Comments to Prakash Sethi

1
Comments to Prakash SethiSelf-regulation as a
way to implement CSR at a global level

• Alessandro Vercelli
• Department of Economic Policy, Finance and
  Development
• University of Siena

2
keeping in mindPrakash Sethi, 2003, Setting
Global Standards, Wiley, Hoboken, N.J.

• Basic questions
• -Which is the best way to enforce CSR standards?
• -Should we rely on CSR self-regulation or
  institutional regulation?
• regulation by law
• -Which is the optimal relationship between
  ?
• self-regulation by corporations

3
The answer depends on a preliminary question do
we really need CSR regulation?

• 3 basic answers
• Neoliberal point of view No regulation because
  any interference with the market should be
  avoided (Friedman, Hayeck, Lucas, and so on)
• however market-led self-regulation is sometimes
  admitted as a lesser evil
• Updated liberalism No self-regulation because
  regulation by law must be restricted to
  externalities and monopolistic practices while
  max. of shareholders value takes care in the best
  possible way of the interests of all the
  stakeholders (Jenssen)
• Theory of stakeholders Yes to self-regulation
  because it is the only way to avoid market
  distributive distortions induced by the market
  and max of shareholder value

4
Attitude towards CSR self-regulation
Max shareholder value Max stakeholder value
No regulation No CSR self-regulation
Regulation when justified No CSR self-regulation Yes CSR self-regulation
5
CSR self-regulation has shaky economic foundations

• Perfect competition model
• distribution of income
• regulation necessary structurally unstable
  ? oligopolist practices
• max utility ? max happiness
• B) Real markets ? perfect competition market
• incompleteness
• externalities
• further sources of market failures and so
  on
• transaction costs
• bounded rationality

6
The role of regulation by law and CSR

• Regulation by law to enforce CSR standards of
  economic agents
• subject to many limitations
• -minimal standards only
• -enforcement slow and inefficient
• -increasing time lag with the evolution of the
  economy and society

7
The role of firms and CSR self-regulation

• In a perfect competition market firms, by
  definition, do not have discretionary power
• ? CSR self-regulation meaningless
• This explains why in a neoliberal perspective
  that assumes perfect competition
• CSR self-regulation is excluded
• In real markets firms have a discretionary power
  and act strategically to preserve and increase
  such a power ? here emerges the problem of the
  objective function of the firm
• to bridge information gaps between
  management and stakeholders
• ? CSR self regulation
• to find an equilibrium between
  conflicting interests

8
Global markets

• Further problems
• ? asymmetry of information
• Different local regulations between
  different stakeholders
• ? asymmetry of power
• harmonization of local regulation
• We need
• transnational authorities to enforce
• in the meantime this enlarges the scope of CSR
  self-regulation

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CSR INITIATIVES AND STAKEHOLDERS FEEDBACK

• ETHICAL CODE SMS CERTIFICATION
  REPORTING
• BOARD MANAGEMENT STAKEHOLDERS

Green arrow implementation information
flow Red arrow behavioral and dialectic
influence Black arrow influence through
shareholders meetings Blue arrow strategic and
managerial influence
10
CSR initiatives conditions of effectiveness

• These initiatives may have an effective and
  durable influence on CSR iff stakeholders react
  actively to the additional information flow
• The closure of the feed-back by the stakeholders
  should be not only active but pro-active
  soliciting new information and CSR initiatives
• ? the firm is pressed to direct its strategic
  and managerial choices
• -increasing stakeholders satisfaction
• towards
• -corroborating sustainability
• ? virtuous circle

11
Ethics and CSR initiatives

• Since CSR depends also on the behavior of the
  stakeholders the latter (and their
  representatives) share with managers and
  directors (and control authorities) the ethical
  responsibility for insufficient CSR
• Business ethics rapidly evolving all the
  subjects involved should evaluate the
  consequences of their actions which may change
  with the rapid evolution of the system
• The CSR initiatives can only aim to reduce the
  gap between individual behaviors and acceptable
  ethical standards by stimulating a constructive
  dialogue between firms and their stakeholders to
  solicit
• Awareness of the ethical consequences of
  alternative decisions
• Convergence towards common values and respect for
  different values
• A process of learning by all the subjects
  involved towards a sort of
• fair social contract between the firm
  representatives and its stakeholders

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Synergy non substitution between regulation and
self regulation

• - CSR self-regulation is not devoid of an
  enforcement mechanisms
• provided that there is an active participation
  of the stakeholders
• - the legal system guarantees at best only a
  minimal standard
• ? synergy between legal regulation and CSR
  self-regulation
• -progressive awareness of stakeholders
• virtuous circle between -effectiveness of
  legal norms
• -upgrading of ethical standards

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Regulation by law of CSR self-regulation?

• Yes of course not in the contents but in the
  procedures
• code of conduct
• The adoption of could become
  compulsory
• periodical ethical report
• statute
• Analogy with
• balance sheets and budgets
• code of conduct
• Requirement of consistency between actual
  behaviours
• ethical report
• Consistency should be enforced (analogy with
  misleading publicity) even if the CSR initiatives
  are not-compulsory

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Concluding remarks

• CSR self-regulation and legal regulation must be
  both strengthened at the same time in a synergic
  way in order to defend and possibly improve
  ethical standards
• In this perspective CSR self-regulation may play
  an important role in checking the deterioration
  of ethical standards in business, triggering a
  virtuous circle between expanding CSR initiatives
  and increasing ethical awareness and activism of
  the stakeholders
• This is true in particular for global markets and
  MNC.
• A requirement of consistency between CSR claims
  and actual behavior in all the countries where
  the MNC operates may help avoiding sweatshops and
  other abuses in developing countries