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Published in:
The Limitations of Corporate Social Responsibility (CSR): A Philosophy at Odds with Its Surroundings Read chapter Read first chapter

2019 | OriginalPaper | Chapter

3. The Interdependent Business: Understanding Value Creation

Author : Ivan Hilliard

Published in: Coherency Management

Publisher: Springer International Publishing

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Abstract

This chapter starts by analyzing what value is and how it is created. It then looks at the arguments behind shareholder supremacy and residual claims, and the risks supported by different stakeholder groups such as employees and suppliers in their relations with any firm. It goes on to explain why current management thinking on these topics is incoherent for any organization that claims to take seriously its social and environmental responsibilities and outlines what coherent value creation looks like, and how it should be distributed across the stakeholder spectrum.

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previous chapter Coherent Organizational Responsibility
next chapter Organizational Autocracy: How the Democratic Wave Passed Over the Organization
Footnotes
1
With the older design, many people could feel close to the celebrities they followed, as though they were actual friends or acquaintances. The new design took away a connection (false though it was) that many users highly valued.
 
2
Inputs include the most obvious, such as materials, finance, energy, labor, and intellectual capital. However, CSR talks a lot about the license to operate provided by society, based on an organization’s legitimacy, the need to return natural resources such as water to their source in the same condition in which they were withdrawn and the obligation not to destroy the habitats of the communities where they operate. These all, in the world of CSR, count as inputs that provide for value creation.
 
3
In monopolistically competitive industries, consumers will actually pay less than the monetary value they placed on the product, with the difference known as consumer surplus. This consumer surplus represents the value the company has been able to generate for the customer and represents the reason for the firm’s existence (Slater 1997).
 
4
The USA, Canada, Brazil, the UK, Germany, France, China, India, and Japan.
 
5
One should remember the Friedman argument when hearing such words—even the decision to organize a staff party would be ‘spending the shareholder’s money,’ ‘short-sighted,’ close to ‘fraud’ and as it wasn’t decided by elected public officials, an ‘undemocratic procedure’ (Friedman 1970).
 
6
This is similar to the point about the C in CSR, leading to the suggestion that responsible management is only for corporations.
 
7
See, for example, Dyer Jr. and Whetten (2006) and Uhlaner et al. (2004), to understand how family firms may differ in how they see their responsibilities, compared to other types of firms. That said, this work has in mind larger firms (although not necessarily publicly traded), as they are most likely to have developed initiatives and programs to deal with a wider set of responsibilities, as well as created specific roles, published non-financial reports, gained certificates, and joined varied associations. In other words, organizations that are most incoherent in their approach to responsible management.
 
8
However, the reality nowadays in many large corporations is vastly different. When profits are enormous, this argument of gently waiting at the back of the queue is what is really shortsighted, fraudulent, and contradictory to claims of being responsible before a wider group of stakeholders.
 
9
It is not the same for an employee to be told that the organization must temporarily stop subsidizing their part-time MBA, as to be told that they no longer formed part of the organization and that the ending of the subsidiary was permanent, and additionally, they would never again have access to any training opportunities the organization provides.
 
10
Firm size was an issue for Patagonia, when making the switch to organic cotton. Some of their long-standing suppliers felt unable to change production processes and terminated the relationship. This was because they had bigger customers than Patagonia who were not interested in taking any responsibility for the serious environmental damage done by the cotton industry.
 
11
The reference here is to the investment house which invests in the organization and who is the one with the residual claim. Obviously, the well-being of individual employees in this investment house are at risk as wrong decisions made by the investment house when playing with other people’s surplus income may cost them their own employment.
 
12
The argument for such elevated rewards is based on the idea that top talent will exit otherwise. Bolchover (2011) finds that this is simply not true, although those who benefit from such rewards are naturally keen to propagate such reasoning.
 
13
In the case of the 10 largest companies, it was over 300 times.
 
14
These last two pieces of data refer only to CEO pay, reflecting the focus of most studies. However, one study of over 1300 US firms showed that the other six most senior executives were also amply compensated, with a median total compensation package approximately half that of the CEO in the same organization, still 161 times, on average, what other employees took home (Chief Executive Group 2014).
 
15
In 2015, Italy passed a law to establish a new legal format, Società Benefit, which is similar to the Benefit Corporation in US states, and so became the first country in the world to do so at a national level.
 
16
While the actions are softer than the ones initially recommended by the House of Parliament Committee advising the government, they do demonstrate that the changing relationship between shareholders and stakeholders is receiving increasing legal support.
 
17
This would require reassessing the manner in which organizations are financed. One possible option would be to eliminate residual claims and guarantee a contractual return to finance for its inputs, and the same way labor and suppliers are rewarded. This is not to say that higher risk options should not command a higher return, rather that there is no justification for their risk being potentially rewarded with extraordinary returns, when it is demonstrably no higher than that assumed by other inputs. Just like high-risk occupations demand high returns, so would high-risk financial operations. High, but not extraordinary.
 
18
Interestingly, they also analyzed by sectors how this value is perceived. Unsurprisingly, the food industry ranked highest.
 
19
Historical populations of large marine animals have fallen some 90% (Census of Marine Life 2010), and some 8 million tons of plastic now end up in the world’s oceans each year (McKinsey & Company and Ocean Conservancy 2015).
 
20
The top one percent of the world’s population captured 27% of the economic wealth generated each year (World Inequality Lab 2018).
 
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Metadata
Title
The Interdependent Business: Understanding Value Creation
Author
Ivan Hilliard
Copyright Year
2019
Book
Coherency Management

Print ISBN: 978-3-030-13522-5

Electronic ISBN: 978-3-030-13523-2

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-030-13523-2_3