A battle over corporate obligations, reviewing “bottom of the pyramid” research and how to solve the standards problem

Fighting Friedman

Academics might not brawl on the street, but they like nothing more than a war waged on paper. As scraps between scholars go, “Friedman v Freeman” is a genuine humdinger. In the Blue Chip corner is Milton Friedman, arguably one of the most influential economists of the 20th century. Up against him is Edward Freeman, the US management scientist credited for foisting the word “stakeholder” on the world.

Like most of the corporate responsibility community, the authors of this combative paper have little time for Friedman. Instrumental in creating the shareholder maximisation model of corporate capitalism, the Chicago School economist bore little truck with the notion of business as a progressive social actor. “The social responsibility of business is to increase profits,” he wrote in a landmark New York Times Magazine essay back in 1970. For Friedman (who died in 2006), the only social obligation for companies was to act within the law.

Over the past four decades and more, Friedman’s theory has been sorely tested by events. Opportunistic short-termism, tax dodging and the ruthless squeeze on workers and suppliers are just some of the negatives to which shareholder primacy has given rise. Scholars from across the disciplinary spectrum have weighed in with their critiques – of which the recently much-cited French economist Tomas Piketty (author of the book Capital) is but the latest.

In this case, the authors ambitiously seek to undermine Friedman not on the grounds of his legacy, but for his logic. For Friedman’s laissez-faire theories to stand up, they need help. And that help comes in the laws of limited liability, which essentially enable investors and business owners to cap their losses. Underpinning such provisions, however, lies an intrinsic acceptance of the interdependence between business and society: an early variant of the “too big to fail” theory. But Friedman explicitly rejects such interdependence. Thus, as the paper concludes, the arch defender of shareholder maximisation “must refuse limited liability or modify his doctrine on corporate social responsibility”.

Ferrero I, Hoffman W, and McNulty R (Spring 2014), “Must Milton Friedman Embrace Stakeholder Theory?” (pages 37–59).

Prahalad’s Progress

In 1998, Harvard management guru CK Prahalad co-authored a radical paper for the Harvard Business Review arguing that multinational companies were missing a trick. Billions of the world’s poorest people were, in effect, missing out on their products and services. That constituted a lost opportunity not only to enter the consumer market, but to improve lives, he argued.

Prahalad’s idea built on a long tradition in economic thought. Ever since Adam Smith, economists have argued that private enterprise can help relieve poverty. The Peruvian economist Hernando de Soto, for example, a contemporary of Prahalad, made a strong case for the entrepreneurial energies of the poor. Yet it was Prahalad’s idea that really stuck, quickly coining its own terminology (the “bottom of the pyramid”, or BoP) and its own global movement.

This fascinating literature review tracks how academics have engaged with the BoP debate in the 10 years after Prahalad’s landmark paper (he actually went on to clarify his thinking in a subsequent paper in 1999, with Stephen Hart). In their study of 104 academic papers, the researchers note that multinational companies play an increasingly diminishing role in BoP projects, with social entrepreneurs, domestic companies and even non-profits coming to the fore. Scholars have also tended to focus on specific geographies, particularly India (Prahalad’s country of origin). Africa, in contrast, appears strangely forgotten.

The paper’s real strength is in pointing out future lines of enquiry for BoP scholars. Topping the list is the need to connect BoP research with other disciplines, particularly the literature on microfinance, subsistence marketplaces, socially inclusive theories and the wider field of development economics.

Kolk A, Rivera-Santos M and Rufín C (May 2014), “Reviewing a Decade of Research on the ‘Base/Bottom of the Pyramid’ (BOP) Concept”, Business & Society, 53(3): 338–377.

Standard deviation

At their best, voluntary sustainability standards provide clarity and guidance about what to do (and what not to do). But that clarity becomes muddled when there are too many of them, leading to problems of inconsistency, extra cost and “a potential race to the bottom” among standard providers.

Two possible mechanisms could resolve this dilemma, this paper contends. The first is “standard equivalence”. The idea is that two standard providers recognise the criteria and requirements of one another. At present, only 90 standard setting organisations of the 426 examples studied pay heed to any other standard; in only seven cases is this recognition reciprocated.

More potential rests with the second mechanism: meta-regulation, which refers to the independent certification of certifiers. This would lead to greater trust in certifiers, it is argued, thereby increasing the credibility of certification processes in general. Again, illustrative cases are thin on the ground, although the paper picks out the Iseal Alliance as an early exemplar. “This form of meta-regulation, in absence of government-led action, can potentially partially address the legitimacy gap,” the paper concludes.

Marx A and Wouters J (April 2014), “Competition and Cooperation in the Market of Voluntary Sustainability Standards”, Leuven Centre for Global Governance Studies, Working Paper No 135.

Campus news

Boston, Bangkok, London and New York are among 15 professional chapters picked out as “gold” performers by the campus-based corporate responsibility group Net Impact.

The International CSR, Sustainability, Ethics and Governance Conference is due to be held at Surrey University, UK, on August 14-16 2014.

Academic news  Business School Bulletin 

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