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External stakeholders CSR genesis model
Teimuraz Vashakmadze, PhD
Associate professor, Institute of Business Studies, RANEPA
Timur Atnashev, PhD
Associate professor, Institute of Business Studies, RANEPA
Introduction
The contemporary understanding of corporate social responsibility (CSR) in developed countries,
foremost in the United States appeared during the last three decades, but it has deep historical
roots. In the case of United States, we can talk about organic evolution of this concept and related
social institutions during the 20th century. As for the majority of emerging economies, the concept
of CSR appears as an “imported” institution driven by globalization of financial markets.
The mechanism of that import can be described in a nutshell as follows. Public companies from
emerging markets must comply with the American and European investors’ standards in order to
meet and manage their expectations regarding their relations with external and internal
stakeholders. In recent years, this information has become crucial for the assessment of the longterm sustainability of cash flows of the enterprise and, consequently, for companies’ valuation.
Thus, firms from emerging markets start disclosing relevant information in their social reports in
order to meet the demands of foreign investors – making the company more attractive for investors,
despite the fact that there are no such local legal requirements. In this way, financial institutions
and stock exchange standards over the past 10 years have been the most obvious factor for transfer
of CSR in the business environment in developing countries.
There is an interesting fact that according to the RUIE (Russian Union of Industrialists and
Entrepreneurs) in total 70 companies published their social reports in 2012, while in 2007 there
were only 34 social reports published. More than twofold growth is quite impressive. However,
the proportion of companies providing regular social reports remains low and there are very few
corporations that provide integrated reporting so far. After the global financial crisis, investors
have become more cautious and selective, therefore, publication of social reports is considered as
a significant tool of enterprise value management available for public companies on emerging
markets. We believe that many Russian companies, which have adapted "Western" concept of
CSR today, just execute few formalities to meet the interest of global investors. Herewith,
employees in charge of the social reporting often do not understand its practical meaning. In spite
of the fact that a growing number of Russian companies began to publish social reports, the level
of corporate social responsibility in Russia is hardly at a comparable level with the United States.
The question of the future evolution of imported and to a certain extend feigned institution in
Russia – and broader, in the emerging economies – has both academic and financial relevance. In
this regard, using the analogy with the history of social responsibility in the Western countries, we
can assume that such “imitation” may eventually play a significant role in the real integration of
CSR in Russian business practices. This will happen in case if a critical mass of investors in the
market really pays attention to this indicator and is ready to "punish" the violators by selling off
share and hence, reducing market capitalization of the company. In this paper, we want to present
a conceptual model that allows estimating and predicting the evolution of social responsibility of
business on the country level. The proposed conceptual model is applicable not only to Russia and
it can be used to compile a global ranking of corporate social responsibility in different countries.
Literature review
At the early stage of formation of CSR related issues in the academic literature, most studies were
normative. They also played a role in the overall movement towards consolidation of CSR
standards. Gradually, more systematic and empirical studies appeared evaluating the real impact
of CSR on various aspects of the business.
In the recent decade, we can speak of a new substantive approach to CSR research related to
the question of the genesis of this type of practices at a company level. What drives
corporations, to a greater or lesser extent, to take CSR seriously, namely, to improve their
business processes in order to reduce ecological footprint, to change their HR management,
to make infrastructural investments, to develop the philanthropic initiatives?
Our model draws on Quentin Skinner, one of the founders of the Cambridge school of history of
discourse, and his critical approach to the classical Weber's "The Protestant Ethic and the Spirit of
Capitalism." Skinner has shown that in order to explain the origin of "the Protestant ethic" among
entrepreneurs in Early Modern Europe one does not necessarily need to make а complicated
verification of the hypothesis of a strong inner religious and theological beliefs (about the
dialectics of personal salvation) as the main motivation for running a successful capitalist
enterprise. The most likely and verifiable a hypothesis is rather about the pressure of socially active
Protestant communities on the emerging class of entrepreneurs. In terms of religion, the behavior
of entrepreneurs was inacceptable, and their social status was vulnerable. For Skinner, the
composition of the Protestant ethic and the spirit of capitalism was not a coincidence, but the result
of long-term mutual adaptation, in which the sin of greed has become a virtue of frugality. The
capitalists were forced to demonstrate compliance of its mercantile behavior to high moral
standards of Protestants in order to survive in vigorous Protestant communities. Skinner's second
hypothesis claims that demonstration of “external” conformity to the linguistic and behavioral
norms leads to a gradual assimilation or internalization of these norms. Complementing Skinner,
we would like to test a hypothesis that an effective system of rewards and punishments should be
the necessary condition for such "education". In other words, this model states that the driver of
new ethical standards of business behavior is angry society, and not conscious business.
We would like to pay attention to three thought-provoking models that largely answer the question
about the factors which affect the development of CSR practices at the level of individual firms referring in particular to the degree of firmness of governmental regulation, the level of
competition, the role of NGOs, and, finally, to the activism of shareholders.
Researchers Aguilera, Rupp, Williams and Ganapathy (Aguilera et al., 2007) in their work show
that stakeholders (staff, customers, management, institutional investors, the government and
NGOs) put pressure on a firm and a company is forced to become socially responsible. Authors
suggest three main reasons for stakeholders to put pressure on a company to engage in CSR:
Instrumental (protection of self-interest), relational (justice) and moral (ethics and morals). The
authors note that motives exist on four levels: the individual level, the organizational level, the
national level and transnational level.
John Campbell (Campbell, 2007) in his work “Why would corporations behave in socially
responsible ways? An institutional theory of corporate social responsibility” comes to a stimulating
conclusion: “economic conditions—specifically, the relative health of corporations and the
economy and the level of competition to which corporations are exposed—affect the probability
that corporations will act in socially responsible ways. Weak corporate financial performance and
an unhealthy economy reduce this probability, while the level of competition has a more complex,
curvilinear effect, where moderate levels of competition tend to elicit more socially responsible
behavior but either high or low levels of competition tend to elicit less socially responsible
behavior. However, a variety of institutional conditions mediate these basic economic
relationships. Corporations are more likely to act in socially responsible ways the more they
encounter strong state regulation, collective industrial self-regulation, NGOs and other
independent organizations that monitor them, and a normative institutional environment that
encourages socially responsible behavior. Moreover, socially responsible corporate behavior is
more likely to occur to the extent that firms belong to industrial or employee associations and
engage in institutionalized dialogue with stakeholders”.
Catherine Glac (Glac, 2014) makes a historical analysis in her work of how would shareholders
affect the business social responsibility. She pays attention to shareholders’ activism and increased
role of Socially Responsible Investing (SRI). Glac concludes: “once shareholder engagement
started to become a social movement, new infrastructure (laws, institutions, services) and
reframing of what is considered to be acceptable investor behavior opened up more connections
with CSR. This development was supported by other social movements (e.g., environmentalism,
consumerism, workers rights) that not only brought specific social issues into the foreground but
also provided opportunities to expand the domain of shareholder activity. With continued
innovation in the marketplace (e.g., SRI indices, the Global Reporting Initiative), the connection
between CSR and shareholder engagement is becoming even more interdependent, and changes
in one movement initiate or support changes in the other”.
We would like to integrate these three models into a single framework making a new emphasis. In
this paper we propose to consider not only conditions defining the likelihood of the adaption of
CSR standards at the individual companies’ level, but also affecting firms’ behavior at the national
level in the comparative perspective. In this way, we consciously exclude from our consideration
the degree of internal business motivation to CSR. This integrated model also allows estimating
and predicting the dynamics of CSR practices in different countries based on the number of key
factors.
External stakeholders CSR genesis model
Presented simplified model shows the pressure of key stakeholders, under which business becomes
socially responsible. Following the Skinner hypothesis, we proceed from the assumption that CSR
is an answer to the three key external stakeholders’ requests – firstly, investors; secondly,
government, as a mediator and political interest exponent; and finally, consumers. Thus, the SRI
institution in the US has become one of the first catalysts for the modern CSR practices of public
companies. According to the latest data for 2013, there are 6.5 trillion dollars in the USA invested
in accordance with the principles of social responsibility, and it represents 16.6% of total assets
under professional management. As we can see, over 5 years, SRI share has increased significantly
from 11% in 2008 (Glac, 2014) to 16,6%. On the second stage, political issues, public discussions
and legal regulation related to taxation, income and gender inequality took the floor, and finally,
there was a change in consumers’ behaviour. Socially responsible mass consumer becomes able
to “punish” and maintain ethical business behaviour in their daily decisions about buying goods
and services.
We assume that social business responsibility forms under the influence of 2 factors at the country
level:


Stakeholders’ ability (power) to influence business
Existence of systematic ethical requirements from stakeholders
Testing the model
For testing our model we analyzed the Russian Federation and the USA. For simplifying the
process, we analyzed stakeholders’ ability (power) to influence business and existence of
systematic ethical requirements based on three groups of stakeholders: customers, investors and
government.
We have analyzed the stakeholders’ power on the basis of macroeconomic indicators. In the table
below, we show calculations for Russia and USA:
Stakeholders
Calculation of
stakeholders
power
Explanation of
abbreviation
Calculation
of
stakeholders
power in
Russia
Calculation
of
stakeholders
power in the
USA
Score for
Russian
model1
Score for
USA model
Government
PG = GS * (1 –
VAI)
PG – Power of
government, (%
of GDP)
PW = 26% *
(1 – 20%) =
21%
PW = 24% *
(1 – 80%) =
5%
62
100
PC = 49% +
26% * 20% =
54%
PC = 69% +
24% * 80% =
87%
100
23
PI = 43% *
29% = 13%
PI = 116% *
94% = 109%
12
100
GS –
Government
expenditure (%
of GDP)
VAI – Voice and
Accountability
Index, %
Customers
PC = CS + GS *
VAI
PC – Power of
consumers, (%
of GDP)
GS –
Government
expenditure (%
of GDP)
CS – Household
final
consumption
expenditure,
etc. (% of GDP)
VAI - Voice and
Accountability
Index, %
Investors
PI = MCap * FF
PG - Power of
investors, (% of
GDP)
CS – Market
capitalization of
listed
1
The example of calculation the score for Russian and the US stakeholders (government). The strength of such
stakeholder as government in relation to GDP in Russia was 21% and 5% in the US. Thus, Russia gains a maximum
score of 100, while the US gets 62 points (54*100/87).
companies (% of
GDP)
FF – Average
free float, %
Next, we evaluated for each country the existence of systematic ethical requirements from
stakeholders to business behavior and the disclosure of information about it, including
environmental, social, socio-economic and political consequences of the firms’ performance. We
used the following metrics that enable us to give qualitative expert evaluation:



0 - absence of ethical requirements
1 - unformulated ethical requirements
2 - well articulated ethical requirements
Our simplified model on the example of Russia and the US shows that the request for a socially
responsible business in Russia is two times lower in comparison with the US (see Exhibit #1).
According to our calculations, the key Russian stakeholder who pressures the business is the
government, whereas in the US the main pressure on the business is provided by consumers and
investors. This fact explains the different understanding of the essence of CSR by companies.
It is important to note, that Russian government has its own understanding of social responsibility
of business. In Russia, the government is interested that big enterprises bear the social burden, as
it allows providing socio-political stability.
Our model shows that social responsibility of business in Russia might develop due to two main
factors:
a) The appearance of stable requirements from consumers and
b) Increasing the power of investors
Conclusion
In this article, we have presented a conceptual model, which allows to analyze the evolution of the
social business responsibility in a given country in a comparative perspective, taking into account
3 main factors. Taking Russia and the USA as an example, we can clearly see that gap between
these two countries may be due to the lack of pressure on business from the customers and
investors in Russia.
Limitations of the model are:
1. Only three stakeholders are analyzed, and business in reality is affected by many
stakeholders;
2. The stakeholders’ power is calculated on the basis of macroeconomic statistics;
3. The ethical requirements are evaluated qualitatively;
4. In the current model, when calculating the final score, all the stakeholders were given the
same weight.
In future research, we plan to analyze the G20 countries and compare the results with the country
rating of CSR. Additionally we are going to work out the quantitative indicators for assessment of
ethical requirements.
Literature



JOHN L. CAMPBELL (2007), WHY WOULD CORPORATIONS BEHAVE IN SOCIALLY RESPONSIBLE
WAYS? AN INSTITUTIONAL THEORY OF CORPORATE SOCIAL RESPONSIBILITY, Academy of
Management Review, 2007, Vol. 32, No. 3, 946–967.
KATHERINA GLAC (2014), THE INFLUENCE OF SHAREHOLDERS ON CORPORATE SOCIAL
RESPONSIBILITY, Economics, Management, and Financial Markets, Volume 9(3), 2014, pp. 34–
72, ISSN 1842-3191.
RUTH V. AGUILERA, DEBORAH E. RUPP, CYNTHIA A. WILLIAMS, JYOTI GANAPATHI (2007),
PUTTING THE S BACK IN CORPORATE SOCIAL RESPONSIBILITY: A MULTILEVEL THEORY OF SOCIAL
CHANGE IN ORGANIZATIONS, Academy of Management Review, 2007, Vol. 32, No. 3, 836–863.
Exhibit №1. The calculation of the social business responsibility level in Russia and the USA
Stakeholders
Customers
Government
Investors
Total score
Stakeholders
Customers
Government
Investors
Total score
Russia
Existence of systematic Stakeholders’ ability to influence
ethical requirements
business
0
2
1
62
100
12
USA
Existence of systematic Stakeholders’ ability to influence
ethical requirements
business
2
1
2
100
23
100
Score
0.0
200.0
11.6
211.6
Score
200.0
23.0
200.0
423.0