organizing corporate governance, the
highest opportunity that companies can develop
towards truly sustainable economies. Nowadays,
nevertheless, most TBL promoters have not cen-
tered their projects around boards; nor, on most
occasions, do they have a comprehensive percep-
tion of the manner in which boards and corporate
governance structures act. This, however, repre-
sents an essential fighting arena in the future.
Clearly, even a growing part of corporate sustain-
ability matters revolves not only close to a system
and goods plan, but also near to the model of
corporations and their value chains, of “business
ecosystems” and, eventually, of markets. Practice
evokes the best method of guaranteeing that
a certain corporation completely addresses the
TBL programme is to include the significant
demands into its corporate DNA from the very
beginning – and into the specifications of the
markets it attempts to serve.
Obviously, companies and corporations are
still far from achieving this aim, but substantial
advances have been made in the last few decades.
The core of sustainable industry deliberation is in
the method of moving from the public relations to
competitive advantage and corporate governance
– and, in the system, from the company walls and
gates to the council chamber. A succession of
waves of governmental constraint has been driv-
ing these changes.
Civil Pressure Waves
Since 1960 and up to the present-day, three con-
siderable waves of civil pressure have modelled
the environmental programme. The functions and
duties of governments and the public sector have
changed as feedback to each of these three waves
and will continue to change. In spite of the fact
that each wave of activism was accompanied by
a downward wave of public apprehension, each
sequential wave has considerably broadened the
programmes of politics and businesses:
• Wave 1 brought about the comprehension that
environmental influences and the needs of
natural reserves have to be limited, resulting
in a basic outflow of environmental rules. The
business reply was cautious, concentrating on
concession, at best.
Triple Bottom Line
• Wave 2 triggered a deeper comprehension that
modern types of manufacturing technologies
and new kinds of products are required,
climaxing in the awareness that development
practices have got to become sustainable – and
an understanding of economic activities,
which would frequently have to take the
lead. The reaction of the business sector
started to become more competitive.
• Wave 3 focuses on the increasing awareness
that sustainable development will require
profound modifications in the governance
of corporations and in the entire process of
globalization, with a modernized focus on
the authorities and on the civil community.
Nowadays, in addition to compliance and
the extent of competition, the business
response will have to be centered on market
formation.
Key Issues
The triple bottom line is a type of balanced score-
card that seizes in numbers and observations the
extent to which any company is or is not produc-
ing value for its shareholders and community.
Triple bottom line (TBL) reporting is aimed at
seizing, illustrating, and measuring the conse-
quences of the company’s actions on society.
However, there is still a large number of man-
agers, owners of enterprises and stock, analysts,
business schools, and others who subscribe to the
Anglo/US business model, which rejects the TPL
approach, i.e., who subscribe to Milton
Friedman’s (1970) thesis that “the business of
business is business.”
Future Directions
The challenges of the twenty-first century are
compelling companies to transform the methods
of operation they use. Concerns such as climate
alteration, natural resource consumption, and the
energy crisis are badly affecting companies head
on and challenging the idea that concentration
should be focused on the details of the activities
2563 T
rather than on quarterly financial outcomes. It is
no longer adequate to maximize solely short-term
shareholder value. Preferably, companies must
notice the economic, social, and environmental
impacts of their actions – seen as sustainability or
corporate social responsibility.
As a new notion in the business field, sus-
tainability is thought over the boundaries of
twenty-first century business pattern, as well as
an asset for those companies competing in the
long term. The most frequently quoted descrip-
tion of sustainability is “Operating in ways that
meet the needs of the present without
compromising the ability of future generations
to meet their own needs” (Brundtland Commis-
sion 1987).
The notion of sustainability covers all charac-
teristics of a company, comprising the research
and development of new end-products that are
suited to the demands of a secure environment;
innovation and originality, where companies
track the using or reducing of waste; marketing
and advertisements that address or support
regional matters and social causes; and enlarged
stakeholder commitment, occasioning communi-
cation with community collaborators, suppliers,
competitors, clients, and commissioners for the
natural environment.
Sustainability is rapidly becoming a key mar-
ket strength set alight by client, shareholder, and
stakeholder requests. A framework to assist with
operating through this sustainability lens is the
TBL, which concentrates companies not only on
the economic value they are supplementing, but
also on the environmental value and on the social
value they are supplementing – and eliminating.
The three lines stand for society, economy, and T
environment. The community relies on the econ-
omy, and the economy depends on the interna-
tional ecosystem whose condition stands for the
final bottom line. In a newborn globalized eco-
nomic space, an implication in corporate social
responsibility represents an enterprise for various
kinds of triple bottom line reporting. This will
vary from the more limited changes required
to handle only the environmental issues. One
way to check a sustainable company is the extent
to which its actions can be prolonged continually
T 2564 Triple Bottom Line Accounting

without negatively changing the elements that

foster the life and formation of sound nations Triple Bottom Line Accounting
and the natural environment.
▶ Social Accounting

Cross-References

▶ Corporate Governance
▶ Corporate Social Responsibility Triple Bottom Line Reporting
▶ Corporate Sustainability
▶ CSR and Poverty ▶ Global Reporting Initiative
▶ Integrated Management Systems ▶ Integrated Reporting
▶ Sustainability

References and Readings

Triple Bottom Line Risk Management
Avery, G. C., & Bergsteiner, H. (2011). Sustainable lead-
ership: Honeybee and locust approaches. New York:
Routledge. ▶ Sustainability Risk Management
Bocean, C., & Barbu, C. (2007). Corporate governance
and firm performance. Management & Marketing
Journal, 5(1), 125–131. Universitaria Press.
Brown, D., Dillard, J., & Marshall, R. S. (2006). Triple
bottom line: A business metaphor for a social con-
struct. Portland, OR: Portland State University, School Triple Bottom Line Success
of Business Administration. www.recercat.net/
bitstream/2072/2223/1/UABDT06-2.pdf. Retrieved
17 Jun 2011.
▶ Business Cases for Sustainability
Brundtland Commission, Our Common Future, 1987,
Oxford University Press
Elkington, J. 1997. Cannibals with Forks: The triple bot-
tom line of 21st century business. Capstone: Oxford.
Elkington, J. (2004). Enter the triple bottom line, The
Triple Bottom Line: Does it All Add Up? Assessing Triple Bottom-Line Reporting
the Sustainability of Business and CSR edited by
Adrian Henriques and Julie Richardson. Earthscan: ▶ Disclosure (CSR Reporting)
London
Goethe-Institut (2008). Sustainability – From principle to
practice. http://www.goethe.de/ges/umw/dos/nac/den/
en3106180.htm. Retrieved 16 Jun 2011.
IISD (2002) Business and sustainable development:
A global guide. Winnipeg: International Institute of
Sustainable Development. http://www.bsdglobal.
Triple-Win Situation
com/tools/principles_triple.asp. Retrieved 16 Jun
2011. ▶ Business Cases for Sustainability
Milton, F. (1970). The Social Responsibility of Business is
to Increase its Profits, The New York Times Magazine,
September 13
Quinn, L., & Baltes, J. (2007). Leadership and the triple
bottom line – Bringing sustainability and corporate
social responsibility to life, A CCL Research White Trisector Partnerships
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Spreckley Freer, Social Audit - A Management Tool for
Co-operative Working, 1981, Beechwood College ▶ Partnership
Ltd., UK. ▶ Partnerships for CSR
Trust
Trust
Adriana Schiopoiu Burlea1 and Eduardo Tomé2
1
University of Craiova, Craiova, Dolj, Romania
2
University Lusiada da Farmalicão, Vila Nova de
Farmalicão, Portugal
Synonyms
Commitment; Confidence; Corporate trust; Faith;
Honesty; Legitimacy; Respect
Definition
There are many ways of defining trust, but some
of the most important are a predisposition to
accept to show our vulnerability to others, an
expectation of competence and good intentions,
and the ability of understanding others and use
them as a reference (Blomqvist 2005).
Therefore, trust is a feeling that predicts
a particular behavior of a person and is related
to actions and their results, the vulnerability of
the actor, the uncertainty and complexity of the
business environment, intrinsic motivation, and
to risky decisions. Trust is the cornerstone of
every business relationship, because without
trust, a sustainable competitive advantage cannot
be built. But, paradoxically, nowadays, the levels
of trust in organizations are in a continuous
decline because of expediency and shareholders’
rush for profit.
Introduction
We live in a world of permanent scandals, per-
manent crises, and permanent outbreaks of fear.
However, if we step aside from the media and
social circus, we will observe that, as Woody
Allen put it in his most recent movie “Midnight
in Paris,” we live in the only known planet where
there is life, so we are somehow a unique miracle.
At any rate, in this messy life we live in,
trust and social responsibility (SR) are two
2565 T
extraordinarily important facts. Therefore, we
have to trust to live. We trust our friends, our
family, our neighbors, our government, and our
bosses. Without trust, we descend into paranoia,
which is, in fact, a huge psychological disease.
We also need to be socially responsible because
we do not live alone and some people depend on
us, but even more importantly we depend on a lot
of people. Moreover, for that interdependence to
take place and be fruitful, trust is an essential
element. Furthermore, when trust is broken, we
may expect the law to be enforced and power to
be exercised toward us. The Aristotelian
approach of trust is related to the “eudaimon,”
or “they who live the good life,” essentially
entwined with the virtue of honesty and integrity
as “the feeling that the other would never do an
injustice to one” (Aristotle 2002). Baier (1986)
emphasizes the Aristotelian approach and argues
that trust is related not only with “goodwill,” but
with less and unequal power relations between
the parties.
Taking into consideration the various ingredi-
ents that make up the structure of the trust (i.e.,
confidence, reliability, predictability, ability,
competence, expertness, intentions, altruism,
loyalty, integrity, fairness, character, respect,
and security), we can argue that social responsi-
bility (SR), as a mechanism related to trust, is
usually used to describe a type of behavior by an
economic agent that takes into account the larger
social environment in which that behavior takes
place. The economic agents in question are indi-
viduals, organizations (private, public, and third
sector), regions, and countries. By taking the
broader social environment into account, the
agent distances herself from a form of conduct T
in which his/her own benefits would be maxi-
mally accrued, but the final social result would
be smaller. It could be considered that socially
responsible behavior, or “correct” behavior, is
that wherein the agent only takes to his/herself
what is socially due. When an agent acts against
the SR rule, his/her behavior is socially irrespon-
sible and has to do with social irresponsibility
(SI). Therefore, trust becomes a two-dimensional
phenomenon that acts not only on individual, but
on organizations too, and corporate social
T 2566
responsibility (CSR) is the responsibility of pri-
vate profit-seeking organizations. In this context,
we consider that social welfare is met by
a welfare mix. This welfare mix is composed of
companies, the public bodies, nonprofit private
organizations (private but not profit seeking), and
families, and some of those entities may be
national, others international.
This generic picture we have just drawn can be
used in relationship with legitimacy, and this
situation may be analyzed in terms of the purpose
of the organization’s sustainable development in
society. According to the first perspective, we
have to take into consideration that in the global-
ized world of today’s economy, competition is
the rule, businesses are long-term sequences,
and news scrutiny is permanent. Therefore, “lies
have small legs” and “cheating” is not a good
strategy. Even if it is said that “a lie thousand
times repeated can be transformed in truth,” in
fact what we observe is that “we can fool a person
all the time, but we can’t fool everybody more
than a few minutes.” So, in order to have success
in the long run, companies have to play fair. This
means that, by and large, they have to be trust-
worthy, and this implies that they have to be
socially responsible.
The four levels of trust (level 1: trust in
yourself – trust in your competences and that
develops an affective commitment; level 2:
trust in others – mutual trust; level 3: trust in
managers – trust in evaluation process; level 4:
trust in organization – contractual trust related to
a normative commitment) allow us to affirm that
trust is fundamental in the relations with other
individuals and organizations, given that most of
the successful businesses are based in partner-
ships. A good working relationship between
organizations is not easy to establish (psycholo-
gists speak of the initial moment, the group
phase, and the team phase). More than that in
the turbulent world of today, surprises happen
all the time, and trust is the decisive element
(with patience) to overcome many business
stresses.
Trust is also extremely within the organiza-
tions. As an example, the knowledge-based econ-
omy (KBE) generated knowledge-based
Trust
organizations (KBOs). In those organizations,
trust is essential for actions to be successful in
conditions of uncertainty and risk.
Trust is also a crucial mediator of results.
Trust is essential to build an efficient cooperation
and an efficient communication. Trust reduces
the transaction costs and increases the benefits.
Indeed, trust can be a source of competitiveness.
In this context, Morton Deutsch (1958)
highlighted the relationship between trust and
cooperative behavior of the people. Later, Dale
Zand (1972) defined trust as behavior in the con-
text of vulnerability and disutility, and Mayer
et al. (1995, p. 712) consider that trust is “the
willingness of a party to be vulnerable to the
actions of another party.” Finally, it is said that
“trust is like a porcelain jar, once broken, it is
impossible to rebuild,” and in a globalized world
of today, trust may be seen as an asset, of orga-
nizations, that once lost, it is very hard to replace.
Key Issues
Trust and Organizations
There are two main ways of managing an organi-
zation (Blomqvist 2005) in order to face the
uncertain world of today: based in control (auton-
omy is decreased) and/or based in trust (auton-
omy is increased). In the traditional top-down
organizations, the subordinates should trust the
bosses that were in command. With the Third
Industrial Revolution and the change to very hor-
izontal forms of power, employees had to learn
the perspective of others, to appreciate the com-
plementarities and to value interdependency.
Paternalistic bureaucracies eliminate the creation
of knowledge in favor of authority, deference,
and dependence.
These organizations are very much put in
jeopardy today and in the “new” organizations
Knowledge is the main asset, and services the
sector in which they operate. Knowledge man-
agement (KM) is based in a strategy of develop-
ment of knowledge processes: share, create,
transfer, stock, and reflect on knowledge. In
these organizations, a “knowledge friendly”
environment has to exist and should be based on
Trust
trust as an essential characteristic of that “new”
environment.
In the development of an affective commit-
ment in organizations, the trust is an implicit
important factor. The role and the nature of
the trust in organizations are determined by the
ethical principles. Therefore, a part of the trust is
interpersonal: expectations guide the work of
a team. But, another part of trust is impersonal:
here we talk about the shared values in the orga-
nizations, meaning reputation, routines, pro-
cesses, reports, and structures that support the
predictability.
Interpersonal trust is promoted as a base for
objectivity that can be considered “as an alterna-
tive to personal trust” (Porter 1995, p. 90). Inter-
personal trust is, on the one hand, a base for
communicative-integrative processes and for
meaningful knowledge creation in organizations
(Blomqvist 2005). On the other hand, it is
a mechanism that creates trust among others.
Therefore, interpersonal trust becomes
a cognition-based trust that puts into play the
competencies and the abilities of individual and
develops affective commitment.
Impersonal trust contributes to a translation of
the trust from the person to organization moti-
vated by the ethical principles that integrated
the trust in organization as a source of legitimacy
and confidence. This translation emphasizes the
importance of corporate governance as a support
of the trust and ethical behavior. Unfortunately,
the human nature of the trust cannot allow the
organization to trust the individual. The trust
relationship between individual and organization
is one side from individual to organization. This
unique sense of relationship is also highlighted by
the level of the organization legitimacy that
implies congruency of shared values and norms.
Therefore, on the one hand the trust is involved in
decision-making process as a determinant factor
that allows risk-taking decisions (Luhmann
1991), and, on the other hand, the risk creates
the opportunity for increasing sustainable trust
as an ingredient of the organizational develop-
ment. In this context, the impersonal trust is per-
ceived as an affect-based trust related with
concern for development of the others’
2567 T
competencies and abilities, and with
a normative commitment.
The connection between interpersonal and
impersonal trust is represented by the individual
beliefs and organizational shared expectations
and ideals. The legitimacy and organizational
reputation is based on both interpersonal and
impersonal trust as a catalyst for sustainable
development.
Processes Which Generate Trust and Their
Consequences
The motivation to trust may be intrinsic (based on
the person’s or organization’s own objectives) or
extrinsic (based on money, income, etc.). Taking
into considerations the intrinsic side of trust, we
identified at least seven types of processes that
may generate trust in an organization; each one of
them has a different basis:
(a) Optimistic or mutual trust: We trust on the
base of reciprocity and confidence in the
other person or organization.
(b) Opportunistic trust: We trust because we
believe we will gain something by trusting
even if we do not have any other reference.
This trust allows us to take some benefits
from the other’s action.
(c) Competent trust: We trust because we believe
that the other person is competent, and fur-
thermore we will complement that person and
he/she will complement us. The negative
consequence of this trust may materialize in
upstream or downstream trust, depending on
the position of the individual in this trustee
relationship.
(d) Referential trust: We trust because we see
somebody as a reference to be followed; this T
type of trust is based on integrity.
(e) Intentional trust: We trust based in goodwill
and in good faith, but this trust, if it is not
mutual, can lead to distrust.
(f) Identitary trust: We trust because we become
identified with the person or we want to
become a member of a group or team.
(g) Affective trust: We trust because we love and
like to believe that the trust is useful for us
and for the other, and this trust is related with
affective commitment.
T 2568
Taking into account the processes which gen-
erate trust, we argue that knowledge is the main
resource of the big successful organizations of
today and trust may be its main helper, because
it is well known that in KBOs:
(a) Collective knowledge is more important than
individual knowledge
(b) Sharing and transferring knowledge is deci-
sive to have success
(c) The combination of different kinds of
specialized knowledge generates profits
(d) The efficiency of a company depends on the
ability of integrating different kinds of
knowledge
(e) Networks are decisive to the production of
new knowledge
Without trust, these statements are seriously
undermined, and trust is a major contributor to
their verification. Knowledge management
implies a strong level of collaboration: a high
sense of being and a high respect for the others.
Therefore, organizations have to adapt continu-
ously and it is necessary to create a “context in
which employees at every level become indepen-
dent agents, take responsibility, experiment and
make mistakes and learn as they strive for con-
tinuous improvement in every aspect of the firm’s
total transformation process” (Spender 1996).
For knowledge to be created, the identity of the
employee cannot be dependent on or subsumed
by others. There has to be room to permit
individual and collective initiatives. The idea
of “knowledge work” (Alvesson 2004) is based
in symbolic and intellectual skills. This type
of work implies extensive communication
and coordination, it implies higher trust to over-
come higher uncertainties, and it is also needed
to be able to make connections at a deep human
level.
In organizations, but particularly in KBOs,
competent trust is a main source of competitive-
ness because in labor relations, opportunistic
trust and intentional trust may also exist. “Old
type” and “gentlemanly” business relations were
based in referential trust and intentional trust, or
even affective trust.
Trust
Causes of Mistrust, Conviviality, and Time
The causes of mistrust can be linked to asym-
metry of information, past history, ignorance,
lack of information, difficulty of understanding,
stereotypes or basically differences, and
a strong self-interest. In short, organizations
trust those they are familiar with. We emphasize
that face-to-face meetings and shared ceremo-
nies in nonworking environments are essential
to build trust because in these meetings the
parties interact and realize that one party can
achieve the goal of the other. Consequently,
cooperation, collaboration, and conviviality are
decisive in building trust and eliminating mis-
trust. Given that conviviality takes time and that
time is a very scarce resource, the analysis of
trust puts time in the economic agenda again.
Evidently, mistrust can be justified in social
relations and as a corporate strategy, but it is
also costly and can be extremely expensive
when the loss of trust becomes evident and the
trust relationship is damaged and is transformed
in conscious distrust. In this context, we con-
sider that it is very difficult to build trust and it
is very easy to destroy it. Therefore, up to
a point, trust and legitimacy have the same
characteristics. But, the difference between
them consists not in their destruction time
cycle (the destruction time cycle is shorter for
both trust and legitimacy), but in their building
time cycle (i.e., the time cycle for building trust
is much shorter than the time cycle for building
legitimacy). The concern for the sensitivity of
the trust and for the legitimacy can prevent risky
decisions and avoid their associated costs.
Economic Consequences of Trust
Trust generates more innovation than lower
prices or challenging markets, and without trust,
transaction costs raise and the strength of a com-
pany is diminished: instead of a community lead
by shared interests, the organization becomes
a set of units in competition. By generating inno-
vation, knowledge management gives the organi-
zation a competitive edge and innovation may be
radical or incremental.
Trust
Incremental innovation equates to “doing
things better” and radical innovation equals
“doing things differently.” The first kind of pro-
cess changes the value chain and improves the
production function and is based on a strategy of
efficient volume and value added, with exploitation
of knowledge. The second process changes the
company and creates a new production function.
Therefore, this process is based in the exploration of
knowledge, in the increase of the total productivity
of factors of the company, and in the contribution of
knowledge to that productivity. Both processes are
driven by knowledge but are fuelled by trust. Trust
is decisive in achieving complex agreements, as in
the discussion of employment contracts, because
the organizational trust can decline over time
if there exist any breaches in contract. Therefore,
trust appears as a result of an intangible relation-
ship based on integrity, vulnerability, and
responsibility of partners involved in.
Future Directions
Are We Confronted with a Crisis of Trust?
In 2011, there is not less trust in the world than
existed before. But the world is confronted with
a crisis of trust. This is owing to the fact that the
world is much more complex and we need
much more trust now than we needed 50, 100,
or more years ago. We are much more
interdependent so we need to trust more. Conse-
quently, there are people who live by making
business on our trust, not only managers but
news industry persons: fear and disgrace always
sell more than security and happiness. Politicians
also bank on our trust in them (the “Good Man”
we choose), and on our mistrust of the other (the
“Bad Man” we do not vote for). Therefore,
mistrust is unsustainable in the long run – para-
noia, Big Brother is watching you, SS20 missiles,
Salazar, or North Korea. In this context, the rela-
tionship between trust, the three levels of
organizational justice (distributive, interactional
and procedural), and commitment (affective,
continuance and normative) will highlight the
2569 T
importance of trust in building a sustainable
competitive advantage.
Corruption, as a phenomenon that has
destroyed the reputation of organizations and
continues to decrease levels of trust, is a subject
that puts in question the importance of trust in
building and maintaining organizational legiti-
macy. Enron, Tyco, WorldCom, and other com-
panies that destroyed public trust in corporations
motivated a rethinking of the role of corporations
in knowledge-based society. Such analysis will
create a new approach to different types of trust
by taking into account the decrease of the credi-
bility of organization due to corruption.
Cross-References
▶ An Aristotelian Approach to Sustainable
Management
▶ Ethical CSR
▶ Legitimacy Theory
▶ Risk Management
▶ Servant Leader/Servant Leadership
▶ Stakeholder Theory
▶ Trust and CSR
References and Readings
Alvesson, M. (2004). Knowledge work and knowledge-
intensive firms. New York: Oxford University Press.
Aristotle. (2002). Nicomachean ethics. Oxford: Oxford
University Press.
Baier, A. (1986). Trust and antitrust. Ethics, 96(2),
231–260.
Blomqvist, K. (2005). Trust in a dynamic environment: Fast
trust as a threshold condition for asymmetric technology
partnership formation in the ICT sector. In K. Bijlsma- T
Frankema & R. K. Woolthuis (Eds.), Trust in pressure,
investigations of trust and trust building in
uncertain circumstances (pp. 127–147). Cheltenham,
UK/Northampton, MA: Edward Elgar Publishing.
Deutsch, M. (1958). Trust and suspicion. Journal of
Conflict Resolution, 2, 265–279.
Luhmann, N. (1991). Trust and power. Ann Arbor, MI:
University Microfilms International.
Mayer, R. C., Davis, J. H., & Schoorman, F. D. (1995). An
integrative model of organizational trust. Academy of
Management Review, 20, 709–734.
T 2570
Porter, T. M. (1995). Trust in numbers. Princeton, NJ:
Princeton University Press.
Spender, J.-C. (1996). Making knowledge the basis of
a dynamic theory of the firm. Strategic Management
Journal, 17, 45–62.
Zand, D. E. (1972). Trust and managerial problem solving.
Administrative Science Quarterly, 17, 229–239.
Trust and CSR
Mohammad Nabil Almunawar1 and
Kim Cheng Patrick Low2,3
1
Faculty of Economics, Business and Policy
Studies (FBEPS), Universiti Brunei Darussalam,
Bandar Seri Begawan, Sultanat,
Brunei Darussalam
2
Universiti Brunei Darussalam, Gadong,
Brunei Darussalam
1
University of South Australia, Adelaide,
Australia
Synonyms
Credibility; Integrity; Reputation; Social capital
and CSR; Trustworthiness; Trustworthy
Definition
Trust and Corporate Social Responsibility (CSR)
are two interrelated terms that need to be under-
stood how they influence each other.
Trust can be defined as a necessary reciprocal
relationship between two entities in order to give
confidence in the strongest sense to the counter
parties and belief in the mild sense in securing,
establishing and strengthening other relation-
ships and to create mutual benefits between
them. On the individual level, human beings are
social beings who cannot live alone; therefore,
they need to interact or relate with one another to
fulfill their (individual or respective) needs. To
interact positively, a level of trust is needed. On
the corporate level, a trust between a corporate
and (any of) its stakeholders and with the society
as a whole, must be established to create mutual
benefits. It is important to comprehend the
Trust and CSR
reciprocity of trust, meaning that both parties
involved in the relationship establish mutual
confidence by showing good intention and
guaranteeing minimal or no risk emanated.
Trust is an essential element of social capital.
The theory of social capital assumes that the
level of trust among two groups of people
increases if the level of interaction between
them intensified. Francis Fukuyama (1995), in
his book “Trust: the Social Virtues and the
Creation of Prosperity,” argues that social capital
is the key factor for a corporation to grow into
a large and sustainable multinational corporation.
Social responsibility is defined as a commit-
ment of a person to reckon the implication(s) of
his/her actions on the social system, considering
his/her contributions to his/her community or
larger society. So basically, social responsibility
has an intrinsic caring intention. Thus, CSR is
a corporate commitment to contribute to its sur-
rounding community and society at large for
mutual benefits. Trust is tightly related to care;
virtually there is no trust without care. Since
caring is an intrinsic value of CSR, meaning
that CSR is very much about the provision of
care, companies practicing CSR will build or
strengthen trust that becomes a source of social
capital for them to grow further.
Introduction
Trust is one of the main foundations of human
life. As a social being, a person can hardly sustain
his/her life without interacting with other fellow
beings. Besides, to interact, a level of trust is
needed, especially when such interaction is
repeated in a relationship. Thus, the existence or
establishment of trust is a critical, essential com-
ponent of all social relationships. In an organiza-
tion, trust between its leader and members and
among members is crucial to make the organiza-
tion grow and be respected. In any business orga-
nization, trust is an essential “nutrition” to grow
and sustain. For example, if customers of a firm
lost their trust in the firm, then the firm will lose
(its image, credibility and customers, and this
may even lead to its bankruptcy). On the other
Trust and CSR
hand, if customers trust the firm, they will stay
transacting with the firm (be loyal, loyalty is
promoted) and may spread the goodness (good-
will) of the firm to others (words of mouth),
which help the firm grows its business.
Fukuyama (1995) laid a theory that trust in
non-kin relationship in a society is the key to
allow the society to develop large corporations.
He asserts that, “One of the most important les-
sons we can learn from an examination of eco-
nomic life is that a nation’s well being, as well as
its ability to compete, is conditioned by a single,
pervasive cultural characteristic: the level of trust
inherent in the society.”
Trust is an essential component of social cap-
ital, an ability of people to work together to
achieve a common goal in a group or organiza-
tion. Based on trust, people in a group (or orga-
nization) ordinarily work together harmoniously
to achieve the common goal(s); the group or
organization may face problems, but they, and
each chips in, help each other with minimal
supervision, through thick and thin, and ulti-
mately achieve the goal(s). Consider if the trust
in the group is low (or worst, trust does not exist),
it will not be able to face problems and challenges
since the members of the group cannot cooperate.
The group will exhibit stress, disoriented or even
disorganized. Only with a strong leader with con-
stant control and supervision the group may
achieve the goal. However, the group hardly
grows and cannot be sustained. In other words,
it is most likely that the group will disintegrate or
break away before the goal is achieved.
It is abundantly clear that the costs of maintaining
a high-trust organization, where the members
exhibit high-trust to one-another (a higher sense
of unity), is much cheaper then maintaining a low-
trust organization. In a business organization,
a high-trust firm (being highly united) will poten-
tially exhibit agility and flexibility in getting results
and things done, and has the necessary competitive
advantage over a low-trust firm (low sense of
unity due to lack of unity among the members).
Before we explore the connection of trust and
CSR, it would be better if we understand
the essence of corporation and their obligations
to society. Drucker (1993) in his book
2571 T
Concept of Corporation defines a business as an
organization – a social structure that brings
together human beings in order to satisfy economic
needs and wants of a community. Although the
main business goal is to make a profit and grow,
a business or corporation cannot be separated from
a society. Since a corporation is an integral part of
a society, it has a duty and responsibility to con-
tribute to society. Drucker argues that corporation
must “fulfill automatically its social obligations in
the very act of seeking its own self-interest.” He
further says, “An industrial society based on the
corporation can only function if the corporation
contributes to social stability and to the
achievement of its social aims independent of the
good will or social consciousness of individual
corporate managements.”
The reputation of a corporation is highly
related to its contribution to the society. Irrespon-
sible acts, greediness and malfeasance will
quickly be disclosed in this information age.
With the Internet, information can be reached
easily; therefore, unreliable and irresponsible
corporations cannot hide themselves and will
face the consequence of losing trust from the
society. Services and financial corporations are
sensitive to trust, losing trust means losing trans-
actions, trade and business. Unfortunately, trust is
fragile and hard to build, but easy to damage and
rebuilding the damaged or destroyed trust is
much harder than building trust from scratch.
The perception of a good corporation is impor-
tant not only from the perception of the share-
holders, but also from the perception of other
stakeholders, including the local community and
the society at large. Hofmeister (2010), the top
US-based Shell executive, said that all large cor- T
porations have to carefully consider how they are
perceived by their stakeholders. Based on his
experience, he asserts that “corporate behaviors
of all kinds are being scrutinized much more
closely today than they were in the past, and the
public face that a company presents has never
been more crucial to its long-term fortunes.”
Many large corporations have been facing
crises of confidence because of their irresponsible
behavior. Recently, we have witnessed mega
scandals of large corporations in the
T 2572
United States such as Enron, WorldCom,
Goldman Sachs and some other giant corpora-
tions. Top executives from troublesome financial
corporations, at the time of their crisis where the
tax used to bail them out, are still getting millions
of dollars bonuses. This behavior greatly destroys
the trust of the society, which may lead to distrust
of the whole financial system.
The 2010 Edelman Trust Barometer (2010)
reveals some interesting findings. Although over-
all trust in business is increasing globally, it is
still very much fragile since people still believe
that once the crisis is over, business and financial
companies will revert to their business as usual.
Trust and transparency are now considered as
important, at par with quality of products and
services. It is interesting that partnerships rooted
in societal good are considered in earning trust.
Collaboration of a company with NGOs to solve
global challenges such as global warming, poverty,
education and healthcare is well respected and
contributes to earning trust. Another interesting
finding is that the majority of the public considers
that all stakeholders are equally important to
consider when a CEO makes decisions. Here is an
important quote from the report: “Now is the time
for companies and CEOs to deliver performance,
communicate frequently and honestly, and consider
the role of business in society” (Edelman 2010).
Besides brand recognition, corporations now-
adays increasingly depend on trust from their
stakeholders. Thus, CSR is increasingly impor-
tant since it concerns the responsibility of corpo-
rations to their stakeholders. Being aware that
social issues are as important as other strategic
business issues, according to a report on CSR
from the World Business Council for Sustainable
Development (WBCSD), the number of corpora-
tions managing social issues is increasing. In
relation to companies doing CSR, the report men-
tions that “For any company, giving a high prior-
ity to CSR is no longer seen to represent an
unproductive cost or resource burden, but,
increasingly, as a means of enhancing reputation
and credibility among stakeholders – something
on which success or even survival may depend.”
Reputation and credibility are two important
components of trust. Therefore, companies which
Trust and CSR
are giving high priority to CSR will gain more
trust from their stakeholders who can be
transformed to more markets and revenues. Dur-
ing a crisis, high-trust companies will have the
resiliency to survive and should be able to
recover quickly after the crisis.
Sztompka (2000) in his book “Trust:
A Sociological Theory” discusses trust thor-
oughly. According to Sztompka, there are three
bases putting trust to targets (either persons or
social objects such as companies): reputation,
performance and appearance.
First, putting trust based on reputation. Repu-
tation is basically a track-record of past actions.
A good track-record implies a good reputation
and vice-versa. The company should build repu-
tation as an investment as Dasgupta (1988) says
that “reputation is a capital asset.” Second, put-
ting trust based on performance. Performance is
the result of measurement of current actions.
Relying on trust based on performance is riskier
than relying on trust based on reputation since
performance does not consider past actions. How-
ever, performance measured by highly regarded
institutions is normally reliable. Third, putting
trust based on appearance, that is, relying on trust
on external characteristics, demeanor or labels,
assuming those characteristics, demeanor or
labels reflect personality, identity or status (Fig. 1).
In The Healthy Company, Rosen (1991)
argues that trustworthiness can be divided into
five characteristics:
• Credibility: The quality and believability of
the leader’s word.
• Dependability: The person or the company
would do what (s)he would say or promise.
• Predictability: Being consistent in ensuring
open communication and following the idea
that employees, just like leaders, do not like
surprises.
• Valuing the Common Good: Demonstrating
the ability to put aside self-interest for the
good of the team, customer and others.
• Emotional Safety: Valuing everyone’s health
(physical and emotional), self-image, and
belief systems with compassion and wisdom
Several Asian religious and cultural perspec-
tives argue trust as below:
Trust and CSR
Reputation Performance
Trust
Appearance
Trust and CSR, Fig. 1 Three bases of trust
The Chinese, very much influenced by Confu-
cianism, also stress on friendships and relation-
ships (guanxi) as the key foundation of trust (xin)
when doing business. A gentleman (lady) (jen)
should be careful in deciding whom (s)he will
follow and/or trust.
As a gentleman (lady) (jen), one must be
benevolent (ren) and kind, keeping one’s prom-
ises to friends (business associates), taking
delight in advertising others’ merits and building
goodwill. To make friendships, and more criti-
cally, trust (xin) last, one should purposely stress
friends’ good points and avoid exposing their
demerits. If an act is shameful (che), one should
avoid that act, and even not think about it. And if
an act should cause a dent on one’s character and
integrity (lien), one should then avoid such an act.
Besides, Confucianism also stresses reciprocity
(shu), and one good act deserves another, build-
ing trust between friends and business associates/
partners. In doing all these, peace, harmony (her
ping), and loyalty (zhong) exist among friends
(business owners/ managers and stakeholders);
and there is prevailing trust (xin) and good busi-
ness relationships (and trust (xin), indeed, grows
the relationships).
In Japan, where some elements and influence
of Confucianism prevails, the spirit of harmony
(wa) is stressed. In business terms, wa is per-
ceived in the Japanese avoidance of self-assertion
2573 T
and individualism as well as the preservation of
good relationships even though differences in
opinion exist. And trust between individuals is
basically built by giving face (kao) or respect to
others, and the latter is one of the basic factors of
the Japanese social system. Face (kao) is
a symbol of personal pride and forms the basis
of an individual’s reputation and social status.
Preserving or saving face comes through
avoiding open conflicts and direct criticism wher-
ever possible. And overall, causing someone to
lose face can be disastrous for building trust and
continuing business relationships.
Directly related to the Japanese concepts of
“wa” and “kao,” “omoiyar” refers to the sense of
empathy and feeling of loyalty encouraged in
Japanese society and practiced in Japanese busi-
ness culture. “Omoiyari” literally means “to ima-
gine another person’s feelings”; thus, building
a strong relationship based on trust and mutual
feeling is critical for business success in Japan.
To succeed in doing business with the Indians
and having good relationships with one’s stake-
holders, it is vital to know and understand the
Indian concept and practice of trust. Among the
Indians, there seems a perceptible lack of privacy
and a smaller notion of personal space, where
several generations often live together under
one roof. And for Indian business practices, this
places an added importance on interpersonal con-
tacts, avoidance of conflict, and a more indirect
approach to communication to build trust and
relationships among business associates and
partners.
For the Indians, to build trust, face and self-
esteem is an essential part of Indian culture. And
thus, any individual criticism in business situa- T
tions must be done cautiously and with sensitiv-
ity. Additionally, to the Indians, making
decisions is often a slow and thoughtful process.
And deadlines should, in fact, not be rushed;
impatience is construed as forceful (tantamount
to lack of trust), impolite and disrespectful.
Perhaps to make the picture of trust complete,
it is important to mention the Islamic term or
notion of trust. The Islamic term of trust is
amanah. There are two dimensions of trust in
Islam, the vertical dimension, where God (the
T 2574
Islamic term of God is Allah), put His trust in
mankind to utilize resources on the Earth and to
manage affairs on Earth according to His Will. In
the vertical dimension, mankind is requested to
put trust in God that His laws and guidance are
the best laws and guidance for mankind. The
other dimension is the horizontal, trust among
mankind. In Islam trust is very important to pre-
serve, since basically there is no belief without
trust. The Holy Qur’an says: “Indeed, Allah com-
mands you to render trusts to whom they are due
and when you judge between people to judge with
justice. Excellent is that which Allah instructs
you. Indeed, Allah is ever Hearing and Seeing.”
(Qur’an 4:58). Being a trustworthy and honest
person is one of the essential characters to be
preserved by every Muslim.
CSR is basically an onus and a duty, meaning
that it should be conducted based on sincerity,
awareness and action(s) that contributing to soci-
ety is indeed a good thing. Technically, can
a company gain trust in return if it invests on
CSR? Lewis (2003) argues that CSR is now
used by stakeholders as criteria for judging com-
panies and becoming a potential basis for
renewed trust between a company and its
stakeholders.
Key Issues
In business, not to speak of CSR, one should not
cheat people, and instead, gain confidence, good-
will and trust of others. One of the key issues is
how, for the company, to establish, build and
promote the trust of the company’s stakeholders
of the company itself. Trust is not tangible, thus
not easily seen at first sight, but trustable compa-
nies would profit from the quality and sustain-
ability of the firm in the future.
The other parallel issue is that, having gained
the trust of the other party or stakeholder, whether
a company investing on CSR can, in return, get or
gain trust from its other stakeholders such as
employees, customers, suppliers and society.
Companies need to examine and act on ways to
elicit trust from its stakeholders while investing
on CSR.
Trust and CSR
Future Directions
It is good to build trust via CSR, but the challenge
here is for the companies who hesitate to invest
on CSR. One clear indicator for companies’
advantage is that the companies can help them-
selves to gain trust from its stakeholders if the
CSR efforts are a sincere and whole-hearted
effort. The authors feel that it is very important
for every employee to serve proactively as in
eliciting and building trust with the stakeholders.
However, companies are also faced with the chal-
lenge of aligning their corporate cultures with the
CSR values so that their employees at all levels
are deeply imbued and practiced in such values,
more so, to reap trust from other stakeholders.
A company needs to extend the trust of others,
and thereby build its goodwill, to attract its
employees, customers and other stakeholders.
There is a need, in spite of these challenges, to
grow and upkeep trust through CSR, and thereby
use it as perhaps a marketing and/or branding strat-
egy and thereafter or simultaneously as a compet-
itive advantage for the company. And yet,
interestingly, trust through CSR should be done,
not in a greedy manner but more in a sincere and
wholesome, socially responsible way. And in that,
such efforts must be seen as such.
Cross-References
▶ Accountability
▶ Altruistic CSR
▶ Business for Social Responsibility
▶ Confucian Ethics
▶ Corporate Reputation
▶ Guanxi and CSR
▶ Islamic Ethics and CSR
▶ Reputation/Reputation Management
References and Readings
Dasgupta, P. (1988). Trust as a commodity. In D. G.
Gambetta (Ed.), Trust. New York: Basil Blackwell.
Drucker, P. F. (1993). Concept of corporation.
Piscataway: Transaction Publishers.
Two-Tier Board 2575 T
Edelman. (2010). 2010 Edelman trust barometer executive
summary. http://www.edelman.com/trust/2010/ Truthfulness of Businesses
Fukuyama, F. (1995). Trust: The social virtues and the
creation of prosperity. New York: Free Press.
Hofmeister, J. (2010). Why we hate the oil companies. ▶ Stakeholder Accountability
Strategy + Business, 59, 1–8.
Holme, R., & Watts, P. (2000). Corporate social respon-
sibility: Making good business sense. Conches-
Geneva: World Business Council for Sustainable
Development. Two-Level Utilitarianism
Lewis, S. (2003). Reputation and corporate responsibility.
Journal of Communication Management, 7(4), ▶ Utilitarianism and CSR
356–366.
Rosen, R. (1991). Healthy company. Los Angeles: Jeremy
P. Tarcher Publishers.
Sztompka, P. (2000). Trust: A sociological theory. Port
Chester: Cambridge University Press. Two-Tier Board

Maria Aluchna
Department of Management Theory, Warsaw
School of Economics, Warsaw, Poland
Trust in the Relationship Between
the Business and the Stakeholders
Synonyms
▶ Stakeholder Accountability
Boards; Dual board; Supervisory board

Definition
Trustworthiness
The two-tier board is a model of corporate control
▶ Trust and CSR
and monitoring in which two boards with distinc-
tive tasks function. The two-tier model encom-
passes supervisory board and management board,
and their mandates are kept separately which
Trustworthiness of Businesses means that members of the supervisory board
cannot be the members of management board at
▶ Stakeholder Accountability the same time. In other words, the functions of
control and monitoring are fully separated from
executive functions in the two-tier model. Both T
boards consist of high-profile directors who are
elected to work together for the long-term sus-
Trustworthy
tainable value of the company and function as
collectively appointed corporate bodies. Manage-
▶ Trust and CSR
ment board includes exclusively executives and
officers who are responsible for daily operation of
the company. Management board is monitored
and controlled by the supervisory board which
Truth in Speech and Actions includes nonexecutive directors only. The two-
tier board is usually discussed while being com-
▶ Stakeholder Accountability pared to the one-tier board model (please refer to
T 2576
Two-Tier Board,
General shareholder
Fig. 1 Two-tier board
metting
within the internal
organization on the
company
Appoints directors
Supervisory board
Non executives
Independent
Affiliated
Constituency
Elects executives
Management board
Executives
the term “one-tier board” for more information).
Similarly to the one-tier model, the two-tier board
is also under scrutiny on its structural shortcom-
ings and challenges revealed in the times of the
financial crisis. Codes of corporate governance
and national and regional reforms target the two-
tier board, formulating guidelines in order to
enhance its monitoring quality and performance
which would contribute to creating firm value.
Moreover, as a comparative analysis reveals, the
corporate governance recommendations and the
mobility of know-how lead to a process of signif-
icant harmonization of board types, and hence
currently the two-tier and one-tier models are
found to be closer to each other in terms of
structure, tasks, composition, and operation
guidelines than ever before.
Introduction
The term “two-tier board” is often referred to
several synonyms such as management and
supervisory boards, dual system, or dual board.
The supervisory board is composed of different
types of directors including executive, indepen-
dent and affiliated, outside and inside, and con-
stituency directors. The dual model board
functions in Germany, Austria, and Poland and
is also widespread in Denmark, Finland,
Two-Tier Board
Audit committee
Remuneration committee
Nomination committee
Forms within its Risk management committee
structure
Netherlands, Norway, and Switzerland (Mallin
2004). Similarly to its one-tier peer, the supervi-
sory board is representing interests of share-
holders who during general shareholder meeting
and often proxy fights appoint directors to its
composition. The structure of two-tier system
within the company organization is presented in
Fig. 1.
As shown in Fig. 1, the supervisory board is
appointed directly by the general shareholder
meeting what makes it the essential corporate
body for company operation as its addresses
directly shareholders expectations and is
accountable to them (according to law, the super-
visory board needs a formal approval from gen-
eral shareholder meeting on annual basis). The
supervisory board task is then to appoint the CEO
and approve the officers suggested by the CEO.
However, the supervisory board is not allowed by
the law to give any orders to executives. Execu-
tives may only receive counsel and advice as they
are ultimately responsible for the company’s day-
to-day operations and performance. Figure 1
depicts some similarities with the one-tier board
in terms of its several committees. (For more
information on board committees, please refer
to the term “board of directors.”) The supervisory
board plays some monitoring roles; it appoints
CEO and structures executive remunerations,
appoints the auditor, and follows corporate
Two-Tier Board
Two-Tier Board,
Fig. 2 The structure of the
Supervisory board
two-tier board
Non executive inside
directors
Management board
strategy issues. The strong independence of the
supervisory board provides a sound oversight and
control over executives.
Key Issues
Structure and Composition of the Two-Tier
Board
The analyses of the two-tier system reveal the
characteristics of this corporate body with respect
of structure and composition as well as indicate
the dynamics as a response to corporate gover-
nance guidelines. The general structure of the
dual board is presented in Fig. 2.
As shown in Fig. 2, according to the regula-
tions and company bylaws, the supervisory board
in two-tier system is composed fully of
nonexecutive directors. The supervisory board
directors fall into different categories which
include the following:
• Nonexecutive outside directors who usually
constitute the majority of the board (except
for German companies) and are members
recruited from outside of the company,
appointed from other institutions and firms.
As mentioned earlier, these members do not
fulfill any executive or management functions.
Within the group, there are three additional
subcategories:
2577 T
Non executive chairman
Non executive outside directors:
Affiliated/ gray directors
Independent directors
Constituency directors
CEO
Executive directors
• Gray or affiliated directors refer to board
members who do personal or professional
ties to the company. These directors usu-
ally are corporate shareholders, auditors,
lawyers, bank consultants, advisors, sup-
pliers, or customers; they may also be for-
mer employees or executives, shareholders
or relatives of dominant shareholders,
executives, employees, etc. Evidence
shows that the affiliated directors would
constitute majority of supervisory board
(in Germany, would account for ca.
20–40% of board members).
• Independent directors are board members
who do not have any personal or profes-
sional ties to the company as defined by
European Commission recommendation on
independent directors, 2005/162/EC (for
more, please refer to “board of directors” T
section). Independent directors constitute
ca. 10–20% of board members although
higher presence of independent directors is
noted on Finnish and Norwegian boards.
According to the European Commission
recommendation, there should be at least
two independent directors on board.
• Constituency directors who are appointed
by stakeholders different than shareholders
would note marginal presence on supervi-
sory boards.
T 2578
• Nonexecutive inside directors are usually
employees and employee representatives
from the company. The presence of inside
directors remains the distinctive feature of
German boards according to the codetermina-
tion (Mitbestimmung) rule. The law stipulates
that in companies hiring up to 2,000
employees, 30% of board mandates are
guaranteed for employee representatives. For
companies hiring more than 2,000 employees,
employee representatives constitute 50% of
board members. These characteristics result
in strong participation of employees in
management and governance system, and
thus their acceptance is required for important
corporate decisions. Codetermination is
viewed as an important element of the
German corporate governance system
so-called patient financing and contributes to
industrial relations and dominance of internal
labor market. However, codetermination
is often criticized by foreign institutional
investors who perceive it as an obstacle to
aggressive restructuring.
In sum, the structure of the supervisory board
differs depending on the country and reveals dif-
ferent shortcomings and challenges, respectively.
The study of a typical supervisory board depicts
lower presence of outside independent directors
as compared to its American and British counter-
parts. However, high presence of independent
directors is observed in the Netherlands, Norway,
and Finland. German boards characterized with
significant participation of employees reveal
a phenomenon of coalition between employees
and executives (as insiders) toward shareholders.
The study of German boards depicts low presence
of female directors who constitute larger number
of directors in Finland or the Netherlands and
have a legally binding quota in Norway. Such
quotas are planned to be introduced in the Euro-
pean Union (EC Strategy for equality between
women and men 2010–2015, 2010; Green
Paper. The EU corporate governance framework,
2011). Researchers as well as regulators stress the
importance of presence of representatives of dif-
ferent gender, race, age, background, or lifestyle.
It is crucial to emphasize that the more diversified
Two-Tier Board
board with the participation of women represen-
tatives of different races and age is believed to
consider a wider range of issues and thus to
function more efficiently.
Efficiency of the Two-Tier Board
It was mentioned in the “one-tier board” section
that the academic and practical debate relates to
the discussion on the efficiency of two board
models. Although the one-tier board is viewed
as more flexible structure and provides better
communication between directors, it reveals
severe structural problems. Similarly, dual
board raises both positive as well as negative
judgment. The relative unpopularity of the two-
tier board (it is less frequent model), in particular
in countries where two models are allowed by
law, often leads to a conclusion that the two-tier
board is perceived as less efficient. For instance,
only 10–25% of companies in France or Italy
which have the option to choose their board
type prefer the two-tier model. However, dual
board has several advantages, and as evidence
shows its structural solutions are adopted also
by the one-tier model. The identified advantages
of two-tier board raised in the academic and
practical discussions refer mostly to the
following:
• Clear division between monitoring and man-
agement – as both boards are kept separate and
held separate meetings, all supervisory boards
directors are nonexecutives. Thus, there is
lower risk of giving orders to executives or
of exaggerated influence of executives over
board directors. Lack of connections between
directors from two boards enables sound
monitoring and counseling. Moreover, the
supervisory board may discuss all issues
independently.
• Keeping two boards separate allows a better
balancing of the power of the CEO and board
Chairman. These two functions from defini-
tion will never be combined in the two-tier
model.
• Directors seating on supervisory boards may
specialize in their supervision functions.
• Stronger independence of directors – outside
directors are more independent and objective,
Two-Tier Board
although their presence is often lower in dual
boards as compared for instance to their
American and British peers. Outside indepen-
dent directors on the supervisory board take
care of shareholders interest; they structure
CEO compensation and formulate the
dividend policy better.
• Directors who sit on supervisory board are
professionals and they know the job; they are
often well-experienced executives in other
companies or representatives or different sec-
tors and industries.
However, the analysis of the functioning of the
dual board depicts several shortcomings. The
major weakness of the dual model lies in its
limited access to corporate data and information
of supervisory board directors. Directors of the
supervisory board do not have full access to cor-
porate information and documents and must rely
on the materials provided by executives. Sec-
ondly, the separate meetings usually hinder com-
munication and information flow between
management and supervisory boards; therefore,
it is recommended to held joint meetings, ask
questions, and give presentations. Thus, the
separation of board members and executives is
mitigated by joint meetings and specialized com-
mittees (compensation, audit, and nomination).
As business practice shows, the supervisory
board may be dominated by one majority share-
holder who would dictate the agenda and the
direction of decision-making. However, this
problem is more rooted in the characteristics of
ownership structure identified in countries which
adopt the two-tier model. The dominant share-
holder may control the board election process and
appoint its affiliated directors who as practical
evidence show may not have necessary knowl-
edge, experience, or skills to fulfill such func-
tions. Therefore, the threat of the dominance of
the board work by representatives of controlling
shareholder particularly in the area of dividend
policy is attempted to be reduced by the presence
of independent directors. Additionally, it remains
doubtful whether outside directors are motivated
enough to fulfill the monitoring functions.
Finally, the dual board is also often criticized
for its higher costs of functioning.
2579 T
The Two-Tier Board in Selected Countries
The discussion on the characteristics of the dual
board requires the presentation of national repre-
sentatives which dictates their structure and com-
position. German boards seem to be one of the
best representatives of the two-tier model. As
studies reveal, the typical German supervisory
board consists on average 18 members out of
which 50% of members are outside directors
(shareholder representatives and independent
directors) and 50% are employee representatives.
Since by definition (as defined by European
Commission recommendation on independent
directors, 2005/162/EC) there are no independent
directors among employee representatives and
many outside directors are viewed as affiliated
directors, the presence of independent directors
on German board is low. Affiliated directors
reveal mostly ties with shareholders or with
banks. It is important to mention the traditionally
strong presence of bank representatives on Ger-
man boards which used to account to 30% of all
directors in 1990s. Such strong representation
what to large extend is the result of the special
depository right (Depositionstimmrecht) which
allows shareholders to deposit their shares in the
bank who then represent them at the shareholder
meeting. In the mid-1990s, the German banks
used to control 60–90% of all shares at share-
holder meetings of largest companies. The posi-
tion of German banks have been decreasing since
then in line with liberalization of the German
financial system, restructuring processes of
banks which had to focus on their core compe-
tence and corporate governance reforms adopted
in Germany in the late 1990s. Additional
characteristics of German boards show that the T
average participation of female directors on
board is estimated at ca. 5–10% which is far
lower as compared to 30–40% female members
on American and British boards. A good illustra-
tion of the two-tier model is the Siemens super-
visory and management board presented in
Tables 1 and 3.
As shown in Table 1, the supervisory board
of Siemens includes 20 members out of whose
10 (50%) are inside directors representing
employees (marked with star). The participation
T 2580
Two-Tier Board, Table 1 Siemens supervisory board
Director name Function and time of membership
Dr. Gerhard Cromme Chairman of the Supervisory
Board of Siemens AG
Member since: 1/23/2003
Berthold Hubera First Deputy Chairman
Member since: 7/1/2004
Dr. Josef Ackermann Second Deputy Chairman
Member since: 1/23/2003
Lothar Adlera Member
Member since: 1/23/2003
Jean-Louis Beffa Member
Member since: 1/24/2008
Gerd von Brandenstein Member
Member since: 1/24/2008
Michael Diekmann Member
Member since: 1/24/2008
Dr. Hans Michael Gaul Member
Member since: 1/24/2008
Prof. Dr. Peter Gruss Member
Member since: 1/24/2008
Bettina Hallera Member
Member since: 4/1/2007
Hans-J€urgen Hartunga Member
Member since: 1/27/2009
Dr. Nicola Leibinger- Member
Kamm€uller Member since: 1/24/2008
Harald Kerna Member
Member since: 1/24/2008
Werner Möniusa Member
Member since: 1/24/2008
Håkan Samuelsson Member
Member since: 1/24/2008
Dieter Scheitora Member
Member since: 1/25/2007
Dr. Rainer Siega Member
Member since: 1/24/2008
Birgit Steinborna Member
Member since: 1/24/2008
Lord Iain Vallance of Member
Tummel Member since: 1/23/2003
Sibylle Wankela Member
Member since: 4/1/2009
Source: Based on http://www.siemens.com/investor/en/corporate_governance/supervisory_board.php. (Accessed
6 Sept 2011)
a
Employee Representative
Two-Tier Board
Additional information
Chairman of the Supervisory Boards ThyssenKrupp AG
First Chairman, IG Metall
Representative of employees
Chairman of the Management Board, Deutsche Bank
AG
Chairman of the Central Works Council of Siemens AG
Representative of employees
Chairman of the Board of Directors of Compagnie de
Saint-Gobain S.A.
Economist
Chairman of the Board of Management of Allianz SE
President of the Max Planck Society for the
Advancement of Science e.V.
Chairwoman of the Combine Works Council, Siemens
AG
Chairman of the Works Council, Siemens Energy
Sector, Erlangen, Germany
President and Chairwoman of the Managing Board of
TRUMPF GmbH + Co. KG
Member of the Central Works Council of Siemens AG
Chairman of the Siemens Europe Committee
Trade Union Commissioner for Siemens, IG Metall
Chairman of the Committee of Spokespersons, Siemens
group
Chairman of the Central Committee of Spokespersons,
Siemens AG
Deputy Chairwoman of the Central Works Council,
Siemens AG
Chairman, Amsphere Ltd.
Attorney, Bavarian Regional Headquarters, IG Metall
Two-Tier Board 2581 T
Two-Tier Board, Table 2 The overview of the composition of supervisory board committees in Siemens
Finance and
Chairman’s Audit Compliance Mediation investment Nominating
Director committee committee committee committee committee committee
Dr. Gerhard
Crommea
Dr. Josef Ackermann

Lothar Adler

Gerd von
Brandenstein
Jean-Louis Beffa

Bettina Haller

Berthold Huber

Dr. Hans Michael

Gaul
Werner Mönius

Håkan Samuelsson

Dieter Scheitor

Birgit Steinborn

Lord Iain Vallance of

Tummel
Sibylle Wankel

a
Audit committee financial expert pursuant to the Sarbanes-Oxley Act, chairman member
Source: Based on http://www.siemens.com/investor/en/corporate_governance/committees.htm. (Accessed 6 Sept 2011)

of employee representation is stipulated by the representatives were either elected by an assem- T

German Codetermination Act. Half of the mem-
bers represent company shareholders, and half
represent company employees. Thus, majority
of outside members have the status of affiliated
directors. Out of 20 members, there are 4 females
what makes Siemens board exceptionally good
example of board diversity as compared to
the German average supervisory board.
According to company website, the shareholder
representatives were elected at the annual
shareholders meeting, and the employee
bly of employee delegates or replaced an
employee representative who had resigned from
the supervisory board. The supervisory board is
elected for 5 years.
German boards similarly to their American
and British peers form several committees focus-
ing on specialized tasks such as remuneration,
audit, corporate governance, risk management,
and nomination. Additionally, workers council
functions as a complementary body within the
German corporate system. Table 2 provides an
T 2582 Two-Tier Board

Two-Tier Board, Table 3 Siemens management board

Director name Responsibilities Shortened characteristics
Peter Löscher CEO He joined Siemens AG in 2007. Earlier he served
President and as President of Global Human Health at Merck &
Chief Executive Co., Inc. (2006) and President and CEO of GE
Officer Healthcare Bio-Sciences. GE Healthcare, UK, and
Member of the Executive Board at General
Electric Company (GE) (2004)
He also serves as Member of the Supervisory
Board of M€ unchener R€ uckversicherungs-
Gesellschaft AG, Munich; Chairman of the Asia-
Pacific Committee of German Business (APA);
Vice Chairman of the European Round Table
of Industrialists (ERT); Co-Chairman of the
EU-Russia Industrialists’ Round Table (IRT)
Roland Busch CEO Infrastructure & Cities Sector; Asia-Pacific He jointed Siemens in 2011. Earlier he served as
Member of the Head of Corporate Strategies at Corporate
Managing Development Department, Munich, Germany
Board (2008) and Head of Mass Transit Division at
Transportation Systems Group, Erlangen,
Germany (2007)
Brigitte Ederer Head of Corporate Human Resources and Labor She jointed Siemens in 2010. Earlier she served as
Member of the Director; Europe, C.I.S. (Commonwealth of Cluster CEO for Central Eastern Europe, Siemens
Managing Independent States) AG (2008) and Chief Executive Officer, Siemens
Board AG Österreich (2005)
Klaus Helmrich Chief Technology Officer; Head of Corporate He jointed Siemens in 2011. Earlier he served as
Member of the Technology CEO of the Drive Technologies Division in
Managing Industry Sector (2008) and on different positions at
Board Automation and Drives Group, Nuremberg,
Erlangen, and Berlin, Germany, and Atlanta, GA,
USA (1997–2008)
Joe Kaeser Head of Corporate Finance and Controlling; He jointed Siemens in 2006. Earlier he served as
Member of the Siemens Financial Services, Siemens Real Chief Strategy Officer of Siemens AG (2004)
Managing Estate, Equity Investments External positions include Allianz Deutschland
Board AG, Nokia Siemens Networks, Bosch Siemens
Hausger€ate GmbH (Chairman), and NXP
Semiconductors N.V.
Barbara Kux Member of the Managing Board She jointed Siemens in 2008. Earlier she served as
Member of the Responsibilities: Head of Supply Chain Member of the Group Management Committee
Managing Management, Chief Sustainability Officer, and Chief Procurement Officer at Royal Philips
Board Global Shared Services Electronics N.V., Amsterdam, Netherlands (since
2003) and Executive Director Central European
Sales Operations at Ford Motor Company, Vienna,
Austria and Cologne, Germany (since 1999).
External positions include INSEAD and Total S.A.
Hermann CEO Healthcare Sector He jointed Siemens in 2001 serving as Member of
Requardt the Managing Board (2006) and Member of the
Member of the Group Executive Management of the Medical
Managing Solutions Group (2001). In 2006 he received
Board Honorary Professorship at Johann Wolfgang
Goethe University in Frankfurt, Germany
(Physics)
External positions include Software AG
(continued)
Two-Tier Board
Two-Tier Board, Table 3 (continued)
Director name Responsibilities
Siegfried CEO Industry Sector; Corporate Security Office;
Russwurm Corporate Information Technology (CIT);
Member of the Corporate Quality Management (CQM); Africa
Managing and Middle East
Board
Peter Y. Head of Corporate Legal and Compliance;
Solmssen Corporate Data Protection; Americas
Member of the
Managing
Board
Michael Suess CEO Energy Sector
Member of the
Managing
Board
Source: Based on http://www.siemens.com/investor/en/corporate_governance/managing_board.php. (Accessed 6 Sept 2011)
overview of the composition of the various stand-
ing committees of the supervisory board.
Finally, the composition of management
board is presented in Table 3 below.
As shown in Table 3, the management board
of Siemens includes 10 members out of whose 2
are female directors. All Siemens executives are
high-profile, well-experienced, and interlocked
(what is discussed below) directors.
German boards similarly to their American
and British counterparts reveal strong
interlocking. The example of interlocks between
several largest German companies is presented in
Table 4.
As shown in Table 4, German largest listed
companies are characterized by significant
interlocking between supervisory boards and
supervisory boards and management boards.
German directors tend to combine one executive
position (mostly CEO) with numerous supervi-
sory board mandates. Josef Ackermann and
Gerhard Cromme belong to the directors with
the highest number of board interlocks. More-
over, as is presented in Table 1 among identified
directors, there are no females.
2583 T
Shortened characteristics
He jointed Siemens in 2001 serving as Member of
the Managing Board (2008) Member of the Group
Executive Management of the Medical Solutions
Group (2006). In 2009 he was awarded
Extraordinary Professorship in Mechatronics by
the University of Erlangen-Nuremberg.
External positions include Member of the
Supervisory Board of Deutsche Messe AG
He jointed Siemens in 2007. Earlier he served as
Executive Vice President and General Counsel at
General Electric Company. GE Healthcare,
Chalfont St. Giles, UK (2004), Vice President and
General Counsel at General Electric Company. GE
Medical Systems, Waukesha, WI, USA (2002) and
Vice President and General Counsel at General
Electric Company (1998)
He jointed Siemens in 2006 serving as Member of
the Managing Board (2011) and Member of the
Group Executive Management at Siemens Power
Generation Group (2008). Earlier he served as
CEO Fossil Power Generation Division
Comparing this example with the American
board of directors, the German supervisory
board represents so-called stakeholder approach
which supports long-term investments, trust,
cooperation, and strong economic performance
and is characterized by participation of stake-
holders such as employees, banks, and suppliers.
As the opposite, the American board (presented
in “one-tier board” section) illustrates share-
holder approach which is structured to safeguard
shareholder interests by independent directors
and to provide market-oriented accounting and
disclosure.
Interestingly, there are several similarities T
between the German dual board and the Japanese
board of directors. Both board types are charac-
terized by lower participation of female and inde-
pendent directors while traditionally having some
representation of banks on their boards. It is
important to mention that the number of bank
representatives is declining due to significant cor-
porate governance reforms. Additionally, both
systems provide for employee voice in corporate
decision-making (though informal in the case of
Japanese boards) and management mediating
T 2584
Two-Tier Board, Table 4 Interlocking directorates between German companies in 2007
Company/mostly interlocked directors
Allianz
Wulf Bernotat, E.ON CEO
Gerhard Cromme, Board Chairman of
ThyssenKrupp and Siemens
Manfred Schneider, Board Chairman of Bayer
Bayer
Paul Achleitner, Allianz CEO
Martin Kohlhaussen, Commerzbank CEO
Klaus Kleinfeld, Siemens CEO
Ekkehard Schulz, ThyssenKrupp CEO
J€urgen Weber, Lufthansa CEO
Commerzbank
Erhard Schipporeit, executive director in E.ON
Ekkehard Schulz, ThyssenKrupp CEO
Heiner Hasford, M€unchener R€ uck CEO
Klaus Sturany, RWE CEO
Daimler
Hilmar Kopper, former CEO of Deutsche Bank
Manfred Schneider, Board Chairman of Bayer
Walter Bernhard, former Board Chairman of
Dresdner Bank
Deutsche Bank
Ulrich Hartmann, Board Chairman of E.ON
Henning Kagermann, SAP CEO
Heinrich von Pierer, Board Chairman of Siemens
J€urgen Weber, Lufthansa CEO
Albert Woeste, Henkel CEO
E.ON
Gerhard Cromme, Board Chairman
ThyssenKrupp and Siemens
Ulrich Lehner, managing director of Henkel
Henning Schulte-Noelle, Board Chairman
of Allianz
Karl-Hermann Baumann, former Board
Chairman of Siemens
Rolf-Ernst Breuer, former Board Chairman of
Deutsche Bank
Source: Based on Wieczorek (2008), pp. 24–25
between these stakeholders. More interestingly,
boards of directors in Germany follow the two-
tier model, while in Japan supervisory functions
fall mainly to the statutory auditor.
It was mentioned above that dual model is also
adopted in Poland. An analysis of the board of
Polish listed companies identified a significant
Two-Tier Board
Company/mostly interlocked directors
Lufthansa
Josef Ackermann, Deutsche Bank CEO
Gerhard Cromme, Board Chairman ThyssenKrupp and Siemens
Michael Diekmann, Allianz CEO
Ulrich Hartmann, Board Chairman of E.ON
RWE
Paul Achleitner, Allianz CEO
Carl L. von Boehm-Bezing, former Board Chairman Deutsche
Bank
Manfred Schneider, Board Chairman of Bayer
Siemens
Josef Ackermann, Deutsche Bank CEO
Gerhard Cromme, Board Chairman ThyssenKrupp and Siemens
Albrecht Schmidt, Board Chairman HypoVereinsbank
Henning Schulte-Noelle, Board Chairman of Allianz
ThyssenKrupp
Jurgen Hubertus, Daimler CEO
Martin Kohlhaussen, Commerzbank CEO
Heinrich von Pierer, Board Chairman of Siemens
Henning Schulte-Noelle, Board Chairman of Allianz
Volkswagen
Gerhard Cromme, Board Chairman ThyssenKrupp and Siemens
Hans Michael Gaul, E.ON CEO
Klaus Liesen, former Board Chairman of Ruhrgas
Heinrich von Pierer, Board Chairman of Siemens
dependence of directors on large institutional
shareholders, either foreign or domestic strategic
investors, the family or the state. This corre-
sponds with the findings of Berglöf and Claessens
(2006) which reveal that the board role in emerg-
ing and transition markets is significantly limited
due to the strong decision-making power by large
Two-Tier Board 2585 T
Two-Tier Board, Table 5 The supervisory board of TVN S.A.
The supervisory board of TVN S.A encompasses the following:
Affiliated directors who reveal family connections, ownership ties of more than 5 % of votes including
Wojciech Kostrzewa who is the chairman of the board and serves on compensation committee and third party
transaction committee
Bruno Valsangiacomo who is the vice chairman of the board and serves on audit committee
Romano Fanconi
Aldona Wejchert
Gabriel Wujek
Independent directors having no connections to the company including
Arnold Bahlmann who serves on third party transaction committee
Paweł Gricuk who serves audit committee, third party transaction committee
Wiesław Rozłucki who serves audit committee
Source: http://www.tvn.pl/grupatvn/investor/corporate/10?lang¼en. (Accessed 6 Sept 2011)

shareholders. The lack of independent and pro-
fessional directors reveals significant limitations
for efficient governing mechanisms leaving man-
agement with huge discretion. A good example of
complying with corporate governance code
(which is an exception for Poland rather than
a rule) is the supervisory board of TVN, one of
the largest media company. The supervisory
board of TVN S.A. is presented in Table 5.
Evolution of the Two-Tier Board: The
Harmonization Process of Two Board Models
The corporate governance reforms and exchange
of the board functioning know-how result in
significant structural changes noted within the
two-tier model. First, the two-tier board evolves
in line with the set of corporate governance
guidelines adopting solutions introduced by the
one-tier model. Thus, these two models prove to
harmonize and develop relatively similar struc-
ture. The similarities in term of characteristics
and solutions adopted include the following:
• Both models identify similar director catego-
ries present on board.
• Both models highlight the importance of inde-
pendent directors.
• Both models emphasize the importance of spe-
cialized committees within the board (audit,
compensation, nomination, risk management).
• Both models formulate similar guidelines and
best practice (competences and experience,
time required to devote to board work, ethical
standards, limited number of mandates,
diversity, self-evaluation, formal functioning
regulation, increased transparency).
• Best practice suggest joint meetings in the
two-tier board system to mirror the structure
of the one-tier system, while at the same time
best practice suggest separate meetings for
independent directors in the one-tier system
to follow the structure of the two-tier model.
• The lead director in the one-tier model is to
follow the outside chairman who is found in the
supervisory board in the two-tier model.
• The stakeholder-oriented supervisory board
(e.g., in Germany) is recommended to strongly
care for shareholder interest, whereas the
shareholder-oriented board (e.g., in the USA)
is suggested in incorporate stakeholder
expectations.
The harmonization process is heavily rooted
in the worldwide recognized corporate gover-
nance recommendations on board functioning
and integration of stock markets into a global
financial system. Figure 3 delivers model illus- T
tration of the harmonization process of corporate
governance of three strongest economies.
As shown in Fig. 3, national systems of cor-
porate governance and their boards show harmo-
nization toward globally accepted standards of
transparency, accountability, and legitimacy.
Second, the board evolution refers to the emer-
gence of the so-called mixed system which
seems to combine the characteristics of both
dual and mono board. The mixed model is
presented in Fig. 4.
T 2586 Two-Tier Board

Two-Tier Board,
Fig. 3 Harmonization of
board American shareholder
capitalism

German interest
groups capitalism

Japanese collective
capitalism

Change directions

Stakeholder orientation Shareholder orientation

• Importance of efficient composition – board

Non executive Executive board
board
Chairman and CEO
Executive directors
Non executive Executive
directors directors
Two-Tier Board, Fig. 4 Mixed board system (Source:
Based on Heidrick and Struggles 2011, p. 10)
As shown in the Fig. 3, the mixed system
consists of two boards meeting separately but
having usually the same chairman and CEO and
some executive who participate in board meet-
ings. The mixed model is observed mostly in
Belgium, France, Portugal, and Sweden.
Future Directions
The dynamics economic situation and both market
and regulatory pressure for corporate governance
reforms impact also the structure, composition,
and work of the two-tier board. Most important
guidelines indicate the following (Isaksson 2009;
Kirkpatrick 2009; EU Green Paper 2011):
should include well-experienced directors
who have skills and competences to fulfill
monitoring functions.
• Board composition should provide for ade-
quate balance of affiliated and independent
directors.
• Board composition should provide for ade-
quate diversity with respect to age, gender,
background, specialization, and nationality.
• Board directors should demonstrate high eth-
ical and moral standards and be able to devote
sufficient amount of time for board work.
• Board should work according to formal bylaws
to ensure high standards of transparency and
accountability and provide self-evaluation.
The last point refers to the overall characteris-
tics of an average European board. They are as
follows:
• Average size: 11.8 (1.2 woman, 1 new direc-
tor, 0.9 non-European director, 1.8 European
nonnational).
• Average age: 59 years.
• Average age of new directors: 55 years.
• Meetings of the full board: 9.6.
• Committee meetings: 1 committee meets
every 4 weeks.
• Attendance: 92%.
• Average length of tenure: 3.1 years.
• Average time on board: 5.5 years.
Two-Tier Board
Cross-References
▶ Corporate Governance
▶ One-Tier Board
▶ Two-Tier Board
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