Corporate Social Responsibility Diamond – Main

Elements of CSR

To address the issue of CSR in a more systematic way, a CSR diamond framework has been
developed that unbundles the CSR system into four main elements:

I. External Environment
a. Rule of Law
b. Regulation, Competition and Standards
c. Complementary CSR Institutions

II. Internal Environment

d. Internal Corporate Structures and Policies

Furthermore, the functioning of the overall CSR system is also considerably influenced by (III)
globalization, (IV) crises and changes in the political and macroeconomic environment, and (V)
the government.

Learn more on each below.

For more information on all these elements and on use of the CSR Diamond as a decision
making tool, please register for the WBI CSR online course.

Rule of Law

• Readings
Regulations, Competition and Standards

• Readings

Complementary CSR Institutions

• Organization
• Readings

Internal Corporate Structures and Policies

• Readings
• Quotations
• Case Studies

Globalization

• Basic Information

Crises and Changes in the Political and Macroeconomic Environment

• Basic Information

Government

• Basic Information

CSR Diamond as a System

• Basic Information

Rule of Law - Readings

Economic Development and the Quality of Legal Institutions

“This belief in the power of legal and judicial reform to spur economic development is supported
by a growing body of research showing that economic development is strongly affected by the
quality of institutions – including the quality of a nation’s legal institutions…” World Bank “Legal
Institutions of the Market Economy project”
http://www1.worldbank.org/publicsector/legal/institutional.htm

The Rule of Law as a Goal of Development Policy

“A prominent concern in the development community is the "rule of law" and the related concepts
from other legal systems -- "etat de droit," "estado de derecho," "rechsstaat." Economic growth,
political modernization, the protection of human rights, and other worthy objectives are all
believed to hinge, at least in part, on "the rule of law." Policymakers in developing and transition
nations are thus seeking ways to establish or strengthen the rule of law in their countries.
Investment rating services, non-governmental organizations, and other students of development
are producing indices that try to measure the degree to which a nation enjoys the rule of law…”
http://www1.worldbank.org/publicsector/legal/ruleoflaw2.htm

Misrule of Law” by Daniel Kaufmann (2001)

Daniel Kaufmann discusses why ‘Misrule of Law’ occurs and what is the reality. He analyses the
application of the rule of law around the world and correlation between rule of law and other
factors such as poverty, literacy, and mortality.
http://www.worldbank.org/wbi/governance/pdf/misruleoflaw.pdf

Regulations, Competition and Standards - Readings

IFC – A Community Development Resource Guide For Companies
Possible Categorization of CSR Codes and Standards
OECD Guidelines for Multinational Enterprises
OECD Guidelines for Multinational Enterprises: Global Instruments for Corporate
Responsibility (2001 edition)
International Labor Organization
UN Global Compact
Caux Principles for Business
Global Reporting Initiative
Global Sullivan Principles
Principles for Global Corporate Responsibility – Benchmarks

IFC – A Community Development Resource Guide For Companies

“This Guide aims to serve as a resource guide to help International Finance Corporation clients
and other companies to establish effective community development programs for communities
located near or affected by their operations. “
Source: IFC

Possible Categorization of CSR Codes and Standards

1. Aspirational codes describe how companies and their employees should

behave. Such codes include the Caux Principles, the Global Sullivan Principles,
and the Keidanren Charter. However, aspirational codes are nonbonding and
usually do not have any mechanism for accountability.
2. Reporting standards are tools to facilitate reporting of what and how a company
is doing. They include the Global Reporting Initiative (GRI), Social Accountability
8000 (SA 8000), and AccountAbility 1000.
3. General standards are a framework through which stakeholders can assess
corporate codes of conduct. These include the Principles for Global Corporate
Responsibility-Benchmarks.
4. Government-sponsored codes include the OECD Guidelines, UN Global
Compact, and the ILO Principles.

Susan Ariel Aaronson, Senior Fellow, National Policy Association

(http://www.multinationalguidelines.org/oecd/documents/booklet.htm)
OECD Guidelines for Multinational Enterprises

The OECD Guidelines for Multinational Enterprises (the Guidelines) are the only global code
which creates a national and multinational governmental infrastructure. The Guidelines are non-
binding recommendations to enterprises, made by the thirty-three governments that adhere to
them. Their aim is to help Multinational Enterprises operate in harmony with government policies
and with societal expectations. [more…]

OECD Guidelines for Multinational Enterprises

The Guidelines are recommendations to multinational enterprises on their business conduct in

such areas as labor, environment, consumer protection and the fight against corruption. The
recommendations are made by the 33 adhering governments and, although they are not binding,
governments are committed to promoting their observance. This book provides an account of
what governments have been doing to enhance the contribution of the Guidelines to the improved
functioning of the global economy.

Source: OECD

International Labor Organization

The ILO tripartite – business, labor, and governments - declared principles concerning
multinational enterprises and social policy. The principles are a distinctive global set of
benchmarks to inspire good policy and practice in international investment from both private and
public sector. [more…]
• Fundamental ILO Conventions
• Frequently Asked Questions About Labor Standards

International Declarations and Treaties

The Universal Declaration of Human Rights states that “every individual and organ of society” has
the responsibility to strive “to promote respect for these rights and freedoms” and “by progressive
measures, national and international, to secure their universal and effective recognition and
observance”. As important “organs” of society, businesses have a responsibility to promote world-
wide respect of human rights. Human rights concerns of particular interest for businesses and
their employees include core labour standards, management of security forces, and indigenous
peoples’ rights.

The ILO Conventions establish norms covering all aspects of working conditions and industrial
relations. Some of the most important cover core labour standards (that is, basic human rights in
the workplace). These include freedom of association (no. 87), right to organise and to collective
bargaining (no. 98), minimum age (no. 138), freedom from discrimination in employment and
occupation (no. 111) and freedom from forced labour (No.s 29 and 105). ILO Conventions are
binding on all countries that have ratified them, although not all countries have ratified all treaties
and not all countries that have ratified them succeed in enforcing them. The co-operative
approach of the ILO, which focuses on providing technical assistance to enable countries to
implement their responsibilities, receives strong support from ILO membership, especially from
developing countries.
The ILO Declaration on Fundamental Principles and Rights at Work is based on the core labour
standards outlined in the ILO Conventions. The Declaration is not binding but applies to all ILO
states by virtue of their membership in the ILO. It contains a mechanism for annual review of the
efforts made by member states that have not yet ratified the core labour standards Conventions.
Its ultimate aim is to provide a basis for ILO assistance to member states in establishing these
rights in law and in practice to allow for ratification of the Conventions. The Declaration cannot be
invoked as the justification for applying economic sanctions against a country. Rather, the ILO
can use the Declaration alongside offering technical assistance and co-operation, in order to help
states to provide these rights. The approach is one of building countries’ capacity to have well
functioning labour markets. The Declaration also reinforces the application of core labour
standards in private voluntary initiatives.

The ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social
Policy is a global instrument designed to provide guidelines to governments, employers and
workers in areas of employment, training, conditions of work and industrial relations. All core
labour standards are covered in the Declaration. Although it is a non-binding instrument, its
implementation is nevertheless the object of regular reviews and there is a procedure for
examining disagreements concerning its application by means of an interpretation of its
provisions.

The 27 principles of the Rio Declaration define the rights and responsibilities of nation as they
pursue human development and well-being. Negotiated in 1992, the Declaration is based on the
notion of sustainable development and defines a number of basic principles (e.g. precautionary
principle, polluter pays principle, the right to development). The meetings at Rio de Janeiro also
produced other significant documents. Agenda 21 provides guidance for governments, business
and individuals on how to contribute to making development socially, economically and
environmentally sustainable. The UN Framework Convention on Climate Change, the Convention
on Biodiversity and a statement of principle on forest management were also signed by many
governments during the Rio meetings.

Summarized by Kathryn Gordon of the OECD in her Background and Issues Paper submitted to
the OECD Roundtable on Global Instruments held on 19 June 2001.

UN Global Compact

The UN Global Compact was announced at the World Economic Forum in Davos, Switzerland in
January 1999 and formally launched in September 2000. UN Secretary General Kofi Annan
called on world business leaders to “embrace and enact” a set of nine principles in their individual
corporate practices and by supporting complementary public policy initiatives. The standard
includes specific practices that endorsing companies would commit to enact. Endorsements from
companies are sought under the Global Compact. [more…]

The 9 Principles

Caux Principles for Business

The Caux Principles are an aspirational set of recommendations covering many areas of
corporate behaviour. They “seek to express a world-wide standard for ethical and
responsible corporate behaviour and are offered as a foundation for dialogue and action
by business and leaders world-wide.” Issued in 1994, the Principles are sponsored by the
Caux Roundtable (comprised of senior business leaders from Europe, Japan and North
America). No formal mechanism for corporate commitment to these principles exists.
• The Principles for Business
o In English
 o Other languages

Global Reporting Initiative

The GRI is an international reporting standard for voluntary use by organisations reporting on the
economic, environmental and social dimensions of their activities, products and services. Using
input from reporters and report users, the GRI has sought to develop a list of specific indicators
for reporting on social, environmental and economic performance. Note that the GRI, since it is a
non-financial reporting framework, does not provide recommendations on business conduct, but
the framework is necessarily underpinned by norms for business conduct. The GRI is led by the
Coalition of Environmentally Responsible Economies (CERES) and includes NGOs, corporations,
consultancies, accounting firms, business associations, academics and others. UNEP provided
some financing. The GRI does not assess companies’ conformity with its reporting
guidelines…[more]

• Mission Statement
• June 2000 GRI Guidelines
• Documents

Global Sullivan Principles

The Global Sullivan Principles are an aspirational standard developed with the input of several
multinational corporations. The principles include eight broad directives on labor, business ethics
and environmental practices of multinational companies and their business partners. Issued in
1999, the Principles were written by the Reverend Leon Sullivan, whose original Sullivan
Principles provided guidelines for companies doing business in South Africa during the period of
apartheid. Companies endorse the principles by publicly pledging to integrate them into their
operations. Continuing support requires that companies provide an annual letter to Reverend
Sullivan restating the company’s commitment and outlining progress to date.

Principles for Global Corporate Responsibility – Benchmarks

The “Benchmarks” are designed to provide a “model framework” through which stakeholders can
assess corporate codes of conduct, policies and practices related to corporate social
responsibility expectations. The principles were revised in 1998 to include the input of a range of
human rights, environmental and labor groups, religious organizations and companies. The
standard contains nearly 60 principles the sponsors consider “fundamental to a responsible
company’s actions”. Finally the standard includes “benchmarks” to be used by external parties to
assess the company’s performance related to the recommended policies and practices.
Benchmarks’ sponsors (several religious NGOs based in the United Kingdom and North America)
do not seek endorsements from companies…[more]

Complementary CSR Institutions - Organizations

Global Alliance for Workers and Communities

Interfaith Center on Corporate Responsibility
Social Accountability International
Social & Ethical Reporting Clearinghouse
 Institute of Social and Ethical Accountability: AccountAbility 1000 (AA1000)
Transparency International
Human Rights Watch
Greenpeace
The Center for Corporate Citizenship at Boston College

Global Alliance for Workers and Communities

An alliance of private, public, and nonprofit organizations - Nike, the World Bank, the International
Youth Foundation, John D. and Catherine T. MacArthur Foundation, Pennsylvania State
University and St. John's University - to help improve the lives, workplaces, and communities of
young adult workers involved with global manufacturing.

Interfaith Center on Corporate Responsibility

ICCR and its members press companies to be socially and environmentally responsible. Each
year ICCR-member religious institutional investors sponsor over 100 shareholder resolutions on
major social and environmental issues…[more]

Social Accountability International

SAI's mission is to enable organizations to be socially accountable by:

a) convening key stakeholders to develop voluntary standards, b) accrediting qualified
organizations to verify compliance, c) promoting understanding and encouraging implementation
of such standards world wide…[more]

Social & Ethical Reporting Clearinghouse

A website providing links to social and ethical reporting guidelines, organisations and surveys.

Institute of Social and Ethical Accountability: AccountAbility 1000 (AA1000)

A standard for measuring the social and ethical achievements of companies against objective
criteria issued by the U.K.-based Institute of Social and Ethical Accountability in November 1999.

Transparency International

Transparency International (TI) is a civil society organisation dedicated to curbing both

International and national corruption. Their activities include building national integrity systems;
creating an international framework against corruption; establishing business principles for
countering bribery; publishing the global corruption report 2001, including annual index of
perceived corruption levels.
http://www.transparency.org/

Human Rights Watch

Human Rights Watch (HRW) is dedicated to protecting the human rights of people around the
world, including children. HRW investigates and exposes human rights violations and hold
abusers accountable. HRW also challenges governments and those who hold power to end
abusive practices and respect international human rights law.
http://www.hrw.org/

Greenpeace

Greenpeace is an independent campaigning organisation that uses non-violent, creative

confrontation to expose global environmental problems and to force solutions which are essential
to a green and peaceful future.
http://www.greenpeace.org/

The Center for Corporate Citizenship at Boston College

“The Center for Corporate Citizenship at Boston College, founded in 1985, provides leadership in
establishing corporate citizenship as a business essential, so all companies act as economic and
social assets to the communities they impact…”

Complementary CSR Institutions - Readings

Are Foreign Investors and Multinationals Engaging in Corrupt Practices in
Transition Economies? by J. Hellman, G. Jones, and D. Kaufmann (2000)

Measuring Governance, Corruption, and State Capture: How Firms and

Bureaucrats Shape the Business Environment in Transition Economies by J.
Hellman, G. Jones, D. Kaufmann, and M. Schankerman (2000)

Why Do Firms Hide? Bribes and Unofficial Activity After Communism

The Influence of Institutions on Corporate Governance through Private

Negotiations: Evidence from TIAA-CREF

Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition

Economies? by J. Hellman, G. Jones, and D. Kaufmann (2000)

In countries rich in natural resources, such as Azerbaijan, Kazakhstan, the Russian Federation,
and Turkmenistan, FDI was made, but flows were weaker than they would have been had better
governance prevailed. In fact, for all 22 countries in transition for which data are available, after
controlling for natural resource wealth, there is a significant negative association between per
capita FDI and the extent of administrative and “grand” corruption— meaning kickbacks in large-
scale government contracts. The assertion that corruption deters FDI is not new.
http://www.worldbank.org/wbi/governance/pdf/fdi_trans_0800.pdf

Measuring Governance, Corruption, and State Capture: How Firms and Bureaucrats Shape
the Business Environment in Transition Economies by J. Hellman, G. Jones, D. Kaufmann,
and M. Schankerman (2000)

The 1999 Business Environment and Enterprise Performance Survey (BEEPS) assesses in detail
the various dimensions of governance from the perspective of about 3,000 firms in 20 countries.
The authors pay special attention to certain forms of grand corruption, notably state capture by
parts of the corporate sector. The survey also measures other dimensions of grand corruption—
including those associated with public procurement—and quantifies the more traditional (“petty”)
forms of corruption.
http://www.worldbank.org/wbi/governance/pdf/measure.pdf

Why Do Firms Hide? Bribes and Unofficial Activity After Communism

by S. Johnson, D. Kaufmann, J. McMillan, and C. Woodruff (2000). The survey of private

manufacturing firms finds the size of hidden "unofficial" activity to be much larger in Russia and
Ukraine than in Poland, Slovakia and Romania. A comparison of cross-country averages shows
that managers in Russia and Ukraine face higher effective tax rates, worse bureaucratic
corruption, greater incidence of mafia protection, and have less faith in the court system. The
firm-level regressions for the Eastern European countries find that bureaucratic corruption is
significantly associated with hiding output.
http://www.sciencedirect.com

The Influence of Institutions on Corporate Governance through Private Negotiations:

Evidence from TIAA-CREF

“This paper analyzes the process of private negotiations between financial institutions and the
companies they attempt to influence. It relies on a private database consisting of the
correspondence between TIAA-CREF and 45 firms it contacted about governance issues
between 1992-1996…”
Source: W.T. Carleton, J.M Nelson and M.S. Weisbach, The Journal of Finance, vol. LIII no. 4,
August 1999

Internal Corporate Structure and Policies - Readings

Empirical Studies on Ownership Structure and Performance Table

Ownership Structure, Legal Protections and Corporate Governance
The effect of changes in ownership structure on performance: evidence from the
thrift industry
Statoil's ownership structure: ownership and competitiveness
Corporate Ownership Around the World
Ownership Structure, Corporate Governance, and Corporate Performance: The
Case of Chinese Stock Companies
Corporate Governance and the Bargaining Power of Developing Countries to
Attract Foreign Investment
Public Pressure on Companies Will Likely Increase
Corporate Citizenship vs. Brand Reputation and Financial Factors
Going Beyond Traditional Duty of Corporation
Making Codes of Corporate Conduct Work: Management Control Systems and
Corporate Responsibility”
Insider Trading: Former Philips CEO Resigns From Ahold Board After Reports Of
Misconduct
The Symbolic Management of Stockholders: Corporate Governance Reforms and
Shareholders Reactions
Does Stakeholder Orientation Matter? The Relationship between Stakeholder
Management Models and Firms Financial Performance
The Effects of Corporate Governance and Institutional Ownership Types on
Corporate Social performance
 Corporate Performance and Stakeholder Management: Balancing Shareholder and
Customer Interest in the U.K. Privatized Water Industry
How Much Does Industry Matter, Really?
Disclosure of Corporate Charitable Contributions as a Matter of Shareholder
Accountability
Cognitive Biases and Organizational Correctives: Do Both Diseases and Cure
Depend on the Politics of the Beholder?

Empirical Studies on Ownership Structure and Performance Table

Comparative analysis of numerous study outcomes on ownership structure and performance are
listed by the name of authors. It analyses sample size and period; ownership variables;
performance variables; other variables; statistical methods; mail results; and preferred
explanation.
Source: Encyclopedia of Corporate Governance

Privatization and Corporate Governance: Principles, Evidence and Future Challenges

“This paper introduces the concept of ‘governance chains’ that can constrain
the ‘grabbing hands’ of public and private actors by providing information and
accountability mechanisms for investors. Recently available empirical data from
established firms from 49 countries around the world provides estimates of the relative
importance and strength of ‘private’ and ‘formal’ governance chains…”
Source: Alexander Dyck, Harvard Business School, 2000

Ownership Structure, Legal Protections and Corporate Governance

“The framework takes a functional approach, identifying six functions provided by a governance
system. The paper highlights the possibilities and limits to governance reform through the
adoption of legal protections and the use of ownership structure. I caution against excessive
emphasis on legal rules themselves, demonstrating their insufficiency to provide the functions of
governance. Instead, I first emphasize the importance of effective legal protections that require
complementary governance institutions including political structure, the location of judicial
authority, norms, and information/reputation intermediaries. Second, I draw attention to ownership
structure, reviewing theoretical and empirical support for the beneficial effect of identity and
concentration on the functions of corporate governance in the absence of effective legal
protections…”
Source: Alexander Dyck, Harvard Business School, 2000

The effect of changes in ownership structure on performance: evidence from the thrift
industry

“Restrictions on the ownership structure of a public company may harm the company's
performance by preventing owners from choosing the best structure.”
Source: Rebel A. Cole and Hamid Mehran, Finance and Economics Discussion Series No96-6,
Board of Governors of the Federal Reserve System (U.S.)

Statoil's ownership structure: ownership and competitiveness

“Views differ on the importance of the owner(s) for the competitiveness of companies in general.
Interest in the issue of ownership has been growing in recent years, however, and there appears
to be fairly widespread agreement that it can have great significance for the results companies
achieve. Both the content and the form of ownership will be important for a privately-owned
company exposed to competition.”
Source: Statoil Website, www.statoil.com

Corporate Ownership Around the World

“We present data on ownership structures of large corporations in 27 wealthy economies,

making an effort to identify ultimate controlling shareholders of these firms. We find that,
except in economies with very good shareholder protection, relatively few of these firms
are widely-held, in contrast to the Berle and Means image of ownership of the modern
corporation. Rather, these firms are typically controlled by families or the State. Equity
control by financial institutions or other widely-held corporations is less common.”
Source: Rafael La Porta, Florencio Lopez-de-Silane, Andrei Shleifer, NBER Working Paper No.
W6625, issued in June 1998

Ownership Structure, Corporate Governance, and Corporate Performance: The Case of

Chinese Stock Companies

“Does the ownership structure of publicly listed firms in China affect their performance? Yes.
Institutional shareholders seem to have a positive impact on corporate governance and
performance; state ownership seems to lead to inefficiency; and an overly dispersed ownership
structure can create problems in the Chinese setting.”
Source: Xiaonian Xu and Yan Wang, The World Bank, June 1997

"Corporate Governance and the Bargaining Power of Developing Countries to Attract

Foreign Investment”

Enrique J. Rueda-Sabater argues that “corporate governance is an important determinant of

inward foreign investment and explores the role that corporate governance plays in determining
the bargaining power of developing countries – including low-income countries – to attract foreign
investment…”

Public Pressure on Companies Will Likely Increase

Opinion leader analysis indicates that public pressure on companies to play broader roles in
society will likely increase significantly over the next few years.
Source: the Millennium Poll on Corporate Social Responsibility, Environics International Ltd. 1999

Corporate Citizenship vs. Brand Reputation and Financial Factors

In forming impressions of companies, people around the world focus on corporate citizenship
ahead of either brand reputation or financial factors.
Source: the Millennium Poll on Corporate Social Responsibility, Environics International Ltd. 1999

Going Beyond Traditional Duty of Corporation

Two in three citizens want companies to go beyond their historical role of making a profit, paying
taxes, employing people and obeying all laws; they want companies to contribute to broader
societal goals as well.
Source: the Millennium Poll on Corporate Social Responsibility, Environics International Ltd. 1999
Making Codes of Corporate Conduct Work: Management Control Systems and Corporate
Responsibility”
“…[C]odes of conduct often represent just the first step in a process of improving management
processes in support of legal and ethical compliance. Subsequent steps include the
implementation of systems of management control designed to promote compliance. These
systems typically employ a range of tools including accounting and record keeping systems,
training, hierarchical controls, compliance offices, whistle-blowing facilities, hiring practices,
production controls, internal incentive systems and both internal and external audits…”
Source: OECD, “Making Codes of Corporate Conduct Work: Management Control Systems and
Corporate Responsibility,” February 2001.

Insider Trading: Former Philips CEO Resigns From Ahold Board After Reports Of Misconduct

“Allegations of financial misconduct compelled former Philips head Cor Boonstra to resign his
seat on Royal Ahold's board of directors. Boonstra reportedly sold NLG700,000 of Ahold shares
prior to the August 2000 publication of the company's first half results, a period in which such
transactions are prohibited. Boonstra admitted the accusation, but claimed he had forgotten he
was director of Ahold at the time of the sale. Boonstra is also currently under investigation in an
unrelated insider trading case involving the purchase of shares in the entertainment company
Endemol.”
Source: Associated Press, September 3, 2001

The Symbolic Management of Stockholders: Corporate Governance Reforms and

Shareholders Reactions

“A paper examines the consequences of symbolic action in corporate governance. Sepecifically,

it examines: 1. whether the stock market reacts favorably to specific governance mechanisms
that convey the alignment of CEO and shareholder interests, such as the adoption of long-term
incentive plans (LTIP), even if such plans are not actually implemented, 2. whether providing
agency-related explanations for the LTIPs affects the stock market response, and 3. whether the
symbolic adoption of LTIPs deters other governance reforms that would reduce CEO's control
over their boards. Analysis of data from over 400 corporations over a 10-year period suggests
that symbolic corporate actions can engender significant positive stockholder reactions and deter
other, more substantive governance reforms, thus perpetuating power imbalances in
organizations.”
Source: J.D. Westphal and E.J.Zajac, Administrative Science Quarterly, 43, 1998: 127-153

Does Stakeholder Orientation Matter? The Relationship between Stakeholder Management

Models and Firms Financial Performance

“Little empirical work has been done on the effort of stakeholder management on corporate
performance. This study contributes to stakeholder theory development by: 1. deriving 2 distinct
stakeholder management models from extant research, 2. testing the descriptive accuracy of
these models, and 3. including important variables from the strategy literature in the tested
models. The results provide support for a strategic stakeholder management model but no
support for an intrinsic stakeholder commitment model. Implications of these findings for
management practice and future research are discussed.”

Source: S.L. Berman, A.C. Wicks, S. Kotha and T.M. Jones, Academy of Management Journal,
Oct.1999
The Effects of Corporate Governance and Institutional Ownership Types on Corporate
Social performance

“The effects of institutional investor types and governance devices on 2 dimensions of corporate
social performance (CSP) were examined. Pension fund equity was positively related to both a
people (women and minorities, community, and employee relations) and a product quality
(product and environment) dimension of CSP, but mutual and investment bank funds exhibited no
direct relationship with CSP. Outside director representation was positively related to both CSP
dimensions. Top management equity was positively related to the product quality dimension but
unrelated to the people dimension of CSP.”
Source: R.A. Johnson, D.W.Greening, Academy of Management Journal

Corporate Performance and Stakeholder Management: Balancing Shareholder and

Customer Interest in the U.K. Privatized Water Industry

“A major contention of stakeholder theory is examined; namely, that a firm can simultaneously
enhance the interests of its shareholders and other relevant stakeholders. Financial data relating
to the UK water supply industry and the customer service performance indicators introduced after
privatization in 1989 to protect customer interests provided the basis of the empirical analysis.
The results show that, although improving relative customer service performance is costly for
firms in terms of current profits, shareholder returns respond in a significantly positive manner to
such improvements. This finding is interpreted as being consistent with stakeholder theory.
Source: S.Ogden and R.Watson, Academy of Management Journal, Oct.1999

How Much Does Industry Matter, Really?

“In this paper, we examine the importance of year, industry, corporate-parent, and business-
specific effects on the profitability of U.S. public corporations within specific 4-digit SIC
categories. Our results indicate that year, industry, corporate-parent, and business-specific
effects account for 2 percent, 19 percent, 4 percent, and 32 percent, respectively, of the
aggregate variance in profitability. We also find that the importance of the effects differs
substantially across broad economic sectors. Industry effects account for a smaller portion of
profit variance in manufacturing but a larger portion in lodging/entertainment, services,
wholesale/retail trade, and transportation. Across all sectors we find a negative covariance
between corporate-parent and industry effects. A detailed analysis suggests that industry,
corporate-parent, and business-specific effects are related in complex ways.”
Source: A.M.McGahan and M. Porter, Strategic Management Journal, vol.18, 15-30, 1997

Disclosure of Corporate Charitable Contributions as a Matter of Shareholder

Accountability

“Current law does not require corporations to disclose to shareholders how much and to whom
management gave to charity from shareholder assets. As an increasing number of Americans
take advantage of corporate ownership to secure their financial goals, they assume a greater role
in responsible and judicious charitable giving. There is no justification for denying shareholders
information as to what management is doing with their money, and a reasonable disclosure
requirement is therefore a matter of accountability”
Source: P.E. Gillmor and C.M. Bremer, The Business Lawyer, May 1999

Cognitive Biases and Organizational Correctives: Do Both Diseases and Cure Depend on
the Politics of the Beholder?

“The study reported here assessed the impact of managers' philosophies of human nature on
their reactions to influential academic claims and counter-claims of when human judgement is
likely to stray from rational-actor standards and of how organizations can correct these biases.
Political ideology and cognitive style emerged as consistent predictors of the value spins that
managers placed on decisions at all levels of analysis.”
Source: P.E.Tetlock, Administrative Science Quarterly, June 2000

Internal Corporate Structures and Policies - Quotations

"[I]f strong corporate governance is to permeate every facet of our marketplace, its
practise must extend beyond merely prescribed mandates, responsibilities, and
obligations. It is absolutely imperative that a corporate governance ethic emerge and
envelop all market participants: issuers, auditors, rating agencies, directors, underwriters,
and exchanges."
-- Arthur Levitt, Chairman of the U.S. Securities & Exchange Commission, October 1999.

“Essentially, corporate governance can be regarded as being about leadership:

leadership for efficiency, for probity and for responsibility. Leadership which is both
transparent and accountable.”
-- Philip Armstrong, Special Advisor to the Commonwealth Association for Corporate Governance
and Company Secretary Anglo-American Corporation.

Internal Corporate Structures and Policies - Case Study

Grabbing Hands of Insider Undermine Corporate Value

UES bows to minority shareholder pressure

Grabbing Hands of Insider Undermine Corporate Value

“Comparing the value the market places on comparable assets across countries
provides another indicator of ‘grabbing hands,’ both private and public. For example, Black et. al
(1999) report that in May 1999, Yukos oil’s market value was just $90 million while it was
estimated to be ‘worth’ $50 billion based on its assets (556 timesless), Gazprom was valued at
just $20 billion while it was ‘worth’ $600 billion (30 timesless). While one can argue with the
specifics of these estimates, the magnitude of thediscounts suggest the real financial costs
associated with governance weaknesses.
Source: Ownership Structure, Legal Protections and Corporate Governance, 2000

UES bows to minority shareholder pressure

“The executives of UES, the Russian electricity utility, appear close to a compromise with the
government that would offer limited concessions to minority shareholders on restructuring plans
for the group due to be discussed at a board meeting this week.”
Source: Financial Times, January 29, 2001
Globalization
Globalization can influence four main elements of CSR in many different ways. Below some
examples of globalization’s impact on the main four elements of CSR have been presented.

Rule of Law

It is becoming more and more obvious that the efficiency of the legal institutions can have a big
impact on good governance, and in that context, the CSR system. Global corruption, money
laundering, and bribery initiatives are just three examples of the impact that globalization has on
the functioning of the legal institutions.

Regulations, Competition, and Standards

As regulations ease and markets become more global, many barriers to competition are falling.
However, without higher global standards and more strenuous regulations it will be difficult for
globalization to continue strengthening an environment that is supportive to global trade and open
markets. Obviously, globalization has triggered many initiatives for global standards.

Complementary CSR Institutions

Globalization influences the behavior of practically all of the elements of the complementary CSR
institutions. For example, changes in norms and societal pressures and the role of the media are
highly influenced by access to global information and ease of Internet use. Similarly, globalization
also has a substantial impact on the functioning of the consulting industry, educational
institutions, and the labor market.

Internal Corporate Structure and Policies

Global trade and open markets have a substantial impact on the way companies compete in the
global markets, and therefore, on internal corporate organizational structures and policies. For
example,

1. Greater reliance on a more decentralized and flat organizational structure forces

companies to move many decisions and responsibilities to local managers.
2. Companies are exposed to legal and reputational penalties in countries in which they
operate and increasingly become more and more responsible for the conduct of their
business partners in various parts of the world.
3. Companies need to communicate values and ethical practices to their employees all
over the world.
4. Recently, companies have started to compete on the basis of the quality of their
corporate governance systems, which directly reflects the level of risk to investors and the cost of
capital.

It can also have the following impacts:

Convergence

For example, globalization contributes to the convergence of governance standards as well as

some elements of the corporate governance system through the influence of various institutions,
such as:
• The OECD,
• International investors and capital markets, and
 • Media, information technology, etc.

Financial markets

Globalization is pressuring many companies to obtain access into international financial markets
and thus face greater pressures to improve their corporate governance systems, including CSR,
transparency, and accountability.

Price and quality

Global competition in price and quality of a firm’s goods and services lead to the convergence of
a cost structure and a firm’s organization, which also influences a firm’s behavior and discipline.

Interconnection of citizens and flows of knowledge

Globalization not only impacts trade, but also impacts the expanding interconnections of markets
and citizens, contributing to shifting social values. Through rising international flows of knowledge
and information, additional incentives are created for achieving a higher level of CSR

It should be noted that more coordinated international efforts are necessary to avoid the fear that
the costs and benefits of a global economy are inadequately shared and out of balance.

Crises and Changes in the Political and Macroeconomic

Environment
Macroeconomic stability is critical for private sector investment and trade so as to promote the
necessary growth for poverty reduction and more equitable development. Major changes in
corporate behavior and corporate governance systems, have often been triggered by corporate
failures or crises as well as substantial changes in the political and macroeconomic environment.

For example, major crisis in product markets, such as loss of market share and market
capitalization due to the use of child labor have, in the past, forced several companies to re-
assess their CSR practices.

The East Asia financial crisis – a change in the macro-economic environment – contributed to a
fundamental reassessment of the functioning of corporate governance systems by putting more
emphasis on transparency, accountability, and the interest of minority shareholders.

All of these elements are also very important to how companies fulfill their social and
environmental responsibilities.

Government
Through its impact on the 4 main areas of CSR:

1. Rule of Law
The capacity of the state and political structures has an important impact on the effectiveness of
law enforcement. For example, governments influence the organization and allocation of judicial
authority. At the same time, the independence of the judiciary from the executive branch and
politics is critical.

2. Regulations, Competition, and Standards

One of the main challenges of governments is how to represent the public interest through
regulation rather than ownership and control, and through the creation of an enabling
environment rather than directly participating in economic activity. States can help make sure that
citizens and the private sector fulfill their responsibilities, particularly to the public good.
Governments can play an important role in making sure that economic growth is based on the
sustainable use of natural resources and that environmental costs are taken into account. States
have the responsibility to create a stable macroeconomic environment, create the conditions
whereby markets operate effectively, and represent the public interest.

3. Complementary CSR Institutions

Bodies with an official mandate, accountability, leadership, and those that have a prominent or
formal role in government are of critical importance for implementing relevant policies.
Governments should also support the creation of new market institutions to fulfill an enabling role
in supporting and complementing the existing CSR institutions. For example, the government
should support a political system that provides opportunities for all segments of society to
influence government policies and practices.

4. Internal Corporate Structure and Policies

Through strong impact on the political and macroeconomic environments, including privatization,
governments also influence the ownership structure. On the other side, this determines the
internal corporate structure and policies.

The government can influence the design and implementation of sound corporate social and
environmental practices in different ways, such as:

providing macroeconomic stability and facilitating private sector investment and trade to
promote sustainable growth.
developing an honest and accountable government that can combat corruption.
developing a commitment to CSR.

The government can influence the design and implementation of sound corporate social
and environmental practices in many different ways, such as:

providing macroeconomic stability and facilitating private sector investment and trade so
as to promote sustainable growth.
developing an honest and accountable government that can combat corruption.
developing a commitment to CSR.

CSR Diamond as a System

The effectiveness of the CSR diamond depends on the way elements of the system function as a
whole. What matters is the cumulative effect of all four elements taken together. The main
challenge is to provide consistency in the efforts and initiatives taking place within individual
elements so that a positive impact on CSR is effectively achieved. As all of the elements are
interconnected, making progress on one will improve the prospects of improving others.

Links between Rule of Law and Regulation, Competition, and Standards

Increased effectiveness of legal institutions and corporate governance are not sufficient
conditions to maximize social welfare. Effective competition, regulation, and standards are also
critical for improving CSR and thus producing social welfare. It is important to simultaneously
consider competition reform and regulation with improvements in the efficiency of the legal
system. The importance of the efficiency of the legal protection depends on the trade-offs related
to the delegating part of authority to specific regulatory agencies and relying on a laissez-faire
approach backed by the general court system.

The first choice is trade-offs associated with relying on the general courts and specialized
regulatory authority with specific rules. The second choice is to what extent the regulators
delegate power, given the quality of the existing intermediaries. Therefore, it is important to
establish a proper balance between:

keeping judicial authority in the general court system,

delegating authority to specific regulatory agencies tasked with particular jobs, and
allowing regulators to delegate responsibilities to private sector organizations.

The location of authority can considerably affect efficiency. For example, giving authority to
specialized institutions might also lead to abuse.

Links between Rule of Law; Regulation, Competition, and Standards; and Complementary
CSR Institutions

For the laws on the books to affect the CSR environment, law enforcement must be credible.
However, law and reliable enforcement by the state’s legal institutions cannot be taken for
granted. The effectiveness of the new laws depend on voluntary compliance, the effectiveness of
the legal institutions that charged with enforcing the law, and legal intermediaries who understand
their meaning and relevance for practical cases. History, culture, and norms are an important
determinant for the effectiveness of legal institutions. Social support for legal reforms is critical for
their success. Legal protection will be ignored when it is inconsistent with social norms. Similarly,
without the appropriate political structure and allocation of judicial authority, the laws on the books
cannot have a significant impact.

Links between Rule of Law and Internal Corporate Structures and Policies

When legal protections are inefficient, ownership structure and identity can help provide
incentives for investors to invest. Weaknesses in legal protection have engendered a process of
ownership consolidation and increased identity and reputation.