1. Does business have social responsibility beyond increasing its profits?
Milton Friedman’s polemic New York Times Magazine essay, ‘The Social Responsibility of Business Is To Increase Its Profits’ (1970) is an appropriate starting point for a discussion of the role of values in business: Friedman’s position has played a large part in entrenching the socio-economic dogma of our time – that business’ only responsibility is to maximise profits for its shareholders. So pervasive is his neo-classical viewpoint, that the distinction between business ethics (which he supported) and business social responsibility (which he viewed very narrowly) has been almost lost on a generation, the amorality of business’ legitimate pure pursuit of profits now accepted as part of our cultural canon. Today, the ubiquitous ‘it’s a business decision’ offers managers a passe-partout with which to avoid reflecting on the wider consequences of their actions.
Friedman can be approached from three directions: one can agree with him; disagree with him and critique his hypothesis; or, disagree with him but develop his hypothesis in line with current sustainability theory.
1.1 Not so fast, Friedman
Mulligan’s (1986) critical evaluation of Friedman’s thesis is well known and proposes two central arguments. Firstly he posits that Friedman’s entire thesis rests on a paradigm where an executive acts as a Lone Ranger, deciding by himself which good deeds to do, and therefore unfairly ‘taxing’ the stockholders without representation. This paradigm is possible, but unlikely according to Mulligan: more representative is a counter-paradigm, whereby a business’ strategy is designed by many stakeholder groups, including executives and stockholders. ‘Lone Ranger executives are no more welcome in a socially responsible business than in one devoted exclusively to the maximization of profit’ (ibid: p.267).
Secondly, Friedman claims that pursuit of social responsibility in a free-enterprise system represents ‘unadulterated socialism’ – that by imposing ‘taxes’ to ‘foster “social” objectives’ executives are undertaking the work of a civil servant, and thus accept the ‘socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation scare resources to alternative uses’ (Friedman, 1970). This reasoning is dismissed by Mulligan on account of it relying on; the already dismissed paradigm – therefore the executive is not, ‘in effect’ a civil servant; the absence of a link between a civil servant advocating social responsibility and also supporting that political mechanisms should determine the allocation of scare resources; and, the extraordinarily wide definition given for socialism (the political allocation of scarce resources) – so wide in fact that it could easily be applied to a government system on the extreme right of the political spectrum.
Friedman’s thesis is therefore open to reasonable challenge. As stated, Friedman did not suggest that business was free of ethics – he concludes his article by stating that a business must increase its profits ‘so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’ (ibid). However, Mulligan (1986), without even pointing out that businesses have become quite involved in setting the rules of the game, is able to counter with regard to Friedman’s moral exhortation:
‘If Friedman does not recognize that even these restrained words lay open a broad range of moral obligations and social responsibility for business… one of the largest areas of human interaction… then the oversight is his.’ (p.269)
1.2 Broad CSR and Friedman’s support of socially responsible business
Mulligan admits that his critique only shows ‘that business people can pursue a socially responsible course without the objectionable results claimed by Friedman’ but does not offer positive arguments as to why they should. Schwartz & Saiia (2012) answer this call by examining Friedman’s ‘narrow’ view of CSR (to maximise profits in accordance with the stockholders’ desires whilst ‘conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom’) against the ‘broad’ view of CSR that is more common today (and that Friedman so objected to). ‘Broad’ CSR requires businesses to interpret ‘ethical custom’ more widely than Friedman would like (fully embracing the ‘spirit of the law’. Applying both views to real cases, they demonstrate the difficulty in siding with Friedman’s view in practice (the Ford Pinto recall in particular).
Schwartz & Saiia (2012: p.12) summarise this broader interpretation as including: universal core ethical values (such as trustworthiness, accountability, caring and citizenship); utilitarianism; Kantianism (do not exploit others); basic moral rights (such as life, health and safety of stakeholders); and, justice (including procedural, compensatory, distributive and societal justice). A theme that will be examined further is the obvious difficulty faced by any firm attempting to apply these additional ethical constraints at the same time as protecting the shareholders’ moral rights to their property. Many of these standards will conflict with each other, and as Orts & Strudler (2010) suggest in their critique of stakeholder theory, ‘balancing seems neither possible nor desirable in practice’ (p.611).
Nonetheless, how to address these constraints is not the same question as whether or not they should be addressed, and why Friedman’s narrow view needs to be broadened. In fact, Friedman’s position, free of modification, can stand even in a company that is completely devoted to broad social responsibility, provided the business is acting in accordance with the owners’ desires, within the law, and conforming to ethical custom. The key factor is what the shareholders expect from the company: the company is able to pursue whatever strategy it has agreed with the owners, even if this is not to maximise profits for them (for instance as with a social enterprise). Furthermore, ‘ethical custom’ has progressed since 1970 and the law has been modified to reflect this, not just in terms of allowing for owners to have desires beyond the bottom line, but also in legislation that demonstrates wider ethical constraints on business behaviour (Michael, 2006).
There are also reasons for broadening Friedman’s view beyond those allowed for within his own thesis. These include: that corporations have made claims to citizenship within society (corporate personhood) and must therefore consider their wider impacts on society; that shareholders, as individuals, have moral obligations toward society even if businesses do not; that corporations have the power and ability to contribute to solving societal issues; and, that society cannot rely on government alone to protect itself from all harmful impacts caused by corporations (Schwartz & Saiia, 2012: p.13).
1.3 Fabulous Friedman or pernicious neo-classical nonsense?
Friedman’s position has partial validity, particularly with reference to a company’s managers’ fiduciary duty to the shareholders. Philanthropy should not be considered an obligation for companies: in fact, companies now understand that CSR initiatives work best when they are in line with core business objectives (Overall, 2012).
The issue is the extent of the legal protection from moral responsibility that Friedman proffers to business. The law cannot hope to regulate every decision that a manager might face: managers must regularly interpret the ‘basic’ rules of law and ethical custom. This narrow neo-classical stance has excused a generation of managers from accounting for the ethical components of decisions, ‘justifying their action on the basis of: “I did what was necessary to maximise the interests of my principal”’ (Schwartz & Saiia, 2012: p.21). Moreover, shareholders are morally accountable for the instructions given to their agents: but moral and legal accountability are two very different matters – beyond fraud there is limited legal basis for lifting the corporate veil.
The law is a social construct, markets too: what happens in one affects the other. Just as the values of society determine ethical custom, ethical or unethical behaviour within businesses can affect the values held by society (Joyner & Payne, 2002). There has always been a close relationship between the law, societal expectations and the evolution of moral judgements – changes in societal expectations coalesce into soft, self-regulatory norms which often get encapsulated into law (Sharp Paine, 2003). However, there is no intrinsically positive direction to this evolution: rather,
“the spiral of culture, wherein culture influences values, which influence beliefs, which influence attitudes, which influence behaviours, which shapes culture, continues to form.” (Joyner & Payne, 2002: p.301)
2 Markets and morals: Paradise Lost?
The pervasive neo-classical belief in the sanctity of markets’ ability to correctly and fairly assign resources where they are most required, had, until a few years ago, gone largely unchallenged for decades. In his latest book What Money Can’t Buy (2012)Michael Sandel argues that over time society has allowed markets to erode non-market norms, providing examples ranging from the onslaught of advertising in schools in the US, to securitization of life settlements on Wall Street.
Markets, we are told, are the only efficient way of allocating scarce resources and ensuring maximum ‘utility’ for all participants; with one or two small caveats, including that there is ‘perfect competition’, the conditions for which ensure that there never is. Furthermore, there are no markets for many of the things that sustainability is concerned with, such as biodiversity, or happiness. Thus all existing markets are effectively in a permanent state of failure, and many resources, vital for immediate as well as sustained civilisation, have no market in which to be efficiently allocated.
Our efforts to create markets in sustainability areas have so far not met with resounding success. The EU ETS, possibly the most ambitious sustainability-oriented market yet set up, has never provided a price for carbon that would make emissions reduction truly compelling, and its expansion to areas of significance, such as aviation emissions within Europe, are met with fierce international resistance. Market management of social sustainability issues, for instance healthcare or education, has not faired any better.
Sandel’s real objection though, is to the introduction of markets where they simply shouldn’t be allowed to exist. Other examples include paying children to improve their grades, paying fat people to lose weight, and trading procreation permits in China. There is no question that financial incentives can work in all of these markets, the question is if we want them to work (ibid: p.59), even though the incentives used will likely corrupt attitudes and norms worth protecting. This theme has long been a matter of disbelief for environmentalists, best articulated in Natural Capitalism (Hawken, Lovins & Lovins, 2000):
“For all their power and vitality, markets are only tools… They can be used to accomplish many important tasks, but they can’t do everything, and it’s a dangerous delusion to begin to believe that they can – especially when they threaten to replace ethics or politics.” (p.261)
And yet this is precisely what society has set the spiral of culture to do over the past 40 years – a market is only as fair or responsible as the people within it setting and taking prices. Remove the integrity of the individual actors within the market, and the market itself begins to slide from theoretical amorality towards practical immorality. Just because the market does not price the value of clean water, biodiversity or equitable allocation of resources, does not mean that these things do not have a value. Individuals or businesses failing to value these things does not leave their value undecided: it leaves the market to set their value (Sandel, 2012), often, at nil. Omission can be as immoral as action.
Ethics only cease to have value in the face of market failure. A business that legally externalises a social or environmental cost that will result in ‘harm’ and inevitably impact its business at some point in the future is accepting a market price set with imperfect information. This has a consequence on any attempt to base a sustainability initiative explicitly on a financial return business case. How can we expect a business to successfully implement sustainability measures, when such success is based on a market ‘that is very good at setting prices but has no concept at all of costs’ (Anderson & White, 2009: l.1037)?
3 Market-based drivers for CSR
CSR is used herein as a proxy for ESG, Sustainability and all the other alternative business practices that incorporate elements of responsibility or ethics on a spectrum of compliance through to ethical business. The terminology used to discuss business ethics differs between academic disciplines, but as explained by Joyner & Payne (2002), CSR can be taken as referring to ‘categories or levels of economic, legal, ethical and discretionary activities of a business entity as adapted to the values and expectations of society’ (p.300).
Friedman was right that not all socially responsible action taken by a business results in a return on investment. For the time being, his adage that ‘business of business is business’ stands: companies must be able to generate an overall return from their investments, regardless of the imperfections of the markets in which they are made. Given that, relatively recently still, many executives were unconvinced that companies should be moral actors or that society had the right to require companies to take on increasing social responsibilities (Holliday et al., 2002, as cited by Samuelson & Birchard, 2003) market-based drivers that do offer a positive return remain the most commonly adopted.
3.1 Four basic reasons for adopting CSR measures
Doane (2005) lists four key drivers for adopting a CSR programme that make perfect financial sense without having to radically re-envision the business landscape: managing risk and reputation; protecting human capital assets; responding to consumer demand; and avoiding regulation. Activity based on these drivers would be acceptable to Friedman. He might even insist on it, provided not ‘fraudulently’ placed under the cloak of CSR, as it would address normal pressures that the market brings to bear on any business strategy.
Even if their purpose is unflinchingly Friedmanesque, the above drivers can all satisfy the EU’s definition of something that is ‘socially responsible’ (‘voluntarily going beyond what the law requires to achieve social and environmental objectives during the course of… daily business activities’ (European Commission, 2012)).
3.2 Machiavellian grounds for going beyond compliance
Joyner & Payne (2002) assert that a company may invoke ethical business practices for Machiavellian motivations: to convince stakeholders that the business is ‘doing the right thing’, avoiding the legal consequences of its actions, or demonstrating its ‘focus’ on their best interests, rather than its own. Complex and expansive legal regulations, as well as the expense of loss of goodwill stemming from public outrage over perceived illegal or immoral acts, provides a sound business case for exceeding minimal compliance measures.
3.3 Carroll’s ‘Organizational Social Performance Model’
Carroll (1979) outlines three intersecting dimensions of organisational social performance:
- Dimension 1; Social Responsibilities (in order of importance)
- Economic – produce goods and services to be sold at profit
- Legal – obey societal laws and regulations in the execution of business
- Ethical – meet society’s expectations for conscientious behaviour.
- Discretionary – any act that the firm undertakes over that required to be taken: not taking the action would not be unethical.
All factors within Dimension 1 operate within normal market pressures under current business paradigms. Some factors in Carroll’s second dimension begin to move towards doing ‘the right thing’ without requiring an ulterior economic interest-furthering motive.
- Dimension 2; Philosophy of Social Responsiveness
- Reaction philosophies – address social issues stemming from external forces such as legal, regulatory or social pressures
- Defence philosophies – address social issues in advance of being forced into action by external forces
- Accommodation philosophies – address social issues because they exist, not for economic interests of the business
- Proaction philosophies – anticipate social issues before they are widely recognised as societal challenges and develop resolution strategies.
Although both accommodation and proaction philosophies can be applied without the ulterior motive of financial return, more likely is that these philosophies are employed by businesses willing to view CSR from a value enhancement perspective, rather than the traditional risk (cost) avoidance perspective (or cost saving perspective for sustainability).
Dimension 3 is fluid: it represents the social issues themselves and therefore changes with the opinions and values of society.
The model illustrates how a company might progress from the pure market-pressured drivers identified by Doane (2005) through reactive and defensive compliance-based cost-avoidance measures (possibly of the Machiavellian nature outlined by Joyner & Payne (2002)), to pre-emptive value-generation and competitive proaction activities.
4 Ethics-based drivers for CSR
The costs that can be avoided or savings that are available to businesses that commit to incorporating risk management and compliance (Grierson, 2012) or sustainable efficiency (Anderson & White, 2009) into their core operations are increasingly well documented. Still, resistance exists even with such clear business cases. What hope is there of enticing companies to entertain activities that include CSR or sustainability outcomes, based on ethical grounds and without clear investment returns? Quite apart from business cases for ethical behaviour not always stacking up, ‘ignoring ethics can be quite profitable. Certainly, ethical scruples can sometimes be an economic handicap’ (Sharp Paine, 2003: p.60).
The issue revolves around three points: clarification on the extent to which companies are solely responsible to the shareholders; an expansion of the discussion in 2.1.2 (businesses’ ethical obligations beyond Friedman’s criteria); and, whether or not including ethical factors in business decisions results in economic benefit to the company.
4.1 Mischievous myths: shareholder primacy vs. communities of stakeholders
Quite apart from veracity of Friedman’s arguments, a universal misunderstanding of the precise rights of shareholders causes further confusion.
Shareholders are not the outright owners of a business – if they were they would be exposed to all of a business’ liabilities as well as being entitled to its profits. In fact, they own only the risk capital of a business, granting them the right to future dividends: the business has real liabilities that rest with its employees, suppliers and other stakeholders. Shareholders “do not own the licence to operate granted to them by the communities within which they operate.”(Steare, 2012).
The view that shareholders are the exclusive owners of the company has been strengthened by neo-classical doctrine, but has long been challenged: E. Merrick Dodd Jr. pointed out in the Harvard Law Review in 1932 that managers are trustees for their institution and its multiple constituents, rather than merely lawyers acting on behalf of the shareholders (cited by Donaldson & Preston, 1995: p.65). The preferred position is best summarised by Letza, Sun & Kirkbride (2004):
‘The process of incorporation (for both public and private companies) can no longer be viewed as a purely private ownership matter in the traditional sense. Shareholders do not have individual free rights and claims on the corporation. They bear only very limited liability and risk. The entire liability and risk of the corporation are shared by many stakeholders including shareholders, bondholders, creditors, employees, suppliers, the government and the public at large. In this sense, all companies have some public character.’ (p. 256)
Even if only in terms of the community licence to operate it is granted, a business should make decisions based on the interests of more groups than just its shareholders. This does not mean that a business can meet the needs or wishes of all its stakeholders, rather that these interests are justly within the range of responsibilities of the business.
4.2 Development of Business Ethics
Business ethics, rather than the prescriptive practice of ‘ethics in business’, is the questioning of the behaviour of a business when judged in relation to the current societal norms and morals. It is facing up to difficult business situations in exactly the same way that one must routinely confront difficult personal situations, conceiving what is right and fair conduct or behaviour, and deciding how to act (Joyner & Payne, 2002).
Current narratives of capitalism, with their foundations in competition and autonomy, separate capitalism from ethics. Freeman (1994) describes this as the ‘Separation Fallacy’, whereby instead of acknowledging the moral dimensions of every decision, a separate sphere of rules and norms has been created, dictated by competition and winning.
Aristotle would have found this separation extraordinary – and dangerous. Any set of rules and norms that systematically removes ethics from decision-making must ultimately lead to the dilution of ethics within related spheres (see 2.1.3). Actions become habitual, thus moral stances can be affected by habit. ‘We are what we repeatedly do. Excellence, then, is not an act, but a habit’ he said – the adage need not apply to excellence alone. Titmuss (1971) explored this more recently with regard to payment for blood donation:
‘It is likely that a decline in the spirit of altruism in one sphere of human activities will be accompanied by similar changes in attitudes, motives and relationships in other spheres.’ (p.224)
Freeman, Martin & Parmar (2007) believe that this separation has led to ‘the dominance of investor rights, the diminishment of good, moral decisions at the sight of profit-taking’, and essentially guides managers to ignore the ethical implications of their decisions (p.309).
Yet in reality, society appears to be slowly reversing the trend of moral blindness in business: organisational stakeholders are embracing the sentiment that ‘that profitability measures in isolation, fail to capture the essence of an organisation’s overall performance, both as a profit-seeking entity and as a member of society’ (Joyner & Payne, 2002: p.298).
Business and management theorists have long supported this view. In fact the original free-marketeers, Adam Smith and Edmund Burke, would have been horrified by the notion of the separation fallacy, both holding that a moral and just society is the absolute pre-requisite for trade. As long ago as 1938 Chester Barnard was investigating the role of organisations within society, their importance as principal societal structural frameworks, the way in which they could direct individual action, and how unwritten rules that guided business activities developed from actual practices. Business decisions could, in his opinion, only be analysed by taking the economic, legal, moral, social and physical elements of the decision-making environment into account (Barnard, 1938). Peter Drucker was the one of the first management thinkers to speak explicitly of the ‘social responsibilities of business’, stating that management had a responsibility to consider whether every business policy or action was ‘likely to promote the public good, to advance the basic beliefs of our society, to contribute to its stability, strength, and harmony’ (Drucker, 1954: p.388).
Corporations were becoming increasingly public in nature (ibid., Selznick, 1957) and business had both an interest and a responsibility in resolving problems affecting the welfare of the communities that it relied upon. Links were drawn between pure profit focus and a lack of organisational direction or purpose; Selznick (1957) went so far as to say that an institution was formed by making value commitments that justified its role and responsibilities within a community. Andrews (1987) developed this further, believing that pursuing profit alone would lead to ethical concern being subordinated to financial outcome, proposing that a business should perform ‘good works’ strategically related to current and future economic functions. In line with Drucker, he also recommended that businesses develop non-economic objectives: a strategically directed company would have
‘a strategy for support of its community institutions as explicit as its economic strategy and as its decisions about the kind of organisation it intends to be and the kinds of people it intends to attract to its membership.’ (ibid. p.77)
Business benefits from and relies on its position within society. It can either choose to reflect society’s values, or it can influence them, for the better as well as for the worse.
4.3 Should companies be ethical?
‘What’s the use of a fine house if you haven’t got a tolerable planet to put it on’ wrote Thoreau (Thoreau, 1895). Much like the previously mentioned words of Anderson and Brower, this concept appears to be, despite its simplicity, often incomprehensible. Public demand for, and businesses’ acceptance of, corporate social responsibility came from more nuanced societal value shifts rather than undeniable sustainability truths.
Solomon (1997) suggests that, in the US at least, this can largely be attributed to the extraordinary success of American companies breeding extravagant expectations by the public, as if the way companies behave is beyond the public’s purview. More reasonably, he argues that this success has created a new privileged class, a nobility even, that society has a long history of making demands against (noblesse oblige). The privileged classes have largely been happy to accept this norm, be it regal responsibility to subjects over the centuries, princely patronage of the arts, or Carnegie’s more ‘modern’ take on the destructiveness and obligations associated with wealth (Carnegie, 1889). Regardless of social demand, business expansion has led it to move into areas more commonly within the realm of government: some companies are amongst most powerful institutions in the world and of their own accord have become involved, actively or passively, in education, support of the arts, research funding, urban planning, world hunger, health and poverty. ‘The more powerful business becomes in the world, the more responsibility for the well-being of the world it will be expected to bear’ (Solomon, 1997: p. 206).
The idea of ‘doing well by doing good’ (Anderson & White, 2009: l.5596) or ‘good ethics being good business’ (Joyner & Payne, 2002: p. 298) will be explored in s.2.4.4, but the very fact that research is being done into the area means that businesses are taking note of the wider debate around values and ethics in business. The more we discuss consciously incorporating ethics into business, ‘the stronger the cultural pull to be ethical’ (ibid: p.299). Even if the connection between values and economic success is unclear in the minds of executives (Anderson, 1997), the fact is that the ‘noise’ being created in the popular and academic press is bringing the amoral character of business together with any pure focus on profit maximisation into increasing dispute, growing the opportunities for discourse (Pirson & Lawrence, 2009). Combined with what appears to be a resurgence of public support of and participation with special interest and action groups (Mendick, 2011, Steel, 2012, Tuffrey, 2012), and the societal turbulence that persists from the ongoing 2008 financial crisis (Confino, 2012), it is unlikely that an executive of a consumer-facing company would today disregard, superficially at least, the values, attitudes, beliefs and behaviours of the communities in which the business operates.
People in the world of marketing and branding would argue that companies have developed personalities – ‘brands’ now have value in and of themselves (Interbrand, 2011). The corporate façade hides the fact that behind every corporate action there is a human being making a decision, a choice. These choices form a pattern of behaviour that is associated with the business, not the individuals that direct them. Allowing individuals within a business to value certain things, and act in certain ways, simply contributes to the collective definition and public projection of ‘who’ the ‘brand’ is and ‘what’ it stands for. The company allows its moral character to be defined by things that its employees value. Regardless of whether or not a company should behave ethically, only people can make moral judgements: a company must allow a value system to pervade the behaviour of the individuals within the business in order for it to act ethically (Joyner & Payne, 2002).
4.4 Ethics costs vs. Ethics pays
The question is not ‘does sustainability pay?’, which is much easier to answer than ‘does CSR pay?’: the basic first step of sustainability (efficiency measures) inevitably results in financial savings for a company. Profitability from ethical decisions (reflecting social norms and values) is much harder to observe or calculate, especially as it can include philanthropic and altruistic acts outside of the core activities of the business, which nonetheless contribute towards the perception of its ‘good’ corporate citizenship. Even those activities undertaken in relation to core business functions, (for example employee health and education, community support around the place of work, or improvement in local air quality), will be far too wide-ranging to make any realistic comparison or tell any coherent story to someone looking for definitive data (Samuelson & Birchard, 2003).
For every study claiming that ethical behaviour pays off there will be one claiming that it does not. Lynn Sharpe Paine (2003) points out that the reality is nuanced: there are companies that have made money through moral indifference (Exxon), just as there are companies that are concerned with ethical and social responsibility that have not made much money at all. Similarly, there will be companies that have lost billions as a result of ethical miscalculations (BP), just as there are companies that can attribute at least a portion of their profits to their moral character, or who exist solely for it (Café Direct).
Joyner & Payne (2002) investigated the socially responsible or socially minded actions of entrepreneurs to determine whether social responsibility could lead to financial returns. They found that there were direct and indirect links between values, ethics, CSR activity and financial performance, but that it was ‘impossible to state that these linkages caused the changes in financial performance noted’ (p.309). In addition, there will most likely be a time lag between any activity and a potential resulting financial gain, further complicating efforts to link socially positive behaviour and corporate profits.
They propose several possible intangible benefits for firms that act ethically, identifying: a relationship between the employees’ opinion of a company’s ethics and their commitment to the company or willingness to work for one; increased ease of business resulting from improvements in trust between the business and its stakeholders; and, the opportunity for business owners and employees to climb Maslow’s (1957) hierarchy of needs towards self-actualisation with every positive ethical action.
Frank (2004) identifies five areas where ‘socially responsible organisations are rewarded the higher cost of caring’ (some overlapping with Joyner & Payne): avoiding opportunistic behaviour between owners and managers; employees’ moral satisfaction reduces their salary demands; moral identity attracts higher quality recruits; customer loyalty is maintained and increased; and, subcontractor trust can be established (p.67).
Doane (2005), in her critique of the application of CSR within the framework of markets and market-based incentives, emphasises that, for now:
‘business can do well and do good… up to a point. Business, in the end, must be profitable, and the aims of social and environmental objectives do not always coincide with the hard-nosed realities of the competitive marketplace.’ (p.216)
This is just one of the tensions that needs to be considered. If being an ethical company is about taking into account the rights and interests of all groups that the company relies upon, then what happens when the rights and interests of third party groups compete with each other, let alone with the economic well-being of the company? Doane’s main criticism of CSR is that, without placing the need to act ethically at the heart of an organisation, a business can promote its efforts to generate positive social impacts that have a concomitant positive financial benefit, such as Tesco rewarding purchases with ‘computers for schools’ vouchers, while ignoring the much more significant question of how to tackle the detrimental effects of the way in which Tesco operates its business on every single community it touches (farmers, local retailers, customers for instance).
Resolving moral situations (difficult judgements that individuals face daily, personally and in business) requires creativity, which, in the right circumstances, can deliver profit. Business however, is prone to innovating solutions only in those areas where profits are available.
4.5 Ethics in practice: the limitations of broad CSR
Doane (2005), quoted above, takes issue with the ever-hopeful CSR battle cry; that a company need not sacrifice financial performance in order to meet its social obligations. Hart (2007), as one of the sustainable development generals, goes so far as to give it a name: ‘The Great Trade off Illusion’ (p.6).
Although research has repeatedly shown that human beings are not the materialistic utility maximisers of the neo-classical view, and that they can and do seek fulfilment beyond financial reward (Tyler (2006), Diener & Seligman (2004), De Cremer & Blader (2005) as cited in Pirson & Lawrence, 2009, and, Freeman, Martin & Parmar, 2007), equally, it has confirmed that our altruistic qualities are, more often than not, squashed by markets and the competition that we have built into the very soul of capitalism: there is no escape from the ‘conflict between economic goals and their social and moral implications’ in the current management framework (Birkinshaw & Piramal, 2005: p.15). Any company that legitimately externalises social costs to increase its privatised profits (i.e. most companies) logically sacrifices its social obligations in order to maximise its financial performance.
CSR has been a useful tool for businesses to give at least the impression of altruism (whilst successfully avoiding increasing regulation), but Doane (2005) claims that it has been little more than a PR strategy to divert attention from the real work of maintaining business-as-usual. ‘The status quo is an opiate’ after all (Anderson & White, 2009: l.4499).
Increasing legislative and governmental pressure on business to report on its non-financial risks aimed to improve companies’ ability to manage and therefore reduce their negative environmental and social impacts, thus benefitting society as well as their own bottom lines. However, even a widened understanding of all ‘material’ risks leaves a large gap between risks that are relevant to a business and the risks to society resulting from business activity. Furthermore, the voluntary codes and standards that business has put in place and that form the backbone of much of the measured reported corporate behaviour, again fall foul of market pressures. Nike found out how hard it is to force through labour standards throughout its supply chain. If the Vietnamese must compete with the Chinese on price, and opt to do it by working their staff harder and longer, then Nike must choose between paying its suppliers in Vietnam more or moving its business elsewhere – hardly the optimal outcome for either party (Zadek, 2004).
CSR programmes often have a goal of building customer loyalty or trust. Consumers may well baulk at buying goods from companies that engage in immoral business practices (e.g. child labour), but that does not mean that they will ‘consume ethically’, demanding ethically produced products of their own accord, or being willing to pay extra for the privilege. Out of site, out of mind: consumers are ‘notoriously passive’ (Doane, 2005: p.222). CSR might well improve customer loyalty, but demand that businesses address and resolve important ethical, social and environmental concerns in their products (such as, why do we need this product?) will, in most cases, not come from consumers (ibid.).
Investors might cite the positive correlation between socially responsible businesses and their share price. SRI funds saw phenomenal investment growth in the mid-noughties, but many have been shut down in the last few years as recovery from the 2008-induced recession continues to stall. New research confirms (for now) that companies committed to improving their performance across ESG factors outperform comparable companies with ‘low’ ESG focus in terms of both stock price and profits (Eccles, Ioannou & Serafeim, 2012). However, just as SRI is flawed, (as it often accepts the ‘best of the baddies’ (Doane, 2005) and rarely takes account of malign corporate activism), so is ESG, which, from a market-perspective, is simply a proxy for risk awareness and long-termism, ‘and it’s not evident that long-termism is ethical per se.’ (Hazlehurst, 2012 quoting Hoskin, M.).
The market forces described above contribute to a situation in which it is incredibly hard for any company to succeed in changing the way business is done, acting as responsibly as it can, respecting its entire corporate ecosystem, internalising environmental and social costs and providing products that serve rather than drive human need. More often than not the companies that do try are small, ethical and idealistic: Doane (2005) refers to them as ethical Minnows, pitting them against themultinational Mammoths (p.222).
Competing in our current markets (playing by rules that do not necessarily reward truly ethical behaviour) is almost an insurmountable challenge for the minnows. Their costs are higher, producing lower returns for shareholders and thus making them a difficult investment sell; add in conventional bias against ‘risky’ new products and consumer focus on value over values, and you have a situation where scaling up and mainstreaming an ethical offering could not be made any harder.
At the same time, the mammoths are trudging in the opposite direction, desperately trying to scale down their negative impacts on society and the environment, more often than not ‘doing what they can, within the confines of the market,’ (i.e. protecting their profits), ‘rather than what they should’ (ibid: p.223).
This strategy’s practical arsenal includes stakeholder engagement (telling communities what is going to happen to them, rather than finding alternatives that meet corporate and community needs); CSR (lip service and self-regulation across a host of standards, without changing the business model that leads to the need for regulation in the first place); and, eating up the minnows in order to green or sanitise their product and service portfolios.
In summary, CSR, ESG, sustainability, long-termism and all other ethical business strategies cannot, on their own, fix a general market failure whereby, despite protestations to the contrary, markets compete against the broader public good (ibid: p.216). We must accept that we have been developing some good solutions to the wrong problems. Ask not how business can minimise its negative impacts, rather, says Doane, ask, what must we do to deliver a sustainable society? Yorick Blumenfeld sums up the challenge (1987: p.304):
‘Suggesting any radical new path for the economy is full of risk. Economics is serious business. The very lives of billions of people are dependent on it. That is why pragmatism usually overwhelms anyone tackling basic economic reform.’
5 Changing the question: alternatives for delivering sustainable business
The main barriers to the development of sustainable business have been identified as:
- a narrow focus on the rights of a dominant group, currently shareholders, within the capitalist narrative (Freeman, Martin & Parmar, 2007);
- a myopic view of value generation and business responsibility (Generation Investment Management LLP, 2012, Porter & Kramer, 2011, Doane, 2005);
- a belief in the innate superiority of competition over collaboration (Pirson & Lawrence, 2009, Tencati & Zsolnai, 2008, Freeman, Martin & Parmar, 2007);
- a failure to value (financially or morally) environmental and social services or to cost environmental and social impacts, creating a gap between business risks and social and environmental risks (Stahel, 2010, Doane, 2005); and,
- a need to play by the rules of the market (which includes meeting consumer demands, whatever they might be) that supports barriers 1, 2, 3 & 4.
Aware of the inherent obstacles of any market-based solution, alternative business models have been proposed that seek to circumnavigate the above blocks to progress. Unfortunately, although always meritorious in addressing one or even two of the barriers, nearly all fail on critical examination to provide the solution, as a result of basing their approach wholeheartedly within one of the other barriers. In other words, the systemic issues remain peripheral, as focus stays rooted in value rather than values.
5.1 Porter and Kramer’s shared wisdom
Porter and Kramer (Porter & Kramer, 2011, 2006) have provided the most high profile proposals for integrating more responsible corporate behaviour into business strategies. They developed their position on CSR into a ‘new’ concept published last year that they call ‘Shared Value’. SV (which clearly draws on the work of Stuart Hart and Jed Emerson) argues that ‘companies create business and societal value when they take a broader and longer-term view of their business activities’ (Sadowski, 2012); frankly, a great starting point.
However, for all the glitz and optimistic sparkle that the HBR paper projects, it cannot escape it roots in competition theory, entrenched by an insistence that capitalism itself needs no fundamental changes. The 2006 paper (Strategy & Society) places CSR as an addition to the current paradigm, not requiring any moral commitment, either in terms of the perspective of value creation, or the rules of the game. It is simply another tool that can improve competitive performance. It does nothing therefore to address current ‘winner takes all’ growth strategies, suggesting instead that being nice to the people you need to drive business growth, will help you drive business growth faster.
The sentiment prevails in their 2011 paper: SV is ‘not philanthropy but self-interested behaviour to create economic value by creating societal value’ (Porter & Kramer, 2011). Responding to an accusation that they had swiped their 2006 CSR paper under the carpet, by professing that SV is the antidote to (a cartoonish generalisation of) CSR which typically involves ‘random donations to charity’ (Denning, 2012), Kramer argued that CSR was often peripheral to a company’s core activities, forced upon businesses by external pressures (NGOs, regulation) and not driven by what mattered to companies.
Conversely, SV requires companies to consider social and environmental dimensions as part of their corporate strategy, forcing businesses to make choices based on factors that have traditionally been ignored. But it only incorporates these factors up to a point. It gives no advice to businesses where the ‘right’ thing to do does not match consensus values (for example ceasing supply of highly inefficient SUVs to urban motorists). No attempt is made to deal with issues where the ‘shared value’ (that which meets the needs of the business and those of society in the long term) is contrary to business value: where the disagreement over values is existential rather than incremental (Weinberger, 2012).
It is odd that this element is absent from Porter & Kramer’s analysis, as they appear aware of it, chastising companies for viewing value creation narrowly and in the short-term,
‘missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell.’ (Porter & Kramer, 2011: p.64).
Sadly, no further reference to moral implications of the above statement is to be found. As a result, the concept, which would undoubtedly provide a giant (incremental) leap forward to the current paradigm has been met with criticism. Denning (2012) accuses it of being a bandage on a cancer. Its reception within the establishment is more worrying: Larry Summers, former US Treasury Secretary and Harvard economics doyen, was overheard asking Mr. Porter “Do you seriously believe this *$%t?” (The Economist, 2012)
5.2 Performing in Sustainable Circles
The criticisms of SV raised above can be levelled at many of the alternative business models that have been proposed. All assume that there is an unquestionable compatibility between doing the sustainable (environmentally or socially responsible) thing, and finding an avenue for profit. Some give inequitable distribution of wealth, quality of life and resource use a nod, but only in so far as they relate to maintaining the GDPs of the global north, and managing down the risks of resource scarcity, environmental impacts and labour competition. The medium-term is king: the long-term, out of scope.
Walter Stahel’s Performance Economy (2010) does go a step further than SV, realising that ‘the invisible hand of the market cannot be expected to promote systems solutions’,as in the current paradigm businesses profit most from individual solutions with a high resource throughput (p.77). Stahel argues that there is a need to exit the consumer society by developing ‘Teddy Bear’ products that last ‘forever’ and place emphasis on stewardship over short-term destructive ownership, but the trickier existential problems of what these products might be is left unanswered. He concentrates merely on pointing out the colossal value of products with high levels of integrated technical knowledge.
The Circular Economy suffers the same issue, perhaps more so, as action is limited to collaboration to improve resource efficiency and extend product life cycles, rather than collaboration to promote sweeping positive social and environmental returns. Even Yvon Chouinard’s co-authored HBR paper The Sustainable Economy (Chouinard, Ellison & Ridgeway, 2011) proposes a system of value chain indices whereby all environmental and social impacts are monetised so that decisions can be made that are comparable across whole value chains and between industries. In other words, advocating the use of all of the tools that have got us into the mess that we are in now (Monbiot, 2012).
The gaps between social or environmental risks and material business risks remain, with solutions rooted in using technical innovation to drive the way we might be able to live, even though ‘the real challenges are social’ (Boyle, 2003: p.273). Absent from almost all of the proposed solutions is acceptance that the ‘right’ action is not always the one that most benefits the business, at least within the system as it is. Interests misalign: ‘if doing the right thing never required sacrifice, we wouldn’t need morality’ (Weinberger, 2012). Normative, not technical, solutions are needed to resolve the regular mismatch between what is best for a business and what is best for society and its supporting systems.
5.3 Balance in the balance
New business models fall short of offering a panacea as they fail to examine a company’s moral obligations sufficiently deeply: they go far enough to say ‘treat your employees well and they will work harder and be more loyal’ but not so far as to say ‘stop making guns, they kill people’. Stakeholder theory, long established in communications and management disciplines (Collins, Kearins & Roper, 2005), has recently become popular in the sustainability field (via business ethics), as it addresses these morally tricky situations discussed above, particularly, determining a business’ moral responsibilities beyond pure profit and economic value obligations (Orts & Strudler, 2010).
Similarities exist between stakeholder theory, collaborative enterprise theory, and humanistic business theory. All place importance on balancing interests amongst parties through discourse, emphasise the importance of community, focus on long-term mutually beneficial relationships, value environmental and social factors alongside financial goals, and promote broader more democratic governance and ownership models. Importantly, the principle of competition is relegated to the wings, cooperation instead taking centre stage (Pirson & Lawrence, 2009, Tencati & Zsolnai, 2008, Freeman, Martin & Parmar, 2007).
Normative approaches to stakeholder theory (rather than the more high self-interest descriptive and instrumental approaches (Collins, Kearins & Roper, 2005)), whereby businesses engage with stakeholders on underlying moral principles (Donaldson & Preston, 1995), link the inherent imperatives of sustainability (equity, equality and long-termism) with a duty to understand the positions of the various stakeholders, including those lacking the power that traditionally grants access to discourse (Collins, Kearins & Roper, 2005). Quite apart from the ‘deep’ sustainability perspective of this view, normative approach supporters argue that businesses must ensure that actual or perceived behaviour aligns with societal norms in order to avoid a ‘legitimacy gap’ (ibid. citing Sethi, 1979), that might threaten business success, now or in the future. Once societal stakeholders are engaged, ‘societally-justified ethical limits’ (Collins, Kearins & Roper, 2005: p.8) are placed on business behaviour and the legitimacy gap is closed.
However, stakeholder theory does not escape criticism. Orts & Strudler (2010) challenged the idea at its core and that has plagued all other models examined so far: how can conflicting interests be balanced (i.e. assigned weights that can be used to judge their relative importance) when the interests are often in conflict precisely because they are incommensurable? In addition, by promoting balance between conflicting interests, stakeholder theory can find itself easily used to condone unethical behaviour by providing a ‘false sense of having grappled with the hard problems’ (p.610). If stakeholder theory’s purpose (as a normative discipline) is to guide businesses in making tricky decisions, it would assign weight to interests across a spectrum: ‘evil interests are just as much interests as good interests’ (p. 611). And harmful behaviour is harmful behaviour, regardless of whether a person or party is affected by a company’s behaviour, defined as a stakeholder or not. Logically, the theory lacks the capacity to accommodate important moral concerns in business decisions, or to apply higher moral principles when required (p.612).
In effect, the tools stakeholder theory arms itself with are incapable of meeting its target – ethically sound decisions. However, Orts & Strudler distinguish between using stakeholder analysis for strategic purposes (which is harmful) and using it to ‘answer questions about the overall objective of a business or how this objective may relate to ethical values’ (p.610).
If stakeholder analysis is applied directly within the current market paradigm (at least ostensibly to assist strategic decisions), then the imperfections of balancing attempts become clear all to quickly. Aside from the obvious questions regarding how business (the powerful) identifies and prioritises the demands of stakeholders (the weak), there is an inherent issue with the self-interest of the (strong and weak) stakeholders themselves. Business managers are likely to address short to medium term challenges that can support their own careers, but, although appearing to be engaging on sustainability, ignoring long-term tricky challenges altogether (IBGYBG). Similarly, business can use its power to close the legitimacy gap, without having to reflect societal norms or deliver a social good – it only needs the self-interest of the weaker stakeholders to do so. Financially compensating stakeholders for environmental damage presents society with an undesirable outcome, which is not at all addressed by the privatised short-term benefit offered to stakeholders.
Sustainable solutions remain out of reach when all stakeholders attempt to ‘balance’ conflict through self-interested means. But the issues presented, alongside the criticisms of other models discussed in this section, do not mean that the models themselves should be dismissed; just that, on their own, they are insufficient. Freeman, Martin & Parmar (2007) were aware of this: ‘There will always be a small minority who are focussed on their own self-interest at the expensive of others. Our claim is that we should set the bar for capitalism at the best we can achieve not limit it by trying to only avoid the worst’. (p.312)
 The spirit of the law: essentially what society determines to be fair and right (morality), and opposed to the letter of the law (legality) (as defined by Raiborn & Payne (1990)).
 Lifting the ‘corporate veil’ of separate corporate personhood is a legal decision that enables the rights or the duties of the corporation to be treated as those of the shareholders. There is no ‘moral’ veil at present.
 A practice that has come about as a result of individuals in the US being able to sell their life insurance policies to ‘investors’, now on an institutional scale, who effectively bet on when an individual will die.
 France and South Africa have degrees of mandatory integrated reporting (Ioannou & Serafeim, 2012).
 The UK expects larger companies to report on environmental impacts where they are ‘material’ to their business (Doane, 2005) and the Carbon Reduction Commitment (CRC) requires companies with energy requirements over a certain threshold to report on their emissions – it is likely that this will broaden environmental reporting to companies that have not previously reported on non-financial information, (http://www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/crc/crc.aspx).
 A issue that carries a relevant risk (Doane, 2005) or, from a financial perspective, ‘Information is material if it could influence users’ decisions taken on the basis of the financial statements,’ (Zadek & Merme, 2003: p.12)
 A paper by Walker & Wan (2012) already questions the position with regard to specific financial benefits attributable to green ‘walk’ (substantive actions) and the negative financial consequences of green ‘talk’.
 The examples are endless (Coca Cola and Innocent, Unilever and Ben & Jerry’s, Cadbury’s and Green & Black’s). BP has become the UK’s largest producer of solar energy through acquisition of smaller operations.
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