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Sanpo-yoshi and CSR
Kanji Tanimoto
School of Commerce, Waseda University,
Shinjuku-Ku, Tokyo, Japan
Synonyms
Japanese managerial philosophy; Public rela-
tions; Stakeholder management; Stakeholder-
oriented policy
Definition
Sanpo-yoshi is an old Japanese merchant’s prin-
ciple which translates as “good for three parties,”
here meaning the seller, the buyer, and society.
Broken down, sanpo refers to the urite (¼seller),
the kaite (¼buyer), and seken (≒society) and
yoshi means “good” in Japanese.
S.O. Idowu et al. (eds.), Encyclopedia of Corporate Social Responsibility,
DOI 10.1007/978-3-642-28036-8, # Springer-Verlag Berlin Heidelberg 2013
This principle holds that when merchants ben-
efit from a transaction, they must always ensure
that they satisfy buyers and contribute to the local
community at the same time. It should be noted,
however, that the term seken does not necessarily
have the same meaning as “society” in English.
Seken in Japanese indicates a relatively closed
community rather than an open society. This
will be discussed in further detail later.
Sanpo-yoshi is a managerial philosophy and
creed established by Ohmi merchants, active
from the Edo period to the end of the Meiji period
(seventeenth–nineteenth century), through their
day-to-day business activities (Ohmi is
a regional area in Japan). The principle encapsu-
lates the merchants’ experience-based approach,
passed down from generation to generation, and
is based on no particular religious view nor East-
ern philosophy.
There is no record of the Ohmi merchants
having or leaving any written record of the prin-
ciple, nor does any other bibliographic record
remain. Sanpo-yoshi is a term coined more
recently by a contemporary researcher (Ogura
1988a), based on his interpretation of the Ohmi
merchants’ family creed. Therefore, the term
itself was not used by the merchants themselves.
Recently, the discussions on CSR concen-
trated in Europe have spread globally and had
a huge impact on Japan. As the economy has
become globalized, common issues have
increased; the ISO 26000 was established in
response to such issues. Relationships between
business and society, however, differ greatly
S 2108
according to country (area); it can be argued that
the non-Western world has different views of
CSR to those held by the Western world. Japan
has its own unique relationship between business
and society/stakeholders, once which has
changed over time. Sanpo-yoshi is one of Japan’s
traditional managerial philosophies, and it is said
to be one of the roots of CSR in Japan. Today,
those leading Japanese trading companies whose
origins can be traced back to the Ohmi merchants,
such as ITOCHU Corporation and Marubeni Cor-
poration, indicate in their CSR reports that the
principle of sanpo-yoshi is indeed at the root of
their CSR and the origin of their business. Before
the current CSR boom occurred, however, sanpo-
yoshi had no widespread popularity as
a managerial philosophy in Japanese business
society and the theoretical relevance between
sanpo-yoshi and CSR was, in general, not well
clarified.
The next section describes the origin of the
sanpo-yoshi principle and examines whether and
to what extent it has been a source for the devel-
opment of contemporary Japanese CSR.
Introduction
1. The Origins of Sanpo-Yoshi
(a) The Ohmi merchants successfully
expanded their trading area in Japan’s domestic
market for three centuries, from the seventeenth
until the nineteenth century. Not a few of them
have continued in business as modern corpora-
tions. Major corporations which can trace their
origins back to the Ohmi merchants, besides the
two mentioned above, include Nippon Life Insur-
ance Company, Toyobo Co., Ltd. (a textile com-
pany), Chori Co., Ltd., Toyota Tsusho
Corporation (a trading company), Daimaru
Matsuzakaya Department Stores Co., Ltd.,
Takashimaya Company, Limited (a department
store chain), Seibu Holdings Inc. (a transportation
and resort development company), and Yanmar
Co., Ltd. (a manufactureing company).
Between the seventeenth and nineteenth cen-
turies, the Edo Shogunate, or military govern-
ment, had created a homogeneous society with
Sanpo-yoshi and CSR
ethnicity, language, and culture controlled under
a centralized administrative framework; there was
relative political stabilization, and commerce
flourished in this peaceful and hierarchical
society. The Ohmi merchants were traveling
salesmen whose businesses were selling goods
manufactured in Kyoto and Osaka (cities in west
Japan, called Kamigata area) in regions other than
Ohmi and bringing raw materials from the regions
they visited back to their base in the Ohmi region
(Ohmi is located almost in the center of Japan, an
area through which many of the major roads in
west Japan ran: the Tokaido and Nakasendo roads
stretching to Edo in the east, as well as the
Hokkoku road leading to the Sea of Japan, with
Kyoto and Osaka nearby to the west).
In addition to these trade activities, the Ohmi
merchants were also involved in multiple business
operations as an organizer: production, including
the procurement of raw materials and tools and the
design of dye patterns for textiles, as well as dis-
tribution, selling, and finance. They opened flag-
ship shops in such leading business districts as
Nihonbashi in Edo, Muromachi in Kyoto, and
Senba in Osaka. They also expanded their business
throughout Japan, employing people from Ohmi
as managers. The Ohmi merchants were accepted
by local people in each area where they conducted
business, and succeeded in developing their busi-
nesses over long periods, while also maintaining
their family businesses in Ohmi.
The Ohmi merchants were appreciated in each
administrative district of Japan because they were
able to make available sophisticated
manufactured products, purchased from the
Kamigata area, and distributed each region’s
special products to Kamigata, thereby creating
demand in new markets. They were wide-area-
oriented merchants who developed nationwide
markets rather than being merely “catch-as-
catch-can” retailers.
In order to win new customers in new markets
where they had no territorial or blood relation-
ships, it was essential that they were able to gain
the trust of the local community. That is why the
idea of sanpo-yoshi was crucial for the mer-
chants. The idea is said to have become
established around the eighteenth century.
Sanpo-yoshi and CSR
(b) The term sanpo-yoshi does not exist in
bibliographic data, as noted above. A hemp mer-
chant, Nakamura Jihei Sogan, however, left some
notes which are regarded as the original “source
text” of sanpo-yoshi in his will in 1754 (70 years
old at that time) to his grandchild (then 15 years
old). The notes describe the following unique
managerial creed:
“When you travel to another region to peddle prod-
ucts such as hemp, always care about people in that
region so that customers can enjoy shopping. Do
not think only about yourself and do not care only
about making money. It is important to pray to the
gods and to Buddha, be careful not to be greedy,
and give consideration to others whenever you
enter another region.”
The Ohmi merchants were strongly aware of
their status of being outsiders when they entered
another region, as the following statement illus-
trates: “A merchant who does business in another
region needs to be a decent and trustworthy per-
son because they hold a different status to those
from the local community” (Guide for Mer-
chants, written by Yao Kihei IV in 1860). The
following episode has been passed down in that
same Yao family: Throughout the Edo period,
even during the time of Great Tempo Famine,
they sold rice at a preferential price and made
charitable donation. As a result, the family busi-
ness came to be held in high esteem by the local
community. Later in 1884, when the Chichibu
Incident occurred, farmers suffered a severe
downturn and staged an armed uprising, killing
government officials and loan sharks by burning
their businesses and residences. Despite the
severity of the incident, the Yao family shop
was not considered by the uprisers to be a target
and thus was saved from being burned. Indeed,
the farmers asked the Yao family for its support.
In this way, the Ohmi merchants succeeded in
building local support by placing importance on
the coexistence between local community and
themselves.
(c) The Ohmi merchants had the following
policies on profit-making: not to make specula-
tive investments or get into debt but rather to
consider business with a long-term perspective
instead of pursuing short-term profits. They
2109 S
believed that business is an ongoing concern
and future oriented and that, for those reasons,
business should be conducted with the aim of
creating mutual satisfaction, for both themselves
and their customers, by making as modest a profit
as practically possible for the business to remain
viable.
Under the social status system of the Edo
period, warriors (samurai) were ranked at the
top, followed by farmers and craftsmen, with
merchants at the very bottom. People considered
the profit-chasing merchants a lowly class.
Baigan Ishida, an intellectual from the Edo
period, was active in affirming the righteousness
of the merchant’s pursuit of profit. He stated that
the business of distribution was the mission that
they had been charged with and that the profit
generated was the result of their contribution to
society. He stated that such a profit was the same,
as valid, as the stipend provided to the samurai:
Ramseyer (1979) explained that diligence and
frugality was thought to be led directly to wealth
amongst merchants in those days. Profit as the
outcome of diligence is fair. Profit is the happy
outcome of industriousness.
In other words, profit earned from faithful
contribution to society with diligence and absti-
nence should be allowable and not be regarded as
the product of greed. This view of profit can be
widely observed in the business operations of the
Ohmi merchants.
It has been pointed out that the Protestant
puritanical spirit of performance and rationalism
in Western Europe was compatible with the mod-
ern and rational spirit of capitalism and indeed S
that this Protestantism worked to prompt the
development of capitalism. By contrast, the prin-
ciple of sanpo-yoshi did not come from any reli-
gion, but it came to similar conclusions as
Protestantism, despite totally different logic.
The document “Notes on Acquaintanceship,”
written by the Tomura family of merchants
(1856), contains the following passage:
“Success in business relies on efforts to establish
mutual interests as a natural course of events.
A wholesaler should run his business with
a long-term perspective, and not allow himself to
be easily influenced by the short-term interest. You
S 2110
will find no peace of mind if you focus only on
short-term trading. As for buying, sellers will be
happy if you buy when there are fewer competitors.
As for selling, customers will be pleased if you sell
things without holding back when they want to
buy. Respecting the needs of both sellers and
buyers is the secret of business.”
The Ohmi merchants were also active in
conducting philanthropic activities in those
days. For example, they rebuilt a large bridge in
the local community, sold rice at low prices
during famines, and donated funds to school edu-
cation. They understood that the profit they
earned came from society, which had come to
value their business activities, thanks to their
social contribution. The Ohmi merchants did not
expect anything in return for their philanthropic
activities; these activities were not motivated by
the desire to cover future costs, or from enlight-
ened self-interest or utilitarian purposes. They
simply knew that in order to be accepted by the
community and build a long relationship
together, they needed to contribute to that com-
munity, and that was what they did.
2. Has the Principle of Sanpo-Yoshi Been
Embedded into Current Japanese Business
operations?
As discussions on CSR in Japan continue to
expand, the spotlight has come to fall on the tra-
ditional principle of sanpo-yoshi, despite the fact
that it has not drawn any particular attention from
business society in the past. It is not particularly
productive, however, in an academic discussion,
to simply state that Japan has traditionally had an
idea which was both original and similar to the
concept of CSR. Rather, we need to understand
what kind of meaning this traditional idea has and
how it has been handed down to modern society –
if indeed it has, although we can reasonably argue
that the customer-first principle seen today, as well
as the emphasis on contribution to local society,
can be traced back to sanpo-yoshi. But many prob-
lems can be identified which contradict the core of
the sanpo-yoshi principle, such as company-
oriented society, environmental pollution, con-
stant corporate scandals, and severe criticism for
lack of consideration of human rights by those
companies which have expanded operations
Sanpo-yoshi and CSR
overseas. Has a tradition of the principle of
sanpo-yoshi really taken root in Japanese
corporations?
(a) Seken Does Not Equate to “Society”
It should be easy to understand the meaning of
the “good for the sellers and buyers” element of
sanpo-yoshi, but how can the ambiguity of seken-
yoshi be best understood? Seken-yoshi can be
literally translated as “good for society.” But
does this mean it has the same meaning as “phil-
anthropic activities,” as is generally understood?
Further, does seken have the same meaning as the
terms “community” or “society” in English?
When Ohmi merchants peddled nationwide,
their priority was always to be welcomed by the
local people of any region they were visiting for
the first time and to coexist with them happily and
without antagonism. It can be said that the orig-
inal nuance of the term seken, in fact an old
Japanese term, has been changed since
researchers decided to use it in the phrase seken-
yoshi to describe this principle. In Japanese,
seken does not have a broad concept linguisti-
cally and cannot be said to have the same mean-
ing as the English word “society.” In seken, the
point is how to place oneself in preexisting blood
relationships or territorial connections rather than
how to establish new social relationships as an
independent individual. Moreover, in the closed
community of seken, where there are relation-
ships based on gifting and reciprocity, people
are allowed to become a member if they share
and follow the rules of that community.
Seken indicates a closed relationship with peo-
ple one has or is likely to have some kind of
connection or relationship with, and does not
include outsiders. In that sense, seken is exclusive
within a relatively small group and is often under-
stood to indicate coexistence and coprosperity
within a peer group. It does make sense to the
extent of the limited relationship. Corporations,
however, are not able either to establish relation-
ships with diverse sets of people in the local or
global community and to make meaningful con-
tributions to the creation of sustainable society
simply by concerning themselves with their rep-
utation within closed markets or industrial asso-
ciations in Japan.
Sanpo-yoshi and CSR
(b) Has Sanpo-Yoshi Has Been Effective over
the centuries?
As the very structure of corporate society has
changed, so it has become more difficult for busi-
ness people to reproduce the spirit of the sanpo-
yoshi founders as well as the general philosophy
of the Ohmi merchants. There are several reasons
causing difficulties in the communication of the
founders’ philosophy and statements, including
management changes (hired managers rather than
founders), shifts toward larger size-scale organi-
zations and more rigid hierarchy, rapid diversifi-
cation through growth and/or restructuring,
intensification of competition at home and
abroad, globalization of the market, and changes
in corporate culture through the acceptance of
diverse human resources. In the case of Ohmi
merchants and other entrepreneurs, the philoso-
phy and words of founders were understood and
shared by homogeneous employees, but the struc-
ture itself has changed.
In not a few cases, long-standing companies
which were established with high ideals in the
Meiji period have not been able to avoid a gradual
waning of the passion and beliefs of their foun-
ders. Some, after committing corporate crimes
and creating corporate scandal and receiving
harsh criticism in response, chose to review
their founders’ original philosophy and to rebuild
their CSR management system based on this
reappraisal of core values. For example, Nomura
Securities, Co., Ltd. was the source of a series of
corporate crimes and scandals from 1990 to 2000
and was severely criticized for this behavior by
the market. When establishing a CSR manage-
ment system in an attempt to improve their cor-
porate reputation, the company chose to review
the words of Tokushichi Nomura II, its founder:
“Nomura’s mission is to enrich the nation
through the securities business. This is something
we must absolutely see through”; “we must place
our customers’ interests before our own.” The
company placed them at the basis of the newly
established CSR management system. Equally,
Mitsui & Co., Ltd. committed a number of cor-
porate crimes and scandals. They too chose to cite
the words of their founder as the basis of their
CSR for rebuilding their CSR management
2111 S
system. Takashi Masuda, the founder of the com-
pany, said: “. . . thus the ultimate objective of the
Company shall be to promote world trade, on the
basis of sincerity and good faith in every aspect of
our professional commitment to justify the trust
that our customers around the world place in us”
(1876).
In Japanese corporations, there is an under-
standing of a company as being a public entity
of society. The founders of Panasonic and Omron
based the mission and business principles of their
respective companies on this concept of a “public
entity of society”; today, their CSR is rooted in
this also. Konosuke Matsushita, the founder of
Panasonic, stated as follows: “All the manage-
ment resources of a company–including the peo-
ple, money, and commodities–all come from
society. While the company engages in business
activities using the resources entrusted by soci-
ety, it also develops along with society, and so the
company’s activities must be transparent, fair,
and just” (Matsushita 2004). This is the essence
of Panasonic CSR. It is based on the founder’s
ideas, and the company is proud of these tradi-
tional principles.
(c) Differences between Sanpo-Yoshi and
Contemporary CSR
The business approach adopted by the Ohmi
merchants showed due consideration for stake-
holders, including sellers, buyers, and seken.
From the present standpoint, however, the mer-
chants’ view of stakeholders could be described
as rather narrow. The CSR expected of compa-
nies today demands more, going beyond the
ethics of individual merchants in business. S
CSR in our time needs to consider a variety of
issues such as environment, labor/human rights,
supply chain management, and communication
with many countries and people (who are differ-
ent from homogeneous Japanese). The range of
stakeholders is becoming increasingly diversi-
fied, and this demands that CSR be reviewed in
order to establish a sustainable economy, society,
and environment from a global standpoint.
Examining the nature of CSR is essentially
a reexamination of the roles and responsibilities
traditionally expected of corporations within
a capitalist economy in the new context of their
S 2112
position within the relationships of various stake-
holders. Rather than being reliant on the personal
ethics of individual merchants or managers, CSR
needs to be considered more broadly, in terms of
its relationship with society, and the stakeholders
which demand accountability from corporations.
(d) Is Sanpo-Yoshi the Source of the Idea That
Japanese Corporations Are Stakeholder oriented?
It is said that sanpo-yoshi focuses on stake-
holders, namely, “the sellers, the buyers, and
seken,” and this is one of the roots of the widely
held belief that Japanese corporations are stake-
holder oriented. The concept of stakeholders in
sanpo-yoshi is, however, narrow and limited as
mentioned above. It is not entirely the case that
the current relationship between corporations and
society has been formed from this idea from the
Edo period. Rather, it can be seen in structural
features of Japanese corporations that were
rebuilt after World War II. A brief discussion
follows.
Stockholders/investors had relatively little
power in Japanese corporations, unlike the stan-
dard setup in Anglo-Saxon corporations. The
ownership structure of Japanese corporations
contains unique features arising from the spe-
cific situation of postwar Japan. The following
two events led to mutual cross-shareholding in
Japanese corporations: the first was the
restructuring of the Zaibatsu (large family-con-
trolled business conglomerates) and the rebuild-
ing of those groups through cross-shareholding
with member corporations, as seen in
the Sumitomo, Mitsui, and Mitsubishi Groups,
which were all dissolved after World War II.
The second is the potential threat of takeover
from foreign capital that Japanese corporations
faced in 1960 when Japan became a member of
the OECD. Japanese corporations attempt to
fight these aggressive takeover attempts by
cross-shareholding among group corporations,
thereby becoming stable mutual shareholders.
As a result, shareholder meetings gradually
came to lose their substance. Major shareholders
would mutually give carte blanche to the others,
leading to the formation of a management con-
trol system based on a principle of mutual
noninterference.
Sanpo-yoshi and CSR
During the postwar period of high economic
growth and low growth period since the end of
1970s as well, this very structure allowed corpo-
rate managers to carry out unrestricted decision-
making on long-term strategy and investment
without having to give consideration to share-
holders and investors. The role expected of
a corporation was to produce goods effectively,
to sell them at a low price, and to maintain
employment levels. These were regarded as
a corporation’s most important social responsi-
bilities. Employees also shared a common under-
standing that their hard work would lead to
company growth and, by extension, benefits to
wider society as well; this would in turn help
ensure stable employment and welfare. Core
members of the corporate social system be situ-
ated centrally (as Dore (1993) described, the rela-
tionship between corporations and society seems
to be solidaristic in Japan), meaning that periph-
eral members could not become core members of
that structure; the relationships with employees,
shareholders, or subcontractors were closed and
exclusive. Thus, minor stakeholders have not
been able to engage with the merits of corporate
society. This structure, however, has seen gradual
changes since the collapse of the bubble economy
(around the end of the 1980s).
Unlike Anglo-Saxon corporations, this kind of
corporate social system allowed Japanese corpo-
rations to focus on management on a long-term
basis and implement management that focused on
stakeholders other than shareholders. This is
a very specific corporate social structure, formed
after World War II, not just based on that Japa-
nese corporations have traditionally been stake-
holder oriented, an approach which places the
strongest emphasis on social relationships
spiritually.
Key Issues
The principle of sanpo-yoshi, which focuses on
stakeholders (sellers, buyers, and seken), was
the result of the cumulative peddling experi-
ences of the Ohmi merchants, and this principle
is regarded as one root of the spirit of
Sanpo-yoshi and CSR
contemporary CSR as seen in Japanese corpo-
rations. Some argue, therefore, that the CSR
practiced by Japanese corporations did not
start under pressure from abroad; rather, that
Japan has had its own original notion from early
times, from which CSR has been formed. It is
said that CSR is a global phenomenon with
Western and non-Western forms and that
Japan also has its own approach to CSR and
associated ethical norms. This view is correct,
but many experts who emphasize the origins of
CSR in Japan feel it sufficient to merely point to
the historical principle of sanpo-yoshi and fail
to conduct sufficient research on how that prin-
ciple has worked in modern corporations,
indeed if it has at all. Further, there is a lack
of discussions on what differences exist
between modern CSR in Japan and traditional
sanpo-yoshi.
In considering non-Western style CSR, not
only an area-specific research but also an inter-
nationally comparative research must be
conducted. The study of comparative systems is
necessary to clarify what differences exist
according to country (area), such as those arising
from differing historical and cultural back-
grounds, as well as differences in the relation-
ships between corporations and society/
stakeholders, in perspectives of CSR, and in the
role of government. At the same time, attention
should be paid to the similarities present in CSR
activities throughout the global economy. This is
vital if CSR research is to draw out theoretical
and practical implications from this global
phenomenon.
Future Directions
Sanpo-yoshi is an ethical principle based on the
experiences of the Ohmi merchants in their busi-
ness transactions in the Edo period in Japan. It is
regarded as one of the origins of CSR in Japanese
corporations. We can say that sanpo-yoshi has
developed into the basis of business ethics in
Japanese corporations which has a strong focus
on stakeholders: customers and communities.
Current CSR in Japan, however, cannot be
2113 S
explained by sanpo-yoshi alone. Since the Japa-
nese market exists only as part of the global
market, CSR in Japan also should be considered
from the perspective of global economic society.
It is vital decisions for Japanese companies on
how to incorporate CSR into management pro-
cesses, develop management strategy, and
enhance competitiveness, while they should
understand the differences which exist between
Japanese corporations and Anglo-American and
European corporations, and recognizes the
advantages (strengths) offered by the Japanese
approach.
Cross-References
▶ Corporate Mission
▶ Corporate Social Responsibility
▶ Philanthropic CSR
▶ Stakeholder Relationship
References and Readings
Abe, K. (1995). “Seken” toha nanika (What is “Seken”).
Tokyo: Kodansha Ltd.
Dore, R. (1993). What makes Japan different? In C.
Crouch & D. Marquand (Eds.), Ethics and markets:
Cooperation and competition within capitalist
economies, political Quarterly. Oxford, UK:
Wiley-Blackwell.
Matsushita, K. (2004). Kigyo no Shakaiteki Sekinin toha
Nanika (What is corporate social responsibility).
Tokyo: PHP Institute.
Ogura, E. (1988a). Ohmi Shonin no Keiei (The manage-
ment of Ohmi Merchants). Tokyo: Sanburaito
Shuppan. S
Ogura, E. (1988b). Ohmi Shonin no Keiei-kannri (The
business management of Ohmi Merchants). Tokyo:
Chuokeizai-sha.
Ramseyer, J. M. (1979). Thrift and diligence, house codes
of Tokugawa merchant families. Monumenta
Nipponica, 34(2), 209–230.
Suenaga, K. (1999). Ohmi Shonin Nakamura Jihei no
“Kakioki” to “kakun” ni tsuite; “Sanpo-yoshi” no
Genten Kosho (A written will and admonition by an
Ohmi Merchant Nakamura Jihei in Edo period: A
historical study on Sampo Yoshi). Doshisha Shogaku
(The Doshisha Business Review), 50(5–6), 25–56.
Suenaga, K. (2000). Ohmi Shonin (Ohmi Merchants).
Tokyo: Chuokoron-shinsha.
Suenaga, K. (2004). Ohmi Shoningaku Nyumon (An
introduction to the study on Ohmi Merchants:
S 2114
Sanpo-yoshi, the origin of corporate social responsi-
bility). Tokyo: Sunrise Shuppan.
Tanimoto, K. (2009). Structural change in corporate
society and CSR in Japan. In K. Fukukawa (Ed.),
Corporate social responsibility in Asia (pp. 45–66).
London: Routledge.
Seclusion
▶ Right to Privacy
Secondary Stakeholders
Linne Marie Lauesen
Copenhagen Business School, Department of
Intercultural Communication and Management,
Center for Corporate Social Responsibility,
Frederiksberg, Denmark
Synonyms
Interested parties; Relationships
Definition
The definition of a stakeholder is an individual,
a group, an organization or a spokesperson who
has a claim or a stake or something at stake in the
business’s behavior, performance, or outcome.
There is a difference between having an interest
in the business and having a stake in the business,
where the latter is related to the term “stake-
holder,” because having an interest is not neces-
sarily as dependent as having a stake or
something at stake. The latter includes the term
of holding a risk – being in a position and having
a legitimate claim on the behavior, performance,
and outcome of the business and how the business
matters to the ones having a stake in the business.
A stakeholder possesses a risk that is attached to
the business’ actions and outcomes. To be
a stakeholder means – opposed to having an
interest – to have a stake or to hold a risk related
Seclusion
to the actions of a certain business. By this defi-
nition, it follows that being a stakeholder takes
much energy to decouple from the actions and
outcome of the business if the stakeholders are
not satisfied with decisions made by it. To have
an interest can rely on many more decoupled
ways such as having a political interest,
possessing a choice, to deal or not to deal with
the business before involving in the risks of the
business, while stakeholders addresses those who
are dealing with the business, who are affected by
it, and who cannot ignore what the business is
doing.
This leads us to define stakeholders in the
category of secondary stakeholders. (Primary
stakeholders are addresses in another entry in
this Encyclopedia – see “▶ Primary Stake-
holders.”) Clarkson (1995) defines secondary
stakeholders as “those who influence or affect,
or are influenced or affected by, the corporation,
but they are not engaged in transactions with the
corporation and are not essential for its survival”
(Clarkson 1995). In Clarkson’s definition, this
group of secondary stakeholders consists of
those who are not related to the market, the finan-
cial foundation of the corporation, but mainly to
the societal surroundings of the corporation. The
existence of the company is not necessarily under
threat by the claims of these stakeholders, but it
can be by the involvement of primary stake-
holders (e.g., the government or the authorities)
through the claims of the secondary stakeholders
(e.g., an interest group, a neighbor, or a citizen).
This leads us to use the following definition of
secondary stakeholders in correspondence with
Clarkson’s definition as:
(a) Citizens of the community
(b) Land and property owners
(c) The media
(d) Interest groups
(e) Nongovernmental organizations (NGO)
The above secondary stakeholders have the
ability to mobilize public opinion in more or
less ways (Clarkson 1995). The first secondary
stakeholder – (a) the citizen – is based on societal
and personal interests. If citizens are gathered in
a specific group though without being assembled
in a special union of citizens, they may pose their
Secondary Stakeholders
claims either individually or as an assembled
voice, for instance, when citizens during
a hearing meet and agree to have certain common
interests, which they speak out. If the citizens
have a claim on personal interest related to their
status as land or property owner, this leads us to
the next secondary stakeholder (b). Normally,
land and property owners are not engaged in
stakeholder relationships with a corporation if
they do not feel that their possessions are threat-
ened, but in case that a corporation wishes to
construct a new building, or change their behav-
ior in a more disturbing manner to their neigh-
bors, land and property owners may have a claim
on the corporation. Citizens and land and prop-
erty owners often use the third secondary stake-
holder (c) – the media – as a threat to the
corporation if they feel that their claims will
have no consequences. This leads us to discuss
the role of the media, which has a high stake in its
ability to mobilize the public interest as well as to
motivate corporations to behave in a proper man-
ner if compromised. In many societies that do not
censor the “voice” of the media, it has the role of
the “public voice,” which is distributed fast and
efficiently through the internet, newspapers, and
television and eventually can and will pose
a threat to the corporation, if it does not behave
in a proper manner according to the opinion of the
media and the public in general. The role of the
media has been widely discussed after the major
News Corp. scandal in June 2011 within the
Rupert Murdoch media empire, where the UK
newspaper News of the World hacked people’s
cellphones as well as bribery of police officers in
London. Journalism normally claims to have high
ethical standards to secure its trustworthiness,
and this has been compelled by media moguls
such as Murdoch, which of course raised a roar
in the media all over the world in order to
reestablish the trustworthiness of journalism –
especially when other UK newspapers like the
Guardian and The Daily Telegraph were reveal-
ing the news of the Murdoch scandal. Where
media has the potential to distribute news
instantly and to impact public opinion, the impor-
tance of (d) interest groups seems volatile in
comparison, but certainly is not. Interest groups
2115 S
have certain powers allocated to the issues they
have at stake and the mobilization of primary
stakeholders that they might be capable of such
as the government or the authorities. Interest
groups have many forms and shapes – some are
organized in unions, where others are assembled
in situ. If the claim of an interest group can mobi-
lize a certain threat to the corporation either by
themselves or by the involvement of primary
stakeholders, they have a very clear voice as
a secondary stakeholder. The last group of second-
ary stakeholders is those interest groups that are
organized legally as a (e) nongovernmental orga-
nization. NGOs have a legitimized stake in what-
ever issue they consider as within their core
activities, because they use the legal system like
courts and authority entrances to pose a trial if their
stakes are threatened. On the other hand, a new
trend of private-NGO partnerships has evolved
during the last few years, which passes the legiti-
macy of NGOs partnerships with the corporation if
such an agreement is made contractually.
This entry on secondary stakeholders will deal
with matters of the above five categories of
stakeholders.
Introduction
R. E. Freeman coined the term “stakeholder” in
1984 while writing the book “Strategic Manage-
ment: A Stakeholder Approach” (Freeman 1984/
2010) as “any group or individual who can affect
or is affected by the achievement of the organi-
zation’s objectives,” and later in 2004, he revised S
this definition to “those groups who are vital to
the survival and success of the corporation”
(Freeman 2008). From the contribution of Free-
man and the entrance of his stakeholder theory in
business and management theory and the links to
many other areas, stakeholder theory has become
vital in matters of business ethics, corporate
social responsibility, strategic management, and
many other theoretical fields.
Freeman’s stakeholder theory has inspired
many theorists during the last 30 years, but as
mentioned above, Clarkson (1995) was the first
to coin the distinction between primary and
S 2116
secondary stakeholders – a development, that
inspired and was debated among theorists such
as Mitchell et al. (1997), Wartick and Wood
(1998), Harrison and St. John (1998), and later
on Freeman et al. (2007). This cemented the
coined notions that Clarkson suggested, but not
necessarily its content. Mitchell et al. (1997) dis-
tinguish different types of stakeholders into the
divisions of how much of the attributes of power,
legitimacy, and urgency each stakeholder has. In
this distinction, Mitchell et al. (1997) as well as
Wartick and Wood (1998) characterize the above
kinds of stakeholders as having various and situ-
ational power, legitimacy, and urgency ranging
from “determinant” to “latent” and “expectant” –
while the secondary stakeholders in Clarkson’s
(1995) terminology are being those who can
mobilize public opinion or mobilize primary
stakeholders. (Harrison and St. John (1998)) did
not use the term “secondary stakeholders” – they
distinguish between the “primary” stakeholders
that the company had inside “the operating
environment” and “the broad environment,” cited
in Freeman 2010, p. 104, Harrison and St. John
(1998), which the firm has little or no influence
over because they are outside the operating
environment. Nevertheless, even though the
“secondary” stakeholders are very much
discussed in the literature, we will define them
according to Clarkson (1995) in order to address
them as salient as stakeholders as well as “pri-
mary” stakeholders.
Key Issues
Citizens of the Community
As secondary stakeholders, the citizens of the
community have a natural voice in the stake-
holder relations and the attention of most corpo-
rations. This is in respect to one of the primary
stakeholders – the government or community,
which the citizens can mobilize if their claim is
viable enough. Many corporations have an inter-
est in a good and sound relationship with their
community and the citizens of it, and they take
citizen claims very seriously if legitimate and
sustainable. Many citizens are considered as (or
Secondary Stakeholders
potentially as) customers as well, and the same
importance may be attached to the claims of
citizens as if they were customers of the corpora-
tion. In nations with freedom to speak, freedom to
assemble in unions and with free religious
beliefs, citizens are highly aware of their rights
and obligations, and they use their rights to have
a voice as a stakeholder to corporations in which
they have a stake or interest. However, in nations
with limited freedom to speak, to assemble in
unions, and to choose religion, citizens mainly
have no voice as a stakeholder of a corporation. In
these nations, that voice of the citizen is con-
trolled by the state or dictatorship, and these
citizens are obliged to rely on the will of the
ruler or the will of the foreign spokespersons
that, through international cooperation (an NGO
or human rights organizations), have the power to
make the voice of citizens heard. But in most
countries, especially the Western world, the gov-
ernment and the court system protect the free will
of citizens, which means that citizens can involve
themselves in matters they find appropriate and
which are legitimate.
Land and Property Owners
Property rights for land and property owners are
one of the most vital human and business rights in
many nations, which are stated in the law by the
constitutions of many nations (Campbell 2004).
Naturally, land and property owners have a legal
and personal interest in protecting these rights,
and since those rights typically are stated in the
legislation, it is also stated how and when those
rights may and may not be violated and under
which conditions. Often, conflicts of interests
appear when certain business or public adminis-
trations decide to change infrastructural assets
such as expanding their own properties or land
use or when installing new or rehabilitating
existing infrastructure. In these situations, the
law demands permissions by the authorities to
establish such changes, and in some cases, the
permissions legally may allow the disturbances
of other parties’ land and property rights. For
instance, when an electricity or water utility
needs to cross privately owned land in areas
where public areas are missing or other concerns
Secondary Stakeholders
are of higher value, the authorities may give
permission to the utilities to install infrastructure
across private land, typically farmlands. In this
situation, the permission to violate the rights of
the landowner follows a specific rule set of how
the landowner must be compensated financially
for his or her loss. Other rights in these situations
can also be legally violated when an authority by
law forces some land and property owners to
connect to the existing infrastructure such as
sewer systems or road areas. In these instances,
the land and property owner will be obliged to
follow the rules of the authorities and to pay for
the connections to the new infrastructure maybe
against their will. This makes these kinds of
secondary stakeholders legitimate, especially in
the negotiation with the authorities about the com-
pensation and the right for the utility to cross their
land, properties or to accept the changes, which
could also be about things like how the installation
is done, by which technology and with which
result in both their and the public’s interests.
The Media
As some of the most significant providers of
public opinion, the media and especially the
internet have gained significance by its prompt-
ness and dispersiveness worldwide. This makes
the media extremely viable as a stakeholder for
the decision makers both in business as well as
in politics and public administration. The above
refers to the free press and to contexts of free
speech, where governments and rule makers do
not harness the voice and availabilities of the
media for the public. In areas of the world,
where the free press and freedom to speak are
not present or extremely restricted or censored,
the stakeholder situation for both the media and
the public in general is quite absent or opposite
to the voice of the government. This situation
makes it very hard for critiques of the present
system of governance, which may be synony-
mous with penalties, prison, or even death even-
tually. Literati and the press have had many
struggles about freedom to speak, and recently
in 2006, the Russian journalist and activist for
freedom to speak, Anna Politkovskaya, died
under mysterious circumstances after her year-
2117 S
long battle for the right to write and speak about
the rulers and power elites of Russia
(Politkovskaya 2004, 2007). Fortunately,
Politkovskaya succeeded in immigrating to the
UK and got her works published, but neverthe-
less, her death testifies that the freedom to speak
and write is not evident in many parts of the
world. Therefore, in those nations where this
freedom is present, the nature of this viable
right is conserved even beyond the political
incentives and desires to close these voices of
critique. The free media has a great amount of
power, which is recognized politically by the
rise of spin doctors in government offices, and
this power in comparison to the power of author-
ities also makes citizens use the media in case
they feel they have a personal struggle or a case
with the authorities that has been abandoned or
neglected. Because the media and the ethics of
journalism in many situations favors the minor-
ity if their rights seem to be violated by
the authorities, it is easy for people to address
the media when unsatisfied with the community
responses. This power of the media can also be
misused, as we saw above in the media crisis of
the Murdoch empire. This kind of abuse of
power will, when revealed, confirm the skepti-
cism of the ethical performance of the tabloid
press, which seeks the scandalous story ahead of
the ethical standards of journalism that most
sober news providers accept.
The media has a viable connection to the CSR
reporting of business interests. In this case, the
corporations have a strong interest in branding
their image in certain parts of the media and also S
on the Corporate Social Responsibility or Sus-
tainability Indexes that certain stock exchanges
such as Dow Jones and FTSE4Good have and
publish in the media. Other media such as the
newspapers and magazines – The New York
Times, The Economist, The Guardian, and
many more – are specially interested in CSR
matters, and these media as well as the many
different indexes of CSR and sustainability,
such as the Dow Jones and FTSE4Good, are
very important to the business world, whose via-
bility is dependent on the news about them in
these types of outlets.
S 2118
Interest Groups
Groups of people can have various forms of
assemblage. Some may be formally constituted
as nongovernmental organizations (see the next
section), while others might be more loosely
coupled or merely formed ad hoc. Nevertheless,
depending on the interest these groups represent
and the salience and legitimacy of it according to
stakeholder relationships, they might have
a higher or minor stake in whatever matter of
the business they interact with. Interest groups
can form immediately around a certain event of
political character, or it may have several years of
background in the particular assemblage form.
For instance, in a small town called Svendborg
in Denmark, some citizens claimed that ill per-
sons were not properly attended to by the author-
ities because of a restrictive interpretation of
a certain kind of social labor act stating that ill
persons within 12 month should be back to work
or else the community would lose a grant from
the state. This act made the local community
authorities send ill people out on the job market
while they were not able to hold a job because of
their severe illnesses. This concern made imme-
diately a large number of citizens assemble every
week during the autumn of 2011 in front of the
city hall to demonstrate their dissatisfaction with
government practices. The mayor and the offi-
cials of the authorities, who promised to make
certain changes in their practice according to the
individual cases they were in charge of, heard
their voices. Activism and interest groups can
be closely connected, and certain well-
established organizations might cherish this
kind of action because it makes a deep impact
on decision makers in many cases. This leads us
to the next group, nongovernmental organiza-
tions (NGO).
Nongovernmental Organizations
NGOs are typically well organized with cer-
tain members assuring their financial and
human capital for doing certain actions in
order to accomplish their goals. Some NGOs
are represented worldwide in many nations
such as Greenpeace, World Wildlife Founda-
tion (WWF), and Human Rights Watch, while
Secondary Stakeholders
others are nationally founded and act locally.
Typically, workers unions, labor unions, and
employer organizations negotiate salaries and
working conditions, while other NGOs have
specific programs for specific political issues.
The limits of this entry do not allow for a very
specific review of all kinds of NGOs, but the
most active in relation to businesses are typi-
cally NGOs about either labor, environmental,
or community issues such as corporate social
responsibility. The latter have in recent years
formed partnerships with businesses for the
purpose of mutual benefits in relation to busi-
ness image, ethics, and social responsibility
(Nijhof et al. 2008). Many large companies
have sought partnerships with NGOs in order
to act and brand themselves as socially
responsible, and the NGOs have taken this
opportunity to make their work for a better
planet viable. It is no secret that NGOs have
limited options to launch their supportive pro-
grams for the poor, the environment, mitigat-
ing labor abuse and child labor and enhancing
the livelihood of the scarce natural resources,
the threatened species, etc., without financial
support from businesses. Individual member-
ship fees do not meet the financial needs of the
projects those NGOs want to achieve, but by
engaging in business partnerships, mutual ben-
efits are gained by both parties – image of the
businesses to show their social responsibilities
and financial support for the NGO. See also
“▶ Stakeholder Engagement.”
Future Directions
There is blurring of boundaries between organi-
zations and stakeholders, and with partnerships
across many groups seen lately, they are rapidly
moving into the arena of “primary” stakeholders.
These kinds of partnerships have not (yet)
become crucial to the survival of the corporation,
and we could fear that during the financial crisis,
these partnerships could suffer from the lack of
stability of financial grounds. Some of the defi-
ciencies in NGO partnerships have been said to
be in the isolation of the targets for the mutual
Self-Interest
interests of the NGO and the business. The NGOs
sometimes claim the businesses exploit the name
of the NGO for branding purposes while not
supporting the NGO enough both financially
and organizationally with human capacity to
organize the projects that they have agreed to
participate in (Nijhof et al. 2008). Other partner-
ships seem to get on very well with well-
established achievements, expectations, and
cooperation (Nijhof et al. 2008).
This tendency will develop further into part-
nerships between both corporations and other
secondary stakeholders, for instance, between
businesses and citizens, or businesses and the
media, and the term “secondary stakeholder”
might wander into the “primary” level as these
partnerships evolve. See also “▶ Stakeholder
Engagement” about NGO partnerships, user-
driven innovation, and “Media CSR reporting.”
Cross-References
▶ Corporate Social Responsibility
▶ Inclusive Business
▶ Media CSR Forum
▶ Media Reporting of CSR
▶ NGOs and CSR
▶ Partnership
▶ Primary Stakeholders
▶ Stakeholder Accountability
▶ Stakeholder Engagement
▶ Stakeholders
2119 S
Freeman, R. E., Harrison, J. S., & Wicks, A. C. (2007).
Managing for stakeholders: Survival, reputation, and
success. New Haven: Yale University Press.
Harrison, J. S., & St. John, C. H. (1998). Strategic man-
agement of organizations and stakeholders: Concepts
and cases. Cincinnati: Southwestern College
Publishing.
Mitchell, R., Agle, B. R., & Wood, D. J. (1997). Toward
a theory of stakeholder identification and salience:
Defining the principle of who and what really counts.
Academy of Management Review, 22(4), 853–886.
Nijhof, A., de Bruijn, T., & Honders, H. (2008). Partner-
ships for corporate social responsibility. Management
Decision, 46(1), 152–167.
Politkovskaya, A. (2004). Putin’s Russia. London: The
Harvill Press.
Politkovskaya, A. (2007). A Russian diary. Estate of Anna
Politkovskaya. USA: Random House.
Wartick, S. L., & Wood, D. (1998). International Business
and Society. Malden, MA: Blackwell.
Secrecy
▶ Right to Privacy
Securities Markets
▶ Global Capital Markets
Security

▶ Right to Privacy
S
References and Readings

Campbell, J. L. (2004). Institutional change and globali-

zation. Princeton: Princeton University Press.
Clarkson, M. B. E. (1995). A stakeholder framework for
Self-Confidence
analyzing and evaluating corporate social perfor-
mance. Academy of Management Review, 20(1), ▶ Assurance
92–117.
Freeman, R. E. (2010). Strategic management.
A stakeholder approach. Cambridge: Cambridge
University Press. (Original work published 1984;
Free Press) Self-Interest
Freeman, R. E. (2008). A stakeholder theory of modern
corporations. In T. L. Beauchamp & N. E. Bowie
(Eds.), Ethical theory and business (8th ed.). Upper ▶ Corporate Social Irresponsibility
Saddle River: Pearson Prentice Hall. ▶ Ethical Egoism & CSR
S 2120
Self-Perpetuating Social Systems
▶ Social Sustainability
Self-Regulation Initiative
▶ Responsible Care (Chemical Industry’s Sector
Wide Initiative)
Selling Public Enterprises
▶ Privatization
Separation of Ownership and
Control
▶ Agency and Corporate Governance
“Servant” of the Board of Directors
▶ Corporate Secretaries
Servant Leader/Servant Leadership
Adriana Schiopoiu Burlea1 and Stephen Rainey2
1
University of Craiova, Craiova, Dolj, Romania
2
University of Namur, Namur, Belgium
Synonyms
Management; Responsibility; Virtue
Definition
The servant leader is the actor that accomplishes
the mission of organization in consonance with
Self-Perpetuating Social Systems
a sustainable vision and who helps people to
understand their roles and responsibilities, doing
their job in harmony with an explicit or implicit
vision. Servant leadership is a philosophy and
a practice of leadership – a desire to serve others
and a commitment to lead.
Introduction
The modern servant-leadership movement was
launched by Robert K. Greenleaf in his essay
“The Servant as Leader” that was first published
in 1970 and revised in 1973 (Greenleaf 2002). In
that essay, Greenleaf considered that the main
characteristics of the leader must be his/her desire
to serve others and to satisfy their needs. In order
to satisfy the needs of others, the servant leader
must listen, understand, accept, and empathize
with their needs. The servant leader must also
communicate his/her vision concerning building
a sustainable community.
In the vision detailed firstly by Greenleaf, the
servant leader is first of all a person of action, and
their actions are oriented to serve the ambitions of
others and are based on dreams that must be trans-
lated into reality. The creative and intuitive rela-
tionship between dreams and reality orient and
reorient the servant-leader actions in function of
situational and contextual factors (Spears 1995).
For a servant leader, it is not sufficient to be
simply a person of action. Besides this, it is very
important to be a powerful person with many fol-
lowers that share a common goal and have the
same ideals based on realizable visions for the
future. In this context, the native intelligence of
the servant leader must be supported by knowledge
and culture. Therefore, the servant leader is
focused on creating values for his/her followers in
order to permit the led to bind their wills to that
of the servant leaders. For this to be effective,
his/her target values must be related to the
follower’s dreams and ideals. In this context,
a servant leader cannot lose any opportunity to
demonstrate his/her abilities and to motivate the
followers to achieve both his/her and their dreams.
This builds trust in the leader but also demonstrates
his/her knowledge of the follower’s position.
Servant Leader/Servant Leadership
The relationship between leader and led under
servant leadership seems to be paradoxical. How
can one both lead and serve? It seems
a conceptual impossibility to be at the same
time leader and servant.
The servant is a person that helps others to
realize various ambitions and dreams. The ser-
vant is not a slave. The association between the
ideas of servant and slave deforms the perception
of the leader as a servant. The leader is not
enslaved but is instead a powerful person with
vision that helps the others to realize their dreams
and common goals. Commonly, not every leader
is a servant. Throughout history, we have many
examples of leaders destroying the dreams of the
others. These leaders generate “alternating cur-
rent” which indicates the fallible humanity
behind leadership in general – leaders are
human beings with bad and good intentions and
desires; they can be egoistic and self-interested.
For this reason, they cannot be servant leaders at
every instant. Displays of power can occur when
fallibility and human nature emerge more pow-
erfully than the enlightened will to lead as ser-
vant. In real life, we see leaders alternate between
servant leader behavior and power play.
It is a huge difference between servanthood
and servant leadership. Servanthood is an activity
that can be done by any person. Servant leader-
ship is an activity that pertains to serving and
leading a group of followers in the name of
a vision and a common goal or goals. Therefore,
servant leadership is the unfolding of a practical
course of action in the light of a dream.
In this chapter, we will seek to answer to the
follow question: What is a servant leader and
servant leadership? What are the limits of the
servant leader and of servant leadership?
Key Issues
History of Servant Leadership
The idea of the “servant leader” is not a peculiar
to the twentieth century. If we take a look in
history, we have many examples about the
leaders that have had servant-like components
to their behavior.
2121 S
For example, in the book Arthashastra written
by Chabakya in the fourth century B.C., we have
the portrait of a “servant king” that “is a paid
servant and enjoys the resources of the state
together with the people.” In the Christian New
Testament and in Islamic religion, the relation-
ship between the leader and the people is one
based on servitude of the leader.
From the beginning of the European tradition,
Aristotle, in the Nicomachean Ethics (Aristotle
2002), considers that the eudaimon is a virtuous
person and a virtuous person is a “servant leader”
that is healthier, wiser, and freer than the mere
technocratic leader.
Aristotle’s conception of the person effec-
tively delineates two distinct arenas of appetites
borne by the “soul.” One refers to the intellectual,
the other to character. Essentially, the person as
a whole is pulled toward seeking truth and knowl-
edge by the intellectual aspect of their soul, while
simultaneously being drawn toward improving
their character through the adoption of ethical
habits. This division does not totally break the
connection between these two aspects of charac-
ter, however, as each is marshaled by the individ-
ual’s practical wisdom or phronesis. In fact, the
person as a whole can only flourish as a result of
becoming a phronemos or an active exponent of
phronesis. That eudaimonia or flourishing comes
about as a result of the balancing of the divided
aspects of the soul underwritten by practical
wisdom. For Aristotle, indeed, this is the funda-
mental basis for exercising virtue per se. Being
a phronemos is the how and the why of virtue.
Virtuous behavior in Aristotle’s account has as S
its aim a specific outcome – praxis. Praxis is
linked to notions of social benefit and is directly
linked to practice. This is contrary to the aim of
knowledge which is best construed as “produc-
tion” (poiesis). We can see that virtue is to be
assessed, then, without essential reference to
instrumental outcomes, whereas the productive
nature of knowledge is part of its concept. In
terms of the servant leader, it is clear that praxis
is the point. Leadership must exhibit phronesis
and end in socially beneficial action. Moreover,
what beneficial action is itself an open question –
were it to be determined in advance, leadership’s
S 2122
role would merely be to bring about the produc-
tion of some set of circumstances. This, of course,
would be an exercise of instrumental reason
and would rely upon technical knowledge. This
would not be phronesis and so could not exhibit
nor end in virtue. Instead, phronesis must under-
write an ongoing unfolding of praxis that
involves learning and the possibility of change.
The practice of servant leadership is fixed upon
realizing the good life, which is itself not revealed
or predetermined but an ongoing critical reflec-
tion. The servant leader serves their community,
themselves, and virtue itself when they seek
praxis through phronesis.
Stogdill (1948) considers that the difference
between a leader and nonleader consist not in
contingencies of personal character but in the
situational factors which give the possibilities to
put into play his/her perhaps hidden characteris-
tics that, given demonstration, prove to be of
value. Therefore, a person becomes a servant
leader only if he/she has the opportunity to dem-
onstrate the value of his/her characteristics.
Throughout the centuries, a great many suc-
cessful leaders were the “servants leaders” that
considered that the welfare of the people contrib-
ute indirectly to his/her welfare. This owes to the
relationship between a leader and his/her subor-
dinates such that a culture of action, trust, and
legitimacy is constructed.
The Relationship Between Leader and
Subordinates (Characteristics of a Good
Servant Leader)
The notion of trust plays a major role in an unre-
constructed account of leadership. Specifically,
doxastic trust, the faith in another to literally
lead the way, carries a lot of weight. What does
such a concept imply for the relationship between
leader and subordinate? The functions of imagi-
nation, critical awareness, dialogical engage-
ment, and other associated ideas are absent from
those being led. Creativity in terms of goals to be
reached and strategies to reach them is ceded
purely to the leader. While often such narrow
conceptions can lead to clear goal setting and
unambiguous strategy development, there is
a central risk in the possibility of emergent crisis.
Servant Leader/Servant Leadership
In the context of changing conditions or in the
light of degenerating effectiveness of prevailing
strategies, what can a leadership based in
doxastic trust do? Effectively, in the context of
crisis, it is trust that is diminished. But under an
arrangement wherein imagination, critical aware-
ness, and dialogical engagement have been
removed from those being led, crisis can only
result in turmoil as leadership must either reassert
itself or be removed. In the first instance, the
effectiveness of the leadership is undermined
automatically as the focus of attention becomes
not the setting and pursuit of goals but the trust-
worthiness of the leadership itself. This “turning
inward” negates the active pretensions of leader-
ship per se as action itself is on hiatus. In the
second instance, the leader with the trust deficit
must be replaced by another more trustworthy
figure. Again, the notion of action and the ratio-
nale of leadership break down.
A servant leader, on the other hand, does not
take the Hobbesian-like position of sovereign
over an assembled mass. On a Hobbesian
approach, to summarize, leadership involves
forcing the submission of the will of the masses
to the will of a sovereign through the fear of how
much worse a situation could be in the chaos of
leaderlessness. Where the notion of doxastic trust
does a lot of work in the scenario outlined above,
the idea of instrumental rationality is as play.
A good leader can be trusted to lead as they set
goals that can be achieved: “. . . the context-
dependence of first-person experience is
suppressed in favour of a third-person perspec-
tive which yields generalised findings in
accordance with clearly formulated, publicly
agreed procedures. The procedures insist on
observation, measurement, replicability, modes
of testing that specify precisely what can count
as counter-evidence and the adoption of an inter-
pretation-immune language; and all of this
ensures predictive value to the findings. Predic-
tion then becomes the basis of control: to explain
reality in this mode is ipso facto to gain power
over it” (Dunne 1999, p. 708). Many scholars
(Graham 1991; Mayer et al. 2008; van
Dierendonck and Patterson 2010) consider that
servant leadership can be a solution for the ethical
Servant Leader/Servant Leadership
problems of humanity. Servant leadership is seen
as an influential process in two directions: per-
sonal influential process that affect the behavior
of servant leader and followers’ influential pro-
cess that contribute to a change of the ideal of the
follower according to servant-leader ideal. There
is a sense of servant leadership as embodying the
“hermeneutic circle,” wherein processes of
reflection occur within the context of action and
inform that very action.
The servant leader does not seek an instrumen-
tally efficient, objective position but rather seeks
to include the range of experience available from
those being led. Indeed, “being led” is
a misleading phrasing as it suggests the passivity
of the subordinates. In fact, in the servant leader’s
openness to the range of experience present
among the group, leadership and being led are
each active components of a group activity. This
servant-leadership context utilizes the imagina-
tion, critical awareness, and communicative
power of the whole group.
The emphasis is thus placed not upon
a technocratic manipulation of putative objective
facts but on a practical engagement with fine-
grained and rich sources of insight besides simple
knowledge. The emphasis is thus upon the leader
as phronemos, or bearer of practical wisdom, not
as wielder of supposedly objective facts and
means to manipulate them. Instead of doxastic
trust, a key notion in servant leadership is the
complicity of leadership and subordinates
through the medium of that servant leader’s
insightful practical wisdom.
Arguments for and Against Servant
Leadership
The Group Benefits of Servant Leadership
There are good reasons for leaders to take seri-
ously the testimony of their subordinates (Misak
2000, pp. 124–125). Essentially, the benefits for
the group are in the fact that servant leadership
takes the group into account. Epistemologically,
if we listen to others, we expand our sources of
evidence. From a merely aggregative perspec-
tive, we improve our evidential base. In gaining
more evidence, critical appraisal or new perspec-
tives upon the goals and strategies being pursue
2123 S
become available. If we harbor any desire to have
good (reliable, true) knowledge, then taking into
account the views of others is a compelling strat-
egy for the servant leader.
From a moral perspective, there is a plain
enough injunction to take seriously others’ testi-
mony about their perspective owing to basic
respect. Others’ experience of the world, though
it is different in fact from one’s own, is not
different in principle. The deeply held values of
another are as deeply held as one’s own, even if in
terms of content they are utterly opposed. If we
take seriously our own deeply held view, as we
likely do, then it would seem a contradiction in
action to ride roughshod over those views as
equally deeply held by the other.
From the perspective of legitimacy, it makes
sense for a servant leader to take subordinates’
perspectives seriously. In the case where the ser-
vant leader requires action from subordinates,
there will be a legitimacy deficit should injunc-
tions appear as if from nowhere. From the point
of view of integrity, should the servant leader
respect the views of those whose actions they
would steer is a respectable modus operandi and
so one likely to achieve results. Moreover, conti-
nuity over time is made more likely as the legit-
imate leader, respected for their integrity and
taking others seriously, does not just lead by
issuing commands but builds a team with the
confidence to involve themselves in the action
of the group. Such leadership is thereby
sustainable.
The Limits of the Servant Leadership S
Does the Servant Leader Have Authority and
Empowerment?
The immediate contrast that springs to mind
regarding the servant leader is the strong line
pressed by Plato in his account of statecraft The
Republic. There are elements of this view that
stand as a precursor to the Hobbesian view
already mentioned. For Plato, leadership is com-
pared to the piloting of a ship – it must be carried
out by an individual, with superior knowledge
and absolute power. The point he makes is that
in the absence of a strong, unified will setting
goals and trajectories to reach them, inaction or
S 2124
error will result. The proto-hermeneutic position
implicit within the Aristotelian position above
represents the worst possible form of leadership,
from Plato’s perspective, as the constant gauging
of opinion and negotiation about ends and means
leads toward a fetishization of preference and
opinion over knowledge and, in all likelihood,
to violence as those with the strongest prefer-
ences seek to dominate the wills of others. With-
out a strong, authoritative, and well-informed
leader, the potential for indolence, misguided
action, violence, and mistake is large. The servant
leader, it could appear, lacks the authority to
counteract such a potentiality.
A second potential liability in the servant-
leadership scenario is that, given the open texture
of decision-making, uncertainty will predomi-
nate. If one figure is thought of as the servant
leader, with all playing a role in the overall prac-
tice of leadership, what power has that servant
leader to make a decision? Conflict resolution in
such a scenario could easily degenerate into
power struggles of the sort that occur when
doxastic trust is the central leadership context.
In short, if all are implicated in leadership, with
one merely facilitating group decision, when
discord arises, what power is there to veto or
compel? Perhaps a limit of servant leadership,
then, is the chance of conflict – servant leadership
is an effective modus operandi when there is
general accord and good will. Its shortcomings
arise when something becomes a problem. This,
of course, is serious as one could easily suppose
that times of crisis are when leadership is most
vital. If one accepts that, this is very troubling.
That it is troubling for leadership in general, not
just servant leadership is important to bear in
mind.
Is the Servant Leader an Ideal without
Horizon?
The human ideal is to become eudaimon, and the
leader ideal is to become a servant leader. The
characteristics required for a person to become
a servant leader are extremely numerous and so
controversial. Owing to the context-sensitive
nature of the skills underwriting servant leader-
ship, indeed, a complete list of essential
Servant Leader/Servant Leadership
characteristics could be impossible to construct.
However, an indicative of some very important,
general properties can be hinted at. For example,
a servant leader must have very good communi-
cation skills, good empathy with his/her fol-
lowers, and a will and the ability to help
followers solving their problems; to be aware
and especially self-aware; to exercise his/her
persuasive power and not a dominating authori-
tarian one; to be all the time connected with the
reality and at the same time to take into consid-
eration the past and to draw objectives for future;
to inspire trust and to recognize the intrinsic
values of the follower for building a sustainable
community; and to have the courage to accept
honest criticism.
It could be suggested that a list such as this
requires a superhuman character from the servant
leader – that it is impossible for a human being to
be adequately altruistic and moral and to make so
many compromises with herself. This ideal is not
based on human characteristics; this ideal is
based on the image of the consideration that
a person is a servant leader because that means
he is a perfect person and do not need any
improvement. Taking into consideration that the
level “servant leader” is thus outlined at an ulti-
mate level, as a guiding ideal rather than
a concrete particular, we ask next the question:
Can a servant leader so conceived handle the
truth and honest criticism?
The answer has to be “no” because:
• The servant leader is so perfect and he does not
receive critics.
• All followers are trustee in servant leader and
do not call into question the servant leader
behavior.
• The servant leader wants only to serve the
followers and community.
Consequently, we consider that the servant
leader is a person with many characteristics,
who has his/her own philosophy of empowering
and developing the followers in the spirit of
ethics, trust, and responsibilities. It is this medi-
ating factor that permits the relation of the regu-
lative idea of servant leader to prevailing
contexts. Burlea Schiopoiu and Lefter (2011,
p. 294) use “the scale of sacrifice” for evaluation
Servant Leader/Servant Leadership
of the relationship between situational factors and
historical context. The degree of sacrifice spirit is
evaluated by five stages:
Stage 1: The leader has not an ideal and the
sacrifice spirit is quasi null.
Stage 2: The leader wants to have an ideal, but
the situational factors and historical (political,
economical, and social) situations raise
a barrier and limit his/her sacrifice spirit.
Stage 3: The leader is dedicated to his/her ideal,
but the risks can destroy his/her image and
reputation.
Stage 4: The leader manifest a superior sacrifice
spirit for attain his/her ideal.
Stage 5: The leader supreme sacrifice – in this
stage, the leader is perceived as a servant leader.
The servant leader is an ideal because the
followers perceive his/her as sacrificing person,
a kind of hero who must bring an offering on the
altar of servant leadership. We consider that it is
difficult to put a leader in the servant-leader cat-
egory without taking into consideration the situ-
ational effects and internal or external social
political and economical context. Factors such
as these condition and make effective the ideal-
ized conception of servant leader.
Future Directions
Is Servant Leadership a Solution for
a Sustainable Management?
Servant leadership’s sustainability was mentioned
above with respect to his/her inclusion of subordi-
nates’ perspectives. This respect for autonomy
allows for the assigning of roles in the service of
a plan by the servant leader such that the will of the
subordinate is brought along in the service of the
plan. The contrast is top-down leadership, where
commands are issued that supply merely tasks for
others to fulfill. The latter course of leadership is
modeled upon instrumental rationality – “if then”
reasoning that prizes efficiency as its guiding vir-
tue. In this type of leadership, a task that is man-
aged with little fuss is judged better than one with
more fuss. Plainly, the perspectives of those to
whom tasks are assigned are not greatly important
in this as those individuals are treated as
2125 S
instruments. Under servant leadership, however,
the autonomy of the individuals is respected and
tasks are assigned on a scheme that presents the
plan to be unfolded and the practical wisdom of
the leader to all involved. Thus, leadership on this
account is a group activity and includes those
involved. The management of tasks on this
model that can be judged “good” are not those
limited to efficiency alone but to a scale of assess-
ment much broader and, ultimately, more human.
In basing a management approach upon
a conception of leadership that is sensitive to
multidimensional assessments of “good,”
a conception of leadership that places judgment
and respect of the group at the fore, the chance of
sustainability is increased. This is so owing to the
fact that in servant leadership, there is scope for
continuous assessment of goals and strategies in
media res. In contrast with instrumentalist, top-
down leadership, this constant monitoring and
potential for dialogue build a culture of action and
progress among the servant leader and the servant
led, rather than a conception of leadership as
a punctilious, task-centered approach. Under
a task-centered rationale, it is easy to imagine ten-
sions growing from task to task should some sub-
ordinates begin to feel devalued. Such devaluation
can grow as further tasks pile up, which can result
in alienated subordinates for whom these tasks are
external impediments rather than actions in which
to take pride. Servant leadership’s culture of action
and progress provides the space for pride in work,
and its openness to perspectives and reassessments
provides a backdrop for the coevolution of stan-
dards between servant leadership and servant led. S
Cross-References
▶ An Aristotelian Approach to Sustainable
Management
▶ Corporate Social Entrepreneurship
▶ Ethical CSR
▶ Management
▶ Responsible Leadership
▶ Socially Responsible Management (SRM)
▶ Trust
▶ Virtue Ethics and CSR
S 2126 Servant Leadership

References and Readings

Share
Aristotle. (2002). Nicomachean ethics. Oxford: Oxford
University Press.
▶ Dividend
Burlea Schiopoiu, A., & Lefter, V. (2011). Les pratiques
de leadership dans les organisations roumaines.
In J. M. Peretti (Ed.), Tous leaders (pp. 293–302).
Eyroles: Editions d’Organisation.
Dunne, J. (1999). Professional judgment and the predica-
ments of practice. European Journal of Marketing, 33
Share Option Bonuses
(7/8), 707–720.
Graham, J. W. (1991). Servant-leadership in organisa- ▶ Bonuses and the Recent Global Financial Crisis
tions: Inspirational and moral. Leadership Quarterly,
2(2), 105–119.
Greenleaf, R. K. (2002). Servant leadership: A journey
into the nature of legitimate power and greatness (25th
anniversary ed.). New York: Paulist Press. Shared Value
Mayer, D. M., Bardes, M., & Piccolo, R. F. (2008). Do
servant-leaders satisfy follower needs? An
▶ Enlightened Self-interest
organisational justice perspective. European Journal
of Work and Organisational Psychology, 17(2),
180–197.
Misak, C. (2000). Truth, politics and morality. London:
Routledge.
Spears, L. C. (1995). Reflections on leadership: How
Shareholder
Robert K. Greenleaf’s theory of servant-leadership
influenced today’s top management thinkers. ▶ Stakeholders
New York: Wiley.
Stogdill, R. M. (1948). Personal factors associated with
leadership: A survey of the literature. Journal of Psy-
chology, 25, 35–71.
van Dierendonck, D., & Patterson, K. (2010). Servant Shareholder Activism
leadership: Developments in theory and research.
Houndmills/New York: Palgrave Macmillan.
▶ Institutional Investor Monitoring

Servant Leadership Shareholder Intervention

▶ An Aristotelian Approach to Sustainable ▶ Institutional Investor Monitoring
Management

Shareholder Primacy Theory

Service Economy
▶ Shareholder Theory
▶ Post Industrial Society

Shareholder Primacy Versus

Service Recipients Stakeholding

▶ View on the Ground: CSR from a Capabilities ▶ Anglo-American Model Versus Continental
Approach European Model
Shareholder Rights
Shareholder Returns
▶ Profit Maximization
▶ Shareholder Value Creation
Shareholder Rights
Ahmed El-Masry1 and Nahla Kamal2
1
Plymouth Business School, Devon, Plymouth,
UK
2
ALROWAD, Dokki, Giza, Egypt
Synonyms
Shareholders’ preemptive rights; Stockholders’
preemptive rights; Stockholders’ rights
Definition
“Shareholder rights” means the bundle of rights
which a shareholder possesses by virtue of part or
total ownership of shares. Such rights can vary
according to types of owners, types of shares,
and also other contractual rights, which may attach
to shares or may stem from a separate contractual
right. The specific contents of the bundle of rights
vary across legal jurisdictions, across companies,
and across types of shares. A shareholder or stock-
holder is the owner of part or all of one or more
shares of the stock of a corporation or a mutual
fund. Therefore, the shareholder is, at least theo-
retically, a part owner of the corporation, which is
a business entity, which is owned by shareholders.
Each shareholder owns the portion of the company
in proportion to his or her ownership of the
company’s shares (certificates of ownership).
This allows for the unequal ownership of
a business with some shareholders owing to
a larger proportion of a company than others.
Shareholders are able to transfer their shares to
others without any effects to the continued exis-
tence of the company. However in practice, very
few shareholders are able to exercise control of
2127 S
a company unless they also hold a majority of
shares in the company. The reality of share-
holders’ rights often does not match the theoretical
promise of “ownership” of a corporation.
Introduction
The shareholder has inherent rights in the corpo-
ration in which they hold shares, based upon the
rights which attach to such shares. There may
also be a contractual relationship between the
shareholder and the corporation, which may be
separate from the inherent relationship the share-
holder may have with the corporation. Also, there
may be a contractual relationship between certain
types of shareholders, which also limits or
extends particular shareholder’s rights.
Share Ownership
An individual or an entity (including corpora-
tions) is usually able to be a shareholder.
Normally, and in the case of most publicly traded
shares, there are no qualifications needed
from the shareholder of business corporations,
other than payment of the price of the share
(or in certain circumstances an agreement to pay
at some later time). However, in particular types
of corporations or for particular types of shares in
certain corporations, there are limitations on who
may be a shareholder. For instance, a professional
license may be required from shareholders in
professional corporations (such as special incor-
porated entities for attorneys, architects,
engineers, public accountants, and physicians); S
and individuals are more frequently accepted as
shareholders in taxation pass-through corpora-
tions, such as “S” corporations in the USA.
Theoretically, shareholders have a right to distri-
bution of a company’s assets and earnings
(after certain debts have been paid) in equal
proportion to their shareholding in the corpora-
tion. In addition to shareholders’ specific rights,
they often have responsibilities.
Frequently Occurring Classes of Shares
Before talking at length about shareholders’
rights, it should be noted that there are two
S 2128
distinctive types of shares, which are offered, by
most corporations: common shares and preferred
shares. Capital stock, which provides a specific
dividend that, is paid before any dividends are
paid to common stock holders, and takes prece-
dence over common stock in the event of liqui-
dation. Like common stock, preference shares
represent partial ownership in a company,
although preferred stock shareholders do not
enjoy any of the voting rights of common stock-
holders. Also unlike common stock, preference
shares pay a fixed dividend that does not fluctu-
ate, although the company does not have to pay
this dividend if it lacks the financial ability to do
so. The main benefits to owning preference
shares are that the investor has a greater claim
on the company’s assets than common stock-
holders. Preferred shareholders always receive
their dividends first and, in the event the company
goes bankrupt, preferred shareholders are paid off
before common stockholders. Preferred stocks or
sometimes referred to as priority shares, which
are referred to as preference shares or privileged
shares, benefit from a preference in the distribu-
tion of profits and might also get privilege in
the distribution of the corporation’s assets upon
liquidation. These types of shares are accepted in
virtually all-legal systems; however, in certain
countries, it is crucial to get the support of an
unusual general meeting of the shareholders in
a particular category of share for the extinction
or restriction of the privilege attached to this
category. Lastly, it should be noted that in
some countries it is possible for the corporation’s
statute to allow the payment of fixed interest
during the period of formation of the corporation;
however, it is subject to conditions which differ
according to the legal system.
Shareholders’ Rights
Shareholders’ rights are not identical in all legal
systems, as rights in various countries are often
not of the same level or managed by the same
legal rules. However, the following share-
holders’ rights are normally found (Malatesta
and Walkling 1988; Ryngaert 1988; Comment
and Schwert 1995; Datta and Datta 1996;
Danielson and Karpoff 2006; Heron and Lie
Shareholder Rights
2006; Curley et al. 2007; Velasco 2007; Chugh
and Meador 2008; Schneeman 2010):
• Participation in the corporation
• Sharing profits
• Voting
• Transferring shares
• Withdrawal from the corporation
• Control
• Active participation in corporate deliberations
• To call general meetings
• Preemptively subscribing to new shares
• Contesting the corporation’s decisions
• Proceeding at law against the directors
• Participation in distribution of assets on
liquidation
Such rights not only vary across jurisdictions
(often flowing from compulsory regulation or a
common starting point of the rights of share-
holders), but also are often also variable by agree-
ment among shareholders or by the constitution
of the corporation. The final three in the list will
not be discussed at length in this entry, mostly on
the basis of the highly technical legal nature of
such rights and the variation across jurisdictions.
Participation in the Corporation
This right entitles a shareholder to preserve his/her
position as shareholder and to avoid elimination
from the corporation either by the board of direc-
tors or by the general meeting. Such exclusion
marks the gap or deficiency of the shareholder’s
title; and it is not open to the corporation to cancel
out or deprive the shareholder of his/her title
except in certain circumstances. The same goes
with the courts as they cannot force a shareholder
to sell his/her shares, except in certain circum-
stances. Exclusion from the corporation may
happen in the following situations:
• If the shareholder fails in his/her duty to
pay the value of the shares subscribed, the
corporation may arrange the sale of the share-
holder’s shares. This is clearly approved by
law in various countries.
• If the shareholder is redeeming shares.
• Other provision of law covering special cases.
In relation to modification of shareholders’
rights, the general rule is that the corporation’s
statute (and rights attaching to shares) may be
Shareholder Rights
modified at a general meeting, but the appropriate
legal requirements oblige more rigorous condi-
tions for this than for other decisions. Share-
holders’ rights of membership usually will not
prohibit an adjustment of their rights; however,
many jurisdictions only allow modification of
special classes of shares (especially those in the
minority) by a majority vote of all shareholders
and the holders of specially affected shares.
Sharing Profits
Sharing profits is called a dividend on the share
which is a taxable payment declared by
a company’s board of directors and given to its
shareholders out of the company’s current or
retained earnings, usually quarterly. Dividends
are usually given as cash (cash dividend),
but they can also take the form of stock (stock
dividend) or other property. Dividends provide an
incentive to own stock in stable companies
even if they are not experiencing much growth.
Companies are not required to pay dividends. The
companies that offer dividends are most often
companies that have progressed beyond the
growth phase, and no longer benefit sufficiently
by reinvesting their profits; so they usually
choose to pay them out to their shareholders,
also called payout. A dividend must be paid to
all shareholders when it is announced in propor-
tion to their ownership interests. The corporation
cannot bias payment of dividends within the same
class of shareholders by withholding payment
while restricting payment to selected small num-
ber of holders. Holders of preferred shares often
receive their dividends before those who hold
common shares. This does not change the guar-
antee payment of equal dividends for specific
classes of shares, but gives the holders of pre-
ferred share some privilege. Priority payment of
dividends to preferred shareholders is often
required where preferred shareholders are so
because of financing arrangements with the com-
pany. For this reason some investors favor pre-
ferred shares as it is usually a lower risk
investment. In addition, bonds are debt instru-
ments so they usually take privilege over all
shares and they are usually also of lower risk
than preferred shares.
2129 S
Voting
It is essential in many countries to give share-
holders the right to vote on certain decisions.
In France for instance, it is illegal to issue shares
without a voting right attached to it or for the
shareholder to give in or pass on his/her vote.
In fact, the law announces termination to all
agreements in respect of the right to vote,
which means that a company cannot issue
a share without having the right to vote; this is
considered a violation of the basic right of
a shareholder. On the other hand, law in some
countries permits the issue of shares without
votes attached and with right to vote restricted
to some resolutions identified by law. Various
countries do not allow multiple voting, while in
others it is allowed according to law or even in the
absence of a rule of law preventing it by the
courts. Finally, in certain legal systems a single
shareholder is not allowed to maintain a number
of votes more than that predetermined by law, or
alternatively the corporation’s statute may set up
such limitation or necessitate a given number of
shares to be represented at general meetings of
the corporation. However, in this case, the
shareholders may unite to create the required
number and may be represented by anyone of
them. An ability to vote is often accompanied
by ability to proxy votes to another shareholder.
Normally, shareholders who have preferred
shares do not vote and the common shareholders
hold all the voting powers. In such circumstances,
holders of preferred shares can be understood as
limited partners in a partnership; although they
make a capital contribution to the corporation, S
they are not allowed to vote. Voting preferences
do exist, but they are the exception rather than the
rule. There are certainly pros and cons when
looking at preferred shares. Preferred share-
holders have priority over common stockholders
on earnings and assets in the event of liquidation,
and they have a fixed dividend (paid before com-
mon stockholders), but investors must weigh
these positives against the negatives, including
giving up their voting rights and less potential
for appreciation. When it comes to election of
Directors, voting rights usually come in two
forms, statutory voting and cumulative voting,
S 2130
and they are extremely different. Statutory voting
is more common, in which one share obtained by
holder equals one vote. In elections dominated by
statutory voting, the majority of shareholders
elect all of the directors based on this method,
while the minority will have no influence in such
election. Cumulative voting on the other hand
gives one vote per share multiplied by the number
of vacancies to be filled on the board of directors.
Cumulative voting is usually understood to be
a more proportional system of voting in that it
better represents the votes of minority share-
holders. The difference here is that all votes
could be cast for candidate. Based on the example
above, 300 votes are in the hands of one holder
who has 100 shares. So, the holder may decide to
give all the votes for one candidate. Based on this
method, the minority of the shareholders are
more likely to get representation on the board,
through focusing all of their votes in one candi-
date. However, this rarely happens because
minority groups do not often stick together to
achieve this goal.
Voting privileges might be surrendered in a lot
of ways, some voluntary and some involuntary:
failing to meet certain compulsory conditions for
share ownership, such as payment of the price of
shares; failing to attend a meeting at which votes
are cast and using a proxy or voting trust to
surrender rights to vote. A proxy is a time-limited
surrender of voting rights, generally for just one
meeting, and is very common. According to
the law in most jurisdictions, a proxy should be
provided by publicly held corporations to their
shareholders. A proxy order can simply pass the
voting rights to another or can direct the proxy
how to vote. The latter is similar to what is called
“absentee ballot” in a political election.
The proxy is sent by shareholders before the
meeting, which enclose all the issues to be
voted upon. The holder makes his/her choices
and votes in favor of or in opposition to the issues.
The proxy comes back and the votes cast as
instructed. A surrender of voting rights is
established as the votes are cast on behalf of the
shareholders, even though the holders’ say is
heard in the determination of the issue. Possible
abuse by corporations is prevented by proxies,
Shareholder Rights
which could restrain a shareholders’ meeting on
short notice in some distant area. The manage-
ment group would manage all corporate decisions
without disagreement, as hardly any holder
would probably be there. Another type of proxy
is a voting trust, which involves a long-term
surrender of voting rights. When the corporation
is going through financial problems the voting
trust often develops. The shareholder might be
called by the management to ask them to surren-
der their right to vote. These votes would be
placed in a trust and the named trustees will
vote if the shareholders agree upon the manage-
ment requests. This would allow the corporation
to formulate more rapid decisions and perhaps
enhance the corporation in the future. In addition,
corporations who wish to preserve family control
(or control by a relatively small group of share-
holders) also use voting trusts. The majority of
shareholders will hold a voting trust certificate
(VTC), while the other voting shares will be
owned by the family. All the privileges of com-
mon share ownership are allowed to VTC except
the voting rights. The market value of the VTC
rarely differs significantly from the common
shares as voting is seldom a key element in
corporate affairs. In extraordinary situations like
a proxy contest for control of a corporation, the
value of the voting trust may be a vital element in
the market price of the share.
Transferring Shares
The right to transfer shares has already been
observed under continental laws; basically
a share is a transferable tool. Therefore, the share-
holder can, if the share is a “bearer” share, trans-
fer his/her title by simple distribution to another
person. But if the share is recorded in the name of
the holder in the corporation’s reports, transfer is
approved in some systems by endorsement; how-
ever, this is unusual in practice. The share-
holder’s right to transfer his/her shares may be
exposed to restrictions. In the first place, some
legal systems prohibit, for financial reasons, the
issue of shares to bearer; alternatively it is usually
required by law that shares be recorded in the
names of the holders until the entire supposed
value has been paid up, and it is enough to pay
Shareholder Rights
up one half in only a few systems. Limitations
upon the transfer of shares enclosed in the
requirements of a corporation’s statute are
accepted by the courts, and in recent legislation
are set up by law. Limitations enclosed in corpo-
ration statutes set down a right of preemption, in
cases of transfer, in favor of other shareholders in
the corporation or the board of management; or
they may offer that transfer only to people of
a specified nationality or to other shareholders,
and so on. A common shareholder has the right to
transfer shares to another person without consent
from the corporation with hardly any restrictions.
Therefore, he/she can sell, assign, or make gifts
of his shares without exceptions. In certain times,
the shareholder will voluntary agree to not trans-
fer his/her shares for a short period, for instance
receiving the shares as employment benefit or as
a reward for achievement.
Withdrawal from the Corporation
In some legal systems, the shareholder has the
right to withdraw from the corporation in cases
where the general meeting of the corporation has
approved on a certain type of resolutions, which
is set up by law. The dissident shareholder can
necessitate the corporation to repay him/her with
the money value of his/her shares.
Control
As discussed before, shareholders are considered
to be the owners of the corporation; for that
reason they are permitted to specific rights to
examine the corporate records of the corporation.
In law, the shareholder’s right to exercise indi-
vidual control over the management of the cor-
poration is very limited. The shareholder is
entitled by law to only examine the corporation’s
balance sheet, accounts, and report, during
a specified number of days prior to the general
meeting. The right of control is, in approximately
all systems, implemented not independently but
through intermediaries selected by the general
meeting, the same as auditors in England. The
English theory has been copied in various sys-
tems, but to this point with small success as in
continental countries and in Latin America, the
remarkable “incorporated accountants” do not
2131 S
exist as they do in England to permit their inde-
pendence, competence, and impartiality. In coun-
tries where an enduring corporation exists for
State supervision of the affairs of corporations,
the shareholder may on his own behalf speak to
the managerial who is accountable for the man-
agement of unknown societies. Publicly held
companies are obliged to formulate reports to
shareholders on standard occasions. Addition-
ally, the Securities and Exchange Commission
demands for in-depth information to be filed in
these reports. There is seldom need for
a shareholder to insist on viewing the corporate
books as they are accessible to public. However,
a common shareholder will utilize legal proce-
dures to receive his/her right to view such infor-
mation in a nonpublic corporation. Apparently,
any confidential information or information that
might work in the disadvantage of the corporation
is not required to be enclosed.
Active Participation in Corporate
Deliberations
Basic shareholder rights should include the right
to (1) secure methods of ownership registration;
(2) convey or transfer shares; (3) obtain relevant
and material information on the corporation on
a timely and regular basis; (4) participate and
vote in general shareholder meetings; (5) elect
and remove members of the board; and (6) share
the profits of the corporation. Shareholders
should have the right to participate in, and to be
sufficiently informed on, decisions concerning
fundamental corporate changes such as
(1) amendments to the statutes, or articles of S
incorporation or similar governing documents of
the company; (2) the authorization of additional
shares; and (3) extraordinary transactions, includ-
ing the transfer of all or substantially all assets,
that in effect result in the sale of the company.
Shareholders should have the opportunity to par-
ticipate effectively and vote in general share-
holder meetings and should be informed of the
rules, including voting procedures that govern
general shareholder meetings. Shareholders
should be furnished with sufficient and timely
information concerning the date, location, and
agenda of general meetings, as well as full and
S 2132
timely information regarding the issues to be
decided at the meeting. Shareholders should
have the opportunity to ask questions to the
board, including questions relating to the annual
external audit, to place items on the agenda of
general meetings, and to propose resolutions,
subject to reasonable limitations. Effective share-
holder participation in key corporate governance
decisions, such as the nomination and election of
board members, should be facilitated. Share-
holders should be able to make their views
known on the remuneration policy for board
members and key executives. The equity compo-
nent of compensation schemes for board mem-
bers and employees should be subject to
shareholder approval.
To Call General Meetings
Shareholders have the right to ask for and set up
general meetings, to be present at, select an alter-
native, or speak at general meeting and to vote in
general meetings. The Annual general meetings
(AGMs) and extraordinary general meetings
(EGMs) are two distinct types of general meet-
ings. A general meeting is only legitimate if it has
been correctly organized with an adequate
amount of shareholders present to form
a quorum, if the president is present, and if no
one has been excluded who is permitted to be
there. AGM should be held by all corporations.
AGM should take place within 18 months of its
incorporation. Then it should be held every year
on scheduled day and not after the corporation’s
financial year-end by 6 months. A forum for
shareholders is provided by the AGM to obtain
key information about the corporation and to
question directors. Regularly it is used by share-
holders to pass resolutions contained in the
annual report and to think about the annual finan-
cial statements, to agree on a dividend, to select
directors, and to assign auditors. On the other
hand, EGMs are held to think about “too urgent”
business such as mergers or acquisition that can-
not wait for the next AGM. In addition, Manage-
ment should seek the approval of shareholders on
certain actions, such as share buybacks, sizeable
acquisitions, or increasing the corporation’s
authorized share capital. Besides, shareholder
Shareholder Rights
approval is now to a greater extent been sought
for management incentive schemes, whether
cash- or share-based. Moreover, shareholders
have the right to obtain the required equipment
to exercise their key rights, including obtaining
copies of the annual financial statements, to talk
directly with directors, the right to expect all
directors to act on their behalf, and the right to
information.
Preemptively Subscribing to New Shares
This right is rather uncommon in the investment
climate these days. Several corporations such as
public utilities permit them as a means of getting
more capital from existing shareholders. The
shareholders’ preemptive right is the right of
some shareholders (usually those who hold com-
mon share) to have the first opportunity to buy
any new share the company issues in an amount
relative to their share ownership; by this the
shareholders protect their relative shareholding
position in the corporation. Such right is very
crucial for shareholders, especially in small cor-
porations with small number of shareholders. For
instance, four shareholders in a corporation own
200 shares of common share per individual. If the
corporation’s board of directors comes to
a decision of selling an additional 1,000 shares
to raise funds, the current shareholders might lose
their voting power on all decisions to be made by
the corporate shareholders. However, when there
are many shareholders in the corporation, partic-
ularly in publicly held corporations, shareholders
are usually not concerned with their proportion-
ate ownership of the corporation. Additionally,
the preemptive right will become extremely hard
to implement, as a result of the number of share-
holders in large corporations. In some countries,
preemptive right is not granted to shareholders
unless it is provided in the articles of incorpora-
tion, while the opposite can be found in other
countries.
Warrants
Warrants are an option, which permits the holder
the right to subscribe to the common share of
a corporation. It is commonly exercisable for
a long period of time unlike preemptive rights,
Shareholder Rights
usually for 10 years or more from the date of issue
and some are permanent. This time feature makes
it appealing for possible capital gains. Com-
monly, a security package called “unit” is issued
in conjunction with a warrant. For instance, on
March 19, 2002, Chiquita Brands International,
Inc. issued $250,000,000 of notes maturing
March 15, 2009 with 10.56 % interest per
annum from March 19, 2002. The note buyers
were attracted by the warrants attached which is
called a “sweetener.” The warrant allowed the
shareholder to buy at $19.23 one share of com-
mon share through March 19, 2009. In 2007, the
common share was selling at $19.93 and the
warrant was at $6. The intrinsic value and time
value are the two factors that determine the value
of the warrant. Therefore, the warrant allows the
shareholder to buy one share of common share at
$19.23, and the common share is selling at
$19.63, thus the intrinsic value would be $.40
and the time value is $3.42. The buyer would
put into consideration that the common share
will increase through the remaining lifetime of
the warrant.
Key Issues
The most important issues in relation to share-
holders rights are as follows:
Corporate Governance and Shareholders
Rights
Particularly since the corporate scandals of 1990s
and 2000s as well as the share market decline of
the new millennium, huge attention is being paid
to the relationship between shareholders’ rights
and corporate governance. Generally speaking,
academics, investors, money managers, govern-
mental institutions, regulatory and professional
bodies, lawyers, and investment bankers are now
alert of the significance of corporate governance
in the recent past. Consequently, huge attention is
being given to building up procedures to mea-
sure, monitor, and quantitatively assess the cor-
porate governance of corporations. The areas of
shareholder rights and shareholder voting are
essential characteristics of a superior corporate
2133 S
governance system. According to the Organisa-
tion for Economic Co-Operation and Develop-
ment (OECD) Principles of Corporate
Governance (2004) “the corporate governance
framework should protect and facilitate the exer-
cise of shareholders’ rights.” The right to perti-
nent, well-timed, and regular information about
the corporation; the right to contribute and vote in
shareholder meetings; the right to choose and
eliminate members of the board; and the right to
share in the corporation’s profits are examples of
shareholders’ rights. Shareholders are the pro-
viders of risk capital and therefore, they need to
be able to protect their investment by ensuring
that a knowledgeable board is in place to run the
corporation and to make sure that effective strat-
egies are in place for the company’s overall cor-
porate performance and long-term sustainability.
The International Corporate Governance Net-
work (ICGN) published its modified Global Cor-
porate Governance Principles, and one of the
principles, Principle 8, is about Shareholder
Rights (ICGN 2009). It talks about the boards’
responsibility and protection to shareholders and
so they should “treat all the company’s share-
holders equitably and should respect and not
prejudice the rights of all investors. Boards
should do their utmost to enable shareholders to
exercise their rights, especially the right to vote,
and should not impose unnecessary hurdles; vot-
ing-related rights whereby the exercise of own-
ership rights by all shareholders should be
facilitated; and shareholder rights of action such
that shareholders who are treated inequitably
have rights of redress.” For instance, the princi- S
ples state that minority shareholders should be
able to get redress when they find themselves
subject to abusive or oppressive conduct. The
shareholders’ rights outlined above are seen by
all stakeholders as essential to the shareholder-
company relationship. Directors must run the
corporation in a way which proves that they are
trustworthy, by creating enduring sustainable
value, and also take into account their relation-
ships with various stakeholder groups such as
employees, customers, suppliers, and the broad
community on which their actions have an
influence.
S 2134
Non-binding Resolutions
Shareholder voting is one of the most influential
ways that corporate investors have to engage
with the boards of directors of their investee
companies. It appears as though even non-
binding resolutions can influence corporate
decision-making. Past experimental studies
(such as Bizjak and Marquette 1998; Martin
and Thomas 1999; Thomas and Cotter 2007;
Ferri and Sandino 2009; Ertimur et al. 2010)
concluded that “shareholders do exert pressures
on boards of directors even if their vote at the
shareholders’ meeting is not legally binding,
because proposals that win a majority vote end
up being implemented by the board of directors
in many cases with relevant spillover effects
even on nontarget companies.” There is a huge
possibility that the corporations may attract
negative press and receive downgrades by gov-
ernance rating firms, when the shareholder’s
vote is ignored by the board of directors. In the
USA, such directors will probably lose their
chance to be reelected besides the possibility
of losing other directorships (Mallin and Melis
2012).
Good Governance ¼ Lower Costs?
Corporations are increasing director responsive-
ness to shareholder concerns, as shareholder pro-
posals seem to have an emerging role in
decreasing corporate costs. Moreover, several
studies concluded that there is a correlation
between shareholder rights and corporate perfor-
mance (Brown and Caylor 2006). The ability of
shareholders to use their voting rights, or connect
with corporations via dialogue or any other
ways such as focus lists, has a positive effect on
corporate performance. Gompers et al. (2003)
investigated the ways in which shareholder
rights differ across corporations. They created
a “Governance Index” to proxy for the level of
shareholder rights in about 1,500 large corpora-
tions in the 1990s. And they discovered that
“firms with stronger shareholder rights had
higher firm value, higher profits, higher sales
growth, lower capital expenditures, and
made fewer corporate acquisitions.” Lastly, the
importance of corporate governance in
Shareholder Rights
rebuilding trust in global capital markets has
been highlighted by the global financial crisis.
As the International Corporate Governance Net-
work (ICGN) statement pointed out “. . .securing
and maintaining the rights of shareholders and
developing the transparency needed for them to
exercise these rights in a responsible, informed,
and considered way.” At last, it is only with
shareholders ability to use their protected rights
and engage with corporations to mitigate the
overall risks and attain a long lasting sustainable
corporate performance. The role of the share-
holder in the corporation has been highlighted
once again by the current events in the business
world. Developing new legal rights for share-
holders was the focus of those who favor an
extended role for shareholders in corporate gov-
ernance, while their oppositions respond with
reasons why such rights are pointless and
unsuitable. Even though these issues are
definitely worthy of consideration, issues relat-
ing to current shareholder rights are more essen-
tial. If current rights are sufficient or could be
enhanced, therefore new rights may not be
required; but if current rights cannot be retrieved,
therefore efforts to formulate new rights may be
equally unavailing. In general, it is supported in
the literature that better shareholder rights guar-
antee a higher value of the corporation
(Sundaram and Inkpen 2004). There are quite
a lot of reasons for this supposition: first, the
possibility of cutting litigation costs and less
litigation will be needed as greater transparency
of governance processes and financial informa-
tion for investors and acquirers, and protection of
minority shareholder rights; second, the possibil-
ity of decreasing the agency costs since indepen-
dent boards can efficiently monitor and supervise
management. In addition, suitable incentives
may be put in place which to the performance
of management. Third, better shareholder-
oriented corporate governance may be taken as
encouraging signal for potential investors and
analysts. And lastly, better transparency may
raise credit ratings, resulting in a lower cost of
debt. Moreover, Experimental literature reveals
that better shareholder rights normally produce
higher share prices, higher growth rates, higher
Shareholder Rights
profitability and lower volatility in share, for
instance, Gompers et al. (2003) and Ashbaugh-
Skaife et al. (2006) stated that cost of equity
capital is lesser for corporations with greater
shareholder rights. In contrast, it should point
out but is often overlooked, that better share-
holder rights involve several essential costs.
Such costs include first, exposing strategic and
tactical information to competitors; second,
slower and less-efficient decision-making in
a competitive environment; third, reduced capi-
tal investment and R&D expenditures as short-
run focus is on profitability; fourth, higher career
risk and thus, higher CEO compensation; fifth,
higher agency costs for creditors in light of
potential for common management turnover
leading to lower credit ratings and higher debt
costs; and lastly, efforts by the CEO to twist and
cover up proprietary information to preserve
competitive position.
Shareholder Apathy
Most votes of general or special meetings of
companies proceed on the basis that most share-
holders proxy their votes to the company’s Exec-
utive. It is not clear that this is healthy or good,
but most shareholders are not especially inter-
ested in anything besides share price and divi-
dend payment. There is some movement among
professional shareholders (such as large pension
funds) to exercise more diligence in relation to
corporate decision-making and non-binding res-
olutions (see above).
Future Directions
Future research can use a sample of corporations,
and their characteristics, in which good corporate
governance has better shareholder rights to
achieve better performance and also determine
the direction of shareholders’ rights of whether
it should be modified or remained as it is.
Cross-References
▶ Corporate Governance
2135 S
References and Readings
Ashbaugh-Skaife, H., Collins, D., & LaFond, R. (2006).
The effects of corporate governance on firms’ credit
ratings. Journal of Accounting and Economics, 42,
203–243.
Bizjak, J. M., & Marquette, C. J. (1998). Are shareholder
proposals all bark and no bite? Evidence from
shareholder resolutions to rescind poison pills.
Journal of Financial and Quantitative Analysis, 33,
400–522.
Brown, L. D., & Caylor, M. L. (2006). Corporate gover-
nance and firm valuation. Journal of Accounting and
Public Policy, 25, 409–434.
Chugh, L., & Meador, J. (2008). An analysis of the
levels and patterns of shareholder rights: 1990–
2006. Journal of Business & Economics Research,
6, 77–86.
Comment, R., & Schwert, W. G. (1995). Poison or pla-
cebo? Evidence on the deterrence and wealth effects of
modern antitakeover measures. Journal of Financial
Economics, 39, 3–43.
Curley, M., Joseph, A., & Walker, J. (2007). Barron’s
stockbroker examination. New York: Barron’s Educa-
tional Series.
Danielson, M. G., & Karpoff, J. M. (2006). Do pills poison
operating performance? Journal of Corporate
Finance, 12(3), 536–559.
Datta, S., & Datta, M. I. (1996). Takeover defenses and
wealth effects on security holders: The case of poison
pill adoptions. Journal of Banking and Finance, 20,
1231–1250.
Ertimur, Y., Ferri, F., & Stubben, S. (2010). Board of
directors’ responsiveness to shareholders: Evidence
from shareholder proposals. Journal of Corporate
Finance, 16(1), 53–72.
Ferri, F., & Sandino, T. (2009). The impact of shareholder
activism on financial reporting and compensation: The
case of employee stock options expensing. The
Accounting Review, 84(2), 433–466.
Finweek. (2006). Shareholders’ rights and responsibili-
ties (pp. 38–39). ISSN: 18124658. Retrieved from
Business Source Premier Database.
Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate
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governance and equity prices. Quarterly Journal of
Economics, 118, 107–155.
Heron, R. A., & Lie, E. (2006). On the use of poison pills
and defensive payouts by takeover targets. Journal of
Business, 79, 1783–1807.
ICGN. (2009). Global corporate governance principles:
Revised (2009). London: International Corporate Gov-
ernance Network.
Karpoff, J. M., & Danielson, M. G. (2006). Do pills poison
operating performance? Journal of Corporate
Finance, 12, 536–559.
Malatesta, P. H., & Walkling, R. A. (1988). Poison pill
securities; stockholder wealth, profitability, and
ownership structure. Journal of Financial Economics,
20, 347–376.
S 2136
Mallin, C., & Melis, A. (2012). Shareholder rights, share-
holder voting, and corporate performance. Journal of
Management and Governance, 16(2), 171–176.
Martin, K., & Thomas, R. (1999). The effect of share-
holder proposals on executive compensation. Univer-
sity of Cincinnati Law Review, 67, 1021–1081.
OECD. (2004). Principles of corporate governance, orga-
nisation for economic co-operation and development.
Paris: OECD.
Ryngaert, M. (1988). The effect of poison pill securities on
stockholders wealth. Journal of Financial Economics,
20, 377–417.
Schneeman, A. (2010). Laws of corporations and other
business organisations. Clifton Park: Delmar Cengage
Learning.
Sundaram, A. K., & Inkpen, A. C. (2004). The corporate
objective revisited. Organization Science, 15(3),
350–363.
Thomas, R., & Cotter, J. (2007). Shareholder proposals in
the new millennium: Shareholder support, board
response, and market reaction. Journal of Corporate
Finance, 13(2–3), 368–391.
Velasco, J. (2007). Taking shareholder rights seriously.
Notre Dame Legal Studies Paper No. 06-03, Univer-
sity of California Davis Law Review 41, p. 605. Avail-
able at SSRN: http://ssrn.com/abstract=886340
Shareholder Theory
Branco Manuel Castelo
Faculty of Economics, University of Porto:
OBEGEF (Observatory in Economics and
Management of Fraud), Porto, Portugal
Synonyms
Shareholder primacy theory; Shareholder value
theory
Definition
Shareholder theory equates to an influential view
on the role of business in society which pushes
the idea that the only responsibility of managers
is to serve in the best possible way the interests of
shareholders, using the resources of the corpora-
tion to increase the wealth of the latter by seeking
profits. According to this theory, such behavior,
done within the constraints of law and without
Shareholder Theory
deception or fraud, would be beneficial for soci-
ety as a whole. Within this theory corporate social
responsibility is defined in purely economic profit
making terms.
Introduction
The many different ways according to which
corporate social responsibility is conceptualized
are related to differing views regarding the role of
business in society. Within the literature there
exist several points of view on the role of busi-
ness in society which lead to different views on
corporate social responsibility. Among the most
important of these views is the shareholder the-
ory, which upholds the age-old view that the only
responsibility of the managers of a corporation is
to maximize the wealth of its shareholders (share-
holder primacy). This view is associated with the
debate over the nature and purpose of the corpo-
ration, in which there is a divide between those
who advocate that maximizing shareholder
wealth is the corporation’s main concern and
those who envision the corporation as a social
institution playing a social service role and serv-
ing broader objectives and a larger constituency.
Whereas the former consider that the fundamen-
tal concern of a corporation’s managers is to
maximize the wealth of the shareholders, the
latter defend the perspective that managers
should make decisions that take into account all
of the stakeholders in a corporation.
Neoclassical economic theory arguments
seem to be the foundation used to justify share-
holder theory, through the use of notions such as
the principle of free markets, economic effi-
ciency, and profit maximization. Two normative
foundations of the shareholder theory, which are
often used has justification for it and arguments
against corporate social responsibility, are wor-
thy of note. First, shareholders are considered the
owners of the corporation, and corporate execu-
tives have fiduciary duties to run the corporation
in their interests. Corporate executives have no
right to act on their own preferences, to make
discretionary decisions, or to use resources of
the corporation for socially beneficial purposes
Shareholder Theory
which cannot be shown to be beneficial to the
achievement of the corporation’s financial ends.
Second, the role of companies is to produce
wealth, and pursuing social objectives may hin-
der their performance in that role, thus interfering
with efficient resource allocation. An additional
argument used by some shareholder theory advo-
cates against corporate social responsibility is
that other organizations exist to deal more ade-
quately with the kind of function associated with
socially responsible actions, such as the
government.
Shareholder theory has been misrepresented in
a variety ways (Smith 2003). First, it is some-
times misstated as suggesting that managers
should do anything they can to maximize profits.
However, major shareholder theory proponents
consider that the options managers have to
increase profits exclude deception and fraud. Sec-
ond, shareholder theory is often criticized as
geared toward short-term profit maximization at
the expense of the long run. Still, several advo-
cates of the shareholder view refer to an “enlight-
ened self-interest” which would lead to the
adoption of long-term preoccupation by corpo-
rate managers. Third, some authors contend that
the shareholder theory prohibits the use of corpo-
rate funds to things such as charitable projects or
investing in activities that promote enhanced
employee morale. Yet, numerous shareholder
theory supporters view such efforts favorably,
as long as they are the best alternatives for the
investment of such funds.
Key Issues
Shareholder Theory: Early Debates and
Proponents
An important landmark in the debate over the
nature and purpose of the corporation is the
1919 Michigan Supreme Court decision in
Dodge v. Ford Motor Company, in which the
view that a corporation must endeavor to maxi-
mize its shareholder value was endorsed
(Sneirson 2007). In this case, the Dodge brothers,
John and Horace, minority shareholders in the
corporation, challenged the decision to suspend
2137 S
the practice of paying special dividend. They
argued that the role of the corporation was to
increase and distribute profits to its shareholders.
Ford instead advocated that the corporation had
responsibilities to a large array of constituents
besides its shareholders. He emphasized the idea
that it was fundamental to pay employees well
and provide affordable cars to consumers.
Another important milestone in this debate is
the famous debate between law Professors Adolf
Berle and E. Merrick Dodd in the Harvard Law
Review during the 1930s (Sneirson 2007). Berle
took the view that the corporate director should
not have any responsibilities other than to the
shareholders of the companies they manage, for
whom money was to be made. Contrary to Berle,
Dodd believed that companies were seen by the
public at large as economic institutions that have
a social service role to play as well as making
profits for shareholders, and that companies had
responsibilities to the corporation’s shareholders,
employees, customers, and to the general public.
The main earlier proponents of the shareholder
theory in the economics and management fields
are opposed to corporate social responsibility on
the grounds that it may run against shareholders
interests. The major author in economics associ-
ated with the shareholder theory is the Nobel
Prize Winning Economist Milton Friedman.
He asserted, as early as 1962, in a book written
with the assistance of his wife Rose D. Friedman,
that, in a “free economy,” “the one and only one
social responsibility of business” would be “to
use resources and engage in activities designed
to increase its profits so long as it stays within the S
rules of the game, which is to say, engages in open
and free competitions, without deception or
fraud” (Friedman and Friedman 1962, p. 133).
This view was reiterated and extended in an
article published, in 1970, in the New York
Times Magazine (Friedman 1970), with the
telling title “The Social Responsibility of
Business is to Increase Its Profits.”
Friedman argues that the purpose of the corpo-
ration is to make profits for shareholders. Because
managers are agents of the shareholders they have
a responsibility to conduct business in accordance
with their interest, which is generally to make as
S 2138
much money as possible and maximize their
wealth. The only responsibility of business
would be to use its resources and engage in activ-
ities designed to increase its profits so long as it
stays within the rules of the game. For this econ-
omist, however, companies should behave hon-
estly, which implies that they do not engage in
deception and fraud. Under this view, because
shareholders are the owners of the corporation
and therefore the profits belong to them, requiring
managers to pursue socially responsible objectives
may in fact be unethical, since it requires man-
agers to spend money that really belongs to other
individuals. Asking companies to engage in social
responsibility activities is considered to be harm-
ful to the foundations of a free society with a free-
enterprise and private-property system. Social
problems should be left for the state to address.
Although Friedman’s views on corporate
social responsibility are more widely known,
they had a conspicuous predecessor in Levitt
(1958). Like Friedman, Levitt also considered
that companies should be concerned with
improving production and increasing profits
while complying with the rules of the game,
which include acting honestly and in good faith.
They also agreed on the idea that addressing of
social problems should be left for the state.
There is however, within the shareholder the-
ory, a different perspective from that of Friedman
and Levitt. In contrast to Friedman and Levitt,
there are those who accept some degree of dis-
honesty. One of the first to accept some degree of
deception was Albert Carr (1968), who compared
the ethics of business to those of the poker game.
He believes business people have a lower set of
moral standards than those in the rest of society.
This permits what he calls “business bluffing”
which includes things like conscious misstate-
ments, concealment of pertinent facts, or exag-
geration. Deception is probably a necessary
component of a strategy to be successful in busi-
ness, and thus business people cannot afford to be
guided by ethics as conceived in private life.
Thus, for Carr a corporation has the legal right
to shape its strategy without reference to anything
but its profits, so long as it stays within the rules
of the game legally set out by law.
Shareholder Theory
Recent Developments
The shareholder theory has a legion of more
recent proponents. Their arguments have arisen
largely through debate with proponents of the
stakeholder theory, and can be associated with
the perspective of Friedman in the sense that
they reject dishonesty and deception (Branco
and Rodrigues 2007). In addition, it should be
noted that some of these more recent stakeholder
theorists do not oppose the involvement in
socially responsible actions by corporations.
While considering shareholder value maximi-
zation as the objective function of corporations,
some contemporary proponents of shareholder
theory, such as Michael Jensen, are not necessar-
ily against corporate social responsibility (Jensen
2001). The basic argument is that having more
than one objective has the important effect of
creating difficulties for managers and is likely to
introduce confusion in their decision making. On
the other hand, there is also the idea that having as
objective shareholder value maximization will
lead managers to take decisions that advance out-
comes for various stakeholders. The basic con-
tention is that value maximization should be the
only objective function of corporations since
doing so implies that managers should not be
allowed to pursue social goals at the expense of
profitability.
There is in the ideas of more recent share-
holder theorists a repetition of several of the
arguments of their predecessors, but they are not
necessarily against the engagement in socially
responsible activities by corporations (Branco
and Rodrigues 2007). These “more thoughtful
shareholder theorists” (Smith 2003, p. 86) appear
to be proposing what Jensen (2001) calls
“enlightened shareholder maximization” view,
according to which a corporation cannot maxi-
mize value if any important stakeholder is
ignored or mistreated.
According to Jensen (2001), it is possible to
argue that “enlightened value maximization” and
“enlightened stakeholder theory” refer to the
same idea. Enlightened value maximization uses
stakeholder theory to consider that it is not possi-
ble for a corporation to maximize value if any
important stakeholder is ignored or mistreated.
Shareholder Theory
In Jensen’s own words, “in order to maximize
value, corporate managers must not only satisfy,
but enlist the support of, all corporate stake-
holders – customers, employees, managers, sup-
pliers, local communities” (Jensen 2001, p. 9).
However, the criterion for making the requisite
trade-offs among its stakeholders continues to be
the long-term value maximization. On the other
hand, long-term value maximization is thought of
by enlightened stakeholder theory as the objec-
tive function of the corporation, thereby solving
the problems that arise from considering multiple
objectives, as in traditional stakeholder theory.
According to some advocates of stakeholder
theory, the alternatives available for managers to
create shareholder value other than “by creating
products and services that customers are willing
to buy, offering jobs that employees are willing to
fill, building relationships with suppliers that
companies are eager to have, and being good
citizens in the community” are very difficult to
envision (Freeman et al. 2004, p. 366).
Some authors believe that corporate social
responsibility is often useful in generating long-
term owner value. The arguments that for some
time have been presented for strategic corporate
social responsibility arise, at least in part, from
the classical idea that the sole objective of busi-
ness is to maximize shareholder wealth and that
a corporation should engage in socially responsi-
ble activities only if it allows value to be created.
This approach is synthesized by McWilliams and
Siegel (2001, p. 125), who argue that decisions
regarding corporate social responsibility should
be treated by managers “precisely as they treat all
investment decisions.”
But even Friedman (1970, p. 250) recognized
that “it may well be in the long-run interest of
a corporation that is a major employer in a small
community to devote resources to providing ame-
nities to that community or to improving its gov-
ernment.” This could have several benefits such
as making it “easier to attract desirable
employees,” “reduce the wage bill or lessen
losses from pilferage and sabotage” (Friedman
1970, p. 250). However, in these cases “the doc-
trine of social responsibility is frequently a cloak
for actions that are justified on other grounds
2139 S
rather than a reason for those actions” (Friedman
1970, p. 250). This would be “one way for
a corporation to generate goodwill as a by-
product of expenditures that are entirely justified
on its own self-interest” (Friedman 1970, p. 250).
More radical authors such as Carr (1968,
p. 149) also recognized that if a corporation
wishes to take a long-term view of its profits, “it
will need to preserve amicable relations with
whom it deals. A wise businessman will not
seek advantage to the point where he generates
dangerous hostility among employees, competi-
tors, customers, government, or the public
at large.” Notwithstanding, his perspective was
that “decisions in this area are, in the final test,
decisions of strategy, not of ethics” (Carr 1968,
p. 149).
Shareholder Theory Versus Stakeholder
Theory
Given these arguments, one can legitimately pose
the question of what is it that tells apart some kind
of stakeholder management as a means to achieve
marketplace success from shareholder theory. If
stakeholder theory does not give any primacy to
one stakeholder over another, there will be times
when some groups will benefit at the expense of
others. One answer is that shareholder theory is
purely economic in nature, and presents a clear
differentiation between economic and social
aspects, whereas stakeholder theory brings
together social and economic aspects. For
Freeman et al. (2004, p. 364), stakeholder theory
“begins with the assumption that values are nec-
essarily and explicitly a part of doing business, S
and rejects the separation thesis,” according to
which ethics and economics can be separated
clearly. The upholders of stakeholder theory
reject the separation thesis. They see a moral
dimension to business activity. On the other
hand, many supporters of the shareholder theory
distinguish between economic and ethical conse-
quences and values and see business as an amoral
economic activity.
For example, according to Porter and Kramer
(2002), the argument underlying Friedman’s rea-
soning has two implicit assumptions. First, social
and economic objectives are separate and
S 2140
distinct. Second, by addressing social objectives,
companies do not provide greater benefit than is
provided by individual donors. The enlightened
shareholder maximization view also has such
assumptions. But the dichotomy between eco-
nomic and social objectives is a false one because
companies do not function in isolation from the
society in which they operate (Porter and Kramer
2002). For these authors, “in the long run, then,
social and economic goals are not inherently
conflicting but integrally connected” (Porter and
Kramer 2002). Therefore, contrary to Friedman’s
ideas, managers who undertake social responsi-
bility activities do not necessarily misuse finan-
cial resources that legitimately belong to
shareholders.
Freeman et al. (2004) believe that these share-
holder and stakeholder theories should not be
considered as opposed, in the sense that even
the former can be regarded as a version of the
latter, given that stakeholder theory admits many
possible normative cores (op. cit., p. 368). As
a particular version of stakeholder theory, the
moral presuppositions of shareholder theory can
be seen as including “respect for property rights,
voluntary cooperation, and individual initiative
to improve everyone’s circumstances. These pre-
suppositions provide a good starting point,
but not a complete vision of value creation”
(Freeman et al. 2004).
Future Directions
The conceptualization of corporate social
responsibility as an investment which derives
from the business case for it has the important
implication of neutralizing the age-old opposi-
tion to the involvement of companies in social
responsibility activities on the grounds that it
may run against shareholders interests. Nowa-
days, the need to consider the expectations and
interests of a large variety of stakeholders
beyond only shareholders for long-term value
creation is widely acknowledged. This is not
tantamount to saying that considering share-
holders expectation and interests is not impor-
tant, nor it implies that profitability is not
Shareholder Theory
a fundamental aspect of a corporations’ success.
It is rather recognizing that in order to survive
and be profitable, a corporation has to acknowl-
edge a wide array of stakeholders who may have
very diverse perspectives on the corporation’s
success.
Much is still to be done regarding the under-
standing of why and how the involvement in
socially responsible activities may be seen as
having strategic value for corporations. Although
the relationship between corporate social respon-
sibility and performance has been an important
area of research and debate at least since the
1960s, there is still no clear answer as to whether
being socially responsible translates into better
performance. Thus, much additional work to clar-
ify this question is needed.
Cross-References
▶ Business Case for CSR
▶ Enlightened Self-Interest
▶ Friedman, Milton
▶ Good Corporation
▶ Shareholder Value Creation
▶ Stakeholder Theory
References and Readings
Branco, M. C., & Rodrigues, L. L. (2007). Positioning
stakeholder theory within the debate on corporate
social responsibility. Electronic Journal of Business
Ethics and Organization Studies, 12(1), 5–15.
Carr, A. Z. (1968). Is business bluffing ethical. Harvard
Business Review, January–February, 143–146, 148–
149, 152–153.
Freeman, R. E., Wicks, A. C., & Parmar, B. (2004).
Stakeholder theory and “the corporate objective
revisited”. Organization Science, 15(3), 364–369.
Friedman, M. (1970). The social responsibility of business
is to increase its profits. In L. B. Pincus (Ed.), Perspec-
tives in business ethics (pp. 246–251). Singapore:
McGraw-Hill.
Friedman, M., & Friedman, R. (1962). Capitalism and
freedom. Chicago: University of Chicago Press.
Jensen, M. C. (2001). Value maximization, stakeholder
theory, and the corporate objective function. Journal
of Applied Corporate Finance, 14(3), 8–21.
Levitt, T. (1958). The dangers of social responsibility.
Harvard Business Review, 36(5), 41–50.
Shareholder Value Creation
Mcwilliams, A., & Siegel, D. (2001). Corporate social
responsibility: A theory of the firm perspective. Acad-
emy of Management Review, 26(1), 117–127.
Porter, M. E., & Kramer, M. R. (2002). The competitive
advantage of corporate philanthropy. Harvard Busi-
ness Review, 80(12), 56–68.
Smith, H. J. (2003). The shareholders vs. stakeholders
debate. MIT Sloan Management Review, 44, 85–90.
Sneirson, J. F. (2007). Article, doing well by doing good:
Leveraging due care for better, more socially respon-
sible corporate decision making. Corporate Gover-
nance Law Review, 3, 438–482.
Shareholder Value Added
▶ Shareholder Value Creation
Shareholder Value Creation
Kojo Menyah
London Metropolitan Business School, London
Metropolitan University, London, UK
Synonyms
Shareholder returns; Shareholder value added;
Shareholder wealth creation
Definition
Shareholder value creation is the process by
which the management of a company uses the
equity capital contributed by the shareholders to
make and implement strategic and financing
decisions that will increase the wealth of share-
holders in excess of what they have contributed.
Introduction
Various economic agents such as individuals,
firms, and institutional investors (pension funds,
insurance companies, mutual funds, and closed-
end funds, among others) buy equity securities in
2141 S
companies for investment purposes in the expec-
tation that the future value of their investment
will exceed the initial investment and therefore
provide a return which compensates them for the
risk taken in making the initial investment.
Hence, the intrinsic motivation for investment
in equity securities is the expectation that it will
generate extra value or wealth, even though
unlike investments in fixed income securities,
such extra value creation is never guaranteed.
The ability of equity investments to provide
a return to their investors requires that companies
that receive equity funds must be able to generate
a surplus of cash flows on their operations after
accounting for all costs, including the cost of
capital. It is only when such a surplus results
that one can talk of the creation of shareholder
value.
Why and how do companies, through their
directors and managers, create shareholder
value and what are the countervailing forces, if
any, that may impact on the extent to which such
a corporate objective can be achieved? For pub-
licly held corporations and other privately owned
firms, the objective to create wealth for those who
contribute their risk capital seems to be the raison
d’être for their existence. In the case of the pub-
licly held corporation in particular, such share-
holder value creation (usually characterized as
the shareholder wealth maximization) objective
provides the motivation for economic agents who
may have no relationships or interactions with
each other to fund productive business activities
which are managed by professional managers in
a free enterprise system. The focus on combining S
risk capital with other resources to create more
wealth ensures that the resources of society are
put to the most productive uses. Therefore, the
objective of companies creating extra wealth
through their operations is the practical manifes-
tation of the concept of the capital market func-
tioning to allocate funds to those businesses that
are best able to make the most efficient use of the
capital by providing a return in excess of the cost
of capital.
The fact that in the wealth creation process
firms rely on employees, customers, and other
interested parties for their success has led some
S 2142
observers to argue that the objective of the firm
should not be narrowly defined to focus on what
shareholders want but should take into account
the interests of other stakeholders. Of course,
value-creating firms must be able to employ,
compensate, and retain productive people; pro-
duce goods and services of high quality and sell
them at competitive prices; and take steps to
mitigate the unfavorable consequences that arise
out of their operations. This implies that taking
care of the legitimate interests of the other stake-
holders is a normal part of the activities of any
well-managed business enterprise. This, how-
ever, does not mean that firms should take on
broader social obligations which might invari-
ably mean that they could cease to function as
businesses. For instance, if a business has to
adopt new technologies that would lead to the
shedding of labor or reorganize its operations to
use fewer employees to be more efficient and
competitive, it should not shy away from such
decisions in order to meet the job needs of its
employees because ignoring such difficult deci-
sions can affect firm profitability and survival in
a competitive product market. Similarly,
a company that provides more value to its cus-
tomers than they are willing to pay for will not be
able to generate sufficient cash flows in the
medium term and may then cease to be viable in
a competitive market. Therefore, in the final anal-
ysis, shareholders cannot subsidize either
employees, customers, or other stakeholders for
any length of time without affecting the long-
term viability of the business. If a business then
fails as a result of pandering to the needs of other
stakeholders, then the effects on such stake-
holders as a group may be bigger than what
could have been if business decisions had been
driven by the objective of creating value for
shareholders.
Key Issues
The Shareholder Value Concept
Business organizations use capital from share-
holders and borrowed funds (debt) to acquire
productive assets and hire labor to create goods
Shareholder Value Creation
and services for sale to their customers. For clar-
ity of exposition, the initial value of a company
when it starts operations is the sum of its equity
and debt. Extra corporate value is created when
through its operations and the generation of cash
flows, a company’s value exceeds the initial
equity and debt contributions. Creating share-
holder value is therefore about those decisions
and actions that increase the value of the com-
pany for all suppliers of capital. Value creation
benefits the suppliers of debt because they will be
able to receive their interest on the debt and get
repaid on the maturity of their debt as the value of
the company increases even though they will not
be able share in the extra value created since they
do not bear any residual risk. This means that all
the extra value created will accrue to share-
holders. In the light of the above, corporate
value can be expressed as
Corporate value ¼ Debt þ Shareholder value
(1)
where debt includes other fixed claims on the firm
like preferred stock and pension liabilities that
have not been funded, all of which are expressed
in market value terms.
From Eq. 1, shareholder value can be
expressed as
Shareholder value ¼ Corporate value  Debt
(2)
From Eq. 2, it is clear that shareholder value
and growth depend on corporate value and its
growth. This boils down to how to determine
corporate value. To do this, we start from the
initial position that value of the firm is the sum
of the equity contributed by shareholders and
debt supplied by debtholders. Let us assume that
shareholders contribute £100 million and
debtholders contribute £20 million to provide
initial total capital of £120 million. In
a productive economy, suppliers of capital expect
a return on their investments. For the purpose of
this illustration, let us assume that equity holders
expect a return of 10% while debtholders expect
a return of 6% because they have a priority claim
Shareholder Value Creation
on the cash flows of the company before share-
holders. This means that shareholders can get £10
million (£100 million  10%) each year in per-
petuity if we assume that the company does not
have a limited life. Similarly, debtholders will get
£1.2 million (£20 million  6%) annually in
perpetuity. Therefore, the £100 million that the
shareholders initially contribute is equal to
receiving £10 million per annum in perpetuity at
a discount rate of 10% – that is, £10 million per
annum discounted at a rate of 10% gives a present
value of £100 million (£10 million/.10).
Similarly, £1.2 million received annually in per-
petuity at a discount rate of 6% by debtholders
provides a present value of £20 million
(£1.2 million/.06). It follows from this illustration
that a company can maintain its initial value if it
generates free cash flows from operations for the
suppliers of capital equal to the sum of the cash
flows required by both equity holders and
debtholders in the sum of £11.2 million. When
we discount £11.2 million as a perpetuity at the
weighted average cost of capital of 9.333333%
(i.e., 10%  100/120 + 6%  20/120), it
gives a total corporate value of £120 million
(£11.2/0.09333333) – the value of the company
at the start. This implies that to increase corporate
value, free cash flows must exceed £11.2 million.
For instance, if free cash flow is £12.5 million per
annum, then corporate value will increase to
£140 million (£12.5 million/0.9333333). All the
£20 million increase in corporate value will go to
the shareholders since the payment to the
debtholders does not change. Suppliers of debt
nevertheless also benefit because the return
expected by debtholders of 6% includes
a margin to cover the cost of debt.
Operating Decisions and Corporate Value
In the light of the above, it is clear that corporate
value and by implication shareholder value crea-
tion depends on free cash flows and the required
rate of return expected by suppliers of capital –
that is, the weighted average cost of capital. What
is free cash flow and what are the factors and
decisions that affect it? Free cash flow is the
cash flow that a company generates from its
core operations after deducting the investments
2143 S
in fixed and working capital needed to sustain the
company. Free cash flow is therefore very differ-
ent from accounting earnings which are calcu-
lated by matching the revenues and expenses
that belong to an accounting year, whether or
not they have been received or paid. This
matching approach to the calculation of account-
ing earnings therefore requires that expenses
incurred but not paid must be charged to the
income statement and accrued while cash pay-
ments for expenses in advance must not be
charged against income and must be treated as
a prepaid item in the balance sheet. Similarly,
credit sales that remain as trade debtors at the
end of the accounting year will feature as revenue
even though no cash would have been received by
the end of the year. Free cash flow on the other
hand is based purely on the principle of the cash
coming into and going out of the company during
the year. The calculation of free cash flow from
operations is summarized in the Table below:
Revenues or sales
Less Operating costs
Operating profit
Less Taxation
Net operating profit less adjusted taxes (NOPLAT)
Add Depreciation
Gross cash flow
Less Increase in working capital
Less Increase in capital expenditures
Free cash flow from operations
These calculations use data from both the
income statement and the balance sheet. In the
sections below, additional information on the S
major calculations is provided.
Operating Profit
This is calculated as sales or revenue less operat-
ing expenses such as cost of goods sold, selling
costs, general and administrative costs, and
depreciation. Operating profit is therefore equal
to EBITA – earnings before interest, taxes, and
amortization.
NOPLAT
EBITA is the pre-tax income a company would
earn if it had no debt. Therefore, taxes on EBITA
S 2144
are the taxes a company would pay if it had no
debt or excess marketable securities. This is nor-
mally equal to the total company tax provision
made up of the current and deferred taxes and
adjusted for taxes attributed to interest expense,
interest income, and nonoperating items.
Gross Cash Flow
Depreciation is an allowable expense when cal-
culating the income which should be taxed and is
therefore deducted in arriving at EBITA. How-
ever, depreciation involves the periodic write off
of the cost of a fixed asset over its useful life,
hence the annual depreciation charge does not
involve any cash outlay and must therefore be
added back to arrive at the gross cash flow.
Gross cash flow is the amount available for rein-
vestment in the business to maintain and grow it
without relying on additional capital.
Changes in Working Capital
This relates to additional investment the company
has made in working capital during the year. For
instance, if a company starts the year with trade
debtors of £2 million and at the end of the year
debtors stand at £2.8 million, then the company
has made an additional investment of £800, 000 in
working capital during the year. Assuming that the
company made sales of £12 million during the
year, then its cash flow potential would have
been £14 million (£2 million trade debtors plus
sales of £12 million). However, with year-end
debtors of £2.8 million, the actual cash flow real-
ized is £11.2 million (£14 million  £2.8 million)
with the difference of £800,000 representing addi-
tional investment in trade debtors. In a similar
vein, an increase in inventory during the year
would involve some cash payment for materials,
labor, and overhead. On the other hand, accounts
payable and accrued liabilities which represent
unpaid bills mean that the cost of sales and selling,
general, and administrative expenses shown in the
income statement are overstated since cash has yet
to go out. Deducting any increase in account pay-
ables and accrued liabilities from the increased
investment in working capital will reverse the
overstatement of expenditure in the income state-
ment when calculating cash flow from operations.
Shareholder Value Creation
Changes in Fixed Capital Expenditures
In any accounting year, a company may acquire
new fixed assets to replace old ones or acquire
new assets to increase the company’s asset base.
In order to capture the additional investment in
fixed assets, capital expenditure is calculated as
increase in net property, plant, and equipment
(PPE) on the balance sheet plus depreciation
expense taken from the income statement. Net
PPE is used rather than the gross PPE because
assets sold in the year are removed from the
balance sheet but their depreciation up to the
time of sale remains on the income statement.
Nonoperating Cash Flows and Company
Value
Even though free cash flows focus on operating
cash flows, nonoperating cash flows also belong
to the suppliers of capital. After-tax cash flow
from items that are not related to operations is
known as nonoperating cash flow. Nonoperating
cash flow includes cash flow from discontinued
operations, extraordinary items, and cash flows
from investments in unrelated subsidiaries. All
nonoperating cash flows must however be
included explicitly in the value of the company.
The total value of the company then becomes the
present value of the operating free cash flows and
the nonoperating cash flows.
Drivers of Free Cash Flows
While the proper calculation of free cash flows is
important in the process of identifying share-
holder value creation, the crucial issues are the
decisions and actions required of managers in
order to generate increasing free cash flows.
This includes identifying the appropriate oper-
ating and investment decisions that will generate
growth in operating cash flows. Operating deci-
sions influencing the product mix, pricing, pro-
motion, and customer service level will
influence sales growth rate, operating profit mar-
gin, and the length of the growth period. Invest-
ment decisions generate the appropriate level of
working capital and fixed asset investments
required to support the product portfolio and
the sales growth rate. Therefore, strategic
choices which lead to the relevant operating
Shareholder Value Creation
and investment decisions buttress the generation
of free cash flows that lead to increases in cor-
porate value.
Financing Decisions and Corporate Value
As already pointed out, corporate value is based on
discounting cash flows available to all suppliers of
capital. This means that in addition to cash flows,
the other major factor affecting corporate value is
the cost of capital. The cost of capital is the rate of
return a company must provide to the suppliers of
capital to encourage them to continue to provide
funds to the company. Based on the idea that
capital is in the form of either equity or debt, the
cost of capital therefore depends on combination
of funds from these two major sources used by
a company. As already pointed out, the cost of
debt is generally lower than the cost of equity and
the appropriate cost of capital to use to discount
the cash flows available to all suppliers of capital
should the weighted average cost of capital where
the weights are based on the proportion of equity
and debt in the total capital used by a company.
The cost of equity must reflect the market
expected rate of return that equity investors
expect on companies with a similar risk and
cash flow profile as the company under consider-
ation. This basically means that the return on
equity must have a risk-free component which
investors would earn if they invested in safe gov-
ernment securities and a risk premium to com-
pensate them for the risk assumed in equity
investment. This is calculated with the capital
asset pricing model presented below:
Cost of equity ¼ Risk  free rate þ Beta
 ðExpected return on the
market index
 Risk  free rateÞ
where beta is a measure of the sensitivity of the
return on a security to the return on the market
index and captures the risk of any particular secu-
rity within a market context.
The cost of debt on the other hand is the rate of
return that debtholders would receive if they held
the debt until maturity (yield to maturity) and
2145 S
does not equal the coupon rate unless in the
unusual case when debt is either issued at par or
trades at par value. Whenever debt is trading
above or below par value, the effective cost of
debt or yield to the investor will be different from
the coupon or interest rate quoted on the debt
instrument. The cost of debt should always be
expressed on an after-tax basis because cash
flows are calculated on an after-tax basis and
also for the reason that the deduction of interest
on debt from income before the calculation of
taxes reduces the effective cost of debt to sup-
pliers of capital. In effect, governments subsidize
debt interest while there is no such subsidy for
dividends on equity. The key drivers of corporate
value discussed above are summarized in Fig. 1.
Shareholder Value Creation
Companies are able to create shareholder value if
they implement strategies and policies that
deliver such value. This means that managers
must identify and evaluate alternative strategies
and assess their implications for the creation of
corporate value. This requires forecasting the free
cash flows that various business strategies would
generate and choosing those strategies that would
most likely lead to increased corporate value.
While the process of estimating free cash flow
already outlined above is analytically robust, its
implementation for valuing the company and its
strategies would require some minor adjustments
to reflect the challenges that arise from long-term
forecasting as well as the competitive context in
which firms operate. The key adjustment required
is that forecasting cash flows is not done to per- S
petuity but should be broken into two periods to
reflect the behavior of cash flow generation in
a competitive product market. This requires iden-
tifying a period of time during which the man-
agement of the company expects the company to
have a competitive advantage after implementing
its strategy and therefore makes it feasible for the
firm to earn in excess of the cost of capital. This
explicit forecast period is usually referred to as
the competitive advantage period or the value
growth period. During this forecast period, man-
agement would forecast in detail the impact of its
strategies on the free cash flows of the firm for
S 2146 Shareholder Value Creation

Shareholder Value
CORPORATE
Creation, Fig. 1 The Shareholder Shareholder Return
OBJECTIVE
shareholder value network Value Added • Dividends
(Source: Rappaport 1998, (SVA) • Capital Gains
p. 56)

VALUATION Cash Flow from Discount Debt

COMPONENTS Operations Rate

VALUE
DRIVERS • Value • Sales Growth • Working Capital • Cost of
Growth • Operating Investment Capital
Duration Profit Margin • Fixed Capital
• Income Tax Investment
Rate

MANAGEMENT
Operating Investment Financing
DECISIONS

each of the relevant years. Such forecasting does
require not only an understanding of the company
and its operations but an acute awareness of the
macroeconomic, social, political, technological,
environmental, and legal factors which could
affect the company’s operations, revenues, and
costs and therefore its cash flows. Forecasting
cash flows beyond the competitive advantage
period requires an understanding of the econom-
ics of the industry and its implications for long-
term cash flow generation. Such forecasting
requires managers to make assumptions about
the firm’s cash flow generation capacity that
reflect its strategic and competitive situation
going forward. The present value of the cash
flows from the explicit forecast period and
beyond that period provides the value of the cor-
porate entity.
Shareholder Value Added
With a valuation of the corporate entity, the pro-
portion of this value due to shareholders can be
calculated by deducting the value of debt using
Eq. 2 above. The resulting shareholder value will
therefore reflect prior equity capital contributions
and any additional value created by the firm. This
additional value can be calculated as the share-
holder value less all the capital contributions
made by shareholders. It should however be
pointed out that such a valuation is either internal
to the company or made by an external analyst
and may not be identical to the valuation placed
on the company’s equity by the stock market.
Therefore, the extra value created for share-
holders is better measured by the market value
added which is calculated as the market value of
equity less the capital contributions made by
shareholders. This requires replacing shareholder
value with the market value of equity.
While market value added is a useful concept
to reinforce the idea of shareholder value crea-
tion, what is more useful is the extent to which
companies may or may not be able to add to such
value over time. For this purpose, it is useful to
Shareholder Value Creation
calculate shareholder value added which can be
defined as the annual change in shareholder
value, for each year of the explicit forecast
period. Such a calculation must account for
changes in capital contribution by shareholders
as well as benefits received by shareholders from
the company such as dividends. Annual share-
holder value added is therefore calculated with
Eq. 3 below:
Shareholder value added
¼ Increase in equity value
þ Dividends paid during the year
þ Other payments to shareholders such as
discounts on par values; share buybacks etc:
 Outlays for new equity capital issues
 Conversion of convertible securities into equity
(3)
The change in the market value of equity dur-
ing the year is the increase in equity value, usu-
ally described as the capital gain. If the dividend
paid during the year is added to the capital gain,
then the total is the return to equity holders during
the year. The other items in Eq. 3 represent trans-
actions that either increase or decrease the capital
contributions as a result of the company asking
for more money from shareholders or returning
money to them.
Other Measures of Shareholder Value
Creation and Valuation
Apart from shareholder value added, there are
other measures of annual value creation which
are derived from periodic accounting statements.
These are economic profit or residual income and
economic value added. Economic profit is
a measure of the wealth created for shareholders
in any accounting year. It is the surplus that
remains after accounting for all costs, including
the cost of equity capital. It is calculated by
taking the accounting profit as the starting point
and deducting from it the normal rate of return
expected on equity capital that has already been
invested. By accounting for the cost of equity
capital, it measures the pure surplus – that
which increases the wealth of shareholders
2147 S
beyond their original capital contributions. This
surplus can either be paid out as dividend or
reinvested in the company.
Economic value added (EVATM) is a variant
of economic profit developed by the consulting
firm Stern Stewart & Co. Unlike economic profit,
it makes several adjustments to the income state-
ment and the balance sheet in an effort to better
reflect economic reality before the calculation of
the economic value added. As measures of value
creation based on accounting information, resid-
ual income and economic value added do not
capture all the extra value created for share-
holders in any accounting year in the way mea-
sured by Eq. 3. In particular, they do not fully
capture how the capital market values the equity
shown in a company’s balance sheet.
While residual income and EVATM tend to be
used mainly for measuring annual value creation,
they can also be used in fact as alternative metrics
to the free cash flow approach for valuing the
corporate entity. This will essentially require esti-
mating either residual income or economic value
added for the competitive advantage period and
the continuing period and discounting them to get
the value of the firm from its operations. To this
value will be added the book value of invested
capital. When these models are used for corporate
valuation, then the determination of shareholder
value creation can be estimated using Eqs. 1 and
2. The residual income and EVATM models of
corporate valuation tend to produce differences in
the valuation results relative to the free cash flow
approach due largely to how these alternative
valuation constructs are defined (Forker and S
Powell 2008).
CSR and Shareholder Value Creation
In the light of the above, it would appear that
creating shareholder value could be inconsistent
with the interests of other stakeholders. This
does not have to be the case, as a company
invariably needs the support of its main stake-
holders in order to develop and maintain a viable
business that will generate wealth for share-
holders. This would normally include invest-
ments and operating procedures that would
address the legitimate concerns of the other
S 2148
major stakeholders in a firm. It should, however,
be pointed out that the existence or otherwise of
appropriate laws and regulations and their
enforcement affecting consumers, employees,
and environmental protection, among others, in
any country in which a company operates is
likely to have an impact on the level and inten-
sity of such investments. For instance, invest-
ments by oil companies to deal with the
ecological problems arising from oil extraction
in the Niger Delta would depend on whether or
not the environmental regulatory requirements
are appropriate to the situation and whether they
are enforced. Similarly, the payment of low
wages in manufacturing plants in Asia can be
seen as being compliant with the law, if no
minimum wage legislation exists. This shows
that compliance with the law is not always ade-
quate to demonstrate a company’s social respon-
sibility, if the laws are grossly inadequate to deal
with the issues at hand. This raises the issue of
how multinational companies, for instance,
should articulate their understanding of what
compliance with the law means when the obli-
gations imposed upon them vary widely across
jurisdictions. If such companies adopt the prac-
tice of just complying with the laws in each
country in which they operate, even when they
know that they deal with similar issues in other
countries with higher levels in investments and
expenditures, then an argument could be made
that such companies are not inclined to using the
same standard of corporate responsibility across
the whole organization. In such a context, the
evolution of demand of new laws and regula-
tions is likely to be the main force that would
make companies commit to a higher standard of
responsibility to their stakeholders.
On the other hand, in other jurisdictions,
where laws and regulations impose higher obli-
gations on companies toward their stakeholders,
the rationale for companies to get involved
beyond the requirements of the law and regula-
tions tends to be driven by the strategic advan-
tages which would accrue from such socially
responsible activities. In particular, the strategy
literature asserts that stakeholder management
Shareholder Value Creation
which involves building better relations with
primary stakeholders such as employees, cus-
tomers, suppliers, and communities could gen-
erate intangible assets which could be a source
of competitive advantage in the form of reputa-
tion, good corporate culture, long-term relation-
ship with suppliers and customers, and
knowledge assets (Hillman and Keim 2001). In
this context, investment in primary stakeholders
of the firm is consistent with creating share-
holder value. On the other hand, investment in
social issues not related to primary stakeholders
is not consistent with shareholder value
creation.
Future Directions
Shareholder value creation is the objective
largely sought by any capitalist firm that is listed
on an organized stock exchange. However, the
procedure for measuring shareholder value cre-
ation is more of an art than an exact science.
Even though the fundamental concepts which
underpin the measurement of corporate value
are well established, their application in any
context depends on the skill and knowledge of
the practitioner. In an effort to profit from the
practical application of the methods for measur-
ing corporate and shareholder value creation,
a number of consulting firms and investment
banks have developed their own versions of
how to implement the valuation of companies
and shareholder value creation. Examples of
consulting firms include Alcar (a consulting
firm initially founded by Alfred Rappaport but
now acquired by L.E.K. Consulting which
developed practical models for implementing
free cash flow valuation), Stern Stewart & Co
(a firm which has developed the practical appli-
cation of economic profit for the measurement of
additional value created by a firm which it calls
EVA), CSFB Holt LLC (which pioneered the
CFROI approach to value-based management),
and McKinsey & Company which has published
a version of its internal corporate valuation
approach as a book sold to students and
SIGMA Framework 2149 S
practitioners. The apparent heterogeneity of valu-
ation models from which shareholder value crea- Shareholder Value Versus Pluralism
tion is determined means that how much extra
value a company creates might lie in the eyes of ▶ Anglo-American Model Versus Continental
the valuer. Nevertheless, even though corporate European Model
valuation and shareholder value creation may
vary among analysts, they are likely to cluster
closely around the mean. Therefore, one of the
potential fruitful areas of research which might Shareholder Wealth Creation
advance the practice of valuation and shareholder
value creation would be the attempt to identify the ▶ Shareholder Value Creation
conditions under which the different methods
either produce the same or different corporate
valuation and shareholder value created.
Shareholders’ Preemptive Rights

Cross-References ▶ Shareholder Rights

▶ Wealth Maximization

Shopping
References and Readings
▶ Wal-Mart
Damodaran, A. (2006). Damodaran on valuation: Secu-
rity analysis for investment and corporate finance.
Hoboken, NJ: Wiley.
Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2008). The
relationship between corporate social responsibility SHRM Practices
and shareholder value: An empirical test of risk man-
agement hypothesis. Strategic Management Journal,
▶ Culture and Organization Performance
30, 425–445.
Hillman, A. J., & Keim, G. D. (2001). Shareholder value,
stakeholder management and social issues: What’s the
bottom line. Strategic Management Journal, 22,
125–139.
John, F., & Powell, R. (2008). A comparison of error
Sickness Presenteeism
rates for EVA, residual income, GAAP-earnings and
other metrics using a long-window valuation ▶ Presenteeism S
approach. European Accounting Review, 17(3),
471–502.
Koller, T., Goedhart, M., & Wessels, D. (2010). Valua-
tion, measuring and managing the value of companies.
Hoboken, NJ: Wiley. SIGMA
Rappaport, A. (1998). Creating shareholder value. New
York: The Free Press.
▶ SIGMA Management Framework

Shareholder Value Theory SIGMA Framework

▶ Shareholder Theory ▶ SIGMA Management Framework

S 2150
SIGMA Management Framework
Catalina Soriana Sitnikov
Faculty of Economics and Business
Administration, University of Craiova, Craiova,
Dolj, Romania
Synonyms
SIGMA; SIGMA framework; SIGMA project
Definition
In 1999, British Standards Institution (BSI), the
Forum for the Future (a sustainability charity and
think-tank), and Accountability, with the main
funding of the UK Department of Trade and
Industry launched the SIGMA project. The pur-
pose of the project is to formulate a management
structure to assist companies come to be more
sustainable. At the core of the project is the
development of a set of measures (The SIGMA
guidelines) that assist companies comprehend the
criteria of sustainability, a management structure
that combines sustainability into essential
procedures and conventional decision making,
and a succession of instruments, which compa-
nies can apply to carry out efficient strategies and
culture modification.
The SIGMA measures are the responsibility
(guaranteeing that company’s stakeholders are
part of the continuous communication process
within the company); funds development and
improvement (stimulating companies to move
further than merely diminishing the adverse
characteristics of their operations), and envi-
ronmental sustainability. The measures
set also a succession of inquiries that compa-
nies have to enquire themselves about their
actions and practices, built around six major
stakeholders (employees, clients, suppliers,
community, investors, authorities, and civil
society).
The SIGMA management structure is
a process-driven application instrument
SIGMA Management Framework
shaping ten major stages that can be used to
plan, carry out, and maintain sustainability
management inside the company. These com-
prise awareness; baseline review; activities,
effects, and results; legal prerequisites; strate-
gic designing; communication and training;
control and impact; supervision and advice;
reporting progress; strategic evaluation. The
SIGMA toolkit includes a number of instru-
ments such as a management structure ques-
tionnaire, a sustainability scorecard, the
business case for sustainability, an environ-
mental accounting instrument, and a stake-
holder engagement instrument based on
AA1000.
Introduction
Creating a sustainable perspective, economically,
socially, and environmentally obliges govern-
ments, community, companies, and people to
reconsider how they use resources, how they
act, and what they hope to accomplish. There is
growing awareness that they are altogether part of
a composite and mutually beneficial system.
Various behaviors are resulting in irreversible
harm that threatens the lasting survival of species
and Earth. Sustainable development gives the
chance of a new direction, for a better
perspective.
Companies are pieces of a growing complex
and international system, outlining and colliding
with that system. Sustainable development sets
a provocation to the conventional attitude of
companies. Progressively, not only by the ser-
vices, products, and profits they may judge their
action but also by the influences they have on
human and collective welfare and on the environ-
ment on which they rely on for living. Conjec-
tures are dynamic, putting forward both threats
and opportunities.
There is an expanding matter of proof that
companies, which acquire a more sustainable
approach, are provided with positive advantages.
The character of these rewards differs for distinct
companies and is determined by their specific
area, strategy, and phase of evolution. Moreover,
SIGMA Management Framework
there are increasing demands on companies to
take bigger accountability for their social, envi-
ronmental, and economic performances:
• Modern communication technologies that
enable the rapid transmission of data and
information about what occurs everywhere in
the world, comprising the deed of distinctive
companies
• An increasing comprehension that corporate,
social, and environmental conduct is an origin
of the business threat, especially to brand
name, reputation, and shareholder worth, but
also to functional competence, use of capital,
certificate to function, attractiveness to clients
and various members of staff
• Growing Governmental involvement and
action
• Enlarging the authority of multinational com-
panies – more authority brings greater
accountability
• Elevated consciousness that corporate respon-
sibility comprises regard to comportment and
action both up and down the supply chain
• Expanding impact of NGOs
A crucial problem for companies that hope to
reply to the trial put forward by sustainable devel-
opment is in what way they can act efficiently.
The SIGMA Project – Sustainability – Integrated
Guidelines for Management – was launched to
create guidelines for companies enabling them to
carry out a significant input to sustainable devel-
opment. The SIGMA Project has implicated
a singular variety of leading practitioners and
scholars to guarantee they are as efficient and
conceivable as possible. The guidelines were
advanced by:
• Groundwork into best practices and through
contracting new employment.
• Applicable piloting of various designs of the
guidelines by top companies and public sector
administrations.
• Information from stakeholders.
SIGMA gives a comprehensible, feasible,
integrated frame for companies. It enables them
to create on what they possess, to take an adapt-
able approach matching to their occurrences and
to diminish duplication and misuse by displaying
in what manner various components can match
2151 S
with each other. The SIGMA guidelines point the
practitioner toward the important questions to ask
and the actions necessary. The SIGMA guide-
lines are a comprehensive integrated system
advanced to conduct the social, environmental,
and larger economic influences of a company’s
actions. Their central purpose is to enhance
a company’s performance. This is accomplished
not by recommending degrees of performance in
the Guidelines themselves, but by setting in place
in what manner companies have to appoint per-
formance objectives. The objectives must be
coherent with the operating rules they have
implemented, evaluate their performance against
these objectives periodically, and report against
them – taking action to resolve any circumstances
where the degree or rate of performance enhance-
ment is inadequate to accomplish the objectives
that have been designated.
They put forward jointly a broad variety of
approaches comprising social reporting, prepar-
ing for sustainability, stakeholder appointment,
and a variant of the Balanced Scorecard (the
sustainability scorecard) to inlay sustainability
inside the company’s projects. The SIGMA
Guidelines are not planned distinctly for accred-
itation purposes. SIGMA conceives assurance as
an influential element of integrity and stimulates
companies to communicate and report the out-
comes of assessments of their performance to
stakeholders.
SIGMA Guiding Principles for sustainable
system assist companies comprehending the
means and ways they can cause sustainable
development and submit a frame to support S
them create their own strong principles. The
SIGMA Guiding Principles comprise two essen-
tial elements:
• Holistic management of five distinct forms of
capital that portray a company’s comprehen-
sive effect and resources (in the broadest
meaning): natural resource – the environment,
social resource – social connections and
frameworks, human resource – employees,
fabricated resource – definite capital, for
example, devices, engineering, instruments,
constructions and all types of infrastructure,
financial capital – profit and loss, transactions,
S 2152
dividends, cash, etc. The Guidelines mention
that a sustainable company will care for and
where feasible, improve these ranges of
resources, rather than reduce or degrade them.
• The practice of responsibility, by being
unequivocal and receptive to stakeholders
and agreeing with pertinent requirements and
standards.
Natural capital (the environment) includes the
other resources, as natural resources and ecologic
structures are the foundation of living on which
all companies (and larger society) lean on. Social
(social connections and structures), human
(employees), and fabricated capital (definite cap-
ital) are essential elements of a company and its
actions. High degrees of these resources give
birth to value to both companies and community,
acknowledging also quality of life for stake-
holders. Financial Capital (profit and loss, trades,
dividends, cash, etc.), which is critical to the
continuing survival of a company, is completely
originated from the other four capitals. All the
capitals are deeply interconnected and there is
a little convergence among them.
This entire system is afterward circled by the
principle of responsibility, standing for the
connection a company has with the exterior
environment – with its stakeholders and for its
attendance of the five capitals. The capitals have
to be administered for the long term, not just for
the nearest profit, establishing capitals and living
off the benefit that this produces. They addition-
ally have to be acknowledged as interdependent,
where modifications in one are plausible to pro-
duce an effect on another. Similarly, one type of
capital cannot just be transacted against other.
The SIGMA Guiding Principles are consistent
with other approaches that companies may aspire
to engage in, most remarkably the triple bottom
line concept that has extensive approval.
The Guidelines Report presents every distinc-
tive form of capital, and provides information on
its meaning, importance to a company,
suggesting ten principles by way of which
a company can increase that capital. It is any
distinctive company’s decision to opt for the
guiding principles that optimal match their
SIGMA Management Framework
values, vision, mission, strategies, and actions.
These guiding principles have to be revealed
afterward to the company’s stakeholders and
performed as a target for improving their sustain-
ability performance. If a company has already
implemented or authorized external conventions
or standards, it can prefer to apply the SIGMA
Guiding Principles to correlate with the coverage,
extent, and broadness of its existent approaches.
SIGMA Management Framework assimilates
sustainable development matters inside essential
processes and conventional decision making.
Four structured stages, broken down into com-
prehensive substages enable companies to create,
design, provide, supervise, and inform on the
sustainable development strategy and act. This
illustrates obviously and concisely activities the
company must perform, the foreseen effects, and
lists additional resources if the company requires
them. It also supports comprehending in what
way companies can create on what they already
have in function.
SIGMA Toolkit gives information and advice
on particular management trials, for example,
examining company’s performance, appraising
opportunities and threats, and stakeholder com-
mitment. The toolkit supplies a diversity of appli-
cable instruments that companies can use to assist
them ameliorate their command of sustainability
matters and their comprehensive performance,
for example, a business case tool, a performance
evaluation tool, a process for stakeholder com-
mitment, and a sustainability scorecard.
The Performance Review Tool is an evalua-
tion checklist that considers company’s perfor-
mance in contrast to the SIGMA Management
Framework. The Performance Review Question-
naire includes 16 investigation domains, each
broken down into subdomains. It is endorsed
that companies answer this questionnaire while
setting out on carrying out the SIGMA Manage-
ment Framework to establish a basis of existing
performance. After that, it can be used during the
process to evaluate, advance, and track tenden-
cies. Once the questionnaire is completed, com-
panies are capable of scoring their performance,
which supplies them with an image of how well
SIGMA Management Framework
they manage concerning sustainable develop-
ment performance. The questionnaire can as
well be used to measure performance among
distinctive functions of a company. This instru-
ment is directed at managers and practitioners
with duties for sustainable development and
actions inside companies.
The Environmental Accounting Tool gives
a preamble to accounting for “internal” environ-
mental connected outgoings (outgoings already
aroused and seized in a company’s accounting
system but possibly lost in overall overheads)
and “external cost accounting” (the incorporation
of environmental externalities). A pro-forma
group of external environmental cost accounts is
displayed simultaneously with an applicable
stepwise guide to assist distinctive companies
embarking on the exercise of creating and
outlining their individual exterior environmental
cost accounts. This tool is generally directed at
users with an excellent degree of environmental
and financial command.
The Marketing and Sustainability Tool sets
a preliminary connection between the two pro-
fessional areas of marketing and sustainability
and recommends several basic actions in creat-
ing a sustainability-marketing plan. By prelimi-
narily providing the trader and the sustainability
practitioner with an insight of each other’s areas
and how the two can cooperate, the tool sets in
place the groundwork for teamwork. It next sets
a number of applicable paces for acknowledging
major opportunities, through perception of cus-
tomers and the market, estimating the sustain-
ability characteristics of the company’ s end
products and services and deciding which sus-
tainability matters have the biggest probability
for use in a marketing effort. This tool is
intended for managers with responsibility for
sustainable development and marketing division
experts.
The SIGMA Management Framework is a
sequence of four adaptable implementation
stages: leadership and perception; designing;
delivery; review, feedback, and reporting. Com-
panies might go in, move throughout the stages at
various paces, and provide different stages
2153 S
different attention depending on their distinctive
occurrences, the accessibility of resources, and
the degree of maturity of their sustainable devel-
opment plans, strategies, and projects.
The SIGMA Management Framework could
be used entirely or in part:
• To combine existent management systems,
building on current approaches.
• To set up a stand-alone management system as
guidance to increase and expand existent man-
agement usage without the conventional
framework of a management system.
In order to guarantee suitability with the cur-
rent convention, the SIGMA Management
Framework is designed on approaches common
in formal and informal management systems. The
“Plan, Do, Check, Act” pattern that underpins the
SIGMA Management Framework is well known
to lots of companies and has the advantage of
being both feasible and efficient in producing
enhanced organizational performance. Compa-
nies can ameliorate their performance by using
the Management Framework:
• To appoint progressive still accomplishable
objectives.
• To construct on current management systems
and approaches or as an individual structure
for administering sustainability matters in
a company.
Lots of the actions and results called for in the
stages of the SIGMA Management Framework
might so far be in-hand due to the current busi-
ness management conventions and systems. Var-
ious companies could have well-founded
business management systems or conventions, S
although may have to refine or revisit their
planned vision. For these companies, the leader-
ship and perception stage would be an excellent
area to begin. For other companies, the priority
could be to inlay sustainability into their essential
procedures and decision making. The designing
and delivery stages of the SIGMA Management
Framework would be a valid point to begin in
these occurrences. Other companies prefer to
begin by reporting what activities or projects
they are implementing and afterward create sys-
tems to enhance their performance. Companies
S 2154
that have previously used the Global Reporting
Initiative’s (GRI) Sustainability Reporting
Guidelines to present sustainability reports will
come upon the fact that operating throughout the
SIGMA Management Framework will assist
them to ameliorate their performance. Every
phase of the four major stages of the SIGMA
Management Framework is separated into sub-
stages (e.g., Leadership and Perception (Vision)
(LV) stage is divided into substages from LV1 to
LV4). Every stage and its components are
depicted in comprehensive tables. The tables
include:
• Essential inquiries to concentrate on.
• A cross-check of the way planned actions con-
nect to the company’s designated rules.
• Who must be implicated.
• What are the major projects.
• When they must be carried out.
• A record of useful resources.
• Anticipated results and products.
• Major matters that need to be carried out about
which the company might have to be well
informed of.
Companies might prefer to set up a committed
group to carry out SIGMA. The tables refer to
such a group as the SIGMA Implementation
Team. Correspondingly, a company might desig-
nate important people to assist the carrying out
process; these are referred to as Project Cham-
pions. The results and products column registers
the potential production and results of the
endorsed actions. Open book symbols indicate
where recorded product is likely to be fit. It is
not compulsory to present all the records entered
in the tables. Some companies will approve
presenting all or the most part of the recorded
production, to assist supervising and checking;
while others will choose a less conventional
approach, or will be capable of adjusting existent
documents rather than producing new ones.
The SIGMA Guiding Principles set a pattern
portraying what a company functioning toward
sustainability might look like. These, together
with additional conventions and rules, will assist
companies improve their specific durable func-
tioning rules. This is a crucial undertaking in the
SIGMA Management Framework
Leadership and Vision stage. The Management
Framework is all about serving companies trans-
form their vision and rules into certainty. It is
significant to preserve these conventions in mem-
ory. The practices of establishing responsibility
and of increasing capital are firmly set in place at
every stage. (Where it is especially relevant to
embark upon stakeholders is emphasized in the
comprehensive depictions of the stages and sub-
stages.) The stages are founded on a management
process, and do not comprise projected degrees of
performance. Nevertheless, enhanced perfor-
mance is the predominant purpose of the
SIGMA Guidelines, and companies are supposed
to determine motivated and accomplishable
objectives that can be produced by employing
the SIGMA Management Framework (Table 1).
Key Issues
SIGMA management framework is constructed
upon the values encompassed in the notion of
sustainable development, reproduced in the Five
Capitals model that assists companies to assimi-
late a sustainable development in their manage-
ment practices, and by the precept of
responsibility, leading the links that a company
has with the external environment. The SIGMA
Guidelines reveals the significance to
“Reviewing and refining corporate governance
settings and performance” as one crucial activity
to be set about in the Planning Stage. SIGMA is
about Sustainability Integrated Guidelines for
Management and the matter of integration is
emphasized in the beginning of the utilization of
the SIGMA management framework.
Future Directions
The Deming cycle (Plan, Do, Check, Act), with
continuous improvement at its center, performs
a great role in numerous standards and structures
that can be connected to sustainable develop-
ment. The SIGMA Management Framework
employs this cycle as its foundation to guarantee
SIGMA Management Framework
SIGMA Management Framework, Table 1 SIGMA management framework stages and substages
Management phase
Leadership and vision
Define the vision for sustainability and
ensure leadership support for it
Planning
Decide what needs to be done to improve
performance
Delivery
Improve performance
Monitor, review, and report
Check that performance is improving and
communicate the results
Source: From the why of corporate sustainability to the how – the SIGMA Project’s management guidelines for
organizations (Oakley 2006)
2155 S
Purpose
• To develop a business case to address sustainability issues and secure
top-level commitment to integrate sustainable development into core
processes and decision making
• To identity stakeholders and open dialogue with them on key impacts
and suggested approaches
• To formulate the organization’s long-term sustainable development
mission, vision, and operating principles and a high-level strategy that
supports them, and to revisit them periodically
• To raise awareness of sustainability issues and how they may affect the
organization’s license to operate and its future direction and its training
and development requirements
• To ensure that the organizational culture is supportive of a move toward
sustainability
• To ascertain the organization’s current sustainability performance, legal
requirements, and voluntary commitments
• To identify and prioritize the organization’s key sustainability issues
• To develop strategic plans to deliver the organization’s vision and
address its key sustainability issues
• Consult with stakeholders on plans
• To formulate tactical short-term action plans to support the agreed
sustainability strategies with defined objectives, targets, and
responsibilities
• To align and prioritize management programs in line with strategic and
tactical planning and the organization’s sustainability vision
• To ensure that identified actions, impacts, and outcomes and legal and
self-regulatory requirements are managed and appropriate internal
controls are in place
• To improve performance by delivering sustainability strategies and
associated action plans
• To exercise appropriate external influence on suppliers, peers, and others
to progress toward sustainable development
• To monitor progress against stated values, strategies, performance
objectives, and targets
• To engage with internal and external stakeholders via reporting and
assurance, and by incorporating feedback into effective strategic and
tactical reviews culminating in appropriate and timely change
S

suitability with these standards without provok-
ing disproportionate duplication of any of their
essential principles.
The majority of companies will initiate by
administering details individually, although over
time, these can be joined using the SIGMA Man-
agement Framework. A number of companies
will mature in various ways and at distinctive
paces from others. The SIGMA Management
Framework has been advanced to be adequately
adjustable for all companies to apply, comprising
those with tailored systems and those at different
phases of sustainable development.
Cross-References
▶ Corporate Sustainability
▶ Integrated Management Systems
▶ Jørgensen Model
S 2156 SIGMA Project

▶ Plan-Do-Check-Act (PDCA) Cycle slowing down the rate of tourism and

▶ Triple Bottom Line
References and Readings
Oakley, R. (2006). From the why of corporate sustainability
to the how – the SIGMA Project’s management guide-
lines for organisations. International Summer Academy
on Technology Studies – Corporate Sustainability.
THE SIGMA GUIDELINES Putting Sustainable Devel-
opment into Practice – A Guide for Organisations.
http://www.projectsigma.com.
SIGMA Project
▶ SIGMA Management Framework
a guarantee of rediscovering oneself
(the physiological and the psychological); it is
about low greenhouse gas emissions and it is
a synonym of patience, peace of mind, deeper
experiences, improved cultural understanding
and knowledge” (Babou and Callot 2009). Slow
tourism means moving at a pace that allows
rediscovery. It is to tourism what slow food is to
the restaurant business; it is doing away with the
stress and speed of traveling; it is accepting
a slow pace as the norm for undertaking one’s
leisure activities. The illnesses that our contem-
poraries suffer from are for the major part linked
to stress; based on this observation, slow tourism
then appears as a therapeutic solution as well as
one that deals out pleasure.

Introduction
Six Sigma
Because climate change forces changes of behav-
▶ TQM ior and because travel forms an integral part of
tourism, it is undoubtedly necessary to develop
a philosophy of life that can balance these new
demands: slow tourism could help to provide the
Skill Acquisition answer. It could be assimilated as a simple, or even
simplistic, form of therapy. On the other hand, we
▶ Apprenticeship consider that this trend forms part of a system of
personal responsibility, showing awareness as
well as offering a demonstration or an example
that it is possible to practice tourism in other ways.
Slow Tourism This could be expressed as a concept within the
hotel business, a lodge or resort that would then
Philippe Callot create its whole strategy of differentiation around
ESCEM Group (School of Business & this approach. Moreover, some establishments
Management), Tours Cedex - 5, Tours, France have started to follow this route. As we can see,
corporate social responsibility may then also adopt
an approach that counters the stress linked to mod-
Synonyms ern-day living. The assertion of a slower form of
tourism that uses less energy, water, and space is at
Slow travel the heart of this “concept.”

Definition Key Issues

For the authors at the source of this trend (Babou In slow tourism, the behavior of the tourist is
and Callot 2007b), slow tourism “is about automatically directed toward moving at
Slow Tourism
a slower pace. Slow tourism thus challenges the
time taken to travel and the issue of the methods
of transport used to carry tourists to their destina-
tion. With its responsible approach regarding
greenhouse gas emissions, in this respect too,
slow tourism is a philosophy of low polluting
travel. The means of applying this philosophy
are simple. On the one hand taking one’s time to
travel (the journey becomes an integral part of the
tourism experience) and appreciating the journey
for what it is. On the other hand, choosing when-
ever possible to take the least polluting method of
transport (train vs. plane, bus vs. car, bicycle vs.
motorbike, sailing boat vs. motor boat, etc.),
which is usually the slowest. The issue here is
that of our addiction for increasing numbers of
holidays (that are shorter and shorter) demanding
speedier journeys in a desire not to waste time
traveling or lose leisure time. These are major
signs of our habits as consumers. Tourism must
therefore be considered in a different way. Slow
tourism deeply challenges tourism as we know
and practice it. When considering the dilemma of
tourism, “a legitimate desire for travel and the
major effects on the environment” (Dubois
2009), it would appear that it is time to review
our methods of transport and even our tourist
practices. “Apart from its environmental impli-
cations, slow tourism is a new way of organizing
oneself, of discovering places close to home;
a new tourist practice that has to find its new
followers or, in marketing language, its own seg-
ment” (Babou and Callot 2009). The idea is also
without doubt to prepare for a type of tourism that
can create a positive alternative to the traditional
format in which the journey (fast) to the destina-
tion precedes the tourist action. Thus, by going
less often but perhaps for longer periods, the
tourist could fulfill the role of individual social
responsibility and contribute to reducing green-
house gas emissions while still practicing a form
of tourism that will completely satisfy body and
soul. Should we then, as some would advocate,
create areas of tranquillity or “areas where human
and tourist activities take place at a slow pace and
are entirely integrated into the natural rhythms”
(Matos-Wasem 2004)? Is corporate social
responsibility not about challenging modern
2157 S
society by questioning practices that are often
irrational in relation to time? Is it not about
establishing through a revised system of offers,
a new approach to the holiday, to meals and to
travel, a soul-searching exercise? Evolution,
revolution. . . Slow tourism should not be merely
a passing fashion, but should be introduced as an
established movement, characteristic of a society
of hypermobility and stress. This resurgent way
of approaching tourism, inspired by the “Grand
Tour” and the pioneering approaches to tourism
in the nineteenth century, should be seen as
a long-term project since our consumer excesses,
addictions, and compulsions pervert all forms of
reason. Going off to the other side of the world
quickly and for a short stay, would no longer
make sense. On the other hand, taking the time
to travel (boat, train, yacht, bicycle) once in your
life and spending a while on holiday (3 weeks,
1 year. . .) would return meaning to the words
travel and tourism. We recognize that this is
a difficult stance since it is very restricting for
those who desire this pleasure (luxury?). B. Mar-
tin reminds us of this form of selfishness: “I know
that the local farmers are short of water, but that
shouldn’t be a reason to stop me having
a swimming pool in a luxury hotel [. . .] When
I travel, I am a tourist or a traveller, not a fellow
citizen” (in Allemand 2005).
Future Directions
As we are reminded by C. Honoré (2005) in his
book in praise of slowness, “activists of slow do S
not aim to destroy the capitalist system. They are
rather seeking to give it a more human face.”
Petrini (precursor as much as instigator of the
slow food movement in Italy) himself speaks of
virtuous globalization. As the author mentions,
“the aim of the movement is to create an environ-
ment in which people can resist the pressure of
time schedules and the order to do everything as
quickly as possible” (Honoré 2005). Here we can
give a few examples of how slow tourism can be
applied without these offers being weakened by
the concept. In the same way as the Swiss glacier
train running between Zermatt and St Moritz, we
S 2158
could introduce tourist trains in France, orga-
nized by the SNCF. Using another means of
transport, it would be difficult to resist the temp-
tation of cycling along the Loire, where the paths
(flat) could be included in a regional development
system. Everyone arranges their own route, social
links become a reality between friends and are
kindled with the inhabitants. Hiking is an exam-
ple of a gentle and ecological activity that fits
perfectly with the system described here. Seen
from this angle, hiking forms a combination of
effort and self-discovery and consequently offers
all the ingredients of the slow cocktail. The prin-
ciple is to define one’s itinerary in accordance
with one’s capacities. It is not necessary to travel
a long way to find this dimension of self-renewal.
The footpath and walking networks or, in France,
the long distance hiking routes are systems that
help to promote slow tourism. Beginning at home
and then widening the circle would appear to be
moving in a promising direction. “Art, environ-
mental resources, history, heritage, gastronomy
and tradition may all be found here, offering
primary activities that are close to home [. . .]
Slow tourism radiates in all its splendour. We
are able to go off to rediscover our powers of
sense, from smell to taste, listening to nature
and being amazed by the landscapes revealed”
(Babou and Callot 2007b). Traveling in horse-
drawn caravans, food-tasting trips (on walking,
horse-trekking, or boat routes), long-distance
trails (such as the Santiago de Compostela pil-
grimage route or the Stevenson walk), and
cycling holidays (such as the beautiful cycle
trail through the Loire) are all examples that
promote the emergence of this new tourist prac-
tice. Offer and demand come together within this
concept, approach, and philosophy, giving
renewed meaning to the pleasures of tourism.
To commit oneself to a concept of slowness
should help to rediscover oneself while finding
out new aspects of our character. We advocate
slowness by recommending that a brake should
be applied to our highly occidental addictions
(material). Since the advent of paid holidays in
France, the notion expressed by the J. Zay text
confirming the democratization of tourism
(March 1939) has been established that “the
Slow Tourism
people who work need to re-create themselves
during their leisure time. To meet this require-
ment, tourism, one of the healthiest and most
pleasant forms of outdoor life, should be avail-
able to all at weekends and during holiday
periods.” The global code of ethics for tourism
adopted by the UNWTO (Santiago, Chile, 1999)
backs and confirms this stance, indicating that
“the universal right to tourism must be regarded
as the corollary of the right to rest and leisure. . .”.
We can only support these proposals. Slow tour-
ism sits at the crossing point of collective capital
assets (the air that we breathe and accessible
space) and individual social capital (available
time, culture, education, etc.). We have
represented this approach in Fig. 1.
Confronted by the price of its success, materi-
alized by an accumulative massification of
impacts and adverse effects, can this sector dis-
cover a new phase through the slowness
suggested here? Could slow become highly
sought after in view of current trends (short
stays, use of low cost magnifying the democrati-
zation of travel, or even popularizing it)? Within
the framework of an exploratory study (Babou
and Callot 2007a), we established a priori seg-
mentation and surveyed 122 people on the type of
tourism that suited them best. Slow tourism
emerged in first place with 32.8% responses
(n ¼ 40) in favor of this method. We were also
able to show some significant link between the
age and the subscribers to slowness (w2 ¼ 63.04,
dof ¼ 28, 1-p ¼ 99.98%). Hence, it would appear
that the over-45 s favor this method. On the other
hand, we did not observe any significant statisti-
cal relationships between the income or gender of
the respondents. Here, we could briefly suggest
a few potential characteristics, values, and prod-
ucts at the base of the slow tourism segment. The
basic characteristics are: time as a variable key
for re-appropriating localities and regions, or
space in the broader context; time spent during
the break or at the holiday destination; time allo-
cated to oneself. The values revolve around: shar-
ing, authenticity (exchanges), a philosophy of life
(based on slowness and harmony of the body with
the external elements). Potential products take us
on a long and slow journey in a sailing ship
Slow Tourism
Slow Tourism,
Fig. 1 The positioning of
slow tourism in relation to
the four types of capital
linked to tourism
Financial
Assets
following a trail (such as the Santiago de
Compostela pilgrimage); the evening merges
gently into nighttime (bed and breakfast, holiday
cottage, room with a host family) and real rela-
tionships are established. The length of the stays
is prolonged and planned as such; the craftsman
and country products constitute an integral part of
the “pastimes” at our disposal. Gastronomy is
naturally involved. We find that the number of
fellow diners increases in slow cities. Learning
how to appreciate, to cook, and to combine ingre-
dients and wines becomes a must. This has
already become very fashionable in view of the
increasing gift boxes offered by specialist opera-
tors (Smartbox, Weekend Desk, etc.). Space and
time then provide opportunities without limits.
Tourist trains, bicycles (on site or as a means of
getting there), traveling on freight transport,
canal barges, sailing ships, horse-drawn traps or
caravans and, above all, walking, are some of the
methods above adopted for this slow type of self-
discovery tourism as opposed to the stressful pace
of our society. Learning to stop on not just one,
2159 S
Air Assets
(Low CO2)
Social
Assets
Tourism (time, culture,
education…)
Space Assets
Slowtourism
but on several occasions so as to truly benefit
from, rather than just consume, the marvels
around us (people, landscapes, fauna, flora)
appears as an alluring prospect. Issues of future
research stem from the various interpretations
expressed here. On the side of demand, if we
accept the hypothesis of a real market, is the
offer ready to integrate this “approach” (socio-
logical approach) by redesigning its services?
Depending on the geographical origins, can we S
consider that expectations are identical or are
they subject to subtle differences based on vari-
ables such as the quality of services (degree of
comfort) or their cost? Is this new method
of tourist consumption not more a resurgence of
Boyer’s refined tourism (1999) and consequently
bound for failure since it is perceived to be too
elitist? With the cost of fuel, or more simply, its
lack of availability, reducing the prospects of
rapid, frequent and/or long journeys, is it possible
that the adoption procedure of this process could
be accelerated accordingly? Do the tourist offers
in support of this idea adhere to an attitude of
S 2160 Slow Travel

social responsibility? Are the tourists motivated
by this trend, pioneers of individual social
responsibility that we wish for so strongly? Is
one of the roles of corporate social responsibility
not to encourage the hyper-consumer to view his
ways of living and behaving during leisure time
from another angle?
Honoré, C. (2005). Eloge de la lenteur. Editions
Marabout.
Matos-Wasem, R. (2004). Le tourisme lent contre le bruit
et la fureur des vacances, La Revue Durable, n 11,
June-July-August, pp. 48–51.
Slow Travel

Cross-References ▶ Slow Tourism

▶ Carbon Emissions
▶ Carbon Footprint
▶ Climate Change Small and Medium-Sized Businesses
▶ Corporate Social Entrepreneurship
▶ Corporate Social innovation ▶ Territorial Social Responsibility and Territo-
▶ Corporate Social Marketing rial Small and Medium-Sized Enterprises
▶ Corporate Social Responsibility
▶ Eco-Innovation
▶ Ecological Economics
▶ Ecological Footprint Small- and Medium-Sized
▶ Ethical CSR Enterprises Engagement in CSR
▶ Global Warming
▶ Managing Change for Sustainability Benjamin James Inyang
▶ Natural Environment Department of Business Management, University
▶ Opportunity Now of Calabar, Calabar, CRS, Nigeria
▶ Post Industrial Society
▶ Social Sustainability
▶ Sustainable Development Synonyms
▶ Sustainable Development in SMEs
▶ Sustainable Marketing Business social responsibility; Corporate
accountability; Corporate citizenship; Corporate
reporting; Microenterprise; Responsible entre-
References and Readings preneurship; Responsible practices; Small busi-
ness organization; Small business responsibility;
Allemand, S. (2005). Les nouveaux utopistes de l’é Sustainable development
conomie. Produire, consommer, épargner. . . diffé
remment. Editions Autrement.
Babou, I., & Callot, P. (2007a). CO2 et tourisme: vers de
nouvelles segmentations? 12èmes Journées de Definition
Recherche en Marketing de Bourgogne, CERMAB.
Dijon.
Babou, I., & Callot, Ph. (2007b). Dilemmes du tourisme.
Small- and medium-sized enterprises (SMEs) are
Paris: Vuibert. variously defined to cover companies ranging
Babou, I., & Callot, Ph. (2009). Slow tourism, slow (r)évo- from 1 to 100 employees and in some cases up
lution? Cahier Espaces, 100, 48–54. to 250 employees as the upper limit. SMEs are
Boyer, M. (1999). Histoire du tourisme de masse. Collec-
tion Que sais-je? Editions PUF.
defined statistically, and this is often based on the
Dubois, G. (2009). Le long chemin vers le tourisme lent. number of employees engaged or the value of
Les Cahier Espaces, 100, 80–84. assets of the organization with the lower limit
Small- and Medium-Sized Enterprises Engagement in CSR
for “small-scale enterprises” usually set at 5–10
workers and upper limit of 50–100. The upper
limit for “medium-scale enterprises” is usually
set at between 100 and 250 employees. The def-
inition of SMEs varies in context across coun-
tries, industries, agencies, and scholars. Within
the European Union, the standard definition of
SMEs is any business with fewer than 250
employees and a turnover of up to 50 million
euros and a balance sheet of about 43 million
euros. This definition may not be applicable
across countries since what is termed SME in
one country may be considered a large company
in another. The SMEs thus encompass a very
broad range of firms from established traditional
family businesses employing over a hundred peo-
ple to survivalist self-employed people working
in informal microenterprises.
Beyond the quantitative criteria, there are also
qualitative criteria used in defining SMEs such as
controlling a small share market, personal man-
agement by owner, or even lacking a formal
bureaucratic organization. SMEs are therefore
distinguished from larger companies by such
characteristics as owner-managed, independent,
multitasking, firefighting, cash limited, personal
relationships, and informality. Lepoutre and
Heene (2006, p. 259) present an interesting defi-
nition of SMEs in terms of small business respon-
sibility, where a responsible entrepreneur is
a person who:
– Treats customers, business partners, and com-
petitors with fairness and honesty
– Cares about health, safety, and general
well-being of employees and customers
– Motivates the workforce by offering training
and development opportunities
– Acts as a “good citizen” in the local
community
– Is respectful of natural resources and the
environment
These characteristics directly influence or
affect the way in which SMEs engage in corpo-
rate social responsibility (CSR).
CSR lacks universally accepted definition as
scholars are wont to offer definitions which
vary in content, context, process, and values.
2161 S
In a distilled definition, drawn from the litera-
ture, Liu and Fong (2010, p. 35) state that “CSR
is largely understood as a range of voluntary
initiatives, beyond legal and contractual
requirements, which, if undertaken effectively
should eventually benefit the workforce, their
families and the local community, and ulti-
mately improve the overall welfare of the com-
munity and contribute to economic
development.” Inyang et al. (2011, p. 120)
define CSR as “obligation of businessmen to
pursue those policies, to make those decisions
to follow those lines of action, which are desir-
able in terms of objectives and values to the
society of their location.” This is a useful defi-
nition that is elastic enough to accommodate the
varied concerns of CSR as espoused in the
burgeoning literature. Issues of economic prof-
itability; legal concern; ethical and philan-
thropic activities; sustainability in all its
ramifications; and ecological, social, etc., eco-
nomic accountability – where businessmen
invest in projects that have specific effects on
the community and are profitable to the firm and
its stakeholders – can be accommodated in the
definition. Equally important is the fact that
content, context, cross-cultural, and/or country
specific analysis concerned with CSR can be
undertaken successfully and more objectively.
Introduction
CSR involves quite a complex range of activities
that the business enterprise is expected to under- S
take to satisfy the interests of stakeholders and
maintain good relationship with the community
where the business is located. A stakeholder here
refers to any group or individual who can affect
or is affected by the activities or achievement of
an organization. A firm’s stakeholders can
be classified into two – primary and secondary
stakeholders:
– The primary stakeholders are those groups of
people, without whose continuing participa-
tion or involvement, a business cannot con-
tinue for any reasonable period of time.
S 2162
– The secondary stakeholders are those groups
of people who have the capacity to influence
or are affected by the business but who are not
engaged in transactions with it and are essen-
tial to its survival. These include, for example,
the media and other civil societies who have
the capacity of putting pressure on business.
The two different perspectives that have
emerged in CSR debate are shareholder versus
stakeholder. The shareholder perspective argues
that the only responsibility of business is to serve
the interests of shareholders by maximizing
profit. The stakeholder perspective suggests that
other groups and constituents are affected by
a firm’s activities and CSR concerns the way an
organization governs the relationship between
the firm and its stakeholders.
CSR is both a core and emerging issue that has
recently taken a center stage in management
discourse. A plethora of literature on CSR
focuses mainly on large corporate organizations
and very little research undertaken on SMEs
engagement in CSR. This imbalance is essen-
tially due to the higher CSR profile of the large
corporate organization, which drive CSR prac-
tices or activities (European Commission 2001).
This is despite the fact that the aggregate contri-
bution of all SMEs can be sizeable and resulting
into significant contribution to the national
economies of both developed and developing
countries. SMEs can form the bedrock on which
economic activity is built, and therefore, they can
be the mainstay of economy, particularly in terms
of employment and development impacts.
According to the European Union Commission
Report of 2005, SMEs contribute immensely to
the European economy; 99 % of all companies
are SMEs, and they provide around 75 million
jobs, and in some industries like in textile, con-
struction, and furniture, they provide around
80 % of the jobs. It is similarly noted that in the
United States, small businesses represent more
than 99 % of all employers, engaging 52 % of
private section employees (www.sba.gov).
Princic (2003) notes that the SMEs comprise
approximately 90 % of Canadian businesses and
employ almost half of the Canadian workforce.
The Australian Bureau of Statistics 2007 notes
Small- and Medium-Sized Enterprises Engagement in CSR
that the SMEs, which are made up of firms with
less than 200 employees, account for 95 % of all
Australian commercial organizations. SMEs are
known to constitute more than 90 % of business
worldwide and account for between 50 % and
60 % of employment and more than half of
gross domestic product. Luetkenhorst (2003)
notes that SMEs constitute 90 % of enterprises
and account for at least half of employment in
developing countries. SMEs engagement in CSR
is of crucial importance to the economy since
they contribute significantly to employment cre-
ation, drive economic growth, promote private
sector development, have the potential for pov-
erty reduction, and enhance equitable distribution
of income in society. Luetkenhorst (2004, p. 159)
argues that SMEs are particularly important in
supporting economic growth and livelihoods in
developing countries because they:
– Tend to use more labor-intensive production
processes than large enterprises, thus boosting
employment and leading to more equitable
distribution of income
– Provide livelihood opportunities through sim-
ple, value-adding processing activities in agri-
culturally based economies
– Nurture entrepreneurship
– Support the building up of systematic produc-
tive capacities and the creation of resilient
economic systems, through linkages between
small and large enterprises
With the sudden realization on the aggregate
impacts of SMEs to national economies, main-
stream academic research is burgeoning, which
focuses on the engagement of SMEs in CSR.
A watershed development that discusses the par-
ticular challenges faced by SMEs in
implementing CSR practices appears in the spe-
cial issues on CSR in SMEs published by Busi-
ness Ethics: A European Review, 18 (1) January
2009 and Journal of Business Ethics, 67 (3) in
2006. These studies highlight the different ways
corporate social responsibility is gradually
emerging not only as a condition but also as
a strategy for SMEs. Thus, emerging literature
on the engagement of SMEs in CSR has shown
that SMEs are not “little big firms” and should not
be treated as such. It is pertinent to study CSR in
Small- and Medium-Sized Enterprises Engagement in CSR
the context of SMEs to understand the key suc-
cess factors that will enable SMEs to compete
effectively and succeed in the long run. The
unique characteristics of SMEs make it manda-
tory that scholars take special interest in studying
this form of business organization rather than
presenting generalizations based on CSR under-
standing in large organizations. In fact, much of
the CSR literature pertaining to large companies
appears to have little relevance to SMEs, as
a rather different set of mechanisms are in play
when SMEs decide on how responsibly they
should behave (Fitjar 2011). According to
Russo and Perrini (2010), the idiosyncrasies of
large firms and SMEs explain the different
approaches to CSR. Although CSR has tradition-
ally been the domain of the corporate sector,
however for SMEs, issues like employee motiva-
tion and community involvement are far more
likely to hold their attention. Formal CSR strate-
gies seem to characterize large corporate organi-
zations, while informal CSR strategies prevail
among SMEs. Spence (2007) identifies and distils
from the literature many key characteristics
which help to understand and distinguish CSR
policies in SMEs from large firms:
– A lack of codification of CSR in SMEs.
– Personal motivations prevail on other motiva-
tions such as marketing approach and strategic
or public relations approaches – for engaging
in social responsibility activities.
– The owner-manager is primarily responsible
to develop and implement CSR activities.
– The embeddedness of the firm in local com-
munities affects the choice of the firm to focus
on socially responsible behaviors.
– The importance of social capital and informal
relationships for the success of the firms –
which is closely linked to their reputation –
represents an important input to act with
honesty and integrity.
– The central role assumed by human resources
in small firms generates a high commitment of
the organizations in employees and their
families.
– The industries in which the SMEs operate
directly affect their approach on how CSR
activities are handled.
2163 S
The implementation regime of CSR in SMEs
is therefore different from that in the large
corporate organizations. SMEs tended to imple-
ment CSR in a tacit manner and very often are
known to perform poorly in handling social
responsibility activities. This is a consequence
of the characteristics which distinguish the
SMEs from large organizations. Importantly
too, it is also as a result of the fact that SMEs
lack formalized organizational structures or sys-
tems to handle CSR activities in the same scale as
undertaken by large firms. SMEs are known also
to adopt CSR as a gradual process, dictated by the
availability of funds and sometimes also based on
explicit demands of consumers, or doing so to
address some social or environmental impacts.
Key stakeholders are not often engaged by the
SMEs in the development and implementation of
CSR initiatives.
Another structural characteristic that distin-
guishes SMEs from large corporations is the
fact that in SMEs, ownership and management
are often not separated, and this gives them
a certain level of autonomy. Thus, the ethical
actions of the SMEs are influenced by a wide
range of factors such as the culture and values
of the owner, certain personal characteristics,
market forces, and even social-cultural context.
The social responsibility activities of the SMEs
are not regular and usually not related to the
enterprise strategy. This may be essentially due
to the fact that many of them lack the resources
and capacity to do so. Equally important is the
fact that the simple bureaucratic structure in place
does not support the integration of CSR initia- S
tives with enterprise strategy, as is the case with
large firms. The present CSR tools are those
developed from studies about CSR in multina-
tional corporations and thus have little applica-
tion in SMEs. The SMEs are yet to evolve the
relevant tools that would have practical utility in
analyzing their engagement in and implementa-
tion of CSR initiatives.
There are several motivations or drivers for
SMEs engagement in CSR activities. Kusyk and
Lozano (2007) identify internal and external
drivers and barriers to SMEs social performance,
based on internal decision-making autonomy and
S 2164
external market pressure. The drivers are consid-
ered as the external and internal pressures to aid,
promote, and compel the SMEs to identify with,
engage, and implement CSR. The barriers refer to
the external and internal pressures that make
SMEs to resist identifying with, engaging, and
implementing CSR. SMEs are predominantly
driven by normative arguments for their CSR
engagements – and this is the “normative case.”
The SMEs are engaging in CSR because “it is the
right thing to do” or putting something back in the
society. The multinational corporations on their
part undertake CSR activities in support of the
“business case” arguments. Another important
internal driver for SMEs engagement in CSR is
owner’s values and ethical standards which help
to influence the development and implementation
of responsible practices in small business organi-
zations. The employee’s personal values also
play a significant role in the implementation of
CSR initiatives among SMEs. Apart from these
internal drivers, there are also external drivers
which compel SMEs to undertake CSR activities
such as customer loyalty, the supply chain, and
community pressure. The engagement here has
the benefit of presenting the small business enter-
prise as a good citizen and has a place of pride in
the community. Providing improved services and
maintaining reputation and integrity are seen as
key for retaining and attracting customer and
staff. Thus, SMEs attain competitive advantage
through CSR initiatives. CSR in SMEs could then
be used as a marketing instrument/tool to help
expand the company to other places and enhance
employee enthusiasm and commitment in the
company. The supply chain pressure from large
organizations helps the SMEs to adopt ethically
responsible practices to sustain their business
relationship with such big firms.
The impact of both internal and external
drivers on SMEs engagement in CSR is shown
in Table 1 below as a generalized illustration of
the differences between large and small and
medium firms.
SMEs engagement is essentially in the areas of:
– Community development: The relatively local
character of SMEs makes it possible for
employees and owners to be well know in the
Small- and Medium-Sized Enterprises Engagement in CSR
community. Thus, the SMEs have strong iden-
tification with the community which also
serves as a major external driver. The SMEs
are therefore engaged in community-related
activities such as sports, health and education,
and other philanthropy giving. Meeting such
obligations endures the business to the
community.
– Employee-related initiatives: The employees
are very important stakeholders in SMEs
engagement in CSR, and with this understand-
ing, the small business operators develop
a very fruitful and cordial relationship with
the workforce. The main social responsibility
issues relating to employees include promo-
tion of employee health and safety, remedial
education for disadvantaged employees,
employee training and development, paying
employee adequate reward, and their involve-
ment in decision making. These in turn
enhance employee’s enthusiasm and commit-
ment to the company. It is worthy to note also
that the SMEs offer great employment oppor-
tunities in the community – and this is consid-
ered as socially responsible action.
– Consumerism: The consumers also play a role
as drivers in CSR engagements of the SMEs
even if it is not at the same scale of large
organizations. SMEs have responsibility to
their customers by providing quality products
and services to enhance the customers’ well-
being as this can impact positively on their
revenues. Consumerism is concerned about
honesty in advertising, product safety, reli-
ability and durability of products, fair pricing,
and responsiveness to customers’ needs. In
fact, the SMEs are naturally closed to their
customers and are able to understand their
needs and which they readily satisfy.
– Environmental initiatives: The SMEs are
beginning to show concern for the environ-
ment by designing environmentally friendly
products or production processes, energy con-
servation, an efficient use of resources to min-
imize wastages, reduction in pollution,
etc. This marks a humble beginning that is
likely to see SMEs undertaking large-scale
environmentally responsible practices.
Small- and Medium-Sized Enterprises Engagement in CSR
Small- and Medium-Sized Enterprises Engagement in CSR, Table 1 Relative impact of CSR drivers in SMEs and
large corporations
Drivers
Laws and regulations
Civil society
Financial and capital markets
Educated consumers/large
buyers (supply chain)
Media and monitoring
institutions
Employees
Exposure to competition and
globalization
Managers/board of directors
Owners/shareholders
Source: Vives (2009)
SMEs
Important, but not determinant
Somewhat less important
Little importance, except for
selected firms with access to these
markets
Consumers have some influence.
Large buyers can be critical for
a small number of SMEs
Relatively unimportant. Unlikely
to be concerned with smaller firms
Very important, some responsible
activities originate with employees
Important if and when consumers
and buyers can appreciate the value
of responsibility
Important drivers. Many times
initiatives originate with
enlightened managers
Critical for family and owner/
manager firms. Sometimes are the
original and most important driver
2165 S
Large
Very important
Critical for consumer goods and
extractive industries
Important in developed markets,
more so for the larger firms
Very important when the final product
is a consumer good (as opposed to
a commodity or an industrial product)
Very important in selected cases,
particularly for multinationals in
developing countries where
environment and human rights are
exposed
Lesser importance as they are
impersonal
Critical, both in a positive way
(capture competitive advantage of
being responsible) and in negative
way (race to the bottom to avoid
costs). Balance will depend on
industry sector and structure
Important also, but tends to be
overshadowed by other drivers. Some
company leaders are realizing the
competitive advantages of
responsibility, including new
products and markets
Only important for very well-
developed financial markets where
responsible investment is
mainstreamed

– Supply chain: The large organizations are put-
ting increasing pressures on SMEs to behave
responsibly. These organizations increasingly
include environmental and social criteria in
their procurement processes, and this has posi-
tive influence on CSR behavior of suppliers.
These large organizations encourage their sup-
pliers to adhere to fixed requirements in their
business dealings and play a further role in edu-
cating the supply chain partners in CSR-related
activities. Thus, the SMEs in performing their
role as providers of goods and services to large
companies automatically undertake responsible
initiatives which impact on the environment and
social and human resources issues.
SMEs face common challenges or barriers
when developing and implementing CSR initia- S
tives. The Australian Centre for Corporate Social
Responsibility in 2007 (www.accesr.com.au)
identifies the following barriers for SMEs becom-
ing involved in CSR:
– The cost of implementing CSR activities when
survival is often the greatest economic
imperative
– Time and resource constraints which may
mean a lack of affordable external support
and resources
– A lack of awareness of the business benefits
with no/little understanding of the business
case for small- and medium-sized enterprises
S 2166
– The fact that existing CSR tools and guide-
lines are mainly geared toward large business
– No systematic incentives or frameworks for
SMEs to engage with this concept
– Fear of additional regulatory and bureaucratic
burdens
Princic (2003) also notes that internal commu-
nications and training for employees on CSR prac-
tices are challenging for SMEs due to the factors of
resource constraints and lack of affordable, external
support. Even sourcing environmentally friendly
products is problematic due to limited availability.
In fact, SMEs rarely have the purchasing power to
influence their local suppliers to provide environ-
mentally and socially responsible products. An
equally important challenge SMEs face when
developing and implementing CSR initiatives is
their inability to develop appropriate tools/stan-
dards to measure the intangible benefits resulting
from their engagement in responsible practices.
In order to overcome these challenges, SMEs
need resources that provide comprehensive infor-
mation about the nature of CSR activities and the
appropriate strategies and tools to employ to be
able to achieve desired results. These should be
formalized tools that go beyond the informal net-
works. SMEs operators need adequate training to
understand even the concept of CSR, the business
case for their engagement, and the process of inte-
grating CSR initiatives into their business function.
Key Issues
The new understanding is that the aggregate con-
tribution of SMEs to economic growth in both
developed and developing countries is quite sig-
nificant, and therefore, a thorough appreciation of
their engagement in CSR is a sine qua non.
Existing academic discourse on CSR tended to
focus exclusively on large and multinational
companies with very little literature available to
enhance our understanding of SMEs involvement
in responsible practices. Therefore, the tendency
to apply CSR standards and practices of large
organizations to SMEs tended to obfuscate our
understanding of the nature of SMEs engage-
ment. This is due essentially too to the fact that
Small- and Medium-Sized Enterprises Engagement in CSR
the concept of CSR is varied in context, content,
process, and value – defying a generally accepted
definition. A paradigm shift is canvassed to suf-
ficiently study the CSR processes of SMEs and
their character and nature of engagement in CSR
programs. This would provide the basis for
a more robust analysis of SMEs activity areas
or dimensions in CSR, their motivations, chal-
lenges, the direction of support requirements, and
benefits that accrue to responsible practices.
Future Directions
There is apparent research gulf in terms of the
large volume of works so far published about
CSR in large companies and the available scanty
literature concerned with SMEs engagement in
CSR. This sorry state of affairs has tended to affect
our understanding about the nature of SMEs
engagement. Also, the further attempts by scholars
to apply CSR standards of these multinational
corporations to SMEs have not yielded the desired
result since there are structural differences
between the two forms of business enterprises.
There is urgent need to develop more systematic
efforts to understand SMEs motivations, practices,
and interest in undertaking CSR initiatives.
Future research efforts should focus on identi-
fying specific guidelines, frameworks, and tools
that would enable SMEs to effectively develop,
implement, and report on their CSR activities,
policies, processes, and performance. Studies
should be conducted to help delineate and properly
define the direction of government support for
SMEs engagement in CSR. In its current state,
the SMEs engagement in CSR is apparently
a standalone activity not integrated in the existing
enterprise development. It is necessary therefore
to design strategies for integrating the responsible
practices of SMEs into the economic functions of
the enterprises and other business support services.
Cross-References
▶ Consumerism
▶ Multinational Corporations (MNCs)
Social Accounting 2167 S
▶ Philanthropic Activities
▶ Shareholder Small Business Organization
▶ Stakeholders
▶ Supply Chains ▶ Small- and Medium-Sized Enterprises
▶ Sustainability Engagement in CSR

References and Readings

Small Business Responsibility
European Commission. (2001). Promoting a European
framework for corporate social responsibility (Green ▶ Small- and Medium-Sized Enterprises
paper: Employment and social affair). Belgium: Euro- Engagement in CSR
pean Commission.
Fitjar, R. D. (2011). Little big firms? Corporate social
responsibility in small businesses that do not compete
against big ones. Business Ethics: A European Review,
20(1), 30–44.
Inyang, B. J., Awa, H. O., & Enuoh, R. O. (2011). Smoking
CSR-HRM nexus: Defining the role engagement of
the human resources professional. International ▶ Tobacco
Journal of Business and Social Sciences, 2(5),
118–126.
Kusyk, S. M., & Lozano, J. M. (2007). Corporate respon-
sibility in small and medium-sized enterprises. Corpo-
rate Governance, 7(4), 502–515. Social Acceptance
Lepoutre, J., & Heene, A. (2006). Investigating the impact
of firm size on small business social responsibility:
A critical review. Journal of Business Ethics, 67(3), ▶ Social License
257–273.
Luetkenhorst, W. (2003). Corporate social responsibility
and the development agenda: Should SMEs care?
(Working Papers No. 13). Vienna: United Nations
Industrial Development Organizations. Social Accountability
Luetkenhorst, W. (2004). Corporate social responsibility
and the development agenda: The case for actively
▶ Social Auditing
involving small and medium enterprises.
Intereconomics, 39(3), 157–166.
Lui, H., & Fong, M. (2010). The corporate social respon-
sibility orientation of Chinese small and medium
enterprises. Journal of Business Systems, Governance
and Ethics, 5(3), 33–50. Social Accounting S
Princic, L. (2003). Engaging small business in corporate
social responsibility: A Canadian small business per- Patrizia Torrecchia
spective in CSR. Vancouver: Canadian Business for
Social Responsibility.
Department of ‘Scienze Economiche, Aziendali
Russo, A., & Perrini, F. (2010). Investigating stake- e Finanziarie’, Università degli studi di Palermo,
holder theory and social capital: CSR in large Palermo, Italy
and SMEs. Journal of Business Ethics, 91(2),
207–221.
Spence, L. J. (2007). CSR and small business in
a European policy context: The five ‘C’s of CSR and Synonyms
small business research agenda 2007. Business and
Society Review, 112(4), 533–552. Corporate social reporting; Corporate social
Vives, A. (2009). Responsible practices in small
and medium enterprises (pp. 7–8). http://www.
responsibility reporting; Nonfinancial reporting;
cumpetere.com/. . ./CSR%20IN20%SMEs%Handbook% Social and environmental accounting; Sustain-
20shorter.pdf. Accessed 20 July 2011. ability accounting; Triple bottom line accounting
S 2168
Definition
Social accounting (SA), in a narrow sense, can be
defined as a “tool” of Corporate Social Respon-
sibility: the identification and recording of an
entity’s activities in terms of its social responsi-
bility. In fact, it is a method by which any kind of
entity seeks to place a value (positive or negative)
on the impact its activities produce on people, on
the environment, and on society as a whole.
Therefore, SA is a useful means of documenting
an entity’s achievements and building a historical
record of its activities. In other terms, it records
the social performance of the entity for
a subsequent evaluation of it. This might look
also at the way the different organizations use
the resources at their disposal. SA consists of
a reporting system that is able to gather informa-
tion from the various stakeholders about how
well the entity is achieving its aims and objec-
tives. It makes clear the importance of the disclo-
sure, purpose, and values. The concept of SA has
been defined in different ways. Some literature
sees SA in a broader sense, just assimilating it to
CSR and considering them as being the same
thing. Other scholars regard it from an ethical
point of view (what an entity should do to be
accountable). Others simply identify social
accounting as aiming to help society by providing
different facilities to entities and recording their
activities. But there is also a part of literature that
supports a negative relationship between
reporting and responsibility regarding the social
practices.
According to Gray (2000), a broad definition
of social accounting might be: “the preparation
and publication of an account about an organi-
zation’s social, environmental, employee, com-
munity, customer and other stakeholder
interactions and activities and, where possible,
the consequences of those interactions and
activities. The social account may contain finan-
cial information but is more likely to be
a combination of both quantified non-financial
information and descriptive non-quantified
information. The social account may serve
a number of purposes but the accomplishment
of the organization’s accountability to its
Social Accounting
stakeholders must clearly be the dominant of
those reasons and the basis upon which the
social account is judged.”
Introduction
In a context that requires more transparency and
openness for the needs of the community, social
accounting is one of the tools that captures the
process and procedures through which an organi-
zation becomes aware of its activities, choices,
and responsibilities. SA can be considered as
a very important tool to use in measuring
the performance of any entity in term of its social
responsibilities. It is usually considered
a subcategory of general accounting that focuses
on the disclosure of nonfinancial information
about an entity’s performance to stakeholders
and in this way fills the information gap of finan-
cial accounting. In fact, it represents the activities
that have a direct impact on society, environment,
and economic performance (in terms of its out-
come) of an entity.
Also the phenomenon of globalization made
clear that corporate entities do not operate in
isolation as monads, but have impacts (both pos-
itive or negative) on the environment and people
at local, national, and global levels. This has led
to an increasing awareness of CSR and to the
evaluation of the success not only under
a financial perspective but also under the triple
bottom line (People, Planet, Profit) that is its
social and environmental impact.
Even though, as suggested by Gray, it is pos-
sible to find traces of SA in the thought and
practice of ancient civilizations, SA developed
in the UK in the 1970s, it was put aside in the
1980s, and was back in vogue during the 1990s.
It is necessary to distinguish between two
levels on the approach to SA: the theory and the
practice.
Gray (2001) outlines three strands in the
development of SA: the “social audits” that are
“public analyses of accountable entities under-
taken by bodies which are independent from the
entity, and typically without the approval of the
entity concerned”; the “silent social accounts”
Social Accounting
which are officially required data disclosed with
regard to (employees, political and charitable
donations, and governance) and data which are
voluntarily disclosed (environmental issues, mat-
ters relating to consumers, product safety, and
interactions with the community); and the “new
wave” of social accounting that sees a range of
organizations (NGOs, values-based organiza-
tions, and companies) making significant
attempts to produce systematic social accounts.
Different theories on SA have different points
of reference. The most used points within the SA
are the stakeholder theory, legitimacy theory, and
agency theory.
The stakeholder theory is based on the notion
that besides shareholders, other groups or constit-
uents are affected by an entity’s activities, and
these have to be considered in its decision-
making process. This theory is concerned with
the idea that the entity’s scope is not just to
maximize profit or to maximize shareholder
value, but in order for an entity to achieve its
objectives effectively, it must consider “any
group or individual who can affect or is affected
by the achievement of the organization’s objec-
tives” (Freeman 1984), that is any group or indi-
viduals who have a stake/interest in the entity’s
activities. Others argue that the fact that the
stakeholder theory does not give any primacy to
one stakeholder over another brings the problem
that sometimes some groups will benefit at the
expense of others.
The Legitimacy theory posits that entities are
bound by the social contract in which they agree
to perform various socially desired actions in
return for approval of its objectives and other
rewards, and this ultimately guarantees its going
concern assumption. It offers a method of man-
aging stakeholders in the face of various threats.
The entity has to operate in a way that is consid-
ered appropriate by the community; otherwise,
the same community will act to remove its license
to operate. So the entity’s actions must be proper
or appropriate within some socially constructed
system of norms, values, and beliefs. For some
literature, the theory of legitimacy could explain
the reasons behind the disclosure of social and
environmental information, but there remains
2169 S
deep skepticism among many researchers that it
offers any real insight into the voluntary disclo-
sures of entities.
The Agency theory can also be used for devel-
oping and testing hypotheses which explain
social disclosure. This theory is usually viewed
as a conflict between different interests in
accounting: Individuals are represented as
expected utility-maximizers where utility is
defined with respect to the preferences of individ-
uals, and preferences reflect whatever desires
individuals happen to have, egoistic or
altruistic. In this sense, social accounting is seen
as a problematic version of public relations.
Concerning the practical level, the major
interest in transforming social accounting tech-
niques into practice has come from large corpo-
rations (e.g., Shell; Body Shop; Co-operative
Bank; British Telecom). These organizations
have seen that it is more convenient investing
in trust to improve accountability and transpar-
ency as it is more likely to outweigh the consid-
erable cost of carrying out the exercise.
Accountability is a fundamental concept to SA,
and it is linked to the other important concept of
transparency. The Institute of Social and Ethical
Accountability (ISEA) is an international body
founded in UK in 1996, and it aims to strengthen
social responsibility. ISEA promotes best prac-
tice in SEAAR and develops standards and
accreditation procedures for professionals in
this field. In 1999, in order to ensure the quality
of social and ethical accounting (but also of
auditing and reporting), ISEA launched
AccountAbility 1000 (AA1000) which has S
established principles and a set of process stan-
dards. The process standards involve the follow-
ing phases: (a) Planning; (b) Accounting; (c)
Auditing and reporting; (d) Embedding; (e)
Stakeholder engagement. This last one phase
makes evident that the principles and process
standards are underpinned by the principle of
accountability to stakeholders. AccountAbility
has to be considered as the ability to account
for something that is the ability to explain or
justify the acts, omissions, risks, and dependen-
cies for which one is responsible to people with
a legitimate interest.
S 2170
The major actor of SA within the accountancy
profession in the UK is the Association of
Chartered Certified Accountants (ACCA). The
ACCA has dedicated an entire section on its
website called Sustainability devoted to this
topic. It sets out a number of key principles for
social reporting in addition to anything that
AA1000 might say.
In recent years, there have been various inno-
vative stakeholder approaches to social account-
ing with new emphases and a new wave of
interest. Various European bodies, including
government bodies, have promoted different
forms of social accounting. Several initiatives
have been mobilized explicitly at the global
level. The ISEA seeks to give social accounting
professional status similar to that of conventional
professional accounting.
After AA1000, there has been a set of stan-
dards and guidelines relating to differing
approaches to CSR. The most relevant of these
include SA8000; The Global Reporting Initia-
tive (GRI), sponsored among others by the UN,
which promotes a triple bottom line reporting
(environmental, other social, conventional);
SIGMA; and the Ethical Trading Initiative
(ETI). Below the relation between social
accounting and these CSR approaches and stan-
dards is outlined.
• SA8000 was set up to ensure that workers of
the world are treated according to basic human
rights principles. SA stands for Social
Accountability and is run by Social Account-
ability International (SAI) that is a global
standard-setting nonprofit human rights orga-
nization dedicated to improving workplaces
and communities. It aims to be a universal
standard based on International Labour Orga-
nisation (ILO) conventions, the United
Nations Convention on the Rights of the
Child, and the Universal Declaration on
Human Rights. SA8000 covers the following
areas of accountability: Child labor; Forced
labor; Workplace safety and health; Freedom
of association and Right to Collective
Bargaining; Discrimination; Discipline;
Working hours; Remuneration; and Manage-
ment system for Human Resources.
Social Accounting
• GRI is the Global Reporting Initiative. It is
a nonprofit seeking organization that promotes
economic, environmental, and social sustain-
ability, and provides reporting guidelines for
the mentioned contents within an entity’s
activities. GRI’s Sustainability Reporting
Framework enables all companies and organi-
zations to measure and report their sustainabil-
ity performance. It also provides important
performance standards and for this reason
could be helpfully used within an AA1000
process to guide the reporting phase of the
process.
• SIGMA is a project that aims to provide clear,
practical advice to organizations to help them
make a meaningful contribution to sustainable
development to address sustainability issues in
a strategic and integrated way. The project, as
declared in its website, developed guidelines
whose aim is to effectively meet challenges
posed by social, environmental, and economic
dilemmas, threats, and opportunities, from one
side, and become architects of a sustainable
future, from the other side. Its aim is to “Help
an organization understand how it can contrib-
ute to sustainable development and offer
a framework to help an organization develop
its own robust principles.” It was launched in
1999 with the support of the UK Department
of Trade and Industry. It is a partnership
between the British Standards Institution (the
leading standards organization), Forum for the
Future (a leading sustainability charity and
think tank), and AccountAbility (the interna-
tional professional body for accountability).
The project scope is to implement these guide-
lines in a wide range of organizations and to
share the information related to this process.
• ETI is the Ethical Trading Initiative. It is an
initiative between UK development NGOs,
UK high street retailers, and international
trade unions. It is an alliance of companies,
trade unions, and voluntary organizations
working in partnership. Its aim is to “improve
the working lives of the poor and vulnerable
people across the globe that make or grow
consumer goods.” Companies that join ETI
must adopt the ETI Base Code that is founded
Social Accounting
on the conventions of the International Labour
Organisation (ILO) and is an internationally
recognized code of labor practice.
In 2011, the final exposure draft of
AA1000SES (AA1000 Stakeholder Engagement
Standard) has been set. It builds on the revisions
to the A1000 AccountAbility Principles Standard
(2008) and on advances in engagement practice,
and it was developed using a broad-based, multi-
stakeholder process. Concerning Accounting the
AA1000 Process Model is based on:
identifying issue; determining process scope;
identifying indicators; collecting information;
analyzing information, setting targets, and devel-
oping improvement plans.
Key Issues
Over the last decades, there has been a renewed
debate on the theme of sustainability. It has
been recalled to the different entities the prob-
lem/chance to more socially responsible moni-
toring their lato sensu environmental impact.
The increasing need to know how an entity is
performing in terms of social, environmental,
economical, and ethical issues and to commu-
nicate this information to the various stake-
holders have brought to the a particular kind of
accounting which is social. This interest is
evidenced by the fact that academic writings
and publications increased in number. In the
academic literature, SA has been considered as
a tool for analyzing the sustainability perfor-
mance of any entity. This topic is placed in the
wider context of Social Responsibility literature
that explores the role of accounting in the rela-
tion between entity and society. Various
scholars with their works have tried to imple-
ment SA in practices. Some of them have
underestimated the great importance/need of
such a tool; some others have looked at social
accountings as the negative and problematic
version of public relations. The latter have con-
cerns about an overlapping between corporate
social responsibility (and therefore also social
accounting) and public relations within the
entity activities.
2171 S
As SA should add a higher level of account-
ability for the entity, there could be a problematic
limitation in the self-interest of so-called inde-
pendent bodies that has not been examined for
social audit. Another critical point is that like any
other accounting system, also the social one must
match the needs of the different entities, so it
becomes difficult to imagine a set of standards
that fit well all of them.
Finally, there are several different approaches
to SA that should be benchmarked.
Future Directions
It is undoubted that an accounting framework
influences how a corporation defines success. In
this context, social accounting is a way of dem-
onstrating the extent to which an entity is meeting
its stated social goals.
What we cannot forget is that social account-
ability concept is subject to changes over time.
So it is necessary that any approach to SA must
follow these changes and be able to respond to
them in an adequate way (Gray 2001).
Traditional accounting focusing its attention
on maximizing shareholder value and on the
financial bottom lines has ignored non-
stockholder stakeholders. But even in practices,
the number of companies who are trying to give
the right attention to all the stakeholders appears
to be growing. In fact, they are under increased
pressure by these “exploited” stakeholders who
want to be fairly informed of what the entity is
doing and how it affects them. S
SA is interested not only in measuring the
impact of practices on the financial bottom
lines, but also the impact of entity activities on
the natural environment, on their employees, on
the communities in which it operates. It seems not
possible then to judge entity outcomes just by
their financial metrics. In this way, social
accounting tries to support information about
social and environmental objectives which are
traditionally not reflected in accounting state-
ments. Thus, in addition to financial perfor-
mance, it shows the nonfinancial performance
(i.e., social and environmental) encompassing
S 2172
a broader definition of the ways in which entities
create value for different stakeholders. An inno-
vative tool to account for social value creation is
the Expanded Value Added Statement (EVAS)
that represents the for-profit organization’s new
frontier. Even though it was born in the field of
nonprofit organizations, it seems to expand its
influence also on private ones for being as much
accountable as possible. EVAS is an adaptation
of a conventional value-added statement but
includes social as well as financial value added:
It reports on economic, social, and environmental
value added in an integrated statement. It shows
the wealth created for a larger group of stake-
holders measuring the wealth that an entity has
created by adding value in its producing process.
In context of “Social and Ethical Accounting,
Auditing and Reporting” (SEAAR), we find that
SA as well as social audit is part of a unique
cyclical process that entities employ to measure
performance under the two aspects of social
impact and ethical behavior. This process should
involve the following three steps: accounting as
internal data collection and analysis procedures;
auditing as an independent audit of the results;
and reporting as a mechanism for disseminating
the outcome more widely.
The mentioned process is driven by internal
and external indicators. One of the most used is
the Social Return on Investment (SROI) that is
a method for measuring nonfinancial value like
environmental and social value relative to
resources invested.
Cross-References
▶ AA1000
▶ ACCA
▶ Accountability
▶ Agency Theory
▶ Corporate Responsibility
▶ Corporate Social Responsibility
▶ Corporate Social Responsibility Report
▶ CSR Communication
▶ Disclosure (CSR reporting)
▶ Environmental Accounting
▶ Social Auditing
Social Activism
▶ Social Return on Investment
▶ Stakeholder Accountability
▶ Sustainability Reporting Guidelines
▶ Triple Bottom Line
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Freeman, R. E. (1984). Strategic management: a stake-
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Gallhofer, S., & Haslam, J. (1997). Beyond
critical accounting: The possibilities of accounting
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Gallhofer, S., & Haslam, J. (2002). Accounting and eman-
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social and environmental auditing, reporting and attes-
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reporting and auditing: what (if anything) have we
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Gray, R., et al. (1996). Accounting and accountability:
Changes and challenges in corporate social and envi-
ronmental reporting. London: Prentice Hall.
Guthrie, J., & Parker, L. D. (1989). Corporate social
reporting: A rebuttal of legitimacy theory. Accounting
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Tinker, T., et al. (1991). Corporate social reporting:
Falling down the hole in the middle of the road.
Accounting, Auditing and Accountability Journal,
4(1), 28–54.
Social Activism
▶ Community Activism
Social Advertising
▶ Social Marketing
Social and Environmental Assurance
Social and Environmental
Accounting
▶ Social Accounting
▶ Sustainability Accounting
Social and Environmental Assurance Environmental Assurance
Matthias S. Fifka
Cologne Business School (CBS), Dr. J€ urgen
Meyer Endowed Chair for International Business
Ethics and Sustainability, Koeln, Germany
Synonyms
Corporate (social) responsibility assurance;
Social and environmental auditing; Sustainability
assurance
Definition
Social and environmental assurance (SEA) is the
independent examination of the information pro-
vided in social, environmental, sustainability,
and corporate (social) responsibility reports.
This examination is done by a third party, such
as an auditing company or a nongovernmental
organization specialized in this issue. Very often
the term social and environmental auditing is
used as a synonym for social and environmental
assurance, though a potential difference between
assurance and auditing remains. Whereas an
audit can be performed by an internal or an
external auditor, assurance is carried out exclu-
sively by external, third-party auditors. They
provide an independent attestation of the reported
contents.
Whereas before 1990 social and environmen-
tal reports were mostly published separately,
companies later started to combine the respective
information in only one report and also began to
include financial information. Following this tri-
ple bottom line approach, the reports were mostly
2173 S
renamed into sustainability or corporate (social)
responsibility reports (Fifka 2012). Consequen-
tially, the terms sustainability assurance and cor-
porate (responsibility) assurance have evolved.
Introduction
The Development of Social and
SEA essentially is a development that has
resulted from the evolution of social and environ-
mental reporting (SER), which has its origins
in the 1970s. During that decade, corporations
in western countries began to voluntarily
provide information on the quality of their prod-
ucts, treatment of employees, and contributions
to the communities where they operated. These
issues reflected public criticism the corporations
were confronted with. Often, the respective
information was disclosed in the regular annual
report, but corporations also began to publish
stand-alone “social reports” or “social balance
sheets” in order to address external calls for
disclosure. Already at this point of time, organi-
zations attempted to judge the nonfinancial
performance of companies. Social Audit Ltd.,
based in the UK, developed a first standard for
social audits, which was later adopted by trade
unions and consumer groups (Gray 2001).
In the 1980s, social reporting remained at the
center of attention, but environmental disclosure
slowly started to evolve. Based on the standard
developed by Social Audit Ltd., Greenpeace
designed a framework for measuring environ- S
mental performance (Gray 2001). In the 1990s,
businesses gradually realized that introducing
environmentally friendly products and produc-
tion methods could bring a significant compara-
tive advantage. Therefore, the environmental
report as such became a certain standard and
often accompanied or even replaced the social
report that had previously been published. After
the turn of the millennium, as noted above, this
separation of SER was reversed and both dimen-
sions were combined in reports of a broader
nature. Also containing information on economic
issues, these reports were now mostly issued
S 2174
under titles such as sustainability report or corpo-
rate (social) responsibility report.
This development in reporting is reflected by
the changing titles of studies conducted by
KPMG on corporate reporting globally. While
the first three surveys (1993, 1997, and 1999)
were titled “International Survey of Environmen-
tal Reporting,” the 2002 study referred to “Sus-
tainability Reporting.” The three most recent
studies (2005, 2008, and 2011) carried the title
“International Survey of Corporate Responsibil-
ity Reporting.”
As SER became more widespread and contin-
uously broader in nature, there were increasing
calls for standardization to allow for measure-
ment and comparability. The standards to be
developed were to give an answer to the question,
what information a voluntary report should con-
tain. In that spirit, some of the first nonfinancial
reporting standards were created by the Global
Reporting Initiative (GRI) and AccountAbility
(AA) in the late 1990s.
Though standardization provided guidelines
and measurable criteria for reporting social and
environmental information, it did not address the
problem that the content disclosed was not nec-
essarily assured and thus could not be verified.
Therefore, external assessments of reports
became more popular after 2000. The GRI and
AA made recommendations on how to conduct
such assurance, and especially the large auditing
companies established departments specialized
in SEA to meet increasing demand for it.
The State of Social and Environmental
Assurance
Since the turn of the millennium, SEA has
become more widespread, especially among
large companies. In 2002, only 29% of the
world’s 250 largest corporations had their sustain-
ability report formally assured, whereas in 2011,
46% had done so. Nevertheless, this growth has
been considerably slower than the growth of SER
itself, and assurance still falls significantly behind
reporting. In other words, companies provide
social and environmental information way more
often than they have it assured by an external
auditor. In the same period as above,
Social and Environmental Assurance
sustainability reporting among the “Global 250”
grew from 45% to 95%. So today, only half of the
companies that issue a report actually have it
assured.
The situation is similar among the 100 largest
companies in 34 countries which were examined
by KPMG (2011). On average, 64% of them
issued a sustainability report, but only 27%
included a formal insurance statement. Of the
countries that were part of the study, India was
leading in terms of assurance. Eighty percent of
the 100 largest companies conducted assurance
activities. South Korea (75%), Denmark (65%),
Spain (65%), and Italy (64%) were the runners-
up. France and the UK also ranked in the upper
third with 60% and 56%, respectively. The bottom
of the list was constituted by New Zealand (19%),
Nigeria (14%), Russia (13%), the USA (13%),
and Singapore (7%). The substantial differences
between individual countries can partly be attrib-
uted to varying socioeconomic conditions, such as
the strength of environmentalism or stakeholder
orientation, as Fifka and Drabble (2012) demon-
strated. Likewise, Kolk and Perego (2010, 182)
stated “that companies operating in countries that
are more stakeholder oriented and have a weaker
governance enforcement regime are more likely
to adopt a sustainability assurance statement.”
With regard to industries, they observed the
highest levels of SEA among environmentally
sensitive industries such as manufacturing,
but also among banking and insurance companies.
The assurance market is clearly dominated by
large accounting and auditing firms. Seventy-one
percent of the 250 largest companies in the world
and 64% of the largest 100 in the 34 countries
examined by KPMG (2011) contracted one of the
big-four auditing firms: PricewaterhouseCoopers,
Deloitte Touche Tohmatsu, Ernst & Young, and
KPMG. Smaller firms specialized in sustainabil-
ity assurance seem to be on the rise, while firms
with technical expertise on environmental assur-
ance are losing market share (KPMG 2011). The
latter were on the rise in the 1990s, when the focus
clearly was on environmental responsibility.
In addition to formal assurance, companies
also include comments and evaluations by inde-
pendent actors, such as academics or
Social and Environmental Assurance
representatives of nongovernmental organiza-
tions, in their reports in order to emphasize their
credibility and accurateness. In 2008, one quarter
of the Global 250 integrated such third-party
commentary (KPMG 2011). The desire to
improve the credibility of the content disclosed
is one of the major drivers of SEA, as shall be
discussed next.
Key Issues
As pointed out above, companies are often
confronted with the allegations that their volun-
tary reporting is solely a marketing-instrument,
that it is biased as it only contains selected infor-
mation of favorable nature, and that it may even
include altered or misleading data, while the
reader has no possibility to verify the content
reported. Having an independent organization
verify the information provided can be seen as
an instrument to counter such claims. Further-
more, companies can send the signal that the
validity of social and environmental information
is as important to them as the validity of the
financial information they traditionally provide.
Accordingly, one third of the companies sur-
veyed by KPMG (2011, 30) responded that the
“ability of assurance to reinforce the credibility
of CR reporting within stakeholders and investor
groups” was the major reason for obtaining inde-
pendent assurance. The improvement of the qual-
ity of the content reported was seen as the second
most important driver. There was widespread
agreement among the respondents that assurance
had actually helped to enhance the reporting pro-
cess in its entirety.
Fostering credibility, as a major reason for
SEA, is difficult due to an assumed underlying
conflict of interest, however. Since companies
have an interest in conveying a positive image
of themselves, they might be inclined to alter
information in their favor or are at least expected
to do so by a critical audience. This lack of
credibility can be addressed by external verifica-
tion, which in turn can be done in two ways. First,
independent nonprofit or stakeholder organiza-
tions can evaluate or assess a report. Since they
2175 S
are not financially dependent on the company,
this ensures a high degree of independence. How-
ever, the lacking commercial foundation might
also mean a lack of expertise and manpower to
conduct a profound assessment. In rare cases,
organizations also act without having received
a mandate by the company they assess in order
to pursue a self-declared “watchdog” function.
This guarantees the largest independence possi-
ble, but inevitably leads to a lack of necessary
internal information to assess the respective
report in depth.
Second, an assessment can also be carried out
by commercial service providers that have been
hired. These are primarily companies specialized
in financial auditing which have expanded their
portfolios. Though SEA is different from finan-
cial assurance, these auditing firms usually have
the necessary expertise and human resources at
hand to generate expertise on SEA as well. Nev-
ertheless, there is a risk that the auditor might not
perform a correct assessment in order to please
the client and not to endanger the contractual
relationship. The existence of such risk was dem-
onstrated by the fraudulent audits conducted by
Arthur Andersen for its client Enron, when falsi-
fied accounts were attested for retaining the man-
date. Though this happened in the area of
traditional financial assurance, the collision of
interest is identical for SEA; on the side of the
company as well as on the side of the auditor.
Whereas the company may be torn between pro-
viding a correct report and altering information
for reputational reasons, the latter may be in
a conflict between conducting a professional S
assessment and attesting falsified data in order
not to lose business.
Therefore, it cannot necessarily be said which
of the alternatives described for external assess-
ment is the better. Accordingly, the GRI (2011,
41), in its section on assurance, acknowledges the
possibility to have organizations of different
kinds assess a report: “A variety of approaches
are currently used by report preparers to imple-
ment external assurance, including the use of
professional assurance providers, stakeholder
panels, and other external groups or individuals.”
In all cases, the qualification of the organization
S 2176
or individual to conduct a solid and appropriate
assurance is essential.
However, even if such quality is given, this
does not necessarily allow conclusions on the
quality of the assurance. Though organizations
like AA and the GRI do provide guidelines not
only on reporting, but also on assurance, the
questions remain to what degree these guidelines
are applied and, more importantly, if they consti-
tute a reliable framework which ensures transpar-
ency and accountability in the first place. As
O’Dwyer and Owen (2005, 205) observed in
their study of 81 reports, the quality of assurance
was questionable in many cases, even if standards
were applied, since “the independence of the
assurance exercise” was not guaranteed in most
cases due to “management control over the assur-
ance process.” Moreover, the extent of assurance
was unsatisfying as most auditors only aimed for
low levels of assurance.
Based on the above considerations and the
elaborations made by O’Dwyer and Owen
(2005) as well as the recommendations put forth
by the GRI (2011) and AA (2008), the following
criteria for sound SEA can be developed:
1. Independence of the assurance provider: First,
it must be noted that some degree of depen-
dence always exists, except for organizations
that act without a mandate, which in turn leads
to rather superficial assessments as internal
information is lacking. In the case of nonprofit
organizations, it can be assumed that they are
at least partly dependent on their own stake-
holders. The members of an environmental
organization, e.g., might expect it to
undertake an overtly critical assessment of
a company’s environmental performance.
Thus, the necessary neutrality is missing.
In contrast, financial dependence especially
is an issue in the case of commercial assurance
providers, as they get paid for their services.
Such dependence is natural to the market and
does not rule out a professional assessment.
However, the company and the assessment
provider should disclose if additional business
or personal relationships exist. Often, large
auditors also serve as consultants at the same
time, though in the USA this has been
Social and Environmental Assurance
restricted in the wake of the Enron scandal,
where Arthur Andersen had been auditor and
consultant to Enron simultaneously. With
regard to personal relationships, it may be the
case that a manager of the auditing company
serves as member on the client’s board or vice
versa. Even if such potential relationships may
create a partial dependence and companies
might hesitate to make them public, their dis-
closure is essential. In case they would not be
laid open and be discovered later by a third
party, the damage to the credibility of the
assurance statement and the company would
be significant.
2. Qualification, identification, and responsibility
of the assurance provider: The assurance
provider must have the necessary knowledge
and resources to conduct a reliable assessment.
A company should only contract providers
that can guarantee a due assessment. In the
assurance statement, the providers should be
clearly identified and their expertise and expe-
rience regarding SEA needs to be described.
This is not only in the reader’s interest, but also
in that of the company, as it underlines the
credibility of the assessment. Likewise, it
should be mentioned who is responsible for
the statement issued and who can be addressed
in case of questions on it.
3. Design, description, and scope of the assur-
ance process: The auditor needs to declare
what data has been assessed, but also what
data has not been assessed, though it might
have been relevant, and why. Moreover, if
a standard or framework was applied for the
assessment, it must be identified. As pointed
out, there are several standards which have
been developed in order to improve the quality
of assessments; the AA1000 series and the
GRI being the most popular ones. When such
standards are used, it is essential to assess to
what extent the issuer of the report has applied
them, because it is not only their purpose to
provide orientation, but also to allow for com-
parison and measurement. However, stan-
dards might not be applicable in all cases,
especially when small- and medium-sized
enterprises (SME) are concerned. If that is
Social and Environmental Assurance
the case and thus a guiding framework cannot
be used, it is important that the assessment is
systematic, comprehensive, evidence based,
and well documented.
Concerning the scope of the assurance
process, the validation of the information
provided by the business is central, especially
when quantifiable data is concerned. How-
ever, the underlying systems of data collec-
tion should also be assessed as well as
governance structures. If businesses have
articulated goals in previous reports, the
extent to which these goals have been
reached should be evaluated. Finally, site
visits and interviews with managers,
employees, and stakeholders should be car-
ried out in order to have a broader basis for
assessment. The reporting company should
support the respective activities undertaken
by the auditor.
4. Inclusivity, materiality, and responsiveness:
The activities just described allow the auditor
to assess the inclusivity, materiality, and
responsiveness – the three core principles of
reporting put forth by AA – of the information
provided by a company. Inclusivity refers to
the commitment of a company to hear its
stakeholders and to respond in an appropriate
fashion. This leads to the criterion of materi-
ality. The auditor has to assess whether the
information provided in the report allows
stakeholders to make an informed judgment
about the company’s performance and its
actions. It also needs to be assessed if
a company has reacted to information
demanded by stakeholders. Thus, it is neces-
sary for the assurance provider to evaluate to
what degree a company has met its obligation
to respond to stakeholder concerns and poli-
cies. Consequentially, there has to be an
assessment of how the responses were com-
municated in the company’s report. In addi-
tion, the adherence to reporting standards to
which a company has subscribed can also be
seen as an element of responsiveness, as
reporting standards express the concerns of
a variety of stakeholders in a generalized and
prestructured manner.
2177 S
5. Verbal Clarity of Assessment: O’Dwyer and
Owen (2005) pointed out in their empirical
study that assurance providers are inclined to
use phrases which blur a clear judgment or
partially relief them from taking the responsi-
bility for the assessments they have
conducted. Auditors frequently state that the
information “presented to them” by the
respective company was correct. However,
this creates the impression that the company
choses which information to present and
which to withhold. In a serious assessment
process, a company rather would have to dis-
close information requested by the assurance
provider. This is coherent to what a reader of
an assurance statement would expect.
Moreover, auditors are inclined to point
out the limitations of assessments in order to
prevent against too much reliance being
placed upon their judgment, as O’Dwyer and
Owen (2005, 223) demonstrate by citing
a typical phrase from an actual assurance
statement: “Our statement should be read in
conjunction with the inherent limitations of
accuracy and completeness for environmental
data, as well as in connection with the scope of
reporting on page 5.” While such a statement
might relieve the auditor as well as the com-
pany from providing accurate data and
a profound assessment of it, the effect most
likely will not be beneficial for the company.
Inevitably, the impression is created that the
information and/or its assessment are not reli-
able, which renders the assessment process in
its entirety absurd. S
This certainly does not mean that assurance
providers should resort to strong statements
for the sake of dispelling such doubts, when
they actually cannot assert that the informa-
tion provided was correct. Nevertheless,
according to the principles of inclusivity,
materiality, and responsiveness, the assurance
provider has to make sure that the information
disclosed is comprehensive, relevant, and cor-
rect. If that is the case, then the provider will
not have any difficulties in clearly stating this
and will not have to resort to phrases which
open up loopholes.
S 2178
As demonstrated, establishing meaningful
SEA is a complex process and involves signifi-
cant effort by the reporting company as well as
the assurance provider. Moreover, it is also
a learning process which requires a longer
period of time. Comprehensive and valid SEA
that meets stakeholder demands cannot be
established within weeks or months. It is
a continuous process that requires constant
exchange with stakeholders to identify changing
expectations, which also materialize in the mod-
ification of reporting and assurance standards.
For exactly this reason, organizations such as
AA or the GRI regularly modify the frameworks
they provide. Such adaptations are necessary to
reflect changes in the socioeconomic environ-
ment, but they also have their downsides, as
they require companies to constantly redesign
the respective processes for measuring,
reporting, and assuring, which is costly. Espe-
cially for SME this can be a burden too large to
bear.
Taking into consideration that reporting,
especially when it is done in accordance with
standards that require disclosure on many indica-
tors (the guidelines established by the GRI, e.g.,
contain more than 120 of them), already is
a costly undertaking, assurance requires addi-
tional financial and human resources. Despite all
the benefits for companies and stakeholders
resulting from reporting and its assurance, this
monetary aspect should not be overlooked in the
future discussion of the subject.
Future Directions
Just like reporting, SEA will have to find
a balance between comprehensiveness and man-
ageable complexity. As just pointed out, the
increasing breadth of reporting standards auto-
matically requires that more assurance activities
will have to be undertaken since more data has to
be verified. While this means more revenue for
auditors, companies might not be willing any
longer to follow along at a certain point, when
the financial burden seems to be too large, and
Social and Environmental Assurance
refrain from assurance overall. Such develop-
ment would not be desirable for all actors
involved. Moreover, standardization cannot be
seen as a panacea, because it reduces – as it is the
nature of standards – the room for individual
action and design. Though providers of stan-
dards have sought to address this problem by
developing sector and company-size specific
standards or at least supplements to existing
ones, this problem of applicability will remain
in the future, particularly with regard to SME
(Fifka 2012).
Despite the hurdles that need to be overcome,
chances are good that SEA will be practiced more
widely in the future, especially when considering
that business currently finds itself in a state of
mistrust due to the financial and economic crisis.
SEA can be one way to address this credibility
problem. In that context, its development will
inevitably be bound to the road that SER itself
will take. Here again it can be assumed
that the disclosure of social and environmental
information will increase, because businesses
seek to maintain the license to operate granted
by society.
Another trend observable with regard to SER
is so-called integrated reporting (KPMG 2011).
Integrated reporting refers to the inclusion of
social and environmental information into the
regular annual report, instead of publishing
a stand-alone nonfinancial report. This type of
reporting would significantly improve the assur-
ance process, as the social and environmental
data could be audited and asserted together
with financial data. Moreover, companies would
increasingly be forced to have their social and
environmental information assured as well,
since only assuring financial data would inevita-
bly create the impression that the company either
does not care about the validity of the social and
environmental content or that it even has manip-
ulated the respective data and thus wants to avoid
its assurance. Such comprehensive assurance
would provide great benefit for the stakeholders
who could rely on being provided credible infor-
mation, although a slight probability of falsified
data being published will always remain.
Social Auditing
Cross-References
▶ AccountAbility
▶ Assurance
▶ Corporate Social Responsibility Report
▶ Disclosure (CSR Reporting)
▶ Enron
▶ Environmental Report Verification
▶ Global Reporting Initiative
▶ Integrated Reporting
▶ Reporting Frameworks
▶ Sustainability Reporting Guidelines
References and Readings
AccountAbility (AA). (2008). AA1000 assurance stan-
dard 2008. http://www.accountability.org/images/con-
tent/0/5/056/AA1000AS%202008.pdf. Accessed 24
May 2012.
Fifka, M. S. (2012). The development and state of
research on social and environmental reporting in
global comparison. Journal f€ ur Betriebswirtschaft,
62(1), 45–84.
Fifka, M. S., & Drabble, M. (2012). Focus and standard-
ization of sustainability reporting – A comparative
study of the United Kingdom and Finland. Business
Strategy and the Environment. doi:10.1002/bse.1730.
Global Reporting Initiative (GRI). (2011). Sustainability
reporting guidelines – Version 3.1. https://www.
globalreporting.org/resourcelibrary/G3.1-Guidelines-
Incl-Technical-Protocol.pdf. Accessed 24 May 2012.
Gray, R. (2001). Thirty years of social accounting,
reporting and auditing: what (if anything) have we
learnt? Business Ethics: A European Review, 10(1),
9–15.
Kolk, A., & Perego, P. (2010). Determinants of the adop-
tion of sustainability assurance statements: An inter-
national investigation. Business Strategy and the
Environment, 19, 182–198.
KPMG. (2011). KPMG international survey of corporate
responsibility reporting. Amsterdam.
O’Dwyer, B., & Owen, D. L. (2005). Assurance statement
practice in environmental, social and sustainability
reporting: a critical evaluation. The British Accounting
Review, 37, 205–229.
Social and Environmental Auditing
▶ Social and Environmental Assurance
2179 S
Social and Environmental Disclosure
▶ Disclosure (CSR Reporting)
Social Assurance
▶ Social Auditing
Social Auditing
Liangrong Zu
Enterprise, Microfinance and Local Development
Program, International Training Centre of the
ILO, Turin, Italy
Synonyms
Auditing; Social accountability; Social account-
ing; Social assurance; Social control; Social
reporting
Definition
Social auditing is a process for evaluating,
reporting on, and improving an organization’s
performance and behavior, and for measuring its
effects on society. The social auditing can be used
to produce a measure of the social responsibility S
of an organization. It takes into account any
internal code of conduct as well as the views of
all stakeholders and draws on best practice fac-
tors of total quality management and human
resource development. Like internal auditing,
social auditing requires an organization to
identify what it is seeking to achieve, who the
stakeholders are, and how it wants to measure
performance. Social auditing provides an assess-
ment of the impact of an organization’s
nonfinancial objectives through systematically
and regularly monitoring its performance and
S 2180
the views of its stakeholders. In the accounting
terms, social auditing is defined as review of the
public-interest, nonprofit, and social activities of
a business. These audits usually are performed
primarily for internal benefit and typically are not
released to the public. The social audit may
be performed routinely by internal or external
consulting groups, as part of regular internal
audits. These evaluations consider social and
environmental impacts of business activities.
Most companies have socially oriented pro-
grams of one kind or another and every company
obviously has an impact on the society in which it
lives. Public concern about the ways companies
fulfill their social responsibilities has created
pressure for “social auditing” in the corporate
domain, and executives themselves have been
attracted to the notion of a social audit as
a possible method for satisfying both themselves
and the public that their companies are doing
what they ought to be doing in the social area.
Introduction
Evolution of Social Auditing
Social auditing and social accounting are rela-
tively new concepts. The term “social auditing”
was first used in the 1950s. Much earlier work
took the form of external investigations to assess
the impact of large corporations on their work-
force, consumers, and the community. This
investigation trend of social auditing continued
into the 1980s, examining the impact of plant
closures and of investment or relocation deci-
sions and, increasingly, uncovering the (un)ethi-
cal behavior and environmental impact of
business corporations. In the 1990s, more broad
developments of social auditing emerged, driven
by increased pressures on organizations to dem-
onstrate social and ethical performance and
accountability. It has moved on to focus on
the process, rather than on the benchmarks, that
an organization should follow to account for its
performance, including a dialogue with its stake-
holders and external verification and disclosure.
In a 1940 publication of the Temporary National
Economic Committee, Theodore J. Kreps presented
Social Auditing
a monograph entitled Measurement of the Social
Performance of Business. Not only was the
term “social audit” used in 1940 (a remarkable
fact considering that a firm’s social performance
was hardly discussed then), but it was used in
a similar vein to that employed today – as
a concept for measuring the social performance of
business. In fact, Kreps introduced the term “social
audit” in a chapter entitled “Tests of Social
Performance.”
Upon close examination of Kreps’s mono-
graph, however, it was found that many of what
he called “social issues” during that late Depres-
sion/pre–World War II period was closer to what
we would refer to today as economic issues. For
example, the measurements he used were
employment, production, payroll, dividends, and
interest. In contrast to current social audits, the
Kreps audit involved more economic type issues,
represented a governmental evaluation of
business’s social performance, and was to be
used by society to assess business performance.
Another landmark in the development of
social audits came in 1953 in a book by Howard
R. Bowen. Bowen’s concept of the social audit
was that of a high-level, independent appraisal
conducted about every 5 years by a group of
disinterested auditors. The auditors’ report
would be an evaluation with recommendations
intended for internal use by the directors and the
management of the firm audited. Bowen also
included more socially oriented activities. In con-
trast to these earlier landmark models, the social
audit as it came of age in the 1970s attempted to
focus on such social performance categories as
minority employment, pollution/environment,
community relations, consumer issues, and
philanthropic contributions. Very few companies
initially undertook social audits as control mech-
anisms. To use a device as a control mechanism
implied that there were some goals or standards
against which to compare actual performance.
Initially, social audits were employed by compa-
nies to examine what the company was actually
doing in selected areas, appraise or evaluate
social performance, identify social programs
that the company thought it ought to be pursuing,
or just inject into the general thinking of
Social Auditing
managers a social point of view. During this early
time, companies had not developed enterprise-
level strategy or corporate social policy. As
firms began to plan for the social environment
and to set social goals, the social audit began to be
better used as a control mechanism.
Social auditing fell out of favor in the 1980s.
In the 1990s, however, there has been some resur-
gence in interest in social performance, ethics,
and values audits and reports. Several examples
illustrate. As part of an ethics program at Dow
Corning, for example, six managers serve 3-year
terms on a Business Conduct Committee. Dow
Corning schedules this committee to conduct an
ethics audit of each of its business operations
every 3 years. These audits include 3-h review
sessions with employees at the audited location.
The committee then reports its findings to the
Audit and Social Responsibility Committee of
the Dow Corning Board of Directors.
Social Auditing and Social Performance
Reporting
As a management function, strategic control
seeks to ensure that the organization stays on
track and achieves its goals and strategies.
Planning is not complete without control,
however, because control aims to keep manage-
ment activities in conformance with plans. Man-
agement control encompasses three essential
steps: (1) setting standards against which perfor-
mance may be compared, (2) comparing actual
performance with what was planned (the
standard), and (3) taking corrective action to
bring the two back into alignment, if needed.
A planning system will not achieve its full poten-
tial unless at the same time it monitors and
assesses the firm’s progress along key strategic
dimensions. Furthermore, there is a need to con-
trol the “strategic momentum” by focusing on
a particular strategic direction while at the same
time coping with environmental turbulence and
change. The social audit is a planning and control
approach that is worthy of discussion within the
context of strategic management. Some compa-
nies actually report their social performance rel-
ative to their standards. Others just report their
social or values activities and achievements.
2181 S
In the context of corporate social performance
or corporate public policy, the idea of a social
audit, or social performance report, as
a technique for providing control has been
experimented with for a number of years.
Although the term “social audit” has been used
to describe a wide variety of activities, in this
discussion, social audit is defined as follows: the
social audit is a systematic attempt to identify,
measure, monitor, and evaluate an organiza-
tion’s performance with respect to its social
efforts, goals, and programs. Implicit in this def-
inition is the idea that planning has already taken
place. And although the social audit here is
discussed as a control mechanism, it could just
as easily be thought of as a planning/control
technique.
In the context of strategic control, the social
audit could assume a role much like that
portrayed in Fig. 1. This figure is similar to the
diagram of the strategic management process and
corporate public policy shown in Fig. 2 but is
modified somewhat to highlight social goals,
corporate social performance, the social audit,
and the first three steps in the strategic control
process. The components of the social audit
include identification, measurement, monitoring,
and evaluation. The identification function is
included as a part of the definition because expe-
rience has shown that companies often are not
completely aware of all that they are doing in the
social or ethics arena. Any serious effort to deter-
mine what a company is doing requires the
development of measures by which performance
can be reported, analyzed, and compared. Moni- S
toring and evaluation stress that the effort is con-
tinuous and aimed at achieving certain standards
or goals the company may have in mind.
The term “social audit” has been subjected to
some criticism. The foremost objection has been
that it implies an “independent attestation” to the
company’s social performance, whereas such an
independent attestation typically does not exist.
The term “audit,” as used by accountants, usually
means verification by some outside party that the
firm’s situation is as it has been reported. Because
social audits are typically conducted by people
within the organization, it is obvious why this
S 2182 Social Auditing

Stakeholder Environment
Social Issues,
Social/Public/Ethical
Trends, Events

Enterprise-Level Strategy

Corporate Social Policy

Activity Actual Social

Performance Results

Social Goals (serve as

standards in control process)
Social Audit

Control Step 1

Comparison of Actual
Results

Control Step 2

Feedback Corrective Action (bring

for Setting performance back
New into alignment)
Standards
Control Step 3

New Social
Performance Results

Source: Archie B. Carroll (2008), Business & Society: Ethics and Stakeholder Management, 7thedition.

Social Auditing, Fig. 1 Social audit in the context of strategic control (Source: Carroll 2008)

objection is raised. The criticism has also been
made that there exist no generally accepted social
accounting principles, no professionally recog-
nized independent auditors, and no generally
agreed-on criteria against which to measure
a firm’s social performance. Despite these con-
cerns, the term “social audit” continues to be
used. More recently, firms have been using
“ethics audits” or “stakeholder audits” to describe
efforts to review social performance. Another
term, social accounting, is frequently used in
reference to social auditing and has been defined
as follows: “The measurement and reporting,
internal or external, of information concerning
the impact of an entity and its activities on soci-
ety.” These definitions are quite similar. The only
term for the function which has not been severely
criticized is “corporate social performance
reporting.” However, there is some evidence
that this term is no longer in vogue. Nevertheless,
Social Auditing 2183 S
Stakeholder Environment
Trends,
Events, Consumer Owner Employee
Issues, Stakeholders Stakeholders Stakeholders
Forecasts

Community Governmental Social Activist Environmental

Stakeholders Stakeholders Stakeholders Stakeholders

Environmental Analysis

Organizational Environment
GOAL FORMULATION
(Social goals set)

STRATEGY
STRATEGY FORMULATION STRATEGY EVALUATION IMPLEMENTATION
(What the organization (Check for consistency (Achieve “fit” among
ought to do) with environment) key variables)

STRATEGIC CONTROL
(Social auditing is one
approach)

Source: Archie B. Carroll (2008), Business & Society: Ethics and Stakeholder Management, 7th edition.

Social Auditing, Fig. 2 Strategic management process (Source: Carroll 2008)

all these terms will be used interchangeably. This
is especially necessary in regard to social
auditing, a term which will be used frequently,
because it is so much a part of the already existing
literature and experience of social performance
measurement and reporting.
Today, all of the following terms are used to
describe social performance reports issues on an
annual or periodic basis by companies interested
in getting their message out: CSR reports, social
performance reports, corporate citizenship
reports, values reports, and so on. Most of these
reports use methodologies that are less rigorous
than the original idea of social audits. What these
reporting processes have in common is that they S
make the public and stakeholders aware of their
social and ethical programs, activities, and
achievements. Some of the more advanced
reports actually report company achievements
relative to previous goals set by management.
Others just report what the company has done
during the previous reporting period.
The impetus for social performance reports in
recent years has come from societal and public-
interest groups’ expectations that firms report
their achievements in the social responsibility
and sustain ability arenas. Such reports typically
require monitoring and measuring progress, and
S 2184
this is valuable to management groups wanting to
track their own progress as well as be able to
report it to other interested parties. Some compa-
nies create and issue such reports because it helps
their competitive positions. For example, BP’s
sustainability reports provide the company with
important “proof points” for their advertising
campaigns. Globalization is another driver for
social performance reports. As more and more
companies do business globally, they need to
document their achievements when critics raise
questions about their contributions, especially in
developing countries companies such as Nike and
Wal-Mart have been criticized for their use of
sweatshops abroad, so they have an added incen-
tive to keep track of their social performance and
issue such reports. In a recent report, GE
presented data documenting its performance
with respect to its supplier network as the com-
pany strives to cope with globalization by raising
and meeting standards abroad.
The organization that keeps the most compre-
hensive data on social performance reports is
CorporateRegister.com – CorporateRegister.
com is a free directory of company-issued CSR,
sustainability, and environment reports from
around the world, and the site is continually
updated with new reports and companies. The
tremendous growth in CSR reports can be seen
by data collected by CorporateRegister.com in
the year 2000, 823 reports were issued. In 2006,
2,235 reports were issued. This shows the number
almost tripling in just 6 years. Companies from
the following countries represented the top num-
ber of reports issued: the United Kingdom, the
United States, Japan, Germany, Australia, and
Canada. Up until 2003, most such reports were
categorized as environmental, but since that time,
the two growing categories have been corporate
responsibility and sustainability.
One of the major impediments to the advance-
ment of effective social performance reporting
has been the absence of standardized measures
for social reporting. Standardization is
a challenge that has been undertaken by
a consortium of more than 300 global organiza-
tions called the Global Reporting Initiative
(GRI). The Global Reporting Initiative was
Social Auditing
established in 1997 with the mission of develop-
ing globally applicable guidelines for reporting
on the economic, environmental, and social
performance of corporations, governments, and
nongovernmental organizations (NGOs). It was
spearheaded by Ceres in conjunction with the UN
Environment Program (UNEP). GRI includes the
participation of corporations, NGOs, accoun-
tancy organizations, business associations, and
other worldwide stakeholders.
The GRI’s Sustainability Reporting Guide-
lines were first released in draft form in 1999.
They represented the first global framework
for comprehensive sustainability reporting,
encompassing the “triple bottom line” of eco-
nomic, environmental, and social issues. In
2002, the CRI was established as a permanent,
independent, international body with a multi-
stakeholder governance structure. Now based in
Amsterdam, its core mission is maintenance,
enhancement, and dissemination of the guide-
lines through a process of ongoing consultation
and stakeholder engagement. In 2004, in part due
to the efforts of Ceres, its coalition, and the Ceres
companies, there are more than 600 organizations
who report using the GRI. Through what is
known as the G3 process, new GRI guidelines
were released in 2006. The new GRI guidelines
provide principles and guidance for firms to fol-
low in developing their sustainability reports.
The purpose of the principles is to help compa-
nies stay focused and to maximize value for
internal and external stakeholders.
As firms develop enterprise-level strategies
and corporate public policies, the potential for
social responsibility and sustainability reporting
remains high. Social reporting is best appreciated
not as an isolated, periodic attempt to assess
social performance but rather as an integral part
of the overall strategic management process.
Because the need to improve planning and con-
trol will remain as long as management desires to
evaluate its cooperate social performance, the
need for approaches such as the social audit and
social performance reporting will likely be with
us for some time, too. The net result of continued
use and refinement should be improved corporate
social performance and enhanced credibility of
Social Auditing
business in the eyes of its stakeholders and the
public. In terms of practices, it must be said that
social performance reporting has become more
popular than the more complex task of social
auditing. Regardless, both approaches serve
much the same purpose and help to keep the
organization on track with its social performance
goals.
Social Auditing and Certification
SA8000 is a global social accountability standard
for decent working conditions, developed and
overseen by Social Accountability International
(SAI). It contracts with a global accreditation
agency, Social Accountability Accreditation Ser-
vices (SAAS), that licenses and oversees auditing
organizations to award certification to employers
that comply with SA8000. In May 2009, it was
verified by SAAS accreditation that over one
million workers are employed in SA8000-
certified facilities around the world.
SAAS is an accreditation agency founded to
accredit and monitor organizations as certifiers of
compliance with social standards, including the
Social Accountability 8000 standard for ethical
working conditions. SAAS began work as
a department within Social Accountability Inter-
national (SAI) in 1997 and was formally
established as its own not-for-profit organization
in 2007. There are 19 certification bodies
accredited by SAAS to carry out SA8000 social
audits:
– ABS Quality Evaluations, Inc.
– Algi Group
– Apcer
– BSI
– Bureau Veritas
– CISE (Centro per l’Innovazione e lo Sviluppo
Economico)
– DNV (Det Norske Veritas AS)
– Eurocert S.A.
– HKQAA (Hong Kong Quality Assurance
Agency)
– Intertek (Intertek Testing Services)
– IQNet Ltd
– LRQA (Lloyd’s Register Quality Assurance
Ltd.)
– LSQA S.A.
2185 S
– RINA S.P.A (Registro Italiano Navale Group)
– SGS-SSC
– STR-R LLC
– TUV NORD Group (TUV Asia Pacific)
– TUV Rheinland Group
– TUV SUD Group (TUV Sud South Asia)
SAAS accreditation maintains a public list of
SA8000-certified facilities and statistics. As of
March 31, 2010:
– Certified facilities: 2,151
– Countries represented: 60
– Industries represented: 67
– Number of employees: 1,234,335
The industrial sectors with the most certifica-
tions include apparel and textiles, building
materials, agriculture, construction, chemicals,
cosmetics, cleaning services, and transportation.
The countries with the most certification to
SA8000 include Brazil, India, China, and Italy.
A number of reporting guidelines or standards
have been developed to serve as frameworks for
social accounting, auditing, and reporting
including:
– AccountAbility’s AA1000 standard, based on
John Elkington’s triple bottom line (3BL)
reporting.
– Accounting for Sustainability’s Connected
Reporting Framework.
– The Fair Labor Association conducts audits
based on its Workplace Code of Conduct and
posts audit results on the FLA website.
– The Fair Wear Foundation takes a unique
approach to verifying labor conditions in com-
panies’ supply chains, using interdisciplinary
auditing teams. S
– Global Reporting Initiative’s Sustainability
Reporting Guidelines.
– GoodCorporation’s Standard developed in
association with the Institute of Business
Ethics.
– Earthcheck Certification/Standard.
– Social Accountability International’s SA8000
standard.
– The ISO 14000 environmental management
standard.
– The United Nations Global Compact promotes
companies reporting in the format of
a Communication on Progress (COP).
S 2186
A COP report describes the company’s imple-
mentation of the Compact’s ten universal
principles.
– The United Nations Intergovernmental Work-
ing Group of Experts on International Standards
of Accounting and Reporting (ISAR) provides
voluntary technical guidance on eco-efficiency
indicators, corporate responsibility reporting,
and corporate governance disclosure.
– Verite’s Monitoring Guidelines.
In some nations, legal requirements for social
accounting, auditing, and reporting exist, though
international or national agreement on meaning-
ful measurements of social and environmental
performance is difficult. Many companies now
produce externally audited annual reports that
cover sustainable development and CSR issues
(“triple bottom line reports”), but the reports vary
widely in format, style, and evaluation method-
ology (even within the same industry). Critics
dismiss these reports as lip service, citing
examples such as Enron’s yearly “Corporate
Responsibility Annual Report” and tobacco
corporations’ social reports.
Key Issues
Current accounting, auditing, and reporting
systems fail to value environmental and social
factors in business decision-making. Investors
and companies too often “externalize,” or ignore,
the ecological and human impacts from their
activity. As a result, companies are able to exploit
finite water resources at minimal cost and release
global warming pollution for free. Therefore, it is
important to ensure that capital markets integrate
the full costs of environmental and social factors
in business strategies, risk management, and
public disclosure. Achieving this will ensure
companies are rewarded for strong sustainable
performance. Thus, new accounting and auditing
systems should be developed to achieve the sus-
tainable development:
– Propel all companies to use a carbon
“shadow” price in capital investment deci-
sion-making and to share that information
with investors.
Social Auditing
– Ensure all analysts, rating agencies, and finan-
cial firms are factoring environmental, social,
and governance risks and opportunities in
their research and valuations.
– Integrate sustainability factors, such as water
availability, forest protection, and human
rights, into company and investment deci-
sion-making.
– Embed sustainability factors into the disclo-
sure requirements of key capital market
drivers such as the Securities and Exchange
Commission, New York Stock Exchange, and
Financial Accounting Standards Board.
In the meantime, the higher standards of busi-
ness leadership are needed to ensure there is
widespread adoption of best practices of sustain-
ability and governance and accountability; ensure
boards of directors at all companies have explicit
oversight over climate change and other sustain-
ability risks; ensure all companies are issuing
GRI-based sustainability reports with specific
performance goals and targets for operations,
products/services, and supply chains; and make
sustainability disclosure, oversight, and account-
ability factors for investors.
Future Directions
Managing the public sector in today’s environ-
ment of constant change has become
a demanding challenge for policy makers, service
delivery managers, and civil servants –
a challenge that is especially daunting for those
in developing countries and countries with econ-
omies in transition. The current trends and
challenges to which governments have to respond
and to which there are no boundaries include
long-term fiscal imbalance, national security,
global interdependence, changing economy,
demographics, science and technology, quality
of life and environment, and governance.
Consequently, the challenges facing the audit
profession are also constantly evolving. The
United Nations, together with international finan-
cial institutions and development agencies, has
for the last two decades expressed concern with
the lack of governance and accountability in
Social Auditing
developing countries and has endeavored to find
responses and solutions. Although structures and
mechanisms exist in all countries for ensuring
public accountability, these have in many cases
not been successful in resolving issues of
governance.
Therefore, the ability of the traditional
accountability mechanisms to effect change on
the functioning, performance, and transparency
of governments is increasingly being openly
debated. International efforts are focusing on
issues of governance and accountability, and
interventions dealing with government reform
range from administrative reforms to the redesign
of judicial and audit institutions. In addition, the
donor community is increasingly initiating pro-
jects aimed at building the capacity of civil soci-
ety and citizens at large to demand accountability
from the state. The focus is on strengthening
public accountability through pressure from out-
side of governments, especially through civil
society institutions. Indeed, donors are targeting
for key reform the strengthening of parliaments,
protecting the autonomy of the judiciary, improv-
ing the performance of the public sector,
supporting the development of professional
media, encouraging private investment, and
decentralizing delivery of services. While in this
context, the strengthening of Supreme Audit
Institutions (SAIs) in developing countries has
received some degree of attention by the donor
community, not enough attention has been paid to
these institutions as potential tools for promoting
socioeconomic and pro-poor governance. Few
reform processes of SAIs have zeroed in on how
the audit function could become a tool to
empower citizens in furthering transparency and
accountability for public spending.
The United Nations Department of Economic
and Social Affairs (UNDESA) proposes that
SAIs and the audit community at large improve
their impact by taking into account the growing
voices of what have become known as “alternate
watchdogs,” including civil society organizations
and the media, with special reference to the
implementation of the Millennium Development
Goals (MDGs). The question is whether the audit
function, both external and internal, can be made
2187 S
more open, pro-active, and participatory, moving
the function from being a technocratic and reclu-
sive tool of expenditure control to a more engag-
ing tool for social change and citizen
empowerment.
It is UNDESA’s belief that the way audit is
currently conducted and the institutional frame-
work within which audit activities are conducted
provide opportunities that can make
a meaningful contribution both to the account-
ability aspect of the public expenditure and to
the core of what government initiatives are
expected to achieve – reduce poverty, guarantee
social justice, and empower people. One of
UNDESA’s newest initiatives is to make the
audit function more central to pro-poor gover-
nance, with the results-based audit of MDGs as
a focus area. The objective is to extend the role
of civil society from participation in the design
of pro-poor strategies and service delivery to
include in contributing to the accountability pro-
cesses of the government to ensure full, timely,
and quality implementation government
commitments.
Cross-References
▶ AccountAbility
▶ CSR
▶ Global Reporting Initiative
▶ Triple Bottom Line
References and Readings S
Adams, C. A., & Evans, R. (2004). Accountability, com-
pleteness, credibility and the audit expectations gap.
Journal of Corporate Citizenship, 14, 97–115.
Basalamah, A. S., & Jermias, J. (2005). Social and envi-
ronmental reporting and auditing in Indonesia. Gadjah
Mada International Journal of Business, 7, 109–127.
Bauer, R. A., & Fenn, D. H., Jr. (1973). What is
a corporate social audit? Harvard Business Review,
51, 37–48.
Carroll, A. K. B. (2008). Business and society: Ethics and
stakeholder management (7th ed.). Mason: South-
Western College.
Courville, S. (2003). Social accountability audits: Chal-
lenging or defending democratic governance? Law &
Policy, 25, 269–297.
S 2188
Hay, R. D. (1975). Social auditing: An experimental
approach. Academy of Management Journal, 18,
871–877.
Henriques, A. (2001). Civil society and social auditing.
Business Ethics: A European Review, 10, 40–44.
Hess, D. (2001). Regulating corporate social performance:
A new look at social accounting, auditing, and
reporting. Business Ethics Quarterly, 11, 307–330.
Malcom Mcintosh, J. A. (2001). Perspectives on corpo-
rate citizenship. Sheffield: Greenleaf.
Morimoto, R., Ash, J., & Hope, C. (2005). Corporate
social responsibility audit: From theory to practice.
Journal of Business Ethics, 62, 315–325.
United Nations Department of Economic and Social
Affairs. (2007). Auditing for social change:
A strategy for citizen engagement in public sector
accountability. New York: United Nations.
Social Benefit
▶ Externalities
Social Campaigns
▶ Social Marketing
Social Capital
Fernanda de Paiva Duarte
School of Business, University of Western
Sydney, South Penrith DC, NSW, Australia
Synonyms
Communities of practice; Social networks;
Teams
Definition
The term “social capital” can be traced back to
the work of Lyda Hanifan (1916, 1920) on rural
school community centers, which discusses
notions such as good will, fellowship, sympathy,
Social Benefit
and social intercourse. However, the concept of
social capital became popularized later through
the work of political scientist Robert Putnam
(1993, p. 167) who defines it as “norms of reci-
procity and networks of civic engagement.”
These ▶ networks of engagement and reciprocity
are based on ▶ trust and shared ▶ values, which
facilitate cooperation for mutual benefit. Social
networks create “collective value” and encourage
people to help each other through norms of
reciprocity.
Introduction
The concepts of networks, reciprocity, and trust
are a recurring feature in the work of theorists of
social capital. For example, Bourdieu (1986)
notes that the volume of the social capital pos-
sessed by a person depends on both the size and
quality of the network of connections she or he is
able to effectively mobilize. Therefore, having
a large network enhances one’s social capital.
Bourdieu (1986, p. 249) views the benefits accru-
ing from network membership “as the basis of the
solidarity which makes them possible.”
Networks are also a prominent theme in
Coleman’s (1990) work. From a slightly different
perspective, he links the notion of networking to
the need that people have for information.
Coleman (1990) views the “potential for infor-
mation” as a form of social capital which is the
active principle in the formation of social net-
works and “networking.” He illustrates this
point with the example of a social scientist who
uses everyday interactions with his/her network
of colleagues to remain abreast of research in her/
his field.
The role of reciprocity in social capital is
explained by Bourdieu (1986, p. 250) through
a monetary metaphor. He contends that networks
of relationships are the product of individual or
collective “investment strategies” aimed at
establishing or reproducing social relationships.
These social relationships engender reciprocity,
as they imply “durable obligations subjectively
felt” in view of the “feelings of gratitude, respect,
friendship” that they generate. In other words,
Social Capital
when a person helps their fellow members in
a group, they are contributing to the group’s
collective social capital and thus can expect that
someone in that group will help them when the
opportunity arises.
Bourdieu’s conception of reciprocity overlaps
with that of Coleman (1988, p. 102) who regards
reciprocity as an instrumental practice in a type of
social capital he labels “obligations and expecta-
tions” (1988, p. 102). Coleman (1988, pp. 102–
103) also uses a monetary metaphor (“credit
slip”) to demonstrate how a favor done for some-
one naturally entails the responsibility of recip-
rocation in the future. In his own words:
If A does something for B and trusts B to recipro-
cate in the future, this establishes an expectation in
A and an obligation on the part of B. This obliga-
tion can be conceived as a credit slip held by A for
performance by B.
Similarly, Putnam (1993) notes that in con-
temporary societies, networks of civic engage-
ment such as neighborhood associations, choral
societies, cooperatives, and sports clubs “foster
sturdy norms of generalized reciprocity.” In other
words, a favor is granted with the expectation that
at some point that favor will be returned.
Trust is another essential constituent of social
capital. For Coleman (1988), trust is an instru-
mental and functional element of social relation-
ships. As he puts it, “A group within which there
is extensive trustworthiness and extensive trust is
able to accomplish much more than a comparable
group without its trustworthiness and trust”
(1988, p. 101). To illustrate this point, Coleman
(1988, pp. 98–99) notes the critical role of trust in
the wholesale diamond markets in New York. In
this particular context, family, community, and
even religious affiliation (diamond merchants
were mostly Jewish at the time of his writings)
provided “the insurance that is necessary to facil-
itate the transactions in the market.” Indeed, as
later acknowledged by Putnam (1996), “Trust
lubricates social life.”
Putnam (1993, p. 167) claims that social capi-
tal engenders a range of “benefits that flow from
the trust, reciprocity, information, and cooperation
associated with social networks.” He notes, for
example, that child development is to
2189 S
a considerable extent shaped by social capital.
Within a child’s family, school, and peers, trust
and networks have significant effects on their
opportunities, choices, and educational achieve-
ment (1993, pp. 296–306). He claims that in
urban areas with high levels of social capital,
public spaces are cleaner, people are friendlier,
and the streets are safer. In places where trust
and social networks thrive, individuals, firms,
neighborhoods, and even nations prosper econom-
ically. According to Putnam (1993, p. 331), social
capital can also help mitigate the effects of socio-
economic disadvantage, and even promotes better
health. In his own words, “if you belong to no
groups but decide to join one, you cut your risk
of dying over the next year in half [original italics].
If you smoke and belong to no groups, it’s a toss-
up statistically whether you should stop smoking
or start joining.” More recently, Putnam’s claims
have been reiterated in works on happiness and
well-being such as Haidt and Offer (2006) who
emphasize in particular the benefits of reciprocity.
Haidt (2006) believes that reciprocity broadens
cooperative circles and increases people’s con-
nectedness, thus ensuring group survival. Offer
(2006, pp. 10, 75) laments that in market societies,
reciprocity is “pervasive, but underestimated.” It
“abounds at work,” affecting management pro-
cesses and mobilizing resources for growth.
Key Issues
The concept of social capital has been embraced
by the World Bank (1999) which captures the S
essence of the concept in their statement that
“Social capital is not just the sum of the institu-
tions which underpin a society – it is the glue that
holds them together” (The World Bank 1999).
The World Bank has compiled a set of statistics
to make the case for the social and economic
benefits of social capital. In line with Putnam’s
findings, they state, based on research findings,
that “Teachers are more committed, students
achieve higher test scores, and better use is
made of school facilities in those communities
where parents and citizens take an active interest
in children’s educational well-being.”
S 2190
Two tools have been produced by the World
Bank to measure social capital in developing
countries, namely, the Social Capital Assessment
Tool (SOCAT) and the Social Capital Integrated
Questionnaire (SOCAP IQ). The SOCAT is
a multidimensional instrument designed to
collect social capital data at the household, com-
munity, and organizational levels (World Bank
2010). The SOCAP IQ was designed for the
purpose to generate quantitative data on six
dimensions of social capital: groups and net-
works, trust and solidarity, collective action and
cooperation, information and communication,
social cohesion and inclusion, empowerment
and political action (World Bank 2010). These
tools have been used to assess the role of various
groups and networks in developing nations. They
also help identify potential opportunities for
enhancing people’s participation, to assess
whether individuals are actively involved in
project implementation and to ascertain whether
there is sufficient trust for a given project to
perform effectively.
More recently, the concept of social capital
has been used to understand work-related phe-
nomena. This perspective was pioneered in the
work of Cohen and Prusak (2001, p. 11) who
describe social capital as “part of the fabric of
people’s working life.” Within the context of the
workplace, they define social capital as:
the stock of active connections among people; the
trust, mutual understanding and shared values and
behaviours that bind the members of human net-
works and communities and make cooperative
action possible. (2001, p. 4)
Cohen and Prusak (2001, p. x) view the work-
place as “a social sphere constituted by many
different networks of employees, organized
along both vertical (e.g., a team leader in her
team) and horizontal lines (e.g., a group of
employees who work in the same department).”
Like other social domains, the sphere of work
engenders “the need for connection and coopera-
tion, support and trust, a sense of belonging,
fairness, and recognition.” These theorists
emphasize that in work settings, social capital is
not found in flowcharts or mission statements but
is inherent in the daily life of organizations – it is
Social Capital
“the feel of organizations.” Social capital does
not grow from “bonding” activities such as week-
end team adventures, retreats, and company pic-
nics, but it is mainly created and strengthened
(and sometimes damaged) within the very con-
text of work (Cohen and Prusak 2001, p. 22).
Consistent with the pattern found in previous
works on social capital, Cohen and Prusak (2001,
p. 56) highlight the critical importance of net-
works. They note that “social capital is about
connection. . .and networks are how connections
between people most clearly manifest them-
selves.” For these authors, networks and
communities
are at once the source and the shape of social
capital in organizations, the primary manifestation
of cooperative connections between people. . .
They are a prime source of a sense of membership
and commitments, the places in organizations
where people feel most at home and most respon-
sible for one another. (2001, p. 55)
Membership of networks, Cohen and Prusak
(2001, p. 61) further note, “implies connection:
the trust, understanding, and mutuality that sup-
port collaborative, cohesive action.” In organiza-
tional settings, network membership generates
commitment to the group and “willingness to do
more for a job.” It also encourages reciprocity or
mutual cooperation. Echoing earlier theorists of
social capital, Cohen and Prusak (2001, p. 8) state
that reciprocity arises from “investments in inter-
personal connections” which produce “returns
just as other, more tangible forms of capital do.”
Cohen and Prusak (2001, p. ix) view social
capital as a resource that is good for business
because it can potentially increase productivity.
That is, people are more likely to give their
energy, talent, and loyalty to an organization if
their colleagues are “helpful and honest as
opposed to uncooperative and devious” and if
managers take “a fair and equitable approach”
to their subordinates. Organizational members
work better if they have a chance to get to know
their coworkers rather than having to continually
adjust to changing rosters of team members.
Acknowledging the quintessential importance
of trust in work settings, Cohen and Prusak (2001,
p. 14) comment that “Businesses thrive when
Social Capital
people trust one another.” In organizations, social
capital is not just about people being fond of each
other, or being “nice,” but it is about mutual trust.
Not only is trust “a necessary condition of social
capital,” but it is also “its natural starting point”
(2001, p. 29). Most importantly, as previously
emphasized by Putnam (1993), trust tends to be
self-reinforcing and cumulative. Cohen and
Prusak (2001, p. 29) compare social capital to
a breeder reactor, which “makes more fuel than
it burns.” In other words, social capital “uses trust
to produce conditions that generate trust.” Hence,
from a managerial perspective, trust is good for
business because organizations run more
smoothly when employees know and trust one
another, deals are accomplished faster, and
teams are more productive. People learn more
quickly and perform with greater creativity.
“Strong relationships, most managers will agree,
are the grease of an organization” (Prusak and
Cohen 2001, p. 86).
The following benefits of social capital in
organizations have been identified by Cohen
and Prusak (2001, p. 10):
• Better knowledge sharing, due to established
trust relationships, common frames of refer-
ence, and shared goals
• Lower transaction costs, due to a high level of
trust and a cooperative spirit (both within the
organization and between the organization
and its customers and partners)
• Low turnover rates, reducing severance costs
and hiring and training expenses, avoiding
discontinuities associated with frequent per-
sonnel changes, and maintaining valuable
organizational knowledge
• Greater coherence of action due to organiza-
tional stability and shared understanding
In their work, Cohen and Prusak (2001, p. 22)
also establish a link between social capital and
the notion of communities of practice (Lave and
Wenger), or groups of people who are drawn
together because they share an interest in
a common topic or activity and learn from each
other in the process. This link had been identified
earlier by Nahapiet and Ghoshal (1998, p. 245)
who more specifically established a connection
between social and intellectual capital – defined
2191 S
as the knowledge of “a social collectivity such as
an organization.” In a society that values knowl-
edge and information, intellectual capital is
a critically important resource. They argue that
in organizations, social capital plays a critical
role in the development of intellectual capital
through three dimensions: structural, relational,
and cognitive levels. The structural dimension
refers to the ability of organizational members
to establish connections with each other; the rela-
tional dimension refers to the development of
interpersonal relationships that reinforce original
connections made within the group; and the cog-
nitive dimension refers to “shared representa-
tions, interpretations, and systems of meaning”
(e.g., language, codes) (Nahapiet and Ghoshal
1998, p. 245).
Taking the ideas of Nahapiet and Ghoshal
(1998) to a new level, Lesser and Storck (2001)
argue that development and maintenance of
social capital among members of a community
of practice is “the vehicle through which commu-
nities are able to influence organizational perfor-
mance.” Communities of practice, they contend,
generate social capital through developing con-
nections among practitioners, fostering relation-
ships that create a sense of trust and mutual
obligation, and creating a “common language
and context” that can be shared by its members.
Preece (2003) examines the development of
social capital in virtual communities of practice,
highlighting the benefits of tacit knowledge
(i.e., beliefs, opinions, sensibilities as opposed
to formally expressed knowledge) present in sto-
rytelling, anecdotes, comments, and opinions that S
occur naturally in communities of practice. She
notes that managers and community leaders can
contribute to the development of social capital
online through actions such as understanding
people’s needs; supporting knowledge creation,
exchange, and storage; supporting communica-
tion and socialization online; encouraging empa-
thy by enabling members to recognize each
other’s similarities; and fostering trust “by ensur-
ing that identity is revealed and past behavior is
tracked.”
Despite a wide acceptance of the theoretical
value of social capital, there has been also
S 2192
criticism of the concept, in particular, the way in
which it has been dealt with in the literature.
A common criticism is that scholars of social
capital generally fail to situate the concept prop-
erly within a historical framework.
For example, in explaining the decline of
American civic participation in recent decades,
Skocpol (2003) takes issue with Putnam and
other social capital theorists on the grounds that
they disregard the role of institutional changes in
the United States in shaping civic participation.
Another point of criticism is a tendency to
overidealize social capital. Theorists overlook
the fact that tight networks of relationships entail
a degree of local surveillance which may impact
on what is deemed proper or improper behavior.
In this case “horizons may be narrowed rather
than expanded,” which might not be a positive
development (Infed 2009).
Nevertheless, while debates about specific
aspects of social capital are likely to continue,
it must be acknowledged that the core premise of
the concept is sound: people’s interaction with each
other leads to the development of communities,
which is essential “to knit the social fabric” (Infed
2009) and to encourage cooperative behavior.
Cross-References
▶ Communities of Practice
▶ Community Relations
▶ International Corporate Governance Network
▶ Networks
▶ Territorial Social Responsibility and
Territorial Small and Medium-Sized
Enterprises
References and Readings
Bourdieu, P. (Ed.). (1986). Forms of capital. New York:
Greenwald Press.
Cohen, D., & Prusak, L. (2001). In good company: How
social capital makes organizations work. Boston:
Harvard Business School Press.
Coleman, J. (1988). Social capital in the creation of human
capital. American Journal of Sociology, 94(Suppl.
S95–S120), 95–120.
Social Capital and CSR
Coleman, J. (1990). Foundations of social theory.
London: The Belknap Press of Harvard Press.
Haidt, J. (2006). The happiness hypothesis. Putting
ancient wisdom and philosophy to the test of modern
science. London: Heinemann.
Hanifan, L. J. (1916). The rural school community center.
Annals of the American Academy of Political and
Social Science, 67, 130–138.
Hanifan, L. J. (1920). The community center. Boston:
Silver Burdett.
Infed. (2009). Social capital. Retrieved January 7 2011,
from http://www.infed.org/biblio/social_capital.htm
Lave, J., & Wenger, E. (1991). Situated learning. Legiti-
mate peripheral participation. Cambridge: University
of Cambridge Press.
Lesser, E. L., & Storck, J. (2001). Communities of practice
and organizational performance. IBM Systems Jour-
nal, 40(4). Retrieved January 7 2011, from http://
www.research.ibm.com/journal/sj/404/lesser.html
Nahapiet, J., & Ghoshal, S. (1998). Social capital, intel-
lectual capital and the organizational advantage. Acad-
emy of Management Review of Economic Studies,
23(2), 242–266.
Offer, A. (2006). The challenge of affluence. Self-control
and well-being in the United States and Britain since
1950. Oxford: Oxford University Press.
Preece, J. (2003). Tacit knowledge and social capital:
Supporting sociability in online communities of
practice. Paper presented at the I-KNOW’03, 3rd
International Conference on Knowledge Manage-
ment, Graz.
Prusak, L., & Cohen, D. (2001). How to invest in social
capital. Harvard Business Review, 79(6), 86–93.
Putnam, R. (1993). The prosperous community: Social
Capital and Public Life. The American Prospect,
4(13), 35–42.
Putnam, R. (1996). The strange disappearance of
civic America. The American Prospect, 7(24),
34–48.
Skocpol, T. (2003). Diminished democracy: From mem-
bership to management in American civic life.
Norman: University of Oklahoma Press.
World Bank. (1999). What is social capital? PovertyNet.
Retrieved January 7 2011, from http://www.
worldbank.org/poverty/scapital/whatsc.htm
World Bank. (2010). Measuring dimensions of social
capital. Retrieved January 7 2011, from
http://web.worldbank.org/WBSITE/EXTERNAL/
TOPICS/EXTSOCIALDEVELOPMENT/EXTTSOCIAL
CAPITAL/0,,contentMDK:20305939menuPK:994404
pagePK:148956piPK:216 618theSitePK:401015,00.
html
Social Capital and CSR
▶ Trust and CSR
Social Contract
Social Capital in SMEs
▶ Sustainable Development in SMEs
Social Causes, Social Change
Campaigns
▶ Corporate Social Marketing
Social Cohesion
▶ Territorial Social Responsibility and Territo-
rial Small and Medium-Sized Enterprises
Social Collaboration
▶ Community Relations
Social Contract
Cécile Rozuel
Institute for Socio-Management, Stirling
Management School, University of Stirling,
Stirling, UK
Synonyms
Contractarian ethics; Contractarianism; Contrac-
tual ethics; Contractualism
Definition
The Social Contract tradition contends that soci-
ety is established through a collective, mutually
binding agreement or contract. Moral expecta-
tions and duties are shaped by the contract and
its implications. Ethics is, therefore, primarily
2193 S
socially constructed and regulated. In a pre-
political state, referred to as the state of nature,
rational individuals accept to enter a reciprocal
agreement because it is mutually beneficial. The
contract is hypothetical in that its existence can-
not be validated historically; however its moral
legitimacy derives from the assumption that
rational, self-interested individuals would likely
forge this agreement because they have more
to gain from joining in a mutually beneficial
association than from staying out of it. In the
Hobbesian version of the Social Contract,
morality, rooted in social reality, is a pragmatic,
self-interested response to sustain survival. Other
Social Contract theorists, such as Locke, Rous-
seau, and Rawls, do not adopt such
a self-interested and pessimistic stance. Kantian
contractarianism (or contractualism), for
instance, values people as ends-in-themselves
and assumes preexisting moral duties embedded
in the human ability to reason.
Introduction
Hobbes: A Reciprocal Agreement
The Social Contract tradition really took off with
the works of early seventeenth century philoso-
pher and political theorist Thomas Hobbes
(1588–1679), although Hobbes himself might
have borrowed the concept from ancient Greeks
(see Boucher and Kelly 1994). Reportedly born
on the day the Spanish Armada sailed for
England, he witnessed firsthand the political tur-
moil of the English Civil Wars during which S
some parliamentarians contested the rule of the
supreme monarch claiming authority by Divine
Right. These events led Hobbes to reflect on the
foundations and dynamics of a political and
social state. Yet, following the publication of
a polemical essay on absolute sovereignty,
Hobbes fled to France in 1640, fearing for his
life. During this self-imposed (and possibly
unnecessary) 10-year exile, Hobbes wrote his
celebrated opus on politics, Leviathan,
published the year he returned to England in
1651. The title refers to a mythological sea mon-
ster which metaphorically represents the
S 2194
powerful commonwealth state, whose strength
resides in individuals joining in a unifying
contract.
Leviathan (Hobbes 1651/1985) echoes the
mechanistic view popular in Hobbes’s days.
Hobbes metaphorically pictures the nation-state
as the body, its citizens as the cells grouped to
form various organs, each operating almost inde-
pendently from the others but all participating in
the sustenance and well functioning of the body.
Hobbes extends his biological metaphor to soci-
ety and political organization. To determine what
political system best guarantees a relatively
peaceful, if not prosperous, society, Hobbes ima-
gines an origin story. He describes a “state of
nature,” a pre-political world with no established
moral boundaries. Hobbes soon concludes that
such state would lead to a “dreadful life” because
human nature is primarily self-interested instead
of altruistic, and the natural environment is harsh,
ill-conducive to survival. Accordingly, life in
a state of nature is dreadful, fearful, and
unproductive. Indeed, with little trust amongst
self-interested individuals and no enduring
authority, hardly any enterprise can develop and
prosper. Individuals are roughly equal in
strength, and those who lack strength may com-
pensate in wit. As a result, no man can gain power
over others for long, and life is nothing but the
war of “every man against every man” (Hobbes
1651/1985).
Hobbes posits that out of self-interest, individ-
uals will soon see advantage in establishing
a minimal agreement to create a more peaceful
and agreeable life. Although such an agreement
would limit absolute freedom, life thus
constrained would be better than in the state of
nature. Human beings are driven by passions and
highly motivated to survive; thus most would
agree to two basic conditions: that people do not
harm one another; and that people keep their
agreements. The contract’s significance and
moral strength lies in its reciprocal dimension: it
is in each person’s interest to obey the rules of the
contract if other people do the same. The sacrifice
of one’s absolute liberty is counterbalanced by
a relative peace, a guarantee of personal safety
upon the condition that one equally refrains from
Social Contract
harming others. Through this contract, Hobbes
establishes a skeletal social framework as well
as a socially and legally grounded morality.
Social rules to not harm one another and to keep
one’s agreements, and the moral co-requisites of
trust and trustworthiness, are adopted for essen-
tially pragmatic reasons. Hobbes does not show
much faith in the human ability to rise above
a suspicious, thoroughly egoistic nature, there-
fore rendering difficult the existence of an
enlightened, cooperative society without the gov-
ernance of an absolute sovereign. The sovereign
(“the head”) must be separated from the people
(“the body”) so as to guarantee smooth running
and ruling.
Hobbes’s thought experiment shaped the
debate not only around the nature and purpose
of the state, but also about the nature and origin
of morality. He directly inspired many later
contributors to political theories, including his
late contemporary John Locke, Jean-Jacques
Rousseau, and more recently John Rawls.
Locke and Rousseau: Accounts of Morality in
the Natural State
John Locke (1632–1704), best known for his
liberal views and belief in natural rights, has
influenced theories of capitalism, liberalism, and
libertarianism with his minimal social contract.
Unlike Hobbes, Locke believes that human
beings are born with natural and negative rights
to life, health, liberty, and property, discoverable
through observation and logical elucidation of
natural laws. In that respect, Locke demonstrates
faith in reason and deduction to uncover ethical
principles. Inalienable natural rights provide suf-
ficient grounds for a moral framework, obviating
the need to establish a mutually binding contract
a priori. The necessity to set up a governance
structure, at the cost of some of our natural free-
dom, only emerges because inevitably some will
not respect the moral law. In particular, but not
only, conflicts of ownership will require the inter-
vention of a supervisory authority. The Lockean
social contract therefore only purports to regulate
preexisting natural moral rights and negative
obligations. Rational individuals agree to place
themselves under a government’s authority in
Social Contract
order to protect their natural rights and secure
peaceful living. Interestingly, the Lockean social
contract legitimizes private property as
a foundational right.
A century later, at the heart of the French
Enlightenment period, Jean-Jacques Rousseau
(1712–1778) reinterpreted Hobbes’s state of
nature to provide a vaguely historical reading of
the social contract. Rousseau laid the foundations
of his social and political philosophy in the
Discourse on the Origin and Foundations of
Inequality Among Men, published in 1755, and
expanded it in a more structured and rigorous
manner in the Social Contract published in
1762. Rousseau offers yet another interpretation
of life in the state of nature. For Rousseau, people
in a truly pre-political and pre-moral state would
possess natural qualities of self-interest and pity.
Social groups do not exist, individuals live rela-
tively isolated; hence conflicts are rare. The
“noble savages” in this arrangement are amoral,
having not yet developed a sense of viciousness
and virtuousness. While life would be rather
peaceful in Rousseau’s state of nature, in contrast
with Hobbes’s constant warfare, human beings
possess reason, and the development of rational
abilities through time enables individuals to
shape the next stage of human evolution, the
civilized society.
The advent of civilization marks, for
Rousseau, the downfall of humanity’s natural
goodness. As society develops and relationships
form, people start acquiring property which even-
tually leads to conflicts and warfare. To protect
peace and social unity, people enter into
a contract. However, argues Rousseau, this first
contract fooled the majority of contractees by
giving power and protection to those already
possessing the most power and wealth. In effect,
Rousseau suggests that the origin of inequalities
lie in a fallacious contract purported to protect all,
in reality protecting a few. In the Social Contract,
Rousseau proposes a solution to this sorry state of
affairs. He aims to establish a new social contract,
truly democratic and conceived for the common
good, through which the “general will” exerts
power over individual wills. The sovereign’s
role is to ensure equality of rights amongst free
2195 S
citizens, and to rule over conflicting individual
desires for the general good. Rousseau thus cre-
ates a significantly egalitarian society, not unlike
that which John Rawls endorses.
Rawls: Establishing Principles of Justice
In his influential book A Theory of Justice
published in 1971 (Rawls 1971/1999), John
Rawls, as many before him, draws upon the
Hobbesian thought experiment only to reach his
own, rather different conclusions. Rawls aims to
identify those principles that would lead to a just
society. He proposes that the conditions under
which principles are chosen ought themselves to
be just, so that the principles can rightly claim to
be principles of justice. Rawls borrows from
Hobbes to imagine an original position in which
individuals are deprived of governing social and
moral norms. He does not imagine what life
would be like in this original position but he
makes the following assumptions regarding
human nature: individuals are self-interested,
rational, and conservative. Their task is to lay
the principles for a society they would all agree
to live in, irrelevant of their position in that soci-
ety. To ensure fairness of the deliberation pro-
cess, Rawls adds a veil of ignorance. Under a veil
of ignorance, individuals in the original position
cannot predict what their future position might be
for they lack knowledge of personal characteris-
tics (e.g., talents, abilities, physical qualities, and
flaws, even the knowledge of one’s gender),
which might influence how they and their depen-
dents would likely fare in society. By removing
the possibility of bias, Rawls creates conditions S
for establishing a fair society where even the
most deprived and most disadvantaged can have
access to primary social goods: wealth and
income, and more importantly basic human
rights, liberty, opportunity, status, and self-
respect. All are essential for a truly human life,
therefore all individuals under a veil of ignorance
would choose a fair contract over other
alternatives.
The subsequent agreement, established
through consensus, consists of two fundamen-
tal principles which then shape a just society.
The first principle (Principle of Liberty) states
S 2196
that people are entitled to the most extensive
total system of equal basic liberties provided all
others are assured of a similar system of liberty.
The liberties Rawls promotes are basic demo-
cratic liberties such as the freedom of speech
and political participation. The second princi-
ple (Principle of Difference) proposes that
a just distribution of wealth be made so that
the least advantaged individuals in society are
better off with respect to primary social goods
than under any other system. Rawls does not
aim for a strictly egalitarian society (at least not
in the way Rousseau might). However, he
asserts that inequalities are legitimate only if
they actually benefit the least advantaged class
in society. Moral principles in the Rawlsian
view emerge from both the context and content
of the social contract established by the people
in the original position. They imply a Kantian
prerequisite that people ought to be considered
as ends-in-themselves. People possess a natural
equality of rights as rational, dignified human
beings.
Ethical Implications of Contractarian Views
It is therefore possible to identify two loosely
defined views of ethics in a Social Contract
tradition. On the one hand, Hobbes construes
morality as entirely socially constructed. With-
out a social contract, there can be no society and
no moral obligations. On the other hand, Locke,
Rousseau, and Rawls envision morality as
partly socially constructed and partly ingrained
in human nature. However, their arguments dif-
fer significantly. For Rousseau, the individual’s
development of reason is the trigger for moral
knowledge. Initially “amorally good,” individ-
uals acquire the potential to be virtuously good
and viciously bad. Rawls affirms an inherent
dignity of human nature: whilst people do not
have natural rights, there exists an implicit duty
to treat others as one would like to be treated,
a duty which is rationally consistent with our
own self-interest. Locke posits natural inviola-
ble rights to life, health, liberty, and property
attached to human nature. No contract can jeop-
ardize an individual’s entitlement to these
rights. Rawls requires an interventionist
Social Contract
governance body in contrast to Locke’s mini-
malist, night-watchman state.
Although primarily designed as a political the-
ory, the idea of a social contract provides
a fruitful ethical framework through which one
can analyze the social responsibilities of busi-
ness. It usefully calls into question relativistic
arguments in favor of a more “flexible” approach
to the social responsibility of businesses. Some in
this camp argue that ethical standards are relative
because they are socially constructed; therefore
business’ social responsibilities should be
adjusted “pragmatically” to conform to relative
ethical standards, since no absolute scheme of
moral duties can be approved. Such reasoning
demonstrates two major flaws. Firstly, not all
contractarian views accept that ethics is primarily
socially constructed. Therefore, Locke’s natural
rights, often used to justify the capitalist doctrine
of private property, actually delineate in a natural
manner what one can and cannot do. Capital
accumulation is not void of moral constraints.
Equally, Rawls also assumes that people ought
to be treated fairly, justly, on account of their
rational human nature. Secondly, even theories
that exclusively ground morality in social evolu-
tion pose basic limits that constitute powerful
ethical boundaries. Hobbes’s two constitutive
principles of the social contract state that people
should not harm one another. Applied to organi-
zational life, this means, for example, that
employers should not harm employees,
employees should not harm other employees or
their employer. Business managers should not
harm their competitors, their customers, their
suppliers, their shareholders – and so the list
goes on, in a systematically reciprocal manner.
The scope of the Hobbesian principle can be
interpreted as more or less encompassing, from
the obvious physical harm to indirect forms of
moral suffering caused by an unsafe or harassing
work environment.
Social Contract and CSR: Modern
Contributions
The influence of the social contract theory is
equally noticeable in two approaches to CSR:
Keith Davis and Robert Blomstrom’s Iron Law
Social Contract
of Responsibility (Davis 1975), and Thomas
Donaldson and Thomas Dunfee’s Integrative
Social Contracts Theory (Donaldson and Dunfee
1994). Davis and Blomstrom’s Iron Law of
Responsibility suggests the existence of an
implicit contract between society and business
whereby society grants business a license to
operate under certain terms and conditions. If
business fails to fulfill its responsibilities accord-
ingly, society will remove its license to operate.
This view clearly assumes that business and
business organizations are social constructions,
and that society oversees the economic game.
License to Operate
The scope of the license to operate derives from
a contractual reading of socioeconomic
exchanges. Companies ultimately need the cus-
tom of their clients in order to exist and operate;
reciprocally, when customers transact with
a company they implicitly grant that company
a license to operate. Both public and private cor-
porations possess a license to operate, and it is
assumed that the stakeholders or the public in
general dictate, or at least influence, the moral
legitimacy of this license. In the case of public
corporations, the sense of public accountability is
more obvious because activities are publicly
funded or primarily address public interest. Citi-
zens, as taxpayers, customers and stakeholders,
have an obvious vested interest in the way public
corporations are managed. The case of private
corporations is more opaque only if one adopts
a narrow view of social responsibility. Indeed, it
is generally agreed nowadays that corporations
ought to consider their stakeholders’ interests as
well as the shareholders’. Therefore, private
corporations also depend on the acceptance of
their activities (and of the way they perform
them) by the larger public. This is particularly
true for private corporations providing public
services such as utilities or “public” transports.
The rationale goes that society has entrusted
these private agents with public resources, so
that society has a moral right to impose con-
straints and rules over the conduct of private
business agents, not only because it is primarily
affected by the outcome (the provision of the
2197 S
service or production of goods) but also because
without the basic provision of these goods, soci-
ety disintegrates and so does business. Davis
(1975) thus argues that businesses ought to
consider both their interests and society’s inter-
ests, for this is part of the underlying contractual
agreement between both parties.
The question remains as to who in particular
should monitor corporate behavior with respect
to the license to operate, especially as the license
is generally implicit rather than explicitly
published. Society often turns to
nongovernmental organizations (NGOs) to act
as moral safeguard. Long-established NGOs
(e.g., Amnesty International, UNICEF, the Red
Cross) have acquired throughout the years
a social visibility and a moral legitimacy which
make them extremely influential with regard to
the content of the license. Their staff possess an
expertise in social issues that enable them to
assess situations carefully and strategically and
to identify society’s best interests. Governments
often consult with NGOs when they intend to
revise regulations within a given industry to
protect workers, local communities, or the envi-
ronment. The greater a NGO’s perceived integ-
rity, the greater its moral legitimacy and the
greater its public trustworthiness. Society then
judges it apt to represent and defend its interests
against a short-term profit-making agenda.
Integrative Social Contracts Theory
Another modern development directly linked
with the Social Contract tradition is the Integra-
tive Social Contracts Theory (ISCT) proposed by S
Donaldson and Dunfee. These authors first devel-
oped their theory in the early 1990s and later
refined and expanded it in their book Ties That
Bind: A Social Contracts Approach to Business
Ethics published in 1999. Donaldson and Dunfee
(1994) loosely follow Rawls but focus on delin-
eating the best principles to govern economic
morality. They intend to provide a normative
yet practical theory to guide business actors
both generally and in specific contexts. They
thus propose a two-tiered theory: a “macrosocial
contract” consists of “hypernorms” that define
general moral rules actors can agree on to
S 2198
regulate human affairs. Within the scope of the
macrosocial contract, communities can then
develop their own specific “microsocial con-
tracts” which account, for example, for cultural
differences or industry-specific traditions. These
microsocial contracts reflect both existing legal
regulations and moral customs at a local,
national, or international level. The combination
of the macrosocial contract and the multiple
microsocial contracts forms the ISCT.
The macrosocial contract essentially resem-
bles the traditional social contract in so far as it
delineates what society considers acceptable or
not. Hypernorms are generally, but not only, neg-
ative (e.g., “Do not cheat,” “Do not harm”) and
bound our “moral free space” for the sake of
social interaction. Although useful in cases of
extreme behavior, Donaldson and Dunfee
(1994) nonetheless reckon that hypernorms gen-
erally fail to provide guidance for more nuanced,
context-specific moral conflicts. Yet these are the
situations typically encountered by business
actors. The macrosocial contract therefore should
allow small groups to gather and define their own
moral norms, relevant to their context, provided
these do not contradict the hypernorms of the
macrosocial contract. Hypernorms are essentially
there to assess and assert the validity of the
local norms. Besides, these local norms only
acquire moral legitimacy if they can claim to be
authentic, that is freely accepted by the commu-
nity, in accord with the law and moral custom.
Donaldson and Dunfee (1994, p. 270–271)
summarize the four principles of the macrosocial
contract as follow:
1. Local economic communities may specify
ethical norms for their members through
microsocial contracts.
2. Norm-specifying microsocial contracts must
be grounded in informed consent buttressed
by a right of exit.
3. In order to be obligatory, a microsocial contract
norm must be compatible with hypernorms.
4. In case of conflicts among norms satisfying
Principles 1–3, priority must be established
through the application of rules consistent
with the spirit and letter of the macrosocial
contract.
Social Contract
The advantages of the ISCT approach lie in the
freedom it grants individual communities to form
their own moral norms and codes. Cultural or
industry-specific differences are respected pro-
vided they do not conflict with hypernorms and
provided they do not negatively impact on the
respective freedom of other individual communi-
ties. For example, Donaldson and Dunfee (1994)
discuss how the ISCT can assist in the grey area
of gift-giving and bribery. Some cultures per-
ceive gift-giving as a natural part of economic
transactions, whereas other cultures would assess
the same behavior as bribery and condemn it as
illegal. According to the ISCT, these two cultures
could coexist as long as the gift-giving norm
respect the boundaries set by the macrosocial
contract (i.e., it is not abusive nor breaching
human rights) and provided it does not affect
the significance of the legal condemnation of
bribery in the other culture. That said, it is likely
that on account of accepted relevant hypernorms
such as “necessary social efficiency,” bribery
would be unjustifiable. Even if a majority of
people within the local community accepts brib-
ery (beyond gift-giving) as normal, the obvious
distortion of the democratic process in the busi-
ness transaction renders the behavior morally
unacceptable. Thus, a relevant hypernorm can
override a seemingly justified local norm, limit-
ing to some extent the risk of excessive cultural
relativism in ethical practice.
In the business field, it can be inferred that the
value of honesty may have different practical
implications for accountants as opposed to
marketers. As a consequence, accountants and
marketers may obey different codes of conduct
specifically suited to their trade. Yet, these codes
(microsocial contracts) are also subject to the test
of hypernorms. Just because a conduct is widely
accepted in an industry does not mean it is mor-
ally justified. All ought to respect human rights
and the inherent dignity of the person in their
doings (the essentials of the macrosocial con-
tract) even though actual behaviors attached to
honesty may differ depending on the industry.
The content and implications of the ISCT have
been much debated (see Dunfee 2006). Questions
have particularly been raised about the nature,
Social Control
content, and origin of the hypernorms. Donaldson
and Dunfee insist there is no need to provide
a constructed list of hypernorms for this would
undermine the value and global scope of the
ISCT as a moral decision-making guidance
device. They only suggest that hypernorms can
be identified through their universal recognition,
their endorsement by legitimate organizations or
governmental bodies, their resonance with main-
stream philosophical or religious precepts, or
their presence in the majority of the world’s
legal texts. Although hypernorms are not
restricted to human rights, the Universal Decla-
ration of Human Rights adopted by the United
Nations in 1948 represent a promising starting
point toward identifying a few essential
hypernorms.
Key Issues
The appeal of the Social Contract view is also its
drawback: morality, firmly entangled with social
history, tends to be interpreted in legal and polit-
ical terms. Yet, it is questionable whether moral-
ity can and should be reduced to a mere contract
or sociopolitical issue. It can be challenging to
apply Social Contract theories to real-life ethical
dilemma in business; this is because the theories
are not designed to resolve specific practical
issues. Rather, they focus on the overall structure
and institutions within which such issues arise.
Future Directions
In spite of these shortcomings, Social Contract
theories are useful at several levels: they shape
reflections on the nature and origin of morality
and society; they provide original, practical
insights into the dynamics of social relationships,
including business-stakeholders relationships;
and more importantly, they offer a critical stand-
point from which to assess existing moral, social,
and political structures and institutions. By think-
ing about how we came to create the socioeco-
nomic system in which we currently live, we may
better see how to rectify its and our wrongs.
2199 S
Acknowledgments The author wishes to thank Dr. Ann
Kerwin for her insightful comments on a draft version.
Cross-References
▶ Ethical Theories
▶ License to Operate
▶ Social License
References and Readings
Boucher, D., & Kelly, P. (Eds.). (1994). The social con-
tract from Hobbes to Rawls. London: Routledge.
Davis, K. (1975). Five propositions for social responsibil-
ity. Business Horizons, 18(3), 19–24.
Delaney, J. J. (2010). Jean-Jacques Rousseau. In The
internet encyclopedia of philosophy. Retrieved 7 July
2010 from http://www.iep.utm.edu/rousseau
Donaldson, T., & Dunfee, T. W. (1994). Toward a unified
conception of business ethics: Integrative social con-
tracts theory. The Academy of Management Review,
19(2), 252–284.
Dunfee, T. W. (2006). A critical perspective of integrative
social contracts theory: Recurring criticisms and next
generation research topics. Journal of Business Ethics,
68, 303–328.
Hobbes, T. (1651/1985). Leviathan. London: Penguin
Books.
Locke, J. (1690/1988). In P. Laslett (Ed.), Two treatises on
government. Cambridge: Cambridge University Press.
Rawls, J. (1971/1999). A theory of justice. Oxford: Oxford
University Press.
Rousseau, J.-J. (1997). In V. Gourevitch (Ed.), The
discourses and other early political writings.
Cambridge: Cambridge University Press.
Williams, G. (2009). Hobbes: Moral and political philos-
ophy. In The internet encyclopedia of philosophy.
Retrieved 7 July 2010 from http://www.iep.utm.edu/
hobmoral S
Social Contract Arrangement
▶ Ethical Egoism & CSR
Social Control
▶ Social Auditing
S 2200
Social Convoy
John Richard Ennals
Kingston University, Kingston Upon Thames,
Surrey, UK
Definition
The phrase “social convoy” is German in origin,
recent and localized, but expressive. Social
Convoy involves maintaining the employability
of former employees through periods of
economic change. It places obligations on
employers. It could be seen as paternalist and in
conflict with the short-term working of market
forces. It presents an alternative which is worthy
of consideration.
Definition
Social convoy is a distinctively German concept,
which has developed and described in the context
of European Employment and Social Policy.
Accounts of corporate social responsibility in
the EU start with employers and their responsi-
bilities to employees. This approach also has
roots in the study of social networks and their
implications for older people, including older
workers.
While occupational transitions increase,
employees experience insecurity with regard to
their individual employment situations, much
more than in the past. The formal guarantee of
a job for life no longer exists. It is argued that
society will have to respond to these changes, and
research has to redirect its focus.
The new challenge is to adapt to the changing
labor market and maintain employability. The
responsibility for the establishment of this new
concept or characteristic cannot only be placed
on the individual employees; nor should the
consequences of company restructuring merely
be borne by society in general. The companies
themselves, which dismiss employees or ask for
greater flexibility, should be considered
Social Convoy
responsible to a greater extent than in the past.
Social convoy regards employers as having
enduring responsibilities for their former work-
forces, after restructuring and downsizing. It is
their responsibility to maintain employability.
At the same time, individuals should cease to
be merely receivers of help and benefits, but
should become active partners in the process of
reorientation. The normalization of occupational
transitions formed the start for the scientific eval-
uation of the European research project “Social
Convoy and Sustainable Employability: Innova-
tive Strategies for Outplacement/Replacement
Counselling” (SOCOSE) coordinated by Thomas
Kieselbach at the University of Bremen. The
results of this project were based on interdisci-
plinary research. In five countries (Belgium,
Germany, Italy, Spain, and The Netherlands),
psychologists and social scientists analyzed the
social convoy, in the course of dismissal until
successful reintegration into the labor market.
Two associated partners further contributed
from the fields of labor law and business ethics.
The main outcome of the project is a concept
which can be used for outlining outplacement/
replacement intervention strategies for
employees affected by job insecurity within
a wide variety of different settings and in differ-
ent countries. These include globalization, enter-
prise restructuring, occupational transition,
employability, and social convoy.
Introduction
In Germany, there has traditionally been
a distinctive emphasis on the importance of
skilled work, with particular reference to
manufacturing industry. Companies have
retained responsibility for workplace aspects of
training, as part of the dual system of vocational
qualifications.
Social convoy is linked to German approaches
to skill, apprenticeship, and vocational training.
Companies are actively engaged. Senior man-
agers have often themselves started with techni-
cal qualifications, acquiring education in
business and management later. Based on the
Social Convoy
assumption that future economic recovery and
development will depend on the availability and
deployment of appropriate skilled labor, it is
argued that employers have a responsibility to
maintain the employability of former employees.
Social convoy combines and extends respon-
sibilities arising from German industrial culture
and European employment and social policy.
Decisions may be made to close factories for
reasons based on short-term economic problems.
This has been a particular issue in the automobile
industry, which has faced global competition. In
many cases, single factories have dominated
employment and economic activity for whole
communities. The culture has been based on
large employers, rather than SMEs and networks,
but large enterprises can provide leadership and
focus, as with RESON, a network of companies
and support organizations in the automobile
industry in Saxony, tackling a set of environmen-
tal projects.
The reunification of Germany could be
regarded as social convoy on the grand scale.
East Germans had formerly been part of the
same country. Their economy had collapsed, for
reasons beyond the control of individuals and
their employers. It was regarded by Germans as
a moral obligation to bring East Germans back
into the new Germany, equipped to operate
sustainable businesses. This was a lengthy and
expensive process.
Social convoy derives from a history of large
enterprises, engaged largely in manufacturing.
For economies with a large proportion of
manufacturing employment, decisions by major
employers have major significance for whole
communities, whose future survival and viability
may depend on a single factory.
Impacts go far beyond large enterprises,
affecting small- and medium-sized enterprises.
Factories are linked to supply chains, with com-
plex networks and social relationships. Closure
can be seen as profoundly antisocial and
irresponsible.
There have often been expectations of stable
long-term employment, which have enabled
workers to stay based in the same towns, with
children expecting to follow their parents into the
2201 S
same patterns of employment. Such expectations
are now being dashed. The result is uncertainty
and instability.
Economic cycles have meant that we have
recently become accustomed to market fluctua-
tions, with impacts on employment. There is
a role for employers in cushioning employees
from the worst effect of downturns. It has been
assumed that although there may be periods when
factories are mothballed, or change to part-time
working and reduced production, a return to
full production and full employment can be
anticipated.
With globalization, company ownership can
change, and expectations of employees and
employers may not be aligned. Globalization
has increased competitive pressures so that both
cost and quality are under scrutiny. It is not inev-
itable that overseas challenges will be defeated.
We consider some cases from around the world.
Workers at the Cadbury factory in Keynsham,
near Bristol, have had prolonged uncertainty.
When Kraft completed the purchase of Cadbury,
they promised to keep the factory open. They
have since announced that Cadbury had moved
key equipment to a new factory in Eastern
Europe, and that the Keynsham factory would
close. A social convoy approach would mean
investing in maintaining the employability of
the workforce. No such commitment has been
given.
Tata (from India) bought Corus, including the
former British Steel. Recession and the decline in
demand have led to the mothballing of the Redcar
plant, with large-scale redundancies. This would S
be a case for the application of social convoy and
would probably involve major government
subsidy.
In Norway, the town of Raufoss was affected
by the closure of the ammunition company at the
end of the Cold War. There was a concerted pro-
gram, with government schemes and engagement
by education and training organizations, as well
as regional government. This enabled radical
restructuring, and retraining, so that there could
be conversion to sustainable civil production.
In the UK, at the end of the Cold War, the
British Aerospace factory in Kingston faced
S 2202
closure, after decades of making military aircraft.
Despite exploration of plans for civil production,
or for hybrid use of the site, all buildings were
demolished, making way for luxury housing.
This also meant the end of apprentice training
activity which had prepared engineers for the
region. Some workers transferred to other facto-
ries. Many were made redundant.
Key Issues
Social convoy represents a voluntarist and dis-
tinctively German contribution to a complex
international problem. Long-term German
employees of major manufacturing companies
may have come to expect an ongoing relationship
with employers. This might not mean a job for
life, but there has been an expectation of contin-
ued contacts through periods of unemployment,
during low phases of the economic cycle.
Is there a case for protectionism? How is com-
petition to be addressed? Is it realistic to have
protection locally, while claiming to work in
a competitive market? How can globalization be
resisted? Can it be used as a stimulus for local
innovation? Can individual regions or countries
stand out against international trends? In each
case, the operation of market forces is being
restricted.
In recent years, it has been argued that protec-
tion could be extended through legislation. To
what extent can legislation protect employment?
Is it rather a matter of developing good practice
cases, and enabling processes of learning? Is it
socially responsible to pretend that jobs can be
protected? How can there be shared understand-
ing of the practical realities of economic change?
Are expectations different in successive
generations?
Are European directives on information and
consultation sufficiently strong? Have they been
observed during the recent financial crisis? Are
they robust enough to influence management
decisions? What are the practical mechanisms
for enforcement? What are the political dangers
of seeking more consistent enforcement? If the
same European directives are enforced
Social Convoy
differently in the member countries, what is the
impact on the rights of workers, and thus on
corporate social responsibility?
What is the role of governments, at different
levels? In general, the greater the role of govern-
ments, the smaller should be the reliance on vol-
untary initiatives. Is it easier for governments to
take a minimalist approach, leaving a major role
to be played by corporate social responsibility?
Does that involve making simplistic assumptions
regarding the good nature of employers?
To what extent do employers take responsibil-
ity for training of their employees? What role is
played by government? Histories and traditions
vary. In the UK, for example, there had been
a system of industrial training boards, financed
by a levy on companies, until the system was
abolished by Margaret Thatcher, removing the
traditional system of apprenticeships. Instead,
a national system of vocational qualifications
was introduced. Employers have felt free to crit-
icize standards, rather than increasing their
involvement.
What are the implications for employers and
trade unions? To what extent do they collaborate
internationally? We are accustomed to employers
collaborating internationally. How do we respond
when trade unions follow that example? The key
distinction is between adversarial industrial rela-
tions (“boxing”) and a partnership approach
(“dancing”).
In each case, different gaps are left to be filled
by companies, for reasons of commercial profit
and social responsibility. Thus, definitions of
what constitutes corporate social responsibility
vary greatly, and will continue to do so.
Future Directions
Can social convoy approaches be sustained
through long-term economic difficulties? How
can this be possible? Does it involve market dis-
tortions? Are other employers prepared to share
the burden?
Is social convoy culturally situated? Does it
assume a framework of social partnership and
social dialogue, as in the European Union?
Social Dialogue
What are other examples? In Sweden, the trade
unions have a leading role in the handling of
benefits for their members, thus extending the
membership relationship beyond redundancy
or retirement. Clearly, arrangements change
over time. In Sweden, the employers have
become less inclined to collaborate with trade
unions, relegating the “Swedish Model” to the
museum.
Could there be international legislation to
cover such approaches? How could it be
enforced, beyond expressions of good intentions
and examples of good practice? What are the
problems with leaving responsibility with indi-
vidual company initiatives?
Can social convoy be regarded as setting
a direction for new initiatives with older workers,
“seniors,” whose status can change rapidly as
they move in and out of the workforce? Can we
envisage a form of social contract to cover rela-
tions between the generations?
Does such an approach offer possible future
directions for developing countries? It is tempt-
ing to try to secure the commitment of employers
without having to go through decades of prepa-
ration of the economic, social, and legal
environment.
Cross-References
▶ Collaborative Advantage
▶ Social Dialogue
▶ Social Partnership
▶ Soft Law
References and Readings
Antonucci, T. C., & Akiyama, H. (1987). Social networks
in adult life and a preliminary examination of
the convoy model. Journal of Gerontology, 42(5),
519–527.
Antonucci, T. C., Smith, J., & Fiori, K. L. (2006). Social
network types among older adults:
multidimensional approach. Journals of Gerontology
B, 62(6), 322–330.
Crosnoe, R., & Elder, J. (2002). Successful adaptation in
the later years: A life course approach to aging. Social
Psychology Quarterly, 65(4), 309–328.
2203 S
Ennals, R. (2001). The public employment service
and transitional labour markets. In Work life 2000
yearbook 3. London: Springer.
Ennals, R., & Gustavsen, B. (1999). Work organisation
and Europe as a development coalition. Amsterdam:
Benjamins.
Gustavsen, B., Nyhan, B., & Ennals, R. (Eds.). (2007).
Learning together for local innovation: Promoting
learning regions. Luxembourg: Cedefop.
Kieselbach, T. (2004). Social convoy in enterprise
restructuring: Concepts, instruments and views of
social actors in Europe. Bremen: University of Bremen.
Kieselbach, T., et al. (2004). Social convoy in occupa-
tional transitions: Recommendations for a European
framework in the context of enterprise restructuring.
Bremen: University of Bremen.
Lang, F. R., & Carstensen, L. L. (1994). Close emotional
relationships in late life: Further support for proactive
aging in the social domain. Psychology and Aging,
9(2), 315–324.
Social Cooperation
▶ Community Relations
Social Cost
▶ Externalities
Social Dialogue
John Richard Ennals S
Kingston University, Kingston Upon Thames
Kingston, Surrey, UK
Synonyms
Consensus; Conversations; Tripartite arrangements
A
Definition
Social dialogue is an integral part of European
Employment and Social Policy. It requires
S 2204
representatives of employers and employees to be
consulted, and engaged in dialogue processes, at
all levels in member countries of the European
Union and in European institutions.
In practice, each of the 27 European Union
member countries has a different history of
employment relations, with varied institutional
arrangements and diverse economies. Therefore,
the same vocabulary of social dialogue will have
very different meanings in use.
It may be that the European Union has now
developed several distinct models for the conduct
of employment relations and social policy, with
implications for corporate social responsibility,
both in practice and in academic discussions. The
shared commitments and institutional structures
of the founding members are not necessarily
shared by new members who joined in 2004,
with different historical and economic back-
grounds. Countries such as Lithuania experi-
enced a rapid transition from the Soviet Union
to the European Union.
Introduction
The European Union, from its foundation, has
sought to embed a social dimension in arrange-
ments for employment and economic policy. It is
unlikely to be able to compete with the USA on
technology, or with the Far East on wage costs. It
regards the knowledge of the people as a key
resource.
Detailed provisions are set out in the social
chapter and included in the acquis
communautaire to which new member countries
are obliged to subscribe. Their previous national
institutional arrangements varied greatly. Formal
agreement was required to secure entry to the
European Union. Detailed implementation is
monitored less closely.
The European Union can legislate for its 27
member countries, but it is engaged in global
markets, over which it does not have legislative
control.
Social dialogue has led to improvements in
working conditions, on a basis of consultation,
dialogue, and agreement, including working
Social Dialogue
time, parental leave, part-time working, tele-
working, and stress at work. The resulting direc-
tives are then transposed into national legislation
in each member state.
Key Issues
To what extent can the European Union deter-
mine employment arrangements and relations in
member countries? To what extent are national
polices a matter for national governments? There
is no movement in favor of a single European
superstate. Under subsidiarity, many decisions
are a matter for national governments. As
a consequence, the treatment of workers varies
country by country.
Is it socially responsible for companies to seek
to enhance their competitiveness by not comply-
ing with EU directives? Is it morally acceptable
for company profits to be increased while protec-
tion for working conditions is reduced? The ques-
tion is whether corporate social responsibility is
just a matter of the expression of fine words at the
level of strategic management, or whether there
are to be checks on implementation in practice at
the level of business operations.
Under European Employment and Social Pol-
icy, including social dialogue and social partner-
ship, CSR is defined as integral to the way that
enterprises operate. It is not an optional extra, but
a legal requirement for companies to follow. CSR
should be integral to corporate strategy and orga-
nizational culture. This means going beyond
established business practice.
The relevant laws and practices apply to all
companies, whatever their ownership or location
of headquarters, with regard to their operations in
the 27 countries of the EU, who came together to
create collaborative advantage, plus EEA coun-
tries. There is close correspondence with ILO
conventions and OECD guidelines. There are
cross-references to the Universal Declaration of
Human Rights.
We are led to assume that companies based in
the EU observe the same principles and practices
in their operations around the world. Research
suggests otherwise. There has often been
Social Dialogue
a strategy of “CSR in one country,” as opposed to
“International CSR,” echoing the debate between
Stalin and Trotsky regarding the development of
socialism. In other words, there is a gap between
declarative law and practice. This is partly
explained by a lack of enforcement. The same
problem arises with ILO conventions and the
Universal Declaration of Human Rights.
In Scandinavia, there has been a tendency to
go further, building on shared traditions of social
equity, collaboration, tripartism, and respect for
work. We can talk of socially responsible inno-
vation. There was strong Swedish influence in
developing European Employment and Social
Policy, including collaborative advantage, social
partnership, social dialogue, and soft law. Swedes
were interested in social convoy and studied Ger-
man ideas and experience.
However, Scandinavia is a relatively small
subcontinent, and again we cannot assume that
all companies follow, for example, Aker in seek-
ing to practice “International CSR.” Scandina-
vian countries tend to embed CSR in their
programs for international development. Scandi-
navians have been interested in the UN Global
Compact, which, at its foundation, built on the
European experience of collaborative advantage,
social partnership, social dialogue, open coordi-
nation, social benchmarking, and soft law. Imple-
mentation has been limited.
In a developing country, competing compa-
nies may work according to many different
legal and moral frameworks: local, American,
European, Japanese, Chinese, etc. There is
a current debate as to whether globalization will
lead to a convergence of practices. Starbucks and
McDonalds are not likely leading partners in the
UN Global Compact, which is a global attempt to
create collaborative advantage.
One complication is that, although the UK has
been a member of the EU since 1973, little atten-
tion has been paid to the attendant obligations and
legal responsibilities of membership. Indeed, UK
employers tend to demand the right to pursue
competitive advantage by disregarding EU regu-
lations, which they dismiss as red tape. They
profess not to understand “European English”
and tend not to recognize the legitimacy of EU
2205 S
institutions. They debate whether the UK should
join the EU, rather than recognizing 37 years of
membership. Thus, little collaborative advantage
has been created. The British rarely attend Euro-
pean meetings, which only diminishes their influ-
ence on decisions. They are typically horrified by
suggestions of social convoy and ignorant of
social partnership and social dialogue, in which
they have not participated. Instead, their natural
reference point has been the USA, and their mem-
ories have been of the British Empire.
Of course, we should not assume that citizens
and employers from the other 26 EU member
countries have a consistent position. Indeed,
when it comes to key elements such as social
partnership and social dialogue, institutional
arrangements and traditions vary greatly.
The idea behind open coordination, social
benchmarking, and soft law is that the heads of
government of member states seek to create col-
laborative advantage by setting an agreed policy
direction (open coordination), encouraging par-
ticipants in member states to learn from examples
of good practice (social benchmarking), and
bringing about improvement in standards,
through a collaborative process rather than legis-
lation (soft law). The approach has been piloted
in European Employment and Social Policy.
The practice of member states will move
toward convergence, without ever quite arriving.
In Germany, for example, there is interest in
social convoy, where employers have responsi-
bilities for maintaining the employability of for-
mer employees. In practical terms, many
employers in other EU countries distance them- S
selves from such approaches.
We are not going to arrive at a unified picture,
nor should this be our objective. Cross-references
may take readers to entries with apparently famil-
iar words, but derived from a different culture. We
will encounter or uncover disputes. Their resolu-
tion will require dialogue, not just textual analysis.
Future Directions
Given the increase in membership of the EU, is it
realistic to seek to maintain consistent
S 2206 Social Economy

arrangements for social dialogue? Is the process

viable, when a number of the EU member coun- Social Economy
tries lack well-developed institutional structures
for the social partners? ▶ Social Entrepreneurship
On the other hand, does social dialogue offer
a practical way forward for a European Union
whose membership is intended to continue to
grow, but where there is little intention of devel- Social Enterprise
oping a federal superstate, with a greater propor-
tion of common legislation? ▶ Social Entrepreneurship
Can social dialogue be seen as underpinning ▶ Socially Responsible Management (SRM)
the UN Global Compact? European Employment
and Social Policy provided a template for inter-
national arrangements.
Social Entrepreneur

Cross-References ▶ Social Entrepreneurship

▶ Collaborative Advantage
▶ Social Partnership
▶ UN Global Compact Social Entrepreneurship

Eberhard Harribey Laurence

BEM Bordeaux Management School, Talence,
References and Readings
France
Claussen, T., Haga, T., & Ennals, R. (Eds.). (2008). Inte-
grated and participatory innovation. Kingston: Kings-
ton Business School Working Paper. Synonyms
Göranzon, B., Hammarén, M., & Ennals, R. (Eds.).
(2006). Dialogue, skill and tacit knowledge. Chiches-
ter: Wiley.
Social economy; Social enterprise; Social
Karasek, R., & Theorell, T. (1990). Healthy work: Stress, entrepreneur
productivity and the reconstruction of working life.
New York: Basic Books.
Larsson, A. (1997). Partnership for a new organisation of
work. (Green Paper). DG Employment and Social
Definition
Affairs, European Commission.
Larsson, A. (1999). The new employment agenda. In R. Social entrepreneurship combines the two con-
Ennals & B. Gustavsen (Eds.), Work organisation and cepts of entrepreneurship and social issues. The
Europe as a development coalition. Amsterdam:
Benjamins.
economist Jean Baptiste Say was the first to intro-
Levi, L. (2002). The European commission’s guidance on duce the term “entrepreneur” at the end of the
work-related stress: From words to action. TUTB eighteenth century, using it to describe the eco-
newsletter. No. 19–20, September, 12–17. nomic actor who decides to “take charge.” As
Levi, L., & Levi, I. (2000). Guidance on work-related
stress: Spice of life or kiss of death? DG Health and
entrepreneurship is a phenomenon that brings
Consumer Protection, European Commission, together an individual and the emergence of
Luxembourg. a new organization, and the founding act of entre-
Putnam, R. (1993). Making democracy work: Civic tradi- preneurship is enterprise creation, then we can
tions in northern Italy. Princeton: Princeton University
Press.
surely consider that the social entrepreneur is
Solutions, A. (2008). Aker international framework agree- acting within the same analytical framework but
ment. Oslo: Aker. in a very specific context, that of social reality.
Social Entrepreneurship
There are three conditions to fulfill for social
entrepreneurship to emerge: The social entrepre-
neur exploits to the full the opportunity to offer
new products or services, he creates a business or
an organization, and he takes significant eco-
nomic risk in committing to this enterprise crea-
tion. These are the features of any
entrepreneurship, but social entrepreneurship
has specific qualities to differentiate it from
entrepreneurship in general. The aim is one of
social benefit; the objective is to be financially
viable and hence sustainable but without looking
for profit for the entrepreneur alone since sur-
pluses will not be distributed but will be
reinvested into the project. Governance of this
enterprise means ensuring that there is stake-
holder participation, and social entrepreneurship
also requires a redefinition of relations between
public/private sectors. As well as these relatively
straightforward basic characteristics, social
entrepreneurship can take on a variety of forms,
being rooted in a variety of cultural, legal, eco-
nomic, and social contexts depending on the
country where they are to be found.
A distinction must also be made between the
two concepts of social entrepreneurship and
social economy, even though nowadays they
tend to cover realities that are moving closer
and closer together. The social economy is
emerging as a model of a specific economic orga-
nization grouping together the third sector which
includes associations, cooperatives, and mutual
groups. Thus the social economy focuses more on
the status of the economic organization whereas
social entrepreneurship is founded on a certain
type of activity, with a clear social mission.
Introduction
The concept of social entrepreneurship is
a relatively recent one in the literature but has
become particularly popular over the last 20
years. A number of top-level departments in the
most prestigious universities like Harvard or
Oxford have set up research centers and courses
devoted specifically to social entrepreneurship.
Foundations like the Ashoka Society in the
2207 S
United States or the Canadian Social Entrepre-
neurship Foundation, also the Schwab Founda-
tion for Social Entrepreneurs in Switzerland,
specialize in supporting social entrepreneurship
and helping it develop. In the last 10 years, social
entrepreneurship has developed considerably
both in Europe and the United States, and also
in the emerging and developing countries. In
2007, as part of its LEED (Local Economic and
Employment Development) program, the OECD
set up a specific research program on strengthen-
ing social entrepreneurship. In a 2003 publica-
tion, the European Union highlighted the role of
social entrepreneurship and the advantages it
could bring since it is a key element in encourag-
ing citizens to be involved in society and in
creating and reproducing social capital. Research
by the EMES European Research Network has
shown the extent and the variety of social entre-
preneurship in Europe, particularly in the area of
economic insertion.
Yet the concept of social entrepreneurship
covers a notion that is both long-standing and
multifaceted, and it is not new. The history of
economic development is scattered with various
forms of social entrepreneurship which, although
they were not known by this name, did already
revolve around the same principles. The guilds of
the Middle Ages, then later the emergence of the
cooperative and mutualist movement, and then
associations, all these are forms of enterprise
founded on social values and organized around
a collegiate principle of participation in decision-
making. However, to understand the multiple
nature of social entrepreneurship as it is emerging S
today and how it relates to the social economy,
we need to consider the two major traditions in
approaching the social question. First, the Euro-
pean tradition which for a long time has provided
for social needs through state action and govern-
ment social policies, by means of the develop-
ment of the Welfare State. It was a relatively
straightforward process to share out the tasks:
Businesses were responsible for creating eco-
nomic value and states or public authorities in
the widest sense were responsible for ensuring
social cohesion and for correcting social inequal-
ities. The nonprofit sector developed as and when
S 2208
it was needed in response to shortcomings or
failure in state provision. Other forms of eco-
nomic and social cooperation developed in par-
allel, based on a different model from the
traditional enterprise; these were cooperatives,
mutual groups, and associations in the service
sector, commonly called the social economy.
This movement began to emerge at the end of
the nineteenth century, following the example of
the Rochdale Pioneers, British weavers who
founded consumers’ cooperatives in 1844, but it
really developed in the 1960s in areas such as
employment, social housing, personal services,
local development, and even finance, with bodies
like cooperative banks. The United Kingdom,
along with Italy, France, and Spain, is particu-
larly a good example of this growth. Europe has
therefore been marked historically by a tradition
of social economy which is not only marginal to
the traditional economy but can also form an
alternative to this economy with the cooperative
and mutualist movement, though this is not social
entrepreneurship as such. Confronted by the
internationalization and financialization of
national economies and major trends toward
European integration as a result of the single
market, a number of businesses in the social
economy sector have undergone considerable
change, especially the cooperative banks, mutual
insurance companies, and large consumer coop-
eratives. Around the same time, however, at the
end of the 1990s, the public authorities too began
to be more interested in this heritage and in the
ability of the social economy to respond to new
societal issues. Public social policies were
experiencing a loss of momentum and there was
a need for an economic development to find local
roots, so social entrepreneurship, combining the
goals of the social economy with the traditions of
entrepreneurship, emerged as a potential solution
to new challenges like providing personal
services and providing employment for the dis-
advantaged. Legislation and other measures were
brought in to encourage the development of
social enterprises; in the United Kingdom, for
example, there was the new status of Community
Interest Companies. In Italy, a country with
a long cooperative tradition, a 2005 law defined
Social Entrepreneurship
the legal status of social companies as “private
non-profit organizations, operating directly and
predominantly in an activity of economic produc-
tion or exchange of goods and services of social
usefulness in order to achieve a goal that is in the
general interest.” The European context is there-
fore characterized by a long tradition of social
economy which has gradually been completed by
more diversified forms of activity where social
entrepreneurship has emerged as a means of
responding in an innovative fashion to social
needs that the public sector is no longer able to
cope with adequately.
The second approach, very different by com-
parison, is that of the American tradition where
philanthropy was the essential means of financing
social needs for which the American federal state
was not in a position to take responsibility. This
philanthropy was to produce foundations, most
often identified with major groups and their chief
executives. These foundations were indeed very
closely associated with the emergence of large
industrial fortunes, such as the Rockefeller or
Carnegie foundations. This was a system founded
on individual initiative, with its main pillars
being business development and a philanthropic
system serving causes of general interest that
were not covered by the market. These founda-
tions steadily increased in number in the course
of the 1980s and 1990s and underwent major
changes in the way they were managed.
Confronted with the same social issues and the
same economic changes as in Europe, this North
American context gave rise simultaneously to
two rather different approaches to social entre-
preneurship which, while having the same social
goals, hinged on two business models (Dees and
Battle Anderson 2006): the school of social inno-
vation on the one hand and the school of social
enterprise on the other.
The driving force behind the school of social
innovation is indeed to encourage innovations in
the social sector, but in the spirit of innovation
described by the economist Schumpeter. The
social entrepreneur is seen as a visionary, capable
of uncovering business opportunities which will
give social added value and support these social
improvements in a sustainable way. In this
Social Entrepreneurship
context, the status of the business is not of over-
riding importance; however, there is an intrinsic
link between its social goals and the nature of its
activity. This approach focuses on the entrepre-
neur and his qualities, used to further the mission,
rather than on the business itself. The business is
entirely within the market economy, but the goal
is entirely social. One of the figureheads of this
approach is the Ashoka association, whose goal is
to encourage exceptional entrepreneurs capable
of innovating to bring about social change. Cre-
ated in 1980 in India by an American, Bill
Drayton, previously an executive at McKinsey
and Co and director of the American Environ-
mental Protection Agency, the association
develops synergy between the world of business
and social entrepreneurs and has today expanded
into almost 70 countries. Their vision is based on
two key ideas: the idea that there is nothing more
powerful than a new idea in the hands of a true
entrepreneur and the idea that for innovative
social enterprises to be able to develop, the social
sector must have a capital-risk structure, hence
the principle of philanthropic risk capital.
The second school of thought, the one known
as social enterprise, focuses more on obtaining
resources to serve a social cause, either to make
up for a reduction in public funding or to ensure
that an organization has a degree of independence
and hence more room for maneuver when putting
projects into action. So in this case, the social
entrepreneur as such is not the focal point; he is
the organizer, he guarantees that projects are
properly run, and he ensures that activities are
carried out do provide effective support for the
social objective. Thus the initiative must come
from a nonprofit organization and not from
a private business or a public body. The social
enterprise is the receptacle for funds to be used
for a social purpose. The purpose behind fund-
raising activities is in fact to achieve the social
objective; there is therefore no cause and effect
relationship between these activities and the
social mission. Social entrepreneurship consists
of developing market dynamics so that social
activities can then be developed. There are three
categories of activity (Alter 2006): integrated
entrepreneurship, when the economic activities
2209 S
have a direct positive social impact; social entre-
preneurship, known as “reinterpretation,” when
nonprofit activities have a link to the social mis-
sion but they are reorganized so as to create profit
margins for the activity to be able to survive; and
finally complementary entrepreneurship for
which the activities have no link with the mission,
their goal being to diversify funding in order to
sustain the mission in the longer term.
More recently, social entrepreneurship has
emerged in the developing countries, sometimes
linked with large foundations and sometimes,
like the Grameen Bank, created specifically for
the purpose. Created in Bangladesh by Mohamed
Yunus, winner of the Nobel Peace Prize in 2006,
this initiative is based on the idea that the poor are
the greatest entrepreneurs because they have to
innovate every day in order to survive; giving
them the opportunity to transform their creativity
into a sustainable income by means of
microcredit is the best chance there is of bringing
about deep-seated transformations in the social
and economic reality. Other countries have intro-
duced new policies to develop social entrepre-
neurship by encouraging new forms of
enterprise: In 1992, Mexico created a support
fund for social enterprises which, according to
the OECD, helped create 20,000 enterprises,
5,000 of which were solidarity initiatives by
women.
Today this multifaceted nature of social entre-
preneurship is the result of major developments
in all countries, indicators of deep-seated
economic and social changes which have gradu-
ally made social entrepreneurship a means of S
responding to specific social needs that the tradi-
tional economy and the public authorities have
difficulty coping with. Whatever organizational
model is used and whatever the form of social
entrepreneurship adopted, the reasons for its
development are more or less everywhere the
same: first of all an escalation in social needs,
alongside a generalization of economic crises
with the different forms of welfare state being
called into question in the developed countries
and a lack of any public social policies in the
emerging countries. Health, an aging population,
exclusion, and also poverty and precarity in the
S 2210
face of economic change all become business
opportunities, and this shift manifests itself in
the privatizing of public social welfare, which is
thrown back to the reality of the free market
(Gilbert 2002). Another reason, linked with the
welfare state crisis, is the emergence of new
forms of citizen-led undertakings, either individ-
ual or collective.
The contemporary forms of social entrepre-
neurship that we see today can be defined in
terms of a common framework of specific
elements, which can be summarized under six
essential headings:
– The first element concerns the importance of
the social mission (Tan et al. 2005). It is this
which defines the entrepreneur; the search for
social added value is at the heart of social
enterprise and it is the prime motivation for
the social entrepreneur. Creating social value
is not limited to the production of goods and
services, but it also forces the entrepreneur to
ask questions about meaning. It requires more
than a traditional market study measuring sup-
ply and demand; instead, it is a joint construc-
tion between users, service providers, and
partners. In this respect, the social enterprise
must be clearly distinguished from the more
general concept of corporate social
responsibility.
– The second element is a degree of risk-taking
for the entrepreneur, for without this there is
no entrepreneurial initiative. A risk taking
which is for the service of others. Economic
initiative is coupled with a social commit-
ment founded on values and an ethical stand-
point. In some ways this is a civic economy.
However, while there can be no social enter-
prise without social entrepreneurs, the entre-
preneurial process nevertheless requires the
existence of a collective of some kind to bring
the project to fruition. Social entrepreneur-
ship requires cooperation and the creation of
networks. Thus the social entrepreneur in fact
takes on the role of an active citizen in
society.
– The third common element is the change
brought about by the social enterprise that
wants to respond to a social challenge in an
Social Entrepreneurship
innovative way using entrepreneurial tech-
niques. This social need represents a business
opportunity. While the expected value is
essentially social, the social entrepreneur is
nevertheless also hoping to ensure the sustain-
ability of his enterprise by creating value. The
approaches here may certainly differ in that
the creation of value may be the goal of the
social mission itself (school of social innova-
tion and European approach) or it may be on
the margins of the mission in order to provide
funding (American school of social enter-
prise), but the aim is still to create value
through social innovation. These innovations
may consist of mobilizing local resources to
resolve a social problem (model currently
used in the local development context or com-
munity services) or new forms of organization
(e.g., marginalized individuals participating in
their own insertion into society or in a totally
different area like the growth of microcredit to
support enterprise creation). In this way, the
social entrepreneur becomes an actor for
social change, transforming an untreated
social need into a sustainable and value-
creating activity. The social entrepreneur
becomes a change-maker, causing a rupture
by bringing in new solutions. He tackles the
causes of a social problem more often than the
symptoms and provides an original response,
thus changing public policies by changing the
perception of the social problem. The problem
is no longer perceived as a problem; it is now
the solution that provides an entrepreneurial
initiative, creating new social links, new insti-
tutional practices, and new economic links
with the world of work.
– The fourth element is the anchoring of social
entrepreneurship in the market economy. The
social entrepreneur shows that he wants to
earn an income and use a business model. He
sees the social arena as a market within which
it is possible to start up a business. Even if
profit is a means to achieving a social purpose
rather than an end in itself, the social entrepre-
neur creates a market opportunity from social
need, distancing himself from a public service
economy by considering the beneficiaries of
Social Entrepreneurship
his activity as clients and by applying all the
management rules used in a traditional
company.
– The fifth common element is the matter of
resources: Although historically the majority
of resources are derived from either public
funding or donations, recent developments in
social entrepreneurship aim to ensure that
resources derived from the social activity
itself or from complementary activities are
carried out by the social enterprise. The
desired aim here is autonomy for the enter-
prise combined with establishing sustainable
solutions. This desire for autonomy can be
explained on the one hand by the need to
make up for a reduction in public funding,
when this existed at all, and cope with state
or public authority disengagement. And on the
other hand, the new forms of citizen commit-
ment, whether they consist of groups from
civil society, companies, or foundations, pre-
suppose a clear separation from the public
authorities. This change has brought in new
forms of public/private partnership, breaking
up the traditional frameworks and leaving the
way open for hybrid forms of enterprise,
which may be private, state, or associations,
situated at the boundary between public and
private sectors, a boundary that is becoming
less clearly defined (Wallace 1999).
– The sixth element concerns governance: In
organizations with radical forms of gover-
nance, like cooperatives or associative social
enterprises, the decision-making process is
clearly disconnected from the ownership of
capital. With other forms of governance, the
social mission implies limited remuneration
from the capital and the involvement of all
stakeholders. The vast majority of the surplus
is reinvested for the benefit of the social mis-
sion. Generally speaking, the organizational
structure of the social enterprise incorporates
this social dimension.
All these determining factors can be summa-
rized in the EMES (European Research Net-
work) “body of evidence” where they suggest
an analysis framework which is both open and
evolving and where bridges can be built between
2211 S
two traditions of social economy which are cur-
rently undergoing great change:
Four economic criteria Five social criteria
– Continuous activity in – Stated aim to serve the
production of goods “local community”
and/or services
– High degree of – Mobilization of a group
autonomy of citizens
– Significant level of – Decision-making not
economic risk based on capital
ownership
– Minimal number of paid – Participatory dynamics
workers
– Limited distribution of
profit
The concept of social entrepreneurship origi-
nated in North America and can today be found in
all countries worldwide, where it complements
a European tradition of the social economy,
created as an alternative solution between the
traditional market economy approach and the
weakening of the welfare states. No longer in
opposition with one another, social entrepreneur-
ship and social economy today seem to be com-
plementary, offering real development
opportunities. The values and ethics system of
social entrepreneurship revolve around creating
social added value, and this is a truly innovative
way to meet collective needs, undoubtedly pro-
viding opportunities for sustainable development
by involving communities and creating local
community links.
Key Issues S
Historically based in different economic tradi-
tions according to the different countries, social
entrepreneurship today takes on several different
forms. In Europe, it is built on a social economy
tradition combining mutual companies, coopera-
tives, and associations in a third sector, all
organized collectively and representing an alter-
native to the traditional enterprise as all involve
participatory governance and the reinvestment of
profits in a social purpose. In the United States,
two schools of thought have developed in paral-
lel. With the school of social innovation, it is the
S 2212
social entrepreneur rather than the form of the
enterprise that counts: This is an entrepreneur
who applies himself to responding to a social
problem in an innovative way, transforming the
issue into a business opportunity. With the school
of social enterprise, the social mission is at the
heart of the enterprise, and this can be achieved
using private funding that may derive from other
economic activities.
Since the end of the 1990s, social entrepre-
neurship has demonstrated its ability to bring
about change in solving local development issues
and social questions. This, combined with the
higher ethical standards required and the need to
involve all stakeholders, can account for its
growth. Whatever form the social enterprise
may take, a common corpus has gradually
emerged around a few key words: social innova-
tion, entrepreneurial action and stakeholder
participation, social added value, and reinvest-
ment of the majority of profits back into projects.
Future Directions
The growth of social entrepreneurship focusing
predominantly on an entrepreneurial response to
social questions aggravated by globalization and
the weakening or absence of state social polices
leads us to ask two important questions about
future developments.
The first concerns the nature of resources and
funding. Social entrepreneurship is intimately
linked with the role of foundations and with the
desire on the part of financiers to apply traditional
management methods to the social sector.
To some extent, there is a convergence between
the rapid growth of major groups operating
according to an economic system that generates
inequalities and an obsession with profit. The
wealth of large groups or the size of large
fortunes provides wealth for the foundations.
However, at the same time, the poor are becom-
ing ever poorer, as if the rapid expansion in the
foundations grew out of an increase in inequal-
ities. So in a context of more and more stringent
demands for sustainable development, shared
governance, and the need to weigh the impact of
Social Entrepreneurship
economic activity on stakeholders, social entre-
preneurship aspires to change social and eco-
nomic relationships through innovation. The
basic question is therefore to what extent is the
link between foundations of large groups and
social entrepreneur a viable one, as it raises the
problem of the new relationship between private
and public sectors. Indirectly, there is also
the question of ethical funding.
The second question is that of the ability of
social entrepreneurship to produce a new busi-
ness model and, beyond this, a new economic
model. There can be no social enterprise without
a social entrepreneur. The question relates to the
set of skills that go to defining the social entre-
preneur and the way these skills are applied. Like
any entrepreneur, the social entrepreneur is of
course looking for a business opportunity and
will take risks to ensure economic viability, but
he also has a social vision. Traditional manage-
ment techniques and methods for evaluating
added value seem clearly unsuitable for projects
by social entrepreneurs which consist of creating
social value and being an actor for social change.
There are underlying questions such as return on
social investment, creation and reproduction of
social capital, a shared vision of social utility, and
the question of assessment by the civil society.
These questions are an indication of the extent
to which social entrepreneurship represents not
only a real innovation in the way it deals with
the social question but also an important factor
in the emergence of a new business model where
the determining features form part of the more
global problem posed by corporate social
responsibility.
Cross-References
▶ Business for Social Responsibility
▶ Corporate Citizenship
▶ Corporate Governance as a Tool for
Alleviating Developmental Issues
▶ Corporate Social Entrepreneurship
▶ Corporate Social Innovation
▶ Philanthropic CSR
▶ Philanthropy
Social Innovation
▶ Social Innovation
▶ Social Partnership
▶ Sustainable Entrepreneurship
References and Readings
Alter, K. (2006). Social enterprise models and their mis-
sion and money relationships. In A. Nicholls (Ed.),
Social entrepreneurship: New models of sustainable
social change (pp. 205–232). New York: Oxford
University Press.
Bornstein, D. (2004). How to change the World: Social
entrepreneurs and the power of new ideas. Oxford:
Oxford University Press.
Dees, G., & Battle Anderson, B. (2006). Framing a theory
of social entrepreneurship: Building on two schools of
practice and thought. In R. Mosher-William (Ed.),
Research on social entrepreneurship: Understanding
and contributing to an emerging field (ARNOVA
occasional papers series, Vol. 1, No. 3, pp. 39–66).
Washington, DC: Aspen Institute.
Durourny, J., & Nyssens, M. (2008). Social enterprise in
Europe: Introduction to an update (EMES Work
Papers 08–01). www.emes.net. Accessed 1 Sept 2010.
Elkington, J., Hartigan, P., & Schwab, K. (2008). The
power of unreasonable people: How social entrepre-
neurs create markets that change the World. Boston:
Harvard Business press.
Gilbert, N. (2002). Transformation of the welfare state:
The silent surrender of public responsibility. Oxford:
Oxford University Press.
Nyssens, M. (Ed.). (2006). Social enterprise: At the
crossroad of market, public policies and civil society.
London/New York: Routledge.
Tan, W.-L., Williams, J., & Tan, T.-M. (2005). Defining
the social entrepreneurship: Altruism and entrepre-
neurship. International Entrepreneurship and
Management Journal, 1(3), 353–365.
Wallace, S. L. (1999). Social entrepreneurship: The role of
social purpose enterprises in facilitating community
economic development. Journal of Developmental
Entrepreneurship, 4(2), 153–174.
Social Factor of Corporate
Responsibility
▶ Community Relations
Social Impact Measurement
▶ Social Return on Investment
2213 S
Social Innovation
Liangrong Zu
Enterprise, Microfinance and Local Development
Program, International Training Centre of the
ILO, Turin, Italy
Synonyms
Corporate social innovation; Corporate social
responsibility; Innovation
Definition
Social innovation is defined as a novel solution to
a social problem that is more effective, efficient,
sustainable, or just than existing solutions and
for which the value created accrues primarily to
society as a whole rather than private individuals
(Phills et al. 2008). The Center for Social
Innovation at the Stanford Graduate School of
Business defines social innovation as “the
process of inventing, securing support for, and
implementing novel solutions to social needs and
problems.” Mark Goldenberg of the Canadian Pol-
icy Research Networks defines social innovation
as “the development and application of new or
approved activities, initiatives, services, processes
or products designed to address social and eco-
nomic challenges faced by individuals and com-
munities.” This broad notion of social innovation
acknowledges that a broad range of actors need to
S
become involved and for those actors to work in
new and different ways on an emerging issue.
OECD defines it as concerning conceptual,
process, or product change; organizational
change and changes in financing; and dealing
with new relationships with stakeholders and
territories. Social innovation seeks new answers
to social problems by:
– Identifying and delivering new services that
improve the quality of life of individuals and
communities
– Identifying and implementing new labor mar-
ket integration processes, new competencies,
S 2214
new jobs, and new forms of participation as
diverse elements that each contribute to
improving the position of individuals in the
workforce
Social innovations can therefore be seen
as dealing with the welfare of individuals and
communities, both as consumers and producers.
The elements of this welfare are linked with
their quality of life and activity. Wherever social
innovations appear, they always bring about new
references or processes. Social innovation is
distinct from economic innovation because it is
not about introducing new types of production
or exploiting new markets in itself but is about
satisfying new needs not provided by the market
(even if markets intervene later) or creating new,
more satisfactory ways of insertion in terms of
giving people a place and a role in production.
The key distinction is that social innovation
deals with improving the welfare of individuals
and community through employment, consump-
tion, or participation. Its expressed purpose
therefore is to provide solutions for individual
and community problems. It seems, therefore,
that social innovation and local development
can be considered as intertwined. Other channels
may exist for social innovations but most of
them need a very tailored and comprehensive
approach, which will be both a condition and
a consequence of local development.
There are some other definitions from
different perspectives, for example, from prod-
ucts and services perspective, social innovation
refers to new or enhanced products or services
that have a positive impact on social or environ-
mental issues, often termed “environmentally
friendly or green products.” Examples illustrat-
ing possibilities for social innovation include
production of fibers entirely from renewable
resources, fuel oils from vegetation, energy and
water savers, chemical-free cleaning, recycled
materials, organic food and cosmetic products,
natural home furnishings, etc. Social innovation
also refers to new strategies, concepts, ideas,
and organizations that meet social needs of all
kinds – from working conditions and education to
community development and health – that would
extend and strengthen civil society. Social
Social Innovation
innovation represents social learning and
problem solving in areas ranging from improve-
ments in human health, education, human
welfare, environmental protection, and energy.
Over the years, the term has developed several
overlapping meanings. It can be used to refer to
social processes of innovation, such as open source
methods and techniques. Alternatively it refers to
innovations which have a social purpose – like
microfinance. The concept can also be related to
social entrepreneurship (entrepreneurship is not
always or even usually innovative, but it can be
a means of innovation) and it also overlaps with
innovation in public policy and governance.
Social innovation can take place within govern-
ment, within companies, or within the nonprofit
sector (also known as the third sector), but is
increasingly seen to happen most effectively in
the space between the three sectors. Recent
research has focused on the different types of
platforms needed to facilitate such cross-sector
collaborative social innovation.
Introduction
The term “social innovation” has come into
common parlance in recent years. Some analysts
consider social innovation no more than a buzz
word or passing fad that is too vague to be
usefully applied to academic scholarship. Some
social scientists, however, see significant value in
the concept of social innovation because it
identifies a critical type of innovation.
Social innovations are often called for when
rapid techno-economic change creates new social
problems that cannot be fixed with old policy
instruments (such as structural unemployment
or increasing social and regional disparities).
Such calls tend to be motivated by equity consid-
erations. It is argued that social innovations are
also needed for good economic performance dur-
ing major structural transformations. Societies,
regions, industrial sectors, and even firms are
interdependent systems where narrowly focused
or partial innovation only produces growing
contradictions, poor productivity, decreasing
returns, and stagnating incomes. Social
Social Innovation
“Systemic”
change
Gradual
or “adaptive”
change ... though many of
the anecdotal examples they cite
seem to be (relatively) modest
adaptations tied to fairly specific
(often local) contexts
Context specific
change
Social Innovation, Fig. 1 Defining “innovation” in social innovation (Source: Policy Research Initiative 2010)
innovations in organizations, policies, rules and
regulations, as well as in collective norms,
values, and cognitive frames, are needed to com-
plement the more traditional technological and
economic innovations in order to reach systemic
synergies, rapid productivity growth, increasing
returns, and steadily growing incomes.
According to scientific literature, there are
three main ways to stimulate development of
social innovation: (1) external actors facilitate
development of social innovation (top-down
approach); (2) local actors develop the social
innovation (bottom-up approach); (3) external
actors facilitate a local institutional capacity to
be able to mobilize internal resources and
develop social innovations (top-down initiatives
to facilitate bottom-up activity). As empirical
data show, a “bottom-up” perspective with
“top-down” initiatives to facilitate “bottom-up
activity” is the most successful strategy for the
emergence and development of social innova-
tions in rural communities.
What Constitutes a Social “Innovation”?
Though there appears to be general consensus in
the literature that social innovations entail novel
applications of ideas, the ideas themselves need
2215 S
Many (though not all)
authors focus on radical
(i.e., disruptive, systemic)
change in describing and
promoting the concept
Discontinuous
or “disruptive”
change
not necessarily be new: the process often involves
novel adaptations (or recombinations) of existing
ideas and/or their application to new areas. There
also tends to be a “systems” focus among users
of the concept – that is, an interest in social
innovation as a mechanism for achieving sys-
temic change to society as a whole – typically
with a view to tackling the underlying causes of
social problems rather than just alleviating their
symptoms.
There is less agreement, however, on
how widespread an innovation should be (or the
magnitude or time frame of its impacts) for it to be
properly considered a social “innovation,” with S
some explicitly discounting adaptive changes or
those with impacts limited to a particular locale or
context, and others viewing distinctions between
disruptive, systemic innovations and incremental,
context-specific changes as inherently subjective.
Moreover, even promoters of a radical or system-
changing interpretation of the term often make
reference to examples that may appear gradual or
local in nature (Fig. 1).
What Is “Social” about Social Innovation?
In addition to a multiplicity of views on what
constitutes an innovation, there are a number of
S 2216 Social Innovation

different strands of thought on what makes social

innovations specifically “social” and, in particu- (Very) broadly defined
“social” innovation
lar, which social actors (community-based orga-
nizations or informal networks, businesses,
governments, etc.) are involved in the process “Economic” Community
(or “business”) innovation
and how: innovation
• Some definitions of social innovation – for
example, “new ideas that work” or “[changes
to] routines, resource and authority flows or
beliefs in any social system” – are so broad
that they can encompass the more familiar
concepts of “business” or “economic” innova- Social Innovation, Fig. 2 Broadly defined “social”
tion (and even innovations in how govern- innovation (Source: Policy Research Initiative 2010)
ments carry out their activities) since they
too – like “community”-based innovators
who are often the main focus of those analyz-
Innovation
ing and promoting social innovation – are
social actors who are embedded in and/or
overlap with broader social structures and net-
(Narrowly
works (Fig. 2). “Economic”
defined)
• Other definitions – for example, “[innovations (or “business”)
“social”
innovation
that are] predominantly developed and diffused innovation
through organizations whose primary purposes
are social” – gravitate toward a much narrower
view based on a sharp distinction between
“economic” and “social” innovations, with the Social Innovation, Fig. 3 Narrowly defined “social”
latter being the preserve of non-business innovation (Source: Policy Research Initiative 2010).
(“community”) actors motivated by fundamen-
tally different objectives than business (or,
implicitly, governments) (Fig. 3). Innovation
• Others still – for example, “[innovations] that
draw from, and appear at the intersection of,
the community, business and government “Economic” Community
sectors” – see innovations as social when (or “business”) innovation
“Social”
they are produced through the collaboration innovation
innovation
of multiple different social actors, usually
when community sector organizations partner
with businesses (or governments) in develop-
ing new approaches to tackling unmet or
emerging needs (Fig. 4). Social Innovation, Fig. 4 Intersection of multiple social
• Other definitions – for example, “[innovations] actors in “social” innovation (Source: Policy Research
for which the value created accrues primarily Initiative 2010)
to society as a whole rather than private indi-
viduals”– demarcate social innovations along the appropriate test here is not based on
an (inevitably somewhat fuzzy) dividing line who is doing the innovating (though there is
between those that generate predominantly a presumption that most such innovations will
private benefits from those whose benefits involve the community sector as key players)
are predominantly public or social. That is, but on the fruits they yield (Fig. 5).
Social Innovation
Social Innovation,
Fig. 5 Private-public
benefits of “social “Economic”
innovation” (Source: (or “business”)
Policy Research Initiative innovation
2010)
Predominantly public or social benefits
The Evolution of the Theory and Practice of
Social Innovation
The concept of social innovation is not new. As
far back as the eighteenth century, Benjamin
Franklin evoked social innovation in proposing
minor modifications within the social organiza-
tion of communities, and in 1893, Emile
Durkheim highlighted the importance of social
regulation in the development of the division of
labor which accompanies technical change.
Technical change itself can only be understood
within the framework of an innovation or
renovation of the social order to which it is
relevant. At the start of the twentieth century,
Max Weber demonstrated the power of rational-
ization in his work on the capitalist system. He
examined the relationship between social order
and innovation, a theme which was revisited by
philosophers in the 1960s. Amongst other things,
he affirmed that changes in living conditions
are not the only determinants of social change.
Individuals who introduce a behavior variant,
often initially considered deviant, can exert
a decisive influence; if the new behavior spreads
and develops, it can become established social
usage. In the 1930s, Joseph Schumpeter consid-
ered social innovation as structural change in the
organization of society, or within the network of
organizational forms of enterprise or business.
Schumpeter’s theory of innovation went far
2217 S
Predominantly private benefits
“Social” innovation
Community
innovation
beyond the usual economic logic, and appealed
to an ensemble of sociologies (cultural, artistic,
economic, political, and so on), which he sought
to integrate into a comprehensive social theory
that would allow the analysis of both develop-
ment and innovation.
Finally, in the 1970s, the French intellectuals
of the Temps des Cerises organized a debate of
wide social and political significance on the
transformation of society, and on the role of the
revolts by students, intellectuals, and workers. At
the same time, a major part of the debate was
echoed in the columns of the journal Autrement,
with contributions from such prominent figures
as Pierre Rosanvallon, Jacques Fournier, and
Jacques Attali. In their book on social innovation,
Que sais-je?, Chambon et al. (1982) build on S
most of the issues highlighted in this debate.
This 128-page book remains the most complete
“open” synthesis on the subject of social innova-
tion to this day. In brief, the authors examine the
relationship between social innovation and the
pressures bound up within societal changes, and
show how the mechanisms of crisis and recovery
both provoke and accelerate social innovation.
Another link established by Chambon et al. con-
cerns social needs and the needs of the individual,
individually or collectively revealed. In practice,
social innovation signifies satisfaction of specific
needs thanks to collective initiative, which is not
S 2218
synonymous with state intervention. According
to Chambon et al., in effect the state can act, at
one and the same time, as a barrier to social
innovation and as an arena of social interaction
provoking social innovation from within the
spheres of the state or market. Finally, these
authors stress that social innovation can occur in
different communities and at various spatial
scales, but is conditional on processes of con-
sciousness raising, mobilization, and learning.
The authors cited up to this point cover the
most significant dimensions of social innovation.
Franklin refers to “one-off” innovation in
a specific context; Weber and Durkheim empha-
size changes in social relations or in social orga-
nization within political and economic
communities; Schumpeter focuses on the rela-
tionship between development and innovation
where strong technical economic innovation is
considered of prime importance and where the
entrepreneur is viewed as a leader who, despite
facing many difficulties, is able to introduce
innovation into modes of societal organization.
Most of these highlight the importance of social
innovation within diverse types of institutions
and institutional dynamics (such as public admin-
istration, world politics, enterprise, local commu-
nities, and intergroup or community relations).
Finally, Chambon et al. add to these dimensions
by introducing the relationships between social/
individuation needs, societal change, and the role
of the state. They thus offer a fuller picture of
social innovation which provides a platform for
global discussion on this theme.
Today’s return to social innovation as
a theme for research and as a principle structuring
collective action is not at odds with the “founding
writings” described above. In tune with
Schumpeter’s work, in contemporary business
literature, social innovation shows itself through
the activities of the innovating entrepreneur
who alters the social linkages at the core of the
enterprise, to improve its functioning, to
transform it into a social undertaking, or to
introduce a social rationale. Schumpeter and
Weber are cited regularly by authors seeking to
legitimize social transformation in organizational
structures, in both business and public
Social Innovation
administration, where principles of social inno-
vation are actively applied.
Following on from the rereading of the works
of Benjamin Franklin, who perceived social inno-
vation as the solution to specific life problems,
and of the foundational writings of sociology,
social innovation today can also be rediscovered
within the artistic world, in which society and its
structures can be creatively rethought. In effect,
the arts reinvent themselves as sociology, as in
the “Sociologist as an Artist” approach, which
underlines the importance of sociology as the
science of innovation in society. Finally, “the
return of social innovation,” both in scientific
literature and political practice, is demonstrated
by the use of the concept as an alternative to the
logic of the market, and to the generalized privat-
ization movement that affects most systems of
economic allocation; it is expressed in terms of
solidarity and reciprocity.
Social Innovation in Contemporary Social
Science
In contemporary social science, there is growing
interest in the idea of social innovation. The focus
is usually placed on four spheres or approaches.
The first sphere is that of management science
and its potential to share themes with other social
science disciplines. For instance, within social
science literature, authors emphasize opportuni-
ties for improving social capital which would
allow economic organizations either to function
better or to change; this would produce positive
effects on social innovation in both the profit and
nonprofit sectors. This emphasis on and reinter-
pretation of social capital, which has also been
taken on board in management science, would
include economic aspects of human develop-
ment, an ethical and stable entrepreneurial
culture, and so forth, and thus facilitate the inte-
gration of broader economic agendas, such as
those which advocate strong ethical norms (fair
business practices, respect for workers’ rights) or
models of stable reproduction of societal norms
(justice, solidarity, cooperation, and so on) within
the very core of the various entrepreneurial com-
munities. However, the price paid for this sharing
of the social capital concept across disciplines is
Social Innovation
that it has become highly ambiguous, and its
analytical relevance is increasingly questioned.
The second sphere arises from the fields of arts
and creativity. It encompasses the role of social
innovation in social and intellectual creation.
Michael Mumford unlocks this idea in a paper
which defines social innovation as: “The emer-
gence and implementation of new ideas about
how people should organize interpersonal activi-
ties, or social interactions, to meet one or more
common goals. As with other forms of innova-
tion, results produced by social innovation may
vary with regard to breadth and impact.” Mum-
ford, author of several articles on social innova-
tion in the sphere of arts and creativity, posits
a range of innovations from the “macro-innova-
tions” of Martin Luther King, Henry Ford, or Karl
Marx to “micro-innovations” such as new pro-
cedures to promote cooperative working prac-
tices, the introduction of new core social
practices within a group, or the development of
new business practices. Mumford presents his
own view of social innovation employing three
main “lines of work”: the life history of notable
people whose contributions were primarily in the
social or political arena, the identification of
capacities leaders must possess to solve organi-
zational problems, and the development, intro-
duction, and adaptation of innovations in
industrial organizations. He then applies
a mixed reading along these three lines to an
examination of the work of Benjamin Franklin
and arrives at a definition that parallels and shows
synergies within the approach of the “Sociologist
as an Artist.”
The third sphere concerns social innovation in
territorial development. Moulaert et al.
(2000) stresses local development problems in
the context of European towns: the diffusion of
skills and experience among the various sectors
involved in the formation of urban and local
development policies; the lack of integration
between the spatial levels; and, above all, neglect
of the needs of deprived groups within urban
society. To overcome these difficulties, Laville
et al. (1994) and Favreau and Lévesque
(1999) put forward neighborhood and commu-
nity development models. Moulaert and his
2219 S
partners in the IAD project have suggested orga-
nizing neighborhood development along the lines
of the Integrated Area Development approach,
(the Développement Territorial Intégré) which
brings together the various spheres of social
development and the roles of the principal actors
by structuring them around the principle of social
innovation. This principle links the satisfaction of
human needs to innovation in the social relation-
ships of governance. In particular, it underlines
the role of sociopolitical capacity (or incapacity)
and access to the necessary resources in achiev-
ing the satisfaction of human needs; this is under-
stood to require participation in political decision
making within structures that previously
have often been alienating, if not oppressive.
A similar approach has been proposed for
regional development policy: the “Social
Region” model offers an alternative to the market
logic of Territorial Innovation Models, replacing
it with a community logic of social innovation.
The fourth sphere in which social innovation
is the order of the day is that of political
science and public administration. Criticisms of
the hierarchical character of political and
bureaucratic decision making systems are well
known and are at the root of new proposals
concerned with change in the political system
and, above all, in the system of public adminis-
tration. Several approaches or initiatives have
been developed: the use of territorial decentrali-
zation (regionalization, enlarging the power
and competence base of localities) in order to
promote citizen access to governance and
government, an increase in the transparency of S
public administration, the democratization of
administrative systems by promoting horizontal
communication, and a reduction in the number of
bureaucratic layers. All are designed to give more
control and influence to both users and other
“stakeholders.”
Social Innovation and Social Change
Social innovation has been seen as the best
construct for understanding – and – producing –
lasting social change. For example, the quintes-
sential social innovation: microfinance – the
provision of loans, savings, insurance, and other
S 2220
financial services to poor people who lack
access to the conventional financial system.
Microfinance combats the widespread and intrac-
table problem of poverty: Billions of people
trapped in a cycle of subsistence because they
cannot gain access to capital to invest in activities
that might allow them to escape poverty. Despite
questions about the overall impact and effective-
ness of microfinance, many believe it is more
effective, efficient, sustainable, and just than
existing solutions. Microfinance has been
extremely successful in effectively delivering
financial services to the poor, reaching more
than 150 million clients (mostly women) over
the last 25 years, often in countries where very
little else works. This remarkable achievement
has led many to believe that microfinance
could be what everyone has been looking
for: a transformative solution to the problem of
poverty itself (Armendáriz and Morduch 2010).
In recent years, social innovation has been also
the increasingly common shorthand for the
approach to public-private partnerships. The
idea is to transform the way public services
are provided, by tapping the ingenuity of
people in the private sector, especially social
entrepreneurs. For example, in recent years, in
America and Britain, governments hope that
a partnership with “social entrepreneurs” can
solve some of society’s most intractable prob-
lems. A social entrepreneur is, in essence, some-
one who develops an innovative answer to
a social problem. For example, Grameen Bank
of Bangladesh, which was created by the
microfinance pioneer Muhammed Yunis, is
a business model for helping to tackle poverty.
In America, on July 22nd 2010, Barack
Obama’s administration listed the first 11 invest-
ments by its new Social Innovation Fund (SIF).
About $50 m of public money, more than matched
by $74 m from philanthropic foundations will be
given to some of America’s most successful
non-profit organizations, in order to expand
their work in health care, in creating jobs and in
supporting young people (see Table 1). The
fund is one of several efforts to promote new
partnerships of government, private capital,
social entrepreneurs and the public, pushed by
Social Innovation
the White House’s Office of Social Innovation
and Civic Participation (OSICP), which
Mr. Obama created soon after taking office.
These initiatives include another fund, i3
(for “investing in innovation”), in the Department
of Education and cash prizes for novel answers
to social problems (The Economist 2010,
pp. 55–57).
The OSICP has high hopes that government
will be able to use cash prizes to encourage social
innovation. Until recently, the only arms of gov-
ernment allowed to create such “incentive prizes”
were NASA, the space agency, and DARPA,
a research arm of the defense department. Legal
changes pushed by the Obama administration
should allow every department to do the same.
The OSICP also hope to ginger up social innova-
tion through two things usually seen as more
worthy than effective: open government and
volunteering.
In Britain, at the same time, David Cameron,
prime minister, gave a speech in Liverpool
outlining his vision of a “Big Society.” At its
heart, he sees a similar partnership to Mr
Obama’s. A Big Society Bank will “help finance
social enterprises, charities and voluntary groups
through intermediaries,” which sounds very like
the task of the SIF. The government, said
Mr Cameron, urgently needs to “open up public
services to new providers like charities, social
enterprises and private companies so we get
more innovation, diversity and responsiveness
to public need” and to “create communities with
oomph.” Britain created a special government
office to work with non-profit groups several
years ago, when Tony Blair was prime minister.
However, the Office of the Third Sector often
seemed more concerned with giving voice to the
concerns of the charity establishment than with
tapping the ideas of social entrepreneurs.
Whether its rebranding as the Office of Civil
Society by Mr Cameron heralds a departure
from such staid ways remains to be seen.
The British have also experimented with social-
innovation funds. In 2000, Mr Blair established
a Social Investment Taskforce, many of whose
proposals to build up the private social sector
were adopted. However, as Sir Ronald Cohen,
Social Innovation 2221 S
Social Innovation, Table 1 Helping hands: Social innovation fund (The Economist 2010)
Helping hands
Social Innovation Fund
Organisation Grant Project
Jobs for the Future $7.7 m; over 2 years Training for 23,000 poor people and more than 1,000 employers
Local Initiatives Support $4.2 m; 1 year Teaching poor families to make better financial decisions
Corporation
Mayor’s Fund to Advance $5.7 m; 1 year Replicating NYC’s anti-poverty programmes in other cities
New York City
REDF $3 m; 2 years Finding jobs for the homeless, ex-prisoners and mentally ill
people in Californian non-profit organisations
Foundation for a Healthy $2 m; 2 years Improving access to health services and reducing health
Kentucky inequality in several poor communities in Kentucky
Missouri Foundation for $2 m; 2 years Tackling smoking and obesity in Missouri
Health
National AIDS Fund $3.6 m; 1 year Helping HIV-positive people receive professional care
New Profit $5 m; 1 year Working with non-profit groups to help young people make the
leap from high school to college
Edna McConnell Clark $10 m; 1 year Helping youngsters stay in school and out of trouble
Foundation
Venture Philanthropy $4 m; 2 years Helping “vulnerable” people aged 14–24 find education and jobs
Partners around Washington, DC
United Way of Greater $2 m; 2 years Investing in education and career guidance in Cincinnati
Cincinnati
Source: Corporation for National and Community Service

a private-equity tycoon and philanthropist the lack of a common definition engenders

who led the taskforce, now concedes ruefully,
“a disappointment was that the Labour govern-
ment accepted policies but never implemented
them as they should have done.” For instance, it
did not use money in long-dormant bank accounts
to capitalize a “social investment bank.”
Mr Cameron has promised to use about £250 m
($390 m) of this to set up the Big Society Bank
(The Economist 2010, pp. 55–57).
Key Issues
Although it is widely contended that social inno-
vation is the best construct for understanding - and
producing - lasting social change, social innova-
tion is regarded as a novel solution to
a social problem that is more effective, efficient,
sustainable, or just than existing solutions and
for which the value created accrues primarily to
society as a whole rather than private individuals,
potential confusion and misunderstanding.
There is, for example, no consensus over whether
“social innovations” should be viewed as inher-
ently system-changing or can also include incre-
mental change whose impacts may be mostly
local. There is also a wide variety of views over
what makes social innovations “social”:
– Some are so broad they can encompass S
“economic” or “business” innovation, others
limit it to innovations by “community”-based
actors motivated by social objectives,
– Others refer to innovations arising from
collaboration among social actors,
– Still others are based not on who does the
innovating, but on the social nature of the
benefits they generate.
“Social innovation” is a term that almost
everyone likes, but nobody is quite sure of what
it means. Some academics would like to abandon
the notion of social innovation altogether,
arguing that it adds nothing to what we know
S 2222
about innovation and is too vague ever to be
useful. Quite obviously, human beings are
indefatigable seekers of newness. Typically, the
search for newness involves a mental process that
happens in society, so that we can say that all
innovations are social innovations. Strictly
speaking, the term “social innovation” is redun-
dant. An immediate implication derived from this
assertion is that the study of innovation is
the study of social innovation, and therefore,
there would be no value in analyzing social
innovation per se.
Future Directions
It is claimed that given the considerable interest
in the social innovation among academic,
community sector and government participants,
a significant early focus of research efforts should
be on social innovation, with particular attention
given to the following:
– Clarifying the variety of meanings given to the
term.
– Describing and analyzing the process of social
innovation (including its various stages and
the roles of different players – including
the frequently key role played by community
sector organizations, the development of
partnerships between sectors, the increasing
emergence of on-line informal networks, etc.).
– Clarifying the relationship of social innova-
tion to the social management of risk – for
example, as one (but not the only) mechanism
by which community sector actors (often in
collaboration with other actors as part of
a broader “ecology”) help manage risks (as
well as meeting other key objectives).
– Mapping patterns of social innovation,
notably with a view to shedding light on the
issues identified above and to help identify
potential gaps in public policy instruments or
general framework policies to facilitate the
generation and scaling-up of social innovation
by/with the community sector, where
appropriate.
Others argue that a useful definition of what
constitutes “social innovation” will entail
Social Innovation
making some kind of distinction between social
and other (e.g., business or economic) innova-
tions – notably in order to help policy makers
distinguish between those innovations where
significant market-driven incentives exist and
those where different (though not necessarily
less powerful) incentives are at play. In such
a context, the following may be worthwhile pol-
icy research questions to pursue, based on the
assumption that the relevant concept of social
innovation for policy makers is one that encom-
passes innovations: Resulting from either uni-
lateral or collaborative actions across a range of
different social actors. Whose impacts can be
expected to generally result in social benefits
(i.e., that accrue primarily to others). Whose
impacts may range from context-specific and
incremental changes to changes that are societal
in scope and potentially disruptive (or “game-
changing”)
Cross-References
▶ Innovation
▶ Social Capital
▶ Social Entrepreneurship
▶ Social Responsibility
▶ Sustainable Innovation
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12 August 2010. Definition S
A social license to operate (SLO) refers to the
perceptions of local stakeholders that a project,
a company, or an industry that operates in a given
Social Intrapreneurship area or region is socially acceptable or legitimate.
Whereas a license in the legal meaning of the
▶ Corporate Social Entrepreneurship term refers to a document issued by an authorized
legal entity, e.g., a city, a state/province, or
a national government, whereby the latter grants
an authorization to build, operate, or change
Social Investment activities with clearly established spatial, tempo-
ral, financial, or social parameters, the social
▶ Socially Responsible Management (SRM) license to operate refers to a more implicit form
S 2224
of agreement between a company and local stake-
holders. As such, from the perspective of
a company, a social license to operate is often
evaluated as an intangible asset. Table 1 summa-
rizes representative definitions of this notion
drawn from managerial literature. Two elements
related to the notion of SLO need to be men-
tioned. First, there is no single/commonly agreed
upon definition of “social license to operate”
(Slack 2008), as this notion is recent and has
emerged since the turn of the millennium.
Second, most definitions have been generated
by practitioners and policy-makers – including
consultants, international financial institutions,
investment companies, policy think tanks, and
company executives. By contrast, definitional
and theoretical developments from academic
researchers in management as well as from legal
research remain scarce.
Introduction
Origins of the Notion of the Social License to
Operate
The notion of social license to operate is most
often associated with companies active in natural
resources and extractive industries, including
forestry, mining, petroleum, gas and minerals,
hydropower, as well as transformation industries
with high industrial risks, such as the chemical
industry. It is, overall, related to the appropriation
and use of common renewable or nonrenewable
resources by a company.
The notion of social license to operate has
emerged in the extractive industry due to several
factors. The first relates to the limitations of com-
panies’ legal license. Common natural resources
such as water, minerals, and oil that are located
underground belong to the nation – or to
aboriginal communities – and are common
goods in numerous national contexts. National
or state governments grant conditional licenses
to a company to explore the potential of, exploit,
and transform these resources most. The legal
license is given by a government to a company
in the name of “development.” Development in
this context is most often defined as overall
Social License
wealth creation, and governments legitimate the
use and conditional appropriation of public natu-
ral resources by a private profit-motivated opera-
tor as a contribution to national or regional
development defined in aggregate terms such as
gross national product. However, it has often
been observed that development as defined by
a government in aggregate terms may translate
into very unequal terms locally, as benefits and
costs/externalities may be unequally shared
among groups in a country or a region, especially
with the most vulnerable groups such as aborig-
inal and rural populations as well as women.
Among the usual externalities are the impacts of
the extraction on the environment quality from
which certain communities derive their liveli-
hood, the social impacts of this activity (e.g.,
displacements, massive in-migrations, etc.), and
the permanent loss of nonrenewable commodities
(Jenkins 2004). Consequently, projects with
a legal license to operate on a given administra-
tive level (national, regional, or local) may be
perceived as not legitimate by local stakeholders
and/or communities who may perceive that they
do not get their share from a project or may feel
that their concerns are not taken into consider-
ation by the company that operates the project.
From the perspective of companies operating
in a locale, it has become clear that the legal
license – granted by authorities – is a necessary
but not sufficient condition for the acceptability
of projects and investments.
The second factor relates to the structure of
investments in the extractive and transformation
industries. Investments in extractive industries
are often capital intensive and long term; the
return on these investments is conditional to the
ongoing access to resources and operations in
a locale and around. As such, these investments
are in a situation of spatial lock-in (Torre and
Rallet 2005) in a given area for several years or
decades due to the fixed location of the resources
that are vital for these industries – as compared to
companies in less tangible industries, such as
the service industry, which may transfer their
activities to another region or country. Therefore,
the return on investments which derives from the
access to resources is conditional to constant
Social License, Table 1 Definitions of social license to operate
Source
On Common Ground Consultants Inc and
Robert Boutilier and Associates (2012)
Timber Communities Australia (2010)
World Bank (2012)
Mark Lovelace (President of Humboldt
Watershed Council) (Paz Durini 2010)
Center for Food Integrity (2010)
Slack/Policy Innovations (2008b)
Sinclair Knight Merz Consulting (2011)
S
Definitions
“At the level of an individual project the Social License is rooted in the beliefs, perceptions and opinions held by the
local population and other stakeholders about the project. It is therefore ‘granted’ by the community. It is also
Social License
intangible, unless effort is made to measure these beliefs, opinions and perceptions. Finally, it is dynamic and
non-permanent because beliefs, opinions and perceptions are subject to change as new information is acquired.
Hence the Social License has to be earned and then maintained
The Social License has been defined as existing when a project has the ongoing approval within the local community
and other stakeholders, ongoing approval or broad social acceptance and, most frequently, as ongoing acceptance”
“Social license is the permission that the community gives an operator (public or private) to use a community resource
either for profit or not for profit, once it (the community) has reached a level of comfort that the costs to the community
associated with that use are acceptable to the community relative to the benefits”
“Acquiring free, prior and informed consent from indigenous peoples, and local communities through mutual
agreements”
“Unwritten acceptance of a business or industry by society which allows it to operate”
“The privilege of operating with minimal formalized restrictions (legislation, regulation, or market requirements)
based on maintaining public trust by doing what’s right”
“‘Social license to operate’ is an intriguing new phrase that has entered corporate parlance in recent years. Its meaning
is not well defined, but corporations usually use it to refer to some kind of approval they must obtain from local
communities in areas where they operate (as compared to the legal license they must obtain from governments). The
concept has emerged in particular with regard to the extractive industries, which often directly impact local
communities by taking their land, water, and other resources. These industries have been the focus recently of
widespread community anger and protest in developing countries”
“There is no accepted single definition for the social licence to operate, and it is often expressed in relation to other
terms such as corporate social responsibility, community acceptance and reputation. The social licence to operate has
been described as stakeholder perception of the legitimacy of a project, a company or an industry
The concept of the social licence to operate is much broader than just “community” issues. Relevant issues include but
are not limited to:
• Environmental performance: Local communities and regulators are often concerned about issues such as air and
water pollution, water extraction, impacts on biodiversity and waste management
• Ethical business conduct and transparency: Trust in companies is easily eroded if there is a perception of dishonest
dealings or inappropriate collusion
• Workers’ rights and safety: Failure to ensure that safety incidents do not occur can have a negative impact on
corporate reputation
2225
• Community relationships: Community issues can delay or even prevent projects from proceeding. Issues include
disputes over land access and ownership, equitable sharing of benefits from corporate activity and the risk of
human rights violations by security forces”
S
(continued)

Social License, Table 1 (continued)
Source
Ethical Funds (2012)
Nelsen (2006)
Andrew Watson (2008)
Lawrence T. Kurlander (2001)
S
Definitions
2226
“The social license to operate is outside of the government or legally-granted right to operate a business. A company
can only gain a social license to operate through the broad acceptance of its activities by society or the local
community. Without this approval, a business may not be able to carry on its activities without incurring serious delays
and costs”
“Social License to Operate (SLO), within the context of corporate responsibility, competitive advantage and growth,
is a new and emerging paradigm within the mining industry. Once camouflaged by concepts such as sustainable
development and sustainability, SLO is now in the forefront as ‘the language of choice’ by industry and stakeholders.
It is a language whereby perspective is fundamental to its definition and purpose. SLO can be defined as a set of
concepts, values, tools and practices that represent a way of viewing reality for industry and stakeholders
Its purpose is to create a forum for negotiation whereby the parties involved are heard, understood and respected.
SLO is a means to earn accountability, credibility, flexibility and capacity for both stakeholders and industry. SLO is
becoming the new ‘vision’ for companies to recognize and embrace in order to acquire economic certainty with
respect to new projects. At one point in time, commodity prices (economics) were the primary driver of mine
construction; SLO adds an entirely new dimension acceptance by all stakeholders affected. If a community does not
support the development of a mine, commodity prices, no matter how high, will not generate a positive production/
development decision
SLO is a dynamic and constantly evolving process whereby the interests of all stakeholders must be balanced at each
phase of mine development, from grassroots exploration, to site remediation, to legacy sustainability projects.
Situational analysis provides the initial framework from which to embark on the process of earning SLO and ensuring
it is maintained to the benefit of all stakeholders”
“[. . .] a phrase coined to describe the global pressure imposed on multi-national companies to meet at least minimum
standards in their operations around the world”
“The Social License to Operate has several distinct characteristics:
Approval. The social license is not something granted by a government for a specified period of time. The social
license is intangible, renewable daily and granted by the people only when their needs are being met
Collaboration. “The social license requires collaboration and trust. Too often mining companies go in with the idea
that generating jobs is in and of itself enough, without taking into account what a community really wants”
Relationships. “The social license is predicated on building ongoing relationships, resulting in concrete actions”
Joint agreement. “The social license requires jointly agreed upon indicators of success. The company and the
community jointly define a good outcome, whether it is improved health and education, jobs, infrastructure or
protection of the environment”
Social License
Social License
smooth operations. This factor explains the
geographical embeddedness/localness of these
projects and the need of companies to build and
maintain sustainable relations with local commu-
nities and stakeholders, in their own interest
(Kapelus 2002).
To address these challenges, companies,
industrial associations, and international financial
institutions have designed standards and norms to
assist managers in their decisions regarding
relations with local communities and help them
cope with reputational risks. For example, the
hydropower industry has three global sets of
norms elaborated by the World Council of
Dams (WCD), the International Hydro Associa-
tion (IHA), and the International Financial
Corporation (IFC). These institutions have differ-
ent definitions for central notions such as the
consent of a community prior to the construction
of a dam. These international standards, which
are related to the social license to operate, are
necessary benchmarks but have their limitations.
The social license, therefore, refers to less
tangible elements that make the operations of
a company acceptable or legitimate in an area
by local communities and stakeholders.
Motives and Components of the Social
License to Operate
The level of SLO granted to a company is
inversely related to the level of sociopolitical
risk a company faces (Thomson and Boutilier
2011). A lower SLO indicates a higher risk. The
lowest level of SLO is having the social license
withheld or withdrawn. This implies that the pro-
ject is in danger of restricted access to essential
resources (e.g., financing, legal licenses, raw
material, labor, markets, and public infrastruc-
ture). Losing a social license represents
extremely high sociopolitical and business risks,
which may even mean nationalization in some
contexts. Motives for companies to engage in
activities related to the construction and nurtur-
ing of the social license concern the reduction of
direct and indirect business risks or the protection
of value for the company. Two forms of value
have been identified. On the one hand, direct
value creation concerns the direct cost-benefit of
2227 S
investments in building a social license to oper-
ate. Value is directly created from input savings
or from productivity increases. This direct value
can be readily calculated from an initiative such
as local workforce training, which enables
substituting expensive expatriates with local
hires. On the other hand, indirect value protection
concerns the indirect risk mitigation potential of
practices related to the construction of the social
license. It includes, among others, the value of
avoiding increase capital expenditure (CAPEX)
due to delays, disruptions, and lawsuits. Such
value is intangible and not easy to be calculated,
as, most of the time, one realizes the existence of
such an invisible, tacit, or implicit value only
when problems actually arise.
From the perspective of managers, compo-
nents of the social license to operate include
(1) social legitimacy: it comes from the
company’s respect for established norms of the
community, which may be legal, social, and
cultural, and both formal and informal in nature.
In practice, social legitimacy comes from
engagement and information-sharing with the
community. Another component is (2) credibility:
this is created by consistently providing true and
clear information and by respecting commit-
ments made to the community. Credibility is
best established through written agreements
where the rules, roles, and responsibilities of the
company and the community are negotiated,
defined, and consolidated; such a framework
also helps to manage expectations (such as
Participation Agreements). Yet another compo-
nent is (3) trust: the willingness to be vulnerable S
to the actions of another. It is a high-quality
relationship that takes both time and effort
and comes from shared experiences, beyond
transactions with the community.
Conditions for the Social License to Operate
Practitioners propose that a social license to oper-
ate is gained under three conditions, namely,
when (1) community engagement is established
from the very early stages, so that a community
feels in control over decision-making, involved
in the implementation of the project, therefore
benefiting from the company’s presence;
S 2228
(2) partnerships are created so that a company
shares risk with other stakeholders; and (3) bene-
fits are redistributed via reinforcement of local
capacity, including engagement with NGOs and
other experts, training and education of the local
population, and local supply and economic
diversification.
Key Issues
Stages and Competencies in Social License
Robert Boutilier (Thomson and Boutilier, n.d.)
has proposed that the social license has four
stages in a continuum, from low-level
nonacceptance to high-level acceptance. The
lowest stage of social license is low borderline
legitimacy; indicators for this low level of social
license are shutdowns, sabotages, boycotts,
blockades, violence, and legal challenges. In the
acceptance/tolerance stage, local communities
accept the presence and operations of
a company. Indicators of this “borderline” accep-
tance are (1) the presence of lingering issues and
threats, the presence of outside nongovernmental
organizations, and watchful monitoring. In this
stage, the company is under intense scrutiny. The
third stage is the approval/support stage in which
the company is seen as a good neighbor, and local
communities take pride in collaborative achieve-
ments with the company. The fourth stage is
co-ownership, in which the company receives
political support from the local community, and
projects related to local development are
comanaged by the company and community
groups (notion of reciprocity) in the form of
roundtables, institutions, and agreements. Local
communities may receive shares in the company
in this last stage (economic co-ownership). In this
last stage, local communities would unite along-
side the company against critics and engage in the
codesign of solutions for the success of the
investment.
Several authors (Thomson and Boutilier n.d.;
Kurlander 2001) insist that the social license to
operate is never fully gained and represents
a constant process of learning in which the
Social License
ability to dialogue and respect the other party
is a key condition; managers need to adapt their
approach to the local communities in which
they operate as well as in the specific moment
of the life cycle of the project, whether it be the
pre-feasibility and feasibility studies, construc-
tion, operation, reinvestment/renewal of a legal
license, or retrenchment and/or closure. While
most of the literature and standards focus on the
earlier stages, more could be done to under-
stand these processes over the long run, as the
long-term quality of relations is a key factor for
the renewal of a license to access natural
resources.
Future Directions
As indicated earlier, the literature on the SLO is
fragmented and, overall, has been generated by
practitioners, consultants, and policy-makers
working in the extractive industries. As such,
the social license is an interface between
a company and a host locale. From a theoretical
perspective, the source of social license could
relate more to two traditions in the business and
society literature. The first tradition views the
SLO debate as an extension of Corporate Social
Responsibility (CSR), which focuses on compa-
nies that take steps and adopt practices for the
benefit of their communities beyond compliance
with laws and regulations. The second considers
the SLO debate as an extension of the stakeholder
theory, which states that companies should
manage their relations with stakeholders so as to
ensure legitimacy and ultimately survival.
However, neither of these two traditions treats
SLO as a specific issue, therefore future research
would be insightful.
Researchers could consider four research
avenues. First, at this stage, SLO is a notion rather
than a concept per se. Researchers could consol-
idate the field and generate more robust defini-
tions of the social license to operate. A second
avenue for research could consist of examining
whether this notion of social license, which has
originated in geographically embedded
Social License
industries, could be elaborated upon and
expanded in other industries whose activities
rely less on a locale and are contested. For
instance, research could investigate how a social
license (or the absence thereof) may lead to
a legal license (or a withdrawal thereof).
Research could also investigate to what extent
problems related to social license may lead to
processes of learning inside business organiza-
tion, inside communities, as well as in the inter-
face between the two. A third avenue concerns
comparative studies of the social license across
time and space. As mentioned earlier, a social
license is an elusive and intangible phenomenon.
It broadly consists of gaining, nurturing, and
renewing legitimacy with local groups, stake-
holders, and communities on a daily basis or
through specific actions. This perceived legiti-
macy fluctuates locally. Indeed, differences are
to be expected between developing countries and
developed countries, between aboriginal and
non-aboriginal populations, and so on, as certain
existing literatures on CSR and culture outline
(see Matten and Moon 2008; Chapple and Moon
2005). What constitutes legitimacy has changed
over time as well (Lauzon 2011): for instance,
local dwellers and stakeholders in Canada used to
perceive a company as legitimate when the
company provided employment and paid taxes.
However, this has changed, as have expectations
of local stakeholders, which have become more
elusive. Companies need to take this into
account. A fourth research avenue concerns the
difference between public relations and commu-
nity relations in the different stages of social
license. These two activities require distinct com-
petencies that are often mastered by different
profiles of human resources. However, compa-
nies still tend to delegate the management of
their community relations to public relations
departments, a strategy that tends to lead to
misunderstandings between the parties involved.
Practitioners suggest that both communication
skills and a capacity to create trust with the
communities are needed. The question remains
as to what are the critical skills needed at different
stages of the construction of a social license.
2229 S
Cross-References
▶ Corporate citizenship
▶ Corporate Social Responsibility
▶ Legitimacy
References and Readings
Center for Food Integrity. (2010). Stop playing not to lose
and start playing to win – redefining today’s dairy to
build consumer trust (p. 6). http://www.vitaplus.com/
documents/DairySummitCharlieArnot.pdf. Retrieved
27 May.
Chapple, W., & Moon, J. (2005). Corporate social respon-
sibility (CSR) in Asia. Business and Society, 44(4),
415–441.
Ethical Funds. (2012). Glossary (p. 1). http://www.
ethicalfunds.com/Pages/SRI/Glossary.aspx. Retrieved
27 May.
Jenkins, H. (2004). Corporate social responsibility and
the mining industry: Conflicts and constructs.
Corporate Social Responsibility and Environmental
Management, 11, 23–34.
Kapelus, P. (2002). Mining, corporate social responsibil-
ity and the “Community”: The case of Rio Tinto,
Richards Bay Minerals and the Mbonambi. Journal
of Business Ethics, 39, 275–296.
Kurlander, L. (2001). Newmont mining: The social license
to operate (p. 1). Denver: Global Executive Forum,
Institute for International Business and Center for
International Business Education and Research,
University of Colorado. October 2001.
Lauzon, H. (2011). Les relations entreprises-
communautés: qu’en pensent les employeurs? Revue
Gestion, 36(2), 39–43.
Matten, D., & Moon, J. (2008). “Implicit” and “Explicit”
CSR: A conceptual framework for a comparative
understanding of corporate social responsibility.
Academy of Management Review, 33(2), 404–424.
Nelsen, J. L. (2006). Social license to operate. International S
Journal of Mining, Reclamation and Environment,
20(3), 161–162. September, Academic Search
Complete, EBSCO host, viewed 27 May 2012, p. 1.
Nelsen, J. L., Scoble, M., & Ostry, A. (2010). Sustainable
socio-economic development in mining communities:
North-central British Columbia perspectives. Interna-
tional Journal of Mining, Reclamation and Environ-
ment, 24(2), 163–179.
On Common Ground Consultants Inc and Robert
Boutilier and Associates. (2012). http://socialicense.
com/definition.html, p. 1. Retrieved 27 May.
Paz Durini, J. (2010). Social license in developing
countries (p. 3). http://www.pazhorowitz.com/admin/
cargar/base_2010-04-16-12-59-07_AI54-25%20Paz%
20Durini.pdf. Retrieved 27 May.
S 2230
Sinclair Knight Merz. (2011). Unpacking the social
license to operate (p. 1). http://www.skmconsulting.
com/Knowledge-and-Insights/Achieve-Magazine/Issue4-
2011/article1.aspx. Retrieved 27 May.
Slack, K. (2008). Corporate social license and community
consent (p. 1). http://www.policyinnovations.org/ideas/
commentary/data/000094. Retrieved 27 May.
Thomson, I., & Boutilier, R. (n.d.). Modeling and measur-
ing the social license to operate: Fruits of a dialogue
between theory and practice. Retrieved from http://
socialicense.com/publications/Modelling%20and%
20Measuring%20the%20SLO.pdf
Thomson, I., & Boutilier, R. (2011). Social license to
operate. In P. Darling (Ed.), SME mining engineering
handbook (pp. 1779–1796). Littleton, CO: Society for
Mining, Metallurgy and Exploration.
Timber Communities Australia. (2010). A discussion paper
on Social License and the role of TCA. http://www.tca.
org.au/statenews/National/2010/Stories_News/TCA_
NAT_CEO_DiscussionPaper_SocialLicense.pdf, p. 1.
Retrieved 27 May.
Torre, A., & Rallet, A. (2005). Proximity and localization.
Regional Studies, 39(1), 47–59.
Watson, A. (2008). Incorporating sustainability into mining
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story027.htm. Retrieved 27 May.
Wilburn, K. M., & Wilburn, R. (2011). Achieving
social license to operate using stakeholder theory.
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3–16. 70.
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Stakeholder submissions to final workshop and
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+Documents/85257559006C22E985256FF6006CE949/
$File/volume5submissionsenglish.pdf. Retrieved 27
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Zandvliet, L., & Anderson, M. B. (2009). Getting it right:
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Sheffield, UK: Greenleaf Publishing.
Social License to Operate
▶ License to Operate
▶ Social License
Social Management
▶ Institutes of Directors and CSR
Social License to Operate
Social Marketing
Gökçe Özdemir Bayrak
€
Yaşar Universitesi Selçuk Yaşar Kamp€us€u, Yasar
University, Ağaçlı Yol, Bornova, İzmir, Turkey
Synonyms
Marketing for social good; Social advertising;
Social campaigns; Social promotions
Definition
Social marketing is the design, implementation,
and control of programs calculated to influence
the acceptability of social ideas and involving
considerations of product planning, pricing,
communication, distribution, and marketing
research (Kotler and Zaltman 1971). As
a broader definition proposed by Andreasen
(1994), social marketing is also defined to be
the adaptation of commercial marketing tech-
nologies to programs designed to influence the
voluntary behavior of target audiences to
improve their personal welfare and that of the
society of which they are a part. Additionally,
Peattie and Peattie (2009) define social market-
ing as a form of marketing which is rapidly
growing and has considerable potential to con-
tribute to consumption reduction. They also
argue that social marketing is unfortunately
often confused with societal marketing
although they different from each other. First,
Kotler and Zaltman (1971) recognized the
importance and foresaw the future of social
marketing by saying that it is a promising
framework for planning and implementing
social change. Later, in the study of Andreasen
(2007), p. 664, social marketing is considered
to be an increasingly important area of market-
ing, focusing on improving the personal wel-
fare of members of society which necessarily
differs from traditional forms of marketing in
important respects. Thus, social marketing
seeks to go beyond changing attitudes to
Social Marketing
changing behavior, and to ensure that
new behaviors, once adopted, are maintained
(Peattie and Peattie 2009).
Whilst still regarded as obscure in the 1970s,
social marketing became more acceptable and
prominent throughout the 1990s (Andreasen
2007, 666). According to Dann (2010) explains
how the term “social marketing” should be
defined from three points of view. First, the
term will follow the pedigree of social marketing
as part of the broader marketing discipline. Sec-
ond, the definition will represent the means and
mechanism for behavioral change using market-
ing concepts and practice which acknowledge
that behaviors are embedded in the individual,
consumer, and societal-level behavioral change
occurs through mass adoption of individual-level
behavior. Third, voluntary change is included
and, finally, benefit is recognized. Hence, social
marketing is the specific use of marketing prac-
tices and tools to design social programs and then
communicate them to the target audience of the
society. In other words, social marketing is about
conveying messages through educational promo-
tions to which it concerns and thereby motivating
the people to act accordingly. Social marketing
can also be applied to people within the target
audience at different stages of awareness and
responsiveness in relation to an issue or behavior
(Peattie and Peattie 2009). Therefore, segmenta-
tion is a critical issue in effective social market-
ing if the aim is to get a convenient and
permanent outcome in terms of social good.
Introduction
Although marketing has heavily been criticized,
it is recently considered as a way of increasing
social well-being of the community. The core
objective of social marketing is to facilitate social
change through increasing the adoption of
a positive behavior or decreasing the use of
a negative behavior, and attempts to facilitate
the change by moving the individual’s preference
away from the negative actions toward the more
positive outcomes for the benefit of the
2231 S
individual, group, or society as explained by
Dann (2010). Andreasen (1994) criticizes the
definition of social marketing goals as necessitat-
ing that consumers “adopt, modify, or abandon”
something ignores the fact that some social mar-
keting programs are designed to discourage
behavior. Andreasen (1994) explains his criti-
cism by giving the example of campaigns to
prevent children from using drugs (e.g., the
“Just Say No” campaign in the United States)
which clearly intend to discourage change.
Finally, Kotler et al. (2002), p. 5 stress the change
agents typically wanting target audiences to do
one of four things: accept a new behavior, reject
a potential behavior, modify a current behavior,
or abandon an old behavior. Therefore, social
marketing is certainly about influencing behav-
iors of the individuals in particular and the soci-
ety in general to achieve a positive outcome.
Consequently, Lefebvre and Flora (1988) identi-
fied eight essential aspects of the social market-
ing process and these are listed as follows:
• The use of a consumer orientation to develop
and market intervention techniques
• Exchange theory as a model from which to
conceptualize service delivery and program
participation
• Audience analysis and segmentation strategies
• The use of formative research in program
design and pretesting of intervention materials
• Channel analysis for devising distribution
systems and promotional campaigns
• Employment of the “marketing mix” concept
in intervention planning and implementation
• Development of a process tracking system S
• A management process of problem analysis,
planning, implementation, feedback, and
control functions
According to Lefebvre and Flora (1988),
social marketing principles are especially well
suited for the task of translating necessarily com-
plex educational messages and behavior change
techniques into concepts and products that will be
received and acted upon by a large segment of the
population. Sometimes this behavior is like the
private sector in that it involves products (e.g., for
family planning or for the prevention of diarrhea)
S 2232
or services (e.g., getting an immunization shot or
participating in the quit-smoking group)
(Andreasen 2007, p. 668). Furthermore, social
marketing is the application of marketing
techniques in the social arena for the sake of
sustainable well-being of the society whereas
commercial marketing focuses on financial
gains. Therefore social marketing is related to
educating people about certain subjects in terms
of social welfare and thereby changing an
adopted behavior of the people in a positive
manner.
Social marketing tries to focus on the benefits
of doing something or not doing something in
order to contribute to the achievement of social
good and attain the goal of social improvement
and development. Above all, Wymer (2010) sug-
gests that if social marketers really want to make
substantial improvements in public health and
welfare, they need to enlarge the boundaries of
social marketing. Wymer (2010) adds that simply
targeting individuals with public service mes-
sages is unlikely to yield major improvements
in instances in which there are negative influ-
ences reinforcing the undesirable behaviors. So,
in many cases, social marketers cannot promise
a direct benefit or immediate payback in return
for a proposed behavior change (Kotler et al.
2002, p. 5). According to Andreasen (2007),
pp. 667–668, there are, of course, a number of
important substantive topics that are challenging
social marketers in the twenty-first century.
Among these are:
1. How to get physicians, psychologists, and
other health professionals to implement
evidence-based best practices
2. How to measure the impacts of campaigns
which have outcomes that are very long run,
difficult to discern, and subject to influences
from many endogenous and indigenous
influences
3. How to influence media gatekeepers and
others to raise specific issues to greater signif-
icance such as rampant use of prescription
drugs for children, African genocide, and
environmentally injurious practices
As emphasized in the study by Peattie and
Peattie (2009), social marketing seeks to
Social Marketing
understand the target market, the competition,
and the marketing context just like commercial
marketing does. Social marketers craft and dis-
seminate messages to persuade individuals to
discontinue unhealthful behaviors or to adopt
healthful behaviors (Wymer 2010). It is clear
that a significant amount of social marketing is
carried out in health issues. The health campaigns
that are the mainstay of the social marketing
discipline all aim to deliver quality-of-life and
well-being benefits that are central to the concept
of sustainability (Peattie and Peattie 2009).
Consequently, the adaptation of commercial
marketing to social marketing is about creating
social changes in favor of community welfare.
Mainly social marketing promotes a particular
issue such as HIV preventions, reducing alcohol
abuse, protecting againist cancer, reducing pollu-
tion, preventing tobacco abuse, discouraging
obesity, encouraging family planning,
maintaining breastfeeding, and so forth. Relevant
motivational ideas are delivered through infor-
mational messages by social marketers in order
to influence and finally change a specific behavior
or set of behaviors in terms of improving public’s
well-being. Andreasen (1994) argues that if
social marketers are to achieve behavior change
objectives in situations where substantive
changes in knowledge and values have not
already been achieved, they will misapply their
valuable skills, waste scarce resources, and show
very limited success, at least in the short term
(Table 1).
Social marketing is largely a mix of economic,
communication, and educational strategies
(Kotler et al. 2002, p. 19). Therefore, social
marketing efforts often rely on educational and
information-based strategies where informative,
argument-based messages are essential tools to
educate and sensitize a target audience on impor-
tant issues (Cornelissen et al. 2007). On the other
hand, Kotler and Zaltman (1971) argue that social
marketing is a much larger idea than social adver-
tising and even social communication.
Andreasen (1997), p. 5 also points out that
although communication tools are often central
to social marketing programs, social marketing is
much more than just communication, and, more
Social Marketing 2233 S
Social Marketing, Table 1 Examples illustrating definition elements
Social arena: Social Environment: water Community
issue Health: birth defects Safety: drowning supply and water quality involvement: voting
Influence a target Pregnant women Parents of toddlers Male homeowners who College students living
audience live in the suburbs out of state
Potential behaviors
to promote:
An application of Take a multivitamin Put a life vest on your Replace your lawn with Apply for a absentee
you that includes 400 mg toddler at the beach native plants and ground ballot
of folic acid covers
Reject a potential Do not drink alcohol Never leave your Do not use fertilizers Do not submit an
behavior toddler alone in the that contain toxic application if you have
bathtub chemicals a permanent absentee
ballot
Modify a current Drink at least eight To model the Water deeply but Read details about
behavior glasses of water behavior, parents slowly, so it penetrates candidates and issues
a day should also and reaches roots
always wear life vests
when boating
Abandon an old If you smoke, quit Do not use “water Do not water your lawn Mail your ballot before
behavior wings” as a substitute if it’s going to rain the deadline
for a life vest
Use marketing Promotion: Product: Retail Price: $50 rebate on Place: Absentee
principles and Messages on displays of coast- electric mulching ballots online
techniques (4Ps) coasters at bars guard-approved life mowers
vests
Benefit Healthier babies Safer toddlers Water availability for Youths experience
the community and having a voice
lower rates
Source: Kotler et al. (2002), p. 6

importantly, it is a set of coordinated interventions Creating social behavior changes necessarily

through the process of doing social marketing. As
Peattie and Peattie (2009) argue, in most social
marketing interventions, the costs of changing
behavior are not financial (although a financial
cost could be involved), but costs may be in
terms of time and effort, overcoming psychologi-
cal barriers, or even a physical addiction (as in the
case of smoking cessation). Also, while social
marketing may be effective in influencing behav-
ioral change in some individuals, many other indi-
viduals may not be sufficiently influenced by
a social marketing campaign to change their
behavior, since individuals live in a complex envi-
ronment of multiple internal and external influ-
ences on their behavior (Wymer 2010). Hence,
according to Kotler et al. (2002), p. 5 the most
challenging aspect of social marketing is that it
relies on voluntary compliance, rather than legal,
economic, or coercive forms of influence.
involves the 4 Ps of marketing (product, place,
price, and promotion) appropriately adapted to
the social exchange context (Andreasen 2007,
p. 666). Here, the marketing mix is developed in
order to compete against the current behavior
which the social marketer is seeking to change S
(Peattie and Peattie 2009). Kotler et al. (2002),
p. 5 also focus on the similarity of the commercial
sector marketers who sell goods and services, and
social marketers who sell behavior change. In com-
mercial marketing, the aim is to sell a product or
a service by influencing the decision-making pro-
cess of consumers by stressing certain benefits of
the product. On the contrary, it is important to
recognize that most of the social marketing pro-
grams do not involve any products or services at
all. Andreasen (2007), p. 69 enlightens this with the
example of an overweight person to start exercis-
ing on his own or to get a smoker to quit or to get
S 2234
a father to stop abusing his child. But still
commercial marketing techniques are regarded as
valid in social marketing. For instance, in commer-
cial marketing, product, promotion, place, and
price are defined as a marketing mix which can
also be applied in social marketing. These 4 P’s
adapted to social marketing are explained by
Kotler and Zaltman (1971):
• Product: In social marketing, sellers also have
to study the target audiences and design appro-
priate products. They must “package” the
social idea in a manner which their target
audiences find desirable and are willing to
purchase. Product design is typically more
challenging in the social area than it is in the
business area. For instance, in “safer driving”
the social objective is to create safer driving
habits and attitudes in the population. There is
no one product that can accomplish this.
• Promotion: It is the communication –
persuasion strategy and tactics that will make
the product familiar, acceptable, and even
desirable to the audience.
• Place: The importance of place has been
recognized in several campaigns. Strategists
of anticigarette campaigns have recognized
the need for action channels by setting up
smoker’s clinics in many large cities. They
could even go further and provide telephone
advice and even social calls if the economics
would justify these additional channels.
• Price: Price represents the costs that the buyer
must accept in order to obtain the product.
The cost of giving up smoking is largely psy-
chological, since there is actually a financial
saving in breaking the habit.
Social marketers recognize that all behaviors
face competition and in the social sector, this
competition can take the form of inaction (e.g.,
continuing to smoke) or some alternative new
action (e.g., vigorous biking rather than dieting)
(Andreasen 2007, p. 666). Thus, social marketing
campaigns attempt to make the benefits of
a change in behavior clear and let the individuals
to act voluntarily and change their behaviors
accordingly. These campaigns can be about
promoting, encouraging, and reminding a social
beneficial change of a behavior. Briefly, it can be
Social Marketing
said that social marketing is reliant upon the
subject of “change” and social marketing aims
to promote behavioral change without seeking
any financial benefit. Andreasen (1997, p. 16)
argues that changing behavior in many affairs is
only the first step and too many programs are
short lived, designed as one-time campaigns.
For the difficult behaviors with which many
social programs are involved, such quick fixes
are likely to have equally quick lifetimes
(Andreasen 1997, p. 16). Therefore, social mar-
keters seek to change the behaviors on a long-
term basis which is quite hard in many aspects
because there may be a variety of reasons for
people who are unwilling to maintain or abandon
their habits. Finally, according to Peattie and
Peattie (2009), the use of social marketing in
relation to the promotion of sustainability is
already well established.
Key Issues
In social marketing, the benefits that the audience
will obtain from the desired behavior change are
being communicated. As a result, social marketing
must not be considered as a quick process, rather it
requires long-term strategies. Although the reac-
tion to social marketing and the final consequence
varies for each individual, the success of social
marketing mainly depends on the effectiveness
of the program as well as the degree of readiness
to change. Therefore, internal and external barriers
for individuals and the society as a whole should
be identified by the social marketers. Social mar-
keting is particularly useful in removing barriers to
change that prevent individuals to take the neces-
sary action in favor of their social good.
Future Directions
Many scholars consider social marketing as an
important area of the marketing discipline and it
seems to develop as social marketing is a popular
concept in addressing the social or health problems
among the community. Ways of encouragement
and discouragement of people within the social
Social Partnership
marketing is being discussed for many years by
both the practitioner and scholars. Now by the
social pressure of community, not only nonprofit
organizations but also governments and other orga-
nizations are many times engaged in social mar-
keting activities. These entities try to encourage
people for acts that are beneficial to themselves,
as well as others. Regarding the nature of people
that do not change easily, social marketers should
try to act in patience and thereby design their pro-
grams in a continuous process. Change requires
time but at the same time it requires necessary
research which results in the enhancement of the
quality of life for both individuals and the society.
Dealing with permanent change of behaviors and
achieving beneficial results also requires effective
communication of benefits for change. Thus,
media is widely used as a mass communication
tool to motivate people for a voluntary change.
2235 S
Lefebvre, R. C., & Flora, J. A. (1988). Social marketing
and public health intervention. Health Education
Quarterly, 15, 299–315.
Peattie, K., & Peattie, S. (2009). Social marketing:
A pathway to consumption reduction? Journal of
Business Research, 62, 260–268.
Wymer, W. (2010). Rethinking the boundaries of social
marketing: Activism or advertising? Journal of
Business Research, 63, 99–103.
Social Marketing and Assessment
Response Tools
▶ Corporate Social Marketing
Social Movements

▶ Community Activism
Cross-References

▶ Corporate Social Marketing

Social Networks

References and Readings ▶ Social Capital

Andreasen, A. R. (1994). Social marketing: Its definition

and domain. Journal of Public Policy & Marketing,
13(1), 108–114.
Andreasen, A. R. (1997). Challenges for the science and Social Object
practice of social marketing. In M. E. Goldberg,
M. Fishbein, & S. E. Middlestadt (Eds.), Social ▶ Community Relations
marketing: Theoretical and practical perspectives.
Mahwah, NJ: Lawrence Erlbaum Associates.
Andreasen, A. R. (2007). Social marketing. In S
G. T. Gundlach, L. G. Block, & W. L. Wilkie (Eds.),
Explorations of marketing in society. Mason, OH: Social Partnership
Thomson South Western.
Cornelissen, G., Dewitte, S., Warlop, L., & Yzerbyt, V.
(2007). Whatever people say I am, that’s what I am: John Richard Ennals
Social labeling as a social marketing tool. Interna- Kingston University, Kingston Upon Thames,
tional Journal of Research in Marketing, 24, 278–288. Surrey, UK
Dann, S. (2010). Redefining social marketing with con-
temporary commercial marketing definitions. Journal
of Business Research, 63, 147–153.
Kotler, P., & Zaltman, G. (1971). Social marketing: An Definition
approach to planned social change. Journal of
Marketing, 35, 3–12.
Kotler, P., Roberto, N., & Lee, N. (2002). Social
“Social partnership” incorporates aspects of part-
marketing: Improving the quality of life. California: nership and consensus in employment relations and
Sage Publications. industrial relations, using particular organizational
S 2236
structures. It can influence wider characteristics of
the political and social system, where partnership
can be contrasted with adversarial relations.
Social partners are defined in the European
Union as representatives of employees and of
employers. They have a distinctive role in European
employment and social policy. However, no two
countries have the same histories, in terms of insti-
tutions or employment relations. Thus, common
agreed policies are given different national interpre-
tations. Trade union membership is recognized as
a right by the International Labour Organization,
whose conventions are binding on all member coun-
tries but lack enforcement (Ozaki 1999).
Employers in the European Union are required to
demonstrate corporate social responsibility, starting
with their conduct of employment relations. This is
part of the European social model and is supported
by a structure of directives, which arise from the
process of social dialog in which the social partners
play an active role. For example, the directive on
information and consultation of employees sets out
what is required when companies are planning
major restructuring or downsizing. Nation-states
are required to transpose these directives into
national legislation. European law takes precedence
over earlier national legislation (Monks 2008).
Companies who operate within the European
Union are subject to European law and directives.
For example, this means that when their opera-
tions are above a certain size, they are required to
establish and support European Works Councils,
which represent social partnership at the work-
place level. Patterns of organization and repre-
sentation vary between countries.
Introduction
Social partnership, as summarized above, offers
an alternative conceptualization of enterprises.
Enterprises are no longer simply dominated by
managers, working on behalf of shareholders.
They involve partnership and dialog, which is
intended to reach consensus. However, this does
not take a consistent form across the 27 member
countries or in the countries around the world
where European companies operate.
Social Partnership
In terms of European employment and social
policy, corporate social responsibility is not
a matter of corporate philanthropy or public rela-
tions (European Commission 2002). It is a legal
obligation. European and Anglo-American dis-
courses on corporate social responsibility have
very different meanings in practice. If we take
a simple definition of corporate social responsibility
as voluntarily going beyond what is legally required
in a given context, we find considerable diversity.
One response would be to ask to what extent
European law and directives are followed in prac-
tice. How realistic is it to talk of social partnerships
in former Communist countries such as Romania,
where there was an absence of independent orga-
nizations for employers and trade unions? The
lack of institutional history has meant token obser-
vation of directives. Advisors or consultants from
one EU country can find themselves facing very
different challenges in other countries.
In the UK, there has been almost no public
discussion of social partnership, so even in busi-
ness schools it is rare to find a student who is
familiar with social partnership and social dialog.
Discussion of corporate social responsibility is
thus often conducted without considering what
it means in terms of European employment and
social policy (Idowu and Filho 2009). Almost
inevitably, it can be relegated to the category of
“optional extra.”
Key Issues
There is not an automatic correspondence
between social partnership and corporate social
responsibility. Indeed, many companies, which
pride themselves on corporate social responsibil-
ity, such as Body Shop, have refused to recognize
or work with trade unions. This represents a clash
of approaches. The Anglo-American business
model faces a challenge, which legally cannot
be ignored. The right to join a trade union is
guaranteed under ILO conventions.
New member countries in the European Union
may assume that they can change the direction of
employment and social policy, so that it reflects
their own traditions. Sweden took this view,
Social Partnership
joining in 1996, and holding the EU presidency in
2001. Sweden had a history of political stability
and consensus, which brought together govern-
ment, employers, and trade unions in tripartite
arrangements. Trade unions had close links with
the Social Democratic Party, and their members
were often appointed to senior government posi-
tions. The trade unions had an important role in the
administration of pensions and welfare benefits.
Norway is a member of the European Eco-
nomic Area but not the EU, yet Norway complies
with all EU directives. They have had a similar
history, and the social partners (or labor market
parties) have worked together with government
in developing and implementing programs of
research and enterprise development. Employers
and trade unions have agreed on suitable projects
for collaborative development.
France had a different history, often involving
conflict, but with a tradition of active engagement
of trade unions in issues of work organization.
When a Swedish director-general for employ-
ment and social affairs was followed by
a French successor, European policy, as it was
implemented by the European Commission,
changed (European Commission 2002).
In Southern Europe, it has typically been
harder to see the key characteristics of active
and effective trade unions, with a high level of
participation, conducting industrial relations with
employers. One distinction is between
contrasting models of employment relations:
boxing and dancing. The UK epitomizes the
adversarial tradition of “boxing” and conducts
employment relations against a background of
class difference. Sweden has had experience of
“dancing,” constructive partnership in the work-
place, and processes of change. Perhaps most
difficult for the international CSR community is
the question asked in the EU: How can true CSR
take place in companies who do not recognize
trade unions? (Monks 2008).
Future Directions
Overall, union membership is falling in most
countries around the world, changing the balance
2237 S
of social partnership. This has implications for the
practical development of CSR, built on shifting
sands. A further complication is that national
economies and policy environments are no longer
separate and distinct. Ownership can be interna-
tional and remote. Outsourcing and restructuring
have transformed many organizations. Where
CSR had formerly been integral to the culture
and linked to social partnership, it may now have
been stripped away, as companies go back to
basics and avoid all but essential activities.
Globalization can work both ways. It can
strengthen the hand of management as against
the workforce and their representatives. Alterna-
tively it can provide an international platform for
trade union activity, which may be in association
with NGOs, and pursuing a CSR agenda. Is there
a danger that employers may use engagement in
voluntary CSR as a means of avoiding the obli-
gations of social partnership? There is clearly
a need for informed debate.
Cross-References
▶ Collaborative Advantage
▶ Partnerships for CSR
▶ Social Dialogue
▶ Soft Law
References and Readings
Ackers, P., & Payne, J. (1998). British trade unions and
social partnership: Rhetoric, reality and strategy. The S
International Journal of Human Resource Manage-
ment, 9(3), 529–550.
Aker Solutions. (2008). Aker international framework
agreement. Oslo: Aker.
Donovan, L. (1968). Royal commission on the future of
industrial relations. London: HMSO.
European Commission DG Employment and Social
Affairs. (2002). Corporate social responsibility
(Green paper). Brussels: European Commission DG
Employment and Social Affairs.
Exton, R. (2009). Health, safety and employee involve-
ment at work. EU Resilience Project. Nottingham:
UKWON.
Exton, R., & Totterdill, P. (2009). Workplace innovation:
Bridging knowledge and practice. AI & Society, 23(1),
3–16.
S 2238 Social Performance Real Estate Agency Restructuring

Huzzard, T., Gregory, D., & Scott, R. (Eds.). (2004).

Strategic unionism and partnership: Boxing or danc- Social Responsibility
ing? Basingstoke: Palgrave Macmillan.
Idowu, S., & Filho, W. (Eds.). (2009). Global practices of
CSR. Heidelberg: Springer. ▶ Corporate Citizenship
Monks, J. (2008). The future of employment relations in ▶ Corporate Governance as a Tool for Alleviat-
Europe. Lecture to UK Work Organisation Network, ing Developmental Issues
London.
Ozaki, M. (1999). Negotiating flexibility: The role of the ▶ Knowledge Transfer, Knowledge Manage-
social partners and the state. Geneva: ILO. ment and CSR
Totterdill, P. (2009). Workplace innovation in Europe. ▶ View on the Ground: CSR from a Capabilities
UK Work Organisation Network, Nottingham Approach
(Commissioned by New Paradigm Institute, Korea).

Social Responsibility Framework

Social Performance Real Estate
Agency Restructuring ▶ CSR Frameworks

▶ Real Estate Agency and CSR

Social Responsibility Model

Social Promotions ▶ CSR Frameworks

▶ Social Marketing
Social Responsibility Structures

▶ CSR Frameworks
Social Protection Benefits

▶ Healthcare and Social Benefits

Social Return on Investment

Massimo Costa
Social Regeneration Department of ‘Scienze Economiche, Aziendali
e Finanziarie’, Università degli studi di Palermo,
▶ View on the Ground: CSR from a Capabilities Palermo, Italy
Approach

Synonyms

Social Regulatory Campaigns Added socio-economic value; Social impact

measurement; SROI analysis; Valuing social
▶ Global Governance and CSR outcome

Definition
Social Reporting
The Social Return on Investment (SROI) is
▶ Social Auditing a method that consents to measure social outputs
Social Return on Investment
and value social outcomes in monetary terms
(Boyd 2004). The basic assumption underlying
the SROI technique is that all economic organi-
zations (enterprises, private businesses, public
bodies, charitable organizations, etc.) have an
impact on people, the society, and the environ-
ment. This impact can be strictly “economical,”
“social,” and/or “environmental.” The SROI
technique, however, considers the “social
impact” referring to all the aforesaid kinds of
impacts generally.
The value which is measured by means of the
SROI Analysis is an added value. However it
does not consider the social value that would
occur even without the social action of the enti-
ties considered, but only that one directly or indi-
rectly due to that activity.
The aim of the SROI Analysis is to improve
planning (looking forward) as well as evaluating
(looking back) and to allow communicating
the social impact of these entities to their stake-
holders (either internal or external) interested in
this information.
The SROI, even if initially elaborated for
“third sector” organizations, is now employed in
other kinds of private and public organizations,
and has been fully embedded in a Corporate
Social Responsibility perspective.
Introduction
The process of evaluation in social activities
has a long tradition in environmental and health
economics, but the SROI extends the same prin-
ciples to other fields (SROI Network 2009).
This technique originates in nonprofit social
enterprise The Roberts Enterprise Development
Fund (REDF), who in the 1990s developed
a system to evaluate its investments in specific
social programs in monetary terms. Though
REDF was fully aware of the difficulty to cor-
rectly express the “real” or “true” value of many
social impacts of its activity in monetary terms,
the use of this methodology grew in the following
years. The reason is to be found in the need for
useful information expressed by investors in
social activities for whom the comparison
2239 S
between the initial objectives and the final
achievements obtained is relevant. Its success
and diffusion were also due to the fact that it is
a tool for assessing performances and communi-
cating results in social activities.
SROI measures the creation of socioeconomic
value along a continuum whose extremes are the
pure “economic” value and the pure “social” one
(Emerson et al. 2001).
The “economic” value and return are com-
monly expressed by means of exchange values,
that is, by prices.
The pure “social” value, instead, is not valu-
able in monetary terms. The SROI analysis, thus,
is not able to capture all aspects of the benefits
and value that accrue as a result of a successful
program.
Between these two extreme bounds, respec-
tively of “economic” and “social” values, the
measurable cost savings and/or revenues that
result from all kinds of organizations’ interven-
tion must be added. These economic values are
not exactly a return for the organization or entity;
rather they accrue to the stakeholders. Hence they
constitute the “socioeconomic” values measured
by the SROI analysis.
The reasons to evaluate the SROI are as many
as the stakeholders that are involved in the busi-
ness. There are internal stakeholders interested to
know if the action of the organization is really
effective, but there are also external stakeholders
interested in knowing if the funds assigned to the
organization have achieved the initial goal for
which they had been acquired or if buying the
products of a specific business has a positive S
social impact. According to authoritative authors
(Lingane and Olsen 2004) the SROI analysis
helps managers and investors to accomplish
three critical tasks: “plan, manage, and assess.”
The SROI methodology presents the follow-
ing main principles:
– Involving stakeholders is central
– A theory of change, mainly represented by an
impact map, can be useful to understand how
the entities create change with their action (link
between resources in input, on one side, and
outputs to be achieved and the social results of
outputs, the “outcomes,” on the other side).
S 2240
– Allowance must be made for the attribution of
outcomes to other organizations, as well as for
deadweights and displacement to account for
what would have happened anyway.
– Evaluation is only for the things that matter.
– Evaluation is only for material impacts.
– Financial proxies are generally used for the
monetization of impacts.
– A general attitude of never over-claiming is
needed.
– The methodology has to be transparent.
– The results of the analysis must be verifiable.
The main part of these principles has been
formalized by the “SROI network” and coopera-
tion between the latter and the Social Accounting
and Audit Network (SAA network) has been for-
mally established. The principles common to the
two networks are:
– Involve stakeholders.
– Value the things that matter.
– Only include what is material.
– Do not over-claim.
– Be transparent.
– Verify the results.
The SROI can concern the entire organization,
a specific aspect of its activity, or a specific pro-
gram or investment. The analysis, according to
who conducts it, can be internal or external and
according to the subject toward which it is
directed, can be for internal purposes or for an
external audience. Furthermore, it can be evalu-
ative, if conducted retrospectively and based on
actual outcomes, or forecast, if designed to sup-
port planning future initiatives.
The SROI method includes four elements:
Inputs, Outputs, Outcomes and Impacts.
Inputs are the resources invested in the activity
to be evaluated. They can be measured in terms of
physical units or as costs.
Outputs are the tangible and direct products of
the activity. They are not generally measured in
monetary terms.
Outcomes are the final effects of the organiza-
tion’s outputs on people. The link between
outputs and outcomes implies – as mentioned
above – an underlying theory of social change
as an effect of the organizations’ social activities.
This theoretical link must be as transparent as
Social Return on Investment
possible. The outcomes are also a crucial element
for another reason: they have a value, perhaps
approximated by a proxy, but nonetheless
a value. This monetary value is calculated by
the stakeholders’ perspective.
Impacts, finally, are the same outcomes but
diminished by an estimate of what would have
happened if the evaluated activity should not
have occurred.
The technique of SROI as indicated in the
main available guide on the matter (SROI
Network 2009) is very nested in main Stages
(six), and further Steps for each stage.
The stages are the following:
1. Establishing scope and identifying
stakeholders
2. Mapping outcomes
3. Evidencing outcomes and giving them a value
4. Establishing impact
5. Calculating the SROI
6. Reporting, using, and embedding
The steps of the first stage (Establishing scope
and identifying stakeholders) are the following:
– Establishing scope
– Identifying stakeholders
– Deciding how to involve stakeholders
The scope of an SROI analysis is an explicit
statement about the boundary of what is being
considered and it is the result of a compromise
between what is possible to be measured and
what is possible to be improved or communi-
cated. Identifying stakeholders means to list
people or organizations that will experience
change as a result of the activity being analyzed.
Change can be either positive or negative.
The ways of involving stakeholders consist in
collecting direct information (through interviews,
workshops, e-mails, and group sessions) or indi-
rect information by means of existing research or
other sources. Sometimes the stakeholders cannot
be involved (future generations, animals); in this
case there is the need to identify people who may
speak on their behalf.
The steps of the second stage (Mapping
outcomes) are the following:
– Starting on the Impact Map
– Identifying inputs
– Valuing inputs
Social Return on Investment
– Clarifying outputs
– Describing outcomes
Mapping of outcomes is built by means of
a specific tool: the Impact Map. An Impact Map
is to be designed and initialized with data on the
organization, the scope, and the stakeholders
determined in the previous stage. The remaining
part of the stage is devoted to the construction of
the other basic elements of the SROI analysis:
inputs, outputs, and outcomes. In this stage,
inputs, already identified qualitatively or in phys-
ical terms, are quantified in monetary terms, as
proper costs. Of course some inputs, like financial
resources, are originally in monetary terms.
Among the nonmonetary inputs, there are not
only goods and services, but also the hours of
work deployed by volunteers. While the identifi-
cation of outputs can be relatively simple, the
same is not true for the outcomes, because the
relationship between social action and outcomes
is based upon a theory of change (Boyd 2004).
The theory of change evaluates how an organiza-
tion creates change in defined social issues with
its action.
The steps of the third stage (Evidencing
outcomes and giving them a value) are the
following:
– Developing outcome indicators
– Collecting outcome data
– Establishing how long outcomes last
– Putting a value on the outcome
Indicators are ways of knowing that change
has happened. Then indicators have to tell
both whether the outcomes have occurred and
with which intensity. They are “subjective”
(self-reported) and “objective”. Both kinds of
indicators can represent an outcome and they
have to be balanced. The materiality, before the
actual availability of data, is the first criterion in
the choice of indicators. The collection of data on
indicators, instead, is quite a plain activity.
Seldom has the outcome expired just after the
activity stops. Then a judgment is requested on
how much the effects will last in the future. The
timescale used is generally the number of years
one expects the benefits to endure after the inter-
vention. Different outcomes can have different
durations. In this stage, the delicate process of
2241 S
giving a value through financial proxies (for the
outcomes) in correspondence to the physical data
collected regarding the indicators takes place. By
combining the subjective evaluations one arrives
at the estimate of the total value created by an
intervention or an activity.
The steps of the fourth stage (Establishing
impact) are the following:
– Deadweight and displacement
– Attribution
– Drop-off
– Calculating the impact
Deadweight is a measure of the amount of
outcome that would have existed even if the
activity had not taken place. It is calculated as
a percentage. Displacement, instead, does not
apply to every SROI analysis and consists in the
assessment of how much the outcome displaced
other outcomes. Attribution is an assessment of
how much of the outcome was caused by the
contribution of other organizations or people.
Attribution is also calculated as a percentage.
Drop-off accounts for the fact that in future
years the impacts will be influenced by other
factors. Thus it consists in deducting a fixed per-
centage in each of the following years, growing
from one year to the next. Finally the impact, in
monetary terms, can be calculated.
The steps of the fifth stage (Calculating the
SROI) are the following:
– Projecting into the future
– Calculating the net present value
– Calculating the ratio
– Sensitivity analysis
– Payback period S
In this stage one needs to determine, first, the
outcome for every year of the period considered.
Then all discounted flows must be summed
together to obtain a single figure, representing
the comprehensive outcome. The ratio is then
calculated dividing the discounted value of ben-
efits by the total investment. If the SROI analysis
uses a spreadsheet it is easy to calculate what
changes when there are variations in data: that
is, it renders possible to conduct a sensitivity
analysis. The aim of this analysis is to test
which assumptions have the greatest effects on
the model. The last step, the determination of the
S 2242
payback period, is optional and describes how
long it would take for an investment to be
“socially” paid off.
The steps of the sixth stage (Reporting, using
and embedding) are the following:
– Reporting to stakeholders
– Using the results
– Assurance
The first step concerns accountability to stake-
holders. The second step concerns changes for
the organizations following the SROI analysis.
The third step is the process by which the infor-
mation in the report is audited both in principles
of good practice and in data.
SROI definitely has a historical precedent that
sounds very much alike it: the ROI. The key
passages that distinguish the old ROI from the
new SROI are fundamentally two:
– ROI considers a return only in the perspective
of the enterprise itself, while SROI considers
a return in the stakeholders’ perspective.
– ROI deals with proper exchange values deter-
mined ultimately by prices, while SROI deals
with “social” values determined by proxies.
Thus, these proxies do not have the pretension
to correctly represent the value of single out-
comes, but only to generate a unit of size useful
for a general comparison among different out-
comes and between the costs of investments and
the value of their results.
The characterization of utilizing proxies might
be seen as a limit of the methodology. The lack of
market values could, indeed, determine an
extreme subjectivity in the process of determina-
tion of such proxies (Scholten et al. 2006). For
this reason, however, the recently established
“SROI network” is attempting to define general
agreed standards for determining these “social
values.”
The methodology was born for nonprofit orga-
nizations but its natural scope is so wide that it is
liable to be applied (and actually it is spreading)
over a large amount of organizations, both for
profit and not for profit.
It accounts for all stakeholders’ interests but
the original direction is toward the investors in
social activities. Thus a prevalence of focus on
investors’ interests is to be recorded. They may
Social Return on Investment
be, in turn, private investors, like philanthropists,
or public investors, like government or other
public bodies, involved in social policies.
The focus on impact implies however
a judgment regards the interval of time to be
considered and concerning the rate at which to
discount the impacts in order to determine the
actual value of social investments.
Another issue to be noted is the difference
between SROI and the SROI Ratio. SROI, as
a matter of fact, consists not only in one or more
ratios that are determined through the application
of a methodology, but it is the methodology itself
or, even, the whole attitude or “philosophy” that
underlies this process of evaluation. SROI, then,
is not only a “number” but the general attitude of
not renouncing to give an economic (monetary)
value to qualitative impacts of all economic,
social, and environmental actions, investments,
and policies.
This attitude and methodology bring with
them benefits and limitations for organizations
that adopt it. According to the prevailing debate
on the subject, benefits and limitations may be
summarized as follows.
The main benefits might be summarized as:
– Economic logic to support social policies
– Clarity of communication of the achievement
of goals
– Effectiveness and efficiency of programming
and managing social activities
– Investment mentality
– Liability to auditing and accreditation
The main limitations might be summarized as:
– Too much focus on monetization
– Losing of information about benefits that can-
not be monetized (proper social outcomes)
– High subjectivity of judgment regards the
links between outputs and outcomes
– High subjectivity of judgment regards the
interval of time and on the discount rate
– Difficulty to synthesize stakeholders’ opposite
interests
Anyway, after a “taxi” of a decade and a half,
finally the “take-off” of the SROI methodology
occurred approximately in the second half of the
2000s, just when mainstream economics was
beginning to experience a period of relative
Social Return on Investment
crisis, together with the general crisis of the
Western Economies, till then mainly oriented
toward the indefinite growth and the maximiza-
tion of profit. Thus, the SROI network was
established only in 2006 and is now a dynamic
and flourishing web community. In a certain
sense it is possible to assert that the SROI com-
munity (see, e.g., the website www.
thesroinetwork.org and its links) is an important
star of the wider constellation of the “new eco-
nomics” stream, which is now questioning the
fundamental assumptions of traditional
economics.
An important contribution to that “take-off”
was the concrete support that the network received
from the Scottish Government and the British
“Office of the Third Sector” (OTS). The latter
funded a 3-year program, beginning in 2008, in
a consortium where there is, among other institu-
tions, the NEF (New Economics Foundation). The
former, meanwhile, is developing a database of
indicators to support the SROI analysis.
Key Issues
According to Jed Emerson (Senior Fellow, “Gen-
eration Foundation,” London, England), “the key
issue for both managers of social enterprises and
those investing in them is whether the capital
provided is generating meaningful, real returns –
returns for the manager, the investor and society as
a whole. SROI is one tool by which it is possible to
assess the full, blended value of NGOs and For-
Profit corporations as both seek to maximize the
full value they have the potential to create.”
In these sentences, it is possible to identify the
core of our discussion. The key subjects inter-
ested in SROI are the managers (inside) and the
investors (outside). But beyond them is consid-
ered also the “society as a whole.” The entities
involved in SROI are defined “social enterprises”
(Rotheroe and Richards 2007), that is, either for-
profit corporations with a social role or other
organizations, which undertake “social” enter-
prises among their activities. The scope of SROI
is, of course, the return. But the overall aim of the
methodology is the search for a management tool
2243 S
(maximizing the socioeconomic value) and for an
evaluation tool (of the same value).
Another key issue is “monetization.” The pas-
sage from outputs, expressed in physical terms, to
outcomes, expressed in monetary term, is one of
the most delicate of the entire methodology
(Ryan and Lyne 2008). Risks here are related to
the chance of not considering a correct balance
among the different stakeholders’ interests to
evaluate and of holding too smoothed or approx-
imated proxies to the monetary values.
Thus, what corresponds to the interest of the
business or stakeholders has to be measured and
translated in value. Every refinement of the
method, however, can never reach the one best
way or be considered the right answer, but, at
most a correct answer.
The correctness in methodology, of course,
deeply affects the results obtained and implies
both closeness to the agreed rules and a right
degree of correct judgment for the controversial
questions.
Another key issue is that the significance of
SROI is linked to the single characterizations of
the business and to the single pieces of informa-
tion needed by the stakeholders.
One intrinsic limitation of the technique is that
it leads to a single number, the SROI ratio, in
which it is presumed that the interests of many
stakeholders are synthesized. In other words, the
SROI technique offers a “reduction of complex-
ity.” But this limitation is also its strength,
because it allows comparison with different qual-
itative items, otherwise is subject only to rhetoric
discussion without a firm point. S
Yet, the SROI ratio, the arrival point of the
SROI analysis, is only a number. Not all out-
comes of social activities can be monetized. The
strict “social” value therefore escapes from its
evaluation. Social accounting, then, may find
the SROI analysis very useful, but it cannot
limit itself to this methodology.
Future Directions
A challenge the SROI methodology is now facing
is the availability of data which is useful for its
S 2244
analysis. In this sense, some governments are
providing information in such direction, in order
for organizations to be able to use reliable gov-
ernmental data.
Furthermore, as mentioned above, the method
began in the past to value a socioeconomic ratio
between an economic extreme, represented by
the traditional ROI, and a social extreme, not
available as a numeric ratio. This traditional con-
ception, between “two” extremes, is progres-
sively overwhelmed by a “three” extreme
conception, where, aside the economic and the
properly social aspect, the environmental one is
distinctively perceived and measured.
But the true direction for the future is the fact
that SROI is becoming a true “way of thinking,”
because the creation of value is considered
obtained through social and environmental
means, and no longer only through financial
means. That is what is generally meant by the
expression of “blended value” (Emerson 2003);
(Nicholls 2009).
A methodological evolution of the SROI can
also involve the use of nonfinancial proxies to
take into consideration the qualitative sides of
social activities and investment. By renouncing
to a general comparison between homogeneous
values might lead to the acquisition of new tools
of evaluation, for those activities whose impacts
cannot be translated in proxy financial values.
Finally it is noteworthy to remember the grow-
ing convergence, or anyway the link, between
SROI and IRIS (Impact Reporting and Invest-
ment Standards), due to the IRIS’ concern for
providing standard performance indicators
for inputs, outputs, and outcomes.
Cross-References
▶ Accountability
▶ Communicating with Stakeholders
▶ Corporate Social Entrepreneurship
▶ Corporate Social Performance Measurement
▶ Disclosure (CSR Reporting)
▶ Environmental Accounting
▶ Social Accounting
▶ Stakeholders
Social Risk
References and Readings
Boyd, J. (2004). Measuring social impact. The Founda-
tion of Social Return on Investment (SROI). London:
SROI Primer, New Economics Foundation.
Emerson, J. (2003). The blended value proposition:
Integrating social and financial returns. California
Management Review, 45, 35–51.
Emerson, J., Wachowicz, J., & Chun, S. (2001). Social
return on investment (SROI): Exploring aspects of
value creation. San Francisco, CA: Roberts
Foundation.
Lingane, A., & Olsen, S. (2004). Guidelines for social
return on investment. California Management Review,
46, 116–135.
Nicholls, A. (2009). ‘We do good things, don’t we?’:
‘Blended value accounting’ in social entrepreneur-
ship. Accounting, Organizations and Society, 34,
755–769.
Nicholls, J., Mackenzie, S., & Somers, A. (2007). Mea-
suring real value: A DIY guide to social return on
investment. London: New Economics Foundation.
Rotheroe, N., & Richards, A. (2007). Social return on
investment and social enterprise: Transparent account-
ability for sustainable development. Social Enterprise
Journal, 3, 31–48.
Ryan, P. W., & Lyne, I. (2008). Social enterprise and the
measurement of social value: Methodological issue
with the calculation and application of the social return
on investment. Education, Knowledge and Economy,
2, 223–237.
Scholten, P., Nicholls, J., Olsen, S., & Galimidi, B. (2006).
Social return on investment: A guide to SROI analysis.
Amstelveen: Lenthe Publishers.
SROI Network. (2009). A guide to social return on invest-
ment. London: Society Media.
Social Risk
▶ Strategic Risk
Social Risk Management
▶ Sustainability Risk Management
Social Security
▶ Healthcare and Social Benefits
Social Sustainability
Social Security System
▶ Healthcare and Social Benefits
Social Sustainability
Dyann Ross
University of the Sunshine Coast, Sunshine
Coast, QLD, Australia
Synonyms
Enduring human development; Intergenerational
equality; Self-perpetuating social systems; Social
justice; Socially sustainable; Sustainable
relationships
Definition
Social sustainability is an ideal state of well-
being which might be expected to occur when
social, economic, and environmental interactions
foster intergenerational equality and longitudinal
equilibrium. That is, social sustainability refers to
equality, well-being, and balance across quality
of life indicators between sociocultural groups
over time and from one generation to the next.
It is an enduring state of reciprocal,
nonexploitative relationships where social jus-
tice and peace are experienced in relation to
achieving basic human needs and interests and
resolving any conflicts which adversely impact
on peoples’ rights and needs. Love mediates
power abuses and imbalances between the three
recognized pillars of sustainability – the eco-
nomic, the environmental, and the social – and
is any action that motivates and directs move-
ments toward this state of human well-being.
The means and ends must be congruent. The
spiritual and nonhuman dimensions of peaceful
and just societies need to be included in this
definition and related practices to avoid an overly
materialistic and humanistic focus.
2245 S
In comparison, the corporate social responsibil-
ity (CSR) literature refers to social sustainability in
narrow terms as the indications of gains by the
nearby community or the host country in terms of
royalties from company profits, job creation, social
services, and corporate philanthropy such as dona-
tions of goods and resources to local communities.
In contrast, in literature which is generated by
impacted stakeholders and nonaligned researchers,
the impact of company operations on community
cohesion and the social character of mining towns,
for example, has been identified as very limited and
in some instances as a negative and depleting
impact. It is arguable that for social sustainability
as a concept and practice to be central to claims of
CSR, it needs to involve natural and social justice
gains for the impacted people (Ross 2009).
In a broader societal context, social sustain-
ability is typically defined as a set of life-
affirming strategies and occurs when “the formal
and informal processes; systems; structures; and
relationships actively support the capacity of cur-
rent and future generations to create healthy and
livable communities. Socially sustainable com-
munities are equitable, diverse, connected and
democratic and provide a good quality of life”
(Barron and Gauntlett 2002).
Introduction
Worldwide, social sustainability is a central tenant
and goal of community development, peaceful
families, and nations and struggles for social equal-
ity (Ife and Tesoriero 2006). Conflict, violence, S
abuse, human degradation, and impoverishment
are all indicators of the lack of social sustainability.
It is also always the case that lack of social sustain-
ability is intricately related to economic and envi-
ronmental abuses or imbalances. Socially
sustainable relationships are free of oppression
from exploitation, violence, imperialism, disem-
powerment, and marginalization (Young 1990). It
is an active state that occurs when people are
involved in nonexploitative ways in the big and
little decisions which affect all aspects of their
lives. In the political realm, it requires local and
global democracy. In the economic realm, it
S 2246
requires vulnerable stakeholder inclusion in the
decisions about the usually undeclared trade-offs
for development agendas of industries and govern-
ments (Brueckner and Ross 2010).
The Universal Declaration of Human Rights is
a crucial starting point for grasping the potentially
revolutionary consequence of foregrounding the
social aspect of sustainability in the context of
CSR. This would hold a tension with the usual
preoccupation with economic sustainability as if,
in its most simplistic sense, all else hinges on
company profits and the broader economy is buoy-
ant. Where corporations pursue their operations in
the contexts of abuses of human rights, this is done
at the expense of the sustainability of peoples’
lives, the social capital of their communities, and
company/impacted stakeholders’ relationships.
With this framing, social sustainability refers to
the presence of social justice for the most vulner-
able social groups and communities impacted by
corporate operations, over time and in relation to
all significant needs and interests, without
compromising the sustainability of the environ-
ment. It is also vital that an economic system that
is conducive to sustainable relationships and envi-
ronments exists.
A more accurate term might be “sustaining
relationships” as this accents the interactive, rela-
tional, and power-drenched nature of economic
activities and avoids reifying the inextricably
human-made nature of all aspects of corporations
claiming to be practicing CSR. In turn, complex,
industrialized societies need “soft infrastructure,”
a term coined by Professor Duhl, University of
California, Berkley, such as social welfare ser-
vices to enable social well-being. These points
highlight the importance of unpacking the vari-
ous definitions and assumptions relating to sus-
tainability. As a term, sustainability tends to
mystify the way human actions, choices, and
relationships are the medium through which eco-
nomics is enacted, through which corporations
achieve profits, and through which the environ-
ment is commodified, communities are denied
sovereignty, and nation states gain or lose by
the corporation’s business activities. The idea of
sustainability being social can help demystify
these human activities.
Social Sustainability
According to German philosopher Martin
Buber, reality is in between – that is, reality is
created through relationships, the interactive
space between people. He identified three main
forms of social relationships:
“I–Thou”
“I–It”
“I–You”
Socially sustaining relationships are “I–You”
relationships where the parties meet as equals
and reciprocity and mutual respect is evident.
“I–It” relationships are unsustainable as they are
characterized by some level of dehumanization
through violence and other forms of oppression.
“I–Thou” relationships are highly spiritual, moti-
vated by love and care for sentient and
nonsentient life forms, similar to the principles
of deep ecology. There would be no need to
struggle for sustainability when love is the main
motivation and practice informing families, cor-
porations, and societies. This is because it would
already exist.
The idea of social sustainability brings atten-
tion to the human and relationship aspects of
societies, groups, or organizations. It has tended
to be the handmaiden to an overfocus on eco-
nomic considerations, especially in relation to
the business activities of multinational and trans-
national corporations. When considered in the
literature, social sustainability is usually consid-
ered from the perspective of the corporation and
narrowly defined in terms of limited consider-
ation of stakeholders’ interests. Where there are
competing or conflicting stakeholder interests,
the limitations of this overfocus on profits and
economic growth become apparent.
Key Issues
The poor conceptualization of social sustainability
serves the powerful stakeholders – corporations,
their shareholders, host governments – as it is not
robust enough to expose abuses of human rights
and needs. There is evidence in the literature of
a doublespeak of corporations claiming socially
sustainable strategies in their public reporting and
less visibly at their local mining site, for example,
Social Sustainability
disrupting the functioning of a community and its
landscape. Corporations also tend to decide what
counts as appropriate philanthropy and what would
be socially beneficial to a mining community. If not
tied to government-regulated key performance
indicators and monitored real-time benefits for
adjacent communities and minority groups,
there is no leverage to change the status quo. The
language of sustainability can be used for political
purposes and can hide the harsh reality of natural
and social injustice which is now well documented
to occur in adjacent communities. The status
quo globally, and often locally, shows a persisting
pattern of advantaging the corporations’ pursuit
of profits at the expense of many local people
(and environments).
Relatedly, there is a need to equalize the relative
value of each aspect of the three dimensions of
sustainability in those nation states where neolib-
eral capitalism has overvalued “the economy” at
the expense of the social well-being of various
social groups. Further, the political nature of social
sustainability needs to accent the social justice
issues of the relationships and as such can bring
human rights, minority groups’ needs, and irrecon-
cilable competing interests into focus in a way that
is not typically addressed in the CSR literature.
There are some noteworthy attempts to recognize
and respect the rights of Indigenous landowners in
mining locales, and this may even extend to formal
agreements which secure jobs and social benefits
for disadvantaged areas. However, research in the
Pilbara area of Australia, for example, shows that
inequalities still persist, with few of the intended
benefits making a substantive difference in Indig-
enous peoples’ quality of life.
The significance of the interrelatedness of
dimensions of sustainability is underappreci-
ated, and along with this is the failure to appre-
ciate the significance of the social aspect, even
in economic activities. Social interactions
between people are the common denominator
across all aspects of social, economic, and envi-
ronmental sustainability. Socially just and car-
ing relationships are the way economic interests
are most likely to be advanced without conflict,
war, and depletion of resources and adverse
impacts on human well-being. Another way of
2247 S
Economic
Environmental Social
Social Sustainability, Fig. 1 A typical Venn diagram of
aspects of sustainability
saying this is that securing social sustainability
in turn will secure economic and environmental
sustainability.
There are few robust examples of equalizing
strategies between three aspects of sustainability
to overcome the dominance of the economic
aspect, and typically in most definitions of sus-
tainability which identify “social” alongside
“economic” and “environmental” factors, equal
value is given to all three components. The best
known diagram shows this unquestioned equal
value and suggests how balance or integration
between the aspects can be represented (Fig. 1).
The debates about sustainability might more
accurately be presented as uneven or disproportion-
ate circles in the Venn diagram (Fig. 2). S
Lozano (2006) seeks to address these oversim-
plifications by the following diagram which closely
links all three aspects of sustainability in a fully
integrated dynamic with a parallel process of
maintaining an equilibrium or balance
between the social, economic, and environmental
interactions over the short, medium, and longer
term (Fig. 3).
This and other attempts to identify pictorially
the complex factors and dynamics involved in
socially sustainable interactions are likely to be
unsatisfying because local context, history, polit-
ical situation, cultural factors, and, in particular,
S 2248
power issues are very hard to represent in any
static or definitive way.
A set of questions which might alert us to risks
to social sustainability are as follows:
• Who is winning and who is losing and by what
mechanisms of power?
• Who is asking and answering this question and
with what vested interests in the status quo?
• What would the situation look like if the most
adversely impacted people were listened to
and advantaged by the corporation’s opera-
tions and host government’s remedial actions?
• What can be done now to avoid creating future
generations of people who are poor,
Economic
Social
Environmental
Social Sustainability, Fig. 2 Disproportionate valuing
of aspects of sustainability
First Tier Sustainabitliy Equilibrium
Economic Environmental, and Social
aspects interactions
Social Sustainability,
Fig. 3 Lozano’s
two-tiered model of
sustainability (2006)
Social Sustainability
dispossessed, unemployed, homeless, and
social outcasts?
• Who is best positioned to finance and sponsor
the investment in people as part of contribut-
ing to the commonwealth of the society?
• What is needed to ensure that entities which
deplete natural resources and impact unfairly
on social groups or communities are held
accountable for harm done?
Future Directions
There needs to be a linking up of some knowl-
edge areas to improve theorizing about sustain-
ability generally and social sustainability
specifically. Many of the concepts used to define
social sustainability are themselves heavily value
laden and culturally specific, but this should not
be used as an excuse to accept the status quo as
the best that is possible. Some authors suggest
that we need to agree on a tangible social indica-
tor such as life span and then ask how much time
do we need to meet our basic human needs and
how much is left and how is this time used, with
what effects on others.
The idea of social justice used here centers the
importance of people being involved in decisions
that affect them and their future relatives’ rights
and interests. Accounts of successful attempts by
the impacted communities or social groups to
engage with powerful corporations to negotiate
better sharing of the benefits and to mitigate the
unequal burden of the risks and losses are
urgently needed. A range of conversations
entered into without fear of domination and dis-
advantage are also urgently needed to model
Short-, Long- and
Longer-terms interactions
Second Tier Sustainability Equilibrium
Socially Conscious Real Estate Agency
sustainable ways of engaging differently posi-
tioned stakeholders. The silence of everyday peo-
ple when injustices are occurring weakens
democracy and the checks and balances that are
assumed to go with a robust public discourse.
As I argued in a case study of a protracted
conflict between a multinational mining company
and small adjacent community, more work is
needed on how to establish fair partnerships
where there are substantial power differences
(Ross 2009). Adapting the idea of warrants from
the area public administration (Fox and Miller
1995), it is possible to suggest that ethical, sus-
tainable relationships require the securing of spe-
cific warrants or agreements around key aspects
of the dispute:
1. To be sincere in building relationships
2. To stay focused on relevant shared issues
3. To do so with willing attention, especially to
the effects of power
4. To ensure that substantive contributions are
made by both parties
More research is needed in this area of the
value of fostering social sustainability in a range
of different contexts as the precursor to improved
capacity for generating economic and environ-
mental sustainability.
A possible implication is that nation states
need to regulate multinational mining and other
inherently unsustainable corporations to better
balance benefits and trade-offs of their opera-
tions. Mining nonrenewable resources is not sus-
tainable, and adversely impacting the social
character and cohesion of local towns is not
recoverable. The social dimension is a sensitive
barometer of the extent of sustainability. It seems
the emperor has no clothes – capitalism’s under-
belly has been exposed with the 2009 global
financial meltdown emanating from the elites
and the banking system. Extremes of wealth and
businesses making disproportionate profits from
nonrenewable resources are possible because
unsustainability is tolerated in the host country.
The dictum of economics, as if people matter,
is yet to be commonplace across the global busi-
ness community. Future directions in the research
and practice of sustainability need to marry
human rights and social justice concerns with
2249 S
economic activity such that there are limits to
profits and the unquestioned superiority of the
profits at any cost.
Cross-References
▶ Dialogue
▶ Human Rights
▶ Intergenerational Justice
▶ Relationship-Based Systems
▶ Sustainable Development
References and Readings
Barron, L., & Gauntlett, E., (2002). Housing and
sustainable communities indicators project. Stage 1
report – Model of social sustainability. Retrieved on
May 15, 2010 from http://wacoss.org.au/images/assets/
SP_Sustainability/HSCIP%20Stage%201%20Report.pdf
Brueckner, M., & Ross, D. (2010). Under corporate skies:
A struggle between people, place and profit. Perth:
Fremantle Arts Press.
Fox, C., & Miller, H. (1995). Postmodern public admin-
istration: Toward discourse. Thousand Oaks: Sage.
Ife, J., & Tesoriero, F. (2006). Community development:
Community based alternatives in an age of globalism
(3rd ed.). Frenchs Forest: Pearson Education
Australia.
Lozano, R. (2006). Envisioning sustainability three-
dimensionally (Working Paper Series No. 39). Cardiff:
BRASS Centre.
Ross, D. (2009). Emphasizing the social in corporate
social responsibility. In S. Idowu & W. Filho (Eds.),
Professionals’ perspectives of corporate social
responsibility. Heidelberg: Springer.
Young, I. (1990). Justice and the politics of difference.
Princeton: Princeton University Press.
S
Social Welfare Benefits
▶ Healthcare and Social Benefits
Socially Conscious Real Estate
Agency
▶ Real Estate Agency and CSR
S 2250
Socially Dependable Real Estate
Agency
▶ Real Estate Agency and CSR
Socially Responsible Behavior
▶ Socially Responsible Management (SRM)
Socially Responsible Business
Management
▶ Socially Responsible Management (SRM)
Socially Responsible Corporate
Property Management
▶ Property Management and CSR
Socially Responsible Corporate
Restructuring
▶ Socially Responsible Enterprise Restructuring
Socially Responsible Development
▶ Property Development and CSR
Socially Responsible Downsizing
▶ Socially Responsible Enterprise Restructuring
Socially Dependable Real Estate Agency
Socially Responsible Enterprise
Restructuring
Liangrong Zu
Enterprise, Microfinance and Local Development
Program, International Training Centre of the
ILO, Turin, Italy
Synonyms
Responsible restructuring; Socially responsible
corporate restructuring; Socially responsible
downsizing; Socially responsible industrial
restructuring; Socially responsible mergers and
acquisitions; Socially responsible restructuring
Definition
Socially responsible enterprise restructuring
(SRER) can be defined as the restructurings
undertaken in enterprises in a socially responsible
manner, taking into consideration the interests
and concerns of all stakeholders, respecting the
values of the enterprise, seeking the involvement
of those affected by restructuring, practicing
open communications, and treating all employees
with dignity, fairness, and respect to mitigate the
negative social impact of restructuring on
employees, community, and society as a whole.
The definition emphasizes overall “stakeholder
value” rather than short-term “shareholder
gains.” The concept of SRER is a brand-new
term emerging in the management literature in
recent years; there is no fit-for-all definition for
the concept, and therefore, the concept is some-
times manipulated with ease to fit in with one
preconceived notion or another that will please
the companies’ shareholders. This sometimes
translates into a confusing set of definitions for
the same concept. For instance, some define
SRER as a systems approach, taking into account
both internal and external stakeholders, while
others may define it as purely voluntary in the
process of restructurings. Some definitions
emphasize strategies and communication tactics
Socially Responsible Enterprise Restructuring
before restructuring happens, involvement
of stakeholders and alternative approaches in
the process of restructuring, and the support
and social service after restructuring. Other
researchers simply regard restructuring
with labor shedding and downsizing as socially
irresponsible restructuring, but regard strategic
restructuring with innovative products and
services, and retaining human capital as respon-
sible restructuring.
Introduction
When financial crisis hits or economic recession
comes, enterprise restructuring becomes an indis-
pensable tool in surviving, growing, or building
a new generation of reengineered companies with
the power and resources to compete on a global
playing field. This is underscored by the fact that
in today’s global economy, companies increas-
ingly look to restructuring, mergers, and acquisi-
tions as an attempt to meet the growing demands
of a changing environment. Whether undertaken
to speed growth, increase market share, or to
realize synergistic benefits, managers pursue
deals in the hope of achieving a more profitable
growth opportunity from the exercise. However,
most of restructurings failed to realize the finan-
cial results that motivated them in the first place.
It is often the case that many restructurings are
poorly planned and badly implemented; in other
words, the restructurings are managed in
a socially irresponsible manner, for example,
employees are often totally excluded in
a decision to undertake the restructuring process,
the restructuring decision would have been made
by management behind the scene, the knowledge
and information would have deliberately been
kept from employees until restructuring is
announced, and in many instances, there would
be no open communications within the company.
As a consequence, many restructurings produced
emotional turmoil in employees. The recent years
have seen increasing concern about the negative
impact of restructuring and downsizing on
employees, community, and society as a whole.
2251 S
How can the negative social consequences of
restructuring be minimized? What can past expe-
rience teach us about socially responsible
restructuring, and how does it affect “the bottom
line”? The question to ask therefore is this: Is
there any evidence to justify that whether
restructurings in a socially responsible manner
could lead to better financial performance and
responsible restructuring makes good business
sense? In answering this question, research inter-
ests in the academic world have increasingly
turned to socially responsible restructuring, rela-
tionships between SRER and financial perfor-
mance, and the best practices of SRER.
Wayne F. Cascio, professor of management at
the University of Colorado Denver, is one of the
first to present a systematic longitudinal research
on the effects of downsizing, particularly, initi-
ated the concept of responsible restructuring.
While writing the U.S. Department of Labor’s
1995 publication Guide to Responsible
Restructuring and a 2002 book Responsible
Restructuring: Creative and Profitable Alterna-
tives to Layoffs, he drew on the results of an
18-year study of S&P 500 firms to prove that it
makes good business sense to restructure respon-
sibly – to avoid downsizing and instead regard
employees as assets to be developed rather than
costs to be cut. He postulated 13 common myths
about downsizing, detailing its negative impact
on profitability, productivity, quality, and on the
morale, commitment, and even health of survi-
vors. He used real-life examples to illustrate suc-
cessful approaches to responsible restructuring
used by companies such as Charles Schwab, S
Compaq, Cisco, Motorola, Reflexite, and South-
west Airlines. And he made specific, step-by-step
advice on what to do – and what not to do – when
developing and implementing a restructuring
strategy. He claims that responsible restructuring
relies on workers to provide substantial compet-
itive advantage by adapting a wide range of prac-
tices such as training, information sharing,
participatory management, flattened organiza-
tional structures, labor management partnerships,
compensation linked to skills, and customer
satisfaction. Thus, professor Cascio developed
S 2252
strategies for socially responsible restructuring
and highlighted some things an organization
carrying out a restructuring process must not do:
He suggests that managers restructuring should
take the following steps:
– Build a plan for restructuring into the overall
economic plan for firm’s business.
– Carefully consider the rationale behind
restructuring.
– Before making any final decisions about
restructuring, managers should make their
concerns known to employees and seek their
input in the process.
– Do not use downsizing as a “quick fix” to
achieve short-term goals in the face of long-
term problems.
– Consider other alternatives first and ensure
that management at all levels shares the pain
and participates in any sacrifices employees
are asked to bear.
– If layoffs are necessary, be sure that the pro-
cess of selecting excess positions is perceived
as fair and that decisions are made in
a consistent manner.
– Make special efforts to retain the best and the
brightest and provide maximum advance
notice to terminated employees.
– Communicate regularly and in a variety of
ways to keep everyone abreast of new devel-
opments and information.
– Give survivors a reason to stay and prospec-
tive new hires a reason to join.
– Train employees and their managers in the
new ways of operating.
Restructuring means change, and employees
at all levels need help in coping with changes in
areas such as reporting relationships, new orga-
nizational arrangements, and reengineered busi-
ness processes. Evidence indicates clearly that
firms whose training budgets increase following
a restructuring are more likely to realize
improved productivity, profits, and quality and
examine carefully human resource (HR) systems
in light of the change of strategy or environment
facing the firm. Training employees in the new
ways of operating is important but so also are
other HR systems. These include workforce plan-
ning, based on changes in business strategy,
Socially Responsible Enterprise Restructuring
markets, customers, and expected economic con-
ditions; recruitment and selection, based on the
need to change both the number and skills mix of
new hires; performance appraisal, based on
changes in the work to be done; compensation,
based on changes in skills requirements or
responsibilities; and labor relations, based on
the need to involve employees and their unions
in the restructuring process.
The International Labour Organization (ILO)
is the first UN agency which devotes its greatest
efforts to promoting socially responsible enter-
prise restructuring over the past few decades. The
ILO carried out a series of studies on enterprise
restructuring based on enterprise surveys in tran-
sition economies. The studies have produced
a number of country reports which investigate
the change in labor demands, employment impact
of privatization and restructuring, human
resource development, and socially responsible
policies during transition to a market-oriented
economy. Particularly since 1990s, the ILO, in
collaboration with European Baha’l Business
Forum (EBBF), carried out a joint project on
corporate social responsibility (CSR) and enter-
prise restructuring with a view to identifying the
best responsible practices and cases of enterprise
restructuring. The joint ILO–EBBF working
paper entitled “Socially Responsible Enterprise
Restructuring” was published in 2000 after years’
extensive literature research and field study visits
to the companies were conducted. The paper syn-
thesizes the various concepts and notions on
SRER and gives an overview of the whys,
whats, and hows of restructuring that minimizes
the social cost implications. In recent years, the
ILO and the Asian Productivity Organization
(APO) have been involved in a number of joint
productivity-related activities addressing not
only economic but social dimensions, labor–
management relations, and CSR. In 2005, the
ILO and APO launched a joint project aimed at
a better understanding of policy implications in
the area of productivity and industrial
restructuring. As a result, the joint ILO–APO
Survey on socially responsible enterprise
restructuring in Asia was undertaken to increase
awareness of the need for SRER among Asian
Socially Responsible Enterprise Restructuring
policymakers and enterprise managers. The main
question the APO and ILO sought to answer was
how an economy, a sector, or an enterprise can
restructure with maximum economic benefit and
minimum social cost. The ILO always attaches
a great importance to the partnership among the
government, employers’, and workers’ organiza-
tions in enterprise restructuring. Therefore, based
on the ILO’s experience in more than 20 coun-
tries around the world, it recommends that the
responsible practices be considered when enter-
prise restructuring happens:
– Company management should always have
a plan of action if restructuring becomes inev-
itable, starting with the company’s human
resources.
– Restructuring should be based on a joint
agreement between employers and workers
and in many cases the government.
– All options should be considered before
downsizing, with priority given to the least
“painful” options.
– If restructuring, downsizing, and relocation
are necessary, they should be carried out in
a socially responsible way, using tools proven
to have global success. These tools include,
among others, counseling, skills assessment,
training, internal job search, external job
search, SME creation, mobility assistance,
early retirement, alternative work schedules
(part-time, subcontracting, flexible leave),
severance packages, and work with local com-
munity groups and government officials.
– Restructuring should be viewed as a process
and should not be started without significant
consideration. Steps in the process should
include examining the different options
involved in restructuring before starting the
process; preparing the company and
employees for restructuring through consulta-
tions and communication and carrying out
restructuring only after this is done; and eval-
uating how effective restructuring has been
after it is done.
– It is critical to evaluate not only the costs of
restructuring but also the benefits of socially
responsible enterprise restructuring. In other
words, companies should be able not only to
2253 S
report on the cost of carrying out restructuring
in a socially responsible way but also to esti-
mate what is gained by being a responsible
restructurer.
– Governments, communities, and unions
should be involved in relocation decisions, in
both the country losing and the country
gaining an enterprise.
In addition to these universal lessons, the ILO
summarizes more specifically the lessons that the
ILO has learned by working jointly with the
European Commission, arguably the most
advanced part of the world when it comes to
socially responsible enterprise restructuring. In
general, there are at least four generic, Europe-
specific lessons learned, based on the presenta-
tions of a number of European companies:
– Costs are known, but benefits tend to be
unknown. Companies know that socially
responsible enterprise restructuring costs
money, and in most cases, this financial cost
is possible to measure, but no one really knows
how to measure the economic and social ben-
efits of restructuring carried out in a socially
responsible way.
– Social dialogue is becoming a reality. In most
West European countries, this is in compli-
ance with existing legislation.
– Tools of SRER now present a more or less
standard package. The good news is that com-
panies facing restructuring are aware of their
options. The bad news is that some companies
are blindly copying what others are doing,
without contemplating whether the tools will
be relevant and effective in their company. S
– Links between long-term strategy and
restructuring are still rare. Quite a number of
companies are still thinking short term.
Restructuring for them is a quick response to
economy/sector/market changes.
The ILO defines a socially responsible com-
pany as one which rewards shareholders with
a reasonable return over time; is customer
focused; considers employees as its most impor-
tant asset, provides meaningful work, fair wages
and benefits, ensures their employability, and
provides an enabling work environment; contrib-
utes to the prosperity and social cohesion of the
S 2254
communities in which it operates; applies the
golden rule (“do unto others as you would have
them do unto you”) to its business partners (sup-
pliers, alliances, franchisees, etc.); and practices
eco-efficiency and environmental sustainability.
In the 1990s, a widespread restructuring tak-
ing place in Europe raises concerns among all
employees and other stakeholders as the closure
of a factory or a heavy cut in the workforce may
involve a serious economic, social, or political
crisis in a community. Few companies escaped
the need to restructure, often through downsizing,
with the year 2000 seeing more mergers and
acquisitions than any other year in history. In
March 2000, the European Council in Lisbon
made a special appeal to companies’ sense of
social responsibility regarding best practices for
lifelong learning, work organization, equal
opportunities, social inclusion, and sustainable
development. In the summer of 2001, the
European Commission published a Green Paper
launching a broad consultation on the European
approach to CSR. It requires both public author-
ities and business to show a new sense of both
social responsibility and environmental responsi-
bility. The companies should rethink their roles
and responsibilities in relation not only to their
shareholders but also to the needs and expecta-
tions of all their stakeholders. Adopting measures
that limit the negative impact of activities on the
environment is no longer enough, the focus has
broadened to also include the dimension referred
to as CSR. In the Green Paper, SRER is defined as
the restructuring that can balance and take into
consideration the interests and concerns of all
those who are affected by the changes and deci-
sions, which involves seeking the participation
and involvement of those affected through open
information and consultation. Furthermore,
restructuring shall be well prepared by identify-
ing major risks, calculating all the costs, and
evaluating all of the alternatives which would
reduce the need for redundancies.
The World Bank has been concerned about the
consequences and impact of restructuring and
privatization on different stakeholders. The
World Bank has learned that good macroeco-
nomic policies – combined with relevant social
Socially Responsible Enterprise Restructuring
policies – provide a favorable environment for
sustained economic growth and poverty reduc-
tion. The studies undertaken by the World Bank
on transition economies have identified the strat-
egies and policies at different stages of
restructuring based on the experience of transi-
tion economies which underwent a large scale of
restructuring and privatization. For example,
when restructuring with downsizing and layoffs
is carried out, the main stakeholders that may be
affected by or influence the design, implementa-
tion, and outcomes of restructuring and privati-
zation should be identified. The labor adjustment
plans for workers prior to dismissal should be
developed in order to help “assist and push”
displaced workers back into the productive
employment and temporary income support and
labor redeployment services to individually
displaced workers and support regional develop-
ment efforts. The communications strategy
should support and continuously be shaped by
consultants with stakeholders on the labor
restructuring strategy and financial/social pack-
ages to be extended to redundant workers. In
addition, evaluation and monitoring of activities
need to be built in as an integral part of any social
mitigation activity related to privatization and
restructuring. In undertaking evaluations, the
social, political, and economic objectives of the
programs need to be taken into account.
In recent years, this author has dedicated him-
self to exploring the concepts of socially respon-
sible enterprise restructuring and the
relationships between SRER and financial perfor-
mance in the context of China’s economic
reform. His study concentrates on examining
how Chinese managers perceive CSR and
whether the socially responsible behaviors in
restructuring were influenced by the attitudes,
whether CSR is positively or negatively associ-
ated with financial performance, and whether
a firm with higher CSR performance in
restructuring outperforms the firm with less
CSR. His study provides more evidence for the
theories about relationship between CSR and
firm’s performance and suggests that there is
a positive relationship between attitude and
behavior with regard to CSR, that is, socially
Socially Responsible Enterprise Restructuring 2255 S

Socially Responsible Enterprise Restructuring, Fig. 1 Framework of socially responsible enterprise restructuring
(Source: Zu 2008)

responsible value-oriented managers pay more
attention to social issues in restructuring. The
result also shows that there is a positive associa-
tion between CSR and financial performance,
that is, more social responsibility leads to better
financial performance in restructuring. Building
on the extensive management literature research,
Dr. Zu developed the framework for SRER
(Fig. 1). The framework shows that the defini-
tion he uses for SRER emphasizes the compre-
hensive restructuring processes. His definition is
concerned with the stakeholders of the firm
S 2256
ethically or in a responsible manner in all the
processes of restructuring, the stakeholders
within and outside the firm shall be consulted
and involved before and after restructuring
activity to protect the interests of the stake-
holders while preserving the profitability of
corporation.
In a time like the current economic downturn
when layoffs, downsizing, pay cuts, and orga-
nizational reordering have become widespread
realities, the companies affected must be
restructured, and it has become a conventional
wisdom that they must do more than improve
operations and realign their strategies. Thus,
some management professors at Harvard Uni-
versity have offered their advice on how to be a
good boss or a socially responsible boss in
a today’s bad economy. Professor Robert Sutton
claims that it is important for companies to
provide predictability, increase understanding,
afford control, and show compassion for
employees when restructuring or downsizing is
implemented. Providing predictability means
giving people as much as possible information
as you can about what will happen and when. If
shocks are preceded by fair warnings, people
not only have time to brace themselves but
also get chances to breathe easy. Increasing
understanding is concerned with explaining
why the change you are implementing are nec-
essary – and do not assume you need to do so
only once. Affording control is about taking
a bewildering challenge and breaking it down
into “small win” opportunities. In situations
where you cannot give people much influence
over what happens, at least give them a say in
how it happens. Showing compassion requires
managers to put themselves in the other per-
son’s shoes and to express empathy and –
when appropriate – sorrow for any painful
actions that have to be taken. Thus, bosses
who increase predictability, understanding,
control, and compassion for their people will
allow employees to accomplish the most in
a time of anxiety and will earn their deep loy-
alty. A manager who provides all four will be
perceived as “having people’s backs.”
Socially Responsible Enterprise Restructuring
Key Issues
The concept of socially responsible enterprise
restructuring has evolved after recent years’
research by the management professionals. It is
a relative vague concept, and there has been little
success in the academic literature in making it
sufficiently concrete and operational in manage-
ment term. Therefore, defining and rationalizing
SRER in management literature becomes
increasingly important because the absence of
a widely agreed definition contributes to misun-
derstanding and cynicism toward the concept
itself.
Future Directions
Socially responsible investment (SRI) has
increasingly assumed a major role in the global
financial markets, it raises numerous research
questions about the processes through which
SRI advocates have succeeded in convincing
investors to adopt socially responsible forms of
investing. Some research studies argue that the
continued growth in investors seeking to align
their ethical concerns with their investment strat-
egies may influence the way in which the
restructuring activity is managed in the publicly
listed firms. The future direction should further
explore, the extent to which, the social perfor-
mance of restructuring is influenced by SRI. SRI
is the practice of making investment decisions
based on both financial and social performances.
Potentially, it is a powerful way for investors to
promote and reward firms whose behavior is per-
ceived to be socially responsible, although, to
date, the investor’s ability to affect social change
through investment decisions has been limited.
Institutional investors believe that low CSR
performing companies tended to be involved in
litigation, industrial action, and/or suffer from
government imposed fines and sanctions; high
CSR performing companies are better invest-
ments over the longer term since low CSR com-
panies are more likely to be involved in business
activities that are unsustainable.
Socially Responsible Investing
Other areas which are worthy of intensive
study in the future are whether there are the
actual responsible practices in restructuring
small- and medium-sized enterprises (SMEs),
what is the difference between SMEs and
large enterprises in the best practices in
restructuring; whether multinational and trans-
national corporations follow similar practices
in restructuring and downsizing outside their
home country as in their home countries; and
whether there is the possibility of codifying
the best and responsible practices in
restructuring, etc.
2257 S
or misspecification? Strategic Management Journal,
21, 603–609.
Rogosvky, N., & Schuler, R. S. (Eds.). (2007). Socially
sensitive enterprise restructuring in Asia countries
context and examples. Tokyo: Asian Productivity
Organization and ILO.
Sutton, R. I. (2009). How to be a good boss in a bad
economy. Harvard Business Review, 87, 42.
Vance, S. C. (1975). Are socially responsible corporations
good investment risks? Management Review, 64,
18–24.
Zu, L. (2008). Corporate social responsibility, Corporate
restructuring and firm’s performance: Empirical evi-
dence from Chinese enterprises. Berlin: Springer.

Cross-References Socially Responsible

Entrepreneurship
▶ Business Ethics
▶ Business in Society ▶ Real Estate Agency and CSR
▶ Corporate Citizenship
▶ Corporate Responsibility
▶ Corporate Restructuring
▶ Corporate Social Responsibility
▶ Mergers and Acquisitions Socially Responsible Estate Agency
▶ Socially Responsible Investing
▶ Real Estate Agency and CSR

References and Readings

Burke, R. J., & Cooper, C. L. (Eds.). (2000). The organi- Socially Responsible Housing
zation in crisis: Downsizing, restructuring, and privat-
ization. Oxford, UK: Blackwell Business.
Burke, R. J., & Nelson, D. L. (1997). Downsizing and ▶ Property Development and CSR
restructuring: Lessons from the firing line for revital-
izing organizations. Leadership & Organization
Development Journal, 18, 325–334. S
Cascio, W. F. (2002). Responsible restructuring: Creative
and profitable alternatives to layoffs. San Francisco:
Berrett-Koehler Publishers. Socially Responsible Industrial
Commission of the European Communities. (2001). Pro- Restructuring
moting a European framework for corporate social
responsibility (Green Paper). Brussels: Commission
of the European communities.
▶ Socially Responsible Enterprise Restructuring
Fretwell, D. H. (2004). Mitigating the social impact
of privatization and enterprise restructuring.
Washington, DC: The World Bank.
ILO. (2000). Socially responsible enterprise restructuring
(Working paper). Geneva: International Labour Orga- Socially Responsible Investing
nization (ILO).
McWilliams, A., & Siegel, D. (2000). Corporate social
responsibility and financial performance: Correlation ▶ FTSE4Good Index
S 2258
Socially Responsible Investment
Eberhard Harribey Laurence
BEM Bordeaux Management School, Talence,
France
Synonyms
Environmental, social, and governance factors in
investment; Ethical investment; Responsible
investment; Responsible investors; Sustainable
investment
Definition
Socially responsible investment is an approach
which incorporates extrafinancial criteria into
investment decisions and fund and portfolio man-
agement. Over and above so-called financial
profitability, investors can consider factors such
as social or environmental utility or they may
proceed by a process of elimination and screen
out certain activities for philosophical, religious,
or political reasons. Historically, socially respon-
sible investment has taken two forms: either
exclusion funds, mainly in the English-speaking
countries and usually at the instigation of reli-
gious communities, or shareholder activism
which involves bringing pressure to bear on
a company through the shareholder vote. During
the 1970s, at a time when questions were being
asked about the link between growth and devel-
opment, the concept of socially responsible
investment began to emerge, focusing on the
more global aim of reconciling economic and
social development and environmental protection
while still ensuring good corporate governance.
The boundary between socially responsible
investment in the strictest sense and responsible
investment became less clearly defined, and
eventually, there were in fact three coexisting
ideas: SRI per se, responsible investment where
ESG factors (environmental, social, and corpo-
rate governance) were taken into account when
assessing company performance, and more
Socially Responsible Investment
recently the notion of sustainable investment,
meaning investment that is in tune with current
social and environmental realities. Although SRI
was already a fairly well-established idea, it
developed further at the beginning of the
twenty-first century with the notion that looking
at social and environmental criteria was a better
way to identify companies which would be suc-
cessful in the medium and long term. Socially
responsible investment is to some extent the
financial equivalent of sustainable development.
As an extension of this idea, the most global
notion is then sustainable responsible investment,
incorporating as it does ethical investment,
responsible investment, sustainable investment,
and all other forms of investment which combine
investors’ financial objectives with environmen-
tal, social, and corporate governance goals.
Introduction
The many definitions of socially responsible
investment that can be found show clearly how
very varied and changing a concept it is. The first
types of SRI, in what were called exclusion funds,
originated mainly in the United Kingdom and the
United States, usually on behalf of religious com-
munities like the philanthropic religious Quaker
movement, founded in England in the seven-
teenth century. In this case, it was their ethical
standpoint and the beliefs of the community of
investors which guided their investment, as they
specifically excluded certain activities such as
arms and gambling or sectors which may be
harmful to health. The “Pioneer Fund” in Boston,
for example, created in 1928, excluded tobacco,
alcohol, pornography, and arms manufacturers. It
was at the beginning of the 1960s that employees
activism, historically the second type of SRI,
emerged in the United States in response to pres-
sure from church groups and student associations
opposed to the war in Vietnam. In the 1970s, the
struggle against apartheid also led to shareholder
activism, especially in companies like General
Motors in the United States or Barclays Bank
and Royal Dutch-Shell in the United Kingdom.
More recently, instead of the negative screening
Socially Responsible Investment
used by exclusion funds, thematic funds have
emerged which screen positively for specific
areas of investment; most are green funds which
favor the environment, but there are also funds
called “red funds” which consider social prob-
lems. More radical, and closer to the historical
approach to socially responsible investment, we
see solidarity funds emerging. These are more
marginal yet effective and are in the form of
either profit-sharing funds, where part of the
profits is used for charitable purposes, or solidar-
ity funds, used to finance solidarity economy pro-
jects directly.
The extension of the notion of SRI to include
responsible investment and sustainable invest-
ment has been accompanied by the emergence
of new types of funds, similar to traditional
investment but also incorporating ESG (environ-
mental, social, and corporate governance issues)
into traditional financial management. The Best
in Class are keen to consider corporate gover-
nance and to take environmental and social
criteria into account, no matter what the sector
of activity. The SRI market in relation with this
approach has in fact expanded greatly and
become much more structured since 2000 with
quoted companies being evaluated according to
ESG (environment/social/corporate governance).
This approach seeks to reconcile financial per-
formance and extrafinancial performance; in the
same way, the most recent best effort analyses are
looking to highlight the progress companies have
made in incorporating environmental and social
criteria (Sparks and Cowton 2004). This would be
to some extent the culmination of the principles
behind SRI which would no longer be in
a marginal niche position, but would have shifted
to the mainstream of financial management.
It is still fairly overambitious to consider ana-
lyzing socially responsible investment in global
terms as it can take so many different forms.
However, the progress made so far is a clear indi-
cator of how the SRI concept itself has evolved.
A distinction has to be made between Core SRI
and Broad SRI. The first group, Core SRI, contains
funds based on ethical exclusions (with more than
two negative criteria) and the positive counterpart
of this which includes both the best in class and
2259 S
theme-based funds. This group harks back to the
original SRI concept based on beliefs and invest-
ment that was often marked by exclusion or, on the
contrary, a form of commitment. The second
group, the Broad SRI, includes simple exclusion
funds, shareholder or stakeholder activism (such
as trade unions with their pension funds), and
everything relating to ESG integration. This
clearly shows the growing importance of
extrafinancial criteria for investors.
This growth and diversification of socially
responsible investment is reflected in a significant
increase in its importance. Whereas SRI could
still be described as a marginal phenomenon at
the beginning of the twenty-first century and con-
sidered as a niche market, all the indicators and
studies now show major progress and an increase
in importance which seems to be much more than
just a fad or fashion. In the United States, for
example, according to the Social Investment
Forum, about 11% of professionally managed
investment is in SRI funds: This is the result of
a very large increase since SRI represented $639
billion in 1995 compared with $2.71 trillion in
2007. If we look only at the years 2005–2007,
SRI increased by 18% whereas assets overall
increased by only 3%. There was also clear pro-
gression in Europe. The number of European
funds increased 70-fold between 1970 and 1990
then fivefold in the 1990s. According to Eurosif,
the European forum to promote sustainable
investment, for this same year, 2007 SRI funds
increased of more than 100% compared with
2005. Yet this increase is much less for the
“Core SRI” which in Europe, for example, repre- S
sents 10% of all SRI (according to Eurosif
sources) and which effectively remains a niche
market whereas the “Broad SRI” represents
almost 90% of total funds and can now be
considered as truly “mainstream.” However, this
progress reveals different situations from one
country to another. According to Eurosif, growth
in Core SRI is strongest in Germany, France, and
Switzerland while the markets in Britain and the
Netherlands are the largest in volume. For
the Broad SRI, growth is most marked in the
Netherlands, followed by France; the British
market again is greatest in volume.
S 2260
There are several factors which can account
for this expansion. Firstly, existing funds have
grown over the years, many new funds have
been created, and funds that already existed but
which were not considered in annual reports have
been updated. SRI funds are created by asset
management companies which put in place spe-
cial facilities with extrafinancial analysis depart-
ments or even management companies
specializing entirely in SRI. In recent years, the
number of SRI products has diversified and
expanded considerably, and they have now
become almost commonplace. However,
although there has been an increase in the number
of products available, these have usually been
mutual funds invested in shares and bonds.
Other products are gradually appearing on the
market as pooled SRI funds, life insurance
investing in SRI funds. The emergence of SRI
monetary funds may also represent a real oppor-
tunity for the development of SRI.
The second factor that can account for the
growth in SRI investment is the effect in some
countries of the use of a legislative lever and/or
regulatory incentives to stimulate SRI develop-
ment. While these measures do not make it com-
pulsory for investors to take the SRI route, they
do promote its visibility and encourage its devel-
opment. In the United Kingdom, for example, the
Department of Trade and Industry launched the
first guide to environmental management,
encouraging financial institutions to take respon-
sibility into consideration. Again in the United
Kingdom, legislation in 2000 made it compulsory
for pension funds to declare how social, environ-
mental, and ethical information were incorpo-
rated into their investment strategies. In Europe,
Germany, Sweden, and Belgium have adopted
similar legislation. In France, the NRE law (new
economic regulations) of 2001 made it compul-
sory for quoted companies to publish
a sustainable development report; also in France,
the legislation regarding employee savings
schemes takes SRI into account by making it
possible to opt to save in the solidarity economy
and by authorizing voluntary savings plans to
invest in solidarity funds. At European level, the
European Commission has published a green
Socially Responsible Investment
paper on Corporate Social Responsibility in
which it sees SRI as having an important role,
and since 2000, it has often taken a stance in favor
of SRI. And now over and above regulations,
a growing number of companies are producing
their own guidelines, revealing a growing aware-
ness on the part of the business world: the
European Multistakeholder Forum on Corporate
Social Responsibility, for example, provides the
opportunity for all actors, social partners, corpo-
rate networks, civil society, consumers, and
investors to establish codes of good conduct. In
the United States, the SEC (US Securities and
Exchange Commission) has suggested that all
investment fund decisions should be made on the
basis of information made available to the public
and that their votes should be made public. In
Australia, the Australian Securities and Invest-
ments Commission (ASIC) has drawn up a set of
directive principles which includes information on
environmental-, social-, and governance-related
factors in financial reporting to encourage trans-
parency for socially responsible funds.
The third factor to account for the rapid
growth in SRI derives from the role of the main
institutional SRI investors who are major long-
term investors. SRI growth is in fact closely
linked with institutional investors. Pension
funds, reserve funds, and retirement savings
funds are indeed major players in SRI,
representing in most countries between 60% and
80% of institutional assets, while the traditional
investors, like the churches or faith groups, now
play a much less significant role. There are three
essential arguments to account for their commit-
ment: their desire to maintain their good reputa-
tion, the need for long-term investment
performance, and the fact that since they hold
a majority of the shares they cannot themselves
ultimately take the risk of allowing negative
externalities to develop as a result of the
company’s activities, which would inevitably
restrict their own performance. Thus for institu-
tional investors, SRI becomes a matter of risk
management, complementing traditional finan-
cial analysis. Institutional investors have also
initiated coalition strategies and in this way are
encouraging environmental and social concerns.
Socially Responsible Investment
The “Carbon Disclosure” project is a case in
point, launched in 2000, for which almost 500
institutional investors gathered to bring pressure
to bear on major multinationals in the face of
growing concerns over climate change. Compa-
nies are encouraged to disclose their environmen-
tal data and to measure and publish their
greenhouse gas emissions. In 2003, 235 compa-
nies responded to the call; 6 years later, in 2009,
2,456 companies published their data; this is
clearly the result of increased awareness but
more especially a realization of the risks involved
in not doing it vis-à-vis the institutional investors.
These coalitions may take the form of collabora-
tions, like the Enhanced Analytics Initiative,
launched in 2004 to develop extrafinancial
research. Some are dedicated to defending and
promoting SRI, like Eurosif in Europe or the
Social Investment Forum in the United States.
The development of SRI has also now reached
the world of unquoted companies. Investment
capital (private equity) has only a modest role to
play in terms of the financial industry as a whole
but an important role in supporting innovative
companies. SRI is clearly a lever for innovation
in that the challenges surrounding development,
like environmental issues with alternative ener-
gies, for example, social issues like personal ser-
vices or meeting the challenge of sustainable
aging, all offer development opportunities.
Some financial institutions promote this link
between private equity and SRI, like the EBRD
(European Bank for Reconstruction and Devel-
opment) which invests only in private equity
programs whose projects respect SRI principles.
Three types of approaches define more specifi-
cally the relations between private equity and
SRI: first, the theme-based approach for value
added sectors, especially in environmental mat-
ters; ESG analysis with the growth of SRI funds
that concentrate on sustainable innovation; lastly,
the “community venture” approach is growing
fast, especially in the English-speaking countries,
supporting innovative companies which are
working within their local communities (citizen
capital)
The integration of ESG into investment deci-
sions poses the problem of the company’s
2261 S
extrafinancial rating and indicator ratings. In par-
allel with the integration of ESG into investment
strategies, there has also been an increase in the
number of rating agencies since the end of the
1990s and there are now about 30 major agencies
of this type which play a decisive role in SRI
qualification. Two types of ratings are proposed:
a declarative rating on the agency’s initiative
whether or not the company agrees and
a solicited rating where the company is the
agency’s client. The agencies disclose informa-
tion to stakeholders which is complementary to
that provided by traditional financial agencies.
They tend to give rather a global image of the
company’s level of social and environmental
responsibility. Via the rating, they are also able
to provide the company with a progress report in
terms of social and environmental performance,
marking out key points for policy improvement.
Some agencies have gone so far as to produce
SRI quality labels. As well as all producing their
own methodologies, which does not facilitate
matters in terms of the transparency of the eval-
uations, they have gone on to produce “ethical”
stock market indices in partnership with stock
market indexing companies. The leading index
is the Dow Jones Sustainability (launched in
1999) which monitors the financial performance
of major companies in respect of sustainability;
the second, the FTSE4GOOD index, measures
the performance of companies that meet globally
recognized social responsibility standards; the
third, which has become the standard in Europe,
is the ASPI EurozoneR (Advanced Sustainable
Performance Indices), based on a set of guide- S
lines produced by the French agency Vigeo and
which uses six criteria to provide a global
approach to evaluation: human rights, human
resources, the environment, business behavior,
corporate governance, and community involve-
ment. These indices form the basis of a search for
ecological and socially responsible investments
and have become the benchmark for following
the performance of so-called responsible invest-
ment portfolios.
As well as ratings, other guidelines have now
been produced, such as the United Nations’ Prin-
ciples for Responsible Investment. These
S 2262
principles were developed in 2006 at the instiga-
tion of the UNEP-FI and the Global Compact, the
aim being to combine all environmental, social,
and corporate governance matters into the man-
agement of investment portfolios. The six princi-
ples are subdivided into 35 possible concrete
actions for the guidance of investors: in addition
to integrating ESG issues, they encourage trans-
parency of information and cooperation between
actors. By their purely voluntary nature, they
inevitably have some limitations, but neverthe-
less they do indicate a recognition of ESG matters
in the financial sector and they are also aimed at
all actors and not only those that fall within the
scope of SRI.
Given the growth of SRI on the one hand and
on the other the declared intention of investors to
look for performance in more global terms rather
than just in terms of financial gain, we should
nevertheless examine the impact of these changes
on financial performance of SRI as such (Woods
1991; Preston and O’Bannon 1997; McWilliams
and Siegel 2000). This remains a largely contro-
versial issue. Whenever constraints are added and
environmental or social goals have to be taken
into account in investment decisions and invest-
ment portfolio management, it is inevitable that
maximum financial performance will be reduced.
Yet a number of empirical surveys have shown
that these constraints are not as costly as all that
and that the investment performance of socially
responsible investment funds is not always worse
than that of traditional funds. A report coauthored
by the “Asset Management Group of the United
Nations Environment Programme – Finance
Initiative” and “Mercer” describes a detailed
study of 20 investment funds from different
geographical regions and applies different
investment approaches. Of these 20 studies, ten
highlighted a positive correlation between the
incorporation of ESG factors and investment per-
formance, seven concluded that the effect was
fairly neutral, and three found a negative effect.
These studies were based on different research
methods, and so we cannot generalize from the
results. Performance comparison remains diffi-
cult as long as we do not know exactly how
fund managers have combined financial and
Socially Responsible Investment
extrafinancial criteria. Given the current studies
that are being undertaken, it appears that
a positive impact is achieved through effective
performance in relation to social and environ-
mental responsibilities rather than by simply
declaring social and environmental concerns
(Butz 2003). The quality of corporate governance
also seems to have a positive impact (Gompers
et al. 2003). However, all studies highlight the
rise in the number of investors incorporating a
responsible element into their fund management.
Key Issues
The concept of SRI has evolved over time. From
the original notion of SRI based on exclusion
through moral convictions, investors have grad-
ually extended this definition by incorporating
more and more extrafinancial, environmental,
social, and good governance factors into all
investment decisions and for all types of invest-
ments. This change has resulted in an increase in
the amount of assets devoted to socially respon-
sible investment and a difference in the investors,
which today are predominantly institutional. SRI
today is indeed an element in the gradual trans-
formation of the foundations of the market econ-
omy: firstly, because it brings leverage to the
creation of value for a company, and secondly,
because by highlighting corporate governance
issues it is altering the relationship between the
company and its shareholders.
Future Directions
Today the development potential of SRI is con-
siderable, but the first question to be asked con-
cerns the long term. While there is a real and
growing demand for Corporate Social Responsi-
bility, socially responsible investment remains
marginal (less than 3% for core SRI and 11%
for the broad SRI). The question is how long
ultimately will SRI remain a requirement and
how are extrafinancial factors to be integrated
into the analysis of traditional markets? Have
ethical indices performed well simply as a result
Socially Responsible Management (SRM)
of funds moving from nonethical companies into
more ethical companies in response to the cur-
rent situation or is this a deep-seated transfor-
mation of the entire structure of the investor/
company relationship? According to a survey
of European financial actors by Novethic
Amedeis in 2007, a third of those questioned
considered that SRI would grow substantially,
22% were convinced that the phenomenon
would remain marginal, and 45% were confident
that applying ESG issues to all portfolio man-
agement would be the most telling factor. It does
indeed seem that it is the notion of broad SRI
factors which will be decisive in years to come,
with three essential challenges to face: first, the
question of standardization methods and trans-
parency, with three possible routes (the volun-
tary route using transparency codes, the
certification route, or the regulatory route,
taken very recently by Belgium); the second
concerns the quality of performance, essential if
SRI is to continue to develop and which raises the
question of producing an evaluation model and
setting out standards for extrafinancial criteria.
The last concerns the extension of SRI to rates
market (bonds market and debts market), espe-
cially when public and semipublic investors are
involved; in which case, further evaluation
methods will need to be devised.
Cross-References
▶ Corporate Citizenship
▶ Environmental Accounting
▶ Environmental, Social, and Governance
factors in Investment
▶ FTSE4Good Index
▶ Institutional Investors
▶ Microfinance
References and Readings
Butz, C. (2003). Decomposing SRI performance. Geneva:
Pictet & Cie.
European Commission. (2001). Promoting a European
framework for CSR (Green paper). Brussels: Commis-
sion of the European Communities.
2263 S
Gompers, P., Ishii, L., & Metrick, A. (2003). Corporate
governance and equity price. Quarterly Journal of
Economics, 118, 107–155.
McWilliams, A., & Siegel, D. (2000). Corporate social
responsibility and financial performance: Correlation
or misspecification? Strategic Management Journal,
21, 603–609.
Preston, L. E., & O’Bannon, D. P. (1997). The corporate
social-financial performance relationship: A typology
and analysis. Business and Society, 36, 419–429.
Sparks, R., & Cowton, C. J. (2004). The maturing of
socially responsible investment: A review of develop-
ing link with corporate social responsibility. Journal of
Business Ethics, 52, 45–47.
Unep Finance Initiative. (2006). Demystifying responsible
Investment performance – Report of the innovative
financing for sustainability. www.unepfi.org
Woods, D. J. (1991). Corporate social performance
revisited. The Academy of Management Review,
16(4), 691–718.
Socially Responsible Management
(SRM)
Ahmed El-Masry1 and Nahla Kamal2
1
Plymouth Business School,
Devon, Plymouth, UK
2
ALROWAD, Dokki, Giza, Egypt
Synonyms
Corporate social responsibility; Responsible
business enterprise; Responsible management;
Social enterprise; Social investment; Socially
responsible behavior; Socially responsible busi- S
ness management; Socially responsible manager;
Sustainable responsible business
Definition
The debate on social responsibility of corpora-
tions engaged on another shape in the second half
of the last decade. The question of the relation-
ship between corporations and governments has
moved on and turned out to be an argument of
mostly environmental questions. Now, the com-
plicated internal and external relationships of
S 2264
Socially Responsible
Management (SRM),
Fig. 1 Corporate social
responsibility
Corporate
Governance
• Power
• Control
• Constitution
corporations with their stakeholders are consid-
ered. In addition, this difficulty may be the cause
for the confusion with the definition of terms like
corporate social responsibility (CSR), corporate
governance (CG), or corporate citizenship (CC).
According to the European Commission, corpo-
rate social responsibility is defined as “a concept
where companies integrate social and environ-
mental concerns in their business operation and
in their interactions with their stakeholders on
a voluntary basis. As they are increasingly
aware responsible behavior leads to sustainable
business success.” No widespread definitions
exist of the concepts of business ethics and cor-
porate governance, as they deal with a broad
range of diverse activities and phenomena.
While business ethics mostly relates to “norms
and values, the concept of corporate governance
covers questions of power, control, and constitu-
tion.” Corporate social responsibility (CSR) can
be simply defined as a company’s commitment to
operate in an economically, socially, and envi-
ronmentally sustainable manner, while recogniz-
ing the interests of investors, customers,
employees, business partners, local communities,
the environment, and society at large. This defi-
nition highlights that CSR is concerned with deal-
ing with the corporation stakeholders in an
ethical or a responsible manner, which means
treating stakeholders in a manner which is
accepted in civilized societies and that stake-
holders could be from inside or outside the cor-
poration. The purpose of social responsibility is
to set up superior standards of living and at the
same time maintain the corporation profits. CSR
embraces workplace issues such as training and
equal opportunities, human rights, impact on the
Socially Responsible Management (SRM)
Corporate
Social
Responsibility
Corporate Business
Citizenship Ethics
• Cultural and • Values
Social Engagement • Norms
• Sponsoring
community, reputation, branding and marketing,
ethical investment, environmental policy, ethics,
and corporate governance, as well as health and
safety. Corporate citizenship appears in primarily
two distinct ways: first of all, it is used synony-
mously to CSR, which seems to be the broadest
term, including a company’s relationship to all its
stakeholders, for instance, its employees and cus-
tomers, the environment, governments, commu-
nities and second, it is used to describe
a company’s social engagement beyond its
immediate business focus – for instance, sponsor-
ing for social networks, cultural projects, or
sports clubs. Corporate citizenship is “about
a new contract between business and society,
a vision of partnership between different sections
of community, which allies profitable companies
with healthy communities because what happens
to societies happens to business.” Basically, cor-
porate citizenship includes passive acts such as
avoiding pollution or positive acts such as build-
ing a park near its factory. A corporation may
engage in corporate citizenship for charitable or
philanthropic reasons but may also do so to pro-
tect its profits. That is, a company known for poor
corporate citizenship is more likely to invite boy-
cotts or to drive away potential customers
(Fig. 1).
Socially responsible management (SRM)
relates to the increasing tendency for managers
to be expected to adapt various social, ethical,
and environmental (political) beliefs in the way
they follow corporate objectives and the way
those objectives are created. It differs from the
management who only focus on economic goals
and controlled purely by such legal restrictions as
are vigorously forced. A lot of researches have
Socially Responsible Management (SRM)
focused on identifying the nature of, and chal-
lenges for, SRM, for instance, those relating to
corporate social responsibility, social enterprises,
and social investment. Despite the fact that the
trend toward socially responsible management is
widespread, several circumstances make
a stronger range of demands on managers than
others. Increasingly, for instance, corporate
social responsibility is identified as a political
question, necessitating an interorganizational
and conceivably interdivisional focus rather
than the corporate precise focus of usual ethical
and strategic conceptualizations.
Introduction
Corporations around the world confront with
a growing pressure to handle questions of corpo-
rate social responsibility. As a result of the diffi-
culty of stakeholder relations, this signifies quite
a challenge for various corporations on the
national level too. The frameworks of the indus-
try, the legal system, the corporation itself, and
other things like that effect actions and reactions
greatly. In the international or even global busi-
ness, the effects of cultural differences add to the
difficulty even further. This leads to the main
problem of recognizing and understanding stake-
holder needs. Are corporations really able to
firstly recognize and secondly understand the
wants of their international stakeholder properly?
According to hypothetical methods, as well as
to experimental studies, CSR is obviously
a management task. But, what makes a socially
responsible manager? Which traits are applicable
and work in various cultures? On one hand, there
are social and intercultural skills, such as empa-
thy, adaptability, flexibility, ethical judgment, or
emotional intelligence. The relation is the most
important, but, to standards which are applicable
in CSR around the world. Ancient Indian knowl-
edge, for example, recognized this relation in the
form of value centers, which are represented in all
individuals and can be evoked by thoughtful
meditation practices. The consequences of devel-
oping and supporting these value centers in our
vegetative nervous system are various. They
2265 S
reach from stress reduction over increased empa-
thy to improved self-management and communi-
cation skills. According to an Austrian survey,
the manager who is eligible to fulfill the task of
socially responsible management within
a corporation should hold two of the most essen-
tial factors: the ethical and moral beliefs of the
management. While the moral values of the
owners, positive results on the profit, demand of
the workers, and public pressure rated much
lower, CSR is obviously a management task.
Therefore, we are searching for the socially
responsible manager: a manager who applies
socially responsible behavior (SRB). Schneider
et al. (2005) defined a SRB the following way:
“Socially responsible behavior is a pattern of
decisions and actions taken by individuals with
the primary purpose of enhancing societal well-
being.” In order to boost CSR managers with high
ethical standards and raise their compassion, they
are entitled to first recognize and understand the
challenges properly and second to be able to
grasp these challenges and alter them into
a positive strategy to the advantage of both cor-
poration and its stakeholders. This is the environ-
ment in which principles can be formed. But how
does it work? What qualities do these managers
need? In addition, ethical judgment, a high
degree of emotional intelligence, adaptability,
and flexibility are necessary. Rather than being
threatened by the difficulty of demands, they
need to be capable of understanding their own
and other’s emotions in order to direct them
(emotionally intelligent).
S
A Socially Responsible Business Management
Model
The typical model of management in a current
corporation will normally show basics like stake-
holder management, organizational culture
development, business process orientation, con-
tinues performance review, and maybe supply
chain management. The typical model must be
altered by setting a different ethical slant on these
basics, as there is a huge support for the concept
that the discipline of responsible corporation con-
tributes to enhancing corporate performance and
increasing opportunities for growth. Primary
S 2266
benefits coming to an enterprise that executes an
organizational ethical program are improved rep-
utation and goodwill; reduced risks and costs;
protection from unethical workers and agents;
better performance, productivity, and competi-
tive position; stretched access to capital, credit,
and foreign investment; enlarged profits and per-
sistent long-term growth; and improved interna-
tional respect. To change the corporation’s
approach to a more socially responsible one, the
corporation will not have to dramatically change
everything and the way it is run. It is approved
that it can be a difficult transformation, however,
this mainly applies to the values of the corpora-
tion, its focus on and adherence to these, and
partly its procedures and practices. The main
“logic” about the corporation and its manage-
ment remains the same; therefore, most of the
typical business model basics remain unchanged.
These basics are tweaked to a socially responsible
business management. It is usually consists of the
same parts, however, altered to focus on ethical
conduct in its scope and activities. The logic of
the model is as follows: the corporation’s stake-
holders including both the noticeable ones such
as customers, owners, and employees and barely
visible ones like the environment, society, sup-
pliers, and even competitors. The more trust man-
agers can build into the relationship with these,
the more the corporation is capable of pleasing
the stakeholders.
Managers’ Attitude and Socially Responsible
Behavior
Efficient decision making necessitates an obvious
understanding of ends. Profit maximization has
a sole end; however, the socially responsible
manager must decide between alternative ends.
He/she must decide which principles are included
in a decision, and he/she should be capable of
operating under circumstances of value disagree-
ment. Management decisions affect a range of
socioeconomic groups in different ways. Each
group has its own objectives, and there is regu-
larly disagreement among the objectives of vari-
ous groups such as customers who want lower
prices, employees who want higher wages, and
stockholders who want larger dividends.
Socially Responsible Management (SRM)
A socially responsible manager should make
a decision on which of these objectives to stress
on in making decisions. This is a matter of value
judgment. Different combinations of objectives
lead to different value results.
According to the principle of socially respon-
sible management, the corporation is such
a powerful organization in any community that
it is catastrophic, for both society and the corpo-
ration, to imagine of it as merely a profit making-
corporation. Whether managers prefer it or not,
their functions exceed profit making, it is argued.
They should agree to have a full responsibility for
the way in which the actions of the corporation
affect society. If they do not, the corporation
“may be in danger of eclipse because of its failure
to safeguard the environmental conditions that
nurture its survival and growth.” Supporters of
the doctrine think that the correct function of
management is to manage the corporation for
the welfare of the groups in community who are
influenced by its activities such as stockholders,
customers, employees, suppliers, dealers, the
community, government, and the nation. Man-
agers are to neutrally decide among their diverse
interests. This approach makes the decision-
making process difficult to handle. If manage-
ment is in charge of more than a few groups in
community, this means the corporation has vari-
ous objectives which reflect the goals, values, and
ends of each of these groups. Obviously, there
will be disagreements among these goals, values,
and ends. Now, management is faced with vari-
ous alternative means-ends hierarchies in place of
a single one as in the profit maximization case. It
should decide on the best combination of ends as
well as the best means to those ends. It must take
into account a wide range of value phenomena in
deciding on ends, phenomena which are inher-
ently highly subjective and psychological in
nature.
As managers assign great weight to corporate
social responsibility, a Chinese survey showed the
percentage of socially responsible activities that
the majority of corporations have been involved
over include public welfare activities (86.6%),
encouraging employee welfare (91.5%), improv-
ing employee welfare (98.8%), active contribution
Socially Responsible Management (SRM)
of tax to government (97.6%), environment protec-
tion and pollution control (97.6%), contribution to
assist the vulnerable group (82.9%), donate to char-
itable and public welfare organizations (42.7%),
and contribute to cultural and literary programs
(62.2%). Although the survey results cannot be
generalized on corporations all over the world,
but they can give us an insight about what man-
agement prefer. Therefore, we can deduce that
managers distribute more importance to worker
welfare and benefits, contribution of tax to govern-
ment, and environmental protection and less to
corporate charitable responsibility such as donation
and contribution.
Why Corporations Should Have a Socially
Responsible Management?
Milton Friedman was one of the participants in
the corporation network seminar established by
EMCC and the Centre des Jeunes Dirigeants
d’Entreprise (CJD) with the help of the
Communauté Urbaine of Lyon from the April
15–16, 2003, on Total Responsibility Manage-
ment, which holds about 40 participants from 10
European countries who attended the 2-day
event, among them business owners and man-
agers, consultants with a focus on developing
and implementing socially responsible manage-
ment strategies, as well as representatives from
the Italian and Swedish governments and Euro-
pean social partner corporations. Milton stated
that “the one and only social responsibility of
business is to increase profits is no longer shared
by the majority of citizens and an increasing
number of businesses. Globalization, environ-
mental disasters and social hardship caused by
companies have changed society’s expectations
vis-à-vis the way businesses operate. The infor-
mation society has helped to increase transpar-
ency with regard to business practices and their
consequences for society.” Today, knowledge-
able people require corporations to take social
and environmental concerns into consideration
as well as attaining good financial results. More
and more, people are eager to hold back their
tradition and asset if corporations do not live up
to these expectations. Corporations have
responded by creating a “total responsibility
2267 S
approach” to management, combining the drive
for good financial results with the aim to live up
to their social and environmental responsibility in
relation to workers and the societies where they
are based. In this environment, diverse initiatives
have been created at national and international
level in order to encourage the idea, and it has
become clear that there is no “one size fits all”
approach. Exchanges of experience and identifi-
cation of good practice are regarded as the most
suitable instruments for promoting the concept of
total responsibility management.
Human Resource Management and CSR
If the HRM goal is to administer human resources
for beneficial social outcomes, then the areas of
recruitment and selection, performance appraisal,
compensation and training, and development
should not be ignored. It is important to bear in
mind while focusing on these functional areas, the
role of executive manager in giving authority and
not refuse to support socially responsible pro-
grams, policies, and procedures. Eventually,
such support should interpret into greater worker
understanding of and dedication to value attune-
ment. Certainly, such shift will not be easy as
various researches suggest that HRM has tradi-
tionally played a minor role in the establishment
and execution of corporate social responsibility.
In recruitment and selection, for instance, corpo-
rations will hire workers who are comfortable
with and skilled at featuring values into decisions.
In other words, an essential step in improving
corporate social responsibility is to screen for
higher levels of cognitive moral development, as S
workers reasoning at highest level of moral devel-
opment would be more expected to work on moral
values rather than narrow egocentric desires and
rewards connected with lower stages. Moreover,
for a human resource manager, employee safety
and health should be a main concern in all he/she
does. In addition, it is legally mandated to main-
tain a safe working environment. Besides, it is an
obligation for any socially responsible manager. It
is very crucial that managers should understand
the significance of having a health and safety
issues and take steps to ensure a safe working
environment at the corporation.
S 2268
Key Issues
The collaboration between private sector corpo-
rations and their stakeholders is turning out to be
an essential feature of CSR in both theory and
practice. Open, deliberative stakeholder discus-
sion has been encouraged as a way of attaining
sound CSR, and civil society corporations more
and more get to enter several form of collabora-
tive discussion with private sector corporations.
In addition, governmental and intergovernmental
organizations apply pressure on corporations to
take into account CSR and supply an institutional
arena for conversation(s) on socially responsible
management to build up. Socially responsible
management as such is naturally implanted in
an extremely difficult interorganizational, cross-
divisional environment with clear managerial and
leadership challenges. This path encourages con-
tribution from researchers fascinated in any part
pertaining to socially responsible management
that handles upon interrelationships and collabo-
rations between social players from several cor-
porations and sectors. Papers may be
experimental, hypothetical, or theoretical in
nature and should create a strong theoretical con-
tribution. Analytical topics include describing the
nature of SRM, investigating the political pro-
cesses originating them, finding the main intra-
and interorganizational challenges, conceptualiz-
ing aspects of management and leadership
pertaining to these, and addressing capacity
building at the individual and organizational
level.
Future Directions
A socially and environmentally responsible
approach to corporation must be management
driven however should at the same time embrace
all stakeholders. Managers who are dedicated to
a total responsibility approach in the way they
perform their business will pass their knowledge
and management practices on to other stake-
holders, primary and most importantly to sup-
pliers and customers. By deciding to work with
socially loyal suppliers who respect responsible
Socially Responsible Management (SRM)
business behavior, corporations have a chance to
expand their method to the full supply chain, for
instance, Amazon PR. A parallel effect can be
accomplished with customers: if the corporation
decides to turn down a customer’s business con-
tract when the corporation does not agree with the
possible customer’s business conduct such as the
case of Pohjoisranta Porter Novelli. Total respon-
sibility management in one corporation can
therefore have a multiplier effect given the
extremely networked and globalized environ-
ment within which today’s businesses work in.
Global collaboration of corporations promoting
socially responsible principles could ultimately
lead to the establishment of internationally
accepted standards, close to those for quality
assurance. The issue still remains as to which
body would develop these standards, implement
them, and validate them. Should this be done by
international organizations, private sector bodies,
or should a specific agency be set up for this
purpose? Furthermore, how could this entity
gain legitimacy and recognition from all those
involved?
Cross-References
▶ Business Ethics
▶ Corporate Citizenship
▶ Corporate Governance
▶ Corporate Social Responsibility
▶ Institutes of Directors and CSR
▶ Social Investment
▶ Sustainable Responsible Business
References and Readings
Andersen, B. (2004). Bringing business ethics to life:
achieving corporate social responsibility. Milwaukee:
American Society of Quality.
Brueck, F., & Hollerweger, E. (n.d.). The socially respon-
sible manager: Can he or she be trained? Retrieved
from http://www.wcfcg.net/gcsr_proceedings/Frank%
20Brueck%20&%20Eva%20Hollerweger.pdf
Deckop, J. (2006). Human resource management ethics:
Ethics in practice. Greenwich: Information Age.
EURAM. (2010). Retrieved from http://www.euram2010.
org/userfiles/file/TRACK%2035%20bis.pdf
Societal Marketing 2269 S
European Monitor Centre on Change. (2003).
Responsible management a total approach. Retrieved Socially Responsible Territory
from http://www.eurofound.europa.eu/emcc/content/
source/eu03003a.htm?p1¼reports&p2¼null
Petit, T. (1966). Making socially responsible decisions. ▶ Region
Academy of Management Journal, 9, 308–317.

Socially Responsible Valuation

Socially Responsible Manager
▶ Property Valuation and CSR
▶ Socially Responsible Management (SRM)

Socially Responsible Workplace

Socially Responsible Mergers and
Acquisitions ▶ Green Workplace

▶ Socially Responsible Enterprise Restructuring

Socially Sensitive Enterprise

Restructuring
Socially Responsible Networks
▶ Restructuring
▶ Networks

Socially Sustainable
Socially Responsible Property Asset ▶ Social Sustainability
Management

▶ Property Management and CSR

Social-Movement Actors and CSR
S
▶ NGOs and CSR
Socially Responsible Property
Valuation

▶ Property Valuation and CSR

Societal Business Guidelines

▶ Blue Ocean Strategy and CSR

Socially Responsible Restructuring

Societal Marketing
▶ Restructuring
▶ Socially Responsible Enterprise Restructuring ▶ Cause-Related Marketing
S 2270
Sociolismo in Cuban Culture
▶ Guanxi and CSR
Soft Law
John Richard Ennals
Kingston University, Kingston Upon Thames,
Surrey, UK
Definition
Soft law is a means, a dynamic process, of
facilitating change in a particular direction.
The focus is on the process of advancement.
Soft law can involve the creation of new de
facto standards by consensus methods. Soft law
enables societies and economies to develop
beyond the capability of conventional legislation
and can be used as a precursor to legislation.
CSR is a reflection of awareness that the
conduct of organizations could be different and
better. The recent series of collections of papers
(Idowu and Leal 2009; Idowu and Lelouche
2011) highlight the diversity of those differences
and the absence of a common direction.
Taking the experience of the EU employment
and social strategy, the process of soft law
involves open coordination and social
benchmarking (Zeitlin and Pochet 2005; Bruun
and Bercusson 2001a). It is conducted within
a context of EU regulation and national legisla-
tion. It is influenced by social partnership and
social dialogue, which are addressed in other
ECSR entries.
Soft law provides a direction of travel, rather
than a set of “standards,” whose status can be
ambiguous. Unless they are monitored and
inspected, they may mean little beyond aspira-
tions. In the UK, for example, cuts in funding for
HSE cast doubt on the credibility of officially
announced standards in health and safety. One
problem has been that UK law does not fully
reflect the EU framework directive 89/391, as in
Sociolismo in Cuban Culture
the UK employers are free to disregard require-
ments for financial reasons, rather than, as in
Ireland, taking account of best practice (Walters
2002). On that basis, EU soft law has had limited
impact in the UK.
This assumes an established context of collab-
oration, within which there can be open coordi-
nation of new developments or building of
consensus by use of a particular instrument.
Effective standards require consent if they are to
be implemented, ideally accompanied by some
degree of monitoring and inspection.
The parallel with international law is partial,
but instructive national laws tend to be enforced,
while international law may be based on
unenforced declarations. Soft law seeks to find
routes to de facto adoption, within a shared dis-
course (Bruun and Bercusson 2001a).
This is not simply a European phenomenon. It
does presuppose a context, or arena, where there
are encounters between groups and a shared will-
ingness to collaborate. It is applicable to many
cases where diverse cultures and traditions come
together. In other regional groupings, such as
SADC and ECOWAS, we may see the develop-
ment of analogous processes, which go beyond
the national laws of member countries.
Introduction
The corporate social responsibility movement
could itself be regarded as a set of examples of
informal soft law, in that there is a growing col-
lection of good practice cases against which
interested companies are invited to benchmark
themselves, in varied contexts. The intention of
participating companies and managers is that
effective standards are improved, but without
the use of regulation. Companies, and in particu-
lar managers, have been targeted with arguments
in favor of CSR, which are often based on
enlightened self-interest.
McKinsey have distinguished between
approaches to CSR which are cosmetic and
driven by marketing and public relations, and
those which reflect strategic CSR. The UN
MDG awards ceremony was intended to motivate
Soft Law
companies to participate, as partners and as spon-
sors, by invoking the model of the Oscars. It
failed.
One problem with using only enlightened self-
interest (see ▶ Ethical Egoism) arguments in
favor of CSR is that the interpretations of CSR
are many and various, around the world and
across the professions, defying easy manage-
ment. Idowu and Leal (2009) and Idowu and
Lelouche (2011) highlight the extent to which
CSR is culturally and professionally situated.
In the EU, the starting point for CSR involves
the obligations of employers to employees. This
is located in a context of social partnership and
social dialogue. Companies who wish not to rec-
ognize trade unions may prefer to talk of corpo-
rate responsibility, as they are worried about the
“social” dimension. If they wish to operate in the
EU, they will need to address the requirements of
EU directives. In EU terms, it can be hard to talk
of a company which does not recognize trade
unions, such as The Body Shop, as engaged in
CSR.
Open coordination may require there to be an
accepted facilitator, who can motivate separate
but related development processes against
a background of agreed policy or within an envi-
ronment of common interest. This will be more
difficult in an adversarial context. The role might
be played by researchers, academics, or NGOs.
Action researchers, as opposed to “inaction
researchers,” recognize their engagement in the
problem being studied. In Latin America and
Scandinavia, for example, action research is
linked to an agenda of emancipation. See the
International Journal of Action Research. This
can provide a framework within which soft law
can develop.
An Example of Soft Law
EU employment and social policy provides an
example of soft law. Heads of governments
since 1997 have agreed on policy objectives and
have then sought to develop instruments by
which programs could be developed and
implemented, without immediately relying on
regulation or compulsion. Taking account of the
diversity of member countries, there has been
2271 S
reluctance to impose a single best way. The Euro-
pean model of employment and social policy is
intended to be based on a European perspective
on corporate social responsibility, which starts
with the obligations of the employer to the
employee. This strategy can be compromised by
the contrast between perceptions of CSR in the
EU and in international discussions based on
voluntarism rather than regulation.
At the level of the United Nations, the Global
Compact was intended to play a similar role,
linking private sector companies and NGOs to
the work of UN agencies in delivering the Mil-
lennium Development Goals. To date, companies
have been slow to see the benefits of creating
collaborative advantage by working together.
Key Issues
The following are some of the main areas of
discussion around CSR and soft law.
Lack of Consensus on Soft Law Initiatives
Consent, participation, or a certain expectation of
conformity is assumed in soft law programs. This
means that a careful balance must be struck in
terms of competing interests or a voluntary pro-
gram will break down. For example, the credibil-
ity of European employment and social policy is
in doubt when countries such as the UK feel
entitled to opt out of arrangements which do not
suit them. The working time directive sets out
a framework which is accepted in 26 out of 27
EU member countries. S
It is hard to transpose European directives into
national legislation, as the process takes time and
requires attention to detail. For example, the EU
discrimination directive of 2000 (Bruun and
Bercusson 2001b) brings together legislation
and institutional frameworks covering each of
the previously separate forms of discrimination,
based on gender, race, disability, sexual orienta-
tion, and age. In the UK, the new legislation and
the new institutional arrangements have taken
a decade to implement and take on significant
meaning. The UK has felt free to disregard EU
directives, labeling them red tape. This removes
S 2272
the scaffolding on which EU soft law is built.
During the many years of delay in addressing
the EU discrimination directive, the UK played
a limited role in the related soft law process.
National Soft Law Initiatives
Soft law is seen as one way of reducing the gap
between leading-edge good practice and a long
tail of activities in other organizations. Open
coordination (Zeitlin and Pochet 2005) sets the
terms for the set of national plans of action, on
which European Commission officials comment.
Reference is made to examples of good practice,
from which companies can learn, in what is
termed social benchmarking. Within the context
of the EU, this encourages greater mutual knowl-
edge and understanding among member coun-
tries, their governments, and their companies.
In the EU, one feature of soft law and social
dialogue is that the option of regulation and leg-
islation remains available if consensus routes do
not succeed. Enforcement should not be neces-
sary if consent is real. However, where the
resolve of governments or other participants
varies, there is a need for credible mechanisms
for enforcement to be available, if the venture is
not to fall into disrepute. This poses challenges
for those who are proposing initiatives to be
followed by companies, which tend to resist leg-
islation and regulation. After all, it is argued,
there should be the minimum restrictions on the
operations of companies, if they are to achieve
competitive advantage.
Soft Law and Weak Voluntarism
The debate on regulation and voluntarism has
been affected by the recent credit crunch and
global economic crisis. It had been argued, by
managers and politicians across much of the
political spectrum, that the financial services
required only “light touch regulation” or “self-
regulation.” The extent of the damage caused by
the failure of financial markets and institutions
has forced a reassessment of the situation.
One complication resides in what Nobel eco-
nomics laureate Joseph Stiglitz termed “infor-
mation economics.” Business has often been
discussed as if all participants in a deal make
Soft Law
their decisions based on full information and
with equal access to particular information.
This is typically not the case. There is power
imbalance, and key information may be
withheld.
The problem is made worse by complexity.
Many of the instruments used in financial trans-
actions, such as securitization and derivatives, are
complex and can be used to hide uncomfortable
truths. Is it socially responsible to make deci-
sions, affecting others, in a context that one
does not understand? Is it acceptable to gloss
over such complications and assert that all is
going well?
Soft law is set against a background of possi-
ble resort to soft law. Soft law may reach the parts
of a problem which hard law cannot reach, and
vice versa.
Future Directions
Some key questions for the future in this area are:
• What happens to those who opt out from insti-
tutional arrangements which depend on soft
law?
• Can free riders be accepted, benefiting from
the actions of others without themselves
complying?
These are broad questions for any democracy.
Soft law makes requirements of civil society and
makes assumptions regarding compliance with
decisions reached by consensus. In a society
marked by division and power distance (Marmot
2004; Wilkinson and Pickett 2010), solutions
may be required.
One of the problems of soft law initiatives is in
relation to noncompliance with voluntary stan-
dards. Questions have been raised regarding the
UK’s noncompliance with several EU soft law
initiatives. There are limits to which individuals
can be allowed to remain in a club when they
habitually disregard the rules. If consensus fails,
harder measures may be required.
We may decide that these questions are not
new. Corporate social responsibility raises age-
old political issues regarding fairness and partic-
ipation. We might argue that it is a sign of the
Spiritual Capital 2273 S
influence of pioneering CSR initiatives that we
are now discussing sustainable processes of con- Special Interest Representation
tinuous improvement.
▶ Lobbying

Cross-References

▶ Social Dialogue Specialization of Function

▶ Social Partnership
▶ UN Global Compact ▶ Authority Versus Bureaucracy

References and Readings

Spirit at Work
Bruun, N., & Bercusson, B. (2001a). Legal dimensions of
the European employment strategy. In R. Ennals (Ed.),
Work life 2000 yearbook 3, Supplementary volume.
▶ CSR and Spirituality
London: Springer Verlag.
Bruun, N., & Bercusson, B. (2001b). Discrimination and
affirmative action in the labour market: Legal perspec-
tives. In R. Ennals (Ed.), Work life 2000 yearbook 3,
Supplementary volume. London: Springer Verlag.
Spirits
Idowu, S., & Leal, F. W. (Eds.). (2009). Global practices of
corporate social responsibility. Heidelberg: Springer. ▶ Alcohol
Idowu, S., & Lelouche, C. (Eds.). (2011). Theory and
practice of corporate social responsibility. Heidel-
berg: Springer.
Ilmarinen, J., & Lehtinen, S. (Eds.). (2004). Past, present and
future of work ability (People and Work research report Spiritual Capital
65). Helsinki: Finnish Institute of Occupational Health.
Marmot, M. (2004). Status syndrome. London:
Bloomsbury.
Theodore Roosevelt Malloch
Walters, D. (Ed.). (2002). Regulating health and safety Yale Center for Faith & Culture, Yale University,
management in the European Union: A study of the New Haven, CT, USA
dynamics of change. Brussels: Peter Lang.
Wilkinson, R., & Pickett, K. (2010). The spirit level:
Why equality is better for everyone. London: Penguin.
Zeitlin, J., & Pochet, P. (2005). The open method of Synonyms
co-ordination in action: The European employment
and social inclusion strategies. Brussels: Peter Lang. Religious capital S

Definition
Soft State Regulation
A succinct definition of spiritual capital is “the
▶ Public Policies on CSR fund of beliefs, examples and commitments that
are transmitted from generation to generation
through a religious tradition, and which attach
people to the transcendental source of human
Special Compensation happiness” (Malloch 2008).
Development requires economic growth;
▶ Bonuses (Incentive System; Employee for growth requires the catalytic drive of the entre-
Performance) preneur, and entrepreneurship exists only where
S 2274
freedom of action is combined with personal
responsibility. In all its myriad forms, account-
ability is a spiritual asset that is forged by the faith
that inspires and governs it, and it does not easily
come into being in other ways.
Wherever faith dynamically arises, you see
hope, swelling in its wake, as currently witnessed
in the dynamism of Indonesia, in offshore Chi-
nese communities, in the now-burgeoning econ-
omy of India, and in the Latin American
evangelical communities that are creating islands
of free commerce despite strict, and often cor-
rupt, state control. Human beings, guided by faith
and hope, add value to nature and transform it in
powerfully positive ways. This happened in
Europe and North America since the seventeenth
century and gave rise to modern capitalism.
Without faith or hope, humankind exploits the
natural world and leaves it weakened, threatened,
and very much at risk.
The creation of wealth requires capital invest-
ment, and the most essential part of that invest-
ment is arguably the spiritual capital with which
enterprise begins, then flowers and bears fruit –
talents creating and sustaining still more talents,
and all of us thriving in a vital spiritual bond.
Introduction
The social sciences are replete with a mature
literature and treatments, both empirical and the-
oretical, on culture and economic development
(See the “Annotated Bibliography” on this topic
by Fred Van Dyke, AuSable Institute, Madison,
WI, 1996). The concepts of social capital and
human capital are by now rich and extend beyond
economics to management, human resources,
political science, and sociology. Indeed, both
have become in recent decades important, twin
pillars in capitalism and democracy. They each
operate at individual, corporate, societal, and
global levels. Spiritual capital has come to prom-
inence in recent years due to the combination of
three related trends: the failure of secularization/
modernization theories to account for reality,
a rise in religiosity globally, and the lack of ethics
and virtue evidenced in the financial crisis and an
Spiritual Capital
ongoing plague of corporate scandals. Concep-
tions of spiritual capital on offer range from those
by Fogel to Coleman to Berger and Putnam (See
Bibliography) and appear more regularly in the
economic and social science literature and popu-
lar accounts. In that sense, the concept of “spiri-
tual capital” is emerging.
The concept of spiritual capital is pregnant
with possibilities drawing on the intersection of
economics and religion and such classic works as
R.H. Tawney’s, Religion and the Rise of Capital-
ism (Tawney 1928) and Max Weber’s The Prot-
estant Ethic and the Spirit of Capitalism (Weber
1905) as well as more recent political economy
thinking on economics and development. The
notion of “spiritual capital” is just beginning to
pass the so-what test. It may possibly be the
hidden motivation in economic booms as far
apart as Ireland and Singapore. How exactly reli-
gion affects economic behavior at both the
macro- and microlevels is a bone of contention.
Many scholars are now trying to more fully dem-
onstrate the relevance, validity, and potential of
the notion that spiritual mores and underpinnings
demonstrably effect development and economic
behavior from consumer habits to firm organiza-
tion to following ethical practices and standards.
The hypothesis is: In the ultimate sense is
spiritual capital a missing leg in the stool of
economic development, which includes its better
known relatives, social and human capital? Is it
a subset of social capital or a category all its own?
How does it relate to various ideas of culture –
corporate culture, national culture, and eco-
nomic/political culture?
Key Issues
Relationship to Social Capital
In, In Good Company, Don Cohen and Laurence
Prusak (2001) examine the role that social capital
– a company’s “stock” of human connections,
such as trust, personal networks, and a sense of
community – plays in thriving organizations.
Social capital, it turns out is so integral to busi-
ness life that without it, corporate action – and
consequently productive work – is not possible.
Spiritual Capital
Social capital involves the social elements that
contribute to knowledge sharing, innovation, and
high productivity.
The World Bank defines social capital as “the
norms and social relations embedded in social
structures that enable people to coordinate action
to achieve desired goals” (The World Bank
1985). Robert Putnam, the Harvard political sci-
entist, describes it similarly. “Social capital,”
Putnam writes, “refers to features of social orga-
nizations such as networks, norms, and social
trust that facilitate coordination and cooperation
for mutual benefit” (Putnam 2001).
In Cohen and Prusak’s recent seminal study,
social capital consists of the “stock of active
connections among people, the trust, mutual
understanding, and shared values and behaviors
that bind members Of human networks and com-
munities and make cooperative action possible”
(Cohen and Prusak, p. 14). Social capital makes
any organization or any cooperative group, more
than a collection of individual’s intent on achiev-
ing his or her own private purposes.
The term first appeared in print in 1916 in the
context of academic debates on the decline of
America’s cities and close-knit neighborhoods.
In present decades, sociologists have given the
term more credentials. Glenn Loury used the
phrase in 1977 (1976) to describe sources of
certain kinds of income disparities, and Pierre
Bourdieu (1986) described it as one of the forms
of capital that help account for individual
achievement. Chicago sociologist, James
Coleman, is best known for his employment of
the concept (Coleman 1990).
As yet, most of this literature has little to say
about how managers can actually increase an
organizations’ stock of social capital. And most
recently, Nan Lin’s trilogy on social capital –
theory of social structures and action, theory
and research, and foundations of social capital –
has further refined what has become a more and
more widely used social construct now in popular
parlance (Lin 1978, 2001, 2002).
In the realm of politics, Robert Putnam’s land-
mark 1993 book, Making Democracy Work
(Putnam et al. 1993), convincingly demonstrated
that the political, institutional, and economic
2275 S
value of social capital is substantial. In 2000,
Putnam brought out Bowling Alone (Putnam
2000), a scholarly and provocative account of
America’s declining social capital. Numerous
findings of comparative economic studies by the
World Bank and United Nations corroborate
Putnam’s thinking; i.e., some regions of the
globe lag behind while others thrive due to social
capital. His latest work, American Grace, shows
how religion both divides and unites society and
is based on comprehensive surveys conducted on
religion and public life in America (Putnam and
Campbell 2010).
Relationship to Human Capital
The term “human capital” first appeared in 1961
in an American Economic Review article,
“Investment in Human Capital,” by Nobel Prize
winning economist, Theodore W. Shultz. Econo-
mists have since loaded on much baggage to the
concept but most agree that human capital com-
prises skills, experience, and knowledge. Some
like Gary Becker add personality, appearance,
reputation, and credentials to the mix (Gary
Becker, The Economic Approach to Human
Behavior, 1978 and other works). Still others,
like management guru Richard Crawford, equate
human capital with its owners, suggesting human
capital consists of “skilled and educated people”
(Works by Richard Crawford on management).
Newer conceptions of total human capital
view the value as an investment. Thomas O.
Davenport, in Human Capital: What It Is &
Why People Invest It (1999), looks at how
a worker performs depending on ability and S
behavior. For him, the choice of tasks also
requires a time allocation definition. The combi-
nation of ability, behavior (Davenport 1999),
effort, and time investment produces perfor-
mance, the result of personal investment,
THC ¼ A&B  E  T, where a multiplicative
relationship enhances the outcome.
Davenport further elaborates a worker invest-
ment notion, describing what it means to work in
the relationship nexus between the employee and
the employer. He explains in mostly anecdotal,
company-specific detail how companies that treat
workers as investors can attract, develop, and
S 2276
retain people. These people both get much value
from their organization and give so much in
return that they create a competitive advantage
for their firms. A further quantitative refinement
in this field is the so-called business case for ROI
in human resources. Works such as The HR
Scorecard by Jack Phillips, among others, put
forward a measurement case for viewing the
employee as a human asset (Phillips et al.
2001). It has become almost trite to recite the
fact that in both economic development and in
firm behavior – the most important assets are the
human ones.
Future Directions
The Future of Spiritual Capital Tied to
Theories of Economic Development and
Culture
When you do a thorough web search, not much
comes up on the topic spiritual capital. In Ama-
zon.com, an index search of all categories, books
included, yields much the same result. It turns up
Seven Capital Sins by Bishop Fulton Sheen;
Witchcraft and Welfare in Puerto Rico; and an
out of stock pamphlet on capital cities and urban
planning. So why bother? Is this a virgin field or
a foolish endeavor? Can the development litera-
ture fill in any of the gaps and provide an ade-
quate framework on spiritual capital?
Among the many facts that confront us in the
contemporary world, uneven development is
among the most glaring. One stark reality of the
twenty-first century is that most of the world has
little wealth or power. The majority of citizens in
developed countries and a small elite in develop-
ing ones are well fed, housed, educated, and live
relatively long and healthy lives. The over-
whelming majority of persons in developing
countries, by contrast, are subsisting in
a preindustrial era. The economies they know
are, by and large, based on either subsistence
agriculture or the export of primary products.
The standard of living in much of the world
hovers perilously close to the level of subsis-
tence. Except for a small elite, the populations
of much of the globe are afflicted by a myriad of
Spiritual Capital
ills in their shortened lives. This set of problems
is the stage for development economics.
The concept of betterment or “development”
is based on the hope that people everywhere will
attain an improved standard of living. Beyond
this statement – little agreement exists about
development or the various forms of capital on
which it is based. Standard indices of develop-
ment abound and typically include such elements
as per capita income, the poverty line, ratios of
energy consumption, railroads, telephones, Inter-
net usage, TVs, schools, teachers, students, liter-
acy, death rates, you name it.
Some economists working out of various eth-
ical frameworks have argued that standard of life
should not be narrowly defined, as is sometimes
the case in positive economics (See
“Planetheonomics” Papers on Economics, Ecol-
ogy and Christian Faith, AuSable Institute, 1996
which includes papers by economists such as:
Mark Thomas, Robert Hamrin, Bob
Goudzwaard, Herman Daly, Donald Hay, Lans
Bovenberg, and Theodore Malloch). Develop-
ment for them would also include aspects of
human well-being, or what economists call wel-
fare, such as health, food, education, housing,
employment, the environment, religious and cul-
tural values, and the even sustainability of each of
these. Significant as any of the indices of devel-
opment may be, this view suggests they do not
alone capture the whole sense of what it means to
develop.
Nearly fifty years of economic research has
concluded that improvement in the standard of
life is difficult to imagine in countries or in
populations with environments dominated by
tribal and agrarian elites who do not want change;
who lack the administrative capacity to stimulate,
regulate, and coordinate activities; and who are
plagued by violence caused by either external or
internal actors, and uncertainty about rewards.
Researchers, however, do not agree on the goal
or vision underlying development or on the sig-
nificance of anything called spiritual capital.
“Neoclassical,” “neo-Marxist,” and “struc-
turalist” have become prominent theories over
the course of the last five or so decades. Each has
in its own way affected development economics
Spiritual Capital
and the policies pursued by developing and
developed countries, alike.
The early neoclassical or “modernization”
models, rooted in the growth experiences of
Western industrial nations, assumed that devel-
opment occurred when nations progressed
through “stages of growth” as articulated by
Rostow, among others, beginning in
a traditional society and arriving at the final
stage of high-mass consumption (W.W. Rostow,
his many titles on the stages of economic growth,
economic development and Asia.). The history of
South Korea, Taiwan, Hong Kong, and Singapore
was often cited as illustrations. All economies it
was argued could be expected to pass through
these same stages, as technology, skills, and atti-
tudes were transferred and transformed via devel-
opment aid and foreign direct investment. The
modernization model (ala Apter) said that the
burden of change rested on the developing coun-
tries themselves (David Apter, his many works on
modernization, Africa, and political culture). It
emphasized entrepreneurship and innovation, the
mobilization of domestic resources – including
human and social capital – capital formation, and
technical progress as the sources of economic
growth. It also considered favorably the role of
external finance and the need for liberalized and
expanded trade. Focusing on economic growth,
the neoclassical theories are widely accepted
today by most professional economists, devel-
oped county aid agencies, and the postwar inter-
national economic institutions, such as the World
Bank, IMF, and WTO. The “dependency” per-
spective on development was derived from Marx-
ist assumptions. It maintained that the industrial
countries had enriched themselves at the expense
of the third world.
This occurred first in colonial exploitation
and later through capitalism and imperialism,
particularly through the vehicle of the transna-
tional corporation. According to various depen-
dency theorists, exploitative relations have to
be broken in order for true economic develop-
ment to occur. Little attention was focused on
the internal dynamics for growth in individual
nations. Rather, the international capitalist
system was castigated (See for instance:
2277 S
Cardoso, Emmanuel, Frank, Hymer, Leys,
Wallerstein, Finn and Brown).
Borrowing heavily from earlier Marxists, the
dependency theorists sprung up, first in Latin
America and then via the New International Eco-
nomic Order throughout the entire developing
world. They utilized dialectical logic to present
capitalism as the sole cause of developing coun-
try economic stagnation. Underdeveloped
“peripheral” regions with their cheap labor and
raw materials were they thought drained by the
developed “core” counties in Europe and North
America.
It was argued that diffusion of modern farm
technology to large farmers caused prices of
crops to drop due to increased supplies; land
holdings to increase in size; and poorer farmers –
who could not adopt – to migrate to cities to look
for unskilled wage labor. Some even argued that
foreign aid programs increased inequalities
between countries and among social
classes within countries because of built-in biases
“against the poor”.
“Structural” hypotheses about development
were formulated in the 1960s and 1970s by
numerous third world economists. They argued
that general inflexibility applied to developing
countries and that production structures in those
counties were “essentially different” from those
in developed countries. According to these
authors, in order to achieve development, the
structures in the third world needed to more
closely approximate those of developed coun-
tries. While distrusting the price mechanism, the
socialist-oriented structuralists tended to ignore S
the influence of prices (See for instance: Rodan,
Lewis, Prebisch, Chenery, and Nurske, Page 9).
Interdisciplinary in focus, these structuralists
offered more of a sociopolitical, than a technical
economic, theory of the development process.
The structuralist position held that the money
supply is exogenous and that only by changing
the structure of the economy – land reform,
import substitution to make the economy less
dependent on foreign trade, educational advance-
ment, and improved fiscal systems – is of any
avail in the long run. An inelastic supply of
exports or inelastic world demand or both were
S 2278
essential parts of the structuralist view. Import
substitution was favored, as were overvalued cur-
rencies, import controls, rapid industrialization,
and the discouragement of export-led growth.
In the last two decades, more recent debates in
development macroeconomics have revolved
around debt management and relief, the appro-
priate role of the price mechanism, trade policy,
the effect of policies in developed countries on
the rest of the world, and the transition from
closed or centrally planned economies to open
market ones. At the microlevel, questions
concerning choice of planning techniques have
continued with a renewed debate on whether
capital-intensive projects and globalization pro-
duce the most growth. There has also been at the
UNDP in particular, an emphasis on human eco-
nomic development in a broadly defined sense
(This is in part due to the resurgence of neo-
classical development economics in the late
1970s (Solow, Kaldor, Kahl, and Smith) which
coincided with a more radical movement toward
increased concern for unemployment, poverty,
and ‘basic needs”. Some of these thinkers would
place themselves outside of the mainstream of
development thinking (Healy, Myrdal, and
Singer, among others)
But development is not just a goal of rational
actions in the economic, political, and social
spheres. It is also, and very deeply, the focus of
redemptive hopes and expectations. In an impor-
tant sense, as Peter Berger reminded us in Pyra-
mids of Sacrifice, development is also a “religious
category” (Peter Berger, Pyramids of Sacrifice,
1986 and other works by this author).
Even for those living on the most within this
frame of reference, economic development can
be seen as stewards who act on their faith com-
mitments can view a process through which per-
sons and communities learn to care for and use
the resources that sustain life (See “Development
from a Christian Perspective”, Lans Bovenberg
and Theodore R. Malloch, AuSable Institute
paper, 1996). Economic development as creative
management of endowed resources. Here, genu-
ine economic growth is guided by normative
laws, character, and principled habits and prac-
tices that take into account the preservation needs
Spiritual Capital
of human beings, their environments, and their
physical, mental, social, cultural, and spiritual
lives. In the ultimate sense, spiritual capital may
be the third or missing leg in the stool which
includes its better known relatives, namely,
human and social capital.
International relations theory and develop-
ment economics since the 1980s have similarly
argued that as more advanced nations progress
with respect to technology, capital formation,
growth, and diversification of economic sectors,
in an era of rapid globalization and greater “inter-
connectivity” and interdependence across
national boundaries, a “feedback” effect on cul-
ture, politics, and society occurs (See Willy
Brandt on North-South and the generation of
literature on sustainable economic development).
To what extent are spiritual variables or spiritual
capitals the missing component ignored in much
of recent academic inquiry and policy analyses of
global economic growth?
One can rightly ask which factors and issues
development economists and practitioners should
add to their future studies to gauge this missing
link. In other words, can we operationalize spir-
itual capital so that the concept and empirical
findings can be made more plausible and evident?
Since the notion of spiritual capital is closely
connected to ongoing debates on trust, corrup-
tion, governance, sustainability, and entrepre-
neurship, this is a critical next step.
Where research is heading, some things to
look at include:
– The practical wisdom of the major faith tradi-
tions for management
– The role and scope of personal religious ethics
on private economic decisions
– The exegetical, economic, and historical tra-
ditions, which give rise to contrasting work
ethics and economic systems
– The role of societal institutions based on faith
ranging from companies to trade unions to
political parties to nongovernmental and
intermediating structures
– Interpretations and practices concerning inter-
est, investment, inflation, growth, government
authority, charity, and trade in various spiri-
tual worldviews
Spiritual Capital
– The impact of religion on conduct and rules as
employees and employers, consumers and
producers, and citizens at every level of
existence
– The degree to which religious practices and
policies directly or indirectly affect economic
behavior, choices, and economic policy
There may be no one set of religious principles
regulating any given economic polity but all reli-
gious peoples, regardless of their faith commu-
nity, make individual and collective choices in
which personal faith colored by long-standing
and deeply rooted historical religious traditions
are highly relevant and important factors. Spiri-
tual capital is becoming a useful concept and term
for a vital feature of economic development that
has been largely overlooked in modern theories
of development. It is being applied in case studies
of individual companies (Yale University School
of Management Spiritual Capital Initiative).
Indeed, the often used terms social capital and
human capital themselves are based to a large
extent on the existence of good faith, trust, stew-
ardship, a sense of purpose, and other moral char-
acteristics or virtues which cannot persist in the
absence of the piety, solidarity, and hope that
come from religion and spiritual sentiments.
When this is lost, societies and economies often
decline rather than grow. When this abounds,
societies, corporations, and economies prosper.
Cross-References
▶ Business Ethics
References and Readings
Baker, C., & Miles-Watson, J. (2007). Faith and tradi-
tional capitals: Defining the public scope of religious
capital: Detailed literature review.
Berger, P. L. (2005). Religion and the west. The National
Interest, Summer.
Berger, P. L., & Redding, G. (Eds.). (2010). The hidden
form of capital: Spiritual influences in societal pro-
gress. New York: Anthem Press.
Bourdieu, P. (1986). Forms of capital. In J. G. Richardson
(Ed.), Handbook of theory and research for the soci-
ology of education. New York, Greenwood Press.
2279 S
Coleman, J. S. (1988). Social capital in the creation of
human capital. American Journal of Sociology, 94,
95–110.
Coleman, J. S. (1990). Foundations of social theory.
Belknap: Cambridge.
Cohen, D., & Prusak, L. (2001). In good company: How
social capital makes organizations work. Cambridge:
Harvard Business Press.
Dasgupta, P., & Serageldin, I. E. (2000). Social capital:
A multifaceted perspective. Washington, DC: World
Bank.
Davenport, T. O. (1999). Human capital: What it is and
why people invest it. San Francisco: Jossey-Bass.
Fogel, R. (1999). Catching up with the economy. Ameri-
can Economic Review, 89(1), 1–16.
Fogel, R. (2000). The fourth great awakening & the future
of egalitarianism. Chicago: University of Chicago
Press.
Hughes, P. (2008). Spiritual capital: An important asset of
workplace and community. Melbourne: Christian
Research Association - Occasional Research Paper
No. 8.
Iannaccone, L., & Klick, J. (2003). Spiritual capital: An
introduction and literature review. Manuscript, John
Templeton Foundation.
Lin, N. (1978). Foundations of social research.
New York: McGraw-Hill Press.
Lin, N. (2001). Social capital: Theory and research.
Piscataway: Aldine Transaction.
Lin, N. (2002). Social capital: A theory of social structure
and action. Cambridge: Cambridge University Press.
Loury, G. C. (1976). A dynamic theory of racial income
differences. Northwestern University, Center for
Mathematical Studies in Economics and Management
Science, Discussion Papers: 225.
Malloch, T. (2008). Spiritual enterprise: Doing virtuous
business. New York: Encounter Books.
Phillips, J., et al. (2001). The HR scorecard. New York:
Butterworth.
Putnam, R. D. (2000). Bowling alone: The collapse and
revival of American community. New York: Touch-
stone/Simon & Schuster.
Putnam, R. (Ed.). (2001). Democracies in flux: The evo-
lution of social capital in contemporary society. S
New York: Touchstone.
Putnam, R. D. (2003). “Religion and social capital” in
better together: Restoring American community.
New York: Simon and Schuster.
Putnam, R. D., & Campbell, D. (2010). American grace:
How religion is reshaping our civic and political lives.
New York: Simon and Schuster.
Putnam, R. D., & Sander, T. H. (2010). Still bowling
alone? the post-9/11 split. Journal of Democracy, 21,
9–16.
Putnam, R., Leonardi, R., & Nanetti, R. (1993). Making
democracy work. Princeton: Princeton University
Press.
Tawney, R. H. (1928). Religion and the rise of capitalism.
London: Mentor.
S 2280
The World Bank. (1985). World development report, p. 29.
Weber, M. (1905). The protestant ethic and the spirit of
capitalism. London: Penguin. Translated 1930.
Woodberry, R. D. (2003). Researching spiritual capital:
Promises and pitfalls. Manuscript, John Templeton
Foundation.
Spirituality in the Workplace
▶ CSR and Spirituality
Sponsor
▶ Stakeholders
Sponsorship
Karen Becker-Olsen and Sean Potucek
School of Business, The College of New Jersey,
Ewing, NJ, USA
Synonyms
Cause-related marketing; Co-branding; Patronage;
Philanthropy
Definition
Sponsorship is a long-held practice used to
associate a person, event, or group with another
person or group, via a payment or donation.
Inherent in this definition is the notion that one
groups pays for the right to be associated with the
other group. Thus, the exchange relationship is
characterized as one group benefitting by being
associated with another. More specifically,
Meenaghan (1999) argues that sponsorship
should be more two sided with both organizations
benefitting in a commercial perspective.
Sponsorship relationships are prevalent in
sport, arts, internet sites, and community events.
Spirituality in the Workplace
Typically, a firm commits to sponsor (or give an
agreed-upon financial contribution to the spon-
sored organization) an event in exchange for the
rights to be associated with that event. Examples
include sponsorship of the Olympic Games, com-
munity music festivals, concert tours, programs
such as Reading is Fundamental, and organiza-
tions like the World Wildlife Fund. As viewed
from a marketing communication’s perspective,
sponsorship is an integration of advertising,
public relations, sales promotion, and even
corporate social responsibility.
Introduction
Today, sponsorship represents a growing compo-
nent of the marketing communication’s budget
for a variety of firms across a myriad of indus-
tries. In the past 20 years, sponsorship growth has
surpassed advertising growth, with total 2007
expenditures over $37 billion worldwide
(IEG 2007). These sponsorships span title
sponsorship programs which can cost upward of
5 million US dollars to community event spon-
sorships which might cost a mere 500 US dollars,
to stadium naming sponsorships which run in the
millions (Sponsorship.com). It has been esti-
mated that more than 80% of all sponsorship
relationships are sports related. Although there
has been an increase in CSR-related sponsor-
ships, with environmental programs topping the
list, it is hard to quantify the exact amount spent
because much of the CSR-related spending is
embedded into sports contracts. For example,
CitiBank’s sponsorship of the Mets includes
funding for community outreach, a Jackie
Robinson museum, and college scholarships.
Although community-based sponsorship
programs were once under the direction of phi-
lanthropy, it is more likely that these types
of programs are used as any other sponsorship
program – as a strategic investment for the brand.
Historically, broadcast media was the driver
for sponsorships. In the 1930s, the boom of radio
saw the rise of what we now refer to as “modern
sponsorship.” Companies flooded the new
medium with sponsorship dollars, encouraged
Sponsorship
by the need of radio stations to underwrite costs
of their operations (Fones-Wolf). Larger compa-
nies like Ford and General Motors sponsored
daily shows and news broadcasts, while smaller
businesses opted for less frequent specials. Both
were designed not only to inform consumers of
the sponsor’s existence, but also to inexorably tie
their name to a program or event on the radio.
Radio remained the dominant media form
until the mid-1950s; however, the model of
program sponsorship was well established over
the subsequent 20 years, leading to the rise of
television. As noted, this model of sponsorship,
still in use today, has seen an uptake as of late as
more corporations find diminishing returns on
ads in traditional media like newspapers and
magazines.
Categories of Sponsorship
Event Sponsorship. Event sponsorship is when
a firm develops a sponsorship relationship with
a particular event. These sponsorships are short
term and focused on the specific events. Events
like the Olympics and the World Cup draw
massive sponsorship money from corporate
underwriters, while local high school sports
teams often have jerseys and equipment bearing
the local grocers name. Events can be sports
related, community outreach, environmentally
based, or even concert tours, all with the empha-
sis on building awareness and a connection with
a particular target audience.
The Beijing Olympics in 2008 appear to have
taken sponsorship to a new level in both the
presence and variety of sponsors at the games.
Viewers were inundated with images and slogans
as almost every square inch of the Olympic
grounds were sponsored by someone or another,
leaving some believing the net effect was
a “watering down” of their effectiveness, and
others that they were a conflict of interest to the
values of the particular event. Analysts and con-
sumer groups became increasingly concerned
that western corporations were using event spon-
sorship as a sort of stepping stone to entry in
China rather than as a show of values consistent
2281 S
with the event. Concurrently, these critiques
pointed to Chinese officials who were seen as
selling off every part of the event to the highest
bidder. There were a multitude of exclusive
providers and a record 63 official sponsors of
various parts of the event bringing to these
games and the Chinese government an estimated
$4–6 billion in revenue (Wedekind). Criticism
was also extended to the choice of certain spon-
sors like McDonalds, Coca Cola, and several
Beer Companies who were described as not
being congruent with the healthy living values
associated with the event. While other companies
chose to use loopholes in regulations to have their
logos seen like Adidas (Wedekind). Together
these factors have led many to doubt the
effectiveness of the sponsorships at the Beijing
Olympics, or at least question the value of both
the event and the sponsoring firms.
These criticisms highlight the importance of
choosing or even building an affiliation between
the sponsor and the sponsored event in an effort
to make the partnership truly effective. Pairings
with perceived conflict of interest or incongru-
ence will tarnish the value of both the event and
the sponsor. Understanding these possible
conflicts necessitates understanding who the
stakeholders are in the agreement.
This incongruence can be seen clearly in
NASCAR and F1 racing, where critics question
why several cars are sponsored by alcoholic bev-
erage companies. It is seen as a conflict because
the combination of liquor and automobiles in any
other context is negative, if not reckless. Diageo,
makers of Crown Royal bourbon, sponsor F1 S
driver Johnnie Walker under the reasoning they
use him as a channel to engage with the auto
community on issues of safe consumption
of alcohol (Cooper). Despite their intention, con-
sumers view the sponsorship with suspicions
because the two entities do not mesh on
a more visceral level, never making it to a more
cognitive one.
Strategic organizational sponsorship. Organi-
zational sponsorship is the association of a firm
with a particular organization over an extended
period of time. In contrast to event sponsorship,
organizational sponsorship refers to a longer-term
S 2282
pairing of two organizations, such Hyundai and
the Jimmy Foundation. In this case, the firm might
also sponsor special events of the organization, but
the focus is on creating long-term value and
associations for both organizations. Stadium
naming rights are another example of an organi-
zational sponsorship. In this case, the organization
being sponsored recognizes the financial contribu-
tion of the sponsor by bestowing “naming rights”
to a given property in recognition of the contribu-
tion. Firms pay upward of 1 billion US dollars
for sports stadiums via multiyear contracts with
the property.
Product Placement. Product placement,
a specialized form of sponsorship, in which
a product is embedded into a television show,
movie, or even video game content, has seen an
upswing with the increasing number of Digital
Video Recorders (DVRs) on set-top TVs. In April
(2010), Neilson reported that 34% of TV house-
holds now had DVRs installed, an increase from
24% the previous year (Gargano). The fear of
advertisers is simple: They fear consumers will
simply skip through the commercials. Thus, if
a brand can appear embedded within the content
of the program, it is more likely to be attended to.
Product placement seeds ads directly in the
content via their use within the context of the
entertainment. Product placement has been used
most obviously in game shows like The Price is
Right where product description and brand nam-
ing are part of the format of the show. More
subtly in movies, product placements like in the
film E.T., where the appearance of Reeses Pieces
in the picture reportedly spurred a jump of 60% in
Reeses sales (Gregorio & Sung), and Die Another
Day, where twenty brands paid in excess of
45 million euros, have been very effective in
creating brand salience. Most recently, product
placement sponsorship has been used with video
and computer games.
Goals of Sponsorship
Firms engage in sponsorships to engender
implied value or values in the eyes of consumers
by associating with the sponsored organization or
Sponsorship
event. Sponsored organizations, on the other
hand, solicit sponsorships for financial gain and
also to be associated with certain sponsoring
firms. In both cases, sponsorship choices are
designed to enhance the overall brand image
with consumers, communities, and other stake-
holders by associating themselves with certain
ideas, lifestyles, themes, and values deemed
acceptable and/or desirable by the various
stakeholder groups.
A sponsor or firm can expect to build at least
short-term brand-related goals through
a successful sponsorship program. Typically this
includes increasing brand awareness and
reinforcing brand familiarity and salience via
mere exposure at the event or through supple-
mental advertising by either or both of the orga-
nizations. However, beyond traditional
advertising-related goals, firms can also create
longer-term brand building effects related to
specific brand attributes, develop a brand person-
ality, or create a loyal connection with a specific
target audience.
By linking a brand with a particular type of
event or lifestyle, a firm can develop a specific
brand personality and build a sense of loyalty and
in-group momentum with the brand and target
group. Mountain Dew spends most of its spon-
sorship dollars linking the firm to extreme sports
events in an effort to build a relationship with
a particular target audience and create a sense of
adventure and risk for the brand.
They found this avenue so appealing they
created The Dew Cup, Dew Tour, as their own
Sporting competition to firmly solidify their com-
mitment to the lifestyle they wish to engage with.
They also have the skateboarder P-Rod act as
a spokesperson for the company in contests, hav-
ing giveaways with cross-branded Dew P-Rod
merchandise. Companies like Wendy’s and
Toyota have joined Mountain Dew as sponsors
for some of the events in the Dew Tour in
an effort to borrow on Mountain Dew’s own
reputation for adventure.
Alternatively, Toyota also has sponsorship
programs to strengthen its market position with
Latino customers by sponsoring Mexican rodeos,
music festivals, and soccer tournaments. In doing
Sponsorship
so, Toyota aims to create a sense of unity between
the Latino community and the brand. These types
of programs are particularly successful in that
they change consumer perceptions of products
as mere merchandise to culturally relevant sym-
bols, thus increasing demand with specific target
groups.
Event sponsorship allows for the unique
opportunity for face-to-face contact and personal
interaction with potential consumers at an event
that is relevant to the consumers, creating
a credible connection for the consumer with the
brand. Events also allow for widespread sampling
and interaction with the product at a given event.
AT&T was the title sponsor for the 2007 Tour de
Georgia. Not only did AT&T receive promo-
tional and visibility with its name on all posters,
banners, volunteer apparel, and television cover-
age, they were able to personally interact with
attendees of the event as they offered free calling
zones and allowed potential customers to sample
their product.
Additionally, event sponsorship of community-
based events provides an ideal opportunity for
reinforcing relationships with the local community
and other business organizations that sponsor the
event. Thus, sponsorship has many audiences, not
just consumers, but the community, and even the
corporations’ own employees (Grimes &
Meenaghan). The Bank of Ireland, like Home
Depot, successfully sponsors local sports teams
and athletes with the intention to reach out to the
community, but with a keen understanding that it
also boosts its workforce’s positive feelings toward
the company. Ultimately, firms are looking to
create attitudes, beliefs, and behaviors that will
lead to increased levels of brand commitment and
brand purchase for consumers, communities,
and other stakeholders.
Key Issues
Perceived Motivation
In order to reach the previously stated goals, firms
need to think about how consumers perceive the
firm’s motivations, particularly when a company
engages in corporate social responsibility
2283 S
sponsorships. These motivations may be
broadly perceived by consumers as altruistic or
self-motivated. Although most consumers under-
stand that firms engage in sponsorships for finan-
cial gain, perceived motivation is still an issue.
Customers generally are repulsed by sponsor-
ships they feel are attempting to deceive them
or cover up an important issue. Thus, perceptions
of these more firm-serving motivations hinder the
effectiveness of the sponsorship program because
consumers become skeptical and perceive the
sponsorship program and the firm as less trust-
worthy and credible (Koslow). Immediately after
the 2010 BP oil spill, BP dramatically increased
aid and advertisement to coastal and fishing
communities showing their key environmental
sponsorships. Such actions were criticized as
reactionary and undertaken only as a tactical
quick-fix for the spill (Fifield). Companies must
invest time and take careful notice of how their
sponsorship and advertisements are perceived;
otherwise, they may face devastating financial
consequences from skeptical consumers.
Congruency Effects
One of the most important strategic consider-
ations a firm must make regarding its sponsorship
activities is the fit or level of congruence between
the firm and the sponsored organization. Congru-
ency refers to how well two things fit together.
Within the sponsorship domain, fit can be based
on mission, value orientation, or target audience.
Fit has been shown to be a key factor in deter-
mining sponsorship success because it influences
consumer thoughts about the sponsorship S
relationship, the sponsoring firm, and the spon-
sored organization via affect transfer and associ-
ation. Fundamentally, fit is important because it
is the mechanism that allows for affect transfer
and determine the quantity and valence of spon-
sorship thoughts by consumers. For example,
Home Depot and Habitat for Humanity Interna-
tional is strong in mission fit, while Home Depot
sponsorship of TLC’s hit show “Trading Spaces”
in hopes of having more female customers repre-
sents target audience fit as the firm hopes to bring
in more female customers. Lastly, Stonyfield
Farms sponsors the Center for Biological
S 2284
Diversity which represents a value congruence
based on environmental values. These are exam-
ples of successful high-fit sponsorships in which
consumer expectations about the firm are met and
solidified.
High-fit sponsorships include sponsorships in
which there is an easily identifiable match or
level of congruence between the two organiza-
tions, while a low-fit sponsorship is one in which
there is a level of incongruence, such as
a company sponsoring a NASCAR driver that
seems to have no personality fit to the product/
company. Low-fit sponsorships tend to result
in negative attributions for the firm, such as
weakened brand image, because the company’s
information is inconsistent or does not have
“thematic relatedness,” making it difficult for
the consumer to understand why the firm would
be involved in the partnership and raising levels
of skepticism related to the firm. In contrast,
a high-fit pairing tends to lead to clarity of posi-
tion for the brand, a more positive attitude toward
the firm, and sponsorship event, as well as
increased feeling of efficacy related to the event.
Interestingly, a high “created fit” – one in which
the firm highlights specific ways the two entities
fit together – tends to have the greatest impact on
firm attributions and brand attitude (Simmons
and Becker-Olsen 2006).
Negative Affect Transfer
Just as firms use sponsorships to create more
positive brand beliefs via affect transfer, negative
feelings and beliefs can also transfer to
a sponsoring firm. Corporate political spending
has recently seen a change to a more liberal
interpretation of the law and companies can
now spend much more sponsoring political can-
didates and issues they feel are in line with their
company’s interests. The danger is that politi-
cally motivated and based sponsorship are
viewed by the public as an endorsement. In the
case of Target Corporation, a 2010 contribution
of $150,000 to Gubernatorial candidate Tom
Emmer of Minnesota proved toxic to their
image. While Target’s intention was to show
support on his tax and business practices, the
consumer’s interpretation was based on Emmer’s
Sponsorship
social policies (The Wall Street Journal). These
policies unfortunately ran counter to the image
and value orientation that target had created for
its stores, and consequently, Target was inun-
dated with angry customers threatening
a boycott. In the future, Target’s misstep can
inform corporations on the need to understand
the dangers of engaging in active political spon-
sorship. Not that it should be unduly avoided;
instead that a comprehensive understanding of
its total impact on a firm’s greater sponsorship
portfolio is assessed.
Negative affect transfer can occur with events,
organizations, and even sponsorship of spokes-
people who have a personal transgression or find
themselves in legal trouble. Tiger Woods and
Michael Phelps are two sports celebrities that
had numerous sponsorship deals that came into
question during 2010 as they struggled in their
personal relationship and with drugs respectively.
Additionally, as consumer attitudes and values
shift, firms need to consider how their target
audience will react to sponsorships of risky cate-
gories such as tobacco, alcohol, gambling, and
even fast food.
Future Directions
Although sponsorship research and practice is
moving forward, there are still many unanswered
questions. Several areas for future work include:
leveraging effects, portfolio effects, measurement,
and the move to internet and social networking.
Leveraging Sponsorship
The notion of leveraging a sponsorship is related to
the additional money a firm spends to promote and
support its sponsorship investment. It has been
estimated that firms spend 1.4 times the amount
of the sponsorship investment to promote their
efforts (Sponsorship.com), yet we know relatively
little about the effectiveness of this spending.
Measurement
In that the dollars being spent on sponsorship
continue to grow, it is imperative that managers
are able to determine the financial return on their
Sponsorship
investment. Hence, the development of
a sponsorship metric is critical, yet the research
is limited. To date, many firms simply measure
reach and frequency of sponsorships, without
regard for more sophisticated measures.
Needed is a way to measure consistently the
relation of companies to one another and in what
aspects positive or negative sponsorship gener-
ates. Firms in future will look to find ways to
better understand how their relationships are
interpreted by consumers and how to objectively
measure the net effect. A reasonable avenue
would be social networking like facebook, find-
ing which consumers “friend” certain institutions
that are sponsored by others and seeing if that
sponsorship translated to an interest in the
sponsor.
Sponsorship Portfolios
Most firms find themselves sponsoring multiple
activities within and across brands. Thus, under-
standing the portfolio impact on the brand is
important. Questions related to processing of
large knowledge-based information about
a brand’s sponsorship abound. Does the addition
of a new event alter current perceptions or
reinforce brand image? If the portfolio sends
mixed messages about value orientation or even
firm motivation, which attributions and beliefs
are longest lasting? Thus, like any other commu-
nication element, understanding trade-offs across
multiple types of exposures is vital.
Keeping the overall message in mind, and
understanding the relation differing events have
to one another should be part of any preliminary
fact finding before sponsoring an event.
With a responsible portfolio, firms can reason-
ably predict and leverage their sponsorship
dollars to maximum effect.
Dilution
Greater emphasis will be paid to sponsorship to
replace lost ad space from traditional media in
future. The result will be an increasingly crowded
sponsorship space, where dilution may negate
return on investment of the sponsors (as with Bei-
jing Olympics). The cost of sponsorship will likely
be more volatile as spokespeople and events
2285 S
receive greater numbers of offers. Thus, the switch
from a seller’s to a buyer’s market will necessitate
firms looking to sponsor to be more directed and
aggressive with their sponsorship dollars.
Sponsorship as practiced and wide spread as it
is, sees a never-ending tide of change. It is as
fickle and unforgiving as the people whom it is
targeted to influence and is by definition never
under the full control of one party. In short, no
two sponsorships are ever the same and careful
consideration is necessary for any undertaking in
the field; even repeat events with the same
parties involved should be scrutinized in terms
of goals, implementation, and measurement.
A responsible sponsorship portfolio ensures
a clear message and a subtext for dialogue with
the stakeholders in the firm.
References and Readings
(2010). Political target practice anonymous. Wall Street
Journal. (Eastern Edition). New York, p. A.20.
Anonymous. (2010). Target is anything but on, while post-
explosion, PG&E does its best. PR News, 66 (36).
Potomac.
Cooper, B. (2006). Sponsorship in the drinks industry:
Management briefing: Drinks sponsorship today.
Just - Drinks: Sponsorship in the drinks industry:
Management briefing Bromsgrove:. pp. 2–12 (11 pp.).
de Gregorio, F., & Sung, Y. (2010). Understanding atti-
tudes toward and behaviors in response to product
placement. Journal of Advertising, 39(1), 83–96.
Armonk: Spring, 14 pp.
Fones-Wolf, E. (1999). Creating a favorable business
climate: Corporations and radio broadcasting, 1934
to 1954. The Business History Review, 73(2),
221–255. Boston: Summer, 35 pp. S
Gargano, A. R. (2010). The mother of invention. Broad-
cast Engineering, 52(6), 90. Overland Park.
Grimes, E., & Meenaghan, T. (1998). Focusing commer-
cial sponsorship on the internal corporate audience.
International Journal of Advertising, 17(1), 51–74.
Eastbourne, 24 pp.
Guarnieri, R., & Kao, T. (2008). Leadership and CSR – a
perfect match: How top companies for leaders utilize
CSR as a competitive advantage. People and Strategy,
31(3), 34–41. New York, 8 pp.
Miller, J. (1993). Marketing communications. The Cornell
Hotel and Restaurant Administration Quarterly, 34(5),
48. Ithaca, 6 pp.
Mountain Dew X P-rod collab giveaway, Lat34.com.
http://www.lat34.com/2010/08/24/mountain-dew-x-
p-rod-collab-giveaway/. 28 October 2010.
S 2286
Rodgers, S. (2007). Effects of sponsorship congruity on
e-sponsors and e-newspapers. Journalism and Mass
Communication Quarterly, 84(1), 24–39. Columbia:
Spring, 16 pp.
Ruihley, B. J., Runyan, R. C., & Lear, K. E. (2010). The
use of sport celebrities in advertising: A replication
and extension. Sport Marketing Quarterly, 19(3),
132–142. Morgantown, 11 pp.
Uggla, H. (2004). The brand association base:
A conceptual model for strategically leveraging part-
ner brand equity. Journal of Brand Management,
12(2), 105–123. London, 19 pp.
Wedekind, J. (2008). The commercial games: Selling off
the Olympic ideals. Multinational Monitor, 29(2),
47–53. Washington, 7 pp.
Wilbur, K. C. (2008). How the digital video recorder (DVR)
changes traditional television advertising. Journal of
Advertising, 37(1), 143–149. Armonk: Spring, 7 pp.
SROI Analysis
▶ Social Return on Investment
Staff Volunteering
▶ Employee Volunteer Programmes
Stakeholder
▶ Unknown Stakeholder
Stakeholder Accountability
Linne Marie Lauesen
Copenhagen Business School, Department of
Intercultural Communication and Management,
Center for Corporate Social Responsibility,
Frederiksberg, Denmark
Synonyms
Answerability; Blameworthiness; Honesty; Lia-
bility; Reliability; Rightfulness in behavior;
SROI Analysis
Transparency in stakeholder relationships; Trust
in the relationship between the business and the
stakeholders; Trustworthiness of businesses;
Truth in speech and actions; Truthfulness of busi-
nesses; Validity
Definition
A “stakeholder” can be defined as those groups or
individuals who can affect or can be affected by
actions done by a company or an organization
(Freeman 2010). A stakeholder relationship is
often referred to by organizations, corporations,
firms, etc., but the term can also be seen as evi-
dent to any entity that has a relation to anything,
for example, a relationship between a dog and its
owner – in its pure sense. In this entry, we focus
on organizational stakeholders, and even though
the discussions of “who” and “what” could count
as a “stakeholder” is ongoing, we define
a stakeholder here as an individual, a group, an
organization, or a spokesperson, who has a claim
or a stake or something at stake in the business
behavior, performance, and outcome. This refers
to “stakeholders” as human beings although even
the environment, the climate, or the animals
could be argued to be a stakeholder as well
(Woodward and David 2002). In this perspective,
we assign a “spokesperson” for these entities,
who will speak for it or them and take the interest
of this kind of “stakeholder.”
The parties, who act in a relationship with
each other, define “Accountability.” To be able
to count on somebody else involves a sense of
“trust,” “reliability,” and “honesty” between all
parties. To obtain this it means that parties must
“include” the “other” in its relationship and espe-
cially in those matters, where the “other” has
a stake or a claim on the first and vice versa. If
“inclusiveness” is avoided or diminished, there
will be either no or a relatively weak or bad
relationship between the parties, and this affects
the “accountability” of this relationship. The lit-
erature holds two different approaches such as
“giving account” or “holding account”: “The for-
mer views accountability as the act of disclosing
information and justifying behavior without more.
Stakeholder Accountability
The latter, however, a more demanding definition
as it requires in addition the possibility that the
actor will have to face consequences” (Curtin
and Nollkaemper 2005, p. 7).
The process of being called “to account” is
generally agreed on as being to some authority
for one’s actions (Mulgan 2000). Richard Mulgan
suggests, that such accountability: “. . . is exter-
nal, in that the account is given to some other
person or body outside the person or body being
held accountable; it involves social interaction
and exchange, in that one side, that calling for
the account, seeks answers and rectification
while the other side, that being held accountable,
responds and accepts sanctions; it implies rights
of authority, in that those calling for an account
are asserting rights of superior authority over
those who are accountable, including the rights
to demand answers and to impose sanctions”
(Mulgan 2000, p. 555)
Either the relationship is compulsory or
voluntary; the “accountability” between the
parties relies on the “wholeheartedness” of both
parties and the symmetry or asymmetry of power
between the parties (Mulgan 2000). If
a relationship is compulsory and determined by
a third party, for instance, the state, the power-
asymmetry between the actors of the mutual rela-
tionship might be high, and in this instance
Mulgan talks about control and responsiveness
(Mulgan 2000, p. 566). This is, for instance, seen
between politicians and officials, where politi-
cians want to control the officials in order to
obtain the goals of the public interest – say,
a promise a politician has made to the public
(Mulgan 2000, p. 566).
On the other hand, if both parties have
a voluntary interest in the relationship with each
other, there might be less asymmetry or even
symmetry, which means that the power in the
relationship might be next to equal. “Account-
ability” is highly affected of power-asymmetry
between the parties in relationship with each
other. In this respect accountability is dependent
on the level and quality of “information” revealed
by each party (Mulgan 2000, p. 567). If “infor-
mation” is of poor quality to one of the parties and
the does not reveal the needed fact by the
2287 S
“owner” of information, this affects the relation-
ship and how “accountable” it is eventually and
vice versa. Finally “accountability” is not only
linked to “information,” but also to the “action”
that takes or has taken place of which the
“information” reveals good or poor quality
about. “Accountability” as a synonym for “trust-
worthiness,” “trust,” “honesty,” and “reliability”
is linked to the “action” that each party actually
do and what “information” they provide about
this “action” (Mulgan 2000, p. 569). If the rela-
tionship is based on high “trustworthiness,”
“trust,” “honesty,” and “reliability” in both infor-
mation, that is directly linked with the actual
“action” that has taken place or is intended and
going to take place, the “accountability” between
the parties is high and vice versa.
“Stakeholder accountability” concerns the
relationship between an organization, company,
or corporation and its stakeholders and how
accountable this relationship is interpreted to be
by all parties, but in this entry the viewpoint of
“accountability” will be seen as the viewpoints of
the stakeholders. In relationship to corporate
social responsibility of the organization, the
stakeholders define the reliability of the company
of acting responsible and accountable. How
stakeholders interpret, understand, and react
upon the information and the actions of the com-
pany in which they have a relationship with is the
standpoint of this entry.
Introduction
S
Stakeholder accountability is closely connected
instrumentally to “stakeholder engagement dis-
closures” such as seen in certification (for
instance, the AA1000 Stakeholder Engagement
Standard, the Global Reporting Initiative, and the
ISO 26000) and CSR/Sustainability indexes
(such as the Dow Jones Sustainability Index or
the FTSE4GOOD index) (Valor 2005). The CSR/
Sustainability indexes reports from the largest
companies around the world, but in relation to
both small- and medium-sized as well as large,
multinational companies, most information is
found in direct reporting to their stakeholders
S 2288
through CSR reports, sustainability reports, or
other company disclosures about their relation-
ships with stakeholders (Kolk 2008). Since these
instrumental elements are discussed elsewhere in
this encyclopedia (see ▶ Stakeholder Engage-
ment Disclosure), this entry focuses on the ethical
part of “stakeholder accountability” in order to
more directly understand what is meant by this
term which underlies the standardization (such as
the above mentioned disclosure instruments) and
what it means and does for the quality of “infor-
mation” and “actions” done by the company or
corporation. For this purpose, we draw on com-
monly known features from the literature of busi-
ness ethics, stakeholder theory, and philosophy of
“ethics” in order to understand what makes
the company or corporation accountable for
stakeholders.
Key Issues
R. Edward Freeman (1984, 2010) emphasize that
the most important features of stakeholder theory
are the “ethics,” the “quality” of the relationship
between a company and its stakeholders, and the
“value” this relationship makes for both parties if
and when “ethics” is highly embedded in this
relationship for the “stakeholder accountability.”
To understand what “ethics” means and what is
embedded in this, we need to confer the philoso-
phy of “ethics” – or “ethical theory,” – which one
of our most contemporary philosophers, J€ urgen
Habermas, has defined as (Habermas 1999):
• Truth
• Goodness and Rightness
• Morality
• Norms
• Just
• Communication and Actions
• Validity
J€
urgen Habermas’ theory of ethics is mainly
derived from Emmanuel Kant’s philosophy.
Habermas’ talks about interactions are “com-
municative” “when the participants coordinate
their plans of actions consensually, with the
agreement reached at any point being evaluated
in terms of the intersubjective recognition of
Stakeholder Accountability
validity claims” (Habermas 1999, p. 58). This
statement leads Habermas to discuss the term of
“validity claims” in more detail. Where “agree-
ment” is reached through “argumentation” by
pure linguistic processes, the actor can make
three different claims of validity (Habermas
1999, p. 58):
1. Claims to truth (in the objective world)
2. Claims to rightness (as shared in the social
world)
3. Claims to truthfulness (in the subjective
world)
In this field of argumentation, Habermas
distinguishes between two kinds of allocated
actions – the communicative and the strategic
actions. The “communicative” actions seek to
rationally motivate the other by the bonding
effect (Bindungseffekt) of the offer in the speech,
whether the “strategic” actions will influence the
other by means of sanctions or gratifications
(Habermas 1999, p. 58). In the above “claims of
validity” the communicative actions are taking
place discursively in (1) and (2) by adducing
“reasons” and in (3) this is done by consistent
behavior as to “show” what he means by his
actions (Habermas 1999, p. 59) – what we today
call “walk the talk.” As Habermas says, “A per-
son can convince someone that he means what
he says only through his actions, not by giving
reasons” (Habermas 1999, p. 59).
We often hear the argument of lacking of
“truthfulness” in relations to both political state-
ments as well as business statements. It is easy to
create the “politically correct” speech, but to
convince the listeners these lines must be
“proved” by either “evidence,” “moral right-
ness,” or “truthfulness” (actions showing the
truth of the speech). In the next section, we will
consider some practical examples of the three
claims.
Claims to Truth
In the “objective world” statements have no
rights unless they are proven scientifically
(Bernstein 1983). And even scientific evidence
is prone to critical discussions among academics.
The more “science” evades the “public” and
“personal” life, the more “claims of truth” is
Stakeholder Accountability
provided both in political as well in business
matters. Since the 1980s, “scientific evidence”
has entered the political and business agenda
more than before since people in general as well
as democratic representatives elected by the peo-
ple – politicians – to be state leaders have
acknowledged that not only political attitudes
and opinions matter alone (Lægreid and
Christensen 2010). People are getting more and
more educated through schools, high schools, and
universities and – if not – through the media, the
Internet, etc. Claims of truth is no longer solely
accepted by “meaning” or opinions of the most
rhetorically convincing politicians, now “evi-
dence” has to support these statements in order
to be generally accepted by the “people” – in this
case – the citizens. This has made many govern-
ments to create “Think Tanks” consisting of pro-
fessionals, academics, business leaders, and
innovators to support the political agendas with
“scientific” created “truths” (Lægreid and
Christensen 2010). The same evolution has
taken place in the business environment. Busi-
nesses allege with more or less reliable “scientific
truth” facts about their products to convince the
consumers about the properties or impacts the
product might have. The debate of “scientific
evidence” has generated a turmoil of trust, since
many businesses and political statements seem to
claim “scientific truth” based on very little aca-
demic grounds – which is problematic for both
sober businesses and politicians.
How Do We Actually Know That the Objective
Claim Truth Is Reliable?
For example in the medical industry, science is
supported financially by the giant drug producers,
whose interests lie in the scientific acceptance of
the probing results of the specific drug to be
“working” and furthermore produced and sold
internationally. This strong interest in academic
scientific probing – first among animals of lower
level (level A probing of bacteria, flies, or rats),
then of higher level (level B probing on rabbits,
dogs, or monkeys), and last among human beings
(level C probing) – leads drug companies to
spend millions on innovation and scientific evi-
dence (Timmermans and Mauck 2005). But since
2289 S
these interests are powerful toward academia and
“customized” results are prone to devaluate the
reliability in academia, many state offices that
approve the final results of the drug probing
require independent academic experiments to
have the drug tested and re-tested by other
academics in order to “prove” the “true” effect
of the drug. Even though this process should sort
“reliable” data from “unreliable,” we see at the
moment a tremendous withdrawal of scientific
results according to the scientific misconduct.
Reliability in science based on evidence is
very fragile and prone to interests in financial
support as well as academic acknowledgement.
Since the “results” of the creation of reliable data
and the sound experiments are a slow process,
some scientists are prone to speed up the process
in order to gain both financial fortune as well as
academic acknowledgement in a harsh competi-
tive academic environment. “Claims of truth” are
more and more relevant in the scientification of
the everyday world, but the “quick fix” has never
proven any good – neither in science. Careful-
ness, edification, method constraints, and validity
approval by independent scientists are values that
are found reliable for “claims of truth,” but the
actual academic “claim” is fragile and has to be
tested not only in the laboratory, but also by peers
in academia before the “claim” eventually
becomes accepted in the academic world
(Timmermans and Mauck 2005).
Stakeholder accountability requires that busi-
nesses adapt to the scientific world of academia.
Whether it is in the creation of “evidence” of
products, of strategic visions of the actions, that S
the company wants to take or it is the impact that
the company has on its stakeholders, the “claim
of truth” withstands this accountability, which
has to be tested and validated in order to convince
stakeholders of the truthfulness of the perfor-
mance of the company (Lægreid and Christensen
2010). If a company fails in their scientific truth-
fulness, it affects the reliability of the company
and impacts the stakeholders and lowers the
accountability of the company. If a company
claims that its wastewater does not harm the
biodiversity of the river, it discharges to, and
fish are dying along the riverbank, the damages
S 2290
the company is guilty of affect more or less all
the stakeholders as well as the company itself
(Freeman 2010). Then customers will not buy
their products, the natural environment will suf-
fer, the employees of the company receive bad
reputation among their peers, the stockholders
lose profit, etc. The same will be the case if the
company cheats with the results (data mingling),
strut in borrowed plumes (use data which is not
ones owns), or window dressing (overexag-
gerating data which has no hold in reality) (Visser
2011).
Claims to Rightness
This claim of “rightness” relates to the accep-
tance in the social world, and according to
(Habermas 1999, p. 60–76), involves legitimiza-
tion of the statement according to moral con-
sciousness, normativity in interpersonal
relations, regulation, and just as well as values
of the society. Normative claims to validity (or
truth) rely on the mutual dependence of language
and the social world in opposition to the “objec-
tivity” claim of truth (Habermas 1999, p. 61),
since norms do not say anything about whether
it is right or wrong or valid in the first place.
Therefore Habermas regards norms as a “social
currency” that are to be negotiated interperson-
ally by the subjects – the humans – in the society
in order to be recognized as valid and its worthi-
ness (Ibid). This leads Habermas to discuss the
principle of morality and justification (Habermas
1999, p. 77–78) linking to his statement of “(a)s
long as moral philosophy concerns itself with
clarifying the everyday intuitions into which we
are socialized, it must be able to adopt. . . the
attitude of someone who participates in the com-
municative practice of everyday life” (Habermas
1999, p. 48). And the link to norms, Habermas
formulates these in relation to moral and just by:
For a norm to be valid, the consequences and side
effects that its general observance can be expected
to have for the satisfaction of the particular inter-
ests of each person affected must be such that all
affected can accept them freely. (Habermas 1999,
p. 120, original italics)
From this point of departure we will investi-
gate the above quote with some examples from
Stakeholder Accountability
“everyday life.” The claim of rightness involves
argumentation in a language that all parties
understand. That corresponds what Habermas
states as “everyday life” and that if the parties –
here called stakeholders – are positioned in very
different knowledge arenas, the language of
“everyday life” is a good place to start, which is
also in line with the normative creation of an
“argument.” If the argument should be able to
persuade every person (stakeholder), it must
speak the language that every person under-
stands. For an argument to be persuasive, it
must be able to be broken down into parts and
explained word-by-word, meaning-by-meaning,
and be reassembled into a common understand-
ing, that all can accept, as Habermas says.
Stakeholder accountability and the “claim to
rightness” are through its nature more prevalent
among businesses and its various stakeholders
than the “claim to truth.” When we acknowledge
that most companies and organizations have mul-
tiple stakeholders, these stakeholders must be
expected to have multiple “claims of rightness,”
and for the company to mitigate all these “claims
of rightness” (note that I consciously write “of ”
and not “to” here), it means that the exercise of
the company is to meet the multiple interpreta-
tions of what “rightness” means to the particular
stakeholders in order to assemble all claims into
a manageable amount of “claims to rightness”
eventually. If the company is capable of this
exercise – to assemble all claims in one or more
expressions of “rightness” that covers all parties
understanding and satisfaction equally – it creates
legitimacy, just, and value and respects the
norms, morality, and justification of the society
in which all parties exist.
Claims to Truthfulness
The last notion of Habermas that we will discuss
is the subjective “claim to truthfulness,” or – in
modern language – how to “walk the talk.”
In other words – truthfulness is about “action”
in relation to “language” – to do as one says he
will. It involves consistency in the spoken words
that the speaker himself lives out his own words.
As Habermas says: “(R)esponsibility becomes
a special case of accountability, the latter here
Stakeholder Accountability
meaning the orientation of action toward an
agreement that is rationally motivated and con-
ceived as universal: to act morally is to act on
the basis of (moral) insight” (Habermas 1999,
p. 162). In relation to stakeholder accountability,
this third issue is very relevant in order to attract
stakeholders and to avoid pressure from other
stakeholders in response to the actions taking
place inside and outside businesses. Examples
of what happens with stakeholder accountability
if a relationship is based on the reverse is the most
significant answer to why this is so important
to secure stakeholder accountability in order to
exist – either in the market, in a business world, or
even in a political world. Some of the kick
starters of the recent financial crisis in late
2007 started already in the beginning of 2000s
with the blast of the IT bubble and finalized with
the bankruptcies of the energy company Enron
Corporation and the investment company the
Lehman Brothers scandals in 2007, from
where the current financial crisis gained speed
(Visser 2011).
The dotcom bubble burst in 2000 and
stockowners lost huge money in the artificial
balloon of the IT successes in the decade earlier.
Soon after the 9/11 event, the Enron scandal
occurred from false accountings of the financial
audit company of Arthur Anderson, which was
able to hide billions in debt from failed deals and
projects from the stock- and stakeholders in gen-
eral. Soon after financial investment companies
investing in convertible bonds went bankrup too
(Global Crossing, Qwest, NTL, Adelphia Com-
munications and WorldCom) (Visser 2011). Nev-
ertheless the boom of consumer borrowings
exploded and the era of high-risk loans continued
in the USA and worldwide. No one ever imagined
that the house prices could ever decline, and
banks and investment companies convinced con-
sumers of the validity of the perpetual rise of
house price, so that even though consumers
were not able to pay off their loans – when they
eventually would like to sell their property, the
financial fortune would create more welfare than
ever before the loan was initiated. In the financial
world these loans were called NINJA – No
Income No Job and Assets – loans (Visser 2011).
2291 S
The US consumer and corporation debt was
stacking up in the ongoing optimism – from $1
trillion in 2000 to $2.7 trillion in 2005 and in
September 2008 Lehman Brothers went bankrupt
owing $660 billion and taking a lot of financial
investors from the world economy down with
them in the fall (Visser 2011). What happened,
everybody ask, and Wayne Visser (2011) has
a very good explanation: In 1993 president Bill
Clinton promised to increase home ownership
among poor districts pushing banks to make
risky loans to people without income, jobs, and
security (assets). The banks put pressure on Clin-
ton to repeal the Glass Steagall Act of 1933 – an
act that prevented a new “Depression” by not
allowing banks and investment companies to
merge interests. After a period of resistance to
this pressure, the GS Act was repealed and made
room for speculative financial traders to gamble in
the market with collateral debt and loan obliga-
tions, mortgage-backed securities, and default
swaps (Visser 2011) – notions and concepts that
I will not explain further here, but sum up as
“fictive papers of speculation of how-the-
market-will-turn-out-in-the-future” – also called
“derivatives.” Banks were allowed to borrow
more than 7 times its assets, and one can imagine
that if everybody does this – there will be no “real
money” or “real value” to meet these loans even-
tually. Some companies had loans or debts ten
times as their actual value, and the Lehman
Brothers had a leverage of 44 times its value
(Visser 2011).
One can ask – where is the responsibility and
accountability in all this? The answer is still S
missing, but people who have been close to
the events that took place have argued, that
everybody thought it would continue to be even
better – no one ever doubted the intensions of
the companies and investors – everybody was
blinded by the greediness in play.
Future Directions
Stakeholder accountability has, after the
subprime mortgage of 2007 and the current finan-
cial crisis worldwide, turned out to be of much
S 2292 Stakeholder Attribute

more salience than ever – both politically and in
global businesses. The future directions of stake-
holder accountability will probably exceed the
notions above in line with the demands of stake-
holders and their rights and options available via
the discourse of business ethics, corporate social
responsibility, and the actual institutions offering
transparency in these matters. See also the entries
on ▶ Stakeholder Engagement and ▶ Stake-
holder Engagement Disclosure.
Business and Society Review, 110, 191–212. Available
at SSRN: http://ssrn.com/abstract¼713873.
Visser, W. (2011). The age of responsibility. CSR 2.0 and
the new DNA of business. Chichester: Wiley.
Woodward, D. G. (2002). Is the natural environment
a stakeholder? Of course it is (no matter what the Util-
itarians might say)! In Critical perspectives on account-
ing conference, New York, 25–27 Apr 2002. New York,
Baruch College: City University of New York.

Stakeholder Attribute
Cross-References
▶ Stakeholder Relationship
▶ Accountability
▶ AccountAbility
▶ Primary Stakeholders
▶ Secondary Stakeholders
Stakeholder Capitalism
▶ Stakeholder Engagement
▶ Rhineland Business Model/Rhineland
▶ Stakeholder Engagement Disclosure
Leadership
▶ Stakeholders
▶ Sustainability Index

References and Readings Stakeholder Contribution

Bernstein, R. J. (1983). Beyond objectivism and relativ- ▶ Stakeholder Relationship

ism. Science, hermeneutics, and praxis. Philadelphia:
University of Pennsylvania Press.
Curtin, D., & Nollkaemper, A. (2005). Conceptualizing
accountability in international and European law. Neth-
erlands Yearbook of International Law, XXXVI, 3–20. Stakeholder Dialogue
Freeman, R. E. (1984, 2010). Strategic management:
A stakeholder approach. New York: Free Press/ ▶ Communicating with Stakeholders
Cambridge University Press.
Habermas, J. (1999). Moral consciousness and
communicative action, translated by Lenhardt, C., &
Nicholson, S. W. Massachusetts Institute of
Technology/Polity Press. Stakeholder Engagement
Kolk, A. (2008). Sustainability, accountability and corpo-
rate governance: Exploring the multinational’s
reporting practices. Business Strategy and the Envi- Christa Thomsen
ronment, 17(1), 1–15. Department of Business Communication, Centre
Lægreid, P., & Christensen, T. (2010). The Ashgate for Corporate Communication, Aarhus
research companion to new public management.
Ashgate: Farnham.
University Department of Business
Mulgan, R. (2000). “Accountability”. An ever-expanding Communication, Århus V, Denmark
concept? Public Administration, 78, 555–574.
Timmermans, S., & Mauck, A. (2005). The promises and
pitfalls of evidence-based medicine. Health Affairs,
24(1), 18–28.
Synonyms
Valor, C. (2005). Corporate social responsibility and cor-
porate citizenship: Towards corporate accountability. Stakeholder involvement
Stakeholder Engagement
Definition
Stakeholder engagement can be defined as prac-
tices that the organization undertakes to involve
stakeholders in organizational projects or activities
(Greenwood 2007). Stakeholders are defined as
individuals and organizations that either affect or
are affected by the activities of an organization
(Freeman 1984). This includes stakeholders that
are close to the company and provide it with essen-
tial resources, such as shareholders, employees,
customers, and suppliers. It also includes stake-
holders that may be more distant to the company
and active in social or political arenas, such as local
communities, nongovernmental organizations, and
activist groups (Post et al. 2002; Sloan 2009).
There is a general agreement that many areas of
organizational activity involve stakeholder
engagement (Greenwood 2007). Given the various
groups of organizational stakeholders, engagement
practices may exist in many areas of organizational
activity including public relations, customer ser-
vice, supplier relations, management accounting,
and human resource management (Greenwood
2007). In these contexts, stakeholder engagement
may be seen as an intentional process of interacting
with individuals and groups who have the power to
affect an organization’s financial and social
responsibilities and environmental performance
(Gao and Zhang 2006), i.e., what is often referred
to as the triple bottom line.
Introduction
Companies increasingly recognize that they need
to take account of their stakeholders and manage
different interests. Stakeholder engagement pro-
cesses help organizations to manage these differ-
ent and sometimes competing interests. The
primary goal of effective stakeholder engage-
ment is an alignment of mutual interests, reduced
risks to the organization, and improved results in
the triple bottom line (Gao and Zhang 2006;
Sloan 2009). Ideas regarding stakeholder engage-
ment are generally drawn from various theoreti-
cal traditions, e.g., business ethics, strategic
management, and human resource management.
2293 S
From the perspective of these theories, stake-
holder engagement is generally understood as
practices by which organizations can demon-
strate responsibility toward stakeholders, often
by involving them in decision-making and gov-
ernance (Greenwood 2007). More recently, it has
been posited that stakeholder engagement gives
various opportunities, e.g., a better understanding
of the expectations and interests of different
stakeholders, a means to gain acceptance and
build the trust of a wide group of different stake-
holders as well as performance benefits, the argu-
ment being that stakeholder capital is a leading
indicator of the quality of management and long-
term financial performance (Greenwood 2007).
These opportunities are noted by various actors
within the field of Corporate Social Responsibil-
ity and sustainability, e.g., the Global Reporting
Initiative (GRI) (www.globalreporting.org). GRI
explicitly notes that stakeholder engagement is
likely to increase accountability, strengthening
trust and corporate credibility.
Clarifying the overall objectives for engaging
stakeholders, e.g., demonstration of responsibil-
ity toward stakeholders versus exploitation of
opportunities, is the first step of the stakeholder
engagement process, this process being itself one
of the key issues in stakeholder management.
Key Issues
Key issues in stakeholder management and
engagement are:
• Who are the stakeholders and what makes S
them such?
• How to prioritize stakeholder claims and how
to determine what will engage the
stakeholders?
• How to plan the stakeholder engagement
process?
• How do we know whether our stakeholders are
engaged?
Who Are the Stakeholders and What Makes
Them Such?
The issue of which groups or individuals are
identified as organizational stakeholders is
S 2294
central in stakeholder theory (Freeman 1984).
Identification of the exact persons who qualify
as stakeholders may be difficult, but identifica-
tion of what counts as a stakeholder claim is vital
because of its implied assumptions about the
moral relationship, or lack thereof, between an
organization and its stakeholders (Greenwood
2007). Stakeholder theory offers a list of signals
on how the questions of stakeholder identification
can be answered (Mitchell et al. 1997). These
include stakeholders identified as primary or sec-
ondary; as owners and nonowners of the firm; as
owners of capital or owners of less tangible
assets; as actors or those acted upon; as those
existing in a voluntary or an involuntary relation-
ship with the firm; as right holders, contractors or
moral claimants; as resource providers to or
dependents of the firm; as risk-takers or
influencers; and as legal principles to whom
agent-managers bear a fiduciary duty (Mitchell
et al. 1997). Freeman (1984) suggested that def-
initions of stakeholders could be described at
a more general level as “narrow” or “broad.”
The narrow definitions included groups who are
vital to the survival and success of the organiza-
tion (Freeman 1984). The broad definition
included any group or individual that can affect
or is affected by the corporation (Freeman 1984).
How to Prioritize Stakeholder Claims and
How to Determine What Will Engage the
Stakeholders?
A fundamental challenge of stakeholder theory is
how to prioritize stakeholder claims and how to
determine what will engage the stakeholders. Sev-
eral writers have given responses to the problem of
how to prioritize stakeholder claims. Greenwood
(2007) summarizes these responses highlighting
first research on the principle of fairness which is
used to determine that obligations should be in
proportion to the benefit accrued. Next, she high-
lights research which suggests that the organiza-
tion show ethical partiality to stakeholders in the
same manner that individuals show partiality to
others, which is based on reciprocity, reparation,
and gratitude. Third, she points at research which
holds that where duties conflict, the organization
should fulfill the duty that will show the greatest
Stakeholder Engagement
respect for persons. Whichever principle is used to
prioritize between stakeholder claims, it seems
apparent that there exists a hierarchy of claims
and corresponding duties.
In order to determine what constitutes effec-
tive stakeholder practices, managers frequently
turn to rankings and standards (Sloan 2009).
The AA1000 Stakeholder Engagement Standard
(AA1000SES) is an example of such a standard.
It is a generally applicable, open-source frame-
work for improving the quality of the design,
implementation, assessment, communication,
and assurance of stakeholder engagement. It is
applicable to both internal and external engage-
ment, and to the relationship between the two. In
line with this, stakeholder engagements may
range from microlevel (organization-stakeholder
specific issues) to macrolevel engagements on
major societal concerns. AA1000SES is, for
example, intended for use either on its own or in
conjunction with other tools, frameworks, and
standards. It may be applied, for example, to
support quality and knowledge management,
transparency and reporting, and governance and
accountability. It is built on the foundation that
underpins all of AccountAbility’s work, i.e., the
mission to “promote accountability for sustain-
able development.” One key question in relation
to what constitutes effective stakeholder prac-
tices concerns how to think about stakeholders
or how to clarify the overall objectives for engag-
ing stakeholders. Some organizations explicitly
point out that stakeholders pose both opportuni-
ties and threats and that stakeholder engagement
is about seizing opportunity and managing risk.
Another key question concerns the relationship
between a company’s engagement practices and
its strategic business processes. Is stakeholder
engagement decoupled from core strategic prac-
tices or is it integrated into strategy and strategic
decisions? The literature points at different stake-
holder engagement practices (Sloan 2009):
• Policy commitments to stakeholders, e.g., pol-
icies for local suppliers, policies on human
rights
• Stakeholder engagement activities, e.g., stake-
holder dialogue, community support programs,
investments in the health and development of
Stakeholder Engagement
employees, measures to strengthen the capabil-
ity of suppliers, employee training and devel-
opment, disclosure and verification of social
and environmental performance
• Performance outcomes, e.g., the level of envi-
ronmental emissions, fines, product safety,
employment equity, job creation, impact of
plant closures, levels of philanthropy
These practices may be considered in
a strategic risk/opportunity perspective. Different
models for stakeholder engagement have been
proposed, e.g., the control model versus the col-
laboration model (Sloan 2009). The control
model is outward-looking, characterized by com-
munications and monitoring activities aimed at
controlling and managing stakeholder risk. The
collaboration model is inward-looking, charac-
terized by collaboration and partnership activities
aimed at generating organizational learning and
transformation.
The control model of stakeholder engage-
ment is grounded in the notion that stakeholders
pose risks for corporations. Stakeholders must
be monitored, assessed, and managed. The key
objective is to anticipate and mitigate the poten-
tial problems that can arise. Listening to stake-
holders’ concerns and telling them about
corporate activities and performance are the
means to do this. Stakeholder engagement activ-
ities are often carried out in parallel with the
company’s strategic activities, with few connec-
tions between the two. As a result, fundamental
organizational change is limited, and opportuni-
ties for innovation and value creation may be
missed. Social performance is likely to be good
but not great.
The collaborative model is more likely to gen-
erate strong social performance. This model is
predicated on the assumption that stakeholders
are a source of opportunity for corporations.
Effective engagement practices – practices that
bring managers and their stakeholders together to
partner and learn from one another – can open
these opportunities and provide the basis for
innovation and fundamental organizational trans-
formation. In this model, stakeholder engage-
ment is no longer bolted on to strategy, but an
integral part of it that contributes to the strength
2295 S
and sustainability of the company. This model is
increasingly recommended in the literature on
stakeholder engagement processes.
How to Plan the Stakeholder Engagement
Process?
The literature typically describes the stakeholder
engagement process as a process consisting of
a number of steps. One such model has been
described by Stanford (2007), who considers
five steps:
1. Clarifying objectives for engaging
stakeholders
2. Identifying the stakeholders
3. Mapping the stakeholders
4. Determining what will engage them
5. Planning precisely how to engage them
First, organizations need to get support for
and buy-in to the project. The ultimate objective
is to have employees performing highly in this
process, and customers, shareholders, and other
stakeholders showing enthusiastic support.
Second and third, organizations need to identify
and map the stakeholders as mentioned above.
Mapping the stakeholders means taking each of
those identified and placing them in relative
positions on a matrix which has two axes of
influence and impact. The map enables an at-a-
glance overview of where stakeholder engage-
ment work needs to be focused. Stakeholders
judged to be highly impacted by the project but
who have low influence on its success or failure
are mapped into the lower right-hand segment.
Stakeholders who have high influence on the
success of the project but are only somewhat S
impacted by it are mapped into the top left-
hand segment, and so on. The engagement
work involves moving stakeholders into
a segment where they are committed to and
advocating the project. The work of stakeholder
engagement continues through the life cycle of
the project as any individual or group can swiftly
move from one position on the matrix to another.
Treating a stakeholder map as a static and stable
piece of information is highly risky (Stanford
2007). Fourth, organizations need to determine
what will engage the stakeholders. The literature
distinguishes various methods available to
S 2296
engage stakeholders, e.g., communication, edu-
cation, involvement, incentives, and power
(Stanford 2007). Communication is a powerful
tool simply because telling and selling are con-
sidered to be powerful tools. Education helps
people make good choices. Involvement builds
ownership and commitment. Incentives and
showing “what’s in it for me” work to bring
people on board. Using power in the right cir-
cumstances and in the right way is an effective
tool. The fifth step consists in elaborating a good
measurable plan, the basic idea being that
stakeholder engagement requires a strategic,
systematic, yet flexible approach to creating
buy-in, minimizing opposition and developing
ownership, and continuing commitment. The
stakeholder map can be used as a basis for deter-
mining the stakeholder engagement plan and
activity level. Depending on the influence and
impact of the project on the stakeholders, these
should either be kept satisfied, managed closely,
monitored, or kept informed.
Another model consisting of as many as 10
phases is outlined in AccountAbility’s AA1000
Stakeholder Engagement Standard (Account-
Ability 2005):
1. Identification of stakeholders. The organiza-
tion shall establish a methodology, including
systematic processes, to identify and map its
stakeholders and to manage the relationship
between them (taking into account the extent
to which it already has means for doing this)
in ways that build accountability to stake-
holders and enhance overall performance. It
shall communicate the stakeholder map to its
stakeholders.
2. Initial identification of material issues. The
organization shall establish a methodology,
including systematic processes, to identify
material issues associated with its activities,
products, services, sites and the subsidiaries,
for which it has either management and legal
responsibility or the ability to influence asso-
ciated performance outcomes (e.g., effects of
product use).
3. Determination and definition of engagement
strategy, objective, and scope. The organiza-
tion shall establish a strategy for stakeholder
Stakeholder Engagement
engagement. It shall establish the context,
objective(s), and scope for engagement.
4. Establishment of an engagement plan and
implementation schedule. The organization
shall establish a stakeholder engagement
plan and schedule that demonstrates the
intent to engage with its stakeholders. It
shall make these available to its
stakeholders.
5. Identification of ways of engaging that work.
The organization shall establish appropriate
ways of engaging with its stakeholders.
6. Building and strengthening capacity. The
organization shall identify and assess stake-
holder capacity needs both in resources
(e.g., staff, money, time) and competencies
(e.g., expertise, experience). The organiza-
tion shall commit itself to responding to
these needs in order to enable effective
engagement.
7. Engaging with stakeholders in ways that
facilitate understanding, learning, and
improvement. The organization shall ensure
that stakeholder concerns, opportunities, and
risks are identified and understood in a way
that enhances the understanding of material-
ity. It shall identify enablers (i.e., the means)
for learning and improving performance.
8. Operationalization, internalization, and com-
munication of learning. The organization
shall use what it learns from stakeholder
engagement to inform its strategies and oper-
ations so that they are consistent with sus-
tainable development. The organization shall
communicate what it learns and how it
intends to respond.
9. Measurement and assessment of perfor-
mance. The organization shall establish pro-
cesses and mechanisms to measure, monitor,
and assess the quality of its stakeholder
engagement practice.
10. Assessment, remapping, and redefinition.
The organization shall assess and remap its
stakeholders and redefine its stakeholder
strategy where changes have occurred or
new learning has been gained.
These two models can be taken as good exam-
ples of the stakeholder engagement process.
Stakeholder Engagement
How Do We Know Whether Our Stakeholders
Are Engaged?
The literature highlights specific factors that indi-
cate stakeholder engagement – typically trust,
loyalty, and advocacy that indicate stakeholder
engagement (Stanford 2007). If they are not obvi-
ous, stakeholders may not be engaged in the
project, which is a real risk to its success. Trust
is the willingness to rely on another party when
that party cannot be controlled. For example,
when customers buy a product they put their
trust in the manufacturer that it is safe to use.
Loyalty is the state of being faithful to an institu-
tion or product. It is not the same as trust – people
can trust others but this does not need to involve
loyalty. So, for example, air travelers can trust
that almost any airline will be safe to travel with,
but they may have no loyalty to a particular air-
line, purchase choices being made on the basis of
cost, schedule, or whatever. It is not enough sim-
ply to develop, retain, maintain or grow stake-
holder trust and loyalty if these stakeholders are
not then active advocates of the organization,
promoting, supporting, and enthusiastically
recommending it to others.
Future Directions
Recent research within the field of stakeholder
engagement (Sloan 2009) suggests a number of
questions for scholarly investigation. For exam-
ple, what is the effect of situation, context and
motivation on the type of engagement that man-
agers pursue? Are there hybrid forms and, if so,
what are their consequences? What would an
even more finely grained analysis of engagement
show – say for different types of stakeholder or
region? What happens over time? How and why
do companies change their engagement prac-
tices, and what does this mean for performance?
The same research provides specific ideas for
action to corporate leaders and managers who
seek effective approaches to stakeholder engage-
ment. Specifically, the research argues that
leaders and managers will be better positioned
to gain the benefits of sustainability and social
responsibility engagement projects if they
2297 S
reframe what it means to them. Adopting
a different mind-set which moves stakeholders
from being a source of risk to a source of oppor-
tunity is a first step in this process. A second step
involves reorienting stakeholder engagement
processes to be more collaborative and inclusive.
Finally, corporate leaders and managers need to
integrate social responsibility and sustainability
within business operations and the strategic deci-
sion-making process.
Cross-References
▶ AA 1000
▶ Engagement/Stakeholder Engagement
▶ Primary Stakeholders
▶ Secondary Stakeholders
▶ Social Dialogue
▶ Stakeholder Accountability
▶ Stakeholder Engagement Disclosure
▶ Stakeholder Relationship
▶ Stakeholder Theory
▶ Stakeholder Thinking
References and Readings
AccountAbility. (2005). AA1000 stakeholder engagement
standard. London: AccountAbility.
Freeman, R. E. (1984). Strategic management:
A stakeholder approach. Boston: Pitman Publishing.
Gao, S. S., & Zhang, J. J. (2006). Stakeholder engage-
ment, social auditing and corporate sustainability.
Business Process Management Journal, 12(6),
722–740. S
Greenwood, M. (2007). Stakeholder engagement: Beyond
the myth of corporate responsibility. Journal of Busi-
ness Ethics, 74, 315–327.
Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997).
Toward a theory of stakeholder identification and
salience: Defining the principle of who and what really
counts. Academy of Management Review, 22(4),
853–886.
Post, J. E., Preston, L. E., & Sachs, S. (2002). Managing
the extended enterprise: The new stakeholder view.
California Management Review, 45(1), 6–28.
Sloan, P. (2009). Redefining stakeholder engagement.
Journal of Corporate Citizenship, 36, 25–40.
Stanford, N. (2007). Guide to organization design creat-
ing high performance and adaptable enterprises.
London: The Economist.
S 2298
Stakeholder Engagement Disclosure
Linne Marie Lauesen
Copenhagen Business School, Department of
Intercultural Communication and Management,
Center for Corporate Social Responsibility,
Frederiksberg, Denmark
Synonyms
AA1000; Disclosure of stakeholder engagement;
Stakeholder engagement; Stakeholder engage-
ment standards; Stakeholder reporting
Definition
By “stakeholder engagement disclosure” is
meant how and when “stakeholder engagement”
is shown in various disclosures such as reports,
internet websites, and certifications and how this
is made transparent for the public. It also contains
various instruments to measure how stakeholders
are engaged in decision making and which
influence stakeholders have on business or
governmental strategies, visions, and missions.
Instruments can be surveys of satisfaction
among employees, customers, citizens, etc., or it
can be qualitative storytelling or quantitative
measures of how businesses and governments
engage stakeholders, for instance, in boards,
commissions, or ad hoc groups with consultancy
function. The quality of disclosure of stakeholder
engagement will also be discussed in this chapter.
A “stakeholder” is according to Freeman
(2010) “those groups or individuals who can
affect or can be affected by actions.” Stakeholder
relationship is often referred to organizations,
corporations, firms, etc., but the term can also
be seen as evident to any entity that has
a relation to anything, for example,
a relationship between a dog and its owner – in
its pure sense. In this chapter, we focus on orga-
nizational stakeholders, and even though the dis-
cussions of “who” and “what” could count as
a “stakeholder” are ongoing, we define
Stakeholder Engagement Disclosure
a stakeholder here as an individual, a group, an
organization, or a spokesperson, who has a claim
or a stake or something at stake in the business
behavior, performance, and outcome. This refers
to “stakeholders” as human beings although even
the environment, the climate, and the animals
could be argued to be a stakeholder as well. In
this perspective, the “spokesperson” for these
entities will speak for it to take the interest of
this kind of “stakeholder.”
By “engagement” is understood as
a “commitment during a certain amount of time
and a place.” To be “engaged” in something
means to commit energy and value to
a relationship between two or more individuals,
a group, or an organization, which means that
a relationship can be defined and has a certain
amount of energy attached to it as long as it lasts
in the place it appears.
By “disclosure” is meant a way to show what
matters, what counts as valuable, and how this
takes place, where, and why. Disclosure is a mean
of “transparency,” which indicates a certain
amount of value due to the fact that the disclosure
gives a benefit to the owner or “sender” of
the information as well as to the “receiver” of
the same information. Either a disclosure is done
voluntarily or compulsory, the value of the dis-
closure is related to either the “identity” or the
“legitimacy” of the “sender” or the “receiver”
that needs the disclosure. Voluntary “disclosure”
is often emphasized by the “sender,” while
compulsory is emphasized by the “receiver.”
Introduction
Stakeholder engagement in businesses and gov-
ernments (including public administration) can
be disclosed in various ways through reports,
internet websites, or certifications. The purpose,
meaning, or value attached to the disclosure of
stakeholder engagement among organizations of
various types is to be able to show transparency in
their actions and to enhance reliability and
thereby “legitimacy” and “identity” by the
means of the disclosure. The end is to demon-
strate which kind of “relationship” and which
Stakeholder Engagement Disclosure
degree of “democracy” are attached to the deci-
sions made by the organization in relation to its
duties and responsibilities in their relationship
with stakeholders.
Why are organizations or corporations inter-
ested to disclose their “stakeholder engage-
ment”? Mainly it is connected to the values
mentioned above attached to the “reliability”
and to the “legitimacy” and “identity” of the
corporation. lf the disclosure is done on a
voluntarybasis, values such as gained benefit of
“reliability” by showing “transparency” in rela-
tion to stakeholders such as customers, authori-
ties, citizens, employees, etc. can be obtained.
“Reliability” will be evaluated by the stake-
holders upon the information that is disclosed,
which the “sender” (the business) wants to
achieve to strengthen its “legitimacy” and
“identitty” of itself. The reverse – lack of infor-
mation by the lack of disclosure – might indicate
certain transaction costs that might supersede the
risk of disclosing certain information. Compul-
sory disclosure is attached to meet the needs of
the stakeholder’s needs for certain information
that the “sender” might not want to give in the
first place, but in respect of or in fear of penalties
from stakeholders such as the authorities, the
stockholders or other dominant stakeholders
might force the “sender” to reveal the necessary
information in the disclosure – again to enhance
or sustain the “legitimacy” and the “identity” of
the sender. If an authority dictates multinational
companies to disclose their stakeholder engage-
ment through legislation, the penalties of not
meeting this claim are higher than the risk of
following the rules – both in relation to finance,
legitimacy, or existence of the company. Volun-
tariness of the same disclosure might indicate the
motives of the company for establishing “confi-
dence,” “reliability,” and competition for more
stakeholders such as investors or customers as
a mean of “branding” and “image” of the com-
pany among its stakeholders and to enhance the
economic solidity and profitability of the com-
pany eventually.
Stakeholder engagement disclosure is often
connected to corporate social responsibility
(CSR) of a company in the way that stakeholder
2299 S
relationship is the most dominant feature of how
to address CSR – for “who” and “what” really
counts. Even though CSR in contemporary times
is closely connected to “business cases” and how
CSR can benefit the profitability of the company
by addressing its reliability, impact, and effect on
stakeholders or issues related to the stakeholders
(Porter and Kramer 2006), the stakeholder rela-
tionship and thereof derived engagement with
stakeholders are crucial to the understanding of
why CSR is relevant and for “whom” by “what”
means.
For the purpose of stakeholder engagement
disclosure, a typical mean to this end is “social
auditing” as an instrument. Social auditing to
enhance “reliability” in CSR as well as stake-
holder engagement is typically performed by
third parties conducting the audit from certain
acknowledged standards such as, for instance,
the AccountAbility Standard AA1000, ISO
26000, Global Reporting Initiative (GRI), or the
United Nations (UN) Global Compact (Gao and
Zhang 2006). These kinds of international stan-
dards are also described in their own entity in this
encyclopedia, but here, we address the term of
“stakeholder engagement” attached to these stan-
dards as one methodology of disclosure.
Key Issues
Standards of Stakeholder Engagement
Disclosure
Stakeholder engagement disclosure has many
faces and medias, but some of the most signifi- S
cant in relationship to CSR is those who are stated
by third party in certification processes with
audits done by acknowledged institutions
asserting the documentation and thereby enhanc-
ing the “reliability” of the corporation, who
undergoes this certification. The above men-
tioned certifications, AA1000, ISO 26000, GRI,
and UN Global Compact, will be addressed
hereafter.
The AccountAbility Standard AA1000
assessed by ISEA was developed in 1999 for the
purpose of elucidating accountability in relation
to sustainability of organizations (Gao and
S 2300
Zhang 2006). The AA1000 covers the whole
range of reporting for sustainability including
stakeholder engagement. The specialty of “stake-
holder engagement” has recently been updated by
ISEA in the AA1000 Stakeholder Engagement
Standard 2011, also called AA1000SES
(AccountAbility 2008). The first version of
AA1000 introduced the term of “inclusivity” as
the most prominent feature of stakeholder
engagement (AccountAbility 2008, p. 4.). In the
AA1000SES, this term is elaborated “using
a broad-based, multi-stakeholder process” based
on (AccountAbility 2008, p. 6) the following:
• The principles of AA1000APS (AccountAbil-
ity Principles Standard 2008)
• A clearly defined scope
• Agreed decision-making process
• Focus on issues material to the organization
and/or its stakeholders
• Create opportunities for dialogue
• Be integral to organizational governance
• Be transparent
• Have a process appropriate to the stakeholder
engaged
• Be timely
• Be flexible and responsive
The definition in AA1000SES is equivalent to
Freeman’s definition of stakeholders referred in
the definitions above, and the purpose of this
standard is to enhance the quality of stakeholder
relationships by reliable reporting methods and
transparency for stakeholders engaged with orga-
nizations. The AA1000SES focuses on the qual-
ity in “outcomes valued by those involved and
must be communicated in a credible way”
(AccountAbility 2008, p. 12). This introduces
two new terms besides the “inclusivity,” namely,
“materiality” and “responsiveness” as account-
ability principles. “Inclusivity” is important in
order to enable stakeholders in finding solutions
to issues to achieve better outcome for all parties
(AccountAbility 2008, p. 13). The purpose is not
to engage all stakeholders in all kinds of decision
making in organizations but to achieve a proper
balance among stakeholders in issues that these
stakeholders value. The “materiality” addresses
the issues at stake for stakeholders. And “respon-
siveness” includes the decisions, actions,
Stakeholder Engagement Disclosure
performances, and communications of these
material issues (AccountAbility 2008, p. 14). To
be able to achieve these three objectives, the
cultural setting and the organizational gover-
nance are very important. Since “responsiveness”
is directed to the “materiality” of issues and the
decision making, the governance of the organiza-
tions necessarily has to include stakeholders in
strategies, visions, and missions as well as other
policies.
The idea is to involve those stakeholders that
have a stake in the firm in the right decision
making at the right time and in the right place.
For instance, it is important to include employees
as operational stakeholders in matters and issues
of operational course, actions, machinery, and
procedures. It is also important to address
employees in matters of negotiation in relation
to work environment, salaries, and in relation to
how organizational practices are conducted in
relation to other stakeholders which they are in
touch with.
Therefore, the “mandate and ownership” shall
be established according to AA1000SES. If these
are fluent or non-defined, the actions behind and
the incentives are not necessarily to be met and
thereby may not be possible to state according to
the actual performance. This also implicates the
necessity to identify the right stakeholders, their
mandate, and ownership in order to define “who”
(the stakeholders), “what” (the issues), and
“why” (the reason) the stakeholder engagement
is necessary.
The stakeholder engagement process has
according to AA1000SES four stages (Account-
Ability 2008, p. 22):
• Plan
• Prepare
• Implement
• Act, review, and improve
The “plan” of stakeholders is a mean to map
the various stakeholder relations and to identify
all perspectives related to each stakeholder
including “mandate” and “ownership.” Without
going through all possible entities related to the
actual stakeholder engagement, which can be
multiple and which is determined by the stakes
of relevance, the idea of mapping out this plan is
Stakeholder Engagement Disclosure
to follow up on this in the next phase – the
preparation. In the preparation, the engagement
is outlined and the resources attached to each
relevant stakeholder, and his/her merits can be
taken into consideration for decision-making
processes in order to reach the third step –
implementation. The implementation of the
stakeholder plan in order to include stakeholders
in relevant decision-making processes concerns
invitation to the process, the information of the
process, the actual engagement (what to do, how
to do it, when, and where), and how to document
the engagement process, and last but not least, the
actual performance (the act), the evaluation (the
review), and the improvement of the process in
order to refine the procedure.
The above “stakeholder engagement disclo-
sure” revealed that AA1000SES certification
procedure is not alone viable for the actual
ongoing process of inclusion of stakeholders in
organizational decision making and performance
– it also documents that it takes place – both for
the stakeholders in the organization, but espe-
cially for future stakeholder relationships that
the organization would be interested in.
The empirical evidences of “stakeholder
engagement disclosure” were investigated in
Australia in 2007 where ACCA and Net Balance
Foundation Limited carried out a survey among
the 50 largest companies in Australia (ACCA
2007). This report analyzed the level of quality
in stakeholder engagement reports of the compa-
nies based on the criteria of the AA1000SES
(from 2006):
– Stakeholder identification
– Evidence of engagement
– Targets and metrics (objectives set by the
companies themselves)
– Integration of engagement programs
– Use of engagement results in report
development
– Opportunities for feedback
The Australian report found that the average
of the quality criteria met by the 50 companies
was only 25 % while those who fulfilled the
quality criteria best were very few (ACCA
2007). These findings led to the recommenda-
tions to the Australian companies to adapt to the
2301 S
criteria set by the AA1000. And further the report
concluded, that this report did not assume, that
stakeholder engagement did not take place in
these firms despite the low rate of findings, but
that reporting of stakeholder engagement (disclo-
sure) was lacking both in importance and of rel-
evance. The report concluded that factors such as
“stakeholder enslavement” should be avoided,
meaning that stakeholders should not take over
the governance of the organization. And further
on that “stakeholder fatigue” should be avoided,
known as the endless dialogue with stakeholders
leading to no solutions, should be reconsidered in
the stakeholder engagement strategy of the
organization.
The same kind of disclosure is met by other
known standards of ISO26000, GRI, and UN
Global Impact who addresses stakeholder
engagement in relation to CSR and sustainability
as well although in a more integrated manner
with CSR and sustainability reporting.
ISO26000 is not certifiable but only a standard
of guidance so far. It is not either to be used as
regulatory item or as contractual purposes. It is
purely voluntary and emphasizes that it is used in
such ways (iso.org). However, the ISO26000
addresses the benefits of using this standard for
achieving the following:
– Competitive advantage
– Reputation
– Ability to attract and retain workers or mem-
bers, customers, clients, or users
– Maintenance of employees’ morale, commit-
ment, and productivity
– View of investors, owners, donors, sponsors, S
and financial community
– Relationship with companies, governments,
the media, suppliers, peers, customers, and
the community in which it operates
The stakeholder engagement according to the
above statements is permeating the ISO26000
standard and is especially viable through these
relationships for the main purpose of the standard –
to achieve a competitive advantage through
a good reputation of the engagement of multiple
stakeholders. The ISO26000 is connecting
CSR and sustainability issues with stakeholder
engagement in seven core ideas (Fig. 1):
S 2302 Stakeholder Engagement Disclosure

Stakeholder
Engagement Disclosure,
Fig. 1 ISO 26000 seven
core subjects of social
responsibility
Holistic approach

6.8*
Community 6.3*
involvement Human rights
and development

6.2* Organizational

6.7* 6.4*
Consumer ORGANIZATION Labour
issues practices

governance

6.6* 6.5*
Fair operating The environment
practices

Interdependence

Although the stakeholder engagement is
underlying all seven core subjects, the
ISO26000 does not supply the integration of
how this engagement is achieved nor how it
should be disclosed. It underlies the voluntariness
of the ideas behind the standard as non-regula-
tive, noncontractual, and noncertifiable that users
of the standard should decide themselves how to
include, use, and report stakeholder engagement.
The Global Reporting Initiative (GRI) on the
other hand is as AA1000SES addressing stake-
holder engagement in the disclosure of CSR and
sustainability of the organization. The GRI ver-
sion 3.1 directs the stakeholder engagement dis-
closure as crucial for the reliability of the entire
CSR/sustainability report and emphasizes that it
should be documented. The documentation of
the stakeholder engagement should be
concerned about the definition of which stake-
holders the organization is engaged with, how
and when the organization has engaged with
these stakeholders, and how the engagement
has influenced the report content and the orga-
nization’s sustainability activities. The salience
of this disclosure is for the reporting organiza-
tion to identify the direct input from the stake-
holders as well as how the societal expections
are legitimately met. Furthermore, the various
conflicting views or differing expectations
among the stakeholder and the organization are
important to state in the report and how these
differences are balanced in the reporting deci-
sions (GRI 2011, p. 11).
The UN Global Compact has an entire section
of how to engage with stakeholders, a so-called
Stakeholder Engagement Handbook. The central-
ity of stakeholder engagement has been stated
since 1998 when World Bank Group made their
first recommendations to the UN Global Compact
in the “Good Practice Manual: Doing Better
Business through Effective Consultation and Dis-
closure” (IFC 2007). This manual has been
updated in 2007, addressing stakeholder engage-
ment in the handbook “Stakeholder Engagement:
Stakeholder Engagement Disclosure 2303 S

Information
Disclosure
Stakeholder Communicate Stakeholder
Identification information to
stakeholders early
Consultation
and Analysis in the decision-
Invest time in Plan out each
making process, in
identifying and consultation process,
ways that are mea-
priortizing stakeholders consult inclusively,
ningful and acces-
and assessing their inte- document the process,
sible, and continue
rests and concerns. and communicate
this communica-
follow-up.
tion throughout the
project life.

Management Functions Negotiation and Partnerships

Build and maintain sufficient
capacity within the company to
manage processes of stakeholder
engagement, track commitments,
and report on progress.
Good For controversial and complex
Stakeholder issues enter into good faith nego-
tiations that satisfy the interests
Engagement of all parties. Add value to impact
mitigation or project benefits by
forming strategic partnerships.

Reporting to Stakeholder Grievance

Stakeholders
Report back to stakeholders
on environmental, social and
economic performance, both
those consulted and those
with more general inte-
rests in the project and
parent company
Involvement Management
in Project
Establish accessible and
Monitoring responsive means for
Involve directly affec- stakeholders to raise
ted stakeholders in concerns and grievances
monitoring project about the project through-
impacts, mitigation out its life.
and benefits, and in-
volve external moni-
tors where they can
enhance transparen-
cy and credibility

Stakeholder Engagement Disclosure, Fig. 2 IFC stakeholder engagement principles (2007)

S
A Good Practice Handbook for Companies Information disclosure to the above stake-
Doing Business in Emerging Markets” (IFC holders is crucial to the principles of the IFC
2007). The principles of stakeholder engagement handbook in a way that stakeholders understand
include the following: what is important to them, what is the impact of
– Stakeholder identification and analysis the projects or actions taking place, and any other
– Information disclosure aspects that have an effect on the stakeholders
– Stakeholder consultation (IFC 2007, p. 27). The disclosure of informations
– Negotiations and partnerships to the stakeholders should be transparent, apply
– Grievance management good practice principles, weigh the risks and ben-
– Stakeholder involvement in project monitoring efits, and manage information on sensitive and
– Reporting to stakeholders controversial issues. The handbook also
– Management functions addresses how the actual stakeholder engagement
S 2304
can be disclosed, and for this purpose, they point
to the AA1000SES, the Dow Jones Sustainability
Index, the FTSE4GOOD Index, the GRI and the
OECD guidelines for multinational enterprises,
SA1000, and UN Global Compact. As
a recommendation, the IFC points to the benefits
of keeping a stakeholder database in which infor-
mation is stored about the stakeholders and for
the stakeholders in order to achieve the goals of
transparency both in information to the stake-
holders (Fig. 2) as well as information about the
stakeholders and how the organization engages
with them.
Stakeholder Engagement Indexes
Two of the most cited indexes for stakeholders
to gain information about companies and their
stakeholder relationships and engagements are
the Dow Jones Sustainability Index and the
FTSE4GOOD Index. Both indexes combine
and benchmark sustainability with stakeholder
engagement and use questionnaire and docu-
ments, which are verified by third parties for
their reliabilities. Verification is done by cross-
checking questionnaires with documentation,
verifying the track record of the company and
incidents and crisis management with media and
stakeholder reports, as well as direct interaction
and clarification with the company. This proce-
dure provides a very high standard and reliable
third party measurement of the actual stake-
holder engagement, and the disclosure of this
via the third party indexes may be as viable as
may certifications with the above instruments as
well.
Companies take sustainability indexes very
seriously, and they know that an exclusion of
or a negative location on these indexes might
affect the reliability of the company and lead to
negative sales and investment possibilities for
those stakeholders that use these indexes in deci-
sion making before engaging in relationship
with the company. The Dow Jones Sustainabil-
ity Index and the FTSE4GOOD Index are
mainly for multinational companies. Dow
Jones benchmarks the 2,500 largest companies,
and the FTSE4GOOD benchmarks 870 leading
companies on sustainability.
Stakeholder Engagement Disclosure
Future Directions
Stakeholder engagement disclosure is an area that
is developing very fast in line with stakeholders
getting more and more interested in disclosures of
stakeholder engagement of companies, and the
number of companies listed in the various CSR
and sustainability indexes is growing year by
year. The pressure from stakeholders to get infor-
mation prior to investment or along the engage-
ment in the specific company chosen also makes
more and more companies engaged literally in
stakeholder engagement disclosure. This is done
first and foremost in direct information to the
actual stakeholders in question for the specific
company, but also as a transparency revealed to
external bodies such as certification institutes,
ranking lists (indexes), CSR/sustainability maga-
zines, etc. This is done first and foremost the
motivation of companies to engage with stake-
holders to meet stakeholder’s needs will be grow-
ing both through academic literature as well as
professions literature, which will make this area
prone to a pivotal growth also.
Cross-References
▶ AA1000
▶ Global Reporting Initiative
▶ ISO 26000
▶ Primary Stakeholders
▶ Secondary Stakeholders
▶ Stakeholder Engagement
▶ Stakeholders
▶ UN Global Compact
References and Readings
ACCA. (2007). Disclosures on stakeholder engagement.
Reporting trilogy – Research on sustainability
reporting in Australia. Part 1. A study by the Associa-
tion of Chartered Certified Accountants Completed.
Syndey, Australia: Association of Chartered Certified
Accountants. Mar 2007.
AccountAbility. (2008). AA1000 stakeholder engagement
standard 2011. Final exposure draft. http://www.
accountability.org/about-us/publications/aa1000-1.html.
Accessed 8 Aug 2012.
Stakeholder Relationship 2305 S
Clarkson, M. B. E. (1995). A stakeholder framework for
analyzing and evaluating corporate social perfor- Stakeholder Involvement in the
mance. Academy of Management Review, 20(1),
92–117. Practices of the Businesses
Freeman, R. E. (1984, 2010). Strategic management.
A stakeholder approach. Cambridge: Free Press/ ▶ Engagement/Stakeholder Engagement
Cambridge University Press.
Gao, S. S., & Zhang, J. J. (2006). Stakeholder engagement,
social auditing and corporate sustainability. Business
Process Management Journal, 12(6), 722–740.
GRI. (2011). Sustainability reporting guidelines. GRI Stakeholder Management
2000–2011. Version 3.1. Global Reporting Initiative.
www.gri.org.
IFC. (2007). Stakeholder engagement. A good practice ▶ Sanpo-yoshi and CSR
handbook for companies doing business in emerging ▶ Stakeholder Relationship
markets. International Finance Corporation. World
Bank Group. www.ifc.org/enviro.
ISO.org. International Standardization Organization. ISO
26000. http://www.iso.org/iso/home/standards/iso26000.
htm. Accessed 8 Aug 2012. Stakeholder Motivation
Porter, M. E., & Kramer, M. R. (2006). Strategy and
society. The link between competitive advantage and ▶ Engagement/Stakeholder Engagement
corporate social responsibility. Harvard Business
Review, Dec 2006.

Stakeholder Participation

Stakeholder Engagement Reporting ▶ Engagement/Stakeholder Engagement

▶ Engagement/Stakeholder Engagement

Stakeholder Relationship

Shuo Wang and Yuhui Gao

Stakeholder Engagement Standards
▶ Engagement/Stakeholder Engagement
▶ Stakeholder Engagement Disclosure
Stakeholder Influence
▶ Stakeholder Relationship
DCU Business School, Dublin City University,
Dublin, Ireland
Synonyms S
Stakeholder attribute; Stakeholder contribution;
Stakeholder engagement; Stakeholder influence;
Stakeholder involvement; Stakeholder manage-
ment; Stakeholder relationship management;
Stakeholder salience

Definition
Stakeholder Involvement
A key characteristic of effective organizational
▶ Stakeholder Engagement management is determined by the group of
▶ Stakeholder Relationship interdependent relationships that exist between
S 2306
Stakeholder
Relationship, Government
Fig. 1 Stakeholder view of
the firm (Source: Freeman
1984, p. 25)
Suppliers
Environ-
mentalists
Special
Interest
Group
the key stakeholders. The primary stakeholders
are those who invest some form of capital, be it
human, financial, or something else of value, in
the firm, and share some of the risks and respon-
sibilities involved. In general, the primary
stakeholders include investors (shareholders),
employees, customers, the community, and the
government. The management of stakeholder
relationships not only includes the continuous
participation of stakeholders in the firm but also
places emphasis on their contribution to it. From
the perspective of the resources involved, a firm’s
ability to outperform its competitors depends on
the unique interaction of the human capital, orga-
nizational, and physical resources over a period
of time (Hillman and Keim 2001).
Introduction
In Freeman’s (1984) book, “Strategic Manage-
ment: A Stakeholder Approach,” he states that all
firms must consider those groups and individuals
that affect or are affected by the strategies of that
firm. Freeman (1984) developed a map to illus-
trate how to analyze a firm from a stakeholder
perspective (see Fig. 1). Among the stakeholders,
it is commonly accepted that four of them are
Stakeholder Relationship
Local Owners
Community
Organization
Consumer
Advocates
Customers
Firm
Competitors
Employees Media
particularly important. Firstly, in relation to its
employees, human capital is an intangible and valu-
able asset that is central to its competitive advan-
tage, and which can increase efficiency and lead to
a higher rate of growth in profits. Secondly, with
regard to the natural environment, a firm’s environ-
mental responsiveness helps it to lower its operating
costs, to invent “eco-friendly” products, and conse-
quently to increase its revenue. Thirdly, in relation
to customers, the evidence shows that if a firm’s
behavior is perceived by its customers to be irre-
sponsible, its market value will decrease. Fourthly,
regarding the local community, although the effects
of the local community on the income of a business
are not clear, many managers believe that commu-
nity involvement is essential and that this involve-
ment often creates its own competitive advantage.
In view of the foregoing, it is suggested that
a management’s handling of these four key stake-
holder relationships is closely related to the financial
performance of a firm (Berman et al. 1999).
Stakeholder interests, and the management of
the relationship with stakeholders, are critical to
a firm’s success. The management of stake-
holders is invariably associated with a firm’s
engagement with corporate social responsibility
(CSR) and corporate performance. Stakeholder
relationships determine the extent of a firm’s
Stakeholder Relationship 2307 S
Stakeholder
Relationship, CSR Stakeholder Business
Programme Interests and Outcomes
Fig. 2 Stakeholder
Vision relationships Revenue
relationship and
CSR-related program • Corporate • Customers • Customer
CSR Preference
(Source: Maklan & Knox, objectives • Current &
Drivers • Customer
2003, p. 13) Potential
• Stakeholder • Product Retention
employees
priorities and Brands Employee
• “Environment”
strategies • Corporate Productivity
• Shareholders
• Scope of Reputation
• Communities Cost
obligations • Employee
• Suppliers • Employee
• Corporate Behaviour
and Motivation • Business retention
competencies Partners • Waste and
• Government energy
Values • NGOs
• Operating Risk
policies • Permission to
• Processes operate
• Procedures • Revenue
volatility
• Disaster
sustainability

involvement in matters related to CSR. The influ-
ence of stakeholder relationships on corporate
strategy and organizational outcomes has been
demonstrated in Fig. 2. Stakeholders’ interests
are the drivers of CSR and inform the strategies
related to CSR and thus indirectly affect business
outcomes. Additionally, many authors have
shown that good stakeholder relationships pro-
vide “insurance-like” benefits, which help firms
to improve employee retention and customer loy-
alty and to recover from poor performance as
quickly as possible.
Given the importance of stakeholder relation-
ships, researchers have placed a fair degree of
emphasis on communication with stakeholders,
by exploring how firms should behave with
respect to their stakeholders. In addition, some
scholars have attempted to identify the relative
importance of different stakeholders. The claims
of different stakeholders are often at odds with
one another. The concept of “stakeholder
salience” refers to the priority attached to the
claims of different stakeholders. Using these con-
cepts, it has been suggested that stakeholder
salience is positively correlated with the three
variables of power, legitimacy, and urgency, as
measured by managers’ perceptions of these
(Agle et al. 1999).
Key Issues
The theory of stakeholder relationships is of
relevance here; nevertheless, it still needs further
development because of the many unresolved
debates and gaps in understanding that would
benefit from the attention of scholars and practi- S
tioners. These include stakeholder salience,
stakeholder actions and responses, firm actions
and responses, and firm performance.
Future Directions
The management of stakeholder relationships
has generated a fair degree of interest due to
the fact that the theories behind it contribute to
the development of other theories, such as those
of CSR and strategic management. For exam-
ple, Kinder, Lydenberg, Domini (KLD)
S 2308 Stakeholder Relationship Management

evaluated corporate social performance (CSP) Maklan, S., & Knox, S. D. (2003). CSR at the crossroads.
from a stakeholder perspective, thereby provid- London: Edelman.
McWilliams, A., & Siegel, D. (2000). Corporate social
ing ratings of CSP since 1991(McWilliams and responsibility and financial performance: Correlation
Siegel 2000). Although many scholars have or misspecification? Strategic Management Journal,
made efforts to understand the management of 21(5), 603–609.
stakeholder relationships, some questions
require further exploration. Firstly, from the
perspective of leadership, how does manage-
Stakeholder Relationship
ment behavior influence the perception of stake-
Management
holders and how can managers move from being
“self-regarding” to being “other-regarding” in
▶ Stakeholder Relationship
their influence over the stakeholder relation-
ship. Secondly, from the point of view of the
stakeholder, to what degree, or in which set of
circumstances, does trust spill over from one Stakeholder Reporting
stakeholder relationship to another. Thirdly,
from the perspective of firms’ actions and ▶ Stakeholder Engagement Disclosure
responses, what is the difference between man-
agers’ intentions and behavior toward the
management of stakeholder relationships
Stakeholder Salience
(Laplume et al. 2008).
▶ Stakeholder Relationship

Cross-References

▶ Business for Social Responsibility

Stakeholder Theory
▶ Corporate Social Responsibility
▶ Good Corporation
▶ Corporate Social Responsibility Strategy

References and Readings Stakeholder Thinking

Agle, B. R., Mitchell, R. K., & Sonnenfeld, J. A. (1999).
Who matters to CEOs? An investigation of stakeholder
Joop H.M. Remmé
attributes and salience, corporate performance, and Maastricht School of Management,
CEO values. The Academy of Management Journal, Maastricht, The Netherlands
42(5), 507–525.
Berman, S. L., Wicks, A. C., Kotha, S., & Jones, T. M.
(1999). Does stakeholder orientation matter? The rela-
tionship between stakeholder management models and
firm financial performance. The Academy of Manage- Synonyms
ment Journal, 42(5), 488–506.
Freeman, R. (1984). Strategic management: A stakeholder
perspective. Boston: Pitman.
Moral agent
Hillman, A. J., & Keim, G. D. (2001). Shareholder value,
stakeholder management, and social issues: What’s the
bottom line? Strategic Management Journal, 22(2), Definition
125–139.
Laplume, A. O., Sonpar, K., & Litz, R. A. (2008). Stake-
holder theory: Reviewing a theory that moves us. A stakeholder in a company is anyone who is
Journal of Management, 34(6), 1152–1189. impacted on by the company’s processes and/or
Stakeholder Thinking
who has an impact on the company. The term
“stakeholder” was coined by Freeman, with the
publication of his book Strategic Management:
A Stakeholder Approach in 1983. With this book,
Freeman focused on those managers who were,
according to most standards, successful, yet had
a hard time coping with the increasing complex-
ity presented by people and groups of very
diverse natures, all demanding his attention and
more. For those managers, Freeman developed
a framework.
Introduction
One can legitimately say that stakeholder man-
agement is older than the concept “stakeholder
management.” Long before first academics and
then managers started to use that term, there were
companies thinking about their most important
stakeholders: owners, employees, and clients
(in that order). Many companies were primarily
inward looking, seeing only those stakeholders
who were important for the success of their pri-
mary processes. Over the years, several develop-
ments have forced companies to look beyond that
narrow focus, and some, showing leadership,
developed in that direction before that. One
such development was the increasing importance
of the environment, heralded in the 1960s and
1970s by publications such as Rachel Carson’s
Silent Spring (1962) and the Club of Rome
Report Limits to Growth (1974). These books
sent a shock through Western societies, as they
made people aware of pressing concerns regard-
ing the environmental impact of business and the
scarcity of resources. They were at the start of
a development in which societies were going to
demand more from companies than only products
and jobs and in which governments increasingly
forced businesses to accept responsibility for the
consequences of their actions and also on people
and realities they were not previously aware of.
To give just one example, in the 1970s, the river
Rhine was heavily polluted, largely by industries
in the German Ruhr area who apparently only
paid attention to customers and shareholders,
not to the people who were depending on the
2309 S
river Rhine for their drinking water. International
intergovernmental cooperation and new legisla-
tion forced businesses to accept responsibility for
the impact of their business processes on the river
and the people depending on it. The people living
in Rotterdam, among others, were stakeholders of
the industries in the Ruhr area not only by buying
the products of those industries but also through
the impact of those industries on the river that
was so important to them. Now that those indus-
tries are, by force or their own will, thinking in
terms of stakeholders, they changed their pro-
cesses, and as a result, the river is no longer
polluted (the fish have returned to it). In recent
decades, consumer activism has also become
a force that reminds managers to think about
more stakeholders than before, such as the people
employed by their suppliers. Examples of this can
be found in NGOs and consumers pressing com-
panies in the clothing industry to look into child
labor, and initiatives in coffee, tea, chocolate, and
fruits producing industries toward offering a fair
price to farmers (the fair trade movement).
The development toward considering stake-
holders runs parallel with the discussion in
academic journals and public media about the
nature of corporate social responsibility. In that
discussion, we see on the one side those who say,
along with Milton Friedman (1970), “the busi-
ness of business is business” and on the other side
those who want to make business responsible for
a wide range of issues within society as a whole.
From the first position, only primary stakeholders
are concerned and among them, first and fore-
most, the owners, while from the second position, S
a wide range of stakeholders are introduced as
entitled to the attention of managers. Those who
defend the first position hold that the interests of
the other stakeholders are best served through
honoring the interests of the owners, which will,
in their view, make the company most successful,
while those who hold the second position hold
that those who defend the first position sacrifice
the other stakeholders to the benefit of the
owners. Both sides appear to have a valid point.
And they appear to overlap in some way. Both
sides of this debate recognize that several stake-
holders will be relevant to the success of
S 2310
a corporation or business venture. And they
appear to recognize that cannibalizing the inter-
ests of some stakeholders to benefit other stake-
holders may not be advisable. The main
difference then appears to be in where to put
emphasis: the first position would always put
emphasis on honoring the interests of the owners,
while the second position will hold that where to
put emphasis varies from time to time.
To understand stakeholders means under-
standing the stakes of stakeholders – in other
words, the very reasons for them to be
a stakeholder in the activities of the organizations
who meet them as stakeholders. The assumption
always was that stakeholders were aware of their
interests and expected the organization to meet
them up to a certain point. Where the traditional
stakeholders – in the days when the word “stake-
holder” was not used – seemed to have under-
standable interests (stakes), the owners wanted
a good return on their investment, the clients
wanted affordable products at the promised qual-
ity, and the employees wanted decent wages and
respectable working conditions. Meeting those
expectations has been difficult enough (How
much return on investment and how fast? Which
level of pay is respectable? What exactly can be
expected from suppliers of goods and services?),
but organizations have over the years become
professional in dealing with them. But much of
this was one-directional. When Henry Ford sup-
plied decent housing for his workers, he did so
from the plausible assumption that workers who
lived in decent circumstances would be more
productive; he did not ask them how they wanted
to be housed. When, in more recent years, Philips
started a campaign entitled “Sense and Simplic-
ity,” it did so because the CEO, Mr. Kleisterlee,
realized that the company had over the years
offered products of excellent quality but too com-
plicated to really please the clients. When, even
more recently, ABN AMRO bank changed its
strategy and decided on new investments in
order to reach the goals determined in the new
strategy, it ran into the problem that the resulting
cost/profit ratio deeply disturbed the share-
holders, which was one of the causes of the drop
in share price and subsequent overtaking of the
Stakeholder Thinking
bank by three competitors (who later themselves
ran into trouble with their shareholders, govern-
ments among them). This is just to indicate that
honoring the interests of the primary stake-
holders, which is the core of the responsibilities
of any organization, is difficult enough. But then,
it becomes more complicated. This can also be
said about suppliers, who, with new ways of
organizing – think of “just in time” and
of outsourcing/insourcing – have become much
more involved in the companies’ strategy and
primary processes while they have interests of
their own and reasons to defend them. Increas-
ingly those interests have become more complex.
Some managers thought in the past that the inter-
est of an employee was limited to being paid
(perhaps influenced by Maslow’s pyramid: as
long as physiological needs were not satisfied in
a lasting manner, one does not have to be
concerned about other needs), but that has more
and more become an inadequate perspective.
It has become apparent that even when being
paid is in the forefront of employee’s minds,
other concerns also motivate their behavior,
such as being treated fairly, working under safe
and healthy conditions, and having opportunities
for advancement.
The ascent of thinking in terms of stakeholders
has much to do with the discovery of the impor-
tance of secondary stakeholders. While managers
were familiar with thinking about owners,
employees, and especially clients, who are now
called “primary stakeholders” and who are
directly linked to the organization’s primary
processes and its strategic intent, they now dis-
covered stakeholders outside of that realm,
dubbed “secondary stakeholders,” while the pri-
mary stakeholders were not exactly becoming
easier to satisfy. Some secondary stakeholders
were already known. As with secondary stake-
holders that were later discovered, companies did
not actively seek their company. I am referring to
governmental agencies. The plural is important
here because the plurality of these agencies forms
art of the trouble for companies. Of course, the
company has to pay taxes, and doing so has been
calculated in from the start. But companies also
need licenses and permits, which are typically
Stakeholder Thinking
more or less severe depending on the particular
type of business; in many cases, those licenses
and permits will be accompanied with regular
inspections. Sometimes, governmental agencies
appear to confuse the company (e.g., in the case
of a restaurant, the fire department may insist on
a fire extinguisher mounted low on a wall and the
labor inspection may insist on a fire extinguisher
mounted at a different height on the wall). One
reason for governments to regard themselves as
stakeholders of the companies’ activities may
have to do with the employment provided by the
company or with the strategic importance of its
goods and services (think of banks). This means
that the company will be confronted with the
ideas and wishes of the government regarding
that employment and those goods and services.
But the situation with secondary stakeholders
is much more complex. The companies’ facilities
may have neighbors whose stakes are clearly
connected with the safety of your own operations,
but there are also citizens who, for various rea-
sons, take an interest in what the company is
doing. Their interests may be less obvious than
the interests of the primary stakeholders and also
to themselves. Some of them may claim an inter-
est of a very tangible nature, e.g., they fear that
the company may have an impact on the environ-
ment which they and their families will suffer
from, or they may claim to have a more abstract
interest, e.g., the company is rumored to be
involved with child labor through one of its sub-
sidiaries in another country, and the stakeholder
may claim to represent international labor justice.
To make the situation even more complex, but
it cannot be helped, is the fact that stakeholders
often overlap. What this means is that stake-
holders do not just have interests as a result of
one particular role, e.g., being an employee, but
also interests resulting from having another role,
such as being a neighbor. This is not only confus-
ing to the manager representing the company but
quite often also to the stakeholder, who may not
always be aware that the organization may have
an impact on him that might relate to his or her
interests.
It can also be the other way around in the sense
that an overlap no longer exists. For instance, half
2311 S
a century ago, most companies had their
employees living close to their place of work.
Those employees had interests as employees but
also as neighbors. That sometimes became prob-
lematic in the sense that they had to allow for
damage to their interests as neighbors just
because they were protecting their interests as
employees. For companies, this situation was
more manageable, as there were fewer stake-
holders to communicate with. This has, in many
cases, changed in recent times. As a result of new
ways of transport and of the fact that increasingly
both partners in a family work, and not necessar-
ily in the same place, the employees are no longer
typically neighbors. This means that the company
has to deal with neighbors as a separate stake-
holder group. And who is to be seen as neighbors
in part depends on the companies’ activities. For
instance, when you look at a refinery, the people
living close to it have certain interests, such as
safety, but if the refinery has activities which, in
case of an accident, may have an impact hundreds
of miles away, the group of “neighbors” becomes
that much bigger. It may be argued that this
leaves the managers of the company with
a special responsibility. After all, having knowl-
edge about their own processes and their possible
risks, which neighbors typically do not have
(especially not if they live many miles away and
are not aware of the impact the company might
have on them), gives those managers a particular
moral (often also legal) responsibility. But it also
gives them a problem: who to talk with?
S
Key Issues
One key issue in connection with stakeholder
thinking is that stakeholders are not always
aware of their own stakes. This sometimes has
to do with a misbalance in knowledge, as the
company is much more knowledgeable of its
own processes and the consequences thereof
than its stakeholders on average are. Some stake-
holders may not even be aware of them. For
instance, if a factory in Germany releases toxic
substances into the Rhine River and the city of
Rotterdam needs the water from the Rhine as
S 2312
drinking water, that does not mean that the citi-
zens of the city of Rotterdam are aware of the
actions of the management of the factory in Ger-
many; it is likely that they are not aware of them
nor of their stake in the operations of that specific
factory.
Another issue is that one can wonder if all
stakeholders are sufficiently able to express
their stakes and defend them. To stay with the
just given example, if all citizens are aware of
their stake in the operations of the factory in
Germany, that does not mean that they are knowl-
edgeable about the natures and consequences of
those operations. And think about the most com-
mon stakeholder relationship (of them all, the
relationship between producer and consumer).
It becomes a bit more complicated when we
realize that stakeholders are not always able to
defend their own stakes. This becomes apparent
when we apply stakeholder thinking to sustain-
ability. Then, we realize that not only people and
groups of people can be considered to be stake-
holders but also nonhuman players (ecosystems,
animals, plants, etc.) and that when we do limit
ourselves to human stakeholders, important
stakeholders are not yet born; sustainability,
after all, makes sense in terms of the impacts of
our deed on future generations. This gives stake-
holder thinking a new challenge: how to honor
the interests of those who have not even been
borne yet and of those, like animals, who are
not in the position to communicate with us in
terms of interests. A further sensitivity appears
to be called for.
An issue that is related to the issue of new
types of stakeholders, while it already announced
itself in “old-fashioned” stakeholder thinking, is
that of representation. Increasingly, managers
who make an effort to think in terms of stake-
holders and their interests become confronted
with the confusing situation of not only having
stakeholders but also stakeholders by virtue of
representing stakeholders. The most familiar
experience with this concerns labor unions,
which claim to represent the interests of the
employees. Many countries also know the phe-
nomenon of intracompany “workers’ councils,”
with which top management confers on a regular
Stakeholder Thinking
basis, sometimes under legal obligation. Often,
this has proven to be efficient for managers, as it
helps to communicate with employees and to
create an overview of their interests and wishes.
Representation, however, creates a few problems.
One problem is that the claim of representation is
not necessarily justified. The representers often
have interests of their own, which may become
confused with the interests of those who they
claim to represent. Especially when the repre-
senters are institutionalized, as is the case with
labor unions but also with consumer interest
groups, they will show signs of organizational
resistance, independent from the interests of
those who they claim to represent.
Another problem is that sometimes separate
representers claim to represent the same stake-
holders. For instance, employees may be
represented by labor unions and at the same
time also by church leaders and politicians.
Those separate representers will typically have
their own interests as well and their own perspec-
tives in representing the interests of others. It
does happen that representers compete with
each other in their claim to represent others,
which may bring an element of tension in the
stakeholder relationships. This is typically the
case between politicians, who all have a reason
to claim to represent citizens (as many as possi-
ble), but also other representing stakeholders,
such as NGOs, who may have a tendency to
compete in their claims to represent others; after
all, they too have something to gain from
representing as many people as possible. And
what about the environment? It cannot speak for
itself and this gives representers a certain impe-
tus. But which representer has the best claim for
representing the environment? That is often hard
to tell. In dealing with those representers, some
representers cannot be avoided, even when there
is doubt about the legitimacy of their claim to
represent. For instance, if you are planning
to build a factory in a country that is ruled in
a nondemocratic manner, then the nondemocratic
ruler may claim to represent the people in the
country, including those who live near the
planned factory and those who might find jobs
there, but you may wonder whether the concerns
Stakeholder Thinking
of those people are known to the person you are
dealing with, whether that person even cares
about those concerns and whether those people
regard that person as their representative. If you
have doubts about these issues, you could try to
communicate also directly to those stakeholders,
perhaps through other representers or more
directly, but then you run the risk of jeopardizing
the relationship with the nondemocratic ruler.
Another complication is prioritization.
A company does not have a fixed set of stake-
holders, nor is the group of stakeholders clearly
delimitated. Stakeholders may vary from situa-
tion to situation. And there are usually more
stakeholders than you can afford to give your
time to. In short, you have to prioritize. One
could even say that if you do not prioritize,
circumstances will do that for you and the result
may not be the most efficient for you.
The shift from stakeholder management to
stakeholder engagement has had consequences
regarding the actions toward stakeholders: con-
flict or conflict. It is probably not so that the first
can be associated with conflict and the second
with cooperation, as both modes of interaction
remain possible, but one can say that in stake-
holder engagement, it is becoming more feasible
to find cooperation and a striving for win-win
solutions, even though there will remain the
potential for opposition and even conflict.
There are many cases in CSR which might
have been prevented with (better) stakeholder
management. We can mention here one of the
most well-known cases.
In the spring of 1995, it caught the attention of
the media that Shell was decommissioning one of
its facilities in the Brent oil field in the North Sea,
Brent Spar (in fact, it was partly owned by Shell
and partly owned by ESSO, but Shell conducted
operational management of the facility). The
decommissioning of the Brent Spar had been
extensively studied by Shell experts in its many
aspects: legal, financial, engineering, and envi-
ronmental. The result of those studies was that
Shell decided that the overall best solution was to
tow the Brent Spar to the deepest part of the
Atlantic Ocean and dump it there. Greenpeace
objected to this, voicing its objections at the last
2313 S
moment in order to achieve the most dramatic
effects for the media. This resulted in several
weeks of media attention and societal debate in
Northern Europe.
At the time of the Brent Spar crisis, Shell was
quite decentralized. Most decisions were made at
the business unit level. This was also the case
with decisions concerning the Brent Spar, which
was co-owned and operated by Shell UK. This
meant that Shell UK made a decision about the
Brent Spar at the same time when Deutsche Shell
(Shell Germany) started a campaign to highlight
its environmental agenda, without either being
aware of what the other was doing. The
governing Board of Shell was also not included
in the decisions on the Brent Spar. The result
was that public opinion, not aware of the
decentralized decision-making at Shell, became
extra distrustful. Stirred by Greenpeace and the
media, society and opinion leaders in Denmark,
Belgium, the Netherlands, and Germany rallied
against Shell, even to the point of committing
terrorist acts. Various Shell managers had to con-
front angry politicians, who were eager to use
public outrage for their own goals, while those
Shell managers at first did not know what to say
(not being in the leadership of Shell UK).
National culture appears to also have played
a role. As it had become clear during the Brent
Spar issue, stakeholders from diverse national
backgrounds acted very differently. Most notable
was that the general populations in Germany and
the Netherlands showed strong criticism toward
Shell – even to the point of acts of sabotage –
while the British population was largely silent. S
This can partly be explained in terms of interests
(dismantling the Brent Sar on land – the alterna-
tive to dumping – would, in all likelihood, happen
in the UK, something the British population
would like to prevent, while the German and
Dutch populations had no reservations of such
nature), but it can also be partly explained in
terms of different sensitivities.
The issue took a dramatic turn when the Pres-
ident of the Board, Mr. Herkstrőter, overturned
the decision of the Board of Shell UK and ordered
the tow vessels to turn around and bring the Brent
Spar back to the North Sea (it had not yet reached
S 2314
its final destination). It may never be clear what
made him make this decision, which, in Shell
terms, was quite revolutionary, but one factor
probably was that he noticed that Shell
employees were upset about the situation. The
overwhelming majority of them were not
informed enough to know whether the decision
to dump the Brent Spar was responsible or not,
but they did all read newspapers in which their
company – one they were usually proud of – was
accused of terrible things. This caused dissatis-
faction among the employees. Presumably,
Mr. Herkstrőter realized that even, or especially,
one of the best performing companies in the
world could not do without motivated employees.
The Brent Spar case holds many lessons about
stakeholder management. One such lesson is that
communicating with external stakeholders is at
the same time also communicating with internal
stakeholders (your employees also read newspa-
pers and watch television). Some managers did
not realize this in the past, only to discover that
their employees also read newspapers; in other
words, what you say to the general public through
the media will also reach your employees (and
other stakeholders). Another lesson has to do with
silent stakeholders. As it would appear, Shell
(UK) studied the various interests involved in
possible ways of decommissioning the Brent
Spar but insufficiently understood some of the
stakeholders and their interests.
Future Directions
Some companies have moved from stakeholder
management to stakeholder engagement. In some
cases, this is just a change in terminology, but
where it does have meaning, it would indicate
a shift in perspective.
The shift from stakeholder management to
stakeholder engagement ties in with a different
way of looking at stakeholders. To borrow
a concept from Karl Weick (1995),
“sensemaking,” we may point out that it is
a very natural process for human beings to try to
make sense of one’s life and actions, thus devel-
oping one’s own identity in continuous
Stakeholder Thinking
interaction with one’s environment. This, of
course, also applies to stakeholders (this remark
appears to apply primarily to stakeholders as
individuals, while groups and organizations may
have a somewhat different dynamic, but also
groups and organizations may be seen as having
sensemaking; see Weick et al. (2005). This means
that the behavior of stakeholders has an origin in
the stakeholders themselves, in principle,
although it may be said that those stakeholders
act under certain influences and often in distin-
guishable patterns.
One can consider the opportunity to make
sense of one’s life and work as a stake of every
stakeholder. This is the minimal interest that
a stakeholder will try to defend. (Experiences
from change management concur with this:
typically members of an organization who expe-
rience change processes will be more inclined to
accept and ideally take part in those processes if
they make sense to them.) One could say that in
dealing with stakeholders, one has to consider
their origins, their horizons, and their journeys.
What I mean by this is that stakeholders have
identities (personal, cultural, etc.) in which their
interests are rooted, they have wishes concerning
what they would like to accomplish in relation to
those interests, and they have their own ways of
designing the journeys that connect the two (even
if the journey has been given to them from tradi-
tion, a leader academic evidence, or some other
source, they still have made it their own). For
anyone involved in stakeholder processes, it
makes sense to not only know the stakes of the
stakeholders but also witness the journeys those
stakeholders have chosen for themselves.
Dialogue is the most suited style of communi-
cation for interacting with stakeholders, who then
are not “managed”; the best way to describe the
interaction is then “engagement.” But “dialogue”
is a notion that is easily misunderstood. It is often,
unfortunately, associated with the notion “con-
sensus,” which leads to the misunderstanding that
dialogue would be a kind of bargaining process
leading to the most common denominator. Such
a process may be useful in certain circumstances,
but it is not what we, here and in the context of
stakeholder engagement, want to treat as the
Stakeholder Thinking
meaning of “dialogue.” It is relevant here to point
to the research of Bill Isaacs, who gave his book
(1999) on dialogue the very apt subtitle “the art of
thinking together.” It explains that dialogue is, at
least potentially, a form of communication that is
explorative and highly creative. But “creative”
does not mean that dialogue is without structure
or boundaries. On the contrary, dialogue requires
a certain realm of safety, in the literature called
a “container.” This is precisely because of the
type of freedom that is applicable to dialogue
and that is the freedom to express anything with-
out any reserve. This is not always easy or even
prudent, especially not within the organizational
context, and for that reason, establishing a realm
of safety is so important. Another characteristic
of dialogue, and highly pertinent to stakeholder
engagement, is the personal attitude toward com-
munication. In most other forms of communica-
tion, the energy is between two, or more, persons
who are focused on each other, often to the point
that they try to convince others or engage others
in their actions and ideas. This is why communi-
cation is often not creative: communication can
be threatening, as others may attack our ideas or
steal them while we feel pressed to defend those
ideas. But with dialogue, ideas are only moments
in an ongoing creative process. The focus is no
longer on protecting or attacking ideas but on
what one has in common with others and the
ideas one can, together with those others, explore
to honor shared interests and responsibilities.
This is why dialogue is often the most suited
style of communication within teams: in most
teams, the members have a challenge that they
share and are committed to while there is no
straightforward answer or approach to that chal-
lenge that anyone of the members can develop
individually, so they are forced or at least invited
to become creative. To put it in other terms, the
traditional interest expressing and defending
forms of communications would render a team
ineffective; what is required is a form of commu-
nication based on the idea that the team members
need each other to meet the challenge and pref-
erably like to meet each other in that challenge.
A proper understanding of dialogue will help
to understand the kind of transformation that
2315 S
stakeholder engagement entails. Stakeholder
engagement has in common with teamwork that
it needs a style of communication in which nei-
ther of the communication partners can claim to
have all of the answers. There are interests to be
expressed and defended within stakeholder
engagement, and this cannot be avoided, but in
using dialogue as the style of communication
(better: in developing this style together), there
is the possibility of seeing those interests together
in a larger context, which offers new venues for
understanding each other and each other’s inter-
ests. This is transformative for managers, who
traditionally have been put in charge of
protecting interests and communicating from
those interests. Traditionally, managers have
been more trained to treat communication as
negotiation than as a shared process of explora-
tion. With dialogue, they will experience com-
munication as honoring the perspectives of at
least two communication partners who justly
claim to be taken seriously.
An important characteristic of dialogue is the
emphasis on listening, more so than is the case
with other forms of communication. It is in lis-
tening that we learn about the other and we allow
the other to teach us about ourselves, as in using
a mirror. Listening also forms an exercise in
humility, which is characteristic of dialogue. By
this, I do not mean that one has to step back from
defending one’s interests (one will rather be
much stronger rooted in doing so) but that
a meaningful interaction with others aimed at
a shared goal benefits from not primarily thinking
in terms of one’s own ego issues – issues that are S
legitimate but hold the risk of creating barriers
with others and disturbing shared creative
processes.
From the work of Emmanuel Levinas, we can
borrow the notion of “face” (already familiar to
those who are well versed in Chinese culture).
The way in which Levinas described dialogue is
a meeting with someone through “looking some-
one in the face,” as opposed to treating someone
as “faceless.” This is reminiscent of the ethics of
Emmanuel Kant, who argues that it is morally
better to treat other human beings not just as ends
but also as means (there will always be some kind
S 2316
of ends relationship, but treating someone merely
as an end is considered by him to betray human
dignity).
As business projects are becoming more com-
plex, it is increasingly relevant to look at the
stakeholders who will make the process
a success or failure. As is the case with strategy,
projects have become, over the years, more and
more difficult to plan, partly because of the vari-
ety of players and their interests and expectations.
It is increasingly becoming clear that the com-
plexity within complex projects stems for the
most part from their stakeholder dimensions.
Other elements of complexity, such as technol-
ogy, are far better to plan than the various dynam-
ics brought in by stakeholders.
Stakeholders are increasingly relevant for strat-
egy, both in the sense of strategy preparation and
in the sense of strategy implementation. In the first
sense, stakeholders are both the realities that have
to be properly understood and the partners in
collecting information. In the second sense, it has
to be understood that stakeholders have, at least up
to a point, to be taken into account in order to
assure the viability of a chosen strategy. Stake-
holders can be approached proactively in the
sense that their dynamic is benefitted from for
the organization’s success, but this can also be
done from a mentality of risk management, as
risk to the success of a chosen strategy often has
to do with an unfortunate impact by stakeholders.
There is an old case from ethics for paying
attention to stakeholders. One could say that the
charity commandment from Judaism and Chris-
tianity – “love thy neighbor as thy self” – is an
early form of the moral call for considering stake-
holders in one’s considerations (there are similar
commandments in Buddhism, Hinduism, and
Confucianism).
Cross-References
▶ Secondary Stakeholders
▶ Shareholder Theory
▶ Stakeholders
▶ Strategic Corporate Social Responsibility
Stakeholder-Oriented Policy
References and Readings
Carson, R. (1962). Silent spring. New York: Houghton
Mifflin.
Donaldson, T., & Preston, L. E. (1995). The stakeholder
theory of the corporation: Concepts, evidence and
implications. The Academy of Management Review,
20(1), 65–91.
Freeman, R. E. (1983). Strategic management –
A stakeholder approach. New York: Cambridge.
Freeman, R. E., Harrison, J. S., & Wicks, A. C. (2007).
Managing for stakeholders – Survival, reputation,
and success. New Haven/London: Yale University
Press.
Friedman, M. (1970, September 13). The social responsi-
bility of business is to increase its profits. The
New York Times Magazine.
Remmé, J., et al. (2008). Leadership, change, responsibil-
ity (Maastricht school of management – Series in
intercultural and global management). Oxford: Meyer
and Meyer Media.
Schouten, E. M. J., & Remmé, J. (2006). Making sense of
corporate social responsibility in international busi-
ness; Experiences from shell. Business Ethics:
A European Review, 15(4), 365–379.
Weick, K. E. (1995). Sensemaking in organizations
(Foundations for organizational science). Thousand
Oaks, CA: Sage.
Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2005).
Organizing and the process of sensemaking. Organi-
zation Science, 16(4), 409–421.
Stakeholder-Oriented Policy
▶ Sanpo-yoshi and CSR
Stakeholders
Karen Becker-Olsen and Kara Moynihan
School of Business, The College of New Jersey,
Ewing, NJ, USA
Synonyms
Backer; Interested parties; Investors; Share-
holder; Sponsor
Stakeholders
Definition
“Stakeholders are those individuals and organi-
zations that are influenced by, or are able to
influence, the activities of a firm” (Freeman
1994). The concept of corporate social responsi-
bility (CSR) builds on the idea that the interest of
some stakeholders should not be sacrificed to the
interest of other stakeholders and it is a firm’s
task to create value for all of its stakeholders.
This is not to suggest that all stakeholders can
be satisfied completely and simultaneously; in
fact, firms will generally need to balance the
needs of one group against the needs of another
group.
More specifically, a stakeholder is an individ-
ual or group with a vested interest or “stake” in
the business and typically stands to gain or lose
value depending on the firm’s decisions and
policies. Typical stakeholder groups include
managers, investors, shareholders, employees,
customers, suppliers, government, and communi-
ties all with special interests and needs directed at
the firm. When a firm implements a more envi-
ronmentally friendly waste management or pol-
lution reduction program, the community at large
benefits in both the short term and long term,
while return on assets may attenuate over the
short term, yet rebound in the long run. Alterna-
tively, a firm in a developing nation could invest
in employees via educational programs and
health screenings, thus satisfying the needs of
the employees, but increasing costs to the firm.
Introduction
Discussions on stakeholder theory commenced in
the early 1980s as scholars such as Freidman and
Levitt articulated their beliefs that a firm’s only
responsibility was to making a profit for share-
holders. Of course, this was to be accomplished
within the confines of governmental regulation
and standard legal practices. Anything beyond
this was touted as socialism. Friedman and his
colleagues argued that that social and community
obligations were outside the reasonable
2317 S
responsibility of the firm. It was their belief that
social- and community-based programs were the
responsibility of governments and that via tax
revenues, not corporate donation, these programs
were to be funded.
Conversely, another group of scholars, led by
Clarkson, espoused the notion that a firm does
not operate in a vacuum and that as part of the
community, it does have a responsibility to
the community. Their argument, in favor of a
broad corporate social responsibility model, was
that the firm was intimately tied to shareholder,
employees, customer, communities, and even
governments; thus, the firm did have a responsi-
bility to ensure their needs were being addressed.
Members of these groups are vital to the continu-
ing successful operations of the firm, and thus, if
the needs of these groups are overlooked, the firm
will suffer. This group also acknowledges that
there are more secondary stakeholders that influ-
ence the firm’s activities even without being
directly engaged in any transactions with the
firm. These secondary stakeholders, such as
advocacy groups, might impact the firm by call-
ing for boycotts or being a source of unwanted
negative publicity. This more normative
approach is different from the pragmatic model
in which relationships with stakeholder groups
are instrumental in maximizing profit. However,
this descriptive approach, which includes instru-
mental and normative components, is used more
by managers because they allow the firm to
analyze and evaluate the relationships with
stakeholders. It can be further argued that this
approach provides a tool for managers to under- S
stand conflicting value perspectives across
stakeholders.
Although in practice, investors and consumers
are driving forces for firm’s CSR actions and
policies, a broader CSR perspective is making
its way to mainstream policy. Most business enti-
ties accept the more macro approach to satisfying
stakeholders, because it encompasses all parties
who have a vested interest in the company, no
matter how small, and values their thoughts, feel-
ings, and actions toward their business which in
turn can affect more than just the company’s
S 2318
bottom line. Further, standardization and formal
metrics such as GRI and ISO standards are mak-
ing it easier for different stakeholders to evaluate
the firm’s social performance. Thus, as various
stakeholders evaluate the legitimacy of an orga-
nization, they are increasingly looking beyond
financial performance and wealth creation to the
firm’s ability to create social wealth.
Key Issues
Freeman notes that classifying stakeholders is
really a game of who or what really counts
(Freeman 1994). Thus, when firms analyze stake-
holder needs, they typically classify stakeholders
in groups that reflect the particular stakeholder’s
ability to direct and influence the firm’s processes
and outcomes. Typically this influence centers
around the group’s power with the firm, their
ability to influence the firm, the legitimacy of
the claim against the firm, and the urgency of
their needs. Stakeholder salience is a combina-
tion of these factors. Highly salient groups are
ones that have power because they add value to
the firm or because they can put the firm at risk.
Thus, primary stakeholder groups such as inves-
tors, employees, and customers are considered
the most salient groups in that they exhibit
power, legitimacy, and urgency.
Investors
Considered a primary stakeholder, investors are
a crucial component to any company, and without
them, the company would be unable to continue
their operations. Investors often have as their top
priority the return on their investment and will
support firms whose CSR initiatives help to
increase that return. Thus, creating strategic
CSR programs and goals ensures that the firm
will meet these investor needs. Therefore, inves-
tors usually rank high on a company’s stake-
holder priority list. Any company’s primary
goal should be to create and maintain a level of
trust with its investors, so much so that almost all
Fortune 500 companies have some type of CSR
plan in place to promote good corporate citizen-
ship between the company and its investors
Stakeholders
(Cheney 2010). As noted in Financial Executives
International, “Investors may shy away from
companies that have CSR policies that are so
inadequate or ignored that the companies fail to
qualify for socially responsible investment funds.
This notion is echoed in research that indicates
many start-up companies are making an effort to
incorporate CSR into the early stages of their
business plan to attract potential investors
(Muller and Kolk 2009). This indicates the rec-
ognition that investors want to invest in
CSR-minded companies and that in order to
bring investors in as economic support
a company must show solid CSR efforts.
Using CSR to attract investors is a global phe-
nomenon. A study on Asian markets showed that
over a three-year period there was statistically
significant data to support the idea that CSR
increases the value of a company (Cheung et al.
2010). Conversely, if a company does not have
socially responsible values or a sustainable eco-
friendly product, it can lose investors. In the
United States, the California State Treasurer
removed money backing tobacco stocks and
reinvested elsewhere, all in the name of socially
responsible investing (Arshad 2008). In Europe,
this is particularly strong with investment funds
flexing their ethical muscles by choosing to not
investing in companies or reducing their holdings
in companies that have poorly articulated CSR
programs as well as CSR-related infractions.
Additionally, these investment firms are willing
to pay a premium of more than 20 % for shares in
a company that go beyond mere compliance and
demonstrate good corporate governance. Thus,
value is created via strategically oriented strong
CSR programs.
Employees
Another primary stakeholder group is employees
of a company, the inner workings of an organiza-
tion. CSR is extremely important and relevant to
this category of stakeholders because of their
direct and immediate impact on the firm’s finan-
cial performance, giving this group extreme
power and legitimacy. Although the needs of
employees can change from firm to firm and
across markets and cultures, understanding
Stakeholders
human rights, safety, labor standards, and eco-
nomic welfare issues associated with employees
is critical for firms on two levels. First, it has been
shown that strong managerial candidates from
top universities tend to gravitate toward firms
with outstanding CSR records. Additionally, in
attracting and retaining low-skilled employees,
CSR programs that focus on education, basic
human rights, and quality of life issues are impor-
tant. Second, employees serve as community
spokes people for the given firm, thus
maintaining a happy workforce is essential in
meeting broader community goals and boosting
productivity.
It has been suggested that it is best to engage
this stakeholder group in the firm and its success,
rather than manage it from the top down (Cheney
2010). This would suggest that firms need to
listen to employees and determine what their
needs are, and how those needs fit with the
growth and development of the firm. Addition-
ally, firms need to make sure that employees are
aware of various CSR initiatives and corporate
value statements. The recognition of the value of
all employees to the ongoing nature of the busi-
ness is important as more firms are realizing that
having a strong employer brand is critical for
hiring and retaining talent.
Trust is a key component in dealing with this
stakeholder group; if trust is distorted between
a company and its employee, it could be an eter-
nal sore spot. According to the Maritz Study on
Employee Distrust For Leadership, incidences
occur all the time during pivotal management
decisions, “some of the draconian measures
United Airlines took a few years ago when they
were on the cusp of bankruptcy, like eliminating
worker pensions. Employees are still bitter. . .”
(Simmons 2010). The study goes on to note that
trust is most vulnerable in times of economic
turmoil, for the respective country and/or for the
organization. This sentiment is echoed across
a variety of firms and reports which suggest that
the key to engaging employees in CSR is to move
away from “managing” this stakeholder group to
engaging them. CSR is not just one person’s idea
or an executive board’s collective wishes; an
effective CSR campaign must be accepted
2319 S
throughout a company, starting with employees.
Repercussions of unhappy employees in the past
have resulted in strikes and discontent severe
enough to end employment. In many cases,
employees are an accurate indicator of company
performance. High turnover rates, repeated
strikes, and low-morale employees are all indic-
ative of systemic problems with the firm.
Although not all employees will be satisfied
in a given employment environment, the firm
does need to look within and make sure employee
needs are being addressed and that employees
feel a sense of ownership and pride in the firm.
Customers
Like investors and employees, customers repre-
sent another key stakeholder group that has an
interest in the firm. Customers dictate the type of
products and services a company might offer and
are also imperative in terms of who the company
must please, not just with their products but with
their actions as well. As an important stakeholder
to a company, they provide revenue and, based on
their preferences, can pave the way for the com-
pany to expand their product and service offer-
ings. Maintaining customer loyalty is key with
this stakeholder group, as a loyal customer base
will constantly patronize a business, thus provide
stable and even growing sales.
CSR is also crucial in developing positive
brand attitudes and ultimately influencing the
actions of the customers. A company’s “sales
may increase for companies with well-publicized
CSR policies. . . They could also be hurt by pos-
sible consumer boycotts over social or environ- S
mental issues” (Cheney 2010). This is
exemplified in a situation with Whole Foods gro-
cery store after their CEO wrote an opinion piece
in the Wall Street Journal stating that Americans
do not have a right to healthcare – an opinion
opposed by a large portion of the Whole Foods
customer base. In retaliation, former Whole
Foods devotees responded to Mackey’s article
by picketing outside branches of the store in
Washington DC, Maryland, New York, and Aus-
tin, Texas. Customers are clearly taking Whole
Foods value system to hear and expecting the firm
to stand strong on more than organic and
S 2320
microfood-related health issues to more macro
concerns about health. Although Mackey has
since recanted part of his piece and has tried to
distinguish his personal views from the firm’s
values, customers can have long memories.
Community
Community can account for a very large stake-
holder group, in some cases a larger percentage
than customers or employees. In context,
a company’s community can be the actual geo-
graphic location of a company’s surrounding
community or a larger and more abstract term as
in the business community. Depending on the
size and reach of a company, the community
could be one geographical area or it could span
continents if a company operates or sells products
globally. As a result, companies can find it chal-
lenging to appease such a sizeable group. Further,
the interests of the community are broader and
perhaps more long range than that of the firm or
other stakeholder groups related to the firm. For
example, it is not uncommon for a community to
protest if they feel an establishment is not aligned
with the goals the town is aiming to uphold.
When an adult club opened their doors for busi-
ness in Port Chester, NY, the community was
outraged and protested for weeks to have the
establishment removed, as they did not want
their town to be associated with what they felt
was an immoral business (Lombardi). Instances
like these occur frequently when two stakeholder
groups clash. This also occurs frequently in the
United States between any given community of
activists and the government, picketing and pro-
test take place to let the government know how
the citizens or community feels about policies the
government is reviewing.
In some instances, the relationship between
the two groups can be viewed as a cause and
effect relationship, where the actions of one
group can provoke a response by the other. For
example, in 2010, a Minneapolis Target store
made news when it donated $150,000 to MN
Forward, the PAC that backs a GOP-endorsed
candidate who happens to be known for opposing
gay rights (Mullins 2010). This resulted in
a backlash from the gay community who
Stakeholders
demanded they remedy the situation. This
prompted a letter from their CEO addressing the
community, “The intent of our political contribu-
tion to MN Forward was to support economic
growth and job creation. . . I realize our decision
affected many of you in a way I did not anticipate,
and for that I am genuinely sorry.” Even though
the retailer has been known to support gay causes,
and even extends partner health benefits to
employees, they were in talks with The Human
Rights Coalition shortly after to arrange
a matching donation to go to the other side of
the issue. This shows that businesses cannot only
focus on economic issues; community issues
need to be considered as well. By appeasing the
community, the company will have obtained
goodwill with the people, even if only for
a short period of time.
Government
The government is a stakeholder group that busi-
ness should always be in good graces with, as
a relevant relationship will be essential to main-
tain a smooth running operation. Corporations
engage with governments on a variety of issues,
not just because it is necessary, but to avoid
legislation. According to the Institute for
Human Rights and Business as well as other
nongovernment organization, CSR reporting
will become a requirement as more governments
adopt legislation requiring social audits and pub-
lic reporting. In some cases, this may take the
form of an incentive for companies to report
voluntarily but with an understanding that
mandatory requirements might be legislated if
companies do not respond positively.
This is also echoed globally as government’s
role in Europe has shifted as well. CSR strategies
in the past were voluntary strategies used by
companies for philanthropic endeavors; but in
a recent trend, governments have taken a larger
interest in CSR, and therefore, companies will
need to take governments’ expectations of corpo-
rate CSR into account. One study took a sample
of 72 companies across various business sectors,
headquartered in 15 countries, and investigated
their 129 CSR solutions that they currently had in
place (Louche et al. 2010, p. 293). It showed that
Stakeholders
only 17 % of CSR solutions catered to the needs
of the government, with only poor and needy
having a lower percentage.
Due to the dominance and authority of the
government as stakeholders, one suggestion is
for a company to be intelligent and realize that
governments, like companies, have stakeholder
they need to appease as well, and it will incorpo-
rate the knowledge about the government’s own
stakeholders into its strategical relationship and
CSR plans aimed at the government. This is one
tactic that certainly puts priority on governmental
stakeholders.
Future Directions
Understanding the interrelationships of various
stakeholders is important for the firm, but provid-
ing quality interactions is critical for the firm to
develop a strong strategic approach to CSR that
satisfies competing needs. Thus, as firms move
forward and stakeholder expectations increase,
firms will need to build their relationships more
proactively. In the infancy of CSR, firms could
satisfy many stakeholders by simply being com-
pliant. With CSR in a growth phase, firms need to
move beyond compliance to responsiveness and
meet stakeholder needs with an eye on sustain-
ability, customer satisfaction, employee morale,
and return on investment. In the future, it is likely
that firms will need to go even further and proac-
tively engage in maximizing economic social and
environmental value. Thus, thinking about eco-
logical innovation in a profit maximizing context
will be critical.
Another consideration is global expansion. As
companies expand internationally, their reach
and thus their stakeholders’ interests will expand
at the same rate. Companies will need to take into
consideration stakeholders overseas and dealing
with customers and employees of all nationalities
and cultures with potentially conflicting values.
This will further force a company to continually
analyze and improve upon their CSR strategies
and efforts. As a result, companies may have
a harder time recognizing not only who their
stakeholders are but how to satisfy their needs.
2321 S
The proliferation of secondary stakeholders
will also be an issue. Technology and more
advanced communication allow various small sec-
ondary groups to have power and influence with
firms. These secondary stakeholders (minorities,
women, environmental groups, political groups,
etc.) will have to be attended to and, in turn, may
influence the economic viability of the company
(Buchholz and Rosenthal). While a company must
tend to all their stakeholders, it is inevitable that no
matter what they try to do, not every stakeholder
will be satisfied. At the end of the day, a company
exists to make a profit; if a company fails finan-
cially, no stakeholder will be satisfied.
Cross-References
▶ Friedman, Milton
▶ Primary Stakeholders
▶ Shareholder
▶ Socially Responsible Investing
▶ Stakeholder Engagement
▶ Stakeholder Theory
References and Readings
Arshad, A. (2008, August 1). Socially responsible. . .wait
no. . . IR-responsible Investing. The New CSR.
Retrieved October 26, 2010, from http://newcsr.
wordpress.com/2008/08/01/socially-responsiblewait-
no-ir-responsible-investing
Cheney, G. (2010). Financial executives and CSR. Finan-
cial Executive, 26(5), 26–29.
Cheung, Y., Tan, W., Ahn, H., & Zhang, Z. (2010). Does
corporate social responsibility matter in Asian emerg-
ing markets? Journal of Business Ethics, 92(3), S
401–413.
Freeman, E. (1994). Strategic management: A stakeholder
approach. Boston: Pitman.
Lombardi, K. Communities study Port Chester’s fight over
topless bar. New York Times – Breaking News, World
News.
Louche, C., Filho, W. L., & Idowu, S. O. (2010). Innova-
tive corporate social responsibility. Innovative CSR:
From risk management to value creation (p. 3).
Sheffield: Greenleaf.
Muller, A., & Kolk, A. (2009). CSR performance in
emerging markets evidence from Mexico. Journal of
Business Ethics, 85, 325–337.
Mullins, B. (2010, August 7). Target discovers
downside of political contributions. WSJ.com. Busi-
ness News & Financial News – The Wall Street
S 2322
Journal. Retrieved October 26, 2010, from http://
online.wsj.com/article/SB
Simmons, B. L. (2010). Maritz study on employee distrust
for leadership. In Positive organizational behavior
(Web). Retrieved October 10, 2010, from http://
www.bretlsimmons.com/2010-04/maritz-study-on-
employee-distrust-for-leadership/
State Administration
▶ Government (Role in Regulation, etc.)
Statement of Business Practice
▶ Corporate Codes of Conduct
Statement of Philosophy
▶ Corporate Mission, Vision and Values
Statement of Philosophy and Value
▶ Mission Statements (Credo, Way, Vision)
Statement of Purpose
▶ Corporate Mission, Vision and Values
Statutory Audit Directive
▶ European Union Directive: The 8th Company
Law Directive on Disclosure and Transparency
Stereotyping and Bias Against
the Old
▶ Ageism
State Administration
Stewardship
▶ Intergenerational Equity
▶ Management
Stewardship Theory
Kojo Menyah
London Metropolitan Business School, London
Metropolitan University, London, UK
Synonyms
Altruism; Ethical leadership
Definition
Stewardship theory is a framework which argues
that people are intrinsically motivated to work for
others or for organizations to accomplish the
tasks and responsibilities with which they have
been entrusted. It argues that people are collec-
tive minded and pro-organizational rather than
individualistic and therefore work toward the
attainment of organizational, group, or societal
goals because doing so gives them a higher level
of satisfaction. Stewardship theory therefore
provides one framework for characterizing the
motivations of managerial behavior in various
types of organizations.
Introduction
A steward is one who takes on the responsibility
of caring for something on behalf of another
person or group of people. Therefore, stewards
do not have ownership of what they have respon-
sibility to take care of, but must, nevertheless,
carry out their duties conscientiously since they
have to render account of what they have done to
the owner. Stewards generally take care of the
property or assets of other people, even though
Stewardship Theory
the concept is applicable to taking responsibility
for caring for other people as well. A key charac-
teristic of a steward is accountability for his or her
actions. The accountability obligation, therefore,
requires stewards to make decisions and take
actions that will benefit the owner irrespective
of the moral lens in which they may view the
owner. This is exemplified in the biblical story
of the talents in which the owner rebuked the
steward who buried the money he was given,
rather than investing it to earn interest because
he thought that the owner was a hard and mean
person. Stewards must therefore be able to sup-
press their personal interests and ego in order to
act responsibly on behalf of the owner or princi-
pal. In other words, the behavior of stewards
arises out of a sense of duty or obligation to
behave responsibly in managing what has been
entrusted to them by the owner or principal
regardless of their personal interests and con-
cerns. The question that naturally arises is how
this sense of obligation arises in stewards given
that self-interest plays a major part in people’s
actions? The sense of obligation of a steward is
likely to arise in people who have the personality
trait of conscientiousness which makes them do
what is right for its own sake (Fong and
Tosi 2007). This suggests that the foundation
for stewardship behavior lies in an individual’s
makeup and experiences which then manifests in
their behavior. Stewardship, therefore, has
a psychological foundation.
Key Issues
Dimensions of Stewardship Theory
In light of the above, stewardship theory has been
developed as a framework for understanding the
motivations for the behavior of a steward in
organizational and societal contexts. Stewardship
theory therefore differs from agency theory
which is based on individualism and assumes
that the motivation underpinning the behavior of
people in organizations is the satisfaction of their
self-interest. In contrast, stewardship theory
argues that people as stewards are collective
minded and pro-organizational and therefore
2323 S
derive a higher utility from working toward the
attainment of organizational, group, or societal
goals. This does not mean that stewards neglect
their personal goals. Stewards recognize the
trade-off between personal needs and organiza-
tional goals but believe that by working to
achieve organizational or collective objectives,
their personal needs would also be met (Davis
et al. 1997). In this sense, stewardship behavior is
related to altruism which is about how an indi-
vidual’s utility is defined on his or her own
consumption as well as the consumption of
others. In other words, altruism involves actions
that allow the individual to simultaneously satisfy
personal preferences as well as the preferences of
others. Such actions enable people to feel good
about helping others which can be used to explain
charitable contributions, volunteer behavior, and
intergenerational bequests. Managers with such
behavioral tendencies are likely to be inclined to
exhibit stewardship behavior.
In the early 1990s, stewardship theory began
to emerge as an alternative framework for
analyzing and understanding the motivations
underlying the behavior of managers in organi-
zations in contrast to the traditional paradigm of
agency theory, especially in profit-making
organizations. In an organizational context, stew-
ardship theory therefore deals with the psycho-
logical factors that underpin behavior as well as
the sociological factors like organizational
culture and situational factors that provide the
context within which stewardship behavior may
be demonstrated. The theory is based on assump-
tions about the model of man, the psychological S
mechanisms underlying behavior, the social con-
text, and situational mechanisms in which such
behavior is exhibited (Davis et al. 1997).
In this formulation, stewardship theory sug-
gests that there is a desire on the part of individ-
uals to achieve higher order needs of growth,
achievement, and self-actualization. In effect, it
relates stewardship behavior to Maslow’s hierar-
chy of needs where stewards are of the self-
actualizing type in contrast to managers who
may be more concerned with rather basic needs.
Such a characterization, however, appears sim-
plistic since behavior may be motivated by both
S 2324
higher order needs as well as basic needs. Never-
theless, stewards are seen to have an intrinsic
motivation for their behavior which makes it
easy for them to identify themselves with the
principal and have a commitment to achieve the
goals of the organization. Intrinsic motivation
may be enhanced by the meaningfulness of
work, responsibility for outcomes, and knowl-
edge of actual results, all of which relate to task
characteristics. More directly, intrinsic motiva-
tion can arise from self-leadership which is
a self-influence perspective that makes an indi-
vidual to lead “oneself towards the performance
of naturally motivating tasks as well as to do
work that must be done but is not naturally moti-
vating” (Manz 1990). For such intrinsically
motivated people, the source of their power
derives from their personality as committed indi-
viduals or experts keen on building long-term
relationships within an organization in which
trust and the collective approach to addressing
issues become the norm. Viewing stewards as
committed individuals does not imply the
absence of reasoned assessment as the basis for
their actions. It only shows that stewards have
a sense of belonging to an organization which
can achieve its purpose through the cooperative
action and behavior of its members.
Even though these early notions of steward-
ship theory focused on the behavior of managers
toward the owners of an organization, there are
other interested groups – stakeholders whose
implicit and explicit contracts with the firm are
needed for the firm to achieve the objectives of its
owners. Since stewards are pro-organizational by
motivation, it does not require any stretching of
the imagination to recognize that managers in the
stewardship mode would be inclined to work in
the interest of all stakeholders. A steward would
therefore show commitment to all stakeholders as
he or she rises above the level of an agent.
Stewardship theory is also thought of as ethi-
cal leadership in which “organisational actors
aim to balance their obligations to stakeholders
inside and outside the organisation while uphold-
ing a broader commitment to societal and univer-
sal moral norms” (Hernandez 2008). Ethics as the
basis for behavior and action, however, means
Stewardship Theory
that individuals make free choices between right
and wrong acts and accept responsibility for their
actions. Ethical leadership therefore requires the
application of moral development acquired from
childhood, through adolescence into adulthood
which enables people to reason about ethical
dilemmas and make the morally appropriate
decision. Therefore, ethical stewards are identi-
fied as those who honor duties to employees,
stakeholders, and society in the pursuit of long-
term wealth creation (Caldwell et al. 2008).
Stewardship theory has therefore evolved to
encompass a deep commitment to uphold the
fiduciary obligations to institutional interests as
well as a nonfiduciary, but still moral obligation
to other stakeholders affected by organizational
actions.
Even though psychological characteristics and
moral values can predispose an individual to
stewardship behavior, people’s actual behavior
in an organizational or situational context when
they have to make the ethically appropriate deci-
sion requires moral courage. Courage has been
characterized as “the disposition to voluntarily
act, perhaps fearfully, in a dangerous circum-
stance, where the relevant risks are reasonably
appraised, in an effort to obtain or preserve
some perceived good for oneself and others”
(Shelp 1984). Therefore, demonstrating ethical
stewardship behavior in practice requires taking
risks to act in ways that will uphold ones moral
principles and standards despite its potential
impact on the individual’s personal and profes-
sional well-being, esteem, and reputation.
Stewardship Theory in Profit-Making
Organizations
The development of stewardship theory has been
part of the wider search for alternative theories to
characterize the relationship between managers
on the one hand and shareholders and other stake-
holders on the other, outside of the dominant
principal-agent theory. The purpose of such
a theoretical development is to help articulate an
alternative model of governance in corporate
entities and other organizations. In widely held
corporations, a stewardship theory-based model
of governance would have features that are
Stewardship Theory
different from and sometimes diametrically
opposed to those that would be predicted by
agency theory.
Under stewardship theory, there is no conflict
of interest between managers and the share-
holders in the firm. The interests of the two
parties are aligned toward the achievement of
the objective of shareholders and other stake-
holders. Within such a framework, there would
be no need for monitoring mechanisms to ensure
that managers properly carry out their responsi-
bilities. In fact, strong monitoring can generate
resentment on the part of managers as it implies
a lack of trust between managers and share-
holders which stewards cherish. Secondly, the
provision of financial incentives to align the
interests of shareholders and managers would
not be considered important since stewards do
not see themselves to have objectives that are
different from those of shareholders and other
stakeholders.
In relation to board structure and characteris-
tics, stewardship theory would suggest that the
same individual should hold the position of chief
executive officer and chairman of the board (CEO
duality) in contrast to the prediction of agency
theory under which the monitoring of the CEO is
required to ensure that self-interested behavior of
the manger is constrained. In stewardship theory,
however, CEO duality is encouraged as managers
are assumed to work in the interest of the organi-
zation and should therefore have the freedom and
discretion to manage the firm and respond to
changing circumstances as they would deem fit
for the benefit of stakeholders.
Similarly, the role of outside or nonexecutive
directors is seen under agency theory to be impor-
tant in monitoring the decisions of inside or exec-
utive directors. However, under stewardship
theory, inside directors know the company and
its activities better and have access to all relevant
information required to make good decisions.
Therefore, the theory suggests that the board of
directors should be dominated by inside directors
who will work with the CEO to achieve the
objectives of shareholders. This avoids the lack
of knowledge and information asymmetry prob-
lem which faces independent directors when they
2325 S
trying to monitor within the context of agency
theory and have to depend on the integrity of
managers to provide them with relevant informa-
tion for decision making. More generally, stew-
ardship theory sees the role of the board as
facilitating the work of management rather than
that of monitoring it as understood in the agency
theory approach to corporate governance. There-
fore, the main function of the board is to advise
and support the work of managers.
While the above implications of stewardship
theory for corporate governance have been
argued in the literature, their empirical testing
has rather been very limited. More importantly,
the available empirical evidence is conflicting.
While some early tests of stewardship theory’s
implications for board structure and attributes
suggested some support for the theory, more
recent empirically robust studies show that the
stewardship theory approach to governance gen-
erates inferior performance, relative to the gov-
ernance approach suggested by agency theory.
The limitations of stewardship theory arise
because managers may not always act as good
stewards and they can and sometimes do exploit
their position to make decisions that are not in the
interest of their shareholders. Stewardship theory
also ignores the benefit of independent advice
that outside directors can bring to an organization
as well as how they can facilitate access to much
needed external networks that may be necessary
for a firm to achieve better performance. Stew-
ardship theory, therefore, at best can only offer
some guidance on some aspects of how boards
should be structured but does not provide S
a comprehensive framework to guide board orga-
nization in a way which would yield superior
performance (Nicholson and Kiel 2007).
Stewardship Theory in Nonprofit-Making
Organizations
Unlike for profit corporations whose members
have ownership rights because of their capital
contributions, nonprofit organizations are usually
created as membership associations without
ownership rights to the assets and profits of the
organizations. Therefore, the relationship
between the membership and the governing
S 2326
board and managers is not clearly defined. In an
agency theory framework, the members would be
the principals in whose interest the board and
management team should manage the organiza-
tion. However, in the absence of the profit motive
and transferable ownership rights as well as the
lack of external monitoring mechanisms such as
the market for corporate control, the board
remains the main mechanism for controlling the
behavior of managers to ensure that they work
toward achieving the objectives of the organiza-
tion. Given the major role of the board, the ques-
tion that naturally arises is how its membership
should be constituted. This can be done by creat-
ing a board which has representation from vari-
ous stakeholders with an interest in the activities
of the organization. It can also be done by using
the democratic model of governance where board
members are elected by and represent the various
interests of the members. The accountability of
the board members therefore comes through
reelection at periodic intervals. However, this
may lead to the board being made up of lay
members who have a political role to reconcile
the interests of various stakeholders within the
organization. On the other hand, stewardship
theory which implies agreement between the
interests of the board and members would suggest
that the board should be made up of experts who
are in a position to assist management to achieve
the objectives of the not-for-profit organization.
Such an approach to board membership reduces
the accountability relationship between the mem-
bers and the board which can become entrenched
and not act in the interest of the organization. For
such dysfunctional behavior to be avoided or
minimized, the board members must have some
intrinsic motivation to carry out their responsibil-
ities in a way that would benefit the not-for-profit
organization. Whether or not this is the case in
not-for-profit organizations is an empirical ques-
tion. Some control over the behavior expert board
members is, however, exercised through legisla-
tion in some countries such as the United
Kingdom Charities Commission which regulates
most not-for-profit organizations.
The advantage of viewing the governance
model in not-for-profit organizations from the
Stewardship Theory
stewardship rather than a democratic perspective
is that it focuses on the selection of board
members from people who do not only have the
expertise but also the commitment and loyalty to
the mission of the organization. Managers in such
organizations must also be viewed in the stew-
ardship perspective. Such interest alignment of
the goals of the organization and that of manage-
ment would imply that the board takes
a partnership approach with management to
ensure the attainment of the objectives of the
organization. However, as pointed out by
Cornforth (2004), stewardship theory, like other
theories of governance, can be too one dimen-
sional because it can ignore the reality that some
of its most useful feature would only be appro-
priate at certain points in time or effective when
used in conjunction with some of the prescrip-
tions of other theories of governance. For
instance, stewardship’s emphasis on collabora-
tion and partnership can lead to groupthink
where management’s ideas are not adequately
scrutinized and challenged by the board. This
can lead to strategies not changing during good
times, but the organization’s performance deteri-
orates rapidly during economic downturn
(Sundaramurthy and Lewis 2003).
Social enterprises such as the trading arm of
charities provide goods and services but are not
profit-making organizations because they are
usually incorporated as companies limited by
guarantee. Such organizations must, neverthe-
less, compete with the private sector in the sale
of the goods and services and may not depend on
grant income. This implies that they must adopt
business methods of planning for growth and the
generation of surpluses to ensure their long-term
viability. Such organizations therefore have
objectives that are similar to that of the private
sector, while in their ownership structure, they
are not-for-profit organizations. In such organi-
zations, a combination of stewardship manage-
ment motivation and profit-making orientation
would therefore seem to be appropriate for direc-
tors to ensure profitability and avoid situations
where losses might arise and would have to be
absorbed by the charities which created them. For
this reason, stewardship principles of governance
Stewardship Theory
alone may not be adequate, and some form of
control and monitoring mechanisms prescribed
by agency theory may be relevant in the gover-
nance of such hybrid organizations.
Stewardship Theory and Corporate Social
Responsibility
Corporate social responsibility looks beyond the
obligations businesses have toward their owners
to responsibilities a company may have toward
other stakeholders and society in general. From
an economic perspective, businesses have the
responsibility to ensure the most efficient use of
society’s resources in the pursuit of profit for their
owners while complying with relevant laws and
regulations. Since stewardship theory focuses on
the motivations for the behavior of managers and
directors toward meeting the objectives their
principal, it stands to reason that the attitude of
stewardship-oriented managers and directors
toward corporate social responsibility would be
guided by the extent to which such activities help
to satisfy the objectives of their principal. This
implies that stewardship-oriented managers in
publicly held corporations would seek to imple-
ment CSR activities that are consistent with
meeting the strategic objectives of the company
for the benefit of its owners and other stake-
holders. Strategic CSR which may involve
companies in community-oriented activities
would be appropriate if it helps businesses to
achieve their strategic goals and in the process
enables firms to fulfill their fiduciary responsibil-
ities to their shareholders. Since ethical leader-
ship is a manifestation of stewardship theory, it
also provides a basis for stewardship-oriented
managers to engage with ethical CSR which
requires a firm to fulfill its morally mandatory
ethical responsibilities. This means that
a corporation has responsibilities to help solve
social problems they create or prevent social
harm that they could potentially cause. On the
other hand, it is not at all clear that altruistic CSR
which goes beyond ethical CSR by helping to
alleviate public welfare deficiencies regardless
of whether or not it will benefit a publicly held
corporation. Altruistic CSR is not appropriate for
publicly held firms because it violates
2327 S
shareholder property rights by imposing avoid-
able costs on them, could lead to higher consumer
prices and lower employee compensation, and
inconsistent with the basic idea of stewardship
which is protecting the assets or property of
another person. Nevertheless, for privately
owned firms and individuals, the stewardship
principle can be seen in the context of the biblical
doctrine “that requires businesses and wealthy
individuals to see themselves as stewards or care-
takers, not just of shareholders’ financial
resources, but also of society’s economic
resources, holding their property in trust for the
benefit of society as a whole” (Lantos 2002).
Such organizations and individuals therefore
have the motivation to contribute to charitable
organizations that provide services to alleviate
social welfare problems.
Stewardship Theory and Environmentalism
The motivation for understanding the impact of
human activities on the long-term sustainability
of natural resources and the environment has
deep roots in stewardship theory. From the view-
point of Christian biblical exegesis, human
beings have a stewardship responsibility toward
the use of resources provided by God who is the
owner and to whom they are accountable. Human
beings hold the resources of the earth in trust for
the benefit of future generations. Each genera-
tion, for the time being, is just a sojourner and
therefore has a natural and moral duty to improve
upon what has been entrusted to them for the
long-term benefit of mankind as no further inter-
vention by the Creator to restore balance is prom- S
ised. This means that there should be an
acknowledgment that there could be unknown
and dangerous consequences from human inter-
action with the biosphere which should engender
a sense of caution and humility when improving
upon the resources entrusted to mankind. From
a secular perspective, the motivation for environ-
mental concern has been attributed to an individ-
ual worldview, value system, and altruism, all of
which invariably reflect the personal moral norms
through which some individuals are motivated
to act for the greater good. The psychological
underpinning of environmentalism reflects the
S 2328
concern some people express for ensuring
intergenerational equity in human interaction
with the biosphere. While the above motivations
for stewardship behavior appears noncontroversial
at the individual as well as the level of privately
owned companies, it is not at all clear that man-
agers, as stewards, have the mandate to engage in
extensive environmentally related activities unless
they are consistent with meeting the objectives of
shareholders. This view arises from the fact that
promising to act in the interest of the principal
does not permit managers to act in ways that are
inimical to the suppliers of risk capital. Neverthe-
less, environmental responsibility can also be in
the long-term interest of an organization, espe-
cially those whose activities impact the environ-
ment in visible ways. Managers in such
organizations are subject to pressure from lobby-
ing groups and must therefore address environ-
mental concerns in a coherent and systematic
way for the purpose of ensuring the long-term
survival of the company.
Future Directions
The development of stewardship theory has
broadened the range of motivational factors
which may underpin the behavior of managers
in organizations. However, despite the persuasive
arguments of stewardship theory in characteriz-
ing managerial motivations and its associated
governance models as well as its implications
for attitudes toward corporate social responsibil-
ity, the theory on its own is unlikely to be able to
provide clear guidance for understanding mana-
gerial behavior in organizations. The continuing
challenge for further theory development is that it
stands in direct opposition to agency theory
which is based on completely different assump-
tions about the nature and motivations of man in
organizations. At the board and managerial level,
determining when and how stewardship theory
might provide an appropriate framework remains
to be identified. This can be assisted by empirical
research in organizational and experimental
settings to test the variety of hypothesis that
most of the theoretical papers on stewardship
Stewardship Theory
theory tend to generate. Empirical testing of
hypothesis would provide the basis for further
refinement of existing theoretical perspectives
on stewardship theory and how it may be used
in conjunction with other theories to shed light on
governance mechanisms and corporate social
responsibility in organizations. In particular, the
empirical study of the significance of stewardship
behavior in the not-for-profit sector may provide
insights which can enrich our understanding of
stewardship in publicly held corporations. Below
the top managerial level in organizations, further
research is also required to see how stewardship
attitudes could be embedded in organizations
to improve upon employee behavior in
organizations.
Cross-References
▶ Agency Theory
▶ Stakeholder Theory
References and Readings
Caldwell, C., Hayes, L. A., Karri, R., & Bernal, P. (2008).
Ethical stewardship- implications for leadership and
trust. Journal of Business Ethics, 78, 153–164.
Cornforth, C. (2004). The governance of cooperatives and
mutual associations: A paradox perspective. Annals of
Public and Cooperative Economics, 75, 11–32.
Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997).
Toward a stewardship theory of management. Acad-
emy of Management Review, 22, 20–47.
Fong, E. A., & Tosi, H. L., Jr. (2007). Effort, performance
and conscientiousness: An agency theory perspective.
Journal of Management, 33, 161–179.
Hernandez, M. (2008). Promoting stewardship behaviour
in organisations: A leadership model. Journal of Busi-
ness Ethics, 80, 121–128.
Lantos, G. P. (2002). The ethicality of altruistic corporate
social responsibility. Journal of Consumer Marketing,
19, 205–230.
Manz, C. C. (1990). Beyond self-managing work teams:
Toward self-leading teams in the work-place. In
R. Woodman & W. Pasmore (Eds.), Research in
organisational change and development
(pp. 273–299). Greenwich, CT: JAI Press.
Nicholson, G. J., & Kiel, G. C. (2007). Can directors
impact performance? A case based test of three theo-
ries of corporate governance. Corporate Governance:
An International Review, 15, 585–608.
Stockholm Convention (2001) 2329 S
Shelp, E. (1984). Courage: A neglected virtue in the Definition
patient-physician relationship. Social Science and
Medicine, 18, 351–360.
Sundaramurthy, C., & Lewis, M. (2003). Control and The Stockholm Convention on Persistent
collaboration: Paradoxes of governance. Academy of Organic Pollutants (POPs) is a global treaty
Management Review, 28, 397–415. with a mission to protect human health and
the environment from POPs. It was adopted on
May 22, 2001, in Stockholm by 152 governments
and put into practice on May 17, 2004. As of
Stigmatization April 2010, 170 parties have ratified the conven-
tion. The United Nations Environment
▶ Discrimination Programme (UNEP) defines POPs as chemical
substances that persist in the environment,
bioaccumulate through the food web, and pose
a risk of causing adverse effects to human health
Stock Tipping and the environment. As a response to evidence
of the long-range transportation of these sub-
▶ Insider Trading stances to regions, where they have never before
been used or produced, and the consequent
threats that they pose to the environment through-
out the world, the international community has on
Stockholders several occasions called for urgent global actions
to be taken to reduce and eliminate the release of
▶ Primary Stakeholders these chemicals. Although the environmental and
health effects of toxic chemicals have been
widely researched by various scientists for
many years, this convention is the first global
Stockholders’ Preemptive Rights agreement to seek to ban an entire class of
chemicals because of their degrading effects on
▶ Shareholder Rights human health and the environment. It thus plays
an important role in international environmental
law. The convention covers the issues of the
elimination of some POPs listed in Annex A,
Stockholders’ Rights also known as “the dirty dozen”; the restriction
of POPs listed in Annex B; the continued reduc-
▶ Shareholder Rights tion of POPs listed in Annex C; the management S
of stockpiles and waste; the preparation of
National Implementation Plans; rules for the list-
ing of new chemicals, promotion, and research;
Stockholm Convention (2001) technical assistance and financial mechanisms;
the exchange of information; and reporting and
Ayça Tokuç effectiveness evaluation. The governing body of
Dokuz Eylul University, İzmir, Turkey the conference, namely the Conference of Parties
of the Stockholm Convention (COP), continues
to hold meetings in order to ensure the implemen-
Synonyms tation and continuation of the convention’s work.
Furthermore, the POPs Review Committee
POP convention; POP treaty; Stockholm conven- (POPRC) meets annually to review proposals
tion on persistent organic pollutants (POPs) submitted by the COP for listing of new
S 2330
chemicals in Annexes A, B, and/or C. The work
of this body is coordinated with the implementa-
tion mechanisms of the conventions that deal
with hazardous chemicals and wastes, namely
the Basel Convention on the Control of
Transboundary Movements of Hazardous Wastes
and their Disposal (1989) and the Rotterdam
Convention on the Prior Informed Consent Pro-
cedure for Certain Hazardous Chemicals and Pes-
ticides in International Trade (1998).
Introduction
Human health is one of the most prevalent issues
of interest worldwide, yet there are few globally
accepted instruments to ensure it. While many
diverse tools are developed and used in many
parts of the world, there remain many challenges
that must be overcome in order to obtain opti-
mum health for the human race. Chemical pollu-
tion is one example of the many self-inflicted
health risks that humans face, and it is arguably
one of the most dangerous. Lots of chemicals that
are released into the environment are done so
without prior knowledge of their degradation
compounds, their mixing effects once released
into the environment, or how they might impact
the environment and human health in the long
term. Neglect of such information can have
a negative effect on the life systems that humans
depend on. According to a growing body of sci-
entific evidence, even in small doses, some of
these chemicals could cause untold damage,
including damage to the developing fetus, gender
the immune system, human (and other species)
development in general, cancer and neurological
effects, as well as damage to the developmental,
reproductive, and immune systems. The Stock-
holm Convention targets POPs alone, which
make up just a small proportion of the world’s
most dangerous environmental contaminants
that concentrate in the food chain and in
human bodies.
With the advent of the industrial age, many
changes in the interaction of humans with the
environment came to being for the sake of devel-
opment, progress, and convenience. One of these
Stockholm Convention (2001)
changes is the increased use of toxic materials
and pesticides, causing chemical pollution of the
environment in a scale that would endanger
human health. It did not become an issue of
debate until after the Second World War. Yoder
(2003) discusses some visible examples, where
the damage wrought on the environment,
humans, and animals could be seen by the
naked eye, and brought great distress to nearby
inhabitants, some institutions, and the interna-
tional community. One of these incidents is the
accumulation of toxic substances in the Great
Lakes, United States of America, which brought
about 1970s environmental legislation in in the
USA. Afterwards some chemicals once presumed
to be safe, such as polychlorinated biphenyls
(PCB) and chlorofluorocarbons (CFC), were dis-
covered to have the potential to be deadly to
humans. This resulted in the use of such
chemicals being severely restricted (or
completely banned) in various countries. Another
incident to raise public awareness among the
international community took place in Bhopal,
India, wherein thousands were killed by
a deadly cloud of pesticide gas in 1984.
Local and national bans against pesticides
were found to be ineffective as the health of the
consumer was still ultimately affected: the con-
tinued use of banned pesticides in other countries
creates a process known as the “circle of poison”
wherein pesticides are applied to agricultural
crops, which are then exported and eaten in the
country of the ban. In addition to this, interna-
tional control would also help to reduce other
problems regarding unsafe handling and storage
practices in countries that export crops.
The traditional legislative approach used in
the past to control the spread of pesticides was
called the “assimilative capacity approach” or the
“permissive approach.” This approach, which
attempted to control permissible quantitative
release levels of harmful substances, was based
on the mistaken assumption that the environment
would be able to dilute and disperse the harmful
substances and thereby render them harmless. As
this approach did not work, it was realized that
a more protective and effective paradigm was
needed to address the problem. Thus, in 1992, in
Stockholm Convention (2001)
the Rio Declaration on Environment and Devel-
opment, the precautionary principle was formed.
Principle #15 of the Rio Declaration notes: “In
order to protect the environment, the precaution-
ary approach shall be widely applied by States
according to their capabilities. Where there are
threats of serious or irreversible damage, lack of
full scientific certainty shall not be used as
a reason for postponing cost-effective measures
to prevent environmental degradation.” Funda-
mentally, this principle insists on using preven-
tive action before it is too late, even before you
have conclusive scientific proof of the sub-
stances’ effects.
UNEP started working on chemicals and haz-
ardous waste products, including POPs, in the
1980s. In May 1981, UNEP launched the Monte-
video Program, which identified the disposal of
hazardous wastes both as a cause for concern and
as an area that required the full cooperation of
international law, resulting in national bans in
1986 on the importation of hazardous waste from
three countries. In 1987, UNEP adopted the Cairo
Guidelines and Principles for the Environmentally
Sound Management of Hazardous Wastes, also
known as the “Cairo Guidelines,” and authorized
the Executive Director of UNEP to convene
a working group of legal and technical experts
with a mandate to prepare a global convention on
the control of the transboundary movements of
hazardous wastes. The resulting treaty is the
Basel Convention on the Control of Transboundary
Movements of Hazardous Wastes and their Dis-
posal, also known as the Basel Convention, which
was adopted in 1989 and implemented with force
in 1992. The mission of the Basel Convention was
to protect the environment and humans against any
adverse effects that may result from the generation
and management of hazardous and other wastes. It
addressed issues regarding cleaner production, the
minimization of hazardous waste, and the control
of the movement of such waste. In 1998, the Rot-
terdam Convention on the Prior Informed Consent
Procedure for Certain Hazardous Chemicals and
Pesticides in International Trade, more commonly
known as the Rotterdam Convention, was adopted.
This promoted the open exchange of information
and called on the exporters of hazardous chemicals
2331 S
to use proper labeling, including directions on safe
handling, and to inform purchasers of any known
restrictions or bans. The Rotterdam Convention
was enforced in 2004.
In 1995, the Governing Council of the UNEP
called for global action to be taken on POPs and
asked the International Programme on Chemical
Safety and the Intergovernmental Forum on
Chemical Safety (IFCS) to create an ad hoc
group to generate a list of the worst offenders.
The IFCS Ad Hoc Working Group on POPs
examined the sources, risks, benefits, production,
and use of the POPs and evaluated potential sub-
stitutes by determining their availability, costs,
and efficacy. The group concluded that there was
sufficient evidence to demonstrate the need for
international action to minimize risks from the
12 POPs, and recommended the UNEP GC and
the World Health Assembly to take immediate
international action on these substances. In Feb-
ruary 1997, the UNEP GC endorsed the conclu-
sions and recommendations of the IFCS and
requested that UNEP, together with relevant
international organizations, convenes an inter-
governmental negotiating committee with
a mandate to develop an international, legally
binding instrument for implementing interna-
tional action by the end of 2000. In May 1997,
the World Health Assembly endorsed the recom-
mendations of the IFCS and requested that the
World Health Organization participates actively
in the negotiations. International, legally binding
instrument for implementing international action
on certain persistent organic pollutants was
prepared at the end of five negotiating sessions S
held by an intergovernmental negotiating
committee over 3 years in Montreal, Nairobi,
Geneva, Bonn, and South Africa.
The final draft of the Stockholm Convention
on Persistent Organic Pollutants was adopted and
opened for signature 6 months after the last meet-
ing in South Africa on May 23, 2001, in Stock-
holm and May 24, 2001, at the United Nations
(UN) headquarters in New York. By signing it,
each country demonstrates its political commit-
ment to the treaty. However, although signatory
countries (as they come to be known after
signing) must give their moral and political
S 2332
support to the treaty, they are not legally bound
by it. A signatory state must then ratify, accept, or
approve the treaty. This usually requires the
transfer of the international treaty provisions
into international law. Consequently, an instru-
ment of ratification, namely a legal document
confirming ratification, acceptance, or approval,
must be deposited with the designated treaty
depository, namely the Secretary-General of the
UN. 152 countries signed the treaty during the
period it was opened for signature. A state that
did not sign the treaty during the period it was
opened for signature could join the treaty later by
“accession.” Just like with ratification, accep-
tance, or approval, a legal document must be
deposited with the treaty depository.
The treaty was put into legal force 90 days
after the 50th instrument of ratification was
deposited with the UN in May 17, 2004. At this
time, the ratifying states became parties, which
meant that they were then legally bound by the
treaty. Once the convention came into legal force,
each new country depositing its ratification or
accession document became a party after
90 days of the deposition. There were 170 parties
as of April 2010.
The POP treaty consists of a preamble, 30 arti-
cles, and six annexes. The following reads as
a list of the main objectives and areas of focus
that the treaty specifies:
– The elimination of POPs listed in Annex A
– The restriction of POPs listed in Annex B
– The continued reduction of POPs listed in
Annex C
– The management of stockpiles and wastes
– The preparation of National Implementation
Plans (NIP)
– The listing of new chemicals
– Promotion and research
– Technical assistance and financial mechanism
– Exchange of information
– Reporting
– Effectiveness evaluation
Known as the NIP, governments are to
develop and implement plans for the fulfillment
of their own specific treaty obligations. Each
party must develop an action plan to evaluate
and address releases; promote measures to
Stockholm Convention (2001)
achieve realistic and meaningful levels of
release reduction or source elimination; use
(where appropriate) substitute or modified mate-
rials, products, and processes to prevent the for-
mation and release of POPs; and finally promote
and use the best available techniques (BAT) and
the best environmental practices (BEP) for both
new and existing sources of materials. Parties
should also designate a National Focal Point;
promote a wide range of public information,
awareness, and education measures; encourage
the research, development, monitoring, and
cooperation of POPs and their alternatives; con-
sider the COP guidelines and give priority to the
recovery, recycling, and other waste manage-
ment practices outlined in Annex C that prevent
the release of POPs; and report to the COP on the
measures taken, their effectiveness, and all data
concerning POPs.
The Stockholm Convention calls for interna-
tional action on POPs, a small set of toxic
chemicals that are considered to be among the
most dangerous in the world. The convention
grouped 12 POPs into three categories: (1) pesti-
cides, such as aldrin, chlordane, DDT, dieldrin,
endrin, heptachlor, mirex, and toxaphene;
(2) industrial chemicals, such as hexachlor-
obenzene (HCB) and polychlorinated biphenyls
(PCBs); and (3) unintentionally produced POPs,
such as dioxins and furans. According to the
convention, for a chemical to be classified as
a POP, it must:
– Be a carbon-based compound with a natural or
anthropogenic origin, used mostly in agricul-
ture, public health, and the energy sector
– Be persistent – it must resist degradation and
remain in the environment for a long time
– Be widely distributed throughout the environ-
ment – by air, water, and wildlife
– Accumulate in the fatty tissue of living organ-
isms – thus, have a low water solubility but
high fat solubility
– Be toxic to humans and wildlife – with acute
and chronic toxic effects
The POP treaty, under various articles, covers
the whole life cycle of the POPs, including
how they are produced intentionally or as
a by-product; stockpiled, imported, and
Stockholm Convention (2001)
exported; unintentionally processed and used;
and finally recycled and disposed of. The con-
vention demands adherence to the complete treaty;
however, there are certain exemptions and accept-
able purposes provisions. Within these clauses, the
production and/or use of some chemicals is
allowed in 5-year periods (with the possibility of
one 5-year extension) subject to the approval of
the COP and if the public register of the country is
informed. Parties using these provisions must take
measures to prevent or minimize both human
exposure and the release of the chemicals into
the environment.
Provision was also made for a procedure to
identify additional POPs and the criteria to be
considered in doing so. A POPRC was set up at
COP-1 to review submissions; develop risk pro-
files and risk management evaluations; make
recommendations to the COP for additions to
Annexes A, B, and C and other criteria; and
develop a procedure for adding new POPs to
Annexes D, E, and F (as established in Article
8 of the treaty). For a new POP application, the
POP candidate should refer to scientific criteria
and the incorporation of precaution. Any party
may submit a proposal for listing chemicals, and
all parties have the opportunity for a full hearing
on any nominated candidate. In COP-4, the con-
vention was amended to include nine new
chemicals. These modifications were put into
practice on August 26, 2010, in all participating
countries except those that submitted
a notification pursuant to the provisions.
The Persistent Organic Pollutants Review
Committee (POPRC) consists of 31 government-
designated experts from parties appointed by the
COP. The members of the Committee are nomi-
nated for a term of 4 years, a term that may be
extended once. To ensure that the membership is
rotated effectively, half of the members of each
region were nominated for an initial term of
2 years and the remaining members of each region
for an initial term of 4 years. POPRC meets annu-
ally at Geneva, Switzerland. The POPRC’s first
meeting was held in November 2005.
COP is the governing body of the convention.
Its members are the parties to the convention, and
there are several subsidiary bodies established
2333 S
under the COP. They are convened to evaluate
the effectiveness of the treaty based on reports
and monitoring data received, and the meetings
take place every 2 years. The COPs convened so
far are:
– COP-1, Punta del Este, Uruguay, May 2005
– COP-2, Geneva, Switzerland, May 2006
– COP-3, Dakar, Senegal, May 2007
– COP-4, Geneva, Switzerland, May 2009
– ExCOP 2010, Bali, Indonesia, February 2010
– COP-5, Geneva, Switzerland, April 2011
The COP, at its first meeting in 2005, amended
the convention to add Annex G, which concerned
arbitration and conciliation procedures. COP-1
also put into motion the Global Monitoring Plan
(GMP) based on the need for comparable moni-
toring data on the presence of POPs and how they
are transported regionally. The objective of the
GMP is to provide a harmonized organizational
framework for the collection of comparable mon-
itoring data and/or information on the presence of
the POPs listed in Annexes A, B, and C of the
convention in order to identify trends in levels
over time as well as to provide information on
their regional and global environmental transport.
Later, in COP-2, 2006, the intricate processes
and mechanisms necessary to support progress
toward meeting the obligations of the convention
were negotiated. The meeting also featured the
first review of the effectiveness of the financial
procedure of the convention, and the creation of
a process that would enable the evaluation of the
effectiveness of the convention at COP-4 in 2009.
Afterward, in COP-3, 2008, 22 decisions were
taken to revise or detail the processes and articles S
of the convention. These included a revised pro-
cess for the review of entries in the register of
specific exemptions, DDT, measures to reduce or
eliminate releases from wastes, guidelines on the
standardized toolkit for the identification and quan-
tification of releases, guidelines on BAT and draft
guidance on BEP, regional centers, the listing of
chemicals in Annexes A, B, or C of the convention,
reporting, effectiveness evaluation, national imple-
mentation plans, budget, financial resources, tech-
nical assistance, synergies, and noncompliance.
Delegates at COP-4, in Stockholm 2009, bro-
kered and negotiated intensely to ensure that a
S 2334
consensus was reached, and due to their efforts,
nine new chemicals were added to those banned
under the convention. Also, the commitment to
the convention was renewed with the decision to
provide both financial and technical assistance to
developing countries, including the endorsement
of regional coordinating centers. Despite being a
much-discussed topic, issues relating to the
noncompliance mechanism were deferred to
COP-5.
COP-5 marked the 10th anniversary of the
adoption of the convention on May 2001 and
was held under the theme “Stockholm at 10:
Chemical Challenges, Sustainable Solutions.”
Amendments list nine new POPs in Annexes A,
B, and C, including endosulfan (with specific
exemptions) under Annex A. Also, more than
30 measures were taken by the COP to encourage
global action against POPs. Other major deci-
sions taken at the meeting concern further steps
in the synergy process to enhance cooperation
and coordination among the Basel, Rotterdam,
and Stockholm Conventions; the continued need
for DDT for disease vector control; and the
endorsement of seven new Stockholm Conven-
tion regional centers. The COP-6 is to be held
from May 6–10, 2013, in Geneva, Switzerland.
Together, the Basel, Rotterdam, and Stock-
holm Conventions cover the key elements of the
“cradle-to-grave” management of hazardous
chemicals. The most comprehensive coverage
is of the case of POPs since all of the three
treaties cover them. As consistency was consid-
ered to be an important factor, regulatory efforts
were often made when creating these instru-
ments. One of them include the creation of
a joint ad hoc working group on cooperation
and coordination among the Basel, Rotterdam,
and Stockholm Conventions to help manage
hazardous chemicals. In the POP treaty, provi-
sions were made for working with the Basel
Convention on the guidelines for the disposal
of POP-contaminated waste; with the UN Insti-
tute for Training and Research to develop guid-
ance; and with UNEP to develop socioeconomic
assessment guidance. The synergies’ decisions
made at the Conferences in 2008 and 2009
called for increased cooperation among the
Stockholm Convention (2001)
convention’s parties through such measures as
integrating National Focal Points, serving the
conventions, and designating regional centers
of excellence. The synergies’ decisions also
called for the establishment of joint convention
services within the convention secretariats in the
areas of administration, information technology,
legal services, public awareness and outreach,
resource mobilization, budget cycles, and
auditing of the conventions’ operations.
A clearing-house mechanism serves the three
conventions and provides a one-stop point of
entry to information resources that in turn sup-
port the implementation of the treaties. UNEP
has long sought to increase coherence in deci-
sion-making processes at an international,
regional, and national level. The simultaneous
meetings of the Conferences of the Parties to the
Basel, Rotterdam, and Stockholm Conventions
(ExCOP 2010) were held in Bali, Indonesia,
from February 22 to 24, 2010. Here, the parties
discussed matters relating to cooperation and
coordination among the conventions. Addition-
ally, the simultaneous convening of three inde-
pendent treaty conferences marked a historic
departure for international environmental gov-
ernance with actions aimed at strengthening
environmental governance.
Key Issues
The concept of taking precautionary action to
protect human health and the environment was
a new one at the time of the Stockholm Conven-
tion. It therefore represents one of the first steps
toward a new way of thinking (and a new way of
doing). Now, further along the road, the nations’
roles regarding the safe management, use, and
trade of chemicals are more clearly defined. The
emergence of such issues as climate change and
biodiversity concretized the importance of the
Stockholm Convention. Meanwhile it affected
the policies of many signatory countries, all of
which shared a common goal. Some of the most
important aspects of the treaty include:
– The precautionary principle
– The elimination of POPs
Stockholm Convention (2001)
– The prohibition of the manufacture of new
chemicals with the characteristics of POPs
– Capacity building and financial resources to
assist in implementing the provisions
– The substitution principle to prevent the for-
mation and release of unintentional POPs as
the priority for best available techniques
(BAT) and to substitute intentional POPs
– The recognition of alternative destruction
technologies that do not create POPs and the
avoidance of incineration (as a priority)
– Moving away from the production and use of
POPs and toward safer alternatives
– Calling for pollution release and transfer inven-
tories, and public right-to-know measures
– The creation of mechanisms to ensure that the
goal of protecting human health and the envi-
ronment from POPs is sustained
Future Directions
The importance of POPs and many other
chemicals is understood better with each passing
day. Furthermore, other research topics include
how chemicals relate to climate change, biolog-
ical biodiversity, and green economics. Along-
side the Stockholm Conventions’ continued
work and scope, new policies are continually
being developed to help realize the aims of the
convention. The work of the treaty becomes
more evident when in closer inspection of its
cooperation with the Basel and Rotterdam Con-
ventions. However, the Stockholm Convention
only concerns POPs and does not manage the
ever-existent thousands of known and poten-
tially hazardous chemicals that do not exhibit
the characteristics of POPs.
The recent declarations within the Stockholm
Convention emphasize the need for greater
coordination between parties on both regional
and global data analysis (in particular, the
assessment of POP levels over time), better
internal consistency of the methods used, greater
comparability of data over time, and more sus-
tainable programs (both new and old). Addition-
ally, with the advent of new technological
solutions and new information, it may be
2335 S
possible to eliminate POPs restricted in Annex
B, such as DDT, within a time frame. In the
meantime, COPs continue to convene and dis-
cuss issues regarding the reduction or elimina-
tion of releases from the intentional and
unintentional use, production and wastage of
these chemicals, implementation plans, how
chemicals are categorized under Annexes A, B,
or C of the convention, information exchange,
technical assistance, financial resources and
mechanisms, reporting, effectiveness evalua-
tion, enhancing cooperation and coordination
among the Basel, Rotterdam, and Stockholm
Conventions, program of work, and adoption of
the budget.
Cross-References
▶ Environmental Ethics
▶ Environmental Risks
▶ Environmental Law
▶ Rio Declaration on Environment and
Development (UN)
▶ UN Conference on E & D
References and Readings
IISD reporting services. In Fifth Meeting of the Confer-
ence of the Parties (COP5) to the Stockholm Conven-
tion on Persistent Organic Pollutants (POPs).
Retrieved October 3, 2010, from http://www.iisd.ca/
chemical/pops/cop5/
Official webpage of the Stockholm Convention on persis-
tent organic pollutants (POPs). Retrieved May 3, 2010, S
from http://chm.pops.int/default.aspx
Richter, S., Steinh€auser, K. G., & Fiedler, H. (2001).
Global treaty for the regulation of POPs: The Stock-
holm convention. Environmental Science and Pollu-
tion Research, 8(3), 212–215.
United Nations Environment Programme Chemicals. Per-
sistent Organic Pollutants. Retrieved July 3, 2010,
from http://www.chem.unep.ch/pops/
United Nations Environment Programme Stockholm Con-
vention on Persistent Organic Pollutants as amended in
2009. (2010). Retrieved October 6, 2011, from http://
chm.pops.int/Convention/tabid/54/language/en-US/
Default.aspx#convtext
Yoder, A. J. (2003). Lessons from Stockholm: Evaluating
the global convention on persistent organic pollutants.
Indiana Journal of Global Legal Studies, 10, 113–156.
S 2336 Stockholm Convention on Persistent Organic Pollutants (POPs)
Stockholm Convention on Persistent of these environmental variables rarely permits
Organic Pollutants (POPs) opportunities or threats and/or strengths or
▶ Stockholm Convention (2001)
Strategic Corporate Social
Responsibility
▶ Institutes of Directors and CSR
Strategic Marketing & CSR
Hart O. Awa
Department of Marketing, University of Port
Harcourt, Port Harcourt, Rivers State, Nigeria
Synonyms
Allocation of scarce resources; Anticipation of,
and response to, change; Great knowledge about
future; Managing environmental change; Maxi-
mizing firm’s competence; Minimizing surprises;
Mutual exclusive relationships; Proactive
actions; Strategic marketing process; Subjective
decision making
Definition
Organizations predict the direction of tomor-
row’s states of nature and discount their effects
today to plan proactive actions; they desire to
keep their business portfolios strategically
healthy amid the rising complexities of eco-
nomic, technological, sociopolitical, legal, eco-
logical, and other environmental factors.
Specifically, the dynamics of information tech-
nology (IT) and its infrastructures as well as
government policies, per capita income, water
pollution, garbage disposal, acid rain, depletion of
ozone layers, bioterrorism, global warming, etc.,
affect strategic decision(s). The swinging nature
weaknesses (SWOT) to exist indefinitely and
often turns managers’ entrepreneurial and
strategic thinking ahead of time and managing
turbulent states of nature to firms’ advantage.
Firm’s subjective decisions to manage such
changes necessitate strategic marketing and
anticipating, and timely responding to, future
changes in order to simultaneously achieve corpo-
rate, business, and functional objectives of a firm.
However, firms’ design game plans to have
direction and control as well as chances of com-
peting successfully on the grounds that exponen-
tial changes may suggest radical change(s) in
resource requirements (be it technical, marketing,
human, financial, or whatever) to suit market
evolution.
Whereas merely incremental changes perhaps
in response to boom and upsurge in demand often
require adjustment of current marketing strate-
gies and/or other functional programs, non-
incremental changes relating to new primary
demand, new technology, market redefinition,
new government policies, and others may ques-
tion the adaptability of incumbent firms and often
usher in new cast of competitors. Therefore, the
rule of the game is to be more proactive than
reactive in shaping organization’s future destiny,
that is, using strategic marketing as an instrument
to monitor, anticipate, assess, incorporate, and
manage states of nature. Three key definitions
of strategic marketing drawn from authorities
will guide our thinking:
• Strategic marketing is the continual process of
making entrepreneurial (risk taking) decisions
systematically and with greatest knowledge of
their futurity, organizing systematically the
efforts needed to carry out these decisions,
and measuring the results of those decisions
against expectations through organized sys-
tematic feedback(s).
• Strategic marketing is the process of making
choices between alternatives that are mutually
exclusive; it involves the allocation of scarce
resources and their strategic coordination once
they are utilized.
Strategic Marketing & CSR
• Strategic marketing is the development and
maintenance of viable fit between the organi-
zation’s objectives, resources, and its chang-
ing market opportunities and shaping and
reshaping the company’s business and prod-
ucts so that they combine to produce satisfac-
tory results.
Further, Henry Mintzberg’s five P’s (plan,
ploy, position, pattern, and perspective) of strat-
egy offer a classic grasp of strategic marketing:
• As a plan, strategic marketing planner thinks
ahead of time of action, sets guidelines to deal
with situations, and makes conscious and pur-
poseful decisions.
• As a ploy, strategic marketing planner sets out
to outwit opponents perhaps through cutthroat
and predatory pricing (offensiveness). For
instance, peak (toothpaste with baking soda)
died on the shelf because before Colgate-
Palmolive launched it, Procter and Gamble
(P&G) had used special pricing appeals to
cause dealers and consumers to stock up with
Crest.
• As a pattern, strategic marketing planner
maintains consistency in behavior whether
intended or not. For instance, Henry Ford
practiced mass marketing when it offered
Model T automobile only in black color just
as Picasso was painted blue for a time.
• As a perspective, the strategist looks inward
into the organization’s capability (strengths
and weaknesses), personality, character, cul-
ture, ideology, grand strategy, and theory of
business before crafting a working strategic
plan.
• As a position, the strategist relates to the orga-
nization’s position (e.g., whether market
leader, follower, nicher, or challenger) in the
industry since one’s strategy is another’s tactic
depending on their industry position and what
seems tactical today may turn strategic tomor-
row. Position takes care of external environ-
mental variables (opportunities and threats)
just as perspective looks inward.
These definitions imply choice, futuristic,
mutually exclusive, environmental scanning,
outcompeting, and integrative behaviors; strate-
gic marketing integrates the general management
2337 S
functions and the various business units and
departments (multifunctional consequences) to
achieve the strategic objectives of creating and
choosing new and different opportunities for
tomorrow or optimizing for tomorrow the trends
of today. They do not suggest that strategic mar-
keting guarantees business success rather it vastly
improves it.
Igor Ansoff and his associates surveyed 33
firms that made strategic decisions on mergers
and acquisitions and found that those engaged in
strategic planning outperformed and predicted
outcomes of their planning effort much better
than non-planners. Nevertheless, intuitive plan-
ning is still recognized especially in situations of
highly interrelated variables, several alternatives,
great uncertainty, or little precedent.
Introduction
Strategic marketing takes its cradle from the
United States in the 1950s and found prominence
in the mid-1960s and early 1970s, cast aside in
the 1980s following economic boom, and
actively resurfaced from the 1990s to date.
Between the mid-1960s and early 1970s, the
United States suffered economic stagnation and
rising unemployment following Arab-Israeli war
induced scarcity of Arab oil and shortages of
other raw materials. Then, the United States’
desire to reposition competitive advantage amid
such crisis necessitated the inroads of military
theories of Carl Von Clausewitz and his contem-
poraries. The assumption of business theorists S
was that the competitive marketplace is symmet-
ric with war front (both characterized by con-
stantly changing states of nature) and that since
such military generals as Alexander the Great,
Julius Caesar, Basil the Great, Napoleon, the
Duke of Wellington, and Patton made much of
their successes through strategic planning,
extrapolation of knowledge is worthwhile. Like
in the military, strategic marketing attempts to
minimize elements of surprises of the changing
states of nature, to maximize a firm’s ability to
manage change, and to move a firm from where it
is today to where it wants to be tomorrow.
S 2338
Decision-makers are always under the gun to
unveil environmental changes and steer up orga-
nizational activities in whatever new directions
dictated by shifting market conditions.
Thus, managers use time horizon of experience
to reassess a firm’s current strategies by looking at
its opportunities and threats and by analyzing its
resources to identify strengths and weaknesses
(SWOT) in order to proactively and perhaps reac-
tively build long-term competitive position in
offensive and/or defensive manners. Anticipation
of changes involves deploying an organized frame-
work to identify the source and directions of the
change in a systematic manner (environmental
analysis and diagnosis), and appropriate response
(s) indicates a clear grasp of alternative courses of
action since most decisions are mutually exclusive;
choice of one precludes others. Perhaps because
resources are limited, strategists rarely exploit all
fronts; rather, they subjectively evaluate alternative
courses of action, choose the option that promises
the highest payoffs provided it is feasible (satisfies
all environmental constraints), and measure results
through organized feedback. This broadly implies
that strategy formulation, implementation, and
evaluation represent more systematic, logical, and
rational process to strategic choice.
Strategy Formulation
This is where the future course(s) of action is con-
ceptualized by top marketing management. It
involves developing vision and mission, identifying
opportunities and threats, determining strengths and
weaknesses (SWOT), establishing strategic objec-
tives, generating alternative courses of actions, and
making informed choice on which to pursue. It also
includes new businesses to invest; businesses to
abandon, turnaround, divest, diversify, or grow
locally or globally; and merger or joint venture
decisions. The entire activities of strategy formula-
tion are trimmed down to the following points:
Vision and Mission
The vision statement precedes all other stages,
including mission statement, in strategic market-
ing process. It delineates top management’s
Strategic Marketing & CSR
aspirations in terms of product-customer-market-
technology and tells, in distinctive, specific, and
emotionally arousing manners, where the firm
heads and a convincing rationale why such direc-
tion makes good business sense. The vision state-
ment of MTN may be “to take leadership position
in the telecommunications industry.” This con-
trasts the domain of mission statement, which,
though enduring and distinguishes a business
from other similar ones, emphasizes present busi-
ness scope, values, priorities, and purpose: who
we are, what we do, and why we are here. Rea-
soned conclusions on directional path(s) require
strategic thinking (SWOT analysis), looking at
the environment critically, and answering key
direction-shaping questions. Among such ques-
tions are the following: (1) How and at what pace
is the firm’s market environment evolving?
(2) What factors drive market change and what
are the likely impacts on our operations over-
time? (3) What are the competitors and cus-
tomers up to? (4) What strengths do we have to
leverage weaknesses and what new capabilities
are expected of us to rake in adequate growth and
profitability? (5) What new markets and customer
groups should we head to serve or abandon?
Strategic Objectives and Performance
Targets
When Dereck Abell and Peter Drucker separately
asked the question, what is our business? the
answer focused on the customer, his realities,
his situations, his behavior, his expectations,
and his values. Such answer informs the estab-
lishment of objectives and strategies as well as
making today’s decision for tomorrow’s results.
The strategic vision is converted into specific
performance outcomes to provide directions and
priorities, aid evaluation and coordination, create
synergy, and offer baseline for effective plan-
ning, organizing, motivating, and controlling
activities. Objectives stretch a firm to reach its
full potential; most common among them relate
to challenging, quantifiable, consistent, reason-
able, time-frame, and unambiguous yardsticks
such as profitability, customer satisfaction, our
people (host communities), citizenship, sales
and market share growth, fields of interest, risk
Strategic Marketing & CSR
diversifications, and innovations. For strategic
business units (SBUs), specific objectives are
also set for each from the overall objectives.
Crafting Working Strategies
The means to achieving long-term objectives rep-
resent strategies and a measure of entrepreneur-
ship. Firms seek directions and forces of
environmental changes as well as opportunities to
do new things or to do existing things in new ways.
Often, the attractiveness of opportunities is mea-
sured by Boston Consulting Group (BCG), General
Electric (GE) strategic planning grid, internal rate
of returns (IRR), Bayesian theory, net present value
(NPV), Hofer and Schendel model,
etc. Operationally, the issues of how to please the
customer and grow the business, how to
outcompete rivals, how to develop new corporate
capabilities to respond to new market evolution,
etc., influence in stitching a strategy together.
Depending on what objectives to achieve, strate-
gies may include geographic expansion and/or
globalization of operations, related and/or
unrelated diversifications, merger and/or acquisi-
tion, product and market developments, market
penetration, retrenchment, cutback and turnaround,
divestiture, and liquidation. Also, it includes do
nothing, joint venture, strategic alliance, collabo-
rative partnership, forward and/or backward inte-
grations, low cost advantage, offensive and/or
defensive actions, outcompeting rivals based on
differentiation, focus on narrow market niche, etc.
A more predominant structural innovation that
encourages more strategic thinking and
decentralized strategy development, especially
among firms with multidimensional operations,
is SBU approach. SBUs are characterized by
a single business or collection of related busi-
nesses with distinct mission, competitors, cus-
tomers, and managers who integrate the units’
activities with other businesses of the organiza-
tion and plan independently.
Strategy Implementation
Implementation mobilizes resources to put to
work the formulated strategies and to test the
2339 S
manager’s ability to coordinate, lead, commu-
nicate, counsel, and motivate. Often referred
to as the action stage of strategic marketing,
implementation addresses the challenge of
what is expected of employees, managers,
and units/departments to stimulate the attain-
ment of corporate objectives within a stated
time frame. This is about the most demanding
and time-consuming stage because it requires
personal discipline and enthusiasm, commit-
ment, and sacrifice; establishing annual objec-
tives (short-term milestones) and effective
organizational structure; and devising policies
(guidelines, rules, and procedures), informa-
tion and operating systems (communications
and interactions), internal leadership styles,
and conducive work climate and supportive
culture. It also involves motivating and com-
pensating employees, tying incentives and
rewards directly to organizational perfor-
mance; and developing budgets and allocating
resources. However, the short-term milestones
(annual objectives) are bids to rework long-
term plans yearly in order to accommodate
environmental changes that were unforeseen
(rolling plan).
Strategy Evaluation
Today’s success rarely guarantees tomorrow’s
because success itself creates new and distinct
ordeals that make tomorrow difficult. Strategy
evaluation exists because non-complacent
managers would want to collect and analyze S
operations-based information in order to know
if the present strategy is working well (stay
the course) to realize the ideal objectives or
not (change). Amid changing business
environment, visions, objectives, and strate-
gies are subject to future improvements to
reposition and realign them once more. Strat-
egists regularly review the environment as
a basis for current strategies, measure perfor-
mance against established standards, and
make corrective adjustments on visions,
objectives, strategies, and/or strategy execu-
tion methods.
S 2340
Key Issues
There exists a limited period during which a fit
between the product-market requirements and
a firm’s competence is at optimum. Organiza-
tions take decisions today for tomorrow’s conse-
quences; they follow the route of proactivity to
remain competitive in an environment character-
ized by constant changes. Strategic marketing
permits allocation of investments based on objec-
tive assessment of future market evolution and
a careful appraisal of a firm’s capability to suc-
cessfully meet the market requirements. Often,
the strategists engage in environmental analysis
(breaking down the magnitude of the change) and
diagnosis (tracing the change to a source econ-
omy, legal, technology, politics, ecology, or
something else) as a way of minimizing surprises
and managing these changes to their own advan-
tage. However, environmental changes may
place some firms in a better position to compete,
close strategic windows behind some others, and
even attract new entrants, who may use technol-
ogies and expertise developed in their parent
industry to exploit the leapfrogs of incumbent
firms. The disadvantaged firms contemplate quit-
ting into a new market now, later, or never or to
increase, maintain, or even reduce expenditures
on equipment and marketing support in current
business.
Future Directions
Whether rapid, complex, or fundamental, change
is a fact of business life and the one thing known
to be permanent. Often, managers are challenged
to keep improving upon competitive advantage
amid many operations-based models for change,
including business process reengineering (BPR),
just in case (JIC), just in time (JIT), B2B, elec-
tronic commerce (EC), and total quality manage-
ment (TQM). Today, the complexities of
environment following many external
interplaying factors turn global and challenge
managers to be more strategic than ever before.
When new ideas and processes bring exponential
changes, they question time-tested business
Strategic Marketing & CSR
models, ways of working, organizational struc-
tures, and accepted truth. Contemporary cus-
tomers are smarter and better informed, and
different IT infrastructures turn the world flat
and strengthen even smaller firms’ competitive
capabilities to overcome the challenges of size
and distance in accessing even global markets.
For instance, broadband, e-trade, e-commerce,
e-business, and e-mail are integral parts of
global life.
The internet promotes integrated ecosystems
and endless comparison shopping and transfers
business power to customers; with a few clicks on
CompareNet.com, the customer scans and evalu-
ates multiples of vendors offering different con-
sumer products. Also, internet promotes
competitive advantage through building inte-
grated value chains that permit real-time interac-
tions among/between stakeholders. Specifically,
e-commerce permits information sharing, direct
selling and advertising, tracking of inventory, and
absence of paperworks. In fact, the knowledge
economy ushers in new casts of business oppor-
tunities and threats as well as new strengths to
leverage weaknesses and to take advantage of
change. This suggests that contemporary strate-
gic marketing thinkers essentially judge firms’
strategic strengths by their ability to wisely take
advantage of human intellectual capital and tech-
nology even beyond traditional resources. The
core competence for survival and growth
involves creating and sharing knowledge and
information and innovating, learning, and
adapting to changes through strategic deploy-
ment of knowledge capital. ICT, expeditious
data processing models, configurable platforms,
networking, and the internet provide firms with
access to knowledge and foster inter-/intraorga-
nizational integration (network externalities and
knowledge sharing) with the promises of building
competitive advantage, cost-effective operations
and value-added interactions, and improved
product development and customer service.
Today, many firms are rewriting the rules of
strategic marketing and trying to rebuild compet-
itive advantages in relationship networks. The phi-
losophy of customer retention reforms
contemporary strategic marketing thinking;
Strategic Risk
it replaces selfishness, superficiality, self-
indulgence, and aggressive and offensive cus-
tomer attraction ideals of transactional marketing.
Traditional marketing management theories focus
on oppressive associations, relationship between
customer and product, short-term or even single
exchange(s), offensive marketing, and/or power-
based notions, whereas relational interactions
change conflicts to harmonic cooperation, associ-
ations, and connections, and ultimately infrequent
business relationships to ongoing. The economic
soundness of such mutual participative architec-
ture revolves on strategic optimization that serves
the interests of stakeholders on the grounds that
customer retention and customer loyalty reflect
complex activity involving inputs from vendors
and other independent firms, and continues even
by the manner the dealers handle and explain
customer complaints and doubts.
All the steps from design to after-sales ser-
vice are mutually integrated flows aimed at
reducing marketing expenses, increasing cus-
tomer switching costs, and moving the customer
up the loyalty ladder. Therefore, integrated stra-
tegic marketing represents a new direction of
scholarly thoughts. The interests of customers,
suppliers, creditors, shareholders, and others in
the value chain must be factored into strategic
thinking; otherwise, the entire system collapses.
Each subsystem may possess the strengths or
knowledge capitals to predict with better preci-
sion the directions of environmental change to
the benefit of the entire system in serving the
customers better.
Cross-References
▶ Business Policy
References and Readings
Abell, D. (1978). Strategic windows. Journal of Market-
ing, 42, 21–25.
Awa, H., & Kalu, S. (2010). Repositioning the non-
incremental changes and business strategic windows
correlates. International Journal of Business and
Management, ss5(2), 184–193.
2341 S
Boone, L., & Kurtz, D. (2007). Contemporary marketing.
Philadelphia: Harcourt College Publishers.
David, F. (2007). Strategic management: Concepts and
cases (11th ed.). New Jersey: Upper Saddle River.
Drucker, P. (1974). Management: Tasks and responsibil-
ities. New York: Harper & Row.
Federici, T. (2009). Factors influencing ERP outcomes in
SMEs: A post-introduction assessment. Journal of
Enterprise Information Management, 22(1/2), 81–98.
Glueck, W. (1976). Business policy: Strategy formulation
and management action (2nd ed.). New York:
McGraw-Hill.
Kotler, P. (1984). Marketing management: Analysis, plan-
ning and control (5th ed.). Englewood Cliffs: Prentice-
Hall.
Metaxiotis, K. (2009). Exploring the rationales for ERP
and knowledge management integration in SMEs.
Journal of Enterprise Information Management, 22
(1/2), 51–62.
Mintzberg, H. (1979). The structure of organizations.
Englewood Cliffs: Prentice-Hall.
Osgood, W. (1980). Basics of successful business plan-
ning. New York: AMACOM.
Thompson, A., Gamble, J., & Strickland, A. (2004).
Strategy. Boston: McGraw-Hill.
Strategic Marketing Process
▶ Strategic Marketing & CSR
Strategic Motive
▶ Motives of CSR
S
Strategic Risk
Henry L. Petersen
School of Management, Alliant International
University, San Diego, CA, USA
Synonyms
Crises management; Environmental risks; Risk;
Social issues management; Social risk
S 2342
Definition
Strategic risks are defined as risks that are asso-
ciated to external events and are generally not the
transactional type that are characterized in finan-
cial management. Typically, as would be seen
with transactional risks, mitigation against natu-
ral disasters, financial or operational risks involve
actions and or the purchase of insurance to
minimize the exposure and attaining a balance
between costs to mitigate and the probable
outcome. The balance is represented by a risk
and return association: The greater the risks, the
greater the return that is expected. Rather, strate-
gic risks stem from the field of strategic manage-
ment and are for some researchers a potential
issue that would impact or inhibit the implemen-
tation of a strategy. Whether the risks are borne
out of a strategic decision to enter a particular
region, restructure to minimize costs or engage in
certain activities that impact stakeholder’s
perceptions of the organization, there really is
no final concrete and descriptive definition of
strategic risks other than the consensus that
these risks have the potential to jeopardize earn-
ings and the prospects of growth. Starting with
reputational risk, these risks have also been iden-
tified as entrepreneurial risks, operational risks,
administrative risks, or simply the risks associ-
ated to poor business decisions, improper imple-
mentation, or the lack of responsiveness to
industry changes. Climate change, changing
technology, changing customer expectations or
preferences, stakeholder problems, a poorly
structured organization, social issues, and envi-
ronmental issues are just some of the examples of
strategic risks that have been suggested in the
literature. The significant aspect is that these
risks fall outside of the realm of financial
management tools and are then generally
recommended to be assessed by the board of
directors.
Introduction
The broad nature of strategic risks opens the door
for many opportunities for future exploration into
Strategic Risk
the management of and “best practices” for mit-
igation. Strategically, for a corporation in
a competitive market, the attainment of
a competitive advantage is often accompanied
by a number of risks. Having foresight or the
ability to identify and weigh each of the risks,
and balancing their costs for potential mitigation
while at the same time taking on the exposure, is
part and parcel of the nature of business. Risk of
failure is expected as is the risk and return corre-
lation. The greater the risk, the greater the
expected return, although the risk and return
association for strategic risks does not seem to
have as much of a correlation as one might
have expected. This is where we really recognize
that strategic risks deviate from the financial/
operational forms of risks managed by most risk
officers. As expressed by Sampath in the Journal
of Risk Management, due to a lack of data,
metrics, and knowability, strategic risks are char-
acterized as nontraditional. Initially identified by
Miller and Bromiley in assessing corporate risks,
strategic risks have had a varying degree of
research and analysis that crosses many different
disciplines. Psychology, geopolitical sciences,
geography, public policy, finance, sustainable
development, and strategy are part of the list
that is extensive in large part due to the varying
nature of the risks considered.
For social and environmental issues, and in
particular social responsibility, this researcher
narrows the current definitional array into two
main types of risk: reputational and organiza-
tional. The latter type is associated to the entre-
preneurial decision making, organizational
implementation, and administrative capabilities
surrounding the organizational management of
issues whose failure or poor performance affects
earnings. This stems from the work of Miles and
Snow for organizational performance and is pri-
marily centered on business performance risk. In
other words, it is simply the risks from lacking the
business acumen required for moderate success.
This would be making the right decisions in
investments, making the correct efficiency
upgrades, managing wastes appropriately,
employee protection and motivation, and so
forth. In many ways, these are operational risks
Strategic Risk
whose monitoring and management is an ongoing
concern. However, reputational risk is somewhat
of a catch all that views items within the external
environment. Here, strategic risks may refer to
the relationship between the firm and its broader
“environment,” and when it comes to social
responsibility, most issues arise from health or
environmental risks that the firm has either
created, imposed, or perceived to have purposed
on others.
This researcher addresses strategic risk from
a strategic perspective and draws upon the areas
of strategic management, financial management,
psychology, social science, and public policy for
its construct.
For all organizations, risks vary. They can be
diverse or similar, incidental or significant,
numerous or few, and deliberate or involuntary.
For the strategist, making decisions amidst so
many types of risks proves to be not only
a daunting task but also an impossible one. This
is especially so without some kind of model to
guide their attention and actions. Enterprise-wide
risk management (ERM) was developed to
address corporate risk in a holistic manner.
However, what the theory and process had in
intent lacked considerably in content, especially
with risks that were not quantifiable, such as
strategic risks.
Risk in Review
The sources of risk can fall into two categories.
The first source is the natural environment. In
most ways, we are subject to the forces of nature,
and although we attempt to control our environ-
ment, there are instances when the environment
gets the best of us. Floods, earthquakes, droughts,
the list could go on. The environment is, in most
cases, a variable out of our control. Although we
may build and create structures that resist nature
and its forces, in most cases, we cannot control
the extremes that nature extols on humankind,
such as natural catastrophes. Hence, we mitigate
these through insurance markets and investment
mechanisms in an effort to offset our losses if
they were to be realized. It is generally accepted
that without the insurance market, industrializa-
tion would not have been so rapid or successful.
2343 S
The second source is that generated by man:
anthropogenic risk. Humans create a multitude of
risks that range from the financial realm to the
sphere of health and toxicological hazards. They
can be thought of as simply having uncertainty in
an outcome where positive or negative results are
possible. For instance, financial investments are
risky and can result in either a loss or gain. How-
ever, when people consider the concept of risks,
they tend to consider the risk in light of the out-
comes. For instance, in terms of health or the
natural environment, most are drawn toward the
negative potential. An exposure to a noxious sub-
stance tends to have deleterious effects, and it is
the effects that grab our attention whereas if the
outcome were cleaner air, this would generally go
unnoticed. Taking this further, we can break
anthropogenic risks down into voluntary and
involuntary categories. Voluntary risks are those
situations in which organizations or individuals
willingly expose themselves to. Smoking is
a prime example. Smoking is responsible for
some 45,000 deaths in Canada per year, yet
there are approximately five million Canadians
that engage in the activity. Even with the statisti-
cal evidence of considerable harm, like prema-
ture death, there are people starting anew with
about 1 in 5 Canadian youths taking up the prac-
tice every year.
Involuntary risks are those that people face
regardless of choice. Involuntary risks are situa-
tions where the choices or decisions are made by
others and imposed upon individuals. Smoking
can serve as our example here as well. Second-
hand smoke, otherwise termed environmental S
tobacco smoke (ETS), extends to the surrounding
area around the smoker. It is estimated that
2.4 million Canadian households have children
under the age of 12 who are regularly exposed to
ETS. Their exposure to ETS is not voluntary but
rather involuntary. Hence, the innocent receivers
are exposed to an agent that has received recom-
mendations to be classified as a Group “A”
carcinogen by the US Environmental Protection
Agency.
Voluntary or involuntary risks are founda-
tional for most strategic risks. Public controversy
seldom erupts from voluntary risks except in
S 2344
situations dealing with the natural environment
where organizations erode or create damage.
Then, nongovernmental organizations (NGOs)
usually take the role of the afflicted and voice
their disapproval. When risks are imposed on
others and there is a degree of uncertainty with
either the risk, its mitigating procedures, or the
potential outcome, conflict is inevitable, espe-
cially if there are questions surrounding who
bears the responsibility in the event that the risk
is realized. Add to that the issue of compensation
and whether the compensation is sufficient or
certain and the issue can become extremely vol-
atile. When a for-profit organization exposes
others to a risk and benefits from it, the strategic
risk is increased, meaning the possibility of con-
troversy and consequential damage to the orga-
nization’s reputation and future earnings is high.
A small example is warranted here. Red dye
number 2, otherwise known as Amaranth, was
banned from the food and drug industries in
1976. Until 1970, tests indicated that the dye,
used in candy, foods, soft drinks, and pill coat-
ings, was innocuous. Then, in 1970, questionable
scientific studies surfaced. They were question-
able in that the scientific community criticized
the studies for many errors they saw in method-
ology. The order for more studies generated
results that were seen as flawed and poorly exe-
cuted. The scientists could not agree with each
other on the methods, let alone the results. Con-
sequently, the public’s concern was heightened.
NGOs subsequently applied considerable pres-
sure on the FDA in the USA, which eventually
gave in and banned the dye. Industry was out-
raged since the dye was used in over $10 billion
worth of food products and they were going to
have to change to a more costly dye. Ironically,
the change was to a dye that was not tested as
rigorously as number 2. During the issue, the
makers of M&M candies strategically stopped
the manufacturing of red M&Ms. Even though
they were not using Red No. 2, they recognized
the controversy and altered their product to
ensure the public were not correlating their red
M&Ms with the health scare.
Saccharin has a similar story but a distinctly
different ending. Saccharin was considered
Strategic Risk
“generally recognized as safe” (GRAS). Several
studies arose that questioned the efficacy of the
product, especially with cancer of the bladder.
The FDA moved to ban the product but the pub-
lic’s response to this move was indicative of their
stance. The store shelves were cleared of the
product. Consumers bought all that they could
before the ban came into effect. After, public
pressure caused Congress to impose
a moratorium on the ban, which has now been
extended six times. This is an interesting outcome
since continued studies show that the product is
a carcinogen in male rats. The science in this case
was not so divided yet the public made the direct
choice of wanting the product. Both of these
cases demonstrate strategic risk instances with
considerably different outcomes. The recommen-
dation that strategic risks be managed at the
highest level would be substantiated here as
would be the obvious point that management of
such issues with financial tools would not be
beneficial as compared to an ongoing manage-
ment process for strategic decision making as
recommended in much of the literature.
Resource intensive organizations, firms that
exploit natural resources, are an example of an
industry with the potential for risk amplification,
the public’s heightened attenuation, or risk per-
ception of a firm’s activity. The extraction and
marketing of natural resources produces
a monetary benefit for the firm and generates
a product that is beneficial for society in general.
However, the people surrounding the activity
may share in the beneficial commodity, but they
are exposed to the hazards that may result from
the firm’s activity, involuntarily. That can be
problematic for them unless they actively made
a choice such as that demonstrated in the place-
ment of a hazardous treatment site in the northern
town of Alberta. The residents of Swan Hills
voted 79 % in favor of having the site near their
community knowing what the risks entailed.
However, for most cases, regulations are imposed
by regulatory authorities to enforce the manage-
ment of impacts and to attempt to align the orga-
nization’s behavior with the interests of the
general public. Hence, risks that are associated
with the activity are imposed upon the local
Strategic Risk
group, involuntarily, and with the approval of the
public defender. The local community’s percep-
tion of the risks will vary from individual to
individual. For instance, sour gas has been an
issue in the Alberta (Canada) oil patch for many
years. Many of the oil and gas companies respon-
sible for the management of sour gas have expe-
rienced opposition to their activities by the local
communities that are not convinced that the risks
are minimized or that they should even suffer
them. Sour gas is a noxious substance. At
extremely low quantities, the hydrogen gas is
lethal and has similar effects as cyanide. Know-
ing that at such low doses the gas can kill,
detecting its odor makes for an alarming experi-
ence. Sour gas, as its name implies, has a rotten
egg smell and can be detected at extremely low
concentrations, in the parts per-billion range.
Hence, just sensing the smell of sour gas incites
concern, making this sort of involuntary exposure
a very contentious issue.
Involuntary risks can take its toll on the
unwary firm. Initiating a risk management strat-
egy for identifying the risks and managing or
mitigating their potentiality is advised, at the
board level. In part, taking from Michael Porter’s
recommendations for competitive positioning,
the executives should recognize what is shaping
the competitive field and staking a competitive
position that is less vulnerable to attack.
A Managerial Perspective
Enterprise risk management (ERM) from the
business risk management literature relegates
these types of risks to the fringe as noncore or
not pure, meaning they are not insurable or finan-
cially mitigated. As a result, some issues that may
pose a serious risk to the organization may not be
identified as a credible or applicable threat and
has a probability of being overlooked, down
played, or ignored. Enterprise risk management
users find intangible risks a definite problem.
Fifty-three percent of firms surveyed for ERM
usage found that intangible risks were
a significant problem for them and so too were
the lack of coordination between the practices of
risk management and strategic planning. Both
fields of practice have been kept conceptually
2345 S
disconnected in the firm. Hence, when an intan-
gible risk is presented, without a strategy the
management of the risk is precarious.
Corporate Strategy
Strategically, strategic risk management is based
on the capabilities and processes enacted by the
executives to mitigate or minimize an issue. As
H.W. Chase had declared, corporate “issues”
management is the “capacity to understand,
mobilize, coordinate and direct all strategic and
policy planning functions, and all public affairs/
public relations skills toward. . .meaningful par-
ticipation in creation of public policy.” Human
resources, subordinate skills, and management
capabilities are key contributors to managing
strategic risks and even crises. Knight and
Pretty’s work in evaluating the performance of
firms following a disaster found that manage-
ment’s capabilities were the moderating factor
between whether the firm recovered from
a crisis or not and, importantly, insurance was
found to not be an appropriate substitute for man-
agement and contingency planning.
The resource-based view of the firm (RBV),
founded by Penrose (1959), emphasizes the need
for management capabilities for not only strate-
gic competitive advantage but also strategic risk
management. The intentional development and
accumulation of capabilities provide an organi-
zation with a potentially advantageous position in
which even ethical behavior or social responsive-
ness has been theoretically identified as
a resource for firm competitiveness. Hence, the
intentional development, or strategic intent of S
accruing capabilities to manage risk issues,
follows suite allowing firms to hedge issues that
have the potential to erode firm value.
For strategic risks and their management, the
RBV provides the appropriate groundwork
toward defining the different strategies exhibited
by executive management. Conceptually, the
strategic decision of how a firm will respond to
a corporate threat is demonstrated in its approach
to managing its risks. The following simplified
matrix in Fig. 1 demonstrates this point.
On the horizontal axis, we have the organiza-
tional response to risks based on strategic intent.
S 2346
Strategic Risk, Resource based response
Fig. 1 Strategic risk
management options for Risk Perception
perceived risks, high or
low, versus the level of
organizational resources,
strong or weak High
Low
A strong resource-based response to risk means
that the firm accrues and/or creates capabilities
that are over and above the expectations of inves-
tors or stakeholders. Their efforts are an attempt
to excel in the area of performance for managing
public policy issues through the compilation and
enhancement of capabilities. Performance and
enhancement typify this firm. Low resource-
based responses are compliance-focused organi-
zations that aim at meeting the standards or
industry average. Compliance and tolerance
would typify this strategy with minimal resource
development or acquisition. On the vertical axis
are perceptions of the risks or otherwise risk
identification, integral in consideration consider-
ing the number of articles suggesting the neces-
sity to develop director processes for their
identification and the ongoing monitoring.
Quadrant 1
Firms develop capabilities that are focused on
hedging the identified risks and more. The capa-
bility or resource focus is not on compliance
alone but also on the development of its resources
to outperform its competitors. Performance is
important. These organizations strategically
position themselves to exceed over and above
the regulatory requirements. The intent of the
strategy is to not only hedge the risks of higher
regulations or potential environmental impacts/
disasters but also to attain a competitive advan-
tage from performing above expectations (good-
will). One important benefit that was mentioned
was the added value to the firm’s image. Image
Strategic Risk
Strong/Performance Weak/Compliance
1 2
3 4
and reputation is a significant intangible asset of
the firm. Having a reputation that is better than
industry average for environmental performance
has been documented to provide benefits such as
quicker regulatory approval for projects,
suggested to provide access to restricted markets,
increase the firm’s exposure on ethical investing
portfolios and funds, and improve relations with
local communities. Essentially, the efforts of the
firm contribute toward the performance (earn-
ings) of the firm and reduce the strategic risk
exposure.
In most cases, firms in this quadrant will have
experienced a strategic risk in the past. Their
performance or out-performance of competitors
is generally motivated by past experiences with
disasters or controversies that have impacted the
firm and its people. From a risk management
perspective, this may simply be considered hedg-
ing, but the increased level of firm performance
and declarations of competitive advantage is
indicative of strategic intent where the enhanced
behavior accrues benefits that are identified as
legitimate and competitively advantageous
opportunities.
Quadrant 2
The strategies of these firms are pointedly against
corporate responsibility for any perceived risks
exogenous to the firm. Denial and aggressive
lobbying in the public policy arena for their own
interests characterizes this firm. Strategies are
designed to maintain the status quo and compli-
ance is the only objective. Hence, resource
Strategic Risk
acquisition will be centered on compliance only.
Any activity over and above compliance is not
recognized to add value to the firm. Issues in the
public policy arena are kept at an arm’s length.
Issues are generally lobbied with the best interests
of the firm in mind, not the general
public. Therefore, public policy management is
not strategically directed at quelling the potential
for a controversy but rather to ensure the corporate
interests are kept in the minds of the policymakers,
regardless of the public’s stance on the issue.
Resource accumulation or creation beyond
legal expectations is not typical of this strategy
and hence the risk mitigation measures tend to be
presented as costs. In most cases, the firm takes
a strategic position that they have conducted due
diligence and that the governing authorities
should handle the management of the controversy
or public disapproval. In other words, the firm
does not perform beyond the industry average in
managing a high-risk issue. As a result, the firm
neglects the public policy process with a typical
approach that says, “it’s not our fault” and “it’s
not our problem.” These organizations are reac-
tive and defend their position to remain with the
status quo. The defensive or evasive stance, since
the risk is recognized, is resigned to comply and
satisfy industry and government standards only.
Senior management’s interests are in ensuring
due diligence only. The exposure to strategic
risks are higher than those in quadrant one but
recognition is critical. The tipping point in which
the firms’ defensive stance becomes deleterious
to maintaining its brand is much more significant
that for quadrant 1 firms. Of course, the trade-off
here is the reduced effort and hence the lower
costs and whether that reduces the firm’s expo-
sure or end expense in managing strategic risks if
they are realized.
Quadrant 3
Strategies for this firm are similar in nature to
quadrant one with an emphasis on performance.
The firm accrues capabilities in response to risk
situations and becomes strategically situated to
exceed in its performance. This firm’s proactive
approach would be typified by the adoption of an
enterprise risk management process. However,
2347 S
the firm’s inferior receptivity for strategic risk
places them into a medium-risk category. Upon
the realization of a risk, the firm reacts with
intentions of managing the issue; however, capa-
bilities fall short and the firm is faced with an
inadequate supply of skills and managerial know-
how. A majority of firms are suggested to be in
this quadrant. Strategically, they are intent on
improving their performance with managing
risks but do not recognize or have a methodology
for identification. Perhaps this is more indicative
of denial, but the corporate response to risk issues
are “it couldn’t happen to us” or “we didn’t see it
coming.”
Quadrant 4
Default would better characterize this firm, which
focuses on compliance standards as its highest
goal and has a low capacity to perceive the
risks. Being compliance oriented and having
a low resource-based response means that the
capabilities for risk management are gathered in
a haphazard manner. Added to this is that the firm
is risk perceptive deficient, meaning the firm
is often noncompliant and neglectful of due
diligence, often missing risks and resultantly not
mitigating or reducing its exposure.
Many strategies of firms, and their risk behav-
iors, stem from both the experiences of the exec-
utive team and their propensity for risks.
A manager’s experiences and frame of reference
influence his/her behavior in response to a risk.
The development of performance strategies for
managing social or environmental issues tends to
emerge as a result of experiencing an unfavorable S
event. We saw that with the chemical industry
and how they changed the way they strategically
managed the environmental issues after the
Bhopal catastrophe. Firms learn from accidents
and near misses and often will change their deci-
sion processes as a result.
As with behavioral finance, in which a per-
son’s past experiences, heuristics, perception of
the situation and frame dependence, influence
their behavior, with respect to health and envi-
ronmental risks, the same principles apply. Stra-
tegically, it follows that an individual or firm will
also utilize their experiences and propensities and
S 2348
then strategically align the appropriate measures
for mitigation. If the development of a corporate
strategy for managing the firm’s risks depends on
the effective identification of those risks and per-
ception is different for each individual, then
diversity in strategy and performance for risk
management is expected.
Discussion
Although insurance has been instrumental in fur-
thering society through technological advance-
ments and development, the extent of insurance
in protecting organizations has its limitations,
especially with strategic risks. Many issues that
have resulted in realized risks stem from
a mismanagement of a public policy issue or an
accident that extends well beyond what insurance
coverage provide. Whether you have witnessed
Toyota’s auto mishaps or BP’s oil leak in the
Gulf, strategic risks often result in significant
reputational damage that will last for years to
come. So, as a result, social and environmental
accountability has become a major part of the
corporate portfolio for many firms and as
suggested in the Washington post, CMA
Management, and the Chartered institute of
Management Accountants, strategic risks must
be better managed at the director level.
The strategic development or buildup of assets
for managing strategic risks is suggested to be
dependent upon first whether the risks are even
identified and then second whether the firm is
performance oriented or compliance focused.
Performance orientation focuses on competitive-
ness and both the negative aspect of the risk and
the positive opportunities that arise from them.
Compliance attempts to maintain the status quo
and achieves this through minimal resource allo-
cation or capabilities development. Performance
or enhancement beyond this is not seen as bene-
ficial and actually cost restrictive. In conclusion,
this analysis of risk and strategic management
contributes to the understanding of firm respon-
siveness to strategic risks and provides some
insights for the managing reputational risk in
the public policy arena.
Strategic Risk
Key Issues
Strategic risks are considered critical board of direc-
tor issues that should have the proper means for both
their identification and management. Although enti-
tled strategic, their definitional construct can be
derived from many different fields. Due to their
broad and cross-disciplinary nature, they have
been characterized as being both difficult to identify
and secondly to manage. The difficult in identifica-
tion stems from a lack of a quantitative and mech-
anistic means for measurement resulting in their
being overlooked, ignored, or misdiagnosed.
Future Directions
Considerable research could be engaged in fur-
ther identifying processes and management prac-
tices. Here, the integration of disciplines may
prove to be fruitful. Many of these risks are iden-
tified in multiple disciplines ranging from finan-
cial management, psychology, and geography.
A holistic approach to strategic risks has been
established, but a further characterization of
both the risks, the management practices, and
analysis, with case studies, would be helpful.
Cross-References
▶ Corporate Strategy
▶ Environmental, Social, and Governance Risk
▶ Risk Management
▶ Risk Management, Environmental
References and Readings
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Doherty, N. A. (2000). Integrated risk management.
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Heath, R. L. (1997). Strategic issues management.
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Kasperson, R. E., Renn, O., Slovic, P., Brown, H. S.,
Emel, J., Govble, R., Kasperson, J. X., & Ratick, S.
(2000). The social amplification of risk: A conceptual
framework. In P. Slovic (Ed.), The perception of risk.
London: Earthscan.
Supply Chain Management 2349 S
Leiberman, A. J., & Kwon, S. C. (1998). Facts versus
fears: A review of the greatest unfounded health scares Success Stories
of recent times (3rd ed.). New York: American Council
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Miller, K. D., & Bromiley, P. (1990). Strategic risk and
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Penrose, E. T. (1959). The theory of the growth of the
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Sampath, V. (2009). The need for greater focus ▶ Management
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Slovic, P. (2000). The perception of risk. London: Earthscan.

Stratosphere Suppliers

▶ Primary Stakeholders
▶ Ozonelayer

Subconscious Wisdom Supply Chain Management

▶ Integrative Management Approach of CSR Catarina Delgado1 and Branco Manuel Castelo2
1
University of Porto, Porto, Portugal
2
Faculty of Economics, University of Porto:
Subjective Decision Making OBEGEF (Observatory in Economics and S
Management of Fraud), Porto, Portugal
▶ Strategic Marketing & CSR

Definition
Subjectivism A supply chain consists of all parties
(manufacturers, suppliers, transporters, ware-
▶ Ethical Absolutism Versus Ethical Relativism houses, retailers, and customers) and, within
each organization, all the functions involved,
directly or indirectly, in fulfilling a customer
Substandard Factory request (Chopra and Meindl 2010). Exactly
what is supply chain management (SCM) is still
▶ Sweatshops being debated. While some say it is a new
S 2350
concept, others say that it is a fulfillment of the
activity integration promise implied in logistics
early definitions, recognizing that the logistics
pioneers had many of the ideas promoted by
current supply chain enthusiasts (Ballou 2007).
According to Chopra and Meindl (2010),
SCM is the management of all the supply chain
assets and flows (financial, information, and
product/materials) and should have as a main
goal the maximization of the supply chain
surplus, the overall value generated. The overall
value generated is the difference between the
how much the product is worth to the customer
and all the costs related to respond to the
customer request.
SCM encompasses the planning and manage-
ment of all activities involved in sourcing and
procurement, conversion, and all logistics man-
agement activities. Importantly, it also includes
coordination and collaboration with channel part-
ners, which can be suppliers, intermediaries,
third-party service providers, and customers. In
essence, SCM integrates supply and demand
management within and across companies.
Logistics management is that part of SCM that
plans, implements, and controls the efficient for-
ward and reverse flow and storage of goods, ser-
vices, and related information between the point
of origin and point of consumption in order to
meet customer requirements.
In 1998, the Council of Logistics Manage-
ment, now named Council of SCM Professionals
(CSCMP) established a new position, by modify-
ing the council’s name and its definition of
logistics, to indicate that logistics is a subset of
supply chain management and that the two terms
are not synonymous (Ballou 2007).
Purchasing and production are now explicitly
included in the scope of managing material
flows and emphasis is placed on coordination,
collaboration, and relationship building among
channel members (Ballou 2007). By establishing
this position, the CSCMP limits the scope
of logistics to the boundaries of the function within
a firm, primarily focused on activity administra-
tion, while interorganizational and interfunctional
management is within the purview of supply chain
management (Ballou 2007). Activity and process
Supply Chain Management
administration is managing activities such as
transportation, inventories, warehousing, and
order processing that are within the responsibility
of the logistics function (Ballou 2007).
Interfunctional coordination refers to collaborat-
ing and building relationships with other func-
tional areas in the same firm. Interorganizational
coordination has to do with collaborating and
coordinating product flows among channel mem-
bers (Ballou 2007).
In addition, the logistic system also includes
support activities, which contribute to the
logistics mission. Although they may be critical
in any particular circumstance, they might not be
part of the logistics system for every firm. These
activities are warehousing, materials handling,
purchasing, protective packaging, cooperation
with operations, and information maintenance.
Introduction
Green Supply Chain Management Versus
Reverse Logistics
Green concerns became fashion in the late 1980s
and early 1990s because of the great awareness of
environmental problems, such as acid rain, CFCs,
and global warming (Rodrigue et al. 2001).
Terms like recycling, reuse, resource reduction,
environmental manufacturing responsibility, and
green products became familiar to all (de Brito
and Dekker 2002). Meanwhile, logistics was
being seen by many as an opportunity for the
transportation industry to become more environ-
mentally friendly, which entailed a significant
increase in studies, opinions, and reports on this
matter during the early 1990s (Rodrigue et al.
2001). Carter and Ellram (1998) stress the
fact that reverse logistics can, in addition to
environmental benefits, result in significant
savings for the company, minimizing the
threat of government regulation and improved
corporate image.
In addition to regulatory restrictions in the UE
and the USA, competition, marketing, or strate-
gic arguments have pushed companies into return
policies: as good as new returned products are
redistributed in the same market, as it happens
Supply Chain Management
with catalog sales. Subsequently, more busi-
nesses and (non-)governmental organizations
are being committed to material and product
value recovery activities (de Brito and Dekker
2002).
Reverse logistics is a process whereby compa-
nies can become more environmentally efficient
through recycling, reusing, and reducing the
amount of materials used. It can be defined as
“the process of planning, implementing and
controlling backward flows of raw materials, in
process inventory, packaging and finished
goods, from a manufacturing, distribution or use
point, to a point of recovery or point of proper
disposal” (Rubio et al. 2008, p. 1100).
Influential authors, such as Rodrigue et al.
(2001), use the terms reverse logistics, reverse
distribution, reverse-flow logistics, and green
logistics, as synonyms. However, the current
view is that reverse logistics and green logistics
are different concepts (de Brito and Dekker 2002;
Rubio et al. 2008), although they overlap in some
aspects. According to de Brito and Dekker
(2002), reverse logistics concerns activities asso-
ciated with the handling and management of
equipment, products, components, materials, or
entire technical systems to be recovered, which
can be the resell, or the collection, inspection,
separation, or other process that can lead
to remanufacturing or recycling. For them,
environmental matters or sustainable develop-
ment are not object of reverse logistics concern.
For Rubio et al. (2008), reverse logistics cares
with planning, implementing, and controlling
backward flows of raw materials, in process
inventory, packaging, and finished goods, from
a manufacturing, distribution, or use point, to a
point of recovery or point of proper disposal and
cannot be confused with issues that are related to
it but distinct, such as industrial ecology, green
supply chains, waste management, etc.
de Brito and Dekker (2002) define the funda-
mentals of reverse logistics and describe them in
an interrelated “why, what and how” framework:
• WHY (drivers):
– Economics (direct and indirect)
– Legislation
– Extended responsibility
2351 S
• WHAT (return reasons):
– Manufacturing returns (raw material surplus;
quality-control returns; production leftovers)
– Distribution Returns (product recalls;
commercial returns (e.g., unsold products,
wrong/damaged deliveries); stock adjust-
ments; functional returns
– Customer/User Returns (reimbursement
guarantees warranty returns; service returns
(repairs and spare-parts); end-of-use;
end-of-life
• WHAT (types and characteristics of returned
products)
– Product composition: ease of disassembly;
homogeneity of constituting elements;
presence of hazardous materials; ease of
transportation
– Product use pattern: location of use;
intensity, and duration of use
– Deterioration: intrinsic deterioration;
reparability; homogeneity of deterioration;
economic deterioration
• HOW (reverse logistics actors and processes)
– Actors: returners, receivers, and collectors/
processors
– Processes: collection; inspection/selection/
sorting; re-processing/direct recovery;
redistribution
In a literature review from 1995 to 2005,
Rubio et al. (2008) use three fundamental areas
to characterize research on reverse logistics, with
the following findings:
• Management of the recovery and distribution
of end-of-life products (12.37% of total
articles analyzed) S
• Production planning and inventory manage-
ment (56.45% of articles analyzed)
• Supply chain management issues in reverse
logistics (31.18% of articles analyzed, with
the majority being published between 2004
and 2005)
Van Hoek (1999) argues that reverse logistics
alone may not be enough and that a focus on
the entire supply chain is more relevant for under-
standing the impact of business practices on the
environment, suggesting that there is much more
to greening than the reversed flow of goods.
As companies are moving away from reactive
S 2352 Supply Chain Management

Green Supply Chain Management

Importance of GrSCM Green Design Green Operations

LCA ECD

Green Manufacturing Reverse Logistics Waste

& Remanufacturing & Network Design Management
Management

Location & Distribution

Remanufacturing
Scheduling
Planning &
Production
Recycling
Reducing

Inventory

Prevention
Pre-processing

Reduction
(Network Design)
Collecting

Disposal
Pollution
Inspection/

Source
Sorting
Product/
Reuse

Material
Recovery

Repair/Refurbish Disassembly

Disassembly Leveling Disassembly Process Planning

Supply Chain Management, Fig. 1 Classification based on problem context in supply chain design (Source:
Srivastava 2007)

approaches oriented at complying with regulation
to an attempt to seek value and gain competitive-
ness, meaning integrating environmental
management into corporate strategic planning
and into day-to-day practices. This requires not
only cross-functional but also cross-company pro-
cesses including, process design suppliers, pro-
cesses, evaluation systems, and inbound logistics.
According to Shrivastava (2007), green supply
chain management (GrSCM) has its roots in both
environment management and supply chain man-
agement literature. Adding the green component to
supply chain management involves addressing the
influence and relationships between supply chain
management and the natural environment.
Srivastava (2007) defines GrSCM as integrating
environmental thinking into supply chain manage-
ment, including product design, material sourcing
and selection, manufacturing processes, delivery of
the final product to the consumers, as well as end-
of-life management of the product after its useful
life. It includes green design and green operations.
Green design may be viewed as an environment
conscious design taking life cycle assessment of
the product/process into account. Similarly, green
operations involve all operational aspects related to
green manufacturing and remanufacturing, usage,
handling, logistics, and waste management, after
the design has been finalized. In his work,
Srivastava (2007) classifies the literature according
to these definitions and does not consider opera-
tional aspects of green logistics or details of empir-
ical studies or literature on green purchasing,
industrial ecology, and ecosystems (Fig. 1).
CSR and SCM
Carter and Jennings (2002) introduced the term
logistics social responsibility (LSR) as an
umbrella for the CSR issues that relate
specifically to supply chain management (referred
to as logistics management). They have conducted
a study based on in-depth interviews. Their
Supply Chain Management
findings suggest that organizational culture, top
management support, individual values, liability,
marketing and public relations, and regulation are
the key drivers to a more responsible SCM. These
authors have also identified the most frequent bar-
riers perceived (availability, coordination, and
organizational culture) and some practices that
could help to overcome those barriers (feedback,
written policies, resources, and individual values).
As to the impact of following the path toward
a more responsible SCM, they have found that,
overall, this change has improved the job satisfac-
tion; the employee motivation; the trust in the
relationships with suppliers, customers, and other
stakeholders; and finally, the financial
performance. They have identified several key
activities that comprise LSR: purchasing
management and transportation management.
They also presented several examples of
practices concerning environment, ethics, human
rights, labor conditions, philanthropy, safety, and
community involvement. Their findings are
presented in Table 1.
Another approach, purchasing social
responsibility (PSR) is focused in the study of
social responsibility in purchasing, which
includes activities such as environmental
purchasing, sourcing from minority-owned
suppliers/fair trade, and human rights, safety,
and philanthropy issues relating to supply
management (Carter 2005). Both logistic social
responsibility and purchasing social responsibil-
ity are under the broader umbrella of sustainable
supply chain management (SSCM) (Carter and
Rogers 2008).
A sustainable SCM may be defined as the
management of the supply chain flows (material,
information, and capital) and the cooperation
among organizations belonging to the supply
chain, while seeking to achieve minimum
performance goals in all three dimensions of
sustainable development (economic, environ-
mental, and social), derived from customer,
governing agencies, and stakeholder require-
ments (Seuring and Muller 2008). This definition
integrates green/environmental supply chain
management as one part of the wider field
(Seuring and Muller 2008).
2353 S
Figure 2 shows the framework proposed by
Carter and Rogers (2008), based on four
“supporting facets of sustainability,” risk
management, transparency, strategy, and culture.
Seuring and Muller (2008) identified two
different SSCM strategies:
• The “supplier management for risks and
performance” strategy, where companies’
major concerns regarding their suppliers are
the loss of reputation if related problems
are raised and the supplier evaluation and
selection based on additional environmental
and social criteria that complement the
economic criteria.
• The “supply chain management for sustain-
able products” strategy, where companies
define life cycle-based standards for the
environmental and social performance of
products, which are then implemented
throughout the supply chain.
Either way, the implementation of a SSCM
should be tackled with caution. In fact, if
the social and environmental initiatives are
disconnected from the supply chain strategy and
handled poorly, the economic goals may not be
achieved (Carter and Rogers 2008).
Key Issues
The meaning of SCM and its differences from the
concepts of logistics, logistics management, or
business logistics is still a subject of debate
among both the academic and practitioners’
communities, despite the position of the former S
Council of Logistics Management, who changed
both its name and the official definition of logis-
tics in order to emphasize that logistics is a subset
of SCM. The now named Council of SCM
Professionals (CSCMP) established a new
position, by modifying the council’s name and
its definition of logistics, to indicate that logistics
is a subset of supply chain management and that
the two terms are not synonymous. Logisticians
are alerting to the danger of the broadness of
SCM concept, which may lead to a lost in its
identity and focus (Ballou 2007). In addition,
empirical studies are showing that SCM efforts
S 2354 Supply Chain Management

Supply Chain Management, Table 1 Examples of socially responsible practices in the supply chain
Involvement
in LSR Purchasing Transportation Warehousing
Environment • Ensuring that supplier • Transportation of H/M: • Proper storage, packaging, and
processes and products are complying with regulations labeling of hazardous materials
environmentally sound including labeling and • Reverse logistics
• Sourcing from placarding • Finding revenue-generating uses
environmentally sound • Clean vehicles/fuel efficiency: for obsolete inventory in
suppliers Ensuring that trucks are warehouse
• Purchasing recyclable and maintained so that they do not
reusable packaging and leak fluids, i.e., oil, etc.
containers • Modal choice (rail versus truck
• Using life cycle analysis in terms of impact on
• Participating in design for environment)
reuse and recycling • Reverse logistics
• Identifying and sourcing • Reconditioning and reuse of
nonhazardous alternatives pallets
• Ensuring proper labeling,
documentation, and
packaging of hazardous
materials (H/M)
• Reducing packaging
material
Ethics. • Using obscure contract • Bribes and kickbacks associated • Employee theft of product
Avoiding the terms to gain an advantage with carrier selection
following . . . over suppliers • Mafia involvement
• Misleading a salesperson • Bribes offered to port officials to
during a negotiation expedite shipments
• Inventing (making up)
a second source of supply to
gain competitive advantage
• Exaggerating the
seriousness of a problem to
gain concessions
• Giving preference to
suppliers preferred by top
management
• Writing specifications that
favor a particular supplier
• Blaming suppliers for
mistakes made by
purchasing
• Sharing information about
suppliers with their
competitors
• Overestimating demand to
gain volume discounts
Diversity • Purchasing from minority/ • Use of minority carriers • Hiring and promotion
women business enterprise • Hiring and promoting equally
(MWBE) suppliers within a traditionally white-
male-dominated industry
Human rights • Ensuring suppliers do not • Operating schedules that allow • Family issues; Providing or
and quality of use sweatshop labor drivers adequate time at home helping employees find child care
life for • Ensuring suppliers comply • Paying adequate wage
workers with child labor laws
• Asking suppliers to pay an
adequate wage
(continued)
Supply Chain Management
Supply Chain Management, Table 1 (continued)
Involvement
in LSR Purchasing
Safety • Ensuring suppliers’
locations are operated in
a safe manner
• Ensuring the safe, incoming
movement of purchased
materials
Philanthropy/ • Helping to develop local
Community suppliers
• Auctioning or donating gifts noise pollution
received from supplier
2355 S
Transportation Warehousing
• Abiding by hours of service • Training and certification of use
requirements of equipment, including forklifts
• Ensuring vehicles are adequately and other materials – handling
maintained equipment
• Contamination/spoilage of food, • Safety procedures/equipment,
including making sure that such as requiring and making sure
trailers and tankers are properly employees use hardhats, gloves,
cleaned/purged safety goggles, hard-toed shoes,
• Proper securement of load (not etc.
dumping product on roads)
• Ensuring the safety of for-hire
carriers: accident records,
operating ratios, insurance,
training. Including
Safety as a selection criteria of
for-hire carriers
• Driver certification and training
• Drug and alcohol testing
• Performing internal safety audits
• Overweight vehicles
• Hours of operation/minimizing • Donation of excess or obsolete
traffic/avoiding neighborhoods, inventory to charity
• Stopping to help stranded
motorists (“White Knights”)
• Education: bringing trucks to
schools
• Professional affiliations such as
CLM

of coordination among different firms are
currently implemented at a very limited degree
(Ballou 2007). The viewpoint of supply chain
management conceptualized as managing the
entire business (logistics and production, market-
ing channels, etc.) led some visionaries to argue
supply chain management is just a new name for
systems theory. While some visionaries agree
that SCM is the next step for logistics, others
agree that logistics should keep its traditional
focus.
Future Directions
The future of logistics and its role in the supply
chain management context is still being debated.
Understanding the past and observing the present
allows an extrapolation to what might be in store
for logistics/SCM in the future. The trend toward
increased globalization, free trade, and
outsourcing all contribute to a continued and
growing interest in logistics/SCM (Ballou 2007). S
Many authors point out the difficulty in the
supply chain management materialization and its
many causes. SCM processes are to be coordi-
nated through collaboration and relationship
management throughout the various echelons of
the supply channel, from initial suppliers to end
consumers (Bowersox et al. 2000; Ballou 2007).
However, although there is much talk about the
benefits of collaboration among channel mem-
bers and an extensive array of articles that focus
on the benefits to be gained, real-world success
stories are still rare (Ballou 2007; Daugherty
2011). The question is still open: to what extent
S 2356 Supply Chain Management

Good? Organizational
Strategy Culture
• Sustainability as part
• Deeply Ingrained
of an integrated
strategy • Organizational Citizenship
l Social
nta • Values and Ethics
n me e Performance
vir o nc
En forma
e r
P

Sustainability

Best

Better Better

Risk Management Transparency

Economic
• Contingency Planning • Stakeholder Engagement
Performance
• Supply Disruptions • Supplier Operations
• Outbound Supply Chains

Supply Chain Management, Fig. 2 SSCM (Carter and Rogers 2008)

is the theoretical scope of SCM actually
practiced? Research is needed to understand
why collaboration is not achieved.
Other research topics in logistics/SCM area
have also been suggested:
• In logistics services innovation, how can we
research innovation in such a manner that will
provide actionable steps to management
(Daugherty 2011)?
• How can the use of technology be leveraged to
increase efficiency (Daugherty 2011)? Studies
show that, for example, the use of technology
such as Radio Frequency Identification
(RFID) integrated with Enterprise Resource
Planning (ERP) systems allows an increase
in the efficiency in information sharing.
However, companies must have willingness
to share (Bowersox et al. 2000).
• How can SCM enhance the revenue? There
will be a shift in strategy. In the past, the
focus of logistics/SCM has been on efficiency.
The contemporary view is that SCM is a new
frontier for demand generation (Ballou 2007).
Customer relevancy will increasingly become
the major strategic commitment of leading
corporations (Bowersox et al. 2000).
In the environmental issues and corporate
responsibility domain, some authors (Daugherty
2011; Rodrigue et al. 2001; Rubio et al. 2008;
Srivastava 2007) point out the need for more
detailed studies, such as studies on:
• Product design and inventory management, in
order to reduce the number of returns
• Overcoming the inconsistencies between the
goals and objectives of logistics, in transpor-
tation-/distribution-related practices, and the
pursuit of a greener supply chain
• Organizational commitment to change and its
impact on operational performance and on
satisfaction level with the new relationships
established
• How the regulatory environment, economic
considerations, and level of commitment
influence the volume of returns
Sustainability
• The impact of remanufacturing on product
quality and on the performance of production
planning and control (PP&C) systems
• The impact of service quality and recovery
strategies in a reverse supply chain on the
customer satisfaction, and, in turn, on
repurchase intentions
• Secondary markets and how companies
should best sell unwanted products (e.g., the
time erosion of a product’s value in the
secondary market is dependent on attributes
and pricing of products in the primary and
secondary markets)
• How various uncertainties influence channel
relationships within GrSCM
• Reverse logistics, its connection to the product
life cycle and, in particular, how, in practice,
reverse logistics activities do change over the
life of a particular product
• The impact of marketing on returns and
the development of models that establish the
relationship between new product sales and
returns rates
• How companies should process, store, and
dispose of returned goods
Cross-References
▶ Bribery and Corruption
▶ Corporate Social Responsibility
▶ Fair Trade
▶ Lean Thinking
References and Readings
Ballou, R. (2007). The evolution and future of logistics
and supply chain management. European Business
Review, 19(4), 332–348.
Bowersox, D., Closs, D., & Stank, T. (2000). Ten mega-
trends that will revolutionize supply chain logistics.
Journal of Business Logistics, 21(2), 1–16.
Carter, C. (2005). Purchasing social responsibility and
firm performance. International Journal of Physical
Distribution and Logistics Management, 35(3),
177–194.
Carter, C., & Ellram, L. (1998). Reverse logistics:
A review of the literature and framework for future
investigation. Journal of Business Logistics, 19(1),
85–102.
2357 S
Carter, C., & Jennings, M. (2002). Logistics social
responsibility: An integrative framework. Journal of
Business Logistics, 23(1), 145–180.
Carter, C., & Rogers, D. (2008). A framework of sustain-
able supply chain management: Moving toward new
theory. International Journal of Physical Distribution
and Logistics Management, 38(5), 360–387.
Chopra, S., & Meindl, P. (2010). Supply chain manage-
ment. Prentice-Hall: Pearson Education.
Daugherty, P. (2011). Review of logistics and supply
chain relationship literature and suggested research
agenda. International Journal of Physical Distribution
and Logistics Management, 41(1), 16–31.
de Brito, M., & Dekker, R. (2002). Reverse logistics –
a framework. Econometric Institute Report EI 2002-
38, Erasmus University Rotterdam, The Netherlands.
Rodrigue, J., Slack, B., & Comtois, C. (2001). The para-
doxes of green logistics. In A. Brewer, K. Button, &
D. Hensher (Eds.), The handbook of logistics and
supply-chain management. London: Elsevier.
Rubio, S., Chamorro, A., & Miranda, F. (2008).
Characteristics of the research on reverse logistics
(1995–2005). International Journal of Production
Research, 46(4), 1099–1120.
Seuring, S., & Muller, M. (2008). From a literature review
to a conceptual framework for sustainable supply
chain management. Journal of Cleaner Production,
16, 1699–1710.
Srivastava, S. (2007). Green supply-chain management:
A state-of-the-art literature review. International
Journal of Management Reviews, 9(1), 53–80.
Van Hoek, R. (1999). From reversed logistics to green
supply chains. Supply Chain Management, 4(3),
129–134.
Supply Chains
▶ Wal-Mart
S
Survivability
▶ Sustainability (World Commission on
Environment and Development Definition)
Sustainability
▶ Business Case for CSR
▶ Corporate Governance as a Tool for Alleviat-
ing Developmental Issues
S 2358 Sustainability (World Commission on Environment and Development Definition)
▶ Corporate Social Innovation
▶ Environmental Ethics
▶ Good Corporation
▶ Intergenerational Equity
▶ Sustainable Production and Consumption
Sustainability (World Commission
on Environment and Development
Definition)
Christa Thomsen
Department of Business Communication, Centre
for Corporate Communication, Aarhus
University Department of Business
Communication, Åarhus V, Denmark
Synonyms
Endurance; Livelihood; Longevity; Preservation;
Prolongation; Survivability
Definition
The Brundtland Commission or the World
Commission on Environment and Development
(WCED), known by the name of its Chair, Gro
Harlem Brundtland, was convened by the United
Nations in 1983. The commission published
its report, Our Common Future, in 1987 and
proposed the concept of sustainable development
as an ideal for the global economy and corpora-
tions. Sustainability was defined as development
that meets the needs of the present generation
without compromising the ability of future
generations to meet their needs.
The WCED was created to address growing
concern about the accelerating deterioration of
the human environment and natural resources
and the consequences of that deterioration for
economic and social development. The work of
the commission resulted in the Brundtland Report
which contained two main concepts: (1) the con-
cept of needs, in particular the needs of
the world’s poor, needs which should be given
priority; and (2) the idea of limitations imposed
Social
Bearable Equitable
Sustainable
Environment Economic
Viable
Sustainability (World Commission on Environment
and Development Definition), Fig. 1 Sustainability as
the reconciliation of environmental, social, and economic
demands
by technological and social pressure on the
environment’s ability to meet present and future
needs. In establishing the commission, the UN
General Assembly recognized that environmen-
tal problems are global in nature and determined
that it was in the common interest of all nations to
establish policies for sustainable development.
At the 2005 World Summit, there was a general
agreement that sustainability requires the reconcil-
iation of environmental, social, and economic
demands, also expressed as the “three pillars” of
sustainability. This view has been illustrated as
three overlapping ellipses indicating that the
three pillars of sustainability are not mutually
exclusive and can be mutually reinforcing. Sus-
tainability is in other words about managing in the
middle as illustrated in Fig. 1.
The UN definition has undergone various inter-
pretations. What sustainability is, what the goals of
sustainability should be, and how these goals are to
be achieved are all open to interpretation. How-
ever, there is some common understanding of the
domains and dimensions of sustainability. We will
address these topics after the introduction.
Introduction
In the following, the process of establishing the
Brundtland Commission is set out in order to
better understand the key issues of sustainability
which are dominating the debate on sustainability
today.
Sustainability (World Commission on Environment and Development Definition)
In 1983, the UN General Assembly passed
Resolution 38/161: “Process of preparation of
the Environmental Perspective to the Year 2000
and Beyond” establishing the Brundtland Com-
mission. In A/RES/38/161, the General Assem-
bly suggested that the special commission should
focus mainly on the following terms of reference
for its work:
(a) To propose long-term environmental strategies
for achieving sustainable development to the
year 2000 and beyond.
(b) To recommend ways in which concern for the
environment may be translated into greater
cooperation among developing countries and
between countries at different stages of
economic and social development and lead
to the achievement of common and mutually
supportive objectives which take account of
the interrelationships between people,
resources, environment, and development.
(c) To consider ways and means by which the
international community can deal more
effectively with environmental concerns in
the light of the other recommendations in its
report.
(d) To help to define shared perceptions of long-
term environmental issues and of the appro-
priate efforts needed to deal successfully with
the problems of protecting and enhancing the
environment, a long-term agenda for action
during the coming decades, and aspirational
goals for the world community.
The General Assembly further suggested that,
in fulfilling its terms of reference, the special
commission should enter into a dialogue with
a number of sustainability stakeholders and:
(a) Maintain an exchange of views with the sci-
entific community, environmentalists, and all
other sections of public opinion, particularly
youth, concerned with the environment, and
those concerned with the relationship
between development and environment.
(b) Receive the views of Governments, principally
through the Governing Council and its inter-
governmental intersessional preparatory com-
mittee, and through contacts with national
leaders, opinion makers, and concerned
international figures.
2359 S
(c) Maintain links with other intergovernmental
bodies within and outside the United Nations
system, while however using the Administra-
tive Committee on Coordination and the des-
ignated officials for environmental matters as
the channels of communication with the
United Nations system; the willingness of
the Administrative Committee on Coordina-
tion to assist should be communicated to the
Commission.
(d) Take account of the scope of environmental
issues as defined by the United Nations
system-wide medium-term environment pro-
gram and as reflected in the efforts of the
United Nations system, including the United
Nations Environment Programme, in the field
of the environment.
(e) Make full use of relevant existing reports and
material.
Taking into account the above terms of refer-
ence for its work, the Brundtland Commission
published its report, Our Common Future,
which deals with sustainability, sustainable
development, and the change of politics needed
for achieving that. In the following, we focus on
key issues in sustainability as the concept has
evolved since 1987.
Key Issues
Key issues in sustainability are as follows:
• Domains of sustainability
• Dimensions of sustainability
• Corporate Sustainability S
Domains of Sustainability
There is no universally accepted understanding of
sustainability. What comes out of the reading of
the Brundtland Commission report is that on the
one hand, sustainability is conceived as a factual
and scientific concept. On the other hand, it is
conceived as a process. The process can best be
described as a political or a stakeholder-oriented
process. However, whereas there is no common
understanding of sustainability, there is some
common understanding of the domains and
dimensions of sustainability. These domains can
S 2360 Sustainability (World Commission on Environment and Development Definition)
be illustrated by the ways different professionals
speak about the concept.
Biologists speak, for example, of sustainabil-
ity when they talk of the interaction between
human and natural systems. The biological
definition of sustainability concerns itself with
the need to save natural capital on behalf of future
generations, particularly the genetic diversity
contained in plant and animal species, or
biodiversity. The biological definition of sustain-
ability touches on the domain where human
urbanization meets undisturbed ecosystems and
the consequences of that interaction.
Economists speak of sustainability when they
analyze whether the modern production system
will collapse because it will exhaust the natural
capital on which it depends. The economists’
definition of sustainability encompasses instru-
ments to internalize the environmental costs of
industrial activity in the economy by way of
public intervention in private markets. This defi-
nition examines how markets, as conventionally
conceived, fail to protect the environment.
Sociologists speak of the sustainability of
individuals, families, and neighborhoods when
they establish a causal relationship between race
and the siting of toxic and hazardous enterprises
in America’s inner city ghettos. The sociological
definition of sustainability concerns itself with
the sustainability of human beings as reflected
in problems such as environmental racism. The
sociological definition of sustainability addresses
the domain in which human interest groups make
decisions over the use of natural resources and
how other humans are affected in their daily lives.
Urban planners speak of sustainability when
they draft creative plans to integrate cities and
nature in unprecedented ways. The urban defini-
tion of sustainability seeks to reduce notions of
sustainability to the practical planning of regions,
communities, and neighborhoods. It involves the
pursuit of a design science that will integrate
urbanization and nature preservation.
Environmental ethicists speak of sustainabil-
ity when they ponder whether nature has rights
and whether the current rate of species extinction
caused by humanity is ethical. The ethical defini-
tion of sustainability asserts that preservationist
natural resource principles are superior to those
that are conservationist and exploitative.
The ethical definition of sustainability probes
the domain where humans ponder whether they
are a part of, or apart from, nature, and how this
should guide moral choice.
The above domain talk demonstrates that
sustainability is a constellation of ideas. More
specifically, the concept has come to be used to
describe a wide variety of social concerns. As we
shall see, it encompasses a number of
dimensions.
Dimensions of Sustainability
One way of understanding sustainability is to
understand it as a concept which requires the
reconciliation of three dimensions, that is, an
environmental, a social, and an economic dimen-
sion. We speak about environmental sustainabil-
ity when governments, corporations, and other
organizations adopt sustainable development
initiatives to address concerns about climate
change and the depletion of natural resources,
reinforced by consumers and activists who push
large corporations to develop such practices.
Companies failing in this effort often become
the target of activist pressures. Examples of envi-
ronmental sustainability initiatives are: reducing
products’ energy consumption, packaging mate-
rials, hazardous substances, and weight, and
increasing levels of recycling and safeguards dur-
ing disposal of products. The Environmental Per-
formance Index (EPI) is a method of quantifying
the environmental performance of a country’s
policies. This index was developed from the
Pilot Environmental Performance Index, first
published in 2002, and designed to supplement
the environmental targets set forth in the U.N.
Millennium Development Goals. The EPI was
preceded by the Environmental Sustainability
Index (ESI), published between 1999 and 2005.
The ESI was developed to evaluate environmen-
tal sustainability relative to the paths of other
countries. Due to a shift in focus by the teams
developing the ESI, the EPI uses outcome-
oriented indicators, then working as
a benchmark index that can be more easily used
by policy makers, environmental scientists,
Sustainability (World Commission on Environment and Development Definition)
advocates, and the general public. As of January
2010, three EPI reports have been released.
Social sustainability is less well understood.
According to the Brundtland Commission’s
view of social sustainability, this term relates
to how companies contribute to the well-being
and quality of life of society and individuals in
current and future generations. Product-related
social aspects therefore refer to how their pro-
duction, use, and disposal satisfy such condi-
tions. Social aspects differ in their level of
focus. For example, some discuss taking
employees into consideration to summarize
how an organization supports employees,
whereas others separate this aspect into working
conditions, education and training, and equity.
Various social aspect themes emerge.
For example, one theme relates to health and
safety, also known as safety and well-being or
accident and injury reduction. Regardless of the
terminology, this theme is based on the premise
that the supplying company should minimize the
potential for a product to harm an individual
during its product’s lifecycle. Another theme
pertains to product usage within the product’s
operating context. The quality of the working
environment, including issues of noise level
and room temperature, impinges on how people
perform their jobs. A product further must
answer stakeholders’ needs. The product also
generates employment or wealth in different
social environments. Ethical production
requires treating employees and those within
the supply chain fairly by ensuring that the pro-
duction process protects individuals and does
not violate human rights or require the use of
child labor. Social sustainability thus represents
a force for good that encompasses equity trans-
fer, such that profit is more evenly distributed
between those involved in the manufacture
within the organization and those within the
supply chain. Economic sustainability is about
achieving economic growth. However, it is not
just about achieving economic growth year after
year. Economic sustainability is about under-
standing that economic growth is only sustain-
able if it simultaneously improves our quality of
life and the environment.
2361 S
Corporate Sustainability
The publication of Our Common Future in 1987
proposed the concept of sustainable development
as an ideal for the global economy, including cor-
porations. In seeking sustainable economic growth
and sustainability at the enterprise level, a number
of sustainability principles or codes of conduct
emerged. A great deal of intellectual effort, mana-
gerial resources, and publicity are devoted to these
principles. While they have created some dialogue,
and helped to lead some organization in the direc-
tion of sustainability, their practical effectiveness
remains more or less uncertain.
Corporate Sustainability has been presented as
the ultimate goal for corporations, meeting the
needs of the present without compromising the
ability of future generations to meet their own
needs – with Corporate Social Responsibility as
an intermediate stage where companies try to bal-
ance the Triple Bottom Line. The three aspects of
sustainability (economic, environmental, and
social) are translated into an approach that com-
panies have to be concerned with. Today, many
consider Corporate Sustainability and Corporate
Social Responsibility as synonyms. In general,
both concepts refer to corporate activities, volun-
tary by definition, demonstrating the inclusion of
social and environmental concerns in business
operations and in interactions with stakeholders.
However, a distinction has been proposed, that is,
to associate Corporate Social Responsibility with
the communion aspect of people and organizations
and Corporate Sustainability with the agency
aspect of the relationship between a principal
(shareholder) and an agent of the principal S
(company’s managers). Therefore, Corporate
Social Responsibility relates to phenomena such
as transparency, stakeholder dialogue, and sustain-
ability reporting, while Corporate Sustainability
focuses on value creation, environmental manage-
ment, environmentally friendly production sys-
tems, human capital management, etc.
Future Directions
The fundamental principles of the Brundtland
Commission are still alive today but the
S 2362 Sustainability (World Commission on Environment and Development Definition)
intervening years have seen changes in terminol-
ogy and thinking. The Report promoted sustain-
able development, economic and technological
activities that are environmentally sound. While
realistic at the time, it has proved difficult to
achieve in practice. The Report assumed that
the environment could be protected while
achieving satisfactory economic sustainability,
but today there is an increased consciousness
that the developed world economies cannot con-
tinue growing to infinity. Mineral resources
including coal, gas, and oil will soon be
exhausted, or at least too expensive to extract
and therefore economically exhausted. In addi-
tion, consumer goods production is heavily reli-
ant on low cost labor in developing countries.
And these countries have fast-growing
populations which world food supplies cannot
support. But sustainability does not stop at eco-
nomics. To live in an industrial society, we need
efficient and reliable transport, energy distribu-
tion, health care, communications, and utilities.
This notion of institutional sustainability typi-
cally relies on a democratic government in
which elected representatives present them-
selves for re-election every 4 or 5 years. Clearly
such an approach encourages short-term poli-
cies, insensitive to long-term environmental
and sociological trends. However, we do now
have some long-term governmental frameworks
that run over decades. In addition to the sustain-
ability of the world economies and institutions,
we also need to consider environmental sustain-
ability: Following mid-twentieth century
concerns about pollution, a broader environmen-
tal movement has developed. Once considered a
dangerous, antiestablishment viewpoint, this
thinking is now mainstream with many major
international agreements already set up.
The most recent is the Kyoto Protocol, also
known as the United Nations Framework Con-
vention on Climate Change. This has set targets
for reduction of emissions of carbon dioxide and
other greenhouse gases. Whereas the link
between emissions and climate change is not
accepted by all scientists and engineers, most
nations have signed up to the Protocol.
Cross-References
▶ Sustainability
▶ Sustainability and Sustainable Development
▶ Sustainability Assessment Models
▶ Sustainability Rating
▶ Sustainability Reporting Guidelines
▶ Sustainability Risk Management
▶ Sustainability-Oriented Innovation
▶ Sustainable Business: A New Paradigm
▶ Sustainable Consumption
▶ Sustainable Development in SMEs
▶ Sustainable Energy Management and CSR
▶ Sustainable Enterprise Development
▶ Sustainable Marketing
▶ Sustainable Primary Energy Production
▶ Sustainable Production and Consumption
▶ Sustainable Tourism
▶ Sustainopreneurship
References and Readings
Basiago, A. D. (1995). Methods of defining ‘sustainability’.
Sustainable Development, 3, 109–119.
Lindgreen, A., Antioco, M., Harness, D., & Sloot, R.
(2009). Purchasing and marketing of social and
environmental sustainability for high-tech medical
equipment. Journal of Business Ethics, 85, 445–462.
Shrivastave, P., & Berger, S. (2010). Sustainability prin-
ciples: A review and directions. Organization
Management Journal, 7(4), 246–261.
United Nations General Assembly. (1983). Process of
preparation of the environmental perspective to the
year 2000 and beyond, Resolution A/RES/38/161,
Adopted by the General Assembly on December 19,
1983. Retrieved March 20, 2011, from http://www.un.
org/en/sustainability/
United Nations General Assembly. (1987). Report of the
World Commission on Environment and Development:
Our common future. Transmitted to the General
Assembly as an Annex to Document A/42/427 –
Development and International Co-operation: Envi-
ronment. Retrieved March 20, 2011, from http://
www.un.org/en/sustainability/
United Nations General Assembly. (2005). 2005 World
Summit Outcome, Resolution A/60/1, adopted by the
General Assembly on September 15, 2005. Retrieved
March 20, 2011, from http://www.un.org/en/
sustainability/
University of Copenhagen. (2009, March). “Key messages
from the Congress” News item on Copenhagen
Climate Congress in March 2009. Retrieved
Sustainability Accounting
March 20, 2011, from http://climatecongress.ku.dk/
newsroom/congress_key_messages/
Van Marrewijk, M. (2003). Concepts and definitions of
CSR and corporate sustainability: Between agency and
communion. Journal of Business Ethics, 44, 95–105.
World Business Council for Sustainable Development.
This web site has multiple articles on WBCSD contri-
butions to sustainable development. Retrieved March
20, 2011, from http://www.un.org/en/sustainability/
Sustainability Accounting
Dimitar Zvezdov and Stefan Schaltegger
Centre for Sustainability Management (CSM),
Leuphana University L€ uneburg, L€
uneburg,
Germany
Synonyms
Management accounting; Social and environ-
mental accounting; Sustainability management
accounting
Definition
Sustainability accounting entails systems,
methods, and processes of creating sustainability
information for transparency, accountability, and
decision making purposes. This includes the
identification of relevant sustainability issues of
the company, the definition of indicators and
measures, data collection, overall performance
tracking and measurement, as well as the
communication with to internal and external
information recipients.
The main understanding of the phenomenon in
literature includes: (1) an empty buzzword blur-
ring the debate (critical, Marxist-lead view), (2) an
overarching measurement and information man-
agement concept for the calculation of a single
corporate sustainability measure (technocratic
view), and (3) an umbrella term bringing together
different environmental and social accounting
approaches for the purpose of addressing sustain-
ability issues (pragmatic view).
2363 S
Introduction
Sustainability accounting and related terms, such
as environmental accounting or social account-
ing, are used with greater frequency not only at
academic conferences but also in corporate prac-
tice. This raises the question of the relationship
between accounting and sustainability and the
role of accounting for sustainability or sustain-
able development, as well as what is understood
by sustainability accounting. In general, sustain-
ability accounting can be understood as the
umbrella term which covers various kinds of sus-
tainability-oriented information management and
communication like environmental management
accounting or social accounting. Following
inside-out logic from decision making in the
company to communicating with external stake-
holders, sustainability accounting can be seen as
comprising three core elements: sustainability
information generation and management, sus-
tainability management control, and sustainabil-
ity reporting.
Information generation and management pre-
sent a challenge for numerous companies and
actors within them. The extensiveness of sustain-
ability-related threats and opportunities as well
strengths and weaknesses require an in-depth
analysis of corporate performance beyond pure
financial performance, including social and envi-
ronmental issues and their interlinkages. The
aspects of information generation and manage-
ment to be considered include:
– Who within the company is involved with
the process of sustainability accounting? S
The process of sustainability accounting
covers all stages of the generation and
reporting of information, from the original
decisions on what information is needed,
physical collection of the initial data and its
processing, as well as its final reporting and
use. Actors can be either a single individual
such as the company’s sustainability man-
ager, a group of people such as the sustain-
ability department as a whole, or another
department such as accounting or quality
management.
S 2364
– What kind of sustainability information is
generated? The type of information that is
generated varies between different companies,
depending on both – each company’s own
priorities in its sustainability management
and its existing information systems. This
includes the issue of how far linkages are
made between information on the different
aspects of sustainability – environmental,
social, and economic.
– Why is the sustainability information gener-
ated? The types of information that are gener-
ated in each company depend largely on the
purposes for which it is needed to support the
company’s main objectives. These vary sub-
stantially between companies, ranging from
internal optimization goals such as increasing
energy efficiency, to externally driven goals
such as reacting to public pressure to report
environmental performance. Both the purpose
of collecting and using such information and
the reasons that prompted it shape the infor-
mation generation in an organization.
– Who uses sustainability information? The
recipients of the information generated in
a company can vary in terms of their role in
the information flows. Recipients can be either
the final recipients who use the information to
support a business decision or judgment in the
course of their work, or intermediate recipi-
ents who then pass on this information to
others, perhaps after first further processing
or combining it with other data. Paying atten-
tion to this question can also be revealing as to
whether the actual use made by information-
users is consistent with what was the initial
purpose of generating the information or what
is anticipated by those providing the
information.
– How are data collection and information cre-
ation organized? This question looks at the
internal organization of the process within
each company and the respective roles of the
various parties involved: for example, the
extent of centralization (or decentralization)
of the information system, and the regularity
with which sustainability information is
generated.
Sustainability Accounting
– What sustainability management accounting
methods are applied? Applying various
methods of sustainability management
accounting can enhance the use(fullness) and
effectiveness of sustainability accounting
practices.
Directly related to sustainability accounting
and based on an expanded understanding of man-
agement control is the concept of sustainability
management control with the central task to
“translate” strategies into strategic management
action. Although it has been sporadically
discussed, there are few detailed elaborations of
the concept so far. The same applies to manage-
rial socio-accounting and control. As far as man-
agement eco-control is concerned, it has focused,
both in academic publications and in business
practice, for about 15 years on manufacturing
processes and energy and materials flows. Eco-
control is strongly linked with the development of
environmental management accounting.
One practice-oriented concept of sustainabil-
ity management control is framed within the
structure of the sustainability balanced scorecard
(SBSC, Fig. 1), which provides a framework for
organizing sustainability management control
and its orientation toward the effective and effi-
cient implementation of a company’s strategy.
This allows distinguishing between the following
orientations, corresponding to the five perspec-
tives of the SBSC:
– Finance-oriented sustainability management
control
– Market-oriented sustainability management
control
– Process-oriented sustainability management
control
– Knowledge- and learning-oriented sustain-
ability management control
– Nonmarket-oriented sustainability manage-
ment control (depicted as a framework within
which the four market management control
perspectives are located)
The starting point is business unit’s strategy
and the identification of the environmental and
social exposure of a given strategic business
unit. Following the top-down approach of the
original BSC, first the environmental and social
Sustainability Accounting
Sustainability management control as
structured by the SBSC
Finance-oriented
sustainability management
control
Market-oriented
sustainability management
control
Process-oriented
sustainability
management control
Knowledge and learning-
oriented sustainability
management control
Non-market oriented
sustainability management
control
Sustainability Accounting, Fig. 1 The concept of sustainability management control (Source: Schaltegger 2011a, 20)
elements are identified and their relevance is
determined, before they are analyzed step-by-
step for the finance, customer, process, learning,
and development as well as for the nonmarket
perspectives. The result of the analysis is the
identification of key performance indicators –
strategically relevant lagging or leading indica-
tors for each perspective – which form the basis
for an operative, perspective-oriented sustain-
ability management control and sustainability
accounting system.
Being a recent development, the practice of
sustainability management control has not been
researched in detail. The disproportionate
amount of publications on the process perspec-
tive, however, illustrates an interest in the matter
in the past two decades. This observation is par-
tially confirmed by research in British and Ger-
man companies, which indicates that the finance
and nonmarket perspectives are also translated
into corporate practice, albeit less pronounced
than the process-oriented one.
2365 S
Processes of SBSC
Determine environmental and social exposure of
strategic business unit
Determine corporate relevance
to sustainability
Finance
perspective
Market
perspective
Process
perspective
Learning
perspective
Non-market
perspective
Corporate sustainability reporting is the third
major area in the field of sustainability account-
ing and probably the one with the most develop-
ment, measured in terms of publication output or
in number of standards and organizations that
have developed such standards. Sustainability
reporting encompasses the formal and official
corporate communication which provides infor-
mation about corporate sustainability issues. This S
includes in particular information about the
social, environmental, and economic perfor-
mance and the relationships between these
aspects of corporate performance. Different
assessments exist whether the term “sustainabil-
ity” may be justifiably applied to reporting on
more specific subsets of sustainability, like car-
bon reporting, CSR reporting, environmental
reporting or water reporting or taking a more
holistic view, whether sustainability reporting
always has to cover all aspects of sustainability.
Furthermore, the notion has been challenged
insofar as sustainability reporting usually deals
S 2366
with sustainability but rather with
unsustainability, i.e., the extent of negative social
and environmental impacts.
Again two streams of research can be
discerned here: accountability with the aim of
creating transparency and the contribution to
decision making and improving corporate per-
formance. Corporate accountability for social
and environmental issues has been subject to
research for over two decades now. For the most
part, it has been largely normative, contemplating
that companies should be held accountable for
their negative social and environmental impacts
and how managers can be held accountable for
the destructive effects of their activities. In this
critical line of thought, accounting and reporting
plays a crucial role to create transparency for
external stakeholders who are expected to push
managers to more sustainable action.
Motivated by the urgent need for action iden-
tified by the accountability discussion, a parallel
research stream has looked at the reciprocal rela-
tionships between corporate sustainability per-
formance and reporting. Central reasoning here
has been that reporting and external corporate
communication play an important role in creating
corporate sustainability. As well as economic
reasons, the vision of sustainable development
also emphasizes the importance of corporate sus-
tainability reporting. On the one hand, companies
depend on a supply of resources from various
stakeholders, so that management is challenged
to secure social acceptance by communicating
the benefits that the company creates for society
and the sustainability effects of its activities. On
the other hand, the vision of sustainable develop-
ment requires participation, which in turn
requires the reporting and communication of sus-
tainability-relevant issues and activities. No par-
ticipation is possible without communication,
whereby the approaches to communication can
differ significantly.
An increasing body of literature deals with
empirical investigations analyzing the publica-
tion outlets from different theoretical perspec-
tives. Sustainability reports have also been in
the focus of a large array of publications about
the design of sustainability reports, whether as
Sustainability Accounting
a print product or on the internet, and what
criteria they should fulfill. Much less thought
has been devoted to the internal processes of
establishing and developing sustainability
accounting and reporting. However, if sustain-
ability reporting is to go beyond rhetoric and an
isolated communications project, then it has to
involve the whole organization and to be devel-
oped strategically by establishing a process of
organizational learning and development.
There is little doubt that in current corporate
practice, sustainability reporting does not com-
prehensively capture all sustainability aspects.
This is highlighted by the view that all or most
of the reports and much of the existing corporate
communication would be exaggerated and some
would even use unjustified claims. Other authors
emphasize that sustainability as a complex
multidimensional vision has different facets of
relevance in each company and corporate con-
text, thus making it inevitable and a result of
systematic management to focus on core topics.
The second view is, of course, only justified if
really the core sustainability topics are addressed
and not if marginal topics are in the foreground or
if substantial sustainability issues are omitted.
A recent framework distinguishes between
five fundamentally different organizational
approaches toward sustainability reporting.
A publicity-driven reporting is solely run by the
corporate communications department as
a satellite activity isolated from core business
processes. It does not affect that organization as
such. The outside-in approach aims at securing
legitimacy whereas the inside-out approach is
concerned with performance management
implementing the corporate strategy. The twin
approach combines inside-out and outside-in
approaches to developing sustainability account-
ing and reporting by involving stakeholders and
establishing a management approach in which
reporting is integrated. The basic logic and ele-
ments of the approaches are discussed and con-
clusions drawn (Table1).
Many issues tackled in the discipline of sus-
tainability accounting relate to all three of the
above components – information management,
management control, and reporting. Such issues
Sustainability Accounting 2367 S
Sustainability Accounting, Table 1 Sustainability reporting in different societal business environments (Source:
Schaltegger 2012, 162)
Business Societal Relevance of sustainability Relevance of
environment expectation accounting sustainability reporting Type of reporting
Trust me None Internal efficiency Internal communication to No external reporting
improvements achieve efficiency needed, internal
improvements communication as part of
normal operations
Tell me Communicate Information creation for Sustainability as an PR-driven reporting
highly visible and formally important external
required issues communication element
of partial internal
relevance
Show me Communicate Information creation to meet Essential communication Outside-in approach to
and illustrate stakeholder expectations element as part of a set of communications and
and information demands “voluntary” reporting driven accounting
communication activities
Prove to me Measure, Disclosure result of what has Additional element in Inside-out approach to
account for, been achieved with a systematic approach of performance management
communicate, sustainability performance performance management and accounting driven
and illustrate management; basis to create and disclosure reporting
transparency and
verification
Involve me Involve, Basis to support exchange One integrated element in Twin approach of involving
empower, and joint development, a systematic approach of stakeholders and jointly
integrate, and implementation, and interactive collaboration developing strategy,
exchange responsibility sharing and involvement of reporting, communication,
stakeholders and accounting

include carbon accounting, water accounting,
and accounting for biodiversity which are still
under-researched but all attract an increasing
amount of attention in research and corporate
practice. Probably, the highest deal of attention
has been attributed to carbon accounting, as the
part of sustainability accounting designed to pro-
vide managers with information that assists com-
panies facing short- and long-term decisions
about carbon emission issues in an ever more
regulated world where company activities are
strongly implicated in the related ecological cri-
sis. As such, corporate carbon accounting deals
with the corporate practice in relation to
collecting, managing, and communicating corpo-
rate carbon-related information.
Carbon-related information is chosen as the
focus of attention for three main reasons: First,
the information needed to support improved car-
bon management has received increasing atten-
tion over the last two decades and has been
reinforced by the introduction of emissions trad-
ing systems, the Cleaner Development Mecha-
nism and Joint Implementation measures.
Second, carbon emissions are subject to standard-
ized quantitative measurement and are one of the
common environmental attributes appearing in
corporate external report. Third, carbon manage-
ment has recently been gaining attention in public S
discourse. As a consequence, information and the
management of information about carbon dioxide
(CO2) releases has become an economically rel-
evant topic for corporate management.
Key Issues
One of the key issues in sustainability accounting
is the (non-)consensus on what its main focus is
and ought to be. Whereas the two opposite
schools in the discipline – the pragmatic and the
critical – do not necessarily contradict each other,
S 2368
the two streams of research have only recently
started to find a common language. The major
divergence in understanding has been the result
of different expectations from sustainability
accounting and how it could or should contribute
to solving urgent social and environmental prob-
lems. The pragmatically oriented management dis-
cussion, on the one hand, has developed
pragmatic, practice-orientated tools and methods
directed to solving observable sustainability prob-
lems. Although, at first, these mainly result in
gradual, step-wise improvement of social and
environmental, their contribution has been
acknowledged. The hope is that the pragmatic
approach of engaging in creating gradual improve-
ments will enable companies and society to take
more radical steps of improvement at some stage.
Based on the assumption that such incremen-
tal improvements are outpaced by social and
environmental degradation, the critical discus-
sion, on the other hand, has argued that incremen-
tal steps can be seen as negative as they might
keep people in the illusion that the sustainability
problems could be solved and that they might
merely justify ongoing social and environmental
degradation. Although of relevance to corporate
performance, the contribution of sustainability
accounting to sustainable development is, in this
case, at best, arguable. Interpreted as an empty
buzzword, from a management view, the term can
be used for window dressing, for covering up the
lack of activity, or for reacting to outside pressure
to engage in corporate sustainability activities.
Particularly these applications of sustainability
accounting for window dressing have led critics
to condemn the management approach to sustain-
ability accounting and to question its usefulness.
The above issue has motivated research on
the true contribution of sustainability accounting
in practice. In turn, the body of both practice-
oriented and academic literature has grown sub-
stantially for the past 20 years. Despite this mean-
while established interest around the globe, the
field is considered young and rapidly expanding.
This is mainly indicated by the issues addressed
in literature, with numerous gaps still to be tack-
led as well as by the sporadic empirical research –
mainly in form of case studies – that has not yet
Sustainability Accounting
delivered a detailed understanding of corporate
sustainability accounting practice. Even highly
relevant topics for business such as carbon
accounting remain under-researched.
From a methodological perspective, the inte-
gration challenge has been addressed. Whereas
“sustainability” and “social and environmental”
have often been used as synonyms in and beyond
the accounting discussion, sustainability account-
ing is seen as the more demanding one, the dif-
ference lying in the importance of considering
social, environmental, and economic aspects of
business integratively rather than separately.
Since most changes in any of the dimension inev-
itably affect the other two, only the net effect of
activities reveals whether a company is moving
toward more sustainable activities.
Future Directions
Given the wider relevance of corporate sustain-
ability for society, there are several groups of
addressees to support and promote the future
development of sustainability accounting. With-
out doubt, corporate decision makers are one
such group that plays a major role. Given the
relative novelty of sustainable development as
a serious issue for business and the new and
evolving nature of sustainability management in
companies, a high level of variety of sustainabil-
ity accounting practice can be observed. It is thus
important for decision makers to be aware of the
discussion to identify contingent variables to sup-
port individual challenges typical for companies
of different sectors, of different company sizes,
with different motives for their interest in sus-
tainability, or with differing approaches to man-
agement control. Particularly notable is the role
of the sustainability officer.
As the main driver of sustainability accounting,
sustainability officers identify the information that
is needed and they also play a crucial role in
generating it. Considering the current develop-
ment in the area, it is likely that the central role
will continue to be taken by a specialist sustain-
ability function rather than by an accountant. This
scenario is particularly probable in the early stages
Sustainability Accounting
of a company’s sustainability accounting, where
most information collection is done on an ad hoc
basis, with a strong element of experiment and
innovation as new information needs become
apparent. As information needs grow stable over
time, the process is likely to become increasingly
systematized, thereby providing an opportunity
for the accounting function to take an increasing
role in sustainability accounting.
Involving the accounting function would still
leave a role for project-based and ad hoc develop-
ments by sustainability managers and others.
These could be either to provide inputs into one-
off analyses on a project or on an ad hoc basis, or in
experimentally developing potential new recurrent
information flows as new issues arise and as the
company develops its sustainability accounting
over time. This could also be expanded into
a further service to the organization which would
require the collaboration of both the sustainability
and accounting functions. The sustainability-
related information that is relevant for a company
can include external as well as internal informa-
tion, since many of the immediate pressures on
companies are imposed by governments and other
external stakeholders. The latter suggests a further
possible value-adding information management
activity to set up and maintain an ongoing database
– effectively serving the function of an in-house
library to support the information needs of man-
agers as these arise.
Professional accounting institutes have a key
role in providing support to the profession. This
can be achieved by ensuring that their members
and others are kept up to date by providing a flow
of information on new developments and exam-
ples of practice through seminars and publications
to support continuing professional development.
Few are doing this already, and many members are
receptive yet understandably curious about what
this implies for their own practice, and often
rightly skeptical of proposals that are not ade-
quately defined and explained. Furthermore,
exchanges between practitioners, academics, and
students could also be facilitated through joint
seminars, lectures, and teaching programs.
The topic also demands the attention of policy
makers. Efforts in the field are likely to benefit
2369 S
from a more systematic approach, especially
when embraced and promoted by influential
actors. For example, despite the high interest
and recognized relevance, there are still very
few courses and trainings on the subject.
Another challenge in the development of sus-
tainability accounting is the role of the accoun-
tant. Although accountants are not as involved in
environmental and sustainability management as
other professionals such as sustainability and
general managers, there is indication that their
involvement is increasing. Most of the different
identified professions seem to be engaged in the
process of sustainability information identifica-
tion, generation, provision, and use. The accoun-
tants’ function, on the other hand, appears
concentrated on the identification of information
that is generated and on the communication of the
final output to senior management – a phenome-
non that has been interpreted as information gate-
keeping. This gatekeeping can be explained with
three types of involvement of accountants in cor-
porate sustainability accounting.
The first interpretation is “adaptive involve-
ment” and can be seen as the result of the appended
nature of the sustainability department and the
subsequent need for interpretation of the results
into “management language,” whereby accoun-
tants communicate the information they are fed
in. The second explanation of gatekeeping is the
limited ability of accounting professionals to
engage in sustainability management, which leaves
them no other option but to act as mediators rather
than to support the process with their expertise.
Through “constructive involvement” accountants S
recognize major deficiencies in communication of
sustainability information and try to contribute to
overcoming them. The third reaction pattern is
“defensive involvement” and is best supported by
the view that accountants fear losing power in
organizational structures and may use their core
position to influence information contents and
information flows. This allows them to retain or
tweak information to avoid changes in existing
(power) structures. Whichever the case, sustain-
ability management should seek to engage accoun-
tants for reasons beyond their expertise in dealing
with numbers and accounting tools and methods.
S 2370
Last but not least, the role of academia in devel-
oping sustainability accounting should not be
neglected. Despite the aforementioned 20-year his-
tory, the field is still considered a young and quickly
developing area for both practice and research.
Numerous calls for more encompassing research
have been made, highlighting, among others, the
need for more empirical exploration and subsequent
investigation work. On a more conceptual level,
there is an opportunity to develop a framework of
sustainability accounting and sustainability man-
agement control, as well as to capture the increasing
number and diversity of social and environmental
challenges companies face. Such a framework
could help managers to deal with the complexity
and multitude of different sustainability issues, deal
with trade-offs, and prioritize areas of action. This
includes the challenge of identifying and develop-
ing suitable methods of dissemination. Developing
a comprehensive toolkit of different methods for
different purposes in a practically applicable form
is a further area for research.
Cross-References
▶ Accountability
▶ Business Cases for Sustainability
▶ Carbon Footprint
▶ Chief Sustainability Officer
▶ Communicating with Stakeholders
▶ Corporate Sustainability
▶ CSR Measurement
▶ Disclosure (CSR reporting)
▶ Eco-Efficiency
▶ Environmental Accounting
▶ Environmentally Sensitive Accounting
▶ Social Accounting
▶ Sustainability Management
▶ Sustainability Reporting Guidelines
References and Readings
Bennett, M., Schaltegger, S., & Zvezdov, D. (2011). Envi-
ronmental management accounting. In M. Abdel-
Kader (Ed.), Review of management accounting
research (pp. 53–84). Basingstoke: Palgrave
Macmillan.
Sustainability and Sustainable Development
Bennett, M., Schaltegger, S., & Zvezdov, D. (2012).
Exploring the corporate practice of sustainability
accounting. London: ICAEW.
Burritt, R., Schaltegger, S., & Zvezdov, D. (2011). Carbon
management accounting. Australian Accounting
Review, 21(1), 80–98.
Gray, R., & Schaltegger, S. (2011). Debating accounting
and sustainability. incompatibility and rapprochement
in the pursuit of corporate sustainability. Proceedings
of the 10th Australasian CESAR conference, Launces-
ton, 4–7 December 2011.
Herzig, C., Viere, T., Schaltegger, S., & Burritt, R. (Eds.).
(2012). Environmental management accounting: Case
studies of South-East Asian Companies. New York:
Routledge/Chapman & Hall.
Schaltegger, S. (2011a). Sustainability as a driver for
corporate economic success. Consequences for the
development of sustainability management control.
Society and Economy, 33(1), 15–28.
Schaltegger, S. (2011b). Sustainability management con-
trol. In R. Burritt, S. Schaltegger, M. Bennett, T.
Pohjola, & M. Csutora (Eds.), Environmental manage-
ment accounting and supply chain management
(pp. 337–352). Dordrecht: Springer.
Schaltegger, S. (2012). Sustainability Reporting beyond
Rhetoric. Linking strategy and accounting. In S. Jones
& J. Ratnatunga (Eds.), Contemporary issues in sustain-
ability reporting and assurance (pp. 159–171). London:
Emerald Publishing. ISBN 978-1-78052-020-9.
Schaltegger, S., & Burritt, R. (2010). Sustainability
accounting for companies. Catchphrase or decision
support for business leaders? Journal of World Busi-
ness, 45(4), 375–384.
Schaltegger, S., Gibassier, D., & Zvezdov, D. (2011).
Environmental management accounting.
A bibliometric literature review. L€ uneburg: Centre
for Sustainability Management.
Zvezdov, D., Schaltegger, S., & Bennett, M. (2010). The
increasing involvement of accountants in corporate sus-
tainability management. Journal of the Asia-Pacific
Centre for Environmental Accountability, 16(4), 20–31.
Sustainability and Sustainable
Development
Eila Jeronen
Department of Educational Sciences and Teacher
Education, University of Oulu, Oulu, Finland
Synonyms
Environmental sustainability: capable of being
sustained
Sustainability and Sustainable Development
Definition
The word sustainability is derived from the Latin
sustinere (tenere, to hold; sus, up). The way in
which sustainability is used nowadays is based on
the English term “sustainability,” which is an
expression of the possibility of a certain matter
to be supported. Sustainability is seen as a
paradigm for thinking about the future in which
environmental, societal, and economic consider-
ations are balanced in the pursuit of an improved
quality of life. The ideals and principles behind it
lays on broad concepts such as intergenerational
equity, gender equity, social tolerance, poverty
alleviation, environmental preservation and res-
toration, natural resource conservation, and
building just and peaceful societies.
Sustainable development is the overarching
paradigm of the United Nations. The concept
of sustainable development was described by
the (1987) Brundtland Commission Report as
“development that meets the needs of the present
without compromising the ability of future
generations to meet their own needs” (United
Nations General Assembly 1987, 24). There are
four dimensions to sustainable development –
society, environment, culture, and economy –
which are intertwined, not separate. Sustainable
development is about engaging the world’s edu-
cational systems to work for a more sustainable
future. We can shortly say that sustainability is
thought of as a long-term goal while sustainable
development refers to the many processes and
pathways to achieve it.
Introduction
“We hold the future in our hands, together, we must
ensure that our grandchildren will not have to ask
why we failed to do the right thing, and let them
suffer the consequences” (UN Secretary-General
Ban Ki-moon (2007)).
In recent years, one of the most important chal-
lenges, at the local and global levels, is how to
support a lifestyle based on sustainability and
sustainable development (SD). It is natural to
relate sustainability to corporations as their
2371 S
practices (e.g., production, waste disposition)
affect the natural environment and, therefore,
the availability of resources for future genera-
tions. Indeed, business stakeholders increasingly
recognize the need for greater coverage of sus-
tainability issues, corporate social responsibility
(CSR), and corporate citizenship in business and
marketing education across the world. CSR is
understood as supporting activities with a strong
focus on civil society. CSR also often includes
the relations to local and national governments
and the acceptance of governance responsibility
(Schrader 2003). The term “corporate citizen-
ship” has various definitions in the literature, the
main criteria for differentiation being how deeply
the company’s activities are embedded in the
social environment. A widely used definition
comes from the research of Westebbe and
Logan (1995) who define corporate citizenship
as the holistic, coordinated, and strategically
aligned engagement of a company beyond its
usual business goals to help resolve social issues.
The British NPO Business in the Community
defines CSR as the management of a company’s
positive impact on society and the environment
through its operations, products, or services and
through its interaction with key stakeholders such
as employees, customers, investors, and suppliers
(Business in the Community 2008). However,
sustainability, CSR, and corporate citizenship
are not easy goals as they require changes in
attitudes, in social values, in politics, and in the
ways we live, consume, and produce our goods
and services.
Many notions now incorporated within the S
concept of SD can be traced back through the
1980 World Conservation Strategy and the 1972
Stockholm Conference on the Human Environ-
ment to the early days of the international con-
servation movement. Books like “The Silent
Spring” by Rachel Carson (1962) and “The
Limits to Growth” by the Club of Rome
(Meadows et al. 1972) are two among various
key publications between 1960 and 1975 that
stimulated the awareness of environmental prob-
lems in a broad public and led eventually to
environmental protections measures, based on
new laws. In that time the concepts of natural
S 2372
sciences with regard to ecological processes were
dominant. The main target of “environmental
protection” was to sustain the quality of aquatic
and terrestrial ecosystems and the climate by lim-
iting the emissions from the anthroposphere to
the biosphere and to the geosphere. “Sustainabil-
ity norms” were limited to an ecosystem, for
example, a lake, a forest, the soil, the ocean, the
atmosphere.
The notion of SD had already been mentioned
in 1980, when the International Union for the
Conservation of Nature (IUCN), the World
Wide Fund for Nature (WWF), and the United
Nations Environmental Programme (UNEP)
published the “World Conservation Strategy”
and coined the term “sustainable development.”
In 1987, the World Commission on Environ-
ment and Development (WCED) chaired by
Norwegian Prime Minister Gro Harlem
Brundtland published “Our Common Future.”
From that moment on, the term “sustainable
development” stood at the core of the debate
on environment and development. It was
described as “. . .development that meets the
needs of the present without compromising the
ability of future generations to meet their own
needs” (United Nations General Assembly
1987, 24). In 1991, this report was updated
through a document called “Caring for the
Earth” and published by the same international
organizations. Agenda 21 was drawn up as
a functioning program for the twenty-first cen-
tury. Agenda 21 is a comprehensive plan of
action to be taken globally, nationally, and
locally by organizations of the United Nations
System, Governments, and Major Groups in
every area in which human impacts on the envi-
ronment (UN Department of economic and
social affairs 1992).
There is a very distinct difference between
“environmental protection” and “sustainable
development.” Environmental protection means
the part of resource management which is
concerned with the discharge into the environ-
ment of substances that may be harmful, or that
might have harmful physical effects, such as
noise and radiation. In the sustainable develop-
ment, the concepts of the social sciences are
Sustainability and Sustainable Development
dominant. The definition of the term “sustainable
development” contains two key concepts:
• “The concept of needs, in particular, the essen-
tial needs of the world’s poor, to which over-
riding priority should be given
• The idea of limitations imposed by the state of
technology and social organization on the
environment’s ability to meet present and
future needs”
For guiding the efforts of governments, com-
munities, and organizations to define sustainabil-
ity goals and create programs to help achieve
those goals, the first summary of the concepts of
sustainable development was presented at the UN
conference in Rio de Janeiro in 1992.
The Rio Declaration contains 27 principles of
sustainability (e.g., United Nations Environment
Programme, environment for development):
• People are entitled to a healthy and productive
life in harmony with nature.
• The right to development must be fulfilled so
as to equitably meet developmental and envi-
ronmental needs of present and future
generations.
• Eradicating poverty and reducing disparities
in living standards in different parts of the
world are essential to sustainable
development.
• Environmental protection is an integral part of
the development process and cannot be con-
sidered in isolation from it.
• International actions in the field of environ-
ment and development should also address the
interests and needs of all countries.
• To achieve sustainable development and
a higher quality of life for all people, coun-
tries should reduce and eliminate
unsustainable patterns of production and con-
sumption and promote appropriate demo-
graphic policies.
• Women have a vital role in environmental
management and development. Their full
participation is therefore essential to achieve
sustainable development.
• Warfare is inherently destructive to sustain-
able development. Peace, development and
environmental protection are interdependent
and indivisible.
Sustainability and Sustainable Development
In its original form, sustainability was associ-
ated with maintenance of environmental quality
and the term “sustainable development” was
stressed by issues of social sciences. However,
both terms are multifaceted.
Sustainability is often said to pertain to eco-
logical issues. It concerns our environment, but
should not and cannot be restricted only to our
natural environment. It also concerns our social
environment (Umwelt). Sustainability applies to
every system that is in interaction with its envi-
ronment. This means that sustainability is
a concept that expresses a relationship. It is an
expression of the existence of a dynamic balance
between human beings, artificial systems, and
their environment. An artificial system is any
kind of system that is made by humans, and
operated by humans. For example, a farm and
its farmland are artificial systems. Sustainability
is applicable to natural environments as well as to
social environments. This perspective is given in
the well-known notion of the triple bottom line of
planet, people, and profit by Elkington (1999).
He wrote in Cannibals with Forks – The Triple
Bottom Line of 21st Century Business (1997):
“Today we think in terms of a triple bottom
line, focusing on economic prosperity, environ-
mental quality, and . . .social justice.”
According to Bell and Morse (2008, 6–14)
sustainability has two roots: an ecological/carry-
ing capacity root and a technology root. The term
“carrying capacity” means the maximum number
of individuals of a species that can be supported
in an area. Depending on where the emphasis is,
there are two different visions of sustainability:
strong and weak sustainability. Strong sustain-
ability theorists hold to the notion of no, or low,
substitutability between natural and artificial cap-
itals (Jorna and Hadders 2010). They argue that
there is little, if any, consideration of the financial
or other costs of attaining sustainability. It
equates to some call to ecological sustainability
and the focus is primarily on the environment.
The system quality is taken in terms of the phys-
ical measures of things (e.g., population, soil
erosion, and biodiversity). The strong sustain-
ability argument implies that environment is crit-
ical for our and our children’s survival and any
2373 S
damage will have negative repercussions
(Bell and Morse 2008, 6–14). Weak sustainabil-
ity theorists contend, by contrast, that human-
made capitals, such as technology and other
anthropogenic innovations, can, with a few
exceptions, be substituted for natural capital,
and that independently managing and
maintaining separate capital stocks is unneces-
sary. Instead, they argue, it is the overall size, or
aggregate, of all capitals that must be maintained
in order to safeguard human and ecological well-
being (Bell and Morse 2008, 6–14). Weak sus-
tainability means that human beings are able to
correct misbehavior or abuse of natural capital in
the present time by innovation and creativity
(social and intellectual capital) so that we find
and develop new resources or that we produce
new natural capital. In the weak sustainability,
costs of attainment are important and are typi-
cally based on a cost-benefit analysis which inev-
itably involves trade-offs between environment
and social and economic benefits. Weak sustain-
ability equates to a sort of economic sustainabil-
ity where the emphasis is upon allocation of
resources and levels of consumptions, and finan-
cial value is a key element of system quality. This
discussion about the various forms of sustainabil-
ity emphasizes the triple bottom line of Planet,
People, and Prosperity (Profit). The triple bottom
line concerns thresholds of natural and anthropo
capital beneath which we should not go. We
should realize that individual or collective
human behavior is not neutral or value free. The
term “carrying capacity” is important in this
meaning. Nowadays, many researchers have S
argued that the Earth is approaching its carrying
capacity, and great dangers are ahead if we push
too close to, or exceed, that limit. Consequently,
knowledge of sustainability requires a new way
of thinking (cf. Naess 1973).
The three basic elements of sustainable devel-
opment are ecological, economic, and sociocul-
tural sustainability. In terms of ecological
sustainability, the primary goals of the program
are to reduce the usage of nonrenewable
resources, to preserve nature’s generative
capacity and ecological values, and to generally
improve the condition of the environment.
S 2374 Sustainability and Sustainable Development

Important challenges of ecological sustainability

are slowing down climatic changes to a level
endured by the ecosystems, securing biological
diversity and a sustainable use of natural
resources. Economic sustainability means growth Economic
which is balanced both in its contents and quality,
which is not in the long run based on indebted-
ness or destruction of resources. In sociocultural
sustainability, the aim is to secure the transfer of
prerequisites of welfare from one generation to
another and to equip society with the skills and
Social Environmental
knowledge required for meeting the challenges of
SD, thereby also generally improving social well-
being. Economic and social as well as cultural
actions must be of the kind that they promote
ecological sustainability (Ministry of the Envi-
ronment 1998). Sustainability and Sustainable Development,
There is no consensus on the politics of SD or Fig. 1 The reformist view of sustainable development
(Huckle 2005)
how this is best done (Huckle 2005). The reform-
ist view of SD is about balancing economic
growth with social and environmental goals
(Fig. 1). It obscures the need to develop the econ-
omy or society within ecological limits and is Ecological

informed by mainstream environmental Society

economics.
The radical view of SD is about generating
economic welfare and social justice within eco-
logical limits (Fig. 2). Considerations of suffi-
ciency and equity are paramount. It is informed Economy
by new forms of environmental economics which
seek to free citizens from the industrial “tread-
mill” of production and consumption.
According to Norton (2005), what actually
matters as regards the environment is not so
much taking principled stances, but rather devel-
oping rational aids to decision making, so that the
Sustainability and Sustainable Development,
various actors can agree on what should be done Fig. 2 The radical view of sustainable development
and develop the concrete policy measures which (Huckle 2005)
need to be implemented. Norton states that sus-
tainability and SD are rather synonyms than com- “SD” has concerned the Earth itself, initially
peting terms. He defines the sustainability as focusing on nature and its resources, later
a relationship between generations where earlier extending to the human environment and com-
generations satisfy their wants and needs without munities, and finally to the complex systems that
compromising important and valued possibilities support life on Earth (Fig. 3).
of future generations (Norton 2005, 363). Characteristic of the last quarter of a century is
According to the National Research Council the effort to link all these issues with people,
(1999, 23–25), the most recently emphasized economy, and society. The most common empha-
ideal concerning the terms “sustainability” and ses concern life support systems. Human beings
Sustainability and Sustainable Development
WHAT IS TO BE FOR HOW LONG?
SUSTAINED: 25 years
"Now and in the future"
Forever
NATURE
Earth
Biodiversity
Ecosystems
LIFE SUPPORT LINKED BY
Ecosystem Services Only
Resources Mostly
Environment But
And
Or
COMMUNITY
Cultures
Groups
Places
Sustainability and Sustainable Development, Fig. 3 Sustainable development: common concerns, differing
emphases (National Research Council 1999, 24)
are totally dependent on natural resources, for
example, we cannot live without oxygen. Classi-
fied as either renewable or nonrenewable, these
resources have preoccupied many generations
seeking to exploit, conserve, or preserve them.
In the last quarter of a century, the concept of
natural resources has expanded, from a focus on
primary products and production inputs to
include the values of aesthetics, recreation, and
the absorption and cleansing of pollution and
waste. This extended view of natural resources
becomes popularly associated with environment
and the many features are defined by ecologists as
ecosystem services. A recent study cataloged and
valued 17 ecosystem services, ranging from
atmospheric gas regulation to cultural opportuni-
ties. A less anthropocentric view of life and
values is found in the emphases on sustaining
nature itself for its own intrinsic value. The
Earth’s assemblages of life forms, whether
described as biodiversity in general, or as species
or ecosystems in particular, are to be sustained
not only for their utilitarian service to humans,
but also because of humanity’s moral obligations.
These obligations are characterized as “steward-
ship” or as the proper response to a form of
2375 S
WHAT IS TO BE
DEVELOPED:
PEOPLE
Child Survival
Life Expectancy
Education
Equity
Equal Opportunity
ECONOMY
Wealth
Productive Sectors
Consumption
SOCIETY
Institutions
Social Capital
States
Regions
“natural rights” in which Earth and its other liv-
ing things have equal claims to existence and
sustenance. In addition from the anthropocentric
point of view, not only are biological species seen
as endangered, but cultural species are as well.
Thus, the concept of communities to be sustained
covers distinctive cultures, particular groups of
people, and specific places (National Research
Council 1999, 25).
The emphases on what is to be developed also
fall within three major areas: people, economy,
and society. Nowadays, the emphasis is very
often on the economy, with its productive sectors S
providing both employment and desired con-
sumption, and wealth providing the incentives
and the means for investment as well as funds
for environmental maintenance and restoration.
Another form of development stressed is human
development. The people-centered development
focuses on the “quantity” of life as seen in the
survival of children or increased life expectancy,
and on the quality of life in terms of education,
equity, and equal opportunity. Finally, some dis-
cussions of what is to be developed adopt
a broader conception of society, emphasizing
the well-being and security of national states,
S 2376
regions, and institutions and, more recently, the
valued social ties and community organizations
known as social capital (National Research
Council 1999, 25).
The concept of SD links what is to be
sustained and what is to be developed. Some
views, while paying homage to SD, focus
almost entirely on just one of the two desiderata,
the sustaining or the developing (thereby
appearing to suggest “sustain only” or “develop
mostly”). Others, while clearly emphasizing
one or the other, subject this choice to
a conditional constraint. For example,
a Brundtland Commission member noted “Sus-
tainability is the nascent doctrine that economic
growth and development must take place, and
be maintained over time, [but] within the limits
set by ecology in the broadest sense.” Other
views tend to leave to some set of publics or
decision makers with determining the exact
nature of and trade-offs between what is to be
sustained or what is not to be sustained
(National Research Council 1999, 25).
It is widely thought that SD is meaningful only
if it is intergenerational. Thus, there is general
acceptance of the loosely stated time horizon of
the World Conference on Environment and
Development as of now and in the future. The
time horizons considered in specific contexts for
future SD, however, range from a single genera-
tion of 25 years or so, to several generations, as in
the Intergovernmental Panel on Climate Change
(IPCC) assessments that extend until 2100, to an
unstated, but implicit, forever. Each of these time
periods presents very different prospects and
obstacles for SD. Over the space of a single gen-
eration, almost any development appears sustain-
able. Over forever, almost none do, as even the
smallest growth in numbers, resource use, or
economy extended indefinitely creates situations
that seem surely unsustainable. Over the century
encompassed by many energy-environment
assessments (e.g., those of the IPCC), the large-
scale and the long-term dimensions of the future
are both remote and uncertain. The sustainability
of development in any usefully concrete sense is
even more so developed (National Research
Council 1999, 26).
Sustainability and Sustainable Development
Responsibility of sustainability and sustain-
able development requires an ethical base. Peter
(Singer 2002) has elaborated ethics of globaliza-
tion as an ethics of justice based on John Ralls’s
book “A Theory of Justice.” Justice assumes that
a person wherever on the globe has the same
rights as anyone else. An ethics of justice
between generations, intra-generational and
intergenerational justice, form also the base in
the Brundtland’s definition of SD. Another
important contributor to the ethics of global
responsibility is ethics of care introduced by, for
example, Carol Gilligan (1982). The ethics of
care is a normative ethical theory; that is,
a theory about what makes actions right or
wrong. Advocates of care ethics see caring as
the key ethical ideal. Working from a particular
view of human nature, the advocates of care
ethics recommend that we focus our attention
on the concrete relationships we are in and attend
to the concrete needs of those who are close to us.
With care ethics, to live an ethical life is to care
for those with whom we are in close relationship.
Care ethics seems an appropriate theory for
a discussion on SD for the reason that SD can
be viewed as a component of the alternative
development paradigm, where there is an inter-
actional view of human expectations, behavior,
and power relationships.
Key Issues
The definitions of sustainability and sustainable
development are very diverse and dependent
upon who is defining the terms in each individual
context. People differ in the environmental, social,
and economic conditions within which they have
to live. Consequently, flexibility as what the sus-
tainability and sustainable development mean can
be a strength in a diverse world. However, we can
argue that the definition of sustainable develop-
ment created by Brundtland Commission (1987) is
also valid today. The target of sustainable devel-
opment is an aggregated norm for the whole living
space, including all spheres and all scales (local,
regional, and global). However, in political prac-
tice, sustainable development is a strategy that
Sustainability and Sustainable Development
leads to diverse norms depending on the social,
economical, and ecological idiosyncrasies of
regions. In addition, social problems are getting
more and more complex and the changes needed
to achieve a sustainable development exceed the
capacity of individual actors. Local and global
responsibility requires cooperation and interac-
tion. Therefore it is natural to relate sustainability
and sustainable development to corporations. For
example, the Plan of Implementation of the World
Summit on Sustainable Development demands the
enhancement of corporate environmental and
social responsibility and accountability through
actions to “encourage dialogue between enter-
prises and the communities in which they operate
and other stakeholders” as well as “develop work-
place-based partnerships and programmes”
(United Nations 2003).
Future Directions
The future is compatible with many alternative
scripts. The Conventional Worlds class of scenar-
ios assumes that sustainability and sustainable
development are possible to attain and current
trends play out without major discontinuity or
surprise in the evolution of institutions, environ-
mental systems, and human values. In the Barba-
rization class of scenarios, fundamental social
change occurs in a manner that many would feel
to be an unwelcome sort, bringing great human
misery and collapse of civilized norms. Finally,
the Great Transitions class of scenarios also rep-
resents fundamental social transformation. In this
case, however, the changes are in directions that
many advocates of sustainable development
would view as greatly for the better (National
Research Council 1999, 148–153). Based on the
analysis of persistent trends and plausible futures,
the National Research Council (1999, 160)
believes that a successful transition toward sus-
tainability is possible over the next two genera-
tions. This transition could be achieved without
miraculous technologies or drastic transformations
of human societies. What will be required, how-
ever, are significant advances in basic knowledge,
in the social capacity and technological
2377 S
capabilities to utilize it, and in the political will
to turn this knowledge and knowhow into action.
According to Doppelt (2008, 208), the basis for
sustainable development lays on that people alter
their thinking and behavior. This requires that we
overcome “systems blindness” and begin to “think
sustainably.” Sustainable thinking involves con-
stantly taking the natural environment and other
people, today and in the future, into account when
we plan, make decisions, and act.
Cross-References
▶ Corporate Citizenship
▶ Corporate Social Responsibility
▶ Elkington, John
▶ Ethical Theories
▶ Rio Declaration on Environment and
Development (UN)
▶ Social Capital
▶ Triple Bottom Line
References and Readings
Bell, S., & Morse, S. (2008). Sustainability indicators:
Measuring the immeasurable. London: Earthscan.
Business in the Community. (2008). Brand benefits:
How cause related marketing impacts on brand equity,
consumer behaviour and the bottom line. London: BITC.
Brundtland Commission. (1987). Our common future.
Oxford: Oxford University Press.
Carson, R. (1962). Silent spring. Boston: Houghton
Mifflin.
Doppelt, B. (2008). The power of sustainable thinking.
How to create positive future for the climate, the S
planet, your organization and your life. London:
Earthscan.
Elkington, J. (1997). Cannibals with forks – the triple
bottom line of 21st century business. Gabriola Island:
Chapstone.
Elkington, J. (1999). Triple bottom line revolution:
Reporting for the third millennium. Australian CPA,
69(10/11), 75–77.
Gilligan, C. (1982). In a different voice. Cambridge:
Harvard University Press.
Huckle, J. (2005, April). Education for sustainable devel-
opment in Europe: Some current challenges. Presen-
tation to a conference on environmental education
organised by the Hellenic Association for the Protec-
tion of the Environment and Cultural Heritage.
University of Piraeus.
S 2378
Jorna, R. J., & Hadders, H. (2010). The many faces of
sustainability describing, analyzing and measuring
sustainability in the Wadden region. Fryske Akademy
(KNAW) and University of Groningen.
http://www.waddenacademie.knaw.nl/fileadmin/inhoud/
pdf/03-Thema_s/Economie/2010-02_Many_faces_of_
Sustainability.pdf. Accessed 20 June 2011.
Ki-moon, B. (2007). Sustainable development. UNESCO.
http://www.unesco.org. Accessed 20 June 2011.
Meadows, D. H., Meadows, D. L., Randers, J., & Behrens,
W. W., III. (1972). The limits to growth: A report of the
Club of Rome’s project on the predicament of man-
kind. New York: Universe books.
Ministry of the Environment. (1998). The Finnish govern-
ment programme for sustainable development (The
Finnish Environment 266). Helsinki: Environmental
Policy.
Naess, A. (1973). The shallow and the deep – Long-range
ecology movements: A summary. Inquiry, 16, 95–100.
National Research Council, Policy Division, Board on
Sustainable Development. (1999). Our common jour-
ney: A transition toward sustainability. Washington,
DC: National Academy Press.
Norton, B. (2005). Sustainability: A philosophy of adap-
tive ecosystem management. Chicago: University of
Chicago.
Schrader, U. (2003). Corporate citizenship: Die
unternehmung als guter B€ urger? Berlin: Springer.
Singer, P. (2002). One World: The ethics of globalisation.
New Haven: Yale University Press.
UN Department of Economic and Social Affairs. (1992).
Earth summit. Agenda 21. The United Nations
Programme of action from Rio. Division of Sustain-
able Development. http://www.un.org/esa/dsd/
agenda21/res_agenda21_00.shtml. Accessed 20 June
2011.
United Nations. (Ed.). (2003). Johannesburg declaration
on sustainable development and plan of implementa-
tion of the world summit on sustainable development.
New York: United Nations Department of Public
Information.
United Nations Environment Programme, Environment
for Development. Rio declaration on environment
and development. http://www.unep.org/Documents.
Multilingual/Default.asp?documentid¼78&articleid¼
1163. Accessed 20 June 2011.
United Nations General Assembly. (1987). Development
and international economic co-operation: Environ-
ment. Report of the World Commission on Environ-
ment and Development: Our Common Future.
Transmitted to the General Assembly as an Annex to
document A/42/427 – Development and International
Co-operation: Environment. http://daccess-dds-ny.un.
org/doc/UNDOC/GEN/N87/184/67/IMG/N8718467.
pdf?OpenElement. Accessed 20 June 2011.
Westebbe, A., & Logan, D. (1995). Corporate citizenship:
Unternehmen im gesellschaftlichen dialog. Wiesbaden:
Gabler.
Sustainability Assessment Guide
Sustainability Assessment Guide
▶ BellagioSTAMP
Sustainability Assessment Models
Linne Marie Lauesen
Copenhagen Business School, Department of
Intercultural Communication and Management,
Center for Corporate Social Responsibility,
Frederiksberg, Denmark
Synonyms
Certification tools for CSR and sustainability;
CSR index; CSR models; Life cycle assessment
models; Sustainability index; Sustainable
decision-making tools
Definition
“Sustainability” is the notion consisting of two
crucial adverbs: To “sustain” and the “ability” to
do so. In other words, it means having the abili-
ties to sustain the qualities of life, hereunder the
qualities of the natural environment. Sustainabil-
ity and businesses in relation to the “natural envi-
ronment” is mainly concerned about four things:
1. Natural resources management
2. Reduction of energy consumption
3. Substitution of pollutants
4. Disposal, discharge, and emission reduction
Other features are also relevant in the sustain-
ability optics, for example, the durability of the
company including to manage businesses in
a way that it takes care of all the above environ-
mental issues as well as human resources and
finally the well-being of the company in eco-
nomic terms (Aras and Crowther 2009). See
also the entry of “▶ Sustainability” as well as
“▶ Natural Environment” in this encyclopedia
for a prolonged explanation of the above terms.
Sustainability Assessment Models
To be and act “sustainable” is to behave
according to a huge variety of concerns for the
natural environment, which laymen cannot pur-
sue without some kind of help – or “assessment.”
Many government and international agencies
provides this “assessment” as an instrumental
tool to educate and teach businessmen to adapt
to the appropriate stance toward a complex field,
which “sustainability” is.
“Sustainability assessment models” (SAM) is
a finite toolbox for businesses and organizations
to adequately embedding sustainability princi-
ples into decision-making (Cavanagh et al.
2007) and providing transparency in measuring
indicators and benchmarking these results in var-
ious sustainability indexes. Most models add not
only the “natural” perspective of “sustainability”
but also the “humanizing” perspective, which
makes these models also comprise:
5. Human working environment
6. Human health and education
7. Principles about child labor
8. Principles for the work-life balance
9. Anticorruption principles
10. Transparency principles
These ten issues will be accompanied by
examples of models and case studies next,
discussing the varieties of SAM, its origin, and
dispersion to a wide range of different businesses,
organizations, and purposes.
Introduction
Sustainability assessment models (SAM) was
originally developed in the UK as a full cost
accounting tool for businesses and organizations
(Cavanagh et al. 2007). It was designed to pro-
duce a graphical encounter for a comparable fea-
ture to handle financial costs and ecological
and sustainable benefits of externalities
encompassing both the social, environmental,
resource, and economic implications of the
behavior of corporations (Cavanagh et al. 2007).
The primary intention of SAM is in its process: to
engage a broader range of stakeholders in order to
generate dialog around indirect impacts of
2379 S
a given task displayed visually and orally in
agreeable terms that could be compared with
other businesses and organization through
a voluntary or governmental benchmarking, so
this in turn facilitated a broader consideration of
options and allowed greater sustainability for that
task to be achieved generally (Cavanagh et al.
2007).
Key Issues
One of the broadest ideas of “sustainability” is to
deal with what consequences, actions, utility, and
exploitation of resources in the present have on
options in the future for other generations, the
nature, climate, and species and diversity (Aras
and Crowther 2009). If resources are utilized by
human conduct in the present, and since
resources are in the optic of “sustainability”
finite, depletion will happen (Aras and Crowther
2009).
1. “Natural resources management” is
a discipline within sustainable management,
which is concerned about how we exploit the
natural resources. It recognizes that human
and business activities especially are deplet-
ing the natural resources, and therefore
this kind of management seeks to limit its
impact on scarce natural resources and
“gives back” – for example, by reforestation
with new, sustainable cultural forests that are
planted by the active users of the forestry
business (Aras and Crowther 2009). Natural
resources in this sense are, for example, raw S
material such as coal, oil, iron, wood, rock
material, and water. The concern for deple-
tion of natural resources does also include the
concern for lack of substituting alternatives
and the social costs of them and concern for
innovation of new substitutions for scarce
resources. For instance, in areas with very
less fresh water but large amounts of sea
water might want to substitute freshwater
with desalination of sea water in order to
reach demands. One of the most obvious
concerns is of course the depletion of oil.
S 2380
Scientists and inventors worldwide are
eagerly trying to find sustainable alternatives
to fossil energy such as oil and coal.
2. “Reduction of energy consumption” is a term
that does not only have a crucial longitudinal
effect on the mitigation of climate changes; it
is also a business case. Businesses can reduce
energy and save money or alternatively sub-
stitute fossil energy consumption to green
energy consumption such as wind, solar,
wave, geothermal heating, and air thermal
heating energy. Therefore, reduction of
energy consumption is one of the low-
hanging fruits that businesses very willingly
engage in for economic and branding issues,
of course. Some energy reductions can be
achieved relatively easily but change of oper-
ation procedures, adjusting the machinery if
possible or using new technology, etc. Most
major savings mean that business must invest
in green energy as a substitute for fossil
energy. And such investments have payback
times over a few to several years, which
might be one of the causes why businesses
are very reluctant in investing in green
energy. Reduction of energy seen from
a sustainability view does not regard the
business case although it acknowledges it as
well (Aras and Crowther 2009), but the main
point of reduction of energy consumption is
to reduce harm from greenhouse gases.
Greenhouse gasses such as CO2, SO4,
Freon, and Methane are in the academic lit-
erature preferably seen as the major cause to
the increasing effect on climate changes
acknowledged worldwide through the Inter-
governmental Panel on Climate Changes
(IPCC). Although skeptics still debate the
cause-effect of greenhouse gasses, the
IPCC’s reports still have been agreed
among several countries as very reliable and
are referred to both politically and academi-
cally without much counter-debate.
3. “Substitution of pollutants” frames the idea
to substitute pollutants with non-pollutants or
less-polluting technologies, materials, and
fluids (Bovenberg 1995). The idea of
substituting pollutants with less pollutants
Sustainability Assessment Models
either by substituting technologies, mate-
rials, or fluids such as fuel is recommended
to businesses to enhance their responsibilities
toward its employees, customers, and the
environment in general. One of the main
issues is choosing less energy-consuming
technology, biodegradable goods, and inter-
mediates and substituting polluting
chemicals for biological degradable ingredi-
ents that reduces harm to employers, cus-
tomers, and the environment eventually.
Even though materials and fluids cannot cur-
rently be substituted with purely ecological
and biodegradable substitutes, the aim for
protecting both the “natural” as well as the
“work” environment leads businesses to take
care of both human and environmental health
conditions. The typical substitution concerns
hostile pesticides, phthalates, organic sol-
vents, and numerous other polluting ingredi-
ents in the production of goods.
4. “Disposal, discharge, and emission reduc-
tion” is another way to reach the ecological
equilibrium in the future generations that
businesses also engage in. Waste, wastewa-
ter, and emissions to the air from the burning
of fossil energy are on the minds of many
business leaders in order to contribute to the
reduction of all impacts. Current business
leaders are taking responsibilities and reduc-
ing packaging and other kinds of goods that
eventually turn into waste products, reducing
the consumption of water in the process in
order to reduce wastewater, etc., but still the
amount of waste and the discharge of
untreated wastewater is still not decreasing
enough even in high-technological western
countries. The environmental state-of-the-art
report from the European Environmental
Agency (EEA) states that actions in Europe
taken toward reduction of impact on the envi-
ronment are, broadly speaking (land, sea, and
air), still not enough in many areas to miti-
gate environmental impact, climate changes,
endangered species, etc. (EEA 2010). Dis-
posal, discharge, and emission reduction
should according to the EEA be of
much more concern even in a highly
Sustainability Assessment Models
innovative- and sustainable-minded western
context (EEA 2010). For a deeper insight in
the special issues addressed by the EEA.
5. “Human working environment” indicates
certain features necessary to secure a safe
living at work. The saying is that working
conditions should not decrease workers
livability, health, and mental state of art.
Naturally, issues concerning the human work-
ing environment deals with “safety” (life,
health, and property), “health,” protection
against abuse both physically and mentally,
protection of equity and property rights, and
“moral” issues such as treating people in
a decent manner in respect of human rights,
race, gender, sexual orientation, etc.
6. “Human health and education” is a part of
the human resource or human capital of the
company. Since business is no longer
regarded only as division of labor, most
leaders see human health and education as
part of the resource capital of the company.
To strengthen human health and education
in general means that one of the most impor-
tant assets of the company is top-tuned in
order to create as maximum outcome as
possible.
7. “Principles about child labor” is a special
issue of “human rights” in sustainability
assessment models. The International
Labor Organization (ILO) has adopted the
principles of Elimination of Child Labour
(IPEC), who provides information on how
to design, develop, and operate child labor
monitoring systems along with practical
examples that will help to adapt the model
to specific child labor situations. ILO is part
of the UN Global Compact. See the entries
of ▶ UN Global Compact for more
information.
8. “Principles for the work-life balance” is
another issue addressed by the ILO to protect
workers from fatigue and illnesses and to
secure a sound balance between working
hours and rest. Also, these principles include
ethical aspects of the “good life” leaving time
for both work and rest, but also qualitative
leisure time for the workers. ILO states,
2381 S
“Long working hours prevents workers
from getting adequate rest, attending to fam-
ily responsibilities and participating in the
community,” and to prevent this, many sus-
tainability models have incorporated ILO’s
principles of “working time” to enhance
a sustainable “work-life balance.”
9. “Anticorruption principles” are part of sus-
tainability assessment models in order to pre-
vent corruption. Corruption is when a trusted
official or steward in secrecy receives money
or other benefits, either to operate for the
cause of the donator or for avoid operating
in legal manners as asked for by the donator
or to abuse his position of trust. Corruption
has major negative economic consequences
in efficiency losses and other damages
because the abuse removes part of the econ-
omy from free competition and may harm
other individuals for not receiving what
they are supposed to according to law,
rules, or principles. The leading organization
in policy-making for mitigating corruption
and to measure the state of the art in
anticorruption is Transparency International,
who divides the efforts into issues in politics,
public contracting, and private sector. The
United Nations Convention Against Corrup-
tion was adopted in 2003 among 154 states
(to date) and entered into force in December
2005. It is the first legally binding
anticorruption agreement applicable on
a global basis. The member states of the
convention have committed to implement
a wide and detailed range of anticorruption S
measures that affect their laws, institutions,
and practices. These measures promote pre-
vention, criminalization and law enforce-
ment, international cooperation, asset
recovery, technical assistance, and informa-
tion exchange (Transparency International
2011).
10. “Transparency principles” is to disclose
information about a business’ decisions,
actions, achievements, results, and outcomes
in an ethical, responsible, and trustworthy
manner to all stakeholders, hereunder share-
holders, financiers, employees, customers,
S 2382 Sustainability Assessment Models

Sustainability Assessment Models, Table 1 Summary table of the sustainability indices (Singh et al. 2009,
pp. 296–297)
Summary innovation Internal market Business Investment in Performance in the Relative intensity of
index index climate the knowledge- knowledge-based regional problems in
indicator based economy economy the community
Economic sentiment Composite Information and Environmental Human Technology
indicator leading communication sustainability development index achievement index
indicators technologies index
Overall health Two “synthetic National General Success of European labor
system attainment environmental innovation indicator of software process market performance
indexes” capacity science and improvement
technology
Eco-indicator 99 Concern about National health Index of Index of Environmental
environmental care system sustainable and environmental policy performance
problems performance economic friendliness indicator
welfare
Living planet index Ecological City Environment Environment Well-being index
footprint development performance vulnerability index
index index
Composite Composite Ford of Genuine Sustainability Compass index of
sustainability sustainability Europe’s savings index performance index sustainability
performance index development product
index sustainability
index
ITT Flygt Environment Life cycle index G score Index of
sustainability index quality index sustainable society

governments, and the public in general.
Transparency also includes “honesty” in dis-
closures no matter which results it might
reveal for the public.
Sustainability Assessment Model Overview
The above ten-mentioned key features incorpo-
rated in the various SAM indexes can be seen in
Table 1. This application for the assessment of
making decision-making processes focuses on
sustainable conduct of businesses that takes
place in many variants, as Singh et al.
(2009) have pictured for 41 various SAM such
as public indexes and indicators.
These multiple indexes used in the various
indexes around the world, such as FTSE4Good,
Dow Jones, and SAM group, just to mention very
few of the total, show us the complexity of how
businesses should and could cope with sustain-
ability assessment models. Although there seems
to be a variety of different sustainability indexes
and indicators, Singh et al. (2009) conclude in
their overview that:
Although there are various international efforts on
measuring sustainability, only few of them have an
integral approach taking into account environmental,
economic and social aspects. In most cases the focus
is on one of the three aspects. Although, it could be
argued that they could serve supplementary to each
other, sustainability is more than an aggregation of
the important issues, it is also about their
interlinkages and the dynamics developed in
a system. This point will be missing if tried to use
them supplementary and it is one of the most difficult
parts to capture and reflect in measurements. (Singh
et al. 2009, p. 297)
One of the explanations to this statement could
be that inputs in each of the features of sustain-
ability are by themselves very comprehensive.
For instance, to do a full life cycle analysis is to
measure more or less all impacts of a given pro-
cess to the environment. One can easily imagine
that this feature alone is very complex. What is
meant by “all,” and when is “all” covered, and
what is “enough”? To produce, for example,
a concrete pipe – just to take a simple example
and not evolve ourselves into complex
Sustainability Assurance
productions such as an entire building – we could
limit the production of this pipe to one basic
material such as concrete if we neglect the rubber
band in the joint to keep it simple. The processes
involved in producing concrete material involves
among other things cement, sand, gravel, water,
and a range of additives (fly ash, etc.) as well as
iron reinforcement. And in cement alone is a long
list of components too such as chalk, crushed
brick, and volcanic tuff. And in a life cycle anal-
ysis, the ideal is to measure impact down to each
component from the extract of it out of its natural
resource till its final return to the nature again, as
disposal or natural breakdown into residual com-
posite. A life cycle analysis should go through all
processual steps from the extract of raw material,
via the entire process within all materials, energy,
molding in the process as well, and additives used
to form the final product, till the concrete pipe is
sold and laid in the soil and has functioned
through its entire lifetime till its finish as
a waste product eventually.
Details are vast in each of the above instru-
ments for sustainable assessment. At therefore
soon, it becomes very complex to comprehend
everything in one model alone albeit desirable.
Future Directions
As Singh et al. (2009) state in the above quote
about the variety of sustainability assessment
models, it is not easy to compress all issues within
the sustainability literature into an overall sys-
tem, but models are fragmented into comprehen-
sible parts of what the sustainability literature
recognizes as important. The OECD has recently
addressed sustainability assessment models as
a strong tool for CSR (www.oecd.org), which
means that interests in evolving these instruments
receive more attention – both politically, profes-
sionally, and academically.
Cross-References
▶ Climatic Change
▶ Corporate Social Responsibility
2383 S
▶ Ecology
▶ Mitigation
▶ Natural Environment
▶ Ozonelayer
▶ Sustainability
References and Readings
Aras, G., & Crowther, D. (2009). The durable corpora-
tion. Strategies for sustainable development. Farnham,
England/Burlington, VT: Gower Publishing.
Bovenberg, A. L. (1995). Environmental quality and
pollution-augmenting technological change in a two-
sector endogenous growth model. Journal of Public
Economics, 57(3), 369–391.
Cavanagh, J. E., Frame, B. R., Fraser, M., & Gabe, J.
(2007). Experiences of applying a sustainability
assessment model. In M. Horner, C. Hardcastle, A.
Price, & J. Bebbington (Eds.), International Confer-
ence on Whole Life Urban Sustainability and its
Assessment, Glasgow, 2007.
Crane, A., & Matten, D. (2007). Business ethics (2nd ed.).
Oxford: Oxford University Press.
EEA. (2010). The European environment – state and outlook
2010: Synthesis. State of the environment Report No.
1/2010. www.eea.europa.eu/soer/synthesis/synthesis.
Accessed 25 Apr 2012.
IPCC. (2007). IPCC Fourth Assessment Report, Climate
Changes 2007 (AR4). www.ipcc.ch. Accessed 25 Apr
2012.
Singh, R. K., Murty, H. R., Gupta, S. K. & Dikshit, A. K.
(2009). An overview of sustainability assessment
methodologies. Ecological Indicators, 9(2), 189–
212.
Transparency International. (2011). The first year of the
UN convention against corruption review process:
A civil society perspective. Transparency International
and the UNCAC Coalition. All rights reserved. www.
transparency.org. Accessed 25 Apr 2012.
Visser, W. (2011). The age of responsibility. CSR 2.0 and the
new DNA of businesses. Chichester/Hoboken: Wiley.
S
Sustainability Assessment Principles
▶ BellagioSTAMP
Sustainability Assurance
▶ Social and Environmental Assurance
S 2384 Sustainability Director

Definition
Sustainability Director
Sustainability management is a notion which has
▶ Chief Sustainability Officer made an impressive career for the last decade.
It firstly describes an activity of managing
sustainability issues in organizations and is
secondly very often used for the group or decision
makers who conduct sustainability management
Sustainability Evaluation activities. The goals of sustainability manage-
ment are described in a multitude of ways
▶ BellagioSTAMP
and mostly comprise the successful integration
of ecological, social, and economic aspects in
a company. Sustainability managers, sometimes
called CSR managers, Corporate Responsibility
Sustainability in SMEs managers, EHS managers, etc., are those
employees or managers who in a company are
▶ Sustainable Development in SMEs responsible to organize social and environmental
activities in line with the company’s strategic and
business goals. Seen as a specific activity, and as
a difference to the sum of uncoordinated social
and environmental activities in an organization,
Sustainability Index corporate sustainability management covers
all systematic activities to measure, analyze,
▶ Corporate Responsibility Index improve and communicate economic, social,
▶ Sustainability Assessment Models and environmental aspects of a company.
Most of the literature dealing with sustainability
management discusses the achievement of a
sustainable development of the organization as a
Sustainability Innovation core goal. Less frequently mentioned is the goal
to enable the organization to create a relevant
▶ Sustainability-Oriented Innovation contribution to a sustainable development of the
economy and society. This last goal, however,
is here seen as a constitutional element of
sustainability management as it constitutes
a fundamental difference to many earlier, less
Sustainability Management far-reaching approaches which are directed
to a more narrow view of organizational
Stefan Schaltegger development or to philanthropic activities only.
Centre for Sustainability Management (CSM), In the more narrow view of sustainability
Leuphana University of L€ uneburg, L€
uneburg, management, the sustainability task of business
Germany management is to reduce negative social and
environmental impacts imposed by existing
production processes, procurement, supply
Synonyms chains, consumption, disposal, etc., in, as far as
possible, an economic way, with particular
Corporate Responsibility (management); Corporate emphasis being placed on reducing or removing
Social Responsibility (CSR); CSR management; unacceptable impacts that lead to damage to the
Environmental management present and future quality of life and ecosystems.
Sustainability Management
The extended view of sustainability management
sees the sustainability task of business manage-
ment to create economically profitable solutions
to existing sustainability problems through
the innovation of new products, services,
arrangements, and organizations. This perspec-
tive is often described with sustainable
entrepreneurship, or the creative destruction of
unsustainable products, companies, processes,
etc., through the successful offering of more
sustainable alternatives which convince
customers and prospective customers and thus
make the unsustainable, current offers
obsolete. This view resonates also with a social
entrepreneur perspective which focuses directly
on solving societal problems.
Introduction
To achieve improved sustainability performance
it is necessary to reduce negative environmental
and social impacts, to create positive social and
environmental impacts and to do this in a way
which supports the economic success of the
company. In order to achieve this, sustainability
management examines production processes
and, also, all support functions such as planning
and control, human resources, financing and
organization, etc. Sustainability management is
therefore a multifunctional activity.
The sustainability orientation of a business
also stretches right across the company. Its
success often depends on cooperation between
different functions. For example, to create
sustainable products over the complete value
chain cooperation with suppliers, innovation
centers, NGOs, regulators, customers, etc., is
essential.
The need for solutions based on cooperation
challenges management with issues of
institutionalizing sustainability management, so
that ecological and social objectives become
an integral part of all management areas in all
business functions. Sustainability management is
often dealt with in a separate internal group
within the company. Without a sustainability
manager to lobby and cooperate with other
2385 S
managers, there is a danger that environmental
and social interests will not be integrated in
business thinking. Sustainability management
is mostly introduced through project groups or
permanent multifunctional teams (e.g., produc-
tion, marketing, and waste handling).
In practice, various ways of institutionalizing
sustainability expertise into management demon-
strate that no single answer to the question about
how to organize sustainability management
exists. At worst, sustainability management can
become an isolated and poorly funded function.
At best, organizational structures exist that, with
a high level of support and commitment from top
management, provide resources to ensure
that sustainability management practices are
integrated throughout the organization and in
the core business model and processes.
The roots of sustainability management go
back quite far. Anthroposophical businesses,
such as Waldorf schools, Biodynamic farms and
gardens, anthroposophically extended medical
practices, therapists, artists, scientists, colleges,
and adult education centers (see the Directory of
Initiatives at http://www.anthroposophy.org/DoI/
intro.html), following Rudolf Steiner’s (b.1861–
d.1925) theories, focused on overcoming social
and environmental problems long before sustain-
ability was coined as a term and sustainability
management became a consideration for
mainstream organizations. Environmental
management was promoted strongly in the
1970s and 1980s as a consequence of the oil
crises and the Club of Rome report. Committed
people in business followed their personal S
convictions like Georg Winter or Claus Hipp,
began to strive for economic success through
a combination of social, ecological, and market
principles. Alternative business approaches
as discussed under the notion of social entrepre-
neurship and sustainable entrepreneurship have
invented and established organizations which
look beyond profit seeking and private industry
deal with social and sustainability issues.
Starting with the perspective on environmen-
tal technologies for pollution prevention, clean
production, and environmental services, which
was the main focus in the USA, Europe,
S 2386
and Japan in the 1980s, managers of more
conventional companies have shifted their
perspective ever more toward cleaner production,
product development and innovation, business
model innovation, creating business cases for
sustainability and designing more sustainable
supply chains. In the 1990s, business received
further encouragement to be aware of environ-
mental and later also social impacts through the
introduction of environmental and social
management systems and standards (i.e., ISO
14000 series, EMAS and BS 7750). Social,
environmental, and sustainability management
systems and performance can now be certified
and communicated in a standardized way.
Exposed to concerns about the social and
environmental impacts of their organizations
and products, the management has realized that
social acceptance and legitimacy are part of
sustainability management and that the consider-
ation of stakeholder expectations is key to
good strategic management (Freeman 1984).
Furthermore, operational management has
understood that reducing energy consumption
and pollution can go along with cost reductions
and that sustainability considerations can be
a basis for innovation. Sustainability has thus
become an argument in product and organiza-
tional development as well as in sustainable
entrepreneurship and strategic management.
Key Issues
Sustainability management has been informed by
the vision of integrating environmental,
social, and economic perspectives in corporate
management. The “Sustainability Triangle”
(Fig. 1) represents this concept of sustainability
management (similar to Dyllick and Hockerts
2002; Schaltegger et al. 2003; Schaltegger and
Burritt 2005).
The sustainability triangle is designed to help
both to explain the three generally recognized
components of corporate sustainability – the
social, environment, and economic perspectives
– and to identify where a contribution is needed
Sustainability Management
from sustainability management in order to sup-
port management with relevant information and
where performance contributions can and should
be made. Its purpose is both to explain each
component individually and the interrelation-
ships between them. In the Triangle, each com-
ponent is represented by one of the three corners,
whereas the interrelationships are represented by
the lines which connect each corner together. The
corners therefore represent the company’s effec-
tiveness in achieving each component individu-
ally and are measured in absolute terms, whereas
the lines represent different ways in which eco-
and socio-efficiency as well as eco-justice can be
defined by taking different combinations of the
three perspectives and expressing the results as
relative indicators. Effectiveness, measured in
absolute terms, is the goal whenever management
strives for the improvement of a single dimension
(e.g., tons of waste avoided, additional income
in poor regions). Whereas efficiency, measured
in relative terms, describes the relation between
different dimensions, e.g., socio-efficiency for
the relation between the social and the economic
dimension (e.g., additional income in poor
regions per unit of additional turnover).
The conventional aim of business
management is economic effectiveness. The
challenge for sustainability management is to
support business leaders on the other aspects.
A company’s eco-effectiveness (i.e., ecological
effectiveness) reflects how successful environ-
mental management as part of sustainability
management has been in reducing its impacts
on the natural environment. This is usually
expressed in terms of the absolute amounts of
physical quantities such as CO2 emissions.
Socio-effectiveness reflects how a company has
performed with regard to social and cultural
demands and to legitimate its activities. The
economic challenge of business is to maximize
its financial returns (profits) relative to financial
resources such as capital invested. The equivalent
challenge to sustainability management is to
achieve the maximum environmental and social
performance as economically as possible,
and these are measured by eco-efficiency and
Sustainability Management
Sustainability
Management, Fig. 1 The
sustainability triangle of
perspectives of corporate
sustainability management
3 Eco-efficiency
Ecological
1 Eco-
effectiveness
socio-efficiency, respectively. Eco-efficiency is
defined as the relative proportions of an economic
(monetary) measure and a physical (ecological)
measure (Schaltegger and Burritt 2005;
Schmidheiny and BCSD 1992; von Weizs€acker
et al. 1997, 2009). It can be defined as the ratio
of value added to environmental impact added
per unit. Environmental impact added is defined
as the sum of all environmental impacts which
are generated directly or indirectly by
a product or activity, e.g., value added per ton
of CO2 emitted. Similarly, socio-efficiency can
be defined as the economic value added relative
to social measures such as the number of staff
accidents. Eco-justice reflects the ratio between
environmental and social objectives or indica-
tors, e.g., environmental impacts relative to
poverty.
Future Directions
The main challenge for sustainability manage-
ment is to integrate all these different aspects.
This integration challenge goes along with
the observation and development that CSR and
2387 S
Economic
effectiveness
Economic
4 Socio-efficiency
5
Integration
Social
6 Eco-justice
2 Socio-
effectiveness
corporate sustainability are approaching each
other, although they are originally different
approaches with similar goals related to sustain-
able development (see, e.g., van Marrewijk
2003). Integration requires the consideration of
all sustainability aspects and the links between
them. Sustainability management can therefore
also be seen as the art of overcoming trade-offs
between social, environmental, and economic
perspectives and the search for ways to integrate
improvements in all dimensions. With regard
to the links to the economic dimension this also
addresses business cases for sustainability.
To support sustainability management a multitude S
of tools have been developed in theory and corpo-
rate practice, some addressing single aspects,
others addressing two or more aspects of sustain-
ability management. So far the application of fully
integrative sustainability management tools (see 5
in Fig. 1) is rare but on an increasing trend. The
future challenges of sustainability management
may thus relate to the broad integration of sustain-
ability aspects to overcome trade-offs and create
multi-win solutions without compromising the
effectiveness in one dimension. This challenge
may seem in-achievable but as a vision it
S 2388 Sustainability Management Accounting

provides direction and can serve to express resource economics 2005/2006 (pp. 185–222).
ambition and to enhance innovation for sustain- Cheltenham: Edward Elgar.
Schaltegger, S., & Synnestvedt, T. (2002). The link
able development. between green and economic success: environmental
management as the crucial trigger between
environmental and economic performance. Journal of
Environmental Management, 65(4), 339–346.
Cross-References Schaltegger, S., Petersen, H., & Burritt, R. (2003).
An introduction to corporate environmental manage-
▶ Business Case ment: Striving for sustainability. Sheffield: Greenleaf.
▶ Business Case for CSR Schmidheiny, S., & BCSD (Business Council for
Sustainable Developmen). (1992). Chaning the
▶ Business Cases for Sustainability course. Massachusetts: MIT Press.
▶ Business Model Innovation Stead, J., & Stead, W. (2008). Sustainable strategic
▶ Business Performance management: An evolutionary perspective. Interna-
▶ Corporate Sustainability tional Journal of Sustainable Strategic Management,
1(1), 62–81.
▶ Enlightened Self-interest van Marrewijk, M. (2003). Concepts and definitions of CSR
▶ Sustainability Accounting and corporate sustainability. Between agency and com-
▶ Sustainable Entrepreneurship munion. Journal of Business Ethics, 44(2/3), 95–105.
▶ Triple Bottom Line von Weizs€acker, E., Lovins, A., & Lovins, L. (1997).
Factor four. Doubling wealth, halving resource use.
London: Earthscan.
von Weizs€acker, E. U., Hargroves, K., Smith, M.,
Desha, C., & Stasinopoulos, P. (2009). Factor five.
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BMU/BDI (Bundesministerium f€ ur Umwelt and Earthscan.
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Federal Ministery for the Environment, German
Federation of Industry Associations) (Eds.),
Schaltegger, S., Kleiber, O., M€ uller, J., & Herzig, C.
(Autors) (2002). Sustainability management in Sustainability Management
business entreprises. Concepts and tools for
a sustainable organisation development. Berlin: Accounting
BMU/BDI/CSM.
Carroll, A. B. (1979). A three-dimensional conceptual ▶ Sustainability Accounting
model of corporate performance. Academy of
Management Review, 4(4), 497–505.
Carroll, A. B. (1991). The pyramid of corporate social
responsibility: Towards the moral management of
organizational stakeholders. Business Horizons, Sustainability Marketing
34(4), 39–48.
Dyllick, T., & Hockerts, K. (2002). Beyond the business
case for corporate sustainability. Business Strategy ▶ Sustainable Consumption
and the Environment, 11(2), 130–141.
Elkington, J. (2004). Enter the triple bottom line. In
A. Henriques & J. Richardson (Eds.), The triple bot-
tom line, does it all add up? (pp. 1–16). London:
Earthscan. Sustainability Rating
Ernst & Young (2012). Six trends in corporate sustain-
ability. Berlin: Ernst & Young.
Freeman, E. (1984). Strategic management. A stakeholder
▶ CSR Measurement
approach. Marshfield: Pitman.
Hansen, E. G. (2010). Responsible leadership systems:
an empirical analysis of integrating corporate respon-
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Schaltegger, S., & Burritt, R. L. (2005). Corporate
Sustainability Reporting
sustainability. In H. Folmer & T. Tietenberg (Eds.),
The international yearbook of environmental and ▶ Disclosure (CSR Reporting)
Sustainability Reporting Guidelines
Sustainability Reporting Guidelines
Branco Manuel Castelo
Faculty of Economics, University of Porto:
OBEGEF (Observatory in Economics and
Management of Fraud), Porto, Portugal
Synonyms
CSR reporting guidelines
Definition
Acknowledging that corporations have some
kind of social responsibility entails the recogni-
tion of the importance of providing information
on corporations’ activities related to aforemen-
tioned responsibility. The provision of such infor-
mation is nowadays predominantly made by way
of sustainability reports (KPMG 2011). The prep-
aration and publication of such information, that
is sustainability reporting, is related mainly with
voluntary disclosures of information on several
economic, social, and environmental aspects
upon which a corporation’s activities may have
an impact: community involvement, employee-
related issues, environmental concerns, the fight
against corruption, etc. Said information can be
qualitative or quantitative, made in financial or
nonfinancial terms, and seek to inform or influ-
ence readers.
The Global Reporting Initiative (GRI) is now-
adays the most relevant organization in the pro-
motion of sustainability reporting. It provides
a widely acknowledged reporting framework on
how to report about a corporation’s sustainability
commitment and performance, proposing the
GRI’s sustainability reporting guidelines.
Numerous companies communicate their CSR
programs and performance using the GRI guide-
lines to produce their sustainability report.
According to KPMG (2011), 80 % of the top
250 companies from the Global Fortune 500 and
69 % of the top 100 companies in 34 nations are
now adopting these guidelines.
2389 S
There are, however, other noteworthy
reporting frameworks, both international, such
as the United Nations Global Compact (UNGC)
(officially launched in 2000), and national, such
as the case of the French Nouvelles Régulations
E´conomiques (NRE). The NRE make mandatory
for listed companies environmental and social
reporting in the management report.
Introduction
CSR reporting has been rising steadily since 1993
(KPMG 2005, 2008, 2011). In 2008, 79 % of
G250 and 45 % of N100 companies issued sepa-
rate corporate responsibility reports, compared
with 52 % and 33 %, respectively, in 2005
(KPMG 2005, 2008). Nowadays, corporations
are increasingly using multiple forms of media
to communicate results (KPMG 2011). Only
20 % of G250 rely solely on stand-alone CR
reports, and barely 10 % restrict their report either
to web-only formats or annual reports alone
(KPMG 2011). In a previous stage of develop-
ment, CSR and the reporting thereof focused
mainly on the environmental aspect. This had
a reflection in terms of CSR reporting, which
has evolved from purely environmental reporting
up until 1999 to sustainability (social, environ-
mental and economic) reporting (KPMG 2005).
The importance attributed to the other compo-
nents of CSR increased over time.
According to the “KPMG International Sur-
vey of Corporate Responsibility Reporting
2011” (KPMG 2011), which analyzed more S
than 3,400 of the world’s largest companies, by
selecting the top 250 from the Global Fortune
500 (G250) and the top 100 companies in 34
nations (N100), CSR reporting has now become
mainstream among G250 companies and is fast
becoming so among N100 companies. Ninety-
five percent of the G250 companies now report
on their corporate responsibility activities. This
represents a jump of more than 14 % over the
2008 survey. Of the N100 companies, 69 % of
publicly traded companies conduct CR
reporting, compared to just 36 % of family-
owned enterprises and close to 45 % for both
S 2390 Sustainability Reporting Guidelines

Sustainability Reporting Guidelines, Table 1 Main contents of the G3.1 sustainability reporting guidelines
Part 1 – Defining report content,
quality, and boundary
Part 2 – Standard disclosures
Includes reporting principles to define report content (materiality, stakeholder
inclusiveness, sustainability context, and completeness) and for defining the report
quality (balance, comparability, accuracy, timeliness, clarity, and reliability) and
on how to set the report boundary
Specifies the content of the report. Refers to three types of disclosures:
1. Strategy and profile
2. Management approach
3. Performance indicators:
Economic: 9 indicators (7 core + 2 additional)
Environmental: 30 indicators (17 core + 13 additional)
Social:
Labor practices and decent work: 15 indicators (10 core + 5 additional)
Human rights: 11 indicators (9 core + 2 additional)
Society: 10 indicators (8 core + 2 additional), pertaining to local communities,
corruption, public policy, anticompetitive behavior, and compliance
Product responsibility: 9 indicators (4 core + 5 additional)

cooperatives and companies owned by profes-
sional investors such as private equity firms
(KPMG 2011).
KPMG (2011) notes that according to the evi-
dence presented in the previous report (KPMG
2008), the GRI guidelines were already gaining
widespread adoption as the de facto global stan-
dard for CSR reporting. Evidence presented in
the 2011 study shows that the GRI has extended
its hold on this position, with 80 % of G250 and
69 % of N100 companies now aligning to the
GRI guidelines. The GRI has been created in
1997 by The United Nations Environment
Programme (UNEP) and the Coalition for Envi-
ronmentally Responsible Economies (CERES).
Its mission has to do with the development and
dissemination of globally applicable guidelines
for corporations to use when reporting on eco-
nomic, environmental, and social performance.
A first draft of the GRI guidelines was proposed
in March 1999 and a pilot test program was
immediately launched. The first official edition
of the GRI guidelines was released in July 2000,
the second edition of the Guidelines was
released in August 2002, and the third version
of the guidelines (the G3) was released in Octo-
ber 2006. In March 2011, the G3.1 guidelines
were launched. It corresponds to an update and
completion of the G3. It is arguably the best-
known and most widely used set of guidelines
for sustainability reporting worldwide.
G3.1 amounts to a guide for defining the
content and boundaries (i.e., the entities of the
company to be included) of the sustainability
report. It requires standard contents pertaining
to the profile of the organization, its governance
structures and processes, and the management of
sustainability issues including goals and environ-
mental, social, and economic performance indi-
cators. The G3.1 guidelines include a list of 84
performance indicators (optional indicators are
called additional) (see Table 1). GRI produces
stand-alone technical protocols to assist reporters
with specific areas of reporting. They are
supported by a Technical Protocol (providing
process guidance on how to define the content
of a sustainability report) and National Annexes
(versions of the guidelines conceived to capture
national and regional sustainability issues). In
addition, there are numerous sector supplements
(see Table 2) and country-specific annexes.
Companies that want to claim that their reports
are consistent with the guidelines are required to
declare an “application level.” There are three
application levels (A, B, and C), corresponding
to the amount of information disclosed. “A” rep-
resents the greatest disclosure, followed by “B”
and then “C.” A “+” rating, e.g., A +, denotes that
Sustainability Reporting Guidelines
Sustainability Reporting Sector supplements
Guidelines, already developed
Table 2 Sector
supplements (Source: data Airport operators
obtained from the GRI web Construction and real
page in February 2012 estate
(www.globalreporting. Electric utilities
org)) Financial services
Food processing
Mining and metals
NGO
the sustainability reporting has been externally
assured. Companies that request the GRI to
make an “Application-Level Check” (for a fee)
may place a “GRI-checked” icon in the report.
These application levels aim to reflect the degree
of transparency against the GRI guidelines in
reporting. They do not provide any kind of state-
ment on the sustainability performance of the
reporting organization, the quality of the report,
or on formal compliance with the guidelines.
Although pointing out that questions regard-
ing the usefulness of the GRI have been raised,
Roca and Searcy (2012) emphasize its help in the
popularization of a multi-stakeholder process in
sustainability reporting as one of the key
strengths. They also point out some of the typical
criticisms made to the GRI, including confusion
over its scope, the lack of a requirement for
independent verification of the report, and the
fact that different levels of application permit
selective reporting on the performance indicators
(Roca and Searcy (2012)).
GRI sustainability reporting guidelines have
evolved substantially over the years. Not only
they have evolved in terms of incorporating new
issues that have become important in the CSR
agenda, such as the fight against corruption, but
also in terms of suggesting new indicators
pertaining to aspects of corporate sustainability
that have become more relevant. The fourth gen-
eration of sustainability reporting guidelines (the
G4) is currently being prepared by the GRI. The
draft version of G4 is due to be released for public
comment in mid-2012. A final draft is expected to
be ready for approval by GRI’s governance
2391 S
Available pilot versions of sector Sector supplements in
supplements development
Automotive Media
Logistics and transportation Oil and gas
Public agency
Telecommunications
Apparel and footwear
bodies in late 2012, and the final version of G4
is due to be launched in 2013.
The issue of the fight against corruption is an
interesting example of the evolution occurred in
both CSR and the reporting thereof. Both are
associated with social and political climates and
are influenced by major events that occur and
draw public attention to certain issues, such as
the case of corruption. The fight against corrup-
tion has been considered as a major aspect of
CSR and the reporting thereof only very recently.
It was only in June 2004 that the fight against
corruption was added as the 10th principle of the
UNGC. The issue of corruption was not
addressed in GRI guidelines’ first version (GRI
2000). In the second version, only one indicator
related to corruption was proposed: description of
the policy, procedures/management systems, and
compliance mechanisms for organizations and
employees addressing bribery and corruption
(including a description of how the organization
meets the requirements of the OECD Convention S
on Combating Bribery) (GRI 2002). In the most
recent versions (G3 and G3.1), the fight against
corruption has been recognized as an important
topic, and five indicators are now proposed (GRI
2006, 2011). These indicators are considered
indicators of social performance (GRI 2006,
2011). They include explicit measures (percent-
age and total number of business units analyzed
for risks related to corruption, percentage of
employees trained in organization’s
anticorruption policies and procedures, actions
taken in response to incidents of corruption) as
well as implicit measures (such as the total value
S 2392
of financial and in-kind contributions to political
parties, politicians and related institutions by
country) (GRI 2006, 2011).
Another important reporting framework is
provided by the UNGC, which has been pro-
posed in 1999 at the World Economic Forum
in Davos by the then UN Secretary General,
Kofi Annan. In July 2000, it was officially
launched at UN Headquarters. UNGC aims at
encouraging corporations to embrace 10 princi-
ples of CSR, relating to human rights, labor, the
environment, and the fight against corruption
(this issue has been introduced only in 2004,
with the addition of a tenth principle). It had
over 6,500 signatories in more than 135 coun-
tries in 2008, which makes of it the world’s
largest corporate responsibility initiative
(UNGC 2008).
Signatories of the UNGC are expected to
introduce changes so that the 10 principles
become part of their strategies and operations.
Originally, the UNGC required participating
companies to submit an annual report, showing
their commitment toward its principles. Since
January 2003, companies are expected to com-
municate publicly on their progress through
a document entitled Communication on Progress
(COP). It is a document that can be included in
their sustainability or annual report (or even in
their websites, press releases, official statements,
or company notices). Failing to provide such
document may lead to the listing of the corpora-
tion on the UNGC’s website as a “noncommu-
nicating” participant. Corporations failing to
submit a COP for 2 years are labeled “inactive”
or “delisted.”
The GRI and the UNGC have promoted some
efforts to provide guidance on integrating the
COP with sustainability reports prepared in
accordance with the GRI guidelines (UNGC/
GRI 2007). An agreement to align the work of
the GRI and the UNGC in advancing corporate
responsibility and transparency and further
develop their combined strengths has been
announced in May 2010. Under the agreement,
GRI is expected to develop guidance regarding
the UNGC’s 10 principles and issue areas to
integrate centrally in a next version of the
Sustainability Reporting Guidelines
sustainability reporting guidelines. At the same
time, the UNGC will adopt the GRI guidelines as
the recommended reporting framework for its
signatories.
Besides these international reporting frame-
works, the French Nouvelles Régulations
Économiques (NRE) are particularly noteworthy
as an example of a mandatory set of sustainability
reporting guidelines (ARESE 2001; Dhooge
2004; Delbard 2008). This legislation is unique
in Europe, making social and environmental
reporting compulsory for all publicly listed
French companies. In 2001, legislation passed
by the French Assemblée Nationale in 2001 as
part of its NRE required French listed companies
to provide in their annual reports information on
a series of social and environmental impacts on
their activity by using a set of social and environ-
mental indicators. These indicators were issued
in 2002, and the requirement to report on such
basis commenced from 2003. Required informa-
tion concerns employee-related issues, commu-
nity involvement, and environmental concerns
(see Table 3).
One of the major problems with the NRE
pertains to the choice of indicators and their com-
parability with the GRI indicators (Delbard
2008). In particular, the fact that NRE do not
provide precise reporting methods and indicators
is seen as an important flaw (Delbard 2008). The
other fundamental weakness concerns the scope
of reporting, given that the NRE did not provide
any precise indication on this matter (Delbard
2008).
Key Issues
Recent initiatives of establishing frameworks
for corporations to report on their CSR policies
and activities by national and international orga-
nizations and interest by large companies in
instruments such as sustainability reports are
evidence of a growth in importance of CSR and
the reporting thereof. Several sustainability
reporting frameworks have been proposed dur-
ing recent years, both by national and interna-
tional organizations. Among national initiatives,
Sustainability Reporting Guidelines 2393 S
Sustainability Reporting Guidelines, Table 3 Provisions of the February 20, 2002, NRE Decree (Source: ARESE
2002. Press release: Mandatory sustainability reporting for French corporations)
Human resources
Issue Disclosure of quantitative data Disclosure of qualitative data
Employment issues Total number of employees
Employees recruited during the Details on the recruiting process (including any
financial year difficulties encountered)
Division between long- and short-term
contracts
Layoffs/redundancies Details and analysis of the rationale
Use of external workers Details and analysis of the rationale
Work hours Total amount of overtime hours Details and analysis of the rationale
worked
Corporate restructuring Measures to mitigate impacts
Work organization Length of work day of full- and part-
time workers
Absenteeism Details and analysis of the rationale
Remuneration Remuneration evolution
Payroll taxes
Equal opportunities Integration of women into different Details and analysis
occupational posts
Health and safety HS conditions and details on incidents or accidents
Training Details on training
Equal opportunities Insertion of physically challenged persons into the
workforce
Social benefits Social benefits
External workforce Outsourcing/subcontracting
Community involvement
Issue Disclosure of quantitative data Disclosure of qualitative data
Local impacts Insertion within the community
Local partnerships Engagement with environmental NGOs, consumer
groups, educational institutions, and impacted
populations
Work conventions ILO core labor conventions – respected by
subsidiaries; promotion with regard to
subcontractors
Local development in
foreign countries
Environment
S
Issue Disclosure of quantitative data Disclosure of qualitative data
Consumption Water
Energy Use of renewable energy + energy efficiency
Raw materials/natural resources
Soil use
Emissions To air
To water
To ground
Odor
Noise
Wastes
(continued)
S 2394
Sustainability Reporting Guidelines, Table 3 (continued)
Environment
Issue Disclosure of quantitative data
Impact on biodiversity
Environment
management system
Budget and expenses
Provisions for environmental risks
Penalties
the French NRE, introduced in May 2001, are
particularly noteworthy. Through them, France
was the first country to make sustainability
reporting mandatory. Amidst international ini-
tiatives, some global standards stand out,
namely, the GRI guidelines and the UNGC.
Both provide reporting frameworks on how to
report about a corporation’s commitment and
performance in areas related to corporate sus-
tainability. Some guidance on integrating the
UNGC with sustainability reports elaborated in
accordance with the GRI guidelines has already
been offered.
The most prominent and most widely used
sustainability reporting guidelines are
undoubtedly the GRI guidelines. These guide-
lines were developed as a way of supporting
companies in creating sustainability reports
that integrate social, environmental, and eco-
nomic impacts of business and to increase
their accountability.
Future Directions
The latest KPMG International Survey of Cor-
porate Responsibility Reporting (KPMG 2011)
stresses that as CSR reporting begins to play
a larger role in the way stakeholders and inves-
tors perceive corporate value, companies
Sustainability Reporting Guidelines
Disclosure of qualitative data
Programs to reduce impacts, promote fauna and
flora
Audit and certification policy
Compliance with laws and regulations
Environmental management structures and
organization
Employee awareness and training programs
Environmental risk management
Integration of foreign subsidiaries within
environmental management system
should increasingly want to demonstrate the
quality and reliability of the information they
disclose. However, this is not substantiated by
the findings from this report. Only 46 % of the
G250 and 38 % of N100 companies use assur-
ance as a strategy to verify and assess the infor-
mation they disclose. Although this represents
an evolution in comparison with 2008 informa-
tion, this is considered by the KPMG
a troubling finding, for the reason that compa-
nies without an external assurance program run
the risk of restatements in the future, as well
as send the message that CR information is
not as highly considered as financial informa-
tion. Therefore, much development is expected
in this area of sustainability reporting
assurance.
Another important future development per-
tains to the articulation of sustainability reporting
with integrated reporting. Integrated reporting is
proving itself as the next step in improving the
value of corporate reporting, and a significant rise
in all forms of integrated reporting over the com-
ing years is likely to happen (KPMG 2011).
A reporting framework for integrated reporting
is already being discussed, and an international
organization, the International Integrated
Reporting Committee (IIRC), with the aim of
creating a globally accepted integrated reporting
framework which brings together financial,
Sustainability Risk Management
environmental, social, and governance informa-
tion has already been created.
Cross-References
▶ AA1000
▶ Accountability
▶ Coalition of Environmentally Responsible
Economies (CERES)
▶ Communicating with Stakeholders
▶ Corporate Social Responsibility Report
▶ CSR Communication
▶ Disclosure (CSR Reporting)
▶ Global Reporting Initiative
▶ Integrated Reporting
▶ Social Accounting
References and Readings
ARESE. (2002). Press release: Mandatory sustainability
reporting for French corporations, 5 Mar 2002.
Delbard, O. (2008). CSR legislation in France and the
European regulatory paradox: an analysis of EU CSR
policy and sustainability reporting practice. Corporate
Governance, 8(4), 397–405.
Dhooge, L. J. (2004). Beyond voluntarism: Social disclo-
sure and France’s Nouvelles Régulations Économiques.
Arizona Journal of International & Comparative Law,
21(2), 441–491.
Global Reporting Initiative (GRI). (2000). Sustainability
reporting guidelines. Boston: GRI.
Global Reporting Initiative (GRI). (2002). Sustainability
reporting guidelines. Boston: GRI.
Global Reporting Initiative (GRI). (2006). Sustainability
reporting guidelines: Version 3.0. Amsterdam: GRI.
Global Reporting Initiative (GRI). (2011). Sustainability
reporting guidelines: Version 3.1. Amsterdam: GRI.
KPMG. (2005). KPMG international survey of corporate
responsibility reporting 2005. Amsterdam: KPMG.
KPMG. (2008). KPMG International Survey of Corporate
Responsibility Reporting 2008. KPMG.
KPMG. (2011). KPMG International Survey of Corporate
Responsibility Reporting 2011. KPMG.
Roca, L. C., & Searcy, C. (2012). An analysis of indicators
disclosed in corporate sustainability reports. Journal of
Cleaner Production, 20, 103–118.
United Nations Global Compact (UNGC). (2008). United
Nations Global Compact annual review. New York:
UNGC.
United Nations Global Compact/Global Reporting Initia-
tive (UNGC/GRI). (2007). Making the connection:
The GRI guidelines and the UNGC communication
on progress. UNGC.
2395 S
Sustainability Risk
▶ Environmental, Social, and Governance Risk
Sustainability Risk Management
Liangrong Zu
Enterprise, Microfinance and Local Development
Program, International Training Centre of the
ILO, Turin, Italy
Synonyms
Business risk management; Environmental risk
management; Risk management; Social risk
management; Sustainable enterprise risk man-
agement; Triple bottom line risk management
Definition
Sustainability risk is a newly emerging risk
area and one of the critical risk areas of the
twenty-first century. In dealing with sustain-
ability risk, sustainability risk management
(SRM) is emerging as a business strategy that
aligns profit goals with internal green strate-
gies and policies. Such policies seek to
decrease negative environmental impact by
reducing use of natural resources and decreas-
ing carbon emissions, toxic substances, and S
by-products. The goal of SRM is to make this
alignment efficient enough to sustain and grow
a business while still preserving the environ-
ment. SRM is also defined as concerning with
environmental and social responsibility risks.
SRM is regarded as a critical part of enterprise
risk management (ERM). It is a key element of
“sustainable development,” and is about man-
aging environmental risks, ethics, and social
justice (Anderson 2005). SRM is another step
in the evolution from traditional business risk
management areas like operations, disaster
recovery, and security. SRM approaches risk
S 2396
management at a higher level, including pro-
duction, manufacturing, and management of
suppliers or materials.
Introduction
Why Manage Sustainability Risk?
Increasingly, businesses are being pressured to
address environmental and social responsibility
performance in addition to the traditional financial
performance. The driving force of this trend is the
increasing environmental and social risk costs that
adversely impact the financial bottom line.
Risk managers have been confronted with envi-
ronmental risks since the 1970s, and, more recently,
corporate social responsibility risks portend prob-
lems. A series of developments indicate that the
level of sustainability risks is reaching new dimen-
sions and will significantly expand in the future. For
instance, in the liability area, standards for deter-
mining negligence are rising, the scope of injuries
and damage is expanding, the Sarbanes-Oxley Act
is increasing disclosure of environmental liabilities,
and new theories of liability are developing.
For example, concern over global warming has
focused on increasing property risks, but the island
states of Tuvalu, Kiribati, and Maldives, the Inuits,
and numerous environmental groups are exploring
litigation against the USA and fossil fuel
companies for damages caused by global warming
(Anderson 2006).
The combination of the increasing number of
nongovernmental organizations and their ability to
instantaneously send information around the world
to large numbers of individuals at virtually no extra
cost through the Internet has greatly increased the
effectiveness of boycotts thanks to the butterfly
effect. Large numbers of the Fortune 500 have
incurred boycott pressures. Among the companies
affected are Nike, Shell Oil Co., Starbucks Corp.,
Citigroup, ExxonMobil Corp., Coca-Cola Co.,
Nestle, Dow Chemical Co., and Ford Motor Co.
Boycott risks resemble business interruption risks
by reducing revenues. Boycotts also produce huge
reputation damage. Developing strategies for
responding to boycott risks is an important compo-
nent of sustainability risk management. US-based
Sustainability Risk Management
multinational companies face uncertainty and diffi-
cult decisions due to new sustainability regulations
in the European Union, Japan, and other countries.
The European Union, Japan, Russia, and Canada
have all ratified the Kyoto Protocol, which man-
dates a reduction in greenhouse gas emissions. The
European Union has recently enacted directives
that require manufacturers to take back, recycle,
and reuse waste electrical and electronic
equipment; call for the restriction of hazardous
substances such as lead, mercury, cadmium,
hexavalent chromium, and certain flame retardants;
and mandate the registration, evaluation, and
authorization of chemicals (Anderson 2006).
US-based corporations operating in the Euro-
pean Union, Japan, and other countries must decide
whether to use two sets of products/chemicals and
greenhouse gas emission strategies or adopt the
higher EU standards for all their operations and
products. These companies must also deal with
the uncertainty that such legislation may later pass
in the USA. Oil shortages and rising prices have
caught the world’s attention, but many ecosystems
are under pressure. A study in Science magazine
found that, in the past 50 years, industrial-scale
commercial fishing has depleted the oceans’
populations of large predatory fish such as tuna,
swordfish, halibut, grouper, cod, and marlin by
90%. If current deforestation rates continue, the
Amazon rainforest could be wiped out in
80 years. A United Nations report estimates that
half the world’s population could face serious water
shortages by 2025. Current extinction rates of ani-
mals and plants will result in the sixth great wave of
extinction. The last one, involving the dinosaurs,
occurred 65 million years ago. Such unsustainable
development presents risks for industries dependent
on ecosystems and firms that may be held account-
able for damaging these systems (Anderson 2006).
Social justice risks derive from the unfair treat-
ment of workers and peoples in foreign countries.
Sweatshop conditions supporting repressive gov-
ernments and gender discrimination litigation such
as the class action suit involving 1.6 million
Wal-Mart workers represent a few of the increasing
social sustainability risks. Sustainability risk
management employs such techniques as waste
reduction, improved recycling and product design,
Sustainability Risk Management
and more efficient energy and transportation
systems. Several companies have formed partner-
ships with NGOs. Qualifying for ISO 14001,
meeting Dow Jones Sustainability Index require-
ments, issuing corporate sustainability reports, and
joining with other businesses in voluntary associa-
tions such as the Ceres coalition or the World
Business Council for Sustainable Development
can bolster a firm’s sustainability risk management
efforts. Retooling sustainability risk financing
strategies offers greater protection, particularly for
directors and officers. Several leading corporations,
including General Electric Corp., Toyota Motor
Corp., FedEx Corp. and Costco Wholesale Corp.,
have expanded their sustainability efforts. By
developing sustainability risk management
systems, risk managers can assist in their firms’
overall management strategy and can help their
firms reduce risk costs, create competitive
advantage, augment reputation, and increase the
bottom line (Anderson 2005).
The emergence of sustainability risk manage-
ment (SRM) has changed the way risk managers
think about risk and has dominated the way busi-
nesses of all kinds approach risk management.
Organizations globally are facing up to the reality
that the world has finite resources. Thinking on
sustainability embraces a much wider range of
issues than just environmental risk. It encompasses
issues of social responsibility including the fair and
equitable treatment of workers and other emerging
risks such as pollution, pandemic disease, poverty,
stakeholder activism, national security, globaliza-
tion, and reputational risk. The immediate task for
risk managers is to recognize that these seemingly
disparate risks are all converging. And although
the effects of many of these risks will take a long
time to manifest themselves, risk managers must
understand how to reconcile these long-term
changes with the short-term financial pressures
businesses face.
The Scope of Sustainability Risk Engagement
Sustainability risk is a newly emerging risk area,
one of the critical risk areas of the twenty-first
century. Sustainability risk management is also
regarded as the risk of “triple bottom line” (TBL)
developed by John Elkington, a leading
2397 S
consultant in the UK and author of Cannibals
with Forks. The TBL can be articulated as fol-
lows (Anderson and Anderson 2009):
Maximize : F þ E þ SR ¼ TBL;
where F ¼ financial performance, E ¼ environ-
mental performance, SR ¼ social responsibility
performance, and TBL ¼ F  Risk costs of E 
Risk costs of SR.
According to Elkington, you need to consider all
three areas to get to maximize the triple bottom
line. You can see the risk management aspect of the
TBL because the costs of risk are subtracted from
profit (or financial performance). Obviously, if you
reduce the environmental and social responsibility
risk costs, everything else held constant, the TBL
will increase.
To provide a background to the scope and expo-
sure associated with sustainability risk, Professor
Dan R. Anderson (2005) identifies six areas of
sustainability risk:
• Global warming/climate change
• Boycotts
• Environmental liability
• Ecosystems
• Social responsibility
• Directors and officers liability
Global warming/climate change is probably the
most significant and the most discussed in the busi-
ness and popular literature. Global warming/cli-
mate change refers to the fact that the Earth’s
atmosphere is getting warmer and will continue to
get warmer; for example, 24 of the 25 warmest
years have occurred since 1980. The main driver S
for this is human activity related to increasing
greenhouse gases, in both emissions and concentra-
tions, from burning fossil fuel – coal, petroleum,
and natural gas (Anderson 2005).
Increased property risks and storms are a
well-known consequence of climate change/global
warming to risk management professionals.
Hurricanes Katrina, Rita, and Wilma are recent
examples of storms. Munich Re has collected
a significant amount of information about property
exposures and global warming. According to
Munich Re, the frequency of weather disasters has
tripled since the 1960s. Also, natural disasters
S 2398
resulted in a record $200 billion in damages in
2005, including $75 billion in insured losses.
Natural disaster damages and insured losses more
than doubled their record-setting levels of $90
billion and $35 billion respectively, in 2004. Global
climate research predicts more intense rainfall,
stronger storms, stronger hurricanes, increases in
sea levels, and more severe droughts (which can
affect wildfires). All of these predictions, of course,
suggest that increasing property damage is going to
be one of the most severe consequences of global
warming/climate change from a risk management
perspective (Anderson 2005).
This is not to say that liability will not also
increase due to global warming/climate change.
Litigation is ongoing, although not much has been
paid out in damages yet. For example, countries
such as the USA that have not joined the Kyoto
Protocol, and industries involved in heavy carbon
dioxide emissions such as coal and oil, are being
sued for their impact on the atmosphere. The groups
that are considering/instigating litigation include
environmental groups such as Greenpeace, the
World Wild Life Fund (WWF), Natural Resources
Defense Council (NRDC), Friends of the Earth
(FOE), and Climate Justice. Island states, such as
Maldives, Tavalu, and Kiribati, concerned with
rising sea levels, are also involved in litigation.
Hurricane Katrina victims have sued oil companies
for contributing to global warming and the increase
in hurricanes that have resulted. Eight states, led by
California and New York City, have sued five
utilities for damages related to global warming,
a development somewhat reminiscent of the
tobacco lawsuits. The state of California sued six
major auto manufacturers for damages caused by
storms related to global warming. A Business Insur-
ance policy states that almost 60 % of risk managers
feel that global warming liability risk will be
a very serious or somewhat serious problem
(Anderson 2005).
Even the life and health risk management/
insurance area is impacted. Of course, the conse-
quences of heat stress are the best example. In
France in 2003, approximately 15,000 people
died of heat stress. Diseases generally spread as
it gets warmer. Malaria is spreading north and
south from the equator and also spreading up
Sustainability Risk Management
elevations of mountains. Insect-borne diseases
spread more easily in warmer weather. Just
recently, insecticide was sprayed in some places
in Canada for the West Nile virus. All of these
situations, unfortunately, tend to have the greater
impact on poorer countries, such as African coun-
tries and Bangladesh. For example, in India and
Bangladesh, the annual monsoon season was the
worst in the last 25 years, and note that these
countries have contributed little to global
warming (Anderson 2005).
Boycott risk is another important risk associ-
ated with sustainability risk management. Risk
management texts do not delve much if at all into
boycott risk. Nike is an example of a company that
was significantly affected by boycotts. Nike was
a profitable company with great employees and
a great image. But Nike’s goods were made in
overseas factories/sweatshops with very poor
working conditions. In many cases, children were
working in these factories. After some
nongovernmental organizations (NGOs) exposed
this aspect of Nike, their profits and stock price
suffered. As a result, Nike has done a turnaround
in managing its sweatshop risks. You can now go
to the Nike website and find any one of their 700
manufacturing locations. International monitoring
groups can go to these locations and observe work-
ing conditions (Anderson 2005).
Because the Internet can be used to send infor-
mation instantaneously around the world to large
numbers of people at virtually no cost, boycotts
can be a sudden, real threat to companies. Boy-
cotts cause revenues and profits to decrease, and
stock prices are adversely impacted. Boycotts are
like business interruption risks, except no insur-
ance is available to cover these risks. Employee
morale suffers. A company’s reputation and
brand are damaged.
Arguably, asbestos cases and Superfund high-
light two really good examples of environmental
risk. In both of these cases, there is a large accu-
mulation of damages. Even before litigation, peo-
ple were being injured by asbestos. Hazardous
waste was being accumulated but nobody was
responsible to pay for its disposal. There was no
accountability. Then, all of a sudden, one event
occurs and totally changes the landscape.
Sustainability Risk Management
In the hazardous waste area, many firms strat-
egized that they would just throw toxic materials
away until the federal government set up rules
about their treatment; once rules were in place,
firms reasoned they would then start following
the rules. However, the Superfund law (or Com-
prehensive Environmental Response, Compensa-
tion, and Liability Act (CERCLA)) imposed
retroactive liability for hazardous waste on
firms. Retroactive liability is very unusual. Sud-
denly, firms became responsible for the hazard-
ous waste disposal that had occurred for many
prior years. Again, damages have been in the
$100 billions, with insurers paying about 50%
of these damages (Anderson 2005).
Ecosystems also pose sustainability risks. Eco-
systems consist of, among other things, oceans,
water in lakes and rivers, forests, and biodiver-
sity, and we are putting tremendous pressure on
all of these.
Social responsibility, another sustainability risk,
frequently focuses on treatment of employees. In
particular, there have been a number of discrimina-
tion suits, especially gender discrimination suits.
Typically, these suits involve a group of women
employees bringing a suit based on lack of promo-
tion opportunities and lack of equal pay, relative to
men. The following companies are being sued/have
settled/made payments as a result of gender dis-
crimination suits: Morgan Stanley ($54 million set-
tlement in 2004), Boeing ($72.5 million settlement
in 2004), Dresdner Bank ($1.4 billion sought in
class action), and Walmart (where 1.5 female
employees were involved in largest class action
gender discrimination suit ever filed). These liabil-
ity suits do not always involve gender discrimina-
tion, however. For example, Texaco settled a case
for $176 million for race discrimination involving
its minority employees.
Finally, there is tremendous pressure on direc-
tors and officers for Liability relating to share-
holders resolutions, boycotts, and reputation risk.
As Warren Buffett puts it, “It takes 20 years to build
a reputation and 5 minute to ruin it. If you think
about that, you will do things differently” (Eisinger
2005). Particularly with respect to global warming,
heavy carbon-producing companies are at risk.
Financial studies have suggested that if a country
2399 S
such as the USA would adopt regulations limiting
greenhouse gas emissions in a short period of time
and companies have not been making any plans for
this, these companies can have a market value loss
of 30–40%. A Carbon Disclosure Project report
estimated that the market value of some heavy
carbon emitters could be slashed by as much as
40% because of lack of planning for reducing
greenhouse gas emissions. And an Innovest Strate-
gic Value Advisors report found similar results with
as much as 45% of earnings and 35% of market
capitalization being at risk.
Directors’ and officers’ liability is changing as
sustainability gains momentum. According to
Matthew Kiernan, CEO of Innovest Strategic
Value Advisors, “The ‘prudent’ fiduciary equation
is being turned on its head. Since there is now
evidence that superior environmental and social
performance improves the risk profile, profitability,
and stock performance of publicly-traded
companies, fiduciaries can be seen to be derelict
in their duties if they do not consider sustainability”
(Kiernan 2002). And Sarbanes-Oxley requires that
the CEO and CFO certify the financial statements
and certify that internal controls are in place.
In addition, under Sarbanes-Oxley, there is
increased pressure to disclose environmental
liabilities and to develop environmental risk
management control systems.
How to Optimize Sustainability Risks?
Every corporation has a desire to increase
profits and improve cash flows. The question is
whether this can be done while implementing
a sustainability program. William Blackburn S
makes the case for sustainability in a corporate
environment where profit and cash flow are
drivers. Clearly, a boycott of a company’s goods
and services, arising from social or environmen-
tal issues, could have a far greater negative
impact on a company’s bottom line than
a natural disaster. Blackburn (2007) lists seven
factors that support his assertion that sustainabil-
ity is completely compatible with these objec-
tives that include the following:
• Reputation and Brand Strength – Sustainable
performance is one of the strongest determi-
nants of corporate reputation, which has
S 2400
a significant effect on sales and stock price.
Studies show more than 25% of a company’s
public reputation is based on social and
environmental performance.
• Competitive, Effective, and Desirable Products
and Services – Companies can spur innovation
by incorporating sustainability in their design
process. By coupling a thoughtful design
process with a detailed market analysis,
a company can better address customer needs,
produce competitive goods and services and
access new markets.
• Productivity – Many aspects of sustainability, if
properly addressed, can help improve business
efficiency, which boosts profits. Productivity
includes reduced material requirements, reduced
energy for production, reducing the use of toxic
chemicals, improving recyclability, improving
the durability and reliability of products, and
maximizing the use of renewable resources.
• Operational Burden and Interference – Ignoring
sustainability concerns can lead to public dis-
trust, greater regulatory scrutiny, operational
burden, and cost. Public distrust of large corpo-
rations has become common in recent years and
may lead to negative customer reaction as well
as regulatory attention. The time and effort to
respond to regulatory inquiries can distract
senior management attention from core corpo-
rate objectives.
• Supply Chain Costs – By working on sustain-
ability issues with suppliers and contractors,
a company can help assure that critical sup-
plies and services will be available and that
costs will be controlled. It is becoming more
common for companies to require that their
suppliers meet minimum requirements for sus-
tainable performance. For example,
a builder’s supply company may require com-
mitments of suppliers to provide only forest
products harvested under sustainable growing
programs (eliminating mature woodlands).
For retailers, the commitments required of
suppliers may include compliance with mini-
mum wage and working condition standards.
• Cost of Capital – A growing number of inves-
tors and lenders are basing their investment
and lending decisions on an evaluation of
Sustainability Risk Management
social and environmental performance as
well as economic results. Published indexes
rate the sustainable performance of corpora-
tions and provide investors access to informa-
tion that allows them to invest in high-
performing entities.
• Legal Liability – Companies guided by sus-
tainability principles are less likely to incur
crippling legal liabilities, which can affect
the bottom line. This is especially true for
claims arising out of environmental incidents
and unfair employment practices that may be
unusually severe and are sometimes difficult
to insure. These issues can also result in claims
against managers and directors for breaches of
their duty in performing tasks related to cor-
porate governance.
Other corporations may benefit from sustain-
ability in a more direct manner. Shortly after
being named CEO of GE, Jeff Imelt promised
stakeholders that the company would double its
spending on energy and environmental technol-
ogies by 2015 to prepare for what he envisions to
be a huge global market for products that will
help other companies and emerging countries
meet their needs for clean energy sources. He
expects that clean power will be at least as
important to firms and nations in emerging
regions as in industrialized areas. New energy
technologies that GE is already engaged in
include wind power, solar energy, coal gasifica-
tion combined cycle generators, carbon capture
and sequestration, bio-diesel electric locomo-
tives, and more efficient aircraft engines. The
company currently produces 15% of the wind
generators installed today and the market is
expected to grow from 10% to 15% a year for
the next decade. This clean alternative has
already evolved to a commercially scalable
technology on a global basis that can compete
in many areas with fossil fuel power generation.
Imelt also committed to cut internal energy use
within GE by 30% and to reduce greenhouse gas
emissions by 1% in the face of greatly expanded
operations. In the absence of making improve-
ments in CO2 emissions, the same equipment
and operations would produce 40% more green-
house gases.
Sustainability Risk Management
Tools and Methodology
The risk management system also sits well with
the frameworks within corporate social responsi-
bility (CSR) frameworks (also known as corpo-
rate responsibility (CR), corporate accountability
(CA) and corporate citizenship (CS)), which fol-
low a sustainable development style framework.
Ensuring business legitimacy and license to oper-
ate are the overreaching aims of the wider busi-
ness community. To ensure this, there are
concepts of nonfinancial performance measure-
ment, CSR also known as corporate responsibil-
ity and corporate accountability, sustainability,
and business durability. Some prominent busi-
ness organizations are also promoting these con-
cepts. The following tools and methodologies
could be introduced to manage sustainability
risk effectively:
RiskMetrics ESG (Environmental, Social, and
Governance) Analytics
The RiskMetrics is provided by RiskMetrics
Group, Inc. as risk management tools, corporate
governance products and services, and financial
research and analysis for investors. The
RiskMetrics ESG Analytics tool provides research
products that enable investors to integrate environ-
mental, social, and governance (ESG) factors into
their investment strategies and analysis. Formed
from ESG pioneers Innovest, KLD, and ISS, ESG
Analytics offers the world’s most comprehensive
ESG data set, and more than 20 years of experi-
ence. As of January 1, 2010, more than 30 of the
world’s 50 largest mutual fund managers, pension
funds, foundations, and other institutional inves-
tors were clients of RiskMetrics ESG Analytics
(Göran 2007).
ESG Analytics research and ratings encompass
a comprehensive range of ESG issues. The
RiskMetrics ESG Analytics research database
encompasses more than 4,000 global companies,
whose ESG performance is tracked across more
than 2,000 individual data points. ESG analysts
monitor company involvement in weapons, nuclear
power, tobacco, and other lines of business for
which investors may want to limit exposure. This
information helps investors evaluate corporations’
quality of management, possible reputational risk,
2401 S
and off-balance-sheet liabilities. ESG research can
also help investors build portfolios that incorporate
their own values and beliefs (Göran 2007).
To measure each company’s ESG perfor-
mance, the ESG Analytics team looks at each
firm’s impact on five categories of stakeholders.
For example, “Environment” stakeholders share
resources like water and land with business, or
are affected by its emissions (Goran 2007).
• The ratings criteria for Environment cover
a company’s management of its environmental
challenges, including its efforts to reduce or
offset the impact of its products and operations.
• Community & Society ratings criteria measure
how well a company manages its impact on the
communities where it operates, including its
treatment of local populations, its handling of
human rights issues, and its commitment to
charitable giving.
• Employees & Supply Chain ratings criteria
assess a company’s record in managing its
employees, contractors, and suppliers. Issues of
particular concern include labor-management
relations, antidiscrimination policies and prac-
tices, employee safety, and the labor rights of
workers throughout the company supply chain.
• The ratings criteria for Customers measure the
quality and safety record of a company’s prod-
ucts, its marketing practices, and its involvement
in anti-competitive controversies.
• Governance & Ethics ratings criteria address
a company’s investor relations and management
practices, including company sustainability
reporting, board accountability, and business
ethics programs. S
RISQUE Method
The RISQUE method (Risk Identification and
Strategy Using Quantitative Evaluation) is
a multifaceted approach that is designed to help
business managers make informed, defensible
risk management decisions as part of a triple bot-
tom line management strategy. It is a sound,
defensible, transparent process that is very useful
for development of risk management strategies. It
incorporates a quantitative risk assessment pro-
cess that translates the so-called intangible or
nonquantifiable environmental and social risks,
S 2402 Sustainability Risk Management

Sustainability Risk RISQUE METHOD KEY

Management, PROCESS PARTICPANTS
Fig. 1 RISQUE method
process flow chart (Source:
Bowden et al. (2001))
1. Establish Context
Project Manager
Assessment criteria Risk Analyst

2. Risk Identification
Risk Analyst
Identify risk events Expert Panel

Estimate likelihood Stakeholders

Project Manager
Identify consequence

3. Risk Analysis

Analyze risks
Risk Analyst
Evaluate risk profiles Project Manager

Rank & short-lisk risk events

4. Develop Treatment Strategy

Compare risk levels with Risk Analyst

acceptability criteria. Evaluate
treatment options Stakeholders
Project Manager
Reduce Transfer Accept
risk risk risk

5. Implement Strategy
Project Manager
Risk action plans

Project Manager
Review

such as community outcry, business reputation
damage, legal culpability, and environmental
impacts, into financial measures that can be
used to develop risk treatment strategies
(Bowden et al. 2001).
Figure 1 presents a flowchart of the RISQUE
method process. The flowchart is consistent with
the risk management process. The RISQUE
method offers a systematic methodology that is
defensible with respect to current world best
Sustainability Risk Management
practice, complies with existing formal stan-
dards, and is consistent with the Canadian Risk
Management Standard. The steps involved in the
RISQUE method are not new; neither are its
quantitative techniques, which have been in use
for some years. However, the method is unique in
its application of techniques to quantify risks
associated with aspects such as community out-
cry, business reputation, legal culpability, and
environmental impacts and in its generation of
financial expressions of risk, risk profiles, and
benefit-cost relationships. As depicted in Fig. 1,
the RISQUE method of risk assessment and for-
mulation of risk management strategy proceeds
as a staged process (Bowden et al. 2001):
Stage 1. Establish the context
Stage 2. Identify the risk
Stage 3. Analyze the risk
Stage 4. Formulate a risk treatment strategy
Stage 5. Implement the risk treatment strategy
Stage 1: Establish the Context
In establishing the background to the risk man-
agement process, the nature of the activities and
potential impacts are assessed. This allows the
stakeholders to be identified and leads to formu-
lation of the risk management aims and structure.
The scope of the risk management process is then
defined. In addition, initial criteria against which
risk is to be evaluated may be established.
The project manager and the risk analyst usu-
ally jointly define the contextual scope and con-
siderations for the risk assessment process.
Stage 2: Identify the Risk
The risk identification process involves utilizing
a good understanding of the project for which
the risk assessment is required to guide an
appropriately skilled expert panel to identify
and characterize the key risk events. For each
event, the expert panel is guided through an
event-tree approach to define the likelihood of
occurrence, the consequences if the event
occurs, and the potential time scale of occur-
rence. Documentation of the panel findings usu-
ally takes the form of a risk register,
a description of each risk event, and
a diagrammatic event tree. The risk analyst
2403 S
facilitates risk identification by the expert
panel (e.g., representatives from the project
manager’s organization and selected specialist
consultants) in consultation with community
representatives.
Stage 3: Analyze the Risk
For the RISQUE method, risk analysis involves
quantifying and modeling the probabilities and
consequences for each substantive risk event.
A specific selection of techniques is applied in
the risk model to derive prioritized profiles of risk
quotient and to estimate the potential cost (the
risk cost) that may be incurred in the future due to
the occurrence of risk events. Typical outputs of
the risk analysis process include:
• Estimates of risk cost at optimistic, pessimis-
tic, and conservative yet realistic (planning)
levels of confidence
• A risk profile, which shows each risk event
ranked in order of decreasing risk
• An exposure profile, which shows the range of
consequential cost for the ranked risk events
The risk analyst, usually in consultation with
the project manager, performs the risk analysis.
Stage 4: Formulate a Risk Treatment Strategy
Formulation of a risk treatment strategy utilizes
the results of the risk analysis process to define
and evaluate options for action plans to treat key
risk events. Various measures of risk and risk cost
are compared with risk management costs and
business elements such as project cost and project
revenue. The benefits, in relation to risk reduction
of implementing the action plan, are estimated by S
modifying and rerunning the risk model. The
benefit-cost relationships are reviewed and, if
acceptable, the risk treatment strategy is
accepted. The risk analyst and project manager,
often in consultation with other stakeholder rep-
resentatives, develop the risk treatment strategy.
Stage 5: Implement the Risk Treatment Strategy
Implementation of a risk treatment strategy can
involve actions such as risk transfer through
insurance or contractual agreements, further
investigations, establishment of rapid response
systems, installation of detection systems,
S 2404
engineering works, lobbying, and community
consultation. The project manager is responsible
for implementing the risk treatment strategy.
Each stage of the RISQUE method offers
a convenient milestone for reporting, review,
and action. Each subsequent stage is dependent
and builds on the work completed in the previous
stage, providing an evolving understanding of the
characteristics of risk events and progressively
more robust management practices.
SERM Framework
Sustainable Enterprise Risk Management
(SERM) system is explored for its use in
supporting an organization’s stability in this fast
moving era. The need to incorporate more
enlightened systems of risk management, new
models and methods of interpreting the risk
“environment” is essential to becoming “sustain-
able.” The main difference in the SERM
approach to risk over time is the ability to include
newer risks and their relevant probabilities of
occurrence into our systems, and the ability to
be risk takers in the first place, without which
progress would be lethargic at best (Spedding
and Rose 2008).
Essentially, the SERM system is an Enterprise
Risk Management (ERM) system that includes
more external and contemporary risk issues than
is traditional. It covers a portfolio of risk issues,
which can then be managed by many elements of
the organization, as opposed to risk management
generally falling on the shoulders of a SRO
(senior risk officer). By bringing together various
risk issues the system helps to develop the exec-
utive view of strategic risk and the appetite for it.
The sustainable risk concept may also assist in
achieving a common risk culture and language
that should improve the understanding of the
importance of managing a variety of risks. It
should help with the inclusion of all elements of
the organization into the risk management sys-
tem. It has the potential to facilitate the unifying
of corporate visions and objectives with their risk
management systems. SERM aims to help an
organization to:
• Achieve existing goals and objectives and
develop new ones
Sustainability Risk Management
• Improve an organization’s business capabili-
ties by seeing emerging risks as new opportu-
nities for activity
• Reduce risk to the organization through anal-
ysis and reduction techniques across a wide
range of risk issues, the provision of case
studies, best practice suggestions, checklists,
and methodologies for specific tasks like due
diligence operations
• Assist an organization to become more stable
and sustainable
• Enhance profitability potential as there can be
real rewards from minimizing noncompliance,
improving the quality of business operations,
enhancing the quality of life of staff and cus-
tomers, and reducing the use of resources by
minimizing ecological “footprints,” that is the
impact that humans have upon the planet
(Spedding and Rose 2008)
The “internal” and “external” trends and
drivers of sustainable risk management are
assessed by using the three tools:
• Tool 1: The Value Drivers of the organization:
costs, revenue, taxes, and investment
• Tool 2: An Environmental Scan, the “external”
risk environment trends are reviewed through
a sustainable development template of eco-
nomic, social, and environmental considerations
• Tool 3: A Stakeholder Analysis of the drivers
and trends in managing risk
In brief, the current trends are as follows:
• Risks and the pressures to address them are
both increasing.
• Reputation and intangible assets are increas-
ingly more important than fixed assets.
• Stakeholder pressure is growing, with more
investor, consumer, and NGO pressure upon
organizations to change and face the challenges
of the future more effectively. The customer
used to be “king,” now they are concerned
rulers. There are increases in legislation, stan-
dards, and fines associated with noncompliance
with these types of sustainability issues.
• There is an increased measurement of benefits,
reporting of the results, and verification of
these reports.
The SERM rating system estimates that just
over half of all the “sustainable” risk to
Sustainability Risk Management
Sustainability Risk
Management,
Fig. 2 SREM assessment
tools (Source: Spedding
and Rose (2008))
organizations’ value is due to indirect risks and
pressures for change emanating from the wider
“external” environment. The resultant figures are
that companies have an average sustainability risk
of 12.5% of value environmental issues,
representing a 5.4% risk to market value, followed
by social and ethical issues at 5.1% (including
health and safety issues) and economic “sustain-
ability” factors at 2.0% (Spedding and Rose 2008).
The tools for trends analysis can be used to
cross-reference each other for level of effect upon
your organization. The key stakeholders from tool
3 can be viewed for significance against the main
trends and drivers from tools 1 and 2 (Fig. 2).
Key Issues
Sustainability risk management deals with
emerging environmental and social justice risks.
Risk managers will need to anticipate these risks
and develop appropriate risk mitigation and
financing strategies for them, but since many
sustainability risks are new and emerging, the
best strategies for dealing with corporate
2405 S
sustainability might not be apparent. But in
a world where the rules of business are changing
faster than ever, now is not the time for igno-
rance. The challenges that are currently facing
this new generation of risk managers include:
• Making best use of the new strengths within
the organization
• A consistency when approaching risk evalua-
tion, risk tolerance, and risk management,
leading to seamless risk decision making
• Both a bird’s eye view and a detail view across
the organization at the same time S
• Managing second-hand, destructive risks or
time scales in suppliers
• Risks that are beyond the ability of the insur-
ance industry to support
• Communication on matters of risk and thus
managing diverse expectations, and keeping
up with change
There are now more opportunities for the
organization to die, and die more quickly; and
the concept of “killer risks” is increasingly
emerging. The brand and stakeholder confidence
concerns are such killer issues; as is solvency,
and business and financial control. Dependencies
S 2406
on central group-wide facilities such as comput-
erization and communications to deliver the
products on time to an acceptable standard, also
the intellectual assets within the organization, are
just a couple more among others. These are all
not unfamiliar to the continuity manager. The
changing regulatory needs are also demanding
a more “holistic” approach to risk management.
Stakeholders have no interest in internal organi-
zational boundaries. They concern themselves
only with the potential for unacceptable impact
on the shareholding, or on any other relationship
they may have with the organization itself. These
regulatory needs, including Turnbull in the UK,
are driving organizations to consider enterprise-
wide operational risks more formally. These
organizations, however, are more comfortable
with the clear-cut aspects of financial risk and
indeed they have experiences, sophisticated strat-
egies, and controls, developed over many years.
The evaluation and cost/benefit analysis of
nonfinancial, operational risk, decision making,
however, is not as simple to quantify. Some are
clearly struggling with the commercial decision
making that is being demanded. The SERM
approach can be useful in this regard (Spedding
and Rose 2008).
Future Directions
In recent years, academic and corporate interest in
sustainable supply chain management and supplier
sustainability risk management has risen consid-
erably. This can be seen by the number of papers
published and in particular by journal special
issues. The study undertaken by Harwood and
Humby (2008) reveals that 20% of the firms
viewed sustainability issues as their largest supply
chain risk and 25% of the firms required suppliers
to adhere to social and ecological standards in
order to mitigate supply chain risks due to the
cost-oriented outsourcing trend over the past
decades; external stakeholders, such as NGOs
and customers, expect the focal buying firms to
assure socially and ecologically sound production
at their suppliers’ sites. Thus, irresponsible sup-
plier behavior of any kind may be projected to the
Sustainability Risk Management
buying firm, causing adverse publicity, reputa-
tional damage, and costly legal obligations.
Firms which outsource production to suppliers
cannot transfer the risk related to unacceptable
environmental and social standards at supplier pre-
mises, but must seek active management of the
supply chain for sustainability. As the foremost
interface to an increasingly global supply base,
sustainable chain management plays an important
role in the mitigation of sustainability risks.
Scholars reprimand that sustainable supplier
management must go beyond supplier
self-declaration of compliance to standards and
encompass effective identification, assessment,
and monitoring measures as well as compliance
incentive systems. Specifically, the increasing reli-
ance on a global supply chain enhances the need for
supply risk management and, in particular, for
active management of supplier sustainability risk.
A well-designed risk-oriented supply chain man-
agement can put companies in a privileged position
to deliver sustainable and reliable long-term bene-
fits to all stakeholders in the value chain
A number of opportunities and methods for
research in this emergent and rapidly maturing
field have been identified. Some of these items
that require investigation in the future research
include:
• Reviews of certain lines of development
regarding the intersection of sustainability
and supply chain management.
• Empirical or case studies of companies and
other supply chain actors’ initiatives that aim
to enhance sustainability aspects that may be
integrated into supply chain management.
• Concepts and cases on the integration of par-
ticularly relevant sustainability issues into sup-
ply chain management. These topics might
cover environmental and/or social issues only.
• Contributions on the relation between the
three dimensions of sustainability (i.e., eco-
nomic, environmental, social) in a supply
chain perspective, so that the understanding
of win–win and trade-off situations is
advanced.
• Case studies on how actors improve the sus-
tainability performance of products and ser-
vices by collaboration in the supply chain.
Sustainability-Oriented Innovation
• The need or limits for supply chain integration
for providing environmentally and socially
sound products.
• The influence of cultural and ethical aspects in
the context of sustainability and supply chain
management.
• Corporate Social Responsibility and supply
chain management.
• The interrelation between fair trade initiatives
and supply chain management.
• The use of environmental and social standards
in supply chain, in particular for supplier
evaluation.
• The interrelation of sustainable supply chain
management with other concepts of inter-
organizational sustainability management.
Cross-References
▶ Corporate Social Responsibility
▶ Risk Management
▶ Supply Chain Management
▶ Sustainability
▶ Sustainable Development
References and Readings
Anderson, D. R. (2005). Corporate survival: The critical
importance of sustainability risk management.
New York: iUniverse.
Anderson, D. R. (2006). The critical importance of sustain-
ability risk management. Risk Management, 53, 66.
Anderson, D., & Anderson, K. E. (2009). Sustainability
risk management. Risk Management and Insurance
Review, 12(1), 25–38. Mount Vernon: Spring, 14 pp.
Blackburn, W. R. (2007). The sustainability handbook:
The complete management guide to achieving social,
economic and environmental responsibility. London:
Earthscan.
Bowden, A. R., Lane, M. R., & Martin, J. H. (2001). Triple
bottom line risk management: Enhancing profit,
environmental performance, and community benefits.
New York: Wiley.
Cendrowski, H., & Mair, W. C. (2009). Enterprise risk
management and COSO: A guide for directors,
executives and practitioners. Hoboken: Wiley.
Eisinger, J. (2005). Buffet’s reputation faces a test. Wall
Street Journal, March 31.
Göran, S. (2007). Aspects of sustainable supply
chain management (SSCM): Conceptual framework
2407 S
and empirical example. Supply Chain Management,
12, 262.
Harwood, I., & Humby, S. (2008). Embedding corporate
responsibility into supply: A snapshot of progress.
European Management Journal, 3(26), 166–174.
Kiernan, M. (2002). Taking control of climate, Financial
Times, Nov 4.
Moeller, R. (2007). COSO enterprise risk management:
Understanding the new integrated ERM framework.
Hoboken: Wiley.
Monahan, G. (2008). Enterprise risk management:
A methodology for achieving strategic objectives.
Hoboken: Wiley.
Spedding, L., & Rose, A. (2008). Business risk management
handbook: A sustainable approach. Oxford: CIMA.
Teuscher, P., Gr€
uninger, B., & Ferdinand, N. (2006). Risk
management in sustainable supply chain management
(SSCM): Lessons learnt from the case of GMO-free
soybeans. Corporate Social – Responsibility and
Environmental Management, 13, 1–10.
Sustainability-Driven Innovation
▶ Sustainability-Oriented Innovation
Sustainability-Oriented Innovation
Erik G. Hansen1 and Friedrich Große-Dunker2
1
Centre for Sustainability Management (CSM),
Leuphana University of L€uneburg, L€uneburg,
Germany
2
Dark Horse GmbH, Berlin, Germany
S
Synonyms
Sustainability innovation; Sustainability-driven
innovation; Sustainability-related innovation;
Sustainable development innovation; Sustainable
innovation
Definition
The commercial introduction of a new
(or improved) product (service), product-service
system, or pure service which – based on
S 2408
a traceable (qualitative or quantitative) compara-
tive analysis – leads to environmental and/or
social benefits over the prior version’s physical
life-cycle (“from cradle to grave”).
Introduction
The importance of business practices to solve
present sustainability issues, such as climate
change, environmental degradation, and social
inequalities has been emphasized in literature
for quite some time (Elkington 1992; Hart and
Prahalad 2002; Yunus and Weber 2007; Porter
and Kramer 2011). From a business perspective,
the areas of corporate sustainability, corporate
responsibility, and ▶ corporate social responsi-
bility (CSR) all seek to address these issues by
transcending the core responsibilities of busi-
nesses (i.e., to make profits) to noneconomic (or
better pre-economic) aspects such as ecological
and social responsibilities. This notion is fre-
quently addressed as the “▶ Triple Bottom Line”
(TBL) (Elkington 1992).
While the last decades of research in sustain-
ability (and particularly the environmental dimen-
sion) has focused on improvements on the levels
of processes (e.g., eco-efficient production; health
and safety) and the organization
(e.g., environmental management systems, codes
of conduct), scholars have lately emphasized
putting sustainability at the core of
a corporation’s value creation activities
(Louche et al. 2010) and thus products and
services (Hart 1997; Maxwell and Van der Vorst
2003). Consequently, innovations are perceived to
play a paramount role in the area of corporate
sustainability (Hart and Milstein 2003; Hockerts
and Morsing 2008), and, going even further, the
business case of sustainability-oriented innovation
activities is increasingly acknowledged (Hockerts
and W€ ustenhagen 2010). In the present entry, it is
thus understood that sustainable development can
be advanced through market mechanisms, specif-
ically, through the diffusion of more sustainable
product (or service) offerings.
In recent years, research in the area of
sustainability-oriented innovation (SOI) has
Sustainability-Oriented Innovation
increasingly emerged and addressed the theme
from different vantage points: Research on
▶ eco-innovation (Rennings 2000) and ▶ social
innovation (Deiglmeier and Miller 2008) focus
on one specific dimension of SOI. It is often
established organizations – both large scale
corporations as well as small and medium-sized
enterprises – in which SOI is considered an
important concept for the transformation of an
organization’s product offerings. In contrast, the
concepts of ecopreneurship, social entrepreneur-
ship, and ▶ sustainable entrepreneurship
highlight the importance of new firms and
start-ups to spur sustainable development
through Schumpeter’s mechanisms of “creative
destruction” (Schaltegger 2002; Hall et al. 2010;
Schaltegger and Wagner 2011). In a broad sense
as applied here, all these innovation endeavors –
independent of the actual firm specifics – can be
considered SOI.
Key Issues
In principle, product innovation is related to great
uncertainty with regard to market success, as it is
often difficult to anticipate the exact
consumer needs, consumer behaviors, as well as
future economic conditions (Cooper 2001). SOI
incorporates even higher risks as additional
environmental and social dimensions have to be
considered (Dyllick and Hockerts 2002; Fichter
and Paech 2004; Paech 2007; Hansen et al. 2009).
According to Paech (2007) SOI is
linked to “directional risks,” as the direction of
(environmental and social) sustainability impacts
of innovations are highly uncertain, particularly
in the long term. For example, bio fuels were
regarded as beneficial for the environment,
just until negative side effects were discovered
(e.g., monocultures and loss of biodiversity;
impact on food prices), which actually
undermine the initial positive impact and put
bio fuels into question. In this regard, the term
“sustainability-oriented innovation” (SOI)
emphasizes that sustainability is not an end
point but rather a (normative) direction which is
linked to (directional) risks (cf. Fichter and Paech
Sustainability-Oriented Innovation
2004; Paech 2007; Wagner and Llerena 2008;
Hansen et al. 2009).
SOI can be further analyzed regarding
(innovation) outcomes and (innovation)
processes (Crossan and Apaydin 2010). While
outcomes look more at the resulting characteris-
tics of innovation, innovation processes
determine how the innovation is developed.
Both notions will be addressed in more detail in
the following.
Characteristics of Outcomes of SOI
Two major dimensions can be considered for
specifying the outcomes of SOI: the target
dimension and the life-cycle dimension (Hansen
et al. 2009).
The target dimension directly relates to
corporate sustainability as the triple bottom line,
a term used to express the expansion from
a narrow financial bottom line (i.e., economic
profits) to a wider recognition of financial, envi-
ronmental, and social bottom lines. While in the
past innovation management has been primarily
focused on the economic (i.e., market) success of
products and services, in the context of sustain-
ability, innovation management also needs to
take social and environmental spheres into
account.
It should be emphasized that the three spheres
(economic, social, and ecological) have strong
interrelations. It is thus of primary importance
to not only optimize one single component in an
isolated way, but take into account subsequent
impacts on other systems as well. Generally, the
economic is part of a social system, which in
turn is embedded in the ecological system.
Consequently, as there is only one finite planet
earth, the ecological system ultimately
constraints the societal and economic spheres.
On a more pragmatic level, there are various
links (both positive and negative) between these
three spheres. First, social and environmental
aspects are often linked to economic aspects.
The most popular link is probably the concept
of eco-efficiency which is able to advance
economic and environmental aspects simulta-
neously. Second, there are also links between
social and environmental spheres. Consider
2409 S
again the case of bio fuels: Although a short
hype around its potential to fuel cars with renew-
able resources emerged, the enthusiasm for bio
fuels was rather short-lived as the necessary
cultivation of oil-bearing trees also implicated
a displacement of food crops and thus negative
side effects to the local population (e.g., advances
of food prices). Therefore, from a holistic point of
view (which the concept of SOI aims to be),
it remains questionable whether bio fuels per se
can be considered an SOI. An example from the
food industry may demonstrate how indeed social
and environmental performance can be achieved
simultaneously. The Austrian chocolate
manufacturer Zotter has experienced double-
digit growth rates for several consecutive years
with the production and sales of socially and
environmentally benign chocolate (Khaire et al.
2010). The company only uses cacao beans from
certified organic agriculture and purchases them
through fair trade schemes.
Besides the target dimension, the life-cycle
dimension is key to defining the intended
outcomes of SOI. Traditionally, the development
of products and services has focused more
narrowly on the direct customer value and thus
aimed at optimizing a product’s core functional or
technical characteristics (e.g., a powerful car
engine). SOI also addresses these core attributes
of the product (e.g., through product safety and
energy efficiency, durability), but goes beyond
this notion. As the aforementioned example of the
chocolate producer approach to fair wages in the
supply chain has demonstrated, the management of
SOI needs to transcend the product’s use phase to S
focus on the entire physical life-cycle
(▶ Product Life Cycle) from raw materials to
end-of-life (“from cradle to grave”). In the context
of sustainability, considering the entire value chain
is vital for innovation in order to identify major
sustainability problems and tackle those problems
at its origin (Maxwell and Van der Vorst 2003).
With regards to SOI, five life-cycle phases are
important, where major sustainability effects
emerge – supply chain, production, packaging/
distribution, use, and end-of-life (see Table 1):
• First, supply chain covers all raw materials as
well as premanufactured components, parts,
S 2410 Sustainability-Oriented Innovation

Sustainability-Oriented Innovation, Table 1 Sustainability challenges and solutions along the physical life-cycle of
a product (Based on Hansen et al. (2009))
Life-cycle phases
Target Packaging/ Use
dimension Supply chain Production distribution (maintenance) End-of-life
Economic Competitive Production Efficient (Technical/ Costs of
procurement; efficiency packaging; functional) take-back/
efficient supply efficient logistics quality; customer disposal/landfill
chain management satisfaction
Environmental Use of eco-friendly Eco-efficient Reduced Durability; Reuse, remake,
(e.g., organic) resource and energy packaging energy- or recycle
materials; energy- use; use of resources; use of efficiency; (upcycle); in the
efficient production; environmental ecological or emission case of disposal:
use of renewable friendly materials recycled reduction; biodegradability;
energies; and and processes; materials; offering of treatment of
environmental renewable energy; minimized maintenance/ dangerous
protection at closed-loop transports; eco- repair services materials
supplier’s site production; efficient fleet
industrial symbiosis
Social Safe and fair labor Occupational health Truthful product Customer health Health threats of
conditions (e.g., no and safety; labor description and and safety; landfills and
child labor); conditions; wages; labeling complaint recycling plants
smallholder employee benefits (packaging); handling;
integration; working increase access to
socioeconomic conditions (e.g., product (e.g.,
development of outsourced inclusive
regions personnel) business)

or modules sourced from third-party sup-
pliers. This includes not only direct (first-
tier) suppliers but also (n-tier) suppliers fur-
ther upstream. Environmental and social
risks (child work, ethical and environmental
standards, legal standards, bribery, etc.) are
often inherently linked to sourcing from
other countries, particularly from develop-
ing countries. Focal companies, in their
endeavor to introduce more sustainable
practices in the supply chain, often innovate
by introducing stricter social and environ-
mental procurement policies and related
process innovations such as sustainability-
oriented supplier selection, evaluation, and
development.
• Second, production covers the proper tasks of
the company in manufacturing or integrating
the final good. Sustainability-related issues
that may emerge at this phase are, for instance,
eco-efficient resource and energy use, waste
handling, use of renewable energy, use of eco-
friendly materials and occupational health and
safety issues, among others.
• Third, packaging/distribution covers the
packaging of products and the efficient
distribution of the final goods. Life-cycle
analysis of individual packaging options is an
important decision criterion for the selection
of the good’s packaging.
• Fourth, the use phase addresses sustainability
effects during the use of products or services.
Although the use of products and services
lies in the responsibility of the customer
and, hence, is difficult to control, the
company has the power to make design
decisions that consequently define the
characteristics of the usage of product/service
(e.g., product-service-bundles). For example,
by bundling electric cars with renewable
energy contracts, carbon-free driving can
more likely be guaranteed. The importance
of the use phase becomes even more evident
when considering the problems of rebound
Sustainability-Oriented Innovation
effects (Herring and Roy 2007), i.e., the effect
that despite increased product efficiency,
the overall consumption increases. For
instance, fuel-efficient cars often entail
a higher usage of such cars (i.e., road kilome-
ters). This behavior results in higher resource
consumption, although the resource efficiency
is increased. Hence, user behavior and
customer needs play a major role for SOI and
need to be integrated into the development
process.
• Fifth, the end-of-life phase ultimately impacts
the sustainability of products. The potentially
most renowned example of an end-of-life prob-
lem is nuclear power technology. Though car-
bon-free energy production is possible
(neglecting here the efforts for extracting and
sourcing of uranium), there has been no ulti-
mate solution yet for how to effectively deal
with radiated waste from power plants. Other
important guidelines to consider are recycling
options (e.g., ▶ Cradle to Cradle principles),
materials with health or safety risks (e.g., quick-
silver in energy saving lamps), and corporate
take-back programs, among others. Though ref-
erence is made here to the entire life-cycle, it is
clear that not all phases can always be consid-
ered with the same level of detail in innovation
efforts. Often, hotspot analyses lead to a focus
on the most important phases (e.g., the use
phase for white goods; supply chain for
textiles). Moreover, some of the life-cycle
phases are nonexistent for some types of
goods. For instance, consumable goods (e.g.,
electricity) usually lack the end-of-life phase
and digital goods may or may not have
a packaging (depending on the distribution
channel). Even pure services (e.g., catering)
can be analyzed along the life-cycle, though
by definition of services, production and use
phases merge into one (it should be mentioned
that highly labor-intense services such as
elderly care may be radically focused on the
use phase and thus need other ways of analysis).
Which Types of Innovation Relate to SOI?
Outcomes of innovation are often classified using
different innovation types. While SOI roots in
2411 S
new product development, and thus in a product
innovation perspective, the concept of SOI is
indeed much broader and relates to or covers
various other types of innovation. In the present
chapter, links to these innovation types are
explained. Considering that the recognition of
the life-cycle dimension is central to SOI, it
is also clear that SOI covers not only product
innovations but also process and organizational
innovations (Rennings 2000). For instance,
the introduction of sustainability criteria in
procurement policies, more efficient production
processes, and the implementation of processes
for product take-back are all examples of process
innovations. Often these process innovations,
particularly in the phase of production, are
supported by new environmental or integrated
management systems, which in turn are examples
of organizational innovations (▶ Environmental
Management System).
The traditional focus of innovation often lies on
the development of technically improved or
entirely new products and processes, thus on tech-
nological innovation. While these efforts are very
important, they alone cannot solve some of the
overarching sustainability challenges, particularly
increased absolute resource consumption and
waste. On the one hand, efficiency gains in the
product’s use phase (e.g., fuel efficient cars) – due
to rebound effects (Herring and Roy 2007) – are
mostly overcompensated through more intense
use. Also, many of the life-cycle improvements
(e.g., recycling) depend on increased interaction
between the producer and consumer (product take-
back system) and thus require innovative solutions S
beyond the technological level.
Against this background, product-service
systems (PSS) can be considered an additional
type of innovation for leveraging SOI. Product-
service systems are generally referred to an
increasing service content of products (Mont
2001). By increasing the service portion of inno-
vations, the consumption of resources can actu-
ally be decoupled from its value proposition and
therefore poses great advantages for SOI. Indeed,
at least three different product service combina-
tions qualify for this (Baines et al. 2007; Mont
2001; Tukker 2004):
S 2412
• Product-oriented PSS add a service to the
initial product. For example, the product
take-back service (end-of-life phase) allows
the producer to recycle or remake the
product and thus contributes to environmental
(but also to economic) value.
• Use-oriented PSS are product-based services
that are based on product rental and leasing
rather than selling. A good example is the case
of Interface Inc., which originally focused on
selling carpets, but later became renowned for
its flooring services based on leased carpets.
Instead of replacing entire carpets, the
company only replaces worn tiles (Stubbs
and Cocklin 2008). Use-oriented PSS can
also be based on shared use, i.e., consumers
(or users) use the same product either
subsequently (e.g., public washing machines;
carsharing) or simultaneously (e.g., ride
sharing services; Hansen et al. 2010).
• Result-oriented PSS are also offerings where
the producer remains in the ownership of the
product but, in contrast to use-oriented PSS,
the producer only sells a result (e.g., laundered
clothes instead of washing machines).
The latter two variants of (product-based
services and result-oriented PSS) are function
innovations because instead of concentrating on
how to improve the product, such innovations
focus rather on how the product’s function is
best (and most sustainably) fulfilled (Brezet
1997). As demonstrated in the various mentioned
examples, PSS are based on the prior product
(e.g., car) but solve some of the sustainability-
related problems on the level of the PSS (e.g.,
carsharing). Function innovations can actually
supersede the original product: for instance,
bike sharing systems represent more sustainable
(and ever more popular) alternatives to car-based
mobility in cities (e.g., call-a-bike system in
Germany).
While function innovation try to satisfy
given needs (e.g., need for private mobility)
with alternative solutions, innovation efforts can
also address (and question) customers’ “needs”
on a higher level (Belz et al. 1998; Paech 2004).
With regards to SOI, this notion is extremely
important, as need structures and lifestyles
Sustainability-Oriented Innovation
are deemed among the major causes for sustain-
ability issues. This relates to the question of
whether or not corporations should modify or
“design” the needs of customers/consumers. For
example, a travel company could make efforts to
redirect the customers’ need for holidays in the
Caribbean toward more local travel destinations
(Paech 2004). In the extreme, a company could
question the customer’s need entirely, such as
in the “Don’t buy this jacket” advertisement of
Patagonia, the environmental pioneer in the
outdoor apparel industry. The development of
alternative solutions and sufficient lifestyles can
be considered a source of innovation with posi-
tive sustainability potentials (Hockerts and
Morsing 2008; Mont and Tukker 2006). Notably,
those issues go far beyond traditional tasks of
innovation management and entail questions
also related to sustainability marketing (Belz
and Peattie, 2009; Louche et al. 2010).
The presented function innovations
(and thereby also most of the PSS innovations)
all require adaptations to a varying degree of
a company’s business model, and thus it is often
spoken of business model innovations
(Chesbrough 2007; Hansen et al. 2009;
Schaltegger et al. 2012; see also [▶ Business
Model Innovation]). For example, a car manufac-
turer engaging in carsharing services follows an
entirely new value proposition linked to new
pricing and revenue models, completely changed
sales organization, and (probably) new partners
in the value chain. Business model innovations
are thus a very important tool for SOI,
particularly regarding the most radical (or even
disruptive) innovations.
How to Design Innovation Processes for SOI?
The framework and dimensions involved with
SOI made clear that SOI, particularly due to
the directional risk, are more complex than
conventional innovation projects (Paech 2007).
It is, thus, even more important to highlight the
role of innovation management to initiate and
support such projects. Therefore, it is crucial to
embed the holistic concept of SOI (i.e., target
dimension covering social, environmental, and
economic capitals; life-cycle dimension covering
Sustainability-Oriented Innovation
phases from resource extraction to end-of-life;
and innovation types beyond product and
processes) as a fundamental element into the
innovation processes (Fichter and Paech 2004;
Hansen et al. 2009; Lang-Koetz et al. 2009).
Only the systematic integration into (semi-)formal
innovation processes as well as the innovation
culture can guarantee the recognition and
incorporation of such complex issues.
Though in reality innovations occurs usu-
ally in an unsystematic, iterative process, with
the aim of analytical clarity, the innovation
process is often presented as a linear process.
It spans across several stages, such as problem
definition, idea generation, idea evaluation,
concept development, prototype, and market
launch, each separated by a gate in which the
innovation projects are evaluated before pro-
ceeding further (Cooper 1990; Fichter and
Paech 2004; Lang-Koetz et al. 2009; Tidd
et al. 2009). One often neglected but with
regards to SOI quite remarkable phase is the
one of problem definition. Narrowing down the
innovation focus too early on products and
technologies or never even questioning such
focus can hinder the development of product-
service systems, which in turn have a much
larger sustainability potential. Another way of
integrating SOI into the innovation process are
sustainability checkpoints as part of the
screening stages after each phase of the ideal-
ized stage gate process (Blomquist and
Sandström 2004). These checkpoints can
cover different assessment levels and mecha-
nisms. For instance, technology assessment
and related social and environmental risk anal-
ysis are methods important at the beginning of
the innovation process, particularly in the case
of risk technologies (Fichter and Paech 2004;
Paech 2004, p. 162). It should be noted that
80 % of sustainability effects can already be
addressed in the conception stage (Maxwell
and Van der Vorst 2003). Also, (streamlined)
LCA methods could be used in the (early
phases of the) innovation process in order to
evaluate potential environmental impacts
along the entire product’s life-cycle (Lang-
Koetz et al. 2009).
2413 S
While the approach of checkpoints and
screening tools are a rather mechanistic
approach, a complementary approach focuses
on the individuals involved in the process. As
the dimensions of SOI aforementioned indicate,
extensive knowledge on environmental and
social structures and relationships is crucial,
yet traditionally not sufficiently located in
corporations. Traditionally, knowledge creation
is the responsibility of the corporate research and
development (R&D) function (i.e., closed
innovation). However, “open innovation”
(Chesbrough 2003) is also an important mecha-
nism to address SOI, as internal company
members are often not fully aware of
potential social and environmental impacts. The
involvement of actors outside of the organization
is particularly important to increase the reflexiv-
ity of the innovation process and thus lower the
directional risk involved in SOI (Fichter and
Paech 2004; Paech 2007). The interaction with
a wider range of stakeholder groups (e.g.,
nongovernmental organizations, community
members, local authorities) through mechanisms
such as stakeholder dialogue fora, stakeholder
advisory boards, joint management stakeholder
boards, and partnerships can address these
shortcomings by facilitating dialogue
(see ▶ Stakeholder Engagement). Furthermore,
a more direct involvement of outside actors into
the innovation process may pose high potentials
for the development of SOI. For example, in the
ideation phase, “idea contests” help to open
the innovation process and involve more
stakeholders which may contribute to the S
development of sustainability-oriented products
(Hansen et al. 2011). In addition, broader
crowd-sourcing approaches applied in later
phases of the innovation process can contribute
to this endeavor (Hansen et al. 2010). Lead user
workshops, also covering environmental experts,
help to successfully design sustainability-oriented
products and services (Arnold et al. 2007;
Hoffmann 2007).
Another issue of innovation management,
which heavily impacts the development of SOI,
is the creation of an innovative organization or an
innovation culture (Tidd et al. 2009, p. 465ff).
S 2414
What are the values a company and the R&D
function are based on? How are managers, espe-
cially R&D managers, trained and developed,
incentivized, measured, and rewarded? If innova-
tion success is only interpreted in mere economic
terms (e.g., sales figures, cost structure, etc.), it is
hard to imagine that the company would spend
time, money, and thoughts on how to address
social and environmental aspects in the process.
Hence, SOI poses a variety of challenges for
innovation management and the related innova-
tion processes, i.e., the adaptation of innovation
processes to include better evaluation and screen-
ing methods – already in early phases of the
process, the integration of external knowledge
and stakeholders and the development of
a sustainability-oriented innovation culture.
Future Directions
In order to further develop the concept of SOI,
various challenges need to be addressed in the
future:
• Radical innovations. Several studies show that
the efficiency of current use of resources must
increase by a factor of about 10–50 in order to
achieve sustainability (Tukker and Tischner
2006). Such efficiency leaps demand more
than just incremental improvements. They
also need radical innovations. This
covers developing and diffusing radically
more sustainable technologies and products
(e.g., renewable energy; decentralized
heat combustion production; electric cars),
product-services systems, and entirely
new business models (e.g., carsharing). But,
in recognition of the life-cycle perspective, it
is also about radical process innovations.
Examples can be taken from agricultural-
based industries where more and more
companies switch to organic agriculture (e.g.,
organic cotton; organic food) and integrate
smallholders into their supply chains
(Bright and Seville 2010). Another radical
process innovation can be seen in the textile
industry where some companies have
established vertically integrated production
Sustainability-Oriented Innovation
in their home markets (e.g., American Apparel
in the USA, or Manomama in Germany)
instead of low-cost sourcing models from
Asian countries – this allows for dramatically
reduced carbon emissions and better control
over labor conditions (Plieth et al. 2012;
Porter and Kramer 2011).
• Open innovation. Particularly in large-scale
corporations, innovation is traditionally the
responsibility of the corporate research and
development (R&D) function, often referred
to as closed innovation. However, as it has
been stressed in this article, organizations
should also think more strongly in terms of
open innovation as an important mechanism to
address SOI; internal company members are
often not fully aware of the full range of
potential social and environmental impacts.
The interaction with a wider range of stake-
holder groups (e.g., nongovernmental organi-
zations, community members, local
authorities) and their systematic integration
in the innovation process, for instance,
through collaborative innovation workshops,
is key to advance toward SOI.
• Capacity building for SOI. As described
above, SOI poses new challenges for innova-
tion management. Often companies, both
large scale corporations as well as small and
medium-sized enterprises (SMEs), cannot
deal with the SOI-related challenges in
isolated ways and thus require some form of
capacity building for SOI. Company networks
and clubs, university-industry linkages, and
public-private partnerships are all possible
means to advance the SOI agenda collabora-
tively. Successful public-private partnerships
such as Ecoprofit in Europe demonstrate that
collaborative approaches can be effective
(e.g., Klewitz et al. 2012; ▶ Partnerships for
CSR).
• Sustainable entrepreneurship. Radical inno-
vations also lie at the heart of the related
concept of ▶ sustainable entrepreneurship
(Hall et al. 2010; Hockerts and W€ustenhagen
2010; Schaltegger 2002; Schaltegger and
Wagner 2011). This concept can be under-
stood as “an innovative, market-oriented and
Sustainability-Oriented Innovation
personality driven form of creating economic
and societal value by means of break-through
environmentally or socially beneficial market
[. . .] innovations” (Schaltegger and Wagner
2011). Both entrepreneurial firms (through
entrepreneurs) and incumbents (through
intrapreneurs) can engage in sustainable
entrepreneurship; however, they play different
roles in the transformation of industries
(Hockerts and W€ ustenhagen 2010). Sustain-
able entrepreneurs introduce radically more
sustainable offerings in niche markets and
put their larger counterparts under pressure,
either by growing into the mass market or by
simply demonstrating alternative (technologi-
cal) solutions. More efforts should be made to
understand the transformation of industries
from this entrepreneurial perspective.
• No innovation? While the potentials of inno-
vation for sustainable development have been
discussed at length in this entry, the almost
ideological innovation orientation of today’s
companies is also considered to be a challenge
to sustainable development (Paech 2004).
Innovation is still too often linked to further
resource consumption and economic growth at
the cost of environmental sustainability.
Sometimes it may also be beneficial to stick
to existing (best) practices instead of
reinventing the wheel. The recent trend of
organic agriculture is an interesting example
for the revisit of ancient forms of agricultural
production which deliberately ignores some
of modern day’s technological achievements
(e.g., chemical fertilizer, pesticides). A critical
reflection of the concept of innovation itself
is thus an important topic for research
and practice.
Cross-References
▶ Business Model Innovation
▶ Corporate Social Entrepreneurship
▶ Corporate Social Responsibility
▶ Cradle to cradle
▶ Corporate Social Innovation
▶ Eco-innovation
2415 S
▶ Environmental Management System
▶ Partnerships for CSR
▶ Product Life Cycle
▶ Social Entrepreneurship
▶ Social Innovation
▶ Stakeholder Engagement
▶ Stewardship Theory
▶ Supply Chain Management
▶ Sustainable entrepreneurship
▶ Triple Bottom Line
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Sustainable Business: A New Paradigm
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Sustainability-Related Innovation
▶ Sustainability-Oriented Innovation
Sustainable Business
▶ Sustainable Enterprise Development
Sustainable Business Development
▶ Sustainable Enterprise Development
Sustainable Business Philosophy
▶ Blue Ocean Strategy and CSR
2417 S
Sustainable Business: A New
Paradigm
Olanrewaju Samson Ibidunni
Department of Business Studies,
Covenant University Canaanland, Ota,
Ogun-State, Nigeria
Synonyms
Sustainable commerce: an innovative model;
Sustainable company: the latest archetype; Sus-
tainable dealing: a new exemplar; Sustainable
industry: a fresh paradigm; Sustainable produc-
tion: a newfangled pattern; Sustainable trade:
a novel paradigm
Definition
Sustainable business: A new paradigm as
a concept can be described as an exploration of
revolutionary change or transformation in the
way of managing business today; as distinct
from how the management of businesses used to
be, to ensure consistency in the achievement of
set objectives, satisfaction of target market and,
on the long run, businesses can outlive the foun-
der(s) for a more progressive society. There is no
standard definition of sustainable business: a new
Paradigm, however, with opinions or beliefs
abound about sustainable business. The United
Nations (UN) report of the World commission on S
environment in 1987 described a sustainable
business as any organization that participates in
environment-friendly or green activities to ensure
that all processes, products, and manufacturing
activities adequately address current environ-
mental concerns, while maintaining a profit
(United Nations General Assembly 1987). From
the above definition, we can deduce that sustain-
able business incorporates the following: (1) prin-
ciples of sustainability into each of its business
decisions, (2) supplies environment-friendly
products or services that replace demand for
S 2418
green products and services, and (3) an enduring
commitment to environmental principles in its
operations. In other words, sustainable business:
a new paradigm is the soul to a nation’s develop-
ment and growth.
Introduction
Sustainable business is significant in the life of
a nation as it holds and promotes the economy of
that nation to the next generation. Developing
and underdeveloped countries, popularly
referred to as Third World countries, are worse
for early death of small and medium enterprises.
Research findings including that of Prof. Noel
Jones, a consultant to many World Bank Projects
in 2009, revealed that majority of small busi-
nesses typically found in Third World countries
fold up after an average of 18 months due to
failure to stand up to competition (Noel 2009).
Entrepreneurs have the responsibility of creating
value for customers, consumers, shareholders,
and the community where their businesses are
located; hence, they must consider the economic,
social, and environmental consequences of their
actions. Sustainability is rapidly being adopted as
a key tool in business strategy to create new, and
innovative best business practices. These efforts
can be used to strengthen a brand’s value and
generate customers’ loyalty. Jennings Cindy, the
President of Volition Strategies in Denver in
2009 asserted that sustainable initiatives are
being launched in both large and small compa-
nies to address a new paradigm of resource scar-
city; increase scrutiny of the environment;
interested parties’ expansion; and social perfor-
mance of the business community (Jennings
2009).
For a business to be sustainable there must be
holistic policy framework put in place by business
organizations to achieve continually the follow-
ing four globally acceptable objectives of busi-
ness: (1) survival, (2) growth, (3) profitability,
and (4) social responsibility. And the policy
framework could be supported with the model
of Strengths, Weaknesses, Opportunities, and
Threats (SWOT) analysis which was
Sustainable Business: A New Paradigm
propounded by Albert S Humphrey, a leading
expert in the field of corporate strategic planning
and strategy realization at the Stanford Research
Institute from 1960 to 1970. SWOT analysis is
meant for auditing an organization and its envi-
ronment (Humphrey 2004). It is the first stage of
planning and helps marketers to focus on key
issues and uncovers opportunities that entrepre-
neurs are well placed to exploit. SWOT analysis
is a simple framework for generating strategic
alternatives from a situation analysis. It is appli-
cable to either the corporate level or the business
unit level and frequently appears in marketing
plans. In Nigeria, hardly do 98% of entrepreneurs
employ this model in decision making either
before or during business operations. Figure 1
below shows how a SWOT profile fits into
a strategic situation of a business organization.
The internal and external situation analysis
can produce a large amount of information,
much of which after filtering will reveal very
useful qualitative and quantitative data and
other quantity of key issues that are relevant to
the operations of business organizations. The
SWOT analysis classifies the internal aspects of
the company as strengths or weaknesses and the
external situational factors as opportunities or
threats.
Internal Analysis
The internal analysis is a comprehensive evalua-
tion of the internal environment’s potential
strengths and weaknesses. By analyzing the
strengths of the firm or organization, that is, its
resources and capabilities, foundation for build-
ing a competitive advantage over other enter-
prises in the industry is laid. A company’s
strengths may be its ability to create unique prod-
ucts, to provide high-level customer service, or to
mark its presence in multiple retail markets.
Examples of strengths of a firm are patents,
strong brand names, good reputation among cus-
tomers, cost advantages from proprietary know-
how, and exclusive access to high-grade natural
resources among others. On the other hand,
weaknesses of a firm or organization are the
qualities that prevent the organization from
accomplishing its mission and achieving full
Sustainable Business: A New Paradigm
Sustainable Business:
A New Paradigm,
Fig. 1 Model of strengths,
weaknesses, opportunities,
and threats (SWOT)
analysis (Source: Model
was developed by the Internal Analysis
author)
Strengths Weaknesses
potential. Weaknesses deteriorate influences on
the organizational success and growth. Weak-
nesses could be identified and listed so that they
may be overcome as quickly as possible. Weak-
nesses can be in terms of lack of marketing exper-
tise/managerial skill; narrow product range;
undifferentiated products or services that are in
relation to your competitors; location of your
business; damaged reputation; technological
backwardness; depreciating machinery; insuffi-
cient research and development facilities; inade-
quate systems or processes; slow deliveries, or
shortage of resources; poor decision-making; and
so on. Though weaknesses are controllable, they
must be minimized and eliminated. The follow-
ing three possible outcomes to the analysis of
weaknesses can be implemented:
1. Correction of an identified defect
2. Protection through cover-up and prevention
strategies to reduce the exposure of your
weaknesses
3. Aggression to divert the attention from your
weaknesses
The role of the internal portion of SWOT is to
determine where resources are available or
lacking so that strengths and weaknesses can be
identified. From this, the marketing manager can
then develop marketing strategies that match
these strengths with opportunities and thereby
create new capabilities, which will then be part
of subsequent SWOT analysis. At the same
time, the manager can develop strategies to
overcome the firm’s weaknesses, or find ways
to minimize the negative effects of these
weaknesses.
2419 S
Situation Analysis
External Analysis
Opportunities Threats
External Analysis
Opportunities of an organization take the form of
benefit of conditions within the organization’s
environment to plan and execute strategies that
enable it to become more profitable. Organiza-
tions can gain competitive advantage by making
use of the opportunities. Opportunities may arise
by moving into new market segments that offer
improved profits. Competition may be explored
as a result of a market vacated by an ineffective
competitor. An industry, any government policy
and technology identified could be tapped to
develop an internet market. Increase in demand
for telecommunication accompanied by deregu-
lations is a great opportunity for new firms to
enter telecommunication sector and compete
with existing firms for revenue. With opportunity
for mergers, joint ventures or strategic allowance,
a new international market can be explored.
Changes in the external environment prohibit
the firm’s ability to deliver value to its targeted
customer segments. Changes can occur in the rate S
of overall market growth and in the competitive,
economic, political/legal, technological, or
sociocultural environments, as well as in the
structuring of departments, lines of authority,
top management, or internal political climate
within the confine of the organization. However,
whatever changes that occur, entrepreneurs
should endeavor to identify the opportunities
within and utilize the same to the growth and
development of the enterprise. Lastly, threats
arise when conditions in external environment
jeopardize the reliability and profitability of the
organization’s business. Businesses compound
S 2420
Sustainable Business: Sustainable Business: A New Paradigm
A New Paradigm,
Fig. 2 Model of
sustainable business: a new
paradigm (Source: Model
was developed by
the author) INTERNAL
Strengths
Weaknesses
the vulnerability when they relate to the weak-
nesses. Threats are uncontrollable. When a threat
comes, the stability and survival of an enterprise
can be at stake. Examples of threats that are
identifiable are as follows: unrest among
employees; ever changing technology; increasing
competition leading to excess capacity,
a competitor has a new innovative product or
service, competitors have superior access to
channels of distribution, price wars and reducing
industry profits; heavy taxation introduced on the
company’s products; and so on.
By understanding these four aspects of its
situation, a firm can better leverage its strengths,
correct its weaknesses, capitalize on golden
opportunities, and deter potentially devastating
threats to achieve four globally accepted business
objectives that culminate to business sustainabil-
ity. Figure 2 below denotes firms’ model of
sustainable business: a new paradigm.
Survival: A Yardstick for Business
Sustainability
Every business starts small. Survival is about the
business sustaining within its means. In order to
survive, the business needs to invest on human
capital, employ strong marketing drive, meet its
financial obligations and have enough cash to pay
Sustainable Business: A New Paradigm
SURVIVAL EXTERNAL
Opportunities
GROWTH
PROFITABILITY
Threats
SOCIAL
RESPONSIBILITY
COMPETITIVE
ADVANTAGE
the debts of the business as they arise, and possess
a viable business model that will normally attract
or yield profit into the business. Investing in the
employees of the organization will aid the sur-
vival of the business. In April 2011, Vish Agashe,
a Senior Director in the Solutions management
group at SAP was passionate about continuous
business process improvement (Agashe 2011).
He wrote extensively on “Survival of the Insight-
ful: Necessity of Sustainable Analytics” whereby
he asserted that developing an analytics-driven
culture requires organizations to invest in people,
process, and technology. Vish Agashe stressed
that educating and training individuals to ask
the right questions in specific situations can help
them internalize the importance of being analyt-
ics driven. Setting up performance plans that
reward employees for using analytics can also
help organizations successfully to establish an
analytics-driven culture.
On marketing drive, Gospe et al. of the
KickStart Alliance team in 2002 were of the
view that some entrepreneurs incorrectly believe
that marketing is not important at the early stage
of a company’s development (Gospe et al. 2002).
Many entrepreneurs view marketing as some-
thing to be done later when they are ready to
build a brand. However, the successful compa-
nies studied by Mike Gospe et al. spent time and
resources to carefully craft their unique value
Sustainable Business: A New Paradigm
proposition and build a foundation of sales tools
before their product was launched. However,
each of these companies was able to insert mar-
keting requirements into their corporate business
plans and investors’ presentations hence so much
success was recorded.
A business that will survive needs sufficient
sources of finance, for example cash, a bank
overdraft, share capital, etc., and should be
able to prudently and appropriately manage the
funds on its operations in order to achieve
desired corporate and unit objectives. Cost lead-
ership is essential to long-term survival. It
should be pursued and executed by the manage-
ment and the line-managers. This is because
managers must view costs relative to the value
they contribute to the business or its stake-
holders in the short and long terms. So cutting
costs to improve operating efficiency must be
balanced by investment in developing the
company’s competitive position. The firm’s
products or services must be continuously devel-
oped to meet customers’ needs so that the suc-
cess of the business is sustained. Management
accountants who have a keen understanding of
the drivers of cost, risk, and value across the
organization’s value chain must be engaged to
handle the books of accounting for the
organization.
On January 29, 2011, Marty Zwilling, Chief
Executive Officer and founder of Startup Profes-
sionals, Inc, posited on how an entrepreneur or
investor can construct a viable business model
that delivers value to customers at a reasonable
price, with an underlying cost that allows the
entrepreneur to make a profit (Zwilling 2011).
Business ventures thrive or survive because they
identify a defined market, and are prudent in the
use of scarce resources. According to Marty
Zwilling, a viable and investable business model
is one of the first things an entrepreneur needs
to highlight in a business plan; hence, he
propounded ten basic principles of a business
model for survival as follows:
1. Value proposition. Target customers should
clearly read the unique value and benefits of
the company’s products to solving their
needs.
2421 S
2. Target market. The beneficiaries of the
company’s products or services can be
reached through geographic, demographics,
and psychographic delineation of the hetero-
geneous sales territory.
3. Marketing and Sales. These are the pro-
grams through which customers are reached.
4. Production. Production of goods here must
conform to demand. Mass production of
quality goods reduces cost and enables com-
petitive prices to be charged.
5. Distribution. Consistent availability of the
company’s product within the area via
channels of distribution should be
determined.
6. Revenue model. An entrepreneur should
supply an explicit pricing and revenue stream
and trade terms to the middlemen and insti-
tutional outlets. Distributors and retailers
must be sure of how the company’s pricing
and revenue stream, and trade terms will
cover their operational costs, including over-
head and support, and still leave a good
return to them.
7. Cost structure. There must be a budget. Total
costs of the venture must be determined.
8. Competition. An entrepreneur should be
aware of the real number of his competitors,
their strengths, and weaknesses in terms of
the 5-Ms, that is, machine, man, manage-
ment, money, materials, and their respective
status in the industry.
9. Unique selling proposition. Branding differ-
entiates products or services. It is a design
that gives sustainable competitive advantage S
over other brands in the market.
10. Market size, growth, and share. Survival of
a business also hinges on market share acqui-
sition, maintenance, and expansion in an
industry. Therefore, strategies to penetrate
new markets, consolidate the existing mar-
kets, and launch into international markets
must be put in place at all times.
Concluding issues on survival, it is logical that
a business enterprise needs to uphold the sanctity
of the four aforementioned factors in today’s
global business environment before it can be
competitive.
S 2422
Growth: A Wheel for Sustainable
Business
It is widely recognized that companies must grow
in order to sustain. Sustainable and profitable
growth is the realistically attainable growth that
a company could maintain without running into
problems. Given the dynamic nature of the politi-
cal, economic, competitive, and consumer trends,
achieving sustainable growth is tasking. Each of
these trends presents unique challenges to the
developing enterprises that are searching for the
strategies to achieve sustainable growth. And it is
important that a business concern adopts a strong
competitive position and offers products and ser-
vices that the market demands. Primary market
research is a key to ensuring that any new oppor-
tunity is potentially viable, competitive, and
designed to meet the needs of customers. Darren
Dahl, a Professor of Marketing at the Sauder
School of Business, in 2010 expressed that turning
a small business into a big one is never easy, as
research suggests that only one tenth of 1% of
companies will ever reach $250 million in annual
revenue (Dahl 2010). An even more microscopic
group, just 0.036%, will reach $1 billion in annual
sales. In other words, most businesses start small
and stay there. The following strategies are appli-
cable for growth in competitive environment.
Intensive Growth Strategies
1. Market penetration. The least risky growth
strategy for any business is to simply sell
more of its current product to its current cus-
tomers. Finding new ways for the company’s
customers to use its product is another form of
market penetration.
2. Market development. The next growth that
rung up the ladder is to devise a way to sell
more of the company’s current product to an
adjacent market, that is, offering product or
service to customers in another city or state.
3. Alternative channels. This strategy involves
pursuing customers in a different way. Exam-
ples are selling company’s products online,
using the Internet as a means for customers to
access products or services in a new way, and
adopting a rental model or software as a service.
Sustainable Business: A New Paradigm
4. Product development. This strategy involves
developing new products to sell to the existing
customers as well as to new ones. Selling
products to your existing customers is far
less risky than “having to learn a new product
and market at the same time,” McFarland says.
Entrepreneurs should ideally sell new prod-
ucts to the existing customers who have more
or less developed loyalty to their businesses.
5. New products for new customers. Sometimes,
market conditions dictate that businesses must
create new products for new customers.
Acquisition or Integrative Growth Strategy
This is a growth strategy in which a company
increases its sales and profits through backward,
forward, or horizontal integration within its
industry. A company may acquire one or more
of its suppliers to gain more control or generate
more profits (backward integration). It might
acquire some wholesalers or retailers, especially
if they are highly profitable (forward integration).
Or finally, it might acquire one or more compet-
itors through acquisition (horizontal integration).
With success or failure of intensive growth strat-
egies, a company can adopt acquisition or inte-
grative growth strategy. Though, Darren Dahl
expressed his fear on integrative growth strategy
whereby it was revealed that some 75% of all
acquisitions failed to deliver on the value or effi-
ciencies that were predicted for them. In some
cases, a merger can end in total disaster. Never-
theless, there are three viable alternatives when it
comes to implementing an integrative growth
strategy. They are the following: (1) Horizontal.
This growth strategy involves buying a compet-
ing business or businesses. Employing such
a strategy not only adds to the company’s growth,
but also eliminates another barrier standing on
the way of future growth like a real or potential
competitor. Acquiring key competitors over the
years is both a shortcut to product development
and as a way to increase the share of the market.
(2) Backward. A backward integrative growth
strategy involves buying one of the company’s
suppliers as a way to better control the supply
chain. Doing so could help the entrepreneur to
develop new products faster and potentially more
Sustainable Business: A New Paradigm
cheaply. (3) Forward. Acquisitions can also be
focused on buying component companies that are
part of the company’s distribution chain.
Diversification as a Growth Strategy
Diversification is a strategy where an entrepreneur
grows his company by buying another company
that is completely unrelated to his present business.
Massive conglomerates such as United African
Company Plc (UAC), Tower Group of Companies
and Doyin Group of Companies in Nigeria are
essentially holding companies with a diverse
range of businesses based solely on their financial
performance. They have a range of divisions, such
as manufacturing, consulting, assemblage, and
financial services all under the letterhead of
a single company. This kind of growth strategy
tends to be fraught with risk and problems and is
rarely considered viable these days.
Product Positioning for Company’s
Sustainable and Profitable Growth
Product positioning is what sets a product, ser-
vice, and company apart from those of competi-
tors, as well as the value the company provides
and how it is different from the alternatives. Posi-
tioning strategy that the company adopts has
value proposition. There are three essential
types of value: operational excellence, product
leadership, and customer intimacy. (1) Opera-
tional excellence: Customers and consumers
appreciate a good and quality product at the low-
est possible price. An entrepreneur who can
acquire a new machine that dramatically lowers
his costs can focus on operational excellence
whereby he can continually produce more vol-
ume at a lower cost, and hence offer the lowest
price in the market. This can be complemented
with advertising messages in the media to both
present and potential consumers. (2) Product
leadership: An entrepreneur should constantly
work on product improvements so that new
ideas can be brought to the market. He should
be acquainted with what the competitors are
doing, and hence focus on staying one step
ahead in order to capture a greater share of the
market. Product leadership should be conceived
as a vision, and their prospects and customers
2423 S
should be made to perceive it so even before
they become customers. (3) Customer intimacy:
An entrepreneur should know as much as possi-
ble about the customers’ businesses so that he can
deliver appropriate and adequate business solu-
tions over time. He should build a good rapport
with them, employ empathy, proffer solutions to
their problems, and suggest useful hints on that
value proposition in every interaction they have
with prospects and customers.
Profitability
Profitability is a term used to describe the financial
health of a business organization or a firm, and can
be interpreted in several ways. In a broad term,
profitability can be described as how well
a company can get a return on the investments it
makes; it is the ability of a company to earn profit
and it is a relative measure of success for the
company. If a company is bringing in more revenue
than it costs to create those revenues, then
a company can be said to be profitable. This
means that its checks are cashed, the workers are
paid, the bills are paid, and hopefully there is some
cash left lying around to call profits. Understanding
the profitability of a business is vital for manage-
ment decision-making and monitoring. First, esti-
mate the expenses and calculate the breakeven
point, that is, the sales level at which the revenue
minus expenses equals zero. Next, analyze several
scenarios with different price levels and other fac-
tors to find out how they affect the breakeven point
and the potential net profit. The same principles of
profit analysis can be used to help decide whether to
pursue certain customers or projects. Gathering the S
facts and calculating potential results can help
entrepreneurs make better decisions and reach
their goals. Financial ratios are used to measure
profitability. So, how is profitability measured?
There can be arguments and differing views as to
which ratios should go where, with many sources
giving varying interpretations. So, in order to appre-
ciate profitability as a business objective, a number
of ratios like Gross Profit Margin (GPM), Operating
Profit Margin (OPM), Pre Tax Margin (PTM), Net
Profit Margin (NPM), Cash Flow Margin (CFM),
Cash Return on Assets (CRA), Gross Profit to Net
Sales (GPNS), Return on Equity (ROE), and Return
S 2424
on Total Assets (RTA) should be considered as
useful profitability measures in the profitability
table. Each of these ratios expresses just a little
amount of information. Used together, they can
reveal how profitable a company is really operating.
Social Responsibility
Dr. Zerk, Jennifer, a Principal Consultant and
Expert on Law and Corporate Social Responsibility
in 2006 defined social responsibility as an ethical
ideology that an entity, be it an organization or
individual, has as an obligation to act to benefit
society at large (Zerk 2006). This responsibility
can be passive, by avoiding engaging in socially
harmful acts, or can be active, by performing activ-
ities that directly advance social goals. Social
responsibility of business refers to all such duties
and obligations of business directed toward the wel-
fare of society. These duties can be a part of the
routine functions of carrying out business activity or
they may be an additional function of carrying out
welfare activity. Social responsibility is a voluntary
effort on the part of business to take various steps to
satisfy the expectation of the different interest
groups, who may be owners, investors, employees,
consumers, government, and society or community
to earn goodwill and reputation for the business as
people prefer to buy products of a company that
engages itself in various social welfare programs.
For the survival and growth of an enterprise, support
from the society is very much essential. Business
utilizes the available resources like power, water,
land, roads, and other infrastructures of the society;
so it should be the responsibility of every business to
spend a part of its profit for the welfare of the
society. The entrepreneurs should try to fulfill all
the expectations of the employees because
employees’ satisfaction is directly related to produc-
tivity and it is also required for the long-term pros-
perity of the organizations. Consumer Awareness:
Nowadays, consumers have become very conscious
about their rights. They protest against the supply of
inferior and harmful products by forming different
groups. This has made it obligatory for the busi-
nesses to protect the interest of the consumers by
providing quality products at the most reasonable
prices; protect the environment, providing better
Sustainable Business: A New Paradigm
living conditions like housing, transport, canteen,
and crèches; promote sports and culture, providing
opportunity for better career prospects; ensure reg-
ular supply of goods and services, proper working
conditions and welfare amenities, goods and ser-
vices at reasonable and affordable prices; provide
prompt after-sales services; and conserve natural
resources and wildlife. Business must take measures
to protect the environment rather than damaging it,
avoiding (1) air pollution, (2) water pollution, and
(3) land pollution. Preventive role must be taken by
the businesses following the regulations laid down
by government to control pollution.
Significance of Competitive Advantage in
Sustainable Business
The effective and efficient management of
the company’s resources based on strengths, weak-
nesses, opportunities, and threats (SWOT) analysis
will enable the firm to achieve the aforementioned
objectives. Consequently, irrespective of the
nature of competition in the industry, the firm will
be in a better position to achieve competitive
advantage. Competitive advantage is defined in
different dimensions; as the attributes exhibited
by a product or brand lend it some superiority
over its immediate competitors, that when two or
more firms compete, one firm possessing
a competitive advantage has the ability to obtain
a higher performance than the other rivals, and
another view, however, claims that the foundation
of competitive advantage is a product and/or ser-
vice that provides value to the business and cus-
tomers. Kin and Oh (2004) are of the opinion that
the competitive advantage of an organization is the
result of the resources that the organization has
developed internally that yields the value the orga-
nization is able to create to differentiate itself from
its competitors. Four factors help a company to
build and sustain competitive advantage: superior
efficiency, quality, innovation, and customer
responsiveness. Each of these factors is the product
of a company’s distinctive competencies. The sim-
plest measure of efficiency is the quality of inputs
that it takes to produce a given output, that is,
efficiency ¼ output/input. The more efficient
a company is, the fewer are the inputs required to
Sustainable Business: A New Paradigm
produce a given output. On quality, a product is
said to have superior quality when customers per-
ceive that the product has the desired attributes of
form, features, performance, durability, reliability,
style, and design which provide them with higher
utility than the attributes of products sold by rivals.
On innovation, an entrepreneur should engage in
product innovation which creates value, particu-
larly when the product is ripe at the saturation stage
of the product’s life cycle, or enhance versions of
the existing products that the customers perceive as
having more utility, thus increasing the company’s
pricing options. Lastly, customer’s responsive-
ness is attracted by prompt identification and sat-
isfaction of customers’ needs and wants better than
competitors. By this, customers will attribute more
utility to its products, creating a differentiation
based on competitive advantage. The company’s
products and services could also be customized to
the unique demands of individual customers or
customer groups. Customer response time, that is,
the time it takes for a good to be delivered or
a service to be performed is an aspect of customer
responsiveness that draws near or drives away cus-
tomers to patronize a company’s product.
By this package, millions of domestic busi-
nesses (Small and Medium) existing in advanced
countries, such as Nigeria and other developing
countries of the world, alongside the multina-
tional and international enterprises will operate
and flourish together, ensuring continual growth
and development of the nations’ economy.
Hence, their sustainability beyond the founding
entrepreneurs will grow the economy of the
nations in particular and the world at large.
Key Issues
The concept of sustainable business: a new para-
digm is particularly significant in the context of
global economy and relevant in the committee of
nations today. Countries of the Third World are
more endemic in this concept as both indigenous
and foreign academic research works are yet to be
imbibed in the practical terms for solutions to the
closedown of most small and medium enterprises
2425 S
in those parts of the world. The indigence of
domestic organizations is so much in vogue, as
well as their ineptitude to stand competition with
their multinational counterparts.
Future Directions
Policies and programs have been initiated and
should continue to be initiated by United Nations
and successive governments of nations of the
world promoting the concept of sustainable busi-
ness. United Nations Department of Economic
and Social Affairs, Division for Sustainable
Development Agenda initiated a program of
strengthening the role of business and industry
whereby countries are encouraged to promote
cleaner production, promote responsible entre-
preneurship, and evaluate financing and low
cost of running businesses. Also, United Nations
Environmental Programme (UNEP), the division
of technology, industry, and economics (DTIE)
focuses on solutions to industrial and urban envi-
ronmental problems. UN Global Compact should
support and respect the protection of internation-
ally proclaimed human rights whereby gender,
ethnicity, and age diversity of employees are
protected to ensure the long-term sustainability
of business organizations. The main objective of
the UNIDO business partnership in South African
Automobile Industry is to provide an economi-
cally viable and sustainable model for technical
assistance and policy support for international
competitiveness of small and medium enterprises
(SMEs) so as to successfully integrate into global S
value chains. Pursuit of SMEs policy framework
as a reform should be incorporated into the new
industrial policy for the country; as such reforms
since 1980s have been promoting survival,
growth, and profitability for SMEs in all sectors
of the economy in Nigeria.
Further studies on this concept should focus on
best management practices of SMEs in develop-
ing countries; human development programs
for sustainable business; ethical issues for sus-
tainable business; relationship marketing for
consumer’s loyalty, and so on.
S 2426 Sustainable Commerce: An Innovative Model

Cross-References
Sustainable Commerce: An
▶ Sustainability-Oriented Innovation Innovative Model
▶ Sustainable Enterprise Development
▶ Sustainable Marketing ▶ Sustainable Business: A New Paradigm
▶ Sustainable Production and Consumption

References and Readings Sustainable Company

Agashe, V. (2011). Survival of the insightful necessity ▶ Sustainable Enterprise Development

of sustainable analytics, San Francisco Business
Area, 19 Apr 2011. http://www.the-decisionfactor.
com/survival-of-the-insightful-necessity-of-sustainable-
analytics
Dahl, D. (2010). How to develop a business growth strat-
egy, February 25. http://www.inc.com/guides/small- Sustainable Company: The Latest
business-growthstrategies.html+Darren+Dahl,+2010
+on+integrative+growth+strategy%3F&ct¼clink
Archetype
Gospe, M., Gospe, M., Gregory, J., Amy, M., Sullivan, M.
(2002). 7 critical success factors for launching and ▶ Sustainable Business: A New Paradigm
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Humphrey, A. S. (2004). SWOT analysis. http://webcache.
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pp. 1–11. Accessed May 2011 ▶ Competition
Jennings, C. (2009). Aligning sustainable business
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htmle/sustainability/corpsustainability.html. Accessed
May 2011
Kim, B. Y., & Oh, H. (2004). How do hotel firms obtain
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65–71. ▶ Responsible Competitiveness
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www.moyak.com/papers/small-medium-enterprises.pdf,
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United Nations General Assembly. (1987). Report of the Sustainable Consumption
world commission on environment and development:
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Development and International Co-operation: Envi- Faculty of Management Sciences, Nnamdi
ronment. Retrieved on 15 Feb 2009. Azikiwe University, Awka, Anambra State,
Zerk, J. A. (2006). Multinationals and corporate social
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Nigeria
international law. Cambridge, UK: Cambridge
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0521844991. Synonyms
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to-ensure-viable-business.html. Accessed July 2011 Sustainability marketing; Sustainable marketing
Sustainable Consumption
Definition
Sustainable consumption as a derivative of sus-
tainable development has resisted all attempts to
offer single universalistic definition. This may be
unconnected with the eclectic and indeed enig-
matic nature of the construct and political idio-
syncrasy that surrounds discussions on
sustainability. Drawing from the almost ubiqui-
tous definition of sustainable development
proposed by the United Nations (1987), sustain-
able consumption can be defined as consumption
that meets the needs of the present society with-
out truncating the chances of future generations
from achieving at least the same level of present
consumption. The perspectives on sustainable
consumption are diverse and stretches from
growth orientated emphasis (e.g., OECD) to
more ecology focused positions (e.g., New Eco-
nomics Foundation). For instance, OECD (2008)
argues that “promoting sustainable consumption
and production are important aspects of sustain-
able development, which depends on achieving
long-term economic growth that is consistent
with environmental and social needs … promot-
ing sustainable consumption is equally important
to limit negative environmental and social exter-
nalities as well as to provide markets for sustain-
able products.” This perspective contrasts with
the New Economics Foundation that advocates
a paradigm shift from the growth orientation of
mainstream economics. Accordingly, the “New
Economics is a philosophical and political school
of thought founded on a belief that economics
cannot be divorced from its foundations in envi-
ronmental and social contexts…. the New Eco-
nomics places the environment at the heart of its
economic analysis, accepting that there are eco-
logical services that cannot be substituted for
other types of capital, and that ecosystems do
not react in a predictable, linear way to external
stresses. Following from this, the economy can-
not be viewed as an abstracted mechanism for
indefinitely producing “value” but rather has to
take its place within the environment – and soci-
ety – as a starting point (Seyfang 2005; also, see
Jackson and Michaelis 2003 for a review of sus-
tainable consumption discourses). Despite wide
2427 S
varieties of definitions on sustainable consump-
tion, the definition of the 1994 Oslo Symposium
on Sustainable Consumption remains one of the
commonly cited definitions. It defines sustainable
consumption as “the use of goods and services
that respond to basic needs and bring a better
quality of life while minimising the use of natural
resource, toxic materials and emissions of waste
and pollutants over the life cycle as not to
jeopardise the needs of future generations”
(Norwegian Ministry of Environment 1995,
emphasis added). Basically, the discourse on sus-
tainable consumption brings the stakeholders’
perspective to issues of consumption, wherein
current consumers must consider the intra and
intergenerational implications of consumption
on the planet, people, and profit of companies,
which hitherto was not the case. The dimension
of profit brings in the issue of sustainable produc-
tion, which seeks to produce products that satisfy
the needs of present and future generations
without hurting corporate profit, the planet, and
consumers themselves.”
Researchers have identified wide variation in
the theme of sustainable consumption, which is
closely aligned to society’s level of development.
Following this, the discourse on sustainable con-
sumption can be seen to fall within the bipolar
divide of sustainable consumption in poor and
rich countries. For the affluent society, for exam-
ple, the dominant sustainable consumption theme
revolves around overconsumption which chal-
lenges the continued health of the planet (when
excess consumption goes beyond the carrying
capacity of the Earth), the people (when excess S
consumption results to obesity and other health
challenges), and profit of companies (which may
be affected as a result of consumers’ resistance to
unsustainable products). Scholars (see, for exam-
ple, Wackernagel and Rees 1996) devised the
ecological footprint as a construct to measure
the amount of ecosystem that could sustain
man’s consumption level. Formally,
Wackernagel and Rees (1996) define ecological
footprint as a measure of how much biologically
productive land and water an individual, popula-
tion or activity requires to produce all the
resources it consumes and to absorb the waste it
S 2428
generates using prevailing technology and
resource management practices. Different
methods have been developed for calculating
ecological footprint and many have criticised it,
yet it has been acknowledged as a very useful
indicator of sustainability (see Wiedmann and
Barrett (2010) for a review of perceptions and
methods of ecological footprint indicator. Esti-
mates from 2007 data reveal that the average
global ecological footprint is 2.70 ha per global
citizen. This means that about 1.5 earths are
needed to maintain the present global level of
consumption as opposed to 0.63 earth in 1961.
According to the United Nations estimates, this
will climb to 2 earths by 2030, yet, we have only
one earth! Using this average, the consumption
by the affluent citizens is already feared to exceed
the global average. For instance, the average eco-
logical footprint of a US citizen is estimated to
9.7 ha, and for a UK citizen is 5.35 ha, which are
quite above the 2.70 ha global average. At the
other extreme of the pole is less affluent citizens
who suffer from malnutrition occasioned by
underconsumption. For instance, the ecological
footprint of an average person in Mozambique is
estimated at 0.47 ha. According to World Wild
Life estimates, if every citizens of the world were
to afford the present consumption level of aver-
age UK Citizen and North American, three and
five planets would respectively be needed. In the
Our Common Future Report, it is noted that “the
more affluent industrialized countries use most of
the world’s metals and fossil fuels. Even in the
case of food products a sharp difference exists,
particularly in the products that are more
resource-intensive.” It is important to mention
that even with less than average ecological foot-
print in the poorer societies unsustainable
consumption can be traced. However, this clus-
ters around poor management of wastes and
overdependence on natural resources such as
excessive use firewood for domestic fuel which
could result in desertification and other natural
disasters. Researchers have equally looked at
sustainable consumption from the socioeconomic
dimension, which shows unsustainable consump-
tion as a function of socioeconomic dynamics
rather than level of development. In this regard,
Sustainable Consumption
unsustainable consumption and sustainable con-
sumption can occur among the affluent and the
poor irrespective of their geographical locations.
Thus, affluent consumers in poorer societies can
exacerbate unsustainability as much as their
counterparts in the affluent society depending
on their pattern of consumption. In the same
vein, poor consumers in the affluent society may
exhibit unsustainable consumption behavior akin
to their counterparts in poor societies. Either way,
consumers in affluent and poor societies foster
unsustainability through their patterns of con-
sumption. Interestingly, their consumption
behavior if channeled properly could foster sus-
tainability. It is in this regard that researchers
have argued that marketing could be agent of
sustainability and unsustainability, depending
on the orientation of consumers, business organi-
zations, government, and other stakeholders.
Introduction
All through recorded history, man has been occu-
pied with insatiable well-being. Concomitantly,
overconsumption (consumerism) and hedonistic
consumption became important parameters to
judge civilization and development. Ironically,
the resulting high level of consumption among
the affluent and the struggle to attain higher con-
sumption by the poor segment of the society have
become antithetical to man and nature’s well-
being as it has accumulated to the point of posing
serious challenge and concern for
intergenerational good. Hence, the increasing
realization that consumption pattern is
increasingly becoming a major correlate of
unsustainable development; this results in
a fairly recent call for development model that
emphasizes inter- and intragenerational equality
and equity in the use of common resources. The
need to promote development that caters for pre-
sent and future generations culminated in the
establishment of the United Nations established
the Brundtland Commission in 1983 to address
growing concern “about the accelerating deterio-
ration of the human environment and natural
resources and the consequences of that
Sustainable Consumption
deterioration for economic and social develop-
ment (United Nations 1987).” The Report of
this Commission seems to set the stage for height-
ened discourse on the concept of sustainability by
researchers, policy makers and governments,
business leaders, and civil society organizations,
and nongovernmental organizations. The
Report’s definition of sustainable development
as “meeting the needs of the present without
compromising the ability of future generations
to meet their own needs,” even with some con-
troversies is popular enough to drive the dis-
course on the subject. The Report further
highlighted the increasing link between con-
sumption and the degradation of the human, nat-
ural, and socioeconomic environment. Perhaps
this emphasis on consumption pattern as
a correlate of ecological degradation and similar
views culminated in the call by the Earth Summit
in 1992 for “national policies and strategies to
encourage changes in consumption pattern.”
Since then, the discussion on sustainable
consumption has become a legitimate area of
academic and policy enquiry.
Despite the increasing popularity of sustain-
able consumption, some questions posed in rela-
tion to a fuller and universalistic comprehension
of the construct have not received exhaustive
discussion to at least appease the inquisition of
stakeholders. Till date, no method has been
devised which seems to satisfy the widely vary-
ing perspectives of all the players. Wackernagel
& Rees (1996) advanced the ecological footprint
construct as a tool for measuring sustainability
consumption. This is a hypothetical level of con-
sumption that is within the carrying capacity of
the Earth, which is measured in terms of the
quantity of land needed to maintain the present
level of consumption by the present and future
citizens of the world. Using this method, in 2007,
an average global citizen requires 2.7 ha of land
to live sustainably and this seems to be on the
increase and is already higher than what is avail-
able. Notably, consumers in developed countries
require more ecological footprint than their coun-
terparts in the developing countries. For instance,
the World Wildlife Fund for Nature in 2002 cal-
culated that an average American requires 9.7 ha,
2429 S
average Briton requires 5.35 ha, and an average
person from Mozambique (a typical developing
country) requires 0.47 ha (World Wildlife Fund
for Nature 2002). These figures suggest that
unsustainable consumption is largely
a concomitant of over consumption from the
affluent citizens of the world, which are largely
prevalent in the developed countries. While it is
plausible that overconsumption in the developed
countries are exacerbating unsustainability, yet, it
has equally being argued that there are affluent
consumers in developing countries that engage in
unsustainable consumption and even the poor can
equally indulge in unsustainable consumption.
The World Wildlife Fund and the United Nations
projected increasing growth in world population
with attendant growth in global consumption as
major threats to ecological devastation as a result
of expected increase in the level of ecological
footprint.
Many opposing prescriptions have been
advanced regarding how best to limit the escalat-
ing threat caused to the Earth as a result of con-
sumption patterns. The options that have been on
the front burner are: cutting down on population
and/or consumption, and promoting production
process and technology that enhance sustainabil-
ity. While all the stakeholders seem to agree in
principle to these proposals, yet, from every indi-
cation everyone connected with the discourse
seems to promote sets of rules that ultimately
are idiosyncratic and mutually exclusive, thereby
reducing sustainability discourse to largely rhe-
torical displays rather than a pragmatic guide to
action. For instance, when the USA withdrew S
from the Kyoto protocol, the following explana-
tion (cited in Burgess et al. 2003) was credited to
the then President of the USA: “we will be work-
ing with our allies to reduce greenhouse gases,
but I will not accept a plan that will harm our
economy and hurt American workers.” Such
extreme, diverse, and egocentric philosophical
lenses employed by politicians, economists, envi-
ronmentalists, technologists, businessmen and
others, tend to frustrate every attempt to devise
a universally acceptable solution.
In the face of the persisting quagmire, promot-
ing environmentally responsible consumption
S 2430
seems to be gaining some form of attention and
acceptance. The environmentalists are of the
view that consumption level is already
unsustainable particularly in the industrialized
nations with high consumption per capita. For
consumers in the developing countries, the prob-
lem maybe less of overconsumption, but more of
postconsumption behavior and practices
especially in their waste disposal behavior and
increasing consumption of nonrenewable
resources. Businesses that possess the technology
and competency for producing sustainable prod-
ucts are pushing for stricter laws to encourage
sustainable production and consumption, appar-
ently to consolidate their competitive and differ-
ential advantages. This business motive has
forced many multinationals that could not cope
with environmental requirements in the devel-
oped countries to migrate their production
resources to developing countries with weak sus-
tainability laws, who are also in dire need of
foreign direct investment for development. Such
countries often play down on environmental laws
and control and their enforcement as strategic
choice for attracting such investments. Again,
governments deliberately promote consumption
as proxy to “quality of life,” but, which in turn
translate to overconsumption with predictable
impact on the environment.
Evidently, a number of consumption perspec-
tives are discussed in the literature, which has
clear implications in attaining sustainability. For
instance, Schaefer and Crane (2005) discussed
two dominant perspectives under rational choice
and information processing, and sociological/
anthropological conceptualizations. The rational
choice and information processing conceptual-
izes consumption choice as psychological pro-
cesses that determine consumers’ choice and
level of sustainable consumption. Following
from this perspective, consumers are capable of
choosing to engage in or abstain from sustainable
consumption depending on the information avail-
able to them and if they have adequate choice and
supported by prevailing externalities such as
economic, social, and cultural beliefs among
others. Accordingly, attaining higher sustainable
consumption entails identifying psychological
Sustainable Consumption
and other determinants of sustainable consump-
tion such as sustainable consumption values, atti-
tudes, and behaviors (see for example: Bohlen
et al. 1993); variables for profiling sustainable
consumers; factors that promote sustainable
value chain (see e.g., Fuller 1999) and other
characteristics of sustainable consumers (Ottman
1993).
The sociological/anthropological perspective
constructs consumption from such diverse
strands as postmodernism, post-structuralism,
feminism, Marxism, and social constructionism.
Basically, the sociologists/anthropologists define
consumption “. . . as less rational, less choice and
goal oriented, and less oriented toward objective
product utility than the traditional account. [Their
emphasis]. . .include hedonistic consumption,
consumption as a means to construct self-iden-
tity, and consumption as a means to construct and
express social relationships and communicate
social and cultural meaning” (Schaefer and
Crane 2005, p. 83). Following from the sociolog-
ical/anthropological perspectives, consumption
has been described as hedonism (wherein
consumption, even overconsumption is consid-
ered an act of pleasure, which represents the
only intrinsic goal worth pursuing by man);
identity construction (a means to define individ-
ual’s “psychological and social identity”);
communication (means through which people’s
feeling, identities of sorts are eloquently commu-
nicated). One crucial sustainability implication of
the sociological/anthropological strand of con-
sumption is the potential for overconsumption
and redundant consumption, which arguably is
common in the developed countries, yet, could
be found among the affluent class in the develop-
ing countries. Even among the not-too-rich class,
some cultural factors and halo effects could cause
redundant and wasteful consumption to occur.
The underlying assumptions and their relation to
sustainability; methods for achieving sustainable
consumption from the prisms of both perspec-
tives; roles and responsibilities of different
actors, supporters, and critics are aptly summa-
rized in Table 1.
A number of options have been suggested as
possible means for enthroning sustainable
Sustainable Consumption, Table 1 Views of consumption and relationship with sustainability

Relation to How to achieve Supporters critics

View of Underlying sustainability in sustainable Roles and responsibilities of Groups to which it Groups to which it does
consumption assumption literature consumption different social actors appeals not appeal
Rational choice Consumers as Strong – main basis Environmental concern Individuals: key locus of action for Green marketers; Radical, “deep green”
and information rational, utility- for “green” leads to inclusion of more sustainable consumption; policy makers seeking environmentalists;
processing maximizing decision consumption environmental criteria Marketers: respond to consumer stimulus–response academics interested in
makers; focus on literature in individual consumer demand for greener products and model of greening; sociological/
Sustainable Consumption

individual decision making; services; Public policy: education environmentalists anthropological

consumers; pervasive of consumers, removal of barriers with natural science perspective
consumption and its environmental concern to individual green behavior; Social background;
antecedents can be and aggregate behavior groups and entities: limited role academics trying to
rationally of many green establish green
determined consumers leads to marketing in
more sustainable mainstream marketing
consumption (and literature
production) patterns
overall
Sociological/ Consumption Weak – often seen as All consumption has Existing social actors are resistant Potential appeal to Environmentalist with
anthropological embedded in social in opposition to, or important social roles to change – wider social, economic, environmentalists and normative concerns
view of and cultural neutral toward, and purposes; and political transitions are critical scholars of and working within
consumption practices; focus on concept of sustainable necessary to address sustainability; consumption seeking positivist framework;
the role of sustainability; sees consumption needs to Individuals: less emphasis on their a richer consumption scholars
consumption in sustainable take into account actions; Public policy: could limit conceptualization of concerned with
people’s lives as consumption as cultural and social promotion of symbolic function of sustainable positive cultural
individuals and a problematic aspects of consumption new consumer goods; could consumption aspects of consumption
groups concept with inherent promote more sustainable ways of and who are unhappy
tensions fulfilling social and cultural needs; with the normative
limits imposed by other approach to
development goals; Marketers: consumption
may be unwilling to promote new
ways of fulfilling social and
cultural needs because of reduced
growth potential; Civil society/
media: promotion of civil discourse
about redirection of social and
2431

cultural functions of consumption

(continued)
S

S
 S
2432

Sustainable Consumption, Table 1 (continued)

Relation to How to achieve Supporters critics

View of Underlying sustainability in sustainable Roles and responsibilities of Groups to which it Groups to which it does
consumption assumption literature consumption different social actors appeals not appeal
Hedonistic Consumption brings Often seen in direct Pleasure may stem
consumption pleasure, often opposition to more from environmentally
through act of frugal lifestyles benign goods and from
shopping itself, advocated by alternative shopping
through use or environmentalists environments, as well
consumption, or as “exploration” of
through possession search for such goods
Construction of Consumption as Literature tends to be Active construction of
self-identity means to construct neutral on links to sustainable self-
through psychological and sustainability identities and lifestyles
consumption social identity
Consumption as Consumption as Literature tends to be Shared experiences of
communication a code for neutral on links to sustainable lifestyles in
communication of sustainability families, groups, and
status, taste, self- communities; group
identity, and social identities and pressures
relationships promote more
sustainable
consumption patterns
Schaefer and Crane (2005)
Sustainable Consumption
Sustainable Consumption
behavior. First, mounting evidence in the litera-
ture suggests rather forcefully that marketing
orthodoxy is exploiting the existing Dominant
Social Paradigm (DSP) to further unsustainable
behavior among consumers, who believe or are
made to believe that more consumption amounts
to greater happiness. Thus, as capitalism is profit
centric, firms keep pushing consumers to
consume more; economies seems to drive their
competitiveness from producing and selling
more, which results in a vicious cycle that rein-
forces unsustainability. Enthroning consumer
curtailment behavior in terms of rejecting
unsustainable products and promoting adoption
of consumption behavior that engender sustain-
ability have received wide endorsement in the
literature. Stern (1993) documents four determi-
nants of such sustainable consumption behavior
to include: contextual forces, attitudinal factors,
habits or routines, and personal capabilities.
Following this classification, values, beliefs,
norms, and habits have been argued to drive
curtailment behavior and adoption of sustainable
consumption behavior.
Secondly, scholars and policy makers are
advocating supply-side approach for encouraging
sustainable consumption. This entails compelling
manufacturers and value chains to adopt pro-
cesses and protocols that promote sustainable
consumption by engaging in sustainable produc-
tion and distribution. This is gaining some
grounds in the developed nations with obvious
access to technologies and resources that could
support sustainable production and value chain
activities. However, for most developing coun-
tries, enthroning sustainable production and
value chain pose some quagmires On one hand,
attaining sustainability has some cost implica-
tions, which translates to additional cost and
higher prices, which most firms and consumers
in the emerging markets may be unable to afford
due largely to their resource base (Nkamnebe
2010). This is consistent with the supposition
that abject poverty and inequity are antithetical
to sustainability (Kirchgeorg and Winn 2006).
Yet, sustainability issue like the juggernaut
called globalization has emerged as a constant
orthodoxy of the neoliberal regime, which the
2433 S
emerging markets cannot afford to ignore without
facing economic peril, as evidence of subscribing
to sustainability reporting serve as key for
accessing global market and resources.
Third, very many researchers are calling for
deliberate actions to reduce global population,
which has grown from 1.5 billion in 1900 to
estimated 6.85 billion in 2010. Man’s conquest
over certain diseases, improvement in nutritional
sciences, and development of highly productive
agriculture among others are contributory to this
state of affair. Ordinarily, this calls for celebra-
tion, but for the adverse impacts of overpopula-
tion on the carrying capacity of the earth. With
increasing population comes increasing con-
sumption of largely nonrenewable resources and
increasing pollution of the Earth as a result of
increasing industrialization to meet up with the
ravaging consumption of man. On the basis of
this, population reduction policies are being pro-
moted as deliberate choice for mitigating the
impact of increasing consumption on the ecosys-
tem. While this may appear plausible on the sur-
face, yet, mere reduction of human population
may be a necessary condition for promoting sus-
tainable consumption but obviously not
a sufficient condition as overconsumption of sus-
tainable products could equally create
unsustainability.
Key Issues
Sustainable consumption is increasingly emerg-
ing as credible perspective toward ensuring S
intergenerational equity in terms of securing gen-
eral good of all generations. However, given the
definitional disagreement of the sustainability
construct and the idiosyncrasy of stakeholders
to sustainable issues, conceptualizing sustainable
consumption and how to attain it is yet to be
realized. Perhaps, context-specific studies and
sharing the outcome of such studies would help
in building universal and contextual relevance of
the construct. Above all, the sooner all the stake-
holders drop their individual interests for the
general good, the sooner the goal of sustainable
consumption would be achieved.
S 2434
Future Directions
While the desirability of sustainable consumption
may have been acknowledged by all the stake-
holders, the extent this has translated to action
plan is still very doubtful. Firms seem to accept
sustainable consumption only when it does not
affect their profit target; national governments
also go for it once national interest is intact and
consumers whose income level may not afford
sustainable consumption habit are likely to ignore
it. Within these conflicts, attempts should be
made to enthrone a model of sustainable con-
sumption at all levels irrespective of the short
term and narrow interests of stakeholders.
Cross-References
▶ Brundtland Report
▶ Carbon Footprint
▶ Climatic Change
▶ Consumerism
▶ Ecological Footprint
▶ Intergenerational Equity
▶ Responsible Consumption
▶ Sustainability
▶ Sustainable Marketing
▶ Sustainable Production and Consumption
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Bohlen, G., Schlegelmilch, B., & Diamantopoulos, A.
(1993). Measuring ecological concern: A multi-con-
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9, 415–430.
Burgess, J., Bedford, K., Hobson, G., Davis, G., &
Harrison, C. M. (2003). (Un) sustainable consumption.
In F. Berkhout, M. Leach, & I. Scoones (Eds.), Nego-
tiating environmental change: New perspectives from
social science (pp. 261–291). Cheltenham, UK:
Edward Elgar.
Fuller, D. A. (1999). Sustainable marketing: Managerial–
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Jackson, T., & Michaelis, L. (2003). Policies for sustain-
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publications/downloads/030917%20Policies%20for%
20sustainable%20consumption%20_SDC%20report_.pdf
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Kirchgeorg, M., & Winn, M. I. (2006). Sustainability
marketing for the poorest of the poor. Business Strat-
egy and the Environment, 15, 171–184.
Nkamnebe, A. D. (2010). Consumption patterns as
correlates of environmental degradation in Nigeria.
In A. Ahmed & S. Nwankwo (Eds.), Achieving
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Norwegian Ministry of Environment. (1995). Oslo
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Good practices in OECD countries. OECD.
Seyfang, G. (2005). Sustainable consumption and the new
economics: Exploring an alternative approach, Centre
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ronment (CSERGE), http://www.cserge.ac.uk/sites/
default/files/ecm_2007_05.pdf
Ottman, J. A. (1993). Green marketing: Challenges &
opportunities. Lincolnwood, IL: NTC Business Books.
Schaefer, A., & Crane, A. (2005). Addressing sustainabil-
ity and consumption. Journal of Macromarketing,
25(1), 76–92. Available at: http://jmk.sagepub.com/
cgi/content/abstract/25/1/76.
Seyfang, G. (2005). Sustainable consumption and the new
economics: Exploring an alternative approach, Centre
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ronment (CSERGE), http://www.cserge.ac.uk/sites/
default/files/ecm_2007_05.pdf
Stern, B. B. (1993). Feminist literary criticism and the
deconstruction of ads: A postmodern view of advertis-
ing and consumer responses. Journal of Consumer
Research, 19, 556–566.
United Nations. (1987). Report of the World Commission
on Environment and Development, General Assembly
Resolution 42/187. http://www.un-documents.net/
a42r187.htm. http://www.un-documents.net/ocf-01.
htm. Accessed 12 May 2011.
Wackernagel, M. & Rees, W. E. (1996). Our ecological
footprint: Reducing human impact on the earth.
Gabriola Island: New Society.
Wiedmann, T., & Barrett, J. (2010). A review of the
ecological footprint indicators: Perceptions and
methods. Sustainability, 2, 1645–1693.
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planet report. http://www.wwf.org.uk/filelibrary/pdf/
livingplanrt2002.pdf. Accessed 12 May 2011.
Sustainable Consumption and
Production
▶ Resource Efficiency
Sustainable Development in SMEs
Sustainable Corporation
▶ Sustainable Enterprise Development
Sustainable CSR
2435 S
▶ Property Development and CSR
▶ Responsible Competitiveness
▶ Small- and Medium-Sized Enterprises
Engagement in CSR
▶ Sustainable Energy Management and CSR
▶ Sustainable Enterprise Development
▶ World Bank (Sep Article on IFC Policy Social
Env Sustainability)

▶ Business Case

Sustainable Development
Assessment Principles
Sustainable Dealing: A New
▶ BellagioSTAMP
Exemplar

▶ Sustainable Business: A New Paradigm

Sustainable Development in MSMEs

▶ Sustainable Development in SMEs

Sustainable Decision-Making Tools

▶ Sustainability Assessment Models

Sustainable Development in Small-

and Medium-Sized Enterprises
Sustainable Design
▶ Sustainable Development in SMEs
▶ Design for Environment

Sustainable Development in SMEs

Sustainable Development S
Emma Murphy
▶ Business Case for CSR Battersea, London, UK
▶ Corporate Governance as a Tool for Alleviat-
ing Developmental Issues
▶ Corporate Social Innovation Synonyms
▶ CSR and Africa
▶ CSR and Poverty Corporate social responsibility in SMEs; CSR
▶ Ecological Economics and SMEs; Entrepreneurship in sustainable
▶ Environmental Ethics development; Social capital in SMEs; Sustain-
▶ Global Environmental Management Initiative ability in SMEs; Sustainable development in
▶ Intergenerational Equity MSMEs; Sustainable development in small- and
▶ Legitimacy Theory medium-sized enterprises
S 2436
Definition
Sustainable development in SMEs can be defined as
the concept and practice undertaken by small,
micro-, or medium-sized businesses which
embraces business conducted in a socially respon-
sible manner with regard to the way they relate to
local and global social, environmental, and eco-
nomic issues. The definition infers long-term over-
all commitment to maintaining equilibrium
between social, environmental, and economic con-
cerns rather than short-term profits and ad hoc, bolt-
on practices. It is a relatively new subject area
emerging in management literature in recent years,
but with a paucity of research into the practice of
SMEs and frequent conflicting misconceptions of
definition of the concept. Consequently, the concept
is sometimes manipulated to fit in with any conve-
nient or preconceived notion and is often equated to
the same meaning as “sustainability” which is more
closely linked to the management approach of CSR,
thus inferring that sustainable development (SD)
offers a feasible business approach to maintain the
current status quo. Sustainable development is also
associated with the effect action taken in the present
has on the future, especially in relation to finite
resources and climate change. Conversely, it is
often defined purely in ecological terms in relation
to SMEs. In the extreme, seen through the deep
ecological paradigm of SD, for example, it has
been surmised that modern technological develop-
ment is an anathema to nature and, if taken in this
context, would bode the end of SMEs through devo-
lution of the modern industrial world, while social
ecology reinforces the relationship between human-
ity and ecology with the need to bring them back
into symbiosis. Sustainable development in SMEs
as a concept is not, however, about ecology in
isolation because it focuses on how SMEs are intrin-
sically connected with the way they relate to local
and global social, environmental, and economic
issues in order to thrive as entities.
Introduction
SMEs are an extremely heterogeneous group of
organizations, operating in very disparate
Sustainable Development in SMEs
markets across the globe under unique condi-
tions, but can be divided into three size-related
enterprise subsections, namely, medium-sized
business, small enterprise, and microenterprise.
These range, in general terms, from organizations
of up to 250 employees – through those with less
than 50 employees – to those with 10 or less,
respectively. The European Commission on
Enterprise and Industry (2010) defines SMEs as
such: medium-sized (<250 employees, 50 mil-
lion turnover, or 43 million balance sheet total);
small (<50 employees, 10 million turnover, or
10 million balance sheet turnover); or micro-
(<10 employees, 2 million turnover, or 2
million balance sheet total). Naturally, the
macrodifferences between those SMEs which
operate in a developed economy such as the
United Kingdom or the United States, in an
emerging economy such as Brazil or India, or
those in severely challenging environments such
as in sub-Saharan Africa, cannot be understated.
In addition, underlying microfactors as to why
SMEs engage in responsible behavior are less
than clear-cut and do not simply depend on firm
size, rather other dependent factors, namely, vis-
ibility, resource access, and scale of operations
(Udayasankar 2008). Access to resources and
differentiation are two very commonly cited
motivating factors, however, and there are under-
lying themes and issues which pervade all SMEs
to certain degrees. SD is an issue which affects
every single living being as well as those not yet
born on the earth and as a result is infinitely
complex and interrelational, much like the fragile
ecosystem on which we all depend.
Sustainable development in entities falling
into the aforementioned categories is an ever
evolving subject open to interpretation and
debate. It can, for example, be broken down into
four commonly recognized ecological functions,
namely, source function referring to delivery of
natural resources to the economy (energy car-
riers, agricultural land, or biological resources);
sink function referring to the possibility of dis-
posing waste; life support function, a set of func-
tions performed by land, water, and air essential
to sustaining life and human health; and welfare
function including services that maintain health
Sustainable Development in SMEs
and contribute to human well-being. SD is not,
however, about ecology in isolation and is also
not the preserve of large corporations and gov-
ernments but is inclusive of all enterprise, orga-
nizations, and individuals because the challenge
is for all entities to change the way they relate to
local and global social, environmental, and eco-
nomic issues. Clearly, sustainable development
means different things to different people, but the
most frequently quoted definition is from the
report from the United Nations World Commis-
sion on Environment and Development entitled
Our Common Future (also known as the
Brundtland Report, 1987) “Sustainable develop-
ment is development that meets the needs of the
present without compromising the ability of
future generations to meet their own needs”
(World Commission on Environment and Devel-
opment 1987). Within this definition, three core
areas are present; economic sustainability
relates to how SMEs are enabled to continue
for an indefinite time, social sustainability con-
tributes to the social well-being of the society
and individuals in which the SME operates now
and in the future, and environmental sustainabil-
ity involves maintaining natural capital and
equilibrium in the natural environment to
a certain degree. These three equally important
factors are intrinsically interrelated but are com-
monly held to be in conflict with each other, or
issues to be treated separately or not at all. The
challenge of sustainable development in SMEs
is to reject the idea of continuing in an
unchanged manner and not to accept
a continuation in development without equal
consideration given to all three prerequisites of
sustainable development in order to safeguard
humanity’s and ecology’s future. The UK gov-
ernment currently cites the following priorities
in sustainable development (DEFRA 2010):
• Sustainable consumption and production
• Climate change and energy
• Natural resource protection and environmen-
tal enhancement
• Sustainable communities
Changing behavior in SMEs is also acknowl-
edged as being a core theme which is inextricably
linked to all of those priorities.
2437 S
Due to the widespread misunderstanding of
the concepts of sustainable development, sustain-
ability, and CSR, and hence poor utilization and
assimilation of them, coupled with the complex-
ities and differences in industry types, sizes, and
“DNA” of small- and medium-sized businesses,
there are many barriers to resolution of deep
economic, environmental, and social issues
which SMEs affect and are affected by. More-
over, there is the challenge of uncertainty and
lack of know-how concerning how SMEs can
change, but on the other hand, it has been
observed that SMEs and the networks which
they function in are sufficiently knowledgeable
about economics, society, and ecology to begin to
tackle some of the changes that need to be put into
effect. One assumed barrier is very limited under-
standing of what SD means within SMEs. Despite
this, SMEs do engage in some forms of SD prac-
tice in their daily work but often do not label it as
such or document it in a CSR or sustainability
report (although the trend toward SMEs using
GRI guidelines to report on nonfinancial aspects
of their businesses is growing).
The bulk of current literature on sustainable
development and social responsibility relates to
larger organizations and multinational corpora-
tions. Those which concentrate on SMEs pre-
dominantly focus on the environment. Limiting
the investigation to only one aspect of sustainable
development out of three (i.e., environment)
ignores the fundamental challenge of the syner-
getic relationship of environment, society, and
economy. In turn, in practice, by treating social,
environmental, and economic as well as short- S
and long-term goals in isolation, it prevents
SMEs from pursuing sustainable development
which demonstrates a convergence between all
three goals. This holistic approach is now thought
to create the conditions for the possibility of
differentiation and business excellence in larger
firms and has also been proven to be effective in
a number of small ones (Jenkins 2004). The busi-
ness case for corporate social opportunity (CSO)
is well documented for large organizations, but
there are relatively few studies on the impact
of sustainable development on SMEs. SMEs
making a business case for CSR state a variety
S 2438
of benefits of responsible business practices, such
as improved image and reputation, better market
position, more business, increased employee
motivation and cost savings, and increased effi-
ciency (Jenkins 2004).
Micro-, small, and medium enterprises consti-
tute the bulk of the private sector in most devel-
oping countries and can contribute significantly
to economic growth, employment creation, and
poverty reduction. Around 80% of enterprise
globally is carried out by SMEs. Furthermore,
they constitute an even higher percentage of
enterprise for the EU and North American
regions. In terms of agriculture and manufactur-
ing, somewhere in the region of 70% of the
world’s production is carried out by SMEs,
a large proportion of which is undertaken by
manual labor. As such, sustainable development
presents formidable challenges to SMEs, and
given the sheer number of small firms in any
country and their significant contribution to
employment and the economy in terms of added
value, countries, corporations, and development
agencies alike are starting to realize that the trend
toward sustainable development cannot be
maintained without the inclusion of these firms.
Consequently, a number of measures have been
added to their economic policies to facilitate the
adoption of sustainability by SMEs. Despite this,
SMEs face formidable challenges both internally
and externally. Conversely, they are also being
presented with monumental opportunity, given
the right conditions and approach. Since this
entry primarily deals with sustainable develop-
ment within SMEs, it focuses on some of the
generic challenges and opportunities faced by
SMEs in light of issues currently being raised.
The broad view of the business case for CSR
enables the firm to enhance its competitive
advantage and create synergistic relationships
with its stakeholders, in addition to realizing
gains from cost and risk reduction and legitimacy
and reputation benefits, the latter two of which
have much less importance for SMEs. SMEs
often have a high potential of stimulating inno-
vation and sustainable initiatives due to their
flexibility and risk taking ability. New features
of entrepreneurship within SMEs are developing
Sustainable Development in SMEs
such features as social responsibility, competi-
tiveness, progressiveness, knowledge generation
and utilization, innovativeness, dynamism, and
the seeking of business benefit which creates
social value or responsible business. Competi-
tiveness and progressiveness are directly
connected to the implementation of sustainable
development in enterprise.
As permeation of knowledge around issues of
sustainable development in pursuit of innovation
is viewed as being vital throughout the firm, the
complexity of developing organizational norms
and values which support SD is a critical issue.
Generally, it is believed, however, that the com-
plexity associated with embedding sustainable
development within organizations will be less in
an SME due to firm size, localization, and the
prevalence of interdepartmental and job role
overlap. However, the tools for knowledge shar-
ing and for enabling a culture of learning may not
be as developed and may need to be instilled and
cultivated within the organization. Stakeholder
engagement initiatives in small- and medium-
sized firms, as well as employee engagement
with the community through volunteer programs
and educational initiatives, for example, can
facilitate better dialogues between stakeholders,
as well as cohesion within the firm, if executed
strategically by using a firm’s core competences
and aligning firm values both internally and
externally. Training is another intrinsically bene-
ficial method of increasing an SME’s ability to
deal with economic, environmental, and social
sustainability, but cost and resistance to change
may be two of a number of prohibitive factors in
stimulating a culture of change for SD.
Management and leadership are further cru-
cial components in creating such a culture. The
strong influence that leadership has on the rest of
the organization is one of the determining factors.
Managers and leaders, together with sustainabil-
ity and CSR professionals, can help to lead by
example and enhance communication and inter-
action in all levels in the organization. According
to Murillo and Lozano (2006), one of the core
dimensions of sustainable development in SMEs
is of the leader’s perception of and attitude
toward sustainable development. Studies on
Sustainable Development in SMEs
leadership have demonstrated that barriers to
SMEs’ involvement in sustainable development
are more influenced by the owners’ or managers’
perceptions and lack of know-how. This is often
compacted by a lack of human resource. That is,
one person deals with many functions and has
little time to spend on SD initiatives.
Challenges to and Opportunities in
Sustainable Development in SMEs
Entrepreneurial activity creates jobs and self-
employment possibilities, and consequently
higher income possibilities. Hence, competitive-
ness of entrepreneurial enterprises is a very
important factor today and is interrelated with
sustainable development. Economic growth is
directly correlated with poverty reduction
coupled with an equitable distribution of wealth,
especially in low-income economies in which an
SMEs struggle to thrive is the most pronounced.
MNCs often create poverty disparity in society,
while SMEs tend to reduce them (WBCSD 2007).
Taking this into consideration, essential to fast
developing economic conditions is the flexibility
and dynamism of SMEs.
A number of barriers or obstacles exist which
impede SMEs thriving including limited
resources – cost and time – for sustainable devel-
opment initiatives, limited access to policy
makers, limited capacity to bear high transaction
costs, and a reduced incentive to follow compli-
ance in some firms with low visibility and weak
internal drivers.
Limited or nonexistent capital resource for
sustainable development initiatives is
a common denominator for nonactivity within
a large proportion of SMEs citing survival as
the biggest challenge to their business.
According to the World Bank (2004), limited
access to finance often constrains development.
One of the World Bank’s strategic priorities,
particularly in high-risk or low-income coun-
tries, is to support the development of SMEs by
indirect financing via financial intermediaries
(often MNCs) and by indirect institution-
building support via specialized regional small
and medium enterprise (SME) development
facilities.
2439 S
Economic sustainability of communities is
absolutely essential. In terms of economic sus-
tainability of a community, SME activity very
seldom outsources or redeploys to other coun-
tries, which safeguards local jobs and commu-
nity. Furthermore, in developing and low-
income nations, SMEs tend to prevent worker
migration under thriving conditions, that is,
workers do not leave in search of a better living,
and hence, depletion of the local workforce and
community is avoided. As such, it is considered
vital by organizations such as the World Council
on Sustainable Development that government
policies facilitate a favorable economic and polit-
ical environment to SME entrepreneurial creation
and continuation.
As limited access to finance has often
inhibited SME development, the risk of which
being particularly in high-risk or low-income
countries, there are a number of avenues which
policymakers, (potential) strategic partners, and
SMEs themselves can do to alleviate this
obstacle. Governments, for example, could
initiate well-considered taxation policies to
encourage SMEs to undertake more sustainable
practices or offer tax relief to SMEs when they
execute specific SD initiatives, especially when
they have a direct positive impact on the local
area in which they operate and/or relieve the
financial, social, or environmental burden off of
the state. In addition, public-sector procurement
policies have been created in some circumstances
in order to incentivize SMEs to be able to tender
for supply contracts more easily. In order to fur-
ther encourage SMEs to engage in more socially S
and environmentally responsible behavior, feasi-
ble procurement criteria encouraging sustainable
development, not purely based on cost, can be
established. In many circumstances, incentives
are designed with larger organizations in mind
and consequently can have an adverse effect on
how micro- and small enterprises in particular
operate.
Often environmental protection is viewed in
SMEs as a burden and not an opportunity,
whereas many environmental protection mea-
sures can improve competitiveness of industries,
focusing on not only low-hanging fruit, but also
S 2440
long-term aims within reducing, reusing, and
recycling but also innovation in process and
production. Again, leadership and values are
key to enabling this. Best practices within envi-
ronmental compliance need to focus on the
opportunity to garner interest within SMEs.
Each firm has only limited bargaining power,
but with assistance, SMEs can set up and develop
their regional associations or partnerships to
source and procure their raw materials, as well
as pool resources. This may produce economies
of scale that makes it easier for suppliers to pro-
duce and result in lower costs.
As the world’s major suppliers of goods and
perishables to the developed and emerging
markets, SMEs are also intrinsically linked to
MNCs through the supply chain. Responsible
business is now largely considered as a strategy
for a corporation’s sustainable development, and
due to the trend of MNCs engaging in corporate
social responsibility (CSR) practices, moving
away from low accountability and transparency
toward more responsible business practices such
as raising nonfinancial reporting standards by
using Global Reporting Initiative (GRI) guide-
lines, SME suppliers to MNCs are now generally
being required to be more accountable in the
supply chain. The challenge for MNCs is to
work more closely with SMEs in order to fulfill
their obligations without causing damage to SME
prosperity.
SMEs often not only require help with access
to capital and favorable economic conditions to
enable more responsible business practices but
also require help implementing environmental
changes not only to reduce costs but also in
order to enable new product development.
A large proportion of practices in SMEs relate
to environmental measures such as reducing
energy consumption and pollution. However,
systems may not be in place to effectively reduce
raw material use and wastage by reviewing pro-
cesses, by reducing paper printing, reducing
energy use, reducing wasting recyclable and
reusable items, and so on. Systems to monitor
effectiveness of sustainable development mea-
sures need to be put in place. Through the evolu-
tion of relevant monitoring systems to check the
Sustainable Development in SMEs
efficiency of specific initiatives in energy, raw
materials, and waste reduction, SMEs can
become more proactive and agile to the changing
demands of sustainability. Strategic alliances and
governmental assistance further strengthen an
SME’s ability to deal with the challenges.
In doing so, this can also enable firms and
individuals to come up with new processes and
products – enabling incremental and more sub-
stantial innovations.
The Stem Review on the Economics of
Climate Change insists that there is a need for
rapid adaptation to face the challenges that cli-
mate change presents. Climate change has signif-
icantly shaken up the sustainability debate in
a multitude of ways, but how has it affected
SMEs? Often, with no direct access to interna-
tional and local capital markets, the burden of
fixed costs of environmental regulation compli-
ance can be major obstacles to SMEs pursuing
more sustainable business practices. Certainly,
market demand can promote the use of environ-
mentally friendly products, but often the demand
is not customer-driven. However, core areas exist
which limit the capacity to produce innovations,
integral to environmental sustainability. This
capacity can be particularly restricted by a lack
of finance, management difficulties, workforce
problems, lack of information, and a lack of intel-
lectual property management.
Social responsibility of the organization
implies business, moreover business decision
makers, be responsible for commercial activity
and decisions. Social responsibility, despite
enduring criticism and cynicism from several
quarters, is now becoming to be understood as
a benefit for the firm and for society. Understood
as such, by taking its core competences and
respecting the values of the enterprise, a firm
can mobilize itself to do well while making
a profit. Companies which take responsibility
for their environment and the people within it
are more able to react and change under testing
circumstances. By seeking the involvement of
those affected by the companies’ actions, prac-
ticing open communications and treating all
employees with fairness and respect, by engaging
in dialogue with the local community and society
Sustainable Development in SMEs
as a whole, a firm is better informed and therefore
prepared for the challenges that the present and
the future hold.
Naturally, SMEs are very often already very
deep rooted in the community in which they
operate and play a vital role in the cohesion of
society on the local level. Community awareness
is often strengthened in SMEs since the busi-
nesses are generally localized. Sustainable devel-
opment for the community makes good business
sense, as many SMEs are already aware, but what
some lack is the ability to utilize this capability in
order to optimize community buy-in as a way of
promoting good company image and reputation,
not only with customers but also other key stake-
holders, hence improving business opportunities.
SMEs could make their business better known to
their local community and develop interactions
with educational organizations, with local gov-
ernmental organizations, with NGOs, and with
other potential strategic partnerships.
As mentioned previously, the demands of sus-
tainable development and the complexities
involved with the need to secure a future for all
are high. Through practicing responsible business,
strategic partnering can enable resource sharing
and pooled innovation investment with other
like-minded SMEs not only in the same sector
but also across divergent industries. Just as large
MNCs engage in strategic partnerships to gain
sustainable competitive advantage by creating
synergies, SMEs have the potential to do the
same. Each individual SME will have only limited
resources, so pooling together resources on pro-
curement, on a specific aspect of product develop-
ment, or implementation, could lower each SME’s
marginal cost and improve efficiency.
Social responsibility in SMEs also refers to
employee welfare. In the developed world, what
is important to the firm is the minimizing of attri-
tion rates and sick days taken, as well as optimiz-
ing employee motivation and performance. In
emerging and low-income countries, however,
welfare of employees has more drastic implica-
tions. The much publicized 2010 case of a Chinese
workers committing suicide at Foxconn, a supplier
to electronics companies, such as Sony, Dell, and
Apple, highlighted deep-seated issues within labor
2441 S
practices. SMEs, whose ability to remunerate well
is even lower than that of large organizations like
Foxconn, and in which working conditions may
also be considered far more severe, are on the
other hand, more often localized and tied to the
community in which they operate. Migration is
thus deterred creating a stable social environment.
Limitations to migration are important to sustain-
able development since mass migration creates an
erosion in social and economic cohesion, espe-
cially in poverty-stricken areas.
Unlike the burgeoning “knowledge economy”
of many of the world’s multinational corporations
(MNCs), SMEs in parts of the developing world
are still very much associated with unskilled labor
which has a much lower income distribution.
Inequality and poverty are thus often attributed
as being barriers to sustainable development in
SMEs. It has been argued that it is necessary for
agro-dependent economies to transform into
industrial and service-oriented economies. The
role of governments is seen by some as to make
programs which incentivize workers to return to
their native countries or local area and make favor-
able conditions for entrepreneurial business.
In order for SMEs to optimize their social
responsibility toward workers, suitable training
could be considered to improve job efficiency
and contentment but also to create future business
opportunities. Training allowances are sometimes
granted by governments to workers in SMEs as an
incentive to stimulate SME activity. Current think-
ing on idea creation and customer satisfaction, for
example, no longer relies on a purely top-down
management approach but requires a bottom-up S
one also so that the values and capabilities of the
firm are embedded. Granting managers access to
information at grassroots level can aid a firm’s
sustainability performance.
To sum up, the issue of sustainable develop-
ment in SMEs is a complex one, with a multitude
of variables affecting buy-in. When considering
sustainable development initiatives, firms need to
consider all three facets of SD and not to treat them
as a bolt-on. They also need access to finance from
financial institutions, which is sorely needed. In
order to encourage buy-in, governments, NGOs,
and larger organizations, including financial
S 2442
institutions, can offer financial support, learning,
knowledge sharing, and know-how to SMEs in
order to create synergy in the pursuit of sustainable
development. Last but by no means least, there is
no one-size-fits-all approach to this subject; when
considering adopting more responsible behavior,
firms need to first undertake a needs analysis and
then tailor their initiatives to suit firm size, capa-
bility, and resource.
Key Issues
It can be argued that the urgency of the social,
environmental, and economic issues surrounding
sustainable development transcends the need for
a concrete definition and rationalization of sus-
tainable development as a term. What becomes
increasingly vital, despite the absence of a widely
agreed definition, is practical and innovative
solutions to the challenges of the issues SMEs
are facing in relation to sustainable development
that can be translated into feasible businesses
practice for organizations of differing sizes.
Dynamism of modern entrepreneurial enterprises
is essential in today’s fast developing and press-
ing conditions, and business capacities to change,
to renew, to change the forms and spheres, to
develop, and to be more effective are the key
challenges for SMEs in sustainable development.
Future Directions
There is a general lack of academic research on
many areas within sustainable development in
SMEs. One of the more pressing issues is that of
bringing definitions of sustainable development,
sustainability, and CSR closer together so that an
integrated approach is understood and managed
by all. Since the bulk of research has placed
emphasis on large corporations, and largely
ignored SMEs, further investigation into how
SMEs can deal with the challenges and also profit
from the opportunities of sustainable develop-
ment will be timely and relevant. Other areas
which are worthy of study in the future are what
can be learned from responsible practices in
Sustainable Development in SMEs
small- and medium-sized enterprises (SMEs) for
other organizations, what the difference between
SMEs and large enterprises in the best practices
in developing initiatives is, whether sustainabil-
ity reporting in SMEs is beneficial, and how
intellectual property management in SMEs can
aid a transition to sustainable development.
Cross-References
▶ Business Case for CSR
▶ CSR
▶ Innovation
▶ Social Capital
▶ Sustainability
▶ World Business Council for Sustainable
Development
References and Readings
DEFRA- UK Govt Sustainable Development – Key
Priority Areas. (2010). http://www.defra.gov.
uk/sustainable/government/what/priority/index.htm.
Last accessed 13 June 2010.
European Commission – SME Definition – Small and
Medium Enterprises (SME) – Enterprise and Industry.
(2010). http://ec.europa.eu/enterprise/policies/sme/
facts-figures-analysis/sme-definition/index_en.htm.
Last accessed 08 June 2010.
Jenkins, H. (2004). A critique of conventional CSR
theory: An SME perspective. Journal of General
Management, 9(4), 55–75.
Kusyk, S. M., & Lozano, J. (2007). SME social perfor-
mance: A four-cell typology of key drivers and barriers
on social issues and their implications for stakeholder
theory. Corporate Governance, 7(4), 502–515.
Murillo, D., & Lozano, J. (2006). SMEs and CSR: An
approach to CSR in their own words. Journal of Busi-
ness Ethics, 67, 228–240.
Udayasankar, K. (2008). Corporate social responsibility
and firm size. Journal of Business Ethics, 83, 167–175.
World Bank Institute. (2004). Can small be responsibil-
ity? The possibilities and challenges of corporate
social responsibility among small and medium enter-
prises. Washington, DC: World Bank Institute.
World Commission on Environment and Development.
(1987). Our common future. Oxford, UK: Oxford
University Press.
World Council on Sustainable Development – Promoting
Small and Medium Enterprises for Sustainable Devel-
opment. (2007). http://www.wbcsd.org/DocRoot/
pZgjPEvxdGu6hk9noQUM/PromotingSMEs_latest.pdf.
Last accessed 13 June 2010.
Sustainable Energy Management and CSR 2443 S
keeping energy for the future; Ensuring respon-
Sustainable Development Indicator sible continuing power supply or source for the
Development future; Helping to offset the carbon footprint
caused by unsustainable energy sources; Possible
▶ BellagioSTAMP future expansions; Sustainable development

Sustainable Development Definition

Innovation
Sustainable means that something can continue to
▶ Sustainability-Oriented Innovation be used or relied upon as a resource without being
depleted or run out. A material or resource (such as
energy) is sustainable if it can be created, used, or
Sustainable Development harvested without damaging the environment; if it
Measurement is renewable, its supply will not run out. And if it
has an afterlife, its afterlife form(s) does not have
▶ BellagioSTAMP ill effects or more specifically harm the environ-
ment such as polluting the rivers or water stream.
Unsustainable energy resources include,
Sustainable Development of among other things, petroleum which is derived
Tourism from fossil fuels and coal. Limited in supply, they
are also not sustainable for various other reasons.
▶ Sustainable Tourism Firstly, combustion of these products produces
dangerous pollutants in the air, and these include
carbon monoxide, sulfur dioxide, and other harm-
Sustainable Development Report ful gases or elements. Secondly, getting petro-
leum means mining, and the latter is damaging
▶ Reporting Sustainable Development to the earth and surrounding environment.
Thirdly, other products derived from petroleum,
including nonbiodegradable plastics and carcino-
Sustainable Energy Management genic synthetic chemicals, have long-term nega-
and CSR tive effects on the environment.
Sustainable energy development is about the
Liyanage Chandratilak De Silva1 and Kim Cheng provision and level of energy services; what is
Patrick Low2,3 more, it is the level of energy services, rather than S
1
Universiti Brunei Darussalam, Sultanat Brunei simply the amount of energy consumed, that
Darussala, Gadong, Negara Brunei Darussalam, determines the satisfaction of basic human
Brunei needs and humankind’s quality of life and stan-
2
Universiti Brunei Darussalam, Gadong, Brunei dard of living. An imperative need exists to con-
Darussalam vert to renewable energies while having
3
University of South Australia, Adelaide, sustainable human living in place as well as
Australia growing a sustainable economy for all of us.
Energy, rather than acting as an obstacle to
growth and sustainable development, can con-
Synonyms tribute to success in those areas critical to sus-
tainable human development such as urban/rural
Development of new renewable energy technol- development, manufacturing/industrial develop-
ogies; Doing business responsibly and up- ment, and agriculture and forestry.
S 2444
Energy and its usage, or more specifically the
pattern of its usage, is central in fulfilling human
needs, reducing poverty, improving women’s and
children’s welfare, promoting overall human
well-being, and preserving the environment.
Introduction
Urban and Rural Development
To improve human living as well as to ensure
responsible continuing power supply for the
future, urban development can be attained, for
example, by providing low-cost, energy-efficient
intra-urban public transportation and community
waste management programs. Such activities too
can simultaneously generate jobs, helping the
people as a whole while improving the physical
environment in which the community lives.
There is all the more the need to promote
energy efficiency in both urban and rural areas,
offices, new plants, and equipment. Also, there is
a need to encourage the development and dissem-
ination of renewable energy technologies.
There is also the undeniable need to improve
the quality of life for women and children, par-
ticularly the poor in both rural and urban areas.
Among other things, this can be done by reducing
the time spent gathering firewood and breathing
fire exhausts in an enclosed area (which is dirty
and unhealthy).
Manufacturing/Industrial Development
In manufacturing/industrial development, sus-
tainable growth can be achieved by the introduc-
tion of advanced technologies that reduce energy
requirements in both the basic materials indus-
tries and the manufacturing industry. Companies
can also produce more energy-efficient products.
Energy-efficient manufacturing is one of the key
areas for sustainability in an industrialized
nation. In a manufacturing system, an effective
energy control system has to be developed, using
information of sensors and in-process measure-
ment and a suitable energy efficiency perfor-
mance measure. In a large manufacturing
plant, the company should set up Energy Key
Performance Indicators (EKPI) with relevant
Sustainable Energy Management and CSR
CSR policies such as use of renewable energy
as opposed to use of nonrenewable energy, effi-
cient energy management, etc. This way,
a company can continuously monitor the overall
performance of the company with respects to the
preset EKPIs and CSRs. Similar use of sensors
and continuous monitoring can be extended to
energy efficiency and sustainability in domestic
environments (DeSilva et al. 2009; DeSilva et al.
2012).
Agriculture and Forestry
In agriculture and forestry, energy can be made
sustainable and last for the future through the use
of biomass waste streams and biomass planta-
tions that in turn help restore ruined land while
providing employment and sustainable energy
supplies. Cooperatives may also be set up to
promote energy conservation as well as to pro-
mote employment and overall raise the standards
of living among the people in the rural areas. Use
of energy efficient agricultural equipment and the
use of efficient harvesting technologies to reduce
energy consumption are two other main issues
here. As in the manufacturing concern, one can
set up EKPIs for agriculture sector and their
related CSR issues such as the reduction of cut-
ting existing trees and vegetation for agriculture,
replanting, efficient agricultural waste disposals,
and an increasing awareness of recycling of agri-
cultural refuse and other CSR concerns.
Types of Renewable Energy Technologies
Numerous types of energy technologies exist for
sustainable development. In recent times, renew-
able energy technologies have taken center stage.
Renewable energy (naturally replenished energy)
are energy sources that come from natural
resources such as sunlight, rain, wind, tides, and
geothermal heat energy. The term renewable
energy technology is often defined in many dif-
ferent angles. Energy technologies like solar
photo voltaic, wind, biomass, biofuels, hydrogen,
hydropower, and biodiesel are often referred to as
renewable energy sources. Some researchers and
politicians group nuclear energy into the renew-
able energy category. Though this is a half-true
factor, we consider it in this group. Renewable
Sustainable Energy Management and CSR
energy technologies are critical contributions to
sustainable energy development as they generally
contribute to world energy safely, minimizing
dependence on fossil fuel resources as well as
giving opportunities for mitigating greenhouse
gases. However, although it looks like these nat-
ural sources of energy have less or fewer destruc-
tive effects to mankind, careful CSR measures
should be adhered before any company takes
part in large-scale energy production using such
technologies. In this section, we look into each of
these technologies and analyze their CSR issues.
Hydropower and Related CSR Issues
Hydropower is the most commonly used and one
of the largest sources of renewable energy. By
converting water in the form of turning a turbine,
usable energy is generated. The waters coming
from the rivers are released through turbines to
generate hydropower. Although this kind of con-
version seems a zero carbon emitting process, it
can easily disturb and harm fish, wildlife, and also
people living around the riverbanks. Hence, the
companies who manage hydropower facilities
should take related CSR issues, rectify them, or
compensate them. Companies should look into
the sustainable development of the habitats
when a hydropower plant is planned to be
commissioned in a given area. They should look
into the relocation of the plants, wildlife, and
basic human needs that would be disturbed by
the new installation. Also, they should look into
the long-term effects on the environment such as
changes in the rain pattern or other climatic
changes around the hydropower plant.
Biomass or Bioenergy and Related CSR Issues
Biomass fuels can be obtained from industrial
waste of wood products, agriculture waste, and
other human waste. Biomass can replace coal in
power plants because it produces less sulfur diox-
ide than coal. However, there is environment
impact, due to the fumes produced during the
production of biomass or bioenergy have to be
dealt with proper CSR in mind. If a company
plans to install a large-scale biomass energy pro-
duction facility they should look into the inherent
fumes and burning smell that may disturb the
2445 S
community. Also, it will contribute to increasing
the pollution index around the facility. Biomass
burning emits many products of incomplete burn-
ing such as small particles, carbon dioxide (CO),
nitrogen dioxide (NO2), benzene, and other haz-
ardous gases. These products have many health
hazards to humans and animals around, and com-
panies should exercise good care before installing
a biomass facility in the vicinity of a human hab-
itat. They should monitor the environment and
take necessary steps to install adequate filtering
(or support new research opportunities to find
ways of reducing the effect) before releasing the
toxic fumes to the atmosphere.
Solar Energy and Related CSR Issues
Solar energy is termed as a very clean type of
energy with zero carbon emission. To get clean
green energy, we need a solar panel and a good
exposure to sunlight. There is no carbon dioxide
emission or no radioactive waste during the gen-
eral operation of a solar energy plant. But we
should not forget that the manufacturing of solar
panels and subsequent decommissioning of large
solar panels after their operation life span pose
a large CSR issue for the companies dealing with
them.
Solar panels have to be manufactured from
raw materials similar to silicon chips. At first,
the raw materials have to be mined. For silicon-
based solar cells, we need quartz sand, and for
thin film–based solar cells, we need metal ore.
Then we need the raw material to be treated
(purification, crystallization, and wafering). All
these steps produce air pollution and heavy metal S
emissions. Also, they consume energy which in
turn pollutes the air by emitting greenhouse
gases. The companies who deal with solar cell
manufacturing should have a good awareness of
the amount of the environment pollution during
production of the solar panels, and they also
should take responsibility in disposing old and
dysfunctional solar panels. This means that
the companies have to be socially responsible
during the manufacturing process and the
decommissioning process even though the solar
energy is known to be a zero carbon emission
process. However, according to researchers, in
S 2446
the process of producing the same amount of
electricity by using solar panels and fossil fuels,
the solar panels process emits one tenth of that of
greenhouse gases when electricity is produced by
fossil fuels (www.lowtechmagazine.com).
Wind Energy and CSR Issues
Wind energy is another clean energy source with
zero carbon emission while in operation (Mathew
2006). To get clean green energy from wind,
a good wind velocity, a wind turbine, and
a generator are required. As with the solar energy,
for wind energy also, there is no carbon dioxide
emission or no radioactive waste during the gen-
eral operation of a wind energy plant. However,
the manufacturing of the wind turbine and related
equipment will contribute to the carbon footprint,
and it is the social responsibility of the manufac-
turer to reduce the carbon emission during
manufacturing.
Nevertheless, the biggest social impact with
wind energy plants is the size of the plant and the
noise generated due to the rotation of blades.
Therefore, wind energy–producing companies
should seek public opinion and should give due
attention to the residents around a wind farm
before and after the commission. The main CSR
issue here is that the wind energy companies
should operate in the comfort zone of the general
public as the installation of such facilities can
propagate the ill effect of them far beyond the
physical boundaries of the installation. They can
block the view of the residents and cause noise
and disturbances to the household electrical
equipment at the same time becoming an eyesore
to a once peaceful neighborhood. Hence, the
companies should do a thorough analysis of the
facts using their CSR measures to reduce the
damage.
Geothermal Energy
Geothermal energy is the heat that comes from
the Earth. It is a clean and sustainable source of
energy. Geothermal energy can range from shal-
low ground hot water to hot water and rock found
a few miles beneath the Earth’s surface. Geother-
mal energy can be extracted from hot dry rocks at
depths of 3–5 miles below the Earth surface.
Sustainable Energy Management and CSR
Access to these resources can be performed by
injecting cold water down one well, circulating it
through hot fractured rock, and then extracting
off the heated water through another well. Many
companies have taken steps to utilize geothermal
energy as a usable energy source, but they should
exercise extra caution in doing so. Often geother-
mal energy is used for hot water heating and
domestic heating. This kind of heat energy is
not possible to transport a long distance as the
loss is very high. Hence, the source of the geo-
thermal energy will be close to the energy users
dwelling. This will pose a potential environmen-
tal threat to the people and the habitat. Clearing
the vegetation and digging holes to extract the
geothermal heat will disturb the natural environ-
ment around the energy users. Hence, the com-
panies should first consult the occupants of the
village or the people living in the vicinity of the
geothermal source before investing on it and
more so, practice proper CSR policies. They
should conduct a survey on long-term impact on
the water table around the geothermal source and
inform the local authorities well in advance for
consideration.
Nuclear Energy and Related CSR Issues
Nuclear energy is one of the strongest alternatives
to ever depleting fossil fuel–based energy tech-
nologies. It is a very low carbon energy source.
According to a report by the British Energy,
the largest producer of electricity in the UK in
2008/2009, it is estimated that nuclear energy–
based energy output was 42.9 TWh compared to
a meager 9.3 TWh energy output using coal
(www.britishenergy.com). However, when any
company deals with nuclear energy, CSR issue
should be high in the company’s agenda.
Nuclear energy has the ability to generate
a large amount of electricity from a relatively
small amount of input material. However, along
with the useful large percentage of output energy,
it does leave behind the toxic radioactive waste,
leaving a hefty corporate social responsibility for
the energy company to deal with. The energy
company should take a very high responsibility
to deposit the radioactive waste in an appropriate
manner. They should always put safety of the
Sustainable Energy Management and CSR
general public and their workforce before their
own commercial gain and make provision to pro-
tect the environment. The nuclear energy compa-
nies should always participate in the long-term
waste disposal research and governmental con-
sultations to get feedback from external parties.
They should be transparent to the general public
on the issues related to new plant commissioning,
old plant decommissioning, location of nuclear
storage facilities, finding new waste deposit sites,
and finding new better CSR ways as well as
improving the overall efficiency and running of
nuclear energy operations. After the recent
nuclear plant disaster in Fukushima, Japan, it is
vital to understand the cost of production is not
merely the initial and running cost of a plant.
Hence considering a relatively expensive renew-
able energy source is better than having a cheap
high risk energy source. It should factor in to CSR
policies of any new entrant or the existing once.
Biomimicry
Biomimicry can help energy savings and conser-
vation, and it can help to increase energy effi-
ciency. Biomimicry can aid human growth and
sustainable development. What is more, while
many businesses are going green by taking basic
steps to save or reduce the use of resources, many
businesses are taking the back-to-nature idea one
step further. They are learning how to design
products for energy efficiency from the original
designer herself: Mother Nature.
Biomimicry is learning from nature and apply-
ing such learning to technology design and devel-
opment or management to aid sustainable
development. The ways of nature can also be, in
fact, used or applied to save/reduce or conserve
energy.
An innovator (with sustainable energy devel-
opment in mind), at times, sees a process in nature
and connects it to an existing technology, energy
issue, and/or problem. Other times, the innovator
assesses an existing design problem and turns to
nature for help (to conserve energy and overall
ensure sustainable energy development).
Human need: Builders want to conserve energy
and have a more economical means of cooling
large buildings.
2447 S
Nature’s example: Certain African termite
mounds must maintain a constant temperature
of 87 Celsius (189 Fahrenheit) for the fun-
gus crop to survive. To attain this, they con-
struct air vents that constantly move air
throughout the mound, cooling or heating it
to the same temperature as the mound itself.
Biomimetic solution: Architects and engineers
are building several large office complexes
that mimic the termite approach to tempera-
ture control (and this saves energy).
Materials too can be improved upon to save
not only resources but also energy. There is also
a need to reduce wastage and ensure reusing and
recycling. Take the abalone, for example; this
shellfish is known for its delicious meat as well
as for its shell that is as hard as nails. A car could
drive over an abalone shell and have no impact. It
is stronger than any known ceramic, but why? It
consists of an intricate crystal architecture that
allows it to shrug off stress. The ceramics that are
produced commercially are very strong mate-
rials, but brittle and subject to cracking. Scientists
are now looking at natural designs like the aba-
lone inner coating to determine how to reproduce
such a structure synthetically.
Company Examples of Sustainable Energy
Development and CSR
Recently, many large technological companies
have shown interest in participating in sustain-
able energy development to offset their individ-
ual carbon footprint. Below, we discuss two such
initiatives. There are many other such initiatives.
S
Going Green Initiative at Google
Some big companies like Google have taken
steps to support the sustainable energy drive by
going green. One such initiative is that they have
installed solar panels to power their network
servers. Also, they promote the general public to
participate in energy savings by introducing
a facility called Google PowerMeter by which
one can track the home power usage from
anywhere in the world (http://www.google.com/
corporate/green/). However recently Google
PowerMeter online service has ceased his
operations.
S 2448
Tata’s (India) Energy Conservation Program
Tata is one of the leading companies based in
India who made a conscious effort to the sustain-
ability in energy by introducing an energy con-
servation program called “Tata Power Energy
Club.” With the help of this initiative, Tata was
able to bring the sustainable energy and energy
conservation practice to the schools aiming at
much responsive future generation to the present
energy needs (http://school.tatapowerenergyclub.
com/media-corner/press-01apr-10.asp).
Key Issues
Companies may incur costs in effecting sustain-
able energy development, and this may reduce
or diminish their profits; even then, there is no
guarantee that it would be able to recoup, or
recover, their energy investment or costs. As
a major CSR policy, companies should increase
the support for research and development of
sustainable energy technologies. Large compa-
nies should act like role models for smaller com-
panies and individuals in promoting sustainable
energy culture. The value of sustainable energy
development should be one of the values or part
of the corporate culture of today’s businesses
and organizations.
Besides, there is also often the need to find
new or alternative energy resources; energy is
never enough because of unlimited human
wants and demands.
Humankind also needs to learn to lower or
reduce their wants and desires; perhaps, there is
a need to be more simple and lean. Simplicity is
to be acknowledged and appreciated as one of the
key answers to sustainable energy development
and good human living.
Future Directions
So far, much monies and investments are spent
on defense, military, and/or war technologies;
perhaps comparatively speaking, more/addi-
tional monies should be spent on energy and
renewable energies, as well as generating
Sustainable Energy Management and CSR
energies with CSR in mind and reducing any ill
effects to humankind.
Nowadays, we face indeed several prob-
lems, some are natural disasters while others
are man-made problems created by our own
misbehaviors and bad thoughts which indeed
can be avoided, and these can in fact help to
sustain humankind and development. One
such particular problem arises from ideologi-
cal differences or conflicts when men fight
each other, losing sight of human goals and
that we need to undeniably sustain ourselves
and attain the goal that for the ordinary or
average person is happiness in life. Building
peace, cooperation, and collaborations can
really help. Humankind can cooperate or col-
laborate on projects such as building dams,
ensuring good water supplies, reducing wast-
age, conserving energies, and helping to
improve human living conditions as well as
ensuring development, overall betterment,
and growth of the local/country communities
and the greater world community.
It is also felt to move well into the future
that humankind needs to have this in mind –
want not, waste not when it comes to energy
and sustainable development. We need to keep
our wants simple or basic. This is very much
reflected by what The Dalai Lama has once
said, “If one’s life is simple, contentment has
to come. Simplicity is extremely important for
happiness. Having few desires, feeling satis-
fied with what you have, is very vital: satis-
faction with just enough food, clothing and
shelter to protect yourself from the elements.
And finally, there is an intense delight in
abandoning faulty states of mind and in culti-
vating helpful ones in meditation” (The Dalai
Lama 1999: 77).
Additionally, to ensure a viable future, CSR
and green (energy conservation, care for
nature, love for all creatures big or small,
and the environment) proactive sustainable
development values should also be taught to
the younger generation. The young need to be
educated or made aware that we are living in
an interconnected world and that we can
change our path we are on, but changing
Sustainable Enterprise Development
takes some knowledge and effort. The positive
aspects are that moving toward more sustain-
able energy and manufacturing policies will
supply or furnish many healthful and happy
benefits for all.
Cross-References
▶ Buddhist Ethics and CSR
▶ Business for Social Responsibility
▶ Christianity and CSR
▶ Confucian Ethics
▶ CSR and Spirituality
▶ Ethical CSR
▶ Ethical Trading Initiative
▶ Islamic Ethics and CSR
▶ Trust and CSR
References and Readings
De Silva, L. C., Petra, M. I., & Punchihewa, G. A. (2009).
In J. H. Kim et al. (Eds.), Ambient intelligence in
a smart home for energy efficiency and eldercare
(Springer book series, Communications in Computer
and Information Science. FIRA 2009, CCIS 44, Vol.
44, pp. 187–194). ISBN 978-3-642-03985-0.
DeSilva, L. C., et al. State of the art of smart homes.
Elsevier Eng. Appl. Artif. Intel. (2012), http://dx.doi.
org/10.1016/j.engappai.2012.05.002.
Going green at Google, http://www.google.com/
corporate/green/. Accessed 15 July 2010.
http://www.british-energy.com/documents/CSR_Highlights_
Report_28_07_09_FINAL.pdf Accessed 12 July 2010.
http://www.lowtechmagazine.com/2008/03/the-ugly-side-
o.html Accessed 12 July 2010.
Mathew, S. (2006). Wind energy: Fundamentals,
resource analysis and economics. New York:
Springer. doi:978-3-540-30905-5.
Singh, R. (1999). The Dalai Lama. The path to tranquility –
daily wisdom. USA: The Penguin Group.
Tata power energy club, http://school.tatapowerenergyclub.
com/media-corner/press-01apr-10.asp. Accessed 15 July
2010.
Sustainable Enterprise
▶ Sustainable Enterprise Development
2449 S
Sustainable Enterprise Development
Liangrong Zu
Enterprise, Microfinance and Local Development
Program, International Training Centre of the
ILO, Turin, Italy
Synonyms
Green business; Sustainable business; Sustain-
able business development; Sustainable com-
pany; Sustainable corporation; Sustainable
development; Sustainable enterprise; Sustainable
enterprise management; Sustainable organization
Definition
Sustainable enterprise is an organization that can
anticipate and meet the needs of present and future
generations of customers and stakeholders through
creating and innovating new business strategies and
activities that accelerate positive social change,
protect and preserve environmental integrity,
while enhancing business performance. Sustainable
enterprise incorporates principles of sustainability
into each of its business decisions, it supplies envi-
ronmentally friendly products or services that
replaces demand for nongreen products and/or ser-
vices, it is greener than traditional competition, and
has made an enduring commitment to environmen-
tal principles in its business operations. A company
truly becomes a sustainable enterprise when its S
sustainability vision is aligned with its business
goals. This more advanced view of sustainability
requires a clear strategy from the top, as well as
wholesale changes to everything from the way
a company thinks, to its processes and systems
and to the products it produces.
Introduction
Why Sustainability Matters to Enterprise?
Nowadays, if we google the term “sustainability”
or “sustainable development,” we are astonished
S 2450
to find nearly 30 million results involving con-
cepts and definitions, practices, and case studies.
We find that increasingly corporations integrate
the social and environmental issues and chal-
lenges into their business strategy and operations.
For example, General Electric CEO Jeff Immelt
announces a new initiative, “ecomagination,”
committing the mega-manufacturer to double its
investment in environmental products – every-
thing from energy-saving light bulbs to indus-
trial-sized water purification systems and more
efficient jet engines. Backed by a multimillion-
dollar ad campaign, Immelt positions GE as the
cure for many of the world’s environmental ills.
Wal-Mart CEO Lee Scott lays out his definition
of “twenty-first century leadership.” At the core
of his new manifesto are commitments to
improve the company’s environmental perfor-
mance. General Electric vowed to improve the
energy efficiency of its operations by 4 % a year
and double its revenues from relatively clean
products to $20 billion by 2010. Wal-Mart will
cut energy use by 30 %, aim to use 100 % renew-
able energy (from sources like wind farms and
solar panels), and double the fuel efficiency of its
massive shipping fleet. Moreover, in a move with
potentially seismic ripples, Wal-Mart will “ask”
suppliers to create more environmentally friendly
products. IBM has generated $500 million in new
contract signings in two quarters from their Big
Green initiative. Clorox is projecting $40 million
in first-year sales from its GreenWorks line.
Why are companies increasingly committing
themselves to sustainability strategies and what
drives companies to lead to firms’ sustainability
journeys? In response to growing social and envi-
ronmental concerns and challenges, managers
and leaders of organizations, in both the private/
public sector and civil society, are being chal-
lenged as never before to find ways to play
a proactive role in addressing the concerns of
sustainable development, particularly since the
middle-1980s. Sustainability becomes part of
the organization’s DNA in such a way that
every decision is made within the context of
whether or not it supports or detracts from the
organization’s sustainability vision. It is claimed
that we are undergoing the sustainability
Sustainable Enterprise Development
revolution, just like the industrial revolution of
the mid-eighteenth to mid-nineteenth centuries,
which has a profound transformation with world-
wide impact, emerged onto the world stage. The
sustainability revolution is and will create
a pervasive and permanent shift in consciousness
and worldview affecting all facets of society. It
draws its significance and global impact from
a wide spectrum of interests with common fun-
damental values. Like the industrial revolution,
the sustainability revolution is far-reaching and is
having a profound impact, shaping everything
from the places we live and work to the foods
we eat and the endeavors we pursue as individ-
uals and as communities.
Sustainability is not an “in vogue concept”
that is about environment or climate change.
Rather, it is an incredible opportunity for new
business and for existing enterprise to reinvent
their practices. From a business perspective, sus-
tainability has been defined as a company’s abil-
ity to achieve its business goals and increase
long-term shareholder value by integrating eco-
nomic, environmental, and social opportunities
into its business strategies. The results of the
research reveal that leading organizations that
profit at the expense of environmental or social
good is ultimately not sustainable. IBM 2009
survey of 224 business leaders worldwide shows
that 60 % believe corporate social responsibility
has increased in importance over past years. Only
6 % say it is a lower priority. These responses
defy the conventional wisdom that the new eco-
nomic environment dilutes CSR focus. The con-
ditions of a faster, flatter, and more
interconnected world are without question chang-
ing business strategy, as is a greater awareness of
systemic risk and its consequence. These same
conditions make a strong case for a sustainable
approach to doing business, one that recognize
that the long-term health of an organization is
inextricably tied to the well-being of society and
the planet on which we live. To be successful,
businesses are now embracing a relatively new
objective: optimizing their operations to mini-
mize environmental impact improves social out-
comes in a manner that also maximize
performance. Organizations are constantly
Sustainable Enterprise Development
assessing the current and future impact of their
activities. They are introducing innovative pro-
cesses to source, distribute, develop, and produce
goods and services in a sustainable manner. In
taking on responsibility for waste and disposal,
they are charged with reevaluating from product
development to partnerships.
Is Sustainable Enterprise Outperformed?
How companies perform on environmental,
social, and strategic governance issues is having
a rapidly growing impact on their competitive-
ness, profitability, and share price performance.
The Dow Jones Sustainability Index (DJGI) mea-
sures performance of the 10 % of companies from
the Dow Jones Global Index with the greatest
social and environmental commitments. The
DJSI has steadily outperformed the DJGI since
1994. A recent study by global management con-
sulting firm A.T. Kearney reveals that firms with
“true commitment to sustainability” outperform
industry peers in the financial markets. The study,
called “Green Winners: The Performance of Sus-
tainability-Focused Companies during the Finan-
cial Crisis,” found that in 16 of 18 industries,
sustainability-focused companies outperformed
their peers by 15 % in a 6-month period. The
performance differential translated to an average
of $650 million in market cap per company.
Another study of measuring sustainable enter-
prise performance has been done by a Toronto
media company called Corporate Knights. Cor-
porate Knights Inc and Innovest Strategic Value
Advisors have tried to make the sustainability
idea clear and measurable by collecting data on
thousands of global public companies and evalu-
ating them according to the different metrics. In
2009, they announced its fifth annual list of the
100 most sustainable corporations in the world at
the World Economic Forum in Davos. The
Global100 includes companies from 15 countries
encompassing all sectors. They were evaluated
according to how effectively they managed envi-
ronmental, social, and governance risks and
opportunities relative to their industry peers.
The companies have distinguished themselves
through their ability to profit from recognizing
new environmental and social markets. The top
2451 S
100 companies were selected from a pool of more
than 2,000 firms representing large global
indices. These include the S&P 500, MSCI
World, FTSE 350, and Eurostoxx, based on rank-
ings by Innovest Strategic Value Advisors. Com-
panies were rated on a range of criteria that
included strategic governance, environmental
initiatives, and human capital/labor relations
practices.
It is obvious that sustainable enterprises are
more profitable because they have their strong,
recognizable brands, are trusted, and customers
are more loyal and buy the companies’ values
as much as their products. They generate posi-
tive media and are less prone to reputation
damage. Sustainable enterprises innovate solu-
tions to society’s greatest needs. Their products
are leading edge and globally sought after.
They break into new markets and define them.
They see opportunities where others see insur-
mountable challenges. Their practices are
ahead of government legislation. Sustainable
enterprises are proud of their profits. Financial
success allows them to expand their contribu-
tion to society and to reward their staff and
investors.
With the apparent link between sustainability
practices and financial performance, what les-
sons can companies learn during these challeng-
ing economic times? The primary takeaway is to
examine all sustainability practices and deter-
mine how genuinely committed the firm is to
them. If the commitment is less than complete
– where efforts are simply to improve public
relations or catch up with industry leaders – S
and there is little payback, it might make sense
to reduce or eliminate sustainability investments
and redeploy this capital to areas that will help
the company weather the current crisis. How-
ever, if sustainability is transforming the busi-
ness, it makes sense to maintain this
commitment and, where possible, even consider
increasing investments to improve future posi-
tioning. The most sustainability-focused compa-
nies may well emerge from the current crisis
stronger than ever – recognized by investors
who appreciate the true long-term value of
sustainability.
S 2452
Strategies and Disciplines for Sustainable
Enterprise
Where companies should start and where most of
them actually start are two very different places.
For many companies, sustainability efforts have
grown out of their environmental, health, and
safety organizations that have traditionally been
responsible for monitoring and complying with
government regulations. Others have started by
rerouting “green” labels onto their products when
they reach the marketing department. Several
others focus on the manufacturing footprint –
reducing waste while decreasing cost. And still
others find themselves taking an ad hoc approach
with employees taking matters into their own
hands to drive change from the bottom up.
From the standpoint of social dimensions of
sustainable enterprise, the International Labour
Organization of the United Nations emphasizes
on the contribution of enterprises to productive
and equitable economic and employment growth.
In the ILO 2007 Report on Promotion of Sustain-
able Enterprise Development, it provides the
basic conditions for creating opportunity for sus-
tainable enterprise: good governance and social
dialog, equity and economic and social inclusion,
macroeconomic stability and sound management
of the economy, physical infrastructure, and
responsible stewardship of the environment, soci-
ety, and culture supportive of enterprise.
ISIS – Indicators, Systems, Innovation, Strat-
egy – is another approach developed by Alan
AtKisson. ISIS builds on 15 years of successful
practice, with case studies from around the world
and easy-to-use training and planning tools that
translate theory into practice in a way that pro-
vides both practical advice and inspiration. The
method is designed for leading groups of all
kinds on a rapid sustainability journey – from
understanding to analysis and to innovation and
action – using the training, planning, and deci-
sion-support process called the “ISIS Pyramid.”
ISIS is a potent method for creating a whole-
systems view, strategizing successfully for inno-
vative change and accelerating progress toward
sustainability. Building a pyramid for sustainable
development can change the way an organization
views itself and unite its principal players around
Sustainable Enterprise Development
clarified goals and high-leverage strategies for
action, supported by a strong consensus. The
results of the process, whether used as a training
program or as the architecture for high-level
political and economic decision-making, often
exceed people’s already high expectations. This
is not merely the language of a consultant mar-
keting his firm’s wares – this is a report from the
field and a synthesis of numerous case studies and
evaluation forms, from Stockholm to Shanghai
and to Sydney. Pyramid makes doing sustainable
development work faster, more effective – and
much more fun.
Chris Laszlo, the author and cofounder and
partner of Sustainable Value Partners, claims
that creating sustainable value is a way for com-
panies to advance their business priorities, drive
innovation, and achieve competitive advantage.
Doing so in today’s competitive context requires
leading companies to carefully consider the
social and environmental dimensions of their
business activities. In addition to leadership com-
mitment, sustainable value requires excellence in
eight disciplines:
1. Understanding the firm’s current shareholder
and stakeholder value position: Knowing
where and how the company is creating,
destroying, and transferring value to share-
holders and stakeholders
2. Anticipating emerging issues: Tracking key
trends and identifying emerging issues that
may change the firm’s shareholder and stake-
holder value position
3. Setting sustainable value goals: Establishing
specific strategic intent and goals, aligned with
corporate strategy, for creating additional
value for shareholders and stakeholders
4. Discovering sustainable value: Identifying
sources of value through a stakeholder approach
and designing initiatives to capture that value
5. Developing the business case: Creating
a compelling business case that aligns line
managers and financial managers around the
initiatives
6. Capturing the value: Executing and managing
initiatives to ensure value capture
7. Validating results and capturing learning:
Tracking and assessing shareholder value and
Sustainable Enterprise Development
stakeholder value and communicating the
connection between the two
8. Building sustainable value capacity: Develop-
ing the mindset and capabilities needed to
capture shareholder and stakeholder value
The recent study of Nidumolu et al. (2009)
shows that most enterprises go through five dis-
tinct stages on the path to becoming sustainable.
They face different challenges at each stage and
must develop new capabilities to tackle them (see
Table 1).
It is also suggested that smart corporations
follow these simple rules in their effort to become
sustainable:
– Don’t Start from the Present. If the starting
point is the current approach to business, the
view of the future is likely to be an optimistic
extrapolation. It is better to start from the
future. Once senior managers establish
a consensus about the shape of things to
come, they can fold that future into the pre-
sent. They should ask: What are the milestones
on the path to our desired future? What steps
can we take today that will enable us to get
there? How will we know that we are moving
in that direction?
– Ensure that Learning Precedes Investments.
Top management’s interest in sustainability
sometimes leads to investments in projects
without an understanding of how to execute
them. Smart companies start small, learn fast,
and scale rapidly. Each step is broken into
three phases: experiments and pilots,
debriefing and learning, and scaling. These
companies benchmark, but the goal is to
develop next practices – not merely mimic
best practices.
– Stay Wedded to the Goal While Constantly
Adjusting Tactics. Smart executives accept
that they will have to make many tactical
adjustments along the way. A journey that
takes companies through five stages – and
lasts a decade or more – cannot be completed
without course corrections and major changes.
Although directional consistency is important,
tactical flexibility is critical.
– Build Collaborative Capacity. Few innova-
tions, be they to comply with regulations or to
2453 S
create a new line of products, can be developed
in today’s world unless companies form alli-
ances with other businesses, nongovernmental
organizations, and governments. Success often
depends on executives’ ability to create new
mechanisms for developing products, distribut-
ing them, and sharing revenues.
– Use a Global Presence to Experiment. Multi-
national corporations enjoy an advantage in
that they can experiment overseas as well as
at home. The governments of many develop-
ing countries have become concerned about
the environment and are encouraging compa-
nies to introduce sustainable products and pro-
cesses, especially for those at the bottom of the
pyramid. It is easier for global enterprises to
foster innovation in emerging markets, where
there are fewer entrenched systems or tradi-
tional mind-sets to overcome.
Wirtenberg et al. (2008), a group of like-
minded committed practitioners, developed the
Sustainable Enterprise Fieldbook to try to help
people in organizations, especially leaders and
managers, better appreciate the value they can
bring to and the difference they can make in
their organizations to help create more sustain-
able enterprises, and ultimately a more sustain-
able world, and to help forge a path to a better
world and a more sustainable future by
supporting employees, managers, and leaders at
every level and in every function, sector, and
industry in three key ways:
– Increasing their understanding and awareness
of the meaning of sustainability on
a conceptual, practical, and personal level S
– Energizing and expanding their commitment
to building sustainable enterprises that can
contribute to enhancing the sustainability of
the world and its ecosystems for generations to
come
– Providing readers with the tools and tech-
niques needed to individually and collectively
take appropriate actions that will improve
their personal and enterprise sustainability
performance in the short and long term
The Sustainable Enterprise Fieldbook is
designed so that the reader may quickly and eas-
ily reference any individual enterprise quality
S 2454 Sustainable Enterprise Development

Sustainable Enterprise Development, Table 1 Five stages for sustainable enterprise

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Viewing compliance as Making value chains Designing Developing new Creating next-practice
opportunity sustainable sustainable products business models platforms
and services
Central challenge Central challenge Central challenge Central challenge Central challenge
To ensure that To increase To develop To find novel ways To question through
compliance with norms efficiencies sustainable offeringsof delivering and the sustainability lens
becomes an throughout the value or redesign existing capturing value, the dominant logic
opportunity for chain ones to become eco- which will change behind business today
innovation friendly the basis of
competition
Competencies needed Competencies Competencies Competencies Competencies needed
needed needed needed
The ability to Expertise in The skills to know The capacity to Knowledge of how
anticipate and shape techniques such as which products or understand what renewable and
regulations carbon management services are most consumers want and nonrenewable
and life-cycle unfriendly to the to figure out resources affect
assessment environment different ways to business ecosystems
meet those demands and industries
The skill to work with The ability to redesign The ability to The ability to The expertise to
other companies, operations to use less generate real public understand how synthesize business
including rivals, to energy and water, support for partners can enhance models, technologies,
implement creative produce fewer sustainable offerings the value of and regulations in
solutions emissions, and and not be considered offerings different industries
generate less waste as “greenwashing”
The capacity to ensure The management
that suppliers and knows how to scale
retailers make their both supplies of green
operations eco- materials and the
friendly manufacture of
products
Innovation Innovation Innovation Innovation Innovation
opportunity opportunity opportunity opportunity opportunity
Using compliance to Developing Applying techniques Developing new Building business
induce the company sustainable sources of such as biomimicry in delivery platforms that will
and its partners to raw materials and product development technologies that enable customers and
experiment with components change value-chain suppliers to manage
sustainable relationships in energy in radically
technologies, significant ways different ways
materials, and
processes
Increasing the use of Developing compact Creating Developing products
clean energy sources and eco-friendly monetization models that will not need water
such as wind and solar packaging that relate to services in categories
power rather than products traditionally associated
with it, such as
cleaning products
Finding innovative Devising business Designing
uses for returned models that combine technologies that will
products digital and physical allow industries to use
infrastructures the energy produced as
a by-product
Source: Nidumolu et al. (2009)
Sustainable Enterprise Development
and find resources, case studies, tools, and related
materials that can be used to help transform any
enterprise from its current state to a more sustain-
able future state. Although all chapters cover
distinctly different sustainable enterprise quali-
ties, a consistent set of content categories are
highlighted by icons throughout the Fieldbook
to provide users with a quick visual guide and to
enhance the Fieldbook’s utility.
Key Issues
History has seen many companies which used to
be so successful and boasted to be sustainable but
ended up collapsing and bankrupting. One of the
striking examples is Enron. Fortune magazine
had named Enron the country’s most innovative
company 6 years in a row. Less than 2 months
later, Enron filed for bankruptcy in the biggest
corporate failure in history, it is the worst of
a series of spectacular corporate collapses that
also took down WorldCom, Tyco, and Global
Crossing. Toyota, one of the world’s leading
automakers, has been listed in Global 100 as the
most sustainable corporation in the world over
the past years because of its strong commitments
to environmental management at its facilities and
with its suppliers. But who will guarantee that
Toyota will sustain its growth and viability in the
context of declining quality and recall scandal in
recent years.
These cases show how important accountabil-
ity and insurance are to the sustainable enterprise
development. Accountability and assurance are
drivers of sustainability and elements of it.
Accountability and insurance checks should be
introduced to enable society to oversee and regu-
late all manner of social institutions from the
global corporate to the community charity.
Accountability strengthens sustainability by build-
ing and perpetuating the shared trust that is neces-
sary for organizations to take a long-term view of
sustainability. Accountability is acknowledging,
assuming responsibility for and being transparent
about the impacts of firm’s policies, decisions,
actions, products, and associated performance. It
obliges an organization to involve stakeholders in
2455 S
identifying, understanding, and responding to sus-
tainability issues and concerns, and to report,
explain, and be answerable to stakeholders for
decisions, actions, and performance. It includes
the way in which an organization governs, sets
strategy, and manages performance. Sustainability
assurance is sometimes referred to as verification
or auditing. Under some circumstances, indepen-
dent assurance can add credibility to
a sustainability report or the reporting organiza-
tion. The sustainability assurance provider (veri-
fier or auditor) evaluates the quality of the report,
including the underlying systems that produce the
information in the report, in relation to a standard
or suitable set of criteria.
The corporate pursuing the journey toward
a sustainable enterprise has to be an accountable
organization. The basic premise is that an
accountable organization will take action to
establish a strategy based on a comprehensive
and balanced understanding of and response to
material issues and stakeholder issues and con-
cerns, to establish goals and standards against
which the strategy and associated performance
can be managed and judged, and to disclose cred-
ible information about strategy, goals, standards,
and performance to those who base their actions
and decisions on this information.
Future Directions
In 2050, around nine billion people live well and
within the limits of the planet. The message voiced
from the WBCSD’ Vision 2050 Report. Just S
40 years from now, some 30 % more people will
be living on this planet. For business, the good news
is that this growth will deliver billions of new
consumers who want homes and cars and television
sets. The bad news is that shrinking resources and
potentially changing climates will limit the ability
of all nine billion of us to attain or maintain the
consumptive lifestyle that is commensurate with
wealth in today’s affluent markets. To tackle this
dilemma, business leaders are advocated to:
• Address the development needs of billions of
people, enabling education and economic
empowerment, particularly of women, and
S 2456
developing radically more eco-efficient solu-
tions, lifestyles, and behavior
• Incorporate the cost of externalities, starting
with carbon, ecosystem services, and water
• Double of agricultural output without increas-
ing the amount of land or water used
• Halt deforestation and increasing yields from
planted forests
• Halve carbon emissions worldwide (based on
2005 levels) by 2050, with greenhouse gas
emissions peaking around 2020 through
a shift to low-carbon energy systems and
highly improved demand-side energy
efficiency
• Provide universal access to low-carbon
mobility
• Deliver a fourfold to tenfold improvement in
the use of resources and materials
There will be a new agenda for business
leaders. Political and business constituencies
will shift from thinking of climate change and
resource constraints as environmental problems
to economic ones related to the sharing of oppor-
tunity and costs. A model of growth and progress
will be sought that is based on a balanced use of
renewable resources and recycling those that are
not. This will spur a green race, with countries
and business working together as well as compet-
ing to get ahead. Business leaders will benefit
from this change by thinking about local and
global challenges as more than just costs and
things to be worried about and instead using
them as an impetus for investments that open up
the search for solutions and the realization of
opportunities. The transformation will bring
with it huge shifts in terms of regulation, markets,
consumer preferences, the pricing of inputs, and
the measurement of profit and loss; all of which
will impact business. Rather than follow change,
business must lead this transformation by doing
what business does best: cost-effectively creating
solutions that people need and want. The differ-
ence is that the new solutions will be based on
a global and local market place with “true values
and costs,” the “truth” being established by the
limits of the planet and what it takes to live well
within them. Business, consumers, and
policymakers will experiment, and, through
Sustainable Enterprise Development
multi-stakeholder collaboration, systemic think-
ing, and co-innovation, find solutions to make
a sustainable world achievable and desirable.
This is opportunistic business strategy at its best.
Business leaders must also run their compa-
nies successfully under present framework con-
ditions while helping to lead society toward the
new framework conditions of sustainability,
working closely with political and social leaders
in doing this. It will mean new partnerships for
business with governments and civil society
groups and more systemic thinking and
approaches to manage challenges and opportuni-
ties such as a doubling of urban populations by
2050. Business leaders will need to manage com-
panies through unprecedented transformational
change, in parallel with governments getting the
right policies and incentives in place.
What is the twenty-first-century sustainable
corporation going to be, as energy prices rise,
water supplies are increasingly contested and
the world’s population grows, the market is
increasingly globalized, and laser-fast digital
communication is intensified where company
reputations on sustainability issues can be
made – or destroyed – in a matter of hours?
Ceres, a leading coalition of investors, environ-
mental groups, and other public interest organi-
zations working with companies to address
sustainability challenges such as global climate
change, provides the guidelines in the new Ceres
report on “The 21st Century Corporation: The
Ceres Roadmap for Sustainability.” The roadmap
sets up a vision and the best practices for inte-
grating sustainability into the DNA of business –
from the boardroom to the copy room. It analyzes
the drivers, risks, and opportunities involved in
making the shift to sustainability, and details
strategies and results from companies who are
taking on these challenges. It is designed to pro-
vide a comprehensive platform for sustainable
business strategy and for accelerating best prac-
tices and performance. It calls for significant per-
formance improvements from companies by
2020. Among the reports, 20 key expectations
for companies:
• Make energy efficiency and renewable energy
the foundation for company operations
Sustainable Enterprise Development
• Design and implement closed-loop systems so
that air and wastewater emissions are elimi-
nated and zero waste is produced
• Require 75 % of top tier suppliers to meet com-
pany sustainability performance standards
• Dedicate 50 % of R&D investment to devel-
oping sustainability solutions
• Compensate and provide incentives for top
executives and other employees to drive sus-
tainability into the business
The report roadmap focuses on four key areas,
each of which includes key expectations and
action steps:
Governance: Companies will embed sustainabil-
ity from the boardroom to the copy room and
will manage their entire value chain from
a sustainability perspective. Five areas for ele-
vating sustainability – board oversight, man-
agement accountability, executive
compensation, corporate policies and manage-
ment systems, and public policy
Stakeholder Engagement: Companies will regu-
larly engage in robust dialog with stake-
holders across the whole value chain and
will integrate stakeholder feedback into stra-
tegic planning and operational decision-mak-
ing. Four areas for elevating sustainability –
focus engagement activity, substantive stake-
holder dialog, investor engagement, and C-
level engagement
Disclosure: Companies will report regularly on
their sustainability strategy and performance.
Disclosure will include credible, standardized,
independently verified metrics encompassing
all material stakeholder concerns, and detail
goals and plans for future action vision. Six
areas for elevating sustainability – standards
for disclosure, disclosure in financial filings,
scope and content, vehicles for disclosure,
product transparency, and verification and
assurance
Performance: Companies will routinely and sys-
tematically improve sustainability perfor-
mance across their entire operations,
extending from the initiation, design, and
delivery of products and services to the man-
agement of employees and the supply chain.
Five areas for improving sustainability
2457 S
performance –operations, supply chains,
transportation and logistics, products and ser-
vices, and employees
Companies must make immediate and mean-
ingful social and environmental improvements if
they are to win in the resource-constrained
twenty-first century. If businesses deepen their
efforts to solve social and environmental threats,
it will position them to innovate and compete in
the fast-changing, resource-constrained global
economy. It is no longer enough for companies
to have special projects or initiatives. Compre-
hensive sustainability strategies are expected.
Cross-References
▶ Corporate Sustainability
▶ Green Business
▶ Sustainability
▶ Sustainable Development
References and Readings
Atkisson, A. (2008). The ISIS agreement: How
sustainability can improve organizational
performance and transform the world. London/
Sterling, VA: Earthscan.
Daniel Mabler, J. B., Belsand, L., & Schulz, O. (2009).
Green winners: The performance of sustainability-
focused companies during the financial crisis.
Chicago, IL: A.T. Kearney.
Edwards, A. R. (2005). The sustainability revolution:
Portrait of a paradigm shift. Gabriola, BC: New
Society.
Hope, J. (2009). Making the transition to the sustainable S
enterprise economy. The Journal of Corporate
Citizenship, 34, 35–40.
Jeana Wirtenberg, D. L., & Russell, W. G. (Eds.). (2009).
The sustainable enterprise fieldbook: When it all
comes together. New York: AMACOM.
John Blewitt, C. C. (Ed.). (2004). The sustainable curric-
ulum: The challenge for higher education. London/
Sterling, VA: Earthscan.
Laszlo, C. (2003). The sustainable company: How to
create lasting value. Washington, DC: Island Press.
Laszlo, C. (2008). Sustainable value: How the world’s
leading companies are doing well by doing good.
Stanford, CA: Stanford Business Books.
Moffat, A. (2010). The 21st century corporation: The
CERES roadmap for sustainability. San Francisco,
CA: CERES.
S 2458
Nidumolu, R., Prahalad, C. K., & Rangaswami, M. R.
(2009). Why sustainability is now the key driver of
innovation. Harvard Business Review, 87, 56.
WBCSD. (2010). Vision 2050: The new agenda for busi-
ness. Geneva, Switzerland: World Business Council
for Sustainable Development (WBCSD).
Wirtenberg, J., Russell, G., & Lipsky, D. (2008). The
sustainable enterprise fieldbook. Sheffield: Greenleaf
Publishing.
Sustainable Enterprise Management
▶ Sustainable Entrepreneurship
▶ Sustainable Enterprise Development
Sustainable Enterprise Risk
Management
▶ Sustainability Risk Management
Sustainable Entrepreneurship
Stefan Schaltegger
Centre for Sustainability Management (CSM),
Leuphana University of L€ uneburg, L€
uneburg,
Germany
Synonyms
Ecopreneurship; Social entrepreneurship;
Sustainable enterprise management;
Sustainopreneurship
Definition
Sustainable entrepreneurship is in essence the
realization of sustainability innovations aimed
at the mass market and providing benefit to the
larger part of society. Actors or companies con-
tributing substantially to sustainable develop-
ment with their core businesses can be called
Sustainable Enterprise Management
sustainable entrepreneurs (e.g., Schaltegger and
Wagner 2011). Sustainable entrepreneurship is
opportunity oriented and aims at generating new
products, services, production processes, tech-
niques, and organizational modes which substan-
tially reduce social and environmental impacts
and which increase the quality of life.
According to Joseph Schumpeter (1934),
entrepreneurship can be described as creative
destruction. Sustainable entrepreneurs destroy
existing conventional, unsustainable production
methods, products, market structures, and con-
sumption patterns, through their convincing,
superior, more sustainable offers. These more
sustainable products and services replace the
existing unsustainable offers by making them
obsolete. This creative destruction of
unsustainable products and services is the
essence of the dynamics of sustainable develop-
ment and the sustainable restructuring of
markets.
Specific forms of sustainable entrepreneurship
include social entrepreneurship and
ecopreneurship. Social entrepreneurship can be
seen as the application of the entrepreneurial
approach toward meeting societal goals
(e.g., Brinckerhoff 2000; Prahalad and Hammond
2002; Mair et al. 2005), whereas actors and com-
panies making environmental progress to
their core business can be called ecopreneurs
(Bennett 1991; Berle 1991; Anderson and Leal
1997; Staber 1997; Keogh and Polonsky 1998;
Pastakia 1998; Isaak 1999; Schaltegger 2002;
Schaper 2004; Cohen and Winn 2007). Whereas
social entrepreneurship is often linked with phil-
anthropic, fund-raising, social-purpose business
ventures or specific forms of non-for-profit own-
ership structures (e.g., Zietlow 2001), the
ecopreneurship literature discusses more
profit-oriented entrepreneurial processes and
organizations.
Introduction
Sustainable development requires sustainability-
oriented managers and entrepreneurs who
achieve environmental or social goals with
Sustainable Entrepreneurship
superior products or processes that are successful
in the marketplace and as a result, replace more
unsustainable products and services. Process,
product, and market innovations driving sustain-
able development do not occur automatically or
by accident but have to be created by leaders who
put them into the core of their business activities.
With their innovations and businesses, sustain-
able entrepreneurs are shaping markets and soci-
ety substantially.
Deriving from the French word “entrepre-
neur,” this phenomenon addresses the activity to
take the initiative to bridge. Whereas all entre-
preneurs deal with bridging activities between
suppliers and customers to create and change
markets, sustainable entrepreneurs also build
bridges between environmental progress and
market success. Sustainable entrepreneurship
can describe various phenomena which the gen-
eral entrepreneurship literature addresses:
• By emphasizing the process of a start-up com-
pany, entrepreneurs are seen as actors opening
a new company, and entrepreneurship is the
process of creating and establishing a new
company (e.g., Bennett 1991).
• Striving for growth is another aspect of entre-
preneurship which views actors who enlarge
companies and expand businesses (Kyrö
2001; Gartner 1990).
• Sustainable entrepreneurship is also a social
movement where entrepreneurs are actors
changing existing consumption and produc-
tion patterns through their initiatives (Pastakia
1998; Mair and Marti 2006).
• The capability to link inventions with market
success, to innovate, and to create competitive
advantage is another feature which is associ-
ated with entrepreneurs (Schumpeter 1934;
Staber 1997; Wiklund 1999).
• Personal leadership characteristics such as
ambition, team building, personal involve-
ment, and commitment are sometimes
interpreted as entrepreneurship (Keogh and
Polonsky 1998; Prahalad 2005, 2006).
As a notion and approach, sustainable entre-
preneurship combines these phenomena with sus-
tainability. Sustainable entrepreneurship is
characterized by some fundamental aspects of
2459 S
entrepreneurial activities which are less oriented
toward management systems or technical proce-
dures and focus more on the personal initiative
and skills of the entrepreneurial person or team to
realize large-scale market success with environ-
mental or societal innovations.
A typology of sustainable entrepreneurship
has been developed to classify and distinguish
different grades and directions of sustainable
entrepreneurship (see Schaltegger 2002; Fig. 1).
It distinguishes sustainable entrepreneurship
from other forms of corporate environmental
and social responsibility activities and is summa-
rized with a positioning matrix which allows
management to assess its state of environmental
and economic activities in relation to others (see
also Schaltegger and Wagner 2011).
Organizations in which sustainability issues
are of low priority, and thus are administered
rather than managed, see sustainability as
a trustee duty and thus concentrate on the imple-
mentation of given regulations and standards.
Environmental and social issues are left to the
legal department and to bureaucracy, which
administer the issues to fulfill formally defined
rules and regulations.
Company leaders who consider sustainability
issues as a supplementary aspect of business
establish environmental, quality, and social man-
agement systems and departments which attempt
to pilot and control impacts in the most efficient
manner. Cost reduction, eco-efficiency, image
campaigns, the differentiation of products and
services, and the improvement of competitive-
ness are core goals of sustainability management. S
Sustainability management becomes in its most
advanced form sustainable entrepreneurship and
fulfills both requirements, high sustainability per-
formance and a large influence on the mass market
(upper right corner of Fig. 1). Sustainable entre-
preneurs strive for business success through sus-
tainability solutions for the mass market. Focusing
on environmental aspects, “ecopreneurs” can be
found close to sustainable entrepreneurship but
with a less strong focus of full sustainability per-
formance as a core business goal.
The sustainable entrepreneurship challenge is
to be economically successful through the
S 2460 Sustainable Entrepreneurship

Effect of company on …
Social
groups
Niche Mass market Market & Society

Sustainable High
Traditional Sustainability
Sustainability Entrepreneurship
social entre- performance as

Priority of environmental and social

preneurship innovation in a a core business
Niche (Bioneers) goal

issues as business goals

Ecopreneurship

Sustainability
Management of environmental and social goals supple-
challenges and opportunities mentary to
core business

Environmental
Administration of and social
social and environmental issues as a
requirements trustee duty Low

Sustainable Entrepreneurship, Fig. 1 Perspectives and development of sustainable entrepreneurship

economically successful supply of products and another form of entrepreneurship. “Bioneers”

services which change consumption patterns and
market structures leading to an absolute reduction
of negative environmental and social impacts
(Hockerts and W€ustenhagen 2010; Strothotte
and W€ ustenhagen 2005). As a difference,
Bioneers are niche market focused and often
inventors. Instead of spending time in laborato-
ries, sustainable entrepreneurs search for inven-
tions which they can place on markets to create
turnover and influence market structures. The
core activity of sustainable entrepreneurs is thus
to search for business ideas to solve environmen-
tal and social problems, to identify the market
potential of inventions, and to realize market
success with them.
For companies with a large economic scale
or influence on the mass market, the
company-internal process of transition toward
sustainability is most relevant. Such a transition
can be led by intrapreneurship (Pinchot 1988)
which in these cases becomes a relevant form of
sustainable entrepreneurship. Social entrepre-
neurship, as the mostly nonprofit application of
entrepreneurship for societal goals, can be seen as
(the combination of “bio” and “pioneer”) focus
on attractive market niches with their focused
sustainable products and customers with high
preferences for their inventions and innovations.
Bioneers often prepare the market for sustainable
entrepreneurs who, at a later stage, further
develop the mass market acceptance for the
respective products and services.
Key Issues
The key issue of sustainable entrepreneurship is
to emphasize the importance of entrepreneurial
spirit and activities as well as the role of compa-
nies for sustainable development. The approach
emphasizes the most market-oriented form of
enacting sustainable development through orga-
nizations. It also unveils the fact that ecologi-
cally or socially supreme products and services
only contribute to sustainable development if
they disseminate and change the mass market.
At the same time, the relevance of ambitious
sustainability standards are underlined which
Sustainable Entrepreneurship
can pose a challenge for mass market-oriented
companies, products, and services.
Another key issue of sustainable entrepreneur-
ship is the notion of creative destruction which
in the sustainability context means that
unsustainable structures, processes, products,
services, and organizations are made obsolete
through the offer of superior, more sustainable
alternatives. This approach shows that also other
forms than government-driven regulations can
substantially contribute to sustainable develop-
ment and it highlights the importance of respon-
sibility consciousness of managers and the
necessity to teach this in higher management
education.
Future Directions
Based on the classification of sustainable entre-
preneurship and related forms of entrepreneur-
ship and sustainability management research is
challenged to identify processes, paths, and fac-
tors of success toward achieving sustainable
entrepreneurship. Research is also needed to fur-
ther explore successful and unsuccessful prac-
tices and how sustainable entrepreneurship
could be supported. Apart from analyzing case
studies and comparing developments under dif-
ferent cultural, social and policy circumstances
also questions of education and policy design are
still not convincingly answered. How can sustain-
able entrepreneurs be educated and what are the
necessary skills and competencies? What factors
and circumstances hinder sustainable entrepre-
neurship and how can sustainable entrepreneur-
ship be supported with encouraging policy and
regulatory frameworks? This also provokes the
question whether first incremental improvements
driven by sustainability management are needed to
create the basis for more radical and fundamental
sustainable entrepreneurship or whether this
actually inhibits such entrepreneurial endeavors.
A major area of research is in the linkage
between innovation management and sustainable
entrepreneurship. As innovations are key to sus-
tainable entrepreneurship, new designs like open
innovation processes and stakeholder
2461 S
involvement in innovation management become
an important field of analysis. This goes along
with the search for new innovative forms of
ecopreneurship as well as social and sustainable
entrepreneurship and the examination of why
they occur and are successful in some industries
and national markets whereas they do not or
barely exist in other industries and markets.
Cross-References
▶ Business Case
▶ Business Model Innovation
▶ Corporate Sustainability
▶ Enlightened Self-Interest
▶ Sustainability Management
References and Readings
Anderson, T., & Leal, D. (1997). Enviro-capitalism:
Doing good while doing well. Lanham: Rowman
Littlefield.
Bennett, S. J. (1991). Ecopreneuring: The complete guide
to small business opportunities from the environmental
revolution. New York: Wiley.
Berle, G. (1991). The green entrepreneur: Business
opportunities that can save the earth and make you
money. Blue Ridge Summit: Liberty Hall.
Brinckerhoff, P. C. (2000). Social entrepreneurship: The
art of mission-based venture development. New York:
Wiley.
Cohen, B., & Winn, M. (2007). Market imperfections,
opportunity and sustainable entrepreneurship. Journal
of Business Venturing, 22, 29–49.
Dean, T. J., & McMullen, J. S. (2007). Toward a theory of
sustainable entrepreneurship: Reducing environmental S
degradation through entrepreneurial action. Journal of
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Sustainable Marketing
Sustainable Leadership
▶ Global Environmental Management Initiative
▶ Rhineland Business Model/Rhineland
Leadership
Sustainable Management of Tourism
▶ Sustainable Tourism
Sustainable Marketing
Karen Becker-Olsen and Kara Moynihan
School of Business, The College of New Jersey,
Ewing, NJ, USA
Synonyms
Eco-innovation; Ecological marketing;
Eco-marketing; Environmental marketing;
Green marketing; Organic marketing
Definition
In 1987, the World Commission of Environment
and Development, also known as the Brundtland
Report, developed a definition of sustainability. It
stated that: “Sustainable development meets the
needs of the present without compromising the
ability of future generations to meet their own
needs” (Brundtland Commission 1987). While
there are no set rules or guidelines that specifi-
cally govern what constitutes sustainable and
what does not, the notion is businesses that can
lessen their environmental impact during pro-
curement, manufacturing, packaging, and/or dis-
posal are acting in a sustainable fashion. Impact
can vary from carbon emission to hazardous
material by products to depletion of earth’s natu-
ral resources or the use of nonbiodegradable
materials, such as plastic grocery bags. It is
2463 S
a wide-ranging term that is meant to encompass
every facet of developing more sustainable busi-
ness operations. Sustainable marketing, more
specifically, encompasses the activities of the
firm that are under the control and supervision
of the marketing function, including supply chain
decisions, product innovation, and customer rela-
tionships. Sustainable marketing would dictate
that, through these functions, the firm has
a responsibility to use resources in a more respon-
sible manner while simultaneously creating value
for the firm. Simply put, sustainable marketing
satisfies the needs of the customer and the planet
while minimizing the environmental impact.
Introduction
Marketing, by its very nature, seems counter to
sustainability in that marketing traditionally
encourages overconsumption which leads to
ecological crisis. However, a new paradigm,
referred to as sustainable marketing calls for an
agenda for firms which focuses on creation of
ecological balance and more ethical consump-
tion. The philosophy and framework of sustain-
able marketing draws on and connects many
different fields and disciplines, including envi-
ronmental engineering, public policy, and busi-
ness. Within business, the marketing function
has the unique role of helping shape not only
firm actions but also those of the firm’s sup-
pliers, distributors, and customers, thus increas-
ing the impact of the environmental charge.
Sustainable marketing can serve many purposes S
in the business world, including increasing
a company’s favorability among eco-savvy con-
sumers, moving other consumers into more
environmentally friendly products via product
innovation, forcing suppliers and distributors to
adopt more eco-friendly behaviors, and boosting
a brand’s popularity. In short, environmentally
responsible strategies can contribute to compet-
itive advantage and superior financial perfor-
mance. This idea is further echoed in the
notion of the triple bottom line “People, Planet,
Profit . . . the 3P’s succinctly describe the goal of
sustainability” (Berdardinelli n.d.).
S 2464
Firms involved in sustainability are incorpo-
rating sustainability into their business plan in
many forms. They may simply support environ-
mental causes and initiatives, seek to modify their
existing products, or replace standard offerings
with more environmentally friendly ones. Many
beverage companies have reduced the amount
of plastic used in bottle packaging, while
Soladigm’s “smart windows” use electrochromic
technology not only to control glare but to allow
solar heat to enter a room are two such examples.
Additionally sustainable marketing efforts can
focus on operational sustainability in which
adjustments might be made to distribution sys-
tems so that transportation effects are minimized
or carbon offset programs are implemented, such
as the Regional Greenhouse Gas Initiative
(RGGI) in the US market aimed to cut CO2 emis-
sions and monitor our ecological footprint in the
Northeastern states.
There are many environmental, social, and
economic benefits of sustainable marketing,
such as less pollution, improvement of commu-
nity welfare, and an increase in ROI. However,
while some agree with the importance and perti-
nence of maintaining a strong environmental
stance and minimizing a firm’s environmental
impact, it has also met with criticism from others.
Some argue sustainable marketing initiatives are
simply a PR stunt and typically have no real
environmental impact. Even though sustainabil-
ity has proven successful for some firms, there is
still a sense of uncertainty and risk associated
with this unfamiliar endeavor, perceived by
some to be “expensive and negative for profits
in the short term” (Dos Santos 2009). How rele-
vant it will become in the future will depend on
a combination of new technologies, laws, and
increased company and consumer support.
Key Issues
An increasing number of firms are seeking to
integrate sustainability goals across their opera-
tion and as a key component of their business
strategy. This growth is spurred by increased
governmental regulations, enhanced concerns of
Sustainable Marketing
scarce resources, growing media interest and
coverage of environmental and social issues,
and a general increase in social and environmen-
tal values in developed countries. This last point
suggests that sustainable marketing can provide
both a positive community and firm impact.
Clearly, the greatest effect will come if a firm is
able to integrate sustainability into the core busi-
ness philosophy, not just externally focused mar-
keting efforts. Thus, in addition to sustainable
communications, a firm should also focus sus-
tainability efforts on the marketing mix as well
as tactical operational issues and strategic busi-
ness decisions, such as appointing a chief sustain-
ability officer to oversee corporate sustainability
policies.
Product
Making a product more sustainable can be
accomplished in various ways that include, but
are not limited to, changing product design, mate-
rials, and packaging. The design of the product
can be modified (e.g., high concentrate laundry
detergents or increased fuel efficiency in automo-
biles) with the goal of sustainability in mind, or
innovative new products (e.g., home use solar
panels or bio-based insulation) can be introduced
specifically to serve a sustainable purpose. Sus-
tainably focused firms look for raw material sup-
pliers that use renewable resources and that
engage in the use of recycled content. Some
advocates even go as far as to suggest that the
extraction of the raw materials used should not
harm any natural habitat or endangered species.
On the packaging side, sustainable marketers are
using recycled or recyclable material and reduc-
ing excess packaging.
Going a step further, the use and disposal of
the product and packaging should mitigate nega-
tive effects to the environment whenever possi-
ble. HP and many other technology companies
have “recycle and reuse” programs, where ink
cartridges and computers can be disposed of and
then reused in a later product cycle. Programs
where you can sell back your unwanted computer
hardware, instead of having the outdated com-
puter become waste, have become the norm.
Computer companies can refurbish and resell
Sustainable Marketing
the computer to another individual. When dis-
posal is considered during the design process,
a brand can come full circle and create a fully
sustainable product. As an example, SunChips
brand has created a 100% biodegradable bag
that is less toxic to the environment in that once
the chips are consumed and the bag decomposes,
you are left with nothing, except the memory of
the 100% sustainable product (Fredrick 2010).
Reuse and recycling programs are commencing
in a variety of other industries as well, such as
apparel and publishing.
Operational
Often overlooked, operational sustainability prac-
tices are just as important to employ and as effec-
tive as sustainable products and materials in
meeting the firm’s overall sustainability goals.
During the manufacturing stage, the minimum
amount of raw materials should be used to con-
struct the product and the production process as
a whole needs to be energy efficient and keep
waste to a minimum. Efforts can be aimed at
improving the manufacturing process by using
alternative energy and also by conserving natural
resources/energy. Alternative energy such as solar
photovoltaic, solar hot water, and wind turbines to
create electricity can all be used to reduce opera-
tional costs and institute sustainable practices.
Conserving resources and energy include things
like minimizing water usage, pollution, and waste.
In a retail context, a prime example is Kohl’s
department stores which saved $50 million over
a 4-year period via installation of energy-efficient
lighting, rooftop HVAC systems, and solar panels.
To minimize cardboard waste, packaging cartons
and containers should be used repeatedly and be
made of recyclable material. Additionally, green
IT is an infrastructure investment that firms are
making to meet sustainability goals as they seek to
reduce the use of hazardous materials, maximize
energy efficiency, and promote recyclability and
biodegradability. The Energy Star program is per-
haps one of the best known eco-labeling interna-
tional programs that impacts both product and
operational sustainability and continues to
increase energy efficiency requirements for meet-
ing the standards set by the program; thus,
2465 S
manufacturers will continue to seek efficient
methods for reducing energy consumption of com-
puters, servers, appliances, heating and cooling
systems, and lighting.
Communications
Communications is the firm’s direct effort to
engage consumers in the sustainability process,
via well-designed communications that do not
greenwash, but provide reliable transparent infor-
mation so that consumers can make more
informed choices and switch into more environ-
mentally friendly products. Dell has a carbon
offset program that consumers can be a part of,
allowing customers to “go zero.” By donating at
the time of purchase, the company will plant
enough trees to offset the estimated total 1-year
carbon impact of an average person. Apple and
other IT companies have similar programs.
Although polls have shown consumers reporting
an interest in buying green and supporting firms
that are environmentally friendly, getting the
information to consumers is a critical. Once con-
sumers have this information, a key challenge
becomes motivating consumers to show their
concern at the point of purchase. This might
mean educating consumers by creating informa-
tive sections of the company website on sustain-
ability like Kodak has done, building rating
programs such as Energy Star, or even pulling
products that are not eco-friendly (even if
cheaper) to force a change in consumption.
Additionally, the escalating use of voice
and data communications has a negative environ-
mental impact. Some research suggests that over S
1% of the world’s carbon footprint is due to
telecommunications. Thus, as firms try to com-
municate more with customers about their envi-
ronmental efficiencies, they are, in fact, being
environmentally inefficient. This is a key area as
we move forward in the sustainability challenge
because although consumers and firms are seek-
ing environmental sustainability, they are also
craving communications bandwidth. To this
end, the communication’s industry is focusing
on building on smart phone technology,
improved processer capabilities, and the integra-
tion of renewable energy sources.
S 2466
Other Examples
As more companies are adopting sustainable
marketing practices, we are seeing changes to
staples in our daily lives to new niches in the
market and products emerging. Companies like
Poland Spring market their half-liter “Eco-
Shape” bottles with a new design; it cuts down
on plastic, has a smaller cap, and uses less paper
in the labeling. A company called Green Box,
whose motto is “Our Planet, Our Responsibility,”
turned a generic pizza box into a sustainable mar-
keting standard. They transformed an average
pizza box, which is usually made from only
60% recyclable material, into a pizza box that
also transforms into four plates for dining, made
from 100% recyclable material. It is smaller and
breaks down easily for disposal and storage;
proving that sustainability can also be functional
(Green Box n.d.). Furthermore, some companies
are not changing their products at all and are still
able to call themselves sustainable. La Crosse
City Brewery in Wisconsin has initiated a renew-
able energy project that is operationally focused
and expected to generate three million kilowatt
hours per year, “which is the equivalent of plant-
ing 951 acres of forest, removing 670 cars from
the road or enough electricity to power 280
homes” (Kuck 2009). They will do this by using
the brewery’s methane gas waste to generate
electricity for the local hospital, rather than
releasing it into the atmosphere.
Even though some of the more well-known
examples of sustainable marketing are present
in the food industry, other examples of sustain-
able products can be found in industries such as
clothing, advertising, and education among
others. GreenGraffiti, an advertising agency, has
been hired by companies such as Domino’s Pizza
and Starbucks to do advertisements; Green
Graffiti uses high pressurized water to blast
dirty pavements and walls in urban areas to
form ads and logos. This is new form of adver-
tisement, although limited in reach, is paperless,
and attention grabbing ultimately sustainable.
Drawbacks
But not all sustainable product ideas can win over
the public, no matter how eco-friendly they are.
Sustainable Marketing
This case is best illustrated by taking the previous
Sun Chips example into account. The company
switched to 100% biodegradable bags for their
snack, and as a result, the bag creates a lot of
noise. The technology used to make the bag
resulted in a stiffer and louder bag than its regular
plastic predecessors (Fredrick 2010). Facebook
groups were even created, “I wanted Sun Chips
but my roommate was sleeping . . .” and “Nothing
is louder than a Sun Chips bag.” As a result, it was
apparent there is a limit to how much consumers
will sacrifice in the name of sustainability. Sun
Chips is now switching back five out of their six
varieties to the original packaging, keeping only
their second best seller in the biodegradable bag.
They are in the processes of refining technology
and hope to relaunch a quieter and eco-friendly
bag again.
There can also be negative effects of not
embracing sustainable design, and it can span
globally. We see the divide between developing
and developed markets widening and find,
“China is beginning to experience ‘green barrier’
pressures from importers of their commodity
products. . . it is estimated that green barriers
have cost China 20 billion dollars in lost revenue
due to noncompliance with the requested envi-
ronmental standards by importing firms” (Dos
Santos 2009). So firm’s wary of implementing
sustainable marketing because of short term
costs should also realize that in the future, as it
becomes a global priority, it may cost them more
not to adapt to more eco-friendly ways.
Awards and Recognition
As a result of the popularity of sustainable mar-
keting and the public’s curiosity in comparing
companies green capabilities, several lists and
rankings have emerged. Lists such as Boston
College’s Corporate Social Responsibility
Index, Fortune’s World’s Most Admired Compa-
nies, Newsweek’s Green Rankings of America’s
500 Largest Corporations, and Harris’ Interac-
tive’s Reputation Quotient have been formulated
to rank a company’s sustainability (Campbell and
Sherman 2010). The oldest list, Fortune’s was
first released in 1997, and the newest list being
Newsweek’s, which was released in 2009.
Sustainable Marketing
The parameters to determine ranking on these
lists varies greatly. For example, Boston
College’s Corporate Social Responsibility
Index is derived from “the public perception of
how a company treats employees, the
company’s ethics, the company’s community
involvement and the company’s respect for the
environment” (Campbell and Sherman 2010).
While Fortune’s World’s Most Admired Com-
panies ranks on a much broader spectrum of nine
attributes: “ability to attract and retain talented
people; quality of management; social responsi-
bility to the community and the environment;
innovativeness; quality of products or services;
wise use of corporate assets; financial sound-
ness; long-term investment value; and effective-
ness in doing business globally.” Though the
lists differ in requirements, they serve their pur-
pose in being a representation of the top green
firms. Some companies that have been success-
ful in gaining a coveted spot on all four lists
include Johnson & Johnson, Hewlett Packard,
and The Coca-Cola Company, which reaffirms
to the public their green credibility.
However, these lists do come with some
controversy. When a company appears on the
lists, after a bad business practice or negative
publicity, there can be backlash. For example,
Nike appears on three out of four lists. While
one may recall that Nike had once garnered
bad publicity concerning its wages to sweat-
shop employees, which should not take the
firm off lists for years to come. In fact, Nike
has made great strides in providing human
rights controls in their own factories and mon-
itoring their supply chain better. They now
provide full disclosure related to corporate
social sustainability in their CSR report
(Landrum and Boje 2008).
Another facet of this complex issue that firms
should be considering are current and impending
government regulations. Sustainable thinking
will equate with forward thinking if a company
wants to stay ahead of regulatory compliance
issues. Governments worldwide are recognizing
the importance of this environmentally conscious
technique and will likely continue to pass regu-
lations. For example, European law has places
2467 S
“restrictions on certain hazardous substances
and electronic wastes and electrical equipment”
that started in 2006 (Dangelico and Pujari 2010).
The United States government has already begun
taking initiatives to purchase green products, all
agencies are required to “acquire recycled con-
tent, energy efficient, renewable, bio-based and
environmentally preferable products” (Courtney
n.d.) to the best of their abilities. Furthermore,
new opportunities are arising in the growing
green market. The Italian government is consid-
ering enacting “a law forbidding the use of
plastic bags” as a result of the potential law, the
“idea to create a company producing low envi-
ronmental impact bags was born” (Dangelico and
Pujari 2010).
Future Directions
Advanced technology will inevitably allow sus-
tainable marketing to advance and eventually
become a cost-effective measure, thus hopefully
enabling businesses to adopt more sustainable
marketing initiatives. The future holds promise
that our society will continue to value sustain-
ability, and businesses will continue to integrate
it in their business model; in the future, sustain-
ability will become the standard.
As firms move forward with their sustainability
programs, they need to realize that marketing has
a key role in helping shape consumer-based atti-
tudes and values. Firms, via their marketing efforts,
need to make it easy for consumers to make sus-
tainable choices. This includes thinking more about S
how they communicate with consumers about sus-
tainability so that it can be operationalized in the
marketplace. In some cases, this might mean that
current patterns of consumption are simply
unsustainable and destructive to our collective
community. This stark notion realizes that
traditional production-consumption models are
inefficient and marketing practices need to be
redesigned to meet these new broad goals.
One possible direction for sustainable market-
ing is “out-greening,” a term coined by Dov
Seidman of LRN and popularized by Pulitzer
prize winner Thomas Friedman. The idea of
S 2468
out-greening the competition is the same context
as outperforming, outmining, and outspending
(Stern 2008). “Not simply by changing a light
bulb” says Mr. Seidman, “It’s about changing
mindsets . . . Values and beliefs are free. If you
can inspire people so that they are working for
something in which they believe, based on fun-
damental values that they share, you will get the
performance you want. You will have established
a deeper sense of connection that goes way
beyond engagement.”
Cross-References
▶ Brundtland Report
▶ Chief Sustainability Officer
▶ Competitive Advantage
▶ Corporate Sustainability
▶ Eco-Innovation
▶ Ecolabel
▶ Ecological Footprint
▶ Greenwashing
▶ Sustainable Consumption
References and Readings
Berdardinelli, R. (n.d.). Bringing sustainability to the
workplace – The role of a green team. EzineArticles.
Retrieved October 25, 2010, from http://ezinearticles.
com/?Bringing-Sustainability-to-the-Workplace-- -The-
Role-of-a-Green-Team
Brundtland Commission. (1987). Report of the World
Commission on Environment and Development,
General Assembly Resolutions 42/187, 11 Dec 1987.
www.un-documents.net/a42r187.htm. Accessed
20 Sept 2010.
Campbell, K., & Sherman, W. (2010). Lists & more lists:
Making sense of corporate reputations. Journal of
Business & Economics Research, 8(7), 47–58.
Retrieved October 5, 2010, from ABI/INFORM
Global. (Document ID: 2107100911).
Courtney, E. (n.d.). A crash course in selling green to
the government. Greenbiz. Retrieved September 6,
2010, from http://www.greenbiz.com/blog/2010/06/
10/crash-course-selling-green-government
Dangelico, R., & Pujari, D. (2010). Mainstreaming green
product innovation: Why and how companies integrate
environmental sustainability. Journal of Business
Ethics, 95(3), 471–486. Retrieved October 7, 2010,
Sustainable or Green Design Principles
from ABI/INFORM Global. (Document ID:
2109673721).
Dos Santos, M. (2009). Achieving sustainable competitive
advantage through the implementation of the societal
marketing concept by a major retailer in South Africa.
Journal of Global Business and Technology, 5(2),
39–50. Retrieved October 5, 2010, from ABI/
INFORM Global. (Document ID: 1902554571).
Fredrick, E. (2010, October 5). Hush! Frito-Lay to pull
most noisy SunChips bags – Yahoo! Finance. Yahoo!
Finance – Business finance, stock market, quotes,
news. Retrieved October 25, 2010, from http://
finance.yahoo.com/news/Hush-FritoLay-to-pull-most-
apf-3363941657.html?x¼0&.v¼10
Greenbox. (n.d.). Greenbox. Retrieved October 25, 2010,
from http://www.ecoincorporated.com
Koerner, P. (2009, December 7). Top 15 Green Products
[ED + C Magazine]. Jetson Green. Retrieved
October 25, 2010, from http://www.jetsongreen.com/
2009/12/top-15-green-products-edc-magazine.html
Kuck, S. (2009, January 23). Worldchanging: Bright
green: Brewery recycles waste energy to help power
local hospital. Worldchanging: Bright Green.
Retrieved October 25, 2010, from http://www.
worldchanging.com/archives/009351.html
Landrum, N., & Boje, D. (2008). Using an ethnostatistical
analysis to interpret data: The Nike case. Organization
Management Journal, 5(3), 119–131. Retrieved
October 6, 2010, from ABI/INFORM Global. (Docu-
ment ID: 1606265631).
Savita, U., & Kumar, N. (2010). Consumer attitude
towards environment-friendly products: A compara-
tive analysis. IUP Journal of Marketing Manage-
ment, 9(1/2), 88–98. Retrieved October 7, 2010,
from ABI/INFORM Global. (Document ID:
2060044751).
Stern, S. (2008, December 9). That old unavoidable ques-
tion: what’s the big idea? Financial Times, 14.
Retrieved September 26, 2010, from ABI/INFORM
Global. (Document ID: 1609412581).
Sustainable or Green Design
Principles
▶ Hannover Principles
Sustainable Organization
▶ Sustainable Enterprise Development
Sustainable Primary Energy Production
Sustainable Primary Energy
Production
Ravshonbek Otojanov and Vlasios Voudouris
Centre for International Business and
Sustainability, London Metropolitan Business
School, London Metropolitan University,
London, UK
Synonyms
Clean technology; Conventional cheap oil;
Conventional oil; Energy mix; Green technology;
Hubbert curve; Hubbert theory; Oil; Oil run tech-
nology; Oil-based technology; Primary energy
mix
Definition
Sustainable primary energy production (SPEP) is
defined here as the informed production of
primary energy sources, such as conventional
oil and gas, that balances intergenerational and
intragenerational human welfare, including
aspects of economic growth, energy security,
and democratic liberties. Although this definition
is general, it emphasizes three interrelated
aspects: (a) the rights of the present generation,
including aspects of changing needs over space
such as those living in disadvantaged regions, (b)
the rights of the future generations, including
aspects of changing needs over time, and (c)
trade-offs between (a) and (b) within
a spatiotemporal framework. SPEP is important,
from the perspective of social responsibility,
because progressive use of hydrocarbon-based
energy has increased human welfare, particularly
since the later part of the eighteenth century with
the Industrial Revolution and the evolution of
end-used energy technologies. Production of
conventional oil, as a key fossil hydrocarbon, is
used here as an example for SPEP because we are
about to enter the second half of the age of oil
with important implications for three aspects of
2469 S
human welfare: economic, social, and environ-
mental – all of which are related to corporate
social responsibility of the energy industry.
Introduction
In order to understand SPEP, one must take
a long-term energy perspective because it takes,
on average, more than three decades to adjust the
energy system for site-independent fuelling of
our economic and social activities. This is
because energy production is usually driven by
four factors: population growth and economic
growth (as approximations to energy demand),
as well as technological progress and energy
sources (as approximations to production
capacity).
Since 1850, the primary energy experienced
two grand transitions (industrialization and
urbanization transitions), which resulted in the
changing shares in the energy mix of energy
production, namely, from renewable to coal
(about 1920) and then oil and gas. A key issue
relating to SPEP is whether the energy industry,
taking on board economic, social, and environ-
mental aspects of their corporate social responsi-
bility, will make a transition of the energy mix in
a way that balances intergenerational and
intragenerational human welfare. This will
require a rethinking of the role of the energy
industry within a low-carbon economy, as corpo-
rations might need to revise their relations with
suppliers, customers, competitors, media, civil
society, and governments based on the concept S
of collaborative advantage rather than competi-
tive advantage.
A good starting point in analyzing the issue
is to explore where we are presently standing in
the world oil production curve, what its exact
shape is, and how far oil (and gas) production
can increase before it changes the world econ-
omy and, by implication, human welfare.
A realistic assessment of sustainable primary
energy production, as exemplified by conven-
tional oil production, needs to consider politi-
cal agendas, population growth, economic
S 2470
growth, and technological innovation – both
energy production as well as end-use energy
technologies.
Hubbert’s Theory: Fossil Fuel Production
Cannot Be Sustained for Long
Historical development of conventional oil pro-
duction modeling practice deserves a brief dis-
cussion here to lay groundwork for the
assessment of SPEP with respect to conventional
oil production and CSR. According to Hubbert’s
theory, conventional oil production over time
would resemble a bell-shaped curve if plotted
against time. The shape of the curve implies that
oil production peaks in its life cycle. Oil produc-
tion from a typical oil field peaks after approxi-
mately 50% of the conventional oil reserves in
the oil field have been produced. In fact, only
approximately 40% of oil is produced from
a typical field because the rest of the reserve is
generally consisted of low quality heavy oil.
Application of Hubbert’s theory opened a new
chapter in oil production forecasting methodol-
ogy. Nearly all methodologies used to forecast
peak oil and oil depletion pattern by researchers
have been formulated using Hubbert’s crude
views. Currently, there are more than dozen
shapes of modified Hubbert curve, each one has
its own merits. The bell-shaped oil production
pattern means that production gradually increases
and peaks after which an exponential decline
phase starts mirroring the right tail of the curve.
However, in practice, majority of oil fields tend to
peak following a gradual and smooth exponential
increase in production and then level off for some
time depending on the pace of extraction efforts
as well as the quality of remaining oil in the field
and, eventually, roll down phase starts. Unlike
the right tail of the curve that starts from zero,
the left tail is expected to be asymptotic, which
implies that oil production will not cease
completely.
There are two important points in Hubbert’s
theory that requires extra consideration when
generalized to world oil production and in
assessing the SPEP: first, peak oil – the point at
which oil production reaches its maximum rate –
and second, the shape of the left tail of the oil
Sustainable Primary Energy Production
production curve after peak oil. The timing of
peak oil and the shape of the left tail of the
production curve depend on many factors includ-
ing economic, social, technological, and
political.
There are several theoretical oil production
curves, which help shape the future of primary
energy mix. SPEP is largely defined by those
production patterns (curves) – conventional oil
production profiles. By the end of 2008, the
cumulative world oil production has reached
1.093 trillion barrels of oil and is in exponential
growth. According to industry researchers, it is
a matter of less than a decade’s time before we
find out how far we can sustain the current levels
of oil production. As there are various estimates
of extractable ultimate resources, the global oil
production peak is obtained through a set of fore-
casts and scenarios only. This makes it difficult to
predict peak oil accurately. Correlation between
SPEP and social agenda of energy industry
remains strong – the more we produce oil, the
more likely it is that the world economy grows,
implications of increasing oil consumption con-
tinue growing, and conventional oil’s share in
primary energy mix continues increasing.
However, modified Hubbert curves of oil produc-
tion pattern can be used to forecast potential and
alternative image of primary energy mix, with oil
losing its dominance in the mix gradually.
Negative Skew Production Curve: Sharp
Decline in Conventional Oil Production After
the Peak
History and experience of mature oil producing
countries in conventional oil production show
that it is not possible to sustain a smooth rate of
oil production continuously before and after the
peak point. It is quite possible that oil production
before peak does not reflect the production pat-
tern after the peak, and the second half of the
production cycle can drastically decay exponen-
tially or linearly. This observation creates
a perfectly left skewed probability distribution
curve. The curve is a modified Hubbert curve as
shown in Fig. 1 below.
This pattern of conventional oil production is
more sensible given the current rate of production
Sustainable Primary Energy Production
Sustainable Primary
Energy Production,
Fig. 1 Unsustainable oil
production curve
1910 1930
and increasing global demand for easy oil from
emerging economies. Declining oil production
might result in loss of conventional oil’s share
in the primary energy mix. The implications of
this observation for the society are manifold
unless production of other primary energy
sources compensate for the declining share of
conventional oil in the primary energy mix. One
can hypothesize the following scenario of impli-
cations of unsustainable oil production:
Due not to adhering to SPEP strategies, future
primary energy mix will consist of non-oil energy
liquids and renewable energy sources to a greater
extent but with economic, social, and environ-
mental implications.
This hypothetical conventional oil produc-
tion scenario brings about serious repercussions
to the economy, society, and environment.
Unsustainable extraction of conventional oil
leads to the depletion of conventional resources
earlier than anticipated. A sudden shift from
growth to decline in the production of cheap
conventional oil entails a host of environmental,
economic, political, and technological problems
to be solved within a short period of time. High
volume extraction is typically driven by
prevailing demand from developing countries
which will overtake Western economies within
a few decades. However, negative implications
of this achievement will be felt by future
generation.
This scenario refers to fundamental change in
human being’s lifestyle – gradual decline in
increasing reliance on oil-based technology
because of sudden and unexpected shortage in
2471 S
1950 1970 1990 2010 2030
conventional oil. As oil production decays expo-
nentially after Peak Oil, people will have to con-
sume fewer units of energy derived from
conventional oil. Higher than anticipated rates
of decline means that there will be less time to
develop new, energy-efficient technology, and
oil-based technology becomes obsolete too
early. Technological developments, innovation,
and shift to efficient technology, on the other
hand, take longer than a decade to fully be in
place. Thus, rights of future generation and
intergeneration equity to exploit natural
resources will be unfairly undermined.
Economic development on the other hand will
hinder due to sudden and unexpected decline in
cheap oil supplies. Many industrialized economies
will use oil-based technology and use oil as input.
Increased oil prices and unavailability of cheap oil
will become prevalent. The cost of energy used to
produce energy increases since conventional cheap
oil shall become scarce and expensive to import
from remote locations. Ground and air transporta- S
tion industry have been consuming most of the oil
produced and hence will be the significantly
affected industries. This host of problems arises
from inconsiderate extraction of available conven-
tional oil resources by humans to satisfy their own
needs while undermining the rights and needs of
future generation and environment.
Environmental effects of oil extraction and
consumption has been a mainstream topic. Never
before has environment been damaged so exten-
sively by human being until fossil fuel become
primary energy source on earth. Growing oil con-
sumption and increasing CO2 emissions will
S 2472
Sustainable Primary
Energy Production,
Fig. 2 Sustainable oil
production curve
1930 1970
destroy the biodiversity and ecology; growth in
offshore oil extraction impacts the marine ecosys-
tems causing irreparable damage that will have to
be dealt by future generations. At the current rates
of consumption, search for oil will take human
being to places earlier thought to be unreachable.
Sustained effort to find cheap oil will eventually
result in finds of remaining conventional oil fields
in remote areas, mostly in Africa and North Pole as
well as in offshore zones.
On the other hand, informed production of oil
provides opportunity to shift from oil-based econ-
omy to green economy, from oil run technology to
clean technology, and help save the clean environ-
ment. Capitalism in industrialized economies and
growing industrial revolution in developing econ-
omies are the main two causes of recent increase in
oil extraction and consumption, which, on the
other hand, has basically been fuelled by the moti-
vation to lead or compete in global economic
development. This is true to every economic
agent in this process – oil majors, governments,
and other businesses. However, working toward
achieving collaborative advantage not competitive
advantage would bring about better results for all
stakeholders and future generation.
Positive Skew Production Curve: Plateau and
Gradual Decline in Conventional Oil
Production After the Peak
In this hypothetical oil production profile, the
production peaks and levels off for some time
and then gradually rolls down due to wider
implementation of SPEP policies. Societies
will have sufficient time to shift energy source
Sustainable Primary Energy Production
2010 2050 2090 2130 2170
production from fossil fuels to renewable
sources. For it to be observed, a strong adher-
ence to SPEP strategies by oil majors and oil
producing countries is required. The side effects
of this pattern are not as catastrophic as those of
sharp decline in oil production, but the negative
impacts to the environment remain high, one
way or the other.
The shape of the oil production curve will be
similar to gamma distribution and can only be
achieved through informed production of oil.
The share of conventional oil in the primary
energy mix will gradually decline after peak oil,
giving way to renewable energy sources. There
will be associated negative social and environ-
mental impacts of this pattern, though human
beings will be able to find an optimal solution to
these problems given the sufficient time achieved
through SPEP. The following hypothetical sce-
nario could effectively be built using the curve in
Fig. 2:
Due to successful implementation of SPEP
strategies, the energy mix will mostly consist of
conventional oil but will gradually give way to
renewable energy sources as technology and
innovation shifts to a new paradigm.
This hypothetical scenario describes the future
where human being will be able to connect the
end of conventional cheap oil with the beginning
of renewable energy consumption by applying
sustainability strategies in energy source exploi-
tation. Future generation enjoys the benefits of
consuming conventional oil with minimum side
effects to the environment and society but with no
or little implications for economy.
Sustainable Primary Energy Production
In the technology development front, avail-
ability of sufficient time for implementing sus-
tainability policies to improve technological
advances allows the human being to hedge the
risks of facing sudden oil supply crunch. No
doubt that oil-based technology will be a major
means of transportation and production for a few
decades even after the peak oil. However, a long
plateau and gradual decline in oil extraction rates
achieved through wider implementation of sus-
tainability strategies, as described in Fig. 2, will
provide opportunity to shift to greener and
cleaner, as well as energy-efficient technology
in time. This newly developed technology will
have positive impact on SPEP, resulting in a two-
way process.
Economies around the world use cheap oil at
declining rates for long after peak oil due to
a long plateau in oil production given wider adop-
tion of energy efficiency and sustainability poli-
cies. However, oil prices will begin fluctuating
around peak oil period, but after a short while,
investments made earlier into green energy and
alternative fossil fuel sources will show their
impact that help mitigate recessionary risks of
higher oil prices. Transport sector will use
energy-efficient engines while shifting the para-
digm to greener and cleaner engine development
before conventional oil supply is overtook by
demand largely due to adherence to SPEP strate-
gies. This will create equitable and favorable
environment for the future generation without
limiting their right to access word’s endowment
of conventional energy resources.
Environmental impacts of SPEP will be in
various forms; on one hand, sustained production
of conventional oil affects the biodiversity and
ecosystems around the world through prolonged
wastage and CO2 emission. On the other hand,
the amount of wastage and CO2 emission decline
as new methods of reducing environmental
impact of oil consumption are used. For example,
carbon trading will eventually be adopted in
Africa and Asia that will effectively offset the
damage caused by industrialized and developing
countries around the world. Likewise, greater
awareness about climate change will lead to the
formulation of robust green policies.
2473 S
Key Issues
Oil has fuelled economic growth for more than
a century, and its progressive use in the second
half of twentieth century made human being reli-
ant on oil more and more. Nowadays, virtually all
economies use oil-based technology; therefore,
sustainability of oil production is determined by
the use of this technology and people’s willing-
ness to adopt sustainable development strategies
such as SPEP. For example, timely efforts to
develop fuel efficient and nonfossil fuel-based
technology while implementing SPEP strategies
would therefore enforce sustainable resource use
and postpone peak oil.
Future Directions
Extensive and unsustainable oil extraction efforts
accelerate the depletion of available conventional
oil reserves. Pace of extraction is dependent on
oil market dynamics, namely, growth in demand
for oil. Economists note that demand for energy
resources increase continuously as population
grows; usually, demand is largely driven by
increasing consumption in emerging economies.
However, demand for resources peaks eventually
due to availability of cheaper and conventional
alternative sources. For instance, in the past,
demand for whale oil peaked not because whales
suddenly become scarce but because of easy and
cheaper alternative energy sources such as con-
ventional oil. Likewise, demand for conventional
oil is likely to peak providing an alternative S
cheaper primary energy mix is available in the
future. There might not be a single energy source
that could effectively substitute conventional oil,
but with the help of alternative primary energy
mix, consumption of oil might be phased out
gradually before peak oil. Therefore, it would
be an interesting contribution if the future
research is directed toward studying peak
demand for conventional oil and its impact on
SPEP. It can be hypothesized that peak demand
occurs before oil production peaks, given an opti-
mal combination of cheap alternative primary
energy sources can be achieved.
S 2474
References and Readings
Frankel, E. (2007). Oil and security. A World beyond
petroleum. Dordrecht: Springer.
Friedrichs, J. (2010). Global energy crunch: How different
parts of the world would react to a peak oil scenario.
Energy Policy, 38(8), 4562–4569.
Hallock, J. L., et al. (2004). Forecasting the limits to the
availability and diversity of global conventional oil
supply. Energy, 29, 1673–1696.
Hirsch, R. (2008). Mitigation of maximum world oil produc-
tion: Shortage scenarios. Energy Policy, 36, 881–889.
Laherrere, J. (2000). The Hubbert curve: Its strength and
weaknesses. Version proposed to Oil and Gas Journal.
http://dieoff.org/page191.htm. Accessed March 2010.
Robert, M., & Lennert, M. (2010). Two scenarios for
Europe: “Europe confronted with high energy prices”
or “Europe after oil peaking”. Futures, 42(8), 817–824.
Schrattenholzer, L., et al. (2004). Achieving a sustainable
global energy system. Cornwall: Edward Elgar.
Umbach, F. (2010). Global energy security and the impli-
cations for the EU. Energy Policy, 38(3), 1229–1240.
Sustainable Production
▶ Sustainable Production and Consumption
Sustainable Production and
Consumption
Liangrong Zu
Enterprise, Microfinance and Local Development
Program, International Training Centre of the
ILO, Turin, Italy
Synonyms
Corporate social and environmental responsibility;
Ecological production and consumption;
Sustainability; Sustainable consumption; Sustain-
able production
Definition
Sustainable production and consumption (SPC)
can broadly be defined as encompassing any
Sustainable Production
and all issues that seek to improve the way that
products and materials are sourced,
manufactured, and marketed and the way that
products are purchased, used, and disposed of at
the end of their useful lives. The Oslo Sympo-
sium in 1994 proposed a working definition of
sustainable consumption as “the use of services
and related products which respond to basic
needs and bring a better quality of life while
minimizing the use of natural resources and
toxic materials as well as the emissions of waste
and pollutants over the life-cycle so as not to
jeopardize the needs of future generations”
(IISD 1995). SPC involves business, govern-
ment, communities, and households contributing
to environmental quality through the efficient
production and use of natural resources, the
minimization of wastes, and the optimization of
products and services. SPC aims to maximize the
efficiency and effectiveness of products, services,
and investments so that the needs of society are
met without jeopardizing the ability of future
generations to meet their needs. SPC’s main
goal is to “decouple” economic growth and
environmental degradation by increasing the
efficiency of resource use as well as supporting
sustainable lifestyles and livelihoods for all. SPC
is seen to represent a journey to resource and
energy efficiency, sustainable infrastructure,
green jobs, and better quality of life and equity.
Thus, SPC helps achieve development goals such
as the Millennium Development Goals (MDGs)
as well as supports the Multilateral Environmen-
tal Agreements (MEAs) by seeking to improve
economic, social, and environmental resilience
while reducing poverty.
Introduction
Why Sustainable Production and
Consumption?
The Agenda 21 action plan for sustainable
development adopted at the United Nations
Conference on Environment and Development
(UNCED) concluded that “the major cause of
the continued deterioration of the global environ-
ment is the unsustainable pattern of consumption
Sustainable Production and Consumption
and production, particularly in industrialized
countries” (UN 1992). Sustainable consumption
and production is referred to the Johannesburg
Plan of Implementation (JPOI) as one of three
overarching objectives of, and essential require-
ments for, sustainable development, together
with poverty eradication and managing the
natural resource base of economic and social
development (JPOI, I.2). The JPOI, which is an
outcome of the World Summit on Sustainable
Development (WSSD 2002), states that funda-
mental changes in the way societies produce
and consume are indispensable for achieving
global sustainable development. The plan calls
for the promotion of sustainable consumption
and production patterns by all countries,
with developed countries taking the lead, while
ensuring that all countries benefit from the
process. To that end, the plan calls on countries
to take into account the Rio principles, including
the principle of common but differentiated
responsibilities. Further, it enjoins governments,
relevant international organizations, the private
sector, and all major groups to play an active
role in changing unsustainable consumption and
production patterns.
There are growing calls for the adoption of
a production and consumption system (PCS)
approach to address sustainability challenges
(e.g., Lebel et al. 2010). Firstly, it is argued that
a PCS perspective directs attention to the
processes closer to the decisions and actions of
final consumers who help drive demand and
hence are often seen to be an underlying reason
for environmental impacts at remote “produc-
tion” parts of commodity chains. Our understand-
ing of consumers is increasingly being linked to
environmental impacts and questions of
sustainability. Secondly, the commodity chain
itself can be thought of as a series, or network,
of many production and consumption relation-
ships. For each linkage, questions can be asked
from both a production perspective (how could
this industrial process be made more resource
efficient?) and, in addition, a consumption
perspective (what are the underlying drivers of
demand?). Thirdly, leverage to improve perfor-
mance in the direction of sustainability can exist
2475 S
at diverse locations along value chains; at times,
these are remote from where pollution and/or
resource overutilization occurs. Many problems
related to consumption do not result directly
from dangerous and/or inefficient production
processes. Likewise, a narrow focus on behavior
of the household consumer may fail to identify
much more powerful leverage points to
reduce environmental impacts. A PCS perspec-
tive allows consideration of alternative leverage
points and the possibility of targeting specific
demand or supply processes where necessary.
Finally, a PCS perspective is inherently interdis-
ciplinary, taking into account material and energy
flows common to life cycle and related methods
but also embracing sociological insights from
exploring behavior and relationships among
actors (Lebel et al. 2010).
Therefore, a PCS perspective offers pathways
toward more sustainable forms of development.
A focus on sustainable production and consump-
tion systems also helps reduce the problem of
pseudo-sustainability that arises from the shifting
of environmental burdens onto others in the
interest of a clean backyard at home. It also
draws attention to the opportunity of negotiating
shared responsibilities for action across disparate
parts of linked value chains among firms and
consumers (Lebel et al. 2010).
Making the Link: SPC and Business Strategy
In the 1970s and 1980s, companies began
developing product stewardship and design for
environment programs to foster life-cycle
thinking and encourage a more systematic S
approach to evaluating and improving the
environment. Advertising and marketing, a
critical link between the production and
consumption of goods and services, also
provide companies with SPC opportunities and
challenges.
Product Stewardship
The concept of product stewardship originated at
Dow Chemical in the early 1970s. Since then, it
has spread widely, and today, multinational
companies from many sectors have instituted
their own product stewardship or product
S 2476
responsibility programs. The list includes
electronics firms such as Hewlett-Packard, Intel,
Xerox, and Northern Telecom and forest products
companies such as International Paper, Noranda,
and Avenor. In the chemicals sector, in order to
be a member of the US Chemical Manufacturers
Association, companies must adhere to
a 12-point Code of Management Practice for
product stewardship as part of the association’s
Responsible Care program.
Product stewardship makes environmental,
health, and safety concerns a priority in all phases
of a product’s life cycle. By way of illustration,
the product responsibility guidelines applied in
companies such as Dow Chemical, SC Johnson,
and 3 M begin with research and development,
when a product is first conceived, and extend all
the way through the product’s design, manufac-
ture, marketing, distribution, use, recycling, and
disposal. The companies believe that their
product stewardship programs provide them
with a competitive advantage because they
involve lower operating costs, give greater
customer satisfaction, and mean reduced
regulatory burdens and long-term liability.
Product stewardship represents a significant
shift in the mindset of industry. It moves corpo-
rate thinking and action beyond the factory walls
and requires it to consider the upstream and
downstream implications of its activities and to
take corrective action. In this way, corporate
product stewardship is analogous to the wider
policy concept of “extended product responsibil-
ity” and serves as a model for its voluntary
implementation. By its very nature, product
stewardship necessitates close cooperation and
partnership with suppliers, service providers
(such as waste management companies), and
customers to effect change throughout the
product life cycle. In practice, product steward-
ship translates into working with suppliers to
reduce the environmental impact of purchased
goods. Typical examples include creating
a supply of reusable shipping containers, remov-
ing heavy metals from packaging, developing
strategies to recycle product wastes, and
providing customers with information about
how to handle and use the product safely. Product
Sustainable Production and Consumption
stewardship may also entail changes to
a company’s internal processes and to the design
of its products. It also means taking responsibility
for a product after it leaves the manufacturing
facility to ensure its proper use, recycling, and
disposal.
Design for Environment
Choices made in the design of new products,
processes, or services determine their environ-
mental impact throughout their lifetime. At the
design stage, the function of the product, process,
or service is defined, and raw materials, supplies,
and process chemicals are selected. These in turn
determine the energy which will be consumed to
create them and the waste which will be
generated. In addition, for products, their dura-
bility, serviceability, and energy consumption
during their lifetime will also be determined.
The design for environment (DFE) concept
takes account of these “lifetime” environmental
effects by incorporating environmental
objectives into a company’s design processes
and procedures. In this way, DFE provides
a proactive and systematic assessment of
a product’s environmental performance and can
therefore lead to continuous environmental
improvements. However, the design process is
a dynamic one. The product designer must
balance multiple objectives, most importantly,
performance, quality, and cost. In many leading
companies, product designers are now being
asked to reduce the environmental impact of the
company’s products and processes. To educate
and assist the product designer, companies are
therefore developing a number of tools including
environmental design guidelines and review
procedures, computer-aided design, training
programs, and analytic devices such as life-cycle
analysis and “green” scoring systems.
Companies practicing DFE report that it has
brought both business and environmental oppor-
tunities. Statoil, which is subject to Norway’s tax
on offshore carbon dioxide emissions as well
as to the Swedish tax on nitrogen emissions,
reduced its tax burden by lowering its process
emissions. Volvo sees DFE as a means of
maintaining or increasing sales volume against
Sustainable Production and Consumption
strong competition. A focus on environmental
issues has led to improved performance of
Hitachi washing machines and Kodak film.
A personal computer, the Eco-PC, made by
Siemens Nixdorf, was designed for disassembly
and recycling, resulting in fewer assembly parts.
Fewer assembly parts in turn translated into less
assembly time and lower production costs.
Sony has included the principles of DFE in its
new programs aimed at moving from products to
services as part of the communications-
entertainment revolution.
The Role of Advertising and Marketing
Business’s efforts to achieve greater sustainabil-
ity in the production, design, and delivery of
goods and services will only go so far in meeting
the goals of sustainable production and con-
sumption. They need to be matched by changes
in the consumption and usage patterns of mil-
lions of individuals and businesses. Ultimately,
business responds to the needs of customers –
their performance and cost requirements. Con-
sumers need clear, accurate, and reliable infor-
mation to make sound purchasing decisions and
to provide the necessary pull from the market-
place. Advertising and marketing is one mecha-
nism used to convey information and influence
consumer choice. The advertising and market-
ing of environmental issues is complex, and the
benefits of promoting environmentally
improved products are unclear, while the risks
can be great. Promoting the company as an envi-
ronmentally responsible business may even pro-
vide a greater return than advertising and
marketing the environmental attributes of prod-
ucts. It is important to note, however, that there
are some companies, such as the producers of
intermediate components, which maintain min-
imal or no direct, visible link between the name
of the (parent) company and its products (Fiksel
2009).
Market pull – meeting the demands of the
customer – is the single most important
agent-driving change in business, and one of
the major challenges for business is therefore
the increasing demand for environmentally
improved products and services in substitution
2477 S
for conventional goods. Some suggestions have
been made on how companies can begin to meet
this challenge.
Sharing Responsibility for Production and
Consumption
Sustainable consumption is a systemic challenge.
Businesses, governments, civil society, and
consumers all have the power to affect change,
sometimes in ways that are not traditionally
perceived to be their role (Figs. 1 and 2).
Consumers may feel a moral responsibility to
live sustainably; however, they cannot do so
without effective support from governments,
NGOs, and the businesses with which they
interact.
The Role of Business: Expand Good Practices
Companies have a continuing responsibility
to assess their customers’ needs and to sell
“solutions,” not just products, that meet those
needs while at the same time minimizing their
environmental impact; to apply life-cycle
principles to the design and delivery of goods
and services; and to provide high-quality and
meaningful information to employees and
customers on the environmental impact of
products and services.
There is no single solution or simple answer to
producing and consuming sustainably. Business
must experiment and apply solutions that make
sense for their sector, company, geographic loca-
tion, and products. Accounting systems, which
are capable of allocating the relevant ecological
burden to individual product systems, are needed S
to facilitate decision-making and communication
about, for example, a company’s decision to put
a new product on the market, or about investment
decisions; companies need to participate in both
the supply and demand side of recycling in order
to improve the quality, cost, and availability
of recycled materials and used components.
Businesses should integrate environmental
criteria into their purchasing policies and
specifications in order to influence their
suppliers; companies need to develop training
programs for product planners and marketing
and sales staff to raise their awareness and
S 2478 Sustainable Production and Consumption

Sustainable Production The systemic challenge of Sustainable Production and Consumption

and Consumption,
Fig. 1 The systematic
challenge of sustainable Resource extraction
production and
consumption Companies Consumption Finance
Producers choices institutions
&
govern-
Retailers Demand
Production choices ments
&
Consumers others
Supply Consumers

Companies Policy
End-of-life managers choices

Local and national development

Governments, consumers and

business all have important roles
The forces of both supply and
to play in fostering sustainable
demand influence the production
consumption
ments and and consumption of products and
vern reg
go ula
of services. Businesses (producers and
International
le

to
Ro

rs

agreements their suppliers, retailers, recyclers

National policies,
and waste management companies)
laws and regulations
Fiscal structures and incentives choose how resources are extracted,
Infrastructure and services
(transport, recycling, etc.)
processed, sold and managed at
Guidance for businesses and
consumers
Monitoring
Economic
Ro
le Enforcement ers
of um
development b ns
co
us

Legal compliance
of
ine

Role

Ethical practices
sse

Purchasing decisions
Sustainable sourcing,
s

production and distribution Lifestyle choices

Eco-efficiency & waste reduction Political support
Consumer choice editing
Peer-to-peer influencing
Consumer choice influencing
Recycling
Innovation f civil society (
eo NG
Example-setting rol O
e
Th

s)

Independent assessment
the end of their lives. These choices
High profile public campaign
are influenced by the shopping and
Critique or endorsement
lifestyle choices of consumers, as well
Thought leadership
as by financial institutions (through
Choice influencing
lending policies and ratings) and
governments (through laws, taxes,
regulation and guidance).

Sustainable Production and Consumption, Fig. 2 The roles of governments, consumers, and business in fostering
sustainable consumption
Sustainable Production and Consumption
harness their creativity in responding to “pull”
from the marketplace; business should promote
openness in environmental performance as
a driving force for change, and this can be
achieved through environmental management
systems and reporting initiatives. This is
particularly important given the growing
significance for customer satisfaction and
purchasing decisions of an environmentally
responsible corporate identity; establishing
internal goals for sustainable production and
consumption with target dates, and measuring
progress in meeting those goals, provides an
incentive for managers. Publishing results inter-
nally and externally would provide even greater
impact and credibility; business leaders need
to communicate the concept of eco-efficiency to
small- and medium-sized enterprises, and
business should promote the idea that the
curriculum in science and engineering schools
should be developed to cover product life-cycle
concepts, including design for disassembly,
reuse, and recycling. Business should work hand
in hand with business schools to address environ-
ment and marketing issues, as well as the more
general business and environment strategies.
The Role of Government in Promoting More SPC
The government has a critical role playing in
promoting SPC in terms of the legislative or
regulatory initiatives. Some of the criteria can
be considered and applied when evaluating pol-
icy makers to tackle the challenges associated
with sustainable production and consumption
(WBCSD 2009). For example, it is recommended
that governments must encourage the use of
recycled resources and product life extension by
reevaluating procurement policies to allow equal
access or give preference to products containing
sustainable resources, or having a recycled
content or used parts that meet quality and
performance standards to encourage the use of
recycled resources and product life extension;
public policy should give priority to economic
instruments that provide flexibility and encour-
age innovation; government must play a role
in elevating environmental awareness in order
to create a pull from the marketplace for
2479 S
environmentally improved products, for instance,
through environmental education campaigns;
government policies must facilitate recycling
and reuse. Regulatory barriers that restrict the
productive use of “waste” must be evaluated
and revised accordingly; public policies
should encourage extended product responsibility
(i.e., shared responsibility among all involved in
the product chain), rather than placing undue
burden only on producers, and government
sectors/ministries need to harmonize their strate-
gies and speak with a unified voice within the
international policy debates (WBCSD 2009).
Customer Education
Changing consumer behavior requires
a cooperative strategy that harnesses the
resources and strengths of multiple sectors,
including government, industry, environmental
organizations, and consumer groups.
Government and industry need to help raise
awareness among consumers of the value, bene-
fits, and performance of eco-efficient products,
remanufactured products, reusable packaging,
and used parts and thus help guide consumer
behavior. Consumer protection organizations
are often powerful and influential and should
therefore be brought in to assist in consumer
education campaigns.
The Role of Civil Society Organizations
Civil society organizations (CSOs) play a vital
role. Being voluntary and dedicated organiza-
tions of active and concerned citizens committed
to the public interest, CSOs play a significant role S
in promoting sustainability to people in their
daily life. They can appeal to consumers and
producers, as well as communicate citizen
ideas, proposals, and concerns to decision makers
and translate decisions made at different levels to
ordinary people. CSOs also have a responsibility
to the public by acting as watchdogs for govern-
ment and industry. They can further support
behavioral change and enhance current policy
instruments, assessment tools, and indicators.
CSOs have the ability to bring different
stakeholders together and to raise urgent issues
for public discussion.
S 2480
Environment-, development-, consumer-,
women-, and community-based organizations
have undertaken a wide range of activities to sup-
port individual and household efforts to achieve
sustainable lifestyles. These efforts could be
strengthened by further work to improve under-
standing and analysis; to undertake research to
develop sustainable lifestyle strategies for con-
sumers; to critically review life-cycle assessments
and monitor environmental claims in advertising
and marketing statements; and to form partnerships
with business, governments, and other groups to
examine jointly how to improve consumption and
production patterns and meet basic human needs
around the world. Some tools can be applied to
modify behavior, for example, to develop commu-
nity-based strategies to enable citizens to move to
sustainable consumption patterns and help people
to maintain and develop their cultural identity in
the face of pressures to adopt unsustainable life-
styles; to raise public awareness through product
information campaigns and highlighting the rela-
tionship between quality of life and consumption
patterns; to operate information clearing houses to
facilitate the sharing of lessons learned through
consumer campaigns, research, and actions of
communities, governments, and industry (e.g., to
ensure a rapid dissemination of information on
environmental harmful production methods); and
to publish action alerts and sustain local and inter-
national campaigns to obtain environmentally
sound products and production. On occasion,
NGOs organize boycotts or call for the ban of
environmentally harmful products and production
processes, seeking to influence governments and
business to implement concrete actions to promote
sustainable consumption.
Sustainable Production and Consumption
Governance (SPCG)
SPC governance is the exercise of political,
economic, and administrative authority to man-
age a systemic process of lifestyle and livelihood
behaviors. This form of governance seeks aims at
sustainable production and consumption systems
that ensure the well-being of all people in an
equitable manner while conserving the ecology
for current and future generations. This occurs
Sustainable Production and Consumption
via suitable mechanisms, processes, and institu-
tions through which individuals and groups artic-
ulate their aspirations, exercise their natural and
legal rights and obligations, and mediate
their differences. Sustainable production and
consumption governance forms a key focus of
the United Nations Conference on Sustainable
Development (UNCSD 2012) under the institu-
tional framework for sustainable development.
SPCG is a relatively new and poorly understood
area of inquiry and without operational frame-
work. At the UN-level criteria, development is
needed along principles and guidelines for
good governance to set up the institutional
arrangements necessary for the managing of the
Ten-Year Framework of Programs on SPC. Such
criteria may include the responsibility toward the
mandate and representation, accountability and
responsibility, participation and engagement,
transparency and reporting, effectiveness and
productivity, as well as coherence and honesty.
Currently, SPCG is not a seriously addressed
issue in the United Nations system or in interna-
tional governance forums. Apart from formulat-
ing a Ten-Year Framework of Programs (10YFP)
on SPC, the official international process has not
taken any significant initiative toward SPCG.
There is no regional governance mechanism or
a solid national mechanism that has been
established by any single country that is exclusive
for SCP governance. Analogous to the UN
Marrakech Process for a 10YFP, most
government programs for SPC across the world
lack solid governance structures.
Overall, SPC governance is still in its infancy
and its institutionalization a distant reach.
Nonhierarchal institutions governing SPC
with largely informal rules and nonbinding
international agreements remain dominant.
Today, strong sustainable consumption exists
only in marginal sectors of society and research,
or as a symbolic reminder in official documents.
Key Issues
SPC has been gradually recognized in both devel-
oped and developing countries. However, many
Sustainable Production and Consumption
regions have a long way to go before SPC
becomes adopted and fully integrated into their
everyday practices. Many countries, particularly
in developing countries, have little institutional
capacity in promoting SPC. In many countries so
far, sustainable production has primarily
addressed production efficiency, with only lim-
ited attention given to product design and use
efficiency. The regional capacity for promoting
sustainable consumption is far less developed than
for sustainable production. There are neither strat-
egies nor policy frameworks to promote
sustainable consumption at the national level, in
accordance with the UN Guidelines on Consumer
Protection. This is due to the wide range of
different consumption styles and patterns that
exist alongside each other, including within coun-
tries. Governments in poor regions give priority to
programs that help to meet people’s basic needs.
Furthermore, sustainable consumption is
a relatively new concept, and where it exists,
consumer activism is still focused on prices,
quality, and consumer safety. In this regard,
sustainable consumption still needs to be
mainstreamed in the consumer movement.
Lack of awareness, weak legislation and policies,
poor education, and inadequate research and
development capacities and consumer traditions
are important constraints to SPC, especially in
developing countries and regions. Awareness is
needed to support new policies, legislation,
education, research, and consumer lifestyles.
Lack of stakeholder cooperation and poor
relations with authorities are also constraints to
SPC. The vast majority of companies pay little or
no attention to improving their sustainability
records. On the other hand, government agencies
are often reluctant or incapable of engaging in
partnership with industry to promote SPC.
Underlying the current debate on sustainable
consumption is a growing awareness that reforms
in national economic policies are required to
ensure that goods and services reflect environ-
mental costs and so stimulate more sustainable
production and consumption patterns. At the
same time, countries are continuing to increase
their income and gross national product. It is
possible to increase incomes while reducing
2481 S
resource use. However, the risk remains that an
increasing volume of consumption will more than
outweigh improvements in energy and resource
efficiencies. There will be occasions when oppor-
tunities for economic growth conflict with moves
toward sustainable consumption. All actors need
to be aware of such possible conflicts. If sustain-
able consumption is to be achieved, then it will
become increasingly necessary in such situations
to put sustainability first. This will not necessarily
require economic sacrifices; indeed, welfare and
employment may be increased.
Future Directions
The environmental trends linked to consumption
and production over the past 30 years have been
described by the United Nations Environment
Programme’s 2002 report, Global Environment
Outlook, and World Wildlife Fund’s The Living
Planet 2002, which present a sobering litany of the
challenges humanity is facing. These disturbing
trends are linked to, or exacerbated by, inefficient,
wasteful, and polluting production systems. In this
context, alternative policies, processes, and prac-
tices can dramatically shift industrial models and
consumption patterns toward sustainability. There
are ways to promote economic prosperity and
personal well-being without compromising.
An international consensus for change is
clearly emerging. Further effort within the
context of an international work program is
required to establish firm foundations to underpin
policy decisions on sustainable production and S
consumption patterns, particularly focused
attention is needed on greater precision in the
definition of key concepts, as well as
a delineation between levels, patterns, and
distribution of consumption and clarification of
the global, regional, national, and local
constraints to consumption and production such
as ecological carrying capacity. The nature
and scale of environmental problems that are
generated by particular patterns or levels of
consumption should be defined; a greater
understanding is needed of the social,
demographic, economic, ethical, cultural, and
S 2482
technological driving forces of consumption
patterns, linking action at the microlevel
(e.g., on life-cycle approaches to product
management) with macrolevel analyses of carry-
ing capacity; clarifying the relationship between
sustainable consumption and other policy issues
(notably trade and environment and international
legal instruments); addressing global imbalances
in income and consumption and sharing the
burden of change fairly among developed and
developing countries; assessing the effectiveness
of regulatory, economic, and social instruments
used to promote sustainable consumption
and production; identifying potential positive
and negative effects of the move to sustainable
consumption, so that appropriate measures can be
designed and implemented; evaluating the
economic and social benefits of changed values
and behavior to the major stakeholders in
sustainable consumption; and sharing approaches
to lifestyles, quality of life, and consumption
across cultures. This foundation work can lead
to the setting of time-bounded targets for action
by governments, industry, and NGOs, as well
as the development of the necessary capacities
to effect change.
Cross-References
▶ Corporate Social Responsibility
▶ Millennium Development Goals (MDGs)
▶ Responsible Care (Chemical Industry’s Sector
Wide Initiative)
▶ Sustainability
▶ Sustainable Development
▶ Sustainable Energy Management and CSR
▶ Local Agenda 21
▶ UN Conference on E & D
▶ WBCSD
References and Readings
Bentley, M. (2008). Planning for change: Guidelines for
national programmes on sustainable consumption and
production. Kenya: UNEP.
Fiksel, J. (2009). Design for environment, second edition:
A guide to sustainable product development:
Sustainable Production: A Newfangled Pattern
Eco-efficient product development (2nd ed.).
New York: McGraw-Hill Professional.
IISD. (1995). Oslo roundtable on sustainable production
and consumption. New York: The International
Institute for Sustainable Development (IISD).
Joel Makower, D. F. (2003). Sustainable consumption and
production: Strategies for accelerating positive
change. New York: The Environmental Grantmakers
Association.
Lebel, L., Lorek, S., & Daniel, R. (2010). Sustainable
production consumption systems: Knowledge engage-
ment and practice. New York: Springer.
The Johannesburg plan of implementation, Rio de
Janeiro, 1992. http://www.un.org/esa/sustdev/docu-
ments/WSSD_POI_PD/English/POIToc.htm
United Nations. (1999). Comprehensive review of
changing consumption and production patterns.
New York: United Nations.
United Nations (UN). (1992). Agenda 21, New York:
United Nations, (1999) United Nations guidelines
on consumer protection (as expanded in 1999),
New York: Commission on Sustainable Development.
Available http://www.un.org/esa/sustdev/sdissues/
consumption/cpp14.htm. Accessed Nov 6, 2011.
United Nations Conference on Sustainable Development.
(2012), Rio+20, in Rio de Janeiro, Brazil, 2012.
WBCSD. (2009). Sustainable consumption facts
and trends: From a business perspective. Geneva,
Switzerland: World Business Council for Sustainable
Development (WBCSD).
World Summit on Sustainable Development (WSSD).
(2002). Johannesburg Declaration on Sustainable
Development, adopted in Eath Summit 2002. Johan-
nesburg, September 2002.
Sustainable Production: A
Newfangled Pattern
▶ Sustainable Business: A New Paradigm
Sustainable Property Valuation
▶ Property Valuation and CSR
Sustainable Real Estate Investment
▶ Real Estate Agency and CSR
Sustainable Tourism
Sustainable Relationships
▶ Social Sustainability
Sustainable Responsible Business
▶ Business Case for CSR
▶ Environmental Ethics
▶ Real Estate Agency and CSR
▶ Socially Responsible Management (SRM)
Sustainable Site Development
▶ Property Development and CSR
Sustainable Tourism
Gökçe Özdemir Bayrak
€
Yaşar Universitesi Selçuk Yaşar Kamp€
us€u, Yasar
University, Ağaçlı Yol, Bornova, İzmir, Turkey
Synonyms
Sustainable development of tourism; Sustainable
management of tourism; Tourism sustainability
Definition
The term “sustainable tourism” does not imply
a specific type of tourism but rather refers to
a status of tourism being sustainable. However,
every destination and all types of tourism should
strive to be more sustainable in order to maintain
their competitiveness. Competitiveness and
sustainability are two main issues linked closely
and thereby influence the future of tourism at
a destination. Sustainable management and
development of tourism is vital if it is aimed to
assure the viability of tourism in the long run.
2483 S
UNWTO (2004) defines sustainable tourism devel-
opment as the guidelines and management
practices that are applicable to all forms of tourism
in all types of destinations, including mass tourism
and the various niche tourism segments. In adding
to this definition, UNWTO (2004) claims that
sustainability principles in tourism refer to the
environmental, economic, and sociocultural aspects
of tourism development, and a suitable balance
must be established between these three dimensions
to guarantee its long-term sustainability. Therefore,
according to the new definition revised by World
Tourism Organization, sustainable tourism should:
– Make optimal use of environmental resources
that constitute a key element in tourism devel-
opment, maintaining essential ecological pro-
cesses and helping to conserve natural
heritage and biodiversity
– Respect the sociocultural authenticity of host
communities, conserve their built and living
cultural heritage and traditional values, and
contribute to intercultural understanding and
tolerance
– Ensure viable, long-term economic opera-
tions, providing socioeconomic benefits to all
stakeholders that are fairly distributed, includ-
ing stable employment and income-earning
opportunities and social services to host com-
munities, and contributing to poverty
alleviation
Sustainability briefly defined by the Brundtland
Report (1987) is meeting the needs of the present
generation without compromising the ability of
future generations to meet their own needs.
Accordingly, this definition can be easily applied S
to tourism to achieve a sustainable approach.
This sustainable approach in tourism involves
a coordinated attempt to manage the tourism
environment in such a way that the long-term
integrity of a region’s natural and human resources
will be preserved (Dinan and Sargeant 2000).
Therefore, sustainable management and develop-
ment of tourism is about creating a better life for
the society also in the future. More commonly,
sustainable tourism is regarded as tourism man-
aged in such a way that it does not exceed the
environmental, social, cultural, or economic car-
rying capacity of a given destination (Weaver and
S 2484
Lawton 2002: 343). Here, the environment with
which tourism interacts includes not only land, air,
water, flora, and fauna but also history, culture,
and heritage (Edgell 2006: 16).
Introduction
Tourism is one of the world’s largest industries,
and as a service industry, it is mainly dependent on
tangible and intangible resources. Particularly,
economic gains have been a motivation for the
growth of tourism in developing countries. In
developing countries, tourism is considered as
one of the biggest income generators also helping
to create various jobs either directly or indirectly.
On the other hand, as the proportion of tourism
increases, the resources are under the risk of being
unsustainable which therefore endanger the pres-
ence of tourism at a destination. Moreover, the
mass tourism industry, long notorious for follow-
ing an unsustainable path of development, is now
pursuing sustainable tourism more seriously
because of the rapid growth in green consumerism
and the potential profitability of sustainability-
related measures as well as self-enlightened ethi-
cal considerations (Weaver and Lawton 2002:
368). As implied by WTO and UNEP (2005:
9–10), tourism is in a special position in the contri-
bution it can make to sustainable development and
the challenges it presents, and this leads to three
important and unique aspects of the relationship
between tourism and sustainable development:
• Interaction: The nature of tourism, as a service
industry that is based on delivering an experi-
ence of new places, means that it involves
a considerable amount of interaction, both
direct and indirect, between visitors, host
communities, and their local environments.
• Awareness: Tourism makes people (visitors
and hosts) become far more conscious of envi-
ronmental issues and differences between
nations and cultures. This can affect attitudes
and concerns for sustainability issues not only
while travelling but throughout people’s lives.
• Dependency: Much of tourism is based on
visitors seeking to experience intact and
clean environments, attractive natural areas,
Sustainable Tourism
and authentic historic and cultural traditions
and welcoming hosts with whom they have
a good relationship. The industry depends on
these attributes being in place.
Tourism has many impacts on physical, social,
and cultural environment as mentioned before.
For instance, according to Cooper et al. (2005:
265), airlines are responsible for a major aspect of
air pollution, and the vast majority of air transport
is for tourism purposes. On the other hand, as
mentioned in the same study, tourism is about
real estate development, and so it competes for
land use and depletes the natural environmental
stock as it does so. A special attention should be
paid to the environmental sustainability, since
many tourism attractions are precisely the natural
resources of a destination. Additionally, tourism
activities can be severely disruptive to biodiver-
sity from the extreme activities of hunting and
fishing to the less obvious disruptions through
wildlife observing and hill walking (Cooper
et al. 2005: 265). With the result of unsustainable
approach, more environmentally friendly types
of tourism have emerged in order to attract par-
ticularly ecotourists. Additionally, new destina-
tions with unique natural and cultural resources
are emerging and being more and more popular in
the international market. However, the introduc-
tion of large numbers of visitors to environmen-
tally fragile areas will always be accompanied by
tension between the natural environment and
tourism (Cooper et al. 2005: 265).
Thus, the negative impacts of tourism can be
minimized if sustainable development is carefully
planned and managed aiming to support long-term
viability. However, there is a discussion between
the academicians and also practitioners about how
to manage the impacts of tourism on the environ-
ment, society, and culture in a sustainable manner.
There is a mutual relationship between tourism
and local culture. Tourism is both benefiting
from and at the same time threatening the environ-
mental assets as well as the local culture. The close
and direct relationship of tourism and sustainable
development creates a sensitive situation, whereby
tourism can be both very damaging but also very
positive for sustainable development (WTO and
UNEP 2005: 10).
Sustainable Tourism
On the positive side, tourism can:
• Provide a growing source of opportunities for
enterprise development and employment cre-
ation as well as stimulating investment and
support for local services, even in quite remote
communities.
• Bring tangible economic value to natural and
cultural resources. This can result in direct
income from visitor spending for their conser-
vation and an increase in support for conser-
vation from local communities.
• Be a force for intercultural understanding and
peace.
Conversely, tourism can:
• Place direct pressure on fragile ecosystems
causing degradation of the physical environ-
ment and disruption to wildlife
• Exert considerable pressure on host commu-
nities and lead to dislocation of traditional
societies
• Compete for the use of scarce resources, nota-
bly land and water
• Be a significant contributor to local and global
pollution
• Be a vulnerable and unstable source of
income, as it is often very sensitive to actual
or perceived changes to the environmental and
social conditions of destinations
Sustainability is a difficult concept; it is complex
and hard to define (Cooper et al. 2005: 286). Key
elements of tourism sustainability include meeting
the needs of both visitors and host communities and
protecting and enhancing the tourism attraction for
the future as part of a national economic resource
(Edgell 2006: 15). Sustainable tourism should
therefore maintain a high level of tourist satisfac-
tion and ensure a meaningful experience to the
tourists, raising their awareness about sustainability
issues and promoting sustainable tourism practices
among them (www.unwto.org). Cooper et al.
(2005: 284) explains sustainability as involving
a process of recognition and responsibility more
than anything else. According to Cooper et al.’s
study (2005: 284), recognition of the resources
which are used to produce the tourism products is
expendable and vulnerable. Efforts for sustaining
tourism involves avoiding and minimizing the neg-
ative impacts of tourism on society and the
2485 S
environment, in addition to maximizing tourism’s
positive impacts on local economies. So, all types
of destinations need to adopt sustainability
approach in order to survive in the competitive
international market since the spoilt physical,
cultural, or social environment is a threat for
a destination’s competitive advantage. Core
indicators of sustainable tourism to be monitored
continuously have been determined by WTO as
explained in Table 1.
Tourist attractions in both the natural and built
environments, such as unspoiled natural ecosys-
tems, well-maintained historical sites, and cul-
tural heritage events, are tremendous engines for
economic growth and can produce quality-of-life
benefits (Edgell 2006: 33). Accordingly, sustain-
able tourism is examined by WTO and UNEP
(2005: 18–19), and 12 aims for an agenda for
sustainable tourism are explained as follows:
1. Economic viability: To ensure the viability
and competitiveness of tourism destinations
and enterprises, so that they are able to con-
tinue to prosper and deliver benefits in the
long term
2. Local prosperity: To maximize the contribu-
tion of tourism to the economic prosperity of
the host destination, including the proportion
of visitor spending that is retained locally
3. Employment quality: To strengthen the num-
ber and quality of local jobs created and
supported by tourism, including the level of
pay, conditions of service, and availability to
all without discrimination by gender, race,
disability, or in other ways
4. Social equity: To seek a widespread and fair S
distribution of economic and social benefits
from tourism throughout the recipient com-
munity, including improving opportunities,
income, and services available to the poor
5. Visitor fulfillment: To provide a safe, satisfy-
ing, and fulfilling experience for visitors,
available to all without discrimination by
gender, race, disability, or in other ways
6. Local control: To engage and empower local
communities in planning and decision mak-
ing about the management and future devel-
opment of tourism in their area, in
consultation with other stakeholders
S 2486 Sustainable Tourism

Sustainable Tourism, Table 1 Core indicators of sustainable tourism

Indicator
Site protection
Stress
Use intensity
Social impact
Developing control
Waste management
Planning process
Critical ecosystems
Consumer satisfaction
Local satisfaction
Tourism contribution to local Proportion of total economic activity generated by tourism only
economy
Composite indices
Carrying capacity
Site stress
Attractiveness
Source: WTO (1996)
Specific measures
Category of site protection according to International Union for Conservation of Nature
and Natural Resources index
Tourist numbers visiting site (per annum/peak month)
Intensity of use in peak period (persons/ha)
Ratio of tourists to locals (peak period and over time)
Existence of environmental review procedure or formal controls over development of
site and use densities
Percentage of sewage from site receiving treatment (additional indicators may include
structural limits of other infrastructural capacity on site, such as water supply)
Existence of organized regional plan for tourist destination region (including tourism
component)
Number of rare/endangered species
Level of satisfaction by visitors (questionnaire based)
Level of satisfaction by locals (questionnaire based)
Composite early warning measures of key factors affecting the ability of the site to
support different levels of tourism
Composite measure of levels of impact on the site (its natural and cultural attributes due
to tourism and other sector cumulative stresses)
Qualitative measure of those site attributes that make it attractive to tourism and can
change over time

7. Community well-being: To maintain and
strengthen the quality of life in local commu-
nities, including social structures and access
to resources, amenities, and life support sys-
tems, avoiding any form of social degrada-
tion or exploitation
8. Cultural richness: To respect and enhance
the historic heritage, authentic culture, tradi-
tions, and distinctiveness of host
communities
9. Physical integrity: To maintain and enhance
the quality of landscapes, both urban and
rural, and avoid the physical and visual deg-
radation of the environment
10. Biological diversity: To support the conser-
vation of natural areas, habitats and wildlife,
and minimize damage to them
11. Resource efficiency: To minimize the use of
scarce and non-renewable resources in the
development and operation of tourism facilities
and services
12. Environmental purity: To minimize the pollu-
tion of air, water and land and the generation
of waste by tourism enterprises and visitors
Mostly, the natural and cultural environment
represents the fundamental resources for destina-
tions. So, tourism based on environmental and
cultural concerns should be embraced in any eco-
nomic development process for a local commu-
nity (Edgell 2006: 33). The increasing demand in
tourism can have severe impacts upon local com-
munities and the environment if it is not properly
managed. Especially, some areas are particularly
vulnerable to pressure. And as a result of
unsustainable practices of some destinations,
demand is increasingly shifting to particularly
unspoilt natural destinations. Cooper et al.
(2005: 285) stresses that environmental sustain-
ability in tourism requires greater awareness and
knowledge about the impacts and ways of trans-
lating those impacts into the economic
marketplace.
Sustainable Tourism
Achieving sustainable tourism is a continuous
process and it requires constant monitoring of
impacts, introducing the necessary preventive
and/or corrective measures whenever necessary
(www.unwto.org). Thus, the responsibility of tour-
ists and businesses must be made clear and there
needs to be a legislative system that penalizes fail-
ure to abide by those systems (Cooper et al. 2005:
285). Tourist attractions in both the natural and
built environments, such as unspoiled natural eco-
systems, well-maintained historical sites, and cul-
tural heritage events, are tremendous engines for
economic growth and can produce quality-of-life
benefits (Edgell 2006: 33). As mentioned in the
study of Edgell (2006: 16), in many respects the
attraction is the ecosystem, the wildlife, the rich
archeological discoveries, the climate, or the cul-
ture that the tourist may have read about or seen on
the television screen.
According to Weaver and Lawton (2002: 368),
there is a shift toward an ecocentric green paradigm
and this shift has seen the concept of sustainable
development become the focus of contemporary
tourism sector management, with weak and strong
interpretations possible depending on whether
a particular destination consists of mainly of
undeveloped natural habitat or heavily modified
landscapes, respectively. Therefore, the identifica-
tion and monitoring of indicators at the destinations
level and operations level is essential if sustainable
tourism is to be achieved (Weaver and Lawton
2002: 368). According to Cooper et al. (2005:
263), the strong sustainability proponents argue
that sustainability meant that the level of each of
the individual capital stocks must be maintained
for future generations. On the other hand, the weak
sustainability proponents discuss that the total cap-
ital stock (i.e., the sum of all four categories) must
be maintained but that is possible to deplete one
stock in order to increase another (Cooper et. al.
2005: 263). Types of the capital stocks are different
types of resources subject to depletion or degrada-
tion and categorized as (Cooper et al. 2005: 262):
1. Human – the population, welfare, health,
workforce, educational
2. Physical – productive capital such as machin-
ery equipment and buildings
2487 S
3. Environmental – man-made and natural
resources and biodiversity.
4. Sociocultural – well-being, social cohesion,
empowerment, equity, and heritage
From the sustainability point of view, manag-
ing tourism can effectively enhance and enrich
the environment (Edgell 2006: 15). On the other
hand, the increasing demand in tourism can have
severe impacts upon local communities and the
environment if it is not properly managed. Espe-
cially, some areas are particularly vulnerable to
pressure. Hunter (2002) explains simplified
descriptions of light green and dark green vari-
ants of sustainable tourism in detail in Table 2. If
it is assumed that there are both positive and
negative impacts associated with tourism and
the net effects are likely to diminish as the vol-
ume of tourism increases there will be certain
thresholds beyond which additional tourists will
create unacceptable net impacts (economically,
environmentally or socially). Additionally,
exceeding these thresholds is likely to affect
every facet of tourism development. For instance,
exceeding (Cooper et al. 2005: 265):
• Physical thresholds will limit the volume of
tourist flows and expose tourists;
• Environmental thresholds will also limit the
tourist flows by creating secondary problems,
such as health hazards, or detract from the
attractiveness of a destination;
• Social and cultural thresholds will generate
resentment and antagonism toward tourists
from the host population;
• Tourist flow thresholds will affect the satisfac-
tion levels of tourists and cause them to search S
elsewhere for a better product
• Economic thresholds will result in misallocation
of resources and factors of production
A sustainable approach to tourism development
is about destination planning and controlling in
coordination with the stakeholders through an
effective communication channel. Here, destina-
tions have more or less different carrying-capacity
levels and therefore, each destination’s sustainable
management case should be considered as unique.
Additionally, sustainable tourism development
requires the informed participation of all relevant
S 2488
Sustainable Tourism, Table 2 Simplified descriptions of light green and dark green variants of sustainable tourism
Light green tendencies
• Advocate and strongly pro-adaptancy
• Benefits of tourism assumed
• Precious view of tourism as a sector and sectoral self-
interest dominates
• Maintain tourism activity in existing destinations and
expand into new ones
• Tourism products must be maintained and evolve
according to market need (nature is a commodity)
• Environmental action only when required and
beneficial (i.e., legal obligation, to tackle specific
problem, marketing benefit and cost saving)
• Narrow scope and geographical scale of environmental • Wide range of potential and actual impacts considered
concern
• Disperse and dilute activity (spread)
• Industry self-regulation as dominant management
approach
• Introspective focus on tourism research and
management literature
• Most likely to have a direct involvement in the industry • Most likely to have training in an environment-type
Source: Hunter (2002).
stakeholders, as well as strong political leadership
to ensure wide participation and consensus build-
ing as mentioned by UNWTO. The important
message is that through educational programs,
awareness and controlled visitation, the natural
environment as a tourist attraction can be nurtured,
managed, and protected for future generations to
enjoy (Edgell, 2006: 16). However, main motiva-
tion for tourism agents to engage in networking is
economic, while the large and highly qualified
companies and tourism associations have deeper
concerns on environmental issues (Erkuş-Özt€ urk
and Eraydın 2010).
Today, public and private sector are both
under high pressure to carry out sustainable prac-
tices since natural, social, and cultural environ-
ments are important resources for tourism.
Responsibility for the wise use of these resources
rests across all stakeholders from the govern-
ments and planners through the industry that
delivers the product to the tourists and their
hosts who temporarily coexist within the
Sustainable Tourism
Dark green tendencies
• Cautionary and knowledge-based
• Benefits of tourism must be demonstrated
• Tourism need nor necessarily be a component of
sustainable development in an area and sectoral
integration required
• Widen economic base if high dependency on tourism
and engage in full proactive assessment of new tourism
development
• Natural resources must be maintained and impacts reduced
(preferably minimized) where possible with products
tailored accordingly (nature has existence value)
• Environmental impacts always considered as a matter
of routine
beyond immediate geographical setting (i.e., hotel,
complex, destination area)
• Focus and concentrate activity (confine)
• Wide range of management approaches and
instruments required
• (more likely to reinvent the wheel)
academic discipline
destination (Cooper et al. 2005: 284). So, sustain-
ability is the responsibility of all those stake-
holders in tourism but especially, governments
have to take sustainability related issues into
account and direct the local organizations accord-
ingly. Thus, efforts to sustain and improve the
environment should be a high priority for the
destination planners. The duty of maintaining
a sustainable development in tourism is also
a matter of destination management organiza-
tions. If sustainability is not applied to tourism,
the quality of destination experience will
decrease which leads the destinations to lose its
appeal and therefore result in lowered prices.
That is why a growing concern in sustainability
issues is within both the public and private sector
in regard to tourism.
Some destinations are dependent on either
domestic tourism or international tourism regard-
ing the volume of demand and income generated
from tourism. Whichever the focus is, sustain-
ability must be treated as a continuous process
Sustainable Tourism
of improvement and development of destina-
tions. Therefore, a sustainable tourism approach
should involve the coordination of the stake-
holders in the planning and production of tourism
activities. Ensuring an effective communication
and coordination between stakeholders, there
should be a written and followed strategy and
policies for sustainable tourism. To better man-
age the destination sustainably, strategies and
policies should be formulated and thereby
implemented. Policies for sustainability must
aim to maximize the benefits and minimize the
costs of tourism at the destination. These policies
should also be revised constantly to ensure an
ongoing progress. The Brundtland Report
(1987) identified some basic principles of sus-
tainability such as the following:
• Take a holistic approach to planning and
strategy.
• Protect the environment (biodiversity) and
man-made heritage.
• Preserve the essential ecological processes.
• Facilitate and engage public participation.
• Ensure that productivity can be sustained into
the long-term future.
• Provide for a better level of fairness and
opportunity between different countries.
Key Issues
Tourism can only be more sustainable if destination
managers pay attention to careful planning in every
phase of tourism. On the other hand, as mentioned
before, national or local governments have a major
role to play in the development and management of
tourism and in making it more sustainable.
Future Directions
Although the level of government engagement in
tourism varies substantially all around the world,
governments should act as a medium and inspire
the stakeholders within the local destination to
positively react to the subject of sustainability.
Governments should disseminate sustainable
tourism strategies and policies at the local level
2489 S
and then, tourism must be integrated into local
sustainable development. Besides governments,
engagement of all other stakeholders to develop
and manage tourism in a sustainable manner is
a prerequisite. Additionally, the government
should fulfill internal marketing efforts for the
stakeholders to create awareness and realize the
importance of sustainable development. But,
the persuasion of local people and industry
authorities in the participation of environmental
friendly manner through promotion of sustain-
able tourism is not an easy task. At the end,
a better sustainable tourism can only be achieved
with the interest and support of each stakeholder.
Cross-References
▶ Sustainability
▶ Sustainability and Sustainable Development
References and Readings
Cooper, C., Fletcher, J., Fyall, A., Gilbert, D., & Wanhill, S.
(2005). Tourism: Principles and practice. Harlow:
Pearson Education Limited.
Dinan, C., & Sargeant, A. (2000). Social marketing and
sustainable tourism is there a match? International
Journal of Tourism Research, 2(1), 2–14.
Edgell, D. L. (2006). Managing sustainable tourism:
A legacy for the future. New York: Haworth Press.
Erkuş-Özt€
urk, H., & Eraydın, A. (2010). Environmental
governance for sustainable tourism development: Col-
laborative networks and institution-building in the
Antalya tourism cluster. Tourism Management,
31(1), 113–124.
Hunter, C. (2002). Aspects of the sustainable tourism debate S
from a natural resources perspective. In R. Harris,
T. Griffin, & P. Williams (Eds.), Sustainable tourism:
A global perspective (pp. 3–23). Oxford: Elsevier.
United Nations World Commission on Environment and
Development. (1987). The report of the Brundtland
commission, our common future. Oxford: Oxford
University Press.
UNWTO. (2004). www.unwto.org
Weaver, D., & Lawton, L. (2002). Tourism management.
Australia: Wiley.
WTO (1996). A practical guide to the development and
use of indicators of sustainable tourism.
WTO, & UNEP. (2005). Makıng tourism more sustainable:
A guide for policy makers. Madrid: World Tourism
Organization & United Nations Environment
Programme.
S 2490
Sustainable Trade: A Novel
Paradigm
▶ Sustainable Business: A New Paradigm
Sustainable Use of Resources
▶ Resource Efficiency
Sustainable Ventures
▶ Inclusive Business
Sustainable Workplace
▶ Green Workplace
Sustainopreneurship
▶ Sustainable Entrepreneurship
Sweatshops
Amos Owen Thomas
Harold Pupkewitz Graduate School of Business,
Polytechnic of Namibia, Windhoek, Namibia
Synonyms
Day laborers; Exploitative workplace; Illegal
employment; Informal economy; Inhumane
working conditions; Job insecurity; Long hours
without overtime; Low-wage labor; Oppressive
employers; Outsourced production; Substandard
factory; Unhealthy environment; Unsafe occupa-
tion; Unskilled workers
Sustainable Trade: A Novel Paradigm
Definition
Any workplace, including factories, farms, mar-
kets, households, and mines, where low-waged
employees work for long hours, sometimes under
coercion, in unhealthy and/or unsafe conditions
with no job security, possibly employed illegally
as migrant or bonded workers, constitutes
a sweatshop. The term is also used more broadly
of any situation of labor exploitation often
involving the vulnerable in society such as the
poor, women, children, uneducated, and ethnic
minorities, usually in developing countries,
where nonetheless the fruits of their labor result
in considerable profit to their employers and other
agents in the supply chain.
Introduction
The term “sweatshop” has its origins in the gar-
ment industry, though not necessarily related to
the making of sweaters per se. In the early to mid-
nineteenth century, the industry used a middle-
man or “sweater” who managed a system of
subcontracted piece work which was called the
“sweating system.” The middleman was said to
“sweat” workers by paying low wages in an
unhealthy environment to perform often dirty or
unpleasant work. The employees at these work-
places which came to be referred to as “sweat-
shops” were expected to work long hours,
sometimes residing on-site, without overtime
pay and with little or no job security. Further-
more, these employees might live under fear of
physical harm, further deprivation, blacklisting
by other similar employers, and even retribution
to their families. The term came to be widely used
in North America, particularly in regard to the
exploitation of recent migrants in cottage
industries.
Thus the word “sweatshop” has come to refer
to any workplace, including factories, shops,
mines, farms, homes, brothels, nightclubs, ships,
and plantations, in any sector of the economy
where employees are exploited through low
wages and long hours, without tenure of employ-
ment, in occupationally unsafe or unhealthy
Sweatshops
working conditions, possibly even using hazard-
ous materials. It is often used as an adjective for
all work under similar conditions, including the
professions and academia, and has been applied
also to the use of detainees, including prisoners of
war and prisoners of conscience often wrongfully
apprehended. Typically women, discriminated
ethnic minorities, the young, sometimes children,
the uneducated, and often undocumented
migrants are particularly vulnerable as workers
to exploitation by unscrupulous employers
through sweatshop conditions. Particularly in
the case of women and children, this extends to
being maids, nannies, bar hostesses, strip-club
dancers, and sex workers under sweatshop
conditions.
While in many developed countries there is
sufficient legislation outlawing such practices
and sweatshops are relatively rare and clandes-
tine, the practice remains widespread and openly
flaunted in many developing countries and
emerging economies to which often production
for developed countries’ markets has been
outsourced for competitive end pricing yet
greater corporate profitability. The prevalence
today of sweatshops worldwide often comes to
light when there is a tragedy such as a fire or
earthquake affecting such a workplace resulting
in loss of life and limb through crowding,
restricted access, and shoddy construction. Fur-
thermore, the countries where the problem some-
times comes to light are those that have
a relatively free press and functional democratic
governments such as India, Philippines, Pakistan,
Brazil, Kenya, and Brazil. It has been argued that
the problem of sweatshops has merely been
exported over the past century to developing
countries in the hope that they would not be
deemed as problematic abroad as in developed,
industrialized countries if done there by the
outsourcing firm itself.
Doubtless, the very term “sweatshop” repre-
sents a value judgment that it is a morally objec-
tionable form of employment that impacts
dependent families and sometimes whole com-
munities, not just a description of working con-
ditions of individual workers. The value of such
labor to a struggling local economy, if not also
2491 S
corruption of regulatory public bodies by the
exploitative employers and other vested interests,
might explain much of the disregard and indiffer-
ence to the problem of sweatshops. The persis-
tence of such practices despite the efforts of civil
society activists, nongovernment organizations,
intergovernment agencies, and even enlightened
governments suggest deep-rooted causes and
facilitating circumstances. These issues that are
worthy of research and key to the effective alle-
viation, if not eradication, of sweatshops is con-
tingent on addressing them.
Key Issues
Poverty and Vulnerability. Invariably, sweat-
shops thrive in conditions of poverty, high unem-
ployment or underemployment, racial and gender
discrimination, and generally low economic
opportunities. The workers in those shops are
usually those who have limited education, if
any; few job skills; and only their hard labor to
offer an employer. The low or no education, even
total illiteracy, does also mean that these workers
are more vulnerable to exploitation in a situation
where there is no written contract or even if there
was one, they could not familiarize themselves
with it or the laws that govern employment. The
depressed wages that are often used by govern-
ments to attract investors may actually be coun-
terproductive in maintaining and probably
widening the wage disparity within the country
as well as between it and other countries. The
argument that people choose to work in sweat- S
shops and thus their employers are morally defen-
sible is fallacious in that these workers have
limited economic options, are often duped into
contracts, and are powerless to effect change in
their employment conditions.
Migrant and Undocumented Workers. Being
guest workers in a country in which they do not
have citizenship, many workers in sweatshops feel
especially in a poor bargaining position to seek
better pay and/or working conditions. Particularly
when they are there illegally, having crossed
porous borders without valid papers, or as visitors
without rights to work, such workers are insecure
S 2492
about being detained and deported, and this is
indeed a fear that their employers exploit to keep
them docile and compliant. Needless to say,
migrant and undocumented workers feel that they
do not have any rights in the country where their
sweatshop is located and so believe, rightly
or wrongly, that they have no recourse of appeal
to government authorities or nongovernment
organizations about their conditions of employ-
ment. Nonetheless, migrants from developing
countries or poorer, often rural regions represent
a significant and valuable labor stream sustaining
sweatshops, particularly those in developed coun-
tries or middle-income/emerging economies.
Bonded Labor and People Smuggling. Given
tariff barriers in trade and other factors that attract
investment, job opportunities sometimes arise in
countries where there is little unemployment rather
than in those that have high unemployment. This
prompts attempts by the poor unemployed in one
country to seek work in another in desperation for
their lives or simply to better themselves econom-
ically. Since there are often restrictions on move-
ments of people even within most regional
economic groupings, this opens the door to
human trafficking and people smuggling. In the
former, workers are recruited in the poorer country
on promise of a seemingly well-paying job and
accept liability for paying a commission to the
job agent and for their illegal transportation to the
richer country. Once in their new country, these
workers are required to repay their traffickers
through deductions of their salaries and thus are
bonded to their employers till the debt is repaid,
under threat of harm to themselves or their families
back home. Other workers decide to travel on their
own to countries where jobs are believed to be
more plentiful and therefore pay upfront those
who specialize in smuggling people across bor-
ders. Nonetheless, these more independent
migrant workers have a high chance of ending up
as sweatshop labor in the new country as well due
to the limited job opportunities encountered.
Outsourcing and Supply Chains. Tradition-
ally, sweatshops are found in the garment indus-
try, though not exclusively so, since such
working conditions may be found readily in agri-
culture, mining, forestry, cottage industries,
Sweatshops
hospitality, entertainment, and domestic work,
among others. While products that are sold in
developed countries may be subject to scrutiny
by civil society and sometime even governments
about the labor practices abroad involved in their
manufacture or raw materials, this is not always
foolproof. Often it is not the brand owner that
manufactures the goods, as this is profitably
outsourced to independent factories in develop-
ing countries. This has been the source of the
classic plea of nonresponsibility for sweatshop
conditions by multinational corporations. Period-
ically there is media scandal about the exorbitant
price of the finished good on the market in com-
parison with the low costs of production and thus
meager wages paid to the workers involved. The
increased profits made possible by outsourced
production appear to accrue to shareholders of
both the firm contracted and the firm contracting
and are made at the expense of the workers.
Export processing zones have been identified as
the permitted location of many sweatshop-like
factories because by definition the labor laws
and other regulations such as of environmental
health of the country in question do not apply, at
least not in full, within these zones or are not
implemented through the collusion of corrupt
local officials with factory owners.
Capitalism and Economic Globalization. The
spread and persistence of sweatshops may be said
to be simply symptomatic of the establishment of
a single capitalist world economy since the 1990s
and thus difficult to mitigate or eradicate. The
neoliberal emphasis on market price does accen-
tuate the search, under the rubric of free markets,
for the cheapest possible inputs for the manufac-
ture of any products. Purist capitalists hold that
the sole mandate of management is to maximize
shareholder value and have no responsibility to
address sociopolitical issues. Apologists for
sweatshops argue that these are a short-term phe-
nomenon in developing countries that aid in pro-
viding paid employment in the short-term and are
a stepping stone to longer-term development,
though this has seldom been borne out in practice.
They also contend, with limited justification, that
attempts to set global standards, investigate
breaches, and impose sanctions are patronizing,
Sweatshops
complex, if not futile. Consequent on adopting
free-market principles, governments of develop-
ing countries seem to have become complicit in
a race-to-the-bottom economically, competing
with each other in promising developed-world
investors about nonunionized labor, depressed
worker wages, and minimal workplace
regulation.
Future Directions
Code of Ethics/Balanced Reporting. Pressure
from activists and consumers have seen multina-
tional corporations as brand owners, and mar-
keters take a more proactive role in establishing
codes of ethics about labor and better monitoring
of the working conditions at their contract man-
ufacturers in developing countries. Increasingly
there are global standards for labor rights pur-
veyed by the International Labor Organization
including guidelines on calculating living wages
that if ignored or defied could lead to fines and
other trade sanctions against the firm, its industry,
and even the whole country of origin. The United
Nations’ Global Compact is another initiative on
corporate citizenship and ethical global manage-
ment that seeks to ensure adoption of principles
that govern human rights, forced labor, unionism,
child labor, environmentalism, and the like. Thus,
the working conditions of employees and
contracted workers worldwide are now recog-
nized as an integral part of the social impact of
firms that needs to be audited even voluntarily for
reporting as part of the balanced scorecard or
triple bottom line in annual reports, and so
could be a deterrent to sweatshop use. One must
guard against overmastery of the rhetoric of com-
pliance with corporate social responsibility
displayed to shareholders and regulators, without
the reality being seen on the ground by workers.
Product Certification/Traceability. With bet-
ter communications technology, the Internet, and
embedded readable microchips, it is increasingly
possible now for there to be greater knowledge
and transparency about the global supply chain
and its labor inputs into products. Nonetheless,
implementation of this is not without its challenges
2493 S
with the extensive networks of subcontracting that
outsourced contractors themselves astutely utilize.
With increasing global awareness and activism,
intensified in no small way by the Internet and
social media, the consequences for ignoring the
working conditions under which products are pro-
duced, however remote, can be far-reaching on
financial viability via such reactions as consumer
boycotts and public protests. Firms need to go
beyond outsourcing production for profitability
and mere corporate social responsibility via mon-
itoring social impact of their business, toward cor-
porate advocacy and activism on human rights,
against bonded labor, and on skills development
and poverty eradication, capitalizing on their con-
siderable clout particularly in developing
countries.
Foreign Investment/Domestic Partnerships.
With low wages for unskilled labor and no
requirement to invest in better workplace condi-
tions, there is little incentive for the upgrading of
skills, technology, and work environment. Con-
sequently, there seems to be a form of economic
apartheid perpetuated by multinational corpora-
tions retaining the higher skilled jobs, advanced
technologies, and cutting-edge expertise in
research, development, and marketing in their
home countries of the developed world, while
exporting the lowly paid, menial, even dangerous
jobs to various host countries in the developing
world. Hence, government policy needs to be
instrumental in promoting technology and skills
transfer over the longer term for sustainable eco-
nomic growth and not short-term employment
creation at all cost, which often dissipates when S
foreign investment incentives by developing
countries cease. Nongovernment organizations
and civil society groups could serve as partners
with firms and government in facilitating and
ensuring compliance with global norms for
workers, especially where financial and human
resources for doing so are otherwise lacking.
Trade Sanctions/Public Policy. There ought to
be vigilance against the abuse of trade sanctions
against alleged systemic exploitative labor con-
ditions in developing country as a means of
blocking imports into developed countries in
order to protect less-efficient or subsidized
S 2494
producers with domestic political clout. While
the phenomenon of sweatshops is very real, we
need to be guarded against false allegations from
developed countries, even competing developing
countries, in the name of protecting jobs and
markets. The longer-term consequences of eco-
nomic disparity, political instability, and atten-
dant social problems of large-scale illegal
migration from poorer to richer countries need
to be factored into the costs versus benefits of
public policies on trade and investment by both
developed and developing countries.
Human Rights/Employment Rights. It is not
sufficient for laws to be enacted or international
conventions and employment and human rights,
such as the International Labor Organization’s
Declaration on Fundamental Principles and
Rights at Work and United Nations International
Declaration on Human Rights, to be ratified, if
there is little or no consistent oversight and
enforcement especially in developing countries,
citing lack of public resources. Sweatshops in the
informal economic sector, however small-scale
and remotely located, need to be legalized and
monitored as workplaces as much as any
medium-to-large-scale factory in the formal
economy of the country. Regularization of
worker permits, especially for those from other
countries, along with periodic amnesties of illegal
migrant-worker is imperative if the need for their
labor for the economy is recognized. Notable
examples worldwide exist of sweatshop workers
organizing against all odds to raise awareness of
their plight and achieve employment rights in
their favor. The right of workers, regardless of
citizenship in the country of employment, to
organize and bargain collectively without recrim-
ination is often an invaluable antidote to the labor
exploitation endemic to sweatshops.
Better Skills/Higher-Wages. Ultimately it is
the availability of more and better jobs closer to
regions and countries of worker origin that would
result in the diminution and hopefully elimina-
tion of sweatshop workplaces and working con-
ditions. It is primarily the responsibility of
government to fund the basic education and voca-
tional training of its citizenry, though such human
capital development may also involve some
Sweatshops
public-private partnerships in investment, tech-
nology transfer, and skills capacity building.
With a work-ready workforce capable of high
productivity, countries are able to attract more
desirable investors and negotiate better employ-
ment terms and conditions for its workers. Being
better educated, these workers would be more
aware of their rights and responsibilities as
workers and/or citizens, making sweatshops and
the incumbent exploitative conditions an
unviable option for potential employers, whether
they be local economic elite or foreign investors.
Since sweatshops thrive in the downward spiral
of economic scarcity, they should decline with
economic opportunity.
Publicity/Research. In the interim, the greater
the knowledge generated about labor practices in
various industries, countries, and supply chains, the
better the chance of preventing or at least mitigat-
ing incidence of sweatshop labor. Understanding
the economics and business models that sustain
sweatshops is imperative to undermining them.
Investigative reporting by journalists, long-range
research by academics, monitoring by civil society
activists, regular inspection visits by multiple gov-
ernment agencies, certification by industry bodies,
education of employers and supervisors on worker
rights, channels for employees to complain without
repercussions, and discerning choices by con-
sumers are but some of the ways in which sweat-
shops might be constrained from operating or at
least growing more prevalent. The more wide-
spread the public awareness of the extent of this
worldwide scourge and the alternatives for
addressing it, the sooner may come the possibility
of eventual eradication of sweatshops and sweat-
shop-like working conditions worldwide.
Cross-References
▶ Global Governance and CSR
▶ Health and Safety (EHS)
▶ Human Rights, Non-discrimination
▶ Outsourcing
▶ Reputation Management
▶ Responsible Consumption
▶ UN Global Compact
Swindle 2495 S
References and Readings Ross, R. J. S. (2007). Slaves to fashion: Poverty and abuse
in the new sweatshops. Ann Arbor: University of
Arnold, D., & Norman, B. (2003). Sweatshops and respect Michigan.
for persons. Business Ethics Quarterly, 13, 2. Trade Union Congress. (2003). Overworked, underpaid and
Bender, D. E., & Greenwald, R. A. (Eds.). (2003). Sweat- over here: Migrant workers in Britain. London: TUC.
shop USA. The American sweatshop in historical and
global perspective. London/New York: Routledge. Websites
Katz, D. (1994). Just do it. New York: Random House. www.behindthelabel.org
Louie, M. C. Y. (2001). Sweatshop warriors: Immigrant www.fairwear.org.au
women take on the global factory. Cambridge, MA: www.laborrights.org/creating-a-sweatfree-world
South End Press. www.nosweat.org.uk
Maitland, I. (1996). The great non-debate over interna- www.un.org/Overview/rights.html
tional sweatshops. In T. L. Beauchamp & N. E. Bowie www.unhchr.ch/html/intlinst.htm
(Eds.), Ethical theory and business (6th ed., www.veganpeace.com/sweatshops/
pp. 593–605). Engelwood Cliffes: Prentice Hall. www.waronwant.org/campaigns/love-fashion-hate-
Moran, T. H. (2002). Beyond sweatshops: Foreign direct sweatshops
investment and globalization in developing countries.
Washington, DC: Brookings Institution Press.
Rivoli, P. (2005). Travels of a T-shirt in the global econ-
omy: An economist explores the markets, power and
politics of World trade. New York: Wiley. Swindle
Rosen, E. I. (2001). Making sweatshops: The globaliza-
tion of the U.S. apparel industry. Berkeley: University
of California Press. ▶ Cheating
Ross, A. (Ed.). (1997). No sweat: Fashion, free trade, and
the rights of garment workers. New York: Verso.